Freedom of Contract and the Endangered Right to Transfer
95 Pages Posted: 25 Aug 2013 Last revised: 19 Sep 2013
Date Written: August 23, 2013
One-fifth of all Americans today live in privately governed, common interest communities (CICs). By definition, property in a CIC is subject to restrictions on use, however many CIC properties are also constrained by restrictions on transfer. Owners may not be able to freely sell or lease their property because of limitations in the community’s covenant regime. Such restrictions on transfer increase the economic vulnerability of communities and their members and compromise owners’ property rights. Proponents of such restrictions cite countervailing, albeit amorphous, community interests (such as harmonious neighborhoods and property values) to justify alienation controls. Legitimate neighborhood concerns could be addressed directly through rules governing use, and therefore these goals do not generally justify restrictions on transfer.
Courts take a hands-off approach with respect to the content of CIC covenants, reasoning that since these covenants are private contracts, freedom of contract mandates their enforcement. But CIC covenants differ from voluntary private contracts in important ways, making deferential enforcement in the name of contract policy unwarranted. Covenants that run with the land are specifically enforceable and bind subsequent owners of the property, potentially in perpetuity. CIC covenants are contracts of adhesion, made up of completely non-negotiable, recorded terms bundled into home acquisition. Developers and lenders generally prescribe the content of such covenants, and they may not reflect community desires or values. Yet most courts reflexively uphold covenant transfer restraints based on freedom of contract principles without fully vetting implications for individual autonomy and market efficiency. This approach is unwarranted.
Free alienability preserves owner autonomy and stimulates market efficiency. Barriers to transfer perpetuate neighborhood segregation, adversely impact minority groups, and can even imperil community financial stability. Legitimate neighborhood concerns regarding maintenance and behavior are better directly controlled through community use regulations rather than through alienation restraints. To promote the still-compelling policies behind free alienability of property, courts should invalidate covenant restrictions that unjustifiably constrain the right to transfer, particularly when the same community objectives could be accomplished through less intrusive means.
Keywords: common interest community, alienation restraint, free alienability, freedom of contract, contract of adhesion, servitude, real covenant, CICs, Fannie Mae, Freddie Mac, racial restrictions, discrimination, property rights, civil rights, cost-benefit, efficiency, contract, property, owners occupancy
JEL Classification: K1, K10, K11, K12
Suggested Citation: Suggested Citation