NARRATOR: Thanks for joining this episode of the No. 86 lecture series, in which Professor Richard Epstein discusses property rules in the Roman Law. In Episode 6, Professor Epstein explains: How mortgages differ from leases How the Romans viewed nuisance The role of easements in property ownership This lecture is part of a series with Professor Epstein on how this ancient legal system can provide crucial insights about modern problems. Professor Epstein is one of the most prominent legal scholars of our day. He is the inaugural Laurence A. Tisch Professor of Law at NYU School of Law, a Senior Fellow at the Hoover Institution, and Professor of Law Emeritus and a senior lecturer at the University of Chicago. As always, the Federalist Society takes no position on particular legal or public policy issues; all expressions of opinion are those of the speaker. PUBLIUS: In the last episode, you discussed landlord and tenant relationships and leases. What about mortgages? Are those rules significantly different? RICHARD EPSTEIN: The third arrangement that one has to deal with, are financial arrangements in which what happens is, property is going to be used as security for the payment or repayment of a loan. The economics behind this are perfectly clear, the techniques for the execution are much more difficult, and what the economics says is this, I'm buying a large piece of property today, and it turns out it costs very hefty chunk of money to do, which I don't have, on the other hand what happens is, I know that the annual yield from this particular property is gonna be large enough to cover my expenses, and also to pay back something on a loan that I happened to borrow. So, if you borrow $1,000,000 on a property which worth say $1,500,000, you have to put in equity of $500,000. You have the loan and then the landlord essentially is gonna charge you interest on this particular loan, and if you have this $1,000,000 loan and the interest is at 6%, you have to pay $60, 000, but if you make $100,000 from this particular property, you clear $40,000 out of the thing, and pay the landlord back. What essentially the mortgage does is it allows somebody to purchase an asset that's beyond his current means to pay, and then slowly pay off the principal of this thing while continuing to work. Now this creates what is commonly called in the financial business a leverage issue, which means in effect, if you don't have any mortgage then just put in the $1,500, 000 on your own, if you lose a $1,000 you lose a $1,000, if you gain a $1,000 you gain a $1,000. It's a small part of a larger whole, but the moment you start having a loan on the particular property, things can get pretty tricky. If you make more than $60,000 you're going to be very fine, if you make less than then that, all of sudden you're gonna have to get extra money to cover it, but what also takes place is if you start to increase something where there's leverage, if you increase the total value by 10%, but you have essentially a loan for two-thirds, it means your that equity's gone up by 30%, and if you're lowered by 10%, it goes down by 30%. So the bigger the mortgage, the higher the degree of volatility, which is essentially a pretty strong reason to say, generally speaking, we don't want to mortgage property up to the hilt because the volatility becomes unsustainable. Well, that's the sort of economic logic of this, and there's trillions of dollars in mortgages out there, which essentially say that cash rich banks, and cash poor entrepreneurs or cash poor residents, can come together and do this in a sensible way. The issue then turns out to be, is what kind of legal arrangements that you do, which will create a security interest in the property in question. If you start to think back to what we said before, the same kind of arrangement here is going to be used that you use with respect to a lease, and things can become somewhat precarious. The Romans created an interest arrangement called fiducia, and what happened is that the landlord would do to con ... rather the owner of the property would take the property and convey it outright to the lender, and then would get the money in exchange. The trick about this is two things can happen. If the mortgage is going to be paid off in full then you have a conveyancing device which will require the lender to return the property to the tenant or otherwise it turns out to be a glorious case of theft. If on the other hands, people start to fall short on the payments in question, then you have to have a method by which the landlord can foreclose on the property, get rid of the tenant's interest, the borrower's interest, so that he can in effect deal with the property in another market. If you don't have strong registration systems, and you don't have strong, sort of, liens on property it turns out to be fairly difficult to organize these kinds of transactions, and we had exactly this problem in the early Roman period, and then we duplicated the problem when we get to early English law because the thing that you would like to create becomes an artificial notion called a lien. A lien simply says, what happens is the property is worth x, my lien is worth something less than x, and