Can Developer Disregard Covenants?

Started by LarryS16 • 22 replies • 3952 views

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LarryS16 (Tennessee)
Posts: 41

Posted:

Our subdivision started with two phases and 29 lots in 2007. The restrictions for the first two phases state "No Lot Shall Be Resubdivided." In 2010 the developer began Phase III and filed restrictive covenants that allow for lots to be resubdivided in that phase. The problem is that when he platted the lots in Phase III, he resubdivided 3 lots in Phase I to give additional land to the lots in Phase III. I contend that the developer violated the covenants by resubdividing the lots in Phase I. Some of the property owners in Phase I are upset because the lots were originally almost 1 acre and sold for $238,000 to $250,000. We feel that the resubdivision of the lots in Phase I could change the character of the lots in our Phase. In addition it allowed the developer to place the lots for Phase III directly below our lots, and the restrictions in Phase III allow for rental units, which was prohibited in Phase I and Phase II. The lots in Phase I and Phase II were marketed as being located in a private gated community, and I would not have purchased a lot in the subdivision if I had known that the developer was going to allow for rental units. By the way, most of the lots that were purchased in the original 2007 offering were foreclosed and repurchased for $10,000-$20,000, so we feel like the developer is taking the subdivision in the wrong direction. The developer claims that he is president of the HOA and has the right to enforce or disregard any and all the covenants. Please help.

1. Can the developer resubdivide the lots in Phase I despite the prohibition against such resubdivision in the restrictive covenants for Phase I?

2. Can the developer create new covenants for each phase of development that are different from the other phases in the subdivision, so that some people are now allowed to rent their houses to the public?

MelissaP1 (Alabama)
Posts: 13,836

Posted:

The issue here is you seem to not understand how the developer and HOA relationship works. A HOA is a sales tool for the developer. For example a developer buys 100 acres and divides those into 100 1 acre lots and sells them for 10k a piece. That is 100k minus the cost of purchase. (50k). So the developer made a 50k profit. Now in order to encourage more buyers the developer installs a pool of 20k. That is part of the sales to attract buyers.

A pool does not take care of itself. So they charge the owners 10 dollars a month until the developer turns over the HOA to the owners. The developer takes that money and covers the maintenace costs of the pool. They also have to consider those who do not pay. The developer may have to raise dues because the non payers instead of being forced to use their own money. After the developer leaves is when the most costs happens as the pool is now fully funded and operated ONLY by owners money.

As for rental restrictions the developer nor the HOA can limit it. The HOA can not interfere with the contracts of the owners. This subject is covered in many many other posts. I would suggest reading them.

Former HOA President

LarryB13 (Arizona)
Posts: 4,099

Posted:

Quote:

Posted By LarryS16 on 03/14/2013 8:57 AM

1. Can the developer resubdivide the lots in Phase I despite the prohibition against such resubdivision in the restrictive covenants for Phase I?

Probably yes. As the seller, the developer's restrictions apply to those lots he has sold and not to those he still retains.

Quote:

Posted By LarryS16 on 03/14/2013 8:57 AM

2. Can the developer create new covenants for each phase of development that are different from the other phases in the subdivision, so that some people are now allowed to rent their houses to the public?

Yes. This is quite common for developers to have different covenants in different phases of the same development. I know of one such development that was done in at least twenty phases and each phase has its own unique covenants but all owners belong to the same association.

One thing I have learned from this forum is that buying into an unfinished development is risky as there is no telling what the developer may do before he is done.

BruceF1 (Connecticut)
Posts: 2,535

Posted:

Quote:

Posted By LarryS16 on 03/14/2013 8:57 AM

1. Can the developer resubdivide the lots in Phase I despite the prohibition against such resubdivision in the restrictive covenants for Phase I?

2. Can the developer create new covenants for each phase of development that are different from the other phases in the subdivision, so that some people are now allowed to rent their houses to the public?

As with your other question, the answer lies with what your state laws permit. Some states have almost no protection, whereas other states place very strict limits on the kinds of amendments (changes) to the Declaration (covenants, CCRs) that the Declarant (developer) can make without homeowner agreement. This is based on the fact that the covenants are a contract and one member of a contract cannot make changes to a contract without the consent of the other parties to the contract.

