The New York Supreme Court, Kings County recently found that a restrictive covenant could constitute an encumbrance under a title insurance policy but nonetheless dismissed an action brought by an insured because the insured was aware of the covenant before purchasing. See 50 Clarkson Partners LLC v. Old Republic Nat’l Title Ins. Co., 516966-2018 (N.Y. Sup. Ct. May 30, 2019). Plaintiff purchased the subject property in 2017, and defendant issued a title insurance policy in connection with the purchase. In 2018, plaintiff allegedly realized that it could not redevelop the property as it had planned because there was a restrictive covenant from 1945 that prohibited the development of a structure more than two stories high. Plaintiff filed a claim with defendant, and defendant denied the claim. Plaintiff then brought this action, and defendant moved to dismiss.
The Court granted defendant’s motion to dismiss. First, it denied defendant’s argument that the restrictive covenant is “an encumbrance regarding the use of the property and is not a defect affecting ownership of the property.” Although the Court noted that “there are no New York cases discussing whether a restrictive covenant is a defect for which title insurance must provide coverage,” it likened restrictive covenants to other encumbrances and found that “restrictive covenants are surely encumbrances within the meaning of the title insurance policy as well as New York law.” Nonetheless, the Court found that the covenant was excluded from coverage under Exclusion 3(a), which excludes any claims “created, suffered, assumed or agreed to” by the insured. In this case, the Purchase and Sale Agreement stated that plaintiff would accept title subject to certain liens enumerated in an exhibit to the Agreement, which included the restrictive covenant. The Agreement further stated plaintiff only accepted title subject to the covenant so long as the seller met certain conditions precedent, including “an agreement to modify the existing restrictive covenants, with the Owners of the properties adjacent to the Land necessary for the underpinning and shoring and which shall be reasonably required to perform the Construction pursuant to the Plans.” Because the seller failed to satisfy these conditions, plaintiff argued that it had not accepted or agreed to the restrictive covenant and Exclusion 3(a) did not apply. The Court rejected this argument, finding that “the failure on the part of the seller to comply with any conditions precedent does not undo or eliminate imputed knowledge of the covenants on the part of the plaintiff.” Plaintiff had the right under the Agreement to terminate the Agreement and receive a return of its deposit if the conditions were not met, and it did not do so. “[T]here can be no question the plaintiff was aware of the covenants and contracted remedies in the event the covenants were not modified in preparation of the anticipated work being performed.” Thus, the closing “took place with full knowledge of the restrictive covenants” and Exclusion 3(a) applied.