учебный год 2023 / (Encyclopedia of Law and Economics 5) Boudewijn Bouckaert-Property Law and Economics -Edward Elgar Publishing (2010)

Decomposition of property rights 135

to Coase, Posner (2007, p. 73) asked and answered why multiple owners cannot solve the problem of inadequate investment by contract. The possessory estate holder often lacks the endowment to make major capital improvements and the future interest holders may be hard to identify or lack the capacity to strike an enforceable bargain. The law plays an important role in regulating land use when ownership is divided.

4.Leaseholds

Landlord-tenant law is one topic in which there is a substantial literature that speaks to scholars from both the economics and the law perspectives. Limitations on the alienability of tenant interests and on landlords’ rights to evict have been blamed for inadequate investment in improvements to land. Solow (1971) discussed the problem in connection with poverty in nineteenth century Ireland. Basu (1989) noted that landlords wanting to make an offer to share the costs of improvements face an adverse selection problem: only the tenants who expect to stay long enough for their investment to be repaid will accept the offer, leaving the landlord with inadequate return on his contribution.

Leases can have many functions, such as spreading risk (Cheung 1969) or creating appropriate incentives for development and husbandry (Allen and Lueck 1992a; Williams 1979a; see also Allen and Lueck 1996). In the context of leasing personalty, Flath (1980) discussed how leases can economize on transaction costs such as identifying, assuring, and maintaining quality. Those topics and many others in commercial leases are more a matter of contract law and are analyzed primarily with contractual analysis and thus are outside the scope of this chapter. One early use of leasehold estates may have been to avoid the ecclesiastical prohibition of usury. When the law prevented lending of money at market interest rates, a lender could avoid usury by transferring money in return for the borrower’s (landlord’s) transfer of an estate in land. The lease would be designed so that the periodic rents from the land during the term of the lease would be sufficient to pay off the principal and additional interest (see Simpson 1986, p. 72).

New developments in leases raise additional issues. Under the common law, landlords had few obligations with regard to the leased premises. To try to reduce the human misery due to squalid living conditions, some modern law reforms have attempted to force landlords to deliver habitable premises at an affordable price. The standard economic analysis of reforms designed to benefit residential tenants is presented entertainingly (that is, at the expense of lawyers) by Albon (1982). Assuming that supply decreases with price and shifts as landlords’ costs increase and that such marginal costs exceed marginal benefits to tenants, the results of reform

136 Property law and economics

are not favorable to tenants. If rents are not controlled, rents will increase by more than the value of the increased housing services to tenants and the reforms end up forcing tenants to buy housing services they do not wish to buy. If rents are controlled, demand will exceed supply and a shortage will develop, housing search costs will increase for tenants, and landlords will discriminate more. Schwallie (1990) argued that, because investors are risk averse, increased uncertainties caused by law reform will reduce the attractiveness of the return from rental housing. In a neighborhood with declining values, the application of housing quality minima may hasten the withdrawal of units from the market and increase discrimination against riskier tenants. Some critics have pointed to reduced supply as a consequence of reforms, but a change in consumer preferences towards home ownership may have reduced new construction of rental housing (Rabin 1984, pp. 561–562).

Hirsch, Hirsch and Margolis (1975) stated that repair-and-deduct remedies may be an inefficient means of housing code enforcement for a number of reasons. Landlords, being specialists in housing, often have more experience than residential tenants in making repairs or finding an appropriate tradesman. Tenants have little reason to monitor the quality of the work, as long as it serves their temporary needs. Landlords have access to all portions of the building and can coordinate related repairs and improvements.

On the other hand, tenants, who often learn of problems before landlords, are more likely to make repairs before they become costly if they know they can deduct the cost. In addition, tenants might make more efficient repairs because they will make no more repair than they think is needed.

Nevertheless, landlords are repeat players. They are likely less transient than residential tenants and thus will know local repair tradespeople. More important, once landlords recognize that ignoring tenant requests for repairs leads to their paying for inefficient repairs, they will become more responsive to tenant requests. The inefficiency of repairs actually made by tenants can be analogized to the cost of incarcerating criminals which is justified if it deters wrongdoing. The repair-and-deduct remedy might be a low-cost way of getting landlords to pay attention to legitimate tenant complaints.

Markovits (1976) argued that the standard economic analysis is wrong in a number of ways. Some tenants, such as children, will value the mandated services more highly than their cost and those tenants will gain from law reform. Reform requirements can also be allocatively efficient if they require housing improvements that create benefits, such as reduced fire, disease and crime, that are external to the person who pays the rent.

