City of Bowie v. MIE, Properties, Inc.

We concern ourselves here with the standard for determining a challenge to the continuing vitality of restrictive covenants on real property. This case involves a set of restrictive covenants, recorded in 1986, encumbering originally a 466 acre parcel of land (“the Property”) in Prince George’s County. The current parties to the covenants are the City of Bowie, Maryland (“the City”), an original covenantee, and MIE, Inc. (“MIE”), a successor covenantor and current owner of the remainder of the Property. MIE’s predecessor in title agreed with the City to a Declaration of Covenants (“the Covenants”) which limits the development of the Property to 14 permissible uses. Contemporaneous with entering into the Covenants, an *668 Annexation Agreement (“the Agreement”) also was executed with the City, bringing the affected parcel, then undeveloped, within the City’s corporate limits. The Agreement contemplated the development of a “science and technology, research and office park” on the Property, hopefully with the support of the University of Maryland.

MIE challenges the continuing vitality of the Covenants, principally on the basis that changes in circumstances since the recording of the Covenants obviates the purpose for the Covenants. The City counters that the Property may be, and is being, developed in accord with the Covenants. The Circuit Court for Prince George’s County upheld the continuing validity of the Covenants. The Court of Special Appeals, however, reversed the judgment of the trial court, concluding that the trial judge applied the wrong standard for determining the ongoing validity of restrictive covenants. We shall reverse the judgment of the intermediate appellate court and remand with directions to affirm the judgment of the Circuit Court.

I. FACTS

Although the record reveals considerable dispute between the parties as to the purpose of the Covenants imposed on the Property, there is little controversy regarding the generic formative history of the Covenants. Approximately twenty years ago, the corporate limits of the City were expanded as a result of the annexation 1 of the Property, located in the northeast quadrant of the intersection of U.S. Route 50 and Maryland Route 3/U.S. Route 301 in Prince George’s County. The annexation process was initiated in 1985 by the application of the then—owners of the Property, Carley Capital Group and the University of Maryland Foundation, Inc. (“the Developers”). An Annexation Agreement was executed on 19 August 1985 between the Developers and the City and recorded in the land records of Prince George’s County on 16 *669 January 1986. 2 In consideration for the annexation of the Property, the City agreed to extend roadways, water and storm water management, and other public facilities to the Property at a cost of $1 million to the City and $3 million worth of Tax Increment Financing bonds to be recouped by the City through a special taxing district planned for the Property. The Agreement obligated the Developers to “develop,” and the City to “fully support [ ] the development” of, the Property as “a science and technology, research and office park.” The Agreement referred generally to the Developers’ “current intention” to “improve the Property and to sell portions thereof for mixed use commercial development ... to be known as the ‘University of Maryland Science and Technology Center’ (although the [Developers] may change such name as it from time to time deems appropriate).... ”

On 19 December 1985, the Developers executed the Covenants in favor of the City, establishing a list of permitted uses for the Property. 3 The Covenants provided, in relevant part:

Uses permitted on the property shall be the following and no other:

1) Office buildings for science, technology, research and related issues;

2) Accessory buildings and uses, such as offices, laboratories, off-street parking, enclosed storage areas, convey- or systems, towers, and signs to serve a principal permitted use;

*670 3) administrative, executive and research facilities, including the following, subject to the provisions of Section 27-331 of the Prince George’s County Code:[ 4 ]

(i) banks, savings and loans associations, or other savings and/or lending establishments;

(ii) business and professional offices;

(in) communications offices (e.g., telephone, telegraph, and the like);

(iv) data processing

(v) public utility offices; and

(vi) research, development and testing laboratories, including testing facilities and equipment, and the manufacture and/or fabrication of the same incidental to such research and development;

4) convenience commercial establishments, including the following, to serve the principal users (and the employees thereof) on the Property, subject to the provisions of Section 27-331 of the Prince George[’]s County Code:

(i) barber and beauty shops;

(ii) medical and dental climes;

(in) commercial outlets engaged in the sale or display of items produced on the premises;

(iv) eating and drinking establishments;

(v) financial offices, such as banks or' lending agencies, the principal services of which will be rendered to the surrounding industrial establishments; and

(vi) laundry and dry cleaning pick-up stations;

5) bio-medical laboratories;

*671 6) hotels and motels, which may include convention facilities and reducing/exereise salons and health clubs;

7) institutional uses of an educational, medical, religious or research nature;

8) technological activities oriented to telecommunications products and systems, including satellite communications;

9) public and quasi-public uses of an educational or recreational nature;

10) public utility buildings and lines;

11) printing and publishing of newsletters, periodicals, and similar products and photostatting, blueprinting, or other photocopying establishments;

12) medical and dental laboratories;

13) radio and television broadcasting studios; and

14) on an interim basis, agricultural uses, including farming, horticulture and similar uses.

