Business & Insurance Litigation Newsletter for Indiana

Real Estate Developer Not Required to Ensure Future Compliance with Restrictive Covenants

In Paniaguas vs. Endor, Inc., 847 N.E.2d 967 (Ind. Ct. App. 2006), the Court of Appeals addressed the issue of whether a real estate developer has a continuing responsibility to ensure compliance with restrictive covenants after selling its interest in the property. Alden Companies sold lots in Fieldstone Crossing to John and Cathy Paniaguas and other buyers. The purchasing of the lots in the suburban development came with numerous covenants and restrictions concerning land use. The covenants, in part, were intended to ensure uniform quality of development throughout the subdivision. Prior to completing the subdivision, Alden sold its interest in the subdivision to Endor, Inc. The sale transferred all the rights and obligations of Alden to Endor, including the obligation to maintain and finish the development of the surrounding property as well as sustain the high quality of properties in accordance with the covenants. Plaintiffs claim that in violation of the restrictive covenants, Endor developed homes of a lower quality than those of the homes constructed by Alden, causing a diminution in the value of their homes. Plaintiffs first argued that the Court should recognize that a developer such as Alden has a duty to ensure that its successor developer adequately adheres to the restrictive covenants. The Court refused to recognize such a tort, finding that imposing such a duty on prior developers would not significantly advance public policy and would result in an unnecessary duplication of legal remedies. Secondly, plaintiffs argued that the original developer should be responsible for ensuring compliance with restrictive covenants because it should not be allowed to delegate contracted duties. The Court noted the general rule that a party may delegate duties under a contract to another except in circumstances where the contract is premised on a personal relationship, unique skill, or discretion. The Court found that Alden's status as a developer of the community was not of such an essential character as to render the contract incapable of being completed without Alden as the builder and, therefore, all contractual rights could be delegated to the successor. In the end, the homeowners had no legal recourse against Alden based on Endor's failure to perform the contractual obligations as the successor in interest to Alden.