Does an undisclosed agreement between the seller obligate a buyer

Question

We are closing on a duplex in the next few days. When I called to switch utilities to my name I discovered that apparently the duplex  shares a water and sewer meter with a neighbor. The meter is on the property I am under contract for so it didn't show up on the inspection. A search of public records shows that the seller sold the neighboring house 11 years ago,  and I discovered there is some agreement in place, but the seller has not produced the agreement, and I have no idea what the agreement could be.  The utility company wouldn't tell me who pays the bill. The contract states the seller should disclose off-record items. He did not. The title company is not aware of this agreement, nor is our lender. It is a deal breaker, but I do not want to loose earnest money. Am I under an obligation to honor an agreement the previous owner made?

Filipe Pereira · Answer

I think you have a pretty reasonable case here to walk away without losing your EMD, especially if the seller knew about this and chose not to disclose - that alone should suffice. However, I am not an attorney, and try not to play one either.

Perhaps @Edward Schenkel can help here.

Gretchen P. · Answer

Thought I'd update everyone. The title company considered the agreement a title matter and issued a title exception. We didn't close, but extended. It turns out the seller was unaware that we didn't see the agreement, he is a lovely man, has owned the property for 30 years, and at a point in his life that he doesn't want to be a landlord any more. His realtor failed to produce the agreement at the off-records title matters deadline, or at any other time before we realized it existed (it is unclear when he got it). The seller is working with the neighbor to install a tap and new lines, which will cost 25K+ and is now on the hook for our legal fees.

In Colorado, Realtors, not lawyers, handle most matters related to real estate contracts. I am incredibly thankful we have the most amazing, knowledgeable realtor imaginable. She is connected to everyone and knew the direct contacts at the utility company, county, title company, utilities, etc. immediately. Her main priority was to protect our earnest money and to bring the deal to a conclusion, because we do really like the property.

Tom Gimer · Answer

Unless an agreement specifically states that it runs with the land and is recorded among the land records, subsequent owners would not be bound by its terms.

Best to figure out now what installing a separate meter would cost -- and the seller should pay for it or credit you for it.

Account Closed · Answer

@Gretchen Place   I believe you have a right to back out of the agreement.  BUT you should talk to a real estate attorney in Colorado before you do anything.

I am getting more and more concerned as the thread goes along.  You need a pro to make sure the property was properly subdivided and when that sub division happened what happened to the water lines.  It sounds like you are assuming that the plumbing in the entire duplex is not completely mixed all the way through.  In multifamily structures that are subdivided after construction that is a bad assumption.

Cara Lonsdale · Answer

This is about non-disclosure for sure.  The Seller had an obligation to disclose any material facts to you, and clearly, this is a material fact.  Additionally, this may present a cloud on title as it sounds like the adjoining land was not sold properly to the neighbor since they didn't formally address the metering.

I would recommend that ALL of your communication about this be in writing, AND you issue the Seller a cure notice to formally request the info.  Cure notices alert the violating party that they are in violation, and give them some time to remedy it (cure it).  If the Cure notice deadline passes, then the next step is to issue a cancellation based on the Seller's inability to cure.  The title company shouldn't have any issues refunding your earnest money under these circumstance as the documentation would support them releasing it back to you.

Sticky for sure....

Edward Schenkel · Answer

@Gretchen Place and @Filipe Pereira, this is a good question. As mentioned in an earlier response, certain types of agreements "run with the land" and certain types of agreements are personal in nature. Agreements that run with the land are binding on future owners, and typically consist of things like easements, leases, covenants, and so forth. For example, if there is an easement that gives your neighbor the right use your driveway, typically the next owner of your home will also be required to allow your neighbor to use your driveway. Also, another legal term from "running with the land" is "touching and concerning the land."

If the agreement does not run with the land, it is considered personal in nature and is not binding on any future land owner and is only binding on the parties that enter into the agreement. For example, if you have a contract with the plow guy down the street to shovel your driveway each winter, this is generally personal in nature and will not be binding on the family you sell your home too.

