Restrictive Covenants

The general term “covenant” often evokes the form of contract. The term “covenant” in American law reflects that idea, as it is:

An agreement, convention, or promise of two or more parties, by deed in writing, signed, sealed, and delivered, by which either of the parties pledges himself to the other that something is either done or shall be done, or stipulates for the truth of certain facts.^[1]

As you can see from this excerpt, covenants need not be solely of a type that prevent actions; rather they may also enforce actions, etc. In Indiana, courts have defined three basic types of covenant:

The nature of the burden determines whether the covenant is negative, affirmative, or restrictive. Negative covenants call for the covenantor to refrain from doing some act. If the required performance limits the uses that can be made by the owner or occupier of land, the covenant is usually called a restrictive covenant. We have held that restrictive covenants are, in essence, a form of express contract between a grantor and a grantee in which the latter agrees to refrain from using his property in a particular manner. In contrast, affirmative covenants call for the covenantor to do some act, such as paying money, supplying goods or services, or performing some other act, either on or off the land owned by the covenantor. We have defined affirmative covenants as a form of express contract between a grantor and a grantee which imposes an affirmative burden on the latter.^[2]

In our studies, we are going to specifically deal with the type of restriction on real property called a “restrictive covenant.” In Indiana law, a “restrictive covenant” has been defined in various ways; one such is set forth in the following case:

We note that a covenant is generally an agreement duly made “to do,” or “not to do,” a particular act. The term “covenant” generally describes promises relating to real property that are created in conveyances or other agreements, and a covenant may be express or implied. A restrictive covenant is an agreement between a grantor and a grantee in which the latter agrees to refrain from using his property in a particular manner.^[3]

What makes a restrictive covenant a form of private restriction on land use is the fact that it is a contract made as part of a transfer of land from a grantor to a grantee. So, for instance, in a development of some sort (such as a subdivision), a developer may own every lot, and place restrictions on those lots in the form of covenants, which then bind the purchaser of a lot in the subdivision. “[C]ovenants control many aspects of land, including what may be built on the land (fence or above ground pool), how the land may be used (private or commercial), and alienability of the land.”^[4] It is very difficult for a purchaser of property in a development or condominium to argue that any given covenant does not apply to the property purchased –

Restrictions found in a declaration (like those found in a master deed) are clothed with a very strong presumption of validity which arises from the fact that each individual unit owner purchases his unit knowing of and accepting the restrictions to be imposed.”^[5]

One of the few times that such restrictions are overturned is when the covenant is “wholly arbitrary in…application, in violation of public policy, or…. abrogate[s] some fundamental constitutional right.”^[6] The latter is often found in contexts where covenants, having come into being before the modern civil rights era, run afoul of the US and Indiana constitutions. For instance, in a case from Elkhart:

Between 1939 and 1941, four of the lots were sold to purchasers without restrictions. However, in 1942, Lot No. 11 was sold with the following restrictions attached: … (e) No persons of any race other than the white race shall use or occupy any building or any lot, except that this covenant shall not prevent occupancy by domestic servants of a different race domiciled with an owner or tenant….In its findings, the trial court found the racial covenants to be unenforceable and redacted them from the deeds…. Restrictive covenants which restrict use of land based on race are unconstitutional. Shelley v. Kraemer (1948), 334 U.S. 1, 23, 68 S.Ct. 836, 847, 92 L.Ed. 1161, 1186. ^[[7]] Thus, undisputably, the racial restrictions contained in the deeds are invalid.^[8]

This restrictive covenant was deemed unenforceable due to constitutional protections for civil rights. Similarly, covenants may not usually prohibit other constitutional rights, and some exceptions and limitations upon restrictive covenants are created by statute. For instance, Indiana Code § 32-21-13-4 states:

Except as provided in section 5 of this chapter, a homeowners association may not adopt or enforce a rule that prohibits a member of the homeowners association from displaying a sign on the member's property during the period

(1) beginning thirty (30) days before; and

(2) ending five (5) days after;

the date of the election to which the sign relates.

In analyzing covenants to determine if they run afoul of constitutional or statutory prohibits, one must take care to determine exactly what is prohibited by a covenant. So, for instance, in holding that a covenant against property in a subdivision being used as group homes for the mentally ill was constitutional, the Indiana Court of Appeals stated:

It is readily apparent the covenants here discussed do not violate the equal protection clause. These covenants neither directly nor by necessary implication prohibit occupancy of the lots in the subdivision by developmentally disabled or mentally ill persons for residential purposes in structures meeting the requirements of the subdivision's building restrictions. Only business uses are prohibited.^[9]

Indiana has explicitly adopted both “disparate treatment” and “disparate impact” tests in regard to whether any particular covenant runs afoul of constitutional law. In brief, the difference is that:

Disparate treatment claims require proof of intentionally discriminatory treatment of a protected class. Disparate impact claims, by contrast, require no proof of intent, and can be established if a policy or practice has a discriminatory effect on a protected class, even if the policy or practice is facially nondiscriminatory.^[10]

If you consider for a moment the changing nature of constitutional protections, you will see that, from year to year, the things which a restrictive covenant may prohibit will change. So, for instance, the covenant restricting ownership of homes by minorities would have been considered constitutional at the time the covenant was entered, but years later, was obviously unconstitutional after the Supreme Court of the United States ruled in Shelly v. Kraemer.