The Covenants were duly recorded in the land records of Prince George’s County in January 1986.

It appears that the impetus for annexing the Property and the execution of the Covenants was for the Developers to gain the City’s infrastructure and political support for the development o f a high-technology research park on the Property. As the Developers and the City originally conceived, the affiliation of the University of Maryland was viewed as a vital component to the hoped-for success of the research park concept, as most such existing parks generally had some association with a research university as a means of attracting tenants. Unfortunately, the level of success expected for development of the Property did not materialize readily and, around 1999, the University of Maryland Foundation, Inc. completely extricated itself from the development project for financial reasons. Carley Capital Group, the other developer, contemporaneously filed for bankruptcy.

*672 Ownership of the Property changed several times since 1985; 5 however, the terms of both instruments remained undisturbed in the main. 6 Eventually, around 2000, MIE and its related entities became the owners of the remaining portions of the Property and began developing part of it with 150,000 square feet of “flex-space” buildings to accommodate various tenants. In 2001, MIE leased a portion of this space to C & C Dance Studio (“the Dance Studio”), a use which the City contended was in violation of the Covenants. MIE countered that the City previously had approved of the Dance Studio’s tenancy, but reneged on that approval in retribution for MIE’s refusal to construct a large, multi-story office building on the Property requested by the City. The City commenced this litigation to prevent the Dance Studio’s further use of its leased space.

II, PROCEDURAL HISTORY

The City filed on 24 October 2002 a complaint in the Circuit Court for Prince George’s County seeking a declaration that the Dance Studio’s use was in violation of the Agreement and Covenants and further requesting a permanent injunction against the continued use of the building space by the Dance Studio. After extensive discovery, MIE filed on 26 November 2003 a counterclaim for a declaratory judgment that the Covenants and portions of the Agreement restricting the permitted uses of the Property were invalid and unenforceable. A bench trial was conducted over the course of three *673 days beginning on 29 March 2004. The Circuit Court determined ultimately that the Covenants were valid and enforceable against MIE and that MIE had violated the Covenants by permitting the Dance Studio to use and occupy leased space on the Property, a use prohibited by the Covenants. Accordingly, the Circuit Court enjoined MIE from permitting the Dance Studio to use and occupy any space on the Property. MIE’s counterclaim was denied.

The Circuit Court reasoned that there had been “no radical change to the character of the neighborhood [of the Property] so as to defeat the purpose [ ] embodied in the Covenants and the Annexation Agreement.” The court was persuaded by the City’s expert witness, Alfred Blumberg II, 7 that the mixed-use development and zoning changes that occurred in the area surrounding the Property since 1985 did not render the Covenants’ purposes meaningless, but rather facilitated them. Having found the Covenants valid, the court concluded that the Dance Studio was prohibited by the Covenants. The court credited Blumberg’s testimony, over that of MIE’s expert, Thomas Kieffer, 8 that the Dance Studio, a private for-profit use, was inconsistent with the Covenants’ allowance for quasi-public and public educational uses.

Further, the primary purpose of the Covenants—the development of a science and research technology park—was found not to be dependent on the participation of the University of Maryland. Thus, the University’s withdrawal from the project was “not a deal breaker,” vitiating the purpose of the Covenant. The court was persuaded by the testimony of the City’s expert, Dr. Anirban Basu, 9 on the issue of the Covenants’ continuing vitality after the University’s withdrawal from the project. Dr. Basu’s testimony, when contrasted with that of MIE’s comparable expert, Dr. Darius Iranni, persuad *674 ed the court of various factual inadequacies in Dr. Iranni’s deposition testimony and a market analysis report prepared prior to his testimony. In particular, the court was troubled by the fact that Dr. Iranni apparently did not consider the Agreement or Covenants in forming his opinion on the “success” of the science and research technology park project. A subsequent report by Dr. Iranni addressing the change in circumstances evidently lacked a “significant factual predicate” for its conclusion that the University’s absence from the project was fatal to its success or potential success. Moreover, the court deemed persuasive the expert testimony of Dr. Stephen Fuller, a professor of public policy and economic development, who opined that the Covenants were not responsible for the failure of the project to advance as expected and that success was still attainable if only a proper marketing strategy were employed.

