Can an HOA Enforce a Short Term Rental Prohibition Retroactively?
We don't think so. In a recent lawsuit we filed, which was the subject of a counterclaim, our client sought guidance from the Court as to whether the Center Hill Lake resort Four Seasons in DeKalb County could retrospectively enforce a restrictive covenant purporting to outlaw short term rentals. Of interest, Four Seasons still allowed rentals of 30 days or longer.
First, it is well-settled in Tennessee that “a property owner’s right to own, use, and enjoy private property is fundamental.” Massey v. R.W. Graf, Inc., 277 S.W.3d 902, 908 (Tenn. Ct. App. 2008) (citing Nollan v. California Costal Comm’n, 483 U.S. 825, 831 (1987); McArthur v. East Tenn. Natural Gas Co., 813 S.W.2d 417, 419 (Tenn. 1991). This principle has been embraced by Tennessee courts as early as 1839: [E]very proprietor of land, where not restrained by covenant or custom, has the entire dominion of the soil and the space above and below to any extent he may choose to occupy it, and in this occupation he may use his land according to his own judgment, without being answerable for the consequences to an adjoining owner, unless by such occupation he either intentionally or for want of reasonable care and diligence inflicts upon him an injury. Humes v. Mayor of Knoxville, 20 Tenn. (1 Hum.) 403, 407 (1839).
Accordingly, “[b]ecause restrictive covenants are in derogation of the fundamental right of free use and enjoyment of real property, they are not favored under Tennessee law.” Massey, 277 S.W.3d at 908 (emphasis added) (citing Williams v. Fox, 219 S.W.3d 319, 324 (Tenn. 2007); Arthur v. Lake Tansi Village, Inc., 590 S.W.2d 923, 927 (Tenn. 1979)). Restrictive covenants are therefore strictly construed. Arthur, 590 S.W.2d at 927. Under this framework, “[a]ny doubt concerning the applicability of a restrictive covenant will be resolved against the restriction[.]” Id. (citing Richards v. Abbottsford Homeowners Ass’n, 809 S.W.2d 193, 195 (Tenn. Ct. App. 1990)). Similarly, “any ambiguity in the terms of the restrictive covenant will be resolved against the restriction[,]” and “when the terms of a covenant may be construed more than one way, the courts must resolve any ambiguities against the party seeking to enforce the restriction and in a manner which advances the unrestricted use of the property.” Id. (citing Parks v. Richardson, 567 S.W.2d 465, 467-68 (Tenn. Ct. App. 1979); Hills v. Powers, 875 S.W.2d 273, 275-76 (Tenn. Ct. App. 1993)).
In the 1984 decision of Conn v. Powell, 1984 WL 588785 (Tenn. Ct. App. April 27, 1988), the Tennessee Court of Appeals addressed the question of “whether an amendment to a restrictive covenant may be enforced against a landowner who acquired his property before the amendment was recorded.” Conn, 1984 WL 588785, at *1. Ultimately, the Court held in favor of the landowner, as discussed infra. Conn involved a dispute between a developer/landowner in a Davidson County residential subdivision known as the “Highlands of Tulip Grove” and the subdivision’s homeowners’ association. Id. When the subdivision was established in 1974, it was subject to certain restrictive covenants which provided, inter alia, that construction of two story duplexes were permitted. Id.
Further, the restrictive covenant contained an amendment provision which provided: Any of the restrictions imposed in the instrument may at any time or times be amended by a recorded instrument in writing, signed and acknowledged by the Grantor herein, or signed and acknowledged by the owner or owners of at least seventy (70%) percent of the lots in said subdivision, and additional restrictive covenants may be placed on the lots in said Subdivision in the same manner. Id. at *2. The developer/landowner purchased property in the subdivision on March 4, 1983. Id. at *1. Four days later, on March 8, 1983, the homeowners’ association recorded an amendment to the original restrictive covenants which prohibited two story duplexes, and thereafter filed a lawsuit against the developer/landowner to enforce the amendment. Id. at *1-*2. The developer/landowner first argued that the relevant amendment was not properly adopted pursuant to the above provision because it was signed by a successor trustee. Id.
The Court rejected this argument. In that regard, the Court reflected that “‘[r]estrictions to protect the beauty of the neighborhood, value of the property, and uniformity are covenants running with the land binding those who purchase lots within the subdivision and are enforceable by the owner of any of the lots so protected by the restrictive covenants.’” Id. at *2 (quoting Benton v. Bush, 644 S.W.2d 690, 692 (Tenn. Ct. App. 1982)). Further, “‘[w]hen a covenant runs with the land[,] liability to assume its burdens or right to use its benefits passes to the landowner’s assignees.’” Id. (quoting American Oil Co. v. Rasar, 308 S.W.2d 486, 491 (Tenn. 1957)).
