## Facts

- In October 1984, David J. and Linda L. Donahue (sellers) agreed to sell their home to Glenn Richard and Penelope Feit (buyers).
- The sales agreement required the sellers to provide good/merchantable title and stated the property was sold subject to applicable building and zoning regulations.
- Before the sale, the sellers had renovated the property by converting the attached garage into living space.
- The City of Thornton had issued a building permit and certificate of occupancy that were conditioned on construction of a new detached garage to satisfy the city code’s enclosed off-street parking requirement.
- The sellers did not complete construction of the required detached garage.
- The sale closed in November 1984 by warranty deed, and the buyers lived in the home for about three years.
- When the buyers attempted to resell in 1987, the city notified them that the certificate of occupancy had been revoked (or would be revoked) because the property did not comply with the zoning/parking requirement.
- The buyers demanded that the sellers either build the required garage or rescind the sale; the sellers refused.
- The buyers could not obtain a variance and could not list or sell the property; the property later went into foreclosure.
- The buyers sued for breach of deed covenants (including the covenant against encumbrances) and for fraudulent concealment. After a bench trial, the court dismissed the warranty and quiet-enjoyment claims, found a breach of the covenant against encumbrances, and found David Donahue individually liable for fraudulent concealment. The sellers appealed.

## Issues

1. Whether an existing zoning violation—arising from the sellers’ failure to satisfy a condition attached to a permit/certificate of occupancy requiring construction of a garage—constituted an encumbrance that breached the deed’s covenant against encumbrances.
2. Whether the contract language stating the property was sold “subject to building and zoning regulations” barred or reduced the buyers’ encumbrance claim after delivery of the deed.
3. Whether the evidence supported fraudulent concealment by David Donahue, or instead showed only nonactionable nondisclosure/misrepresentation of law.
4. Whether the buyers could recover attorney fees as damages, and if so, which categories of fees were recoverable.

## Decision

- The Court of Appeals held that the pre-existing zoning violation and the city’s ability to require compliance constituted an encumbrance breaching the deed’s covenant against encumbrances.
- The court rejected the sellers’ reliance on the contract’s “subject to building and zoning regulations” clause because, upon closing, the deed governed the parties’ rights and obligations under the merger doctrine.
- The court affirmed the finding that David Donahue committed fraudulent concealment by failing to disclose the conditional nature of the occupancy approval and the garage requirement.
- The court approved the trial court’s benefit-of-the-bargain approach to damages on the encumbrance/fraud theories.
- The court ruled that attorney fees incurred in addressing the controversy with the City of Thornton could be recovered as consequential damages, but it reversed portions of the fee award (including fees tied to the foreclosure and the litigation itself) and remanded for recalculation limited to fees connected to the city dispute.

## Legal Principles

- An “encumbrance” includes any burden on real property that diminishes value or interferes with use and enjoyment; a pre-existing zoning violation requiring substantial corrective action, and exposing the owner to enforcement, can qualify as an encumbrance.
- General zoning ordinances, standing alone, are not encumbrances in a deed-covenant sense, but an existing violation at the time of conveyance may be.
- Under the merger doctrine, contractual provisions concerning title ordinarily merge into the deed at closing; after delivery and acceptance of the deed, the deed’s covenants control unless a contractual term is clearly preserved.
- Fraudulent concealment may be based on nondisclosure of a material property-specific condition (such as a conditional occupancy approval and an unperformed construction obligation) when the seller knows the facts and fails to disclose them to induce the sale.
- Attorney fees are generally not recoverable absent a recognized basis, but fees incurred to address third-party problems caused by the defendant’s wrongful conduct may be recoverable as consequential damages; fees for foreclosure proceedings or for prosecuting the lawsuit are not recoverable on that theory.

## Conclusion

The court treated the sellers’ unfinished, city-required garage obligation—embedded in a conditional permit/occupancy approval and existing at conveyance—as an encumbrance that breached the covenant against encumbrances, held the deed controlled despite the contract’s “subject to zoning” language, affirmed fraud liability against David Donahue for concealing the material condition, and allowed only city-related attorney fees as consequential damages while remanding to reduce the fee award accordingly.


Feit v. Donahue, 826 P.2d 407 (1992)