Bryan Caplan  

Restrictive Covenants, HOAs, and Libertarian Legal Theory

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Over at Cato Unbound, my old friend Sheldon Richman denies that restrictive covenants are kosher in libertarian terms:
[I]n a fully free society restrictive covenants in deeds would be unenforceable because they are feudal in nature and thus violate fundamental libertarian principles. A restrictive covenant constitutes a prohibition that "runs with the land" in perpetuity, permitting rule by the dead hand of the past. Under the covenant the buyer is said to be obligated not only to abide by the restriction himself, say, by never selling to a black person; he is also supposed to pass the restriction along in any resale. Why should that be enforceable? It has the appearance of a naked promise to perform or not perform some action in the future. How is it different from promising to marry someone and then changing your mind? If the restriction is violated, who has been wronged or deprived of just property? The former owner? How so? What if he dies?
But if that's how the law works, there's a simple loophole for racists: instead of relying on restrictive covenants, use a home owner's association.   Contractually agree to let the HOA limit resale, and you're done.  Note further that this need not be a geographically-based HOA.  It could just as easily be a racist charity that collects resale rights, and pays for itself by suing violators.

The more general lesson is that using libertarian legal theory to undermine unsavory private agreements doesn't really work.  As long as contracting parties know the details of the legal theory, they can manipulate them to approximate whatever outcome they want.  Take Sheldon's marriage promise example.  If the law ignores naked promises, parties who want them enforced can switch to, "If I refuse to marry you on this date, you owe me $1,000,000."  Non-libertarians can readily invalidate contracts as "contrary to public policy" or "unconscionable," but libertarians don't have that luxury.

Update: In the comments, Sheldon responds:
Fair point, Bryan. But what if my criticism calls homeowners associations into question? Does the obligation to join an association run with the land? If A sells his home to B, why does B have an obligation to the HOA?
By assumption, A gave/sold limited resale rights to the HOA before he sold to B, so he can't sell B an unlimited resale right.  It's no longer his to sell.  Or to be more realistic, the builder gave the HOA limited resale rights before it sold the homes in the first place, so no owner ever held unlimited resale rights in the first place.


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TRACKBACKS (1 to date)
TrackBack URL: http://econlog.econlib.org/mt/mt-tb.cgi/3659
The author at MikoĊ‚aj Barczentewicz in a related article titled Bryan Caplan on property rights and libertarian legal theory writes:
    Bryan Caplan suggests that under libertarian law, racial covenants could operate in the form of home owner association agreements (HOA): By assumption, A gave/sold limited resale rights to the HOA before he sold to B, so he can’t sell B an unlimi... [Tracked on June 30, 2010 2:12 PM]
COMMENTS (15 to date)
Doc Merlin writes:

A larger problem is restrictive covenants that follow land become an easy way to form non libertarian governments within libertarian societies, making libertarianism that enforces restrictive covenants non-equilibrium.

This is a very serious issue.

Henry writes:
If the restriction is violated, who has been wronged or deprived of just property? The former owner? How so? What if he dies?

If I create a restrictive covenant, I am either increasing the value of the property somehow (in which case the next owner presumably won't want to remove it) or more likely, reducing my property's resale value in exchange for the comfort of knowing it will be used how I like. Why does it matter whether we obey the dead's preferences? Technically, in the end period at least, it doesn't (unless you believe that dead people can see what happens on Earth from the afterlife). However, we honour their preferences to establish credibility for the living that we will continue by honouring their preferences too.

A larger problem is restrictive covenants that follow land become an easy way to form non libertarian governments within libertarian societies, making libertarianism that enforces restrictive covenants non-equilibrium.

This is a very serious issue.

So much the worse for libertarianism then. If you have to start violating libertarian principles to protect libertarianism, then it's really not that difficult to eventually arrive at a highly interventionist state ("We need welfare to prevent revolution, a strong military to defend against invaders, censorship to stop revolt...")

I happen to think this means that libertarianism (at least minarchism/anarcho-capitalism) is either impossible (coercive forces eventually arise) or superfluous (governments similar to contemporary ones form because they're beneficial).

mdc writes:

I don't think his original criticism even makes sense. "It's a bit like feudalism and feudalism is Very Bad" isn't exactly an argument. The promise to do something in the future is exactly what all contracts are for. Can I refuse to pay my gas bill in a libertarian world because I agreed to send the money after I used the gas? Don't be ridiculous.

However, there is a way out of the restrictive covenant: allow the land to become abandoned. If restrictions became too oppressive (or too out of kilter with current values), then there would simply be no buyers or users of the property. The owner would abandon it, and someone else could homestead it without any strings attached.

