Policy
CAI supports legislation that permits the recorded
governing documents of community associations to be enforceable in perpetuity,
including restrictions on the nature of the community even where there is no
community association. Certain states have adopted legislation known as the
Marketable Title Act or the Marketable Record Title Act (the “Marketable Title
Acts”) that automatically eliminate encumbrances on title to real property,
including restrictive covenants, after the passage of statutory time periods. Almost
all of these statutes contain an exception allowing restrictions limiting real
estate to residential use to continue in force.
However, these statutes can create uncertainty over the continued
enforceability of restrictions on the nature of the community and the governing
documents of community associations. CAI supports legislation that clearly
supports the continuing and perpetual enforceability of such restrictions
unless and until amended by the property owners subject to them, especially the
governing documents of community associations.
About the Community Association
Housing Model
Although community
associations come in many forms and sizes, all associations share three basic
characteristics: (1) membership in the association is mandatory and automatic
for all property owners; (2) certain legal documents bind all owners to defined
land-use requirements administered by the community association; and (3) all
property owners pay mandatory lien-based assessments that fund association
operations.
The community
association housing model is actively supported by local government as it
permits the transfer of many municipal costs to the association and homeowners.
Today, many community associations deliver services that once were the
exclusive obligation of local government usually funded by government-levied
property taxes. In fact, 77% of new homes in the United States are built in a
community association. Generally, community
associations are governed by a board of directors or trustees comprised of
owners and residents elected by their neighbors. This board guides the
association in providing governance and other critical services for the
community.
Background
Approximately half
of the states in the United States have adopted some form of a Marketable Title
Act. The purpose of these statutes is to eliminate older recorded real property
interests that may interfere with future development or create potential
liability for title insurance companies to insure over when providing title
insurance. It is common for states to create a 20-40 year time period in which
certain real property interests will automatically be eliminated if they do
appear in the chain of title. In many cases, the governing documents of
community associations are subject to these acts. In some states, it is
incumbent upon community associations to re-record notice of the restrictions
before the expiration of the statutory time periods for the restrictions to
avoid being automatically eliminated. The states also vary as to whether a
document is contained within the chain of title if a deed indicates that the
property is subject to “all restrictions of record” or whether a document must
be specifically identified within a deed to come within the chain of title.
The limited
purpose of Marketable Title Acts is not to permit title insurance companies to
ignore earlier recorded restrictions because all such laws have exceptions
requiring the title insurance company to examine title beyond the stated time
limit. The true purpose is to invalidate
claims to ownership, not restrictions on use or development. Marketable Title Acts would allow title
insurance companies to avoid claims such as dower rights of a divorced spouse
in some states, but not lot setback or coverage limitations or prohibitions on
multifamily structures. In those
jurisdictions where the Marketable Title Act has been interpreted strictly by
the courts, it has allowed landowners and developers to ignore basic
restrictions on which the other property owners have relied when purchasing
their homes.
Marketable Title
Acts may pose significant problems for community associations. In addition to
potentially eliminating restrictions without the consent of the owners, these
statutes create the possibility of nonuniform restrictions within the same
subdivision or condominium. Under these statutes, it is possible for
restrictions to be removed from less than all of the properties in a
subdivision or condominium. Such a statutory scheme is inconsistent with the
owners’ ability to enter into permanent contractual agreements to govern their
property, and later vote to amend or terminate those restrictions. Lack of
uniformity in the application of restrictions is inconsistent with the common
law doctrine of negative reciprocal easements, and may also lead to decreased
property values in a community. Arbitrarily terminating restrictive covenants
that contain private property rights that owners have relied on for years is
inconsistent with the community association housing model.
Additionally, these statutes have the
effect of shifting the burden to perform title searches from sophisticated
professional title companies to volunteer community association board members.
These statutes are intended to benefit title insurance companies so that they
no longer have to insure over older property interests, including restrictive
covenants. In many cases, the statutes do not require notice to property owners
or community associations that a single property owner is attempting to remove
restrictions on their property. Rather, these types of statues require
community associations to perform regular title searches to determine whether
any of the lot owners have attempted to remove restrictions. In contrast, if a
title insurer does not want to provide insurance for restrictions of a certain
age, it can simply amend its contract to limit the scope of insurance.
As
many common-interest communities created in the 1970s, 1980s, and 1990s mature
the volume of communities that may suffer the loss of covenants and lien-based assessment
rights materially increases. Even age-restricted communities that rely on the
age restrictions can lose their protected status under the Fair Housing Act.
Recommendation
CAI recommends that community associations consult with counsel to
determine if a version of the Marketable Title Act presently exists in their
state and what impact it may have on the continued enforcement of their
governing documents. CAI supports legislation that clearly provides that (1)
restrictions on residential use or additional development and (2) covenants
establishing a community association continue in perpetuity unless and until
amended by the property owners subject to such restrictions and covenants.
Policy History
Approved by the Government & Public Affairs Committee, December 9, 2020.
Adopted by the Board of Trustees. December 17, 2020