Property and Radically Changed Circumstances

1
Property and Radically Changed Circumstances

• John A. Lovett
• Associate Professor
• Loyola University New Orleans
• College of Law

2
Starting Premise

• Within a matter of hours, Katrina brought radical
  change to Southeastern Louisiana and the
  Mississippi Gulf Coast.
• Homes, workplaces and the lives of more than
  three million people were turned upside down.
• The long-term impact on hundreds of thousands of
  people is still unclear.

3
My Focus

• Is not on causes of the levee failures or the
  reasons why the government evacuation and rescue
  efforts failed.
• But on the long term impact of Katrina, and other
  instances of radically changed circumstances, on
  property law, property relationships, and
  property regimes.

4
A Cautionary Statement

• Its too soon to pass judgment.
• Legal system, political system, property markets,
  and communities are just beginning to absorb the
  changes wrought by the storm.
• Dont give New Orleans a failing grade yet.

5
Another Cautionary Statement

• Lets make our assessments in a rich comparative
  context.
• Not just Louisiana v. Mississippi or New Orleans
  v. Biloxi.
• Not just New Orleans v. Chicago (1871).
• Not just New Orleans v. San Francisco (1906).
• Lets consider Tokyo, Warsaw, Kobe, Mexico City,
  Grand Forks, Holland, Hiroshima . . . .

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Identifying Radically Changed Circumstances

• Four Overarching Characteristics
• Sudden (Happens over course of a few months,
  weeks, days, hours or less).
• Unexpected (No one could predict with certainty
  if or when in the near future the change would
  occur).
• Intense (Penetrating, effecting multiple aspects
  of life, markets, communities at once).
• Geographically Pervasive (Affects more than one
  person, one piece of property, one block, or even
  a neighborhood).

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Six Hypotheses About Property and Radically
Changed Circumstances

• First a Fact Instances of radically changed
  circumstances do occur.
• Katrina, Rita
• Tsunami in Indian Ocean
• 9/11 New York City
• San Francisco Earthquake of 1906
• 1992 Riots in L.A.
• Flood in Grand Forks in 1997
• Earthquake in Bam, Iran
• War in Lebanon

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Hypothesis 1

• Property law is generally not well designed to
  respond to radically changed circumstances.
• Although some structures do help mediate stress
  of change.
• Insurance private and semi-public forms like
  National Flood Insurance Program.
• Some legal doctrines change of circumstances
  doctrine for terminating an easement or
  servitude, waste doctrines.
• Ex ante contractual planning can help.
• Typically found in certain kinds of relatively
  short-term, finite relationships (landlord and
  tenant, mortgagor and mortgagee, buyer and seller
  in an executory contract).

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Hypothesis 2

• When radical change happens, we see that default
  rules really do matter.
• Especially for longer-term, indefinite
  relationships.
• Concurrent Owners (tenants in common, co-owners,
  joint tenants, tenants by the entirety, owners of
  condominiums, owners of homes in common interest
  community).
• Dominant and servient owners in a servitude or
  easement relationship.
• Partners in a partnership, shareholders in a
  closely held corporation.

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Hypothesis 2

• When radical change happens, we see that default
  rules really do matter.
• And even for an in-between category of property
  relationships that are temporally finite but
  whose precise ending point is uncertain.
• Life estate holders and reversion or remainder
  holders.
• Usufructuaries and naked owners.
• Beneficiaries of a trust and trustee.

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Hypothesis 3

• Well designed markets, default rules, and
  government intervention can help ease transitions
  within property relationships in times of
  radically changed circumstances.
• Will Louisianas Road Home Homeowner Assistance
  Program meet the challenge?

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Hypothesis 4

• The best designed property default rules
• Facilitate quick, consensus oriented decision
  making that is necessary to preserve property.
• Avoid costly anti-commons problems.
• Promote exit and entrance into and from property
  relationships when reasonable consensus or
  super-majority decision making is impossible.
• Respect rights of minority interest holders
  without impeding majority from moving on.

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Hypothesis 5

• Community wide decisions redirecting or altering
  land use patterns in a dramatic way are difficult
  to obtain.
• Maybe impossible given inertia of pre-existing
  patterns, expectations, and connections.
• Top-down changes in land use planning may not
  work.
• Decisions that are made need to be as simple and
  easy to understand as possible.

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Hypothesis 6

• Radically changed circumstances can
  simultaneously reinforce dramatically different
  conceptions of property.
• Property as fungible commodity.
• Property as exit.
• Property as symbol of attachment to community,
  place, spiritual and civic commitments.
• Property as entrance.

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What to Watch For in the Next Four Years

• Will Louisianas Road Home program enable
  citizens and property owners to make the
  transitions they need to stabilize their lives,
  rebuild their communities, preserve their assets,
  or transform their property into more productive
  form?
• Can it do all of these things at once?
• Will default rules of property help or become
  barriers to achieving these goals?

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Louisianas Road Home Housing Programs Estimated
Costs

• Homeowner Assistance
• Workforce and Affordable Rental Housing
• Homeless Housing
• Developer Incentives
• State Administrative Costs
• Housing costs previously approved
• Total

• 6,347,400,000
• 1,535,700,000
• 25,900,000
• 32,100,000
• 120,900,000
• 18,000,000
• 8,080,000,000

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Road Home Homeowner Assistance Program

• Goals
• Provide compensation for homeowners uninsured
  losses due to Katrina and Rita.
• Encourage people to stay in or return to
  Louisiana and rebuild communities.

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Road Home Homeowner Assistance Program Basic
Structure

• Three Options
• Repair or rebuild your home on site.
• Sell to the LRA (State agency set up to run
  recovery) and buy a new home elsewhere in LA.
• Sell to the LRA with no obligation to buy a new
  home in the State.

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Road Home Homeowner Assistance Program Incentives

• Grants under Options 1 or 2 (Cap of 150,000)
• Lesser of
• Replacement Cost
• - Other Compensation
• - 30 moral hazard penalty
• or
• Pre-Storm Value
• - Other Compensation
• - 30 moral hazard penalty

• Grants under Option 3 (Cap of 150,000)
• Lesser of
• Replacement Cost
• - Other Compensation
• - 30 moral hazard penalty
• or
• 60 of Pre-storm value
• - Other Compensation
• - 30 moral hazard penalty

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Road Home Homeowner Assistance Program Escrow
Accounts

• Under Options 1 and 2, grants will not go
  directly to eligible homeowner, but into escrow
  account administered by mortgage lender or
  closing agent.
• Funds can only be used for approved home
  repair/rebuilding or purchase of new home.

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Road Home Homeowner Assistance Program
Obligations

• Under Options 1 and 2
• Homeowner must agree to
• Maintain flood and hazard insurance on property.
• Rebuild or build to new building code and latest
  FEMA Advisory Base Flood Elevations.
• Occupy home for at least three years.
• Will probably be enforced with forgivable lien.
• Subrogate unresolved insurance claims to LRA.

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Road Home Homeowner Assistance Program Risks

• Complexity and supervision of funds could bog
  down administration of program.
• Incentives might not be worth it.
• Barriers for homeowners in atypical situations
  (non married co-owners, usufructuaries and naked
  owners) could be difficult to overcome.

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Road Home Homeowner Assistance Program Potential

• Might encourage more homeowners to stay in
  Louisiana than a pure compensation plan like
  Mississippis would.
• Might provide useful opportunity for land
  assembly and redevelopment if many homeowners
  take options 2 or 3.
• What Baker Bill wanted to do.
• Might lead some property owners to consolidate
  home ownership in the hands of those who value it
  most or will invest more in their homes and
  communities.