Monday, January 02, 2012

Do Americans consider CC&Rs Contracts, Revisited

I have been thinking about an issue raised in a post by Fred Pilot recently, and responded to by Tyler Berding in a comment. I will do both of them the injustice of oversimplifying their arguments so I can rush to make my own, and I invite them (and others) to reply and continue the conversation.

Fred argues that the American public generally does not consider CID declarations and other governing documents to be contracts. Fred has long held that Americans do not accept the basic concept of residential private governance. He believes that the general home-buying public rejects the notion that there is any real legitimacy in the decisions made by condo associations and HOAs. If I understand his position correctly, he is saying that Americans do not consider CID documents and decisions to be legitimate either in a public or a private sense. They are not viewed as the actions of de facto quasi-local governments, and they are not viewed as obligations people are bound to by private contract. They fall between two stools, as the saying goes.
Tyler responds that they are contracts, period, because that is what courts universally say they are. This is in large part beyond dispute: like it or not, condo associations, HOAs, and housing cooperatives are recognized by federal and state law, and CC&Rs and other CID governing documents are fully enforceable, subject to a few exceptions, in every court in the nation. What, then, is the point of claiming that people reject them as illegitimate? Isn’t that akin to saying that you reject the law, which you have to obey regardless of how you feel about it?
This is an important conversation, and I have been thinking about it for many years. At the outset, it has to be pointed out that it is logically possible for both positions to be true. Perhaps the American public believes that homeowner and condo associations have no legitimacy, but they obey their rules for the most part simply because they know those rules are enforceable. However, I think the truth is more complicated than this.
I agree with Tyler, as I must, that CID governing documents and the decisions based on them are legally enforceable under contract and real property law. This has been true for many decades, even centuries, and in my first book on this topic I relate some of the early legal history that laid the foundation for enforcing these documents.
However, I think that Fred raises an important point. Is it true, as he claims, that these documents and decisions have no legitimacy in the eyes of the public, notwithstanding their enforceability? And if this is true, does it imply that there could conceivably be sufficient opposition to CID regimes to bring about dramatic change, such as local government opposition to CID construction, developer decisions to move toward other ways to build, market rejection of CID housing, judicial rulings that undermine CID power, or state legislative action that would reverse the overwhelming trend in favor of CID construction?
How would we measure the level of rejection of the concept of CID living? How about the following questions:
1. Do people keep buying them? Yes. This is the predominant form of new housing construction and until the market collapsed people couldn’t buy units in condo associations and HOA fast enough.
2. Do people generally obey their rules and make their assessment payments without having to be sued? Yes. You can dispute the meaning of “voluntary” if you like, but the level of voluntary (not specifically coerced) compliance with CID regimes is very high. When the HOA president tells you to stop parking your car in the driveway overnight, nearly everybody moves it into the garage. Period. End of story.
3. Is there nonetheless a substantial amount of conflict, and even litigation, over fundamental issues, such as obeying rules and paying assessments ? By all accounts, yes, especially when associations tread on areas that are perceived as not generally within the purview of public local governments and within the scope of owner dominion and control. This problem is well documented in the literature.
4. Have some owners organized themselves outside their association structure to oppose particular actions of their association, to reform the laws generally, and even to abolish CID housing? Yes. Lawyers and property managers routinely portray these folks as chronic malcontents, social misfits, and neighborhood cranks. Such people do exist, and I have met some of them. But if you have met as many “Pink Flamingo” movement people as I have, you cannot help but see that many of them are just ordinary home owners who have been driven into opposition by lawless, self-serving, arbitrary, and/or predatory behavior on the part of their BODs and the professionals who advise them. I believe that the lack of governmental oversight of CID activities leads to a whole lot of unnecessary problems.
5. Is it hard for many associations to find sufficient volunteers to serve on BODs? Yes, and it is said all the time in industry conferences and publications. This is beyond dispute, and it is a major problem, because it is hard to imagine how CIDs can exist without a sufficient supply of volunteers.
6. Have state legislatures become involved in law reform out of concern (among other things) for the way associations sometimes treat owners, and the general level of discontent they believe exists? Yes, in a number of states, and over a number of issues, including assessment collection and foreclosure, rule-making, elections, access to records, budgets, meetings, architectural review, and on and on.
7. Is the industry concerned about the public perception of CID living? Undoubtedly, and they spend a whole lot of time trying to convince the press and the public on that score, including paying for surveys that purport to show how much people like their associations. Would they bother to do this if the underlying point were really so obviously true? I think not.
So, on the specifics of CID life I suppose there is evidence on both sides, but that isn’t the end of the argument. What do we know about American political culture that would help us answer this question? I think several things need to be pointed out. Public opinion polling over the years makes some things abundantly clear.
1. Americans’ support for the institutions of national government goes up and down all the time, as measured by the best polling available. So what? That doesn’t mean we reject the concept of Congress (currently at about 12% approval), or the Presidency, or the Supreme Court, or representative democracy. The same is true for condo and HOA decisions. If things are going well, we accept and approve. When things are bad (special assessments, litigation, etc.) we get mad. But…see #2 below…
2. For the most part, Americans are an obedient, rule-following, moralistic, pious lot who do what they are told by people in authority, regardless of whether it is the private mall cop or the local police. I do not expect widespread disobedience in CIDs. I do expect huge financial problems, but that is another issue. I realize that there are constitutional questions to be raised about the use of private entities to do public tasks. I have written about it at some length. However, most Americans are not bothered by such issues, so they do not reject private governance out of hand.
3. The American public overwhelmingly believes in the sanctity of private property and the obligations of contract. They believe that individuals are largely responsible for their lot in life. In fact, that is one of our distinguishing characteristics as a people. Nowhere on earth is there this obsession with competitive individualism. (This is why it is so easy for Fox News and Rush Limbaugh to blame the entire subprime mortgage crisis on Barney Frank and home buyers who got greedy and bought more house than they could afford—a claim that is so far beyond ridiculous that it can only be called a huge lie.) People here believe that if you bought a property with 200 pages of documents attached, then a deal is a deal and you are on the hook for obeying all of it. Sure, you can talk about adhesion contracts, and I do—but most people really
And when I add the CID-specific facts to the things we know about American political culture, I conclude that for the most part, despite having some reservations and misgivings about privatized local government, the overwhelming majority of Americans will continue to act as if they believe condo and HOA actions are legitimate contracts. Even when they go into conflict with their BOD they will do it in the language and context of contract law. I think, as I argue in my new book, that this form of housing is now part of the fabric of local governance, for better or worse.


