Thursday, November 11, 2010

Deed Restrictions and Covenants - are they worthwhile?

At a garage sale the other day, I purchased a copy of the Syracuse New Homes Guide from 1939.  It was an interesting read, from a number of perspectives.  For starters, back then, long-term 30-year mortgages were unheard of.  In fact, due to the depression, banks were just then starting to institute 10- and 15-year mortgages, government guaranteed.

And as you might expect, houses were fairly inexpensive back then, even "dream homes" in Sedgewick Farms.  And they were not all that big, either.  Less costly to buy, less costly to heat, and in most instances, the owner would own them outright long before retirement rolled around.  My, how times have changed.

The frontspiece contained an article from the then President of the Syracuse Board of Real Estate Agents, and the topic of his article was how modern housing communities were enhanced by the use of restrictive deed covenants, which insured that houses within a particular neighborhood would all be of a similar type and style, thus preserving value.

It was a compelling argument for the time, in a time long before spurious litigation and homeowner's associations, where zoning laws were lax and you could build a home, only to discover in five years that a rendering plant was to be built next door.  Restrictive deed covenants would insure that your home values would not be degraded by the poor choices of your neighbors.  In theory, anyway.

Of course, this was not my first exposure to covenants.  When I bought my first home in Virginia, I was chagrined to see it was encumbered with covenants that, in theory, would prevent me from selling my home to Jews or non-whites.  In fact, non-whites were not allowed to live in the neighborhood, in 1949, except as servants.  Mighty white of them.  Of course, while those odious covenants still were on the record books (they "run with the land" so to speak) they are not enforceable, due to subsequent Supreme Court decisions.

But this raises some issues.  Are covenants on a property desirable?  And are they enforceable?  And if so, how?  The following is based on my experiences in owning various pieces of property and in no way is an exhaustive review of the subject.  And since this is an area of law controlled by State Law, you should consult a local Real Estate Attorney about covenants on your property, what they mean, and how they are enforced.

Covenants can come in all shapes and sizes.  In Law School, we read about cases where a landowner tried to restrict use of his property by forbidding anyone from ever consuming alcohol on the property, in perpetuity.  Such covenants may sound silly, but if you want to open up a bar on that property, 50 years later, it could be problematic.

Other covenants are more prosaic - limiting what you can do with the property (commercial versus residential uses), how the property can be divided (if it can be divided) occupied, rented, or otherwise used, or what sort of structures can be built or installed (e.g., no trailer homes).  Usually, the general idea is to preserve property values by preventing owners within a development or neighborhood from using their property in a way that devalues the property values of adjacent properties which have similar covenants.

And while this might initially seem like a good idea to some, it can backfire to some extent, in a big way, by limiting the use of your property.  For example, if you live in a development which forbids commercial use of your property, suppose you decide to start a home-based business?  Suppose you decide to plant a truck farm and sell vegetables by the road?  Do these activities violate the covenants?  Perhaps.  What is clear is that the covenants do restrict your activities in this regard, particularly if they are vaguely or poorly drafted.

Similarly, a covenant that forbids placement of a "trailer or modular home" might be a good idea to prevent your neighbor from building a trailer park.  But today, many modern homes can be bought in modular form - often four, five or six modules tied together into a traditional home style.  As time progresses, no doubt such pre-fab construction techniques will increase in popularity.  But if you have a covenant that any home you build has to be "stick built" it limits your use of the land and also increases your costs dramatically.

And such covenants might not serve to prevent the sort of problems they were designed to prevent.  For example, in one development I am aware of, one owner has a "stick built" house that is a run-down eyesore.  A high-end modular home would be an improvement over his cobbled-together nightmare.  But according to the covenants, the former is forbidden while the latter is permissible.  In other words, you can try to encourage or control people's behavior through covenants (just as you can through zoning) but only to some extent.

Of course, some modern developments in large suburban areas (e.g., Reston, Virginia) have homeowner's associations which are the final arbiter of all design, taste, and even color choices.  Much ink has been spilled about angry homeowners who are cited for painting their front door a color that was not an approved choice.  But that is the nature of the beast - and if you sign up for such a scenario, you can't complain later on that it was somehow "unfair".

