By Delilah Cassidy.
Living on a golf course seems like a dream: waking up to the smell of freshly cut grass, sitting on the porch drinking lemonade during the Arizona spring. But since the Great Recession, what was once a dream for those living on the Ahwatukee Lakes Golf Course quickly became a nightmare; a nightmare even the law could not truly wake them up from.
Three decades ago, a deed restriction was placed on a master-planned Arizona community limiting a portion of the land stating: “[t]he Property shall be used for no purposes other than golf courses . . . .” This restriction could only be changed if either 51% of the homeowners approved of the alternative use or a court found a “material change in the conditions and circumstances” that justified the non-golf course use.
The company Bixby bought the course in 2006, but after the Great Recession it was no longer profitable. By 2013, the course had ceased operation. Notably, it placed a barbed-wire fence around the course, drained the lakes, stripped the sod off the greens, and removed hundreds of irrigation heads. What little grass was left soon withered and died, and the property began emitting a “horrible stench.” The homeowners sued Bixby for violating the deed restriction. While the suit was pending, TTLC (an investment company) agreed to buy the land from Bixby on the condition that the restriction be invalidated. TTLC tried to persuade the homeowners to change the restriction, but it fell well short of the 51% needed.
The trial court found that the golf course could be profitably operated and ordered TTLC to restore and operate the golf course. On appeal, TTLC argued that the economic crisis constituted a “material change” that justified non-golf course use of the land. The Arizona Court of Appeals rejected this argument partially because the trial court found the course could be profitably operated, but also because TTLC knew the risk when it bought the property. It also stated that “[m]ere economic struggles cannot serve as a basis for abrogating a restrictive covenant and rendering its enforcement inequitable.” It also reasoned that “Arizona’s public policy is to protect those who have purchased property relying on restrictions from the invasion of those who attempt to break down the guaranties of home enjoyment under the guise of business necessities.”[i] TTLC filed a petition for review with the Arizona Supreme Court in January.
The Fair Way:
The result in the case is not surprising. But the Court’s holding ignores business realities and creates bad Arizona precedent. On one hand, if these companies could operate the land profitably as a golf course, they would. It makes no sense for them to maintain a smelly, vacant lot instead of a profitable golf course. On the other hand, if the course cannot be profitably operated, Bixby will go into bankruptcy. As a result, the land with the restriction will be worthless and numerous creditors will be left unpaid.
Arguably, bankruptcy law could provide relief through §363(f). With the help of this provision, Bixby could sell the property free and clear of an “interest.” However, “interest” usually refers to a mortgage interest, not a covenant (and there may be hyper-scrutiny for a covenant that runs with the land). It should be noted that allowing bankruptcy to erase a deed restriction would undermine one of the key principles of bankruptcy law: defer to and protect property rights.
There is a more practical solution. Deed restrictions like this one should have forced arbitration clauses, triggered by the course owner’s desire to re-purpose the land for economic purposes. If the arbitrator finds that a material change has occurred, then the homeowners should decide by majority vote to choose either a compulsory buyout of the golf course or an award of damages from the golf course owner.
[i] Swain v. Bixby Village Golf Course, Inc., 247 Ariz. 405 (2019).