Abstract

Excerpted From: Randall K. Johnson, How to Limit the Downstream Costs of Racially Restrictive Covenants, 72 University of Kansas Law Review 587 (May 2024) (118 Footnotes) (Full Document)

This article, which is part of the University of Kansas Law Review Symposium on the seventy-fifth anniversary of Shelley v. Kraemer, is the first to explain how a current successor in interest to a racially restrictive covenant may limit more of their own downstream costs through the use of self-help options. Downstream costs are any expenses that arises after the initial formation, and in the course of performance, of a valid common law contract. Typical downstream costs include the time, money, and energy that successors in interest to a racially restrictive covenant, i.e., current owners of encumbered properties, too often expend in removing these now-unenforceable terms from their own real estate documents.

The article encourages more current property owners to limit, or internalize in economic terms, their own downstream costs by making greater use of self-help options such as the marketable title doctrine and title covenants with expanded coverages. One way for more current successors in interest to do so is by negotiating with potential buyers to provide additional title assurance. Any such negotiations could lead to a redefinition of the terms “marketable title” and “title defect” in exchange for some valuable consideration. This fresh, or additional, consideration could take the form of a higher purchase price and more title assurance, which increases coverage under the marketability doctrine and related title covenants (i.e., present covenants and/or future covenants).

By doing so, the parties to any real property transfer could increase the scope of title assurance provided by sellers to buyers, if only for the express purposes of avoiding future litigation. In the process, it becomes possible to recognize that racially restrictive covenants are exactly the type of encumbrance that may stand in the way of valid property transfers in an increasing number of states.

There are three main ways to do this work through use of existing self-help options. In the first instance, between the signing of a purchase contract but before turnover, the negotiation of a valid agreement to redefine “marketable title” and “title defect” encourages a seller to remove all racially restrictive covenants in advance of an agreed-upon closing date with a buyer. Second, when the exchange of consideration takes place during a real estate closing, buyers and sellers may do the same thing by using a present covenant against encumbrances. And third, after turnover, when other types of title assurance are no longer available, a future covenant of further assurances can be used.

This article's innovative use of these self-help options has theoretical and practical implications. For example, in keeping with recent contract law scholarship, it underscores the seemingly obvious point that valid common law contracts should not include any per se unenforceable terms. In addition, the article's proposed use of title assurance highlights an inconvenient truth: that too little attention is devoted to the possibility that the mere presence of per se unenforceable terms may discourage legal compliance. And, as a third example, this article's analysis points out a hidden problem with the status quo: any failures to remove per se and easy-to-identify unenforceable terms cause confusion about how the law works and what it considers beneficial.

The article substantiates its modest claims in the following Parts II-V. Part II provides useful background information. Part III describes the applicable law for racially restrictive covenants in the wake of Shelley v. Kraemer. Part IV contains positive and normative analysis concerning the downstream costs that continue to be generated by racially restrictive covenants. Part V is the conclusion, which includes an implementation plan and a description of some of this article's implications for the future.

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To review, there is a lot more work to be done in the wake of Shelley. One way for more current successors in interest to do some of it is by negotiating with potential buyers to provide title assurance with expanded coverage. Such coverage may be provided by redefining the terms “marketable title” and “title defect” in exchange for additional consideration in the form of increased purchase prices.

By making better use of certain title assurance options, at least on a prospective basis, the parties to a future real estate transaction could limit the possibility of subsequent litigation. The idea is that negotiating for additional insurance, which takes the form of expanded coverage for the promises that a seller makes to a buyer as part of their real estate deal, helps parties to a prospective real estate transaction to recognize that racially restrictive covenants may be the exact type of encumbrances that could prevent the transfer and recording of rights in an increasing number of U.S. states. One illustrative example is Missouri H.B. 1662, which calls for removal of certain unenforceable terms before property transfers are recorded.

And in the event that a buyer and seller do agree to revise definitions of “marketable title” and “title defect,” at least for the purpose of their pending real estate deal, then both parties also should take the following steps. The buyer and seller should find out, exactly, what needs to be done in their jurisdiction. Next, these parties need to comply with the applicable law. And after the parties have fully complied, both should be sure that updated documents are filed in their proper place.

It should be noted that implementing this article's recommendations may underscore the need for additional reforms. For example, in some jurisdictions, these recommendations may point out the need for better detection and deterrence of a wider range of unenforceable terms. Implementing these recommendations also may highlight other related inconvenient truths, such as the fact that too little attention is devoted to preventing certain public accommodations, like restaurants, from undercutting protections expressly provided in Title II of the 1964 Civil Rights Act. Finally, the mere act of taking up this article's recommendations could identify other problems with the status quo. For example, it might turn out that some U.S. governments are more likely than other ones to tolerate unenforceable terms.

Within this context, and in keeping with other recent scholarship, each recommendation underscores a seemingly obvious point--valid common law contracts should never include any per se unenforceable terms. Second, each also highlights an inconvenient truth: that too little attention is devoted to the possibility that the mere presence of per se unenforceable terms may discourage full legal compliance. And, lastly, each of these modest recommendations point out a different issue with the current legal status quo: that failures to remove per se unenforceable terms, often, cause confusion about what the law is and how it applies in practice.

Professor of Law, University of Missouri-Kansas City, School of Law & Visiting Scholar, University of Kansas, School of Law.