Daily Development for
Monday, May 20, 1996

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
randolphp@umkc.edu

DEED COVENANTS; COVENANT AGAINST ENCUMBRANCES; SUBDIVISION REGULATION: Conveyance of land without required state subdivision approval constitutes a breach of the covenant against encumbrances in deed for which grantee can recover direct and consequential damages for loss on resale. Hunter Broadcasting, Inc. v. City of Burlington, 670 A.2d 836 (Vt. 1995). City, as grantor, and plaintiff, as grantee, entered into a land swap agreement under which the grantee deeded a certain land to the City and the City leased (and subsequently sold) 9.7 acres to the grantee. The eventual sale to the grantee was by a warranty deed containing a covenant that the property was free of encumbrances. Thereafter, the grantee entered into an asset sale with a third party, whose title search revealed that the parcel lacked local and state subdivision approval. The City applied for and obtained local subdivision approval only. The asset purchase failed. The grantee eventually resold the property at a substantially lower price after incurring significant expenses to obtain state subdivision approval and close the sale. The trial court entered a directed verdict in favor of the grantee and presented the question of damages to the jury, which awarded the grantee $112,000.

A Vermont statute, 18 V.S.A. 1218, prohibits an owner of land from subdividing a tract of less than 10 acres without obtaining state subdivision approval. Failure to obtain the approval can result in a fine of $1,000 secured by a lien against the unlawfully subdivided real estate.

In affirming the trial court, the Supreme Court of Vermont distinguished cases from other jurisdictions in which state and local police power regulations have been held not to constitute encumbrances for purposes of the covenant against encumbrances. In those cases, the regulations in question might have affected use of the land but did not affect the title to land. Under the Vermont statute, failure to obtain subdivision approval does affect title to land. The statute prohibits resale unless subdivision approval is subsequently obtained. Vermont is a minority jurisdiction in that it regards covenants against encumbrances as running with the land. The statutory restriction binds the land and not just the present owner. Therefore it also runs with the land and is within the covenant against encumbrances.

The initial lease had provided that "in the event there shall be any subdivision expenses . . ., they shall be born [sic] by [grantee]." The trial court and the Vermont Supreme Court found that this provision affected only the allocation of the cost of obtaining subdivision approval and not the risk of failure to obtain subdivision approval. Therefore it did not afford the City a defense.

Finally, the court upheld the award of consequential damages although it recognized the well settled rule that the proper measures for breach of a covenant against encumbrances is the cost of removing the encumbrance. Resale of the property was foreseeable to the City at the time of the original sale; "where the dead is silent, parties to a conveyance are presumed to contemplate eventual resale of the property by the purchaser." Therefore, the grantee's loss on resale was within the contemplation of the parties and consequential damages were appropriate.

Comment 1: For the most part, parties to a land transaction view the question of compliance with applicable public regulations a matter of buyer's risk. If the seller had knowingly failed to comply with subdivision regulations, there is a good chance that a court would view this as an undisclosed "latent defect" for which the seller would be liable. Therefore, the analysis of this case is not necessary to get at the wilfully fraudulent seller. Beyond that case, the editor would contend that neither typical buyers nor typical sellers expect the seller to warrant that public land use regulations, including subdivision regulations, have been satisfied.

Comment 2: Although the decision is wrong, it is the law. Sellers' lawyers in states in which the same reasoning might apply would do well to add an exception to the standard deed form providing that there is no warranty that applicable state land use controls, including subdivision requirements, have been satisfied. If this language doesn't appear, then the ordinary deed form would provide that there is such warranty. Is that what your client intended?

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last five years, these Reports annually have been collated, updated, indexed and bound into the Annual Survey of Developments in Real Estate Law, volumes 1-5, published by the ABA Press. The Annual Survey volumes are available for sale to the public. For the Report or the Survey, contact Laprica Mims at the ABA. (312) 988 6233.

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