Decomposition of property rights 137

Almost all reforms of landlord-tenant law were designed to improve the life of tenants by shifting rights from landlords to tenants. But empirical work indicates that the reforms have hurt many tenants (Hirsch, Hirsch and Margolis 1975; Hirsch 1980, 1981, 1983, 1984, and 1987; Rydell 1981; and Schafer 1979). If that is so, why have the habitability reforms been so popular? The passage of reforms increasing housing quality unaccompanied by rent controls might be explained as a rational attempt by tenants whose income has increased to increase their housing quality without incurring the costs of moving.

Vlatas (1994) argued for extension of habitability warranties to commercial leases on the basis of efficiency arguments like those used to support habitability in residential leases. However, Ashauer-Miller (1997) advised caution in adopting habitability in commercial settings, noting that efficiency arguments are weaker than they are in the residential setting.

5.Division of land by usage

This entry now shifts from division of land ownership by time to division by use, where one person holds the right to control one use while another holds the right to control remaining uses in the same land at the same time. These sorts of interests are not ‘estates in land’ but go by a number of other names such as easements, profits, covenants, and equitable servitudes. Examples include a utility company’s easement to bury service lines under private lawns or a neighbor’s equitable restriction preventing an owner from using his home for a business. A promise by an owner to keep his driveway cleared might be found by a court to be a covenant, a servitude, or an easement. Land-use doctrines govern the separation of such non-possessory rights from the rights of possession ordinarily thought of as ownership. The next sections address the enforceability, outside the landlord-tenant context, of easements, profits, licenses, covenants, and equitable servitudes.

The basic economic rationale for allowing an owner to divide the set of all rights to use a piece of land into smaller packages of use rights would appear to be the same as the rationale for allowing the owner of a farm to break it geographically into tracts for a subdivision, or allowing the owner of a house to slice it temporally into the rights of landlord and tenant. In all these cases, the sum of the parts can be worth more than the whole.

Assume that it is worth $200 to Sara, who owns Blackacre, to be able to walk across her neighbor Ben’s pasture on Whiteacre to get to town. Assume also that Ben feels a loss equal to $100 from Sara’s walking across the pasture. Ben and Sara could improve their positions by a contractual exchange, in this case Sara’s $150 for Ben’s allowing her to walk across Whiteacre. The land-use situation differs from the ordinary

138 Property law and economics

contractual situation, however, in that Sara’s real concern is not just with Ben’s consent, but also the consent of all future owners of Whiteacre (see Dunham 1965). Sara’s goal cannot be achieved by contract because Ben cannot bind his successors to perform his contractual promise.

Over the centuries, the tremendous gains to be had from exchanging rights to control the use of land have driven owners to seek legal mechanisms to accomplish those exchanges. And courts have obliged. The problem is solved by separating out the right to determine whether the owner of Blackacre can walk across Whiteacre to get to town from the other rights in Whiteacre. As Korngold (1990) put it, with servitudes people do not have to acquire more rights than they want.

The interesting economic issues relate not to why rights in Whiteacre can be subdivided according to usage, but rather why the law fetters the subdivision of rights, as it does, and whether there is any current utility to having multiple doctrines with differing rules by which rights are subdivided. Many of the restrictions have yet to be supported with an economic rationale. One concern, supporting constraints, is that subdivision of rights will lead to situations in which later purchasers think they are buying complete packages of rights when, in fact, they are not. During the initial development of the common law, England had no recording system to give purchasers notice of outstanding non-possessory interests in land. Without such a system, mistakes and fraud become likely, reducing the liquidity of land markets and undermining the basis for assuming that a voluntary exchange of rights is a Pareto improvement. Curtailing the number of non-possessory interests with restrictive doctrine, i.e., limiting the number of possible forms of rights, reduces the occasions for incomplete or false information.

In addition, peculiar restrictions and obligations impressed on land by a capricious or imprudent owner may continue to burden land in perpetuity. Indeed, if severe enough, such private restrictions could deprive the land of its productive power forever. In part for those reasons, judges and scholars have been quite reluctant to allow burdens placed on land to run to successors and have imposed the many limitations found in land-use doctrine.