Thus, because nothing in the original restrictive covenants indicated that the power to amend could only be exercised by the original trustee, the Court held that the amendment was effectively adopted even though signed by a successor trustee. Id. The Court went on to hold, however, that the amendment could not be enforced retroactively against the developer/landowner who purchased property in the subdivision before the amendment was recorded. Id. at *3. Specifically, the Court first recognized that “‘[o]f course, it is well settled, in Tennessee as elsewhere, that an owner of land is not bound by covenants restricting the use of the land by his remote grantor, when such covenants do not appear in the owner’s chain of title and when he had no actual notice of the alleged covenant at the time he acquired title.’” Id. (quoting Land Developers, Inc. v. Maxwell, 537 S.W.2d 904, 913 (Tenn. 1976); and citing Arthur v. Lake Tansi Village, Inc., 590 S.W.2d 923 (Tenn. 1979); Yates v. Chandler, 38 S.W.2d 70 (Tenn. 1931)).
Notwithstanding the well settled authority above, the Court also recognized other competing equitable principles. For example, “where a buyer purchases land with notice that the property is covered by restrictive covenants and that either the grantor or the landowners may amend those covenants, the buyer may be bound by subsequent amendments after he has acquired title to the property.” Id. (citing 26 C.J.S. Deeds § 167(3), p. 1147, § 168, pp. 1160-61, § 169, p. 1169). On the other hand, restrictive easements “are never retroactive and cannot fasten on one lot by reason of the other lot owners conforming to a general plan.” Id. (quoting C.J.S. Deeds § 167(3), p. 1157).
Further, “‘a provision that any of the restrictions imposed may be modified or amended does not authorize any new or additional restrictions to be imposed, but only authorizes existing restrictions to be made less harsh.’” Id. (emphasis added) (quoting 26 C.J.S. Deeds § 168, p. 1161). However, the Court ultimately looked to equitable principles associated to the enforcement of building restrictions. Id. (citing 20 Am.Jur.2d Covenants § 313). In particular, “although a violation of a building restriction may have occurred, where it has occurred because of innocent mistakes, or because of a good faith claim of right, and where enforcement of the restriction would cause damage to the defendant disproportionate to the injury which plaintiff claims,” the defendant cannot be enjoined and prohibited from building. Id. (citing 20 Am.Jur.2d Covenants, § 329).
Thus, the Court held that the developer/landowner “may be bound by [the relevant amendment prohibiting two story duplexes] if they should attempt in the future to construct [two story] duplexes, but they will not be bound where that construction was already begun before the amendment took effect.” Id. at *4 (emphasis added). The Court stated that this was “especially true” where the relevant amendment imposed a “harsher restriction” than before. Id.
The more recent Tennessee Court of Appeals’ decision in Mendelson v. Bornblum, 2005 WL 1606068 (Tenn. Ct. App. July 8, 2005), extends the holding Conn, and strengthens a landowner’s rights. There, a prior landowner owned a tract of land in Memphis, Tennessee, and, in 1952, subdivided the lots into 32 separate lots which he named the “Northfleet Estates.” Mendelson, 2005 WL 1606068, at *1. The restrictive covenants at the time did not prohibit further re-subdivision, but also provided that amendments to the restrictive covenants may be made upon the majority vote of the neighborhood’s lot owners. Id. In 2002, the plaintiff in the case purchased a lot in the Northfleet Estates. Id. at *2. He did so with the approval of a majority of the other owners in the subdivision to divide the lot into two single-family residential lots. Id. This approval was recorded as an amendment to the original restrictive covenants, showing that the particular lot at issue was instead two residential lots. Id.
However, the City of Memphis’ Land Use Control Board denied the configuration of the lots. Id. at *3. While this decision was on appeal to the Memphis City Council, a majority of the lot owners recorded another amendment to the restrictive covenants which effectively reversed the previous amendment and prohibited the plaintiff to divide the lot he purchased. Id. Thereafter, however, Memphis City Council approved the plaintiff’s revised proposed lot configuration. Id. Accordingly, the plaintiff filed a lawsuit requesting a declaratory judgment stating that he had the right to subdivide his lot. Id. The trial court ruled against the plaintiff. Essentially, the trial court determined that because the restrictive covenants provided a majority of the lot owners in the Northfleet Estates to amend the restrictive covenants – and because the plaintiff was on notice of this fact – he was bound by the second amendment which prevented him from dividing his lot. Id.
