One of the biggest challenges real estate developers face is dealing with overzealous municipal boards seeking to impose excessive restrictions on projects as a condition of granting land use approvals. Developers frequently agree to such restrictions in the form of restrictive covenants, only to realize afterwards that compliance with such restrictions is so costly that proceeding with the project is economically unfeasible. Such restrictions can be challenged in court, but where the developer has specifically agreed to the restrictions as part of a conditional approval, this challenge would be very difficult to win unless counsel can show the restrictions are illegal or violate public policy. See Summit School v. Neugent, 82 A.D.2d 463, 468 (2d Dep't 1981). Counsel advising real estate developers faced with this situation may appear to have no choice but to recommend abandoning the project—until now.

In the recent decision obtained by our law firm in Blue Island Development v. Town of Hempstead, 143 A.D.3d 656, 659 (2d Dep't 2016), app. den., 29 N.Y.3d 915 (2017), app. dismissed, 29 N.Y.3d 984 (2017), the Second Department applied Real Property Actions and Proceedings Law (RPAPL) 1951 to invalidate a restrictive covenant imposed under these conditions on the ground that the restriction provided “no actual and substantial benefit” to the town and extinguished the restrictive covenant entirely.

In the late 1990s, Blue Island Development (Blue Island) purchased a +/- 10 acre industrial property in Harbor Island, Island Park; and in 2008, sought a zone change from the Town of Hempstead (the town) to develop the site into a 172-unit waterfront residential housing development. The town granted the zone change, but conditioned its approval on Blue Island agreeing to enter into certain restrictive covenants, including one covenant prohibiting rental units and requiring all units in the project to be sold as condominiums (the restrictive covenant).

However, as a result of subsequent and drastic changes to the market for such condominiums arising after the zone change, a condominium-only development became economically unfeasible, and Blue Island applied to the town to eliminate the restrictive covenant. The town refused and only agreed to allow 17 rental units, which was insignificant.

Blue Island then sued the town on two principal grounds: (1) such condominium-only restrictions are illegal and violate public policy because they contravene the “fundamental” rule of zoning—i.e., that zoning must deal with the “use” of land, not the “person who owns or occupies it” (see FGL&L Prop. Corp. v. City of Rye, 109 A.D.2d. 814, 815 (2d Dep't 1985), aff'd 66 N.Y.2d 111 (1985)); and (2) the restrictive covenant violates RPAPL 1951 because it provides no “actual and substantial benefit” to the town. See Blue Island Development v. Town of Hempstead, 131 A.D.3d 497, 501 (2d Dep't 2015).

RPAPL 1951 was enacted in 1962 to further the “public interest in the marketability and full utilization of land” by allowing landowners an efficient method of eliminating restrictions that serve “no purpose.” See Orange & Rockland Utils v. Philwood Estates, 52 N.Y.2d 253, 265 (1981). The statute provides that if a court determines that at the time a restrictive covenant is sought to be enforced it is “of no actual and substantial benefit to the persons seeking” to enforce it, the covenant will be “completely extinguished.”

Historically, the cases that applied RPAPL 1951 involved decades-old agreements between private parties that became obsolete. The classic RPAPL 1951 case involves a 50-year old private restriction imposed by the seller on the buyer to only develop the property at issue as residential in a residential area, which was subsequently developed into a commercial area decades later. Thus, as the character of the neighborhood changed over time, the residential restriction no longer provided an “actual and substantial benefit” to the seller, and was extinguished pursuant to RPAPL 1951. See, e.g., Clintwood Manor v. Adams, 29 A.D.2d 278 (4th Dep't 1968), aff'd, 24 N.Y.2d 759 (1969).

Indeed, prior to the Blue Island case, few courts, if any, applied RPAPL 1951 to a restrictive covenant entered into as a condition of a zone change—and that was the town's principal argument in opposition to Blue Island's RPRAP 1951 claim—i.e., that RPAPL 1951 simply did not apply to conditional zoning restrictions. See also New York Real Estate Law Reporter, v.33, n.2 (December 2016) (“there is little authority for invoking RPAPL 1951 to extinguish covenants imposed by government bodies”).

Further, the trial court in the Blue Island case rejected the RPAPL 1951 claim, but ruled that the condominium-only restriction violated public policy because it unlawfully restricted the “ownership of land” and remitted the issue of the restrictive covenant back to the town board for further proceedings. Blue Island Development v. Town of Hempstead, Index No. 3533/14 (S. Ct. Nassau Co., Dec. 9, 2015). Such ruling on the legality of condominium-only restrictions has been the focus of most subsequent discussions of this case—but these discussions miss the main point of this case as determined by the appellate courts. See, e.g., “Can Zoning Stop Property Owners From Renting?” N.Y.L.J., v.257, n.16 (Jan. 25, 2017).

On appeal, the Appellate Division, Second Department, modified the trial court's ruling and determined that the principal issue was the application of RPAPL 1951. The Second Department held that RPAPL 1951 was fully applicable to the restrictive covenant, that it rendered unenforceable any restriction that is “of no actual and substantial benefit to the persons seeking its enforcement,” that Blue Island had demonstrated the restrictive covenant was of no actual and substantial benefit to the town, and that the town “offered no explanation” to rebut this showing. Accordingly, the Second Department ruled that the restrictive covenant be declared invalid and unenforceable, while the zone change remained intact. Blue Island Development, 143 A.D.3d at 659.

The town subsequently moved the Court of Appeals for leave to appeal the Second Department's decision on the principal ground that RPAPL 1951 should not apply to conditional zoning restrictions, which the Court of Appeals rejected. Blue Island Development, app. den., 29 N.Y.3d 915 (2017), app. dismissed, 29 N.Y.3d 984 (2017). Thus, the Second Department and the Court of Appeals have both recognized that RPAPL 1951 is fully applicable to such restrictions.

Although every case is, of course, dependent on the particular facts, Blue Island gives clear guidance to real estate development counsel that may be faced with a municipality trying to overreach in imposing restrictions on a project without justification. At the end of the day, if a municipality now attempts to impose a restrictive covenant as a zone change condition that serves no “actual and substantial benefit,” the restriction is subject to judicial attack and will be struck down by the courts—even if the developer originally agreed to the restriction. This is sure to be a powerful new tool for real estate development counsel.

Jason A. Stern is partner and director of litigation at Weber Law Group. The firm represented Blue Island Development in the litigation discussed in this article.