As a means of controlling uses of land, servitudes of one form or another should be compared to and contrasted with zoning. Servitudes are created by private parties, whereas zoning is imposed by public entities, local governments. Following Siegan (1972) and Ellickson (1973), servitudes are often discussed as an alternative to zoning (see Speyrer 1989). As is obvious from thousands of modern developments, however, public and private controls are not mutually exclusive and often perform different functions.

Decomposition of property rights 139

Fischel (1990) noted that zoning is often easier to revise, at least compared to covenants requiring unanimous consent. Hughes and Turnbull (1996) contended that things that are inherently difficult to adjust, like lot configuration and basic type of use, are better candidates for regulation by zoning. By contrast, they said, activities that are easily adjusted by subsequent landowners, like yard plantings and automobile parking, require more rigid intertemporal regulation and would be better regulated by covenant. This led Korngold (2001) to conclude that it is most efficient to have a combination of both zoning and servitudes.

6.Easements, profits and licenses

When an easement is for the benefit of the owner of a particular parcel of land, the benefit is said to be ‘appurtenant’ to that ‘dominant’ parcel and may be exercised only for the benefit of that parcel. Suppose Ben, Sara, and Janet own lots 1, 2, and 3, respectively, and Ben grants to Sara an easement so that she and future owners of lot 2 can get from her dominant parcel to the road passing by Ben’s servient parcel. Sara then buys Janet’s lot and decides to build a new house on that lot instead of lot 2. Sara cannot use her easement for the benefit of lot 3 even though there is no more harm to Ben than he anticipated when he granted the easement (Bruce and Ely 2001, sec. 2.8). This rule obviously puts Ben and Sara in a bilateral monopoly situation, with the possible result that a Paretoimproving exchange of rights will not take place because of strategic bargaining. One justification for the rule is that in most situations, unlike the example above, the extension of an easement to benefit parcels other than the dominant tenement will indeed generate greater costs to the servient land, and it is administratively easier to lump all extensions together than to cull the harmless extensions from the bulk. The rule also creates an incentive for the holder of the easement to negotiate with the servient owner before extending or modifying her use of the easement in any way. It also creates an incentive for the party obtaining an easement to negotiate an agreement that it can be extended to his other parcels in the future. Nevertheless, it would seem a close case as to whether the rule is justified on efficiency grounds.

Easements can be created by express or implied grant or reservation and, unlike real covenants and equitable servitudes, can be created by prescription (longstanding use). Like real covenants and equitable servitudes, easements can be divided into negative (or restrictive) easements and positive (or affirmative) easements. Early English decisions recognized four types of negative easement: easements of light, air, building support, and flow of water in artificial streams. In most American states, a landowner has no right to sunlight coming across his neighbor’s land. Because of

140 Property law and economics

increased interest in solar energy, some reformers have argued that either nuisance or prior appropriation rules should be applied to protect persons who install solar energy devices from being shaded by subsequent development (for a critical discussion, see Williams 1979b). However, private allocation of rights might suffice since current law defines solar rights clearly and allows for their alienation at low cost by restrictive covenant. Freerider and holdout problems are minimal because it is rare for more than a few owners to be involved in the location of a particular solar collector, although bi-lateral monopoly could prevent the parties from reaching the efficient result.

For a number of reasons, courts cabined the development of negative easements with the rule that only four types could be created; no new forms were allowed. One economic rationale is that negative easements are harder for prospective purchasers of the servient parcel to discover than affirmative easements, such as shortcut footpaths. Limiting the number of unobservable easements reduces the frequency of inefficient transfers of the burdened parcel to unsuspecting purchasers.

A person who uses land of another in a particular way for a long time may gain an easement by prescription, which allows that person (and possibly her successors) to continue making that use of the land. In light of the ease of ex-ante contracting, it is unclear whether this ability to gain rights by wrongful act can be justified. It is some evidence of the questionable merits of the doctrine that in 1966 the Law Reform Committee debated total abolition of prescription in England. However, the closely related doctrine of adverse possession might be defended on the ground that depriving a longstanding user carries a higher cost than refusing to honor the meritorious claim of a non-user (Stake 2001). Perhaps prescription might be justified on a similar rationale.

The rules of prescription provide a good example of path-dependent evolution in the law. The possibility in England that negative easements could be created by prescription explains the English judicial reluctance to allow new types of negative easements. If new types of negative easements could be created by longstanding non-use, any new use of land could be met with a neighbor’s objection that she had a prescriptive negative easement preventing such use. The law could not allow new sorts of negative easements to be created by prescription without creating great uncertainty about whether a parcel of land could be put to a new use without encroaching on prescriptive rights held by neighbors. In the United States, where most courts have held that negative easements cannot be created by prescription, allowing new sorts of negative easements is not similarly problematic and need not be proscribed.

