New York Law Review

Tag: Covenants Running with the Land

  • Suffolk Business Center, Inc. v. Applied Digital Data Systems, Inc., 78 N.Y.2d 383 (1991): Distinguishing Covenants Running with the Land from Future Interests

    78 N.Y.2d 383 (1991)

    Whether a clause in a deed is a covenant running with the land or a future interest on a condition subsequent depends on the parties’ intent, as gleaned from the deed’s language and the omission of a right of reentry effecting forfeiture.

    Summary

    Suffolk Business Center (SBC) sold land to Applied Digital Data Systems (Applied) with a clause requiring Applied to build improvements within a year, or SBC could repurchase the land at the original price. Applied built part of the improvements but failed to complete the rest. SBC sought specific performance of the repurchase option. The court had to determine if the clause was a covenant, enforceable by specific performance, or a future interest, subject to RPAPL 1953. The Court of Appeals held that the clause was a covenant running with the land, based on the parties’ intent as shown in the deed, because it used the term “covenant” and lacked a right of reentry. This allows SBC to seek specific performance.

    Facts

    Suffolk Business Center (SBC) sought to develop an industrial park and sold a parcel to Applied Digital Data Systems (Applied).
    The contract required Applied to start construction on improvements within one year and diligently continue until completion.
    If Applied failed, SBC had the option to repurchase the parcel at the original price.
    The deed, which was recorded, contained the construction/repurchase provision.
    Applied began but did not complete all required construction due to economic conditions.
    SBC tried to exercise its repurchase option, but Applied refused.

    Procedural History

    SBC sued Applied for specific performance in Supreme Court, Suffolk County.
    The Supreme Court granted Applied’s cross-motion for summary judgment and dismissed the complaint, suggesting SBC bring an action under RPAPL 1953.
    The Appellate Division affirmed the Supreme Court’s decision.
    The Court of Appeals granted SBC’s motion for leave to appeal.

    Issue(s)

    Whether the construction/repurchase provision in the deed constituted a covenant running with the land, enforceable by specific performance, or a future interest on a condition subsequent, enforceable only under RPAPL 1953.

    Holding

    No, because the parties intended to create a covenant running with the land enforceable in equity, as evidenced by the use of the term “covenants” in the deed and the omission of any right of reentry effecting a forfeiture.

    Court’s Reasoning

    The Court’s reasoning hinged on determining the parties’ intent from the deed’s language. The Court emphasized that the deed specifically used the term “covenants running with the land” in relation to the construction/repurchase provision. “[T]he deed to be delivered by the Seller under this Agreement shall contain such provisions as are necessary to implement the [construction/repurchase] provisions * * * so that such provisions shall constitute covenants running with the land“. This explicit language indicated the parties intended to create a covenant.

    Further, the absence of a right of reentry, which is typical of future interests on a condition subsequent, suggested that the parties did not intend a forfeiture. The Court noted that “a covenant is intended and preferred where, as here, the deed is tellingly silent as to any reentry authorization”.

    The Court distinguished covenants from future interests, noting that future interests often involve a forfeiture if the condition is not met, whereas the repurchase provision in this case required SBC to pay Applied the original purchase price, thus avoiding forfeiture in the traditional sense. The court emphasized that “the provision does not effect a forfeiture, which is usually an essential component of a future interest on a condition subsequent”.

    The Court also considered the legislative history of RPAPL 1953, which was designed to limit the enforceability of forfeiture provisions. Since the provision in question did not effect a forfeiture, the statute was deemed inapplicable.

    The dissenting opinion argued that the provision created a condition subsequent, as the right to repurchase was personal to the grantor (SBC). The dissent also contended that requiring Applied to reconvey the property for the original purchase price, when its value had significantly increased, constituted a forfeiture. However, the majority rejected this argument, focusing on the explicit language in the deed and the lack of a right of reentry.

    The court considered the distinction between a covenant and a condition subsequent, noting that a covenant is a promise concerning real property, while a condition subsequent involves a right of reacquisition triggered by a specific event. The characterization depends on the intent of the parties at the time of the transaction.