Two things to keep in mind:

1. Developers are often ignorant of state laws and fail to consult with an attorney before making their decisions.

2. The opinions you will get in this forum are based mostly upon one's own experience in their own state and should not be assumed to apply everywhere.

LarryS16 (Tennessee)
Posts: 41

Posted:

That was very helpful. Thank you.

JohnC46 (South Carolina)
Posts: 14,265

Posted:

This is quite common for developers to have different covenants in different phases of the same development. I know of one such development that was done in at least twenty phases and each phase has its own unique covenants but all owners belong to the same association.

Larry is correct. I know of one large development where there are multi builders, multi sections, multi associations that range from high rise condos to million dollar stand alone homes. Each HOA as its own Covenants, Bylaws, Rules and Regulations and they can be quite different. Each owner belongs to a "local HOA" and the local HOA's all belong to an overall master HOA.

Hope this helps.

LarryS16 (Tennessee)
Posts: 41

Posted:

If the developers create different covenants for the other phases, I guess we'll have to live with it, but in this case the covenants for Phase I actually prohibited the resubdivision of the lots in Phase I; nevertheless, the developer resubdivided 3 lots in Phase I and added part of those three lots to Phase IV, where they have different covenants.

The problem is that the people who purchased lots in the phase I and phase II were never told that there would be additional phases. And we certainly never would have anticipated that the additional phases would have different covenants, particular covenants that allow for rental dwellings. This was sold as a private gated resort community, but now the developer is opening it up to $180,000 cabins that can be rented to the public.

RayC4 (Virginia)
Posts: 173

Posted:

Quote:

Posted By LarryB13 on 03/14/2013 10:18 AM

Posted By LarryS16 on 03/14/2013 8:57 AM

1. Can the developer resubdivide the lots in Phase I despite the prohibition against such resubdivision in the restrictive covenants for Phase I?

Probably yes. As the seller, the developer's restrictions apply to those lots he has sold and not to those he still retains.

Posted By LarryS16 on 03/14/2013 8:57 AM

Larry, I was stunned by this revelation. I understand the difference you're suggesting between sold and unsold lots. But the Covenants, I thought, were just that -- a 'covenant' between the Declarant (the developer) and lot purchasers, and applies to the entire community per 'recitals' in the Covenants. If the Declarant pledged "not to subdivide" demarcated lots within the platted community, then it seems to me he is breaking the Covenants he agreed to (and in fact wrote himself). These lot owners have grounds to challenge such a blatant violation.

LarryB13 (Arizona)
Posts: 4,099

Posted:

Quote:

Posted By RayC4 on 03/15/2013 2:53 PM

Larry, I was stunned by this revelation. I understand the difference you're suggesting between sold and unsold lots. But the Covenants, I thought, were just that -- a 'covenant' between the Declarant (the developer) and lot purchasers, and applies to the entire community per 'recitals' in the Covenants. If the Declarant pledged "not to subdivide" demarcated lots within the platted community, then it seems to me he is breaking the Covenants he agreed to (and in fact wrote himself). These lot owners have grounds to challenge such a blatant violation.

Ray,

My defense of the developer is reluctant. My reasoning is that regardless of where the land lies, the developer has the option to attach whatever deed restrictions he chooses (including no restrictions at all) as he sells the lots.

I am no expert at this and the only plats I have ever looked at were those in my home state, but I have never found much of a link between the plats and the declarations. A deed says "lot 123" of a recorded plat but the deed also says "subject to the restrictions recorded on page 456 of book 789." The plat locates the real estate but the recorded declaration contains the restrictions. The plat by itself has no restrictions and the restrictions by themselves do not locate the real estate.

I do not believe that there is even a legal requirement to have a plat for selling real estate. In the western US it is not unheard of to describe real estate in terms of fractions of a section. Such as, the north half of the south half of the northwest corner of the southeast corner of Section 25 of Township 10 East, Range 5 North, Gila and Salt River Baseline and Meridian. This kind of description does not work well with the sale of many small lots as each time the property is sold the description must be re-typed, inducing errors into the legal descriptions.

Unless there is language in the declaration that says something to the effect that all lots located on the recorded plat shall be subject to these restrictions and no others, I doubt that there is much room for fighting with the developer. I also have my doubts about the declaration containing any language that would prohibit the declarant from subdividing his own lots; restrictions usually stop the buyer (not the seller) from doing something.

