Assuring Your Covenants “Run with the Land”

Developers and owners of real property typically enter into a variety of contracts concerning the use of real property. This is particularly true in the natural resource extraction industry. Generally, under Colorado law contractual obligations may be deemed personal covenants that bind only the parties signing the agreement, or they may be covenants that “run with the land” and bind successors-in-title. In order for a covenant to run with the land, however, two primary elements must be established: 1) the parties to the covenant intended it to run with the land, and 2) the covenant “touches and concerns” the land (i.e. it must closely relate to the land, its use, or its enjoyment). If either element is not present, the covenant will generally not bind successors-in-title.

If parties to an agreement intend to create covenants that run with the land, it is important the agreement itself contain express language to this effect, together with express language stating that the obligations under the agreement will bind and inure to the benefit of successors and assigns. It is also important that the agreement is recorded in the real property records to put future successors-in-title on record notice of the covenants. “In order for a covenant to run with the land, there must be an intent by the parties to the covenant that it do so,” Cloud v. Ass’n of Owners, Satellite Apt. Bldg., Inc., 857 P.2d 435, 440 (Colo. App. 1992), and such intent “turns on the construction of relevant documents.” Lookout Mountain Paradise Hills Homeowners’ Ass’n v. Viewpoint Assocs., 867 P.2d 70, 74 (Colo. App. 1993). Courts resolve all doubts against the restriction and in favor of free and unrestricted use of property. K9Shrink, LLC v. Ridgewood Meadows Water and Homeowners Ass’n, 278 P.3d 372, 377 (Colo. App. 2011).

Courts have refused to find a covenant runs with the land even when the covenant is included in an instrument that contains a general provision stating the instrument shall be binding upon successors and assigns. In TBI Exploration, Inc. v. Belco Energy Corp., for example, the Fifth Circuit affirmed that under Colorado law, a covenant in a Participation Agreement to drill exploratory wells was not a covenant that ran with the land even where the Participation Agreement contained general language stating the agreement shall be binding upon the parties’ “and their respective successors and assigns.” 220 F.3d 586, 2000 WL 960047, *4 (5th Cir. 2000) (not designated for publication) (applying Colorado law). The Fifth Circuit explained that the requirement that real covenants be expressed in specific and unambiguous terms carries force because “nonparties and successors-in-interest who did not participate in the negotiations to the principal agreement should be able to determine their respective rights and obligations from the face of the principal agreement.” Similarly, in Midcities Metropolitan Dist. No. 1, v. U.S. Bank Nat’l Ass’n, 2013 WL 3200088, at ** 4 and 6 (D. Colo. June 24, 2013) Judge Babcock found as a matter of law that where Deed did not expressly reference any of the covenants in its Article II as being covenants that run with the land or binding on the parties’ successors and assigns, such covenants did not run with the land despite general language stating “[t]his Deed shall be binding upon and inure to the benefit of the parties hereto and their successors and assigns.”).

It is also important to keep in mind Colorado recording statutes, including C.R.S. § 38-35-108, which provides:

When a deed or any other instrument in writing affecting title to real property has been recorded and such deed or other instrument contains a recitation of or reference to some other instrument purporting to affect title to said real property, such recitation or reference shall bind only the parties to the instrument and shall not be notice to any other person whatsoever unless the instrument mentioned or referred to in the recital is of record in the county where the real property is located. Unless the same is so recorded, no person other than the parties to the instrument shall be required to make any inquiry or investigation concerning such recitation or reference.

Because parties are presumed to contract with knowledge of applicable law, the failure to record a contract or instrument in the real property records to put successors-in-title on record notice thereof is evidence that the parties to the agreement did not intend for contractual covenants to bind successors-in-title at the time it was entered. This holds true even if a later successor-in-title had actual knowledge of the covenant when it acquired the property because the intent of the parties at the time of contracting is controlling. Thus, parties who intend for a covenant to run with the land should not rely on a mere reference to the contract in a recorded instrument but should record the agreement itself, or some memorandum reciting the material terms, in the real property records and include express language in the agreement as to their intent for the covenants to run with the land.

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Colorado Supreme Court Holds That a Revocable Option Agreement Does Not Violate The Common Law Rule Against Perpetuities

The Colorado Supreme Court held that an option to purchase oil and gas properties did not violate the common law rule against perpetuities. Atlantic Richfield Company v. Whiting Oil and Gas Corporation, f/k/a Equity Oil Company, 2014 CO 16. In 1968, Atlantic Richfield Company (ARCO) and Equity Oil Company (Equity) entered into an agreement regarding oil shale research by Equity. The 1968 agreement included provisions for money payments to Equity, conveyance of a partial interest from Equity to ARCO in certain property in western Colorado, and a provision that if oil shale was not in commercial production by 1983, Equity would convey to ARCO an additional interest in the property. Id. ¶ 8. In 1983, the parties entered into an amendment of the agreement. In the 1983 amendment, ARCO granted Equity a non-exclusive option to buy back the interest that ARCO had previously acquired from Equity as part of the 1968 agreement. The option would expire in 2008. The 1983 amendment provided “ ‘ARCO shall retain the sole and exclusive right to cancel this Option at any time during its term,’ with the exception that Equity was granted a right of first refusal if ARCO received an offer from another party to buy its interest” in the property. Id. ¶ 9. ARCO and Equity had negotiated for a year regarding the 1983 amendment. The option exercise price was tied to ARCO’s West Texas sour crude oil benchmark price. Equity exercised the option in 2006. The option exercise price at that time was significantly below the property’s 2006 market value. ARCO refused to convey the interest in the property to Equity. Id. ¶ 10.

Equity sued ARCO for specific performance of the 1983 option. ARCO argued that the 1983 option violated the common law rule against perpetuities and was void. The trial court agreed. The common law rule against perpetuities provides that “ ‘[n]o interest is good unless it must vest, if at all, not later than twenty-one years after some life in being at the creation of the interest.’” Id. ¶ 25. The Colorado Statutory Rule Against Perpetuities Act (Act), §§ 15-11-1101 to -1216 C.R.S. (2013), supersedes the common law rule against perpetuities for nonvested property interests created after May 31, 1991. (The common law rule may still apply to nonvested property interests created prior to that date, subject to other provisions of the Act.)

The trial court and the court of appeals applied § 15-11-1106(2) of the Act, which is “a reformation provision that requires courts, upon request, to reform nonvested interests created prior to May 31, 1991 to bring them into compliance with the common law rule.” Id. ¶ 4. This reformation provision was at issue in the appeal. The Supreme Court, however, affirmed the court of appeals on different grounds. The reformation provision applies only to reform instruments that are determined “to ‘violate this state’s rule against perpetuities as that rule existed before May 31, 1991.’” Id. ¶ 4. The Supreme Court held that the option did not violate the common law rule against perpetuities. “The commercial option negotiated by the parties posed no practical restraint on alienation because it was fully revocable at any time before its exercise.” Id. ¶ 6. Thus, the court found the option was valid as originally negotiated.

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