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Hensley v. Gadd

Supreme Court of Kentucky

November 15, 2018




          COUNSEL FOR APPELLEES/CROSS-APPELLANTS: Carroll Morris Redford III Elizabeth C. Woodford MILLER, GRIFFIN, & MARKS, P.S.C.



         Restrictive covenants governing the use of real property are enforceable according to their terms. The issue we must determine in this case is whether the Garrard Circuit Court erred enforcing Deed of Restrictions for Woodlawn Estates Subdivision Section II, by granting judgment in favor of Don Hensley against Keith A. Gadd and JHT Properties, LLC[1] on the basis that Gadd was renting private residences in the Subdivision as short-term vacation rentals in contravention of restrictions on commercial use of property. We hold that the trial court did not err, and we therefore reverse and vacate so much of the Court of Appeals' Opinion as reversed the trial court's judgment. We, however, affirm the Court of Appeals insofar as it affirmed the trial court's dismissal of Gadd's counterclaim for harassment.

         I. Factual and Procedural Background.

         In the early 1990s, Hensley and his wife, Marsha, developed the Subdivision as a lakeside development on Lake Herrington. The Hensleys reside in the Subdivision and own several properties there. As a part of the development, they executed and filed Deed of Restrictions Lots 1-15 Woodlawn Estates Subdivision Section II.[2] For purposes of our review, the significant provisions of the Deed of Restrictions are

1. Lots 2 thru 15 shall be known and described as single family residential lots and shall be used only for residential purposes. Structures erected thereon shall be designed for and occupied by one family; no more than one residential structure shall be erected on each lot.
2. Lot 1 shall be known and described as commercial lot and may be used only for single family, multi-family or commercial purposes. Commercial use shall be limited to food stores, marinas, offices, hotels, restaurants and similar retail of [sic] professional businesses; no wholesale, industrial or manufacturing activities shall be permitted.
13. No trade, business, or profession of any kind shall be carried out upon any residential lot nor shall anything be done thereon which may become an annoyance or a nuisance to the neighborhood [.]
14. No sign for advertising or for any other purpose shall be displayed any place on any residential lot or on any residential structure on any lot except one sign for advertising the sale or rental thereof[.]

         Keith Gadd owns Lot 3 in the Subdivision, and JHT owned Lot 2. No question exists but that both lots were covered by the Deed of Restrictions.

         As found by the trial court, Gadd advertised the properties for short-term recreational residential use, placing ads on using the phrase "vacation rental per night". The ads listed a nightly rental of $375 for Lot 2, and $300 for Lot 3. Ads on advertised for nightly and weekly renters, with conditions of a 10% tax rate and a cleaning fee of $125.

         In October 2013, Hensley filed a complaint against Gadd alleging violations of the restrictions and that Gadd's renters had created an "annoyance and or nuisance" to other owners in the neighborhood. Gadd answered and filed a counterclaim for harassment. KRS[3] 525.070, KRS 446.070.

         The parties initially filed cross-motions for summary judgment in January 2014, which the trial court denied. After a period of discovery, the parties again filed cross-motions for summary judgment. At a hearing on the motions, the parties advised the court that all issues had been addressed by deposition and agreed for the trial court to try the case on depositions.[4] CR[5]43.04(1). The trial court did so, and, on November 20, 2015, issued its Findings of Fact, Conclusions of Law and Judgment.

         In addition to the matters set forth above, the trial court noted the complaints of other residents concerning Gadd's renters: occasional excessive noise, vehicles parked on the street, possible overuse of septic tank causing offensive odors and possible conduct damaging the Subdivision's golf course property. The trial court noted the communications between Hensley and the other deponents concerning complaints about noise, traffic, septic tanks, and potential damage that short-term rentals could have on the deponents' property values. The trial court did not make a finding that Gadd's renters and their activities constituted "an annoyance or a nuisance to the neighborhood" within the meaning of Restriction 13.

         The trial court summarized Hensley's testimony, as follows:

[Hensley's] intention when imposing the restrictions was to limit rentals to single families for longer terms. He acknowledged that the specific term was not stated in the restrictions but indicated that he felt like a six month rental or a year rental would be a reasonable length of time. ... He acknowledged that "single family" could include members of an extended family, as well as guest of that family. . . . [W]hen asked about whether a monthly rental would be okay, he acknowledged the ambiguity in the restrictions but insisted that he did not intend for rentals to be made only on a daily basis. ... He described the overnight rentals as giving the properties a "motel atmosphere" inconsistent with the neighborhood.

         The trial court summarized the factual statements in Gadd's affidavit that he personally used the Lots approximately three months each year and denied any business use. He stated that various governmental agencies have investigated the neighbors' complaints and found no violations.

         The trial court then examined the restrictions and recent case law from the Court of Appeals in which similar restrictions and factual situations were present. Barrickman v. Wells, No. 2013-CA-001578-MR, 2015 WL 2357179 (Ky. App. May 15, 2015); Vonderhaar v. Lakeside Place Homeoumers Ass'n, Inc., No. 2012-CA-002193-MR, 2014 WL 3887913 (Ky. App. Aug. 8, 2014); Hyatt v. Court, No. 2008-CA-001474-MR, 2009 WL 2633659 (Ky. App. Aug. 28, 2009). The court concluded that Gadd's use of the property, specifically short-term rentals, constituted a business in violation of Restriction 13, and that Hensley had not waived enforcement of the restrictions. The trial court entered judgment in favor of Hensley, enjoined Gadd from further violation of the applicable restrictions, awarded Hensley costs, denied Hensley's request for punitive damages, and dismissed Gadd's harassment counterclaim.

         Gadd appealed, as a matter of right, to the Court of Appeals. That court determined that the restrictions were ambiguous in that they permitted rentals, but stated no time limit on those rentals, construed the restrictions against Hensley as the grantor, and noted other residents operated business from their homes (as supporting the imprecision of the restrictions). Ultimately, the Court of Appeals concluded that, in case of doubtful meaning, restrictions should be construed in favor of the free use of property. Slip op. at 16 (citing Connor v. demons, 308 Ky. 9, 11, 213 S.W.2d 438, 439 (1948); Glenmore Distilleries Co. v. Fiorella, 273 Ky. 549, 556, 117 S.W.2d 173, 176 (1938)). As to Gadd's counterclaim of harassment, the court concluded that he had not proven harassment. The court therefore reversed the trial court's judgment enjoining Gadd's short-term rentals of the property, but affirmed dismissal of Gadd's counterclaim. Hensley moved this Court for discretionary review, and Gadd similarly requested discretionary review, both of which we granted.

         II. Standard of Review.

         The trial of this matter was by deposition by agreement of the parties under CR 43.04(1). In pertinent part, the rule provides "the court may upon motion or upon its own initiative, and with due regard to the importance of presenting the testimony of the witnesses orally in open court, order the testimony to be taken by deposition upon any issue which is to be tried by the court without a jury." Id. The trial court essentially conducted a bench trial. CR 52.01 states "[i]n all actions tried upon the facts without a jury . . . the court shall find the facts specifically and state separately its conclusions of law thereon and render an appropriate judgment." "[I]n granting or refusing . . . permanent injunctions the court shall similarly set forth the findings of fact and conclusions of law which constitute the grounds of its action[.]" Id. Furthermore, "[f]indings of fact, shall not be set aside unless clearly erroneous, and due regard shall be given to the opportunity of the trial court to judge the credibility of the witnesses." Id.[6]

         Interpretation or construction of restrictive covenants is a question of law subject to de novo review on appeal. Triple Crown Subdivision Homeowners ...

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