There's a little puzzle question in the comments here, right at the end. I'm interested in what others think (a rare condition - take advantage). Ed.

Daily Development for Thursday, May 2, 2002

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

SERVITUDES; TERMINATION; RELEASE: A seller under an executory sale contract has, by execution of the contract, waived the right release a covenant benefitting the property sold.

Lone Star Steakhouse & Saloon of Ohio v. Quaranta, No. 01.CA.60 (Ohio App. 3/18/02)

Weaver subdivided his property into two parcels and sold Lot 1 to Quaranta and Lot 2 to a entity in which Weaver held an interest.

Quaranta acquired the property in order to establish a restaurant, and was concerned that there be no competing restaurant on the adjacent property, so Weaver promised in the contract of sale that the other parcel would be restricted from use as a restaurant.

Apparently during the executory period on the Quaranta contract, Weaver did transfer a deed to the other parcel and did include a restriction. The court does not give us the precise language of the restriction, but describes it as follows:

"The restriction stated that for fifteen years from the date of recording the deed that T&W, their heirs, successors, and assigns could not open a sit-down restaurant or tavern on Lot 2 in competition with the restaurant on Lot 1. The restriction further stated that the restriction was for the benefit of Ronald L.

Quaranta, his heirs and assigns and that if Lot 2 was sold these restrictions would be incorporated into the deed. The aforementioned restriction was to lapse on June 23, 2000."

Later, when Weaver delivered a deed of Lot 1 to Quaranta, he included language referencing this restriction:

"Further granting unto the Grantees, their heirs and assigns, the rights in common with the Grantor in and to the restrictions contained in a prior deed from the Grantor herein to T&W Properties, a partnership, conveying Lot Number 2 in said Bud Weaver Plat No. 1, as found recorded in Volume 82, page 324, Mahoning County Records of Deeds made among other purposes for the benefit of Lot Number One (1) herein conveyed, together with, but not limited to, the right to enforce said restrictions as fully and completely as the Grantor herein."

Some years later, Quaranta contracted to sell Lot 1 to Lone Star, which intended to continue to operate a restaurant on the property. The court does not discuss whether Quaranta said anything to Lone Star about the restriction, and apparently the sale contract was silent (or else the court would have referenced any language.) But Lone Star, at least arguably, knew of the covenant because its title report listed the provision in the Lot 2 deed (yes, the Lot 2 deed) as a exception to coverage of Lot 1.

Thereafter, Quaranta apparently realized that there were potential plans that he would join with Weaver and others in developing a restaurant on Lot 2. Consequently, Quaranta executed a release of the benefits of the covenant restricting Lot 2 from use as a restaurant or tavern. Apparently nothing was said about this to Lone Star.

Lone Star closed on its deal. The title policy also mentioned the restriction on Lot 2 as an exception to the insurance of the title of Lot 1.

According to the court, the policy "showed that the covenant was still in full force."(The court says "commitment, but in context that appears to be a typo). The court does not tell us exactly what the policy said affirmatively that conveyed this view, and perhaps the court is simply saying that the title company failed to disclose the release.

Quaranta indeed later did join Weaver to establish a restaurant and tavern on Lot 2, which opened three months after Lone Star closed on its acquisition of Lot 1. Lone Star made no inquiry about this competing restaurant for three and a half years, when, upon inquiry, it discovered that the covenant had been released.

Lone Star tendered the defense of its covenant to the title company, which refused coverage. It then initiated a lawsuit of its own for a declaratory judgment that the covenant was in force. The trial court granted summary judgment to Quaranto.

On appeal: Held: Reversed.

In a nutshell, the court concluded that it was clear from the covenant language and from the language of the provision in the sale agreement that the parties intended that the benefit covenant run with the land to successors in interest of Quaranto in Lot 1. The court also recognized the various requirements for a covenant to run with the land - that it touch and concern the land, and that there be privity of estate, both horizontal and vertical. In rather sketchy fashion, the court concluded that indeed all the requirements had been met here.

In a rather bizarre passage, the court discusses whether Lone Star had notice of the provision, and holds that it did, since the provision was recorded. The court suggests that notice is a requirement for a covenant to run. But the authority the court cites deals with the question of whether purchasers of restricted property are bound by an equitable servitude. The obviously different, and interesting, question of whether a landowner needs to have notice of the existence of a covenant benefitting its property, and when, is not raised, although, as indicated above, there is no evidence that Lone Star bargained to buy the property with the covenant in mind.

Comment: What the editor finds interesting about the case is the application of the doctrine of equitable conversion to conclude that effective title passed to the buyer upon execution of an enforceable contract, so that the legal titleholder no longer had the power to modify the covenant.

The concept of equitable conversion is an theoretical construct that can prove valuable in solving certain issues, but it should not be applied mechanically when the equities don't support it. An interesting question arises when the equities are somehow "neutral," as the editor suspects that they were here.

It is possible that Quaranto represented to Lone Star that there was an covenant restricting lot 2. It is also possible that Lone Star bargained with that covenant in mind, whether its knowledge of the covenant stemmed from Quaranto's representations or otherwise, and that Quaranto knew that. If that were the case, then Quaranto might be bound to recognize the covenant on a number of different theories, and equitable conversion would not be necessary.

Let us assume, however, since the court says nothing about Lone Star's actual knowledge of the covenant, and since the discussion of "constructive notice" by Lone Star is a little silly, that Lone Star in fact didn't learn about the covenant until much later - perhaps at the time that it got concerned about the competition from the adjacent tavern. The fact that Lone Star said nothing about the adjacent tavern for three years suggests that at least some of Lone Star's people didn't know of the covenant.

If Lone Star knew nothing of the covenant, it is still likely that a court would assume that it accepted the benefits of the covenant when it accepted the deal. And certainly, following closing, Quaranto would have no power to alter the covenant, since it ran with the land. But, in that event, at what time would Quaranto lose the power to modify or release the covenant? The court's answer is that equitable conversion compels the conclusion that this power was lost when the contract was signed. Certainly that's a nice clean line. Absent (as we're assuming) any reliance on the part of Lone Star, is it the right line? The editor is still puzzling about that. It's hard to think of a circumstance in which the seller would be inequitably disadvantage by such a rule, but buzzing in the editor's mind is the notion that the seller likely believes that he still has some discretion relating to things that are not explicitly part of the deal until the contract closes.

What do you think?

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