STALE REAL ESTATE COVENANTS.

• Author: Ellickson, Robert C.

TABLE OF CONTENTS Introduction 1833 I. Two Snapshots 1834 A. Hancock Park: Los Angeles in the 1920s 1835 B. The Rise of Common-Interest Communities 1839 II. A History of the Use of Covenants 1841 A. The Crudeness of Early Covenants 1842 B. Key Innovators Who Shaped Covenant Practices 1843 III. Covenants Have Value, but Declining Value over Time 1847 IV. Three Actors Who Can Eliminate Stale Covenants 1852 A. How Attorneys Drafting Covenants Have Historically Dealt with Issues of Amendment and Termination 1853 B. Judicially Created Doctrines That Weed out Stale Covenants 1856 1. Changed Conditions 1857 2. Waiver 1859 3. The Advantages of a Damage Award for Breach of Covenant 1860 C. Statutes That Limit Covenant Enforcement 1861 Conclusion 1865 INTRODUCTION

Private restrictive covenants certainly may have benefits, but they reduce the dynamism of American real estate markets. When choosing to alter an existing land use, a landowner must comply with both a valid private covenant and a valid public enactment, such as a zoning ordinance. (1) In other work, I have induced that the politics of local zoning tends to freeze land uses in urban America. (2) The zoning straitjacket commonly is tightest in a developed neighborhood of single-family dwellings. (3) Private covenants can add to the tightness. Many covenants undoubtedly generate value, particularly when a restricted development is young. As covenants age, however, they are likely to become outmoded. Both state courts and state legislatures have recognized the need to loosen the grip of covenants after decades have passed. This Article analyzes the problem of aging covenants and provides advice to the attorneys who draft covenants, the judges who decide covenant cases, and state legislators.

Covenants come in two basic forms: negative restrictions on the use of land and affirmative obligations to perform a duty, especially that of paying an assessment to a homeowners association. In 2018, the Community Association Institute (CAI) estimated that at least 61 percent of new dwellings produced in the United States came laden with covenants. (4) That estimate included only dwellings in common-interest communities (CICs), that is, those in which covenants imposed a duty to pay an assessment. (5) In some additional real estate ventures, negative covenants restrict an owner's choices among land uses.

Covenants restricting land uses first appeared in the United States in the early nineteenth century. (6) During the first half of the twentieth century, they gained notoriety as a mechanism for the exclusion of households from neighborhoods on the basis of race and, less commonly, religion. In 1948, the Supreme Court famously held in Shelley v. Kraemer that courts could not enforce those particular sorts of restrictions. (7) The Court's decision, however, did not forbid covenants that limit an owner's choices among land uses and building designs. (8) Since Shelley, restrictions of those sorts have become ubiquitous.

1. Two SNAPSHOTS

   In the United States, declarations of covenants lie in thousands of local land-records offices. (9) This scattering has discouraged research into what the documents provide. To provide an overview of the modest amount of current knowledge, this Part first describes how covenants in Hancock Park, a famous subdivision in Los Angeles, generated what came to be known as the "Dead Mile." It then briefly depicts prevailing covenant practices in the twenty-first century. Because I focus on the freezing of land uses in a residential neighborhood, I emphasize how long a negative or affirmative covenant can bind an owner of land.

   1. Hancock Park: Los Angeles in the 1920s

      Downtown Los Angeles, originally sited where its residents could readily access fresh water, lies fifteen miles east of the Pacific Ocean. One of Greater Los Angeles's major thoroughfares, Wilshire Boulevard, runs due west from downtown towards the ocean beaches. During the 1920s, a decade in which the population of the City of Los Angeles doubled, G. Allen Hancock subdivided Hancock Park, a rectangular tract of almost one-square mile. The rectangle's southern border was Wilshire Boulevard. (10) Hancock sought to create a high-end neighborhood of houses. (11) He imposed covenants that ran with each of the lots, restricting most of them to only single-family residential use and a minimum lot size of 15,000 square feet. As was common in California at the time, Hancock also banned residency by nonwhites. (12) His covenants set an explicit expiration date, January 1, 1970. (13) Hancock, unlike a handful of pioneering 1920s developers, did not establish a common-interest community (CIC) to govern Hancock Park. Many residents apparently now wish that he had. Competing neighborhood associations have arisen within Hancock Park, although none has the power to compel homeowners to pay an assessment. (14)

