Red Flag Land Developments — Restrictive Covenants, Notes & Conditions

Red flag situations that you may encounter when you’re preliminarily screening parcels to purchase for real estate development can be obvious, subtle or somewhere in between. The first two articles in this series touched on a range of challenges presented by the physical characteristics and surroundings of a parcel.

This article focuses on potentially big problems caused by limitations initiated or agreed to by the current or past owner of the property that could make it difficult or impossible for you to implement your desired real estate development. These restrictions have nothing to do with zoning or other municipal ordinances. One type consists of deed restrictions or covenants that would presumably be revealed through the title search you’d have done of the property once you had a purchase contract signed with the owner.

Generally, restrictive covenants are provisions recorded against a parcel and referred to in the deed that spell out some affirmative or negative requirement concerning the use or development of the property. An affirmative covenant might be one stating that any structure built on a parcel be at least 3,000 sq. ft. in size. An example of a negative covenant would be one that prohibits the sale of alcoholic beverages on the property, even where that use might be permitted by the current zoning classification. You can read a more in-depth discussion of deed restrictions and their implications on land development in the article entitled “Some Controls on Developing Property”.

Here’s the catch: sometimes there are binding restrictions you might not find anywhere in the deed. These could be official notes on plans or written conditions agreed to by the owner where the parcel had gone through subdivision or some other municipal proceeding in the past, such as an outright change of zoning or the granting of some type of variance. If you don’t do your research carefully, you might not find out about them until after you had wasted a lot of time, effort and money.

Once I came across a parcel that appeared to be very promising for development. In speaking with the seller’s agent, I learned that the property (which was owned by an estate) had undergone a recent subdivision and had been split off from a smaller parcel. Inexplicably, a red flag went up in my mind. I just had this feeling there was something beneath the surface of the subdivision and I needed to investigate it more deeply. So I looked at the deeds for the two parcels but didn’t find anything unusual. This surprised me, but I wasn’t yet willing to conclude that my gut feeling had been wrong. I then went to the municipal building and looked at the development file and plans that were approved at the time the two-parcel subdivision was done. (This is public information.) What I found was a note on the subdivision plan specifically prohibiting the further subdivision of either parcel, resulting from one of the conditions set forth in the approval letter the estate representative had signed. More here terra hill

The municipal process for subdivision, development or use approval is in large part a negotiation between the property owner and the local government. Each side wants to obtain the most favorable terms. When a municipality approves a plan (or grants a variance), it typically attaches conditions to it. In the case of the estate parcel, the local government saw an opportunity to get something it wanted (i.e., no further development of the two parcels), so it conditioned its approval on the property owner’s acceptance of that restriction. The estate applicant didn’t understand the far-reaching implications of agreeing to the municipality’s condition. All it wanted was approval of the two-parcel subdivision, which it got. What it also got was a significant decrease in the value of the two parcels.