328 Owners Corp. v. 330 W. 86 St. LLC, 8 N.Y.3d 372 (2007)

Land use restrictions referenced in the recitals of a deed, particularly when the deed derives its validity from a statute like Article 16 of the General Municipal Law (Urban Development Action Area Act), can be enforced against a successor grantee if the intent to create a covenant running with the land is evident from the entire instrument and surrounding circumstances, and the traditional requirements for a real covenant are met.

Summary

This case concerns the enforceability of land use restrictions on a property sold by New York City as part of an Urban Development Action Area Project (UDAAP). The City sold a deteriorated townhouse to a tenant-formed corporation (Oaks Corp) with deed recitals specifying that the property could only be used for conservation or rehabilitation. Oaks Corp quickly sold the property to 330 West 86th Street LLC (330 West), who planned to build a high-rise. The court held that the land use restrictions were enforceable against 330 West because the deed, read in its entirety and in conjunction with the UDAAP statute, demonstrated the intent that the restrictions run with the land, and the requirements of intent, touch and concern, and privity were satisfied.

Facts

The City of New York acquired a townhouse through tax foreclosure. The building was in deteriorated condition. The City designated the property as an Urban Development Action Area Project (UDAAP) to facilitate its rehabilitation. The City offered the tenants the right of first refusal to purchase the building, subject to restrictions on its use. The tenants formed Oaks Corp. to purchase the property for $340,000. The deed contained recitals referencing the UDAAP status and restrictions on land use (conservation, rehabilitation, or construction of one to four unit dwellings). Oaks Corp. sold the property to 330 West for $1 million, who intended to build a high-rise.

Procedural History

328 Owners Corp., an adjacent property owner, sued Oaks Corp. and the City, challenging the conveyance and seeking a declaration that the deed restricted land use. 330 West was added as a defendant after purchasing the property. The City filed cross-claims seeking to enforce the use restrictions. Supreme Court granted partial summary judgment to the City and 328 Owners Corp., declaring the property could only be used for conservation, rehabilitation, or construction of one to four unit dwellings. The Appellate Division reversed, granting summary judgment to 330 West. The City and 328 Owners Corp. appealed to the New York Court of Appeals.

Issue(s)

1. Whether the land use restrictions contained in the recitals of the deed, rather than the habendum clause, are enforceable against a subsequent purchaser.
2. Whether the requirements for a covenant to run with the land (intent, touch and concern, and privity) are satisfied in this case, such that the UDAAP restrictions are binding on 330 West.

Holding

1. Yes, because the intent of the parties, as gathered from the whole instrument including the City Council and Mayoral approvals, and surrounding circumstances, demonstrates that the land use restrictions were intended to run with the land.
2. Yes, because the deed and surrounding circumstances demonstrate the intent that the restrictions run with the land, the restrictions touch and concern the land, and there is privity of estate between the City and 330 West.

Court’s Reasoning

The court emphasized that Real Property Law § 240(3) requires every instrument transferring an interest in real property to be construed according to the intent of the parties, gathered from the whole instrument. While the habendum clause is important, restrictions outside that clause can be enforceable. The court found 28 references to the property’s UDAAP status in the deed and associated documents, indicating an intent to restrict land use. The court cited Matter of Lade v Abbott, 185 Misc 501, 507 stating that because the deed “derives all its validity” from article 16 of the General Municipal Law, its provisions must “be construed into and with the deed”. The court applied the three-part test from Neponsit Prop. Owners’ Assn. v Emigrant Indus. Sav. Bank, 278 NY 248 (1938) for determining whether a covenant runs with the land.

The court found intent based on the deed’s references to UDAAP, the clause stating covenants “shall run with the land,” and the circumstances of the sale, where the sponsor received benefits (low appraisal value, exemption from competitive bidding) in exchange for agreeing to the restrictions. The court stated, “the sponsor must have understood that the benefits it received—low appraisal value and exemption from both competitive bidding and a time-consuming land use review—were directly related to the City’s intent to restrict the use of the land for the purposes of the completion of the project.”

The court found that the covenant touched and concerned the land because, though some requirements were finite, they were relevant to the economic development of the property under Article 16. Citing City of New York v Delafield 246 Corp., 236 AD2d 11, 25, the court found that the durational restraint of General Municipal Law § 695, that the project be completed within a reasonable time, appears to be “merely a reflection of prudent business practices” and is not meant to restrain the ongoing duty to conserve, rehabilitate or reconstruct within the constraints of the deed and UDAAA. The court emphasized that the restrictions were rooted in the finding that the property’s condition impaired municipal development, and the new owner had notice of the restrictions.

Finally, the court found privity of estate due to the direct chain of title from the City to Oaks Corp. to 330 West. The court also noted that if the project identified in the deed recitals is accomplished, the restrictions may expire by their own terms, and owners can seek extinguishment under RPAPL 1951.