Investors must familiarize themselves with any deed restrictions before engaging in any new venture.
There are typically two types of restrictions that affect an investor’s plans to develop a property: zoning restrictions and deed restrictions.
Investors are generally familiar with zoning restrictions and they can be easily found when an investor is researching a property. Zoning restrictions are designed to better regulate community expansion and keep community interests in mind. For example, restrictions could prevent a scenario where a business park is developed next to an elementary school.
Conversely, offense limitations can be harder to identify, sometimes contain vague wording, and are often put in place to protect the interests of specific parties rather than the community at large. Ownership restrictions “run with the land” meaning that changes in ownership do not overrule previous restrictions and any new owner of a parcel is required by law to follow the applicable restrictions.
Because deed restrictions can significantly affect a developer’s vision for a new project, it is imperative that investors educate themselves about potential restrictions before committing to any new venture.
What is a deed restriction?
Restrictions on acts are also commonly referred to as “restrictive agreements”. A covenant is a legal mechanism adopted from English common law and, in the legal sense, is a solemn promise to do or not to do a certain thing.
Restrictive shore-based agreements have a long history in the United States. They have been used for things as mundane as regulating fence height to strict guidelines to racially segregate communities and neighborhoods. Segregation through charter restrictions was made entirely illegal by the Fair Housing Act 1968, but other potentially onerous restrictions may still be legally enforceable provided they do not violate civil liberties.
This long history of use means that some properties with restrictions agreed decades earlier are still legally binding, regardless of relevance to current ownership and community relations. It can be difficult to track down the full history of deed restrictions on a particular property, but failure to do so can expose investors to significant legal liability.
Common types of residential deed restrictions
The most common types of deed restrictions are found in housing developments and are often governed by a homeowners association (HOA). These are the limitations investors are most familiar with. They are generally instituted to maintain certain standards so that property values under development are not reduced by actions by individual owners.
Because these restrictions are inherent in the land itself, demolishing an existing structure with the intention of rebuilding does not relieve the developer of previous restrictions. HOAs often have broad powers to regulate actions within a development, and investors may find it difficult to obtain approval to start a development that does not conform closely to specified restrictions.
Common restrictions include restrictions on outdoor building materials, regulations against additional structures or exterior improvements, restrictions on parked vehicles or outdoor storage, and even restrictions on the type of pets allowed in the development. Unlike zoning restrictions, which are created by a public commission and can be changed if the intended use benefits the community, HOAs do not have to consider the benefits of changing restrictions in order for a project to proceed. This means that an investor attempting a project prohibited by an existing restrictive agreement faces lengthy legal action.
Commercial Deed Restrictions
While HOAs and their often severe restrictions are well known to developers, many investors are unaware that commercial real estate can also be subject to significant restrictions.
These restrictions are generally put in place to protect a seller’s interests and may limit what commercial ventures are acceptable on a package. For example, a seller may place a restriction on the sale of the property that prohibits the buyer from operating a business that competes with businesses on the seller’s adjacent properties. These restrictions are often written in vague terms, and any investor purchasing a chartered commercial property must be aware that a broad interpretation of murky restrictions can preclude them from a wide variety of business activities in that location.
However, commercial restrictions are not always drafted in favor of a single party. Some properties may contain restrictions due to environmental concerns. These restrictions ensure, for example, that a medical center cannot be built on a site that has previously been subject to severe pollution.
Commercial title deed restrictions can be more difficult to prosecute than residential deed restrictions, but the savvy investor will thoroughly research a parcel’s history before planning any potentially prohibited development.
How to find deed restrictions
Deed restrictions often span decades and are constantly associated with the country, so discovering the entire list of potential restrictions can be a challenge for any investor. Estate agents are generally able to provide information on deed restrictions but may not always have full history available.
Because title restrictions are recorded with the deed of sale or title deed, title companies are the most powerful resource for identifying potential restrictions on a particular property. A title search is usually subject to a fee and is carried out by the title company.
Investors should note, however, that not all title searches go far enough back in a property’s history and that a parcel may also have additional, older restrictions.
For investors conducting their own search, each county maintains a registry of deeds or makes the information available at the county secretary’s office. Although many counties offer this information online in a searchable format, not all charter information is digitized. You may need to look for older records in person at a County Records Office.
Searching for deed restrictions can be time consuming and challenging, but the risks an investor runs by not conducting a proper search far outweigh the costs associated with the search.
Dealing with the risk of restriction of documents
Most investors are aware that before purchasing a new property, renovating an existing structure, or reviving a failed business, they must conduct extensive due diligence. However, deed restrictions are often overlooked when an investor prepares a business plan, conducts assessments and obtains local regulatory approvals.
Each of these points is undoubtedly an essential part of the investment process, but it is also necessary to spend sufficient time researching a property’s ownership history to ensure a smooth path to realizing the investor’s vision. The last thing an investor wants is to deal with a convoluted and costly court process to change or lift a deed restriction that was undetected at the time of purchase. A full research of the investor’s target property deed history helps ensure a successful venture and allows the investor to focus their energies on realizing their vision.
David Jacobs is a senior project specialist at Owner Builder Advisors. His experience includes construction work, construction risk management and sales. Jacobs uses his wealth of experience both on site and in the office to better support OBA customers.