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Michigan Court Rules Amendment of Restrictive Covenants is Based on Plain Language and Not Reasonableness

On July 14, 2022, the Michigan Court of Appeals issued a new opinion regarding how restrictive covenants can be terminated in Schwintek, Inc v High Top Buds, LLC, unpublished per curiam opinion of the Court of Appeals, issued July 14, 2022 (Docket No. 357152). In Schwintek, the Court of Appeals examined the process by which restrictive covenants which contain an automatic renewal provision can be amended and the timing of when such amendments to restrictive covenants take effect.

 

Facts

The dispute in Schwintek involved two parties that each owned property within a 48.8 acre industrial park subject to restrictive covenants (the “Park”). The plaintiff, Schwintek, Inc. (“Schwintek”) owned a 3.28-acre parcel of property within the Park. The defendant, High Top Buds (“HTP”), was the owner of 39.06 acres of property within the Park. The restrictive covenant at issue provided that no part of the real estate within the Park was permitted to be used for other than industrial, warehouse or commercial non-retail sales. Schwintek had owned its property since 2006 and used its property for manufacturing components for boating and recreational vehicle industries.

The restrictive covenants, which were originally imposed in 1990, contained a provision stating that the deed restrictions would run with the land and remain in effect “until December 31, 2000, at which time these restrictions be automatically extended for successive periods thereafter of ten years each, unless owners of more than 75 per cent of the real estate … shall execute and record … an instrument revoking or modifying such restrictions…”

In June 2020, HTB purchased 15.65 acres of land in the Park. In August 2020, HTB purchased an additional 23.41 acres of land in the Park and obtained approval from the Village of Cassopolis to construct a 30,000-square-foot building, with an anticipated investment of three million dollars and the creation of 25 jobs, to be used for cultivation of marijuana. On October 23, 2020, HTB, as the owner of more than 75% of the land within the Park, adopted and recorded a Revocation and Release of Restrictive Covenants (the “Revocation”) to remove all of the restrictive covenants, including the restriction that prohibited use of the property for agricultural purposes.

After HTB began constructing its building, Schwintek filed a lawsuit and alleged that HTB’s planned agricultural use of the property violated the restrictive covenants. Schwintek also alleged that HTB’s attempt to revoke the restrictive covenants was “premature, non-uniform, materially changed the character of the industrial park, and was unlawful because HTB did not own 75% of the appraised value in the industrial park.” After initially granting a motion for temporary restraining order, the Cass County Circuit Court dissolved the TRO and dismissed Schwintek’s case in its entirety.

 

The Michigan Court of Appeals Hold That the Restrictive Covenants Will Be Enforced Based on Their Plain Language

On appeal, the Michigan Court of Appeals affirmed the Cass County Circuit Court’s ruling and explicitly held: (1) HTB’s Revocation of the restrictive covenants became effective on January 1, 2021; (2) HTB’s Revocation of the restrictive covenants applied equally to all property within the Park; and (3) HTB’s Revocation of the restrictive covenants was not “unreasonable” as argued by Schwintek. At the outset, the Court reaffirmed the long-standing legal principle under Michigan law that “Restrictive covenants involve two fundamental freedoms—the freedom to contract and the freedom to use property.” Mazzola v Deeplands Development Company, LLC, 329 Mich App216, 223-224; 942 NW2d 107 (2019).

With respect to the timing of the Revocation of the restrictive covenants, the Court of Appeals cited an earlier opinion from the Michigan Court of Appeals in the matter of Brown v Martin, 288 Mich App 727; 794 NW2d 857 (2010), where the Court of Appeals held that because an amendment to deed restrictions was adopted “by less than the unanimous vote of the then lot owners, the amendment [would] not take effect until the end of the current 10–year extension period.” Because the amendment by HTB was not unanimous, the amendment could not take immediate effect.

The plain language of the restrictive covenant in Schwintek provided that the restrictions automatically renewed on January, 1, 2001 for a period of ten years, and then renewed again for another period of ten years commencing January 1, 2010. The next 10-year period was due to expire on December 31, 2020. Because HTB’s Revocation was recorded on October 23, 2020, and was adopted by less than unanimous consent (but with at least the required minimum of 75%), the Revocation would not take effect until after the most current renewal period ended, which was on January 1, 2021. Accordingly, once the restrictions were revoked on January 1, 2021, HTB, and all of the other owners of property within the Park, were no longer subject to the restrictions.

