Will builders and developers be able to sidestep the courts when faced with a homeowner’s construction defects claim?
Last Wednesday, in a case of first impression the Second District Court of Appeal held that a builder’s deed to a home purchaser requiring arbitration of construction defect claims was enforceable against a subsequent grantee in Hayslip v. U.S. Home Corp., Case No. 2D17-4372 (Fla. 2d DCA July 10, 2019).
The court certified the following question as one of great public importance:
Does a mandatory arbitration provision contained within a residential warranty deed conveying residential property from home builder to original purchaser run with the land such that it is binding on subsequent purchasers where the intended nature of the provision is clear and the party against whom enforcement is sought was on notice of the provision?
As discussed below, it appears that the decision disregards that the very nature of the underlying claim indicates that the provision does not restrict use, the well-established test for a real property covenant.
In 2007, U.S. Homes sold a newly built home to the Kennisons, conveyed by a special warranty deed (the "original deed") which was properly executed by a U.S. Homes’ representative but not signed by the Kennisons. The original deed which was timely recorded, included language providing that:
All covenants, conditions and restrictions contained in the deed are equitable servitudes, perpetual and run with the land.
- The transaction involves interstate commerce.
- Any dispute arising under or related to the home be submitted to binding arbitration under the Federal Arbitration Act and not by a court of law or equity.
- A grantee, by accepting the deed, automatically agrees for itself, and its heirs, personal representatives, successors and assigns, to observe and to be bound by all of the deed's terms and conditions.
In 2010, the Hayslips purchased the home from the Kennisons. The 2010 deed was not signed by the Hayslips and does not contain any express provision requiring arbitration but does provide that the conveyance is subject to "easements, restrictions, reservations and limitations, if any.”
In 2017, the Hayslips sued U.S. Homes alleging damages sustained as a result of an improper stucco system in violation of the Florida Building Codes Act. U.S. Homes moved to stay and compel arbitration based on the language of the original deed to the Kennisons. Following a hearing, a general magistrate said he concluded that the arbitration provision in the original deed is a covenant running with the land and binding on the Hayslips, who were properly noticed of the condition. The circuit court adopted the magistrate's report and recommendations. The Hayslips appealed.
Appellate Court Ruling and Analysis
The appellate court affirmed the trial court’s non-final order. The decision began its analysis reciting the incantation that “courts are required to indulge every reasonable presumption in favor of arbitration, recognizing it as a favored means of dispute resolution (citations omitted).”
Rejecting the Hayslips' claim that no valid arbitration agreement exists because the Kennisons did not sign the original deed, the court held that neither the Federal Arbitration Act nor the Florida Arbitration Code requires an arbitration agreement to be signed to be enforceable. Instead, conduct can supply the intent necessary to be bound by an arbitration agreement. Seeking intent, Florida law does not require a home buyer to sign a warranty deed to be bound by the deed; thus, the Kennisons acquiesced to the arbitration provision by:
- Being on record notice of the original deed's covenants and restrictions; and,
- Taking title to and possession of the home.
As a result, a valid arbitration agreement existed between the Kennisons and U.S. Homes!
The court next addressed whether the arbitration language in the recorded deed was a real property covenant running with the land and enforceable against a subsequent purchaser with notice, such as the Kennisons, or whether the arbitration language was a personal covenant that did not run with the land and did not bind the Kennisons. The court recited the three-pronged test for an enforceable covenant running with the land as:
- The existence of a covenant that touches and involves the land.
- An intention that the covenant run with the land.
- Notice of the restriction by the party against whom enforcement is sought.
Although the court acknowledged that no Florida appellate court has considered whether an arbitration provision contained in a deed touches and concerns the land such that it is binding on subsequent purchasers, the court relied on decisions restricting the use of property, including leases providing an exclusive right of a use or a prohibition of a use.
The court found that the performance of the covenant to arbitrate affects the “occupation and enjoyment” of the home because the covenant dictates the means by which the Hayslips must seek to rectify building defects related to the home.
The appellate court, focusing solely on arbitration as a procedure for a remedy, appears to have disregarded whether there was a restriction on use. The court then appeared to equate a traditional covenant issue, a lease restriction on “use” claim, with U.S. Homes’ new “covenant” for defense of a money damage claim, a questionable leap as the claims brought by the Hayslips are not claims to restrict U.S. Homes’ use but are purely for damages.
This writer comments that historically, Florida courts started with the presumption that restrictive covenants are not only to be narrowly construed, but that they must restrict the use of the land. Although in the community association context, a declaration of covenants may provide for damage remedies as equitable servitudes, claims for declaration violations are distinguishable because damages would be for breach of a use restriction contained in the declaration.
While the Hayslips claim involves construction improvements to real estate, the claim does not involve the Hayslips’ use of the real property, or any use of the property. The benefited party to the deed provision, U.S. Homes, is not seeking to enforce a use restriction. Thus, a real property analysis would seemingly conclude that U.S. Homes’ deed provision does not touch the land, but instead provides merely a personal benefit. Reinforcing this is that the claim for construction defects as it relates to the property is solely for damages based on the statutory building code with statewide application, not based on a violation of a restriction on the Hayslips specific property, nor for injunctive or other equitable relief concerning the specific property.
Rather than follow that traditional analysis in the absence of Florida law directly on point, the court relied heavily instead on decisions from several other state and federal courts, mostly trial courts, that have found that similar arbitration provisions like the one in this case were real property covenants that touch and concern the land.
Certified Question and Impact
Although it is too early to know whether the Florida Supreme Court will accept jurisdiction to decide the certified question, and if so, then how the Florida Supreme Court may rephrase the question, the decision has potentially wide-ranging effect. It is noted that the Florida Supreme Court is not the same forum that it was last year, and that the Court’s outlook may be more sympathetic to alternate dispute resolution processes.
While many construction contracting parties mutually seek arbitration, those are typically personal covenants, “contracts,” not covenants running with the land.
The court's decision may encourage builders and developers, as well as other grantors, to include deed provisions requiring binding arbitration for construction defect claims and perhaps other claims. As a drafting consideration, U.S. Homes apparently sought to avoid precedent that a consumer real estate purchase of a single parcel is not interstate commerce, by including in the deed express text stating that the transaction was interstate commerce which the court accepted at face value.
The decision also serves as a warning to counsel for buyers to review not only the proposed transaction deed, but also deeds in the chain of title for provisions which may be legally binding on their clients. The case also highlights the risks to residential buyers not represented by counsel at closing, as well as the time of contract.
The appellate court’s decision could be said to further undermine the institutional role of the courts. The courts, created by the founding fathers as an independent branch of government to resolve disputes in public forum with rules of procedure and evidence to level the playing field (with due regard to Winston Churchill, far from perfect, but far better than the supposed alternatives), creating precedent through appellate review to guide the public in their future activities. The judicial process reinforce legitimacy in decision making, even for those suffering “adverse decisions.”
Many thanks to Messrs. Christy and Brown for promptly providing notice of the decision, and to Ms. Tamela Eady for her drafting assistance (all errors and over/understatements being mine, absolutely).
Have a great week. Hope to see all at the Legislative Update meetings next week at The Breakers’.
Michael J. Gelfand
Real Property, Probate and Trust Law Section
of The Florida Bar
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Note: This article is not legal advice. Statements and comments made are not those of The Florida Bar or the RPPTL Section
© 2019 Michael J. Gelfand
Michael J. Gelfand
Florida Bar Board Certified:
Real Estate Attorney
Condominium & Planned Development Law
Florida Supreme Court Certified Mediator:
Civil Circuit Court & Civil County Court
Fellow, American College of Real Estate Attorneys