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Tarr v. Timberwood Park Owners Association, Inc.

Supreme Court of Texas

May 25, 2018

Kenneth H. Tarr, Petitioner
v.
Timberwood Park Owners Association, Inc., Respondent

          Argued February 6, 2018

          On Petition for Review from the Court of Appeals for the Fourth District of Texas

          OPINION

          JEFFREY V. BROWN JUSTICE

         This case requires us to decide whether short-term vacation rentals violate certain restrictive covenants that limit tracts to residential purposes and single-family residences. The trial court concluded that a homeowner violated the restrictions by operating a business on a residential tract and engaging in multi-family, short-term rentals. The court of appeals affirmed, agreeing with the trial court that the rental agreements contradict the residential-purpose limitation because the renters' stays are merely temporary. We hold that the unambiguous restrictive covenants impose no such limitation and decline to inject restrictions into covenants under the guise of judicial interpretation. Accordingly, summary judgment for the homeowner's association was improper. We reverse the court of appeals' judgment and remand to the trial court for further proceedings consistent with this opinion.

         I

         In 2012, Kenneth Tarr purchased a single-family home in San Antonio's Timberwood Park subdivision. Two years later, after his employer transferred him to Houston, Tarr began advertising the home for rent on websites such as VRBO (short for Vacation Rentals by Owner). See Santa Monica Beach Prop. Owners Ass'n v. Acord, 219 So.3d 111, 113 n.2 (Fla. Dist. Ct. App. 2017) (describing VRBO as "a website on which owners can advertise their houses and other properties for rent"). He also formed a limited-liability company called "Linda's Hill Country Home LLC" to manage the rental of the home. Between June and October of 2014, Tarr entered into thirty-one short-term rental agreements, ranging from one to seven days each. In the aggregate, the home was rented for 102 days.

         Tarr's short-term rental contracts permit various-sized rental parties but limit the guest count to no more than ten people. And the home was indeed leased to parties of all sizes. For example, the home was booked by parties consisting of three adults and three children, four adults and five children, six adults and four children, seven adults and one child, and nine adults and no children. Nearly one quarter of the rentals were to two adults accompanied by as many as six children. The agreement does not mandate that the guests be members of a single family, and the record contains no evidence of the familial relationships of the individuals to whom the home was leased. These rental groups came from towns throughout Texas, as well as other states, such as Washington and Indiana.

         The short-term rental agreement that Tarr employed leased the entire home, rather than individual rooms, to these various groups. So unlike what one might expect at a hotel, rental groups were alone in Tarr's house, unaccompanied by employees and without services a hotel stay might provide, such as cooked meals or housekeeping. In addition, no business office, leasing office, signage, or other business activity exists at the home. But Tarr does remit hotel taxes applicable to home rentals of less than thirty days. Specifically, he pays the Texas Hotel Tax, which applies to such rentals statewide, see Tex. Tax Code ch. 156, and the San Antonio/Bexar County Hotel/Motel Occupancy Tax.

         The dispute that led to this case arose late in 2014. As reflected in a plat recorded in the Bexar County plat records in 1979, Timberwood Park Unit III, which includes Tarr's property, is subject to certain "easements, covenants, conditions, and restrictions." In July and September of 2014, the Timberwood Park Owners Association notified Tarr that the rental of his home violated two deed restrictions: (1) the residential-purpose covenant, and (2) the single-family-residence covenant. The residential-purpose covenant provides, in part:

All tracts shall be used solely for residential purposes, except tracts designated . . . for business purposes, provided, however, no business shall be conducted on any of these tracts which is noxious or harmful by reason of odor, dust, smoke, gas, fumes, noise or vibration . . . .

         No one disputes that Tarr's tract is not designated for business purposes. A separate paragraph sets forth the single-family-residence restriction, which provides:

No building, other than a single family residence containing not less than 1, 750 square feet, exclusive of open porches, breezeways, carports and garages, and having not less than 75% of its exterior ground floor walls constructed of masonry, i.e., brick, rock, concrete, or concrete products shall be erected or constructed on any residential tract in Timberwood Park Unit III and no garage may be erected except simultaneously with or subsequent to erection of residence. . . . All buildings must be completed not later than six (6) months after laying foundations and no structures or house trailers of any kind may be moved on to the property.