Easements may terminate by their own terms, by express release, by

Decomposition of property rights 141

adverse use, or by abandonment, though the latter is hard to prove. Easements terminate by the ancient doctrine of ‘merger’ if the servient tenement and the easement come into the same hands. In such cases the easement is not created anew when the once-dominant or once-servient parcel is transferred. This rule creates problems for future holders of the dominant parcel that wrongly assume the old easement still exists. However, the merger rule can be justified on the simple ground that it reduces the costs of selling the unencumbered fee in the future; the seller of the once-servient parcel need not specify that he is transferring both the previously encumbered fee and the right to be free of the encumbrance. On the reasonable assumption that sellers wish to transfer all their rights more often than they wish to transfer a previously divided subset of their rights, the rule reduces transaction costs.

A profit (or ‘profit à prendre’) is a right to sever and remove some substance, like minerals, gravel, or timber, from land possessed by another. The common-law rules governing ownership of fugacious minerals were borrowed from the rules applied to the capture of wild animals. Because those rules created common-pool problems and led to massive waste, they have been superseded by statutory regimes.

7.Real covenants

Whereas easements and profits usually involve rights of the dominant owner to do something without interference from the servient owner, real covenants and equitable servitudes usually involve rights of the dominant owner to make the servient owner do something, such as maintain a wall, or to prevent the servient owner from doing something, such as making noise on Sundays. Servitudes and easements are not mutually exclusive, however. Equitable servitudes overlap with negative easements.

A real covenant is a promise. It is different from a contractual promise in that a real covenant is stuck to some interest in land and passes automatically to each owner of that interest rather than staying with the original party to the promise. The law of real covenants sets forth a number of ‘elements’ that must be met for a promise to ‘run’ with land: as covenants, they must be in writing; they must be intended to run; they must ‘touch and concern’ the land (rather than being irrelevant to the ownership of interests in land); there must be ‘horizontal’ and ‘vertical’ ‘privity of estate’ (abstruse requirements explained below); and, under modern recording acts, grantees of the affected interests in land must have notice of the covenants.

These requirements apply separately to the burden and the benefit of the covenant. Whether the burden (duty to perform) runs to future holders of the servient parcel and whether the benefit (right to performance) runs to

142 Property law and economics

holders of the dominant parcel are, for the most part, independent issues. The covenanting parties must intend, for example, that the burden of the promise run to the successors of the burdened party for the burden to run and must intend that the benefit run in order that the benefit run. An examination of the doctrinal elements follows next.

A.Intent

We can be reasonably confident that the parties to a real covenant will reap gains from their exchange only if the law enforces what the parties intended. If the law expands the rights exchanged, the chances that the outcome will be a Pareto improvement decrease dramatically. Furthermore, if promising parties think the law might increase the scope of their promise beyond what they intend, they might pass up a beneficial exchange. Therefore, it is essential that courts find that the parties intended for the promise to run before holding that it does so. However, Winokur (1989) contended that courts are all too willing to find intent, essentially dispensing with the requirement as an independent element. In order to assure more meaningful consent, he urged that courts require some explicit language expressing the parties’ intention that the covenant run.

Although the running of the benefit and burden are usually independent, English (see London County Council v. Allen, 1914) and a few American authorities have linked the two. These authorities hold that the burden of a real covenant will not run with land if the benefit is ‘in gross,’ which means that the benefit is held by a person rather than being attached to a parcel of land. The cost of this rule is that it prevents many beneficial divisions of rights in land. Suppose, for example, a talented gardener has worked hard to make his house a showcase for his horticultural abilities. Suppose also that his family has outgrown this house, and he would like to sell if he could be assured that his successors would maintain his garden. He cares what happens to his garden no matter where he moves; he wants to hold ‘in gross’ the benefit of a promise that the subsequent owners will maintain the garden. If law does not allow the burden to run with the benefit is in gross, the gardener can assure that the garden will be maintained only by remaining the owner.