    Ultimately, the Court’s decision turned on the importance of interpreting the deed according to the parties’ intent, as evidenced by the specific language used and the absence of terms traditionally associated with future interests. The Court prioritized the specific use of the word “covenants” over the boilerplate language of the contract. This approach emphasizes the importance of clear and precise language in real estate transactions.

  • Orchard Hill Realties, Inc. v. Maas, 311 N.Y.S.2d 506 (1970): Affirmative Covenants and “Touch and Concern”

    Orchard Hill Realties, Inc. v. Maas, 47 A.D.2d 292, 366 N.Y.S.2d 682 (1975)

    For an affirmative covenant to run with the land and bind subsequent owners, it must satisfy three requirements: the original parties intended the covenant to run, there is privity of estate between the parties, and the covenant must touch and concern the land, meaning it substantially affects the ownership interest in the property.

    Summary

    Orchard Hill Realties, Inc. sued Maas to enforce a covenant in a deed requiring Maas to purchase water from Orchard Hill. The original deed contained a provision that the covenant would run with the land. Maas, a subsequent owner, refused to purchase water, having established his own well. The court held the covenant was not enforceable against Maas because, while the original parties intended the covenant to run with the land and privity of estate existed, it did not sufficiently “touch and concern” the land. The court emphasized that such covenants are disfavored due to potential restrictions on alienation.

    Facts

    In 1951, Orchard Hill Realties, Inc. (Orchard Hill), a developer, sold land to William and Pauline Baum. The deed required the Baums to purchase water for domestic use from Orchard Hill’s well from May 1st to October 1st each year for $35. The deed stated the covenants would run with the land. Maas became a successor in interest to the Baums after a series of conveyances. Maas’s deed did not contain the water purchase covenant, nor did it refer to any restrictions. Maas built his own well and refused to purchase water from Orchard Hill. Orchard Hill sued Maas to collect the annual fee for the water supply.

    Procedural History

    The trial court found the covenant ran with the land and was binding on Maas. The Appellate Division reversed, holding the covenant was not enforceable against Maas. The New York Court of Appeals affirmed the Appellate Division’s order.

    Issue(s)

    Whether a covenant requiring a grantee to purchase water seasonally from the grantor is enforceable against subsequent grantees when the covenant is only contained in the original deed and the subsequent grantee has an independent water source.

    Holding

    No, because while the original parties intended the covenant to run with the land, and there was privity of estate, the covenant did not sufficiently “touch and concern” the land and created a burden in perpetuity.

    Court’s Reasoning

    The court reaffirmed the three-part test for an affirmative covenant to run with the land from Neponsit Prop. Owners’ Assn. v Emigrant Ind. Sav. Bank, 278 N.Y. 248 (1938): (1) the original grantee and grantor must have intended that the covenant run with the land; (2) there must exist “privity of estate” between the party claiming the benefit of the covenant and the party upon whom the burden of the covenant is to be imposed; and (3) the covenant must be deemed to “touch and concern” the land with which it runs. The court emphasized that even with an express statement of intent for the covenant to run, it must still meet all legal requirements.

    The court focused on the “touch and concern” requirement, stating that a covenant must substantially affect the promisor’s legal interest in the property. Citing Neponsit, the court noted, “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 the ownership of land and which are connected with the land.”

    In this case, the covenant for seasonal water supply did not significantly affect Maas’s ownership rights or those of other property owners. Maas secured his own water source, and the record did not show that other owners would be deprived of water or face prohibitive costs if Maas terminated the service. The court characterized the agreement as a personal, contractual promise rather than a property interest.

    The court also expressed reluctance to enforce the covenant because affirmative covenants are disfavored due to concerns about undue restrictions on alienation and perpetual burdens, citing Nicholson v. 300 Broadway Realty Corp., 7 N.Y.2d 240 (1959). Unlike covenants in Nicholson and Neponsit, the water supply covenant had no outside limitation, creating a potential burden in perpetuity, which weighed against its enforcement.