4 Comments
Apr 24, 2023·edited Apr 24, 2023

Hi Dave. Good article. I agree there's a case to regulate. But tread carefully! It's not right to assert they only could exist because neighbours see value in regulating each other. Developers also use them to prevent the first buyers from being NIMBYs that prevent them completing the development; otherwise the developer may not bother building at scale.

Fischel explains this in his book "Zoning Rules!", where in the US developers give themselves 3 votes in the Homeowners Association for each unsold lot, to balance the power between buyers and developers. US developers also trade off the scope or scale of the Special Purpose Governments (SPGs) they constitute to supply public works. (Eg Houston's Woodlands is built with 6 municipal utility districts, whereas Stapleton residential development in Denver's old airport is built with a separate tax SPG from its debt issuer and spending SPG because "they knew they were building 'the most entitled community in Denver'".) In NZ developers usually do this for greenfields by having covenants not on titles but the Sale & Purchase Agreements (SPAs), awarding themselves power of attorney over buyers. Initial buyers must acknowledge they are in the early phases of development and they forfeit the right to complain. If they do, the developer can override their complaints as their power of attorney. (Which I find astonishing.)

Also, developers can and sometimes do set up incorporated societies to manage uncertainty and contractual incompleteness. I see a case to consider requiring these to be introduced when the volume of titles gets high enough. Cheers, Chris Parker, Principal at Treasury's Housing & Urban Growth team.

Expand full comment
author

Thanks Chris for those great insights! While the power of attorney did read like using a sledgehammer to crack a nut, it certainly is a creative way to handle post-contractual opportunism by purchasers!

Expand full comment

Another interesting aspect of this is that Councils (at least Auckland Council) ignore covenants when issuing building consents. When called on it their response was that it was a civil matter and not their responsibility to enforce - I would have thought it was at least their responsibility to notify neighbours! My conclusion - most covenants are not worth the paper they are written on once a development is completed and a decade down the track. An accidental implementation of the natural end recommendation (25-30 years). This seems to be the practice if not the law. Of course, I am working with a sample size of one here!

Expand full comment
author

Thanks Mary -- enforcement is a question I haven't really got my head around. One angle with potential explanatory power is risk. Land-owners considering an action prohibited by the covenant likely assess two factors: (1) the likelihood of enforcement; and (2) the costs they face, should it be enforced (i.e. to reverse/repair the action)? If enforcement likelihood is low, it makes sense to proceed -- unless reversal costs are high. Alternatively, if reversal costs are high, then proceeding is risky -- even if enforcement likelihood is low. These considerations might make self-enforcement reasonably common. Such self-enforcement is difficult to observe, though.

Expand full comment