         Because the leases of Tarr's home were temporary, the association determined short-term rentals did not adhere to the "single family residence" restriction and, instead, rendered the tract "a commercial rental property." So the association sent Tarr a violation notification requesting his compliance. The notification further indicated that the violation would remain in effect until the online advertisements were taken down and the home was no longer used for commercial purposes. Should he not comply within fourteen days, the notification letter warned, the association would assess a fine of $25 per day.

         Tarr did not heed the association's warnings. And throughout the dispute, neither the association nor Tarr attempted to amend the deed restrictions to specify a minimum duration for leasing-an option available to both of them under the deed's amendment provisions. Instead, the fines against Tarr mounted steadily.[1] Tarr appealed the imposition of the fines to the association's board. The board heard and denied the appeal in September 2014, stating it would continue imposing the fines so long as the violations persisted. Five days after the board sent a letter denying his appeal, Tarr sued for a declaratory judgment and claimed breach of the restrictive covenants.

         Tarr sought a declaration that the deed restrictions do not impose a minimum duration on occupancy or leasing. Nor, Tarr contended, do they permit the association to police home-rental advertisements or impose penalties in the form of fines. The association filed a general denial; both parties sought attorney's fees.

         The trial court soon faced competing traditional summary-judgment motions. It granted the association's and denied Tarr's, concluding that Tarr operated a business on his residential lot and engaged in "multi-family, " short-term rentals in violation of the unambiguous deed restrictions. In doing so, the trial court noted that it must ascertain the drafters' intent by "balancing the statutory requirement to liberally construe language within restrictive covenants with the common law mandate to strictly construe restrictive clauses in real estate instruments resolving all doubt in favor of the free use of real estate." It reasoned that one's use of a home is not residential unless the occupant is physically present and has an existing intent to physically remain there for a sufficient duration. The trial court also permanently enjoined Tarr from "operating a business on his residential lot" and from engaging in short-term rentals to "multi-family parties." In a separate order, the trial court awarded attorney's fees to the association. Tarr appealed.

         The Fourth Court of Appeals affirmed the trial court, holding that the deed restrictions prevented Tarr from leasing the home for short periods of time to individuals who did not possess an intent to remain in the house. 510 S.W.3d 725, 730 (Tex. App.-San Antonio 2016). First, the court noted that the intent underlying the covenant at issue must be afforded a liberal construction as it is unambiguous, and thus the rule disfavoring restrictions on the free use of property did not apply. Id. at 729-30. The court of appeals relied on its opinion in Munson v. Milton, in which it noted that though "residence" welcomes a variety of connotations, the term usually mandates both a "physical presence and an intention to remain." Id. at 730 (quoting Munson v. Milton, 948 S.W.2d 813, 816 (Tex. App.-San Antonio 1997, pet. denied)). Accordingly, it distinguished between "transient" and "residential" purposes on property subject to such restrictive covenants. Id. at 730- 31. And under the facts of this case, especially in light of the short-term rental agreements and Tarr's creation of an LLC to manage the property, as well as his payment of hotel taxes, the court of appeals held the leasing agreements to be in direct contradiction with its residential-purpose test-that the renter intend to remain at the home with a contemporaneous physical presence. Id. Tarr sought our review.

         II

         A trial court's ruling on a motion for summary judgment is reviewed de novo. Joe v. Two Thirty Nine Joint Venture, 145 S.W.3d 150, 156 (Tex. 2004). To prevail on a traditional motion for summary judgment, the movant must show that no genuine issue of material fact exists and that it is entitled to judgment as a matter of law. Tex.R.Civ.P. 166a(c). Here, Tarr and the association filed cross-motions for summary judgment. When competing summary-judgment motions are filed, "each party bears the burden of establishing that it is entitled to judgment as a matter of law." City of Garland v. Dall. Morning News, 22 S.W.3d 351, 356 (Tex. 2000). In that instance, if "the trial court grants one motion and denies the other, the reviewing court should determine all questions presented" and "render the judgment that the trial court should have rendered." Id.; see also Comm'rs Court of Titus Cty. v. Agan, 940 S.W.2d 77, 81 (Tex. 1997) (requiring appellate courts to "review the summary judgment evidence presented by both sides" when making this inquiry); Guynes v. Galveston Cty., 861 S.W.2d 861, 862 (Tex. 1993) (reviewing cross-motions for summary judgment where the facts were undisputed by "determining all legal questions presented").