The Circuit Court also found that the City had not waived enforcement of the Covenants, even in view of its collateral extinguishment of the Covenants for two parcels of the Property conveyed to the federal government.

MIE filed a timely appeal to the Court of Special Appeals. It raised five questions for review, 10 alleging primarily that the Circuit Court erred by finding the Covenants valid and enforceable. Secondary arguments were tendered based on nonjoinder of an essential party (the Dance Studio), an assertedly unnecessary ruling on the Dance Studio’s noncompliance with *675 the underlying actual zoning classification of the Property, waiver by the City of the Covenants, and the City’s equivalent of the improper exercise of zoning power (tantamount to illegal “contract” zoning). In an unreported opinion, the intermediate appellate court disagreed with all of MIE’s secondary arguments, but held that the Circuit Court’s judgment that the Covenants were valid and enforceable must be vacated and the case remanded for further proceedings.

In those further proceedings, the Circuit Court would revisit the question of the Covenants’ validity vis-a-vis their purpose in light of a different standard than that applied originally by the Circuit Court. The Court of Special Appeals concluded that the continuing vitality of a restrictive covenant is determined by the “reasonable probability that the parties will be able to achieve the goals of the Covenants within a reasonable period of time.” 11 (emphasis added). Therefore, the panel of the intermediate appellate tribunal opined that the Circuit Court incorrectly “emphasized the theoretical possibility that the Maryland Science and Technology Center will be developed on the property” as the standard for determining the validity of the Covenants, (emphasis added). Thus, a remand was necessary to consider the facts under the “correct” legal standard.

The intermediate appellate court, with relative ease, disposed of the other questions raised by MIE. First, as to the *676 City’s failure to join the Dance Studio as a named defendant to its action, the court opined that the non-joinder was not a ground for reversal because the Dance Studio was aware sufficiently of the litigation related to its interest in its leased space on the Property, evidenced by the fact that the owner of the business testified at trial, effectively giving the Dance Studio its “day in court.” Second, the appellate court held that the trial court did not abuse its discretion in addressing the noncompliance of the Dance Studio’s use with the underlying actual zoning classification of the Property assigned by the County because MIE’s trial counsel essentially invited a ruling on that question during closing arguments. Third, although the appellate court was “not persuaded that the Circuit Court erred or abused its discretion in rejecting [MIE’s] waiver argument,” it nevertheless directed that the Circuit Court reexamine the issue on remand in light of events elapsing since judgment was entered by the trial court. Finally, the court held that the City’s enforcement of the Covenants, by virtue of the restrictions placed on the use of the Property, did not affront or usurp the zoning authority vested in Prince George’s County.

The City petitioned us for a writ of certiorari on the question of whether the Court of Special Appeals identified an incorrect standard for determining the continuing validity of the Covenants. MIE filed a Conditional Cross-Petition requesting that we review the remaining issues decided against it by the Court of Special Appeals. We granted both petitions. 394 Md. 478, 906 A.2d 942 (2006).

III. STANDARD OF REVIEW

We review the factual findings of the Circuit Court for clear error, observing “due regard to the opportunity of the trial court to judge the credibility of the witnesses.” Maryland Rule 8-131(c). In addition, “we must consider the evidence in the light most favorable to the prevailing party and decide not whether the trial judge’s conclusions of fact were correct, but- only whether they were supported by a preponderance of the evidence.” Colandrea v. Wilde Lake *677 Cmty. Ass’n, 361 Md. 371, 393-94, 761 A.2d 899, 911 (2000) (quoting Urban Site Venture II Ltd. P’ship v. Levering Assocs. Ltd. P’ship, 340 Md. 223, 229-30, 665 A.2d 1062, 1065 (1995)) (citations omitted); Murphy v. 24th St. Cadillac Corp., 353 Md. 480, 497, 727 A.2d 915, 923-24 (1999); In re Adoption/Guardianship No. 3598, 347 Md. 295, 331, 701 A.2d 110, 128 (1997). Thus, we examine the Circuit Court’s findings of fact in a light most favorable to the City for substantial evidence to confirm such findings.

