Signing a Real Estate Purchase Agreement

According to a recent Court of Appeals decision, the seller of real estate does not have the right to terminate a covenant that runs with the land after signing a purchase agreement with a buyer. The Court ruled that once a purchase agreement for real estate is signed, equitable title transfers to the purchaser and seller no longer has the right to terminate a real covenant that runs with the land subject to the purchase agreement.

In this case the seller owned two contiguous parcels and operated a restaurant on one of them. The seller wanted to ensure that a restaurant would not be operated on the adjacent lot and made a condition of the sale that a restriction to be put into each deed. The restriction was to lapse in 2000. In 1994, the seller sold the restaurant to another restaurant. In March of 1994, after the purchase agreement was executed but prior to the transfer of the deed and the purchase price, the seller released the Restrictive Covenant from the other lot. The Court records indicated that the purported reason for doing so was that seller and a potential business partner had discussed opening up a tavern on the lot after the sale.

The Court first needed to determine what type of covenant the Restrictive Covenant was – either a personal covenant or a real covenant that runs with the land. Generally, a personal covenant only binds the covenantor personally, and is generally enforceable only between the two persons, but not subsequent land owners. Whereas a "real covenant" is one that runs with the land and has been characterized as relating to the realty, having for its object something annexed to, inherent in or connected with the land. "Real covenants" are generally enforceable by all subsequent title owners of the original covenantee and against all grantees of the original covenantor. According to the Court, when determining whether a covenant runs with the land, the following three factors must be met: (1) intent for the restrictive covenant to run with the land; (2) the restrictive covenant touches and concerns the land; and (3) whether privity exists.

Citing the use of the words "heirs" and "assigns", the Court determined that the element of intent is met if the original grantor and grantee at the time of the conveyance intended the covenant to run with the land. After determining that there was intent for the Restrictive Covenant to run with the land, the Court next declared that the essential element of a real covenant is whether the covenant touches and concerns the land. Touching or concerning the land is a determination of whether the property was made more useful or valuable by the covenant. The third requirement analyzed was privity. One is said to be in privity with another if he/she succeeds to an estate or an interest formerly held by the other. Where privity exists, subsequent grantees of the original grantor are generally permitted to enforce a restrictive covenant.

Finally, the Court recognized the conversion of equitable title in Lot 1, which automatically vested in the buyer when the seller signed the purchase agreement and stated that under the doctrine of equitable conversion, the seller becomes the owner of the money, and the buyer becomes the owner of the property.

For more information concerning transfers of real estate issues, please contact Jennifer L. Stueber: jlstue@climacolaw.com