The advantage of this intent-frustrating rule is that it makes a real covenant easier to terminate by private negotiation because it will usually be possible to find the holder of the benefit since the benefit is tied to land and the owner of any given parcel of land can usually be identified. If the benefit is not tied to land, a successor willing to pay more than the gardener’s price to convert the garden to another use might have a harder time finding the gardener. Thus, transaction costs could prevent the successor

Decomposition of property rights 143

from buying his way free of the promise. The requirement that the benefit run with land helps keep down the costs of terminating promises. This justification seems to have failed to convince most American commentators, perhaps because the problem of locating benefit holders could be solved by requiring holders of benefits in gross to place their mailing address on record if they wish to keep the promise from lapsing.

B.Touch and concern

Courts require that the benefit of a real covenant touch and concern (sometimes ‘touch or concern’) the dominant parcel for the benefit to run to the successive owners and that the burden touch and concern the servient parcel for the burden to run successors to that parcel. Reichman (1978) pointed out that the touch and concern element is the only real barrier to the attachment of a promise to land. While it does not prohibit any particular agreement, it does shift the burden of negotiation once a parcel has been transferred. If the promise does touch and concern, the new neighbors have to negotiate if they want to terminate the covenant. If the promise does not touch and concern, the new neighbors have to negotiate if they want to reinstate the promise.

A promise to keep a party wall in good repair touches and concerns, as does a promise not to use for commercial purposes, but promises to pay money, promises enforcing ideologies, and promises for personal services usually do not. Some promises have proved hard for courts to categorize, and the touch and concern element has long been criticized as being indeterminate. Rarely, however, do the critics identify an actual case that has been decided badly because of the touch and concern element. Rather, Epstein (1982) said, the harm from indeterminacy is that it generates litigation, increases the costs of exchanges, or dissuades parties from using covenants.

The amount of litigation generated by the touch and concern requirement remains uncertain. The reported appellate cases in the United States in the twentieth century in which that element has played an important part number only in the hundreds. A Lexis search on 7 June 2007 for ‘touch and concern and (covenant or servitude)’ in the ‘mega’ file containing all US federal and state cases yielded 488 cases. Although the reported appellate cases are just the tip of the iceberg, this tip is so small that the whole might not be of huge concern. It is unknown to what degree the touch and concern element deflects parties from desirable transactions or raises the drafting costs of completed transactions.

The element may be less indeterminate than the critics suggest. According to one examination of American cases (Stake 1988), the element can be understood as a mechanism for efficiently allocating the

144 Property law and economics

burden and the benefit of the promise. If the benefit of the promise is likely to be enjoyed more by the successor than the original promisee, the court will find that the benefit touches and concerns. In other words, the benefits will be allocated to the person who would enjoy them most. On the burden side, courts act as if they assume the promise will be performed and the only question is whom to hold responsible for its performance. If placing the burden of performance on the successor to the promisor would avoid inefficiencies that would result from leaving the burden with the original promisor, the court will find that the covenant touches and concerns. In some cases it is a simple matter of allocating the burden to the party that can perform the obligation more easily. For example, the new owner of a barn is better able to perform a promise to keep the barn painted because he can monitor its condition and has easy physical access when it needs painting. In other cases the court improves the allocation of resources by avoiding situations having more subtle inefficiencies, such as when the court passes burdens to pay homeowners association dues on to those who will be spending those dues. If the court were to find that the covenant did not touch and concern, the homeowners in charge of the association would in theory have the power to make improvements and charge them to former homeowners, a group not represented in the decisions to purchase. The association might easily spend too much if it is spending other people’s money.

There are other economic tests for determining whether a covenant touches and concerns land. Under one, a covenant touches and concerns if it was set up to regulate externalities generated by the use of one parcel (see Nelson, Stoebuck and Whitman 1996, p. 610). Another intuitive approach is to ask whether ownership of some particular land makes the burden easier to perform or the benefit more enjoyable.

Successful positive explanation of touch and concern does not as a normative matter justify the element’s interference with the parties’ intent that the covenant run. Krier (1974) developed a defense based on problems with successive bargaining. While it is possible for successive owners to re-bargain and contract for the original covenant, it is not hard to see that this is not probable. The purpose served by touch and concern is to continue those covenants which would have been agreed to by successive owners had they negotiated. Reichman (1978) defended the touch and concern element on the ground that tying to land the sorts of promises that do not touch and concern to land could reduce efficiency, democracy, or personal freedom.

Stake (1988) developed a justification of the touch and concern element that builds on the models suggested by Krier and Reichman by adding an observation about the low costs of renegotiating promises that do not touch