PRIVATE RESTRICTIONS ON TRANSFERS OF TITLE€¦ · WFG National Title Insurance Company 3211...
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2019 Texas Land Title Institute – Private Restrictions on Transfers of Title Page 1
PRIVATE RESTRICTIONS
ON TRANSFERS OF TITLE
Leslie S. Johnson
Vice President and Texas State Counsel
WFG National Title Insurance Company
3211 Internet Blvd., Suite 100
Frisco, Texas 75034
877-366-8781
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Leslie S. Johnson
VP and Texas State Counsel
WFG National Title Insurance Company
Leslie Johnson is Vice President and Texas State Counsel
for WFG National Title Insurance Company. Leslie
underwrites title insurance transactions and provides legal
support, education, and training to WFG agents in Texas
and Oklahoma.
Before moving in-house to underwriting counsel and working for another national title insurance company,
Leslie practiced law for nearly a decade at Winstead PC in its Commercial Litigation Practice Group. There she represented local, regional and national clients in complex commercial and business cases, including real estate and financial services disputes. In particular, Leslie represented title agents and underwriters, including WFG, in title insurance claims matters.
Leslie is an alumni of the 2016 TLTA Alex H. Halff Leadership Academy and the 2013 Dallas
Association of Young Lawyers Leadership Class. She was recognized as a Texas Rising Star for
2016 and 2017. She has spoken at multiple TLTA events as well as the Texas Association of
Bank Counsel, and she is a chapter author for the Texas Foreclosure Manual. Leslie chairs the
TLTA Judiciary Committee, and is a member of the TLTA Legislative and Regulatory
Committees, as well as the CREW Dallas Programs Committee, the Dallas Bar Association, and
the Dallas Association of Young Lawyers. Leslie is licensed to and has practiced in front of all
the federal district courts in Texas as well as the U.S. Court of Appeals for the Fifth Circuit. She
also served as the 2019 Chair of Preston Royal Preschool’s Silent Auction.
Leslie earned her Bachelor of Arts from Texas A&M University, graduating summa cum laude
and as a member of Phi Beta Kappa. Leslie received her Juris Doctorate, cum laude, from Tulane
University Law School and was elected to the Order of the Barristers. During law school, she
served as a managing editor for the Tulane Journal of International & Comparative Law and was
the winner of Tulane’s Intraschool Appellate Competition. Leslie is married to her law school
sweetheart, Allan Johnson, and has two spirted children, Hazel and Jack.
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PRIVATE RESTRICTIONS ON TRANSFERS OF TITLE
I. INTRODUCTION
Private restrictions on the use and alienability of real property seem at odds with many
Texans’ belief that they have a fundamental right to use their own property as they wish. Even the
Texas Supreme Court looks with disfavor on “covenants restricting the free use of property.”
However, these restrictions are generally valid and binding on owners and purchasers, and they
provide important benefits to landowners, such as the ability to control land in a manner which is
socially preferable and increased value of the property. This paper provides a detailed review of
multiple types of private restrictions, including restrictive covenants, rights of first refusal, options
to purchase, and transfer fees; their impact on the conveyance of real property; and title insurance
considerations associated with such restrictions.
II. RESTRICTIVE COVENANTS
In general, deed restrictions are the means by which a party may limit another’s use of real
property. See Curlee v. Walker, 244 S.W. 497, 498 (Tex. 1922) (“The law recognizes the right of
parties to contract with relation to property as they see fit, provided they do not contravene public
policy and their contracts are not otherwise illegal.”). By far, the most common type of deed
restriction (and what is commonly used interchangeably with “deed restrictions”) is a restrictive
covenant. When property burdened by restrictive covenants is conveyed, questions inevitably
arise as to what exactly the restrictions prohibit, whether the property remains bound by them,
what can be done to avoid them, and what title insurance coverage can be given for them. These
questions are particularly relevant in the flip and new development scenarios, where existing
structures are demolished and new buildings constructed or new uses planned for the property.
This section addresses how Texas courts construe restrictive covenants, who can enforce them,
when they may be waived and the factors that influence that analysis, additional defenses to their
enforcement, and title insurance considerations.
A. What Do Restrictive Covenants Prohibit? How to Interpret Them
Restrictive covenants are treated and interpreted as contracts under Texas law. Pilarcik v.
Emmons, 966 S.W.2d 474, 478 (Tex. 1998); Ski Masters of Tex., LLC v. Heinemeyer, 269 S.W.3d
662, 668 (Tex. App.—San Antonio 2008, no pet.) (“A restrictive covenant is a contractual
agreement between the seller and the purchaser of real property.”). Thus, restrictive covenants are
subject to the general rules of contract construction, including the following:
• The intent of the parties must be ascertained from the instrument as a whole;
• Different instruments pertaining to the same purpose must be read together;
• The drafter’s intent must be determined from the “four corners” of the document
(meaning, the intent of the drafter as reflected in the language used in the document);
• The words of the instrument may not be enlarged, extended, stretched or changed by
construction; and
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• Courts must avoid any interpretation that nullifies or “reads out” a provision of the
instrument.
Tarr v. Timberwood Park Owners Association, Inc., 556 S.W.3d 274, 280 (Tex. 2018); Pilarcik,
966 S.W.2d at 478; Wilmoth v. Wilcox, 734 S.W.2d 656, 658 (Tex. 1987); Buckner v. Lakes of
Somerset Homeowners Ass’n, 133 S.W.3d 294, 297 (Tex. App.—Fort Worth 2004, pet. denied);
Scoville v. SpringPark Homeowner’s Ass’n, Inc., 784 S.W.2d 498, 502 (Tex. App.—Dallas 1990,
writ denied). Specific to restrictive covenants, courts must also “examine the covenants as whole
in light of the circumstances present when the parties entered the agreement.” Pilarcik, 966
S.W.2d at 478. More precisely, courts must give “the words used in the restrictive covenant . . .
the meaning which they commonly held as of the date the covenant was written, and not as of
some subsequent date.” Tarr, 556 S.W.3d at 280 (citing Wilmoth, 734 S.W.2d at 658). What this
means in practice is that the restrictive covenant arising from the 1940s deed in the chain of title
must be interpreted as it was understood in the 1940s, not as we understand or interpret it today.
Despite these construction rules, many real estate practitioners and courts rush to the
conclusion that a restrictive covenant is ambiguous. When a contract is ambiguous, the
interpretation of the instrument becomes a fact issue. Coker v. Coker, 650 S.W.2d 391, 394 (Tex.
1983)). Therefore, fact evidence must be taken, summary judgment is not available, and a quick
end to litigation over the restrictive covenant is not likely. See id. However, a determination that
a restrictive covenant is ambiguous should not be taken lightly. “Whether a restrictive covenant
is ambiguous is a question of law for the court to decide by looking at ‘the covenants as a whole
in light of the circumstances present when the parties entered the agreement.’” Tarr, 556 S.W.3d
at 280 (quoting Pilarcik, 966 S.W.2d at 478). A covenant will not be considered ambiguous if it
can be given a definite or certain legal meaning. Pilarcik, 966 S.W.2d at 478. “Mere disagreement
over the interpretation of a restrictive covenant does not render it ambiguous.” Buckner, 133
S.W.3d at 297. Recently in Tarr, the Texas Supreme Court took a page from the late Justice
Antonin Scalia and Bryan Garner’s book on legal interpretation to offer this instruction: “A word
or phrase is ambiguous when the question is which of two or more meanings applies; it is vague
when its unquestionable meaning has uncertain application to various factual situations.” Tarr,
556 S.W.3d at 290 (quoting ANTONIN SCALIA & BRYAN A. GARNER, READING LAW: THE
INTERPRETATION OF LEGAL TEXTS 31-32). Using the facts of the case, the court explained that “if
a court can assign a meaning to ‘residential purposes,’ the term is not rendered ambiguous solely
because the application of ‘its unquestionable meaning has uncertain application to various factual
situation.’” Id.
