Don’t Let Deed Restrictions Flip You

Some of the most intriguing shows on TV are home-remodeling programs. After seeing the before and after versions of a property, you may be tempted to tackle a renovation on your own home or flip a property.

But before you pour your savings into a project, you should know these two little words: restrictive covenants. Also known as deed restrictions, restrictive covenants are typically a set of rules that a neighborhood association or owner of a property says you must follow.

You’ve probably heard of common neighborhood restrictions designed to keep the architectural look and feel of your home consistent with the rest of the neighborhood such as limitations on the color of paint you use on the exterior of your home. In other instances, restrictive covenants might limit the number of pets you can have, where vehicles can be parked, and the use of yard signs. But restrictions aren’t limited to neighborhoods: they’re often applied to condominiums and sometimes to commercial buildings or commercial lease space.

While Texas law often requires property sellers to disclose the existence of a property owners association, buyers rarely read applicable restrictions and if they do, they rarely give them careful study (and restrictions are rarely disclosed in commercial leasing). Sometimes restrictions lie dormant because they’re not being enforced by an association, but the law allows a neighbor to enforce them with a lawsuit (and to recover attorney’s fees for doing so). As a result, restrictive covenants can cause legal issues that might not be so obvious.

The casual investor inspired by a marathon of “Flip This House” episodes might have the urge to purchase a ‘fixer-upper’ two-bedroom home and turn it into a quaint, four-bedroom home (to increase resale value and appeal). But after consulting engineers, purchasing architectural drawings, and doing the work, it might later come to light that a covenant actually prohibits adding more bedrooms. Since the remedy for restrictive covenant violations is generally to ‘restore’ the property to a condition that complies with the restrictions, any potential increase in value would easily be lost.

Similarly, commercial landlords and tenants would be wise to review potential restrictive covenants for a property before either party invests time and money into a lease and the leased space. Commercial covenants often place limits on the types of businesses that can be conducted at a property. While these covenants are more common in ‘office condo’ developments, both the landlord and tenant can be held liable for a violation of such restrictions. For tenants, the burden of checking to see if covenants exist falls on them – the inability to use the space often won’t be an excuse to get out of the lease later.

Another trap for the unwary may arise in the use of a home office. While it’s often the ‘cheapest’ office space for small business and there might be an available tax deduction for a home-office, you should check the property covenants to see what restrictions exist for the types of businesses you can operate or the manner in which you can operate. Most covenants prevent home-based businesses from displaying signage or having customers visit the home, yet these are often items used to support the home office deduction with the IRS.

Just recently the city of Houston sued a couple and their landlord saying the couple exceeded the number of allowed garage sales at their home, even though the couple had a permit from the state to run a business from their home. The city claimed their daily garage sales violated deed restrictions.

In short, before leasing a property or buying property, part of the due diligence process should include a request for any applicable deed restrictions or restrictive covenants. They are usually available through the neighborhood association or the county property records department. If you don’t feel comfortable independently researching them, a title company can help you find the document for a small fee. An experienced real estate attorney also can help you find the restrictions and translate any jargon that might be in the document.

If you need legal advice, schedule a meeting with Tiwari + Bell PLLC through our website or by calling (210) 417-4167