Tuesday, January 3, 2012

Excerpts From an Ongoing Debate

Do owners believe CCRs are contracts?
And why that doesn’t matter! 
By Tyler P. Berding, JD., Ph.D.

Editor’s Note: Evan McKenzie is an Associate Professor of Political Science at the University of Illinois at Chicago. He is also a lawyer and has written extensively on the phenomenon of private government as applied to housing. He has written two books entitled “Privatopia” and “Return to Privatopia” and he regularly posts on his blog, “The Privatopia Papers.” The following blog post by Evan and the responses below, contain both philosophical and practical points of view on the nature and future of community associations.  

Evan McKenzie’s Post:

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:

I. 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 II. below…

 II. 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.

III. 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 don't understand what that term means, much less think about the conditions for enforceability of such contracts.

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’s Response:

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.

Tyler’s Response:

I agree with Evan that the vast majority of buyers of property within a common interest development do understand that there are covenants running with the land that impose certain restrictions on its use and financial obligations on them. Maybe not in those terms, but certainly they know that the roof isn’t maintained by the city, that you can't leave wrecked cars on your front lawn, that the property is managed by a board of directors, and that there is a community pool that isn't maintained for free. If they are truthful they will also tell you that they recognize that the assessment statement that arrives every month is to collect money to pay for something other than the annual Christmas party.

To suggest otherwise would be insulting to most owners. People do understand that there are obligations that must be met, and a high percentage meet those obligations and would look at you blankly if you told them that somehow they didn't have to pay the monthly assessment because it was not fully explained that they bought a home with covenants. The fact is that very few believe that--so we should get off of the "They were duped" soapbox. Yes, not only are CCRs covenants which can be enforced by the courts as can any contract, it is a business proposition that most people understand until they choose not to. So, no I don't agree that people fail to see their obligation to pay assessments for example, as a contractual obligation, just as most people don't fail to see their car payments, feeding the parking meter, property taxes, and mortgage payments also as binding obligations.

Now having said that, it is also clear that if any contract provision is extracted through deceit it can be deemed by a court to be without the owner's consent and hence unenforceable--as in, no contract ever existed. Courts have found provisions of CCRs imposed unilaterally by developers to be "unconscionable" and therefore unenforceable for that very reason--no consent. The courts of many states, for example, have invalidated such things as binding arbitration provisions imposed by developers. So if an owner can prove that they actually had no idea that they were buying a home which was bound by covenants, and can offer sufficient evidence to prove that they were misled, they might have a claim against their seller, and maybe a case for rescinding the contract and returning the house--but remember, that takes proof, not just a short memory, and no, you can't rescind the contract and also keep the house. 

As Evan knows, I think that the debate over the legal nature of the relationship between a homeowner and their homeowners association is largely a distraction from the real problem which is that community associations are created mostly for the benefit of municipalities and developers, with very little insistence by government on a financial model that can remotely meet the expectations of the eventual homeowners. Community associations are dying financially. Their business model is fundamentally flawed and many will eventually become obsolete and fail. That is the real issue--not whether a board’s authority to enforce the governing documents is a legitimate exercise of police power, or of contract, or of whatever other legal or moral hook you choose to hang your hat on. And before anyone gives me a big thumbs down for that comment, consider another of Evan’s blog posts, the one today about a city threatening to shut down an association and evict the owners because they haven’t paid their water bill. 

If you think that situation is an anomaly, then you have been spending too much time reading the Constitution and not enough time looking at the budget. Community associations are a financial disaster in normal times, and when hidden or unexpected damage or expenses arise, most associations lack the financial reserves to meet the demand. The water bill case is just one example. The average association does not have half the financial reserves it needs to properly maintain the expected issues—and they have zero funding for the unexpected.

So I guess my response to your post, Evan, and to Fred’s position, is this: While I think that community associations are creatures of contract—I also think that we spend too much time debating such things as the legal structure of community associations as if that were somehow a fundamental problem. It isn’t, it’s largely academic, and in the big picture, it isn’t important. I can appreciate that it generates a lot of heat, but unfortunately not too much light. That’s because there is no conclusion—and there never will be because the reasoning is largely circular. “Boards of directors abuse owners because homeowner associations are not legitimate forms of government” Where would anyone start to respond to that? And please don’t tell me to check the U.S. Constitution. That truly would be circular. 

But worse, that debate, while stimulating and capable of taking up many kilobytes of blog space, diverts us all from the more immediate discussion of how best to protect owners and preserve what little value remains in many of their homes. If large scale underfunding cannot be rectified, and I believe that with most existing condo associations, it cannot be, then it won’t matter whether the form of government is constitutional or not, or who created it, or if the governing documents were found in a Cracker Jacks' box. Better, all of us should be discussing how to help owners save whatever remaining equity they have, and then second, how to convince government to quit mandating for sale housing that will inevitably become obsolete because it has a form of governance that cannot fund its operations--just for the sake of additional property tax revenues. Sustainability is an objective for which we might actually get consensus!

As always, thanks for the opportunity to enter the discussion.

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