A New Jersey appellate court addressed the subject of restrictive covenants in deeds to property and their relevance to charitable organizations, including churches.
- Key point 7-13. A restrictive covenant is a restriction on the use of property. Such restrictions often are noted in deeds to property, but they may appear in other documents as well. Such restrictions apply to a church’s use of its property.
Additionally, the appellate court also addressed “standing,” a constitutionally mandated requirement in which a party must suffer an actual injury in order for its lawsuit to go before a US court.
Background
A New Jersey appellate court mostly affirmed a lower state court’s decision to dismiss two lawsuits involving a property with restrictive covenants placed upon it.
The court’s decision went unpublished, meaning it offers no precedential value. However, church leaders still should note the importance of understanding the court’s reasons.
Furthermore, unpublished opinions still can prove persuasive for parties and courts in future litigation involving similar disputes.
Relatedly, and perhaps of greatest relevance, the 10-point checklist included with this article offers a helpful guide for leaders to review regarding restrictive covenants and property deeds.
A major land donation
The Westminster Choir College was founded in 1920 as the Westminster Choir of the Westminster Presbyterian Church, in Dayton, Ohio. The College moved to its Princeton campus in 1935 when Sophia Strong Taylor, a philanthropist and devout Presbyterian, donated the land to advance the “training of Ministers of Music of Evangelical Churches.” Taylor’s gift came with a significant restriction (a “restrictive covenant”) stipulating that the land:
- “shall be used . . . for the purpose of training Ministers of Music of Evangelical Churches;”
- “that in connection with such use the Bible is to be taught to the whole school at least one hour per week in accordance with the principles of the Westminster Confession of Faith. . . .”; and,
- “This covenant shall run with the land and be binding upon [Westminster], its successors and assigns. . . .”
Taylor’s gift also included this stipulation:
Should [Westminster] at any time violate its covenant with respect to the use of any part or all of said premises, then the title to all of such premises, including those heretofore conveyed, shall be forfeited by [Westminster] and such title shall thereupon pass to and vest in the Theological Seminary of the Presbyterian Church [now known as Princeton Theological Seminary].
Financial troubles
In the decades that followed, Westminster operated independently and had a sizeable endowment. But in 1991, it found itself in severe financial straits, a semester away from having to close its doors. It eventually merged with Rider University.
Westminster thrived following the merger. By 2016, Westminster ran three straight year of operating surpluses, and its endowment had risen to nearly $19 million.
Rider, however, was not thriving. Rider’s president announced significant financial challenges, indicating the university faced selling, transferring, closing, or moving Westminster.
Lawsuits arise
In 2017 and 2018, two lawsuits were filed by students, faculty, former board members, alums, and donors in a New Jersey court to prevent the sale or relocation of Westminster.
The plaintiffs, represented by the same attorney, claimed that “because no court has ever extinguished the restrictive covenant, it continues to burden the property,” meaning “Rider does not possess . . . title to the campus,” and “if Rider, or any successor to it, ceases to operate and maintain a college for training ministers of music for evangelical churches on the Westminster campus, ownership of the campus shifts to the Seminary in accordance with the [restrictive] covenant.”
The state attorney general provided the court with a comprehensive statement of the office’s position on several issues. As to Rider’s plan to relocate Westminster, the attorney general noted the purposes of the Taylor trust, that the land be used for the “training of ministers of music for Evangelical churches” and Bible study “in accordance with the principles of the Westminster Confession of Faith,” could “still be undertaken and performed by Rider, the Seminary, or a third party entity.”
The trial court dismissed the lawsuits, saying the plaintiffs lacked standing both to enforce the deed and to enforce agreements between Westminster and Rider.
In addressing “standing,” the court concluded that donors to the Seminary lacked standing and so they had to be dismissed from the case. The court noted that “New Jersey does not recognize the standing of charitable donors to challenge management decisions of the charity to which they’ve contributed,” and it referred to the “general rule” that “contributors to a charitable fund lack standing to challenge management of the fund as ‘there must be something peculiar in the transaction beyond the mere fact of contribution to give a contributor to a charitable fund a foothold in this court for the purpose of questioning the disposition of the fund.’”
The judge acknowledged the plaintiff donors’ contributions of their time and money to Westminster, but found they “failed to demonstrate an interest that differed in any meaningful way from the public at large.”
The court also found that the plaintiffs had not identified “any New Jersey case to support their argument that alumni have standing to challenge administrative decisions and policies of their alma mater.
The plaintiffs appealed the dismissals.