The Court of Appeals also determined whether or not HTB’s Revocation was effective as to all property within the Park or just the property owned by HTB. This dispute arose because the legal description of land recited in HTB’s Revocation only included the land owned by HTB (and not the other parcels of property within the Park that were owned by other parties). The Court relied on the introductory paragraph of the Revocation which stated that it was: “for the express purpose of terminating and forever releasing and discharging the ‘Restrictive Covenants’ . . . .” and language in the Revocation that stated: “the Restrictive Covenants are hereby revoked, terminated, extinguished and released in their entirety; shall be of no further force or effect; and no longer a burden or encumbrance on title to the Property” in determining that HTB revoked the entire restrictive covenant and the Revocation applied uniformly to all of the lots in the Park.

Finally, Schwintek argued that the Revocation was “unreasonable” and relied on out of state caselaw to support its position. However, the cases relied on by Schwintek all related to amendments of restrictive covenants which imposed new obligations that were not agreed to by the original owners of properties, such as amendments requiring a mandatory membership in a homeowners association and amendments requiring property owners to maintain roads at their own expense (as opposed to a revocation of the restrictive covenants which HTB adopted in this case). The Court of Appeals held that the Revocation was “executed by the requisite 75% super-majority and it did not subject the property in the industrial park to additional encumbrances” as its rationale for dismissing Schwintek’s “reasonableness” argument.

The Schwintek case is a helpful reminder from the Michigan court of Appeals on the timing and effectiveness of amendments of restrictive covenants that are subject to an automatic renewal provision. As outlined by the Court in Schwintek, if deed restrictions are currently in an automatic renewal period, unanimous consent of all property owners will likely be necessary to allow an amendment or revocation to take immediate effect. Absent unanimous consent, an amendment or revocation to the restrictions can still be adopted by the requisite percentage of owners, but the amendment or revocation will not take effect until the end of the current renewal period.

Restrictive covenants should always be carefully reviewed before purchasing property, regardless of whether or not the property is to be used for residential or commercial purposes. Restrictive covenants should be disclosed by an accurate and complete title search, which purchasers should always obtain prior to closing on the purchase of a property. Property owners should also carefully review the language of the restrictive covenants to determine if the covenants will automatically expire on their own, are subject to an automatic renewal provision, and to determine what the amendment requirements are. Importantly, if HTB had waited another 3 months before recording the Revocation, it would not have taken effect for another 10 years as the restrictive covenants would have automatically renewed on January 1, 2020 through December 31, 2030 and the result of the Schwintek case would likely have been drastically different.

Brandan A. Hallaq is a Senior Attorney with Hirzel Law, PLC where he litigates cases involving defective construction, contract disputes, shareholder/member disputes, quiet title actions to determine interests in property, enforcement of restrictive covenants, real estate foreclosure actions, and bankruptcy matters representing creditors. Mr. Hallaq is also a licensed Real Estate Broker in the State of Michigan and leads the real estate transactions department at Hirzel Law, PLC where he negotiates and prepares the necessary documents for business and real estate transactions, including purchase agreements, franchise agreements, loan/financing documents, and commercial and residential leases and mortgages. In each year from 2018 through 2021, he has been recognized as a Rising Star in the area of real estate law by Super Lawyers Magazine, a designation that is given to no more than 2.5% of the attorneys in the State of Michigan each year. He was also recognized as a 2020 Up & Coming Lawyer by Michigan Lawyer’s Weekly, an award given to no more than 30 attorneys in the state each year, and he was recognized in the inaugural issue of the 2021 Best Lawyers in America: “Ones to Watch” list for professional excellence in real estate law. Mr. Hallaq obtained his Juris Doctor degree, cum laude, from Wayne State University Law School where he served as an editor on the Wayne Law Review. Prior to joining Hirzel Law, PLC, Mr. Hallaq worked for a Federal Judge and in a Fortune 500 corporation’s in-house legal department. He can be reached at (248) 480-8704 or at bhallaq@hirzellaw.com.

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