Deed restrictions are typically used by developers to control uses of a property and preserve value. If a restriction is properly recorded, thereby providing notice to subsequent purchasers, it will run with the land and apply to future owners. It is important to remember that not all properly recorded restrictions are enforceable.
For example, courts have held that restrictions that prohibit ownership based on race or religion are not enforceable based on illegality. Additionally, some restrictions or covenants may be void if found to be an unreasonable restraint on trade or for the purpose of creating a monopoly. This article will examine whether a developer may require all subsequent purchasers to use a specific builder in a residential development.
Developer Monopoly on Future Construction
According to Texas law, deed restrictions are enforceable if they are:
- Not immoral or illegal, and
- Not contrary to public policy.
Frey v. DeCordova Bend Estates Owners Ass’n., 647 S.W.2d 246 (Tex. 1983), Bein v. McPhaul, 357 S.W.2d 420 (Tex.Civ.App.--Amarillo 1952, no writ).
If real property carries a restrictive covenant that requires any subsequent purchaser to use a certain developer or builder to construct a house or building, does it pass the enforceability test? While it may be argued that such a restriction is against public policy as discouraging competition, such restrictions have continually been upheld. Restrictive covenants are contractual agreements that bind subsequent purchasers. Such covenants are subject to the general rules of contract construction. Pilarcik v. Emmons, 966 S.W.2d 474, 478 (Tex. 1998). It is undisputed that a developer can bind an original grantee to an exclusive construction agreement under basic contract principals.
At the time this article was written, no case could be found dealing specifically with a developer requiring subsequent purchasers to employ a certain developer for construction. However, the courts have previously ruled that other types of contractual arrangements will run with the land, thereby binding subsequent purchasers. (See Twin Creeks Golf Grp., L.P. v. Sunset Ridge Owners Ass'n, Inc., 537 S.W.3d 535, 538 (Tex. App. 2017) where court enforced mandatory membership in a golf club to subsequent purchasers.). These court cases would likely be interpreted to allow a developer to bind subsequent purchasers to an exclusive construction relationship.
Can The Restriction Be Removed?
If a restriction is enforceable, the buyer does not have many options. They can use the developer as the covenant dictates, negotiate a waiver of the deed restriction from the developer, or sell the property to someone else. A failure to exercise due diligence during the title search can severely limit a purchaser’s options.
It is important to carefully read the list of exceptions to coverage in your title commitment. If you see a reference to another document, find it and check it for any restrictions or other issues. If you are unfamiliar with exceptions and exclusions in schedules B and C of a title commitment, it is prudent to hire an experienced real estate attorney to assist.
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