A question which is often asked by a homeowner is whether any given restrictive covenant is still binding or has terminated. This is an oft-discussed question in law, and there may be several reasons a covenant (or all of the covenants binding a particular property) are no longer in effect. Obviously, civil rights laws may affect particular covenants (although courts will often strike only the offending provision and enforce the remainder of the covenants).

One reason covenants may become invalid involves changes in public policy or local neighborhood character. Courts have stated that that:

[P]ublic policy requires the invalidation of restrictive covenants when there have been changes in the character of the subject land that are “so radical as practically to destroy the essential objects and purposes of the agreement.^[11]

Interestingly, there may be only two Indiana cases in which a restrictive covenant has been overturned for the “substantial change” reason. One is a case where nearly seventy years had passed since a covenant was contracted, and the original business which was restricted by the covenant had grown to the extent that the original size restriction was no longer enforceable.^[12] A second case involved a question of a commercial non-compete covenant, whereby the grantor of land attempted to use a covenant to restrict competition and prevent another store from moving in, despite the grantor no longer operating the type of store in question.^[13]

“What if,” you may ask, “the person buying a particular piece of property was unaware of the restrictions at the time of purchase?” Correct! Another way that covenants may cease to be enforceable is if the purchaser of land has no notice that the covenants exist or will be enforced. This can come about in any number of ways. The Court of Appeals has summarized the issue as follows:

A landowner must have actual or constructive notice of restrictions on the land at the time he acquires title to the land in order for the restrictions to be enforced against him. Concerning notice, we have previously stated: The law recognizes two kinds of notice, constructive and actual. Constructive notice is a legal inference from established facts. Deeds and mortgages, when properly acknowledged and placed on record as required by statute, are constructive notice of their existence and charge a subsequent grantee with notice of all that is known by the record….Notice is actual when it has been directly and personally given to the person to be notified….Because the restrictions on Bonnie Ney's Addition are properly recorded and are within the chain of title of Lot # 18 of Bonnie Ney's Third Addition, McIntyre had constructive notice of the restrictions. “[A] purchaser is bound by any instrument of record found within his chain of title.”^[14]

So, even if a restrictive covenant is not located within a deed, such a covenant, if located within other documents (condominium records, for instance), the covenants will be enforceable against the purchaser.

Another way a person may be put on notice of certain restrictive covenants is through the idea of a “common development” or “common scheme.” Even if there are no actual covenants in a deed or other document:

Where a common grantor opens up a tract of land to be sold in lots and blocks, and before any lots are sold, inaugurates a general scheme of improvement for such entire tract intended to enhance the value of each lot, and each lot subsequently sold by such grantor, is made subject to such scheme of improvement, there is created and annexed to the entire tract what is termed a negative equitable easement, in which the several purchasers of lots have an interest, and between whom there exists mutuality of covenant and consideration.^[15]

In this case, if a land purchaser has no direct notice of covenants, and there is no common scheme of improvement, then the purchaser might not be bound by one or more of such restrictions.

In our next chapter, we will discuss public restrictions on land use, mainly through a review of the land use laws (a/k/a “zoning”).

[1] Id.

[2] Columbia Club, Inc. v. Am. Fletcher Realty Corp., 720 N.E.2d 411, 418 (Ind. App. 1999)

[3] Mayer v. BMR Properties, LLC, 830 N.E.2d 971, 979 (Ind. App. 2005).

[4] Villas W. II of Willowridge Homeowners Ass'n, Inc. v. McGlothin, 885 N.E.2d 1274, 1278 (Ind. 2008); in this case, a covenant prohibited leasing the condominium units to anyone.

[5] Id.

[6] Id.

[7] Shelly v. Kraemer is the case that held that held that courts could not enforce racial covenants on real estate.

[8] Corner v. Mills, 650 N.E.2d 712, various (Ind. App. 1995).

[9] Adult Group Properties, Ltd. v. Imler, 505 N.E.2d 459, 465 (Ind. App. 4th Dist. 1987).

[10] Villas W. II of Willowridge Homeowners Ass'n, Inc. at 1280.

[11] CSL Community Ass'n, Inc. v. Meador, 973 N.E.2d 597, 600 (Ind. App. 2012).

[12] Am. Cannel Coal Co. v. Indiana Cotton Mills, 134 N.E. 891, 893 (Ind. App. 2d Div. 1922).

[13] “Pay Less is attempting to use the covenant to restrict competition for its grocery stores located at other locations. Kroger was within its rights to assign the lease to Pay Less, and if Pay Less had chosen to continue grocery operations at the center, its interest in the lease would support enforcement of the covenant. However, Pay Less voluntarily abandoned grocery operations in the center and thereby severed the restrictive covenant from the occupancy.” Tippecanoe Associates II, LLC v. Kimco Lafayette 671, Inc., 829 N.E.2d 512, 515 (Ind. 2005).

[14] McIntyre v. Baker, 660 N.E.2d 348, 352 (Ind. App. 1996).

[15] Elliot v. Keely, 98 N.E.2d 374, 379 (Ind. App. 1951).