Daily Development for Tuesday, September 19, 2000

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

SERVITUDES; COVENANTS; USE RESTRICTIONS: Hawaii court torpedoes efforts to establish running covenants..

Fong v. Hashimoto, 994 P.2d 500 (Hawaii 2000).

Developer established a fifteen unit subdivision and contracted to convey lot 4 in 1940, but did not deliver the deed until 1944. The deed contained a restriction that read as follows:

"That at no time shall any building or structure or any part thereof be erected or placed or allowed to remain on [Lot 4] within fifteen (15) feet of the property boundary line on the 20foot right-of-way adjoining said premises."

In 1940, Developer deeded lot 5 subject to the following restriction:

"[A]t no time shall any building or structure or any part thereof be erected or placed or allowed to remain on [Lot 5] within fifteen (15) feet of the property boundary line on the 20foot road right-of-way adjoining said premises, nor within five (5) feet of the property boundary line on the 15foot road right-of-way adjoining said premises."

Note that neither covenant contained a view or height restriction. Lots 4 and 5, are adjacent uphill lots, and are situated so that construction on them would not block the view of any owners of subdivision lots.

Ultimately the Fongs acquired lots 4 and 5 and built homes on them.

In 1941, Developer contracted to convey lot 11, and actually did so in 1943. The deed contained the following restrictions.

"1. That at no time shall any building or structure or any part thereof be erected or placed or allowed to remain on the hereinabove described premises of more than one (1) story in height, nor within fifteen (15) feet of the property boundary line on the 20foot road right-of-way adjoining said premises, nor within five (5) feet of the property boundary line on the 15foot road right-of-way adjoining said premises.

2. That no deed, lease, mortgage or other conveyance of the premises hereby conveyed will be made unless the same shall in each case contain the same restrictive covenants, including this covenant, either expressly or by appropriate reference, nor unless or until the grantee, lessee, mortgagee, or other person thereunder shall join therein and bind himself, his heirs and assigns to require the same covenants on the part of any grantee, lessee, mortgagee, or other person under any deed, lease, mortgage or other conveyance made by him."

3. That the foregoing covenants shall run with the land hereby conveyed and shall also apply to and be equally binding upon the legal representatives and successors in interest of the parties hereto, whether or not expressly contained in any deed or other instrument whereby any title to or interest in said property is obtained."

It appears that two of the three other downhill lots in the subdivision were similarly restricted and were developed in a manner consistent with the height restrictions, but lot 11 remained undeveloped for 50 years. Lot 11 is the only lot in issue here.

During period since 1943, the original grantee of lot 11 conveyed to another, and included all of the above covenants in the deed. Subsequent deeds referred expressly to the covenants contained in that deed, but did not state them directly.

When Hashimoto's attempted to build a two story house on lot 11, Fongs brought suit to enforce the covenant. The trial court refused to enforce the covenant, either as a covenant running at law or as an equitable servitude equity.

With respect to the covenant running at law, the court pointed out that the Developer did not own lot 5 and had already contracted to sell lot 4 at the time the Developer exacted the covenant on lot 11. Therefore the benefits of the covenant could not run to the Fongs, as they were not in vertical privity with the benefited party. The court held that the "bare legal title" held by the Developer in lot 4 at the time of the lot 11 covenant was not the kind of interest as to which it was appropriate to confer the benefit of a running covenant. (It is not clear whether the lot 4 contract was an installment land contract where possession had already passed to the buyer - but it is likely that this was the case, based upon some of the authorities that the court cites.)

This holding, though noteworthy, is not particularly remarkable, but the court then goes on to make two more significant statements about the issue of the covenant running at law. First, it states that the covenant would not run at law because the developer had not designated lot 4 as a benefited parcel in the lot 11 restriction. Indeed, under general theory in this area, had the developer designated lot 4 as a benefited parcel, it might have been possible for the owner of that parcel, even though a predecessor to the sale of lot 11, to have argued that it was a third party beneficiary of the covenant. But the court goes beyond this theory. It appears to view need to designate the benefited parcel as a requirement that would have existed even had the developer still been the owner of lot 4.

To this extent, the opinion is unusual, since the juxtaposition of the two lots would appear to make it easy to conclude that the parties intended to benefit lot 4.

The court may have gone even farther into new territory, however. As an additional basis for denying that the covenant can run at law, the court held that "a restrictive covenant is a contract dependent upon reciprocal or mutual burdens and benefits." It appears to be saying that because lot 4 was not burdened for the benefit of lot 11, lot 4 could not have enforced the covenant even had it been owned and designated by the developer at the time of the lot 11 covenant. It is difficult to make out if the court really meant to make such a statement, which might have some relevance as to the running of equitable servitudes, but is not a common principle for covenants that run at law. . If it did intend that this statement mean what it said, then the court has put into question a large number of "one way" covenants around the country. More likely, the court is just saying that in context it is impossible to identify a scheme that would justify concluding that the parties intended to benefit lot 4.

Of course, the Fongs also argued that, regardless of privity of estate, the covenant could burden lot 11 as an equitable servitude. Here, again, the Hawaii’s Supreme Court took a rather conservative approach. It first pointed out that for an equitable servitude to exist there must be a "common scheme." There was some evidence of such a scheme, as three of the four downhill lots were restricted for view. At first, it appears that the court is concluding that the failure of the developer to restrict the fourth downhill lot shows that there was no scheme. But then, quite explicitly, the court states that for a common scheme to exist *all fifteen* of the lots would have to be similarly burdened, even though in most of them a height restriction would have been pointless.

Comment 1: The first thing to note is that the Hawaii’s court utterly ignores the new Restatement of Servitudes. Perhaps it should have paid closer attention.

Comment 2: If, indeed, the contract by which the Developer sold lot 4 had been an installment land contract, then the editor agrees that it is likely that the Developer should be treated as having an inadequate ownership interest in order to benefit lot 4 without saying so. But the editor has some problem with the court's apparent assertion that even if the Developer had owned lot 4, it would not be viewed as a benefited parcel unless the covenant said so expressly.

Comment 3: On the issue of the covenant functioning as an equitable servitude, the notion that subdivision restrictions must be perfectly uniform for a "common scheme" to exist strikes the editor as ridiculous, frankly, and not consistent with the best authority in the area. If we are going to recognize that a developer has the right to create a covenant regime to form an integral neighborhood in which all parcels contribute to a common benefit, it only makes sense that some parcels will bear different burdens than others. The downhill lots had to be restricted for the view. The uphill lots did not. The editor fails to see why the restriction of the downhill lots could not nevertheless be viewed as part of a common scheme.

The proponents of the scheme would still be required to show that the scheme was an operative factor in the developer's marketing of the lots. But if one could show that, then the purchasers of the uphill lots are being deprived of a perfectly legitimate expectation.

The failure to restrict the fourth downhill lot, of course, creates greater problems. But there were still 75% of the lots bound, include the one at issue here. Looks OK to the editor.

Comment 4: In another part of the opinion, the court noted further that the covenant was unenforceable for vagueness because "two story house" was not precise enough to establish any rationale height limitation standard. Important drafting lesson here.

Readers are urged to respond, comment, and argue with the daily development or the editor's comments about it.

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