Discovering use restrictions after settlement: An unhappy ending

Once upon a time there was a buyer looking for a country home with acreage where he could operate a small auto body shop. His buyer agent identified properties that fit her client’s needs, carefully eliminating properties whose zoning was such that a body shop was not permitted.

Remarkably, one of the eligible properties had once supported a small body shop in a small block structure that was still in serviceable condition. Research revealed that 20 years previous, the then-owner was an antique car enthusiast who made extra money working on other collectors’ cars on weekends.

On their first visit to the property, the buyer and his agent met the listing agent.  The buyer asked whether he would be able to operate a small, part-time body shop on the property and was told by the listing agent, “I don’t see why not. The previous owner did that for years.”

This assurance – and others provided by the seller – never made it into the agreement of sale. Regardless, the buyer relied on these statements and the further assurance of the buyer agent who claimed to have received a similar answer from the township zoning officer.

When the buyer and his agent sat down to write the agreement of sale, the agent suggested inserting a clause that would enable the buyer to investigate the use restrictions and allow him to terminate if the property would not lawfully support a body shop. The agent cautioned, however, that since the property was being sold short, it likely would complicate the process. Both decided that based on the information received from the zoning officer, the seller and the seller’s agent, no such clause was necessary.

After settlement — and shortly after taking possession of the property — a neighbor told the buyer that his newly opened body shop violated restrictive covenants that ran with the property. Within days, a lawsuit was filed by the neighbors. One of the defenses raised by the buyer was that no one objected when a body shop was operated on the property in the past and as a result, the neighbors lost the ability to now enforce the restrictive covenant. This defense failed, the neighbors won and the body shop was closed.

Now it was the buyer’s turn to aim his gun sights and they fell squarely on his friendly buyer agent. The buyer agent was shocked. After all, she had word from the township zoning officer that the property could be used as a body shop. Further, she had the assurance of the listing agent as well as the seller. How could the fault be hers?

The buyer agent should know that a buyer is not entitled to rely on the representations of the seller and listing agent that do not appear as provisions in the agreement of sale. Every licensee is familiar with the Representations clause in the agreement that states: “All representations, claims, advertising, promotional activities, brochures or plans of any kind made by Seller, Brokers, their licensees . . . are not part of this Agreement unless expressly incorporated or stated in this Agreement. This Agreement contains the whole agreement between Seller and Buyer and there are no other terms, obligations, …”  Generally, if a representation is made before the agreement of sale is executed, that representation is lost unless it finds its way into the terms of the agreement.

So why can’t the buyer agent take advantage of that same clause? She can when defending a claim of misrepresentation. The problem is, the buyer agent is going to be sued on the basis of her negligence. This clause does not help in that situation.

Conducting due diligence with respect to use restrictions is a difficult task. A lawyer would not dream of advising a client on the basis of what a zoning officer says in a telephone call. The zoning officer only deals with the zoning laws of a municipality and may not know of other private restrictions or laws. Private restrictions, more commonly referred to as restrictive covenants, may have the very same effect as law, even though covenants are created between landowners and do not necessarily involve the government.

The negligence of our buyer agent may be that she allowed the buyer to sign an agreement of sale providing that the buyer would take marketable title subject to restrictions without ever having determined whether there were restrictions preventing the buyer from operating a body shop. The buyer agent could have done several things. She could have inserted a clause that the seller warranted and guaranteed that the property could be used as a body shop, however, I cannot imagine the seller would take that risk. The buyer agent could have elected an inspection option permitting the buyer to assess use restrictions and terminate the agreement if restrictions prevented use as a body shop. She could have advised the buyer to have an attorney search use limitations before the buyer made his offer.

All too often licensees have a limited understanding of the type of restrictions that can affect one’s use of the property. Commercial licensees are more experienced and quite often refer, as part of the due diligence investigation, to an attorney with experience investigating laws as well as private restrictions of record. Failing to conduct a proper due diligence can have expensive consequences not only for the buyer but also his agent.