Keep in mind, too, that a deed does not normally issue until a lot is sold. At the time the developer subdivided that large lot there was not likely a deed recorded as it had not been sold. Without a deed, there are no deed restrictions that apply.

Even if the developer is in blatant disregard of the covenants, he knows that the average owner is not going to have the means to engage in a protracted battle in the courts and thus can get away with it.

LarryS16 (Tennessee)
Posts: 41

Posted:

Thank you for your replies. I think it might help to show you what the covenants state:

"Whereas, it is for the interest, benefit and advantage of the Owners, the Developer and each and every person or entity that shall hereafter acquire any lot or any portion of any lot in the Subdivision, or any resubdivision thereof, (all such lots being collectively referred to as the "Lots" and individually referred to as a "Lot") that certain restrictive covenants governing and regulating the use and occupancy of the same be established, set forth and declared to be covenants running with the land."

"Now, therefore, for and in consideration of the premises and benefits to be derived by the Owners, the Developer and each and every subsequent owner of any of the Lots or portions of said Lots in the Subdivision, the Owners do hereby set up, establish, promulgate and declare the following restrictive covenants to apply to the Property and to all of said Lots and portions of said Lots, and to all persons owning any of said Lots or portions thereof, hereafter. These restrictive covenants shall become effective upon the recordation of the instrument and shall run with the land and be binding on all persons claiming under through the Oners for a period of fifteen years after the recordation of this instrument, at which time said covenants shall be automatically extended for successive periods of ten years each unless it be agreed by a vote of sixty six percent of owners of Lots with the Subdivision..."

By the way the developer never amended the covenants. He just resubdivided the lots in Phase I, even though the covenants don't allow lots to be resubdivided in Phase I.

LarryB13 (Arizona)
Posts: 4,099

Posted:

Larry,

Have you been able to find a deed or some other document that would have made that large lot definitely subject to the CC&R's for Phase I? If there is no such deed, was there some sort of public offering statement tying the large lot to Phase I? Was there any language on the plat that said the all the lots shown in Phase I will be subject to the CC&R's for Phase I?

From what I have seen so far, it looks like you have a witness and the smell of gunsmoke in the air but no dead body and no smoking gun.

LarryS16 (Tennessee)
Posts: 41

Posted:

I have the restrictions for Phase IV where the large lot and rental cabins exist, and it says that Phase IV will be subject to the covenants for the "subdivision," but then the same restrictions give different covenants to Phase IV. It also says that Phase IV will be part of the same HOA, but I don't know if that matters.

Nevertheless, the lots that were resubdivided were actually part of Phase I, not Phase IV, and I'm saying that the covenants for Phase I should have prevented the developer from resubdividing the lots in Phase I.

RayC4 (Virginia)
Posts: 173

Posted:

Posted By LarryS16 on 03/18/2013 1:11 PM

"Whereas, it is for the interest, benefit and advantage of the Owners, the Developer and each and every person or entity that shall hereafter acquire any lot or any portion of any lot in the Subdivision, or any resubdivision thereof, (all such lots being collectively referred to as the "Lots" and individually referred to as a "Lot") that certain restrictive covenants governing and regulating the use and occupancy of the same be established, set forth and declared to be covenants running with the land."

I am not an attorney, but it sure seems to me that this language includes the Developer as subject to all provisions of the Covenants. It even specifically mentions 'the Developer' plus phrases like "all such lots" and "running with the land" seem pretty inclusive. If this Developer arbitrarily subdivided lot(s) in Phase I and the Covenants expressly forbid it, he is in violation of the contract (Covenants).

LarryS16 (Tennessee)
Posts: 41

Posted:

Does anyone know what the potential consequences are for violating the covenants? How can we remedy the violation? The developer already started a house on part of the land that was resubdivided.

LarryB13 (Arizona)
Posts: 4,099

Posted:

Quote:

Posted By LarryS16 on 03/19/2013 1:17 PM
Does anyone know what the potential consequences are for violating the covenants? How can we remedy the violation? The developer already started a house on part of the land that was resubdivided.

You have just introduced a whole new problem. Prior to this point, have you or any other owners made a written objection to the developer regarding splitting the lot or building on it?