         III

         The parties do not dispute that the deed provisions at issue contain restrictive covenants. Like a trial court's summary-judgment ruling, courts review "a trial court's interpretation of a restrictive covenant de novo." See Buckner v. Lakes of Somerset Homeowners Ass'n, 133 S.W.3d 294, 297 (Tex. App.-Fort Worth 2004, pet. denied). Before this Court, Tarr argues that if a deed restriction does not expressly address or restrict a certain property use, that usage must be permitted. Accordingly, short-term rentals must be permitted because the Timberwood Park Unit III's deeds remain silent as to short-term rentals. Tarr further contends that a deed restriction forbidding business purposes and permitting only residential purposes does not alter the permissibility of renting property in Timberwood for short durations of time. Meanwhile, the association interprets the restrictive covenants as prohibiting owners from using their tracts for any purpose other than single-family, residential use, which does not encompass Tarr's short-term rentals as that is a business, transient, multi-family use. It employs a "liberal" reading of the covenants and reasons that short-term rentals are not residential because the individuals occupying the home do not satisfy the definition of "residence" that it advances: physical presence for a substantial period of time coupled with an intent to remain. Both parties, however, maintain that the restrictive covenants they rely on are unambiguous.

         A

         The parties arrive at their divergent interpretations of the restrictive covenants by employing different mechanisms to give effect to the drafters' intent. In Tarr's view, restrictive covenants must be strictly construed as they historically were at common law. The association contends, on the other hand, that the legislature superseded the common-law rule when it adopted Texas Property Code section 202.003(a), calling for restrictive covenants to be liberally construed.

         "A 'restrictive covenant' is a negative covenant that limits permissible uses of land." Restatement (Third) of Prop.: Servitudes § 1.3(3) (Am. L. Inst. 2000). Such covenants limit the use an owner or occupier of land can make of their property. See id. cmt. e; see also Tex. Prop. Code § 202.001(4) (defining "[r]estrictive covenant"). "The freedom to restrict the use of land gives individuals the ability to control land in a manner in which they deem to be socially preferable. The use of restrictive covenants to control the use of land has its roots as far back as sixteenth century England." David A. Johnson, One Step Forward, Two Steps Back: Construction of Restrictive Covenants After the Implementation of Section 202.003 of the Texas Property Code, 32 Tex. Tech L. Rev. 355, 358 (2001) (footnote omitted).

         "The law recognizes the right of parties to contract with relation to property as they see fit, provided they do not contravene public policy and their contracts are not otherwise illegal." Curlee v. Walker, 244 S.W. 497, 498 (Tex. 1922). And while our jurisprudence does not favor restraints on the free use of land, we have previously acknowledged that restrictive covenants can enhance the value of real property. See Davis v. Huey, 620 S.W.2d 561, 565 (Tex. 1981). Accordingly, when land is sold, the agreed-to covenants "enter[] into and become[] a part of the consideration." Curlee, 244 S.W. at 498 (quoting Hooper v. Lottman, 171 S.W. 270, 272 (Tex. Civ. App.-El Paso 1914, no writ)). "The buyer submits to a burden upon his own land because of the fact that a like burden imposed on his neighbor's lot will be beneficial to both lots." Id. (quoting Hooper, 171 S.W. at 272). Consequently, the covenant "between the original owner and each purchaser is . . . mutual." Id. (quoting Hooper, 171 S.W. at 272).