When a restrictive covenant is in fact ambiguous, there is an ongoing question in Texas
courts as to whether restrictive covenants should be given a strict or liberal construction. For
decades, Texas courts have adhered to a strict construction philosophy, as evidenced by a 1925
opinion of the Commission of Appeals adopted by the Texas Supreme Court:
Covenants or restrictive clauses in instruments concerning real
estate must be construed strictly, favoring the grantee and against
the grantor, and all doubts should be resolved in favor of the free
and unrestricted use of the premises. A reservation contained in an
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instrument of conveyance or lease which favors the grantor or lessor
and tends to limit the free use of the premises by the grantee or lessee
will not be enlarged by construction, but will be given effect
according to the plain meaning and intent of the language used.
Tarr, 556 S.W.3d at 281 (quoting Settegast v. Foley Bros. Dry Goods Co., 270 S.W. 1014, 1016
(1925)) (emphasis added). However, in 1987, the Texas Legislature added Section 202.003(a) to
the Texas Property Code, which mandates that a restrictive covenant “be liberally construed to
give effect to its purposes and intent.” (emphasis added). The stark difference in the statute’s
language compared to the common law approach has led to confusion in the courts:
[C]ourts suddenly had extreme “difficulty in ascertaining and
declaring the controlling general principles of the law,” because they
began to question whether this legislative enactment was an attempt
to contravene our long-adhered-to common-law standards. And,
unfortunately, “the legislature provided no explanation as to the
motivations or necessity for ... change” to help guide our courts. As
a result, Texas’ courts of appeals have grappled “with the varying
standards established by the passage of section 202.003 and the
historical common-law rules of construction” but “have been unable
to determine any uniform standard for interpreting ambiguous
restrictive covenants.”
Tarr, 556 S.W.3d at 283 (citing David A. Johnson, One Step Forward, Two Steps Back:
Construction of Restrictive Covenants After the Implementation of Section 202.003 of the Texas
Property Code, 32 TEX. TECH L. REV. 355, 358 (2001)). Many courts have simply avoided the
conflict by holding that the same result would be reached under either approach.
The Texas Supreme Court took up the issue in 2018 in Tarr when it addressed the
AirBNB/VRBO dilemma of whether the short term vacation rental of a single family residence
violated the subdivision’s residential-purpose and single-family-residence covenants. Id. at 276-
77. However, it refused to definitively answer the question:
We have not yet deliberated section 202.003(a)’s effect, if any, on
the construction principles we have long employed to interpret
restrictive covenants. Nor do we reach that decision today. We
don’t have to reconcile any potential conflict between section
202.003(a) and the common-law principles—or whether those
common-law standards can ever again be appropriately employed—
because our conclusion today would be the same regardless of
which interpretative standard prevails.
Id. at 284-85 (emphasis added). The Court ruled in favor of the homeowner, holding that the
“single-family residence restriction merely limits the structure that can properly be erected upon
Tarr’s tract and not the activities that can permissibly take place in that structure.” Id. at 287. The
Court also held that the residential-purpose covenant did not address leasing, use as a vacation
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home, short-term rentals, or minimum-occupancy durations and did not require owner occupancy
or occupancy by a tenant who uses the home as a domicile, but merely required that the activities
on the property comport with a “residential purpose” and not a “business purpose.” Id. at 290-91.
Thus, the debate over the correct interpretation standard is unlikely to be resolved any time
soon. The effect may be that courts will continue making their own judgments as to the meaning
of restrictive covenants with an eye toward the desired result. See, e.g., BCH Dev., LLC v.
Lakeview Heights Addition Property Owners’ Ass’n, No. 05-17-01096-CV, 2019 WL 2211479, at
*4-6 (Tex. App.—Dallas May 21, 2019, pet. denied) (citing Tarr extensively and finding that the
restriction limiting buildings to “one single family dwelling not to exceed one story in height” was
unambiguous as the commonly understood meaning of the term at the time the covenants were
written meant only one story of living space, and refusing to “resolve the parties’ disagreement
over whether the covenant is to be strictly construed or liberally construed.”). At a minimum,
interpretation of restrictive covenants remains a fertile ground for litigation.
B. Who Can Enforce Restrictive Covenants
After conveyance of a property burdened by a restrictive covenant, only those who have
standing to enforce the restrictive covenant against the new owner may do so. Standing requires
that the plaintiff demonstrate (1) that the restriction actually exists, and (2) that the restriction was
intended to inure to the plaintiff’s benefit. EWB-I, LLC v. PlazAmericas Mall Texas, LLC, 527
S.W.3d 447, 472 (Tex. App.—Houston [1st Dist.] 2017, pet. denied); see also Country Cmty.
Timberlake Vill., L.P. v. HMW Special Util. Dist. of Harris & Montgomery Cntys., 438 S.W.3d
661, 667 (Tex. App.—Houston [1st Dist.] 2014, pet. denied); see also Davis v. Skipper, 83 S.W.2d
318, 322 (Tex. 1935) (if party seeking enforcement cannot show that restriction to be enforced was
imposed to benefit that party’s land, “it is construed as a personal covenant merely with the
grantor.”). Thus, a third party with no connection to or benefit from the restrictive covenant cannot
sue to enforce it against the property owner allegedly in violation of it.
C. Are They Still Valid? Can They Be Avoided?
Restrictive covenants are oftentimes limited by their express language to a term of years.
But just as often, the covenants include renewal periods that continue automatically unless a
majority or more of the owners and interest holders bound by the restrictions agree to terminate
them. Rarely, if ever, will there be record evidence of termination of those restrictions, so the
restrictions usually cannot be removed from Schedule B on the basis of their own expiration.
Lenders and buyers may balk at the promulgated exceptions to all restrictive covenant and ask title
personnel to either remove them or insure over them. Whether such affirmative coverage can be
given for restrictive covenants that may be violated requires a fact-intensive analysis with little to
no supporting evidencing in the real property records, as demonstrated below.
1. Abandonment and/or Waiver
A court may refuse to enforce a covenant where it determines that the lot owners have
(1) abandoned the covenant itself, or (2) waived the right to enforce it. Vance v. Popkowski, 534
S.W.3d 474, 478 (Tex. App.—Houston [1st Dist.] 2017, pet. denied). However, practitioners and
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courts tend to use “abandonment” and “waiver” interchangeably (as well as “acquiescence” and
“estoppel”) and the standards are nearly identical for all of these terms. Ortiz v. Jeter, 479 S.W.2d
752, 756 (Tex. Civ. App.—San Antonio 1972, writ ref’d n.r.e.) (“In cases where enforcement of
restrictions has been denied because of prior uncontested violations, the courts have spoken in
terms of acquiescence, waiver, estoppel, abandonment, and, sometimes, changed conditions. No
serious effort has been made by most courts to delineate the contours of the various doctrines, and
where enforcement is denied because of prior violations, the various doctrines are used almost
interchangeably.”).
