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 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 comprising 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 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 must 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.  

Approved by the Government & Public Affairs Committee, December 9, 2020.  

Adopted by the Board of Trustees. December 17, 2020  ​