Doc Merlin writes:

Thats a good way around the problem, mdc.

geckonomist writes:

As long as I have the liberty to refuse to sign such contracts, I guess i'll survive a libertarian law world.

I'll also enjoy the liberty to avoid meeting or having to deal with people who did commit themselves to such restrictive orders or contracts.
Meanwhile, i am quite happy that these narrow-minded lads get a beating once in a while from the contemporary law enforcement.

Sheldon Richman writes:

Fair point, Bryan. But what if my criticism calls homeowners associations into question? Does the obligation to join an association run with the land? If A sells his home to B, why does B have an obligation to the HOA?

Your amendment of the marriage promise might discourage potential transactors but I agree that performance bonds could be used in a variety of situations.

Sorry, mdc, for not expounding on the moral objections to feudalism, but I don't see the comparison with your gas-bill case. That has nothing to do with restrictions running with the land.

For the record, I do not labor under illusion that libertarian theory can preclude all unsavory agreements.

On this topic, Mr. Richman is indistinguishable from a regular know-nothing 'Progressive' throwing out all libertarian principles to ensure an outcome.

There is one problem with Bryan Caplan's argument - it presupposes that you can somehow "unbundle" ownership as a legal right.

Obligation not to resale your property without third party's consent is merely an obligation, which generally would mean that you are allowed to sell your property without this consent and only then, compensate this third party for breach of contract (assuming that there was one in the first place). The sell in question is valid and legal nevertheless.

What prof. Caplan suggests would mean a "real" effect of a contract not to resell, ie. unbundling this set of rights we call "ownership" and alienating one of them (unrestricted right to resell - ius disponendi). But there are issues with that, and in jurisdictions I am familiar with it is usually impossible among private parties.

Why should we not allow for such unbundling? Well, standard explanation is that would undermine the notion of ownership and its social utility - you would never know whether the seller transfers to you "full bundle" or just a "limited option".

Anyway, it's always great to see a discussion on libertarian legal theory, although it reminds me that this "theory" still requires a lot of work.

Maximum Liberty writes:

The answer of selling certain rights to a home owners' association depends on whether an HOA would be viable under libertarian legal theory. I've read enough of them to know that at least some reject the notion of an association having legal personality apart from the legal personality of its members (e.g., through limited liability incorporation). It seems to me that there are practical problems in the law of associations, agency, and trust. In particular, suppose that a member in the association has a large judgment against him for something unrelated to the home owners' association. Does that affect any of the rights given to the HOA? (E.g., can the judgment creditor execute against the member's pro-rata interest in the HOA's property?) Does it matter whether the individual is the manager (general partner, director, president, whatever) of the HOA? The modern law of business organizations answers these questions. I haven't read enough libertarian legal theory to know whether it does.

Max

Steve Sailer writes:

Anti-black restrictive covenants were very common outside the south in the middle of the 20th Century, such as Los Angeles. Today, they've been replaced by environmental and zoning restrictions to maintain property values in a nominally colorblind fashion that actually has racial disparate impact. The Obama Administration appears to be considering an assault on these practices, as its recent lawsuit against Westchester County suggests.

Steve Z writes:

The problem with easements, covenants, and servitudes IS that they come out of the feudal system. This isn't problematic because these instruments are unlibertarian, though, it's problematic because they are irrational. For instance, why should my dumb restriction have to "touch and concern" the land before I slap it on the deed of a willing buyer?

It would be preferable to fold easements, covenants, and servitudes into vanilla contract law. This accomplished, I side with Prof. Caplan: libertarians have no ready-made mechanism for preventing racist contractual restrictions. Perhaps extreme restraints on alienation violate the non-aggression principle?

Bob Murphy writes:

Bryan wrote:

If the law ignores naked promises, parties who want them enforced can switch to, "If I refuse to marry you on this date, you owe me $1,000,000."

He meant "...I owe you $1,000,000," right?

Noah Yetter writes:

...so no owner ever held unlimited resale rights in the first place.

Except the original owner of course (in your example, the builder)? I think the question still stands. Why is one owner of the property arbitrarily and in perpetuity able to limit the rights of future owners?

Doc Merlin writes:

I think a good way to do it is to make agreements only attach to people, not to land.
So, someone makes a contract that if y sells to x and require x to agree to the contract. If y sells to x without getting him to agree to the contract, then the contract no longer applies to x, and y is liable for damages from the other people in the contract.

That way as attitudes change its possible for these sorts of agreements to go away.

oakshott writes:

If the restriction on resale is treated as an interest in the property that is retained by the original seller, what is the issue? Treat the restriction as a legal interest akin to a share in a business.

The restriction/interest can be passed to heirs and at any point in the future, the restriction/interest can be sold or relinquished to the owner of the real property.

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