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Restrictive Covenants and Commercial Property in Florida: Some Potential Issues to Be Aware Of

When you go through the process of selecting the best commercial property for your business, you doubtlessly put in a great deal of thought, research and analysis. When you’ve finished that and finally made a selection, the last thing you want is for some unforeseen pitfall to unravel everything you were hoping to achieve. To make sure your business avoids that, you need to be certain you have a skilled South Florida real estate attorney on your side who knows how to uncover all of the information you need.

One of those unforeseen “pitfalls” can be a restrictive covenant, and, as one Palm Beach County entity discovered recently, those use restrictions are probably going to be enforceable against you, even if you didn’t know about them.

Back in 2005, the owner of a commercial property in Seminole County, looking to sell, worked out with its tenant an early termination of the tenant’s lease. The two entities executed a “lease termination agreement.” At the insistence of the tenant, who ran a gas station, convenience store and restaurant on the other side of the street, that contract contained a clause that said that no buyer “nor any successor or assign will operate, lease, sell or otherwise transfer the Property for use as (i) a convenience store, (ii) a fast food hamburger restaurant, (iii) tobacco/beverage store, (iv) gasoline sales,” or any combination of the above business types.

A few months later, a Tampa LLC purchased the property. It sold the property to a North Carolina LLC, and that entity sold the property to the Palm Beach County LLC in 2014. That buyer later sought to sell the parcel to a company that operates gas stations, convenience stores and eateries. The potential buyer, however, discovered the restrictive covenant while it was doing its due diligence, causing the deal between the two parties to fall through.

That triggered litigation between the Palm Beach County LLC and its title insurer. The LLC, which had been unaware of the restriction until the potential buyer discovered it, argued that it neither had constructive notice of the covenant nor actual notice of it and therefore was not legally bound by the restrictions.

Being bound by a use restriction, even though you didn’t know about it

The LLC was wrong about constructive notice. As the appeals court noted in ruling against the LLC, when a document that creates a restrictive covenant is “properly executed, notarized, and recorded,” then the law says that subsequent buyers of the property, whether or not they have actual notice of the use restrictions, are deemed to have constructive notice of the restrictions. Because they are deemed to have constructive notice of the restrictions, they can be bound by the covenant.

What that means is that the courts can hold you responsible for knowing about and obeying the restrictive covenants that run with a property, even if the restrictions were created several sales transactions and many years ago, and even if you knew nothing about them.

Since the courts are likely going to hold you accountable for these restrictions, whether or not you know about them, it is essential for the well-being of your business to ensure that you do know about them before you complete a purchase of that property. The results of truly detailed and diligent due diligence may yield information that makes it clear that a property that previously seemed like a good bargain is actually a poor deal.

Whether you are in the negotiation phase, the due diligence phase or the transaction completion phase, make sure that you have the effective legal team you need protecting your interests. Rely on the South Florida real estate attorneys at Stok Kon + Braverman to provide your business with the protection, advice and advocacy you need.

Contact us online or by calling (954) 237-1777 to schedule your consultation.

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