a. Factors Establishing Abandonment and/or Waiver
The standard for finding abandonment and/or waiver of a restrictive covenant is where “the
violations are so great as to lead the mind of the average man to reasonably conclude that the
restriction in question has been abandoned.” Tanglewood Homes Ass’n, Inc. v. Henke, 728
S.W.2d 39, 42 (Tex. App.—Houston [1st Dist.] 1987, writ ref’d n.r.e.) (citing Cowling v. Colligan,
312 S.W.2d 943, 945–46 (Tex. 1958); New Jerusalem Baptist Church, Inc. v. City of Houston, 598
S.W.2d 666, 669 (Tex. Civ. App.— Houston [14th Dist.] 1980, no writ)); see also BCH Dev., LLC
v. Lakeview Heights Addition Property Owners’ Ass’n, No. 05-17-01096-CV, 2019 WL 2211479,
at *7 (Tex. App.—Dallas May 21, 2019, pet. denied) (citing Hicks v. Loveless, 714 S.W.2d 30, 35
(Tex. App.—Dallas 1986, writ ref’d n.r.e.); Forest Hills Improvement Ass’n v. Flaim, No. 09-15-
00478-CV, 2017 WL 5179968, at *4 (Tex. App.—Beaumont Nov. 9, 2017, no pet.) (mem. op.);
EWB-I, LLC v. PlazAmericas Mall Tex., LLC, 527 S.W.3d 447, 466 (Tex. App.—Houston [1st
Dist.] 2017, pet. denied)).
Establishment of waiver is necessarily a fact-intensive inquiry, and thus a fact question in
court. BCH Dev., 2019 WL 2211479, at *9; Nolan v. Hunter, 04-13-00072-CV, 2013 WL
5431050, at *7 (Tex. App.—San Antonio Sept. 25, 2013, no pet.). Factors that courts consider in
determining whether abandonment or waiver has occurred include:
• The number of the existing violations;
• The nature of the existing violations;
• The severity of the existing violations;
• Any prior acts of enforcement of the covenant;
• Whether it is still possible to realize to a substantial degree the benefits intended
through the covenant;
• Whether the restrictive covenants contain a severability clause (providing that
invalidity of one covenant will not otherwise impact any other covenant, and all such
other covenants remain in full force and effect);
• Which covenants have been violated (finding that a waiver of one restriction does not
constitute waiver of another); and
• The numeric rate of violations.
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BCH Dev., 2019 WL 2211479, at *7-8; Tanglewood Homes, 728 S.W.2d at 43; Hicks, 714 S.W.2d
at 35; City of Houston v. Revels, No. 14-99-00139-CV, 2001 WL 699546, at *2 (Tex. App.—
Houston [14th Dist.] 2001, pet. denied) (mem. op.) (not designated for publication). At least one
court observed from prior decisions that covenant violation rates ranging from 1.9% to 8.9% are
insufficient to support a waiver of restrictions. Revels, 2001 WL 699546, at *2.
b. Trivial Violations and Single Property Owners
Does this mean that a property owner must object to every neighbor’s violation of every
restrictive covenant in order to prevent a finding of waiver? Not necessarily. Texas courts have
consistently found that “a property owner is not required to complain of a violation of a restriction
if the violation is merely trivial or does not materially affect him.” Nolan v. Hunter, 04-13-00072-
CV, 2013 WL 5431050, at *7 (Tex. App.—San Antonio Sept. 25, 2013, no pet.) (citing Stewart v.
Welsh, 178 S.W.2d 506, 508 (Tex. 1944); Garlington v. Boudreaux, 921 S.W.2d 550, 553 (Tex.
App.—Beaumont 1996, no writ)); see also Cox v. Melson-Fulsom, 956 S.W.2d 791, 794 (Tex.
App.—Austin 1997, no pet.). Therefore, a restrictive covenant may still be enforced even if a
party has failed to object to trivial violations of covenants. Texas courts have also distinguished
between the rights and obligations of a single property owner and those of an owner of multiple
properties within the subdivision, such as a developer. See Nolan, 2013 WL 5431050, at *7;
Spencer v. Maverick, 146 S.W.2d 819, 824 (Tex. Civ. App.—San Antonio 1941, no writ). While
an individual owner is only concerned about his or her property, a “proprietor is or may be directly
interested in violations of such covenants upon any part of the entire tract, and acquiescence on
his part may appropriately deny him the equitable right to enforce the covenants.” Spencer, 146
S.W.2d at 824 (internal citations omitted). Again, the existence of waiver or abandonment of the
right to enforce a restrictive covenant is highly dependent on the specific facts of the case.
c. Non-Waiver Provisions
More recent CCRs and other deed restrictions may contain “non-waiver” provisions that
purport to prevent a finding of waiver of the right to enforce a covenant. Such “non-waiver”
provisions typically read as follows:
No act or omission by any party hereto or any person hereafter
acquiring any interest in any tract in said subdivision through or
under same shall ever be construed as a waiver of the right to enforce
any of these covenants, either against such person or against any
other person.
The plain language of this type of provision appears to preclude any waiver or abandonment of a
covenant based on any failure to prosecute a covenant violation. These non-waiver provisions are
considered valid and binding, and they have been enforced in the context of restrictive covenants.
See A.G.E., Inc. v. Buford, 105 S.W.3d 667, 676 (Tex. App.—Austin 2003, pet. denied).
However, a recent line of restrictive covenant cases has held that non-waiver provisions
may be waived. In Musgrove v. Westridge Street Partners I, LLC, the court held that non-waiver
provisions in restrictive covenants could be waived, just like other contractual provisions. No. 2-
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07-281-CV, 2009 WL 976010, at *4 (Tex. App.—Fort Worth Apr. 9, 2009). It also found that the
non-waiver provision would be “ineffective if a complete abandonment of the entire set of
[r]estrictions has occurred,” and that abandonment occurs “when the violations are so pervasive
that they have destroyed the fundamental character of the neighborhood.” Id. (internal citations
omitted) (emphasis added).
In 2017, in a lease dispute case, the Texas Supreme Court confirmed that non-waiver
provisions could be waived expressly or impliedly, except that waiver of a non-waiver provision
could not be “anchored in the same conduct the parties specifically agreed would not give rise to
a waiver of contract rights” but required intentional conduct inconsistent with claiming the right
to enforce the non-waiver provision. Shields L.P. v. Bradberry, 526 S.W.3d 471, 474, 485 (Tex.
2017).
Later in 2017, the court of appeals in Vance v. Popkowski clarified the Musgrove holding
to find that a non-waiver provision precludes a finding that particular restrictive covenants were
abandoned, unless the landowner demonstrates: (1) a complete abandonment of the entire set of
restrictive covenants, including the non-waiver provision; or (2) that the non-waiver provision
itself had been waived. 534 S.W.3d 474, 480-81 (Tex. App.—Houston [1st Dist.] 2017, pet.
denied). In Vance, the landowner that admittedly violated the “residential use only” restrictive
covenant obtained jury findings that the specific covenant had been abandoned. Id. at 481.
However, he failed to request any jury questions on whether the non-waiver provision had been
waived, either standing alone or as a result of complete abandonment of the entire set of
subdivision restrictions so pervasive that the fundamental character of the neighborhood was
destroyed. Id. Consequently, that the landowner did not overcome the non-waiver provision and
establish his affirmative defense of abandonment, as there was no evidence that the non-waiver
provision was in fact waived. Id. Two recent cases addressing non-waiver provisions in restrictive
covenants have reached similar results. See Clark v. Litchenburg, 05-18-00278-CV, 2019 WL
4010771, at *5 (Tex. App.—Dallas Aug. 26, 2019, no pet. h.); EWB-I, LLC v. PlazAmericas Mall
Texas, LLC, 527 S.W.3d 447, 467–68 (Tex. App.—Houston [1st Dist.] 2017, pet. denied).