Review of the legal questions decided below is not so deferential. We examine de novo issues of law as decided based on the Circuit Court’s sustainable findings of fact. In re Anthony W., 388 Md. 251, 260, 879 A.2d 717, 722 (2005); Ins. Co. of N. Am. v. Miller, 362 Md. 361, 372, 765 A.2d 587, 593 (2001) (citing Heat & Power Corp. v. Air Prods. & Chem. Inc., 320 Md. 584, 591, 578 A.2d 1202, 1205 (1990)). This is true of a court’s interpretation of a contract, Myers v. Kayhoe, 391 Md. 188, 198, 892 A.2d 520, 526 (2006), of which a covenant is a species. Colandrea, 361 Md. at 395, 761 A.2d at 912 (cited by Burns v. Scottish Dev. Co., 141 Md.App. 679, 695-96, 787 A.2d 786, 795 (2001)); Boyle v. Peabody Heights Co., 46 Md. 623, 628 (1877). Thus, the interpretation of a restrictive covenant, including a determination of its continuing vitality, is subject to de novo review as a legal question. See Chestnut Real Estate P’ship v. Huber, 148 Md.App. 190, 201, 811 A.2d 389, 395-96 (2002).

We generally review the issuance of an injunction by a trial court for an abuse of discretion. Colandrea, 361 Md. at 394, 761 A.2d at 911.

IV. DISCUSSION

The existence of the Covenants is not disputed. In particular, MIE has not challenged the existence of the Covenants for want of a necessary legal element of a covenant that *678 runs with the land. 12 County Comm’rs v. St. Charles Assocs. Ltd. P’ship, 366 Md. 426, 454, 784 A.2d 545, 562 (2001) (quoting Mercantile-Safe Deposit & Trust Co. v. Mayor & City Council of Baltimore, 308 Md. 627, 632, 521 A.2d 734, 736 (1987)) (“[T]he four elements necessary to create a covenant that can run with the land [are]: ‘(1) the covenant “touch and concern” the land; (2) the original covenanting parties intend the covenant to run; [ ](3) there be some privity of estate[;] and [ ](4) the covenant be in writing/ ”). There is also no question that the law of Maryland has long-recognized properly created restrictive covenants as permissible encumbrances on land. See, e.g., Miller v. Bay City Prop. Owners Ass’n, 393 Md. 620, 632-33, 903 A.2d 938, 945 (2006) (cataloging cases); Colandrea, 361 Md. at 398, 761 A.2d at 913; Steuart Transp. Co. v. Ashe, 269 Md. 74, 88, 304 A.2d 788, 796-97 (1973) (citing McKenrick v. Sav. Bank of Baltimore, 174 Md. 118, 128, 197 A. 580, 584-85 (1938)); Markey v. Wolf, 92 Md.App. 137, 148, 607 A.2d 82, 88 (1992) (citing Jones v. Northwest Real Estate Co., 149 Md. 271, 280-81, 131 A. 446, 450 (1925)); see also Gnau v. Kinlein, 217 Md. 43, 48-49, 141 A.2d 492, 495 (1958); *679 Turner v. Brocato, 206 Md. 386, 352-53, 111 A.2d 855, 864 (1955); Middleton Realty Co. v. Roland Park Civic League, 197 Md. 87, 97, 78 A.2d 200, 205 (1951); Oak Lane Corp. v. Duke, 196 Md. 136, 139, 75 A.2d 80, 81 (1950); Levy v. Dundalk Co., 177 Md. 636, 647, 11 A.2d 476, 481 (1940).

A. The Legal Standard for Determining Challenges to the Ongoing Validity of Restrictive Covenants

The primary dispute in this ease is the proper legal standard for assessing the continuing vitality of a restrictive covenant that facially has perpetual existence. Before addressing that question directly, we first shall recount the manner in which restrictive covenants are read and interpreted generally by Maryland courts. In Belleview Construction Co. v. Rugby Hall Community Ass’n, 321 Md. 152, 157-58, 582 A.2d 493, 495-96 (1990), we said:

In construing covenants, “[i]t is a cardinal principle ... that the court should be governed by the intention of the parties as it appears or is implied from the instrument itself.” The language of the instrument is properly “considered in connection with the object in view of the parties and the circumstances and conditions affecting the parties and the property____” This principle is consistent with the general law of contracts. If the meaning of the instrument is not clear from its terms, “the circumstances surrounding the execution of the instrument should be considered in arriving at the intention of the parties, and the apparent meaning and object of their stipulations should be gathered from all possible sources.”

If an ambiguity is present, and if that ambiguity is not clearly resolved by resort to extrinsic evidence, the general rule in favor of the unrestricted use of property will prevail and the ambiguity in a restriction will be resolved against the party seeking its enforcement. The rule of strict construction should not be employed, however, to defeat a restrictive covenant that is clear on its face, or is clear when considered in light of the surrounding circumstances.

