Posted by: Patricia Salkin | January 4, 2014

Fed. Dist. Ct. in MD Finds Plain and Unambiguous Language in Restrictive Covenant Prohibits Use of Property for Vineyard, Winery and Retail Store

Plaintiffs Joe and Nancy Hollingsworth, Third-Party Defendant Margaret Mary Daly, and Defendant/Counter-Plaintiff Chateau Bu-De, LLC (“CBD”) are all owners of adjacent parcels of land in Talbot County, Maryland. In 1972, the owners at the time (who were different than the current owners) subjected the parcels to certain restrictions. The dwellings on each parcel were limited to a single family dwelling with a non-rentable guest house. Additionally, the properties were to be maintained as residential and “not for purposes of any trade or business whatsoever.” In December of 1981, the properties were subjected to conservation easements in favor of the Maryland Environmental Trust (“MET Easement”) to preserve their agricultural and rural nature. The MET Easements prohibited any commercial activity “with the exception of farming and activities that can be conducted from a residential or farm building without alteration of the external appearance of the building.” Finally, the properties were subjected to a Road Maintenance Agreement in 2004, which provided that the road near the properties (“Riverside Lane”) could only be substantially altered upon unanimous consent of all the property owners and at the expense of the owner proposing the change.

The Hollingsworths purchased their property in May of 2004, and CBD purchased its property in December of 2011. Thereafter, CBD sought to operate a vineyard, winery, and retail store on its property. It also sought to widen Riverside Lane for public usage in connection with its wine business.

In November of 2012, the Hollingsworths filed an action for declaratory judgment against CBD in the Talbot County Circuit Court, seeking to enjoin CBD from its proposed activities. The Hollingsworths asserted that the restrictive covenant prohibited CBD from operating the vineyard because it constituted commercial activity. They further argued that the Road Maintenance Agreement prevented CBD from widening Riverside Lane for public usage. In response, CBD filed a counter-claim against the Hollingsworths and a Third-Party Complaint against the Dalys. CBD countered that it could engage in its planned activities because (1) the restrictive covenants were ambiguous, (2) the Hollingsworths had unclean hands, and (3) the deed restrictions had been abandoned. CBD further claimed that it could alter Riverside Lane as long as it covered the expenses to do so.

The court first addressed the alleged ambiguity of the restrictive covenants by applying contract interpretation principles. Restrictive covenants must be analyzed in three steps. First, the court must look to the plain language of the covenants in order to determine the parties’ intent. If the language is unambiguous, then the plain meaning is what governs, and no further analysis is required. If the plain language is ambiguous, then the court must proceed to the second step and consider extrinsic evidence to determine the parties’ intent. Finally, if the extrinsic evidence does not make clear the parties’ intent, “the covenant must be construed in favor of unrestricted use.”

Here, the court determined that the plain language of the restrictive covenants was unambiguous. The restrictions provided that the properties were to be “for residential use only and not for purposes of any trade or business whatsoever.” The court found CBD’s argument – that the terms “trade” and “business” were undefined and thus ambiguous – to be unavailing. The court found that despite these terms not being defined, the clear intent of the parties was evident throughout the entire document. The restrictive covenant made multiple references to the properties being maintained as residential and “free from commercial activity.” The court found this emphasis to be clear and unambiguous, and rejected CBD’s assertions otherwise.

Second, the court addressed the issue of whether the Hollingsworths had unclean hands. CBD contended that the Hollingsworths’ themselves violated the restrictive covenants, and their hands were thus unclean because (1) the Hollingsworths did not obtain approval before building their home, (2) Mr. Hollingsworth practiced law in his home, and (3) the Hollingsworths grew crops on their property. The court explained that the doctrine of unclean hands is “not to punish the wrongdoer, but to protect the courts from having to endorse or reward inequitable conduct.” Furthermore, the alleged misconduct must be “connected with the transaction upon which the claimant seeks relief.”

Here, the restrictive covenants provided that “no building or other structure shall be commenced, erected, or maintained … without being approved in writing by Frederick R. Menke, his successor or successors in interest, his nominee or nominees.” The relief sought by CBD here was to enforce a different paragraph of the covenants that limited the land to residential use. This asserted right was different from that which CBD claimed caused the Hollingsworths’ hands to be unclean – that is, that the Hollingsworths failed to obtain approval by Frederick Menke or his successor before building their home. Since the doctrine of unclean hands requires these asserted rights to be the same, the court held that the doctrine was inapplicable here.