Accordingly, while a non-waiver provision in restrictive covenants is not determinative of
whether waiver and/or abandonment defenses may be asserted, substantial evidence is required to
overcome it. Be aware of whether the deed restrictions burdening the property include such a
provision, as it may preclude any defense of waiver or abandonment if a future use of the property
does not conform to the requirements of the deed restrictions.
2. Changed Conditions
Courts may also refuse to enforce restrictive covenants upon “changed conditions.” In
order to assert this defense, the property owner must prove that “there has been such a change of
conditions in the restricted area or surrounding it that it is no longer possible to secure in a
substantial degree the benefits sought to be realized through the covenant.” Cowling v. Colligan,
312 S.W.2d 943, 945 (Tex. 1958); see also Davis v. Canyon Creek Estates Homeowners Ass’n,
350 S.W.3d 301, 309 (Tex. App.—San Antonio 2011, pet. denied). “[W]here the reason for
enforcing a restrictive covenant has ceased, equity will no longer enforce the covenant.” Moseley
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v. Arnold, 486 S.W.3d 656, 663 (Tex. App.—Texarkana 2016, no pet.) (quoting La Rocca v.
Howard–Reed Oil Co., 277 S.W.2d 769, 772 (Tex. Civ. App.–Beaumont 1955, no writ)). “It is
not enough that a change reduces the value of the benefit sought to be realized through the
restriction” but also a full elimination of “all benefits created by the restriction” is not required.
EWB-I, 527 S.W.3d at 458.
Like waiver and abandonment, whether conditions have changed sufficiently to warrant
voiding a restrictive covenant is a fact-intensive analysis. Id. (citing Lebo v. Johnson, 349 S.W.2d
744, 749–50 (Tex. Civ. App.—San Antonio 1961, writ ref’d n.r.e.)). The alleged changed
circumstances must be “radical,” and courts will consider:
• The size of the restricted area;
• The location of the restricted area with respect to where the change has occurred;
• The type of change or changes that have occurred;
• The character and conduct of the parties or their predecessors in title;
• The purpose of the restrictions;
• The unexpired term of the restrictions (to some extent); and
• A balancing of the equities.
Davis, 350 S.W.3d at 309 (citing Simon v. Henrichson, 394 S.W.2d 249, 254 (Tex. Civ. App.—
Corpus Christi 1965, writ ref’d n.r.e.)); Cowling, 312 S.W.2d at 946. However, a court cannot
void a restrictive covenant solely on the ground that the property is no longer suitable for
residential purposes and it would be unfair to the current owner to continue to subject the property
to that restriction. Cowling, 312 S.W.2d at 945. The fairness to the current owner is merely one
consideration in the overall analysis that must be weighed against the other lot owners who want
to maintain the residential character of the area. Id. As early as the 1960s, Texas courts have
rejected the expansion of commerce as a sufficient reason standing alone to void a restrictive
covenant. See Lebo, 349 S.W.2d at 751 (“In every growing city it is inevitable that sooner or later
commercial and business areas must come face to face with residential areas, and it is then that the
restrictions are most valuable to the interior lot owners. It is when the outer tier of lots become
more valuable for commercial and business purposes that the restrictions come into play and
prevent the residential area from being taken over by commercial establishments.”). Additionally,
a property owner cannot rely on events that occurred prior to his or her purchase of the property
to support a changed circumstances defense. Oldfield v. City of Houston, 15 S.W.3d 219, 228
(Tex. App.—Houston [14th Dist.] 2000, pet. denied) (superseded by statute on other grounds).
3. Limitations and Laches
Texas courts are in agreement that the four-year limitations period under Texas Civil
Practice and Remedies Code § 16.051 governs suits to enforce deed restrictions. See BCH Dev.,
2019 WL 2211479, at *10; Girsh v. St. John, 218 S.W.3d 921, 925 (Tex. App.—Beaumont 2007,
no pet.); Air Park–Dallas Zoning Comm. v. Crow–Billingsley Airpark, Ltd., 109 S.W.3d 900, 911
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(Tex. App.—Dallas 2003, no pet.); Malmgren v. Inverness Forest Residents Civic Club, Inc., 981
S.W.2d 875, 877 (Tex. App.—Houston [1st Dist.] 1998, no pet.); Colton v. Silsbee State Bank,
952 S.W.2d 625, 630 (Tex. App.—Beaumont 1997, no writ). Limitations begin to run upon a
breach of the restrictive covenant. BCH Dev., 2019 WL 2211479, at *10; Girsh, 218 S.W.3d at
925.
When a breach actually occurs for purposes of the accrual of limitations can be a moving
target. Where there are multiple violations of a restrictive covenant, Texas courts have considered
whether the original violation is “insignificant or insubstantial” and held that limitations actually
ran from the date of the subsequent and substantial covenant violation. Bollier v. Austin Gurdwara
Sahib, Inc., 03-09-00313-CV, 2010 WL 2698765, at *4 (Tex. App.—Austin July 9, 2010, pet.
denied) (citing Colton, 952 S.W.2d at 630). However, such an analysis only applies to a violation
that may be stopped and restarted, such commercial use of a structure in violation of a residential-
use-only covenant or parking of mobile home or camper on residential lots. Violations like the
location of a structure over the building line should have a clear beginning date, like the completion
of construction, and cannot be easily moved.
If the statute of limitations has not yet run, a defendant seeking to prevent enforcement of
the restrictive covenant may assert laches. To raise the defense of laches, “there must be delay on
the part of the complaining party which results in injury to the defendant.” Dempsey v. Apache
Shores Prop. Owners Ass’n, Inc., 737 S.W.2d 589, 596 (Tex. App.—Austin 1987, no writ) (citing
Culver v. Pickens, 176 S.W.2d 167, 170–71 (Tex. 1943)); see also Air Park-Dallas, 109 S.W.3d
at 911 (“Under equitable principles, the essential elements of a laches affirmative defense are
(1) unreasonable delay in asserting one’s legal or equitable rights, and (2) a good faith change of
position by another to his detriment because of the delay.”). The evidence in support of a laches
defense often overlaps significantly (if not entirely) with evidence supporting a waiver defense,
and considering the equitable nature of the remedy, courts are often unwilling to apply it.
4. Unclean Hands
Defendants have also used the “unclean hands doctrine” as another defense to enforcement
of restrictive covenants. Under this doctrine, “a court may refuse to grant equitable relief, such as
an injunction, sought by ‘one whose conduct in connection with the same matter or transaction has
been unconscientious, unjust, or marked by a want of good faith, or one who has violated the
principles of equity and righteous dealing.’” Park v. Escalera Ranch Owners’ Ass’n, Inc., 457
S.W.3d 571, 597 (Tex. App.—Austin 2015, no pet.) (quoting In re Jim Walter Homes, Inc., 207
S.W.3d 888, 899 (Tex. App.—Houston [14th Dist.] 2006, orig. proceeding)). The doctrine only
applies in restrictive covenant cases “when the plaintiff is guilty of the same actions of which the
defendant is accused,” such as where both parties violated building setback lines. Fox v. O’Leary,
No. 03–11–00270–CV, 2012 WL 2979053, at *7 (Tex. App.—Austin July 10, 2012, pet. denied)
(mem. op.). The party asserting unclean hands will have the burden to show precisely how it was
injured by the other party’s unlawful or inequitable conduct, and courts are loathe to apply the
doctrine unless the defendant has been seriously harmed and there are no other available remedies.