The problem is this: If a party knows of an objection and continues construction anyway, he places himself at risk of having to tear down an offending structure. Example: In Arizona, a cell phone carrier tried to install a tower on property protected by covenants. The structure was partially completed when one of the neighboring owners filed suit to stop it. The cell phone company argued that it had already invested a substantial amount of money in the project and it was not fair to make them stop at such a late stage. The neighbors presented evidence that they made a written objection to the cell phone company when they first announced their plans. The court ruled against the cell phone carrier because the company knew of the covenants and proceeded knowing that they were possibly in violation.

The longer you go without making an objection to the developer, the less likely you are to prevent him from carrying out all of his plans. If you feel that this issue is worth risking your 401K and the kids college tuition money, then find yourself an attorney this week and get some legal advice. You may already have waited too long to object, but an attorney is a better judge of that.

RayC4 (Virginia)
Posts: 173

Posted:

Quote:

Posted By LarryB13 on 03/19/2013 5:12 PM

Posted By LarryS16 on 03/19/2013 1:17 PM

The longer you go without making an objection to the developer, the less likely you are to prevent him from carrying out all of his plans. If you feel that this issue is worth risking your 401K and the kids college tuition money, then find yourself an attorney this week and get some legal advice. You may already have waited too long to object, but an attorney is a better judge of that.

Larry raises the 64 dollar question: what is this worth to you? To that I would also ask (and maybe I missed it in the thread): how many other lot owners feel as you do?

Larry alludes to the potential high cost of full-blown litigation which is true. But if there are multiple homeowners objecting (and the project is not too far along), a letter or two from an attorney representing a bunch of lot owners would not cost the farm and may just get the developer's attention enough to lead to some kind of negotiation, whatever. (Have to decide what it is you want of course.) Just a thought.

LarryB13 (Arizona)
Posts: 4,099

Posted:

Ray & Larry:

I have several concerns here.

First, I am not yet convinced that the developer bound himself to his own covenants in such a way as to preclude him from splitting the large lot into three and putting it in another phase of the development. That, of course, is best answered by an attorney after an examination of all relevant documents.

Second, is that construction has started on at least one part of the former large lot. Each day that passes and each board that is nailed up makes it more difficult to prevent the developer from carrying out his plans. Under the doctrine of laches, a party looses his rights if he is aware that he has a cause of action, he fails to act, and his delay puts the other party in a worse situation. In this case, the developer's situation worsens because he continues to proceed on a course of action that involves the expenditure of funds to construct buildings. Had an objection been made, the developer would be proceeding at his own peril. That has not happened.

For Larry to have any measure of success he needs to act quickly to determine if he has a cause of action against the developer and, if he does, to take some action now to preserve the issue for litigation. By quickly, I mean today.

LarryS16 (Tennessee)
Posts: 41

Posted:

The majority of the lots were sold to non-residents, so most people don't know what's going on in the subdivision unless someone tells them. Three people objected almost immediately when the cabin was being built because it's a $130,000 cabin located in a gated resort community with $700,000+ homes. The assessor's viewing tool that is available online did not show that phase IV was part of the subdivision, so it was hard to locate, and once we did locate it, it was not immediately apparent that the 3 lots in phase I had been resubdivided and added to Phase IV. Once we found out that the lots in Phase I had been resubdivided we objected and told the developer that we did not want the lots in Phase I resubdivided into smaller lots, and we asked him to stop construction of the cabin.

Once we located the sale, we found that the developer sold the 4.4 acres to his brother for $29,000, and the brother resold the land on the same day for $50,000 to a third party. The brother is the person building the cabin, but he doesn't own the land. It's a sub-issue of the resubdivision of the 3 lots in Phase I, but people who paid $250,000 and more for their lots feel like the sale will hurt the value of their lots in the future, as this is the only qualified sale in the subdivision since 2007. The lots in the subdivision originally sold for $250,000 to $350,000, and were appraised by the assessor as such. We have had MANY foreclosures, and some have speculated that the developer will use the $50,000 sale to convince the assessor to lower the tax appraisals, which will benefit the developer as he plats new lots in additional phases around the 2014 county-wide reappraisal. I think it's a great idea to lower the taxes, but there is some validity to the others' concerns that this sale of 4.4 acres for $50,000 will be used as a comparable by an independent appraisal, and the people who paid $250,000 for a 1 acre lot, might get an appraisal for $50,000 or less. I personally think the lots will appraise for less than $20,000 today. It's hard to argue that the lots in phase IV are somehow significantly different from the lots in phase I when 3 lots from phase I were resubdivided to create phase IV.

