PRIVATE RESTRICTIONS ON TRANSFERS OF TITLE€¦ · WFG National Title Insurance Company 3211 Internet Blvd., Suite 100 Frisco, Texas 75034 877-366-8781 [email protected]

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

[email protected]


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.


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


• 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


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


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


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.


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-


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


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


(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


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.


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


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


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


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;”


• 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


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


1

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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


4

5

6

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


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


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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


Rights of First Refusal

(ROFR)


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


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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”


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


Option to Purchase


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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


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


Private Transfer Fees

(PTFs)


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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


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


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


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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


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


Thank You!

Comments or Questions?

[email protected]

Direct: 972.295.6838 Cell: 469.410.4701


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Documents

PRIVATE RESTRICTIONS ON TRANSFERS OF TITLE€¦ · WFG National Title Insurance Company 3211 Internet Blvd., Suite 100 Frisco, Texas 75034 877-366-8781 [email protected]