Property Law Outline - Common Interest Communities
Definition/Benefits of CICs
Cover a broad spectrum:
Urban high density apartment buildings
Suburban gated communities
Allows for private ordering which courts should try to avoid upsetting.
Use detailed covenants to tailor the living environment to a targeted audience and to create a quasi-democratic governance style to manage the community and give it flexibility to evolve.
Have risen in popularity because of the doctrinal and practical limitations of traditional nonpossessory interests, benefits of shared costs, and dissatisfaction with local government.
Easements, real covenants, and equitable servitude cannot always be counted on to secure the integrity of the neighborhood.
There are free-rider problems associated with the enforcement of nonpossessory interests.
CICs overcome these issues by governing the commons directly and spreading enforcement costs over the community residents.
Can provide shared amenities without burdening homeowners with maintaining the remedies.
Can supplement or replace local governments in the provision of basic services.
However, CICs are not panaceas for the ills of single-family home ownership and renting.
Predominant forms of CICs
Use a corporation or business trust model to structure the ownership interests in multi-unit buildings.
CIC developer forms a corporation and conveys the land to the corporation.
Corporation assigns stockholders "proprietary leases" to specific dwelling units.
Residents do not hold actual title to their apartment, but retain exclusive use and lease renewal rights for as long as they retain their stock in the corporation.
Typically financed through a blanket mortgage.
Shareholders elect representatives to oversee operation of the building.
Condominium members own their individual dwelling in fee simple.
Possess title to the interior space of their dwelling units extending to or even partway through exterior and common walls.
However, condo members are also tenants in common with other unit owners in the underlying land and in the spaces and building parts used in common.
Operated similar to cooperatives, with some differences:
If building is destroyed, condo owners decide whether to rebuild, whereas the corporation decides in a cooperative.
Condo owners finance their ownership interest individually by pledging their fee interest as security.
Planned Unit Developments and Subdivisions with Mandatory Membership Homeowner Associations
Homeowners own both the dwelling unit and the land on which it is built.
Developers establish a non-profit association that owns the common areas, including the roads, recreational facilities, clubhouses, parks, etc.
Homeowners can also own these as tenants in common.
Homeowner Associations act as quasi-democratic decision-making bodies.
Prior to selling, developer records covenants, conditions, and restrictions including rules for homeowner association. Also incorporates these into individual deeds.
Popularity took off as courts became more receptive to them.
Judicial Role in Overseeing Homeowner Associations
Assumes that the property owners in CICs purchase their interests with knowledge (actual or constructive) of the covenants, conditions, and restrictions by which they will be governed.
Terms are voluntarily agreed to.
To the extent that a homeowner's assoc. merely implements the covenants of the CIC, the owners' prior consent is enough to legitimate the association's decisions.
Is more problematic when considering subsequent amendments to the CIC restrictions that are voted in by the homeowner association.
Emphasizes the notion that personal autonomy is the source of obligation, so views of the larger society outside of the CIC have little bearing on the voluntary restrictions of the CIC.
Reviewing court should base its decisions on the agreements creating and implementing the CIC.
Ex. Nahrstedt v. Lakeside Village Condominium (Supp)
The project declaration included a restriction against having animals in the unit. P had quiet housecats, said they would have no effect on health or safety of other tenants.
Held that (in compliance with statute on point)…
If the use restriction is contained in the declaration or master deed of the condominium project, the restriction is presumed valid and should be enforced unless it is arbitrary, the burden significantly outweighs benefits, or violates public policy or some fundamental constitutional right.
If the use restriction is a rule promulgated by the governing board of the homeowners association or the association's interpretation of a rule, the restriction should be enforced if it meets a reasonableness test.
In defining reasonableness, look at entire community, not the individual.
Court should not impose standards of larger community outside the CIC.
Relies heavily on notice and consent
Flaw is that purchasers often neither read nor understand documents associated with home purchase.
Local Government Model
Residents of the CIC, in order to avoid issues associated with the K model, should receive the same constitutional protections against the effective governing authority (homeowner's association) as residents of any publicly constituted government.
As such, courts should review the decisions of homeowner associations based on values that are shared throughout the rest of the polity.
However, residents voluntarily submit to homeowner associations much more than they do public governments.
Administrative Agency Model
Middle ground between the K model and the local government model.
Homeowner associations are viewed as administrative agencies that have been delegated constrained authority to administer a regulatory framework.
Part of that authority includes power to promulgate, interpret, and amend rules and the power to enforce the rules.
Courts use a process-oriented framework to review decisions of administrative agencies.
Balances tension between the need to allow agencies latitude to administer a broad range of functions effectively and need to ensure that the agency adheres to its legislative mandate and standards of reasonableness.
As such, court requires the homeowner assoc. to give proper notice of issues being address, opportunity to provide input, and a concise statement of the basis for the decision.
Court would also assess whether the assoc.'s decisions are within its authority and are reasonable (not arbitrary, capricious, or an abuse of discretion).
Corporate Board Model
CIC is conceptualized as a corporation whose shareholders have delegated authority to the corporate board, or homeowner association, to manage affairs.
Court would judge the association's decisions based on whether:
Its decision making process adhered to governing rules,
It acted within its delegated authority, and
It acted in concordance with its fiduciary duty.
Business judgment rule has some serious shortcomings because it was designed for corporations, not non-profit organizations.
Homeowner association acts as a trustee charged with the fiduciary duties of impartiality, loyalty, reasonable care, and information reporting.
Would be less deferential to assoc. decisions than corporate board model because it does not apply the rather permissive business judgment rule.
Documents Used in CICs
Describes land, units and commons.
Incorporates applicable covenants and other land use restrictions.
Rules governing how the homeowners association will function, enforce restrictions.
Deeds to individual units transfer title to purchaser
Restrictions on Occupancy in CICs
Restrictions on Age in Deed
In 1988, HUD prohibited age discrimination in CICs except in retirement communities.
Restrictions against children are allowed in some states.
Restriction Against Undesirable Tenants in Deed
Group home for mentally retarded children in single-family CIC.
Held that group of mentally retarded children in a homes does not violate single-family requirement.
Group home for mentally retarded children in single-family CIC.
Held that the home violated the single-family restriction. However, court struck down the restriction as void for public policy.
Restraints on Alienation in Deed
Restraints on alienation apply to CICs just like any other grantor.
Restraint is void if it gives the homeowners association absolute veto power over sale.
However, if association only has right of first refusal (can veto the choice but have to buy the property themselves to sell to another owner), should be fine.
Restriction allowed the community to block sale to keep the community "genial." Upon sale by owners, the community had a time frame in which they could find another buyer.
Held that this restriction was valid because the sellers were no worse off. Either way, their property would be sold.