Daily Development for Monday, January 8, 2001

By: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
prandolph@cctr.umkc.edu

CONDOMINIUMS; RESTRICTIONS: Restrictive covenants in condominium unit deeds intended to create a "neighborhood scheme" are not enforceable; overall covenants must be in the master deed.

Amir v. D'Agostino, 328 N.J. Super. 103, 744 A.2d 1212 (App. Div. 2000)

A condominium unit owner sought to prevent the tenant of another unit owner from selling women's clothing and other items from a commercial unit of a high-rise condominium. The condominium project consisted of two high-rise towers containing 726 residential units and twenty-nine commercial units.

Neither the Public Offering Statement nor the Master Deed contained any restrictions on using the commercial units for the sale of women's clothing. As the commercial units were sold, however, the original developer elected to utilize individual unit deeds to create what was intended to be a common scheme of covenants, purportedly designed to coordinate and divide the uses among the commercial spaces. "Instead, [in the words of the court], what resulted was a complex, confusing and internally inconsistent set of restrictions which created significant disagreement as to their meaning and ultimately generated this and other litigation."

Each deed restricted the type of commercial activity permitted in the commercial unit and limited the products that could be sold. The deeds also listed sixteen separate categories of restricted conduct presumably common to all units, such as restrictions on advertising and prohibitions on the sale of pornography. Those latter restrictions, by their terms, ran with the land, and were intended to be for the benefit of the developer and the condominium association. The beneficiaries of the restrictive trade covenants were more limited and varied from deed to deed.

For example, one deed gave the occupants of the unit the exclusive right to operate a retail store engaged in the business of selling Christmas-related gifts and souvenirs. That restriction could not be changed without the approval of the unit seller or its successors, and then only if the requested new use had not been acquired as an "exclusive" use by some other unit. Any change in that use could not include any of twenty-four additionally enumerated conditions, including the prohibition on the sale of women's clothing. Those restrictions inured only to the benefit of the sellers of the applicable unit, their successors, and assigns.

The deed to the unit from which the women's clothing was being sold did not contain a restriction prohibiting the sale of women's clothing although it contained exclusive uses and non-exclusive uses. One non-exclusive use was "women's wear (non-Italian)." The Court reviewed only four of the twenty-nine unit deeds and made certain assumptions about the entire development scheme. It assumed that the original developer "intended to create a common scheme of positive and negative covenants so that the uses among the commercial units would be coordinated." The Court also accepted the complaining unit owner's factual claim that when he purchased his unit he reviewed all of the other commercial deeds, proceeded on the assumption that he would have the exclusive right to sell certain items, and that the sale of those items would not conflict with the ordinary business operations of the other units. In his deed, he was given a "non-exclusive" right to sell women's clothing, but it! app eared that he had never sold that kind of clothing, unless one assumed that T-shirts and sweat pants fall into that category.

Faced with this confusing set of facts, the Court felt the need to address the following issues: "(1) whether the developer's failure to include any of the restrictions in either the Public Offering Statement of the Master Deed preclude[d] their enforceability; (2) whether [the complaining unit owner had] standing to enforce these covenants; and (3) whether these provisions satisf[ied] the specialized requirements relating to enforceability of restrictive covenants, such as the need for uniformity and clarity."

As to the Master Deed and Public Offering Statement arguments, the essence of the contention was that the Condominium Act required certain restrictions on Use and Occupancy to be placed in the Master Deed. The complaining unit owner argued that the Condominium Act language in that regard was permissive only and that, even if mandatory, would not prevent the developer from placing use restrictions in individual deeds.

The Court disagreed. It acknowledged that developers are not required to impose restrictions on use and occupancy; thus there is no obligation to include restrictions in a Master Deed. On the other hand, the Court held that if the developer or a condominium association chose to impose such restrictions, "the requirement that they be included in the master deed is mandatory." The Court looked at the legislative intent and determined that if the Legislature thought that if the developer wished to create a "so-called neighborhood scheme," that would affect all unit owners, notice in the Master Deed would be required. The Master Deed is intended to act as the defining document with respect to the rights and obligations of unit owners. The court concluded that overall covenants that are not in the Master Deed unenforceable.

That ruling effectively resolved the issue. Nonetheless, "given the uniqueness of the statutory issue just discussed and the importance of the challenges that remain[ed]," the Court addressed some of the other issues. The complaining unit owner sought to enforce prohibitions of sale that were contained in the unit deed for the unit from which the women's clothing was being sold. Those restrictions, however, inured only to the benefit of the seller of that unit, its successors, and assigns. The complaining unit owner was neither a successor nor an assignee of the unit seller. To the extent that the complaining unit owner's chain of title derived from that of the original developer, the original developer was a predecessor in title, not a successor.

The Court then considered whether the owners of the unit from which the women's clothing was being sold would have had reason to know that the restrictions against the sale of women's clothing would benefit some other unit owner or owners. Even though the Court was forced to make that assumption in the context of a motion of summary judgment, it refused to ignore the plain language of the deed that indicated that the covenants were for the benefit only of the sellers and the seller's successors and assigns. The complaining unit owner then attempted to show that there was a "neighborhood scheme" that had been validly created and which was not against public policy. "[R]estrictions on use that are part of that scheme may be enforced by all of the owners within the area intended to be benefitted." The Court, however, held that a neighborhood scheme was never validly established because the purported scheme lacked uniformity and clarity.

Reporter's Comment: New Jersey law historically has frowned on the placement of restrictions on the alienation of land, and without clarity, "neighborhood scheme" restrictions are not enforceable.

Editor's Comment: The complexity and diversity of the scheme established here, especially in the context of covenants binding fee owners and their successors, probably dragged these covenants down (even leaving aside the condominium act issue). That being said, the editor believes that courts should be careful to differentiate rules that they apply to residential common interest communities from those they to apply to commercial arrangements. In this case for instance, there seems to be little question that it was the intent of the grantors and grantees of the deeds in question to create a complex system of business restrictions similar to those that might exist in a large shopping center, and for the same reasons. Although the restrictions in such situations might not be uniform, they serve a common purpose. Although they may be complex, complexity may be necessary to satisfy the diverse business objectives of each participant. In general, the best protection for a mark! et real estate system to work appropriately is the complete enforcement of clearly understood and accepted agreements. The market players, and not the courts, are in the best position to determine whether risks are worth taking and whether investments in commercial condominiums carry with them acceptable protections for a coherent retail scheme. It's a big market - no one is forced to buy into this condominium. We should expect commercial real estate investors to obtain competent business and legal advice and to stick to the promises that they make when they follow that advice.

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