On appeal, the Tennessee Court of Appeals reversed. Id. at *7. In that regard, the Court addressed three issues: (1) whether the plaintiff was estopped from asserting that initial majority approval for dividing his lot was irrelevant or unnecessary; (2) whether the plaintiff’s representations regarding the specific lot configuration to the other homeowners became part of their consent and whether he was therefore estopped to substantially deviating from those initial representations by dividing the lot under the revised lot configuration approved by the City of Memphis; and (3) whether the subsequent amendment recorded by a majority of the other homeowners applied to the plaintiff. Id. at *4. As to the first issue, the Court held that because a majority approval was unnecessary under the original restrictive covenants, the plaintiff was not estopped from arguing that such approval was irrelevant or unnecessary even after he obtained such permission and recorded an amendment to the original restrictive covenants. Id. at *5.
As to the second issue, the Court held that the approval signed by the majority of the other homeowners that was later recorded only stated that the plaintiff’s lot would be re-subdivided into two residential lots. Id. at *6. The Court recognized that restrictive covenants “‘will be enforced according to the clearly expressed intention of the parties; but being in derogation of the right of unrestricted use of property, will be strictly construed, and will not be extended by implication to anything not clearly and expressly prohibited by their plain terms.’” Id. (quoting Turnley v. Garfinkel, 362 S.W.2d 921, 923 (Tenn. 1962)).
Accordingly, because the approval that was recorded did not limit the lot configuration, the Court held that the plaintiff was not required to split his lot according to the original plan, and could move forward with the revised lot configuration approved by the City of Memphis. Id. Finally, as to the third issue, the Court held that the subsequent amendment to the restrictive covenants prohibiting the plaintiff from re-subdividing his lot could not be enforced retroactively.
In that regard, the Court reflected as follows: The Tennessee Supreme Court has stated that “no set of covenants should be given any general retroactive effect.” E. Sevier County Util. Dist. v. Wachovia Bank & Trust Co., 570 S.W.2d 850, 853 (Tenn.1978); see also Land Developers, Inc. v. Maxwell, 537 S.W.2d 904, 913 (Tenn.1976); Graham v. Edmondson,1999 WL 476466, at *4 (Tenn. Ct. App. July 12, 1999). Generally, “the date when title [is] transferred [is] the critical point after which amendments [can] not be enforced against the purchaser.” Conn v. Powell, 1984 WL 588785, at *3 (Tenn. Ct. App. Nov. 5, 1984).
However, where a buyer of land has notice that the property is covered by restrictive covenants and that other lot owners may amend those covenants, the buyer may be bound by amendments made subsequent to the acquisition of title. Id. (citing 26 C.J.S. Deeds §§ 167(3), 168, 169 (1956)). Notwithstanding that principle, “a provision that any of the restrictions imposed may be modified or amended does not authorize any new or additional restrictions to be imposed, but only authorizes existing restrictions to be made less harsh.” Id. (quoting 26 C.J.S. Deeds § 168 (1956)). Id. (emphasis added). Accordingly, because the subsequent amendment “operate[d] to tighten the restrictions” on the plaintiff’s right to use his property, applying it to prohibit the plaintiff to re-subdivide his lot “would serve as an impermissible retroactive application of a restrictive covenant.” Id. (emphasis added).
The Court therefore reversed the trial court and the plaintiff was permitted to re-subdivide his lot. Id. at *7. The Mendelson decision extended the principles espoused in the Conn decision inasmuch as the ruling did not depend on any equitable theories associated to the enforcement of building restrictions. Id. In other words, this decision shows an expansion of Tennessee law favoring a landowner’s right not to have restrictive covenants applied retroactively.
Similar to Mendelson, the Tennessee Court of Appeals’ 1988 decision in Wicklow Cluster Homes Ass’n, Inc. v. Salmon, 1988 WL 39553 (Tenn. Ct. App. April 27, 1988), also emphasizes the principle that an amendment to a restrictive easement cannot be applied retroactively. In Salmon, the defendant homeowner purchased a property in the Wicklow Cluster Homes Development in 1985. Salmon, 1988 WL 39553, at *1. The property was subject to a 1981 restrictive covenants which provided certain use restrictions, including a provision which required that she obtain the approval of the homeowners’ association board to modify the property, including any fencing on the property. Id.
Further, the 1981 restrictive covenants provided that such restrictions could be amended. Id. at *2. After the homeowner purchased the property, she discovered that a fence on the property was four feet within her property line and was concealing a water faucet to which she wanted access. Id. at *1. Accordingly, she requested that the board approve her moving the fence pursuant to the terms of the 1981 restrictive covenants. However, the board denied the defendant’s request based on both the original 1981 restrictive covenants an amendment to the 1981 restrictive covenants that was passed and recorded after the defendant had purchased her property and after she submitted her request. Id.
