Community Covenant Alienation Restraints and the Hazard of Unbounded Servitudes
Real Estate Law Journal, Vol. 42, No. 4, 2014
43 Pages Posted: 20 Jun 2014
Date Written: June 19, 2014
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.
Historically, most restrictions on alienation contained in community covenants have been upheld based on freedom of contract rationale, but courts have struck down some such restrictions as unduly limiting an owner's economic interest in the property. When a restriction significantly hinders an owner's ability to make the trapped value of the real estate liquid, courts are more likely to deem the restriction “unreasonable” and refuse its enforcement. Other sorts of limitations — including those that increase the costs of transfer or constrain an owner's choice of transferee — are usually not invalidated.
Today, one of the most common alienation restrictions in private communities is a leasing limitation. Although courts purport to police such restrictions for unreasonableness, the near uniform judicial validation of leasing restrictions does not adequately protect the economic interests of owners.
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