Id. (citing Paciwest, Inc. v. Warner Alan Props., LLC, 266 S.W.3d 559, 571 (Tex. App.—Fort
Worth 2008, pet. denied)). Therefore, unless the defendant can demonstrate specific and serious
2019 Texas Land Title Institute – Private Restrictions on Transfers of Title Page 12
harm caused by the plaintiff’s own violation of the same restrictive covenant, application of the
doctrine is unlikely.
D. Title Insurance Exceptions to and Coverage for Restrictive Covenants
The Texas Title Commitment (T-7) and the Texas Owner’s Policies (T-1 and T-1R) and
Loan Policies (T-2 and T-2R) clearly except to the existence of any covenants, conditions and
restrictions of record. However, remember that the Loan Policies also insure that restrictive
covenants have not been violated “so as to affect, and that future violation thereof will not affect,
the validity or priority of the insured Mortgage.” See T-2, Sch. B, Paragraph 1; see also T-2R,
Sch. B, Paragraph 1.
Specific endorsements and express insurance are available to further insure against the
possible effects of restrictive covenants. Paragraph 1 of the T-17 Planned Unit Development
Endorsement provides insurance against loss due to:
Present violations of any restrictive covenants referred to in
Schedule B which restrict the use of the land, except violations
relating to environmental protection unless a notice of a violation
thereof has been recorded or filed in the public records and is not
excepted in Schedule B. The restrictive covenants do not contain
any provisions which will cause a forfeiture or reversion of title.
Similarly, Paragraph 3 of the T-19 and T-19.1 provide expansive coverage for violations of
restrictive covenants, including covenant violations that impair or invalidate the insured mortgage,
and violations of covenants on the land. Even the T-28 Condominium Endorsement provides
coverage for “present violations of any restrictive covenants which restrict the use of the unit and
its common elements . . . .”
Additionally, an underwriter may “insure over” a restrictive covenant excepted in Schedule
B by use of one of the promulgated insuring paragraphs in P-39 Express Insurance. Thus, if the
underwriting requirements are met or the underwriter considers the risk acceptable, affirmative
coverage may be given for a restrictive covenant that has actually or potentially been violated.
However, such coverage is notoriously difficult to give and involves substantial amounts of risk.
Underwriters typically consider the possible defenses to enforcement discussed above, as well as
whether the limitations period has definitively run or laches may apply.
II. RIGHTS OF FIRST REFUSAL AND OPTIONS TO PURCHASE
Like restrictive covenants, rights of first refusal and options to purchase are specific
burdens on the purchaser’s property, and the purchaser will take title subject to the rights of the
holder of each. Yet, rights of first refusal and options are contracts and therefore may be time-
barred if sufficient time has passed after a breach. Additionally, certain endorsements can provide
affirmative coverage over rights of first refusal and options, and options themselves may be
insured.
2019 Texas Land Title Institute – Private Restrictions on Transfers of Title Page 13
A. Definition of a Right of First Refusal and Remedies for Its Breach
A right of first refusal (“ROFR”) is a contract between a property owner (the “Grantor”)
and a prospective purchaser (the “Holder”) in which the Grantor conveys to the Holder “a
preferential right to purchase the subject property on the same terms offered by or to a bona fide
purchaser.” Tenneco Inc. v. Enter. Prods. Co., 925 S.W.2d 640, 644 (Tex. 1996). A typical ROFR
requires the Grantor to: (1) notify the Holder of any third-party offer to purchase the property; and
(2) offer to sell the property to Holder on the same terms and conditions as offered by the third-
party. Archer v. Tregellas, 566 S.W.3d 281, 287 (Tex. 2018) (internal citations omitted). The
Holder may then: (1) purchase the property under the same terms and conditions as the third party’s
offer; or (2) decline to purchase the property. Id. If the Holder declines the offer, then the owner
is free to sell the property to the third-party. Id. The ROFR is not a conveyance of title, but rather
“a property interest that ‘runs with the land itself . . . .” Archer, 566 S.W.3d at 287 (quoting Stone
v. Tigner, 165 S.W.2d 124, 127 (Tex. Civ. App.—Galveston 1942, writ ref’d)).
If the Grantor fails to offer the Holder the right to purchase the property after the Grantor
receives a third-party offer, the Holder may sue for breach of contract and seek either: (1) money
damages; or (2) specific performance to require conveyance of the property to the Holder. Id. But
if the Grantor has already conveyed the property to the third party, then the Holder can only obtain
money damages from the Grantor. Id. However, if the third-party purchaser had actual or
constructive notice of the ROFR, the third party “stands in the shoes of the original seller when
specific performance is sought and may be compelled to convey title to the [Holder].” Id.
B. Limitations and the Discovery Rule After Breach of a Right of First Refusal
Because a ROFR is a contract, remedies for its breach must be pursued within the
applicable statute of limitations for contracts – four years after the cause of action accrued – or
otherwise those remedies are barred. TEX. CIV. PRAC. & REM. CODE § 16.004(a)(1). In Archer v.
Tregellas, the Texas Supreme Court recently confirmed that a “right of first refusal is breached
when property is conveyed to a third party without notice to the rightholder.” 566 S.W.3d at 288.
Thus, the cause of action accrues when the Grantor conveys the property to the third party
purchaser without notice to the Holder, and the Holder has four years from that conveyance to
bring suit. The Court explicitly rejected the Holder’s argument that limitations did not begin to
run until it received notice of the sale (more than four years after the conveyance) because the third
party purchaser took the property subject to the ROFR and the Holder did not attempt to exercise
its right until that time. Id. at 289. According to the Court:
The ROFR was breached when the [Grantor] conveyed their mineral
interest without notifying [Holder] of the [third party’s] offer. At
that point, [Holder’s] preemptive right was impaired despite the fact
that the [third party] took the property subject to that right. This is
because even if [the Holder] retained the right to purchase the
mineral interest (albeit from the [third party] rather than the
[Grantor]) once they learned of the conveyance, they lost the right
2019 Texas Land Title Institute – Private Restrictions on Transfers of Title Page 14
to purchase the interest at the time contemplated by the ROFR:
before the property was sold to a third party.
Id. at 289 (emphasis in original).
However, the running of a limitations period can generally be suspended (and thus the time
to file suit extended) where the “discovery rule” applies. The discovery rule defers accrual of the
limitations period until the plaintiff knew or should have known of the facts giving rise to the cause
of action. The discovery rule is applicable when two factors are established: (1) the nature of the
injury is inherently undiscoverable, and (2) the evidence of the injury is objectively verifiable. Id.
at 290. “An injury is inherently undiscoverable when it is ‘unlikely to be discovered within the
prescribed limitations period despite due diligence.’” Id. (quoting Via Net. V. TIG Ins. Co., 211
S.W.3d 310, 313-14 (Tex. 2006)). Whether an injury is “inherently undiscoverable” is not
determined on the facts of each, but rather on a “categorical basis” – meaning an analysis of
whether the particular injury was “the type of injury that could be discovered through the exercise
of reasonable diligence.” BP Am. Prod. Co. v. Marshall, 342 S.W.3d 59, 66 (Tex. 2011).
In Archer, the Holder also argued the discovery rule applied to prevent limitations from
running on its breach of the ROFR claim until it knew of the sale to the third party. The Texas
Supreme Court agreed, holding that:
A grantor’s conveyance of property in breach of a right of first
refusal, where the rightholder is given no notice of the grantor’s
intent to sell or the purchase offer, is inherently undiscoverable and
that the discovery rule applies to defer accrual of the holder’s
cause of action until he knew or should have known of the injury.