The courts seem to have generally recognized that there is no public policy against a fair and reasonable construction, *680 in the light of surrounding circumstances, of restrictions designed, in general, to accomplish the same beneficial purposes as zoning. The courts, it would seem, are under a duty to effectuate rather than defeat an intention which is clear from the context, the objective sought to be accomplished by the restriction and from the result that would arise from a different construction.

(citations omitted). This explication of the method of construing restrictive covenants has been accepted as the standard in Maryland. SDC 214, LLC v. London Towne Prop. Owners Ass’n, 395 Md. 424, 434, 910 A.2d 1064, 1069-70 (2006); Lowden v. Bosley, 395 Md. 58, 67, 909 A.2d 261, 266 (2006); Miller, 393 Md. at 634-35, 903 A.2d at 946-47; Colandrea, 361 Md. at 400-01, 761 A.2d at 914. In particular, our recent cases have identified Belleview as the seminal case addressing the evolution of our covenant jurisprudence from a purely strict construction approach to that of a reasonableness approach. See, e.g., SDC 214, LLC, 395 Md. at 434, 910 A.2d at 1070; Lowden, 395 Md. at 67, 909 A.2d at 266; Miller, 393 Md. at 634-35, 903 A.2d at 946-47; Markey, 92 Md.App. at 150-52, 607 A.2d at 88-89; see also St. Charles Assocs. Ltd. P’ship, 366 Md. at 446-48, 784 A.2d at 557-58.

The essential difference between the “competing” principles of construction is revealed when employed to construe an ambiguous restrictive covenant. Strict construction requires that an ambiguous covenant be read narrowly in favor of the free alienability and use of land without regard for extrinsic evidence bearing on the intent of the parties. Steuart Transp. Co., 269 Md. at 87-89, 304 A.2d at 796-97; Norris v. Williams, 189 Md. 73, 76, 54 A.2d 331, 332-33 (1947); Whitmarsh v. Richmond, 179 Md. 523, 527, 20 A.2d 161, 163 (1941) (citing Ferguson v. Beth-Mary Steel Corp., 166 Md. 666, 672, 172 A. 238, 240 (1934)). On the other hand, reasonable construction permits the consideration of the circumstances surrounding the adoption of the ambiguous covenant to effectuate the ascertainable intent of the parties. SDC 214, LLC, 395 Md. at 434, 910 A.2d at 1069-70; Lowden, 395 Md. *681 at 67, 909 A.2d at 266; Miller, 393 Md. at 634-35, 903 A.2d at 946-17; Colandrea, 361 Md. at 400-01, 761 A.2d at 914. The rule of reasonable construction has not replaced the rule of strict construction, but has been engrafted onto it. Markey, 92 Md.App. at 164, 607 A.2d at 95. Thus, in construing an ambiguous covenant, courts should consider extrinsic evidence relating to the intent of the parties, but, should that fail to cast sufficient light on the analysis, the rule of strict construction is engaged. Belleview, 321 Md. at 158, 582 A.2d at 496.

Extrinsic evidence is only utilized when the intent of the parties and the purpose of a restrictive covenant cannot be divined from the actual language of the covenant in question, necessitating a reasonable interpretation of the language in light of the circumstances surrounding its adoption. SDC 214, LLC, 395 Md. at 434-36, 910 A.2d at 1070-71 (refusing to employ the rule of reasonable construction when no ambiguity was present in the restrictive covenant and applying the plain language of the covenant); Miller, 393 Md. at 634-35, 637, 903 A.2d at 946-47, 948 (outlining the evolution of the reasonable construction rule and foregoing its application in construing a covenant because the “words used [were] clear and unambiguous”); see also St. Charles Assocs. Ltd. P’ship, 366 Md. at 447, 784 A.2d at 557-58 (quoting Markey, 92 Md.App. at 153, 607 A.2d at 90) (“In interpreting words used to create restrictions, the court should endeavor to ascertain the real purpose and intention of the parties and to discover the purpose from the surrounding circumstances at the time of the creation of the restriction, as well as from the words used.”) (emphasis removed); Belleview, 321 Md. at 157-58, 582 A.2d at 495-96 (stating that if an instrument is not clear from its terms that the wider circumstances should be considered to ascertain the intent of the parties and only then, if the ambiguity is not so resolved, should the instrument be construed strictly).

1. The Purpose of the Covenants

As our cases direct, we begin our analysis of whether the Covenants in this case remain valid and enforceable with an examination of the Covenants’ purpose as indicat *682 ed by their actual language. SDC 214, LLC, 395 Md. at 433, 910 A.2d at 1069; Miller,