Fred Pilot said...

This discussion fails to distinguish between power and authority. HOA governance most certainly has inherent power as you point out. The problem is that many people don't accept the exercise of that power because they don’t recognize the underlying moral authority of the HOA to exercise that power for some greater good. Instead, they frequently view it as the personally motivated machinations of power hungry board members and the economically driven actions of HOA managers and attorneys. Government depends not just on explicit law for its authority but also an implicit social and moral contract between government and its citizens. That social contract, I would submit, has not been present to any meaningful extent in Privatopia and has grown increasingly frayed as the article I cited suggests.

Finally, while the courts may equate taking property burdened with covenants as entering into a contractual relationship, this act does not constitute forming a contract in the mind of the average homebuyer. The only contracts they have in mind when purchasing a home is the one with the seller to pay for the property and if financing, with the lender to pay back the loan on the agreed upon terms. It’s one thing for the courts to call an action forming a contract. But if the parties to that “contract” don’t see themselves entering into the contractual obligation and mutually understand the terms of that contract, then it’s no surprise they feel no obligation to honor it.

Anonymous said...


On what do you base your assertion that "people don't see HOA convenants -- a real property contrivance -- as contracts"? Do you have polling data you're not sharing with us?

If you want to argue that CC&Rs don't carry the moral authority and legitimacy of what most people think of as a contract, I agree with you -- along with everything else you have said.

But as Tyler Berding correctly pointed out, courts will and do enforce them as such. ie, the State will enforce them at gunpoint. And that is a a problem that needs to be addressed, especially when words like "contract" and "debt" don't mean what most people think they do.

Law professor Benjamin Barton has demonstrated that the courts make rulings designed for the benefit of the legal profession. See "Do Judges Systematically Favor the Interests of the Legal Profession?" (SSRN # 976478 , October 2007) and this 12 minute interview (YouTube v=Hbs_3lePAjE , January 2011) promoting his book on the subject.

And as far at the courts and legislatures are concerned, HOAs have both power and authority. And that needs to be changed.

Anonymous said...

Ten years ago, courts required affirmative evidence of agreement to form a contract. No court had enforced a shrinkwrap license, much less treated a unilateral statement of preferences as a binding agreement. Today, by contrast, it seems widely (though not universally) accepted that if you write a document and call it a contract, courts will enforce it as a contract even if no one agrees to it.

-Mark Lemley
"Terms of Use" (2006)

Nearly all of this stuff is enforceable, as many an HOA or condo unit owner has discovered, and it makes citizens relatively powerless....The law calls these boilerplate documents "contracts of adhesion," but the days are long past when judges were willing to throw them out because they were drafted by one party and imposed on the other, there was gross inequality of bargaining power, and there was no real assent to the terms. Now they are deemed essential to the free flow of modern commerce.

-Even McKenzie
"The Fine Print Society" (December 22, 2011)

Fred Pilot said...

"I think, as I argue in my new book, that this form of housing is now part of the fabric of local governance, for better or worse."

I respectfully suggest that housing and governance not be conflated. They are not the same thing.

Mike Reardon said...

You guys miss the real issue.

Our "contracts" are worthless because the BOD only recognizes them when it suits them.

HOA lawyers trumpet the whole "contract" baloney, but are in the business of enforcing the arbitrary will of the folks who write the checks.

Homeowners can either spend their entire equity in court asserting their rights, or god help them, what they actually agreed to, or keep their heads down and hope they "go after" someone else.

Fred Pilot said...

You speak to the issue of the legitimacy of private local government in your recently published book, Beyond Privatopia. Excepted from p. 62:

"Municipal governments operate within the limits imposed on governments by constitutional law and the American political culture and derive their legitimacy from notions of liberal democracy. Common interest housing developments do not respect those limits and rest on an argument about efficiency rather than legitimacy."

So there!

Fred Pilot said...

From "Beyond Privatopia," p. 95:

"....owners may be unwilling to follow the policies laid down by their community leadership, and conflict can result because of a lack of private government legitimacy."