RayC4 (Virginia)
Posts: 173

Posted:

Quote:

Posted By LarryS16 on 03/20/2013 9:26 AM
Three people objected almost immediately when the cabin was being built because it's a $130,000 cabin located in a gated resort community with $700,000+ homes....... Once we found out that the lots in Phase I had been resubdivided we objected and told the developer that we did not want the lots in Phase I resubdivided into smaller lots, and we asked him to stop construction of the cabin.

If these objections were made in writing, that should answer Larry's legitimate concern about 'Laches.'

Again, it sounds like you have a legitimate beef re impact(s) on your property values. The question is whether it's worth the legal expenses and all the inherent risks there, and can those costs / risks be spread among several?

As an aside, I would quit focusing on Phase IV or whatever. Your issue are the rules re Phase I and a developer who feels like he can ignore them.

JohnC46 (South Carolina)
Posts: 14,265

Posted:

Larry

Is the real issue that your lot is no where near worth what you paid for it and the new lot sale prices are simply reflecting that?

Saw that in a golf course development in this area. Some paying almost $200K for lots that today are selling for $20K and you cannot give them away.

LarryS16 (Tennessee)
Posts: 41

Posted:

No, I purchased my lot out of foreclosure, so I didn't get hit as hard as the buyers who purchased lots in the initial marketing campaign. I purchased my lot because it was part of a gated community and I intended to build in the subdivision. I don't want the developers resubdividing lots and building these small cabins that they can now rent to just anyone. At this point there is nothing to prevent them from renting the cabins to a family of 14 for the year, who would presumably have access to all our amenities. In addition we all have large .5 to 1 acre lots, and we don't want small lots with small houses close to our properties.

The people involved in selling the lots used a bogus appraisal to inflate the values for the original sales. All the buyers were from out of states and most took out 3-year arm loans and never made a payment, so the banks foreclosed. It's a mess. If the lots had been sold for the actual fair market value, we probably wouldn't have suffered so many foreclosures, and my lot would have probably held its value. I'm just trying to maintain the character of the subdivision at this point. The developer isn't doing anything to get activity in the subdivision, but hopefully that will change as he ads additional phases, and I might get out while I can.

LarryB13 (Arizona)
Posts: 4,099

Posted:

Quote:

Posted By JohnC46 on 03/20/2013 10:33 AM

Saw that in a golf course development in this area. Some paying almost $200K for lots that today are selling for $20K and you cannot give them away.

We have a similar situation with our "ranch" land in northern Arizona. After the 2008 meltdown, 40 acres of recreational land in the middle of where became worthless as people tried to hang on to their primary residences after being laid off. When we tried to collect our delinquent assessments we found that most of those owners had moved without a forwarding address, suggesting that they had bigger problems than our $130-a-year charges.

My mind boggles at the thought of paying $250,000 to $350,000 for a lot to build a second home worth $700,000. In Tennessee. (I'm not knocking TN; I just cannot imagine prices like that anywhere even prior to 2008.)

LarryS16 (Tennessee)
Posts: 41

Posted:

It would boggle your mind even more if you saw the state of the development when those people purchased their lots. The majority of the people never even visited the subdivision. The developers assured the buyers that they would help them sell their lots within 1 year of purchase, and in the meantime the developers agreed to cover their payments for the first year through something they called a "lease back" agreement. The buyers got the payments for the first 8 to 10 months, and then nothing. They got hosed big time. The lots should have really sold for $25,000 to $50,000, but the people from out of state were told that the property values were similar to developments around Hilton Head. It's unfortunate that they never drove down to see the subdivision because the dilapidated trailers and potholes leading to the subdivision combined with the lack of infractructure in the subdivision probably would have changed their minds. Don't get me wrong, it's a beautiful subdivision, but it's in the middle of nowhere. The thing that boggles my mind is how some of these people got loans for $250,000 for a vacant lot as the economy was turning south in 2007.

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