In examples like that, enforcement of covenants and the like are fairly easy to achieve.  Homeowner's Associations have enforcement mechanisms, usually in the form of fines (which can turn into liens, if not paid) for violations of various rules.  They also have to provide a "due process" to appeal such fines, of course, and as you might imagine, it ends up leading to a lot of hard feelings and eventual litigation.

But in other instances, enforcement of covenants is a little trickier.  One big self-enforcement mechanism is usually through banks.  Most banks don't want to lend money to buy a property where there are deed problems or other issues.  For example, banks shy away from homes without potable water or working septic systems for the simple reason that they are uninhabitable and thus difficult to rent or sell, should you default on the mortgage.  A covenant violation can be similarly problematic for a bank, as if you have a non-conforming structure on the property, you could, in theory, be forced to remove it, rendering the property significantly less valuable.

So violating a covenant is not something to take lightly or do intentionally, as it could make re-selling your property more difficult.

Other mechanisms of enforcement may also exist.  As noted above, a homeowner's association may be empowered to sue to enforce covenants.  Or, as I saw in one situation where there was no homeowner's association, any individual homeowner in the development could bring suit.  The latter could be a nightmare for a homeowner, as if you want to use your property in a way which violates or may violate a covenant, you would need to get approval from all the other property owners who have the right to sue under the covenants.  All it would take is one ornery neighbor or someone who doesn't like you to mess things up.

And that's where it gets nasty.  You see, once you empower your neighbors this way, covenants can be used to settle petty grievances or settle old scores.  Granted, zoning laws can work the same way.  For example, a neighbor wants to build an addition that requires a zoning variance.  It is a perfectly reasonable addition and an asset to the neighborhood, and only technically violates some zoning ordinance.  However, to get the variance, the neighbor needs to get a sign-off from adjacent property owners and sometimes a random property owner in the neighborhood (assigned by the zoning board).  As it turns out, that neighbor has an enemy - over something as silly as a dog pooping on their lawn or whatever.  So they don't get their variance, not because of the merits of the case, but because one crotchety old man hates life.

Similarly, with covenants, the opportunity exists for petty grievances and festering hatred to come to the forefront, as I have seen firsthand.  A neighbor asks for permission to use his property in a manner inconsistent with the covenants and is shouted down, not because of the nature of his request, but because of who he is and because of decades-old grievances.  It is not pretty.

There may be ways around such covenants, of course, and you should consult a Real Estate Attorney regarding these.  But most Attorney's you contact won't return your call for the simple reason that it is messy business and ripe for malpractice suits.  If the Attorney can't work magic with the covenants, chances are, they'll get sued.

I contacted two Attorneys on behalf of my neighbor who wanted to have a covenant removed from his property.  The answer was unclear, other than his neighbors (who harbored a grudge against him) could, in theory, sue him over the matter.  One Attorney noted there was a two-year window in which to bring such suits, which is perhaps one way of voiding the covenant.  As most neighbors are not going to be willing to spend the $10,000 or more to bring suit to enforce the covenant, it could be possible to simply do the act proscribed by the covenant, put all the neighbors on notice, and then wait two years.

But each case is fact-specific and also specific to your State's laws.  So consult an Attorney for more information.

Overall, I would shy away from properties with covenants on them, or properties with many covenants.  While in theory they are useful in preserving "neighborhood values", in reality they usually fail to accomplish this while merely inconveniencing owners.  Developers long dead try to control the actions of the living, which is never a good idea - just as trusts are usually a bad idea.  Conditions change over time, and what seemed like optimal use of a piece of land in 1940 might not be economically feasible in 2010.

If a property has a lot of covenants limiting its use, they can actually serve to devalue the property.  For example, a covenant not to subdivide can be fatal to property value, if you have a 20-acre parcel in a neighborhood of 1-acre lots.  While neighbors around you are developing your land, you are stuck with a white-elephant parcel that is also a property tax nightmare and not of much use to anyone, in a suburban environment.

Like owning a condo, or living on a private road, any instrument which limits or encumbers your rights to use a property can be a double-edged sword, and should be viewed with great skepticism.  While the goal of such devices is often to enhance property values, in many cases not only do they fail to protect owners from the stated harms (degradation of property values due to actions of adjacent owners) they may actually devalue the property themselves.  Think long and hard before attaching a covenant to a property you own, or before buying a property with many covenants.

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