With that being said, the question you ask is really - how do you tell if an agreement runs with the land (such as a driveway easement) or is personal in nature (such as the plow guy contract to shovel snow)? There is a test, and it might vary slightly state to state, but it really depends on the intention of the parties, the nature of the agreement, and how it impacts the property's value. Here is an excerpt (edited slightly by me) from an Appellate Court case in Connecticut that discusses the test:

"If an agreement is personal, it cannot be said to have run with the land and thus cannot have bound the future grantee....For purposes of the distinction between real covenants (running with the land, or touching and concerning the land) and personal covenants, a covenant may run with the land or may be a matter between only the purchaser and grantor. If the covenant does not touch or concern the occupation or enjoyment of land, it is the personal obligation of the grantor or lessor and does not run with the land. 21 C.J.S. 359–60, Covenants § 32 (2006). A covenant that touches and concerns the land can be one that either calls for doing either physical things to the land, or refraining from doing physical things to the land. 21 C.J.S., supra, p. 359. Whether a promise with respect to the use of the land is real (runs with the land) as compared with personal depends upon the intent of the parties and the promise, to be determined in light of the circumstances.  If it touches the land to the extent it materially affects the value of that land, it is generally to be interpreted as a covenant that runs with the land. A covenant in a deed which restrains the use to which the land may be put in the future as well as in the present which might very well affect its value, touches and concerns the land..."

As you can see, it is fact specific but generally the court looks to the intention of the parties, the impact of the agreement on future use, and whether it impacts the value of the property. With that said, I do not think there is any clear answer to your question whether the utility agreement runs with the land or is personal in nature, but typically these types of agreements are more akin to a maintenance agreement and are personal in nature and do not run with the land. You should try to review a copy of the agreement before the closing. For example, if the agreement says that it is the intention of both parties for this agreement to run with the land, then there is an argument it does. As stated earlier, agreements that run with the land are typically recorded (or perfected, is the legal term) and some states may have requirements that something must be recorded to run with the land. In Connecticut, although that is the general rule, there are some exceptions, so it is not a set in stone requirement.

I think if the utility agreement is not a deal breaker then you should proceed with the closing. If you can, perhaps try to get an indemnity agreement from the seller saying that the agreement is personal in nature, and will indemnify and hold you harmless if in fact you try to terminate the agreement with the neighbor and the neighbor will not allow you to claiming it runs with the land. If you cannot get this, then it is your call whether to proceed with the closing (and this may or may not be grounds to get out of the contract - ask your lawyer) but it sounds like it will not be a deal breaker. I also agree with a previous post that a credit is another option to consider.

I think this is a great question generally - what type of things run with the land and do not run with the land. This post will hopefully educate the biggerpockets community on this issue and I hope it was helpful. If anyone has any follow up questions, let me know.

Gretchen P. · Answer

Wow, the plot thickens, the realtor realized she printed the investor listing out the day we saw the property, on Day 0 of the listing. There is NO mention of the agreement to share water on day 0. We made an offer that day. The listing she printed out today has the blurb about shared water, so it was added later, only to the investor listing. Seems a little "off" to me. Especially because we made an investor offer, and the realtor never added it to the other listing. It will be interesting to see what the lawyer says.

Gretchen P. · Answer

I do have a call into an attorney, the property is a strange situation for sure. In CO it is unusual to engage an attorney my realtor is top-notch (she owns 28 properties in the area and has seen everything (except this of course), this deal has been a challenge all along to say the least.

Gretchen P. · Answer

Thanks for your detailed response. The seller is an attorney and the title company found no recorded agreement. The seller hasn't produced an agreement. It is mentioned in a cursory fashion (which the realtor missed, (which is understandable as the property was listed only as 200 XXX avenue, and in fact it is 200 and 202 XXX avenue) in the realtor remarks section (not visible to the buyer) on the investor listing, but not mentioned at all in the residential listing for the property. If the agreement is recorded, isn't it a title insurance issue?Cost to install a new tap is 10K, and there are other costs, so I am guessing the total cost to remedy the situation is about $15-20K. I would like to proceed with the deal IF the seller remedies this, but realize this situation could impact my ability to sell in the future, or cost me money (for all I know, the agreement could state I will pay for water at the neighbors) and feel as if the seller was not completely forthcoming.

Gretchen P. · Answer

Thanks everyone.

Does an undisclosed agreement between the seller obligate a buyer

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