      As the decades passed, public works departments substantially widened Wilshire Boulevard. Lots abutting that thoroughfare became too noisy to serve as an ideal site for a single-family use. Owners of Hancock Park lots abutting Wilshire brought several lawsuits--some successful, some not--claiming that conditions had so changed that courts should no longer enforce the single-family-use restriction. (15) Aware that the covenants would expire in 1970, some owners of vacant lots simply chose to wait until that year, in the hope that Los Angeles would then zone their lots for more intensive uses such as apartment buildings. (16) Prior to 1970, thus evolved the Dead Mile on Wilshire, a stretch centered on Hancock Park. (17) The nickname highlights the differences between this underdeveloped stretch and Wilshire's so-called Miracle Mile, an auto-oriented commercial strip just to the west. (18)

      How did Hancock's covenants interact with the City of Los Angeles's zoning? (20) Los Angeles had designated "residence district[s]" as early as 1910, well before New York City's more celebrated embrace of zoning in 1916. (21) In 1920, Los Angeles also became the U.S. pioneer in the mapping of zones solely for single-family detached houses. (22) Yet Hancock correctly envisioned that city zoning, by itself, would not create the high-end neighborhood that he wanted to offer. (23) A century after Hancock dreamed of its creation, and long after his covenants had expired in 1970, the core of Hancock Park remains as he conceived it. (24) In 2020, the City of Los Angeles was zoning most of the neighborhood for the sole use that Hancock's covenants had permitted, a single-family detached house on a lot of at least 15,000 square feet. (25) This minimum lot-size requirement was three times greater than what Los Angeles was requiring in the single-family neighborhood just east of Hancock Park. (26)

      In 2021, Trulia reported that a Hancock Park house on a lot of at least 15,000 square feet had a median asking price of around $7 million. (27) Despite these astronomic values, market pressure to densify this now centrally located neighborhood is intense. (28) The City of Los Angeles has responded by rezoning some of the edges of Hancock Park for commercial and multifamily uses. In 2020, these rezonings represented about 5 percent of the neighborhood's total area. (29) Along much of the neighborhood's frontage along Wilshire Boulevard, zoning now allows commercial or multifamily uses, typically in structures less than four stories in height. In sum, covenants originally shaped land uses in Hancock Park, but after they had expired in 1971, zoning largely took over the task of freezing 95 percent of the neighborhood.

   2. The Rise of Common-Interest Communities

      The developer of a common-interest community, which Hancock Park is not, compels each purchaser to become a member of a private homeowners association and pay a periodic assessment to that entity. (30) In 1844, four purchasers of a Boston farm created the first CIC in the United States, Louisburg Square in the Beacon Hill neighborhood. (31) In that instance, owners of twenty-eight townhouses abutting a small park agreed to pay mandatory fees to maintain the park. Louisburg Square endures as an institution, evidence that covenants may produce value for centuries.

      Nationally known CIC developments of recent vintage include the New Urbanist communities of Celebration and Seaside in Florida, and Kentlands in Maryland. (32) Residential structures in these communities vary and include detached single-family houses, town-houses, and higher-rise apartments and condominiums. Property owners, not tenants, elect the members of the executive board that governs the CIC association. (33) Covenants typically empower the board to adopt and enforce rules governing member conduct, and to collect assessments to finance maintenance of the CIC's common property, such as recreation facilities and open space. (34) So thoroughgoing are board enterprises in Celebration and Seaside that residents in both have declined to incorporate as municipalities. (35)

      The Community Associations Institute represents CICs, which it claims contain a solid majority of new dwellings. CAI surveys assert that in 2017, as mentioned, CICs accounted for 61 percent of new housing units built in the United States. (36) There have been few studies of what CIC covenants typically provide. Susan French and Wayne Hyatt, two noted legal experts, credibly assert that the "[m]odern documents" of a CIC typically handle the issue of covenant life in the following manner. (37) The declaration of covenants specifies an initial term, perhaps twenty-five to fifty years. The covenants then automatically renew for a shorter term, commonly ten years, unless opponents of renewal, by majority or supermajority vote, affirmatively vote to amend or terminate them. Specialists refer to this system as automatic renewal with opt-out. This now-standard approach stacks the deck in favor of the continuation of covenants. Unless loosened, these...