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To Touch And Concern
by Robert Franco
 | 2008/02/01 |
This is really the third post in what has become a series on covenants that require a private transfer fee to be paid to the declarant of the covenant. The first post, Patently Stupid, discussed what I perceive as practical problems with these covenants in the title industry, the burdens they create on the property, and the absurdity of patenting "legal strategies." The second post, Freehold Licensing Defends Covenants, continued my opinion on the use of the covenants and addressed comments posted by Freehold Licensing. This one, however, will be a bit different. Today we will look at the requirements for a covenant to run with the land and whether such covenants would even be enforceable.
In yesterday's post I said that "It is my sincere hope that the courts will find an insufficient nexus between the covenant and the property to hold that it runs with the land and that they will find them unenforceable." There are three basic requirements for a covenant to run with the land:
- the intent of the parties as can be determined from the instruments of record;
- the covenant must be so closely connected with the real property that it touches and concerns the land; and,
- there must be privity of estate between the parties to the covenant.
INTENT OF THE PARTIES
There is usually very little difficulty establishing the intent of the parties. The covenant Freehold describes in its patent application specifically states "...for the foregoing benefits and other good, valuable and independent consideration, receipt of which is acknowledged by acceptance of the Deed, and as a covenant running with the land..." That would seem sufficient, but the analysis does not end there.
Source of Title Blog ::
TOUCH AND CONCERN
It was traditionally held that a covenant to pay a sum of money was usually personal in nature and did not run with the land, thus would not bind subsequent grantees. Thus, if I simply add a covenant to the deed when I sell my home that requires "the owner to pay me $1,000 on the first day of each year," that would be a personal covenant, affirmative in nature, that would not bind future owners regardless of the intent that it run with the land.
However, if the covenant stated that "the owner is to pay me $1,000 on the first day of each year for the maintenance of the joint driveway..." the covenant now ties the burden and benefit to the real estate and it would "touch and concern" the property. My neighbor is burdened by the annual payment, but also receives the benefit of my maintenance of the driveway. As one court stated "the distinction between covenants which run with land and covenants which are personal, must depend upon the effect of the covenant on the legal rights which otherwise would flow from ownership of land and which are connected with the land." Now, future owners of my neighbor's lot would be bound to continue to pay the annual sum, and future owners of my lot would be required to maintain it.
The Freehold covenant falls somewhere in between these two simple examples. The covenant states in part:
Within, and for the benefit of, the subdivision and the Lots therein, Declarant has created a master subdivision plan, set aside parkland and common areas, and constructed streets, drainage and other improvements, (jointly and severally "Improvements"), which a party taking possession of any Lot stipulates all and singularly benefit said Lot.
The covenant ties in the common areas of the development as the benefit to the owners of the lots in the subdivision. However, there is no mention of any ongoing maintenance. Owners of the lots may be able to enforce their right to use the common areas, but who is responsible for maintaining them? At least with the "parkland and common areas" this may be a legitimate concern.
The "streets, drainage, and other improvements" are a bit less clear to me. I don't really see how this is a benefit to the owners of the lots in the subdivision. Can you imagine that being a selling point when the Realtor walks through a potential buyer? "... And, the home comes with use of the street out front and there is drainage so when it rains the water has somewhere to go. BUT, when you sell the home you will have to pay the developer a couple of thousand dollars for your use of those benefits." That just seems a little absurd to me.
How far could you take such a "touch and concern" theory? Suppose it just said "the developer has built the house which you will benefit from as the owner, and in return you will pay him a one percent fee when you sell." Surely nothing could touch and concern the property more than the home itself. But, without a corresponding obligation to maintain it, such a covenant would be silly. Now, if the covenant read "the developer has built the house, and will mow the lawn, make any necessary repairs to the roof, and paint the exterior once every ten years, which you will benefit from as the owner, and in return you will pay him a one percent fee when you sell," that would start to make a little more sense (though it still seems more like a contract for personal services between the original grantor and grantee). We start to see this as more of two-way street - there is an ongoing obligation on the part of the coventor that provides a benefit to the owner in return for his burden to pay the fee.
The real issue here is whether the mere usage of the common elements in the Freehold covenant is sufficient to touch and concern the land that will enable it to run with the land. One court has stated that "at least it must 'touch' or 'concern' the land in a substantial degree..." Is the mere usage without maintenance "substantial?"
However, there is still more to consider...
PRIVITY OF ESTATE
Freehold touts their patent-pending covenant as a way "to restructure transactions in a way that unlocks hidden sources of equity and which can generate substantial cash today or a long term income stream which lasts for generations to come..." In fact, they even claim that the rights to that "income stream" can be sold. "The transfer fee rights are your property, just like oil and mineral rights and other valuable assets. You can sell them, pledge them as collateral, etc."
If a third-party acquires the rights to receive the transfer fee, without succeeding in ownership to any of the property, is there privity of estate sufficient to enforce the covenant? If the transfer fee is not designated for maintenance of the common areas, would any of the other property owners have standing to enforce the covenant? Surely, if it is the mere right to use the common areas the other owners of the lots would have no interest in suing another owner to force him to pay the transfer fee.
There was a case which addressed a similar situation in which a developer created a covenant requiring transfer fees to be paid upon future sales. In that case, the developer assigned his rights under the covenant to a homeowners' association and an owner of a lot challenged the ability of the association to enforce it. However, the covenant specified that the fee was to be "devoted to the maintenance of the roads, paths, parks, beach, sewers and such other public purposes..."
In such instance, the court found that when the association was formed "the property owners were expected to, and have looked to that organization as the medium through which enjoyment of their common right might be preserved equally for all." It held that "In substance if not in form the covenant is a restrictive covenant which touches and concerns the defendant's land, and in substance, if not in form, there is privity of estate between the plaintiff and the defendant."
Again, the Freehold covenant seems to fall in a gray area. It includes the usage of common areas, without the maintenance. Perhaps it is just a case of marketing gone wrong... rather than market the covenant as a way for the the declarant-developer to create a new revenue stream of future income, it should focus on the potential to create funding for an ongoing, legitimate homeowners' association to maintain the benefits for the owners of the lots. But, that doesn't seem to be their primary purpose, and it would hardly be new and patentable. That is what I find objectionable in the Freehold "strategy."
This would also seem to be harmonious with the Texas legislation (Texas Property Code § 5.017), which prohibits this type of covenant, but provides an exception for "property owners' associations." Private transfer fees do have a substantial and legitimate purpose that can be a real benefit to homeowners. Texas recognized that and we should all be aware that not all such covenants are problematic.
I believe that there is sufficient basis for finding these types of covenants unenforceable, those that require payment of a fee for mere usage of common areas without providing for maintenance. If the courts do truly look at substance over form I believe they would find that this is a private covenant to may a sum of money - not a real covenant that runs with the land. If there is no real obligation on the part of the coventor to maintain the common areas, or even if the transfer fee is not reasonably related to that purpose, there is really nothing more here than a covenant to pay a fee. Ultimately, the burden on the land should bear a reasonable relation to the benefit received; that is where I feel that these covenants do not measure up.
Robert A. Franco
SOURCE OF TITLE
rfranco@sourceoftitle.com
Categories: Abstractors, Innovation, Title Industry, Title Problems
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