Id. at 292 (emphasis added). The Court determined that because the Holder had no duty to act
until it received notice of a third party’s offer to purchase the property, the Holder had no reason
to believe that its interest in the property may have been impaired and thus no duty to monitor the
public records for evidence that its ROFR had been breached. Id. The Court also considered the
competing equities – preventing stale claims on one hand, and discouraging deceptive conduct and
not barring claims before a party knows it has been injured on the other – and found that in this
instance they weighed in favor of applying the discovery rule. Id.
As a result of Archer, a purchaser who takes title to property with actual or constructive
notice that the property is subject to a ROFR may be subject to a breach of contract claim well
after four years from the date of its purchase. That breach of contract suit will not seek monetary
damages from the purchaser, but rather specific performance of the ROFR and an order conveying
the property from the purchaser to the Holder of the ROFR. Such an order would constitute a
complete failure of title. Therefore, the best practice is to obtain and record a full and complete
release of the ROFR signed by the Holder. At an absolute minimum, the ROFR must be listed as
an exception in Schedule B of any title insurance policy for the property. But remember too, that
the T-17 gives coverage for “[t]he failure of title by reason of a right of first refusal to purchase
the land which was exercised or could have been exercised at Date of Policy” and the T-19 and T-
19.1 insure against damages due to “[e]nforcement of a private right” defined as an option to
2019 Texas Land Title Institute – Private Restrictions on Transfers of Title Page 15
purchase and a right of first refusal, among others. Additionally, the T-28 insurances against “[t]he
failure of title by reason of a right of first refusal to purchase the unit and its common elements
which was exercised or could have been exercised at Date of Policy.”
C. Definition of Option to Purchase and Title Insurance for Options
While some practitioners use the terms “right of first refusal” and “option”
interchangeably, the two are distinct contracts. Jarvis v. Peltier, 400 S.W.3d 644, 649 (Tex.
App.—Tyler 2013, pet. denied) (“‘Right of first refusal’ and ‘option’ have distinct meanings.”).
Unlike an ROFR, an option is “a privilege or right that the owner of the property gives another to
buy certain property at a fixed price within a certain time.” Id. at 650 (citing Casa El Sol-
Acapulco, S.A. v. Fontenot, 919 S.W.2d 709, 717 n.9 (Tex. App.—Houston [14th Dist.] 1996, writ
dism’d)) (emphasis added). “A party with a right of first refusal cannot compel a sale, but a
purchase optionee may, before the option expires, compel the owner to sell under the terms set out
in the option.” Weaver v. H.E. Lacey, Inc., 562 S.W.3d 114, 119 (Tex. App.—Texarkana 2018,
pet. denied). An ROFR is effectively a dormant option that ripens into an enforceable option when
the ROFR grantor communicates to the holder a third party’s offer to purchase the property. Id.;
Archer, 566 S.W.3d at 287. Like ROFRs, options are enforced through a suit for breach of contract
and specific performance where the grantor of the option fails to convey the property to the holder
upon full performance by the holder. See Lewis v. Brown, 321 S.W.2d 313, 315-16 (Tex. Civ.
App.—Fort Worth 1959, writ ref’d n.r.e.). Options are commonly standalone agreements;
however, they may also be found in leases, deeds of trust, wills, and even deeds (as a right to
repurchase). Such purchase options must be supported by sufficient consideration, separate from
any related lease or contract, in order to be enforceable. Rollingwood Tr. No. 10 v. Schuhmann,
984 S.W.2d 312, 316 (Tex. App.—Austin 1998, no pet.).
Like ROFRs, options are afforded affirmative coverage under several endorsements,
including the T-17, T-19, T-19.1, and the T-28. Also, title insurance is theoretically available for
options to purchase real property. However, consult your underwriter as to whether he or she is
willing to insure an option. If so, your underwriter will likely: (1) provide you with specific
language for describing the option in Schedule A; (2) require Schedule B exceptions to the terms
of the option itself, the terms of any related lease or contract, the enforceability of the option,
and/or any bankruptcy of the grantor; and (3) limit the amount of the policy to the consideration
paid for the option.
III. PRIVATE TRANSFER FEES
Private transfer fees (“PTFs”) required upon the sale of real property also represent a type
of restriction or impediment to the transfer of title. PTFs are typically found in development
declarations, CCRs, or other covenants recorded in the real property records. They may also be
found in recorded and unrecorded contracts, although this is a rare occurrence.
The viability of most PTFs is limited due to the 2011 passage of Texas’ version of the
ALTA/NAR model statute limiting the enforcement of private transfer fee covenants, found at
Texas Property Code § 5.201 – § 5.207. Section 5.202(a) makes clear that except for certain
exemptions, “a private transfer fee obligation created on or after the effective date of this
2019 Texas Land Title Institute – Private Restrictions on Transfers of Title Page 16
subchapter [June 17, 2011] is not binding or enforceable against a subsequent owner or
subsequent purchaser of an interest in real property and is void.” Thus, private transfer fees created
on or after June 17, 2011 are not valid unless they fall into one of the following statutory exceptions
found in § 5.202(b):
• Purchase price for the property
o § 5.202(b)(1): “Consideration paid by a purchaser to a seller for an interest in
real property transferred, including, as applicable, a mineral interest transferred,
including additional consideration paid to a seller for the property’s
appreciation, development, or sale after the interest in the property has been
transferred to the purchaser, if the additional consideration is paid only once
and that payment does not bind successors in interest to the property to any
private transfer fee obligation;”
• Real estate commissions
o § 5.202(b)(2): “A commission paid to a licensed real estate broker under a
written agreement between a seller or purchaser and the broker, including an
additional commission for the property's appreciation, development, or sale
after the interest in property is transferred to the purchaser;”
• Interest and loan/lender fees
o § 5.202(b)(3): “Interest, a fee, a charge, or another type of payment to a lender
under a loan secured by a mortgage on the property, including: (A) a fee payable
for the lender’s consent to an assumption of the loan or transfer of the property
subject to the mortgage; (B) a fee or charge payable for an estoppel letter or
certificate; (C) a shared appreciation interest or profit participation; or (D) other
consideration payable in connection with the loan;”
• Rent and lease fees
o § 5.202(b)(4): “Rent, reimbursement, a fee, a charge, or another type of
payment to a lessor under a lease, including a fee for consent to an assignment,
sublease, encumbrance, or transfer of a lease;”
• Options and rights of first refusal
o § 5.202(b)(5): “Consideration paid to the holder of an option to purchase an
interest in property, or to the holder of a right of first refusal or first offer to
purchase an interest in property, for waiving, releasing, or not exercising the
option or right when the property is transferred to another person;”
• Recording fees to the county clerk
o § 5.202(b)(6): “A fee payable to or imposed by a governmental entity in
connection with recording the transfer of the property;”
2019 Texas Land Title Institute – Private Restrictions on Transfers of Title Page 17
• HOA dues and fees, Condo dues and fees, and Timeshares
o § 5.202(b)(7): “Dues, a fee, a charge, an assessment, a fine, a contribution, or
another type of payment under a declaration or other covenant or under law,
including a fee or charge payable for a change of ownership entered in the
records of an association to which this subdivision applies or an estoppel letter
or resale certificate issued under Section 207.003 by an association to which
this subdivision applies or the person identified under Section 209.004(a)(6),
provided that no portion of the fee or charge is required to be passed through to
a third party designated or identifiable in the declaration or other covenant or
law or in a document referenced in the declaration or other covenant or law,
unless paid to: (A) an association as defined by Section 82.003 or 221.002 or
the person or entity managing the association as provided by Section
82.116(a)(5) or 221.032(b)(11), as applicable; (B) a property owners’
association as defined by Section 202.001 or 209.002 or the person or entity
described by Section 209.004(a)(6); or (C) a property owners’ association as
defined by Section 202.001 that does not require an owner of property governed
by the association to be a member of the association or the person or entity
described by Section 209.004(a)(6);”
• Club memberships related to the property
o § 5.202(b)(8): “Dues, a fee, a charge, an assessment, a fine, a contribution, or
another type of payment for the transfer of a club membership related to the
property;”
• Payments to charities (as long as the payments are used on matters that touch and
concern the property)
o §5.202(b)(9): “Dues, a fee, a charge, an assessment, a fine, a contribution, or
another type of payment paid to an organization exempt from federal taxation
under Section 501(c)(3) or 501(c)(4), Internal Revenue Code of 1986, only if
the organization uses the payments to directly benefit the encumbered property
by: (A) supporting or maintaining only the encumbered property;
(B) constructing or repairing improvements only to the encumbered property;
or (C) providing activities or infrastructure to support quality of life, including
cultural, educational, charitable, recreational, environmental, and conservation
activities and infrastructure, that directly benefit the encumbered property;” and
• Veterans’ Land Board assignment fees
o §5.202(b)(10): “A fee payable to or imposed by the Veterans’ Land Board for
consent to an assumption or transfer of a contract of sale and purchase.”