CBD also argued that the Hollingsworths had unclean hands because Mr. Hollingsworth conducted business out of his home office, thus violating the restrictive covenants’ prohibition against commercial activity. The court cited to case law in which the courts have held that incidental usage does not violate a restrictive covenant that limits use to residential purposes. In these cases, similar facts led to findings that if a homeowner occasionally uses a home office, but maintains his main office elsewhere, then his home office is considered an incidental usage.

In the present case, Mr. Hollingsworth admitted to occasional use of a home office to “take phone calls, review/revise legal documents, and send emails.” Yet, Mr. Hollingsworth’s main office was located in Washington, D.C., and he never held out his home office to be an additional public location. The court concluded that this usage was merely incidental and was thus not in violation of the restrictive covenants. CBD countered that it was unreasonable to believe that Mr. Hollingsworth’s only law office was located in Washington, D.C., because it was a two-hour drive away from his home. The court found this to be mere speculation, and absent any evidence, the court rejected the argument.

CBD further argued that the Hollingsworths had unclean hands because they violated the deed restrictions by conducting agricultural activity on their property. CBD claimed that the growth of crops constituted commercial activity as prohibited by the restrictive covenants. The court explained that at the time that the Hollingsworths and the Dalys acquired their property, portions of the property had already been used for growing crops. The court found it “nonsensical” to conclude that the deed restrictions against commercial activity would prohibit “the same agricultural activity that has occurred during, and since, the drafting of the deed restrictions.” Moreover, even if the Hollingsworths’ activity had violated the restrictive covenant, they may still enforce activities that exceed the scope of the preexisting violations. The only activity that the Hollingsworths engaged in that was arguably in violation of the covenants was their growth of crops on their property for use elsewhere. CBD’s activities, on the other hand, were beyond the growth of crops; CBD was growing and processing crops for on-site use and engaging in public tours and sales in the community. The court found that these activities exceeded the scope of the preexisting agricultural activity and that the Hollingsworths were entitled to enforce the covenant accordingly. The Hollingsworths were found not guilty of unclean hands in any of the respects asserted by CBD.

The third issue addressed by the court was the alleged abandonment of the restrictive covenants. CBD argued that the deed restrictions had been abandoned because they contradicted the later-established MET Easements. The purpose of the MET Easements was to preserve the agricultural and rural nature of the land by prohibiting commercial activities, “with the exception of farming and activities that can be conducted from a residential or farm building without alteration of the external appearance of the building.” The sale of farm products to the public was also allowed by the MET Easements. The exception provided for in the MET Easements was not provided for in the original deed restrictions; rather, the deed restrictions placed a blanket prohibition on all commercial activity. Although this particular issue was one of first impression, the court looked to case law in which governmental regulations were enacted that similarly contradicted a preexisting restrictive covenant. In such cases, “the Maryland courts have consistently held that the most restrictive document controls.” Here, the most restrictive document was clearly the original deed restrictions. As such, the court determined that the deed restrictions governed and rejected CBD’s argument that they been abandoned.

Finally, the court discussed CBD’s argument that the Road Maintenance Agreement permitted CBD to alter Riverside Lane at its own expense. The Road Maintenance Agreement provided that substantial changes “such as upgrading, widening, or converting it from a private road to a public road” would require “unanimous consent” of all the property owners. The agreement further provided that if such changes to the road were to occur, the owner seeking the change would need to do so at his own expense. CBD argued here that since it would be paying for the changes himself, it was permitted to make the changes without unanimous consent. The court concluded that the plain and unambiguous language of the agreement required unanimous consent regardless of whether the owner paid for the changes himself. These were two separate requirements that needed to be satisfied independent of one another. Therefore, the court determined that CBD needed to obtain unanimous consent before making its proposed changes to Riverside Lane.

Hollingsworth v. Chateau, 2013 WL 6537723 (D. MD 12/12/2013)

The opinion can be accessed at: http://scholar.google.com/scholar_case?case=13110298862005506218&hl=en&as_sdt=6&as_vis=1&oi=scholarr


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