Property owners and developers enter into a variety of contracts to restrict the use of real property. For instance, a developer may wish to maintain the architectural integrity of a neighborhood or prevent a property use that might disturb the community’s character. A seller of property may want to require future buyers of the property to honor certain promises. Creating such a restriction requires attention.
Generally, contractual obligations only bind the parties signing the agreement. To bind subsequent property purchasers or successors-in-title, the contracting parties must create a restrictive covenant that “runs with the land.” Ohio courts examine the parties’ agreement to determine if the agreement runs with the land using three criteria:
1. There must be a clear intent of the original contracting parties for the covenant to bind successors;
2. The restrictive covenant must touch and concern the land; and
3. There must be privity of contract.
See LuMac Dev. Corp. v. Buck Point Ltd. Partnership, 61 Ohio App.3d 558, 562, 573 N.E.2d 681 (1988); Capital City Community Urban Redevelopment Corp. v. City of Columbus, 10th Dist. Franklin No. 08AP-769, 2009-Ohio-6835, ¶ 13.
The intent of the parties is an important element. The parties should clearly express their intent for the agreement to bind subsequent purchasers and “run with the land” in a written agreement that is recorded with the county recorder to ensure enforceability.
To “touch and concern” the land, the agreement must burden or benefit the property. A covenant that is personal in nature does not run with the land. Lone Star Steakhouse & Saloon of Ohio, Inc. v. Quaranta, 7th Dist. Mahoning No. 01 CA 60, 2002-Ohio-1540, ¶ 17.
The final element requires that the original contracting parties be in “privity of contract.” This common law principle provides that a contract cannot confer rights or impose obligations upon a person who is not a party to the contract. Said another way, only parties to contracts (and their direct successors) should be able to sue to enforce their rights.
To better understand restrictive covenants, it is helpful to review cases where Ohio courts examined them. One such case involves a historic theatre. A property development company, Capital City Community Urban Redevelopment Corporation, bought the Lincoln Theatre on the near east side of Columbus, Ohio in 1991. Capital City Community Urban Redevelopment Corp. v. City of Columbus, 10th Dist. Franklin No. 08AP-769, 2009-Ohio-6835. Capital City’s president, Charles Adrian, had a personal history with the theatre. Adrian grew up in a neighborhood near the theatre. As a child, he watched Saturday double-feature movies there. When Capital City sold the theatre, at Adrian’s direction, it included two, specific provisions in the real estate purchase contract to restrict the theatre’s use. One provision required the buyer and subsequent owners of the theatre to provide double-feature movies each Saturday for $1 or less to benefit the neighborhood children. A second provision required the buyer to install and maintain a bronze plaque on the front of the building to honor Adrian. The deed did not include the specific restrictions. It did, however, reference the parties’ purchase contract, saying the deed was “subject to” the restrictive covenants in the purchase contract.
Eventually, the City of Columbus took title to the Lincoln Theatre. When city officials removed the bronze plaque, Adrian had another plaque affixed to the theatre, which the city also removed. The city did not use the theatre to show movies. Instead, the city announced plans to use the theatre for jazz music lessons for children. Adrian and his company, Capital City, sued to enforce the restrictive covenant referenced in the deed. Id., ¶ 5. Although they were unsuccessful at the trial level, the Court of Appeals for the Tenth District ultimately found that the agreement was a restrictive covenant. Despite the fact that the agreement seemed personal in nature to Adrian, the appellate court found that the covenant indeed, “ran with the land.” The city was required to maintain the bronze plaque and show Saturday movies for as long as feasible as soon as the theatre became operational. Id., ¶ 19, 23.
In another case, a seller of commercial property sought to restrict selling groceries or alcoholic beverages. BM-Clarence Cardwell, Inc. v. Cocca Dev., Ltd., 5th Dist. No. 16 CA 3, 2016-Ohio-7751, 65 N.E.3d 829. Presumably, the seller sought to protect its own business that would be conducted at an adjacent property. The buyer agreed to the restriction, which was plainly written in the parties’ contract and included in the deed.
After purchasing the property, the buyer leased it to Dollar General. Dollar General intended to sell groceries, among other items. Id., ¶ 8-9. The property’s seller sued both the buyer and Dollar General, to enforce the restrictive covenant and prevent Dollar General from selling groceries. Id., ¶ 14.
The Court found the words used by the parties to be important. It recognized, “The covenant contains the phrase ‘successors and assigns.’ The use of these words plainly indicates an intent that the covenant run with the land.” Id., ¶ 49. The Court also found important the fact that the seller made the restrictive covenant a matter of public record by including it in the recorded deed. A lengthy and conspicuous paragraph in the deed plainly described the restrictive covenant. The Court therefore held that the covenant “ran with the land” and prevented Dollar General from selling groceries.
The Court of Appeals for the Fifth District refused to enforce a written memorandum which purportedly evidenced an agreement between family members, indicating that the brother owned the front 1.5 acres and his sister owned the 3.52 back acres of a property. The court found that the family failed to create a covenant running with the land. The parties did not adequately describe their agreement in the written memorandum and expressed no intention to bind subsequent property owners. The court found, “[W]e note that no mention of assigns, heirs, successors or other similar language is utilized.” Keil v. Thompson, 5th Dist. Morrow No. 03 CA 10, 2004-Ohio-6976, ¶ 14. The successors of the brother and sister were therefore unable to enforce the memorandum.
When entering into a real estate transaction, pay careful attention to restrictive covenants. To ensure a covenant runs with the land, best practice is to explicitly and clearly state the parties’ intention. Use language to make clear that the covenant binds “successors and assigns.” Consider including unequivocal language such as, “the parties intend for this covenant to run with the land.” Include the restrictive covenant as a material term in a written purchase agreement in a conspicuous place. Also include the restrictive covenant on the deed or other instrument transferring the property and record that instrument with the county recorder. Ensuring subsequent purchasers have notice of the restriction is key to enforcement. With careful attention, parties can effectively restrict future owners’ use of property.
Public-Private Partnerships are creating new opportunities for all industry players, including sureties. With new opportunity, however, comes new risk and uncertainty. It is essential that contractors involve experienced insurers, bonding agents and counsel to assist in understanding the risk potential in some P3s. After examining these and other related factors, contractors and sureties can then determine if P3s are a good opportunity. Each of the issues discussed above should be considered from a claims and underwriting perspective, and to the extent possible, the surety should be engaged as early in the contracting process as possible to avoid some of these risks.