Do arbitration agreements in home construction contracts run with the land? The Texas Supreme Court recently answered this question affirmatively, binding a subsequent buyer to arbitration.

In Lennar Homes of Texas Land and Construction, Ltd., et al. v. Kara Whitely, Kara Whitley filed suit against Lennar alleging negligent construction, breach of warranties and DTPA claims regarding a house she had purchased from the original buyer.  Lennar built the house in Dickinson, Texas and sold it to the original buyer in 2014. At the time, Lennar conveyed the house and property via special warranty deed and single-family warranty, both of which contained mandatory arbitration provisions.

In 2015 the original buyer sold the home to Whitley subject to all “covenants” described in the property records. Both deeds were properly recorded in Galveston County. Soon thereafter, Whitley filed suit against Lennar for construction defects caused by the home’s HVAC system. Lennar responded by filing an application to stay the lawsuit pending arbitration, which was subsequently granted by the trial court. Whitley opposed the motion to compel arbitration, arguing that the original buyer agreed to arbitrate, but the arbitration provisions in the original deed and warranty were not applicable to her.

The arbitrator’s award dismissed Whitley’s claims and awarded Lennar attorney’s fees. Lennar later moved to confirm the award, to which Whitley responded by filing a motion to vacate the award on the basis that she was not a party to the arbitration agreement. The trial court subsequently granted Whitley’s motion and vacated the arbitration award.

Lennar appealed to the Houston Court of Appeals, which affirmed the trial court’s decision to vacate the arbitration award. The Court of Appeals held that the arbitration covenant could not bind subsequent purchasers and was not a binding covenant running with the land because it did not “touch and concern the land”. Lennar subsequently appealed the Court of Appeals ruling to the Texas Supreme Court which granted review.

In its opinion, the Texas Supreme Court held that the arbitration covenant ran with the land and Whitley was bound to arbitrate her claims against Lennar. According to the Court, an arbitration covenant covering disputes related to the property “necessarily touches and concerns that property.” Further, since the basis of Whitley’s suit against Lennar is the home Lennar built, the arbitration covenant benefits or burdens the property. The reason being is that an arbitration provision permits a faster means of dispute resolution, which is a benefit or burden on the property.

The Court held that a covenant runs with the land and is binding on subsequent purchasers if four factors are met: “(1) touches and concerns the land; (2) relates to a thing in existence or specifically binds the parties and their assigns; (3) is intended by the parties to run with the land; and (4) the successor to the burden has notice.”

Here, the Court found that the arbitration covenant touched and concerned the land because it affected dispute resolution regarding the property. The arbitration provision bound the parties or assignees by requiring them to engage in arbitration as an alternative dispute resolution method. Lennar and the original buyer intended that the arbitration provision would run with the land, as the arbitration covenant was made mandatory via the special warranty deed. Lastly, the successor (Whitley) had notice of the arbitration provision as it was recorded in Galveston County prior to her purchase of the home.

The Court’s decision makes it easier to enforce arbitration against subsequent owners when an arbitration provision is included in the deed and the four elements outlined by the Court are met. Should a subsequent purchaser seek to sue the property builder, they will be subject to the mandatory arbitration provision and any other provisions that “touch and concern” the property contained in the original deed conveyance.

The attorneys in our Austin and Dallas office frequently assist design and construction professionals in determining whether disputes are arbitrable. We are available to answer any questions you may have.  Please contact us at info@gstexlaw.com.

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