Convenants, Conditions, and Restrictions: Including but not limited to Regulatory Agreements

By SHARON YARBER, Vice President and Senior Commercial Underwriting Counsel, LandAmerica Financial Group, Inc.

An owner of property can place restrictions on the use of the property through the recordation of covenants, conditions and/or restrictions, commonly known as CC&Rs.

A covenant is a promise to do or refrain from doing something, and is enforceable by the party who is to benefit from the promise (the covenantee) against the person who made the promise (the covenantor), and, if the covenant runs with the land, it is also enforceable against the covenantor’s successors and assigns.

A condition is a limitation imposed by a grantor in a deed that can cause the ownership of the property to revert to the grantor who imposes the condition if the condition is not satisfied (e.g. Mother transfers her property to her son for so long as he remains married to his wife; it reverts to Mother in the event son and his wife get a divorce). Courts do not like to see title to real property revert to former owners (called a forfeiture), and therefore, they will try to interpret a condition as a covenant or a restriction so that it can be enforced, or damages be awarded for breach, but without resulting in divestiture of title.

A restriction is a limitation on the use of the property that can be enforced by the party benefiting by the restriction and his successors in interest against the restricted property owner and his successors and assigns. Many restrictions are imposed by property owners in favor of governmental agencies.

When the person charged with the responsibility of reviewing a preliminary report or commitment sees an exception for Covenants, Conditions and Restrictions, it is vitally important for the title reviewer to actually read the underlying document so that he has a full and complete understanding of all of the limitations on the use of the property that may exist. Such CC&Rs could completely prohibit the contemplated development of a property.

Let’s say, for example, that a developer is purchasing a city block of contiguous properties with the intention of tearing down the existing improvements and building a brand new building of a totally different nature and use. Let’s say that right now each of the lots being acquired has a single family residence on it, and each of the lots is subject to CC&Rs that restrict the use of the property to single family houses, and that prohibit the vending of intoxicating liquor (query – is there such a thing as non-intoxicating liquor?). Let’s assume that the developer is planning on tearing down these houses (they are old and dilapidated) and constructing a strip shopping center, and that Joe’s Liquor in the anticipated anchor tenant! If these CC&Rs are still viable and enforceable, the developer can be enjoined (i.e. stopped by court order) from building his shopping center if an action is brought by any of the property owners who are entitled to enforce the restrictions. If the title reviewer asks the title company for an endorsement insuring there are no present violations of any enforceable CC&Rs, the title company will willingly provide such coverage since, at the moment, there are NO violations, however, such an endorsement does not provide any coverage of value; what the insured needs is an endorsement that will insure against the enforceability of the CC&Rs if they are violated in the future (as the developer intends to do with the contemplated project).

At the point in time that the title company is preparing the preliminary report, the CC&Rs were probably not read, but merely examined to see if they affect the subject property. Therefore, the write up in the report will not typically put the title reviewer on notice of the contents of the document. That is why it is essential that the reviewer READ the documents in their entirety. Then, if there is a question about their efficacy, or whether the insurer will insure over them, the title officer or underwriting counsel will review them and respond to the request. I have seen CC&Rs that require certain types of slip resistant flooring be maintained, that require parking attendants to be on the premises during certain hours of the day, that a minimum side yard area be maintained (which limits expansion of improvements into otherwise unimproved portions of the property), etc. CC&Rs come in all shapes and sizes, and some may pose a concern and many will be perfectly acceptable to the new buyer or lender who will be taking an interest in or lien against the property.

It is not uncommon for the title company to identify the CC&Rs by name, in which case Regulatory Agreements will frequently stand out from the boilerplate code write up for CC&Rs, but the mere fact that a Regulatory Agreement is not identified as such does not mean that it is not, in fact such an agreement.

Regulatory Agreements are agreements entered into between a property owner/developer and a federal, state or local government agency which requires that for a stated term of years the property will by utilized to provide low or moderate income housing. The developer is willing to place such a use restriction on his property in exchange for a very favorable loan with below market rates and sometimes even forgiveness of the principal, or some portion thereof. Often time, title company personnel have assumed that if the debt to the governmental agency was paid off, that the reason for the regulatory agreement had gone away and hence the restriction was lifted. This is not so. The lien of the deed of trust or mortgage in favor of the agency for whose benefit the use restriction runs can be paid off without in any way terminating the Regulatory Agreement.

Care must be exercised by the person reviewing title to determine the full extent of the impact of the CC&Rs, regardless of their nature. Only then can an informed decision be made about the desirability of the property.