The majority of PTFs that fall within these exceptions do so under § 5.202(b)(9) as
payments to charities. Section 5.202(c) provides additional guidance as to which entities may
collaterally benefit from the PTFs under § 5.202(b)(9)(c) and therefore validate the PTF, including
2019 Texas Land Title Institute – Private Restrictions on Transfers of Title Page 18
a community composed of: (1) property that is adjacent to the encumbered property, or
(2) property a boundary of which is not more than 1,000 yards from a boundary of the encumbered
property. PTFs that are paid to a school for education activities may also collaterally benefit
property that does not fall within the prior two categories, and thus be valid, if the encumbered
property is located within: (1) the school’s assigned attendance zone and (2) a county with a
population of more than 650,000 that is adjacent to two counties, each of which has a population
of more than 1.8 million. Section 5.202(d) provides that payments charity will be deemed to
directly benefit the property if: (1) the organization provides to the general public activities or
infrastructure described by subsection (b)(9)(C); (2) the provision of activities or infrastructure
substantially benefits the encumbered property; and (3) the governing body of the organization:
(A) is controlled by owners of the encumbered property; and (B) approves payments for activities
or infrastructure at least annually. Simply put, the requirements for PTFs that purport to benefit
charities are stringent, and care must be taken to determine whether the PTF meets these
requirements before determining that it is valid.
For private transfer fee covenants that existed prior to June 17, 2011, a “Notice of Private
Transfer Fee Obligation” (the “Notice”) was required to be recorded on or before January 31, 2012
in the real property records of each county in which the encumbered property is located. TEX.
PROP. CODE § 5.203(a). Section 5.203(c) requires the Notice to state the amount of the PTF, the
payee and his or her contact information, its purpose, and the legal description of the property
subject to the PTF. The Notice must be refiled in the real property records not more than 30 days
before the 3-year anniversary of the original recording date, and similarly refiled every three years
after that. TEX. PROP. CODE § 5.203(d)(1). The Notice must also be amended to reflect any
changes in the name or address of the payee within 30 days after the change occurs and
subsequently refiled. Id. at (d)(2). If the Notice is not recorded and refiled as required, then the
PTF is unenforceable and void. Id. at (f).
Additionally, the payee of record a PTF (pursuant to the Notice) must actually accept the
payment within 30 days after it is tendered. If it does not, the payment must be returned, the PTF
is not required for the conveyance of the property, and the property will not be subject to any future
PTFs. TEX. PROP. CODE § 5.204. This helps alleviate concerns regarding whether a PTF payee
can actually be found. If they cannot, then the PTF is void as to that property.
Section 5.205 further requires that a disclosure of the possibility of a PTF must be included
in a sales contract. TREC has revised Paragraph 6.E(8)its 1-4 Family Residential Contract to
include that disclosure, which reads as follows: “(8) TRANSFER FEES: If the Property is subject
to a private transfer fee obligation, § 5.205, Property Code, requires Seller to notify Buyer as
follows: The private transfer fee obligation may be governed by Chapter 5, Subchapter G of the
Texas Property Code.” Finally, § 5.206 provides that a provision which purports to waive a
purchaser’s rights under the Property Code is void. Thus, any such waiver present in a declaration
should not be relied upon.
Private Restrictions on Transfers of Title
Leslie S. Johnson, VP and Texas State Counsel
Presentation Will Cover:
▪ Restrictive Covenants:
What do they prohibit?
Are they still valid?
▪ Rights of First Refusal
▪ Options to Purchase
▪ Private Transfer Fees
▪ Title Insurance Considerations
2019 TEXAS LAND TITLE INSTITUTE – PRIVATE RESTRICTIONS ON TRANSFERS OF TITLE
Restrictive Covenants
2019 TEXAS LAND TITLE INSTITUTE – PRIVATE RESTRICTIONS ON TRANSFERS OF TITLE
1
2
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Quick Refresher
▪ Created By:
Declaration – CCRs
Restrictions in deed
Separate recorded instrument
▪ Covenant Binds:
Original parties
Heirs, successors, and vendees of
original parties if it “runs with the land”
▪ Who Can Enforce:
Anyone whose land is benefited by
restrictive covenant2019 TEXAS LAND TITLE INSTITUTE – PRIVATE RESTRICTIONS ON TRANSFERS OF TITLE
What Do They Prohibit?
▪ Interpreted like a contract: Determine drafter’s intent from “four
corners” of document
Cannot enlarge, extend, stretch, or
change words used
Avoid interpretation that nullifies any
provision
Must give words their common
meaning as of date covenant was
written2019 TEXAS LAND TITLE INSTITUTE – PRIVATE RESTRICTIONS ON TRANSFERS OF TITLE
Are They Still Valid? Can They Be Avoided?
Abandonment – Waiver
▪ Standard = Violations are so great as to lead average person
to reasonably conclude that restriction has been abandoned
▪ Factors to Consider:
Number of existing violations and rate of violations
Nature of existing violations
Severity of existing violations
Any prior acts of enforcement
2019 TEXAS LAND TITLE INSTITUTE – PRIVATE RESTRICTIONS ON TRANSFERS OF TITLE
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5
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Still Valid? cont.
▪ Factors to Consider, cont.
Possible to realize to substantial degree benefits intended
through covenant
Existence of severability clause
Which covenants have been violated
Single property owner or developer
Non-waiver provision
◼ Can be waived – requires:
Complete abandonment of entire set of restrictive covenants,
including non-waiver provision, or
Non-waiver provision itself had been waived
2019 TEXAS LAND TITLE INSTITUTE – PRIVATE RESTRICTIONS ON TRANSFERS OF TITLE
Still Valid? cont.
Changed Conditions▪ Standard = Such change in restricted area or area surrounding it that it is
no longer possible to secure intended benefits in substantial degree
▪ Change must be radical
▪ Factors to Consider:
Size of restricted area
Location of restricted area with respect to where change has occurred
Type of change or changes that have occurred
Character and conduct of parties or their predecessors in title
Purpose of restrictions
Unexpired term of the restrictions
Balance of equities2019 TEXAS LAND TITLE INSTITUTE – PRIVATE RESTRICTIONS ON TRANSFERS OF TITLE
Still Valid? cont.
