Jack Nelson Jones Professional Association

November 23-29, 2015

Akers v. Butler, 2015 Ark. App. 650 (Nov. 12, 2015)

This appeal comes from the Garland County Circuit Court, Honorable John Homer Wright presiding. The case concerns the interaction between restrictive covenants and land deed agreements.

In April 2005, Angie and Darrel Butler (the Butlers) entered into an “Agreement for Deed” with Mary and Kenneth LaBuy (the LaBuys), who were developing property called Forest Ridge Estates. The agreement was for the sale and purchase of the property at issue in this appeal. At the time the agreement was executed, the “Land Use and Architectural Controls” referenced as part of the agreement had not been filed and was not listed in the agreement. The “Agreement for Deed” provided that if the Butlers defaulted on the agreement, the LaBuys could cancel the contract and retain all the payments made by the Butlers as liquidated damages. The referenced “Land Use and Architectural Controls” restrictions was not filed until October 28, 2005. The document was signed and acknowledged on that same date by fourteen property owners within the subdivision, but the Butlers’ signatures were not among them. Included among the restrictions was one in paragraph 1.1 prohibiting the use of subdivision property for commercial purposes. In addition, paragraph 3.1 of the document provided a mechanism for amending the controls. None of the acknowledgments to the document referenced “consideration.” A document entitled “Modification of Land Use and Architectural Controls” was recorded on April 30, 2013. Pursuant to that document, paragraph 1.1 of the original restrictions was amended as follows: “No noxious or offensive activity, and no commercial activities of any kind shall be carried on or upon any tract in Forest Ridge Estates, nor shall anything be done thereon that may become an annoyance or nuisance to the area, except that rentals for special events shall be allowed.” The document goes on to state that the modification applies to certain described lands. It was signed by the Butlers, and, according to them, it was also signed by thirty-seven other owners of property within Forest Ridge Estates, including the developers (the LaBuys). Also, according to the Butlers, thirty-seven owners represented over eighty percent of the total owners, and sixteen of the twenty-one plaintiffs in the instant case signed the modification. The Butlers thereafter built a barn on a portion of their property and began renting it out, thus operating a commercial business in the residential subdivision. The LaBuys’ and twenty-one other property owners’ petitioned for a temporary restraining order and permanent injunction followed. The trial court ruled in favor of the Butlers finding that because the Butlers did not sign the document entitled “Land Use and Architectural Controls,” they were not bound by it. The LaBuys and the twenty-one other property owners (the appellants) appealed.

On appeal, the appellants argued the restrictions on land use for the subdivision were valid and unambiguous and should have been enforced against the Butlers by the court. They further argued that the fact the Butlers did not sign the restrictions is of no consequence because, when the restrictions were signed, the Butlers did not “own” any land in the subdivision, only an inchoate right to acquire land at some future date if their rights were not forfeited under their contract. The Court of Appeals began by noting that Arkansas Code Annotated section 18-12-103 provides that an instrument creating a restrictive covenant must be executed by the owners of the property and recorded in the office of the recorder of the county in which the property is located. The Court also pointed out that, as found by the trial court, it was undisputed that the “Land Use and Architectural Controls” document, which contained the restrictions relied upon by the appellants, was not signed by the Butlers. Thus, the Court reasoned, the main thrust of the appellants’ argument was that the Butlers’ signature was not necessary for the restrictions to be effective against the Butlers because they were not the “owners” of the property. Rather, because the Butlers were purchasing the property pursuant to a contract for deed, which contained a forfeiture clause, they had no vested interest in the property—only an inchoate interest.

The Court determined that an Arkansas Supreme Court case which declined the invitation to construe Arkansas Code Annotated section 18-12-103 to require mineral owners to join in the execution of bills of assurance before covenants can affect the use of real property to be significantly distinguishable. Moreover, the Court noted that, to the extent the appellants relied upon cases in which defaulting buyers under a land-sale contract containing a forfeiture clause contended they had an equitable interest in the property and were entitled to a return of the payments they had made, were also inapposite. Obviously, the Court stated, as between a seller and a defaulting buyer, concluding that the buyer had an equitable interest would totally negate the forfeiture clause the parties had agreed upon. However, the Butlers were never in default, and this dispute was not between the Butlers and the LaBuys, the sellers, over their land-sale contract. Rather, the Court reasoned that the dispute was whether the Butlers were bound by restrictive covenants they did not sign. The Court was convinced that for the purposes of section 18-12-103, the Butlers constituted “owners of the real property.”

The appellants further argued the Butlers had actual knowledge of the restrictions. At the time the Butlers entered into their contract to purchase the property in April 2005, the land-use restrictions had not been executed. The restrictions were not executed until October 2005, and they were executed without the Butlers’ signatures. The Court was unconvinced that, under the circumstances of this case, the clear requirement for signatures under section 18-12-103 was negated by the Butlers’ alleged knowledge of the restrictions, which at that point was based upon a sentence in their agreement for deed that provided, “Complete list of Land Use and Architectural Controls shall be part of this agreement.”  Accordingly, the Court concluded that the Butlers were land owners for the purposes of section 18-12-103, and that they were not bound by the restrictive covenant. Affirmed.