Today we write about Loblolly Properties LLC v. Le Papillon Homeowner's Assn. Inc., 2021-CA-00767-COA, 2022 WL 4478395 (Miss. App. Sept. 27, 2022), a recent case that landed in the Mississippi Court of Appeals. This case examines the relationship between covenants and restrictions following a foreclosure on a property.

Historical Context of Loblolly Properties

This dispute arises from the sale of land that stemmed from a foreclosure. To understand the facts of the present case, we must first look at the historical context of the land.

Chattel Group LLC (Chattel) initially owned thirty-five lots of the Le Papillion Subdivision. On March 10, 2008, Chattel executed a deed of trust to First State Bank (First State) and pledged twenty-two of its lots as security. In that deed, Chattel retained the “right to remain in possession and control of the property … [and] use, operate or manage the property.”

Later in December of 2008, Chattel filed a "Declaration of Covenants, Conditions and Restrictions" with the chancery clerk's office, which covered all lots Chattel owned, including those used for security. This declaration included homeowner association (HOA) fees for the use of common areas to help upkeep the subdivision. According to the covenants, non-payment fees would become a continuing lien on the property.

After Chattel failed to comply with the terms of the March 2008 deed of trust, on February 6, 2009, First State foreclosed on the lots pledged to it. Four years later, First State sued HOA regarding the validity of the covenants, which was ultimately settled out of court. In the final judgment, the chancery court held that the 2008 “Declaration of Covenants, Conditions, and Restrictions” was properly filed.

Present Context for Loblolly Properties

On January 31, 2018, First State sold Loblolly Properties LLC (Loblolly) ten of the lots that it had obtained via the foreclosure sale. The instrument of conveyance was a “Special Warranty Deed," which specifically provided that the conveyance and the warranty be subject to all Covenants and Restrictions of record.

After attempting to pay the dues that came with the land, Loblolly's attorney opined that when First State foreclosed, the title attained related to the date of the mortgage, which would so extinguish the covenants that were filed following the mortgage. On July 19, 2019, HOA filed a notice of lien against Loblolly's properties for unpaid dues, leading to the present action.

Loblolly filed a complaint in the Lamar County Chancery Court against HOA to avoid the lien and for slander of title. HOA filed a motion to dismiss. The chancery court denied Loblolly’s motion for partial summary judgment, finding that the clause in the special warranty deed clearly conveyed the property subject to the covenants and restrictions in question. Loblolly appealed.

Loblolly raised two issues on appeal: whether the covenants and restrictions were no longer “of record” following the foreclosure and non-binding, regardless of the language of the special warranty deed and whether First State’s foreclosure on the lots in question extinguished Chattel’s prior covenants and restrictions.

Whether the Covenants/Restrictions are No Longer “of Record”

The chancery court recognized that the covenants that post-dated the deed of trust could have been extinguished via successive foreclosure. However, the chancery court found that the covenants and restrictions were valid and enforceable because the language in the special warranty deed specifically stated the conveyance was subject to all covenants and restrictions of record, to which the appellate court agreed.

First, it is undisputed that First State agreed to bind the property to the covenants, which, established by Chattel, specifically provided that they were intended to run with the land. Even if the covenants did not survive the foreclosure, First Bank later agreed that the covenants were considered valid, enforceable, and bound the lots it held, which was shortly followed by a sale to Loblolly.

Second, Mississippi law states that instruments that are properly recorded give constructive notice to all who deal with property. The rule is that, whatever will put a party upon inquiry if pursued with ordinary diligence and understanding, would lead to knowledge of the requisite fact, its notice of it. This is furthered by the rule that a duty is imposed on a purchaser to examine all deeds and conveyances previously executed and recorded if such conveyances affect the title in question.

Lastly, deeds are construed like contracts, meaning that they are to be considered as a whole and the intent of parties is to be gathered from the plain and unambiguous language contained therein. Upon looking at the "four corners" of the document, the court must construe what is clear and unambiguous as is stated in the document. Beyond that, the court holds that it is necessary to construe the documents as a whole, and the intent of the parties may be gathered from the plain and unambiguous language therein.

Overall, the court held that the special warranty deed conveying the property from First State to Loblolly clearly and unambiguously stated the conveyance in question would be subject to any and all covenants and restrictions of record. The court held that Loblolly could have discovered the covenants on the lots through minimal diligence and that the chancery court did not err in finding that the terms of the special warranty deed bound Loblolly to the covenants in question.

Whether the Covenants and Restrictions were Extinguished Upon Foreclosure of the First State Mortgage

This is an instance of first impression for the Mississippi courts. On appeal, Loblolly contends that the December 2008 covenants and restrictions did not bind the lots in question and contends that Chattel could not impair the property that it had given as security with a successively filed declaration without First State’s consent.

Encumbered Indeed

The court first discussed whether the lots pledged were indeed encumbered by the declaration that was filed after the deed was executed. First, the court points to Merchants and Farmer’s Bank v. Pool Brothers, 140 Miss. 799, 106 So. 627, 629 (1926), which established the general principle that the holder of security must give consent to any action by the grantor that would lessen the value of the collateral property.

The court held that Loblolly presented no evidence that the covenants and restrictions imposed by Chattel impaired the property in any way. Thus, the court reasoned that Chattel's failure to obtain permission from First State before creating the covenants did not bar the covenants from attaching to all of Chattel's property.

It has been shown that there was intent to create said covenant, that there was privity of estate between the creator of the covenants and the person burdened by it, and that the covenant must "touch and concern" the land. Thus, the covenants ran with the land.

Extinguished by Foreclosure?

Next, the court had to determine whether or not the covenants were extinguished by First State’s foreclosure. The court, relying on Hearn v. Autumn Woods Off. Park Prop. Owners Ass'n, 757 So. 2d 155 (Miss. 1999), reiterated the rule that an intervening tax sale does not extinguish an easement that had increased the value of the property. A tax sale would severe a restrictive covenant only because of “negative” ownership

Here, the court held that the easements created by the covenants in question were used to maintain the common areas and further development, which in turn added value to the land. This benefitted the owner, thus meaning that the covenants which ran with the land were not extinguished by the intervening tax sale.

The ruling in Hearn also noted that most jurisdictions have held that an “easement appurtenant” is not extinguished by a tax sale. This specific type of easement is an easement that runs with the land, thus demonstrating that this easement appurtenant is not extinguished by the foreclosure sale.

The court holds in Diamondhead Country Club and Prop. Owners Assn., Inc. v. Peoples Bank, 296 So. 3d 651 (Miss. 2020), reh'g denied (June 11, 2020), that a personal covenant is extinguished by foreclosure if it is not included in a deed of trust, but covenants that run with the land are not. Chattel's covenants ran with the land and were attached prior to the foreclosure.

Conclusion

The Court of Appeals of the State of Mississippi affirmed the judgment of the chancery court that Loblolly's lots were bound by the declaration of covenants and that the HOA was entitled to summary judgment. First State agreed that the property was bound by the covenants after foreclosure. The court further held that the restrictive covenants did apply to Loblolly's lots and were not extinguished by First State's foreclosure.

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