         So the courts have always treated unambiguous covenants "as valid contracts between individuals." Johnson, supra, at 356; see also Ski Masters of Tex., LLC v. Heinemeyer, 269 S.W.3d 662, 668 (Tex. App.-San Antonio 2008, no pet.) ("A restrictive covenant is a contractual agreement between the seller and the purchaser of real property."). Therefore, "restrictive covenants are subject to the general rules of contract construction." Pilarcik v. Emmons, 966 S.W.2d 474, 478 (Tex. 1998). Whether a restrictive covenant is ambiguous is a question of law for the court to decide by looking at "the covenants as a whole in light of the circumstances present when the parties entered the agreement." Id.; see also Coker v. Coker, 650 S.W.2d 391, 394 (Tex. 1983). "Like a contract, covenants are 'unambiguous as a matter of law if [they] can be given a definite or certain legal meaning." Pilarcik, 966 S.W.2d at 478 (alteration in original) (first quoting Grain Dealers Mut. Ins. Co. v. McKee, 943 S.W.2d 455, 458 (Tex. 1997); and then citing Columbia Gas Transmission Corp. v. New Ulm Gas, Ltd., 940 S.W.2d 587, 589 (Tex. 1996)). However, "if the covenants are susceptible to more than one reasonable interpretation, they are ambiguous." Id. "Mere disagreement over the interpretation of a restrictive covenant does not render it ambiguous." Buckner, 133 S.W.3d at 297.

         A paramount concern when construing covenants is giving effect to the objective intent of the drafters of the restrictive covenant as it is reflected in the language chosen. See Wilmoth v. Wilcox, 734 S.W.2d 656, 658 (Tex. 1987); see also Owens v. Ousey, 241 S.W.3d 124, 129 (Tex. App.-Austin 2007, pet. denied). Accordingly, "[c]ourts must examine the covenants as a whole in light of the circumstances present when the parties entered the agreement, " Pilarcik, 966 S.W.2d at 478, giving the "words used in the restrictive covenant . . . the meaning which they commonly held as of the date the covenant was written, and not as of some subsequent date." Wilmoth, 734 S.W.2d at 658. Moreover, the words in a covenant "may not be enlarged, extended, stretched or changed by construction." Id. at 657; accord Buckner, 133 S.W.3d at 297. And courts should avoid any "construction that nullifies a restrictive covenant provision." Pilarcik, 966 S.W.2d at 479.

         Our courts enforce these private agreements subject to certain well-established limitations. For instance, it must "appear[] that a general building scheme or plan for the development of a tract of land has been adopted, designed to make it more attractive for residential purposes by reason of certain restrictions to be imposed on each of the separate lots sold." Curlee, 244 S.W. at 498 (quoting Hooper, 171 S.W. at 272). Moreover, we have continuously called for a covenant's enforcement if it is "confined to a lawful purpose and [is] within reasonable bounds and the language employed is clear." Davis, 620 S.W.2d at 565. But we have also noted that "covenants restricting the free use of property are not favored, " id., because "[t]he right of individuals to use their own property as they wish remains one of the most fundamental rights that individual property owners possess." Johnson, supra, at 356. As such, we have limited this mandate to enforce restrictive covenants to instances where purchasers of real property buy "with actual or constructive knowledge of the scheme, and the covenant was part of the subject-matter of his purchase." Curlee, 244 S.W. at 498 (quoting Hooper, 171 S.W. at 272). If, however, one "purchases for value and without notice, " he "takes the land free from the restriction." Davis, 620 S.W.2d at 566. Whether the purchaser had notice "is determined at the date of the inception of the general plan or scheme, " which is the time at which the restrictions were filed in the county's property records. Id. at 567.

         For those reasons, courts nationwide have long afforded restrictive covenants a narrow interpretation.[2] For example, the Kansas Supreme Court has explained:

The rules governing the construction of covenants imposing restrictions on the use of realty are the same as those applicable to any contract or covenant, including the rule that, where there is no ambiguity in the language used, there is no room for construction, and the plain meaning of the language governs. When construction is necessary, the language used will be given its obvious meaning.
Another well-settled rule is that covenants and agreements restricting the free use of property are strictly construed against limitations upon such use. Such restrictions will not be aided or extended by implication or enlarged by construction. Doubt ...

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