April, 2007

REAL ESTATE LAW UPDATE

Rentals Allowed Under Restrictive Covenant

                After a couple bought property in a subdivision, they were surprised to learn that several homes near theirs were going to be offered as vacation rental property. Strangers on vacation were not the neighbors the couple had in mind. All of the properties in the subdivision were subject to a set of restrictive covenants, one of which required that lots be used for “single‑family residential purposes only.” The couple sued to get a court to declare that renting a home, even to one family, violated that restriction, but the couple came out on the losing end of the litigation.

                In the plaintiffs’ view, to derive rentals from a home was to convert the property from single‑family residential use to a prohibited commercial or business use. The court disagreed. Citing statistics showing that in most states over 30% of homes are rented rather than owned by the families living in them, the court reasoned that an owner’s receipt of rental income does not detract from or change the “residential” use of the property.

                The plaintiffs’ position was undercut by a separate covenant that permitted delegation of certain owner rights to “tenants,” thus obviously contemplating the rental of property. The plaintiffs argued that only long‑term rentals were allowed, not short‑term vacation rentals, but they could point to no language supporting such a distinction.

 

Seller’s Duty to Disclose

                Before building a home on property it owned, a developer obtained a study of the soil conditions in the area that included the lot for the home. The study was prompted by the fact that a church that formerly owned adjoining land had abandoned plans to build a church structure on that land because of its own study indicating that there was too much collapsible soil to support the building. After receiving the soil study of the neighboring land, the developer dug out some soil on the lot for the home, reducing its grade by about six feet, and built the new house.

                That there were any concerns over soil suitability came as news to the buyers of the new home when, not long after the purchase, cracks appeared in the foundation, doors would not open or close, and, as the court later put it, “[e]vidence of excessive settling abounded.”

                The developer had not disclosed the contents of the soil study to the buyers. A state supreme court ruled that the buyers’ lawsuit for fraud should go to a jury. The court reasoned that a developer/builder may owe his buyer a duty to disclose information known to him concerning real property, including property not being conveyed to the buyer, when that information is material to the condition of the property being purchased. To be material, the information must be “important.” Importance, in turn, is measured by the degree to which the information could be expected to influence the judgment of a person buying property.

                In the case before it, the court found that a jury could well conclude that the buyers would have wanted to know about collapsible soil on adjacent land before they bought their home. In the court’s view, a property boundary should not be considered a perimeter outside of which, as a matter of law, nothing is material to a prospective buyer.

 

 

 

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