Daily Development for Monday, July 16, 2007
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri

SERVITUDES; RESTRICTIVE COVENANTS; PUBLIC HOUSING PROGRAMS: Where city sells property at bargain price subject to language implicitly restricting use to one-four family housing, covenants will run with the land to successor. 

328 Owners Corp. v. 330 West 86 Oaks Corp., 8 N.Y.3d 372, 834 N.Y.S.2d 62 (2007).

City obtained through tax foreclosure a  five-story townhouse serving as a multiple dwelling with eight units.  The building  had violations against it and under the city's asset sales program it was sold to the tenants – by means of a corporation they formed – as an Urban Development Action Area Project .  The price was based on the capitalization of income instead of market value, which made it a bargain at $340,000.

The city imposed conditions on the sale that required repair of the various code violations, and limited the rent (presumably to any non-owner tenants) for two years.    These conditions were in the deed and in documentation of the various approvals required under Projects of this type.  The recitals at the beginning of the deed stated: “[T]he project to be undertaken by Sponsor ('Project') consists solely of the rehabilitation or conservation of existing private or multiple dwellings or the construction of one to four unit dwellings without any change in land use permitted by existing zoning . . . ."  The deed also recited an intent that at least some of the covenants would run with the land: “The agreements and covenants set forth in this Deed shall run with the land and shall be binding to the fullest extent permitted by law and equity. Such covenants shall inure to the benefit of the City and shall bind and be enforceable against Sponsor and its successors and assigns."

Less than two years later, and without having corrected the code violations, the corporation  sold the property to Buyer – for $1 million (or more - newspaper reports suggested a price of $2.2 million.” . Buyer planned to build a “sliver” high rise multi unit apartment building on the property.  Presumable such use would have been permitted by existing zoning.

A neighbor, the owner of an adjacent building, which shared a party wall, brought an declaratory relief and injunction action against Buyer seeking a declaration that buyer the “four unit” restriction bound Buyer.  The City joined the suit.   City and neighbor alleged that the property was subject to a four unit limit for new development, and that this obligation, as well as the obligation to repair the code violations and to maintain rents to existing tenants ran with the land. Although the four unit restriction was not stated specifically in the deed, the reference to the City’s Project, the petitioners argued, gave notice that other terms of the bargain sale more explicitly bound the owners to conserve the existing building and to limit any new construction to one to four units.

The  court stated that three conditions must be satisfied for a covenant to run with the land, and found all of them satisfied here:

1. the grantor and grantee (of the original deed) must manifest an intent that it so run;

2. the covenant must touch or concern the land; and

3. there must be "privity of estate" between the one claiming the benefit of the covenant and the one against whom it's now sought to be enforced.

The neighbor, of course, lacked privity.  It  was not a party to the sale and was not linked to the chain of title.  But the city had joined the suit, and therefore the court found the neighbor’s lack of privity to be “immaterial.”

Buyer emphasized that  the covenants containing the restrictions were in the "recital" provisions of the deed rather than in its "habendum" clause, and therefore were invalid as restrictions on title.  The New York Court of Appeals dismissed the distinction between the clauses and read the instrument as a whole in order to discern the parties' intent. In fact it was so instructed by a New York Statute. 

The real dispute in the case, which split the court, and which had motivated the lower court of appeals to find against the city, was the question of whether the parties evinced an intent that the covenants run beyond the original purchasers.

The dissent, by Judge Pigott, argued that the intent of the restrictions on the use of the land for a four unit apartment building was to limit only the original grantee.   He argued that otherwise the restrictions would have bound the property “in perpetuity,” and that this was inconsistent with the transferability of the property.  He pointed out that the language of the restriction on land use specifically referred to “the Sponsor.”  As to the “boiler plate” language about the covenants running, the judge noted that there were other covenants dealing with non discrimination that clearly did run. 

The real question had to do with the four unit restriction.  It appears that Judge Piggot agreed that  the covenant relating to cure of code violations did bind the successor, but of course any code violations would be resolved when the property was demolished and the “sliver” building was erected. Judge Piggot’s views apparently mirrored those of the lower appeals court majority, which had denied relief. 

The majority countered that the restriction on land use could later be waived by the City, and therefore did not bind the property in perpetuity.

The City, relying again on the reference to the housing law relating to projects of this type, argued that the owners were required to conserve the existing building, rather than simply limit the use of the property to a one-four unit structure.  The court denied this particular form of relief, holding that the reference to the general purpose of the statute was insufficient to impose such a restriction. 

Comment 1: The vague and general reference in the deed to the purpose of the statute to provide for the rehabilitation of one-four family structures strikes the Editor as also unenforceably  uncertain, and not a good basis for a covenant running with the land.  The court seems to be of the view that various other contracts and approval documents were incorporated into the burdens imposed on the property, but it is very unclear exactly how it viewed this as happening. 

But we should differentiate the original covenanting parties’ purpose from the question of notice to successors.  Here, prior to purchasing (if not prior to contracting) the proposed purchasers had adequate notice that there was a challenge based upon the overall preservation scheme.  Therefore, arguably the question was not one of notice, but simply of interpretation of the original parties’ intent. 

Possibly a purchaser that had no express notice of the contents of the other land use agreements would not be put on constructive notice of them by the deed language.  But don’t bet the ranch on that - in fact the tenor of the opinion suggests that it would have found constructive notice, if necessary. 

Comment 2: In the editor’s view, the probable purpose of the City in fact was to bind successors.  Otherwise, what was the point of the original deal?  It would make little sense to sell a $2 million property to its occupants for $340,000 if there is no long term land use goal to be satisfied.  The owners were already subject to code enforcement requirements.  A two year rent cap does seem an insufficient additional objective to support the bargain price.  

Comment 3: Note that the Court of Appeals resoundingly affirms most of the New York common law on the requirements for covenants running with the land - the touch and concern requirement and the “vertical privity” requirement.  Note also, however, that the City was not the owner of “benefitted property.”  It appears that the court is implicitly acknowledging that covenants in gross will run in New York.  It may be that earlier authority had already crossed this bridge. 

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