In Alfaro v. Community Housing Improvement System & Planning Association, Inc., (89 Cal.Rptr.3d 659, Cal.App. 6 Dist., Feb. 19, 2009), a California Court of Appeal considered whether homeowners who acquired their homes through a program aimed at creating affordable housing for those with very low to moderate incomes are subject to a deed restriction that requires the properties to remain affordable to subsequent buyers. The Court of Appeal held that the affordable housing deed restriction was valid and that the homeowners’ properties were subject to the restriction.
Due to an acute need for affordable housing, the Monterey County Board of Supervisors (“Board”) approved development permits subject to certain conditions including Condition 99, which provided that all units in the Moro Cojo Inclusionary Housing Projects (“Projects”) shall “be affordable to very low, low and moderate income households as defined in Section 50093 of the California Health and Safety Code.” The Projects included a senior housing development and 175 single family dwellings. A lawsuit was filed to challenge Monterey County’s approval of the Projects. A stipulated judgment in the lawsuit required that Condition 99 “be a permanent deed restriction on the project parcels, and shall not be subordinated to any financing, encumbrance, loan, development agreement, contract, lease or other document.” The Board passed a resolution accepting the final map for the Project and found “that Condition 99 would be implemented by a deed restriction that would be recorded along with the final map.”
On October 13, 1997, the Community Housing and Improvement System & Planning Association, Inc. (“CHISPA”), which owned the property to be used for the Projects, recorded a document with the Monterey County Recorder entitled “DEED RESTRICTION.” The deed restriction quoted Condition 99 and provided that the restriction had to remain in full force and effect throughout the development of the property and was a covenant that ran with the land.
CHISPA distributed a brochure informing its readers that applicants with low or very low income could own one of the homes by spending 40 hours a week per family for eight to ten months building their own homes under CHISPA supervision. The financing of the homes was explained in English and Spanish and the brochure provided that the owner would pay no monthly payments as long as he or she is not in default under the terms of a promissory note made to the County of Monterey. An owner was required to make a one-time payment within 30 days of the completion of the home that was equal to the amount of a first time homebuyer program mortgage subsidy. The amount of the note and the accrued interest had to be paid on the sale or transfer of the home. The County retained the first option to purchase the home at fair market value. If the County declined the option, the owner could sell the home to anyone else.
The owners of 23 residences in the Projects (“Homeowners”), who obtained their grant deeds from CHISPA and South County Housing, Inc., brought a lawsuit challenging the affordable housing deed restriction. The trial court found the challenged deed restriction to be valid.
The Court of Appeal upheld the decision of the trial court that the affordable housing deed restriction is valid. The court first found that the deed restriction was properly recorded. Under California case law, if a declaration that establishes a common plan for a subdivision describes the property that it is to govern and states that it binds all home purchasers and their successors, the “subsequent purchasers who have constructive notice of the recorded declaration are deemed to intend and agree to be bound by and accept the benefits of, the common plan.” Such recorded restrictions “are not unenforceable merely because they are not additionally cited in a deed or other document at the time of the sale.” Under California Civil Code section 1213, “every ‘conveyance’ of real property recorded as prescribed by law provides ‘constructive notice’ of its contents to subsequent purchasers.” A “conveyance” as used in section 1213 includes every written instrument “by which the title to any real property may be affected.”
Here, the deed restriction, which required the units within the Projects to be affordable to very low, low and moderate income households, was filed in October 1997, well before Homeowners entered into the contracts to acquire their residences or obtained their grant deeds. Homeowners argued that this law should not apply because the law is limited to “use restrictions” and does not apply to “restraints on alienation.” The court rejected this argument finding that Homeowners are overlooking “the very public policy that benefited them.” They acquired their homes under projects designed to encourage the construction of low and moderate housing projects. Although committing properties to continued affordability may depress their market value, the restriction placed on the Projects’ homes serves the public policy of providing adequate affordable housing. The restriction on the sale of the homes “is necessary to ensure that the property remains affordable by the poor who were and are the intended beneficiaries of the Projects.”
Under Government Code section 27281.5, subdivision (a), any governmental restriction imposed on real property after 1982 which restricts conveyance of real property that is not owned by a governmental entity must “be specifically set forth in a recorded document which particularly describes the real property restricted in order to impart constructive notice of the restriction, or shall be referenced in a recorded document which particularly describes the real property restricted and which refers by page and book number to a separately recorded document in which the restriction is set forth in full.” Here, the CHISPA deeds meet this requirement because these deeds refer by page and book to the recorded document that sets forth the restriction in full.
The South County grant deeds do not make specific reference to the deed restriction recorded on October 13, 1997. This omission, however, “does not invalidate the restriction so long as the recorded deed restriction itself ‘particularly describes the real property restricted in order to impart constructive notice of the restriction.’” Homeowners asserted that the deed restriction does not particularly describe the individual lots to which it applies but instead gives a general description of the tract map. The court disagreed finding that, when a deed restriction is generally applicable to a subdivision, section 27281.5 does not require the deed to set out specific descriptions of every lot within the subdivision” A deed “can incorporate the description of property in a map or other document by sufficiently specific reference.” The court concluded that the deed restriction at issue here particularly described all of the property that is subject to the restriction.
Homeowners also asserted that the deed restriction is an unlawful restraint on alienation. The court disagreed and found that the restriction is reasonable. Civil Code section 711 states, “Conditions restraining alienation, when repugnant to the interest created, are void.” California case law, however, provides that “only unreasonable restraints on alienation are invalid.” In order to determine if a restraint on alienation is unreasonable, a court “must balance the justification for the restraint against the quantum of the restraint.” The greater the restraint on alienation, “the stronger the justification must be to support it.”
Homeowners acknowledge that the policy of assuring low cost housing is very important. They argue, however, that this policy is outweighed by the consequences of the restriction. Homeowners assert that the restriction discourages them from maintaining and improving their properties and makes them forfeit increases in equity from a rising market, which they claim is “the main right of value in real property title ownership.”
The court concluded that Homeowners are essentially arguing that the housing program should be designed to benefit the first wave of low income home buyers. Homeowners fail to explain how avoiding the deed restriction will benefit later waves of buyers. An inherent conflict exists “between the goals of maximizing the financial benefits to the first wave and preserving affordable housing for future buyers.” The court concluded that “it is reasonable to impose a continuing affordability requirement for the benefit of future low to moderate income homeowners.” This interpretation is not only reasonable, it also “carries out the intended purpose of the contract.”
The court further concluded that the deed restriction is not perpetual in nature. The restriction is to “remain effective while the ‘development authorized by said permit or any modification of said development, remains in existence in or upon any part of, and thereby confers benefit upon, the subject property described herein.’” The court interpreted this provision to provide that the restriction will “remain in effect while it is beneficial,” and concluded that the restriction will lose its effect when there is no longer a need for affordable housing for low income households.
Also, contrary to the Homeowners’ contention, the court concluded that there is nothing in the restriction that prohibits inheritance. Accordingly, the court concluded that the deed restriction is a reasonable restraint on alienation, and affirmed the trial court on this issue.
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