The state appellate court affirmed the trial court’s dismissal of all the claims, but two (neither of which dealt with the restrictive covenants or standing).
What this means for churches
This case illustrates the importance of church leaders being aware of the existence of any restrictive covenants that apply to a church’s property. Property owners, including churches, generally are legally bound by such restrictions.
A restrictive covenant is a restriction on the use of property. Usually, such covenants appear in deeds, but this is not always the case. Several practical tips in the 10-point checklist accompanying this article will assist church leaders in dealing with restrictive covenants.
Another interesting finding by the court in this case was that donors may lack standing to challenge “management decisions of the charity to which they’ve contributed,” and it referred to the “general rule” that “contributors to a charitable fund lack standing to challenge management of the fund as ‘there must be something peculiar in the transaction beyond the mere fact of contribution to give a contributor to a charitable fund a foothold in this court for the purpose of questioning the disposition of the fund.’”
Vazquez v. Rider, 2023 N.J. Super. Unpub. LEXIS 1092 N.J. App. 2023).
Reversionary clauses: A checklist for churches
Many churches received title to their property by means of a deed containing a restriction. It is imperative for church leaders to be aware of such conditions.
Consider the following points:
Never purchase property without a clear understanding of the existence of any restrictive covenants and how such covenants may limit the church’s use of the property. The presence of a restrictive covenant can prevent a church from using property for its intended purpose. In most cases, restrictive covenants will be spelled out, or referenced, in the deeds to church property.
If your church owns property, be sure you are familiar with any restrictive covenants before you plan any changes in the use of the property.
Deeds to property may contain restrictions on the sale of the property. Two common restrictions are “powers of reentry” and “possibilities of reverter.” These interests are very similar, but they have very different legal consequences. A possibility of reverter arises when one person transfers property to another by means of a deed containing language clearly providing that title will automatically revert to the prior owner if the current owner violates a restriction in the deed. Language creating a possibility of reverter includes words such as “so long as,” “until,” or “until such time as.” To illustrate, assume that A transfers land to B with a deed specifying that title is transferred “so long as” B uses the property for church purposes. Here, the language is clear that if the land ceases to be used for church purposes, it will automatically revert to A. The significance of this is that the reversion of title to A is automatic, and requires no action by a court. On the other hand, deeds often contain conditions that do not call for an automatic reversion of title to the previous owner upon the occurrence of some condition. In such cases the prior owner has a “right of reentry.” Such a right does not vest automatically in the prior owner. Rather, the prior owner must go to court to have his or her interest recognized. As this case illustrates, this is a more uncertain interest in property, since it does not operate automatically.
Churches should check their deeds to see if they contain a condition that may give the prior owner either a possibility of reverter or a right of reentry. In either case, the prior owner may attempt to claim title to the church’s property in the event the specified condition is violated. However, if the prior owner retained a possibility of reverter, the transfer of title back to the prior owner occurs immediately. This can cause major problems for a church when it belatedly discovers that it no longer owns the property.
The courts generally have a negative attitude toward restrictions on the sale of property by charities. Some states have enacted laws giving the civil courts some leeway in extinguishing such restrictions. If your church deed contains restrictions on the sale of property, you may want to consult with a local attorney concerning the existence of such a law in your state.
In some cases, restrictive covenants can be modified or ignored because of widespread disregard by property owners, or because of substantial changes in the properties subject to the restrictions. However, as the church in this case learned, establishing such an exception can be a very costly legal battle that may take years. The attorneys fees you incur ordinarily will not be covered by any insurance policy, so they will be an expense the church must bear. Church leaders should never assume that a covenant can be ignored. Check with a real estate attorney for an opinion regarding the current viability of a covenant.
It is possible in some cases to have conditions “released” by the previous owner (if he or she is willing to do so). Often this is done by having the previous owner execute a quitclaim deed. If the previous owner is no longer living (a fairly common circumstance), then the condition can be released only by all of the legal heirs of the deceased owner. This can be a very cumbersome process.
Be sure your church complies with any deed restrictions to the extent you are unsuccessful in getting them removed.
When acquiring property through purchase or gift, discourage the property owner from encumbering the title with any restrictions that could later create substantial inconvenience for the church.
Church leaders also should be aware that restrictive covenants often provide that a property owner who violates the restrictions is required to pay the legal fees incurred by other property owners in enforcing them. In other words, restrictive covenants not only may prevent a church from using property for a purpose that violates the covenant, but they also may force the church to incur an unbudgeted and possibly substantial expense in paying the legal fees of neighbors who successfully sue to enforce the covenant.