Is a Homeowners' Association a Contract?

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The Colorado Freedom

Is a Homeowners' Association a Contract?

[Brian Rachocki here replies to two articles about homeowners' associations. The first is a short Freedom Update by Ari Armstrong. The second is an article by Joe Johnson with Armstrong's reply. Also, the state LP issued a release that mentions the issue. Following Rachocki's comments, Armstrong replies. Posted February 26, 2003.]

I don't agree with the notion that a covenant is the same as a contract.

Contracts are among specific, pre-identified individuals, each agreeing to do a specific deed or offer a specific good in exchange for a consideration, within a specific time. NB, I am not a lawyer, nor do I play one on TV, but this is my understanding of a contract, and what most other non-lawyers would describe as one.

A covenant fails on several of these criteria.
---It's perpetual.
---It's between a corporation and a tract of real property, becoming enforceable on the owner of the real property. I am not comfortable with a corporation being fully recognized as a person before the law, am even less so with a parcel of land being so recognized.

Covenants also appear to confer rights in my property to others, as a way to limit externalities that neighbors commonly impose on each other. Proponents of the free market would ordinarily think this a good thing, I don't. Every activity carries some externalities. The externalities of a distasteful paint color, for example, are in my view too small to try to quantify let alone try to limit. The right approach is to tell the busybody to mind his own g-ddamned business and keep his dog's sh-t off my lawn.

The "democratic" idea of the HOA also rings hollow... most are set up as dummy corporations by the companies who have bought and developed the land, and are about as democratic as the corporations set up by the Brits and the Dutch to develop the Western Hemisphere. Getting a seat on one requires either a non-working spouse who has no family or life, or a busybody of the type that delights in, uh, fining people for distasteful paint colors.

My $96 per year, paltry though that is for this area, was supposed to include the maintenance of a swimming pool in our development. Uh oh, the pool was improperly built, it has cracked, will be too expensive to repair, so we're shutting it down. Will the HOA fees be reduced because the pool expenses are no longer incurred? Of course not. And in spite of HOA rules, somebody's dog still sh-ts in my lawn. I'm more likely to be fined for the sh-t than the owner. In short, I'm paying for services (limitation of externalities, as well as outright community services) that are not being rendered, and I have little or no recourse.

And if you don't like the HOA and want to relieve yourself and your neighbors of the covenant, you can. In the year 2010.

Armstrong Replies

Rachocki conflates land covenants and homowners' associations, but the two are not quite the same thing.

In Economic Analysis of Law, Judge Richard Posner describes "restrictive covenants" as "restrictions [in a deed of sale] against land uses that would reduce the net value of the property as a whole. Such restrictions run with the land, which means that they are (if recorded) enforceable against any future owner of the land, as well as the present owner..." (p. 67). Posner notes one problem with such covenants is they are "inflexible in the face of changes that may alter the relative values of conflicting land uses." While the covenant is active, Posner notes any deviation requires unanimous consent among all property owners who fall under the covenant (67-8). Posner continues:

Some covenants provide... that they will expire after a certain number of years unless renewed by majority vote of the affected landowners. And courts may refuse to enforce a restrictive covenant on the ground that it is obsolete...

This is a little different from a homeowners association. Posner explains:

The inflexibility of restrictive covenants has led increasing numbers of developers to establish homeowners' associations empowered to modify the restrictions on the uses to which they may put their property. This method of coping with the problem of high transaction costs [in changing land uses] resembles another method, the business firm...

It's not quite correct, then, to say that either a covenant or a contract is "perpetual," though both are indefinite. That is, both may continue perpetually, but neither must. Another example of an indefinite, legally binding agreement is marriage. (Would Rachocki argue against marriage on the grounds that it is "perpetual?")

A homeowners' association is agreed to unanimously. Usually a developer purchases a whole plot of land, subdivides it, and sells it with an HOA built in. Every single purchaser signs paperwork agreeing to abide by the rules of the HOA.

Rachocki believes some types of externalities ought not be subjected to contract. But libertarian theory holds people should be allowed to contract voluntarily. Those who dislike a particular set of rules are free to avoid signing that contract.

The fact that HOAs are typically democratic -- following the initial unanimous contract (that's the key point) -- is not a justification for HOAs, but merely a description of how they are typically set up. My experience with my HOA does not bear out Rachocki's claims. I personally know several members of my HOA board, they all work, they all have lives, and they do not delight in fining others.

However, I am exceedingly glad fines may be issued. In my HOA, fines have successfully encouraged people to not blare loud music in the middle of the night or leave trash in the common areas. HOA fees also mean I don't have to deal with maintaining the yard, painting the exterior of my residence, keeping up the pool (which functions perfectly), etc.

It is unfortunate that Rachocki has had a less pleasant experience with his HOA. However, he has exactly the same recourse available to every other party of every other contract. Every single day, people have problems with contracts. Is that an argument for abolishing contracts?

Another writer seemed to conflate HOAs with zoning laws. As I've mentioned, zoning laws impose rules on unwilling property owners by the state, and so they violate libertarian principles. Posner describes HOAs as "private solutions to the problem of conflicting land uses" (68). A non-private or "public" solution, writes Posner, is zoning.

In an interview in the Austrian Economics Newsletter (Summer 1998), Prof. Randall G. Halcombe, an adjunct scholar of the Ludwig von Mises Institute argues:

A restrictive covenant is a contract among owners which allows them to guarantee that property will be used in a certain way. When I bought my house, along with it came a long list of regulations drawn up by the homeowners association. They aren't government regulations; they are private and designed to keep property values high. These covenants are increasingly common and very efficient market means of insuring the quality of life. The key is that they are entered into voluntarily. They are used in areas where there is no zoning, but also in areas with heavy zoning restrictions.

And Murray Rothbard, a prominent leader of the Austrian School of Economics once known as "Mr. Libertarian," writes:

[I]n our title-transfer model, a person should be able to sell *not only* the full title of ownership to property, but also part of that property, retaining the rest for himself or others to whom he grants or sells that part of the title... [V]alid and enforceable would be restrictive covenants to property in which, for example, a developer sells all the rights to a house and land to a purchaser, *except* for the right to build a house over a certain height or of other than a certain design. The only proviso is that there must, at every time, be *some* existing owner or owners of *all* the rights to any given property. In the case of a restrictive covenant, for example, there must be *some* owners of the reserved right to build a tall building; if not the developer himself, then someone who has bought or received this right. If the reserved right has been abandoned, and no existing person possesses it, then the owner of the house may be considered to have "homesteaded" this right, and can then go ahead and build the tall building Covenants and other restrictions, in short, cannot simply "run with the property" forever, thereby overriding the wishes of *all* living owners of that property. (The Ethics of Liberty, p. 146)

Homeowners' associations as a type of "restrictive covenant" fits Rothbard's analysis nicely.

In another e-mail, Mark Call suggests the state might be encouraging more HOAs than the market otherwise would bear. This is possible, of course. However, I have seen no evidence of it. If such evidence were discovered, the proper response would be to call on the state to stop interfering with HOAs. Similarly, the fact that government tampers with prices does not mean prices should be abolished, it means government tampering with prices should be abolished.

In general, libertarians are not opposed to rules per se. They are opposed to statist rules imposed by force. The entire system of property rights libertarians embrace is basically a set of rules defining what people can do and what they can't do. Libertarianism isn't about abolishing rules: it's about trying to implement a specific set of rules we think is more just and more useful. HOAs are entirely compatible with those libertarian rules.

The Colorado Freedom