Secor v. Knight

In 1978, Jesse and Michael Knight (defendants) met with a subdivision sales agent, David Goates, to discuss the Knights’ interest in building a home with a basement apartment on a subdivision lot. Goates said that the developer wanted single-family homes in the subdivision, but implied that having a separate basement apartment wouldn’t be a problem. Goates told the Knights that any basement apartment would be at their own risk, but people in other subdivisions had built basement apartments in violation of use restrictions without any problems. The Knights decided to buy a lot and entered an earnest-money agreement or sale contract in April 1978. At the time the Knights signed the earnest-money agreement, the area was zoned for multiple units, and the developer had not recorded any restrictive covenants. The earnest-money agreement itself contained no reference to any restrictive covenants. Over two months later, restrictive covenants restricting the subdivision to single-family homes were recorded. The Knights were not notified of this action. When the Knights closed on their lot in June 1978, there was no discussion of the restrictive covenants. However, the Knights did receive a warranty deed that referred to “restrictions of record.” The Knights built a home with a basement apartment, and rented out the apartment. Subdivision residents (plaintiffs) sued for an injunction prohibiting the Knights from renting the apartment in violation of the subdivision’s use restrictions. The trial court found for the plaintiffs, and the Knights appealed. On appeal, the Knights argued that any modification of the earnest-money agreement required the Knights’ consent. The plaintiffs argued that, under the doctrine of merger, the earnest-money agreement was superseded by the deed. The Knights asserted that two possible exceptions to the merger doctrine applied: fraud and collateral rights in the contract of sale.