Limitations
▪ 4 years from date of violation
▪ But “insignificant or insubstantial” violation:
Limitations may run from date of subsequent and substantial violation
Only applies to violation that can be stopped and started
Laches
▪ Requires unreasonable delay by plaintiff and good faith change of
position by defendant to its detriment due to delay
▪ Usually same evidence as waiver defense
▪ Courts unlikely to apply
2019 TEXAS LAND TITLE INSTITUTE – PRIVATE RESTRICTIONS ON TRANSFERS OF TITLE
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Exceptions to and Coverage for Restrictive Covenants
▪ Commitment, Owner’s Policies, and Loan Policies have
promulgated exceptions to restrictive covenants in Sch. B.1
But Remember: LTPs also insure that covenants have not
been violated
▪ Affirmative coverage available in T-17, T-19, and T-28
▪ Express insurance under P-39(b)
Do not remove covenant from Sch. B
Notoriously difficult to give where covenant has been or may be
violated
2019 TEXAS LAND TITLE INSTITUTE – PRIVATE RESTRICTIONS ON TRANSFERS OF TITLE
Rights of First Refusal
(ROFR)
2019 TEXAS LAND TITLE INSTITUTE – PRIVATE RESTRICTIONS ON TRANSFERS OF TITLE
Definition
▪ Contract between Grantor and Holder
▪ Preferential Right to purchase property on same terms
offered by or to bona fide 3rd party purchaser
▪ Grantor must communicate offer to Holder
▪ Holder can then:
Purchase property under same terms as 3rd party’s offer or
Decline to purchase property
▪ If Holder declines, Grantor is free to sell property
2019 TEXAS LAND TITLE INSTITUTE – PRIVATE RESTRICTIONS ON TRANSFERS OF TITLE
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Remedies for Breach
▪ Remedies Before Conveyance:
Money Damages
Specific Performance
▪ Remedies After Conveyance:
Against Grantor: Money Damages
Against 3rd Party Purchaser: Specific Performance
◼ If actual or constructive notice – Takes property subject to ROFR
◼ “Stands in shoes of seller”
2019 TEXAS LAND TITLE INSTITUTE – PRIVATE RESTRICTIONS ON TRANSFERS OF TITLE
Limitations
▪ 4 Year Limitations Period
▪ Begins to run when property conveyed to 3rd party without
notice to Holder
▪ But Discovery Rule may apply
Defers running of limitations until Holder learns of sale to 3rd party
Holder has no duty to monitor public records
▪ Best Practice: Get full release from Holder and record it
▪ At a Minimum: Exception to ROFR in Sch. B
2019 TEXAS LAND TITLE INSTITUTE – PRIVATE RESTRICTIONS ON TRANSFERS OF TITLE
Option to Purchase
2019 TEXAS LAND TITLE INSTITUTE – PRIVATE RESTRICTIONS ON TRANSFERS OF TITLE
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Definition
▪ Contract between Owner and Holder
▪ Right to buy property at fixed price within certain time
▪ Difference from ROFR:
Holder can compel owner to sell under terms set out in option
ROFR ripens into option after 3rd party offer to purchase
▪ Found in stand-alone agreements, leases, deeds of trust,
wills, and deeds (right to repurchase)
▪ Remedies: Money Damages and Specific Performance
▪ 4 Year Limitations Period
2019 TEXAS LAND TITLE INSTITUTE – PRIVATE RESTRICTIONS ON TRANSFERS OF TITLE
Title Insurance?
▪ Coverage against breach in T-17, T-19, T-19.1, and T-28
▪ Theoretically available as an insured interest – Talk to your UW
Specific language to describe Option in Schedule A
Schedule B exceptions:
◼ Terms of Option
◼ Terms of any related lease or contract,
◼ Enforceability of Option
◼ Bankruptcy of Grantor
Policy amount limited to price paid for Option
2019 TEXAS LAND TITLE INSTITUTE – PRIVATE RESTRICTIONS ON TRANSFERS OF TITLE
Private Transfer Fees
(PTFs)
2019 TEXAS LAND TITLE INSTITUTE – PRIVATE RESTRICTIONS ON TRANSFERS OF TITLE
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General Rule – Not Valid
▪ Usually in Declarations or CCRs
▪ Governed by Property Code § 5.201
through § 5.207
▪ PTF created on or after June 17, 2011
is NOT binding or enforceable against
subsequent owner or purchaser – but
many exceptions
▪ Pre-existing PTFs are valid, but lots of
new requirements and if not valid, PTF
is invalidated
2019 TEXAS LAND TITLE INSTITUTE – PRIVATE RESTRICTIONS ON TRANSFERS OF TITLE
Exceptions to General Rule
1. Property Purchase Price
2. Real Estate Commissions
3. Interest and Loan or Lender
Fees
4. Rent and Lease Fees
5. Rights of First Refusal and
Options to Purchase
6. Recording Fees due to
County Clerk
7. HOA, Condo, and
Timeshare Dues and Fees
8. Club Memberships related to
Property
9. Payments to Charities
10. Veterans Land Board
Assignment Fees
2019 TEXAS LAND TITLE INSTITUTE – PRIVATE RESTRICTIONS ON TRANSFERS OF TITLE
10 Statutory Exceptions to Invalidity
Charitable Payment Exceptions
Most PTFs fall under “charitable
payment” exception
▪ Must be paid to 501(c)(3) or (c)(4) organization
▪ $$$ must directly benefit property by:
Supporting or maintaining only encumbered
property
Constructing or repairing improvements only to
encumbered property
Providing activities or infrastructure to support
quality of life (cultural, educational, charitable,
recreational, environmental, and conservation
activities and infrastructure) that directly benefit
encumbered property
2019 TEXAS LAND TITLE INSTITUTE – PRIVATE RESTRICTIONS ON TRANSFERS OF TITLE
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Notice Requirements
▪ For PTFs existing prior to June 17, 2011, must record “Notice
of Private Transfer Fee Obligation” by Jan. 31, 2012
Amount and purpose of PTF
Payee and contact information and mailing address
Legal description of property
▪ Notice must be re-filed not more than 30 days before every
3-year anniversary of original Notice recording date
▪ If requirements not met, PTF is unenforceable
2019 TEXAS LAND TITLE INSTITUTE – PRIVATE RESTRICTIONS ON TRANSFERS OF TITLE
Final Rules
▪ Payee on pre-existing PTF must accept payment within
30 days of tender
If not, payment returned and property no longer subject to PTF
Resolves PTF issue where payee cannot be found
▪ Possibility of PTF MUST be disclosed in sales contract
TREC 1-4 Family, Paragraph 6.E(8):
“(8) TRANSFER FEES: If the Property is subject to a private transfer fee
obligation, § 5.205, Property Code, requires Seller to notify Buyer as follows: The
private transfer fee obligation may be governed by Chapter 5, Subchapter G of the
Texas Property Code.”
▪ Any waiver of purchaser’s rights under Chapter 5 is void
2019 TEXAS LAND TITLE INSTITUTE – PRIVATE RESTRICTIONS ON TRANSFERS OF TITLE
Thank You!
Comments or Questions?
Direct: 972.295.6838 Cell: 469.410.4701
2019 TEXAS LAND TITLE INSTITUTE – PRIVATE RESTRICTIONS ON TRANSFERS OF TITLE
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