WHO IS THE DEVELOPER?

For many years, I have wondered about this question. It is not an uncommon scenario.

A developer buys a parcel of property. The developer begins development of the property. The developer records a subdivision plat for some, but not all, of the property. Typically, the plan is to develop the subdivision in phases or sections. Therefore, the plat only relates to a small portion of the property. Likewise, the developer records a declaration of covenants, conditions and restrictions for the platted property. The declarations give the developer supermajority rights with respect to all votes so that the developer maintains control of the development of the property.

The developer sells some lots. Then, normally for financial reasons, the developer sells the remaining lots and the undeveloped land to another entity. Is the buyer now the developer? Does the buyer have all of the rights (and all of the obligations) of the developer? Can the buyer change the development plan for the property?

Thankfully, the Court of Appeals has answered these questions in Hughes v. New Life Development Corporation, No. M2010-00579-COA-R3-CV (Tenn. Ct. App. April 29, 2011).

First, is the buyer now the developer? Unless the deed limits the estate conveyed, Tennessee law presumes that the deed includes all of the grantor’s interest in the property. In this case, the deed did not limit the interest conveyed. Likewise, the Restrictive Covenants defined the developer as “Developer, and its successor and assigns.” Therefore, the court concluded that the buyer was now the Developer.

Second, can the buyer as the Developer use its supermajority power to amend the Declarations and homeowners’ association charter to change the development plan? The answer is a qualified yes. The Developer may make changes as long as those changes are “reasonable.” In making that determination, the court considers:

(1) the original intent of the contracting parties,
(2) whether purchasers knew that amendments could be made,
(3) the materiality of the change of character of the development, and
(4) the totality of the circumstances.

Third, can notations on a plat with respect to property owned by the original developer, but not otherwise the subject of the plat, restrict that property? The answer is again a qualified yes. That notation on a plat for adjoining land can provide “actual notice” of the existence of the restriction to the buyer.

So, developers in Tennessee win and lose. More importantly, this case emphasizes that once a developer records restrictions or a subdivision plat, the developer’s ability to change those documents is limited regardless of the terms of the document. Finally, purchasers of land within the development possess rights that the developer and any successors must honor.