This amendment expressly provided that all original fencing must remain in its original location. Id. at n. 1. When the defendant provided the board notice that she intended to proceed with moving the fence, it filed suit to prohibit her from doing so. The trial court ruled in favor of the defendant and held that the amendment could not be applied retroactively. Id. at *2. On appeal, the Tennessee Court of Appeals affirmed on this issue. Id. at *3.
In that regard, although the Court reversed the trial court and ultimately concluded that other restrictions in the original 1981 restrictive covenants prohibited the defendant from moving the fence, the Court emphasized that the amendment itself was inapplicable. Id. at *2-*3. Specifically, the Court recognized the well-settled principle that “absent an express contract so providing, ‘no set of covenants should be given any general retroactive effect.’” Id. at *2 (quoting E. Sevier Cty. Utility Dist. v. Wachovia Bank, 570 S.W.2d 850, 853 (Tenn. 1978)).
Further, although the original 1981 restrictive covenant provided the board the right to amend the restrictions, the Court held that the provision did not “provide an express agreement by the owners of the servient estates that any change made by the [board] will impact on their current property rights.” Id. Accordingly, although the defendant was ultimately prohibited from moving her fence, the Court expressly held that it “agree[d] with the trial court’s conclusion that subsequent amendments are not applicable to current owners without their express agreement[.]” Id. at *3.
Similarly, the Tennessee Court of Appeals’ 1999 decision in Graham v. Edmondson, 1999 WL 476466 (Tenn. Ct. App. July 12, 1999), supports the principle that restrictive easements cannot be applied retroactively. The relevant facts of the case are as follows: In March, 1978, a development company (“Fitts”) acquired a large tract of land it subdivided into several plots that became the development known as Bluff Road Acres. Graham, 1999 WL 476466, at *1. On April 7, 1978, Fitts sold two plots within Bluff Road Acres to the Hasty Construction Company (“Hasty”). Id.
Some five months later, Fitts executed and recorded certain restrictive covenants related to the Bluff Road Acres development, which it intended to cover the entire development including the two plots it previously sold to Hasty. Id. Among other restrictions, the restrictive covenants prohibited any commercial use within the Bluff Road Acres development. On November 17, 1978, two months after Fitts recorded the restrictive covenants, Hasty sold part of the land it purchased to Mr. and Mrs. Thomas. Id.
Three years later, this property was sold to the defendant, Edmondson, and her husband at the time. After Edmondson and her then-husband divorced, the subject property was quitclaimed to Edmondson individually. Thereafter, Edmondson installed a mobile home and expanded barn. She also held rodeos and began a beauty shop business on the property. In response, the other homeowners filed suit against Edmondson for violations of the Bluff Road Acres restrictive covenants. Id. at *2.
The trial court held in favor of Edmondson, holding that the relevant restrictive covenants ran with the land and were therefore confined to the property as it existed at the time of the covenant. Id. Accordingly, the trial court held that “[s]ince the defendant’s property is not burdened by restrictions either directly in the chain of title or by any other document, recorded or otherwise, this court cannot impose such restrictions upon her land[.]” Id. (emphasis in original).
On appeal, the Tennessee Court of Appeals affirmed. Id. at *2-*3. Specifically, the Court unequivocally held that, because the subject property did not have any restrictions applicable at the time it was sold by Fitts to Hasty, no restrictive covenants were applicable as the property passed through the various owners. Id. at *3. As the Court reflected, a buyer of property acquires the property subject only to the express restrictive covenants running with the land itself: “The present record reveals no reason why the restrictive covenants should not be applied according to their terms against buyers of lots who personally agreed to them or whose purchases occurred after the recordation of any particular set of covenants. We have already stated that no set of covenants should be given any general retroactive effect.” Id. at *4 (emphasis in original) (quoting East Sevier County Util. Dist. v. Wachovia Bank & Trust Co., 570 S.W.2d 850, 853 (Tenn. 1978)).
Accordingly, the subject plots of land were “not burdened by the restrictions which apply to all other tracts comprising Bluff Road Acres.” Id. Importantly, the Court also held that Edmonson’s knowledge of the restrictive covenants was entirely irrelevant. Thus, like the other cases discussed supra, Graham affirms the principle in Tennessee law that a purchaser of land acquires such land subject only to the restrictive covenants applicable at the time of the transaction, regardless of whether certain restrictive covenants burden other properties in the particular development, and their knowledge regarding subsequently recorded restrictive covenants is irrelevant.
In support of its position, Four Seasons has relied solely upon Preserve at Forrest Crossing Townhome Ass’n v. DeVaughn (Tenn. Ct. App. 2013), involving a townhome/condo in suburban Williamson County. For a number of reasons, this case does not apply, but we will discuss that at another time.