Saturday, June 30, 2018

How Buyers Should Protect Themselves From Undesirable Restrictive Covenants

In my last post, I lauded the new Real Estate Condition Report's required disclosure of restrictive covenants and deed restrictions.  I write this post to emphasize that disclosure of the mere existence of restrictive covenants in a subdivision isn't good enough.

To review, sellers answer questions on a Real Estate Condition Report "YES," "NO," or "N/A."  A "YES" answer to the question "are you aware of restrictive covenants or deed restrictions on the property?" only tells buyers that there are restrictive covenants or deed restrictions; it does not inform buyers what uses of the property are actually restricted.  A mere affirmative answer to this question fails to inform buyers whether or not they can have an above-ground pool or hang out their laundry.

True, sellers are required to explain their "YES" responses.  The old Real Estate Condition Report contained an explanation section several lines in length at the end of the report.  The new Real Estate Condition Report contains explanation sections that run only three lines long at the end of each section.  Since the question about restrictive covenants is question 7 in the "LAND USE" section, sellers must explain a "YES" response to that question at the end of that section.  Even assuming that this question is the only one in that section to which the seller answered "YES," three lines is nowhere near enough space to explain restrictive covenants that may run over thirty pages in length.

Some real estate condition reports provide sellers with an option of answering "See Expert's Report" instead of "YES, "NO, or "N/A."  While restrictive covenants are not expert reports, such an option could prompt some sellers to attach their subdivision's restrictive covenants to their real estate condition reports.  Alternatively, some sellers might "explain" their "YES" response to the restrictive covenants question as "see attached restrictive covenants."  I doubt that either practice is common however.

Even before sellers were questioned about restrictive covenants and deed restrictions in the new Real Estate Condition Report, I drafted language in offers requiring sellers to deliver any restrictive covenants to buyers within 10 days of acceptance.  Even that isn't good enough however.  If the content of restrictive covenants is important to buyers and those restrictive covenants are not provided to buyers prior to acceptance, buyers might have to close on their purchase even if they later find out that they cannot have their pool.  Without a contingency or a right to rescission based on the contents of the restrictive covenants, the buyers have no excuse for failing to close and might forfeit their earnest money or even face liability for damages.

Going forward, I will draft language in offers requiring sellers to deliver any restrictive covenants to buyers within 10 days of acceptance AND giving buyers the right to rescind their offer and get their earnest money back in the event that they object to the content of any of those restrictive covenants.  Of course, some sellers will object to this language because it would allow buyers to rescind for purely subjective reasons (unlike rescissions based on the disclosure of defects in a Real Estate Condition Report, which are subject to a more objective standard).  Trouble is, I see no other way to protect buyers from purchasing a property with undesirable restrictive covenants other than demanding that sellers deliver said covenants to buyers before any offer is made, which is unrealistic under most circumstances.

Please reach out to me at rudolphkuss@stevensandkuss.com if you're interested in a property for sale in a residential subdivision. 

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