Wisconsin Supreme Court Case Highlights Need for Clarity in Restrictive Covenants
June 29, 2018

By Timothy J. Feldhausen

A recent decision by the Supreme Court of Wisconsin highlights the need for developers and property owners to be clear and precise in drafting restrictive covenants. Richard Forshee v. Lee Neuschwander, Docket Number 2016AP1608, illustrates that even the state’s highest court can have difficulty in understanding and applying owner intent. The June 5, 2018 decision highlighted this difficulty, with a divided Supreme Court ruling in favor of the homeowner on a 6-1 decision, but with three substantially different lines of reasoning. This case also illustrates the difficulty of interpreting broadly worded restrictions.

In Forshee, the plaintiff property owners, the Neuschwanders, purchased and renovated a large house on Hayward Lake and rented the house to vacationers on both a short-term or long-term basis. Neighboring property owners objected to the vacation rental arrangement and sought to use a restrictive covenant applicable to the subdivision to block the activity. The deed restriction in question provided that “there shall be no commercial activity allowed on any of said lots”. The neighbors prevailed in the initial action in Sawyer County Circuit Court seeking to enforce the restriction. The Court of Appeals reversed the finding and the Supreme Court upheld the Court of Appeals decision, effectively allowing the Neuschwander’s property to continue to be rented out.

The issue before the Supreme Court was whether the term “commercial activity” in the restriction was either clear (and thus enforceable) or ambiguous (and unenforceable). A five-member majority found for the Neuschwanders; however, only three of those five justices held that the term “commercial activity” was itself ambiguous. The majority based its decision on whether it was possible, either within the language of the covenant or through context, to determine the meaning of the term “commercial activity” in order to enforce the restriction. The majority also attempted to determine the meaning by resorting to the plain “dictionary” meaning, but found that the restriction was so open-ended and ambiguous that it was unenforceable. In reaching its decision, the majority noted that the previous owner of the property, Louisiana Pacific Corporation, initially used the property for both short-term and long-term meetings and guest stays.

A concurring opinion, written by Justice Shirley Abrahamson, argued that the restrictive covenant was not ambiguous, but instead held that the Neuschwanders simply did not violate the (unambiguous) deed restriction by their activities. Her argument centered on the fact that the “commercial activity” was carried on by the property owners only in the act of renting the property out. The activities taking place at the property were “residential” in nature: living, vacationing, and leisure activities. Justice Abrahamson’s analysis took into consideration the specific activities occurring on the property (namely vacationers or guests doing activities of a purely residential nature), which she did not equate to activities of a commercial nature (which presumably took place either on the internet or at a leasing office). Justice Abrahamson supported her position with other Wisconsin cases focusing on how the property would be used by occupants rather than how the property would be used by owners.

Justice Daniel Kelly (with Justice Rebecca Bradley joining) added to the majority with yet another separate concurrence. Justice Kelly’s concurrence alone is entertaining and worth a read if you are interested in refresher training on “active” versus “passive” voice or would like to reminisce about the intricacies of diagramming sentences from middle school. Justice Kelly reasoned that because the (badly worded) restrictive covenant is “location-specific”, no reading of the covenant could support the position that either (A) the act of renting is happening on the property or, on the other hand, (B) the acts of “sleeping, cooking, eating, and recreating”, which are occurring on the property are commercial in nature.

The only dissent came from Justice Ann Walsh Bradley, who focused on the plain meaning of the word “commercial activity”. Resorting to the dictionary definition, Justice Bradley interpreted the term “commercial activity” as any activity “having profit as a chief aim”. Because the property owner sought to rent out the property for the purpose of achieving a profit, Justice Bradley would have held that the deed restriction was clear, and the property owner violated the prohibition in renting the property to vacation renters.

Business owners and parties looking to add restrictive covenants to a property should note several interesting and important lessons from this case. The following are some key considerations in light of the Forshee case:

  • Limiting Scope. A broadly worded restriction, such as that in Forshee, if enforced, could have been used to prevent a property owner from conducting an inconspicuous internet-based home business (even if there wasn’t a physical “storefront” presence or client visits). It is impossible to foresee what changes technology will bring in the future, but drafters and owners should be clear about the attributes of the activities they seek to avoid (e.g., a storefront/retail business).

  • Thoroughness. In order to avoid a court invalidating a restriction as overly ambiguous, drafters should be as detailed and thorough as possible. Where the entire range of activity to be restricted cannot be described in a specific restriction, language should indicate that activity of a certain type, as illustrated by a set of examples, should be included. The task for drafters of restrictive covenants is to create covenants detailed and clear enough to avoid unnecessary ambiguity, while not being too detailed so as to exclude undesirable activity that would be captured by a broader covenant.

  • Readability. A restrictive covenant should be plain and readable to a layperson, even if it contains legal descriptions or specifications. Overly complex or grammatically stilted language risks only muddying the waters and opening the door for not only undesirable activities on the property, but also potential litigation. If it doesn’t make sense to a non-party reader, then it may not make sense to a court.

  • Communications. Communication between the property owners and the drafters is paramount. The drafter should ensure that the property owner’s intent is clearly transferred into the language of the covenant.

  • Avoid Unclear Language or Passive Voice. Finally, deed restriction language should avoid colloquial phrases that may give rise to different meanings among different people. As the Forshee case demonstrates, “commercial activity” has a different meaning to different people. Justice Kelly’s concurrence also highlights the perils in using passive instead of active voice in drafting covenants.

It pays to get restrictive covenants right the first time, because subsequent owners of the property will be bound to the language as originally drafted, but which may not fully reflect the intent of the original owners if not properly drafted. If you have any questions about the likely enforceability of your current restrictive covenants or would like to consider incorporating restrictive covenants into your property, please contact your Davis & Kuelthau attorney, the author noted above or our Real Estate practice co-chairs linked here.

 

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