then exactly what I said before starts to happen. So, originally we started to have conveyances and reconveyance. A conveyance when the loan was created, and a reconveyance when it wasn't. Today what we tend to do is put liens on property, and then remove them,, without a conveyance once the loan has been done. Mortgages, of course, can be extremely complicated in the following sense, generally speaking you have a conveyance and a reconveyance device, what happens is you can only create one loan, because it's just too difficult to have the mechanics to work to create other interests. One device is, what we do is take a deed and we divide it in half and the owner of the property keeps one half, and the owner of the loan keeps the other half, and you have to put the two of them together. The owner of the loan keeps the other half, and you have to put the two of them together. Start having more interest than that, you can't do it. So the lien system turns out to be a much more efficient way today, which is you can have a first lien, a second lien, and a third lien. At that particular point, the issue of priority starts to come up, and the general rule today is that in strict order, the first guy gets everything, the second guy gets property only if the first guy has been paid off in full, and so on down the line. These devices, which in Roman times were relatively limited use, because you did not have recordation systems in the lien notion. In modern times, essentially become absolutely dominant. If you start to think of the way in which this works, looking at these kinds of interest, what happens is the family stuff, the fiduciary thing, today gets thrown off into a family trust. In which the trustee gets the power to adjudicate the value typically of cash, that goes between the life-tenant and party in remainder, and you can have more complicated interest. The lease remains a commercial arrangement with the sublease and assignment rule, and the mortgage and the second mortgage remain more or less in their form. PUBLIUS: What about the issue of nuisance? Did the Romans have rules about that? RICHARD EPSTEIN: Roman transactions were relatively primitive on many of these classifications, but there's no question that they understood the relationships pretty well amongst themselves. Well the last problem that one has with respect to problem and property is known as “ius in re aliena,” and that means the rights, in re, in the things, owned by another. So what happens is when you start talking about property, you can think about the property as a self-contained situation, and ignore all the external relationships that have between you on the one hand, and your neighbors on the other hand. And then the question is, how do these neighboring relationships start to work? Because what one person does on property could easily impact what's going to be the peace and enjoyment of somebody else of his own property. And the Roman system, like the common law system, essentially developed a set of off the rack rules for dealing with this problem. We call it the law of nuisance. They tended to call it something called nocumentum, which meant harm. And the basic intuition about this is, I may own my property, I may do what I like with my property in some sense or another, but by and large I'm not allowed to admit filth, noise, and pollution onto somebody else's property, and he's not allowed to do it to me. And the guess that we're making with these, is when you're talking about high-level risk associated with these things, the gains that you get from having a messy, polluted system, is certainly smaller than the harm suffered by the other side. So by and large we want to do two things. One, give damages for the harm that's inflected, and two, give a system of adjunctions to stop the thing from taking place. But this kind of relationships actually gets a bit more complicated. Because as the nuisance level start to become very low, to use the English phrase, a system of "live and let live" starts to make more sense. So we may want to say if you're not a factory and you're spewing filth out to somebody else's land so they can't breathe, it's a tort, but if I have a barbecue and it turns out there's a little whiff of smoke that crosses over to your property, it's still a physical invasion. But the rule of live and live takes over, because now we have a generalized assumption that the gains that somebody gets from creating this little nuisance, are going to be far greater than the harm suffered from the other side. And so you then have to figure out what the baseline is going to be before you switch from one system to another. And you start to control these things in this particular fashion. And sometimes it's another problem about support for your neighbors land, and generally speaking, the off the rack rule is I can't dig right up to the boundary lines so that your land tumbles down, and you can't do the same thing for me. But I'm not duty-bound to support your house, and I can take out land. If the house is going to fall, we want to you build it back from the boundary line. And so if you get, "No," just stick with it and adjust what's going on so as to avoid it. Now, what's important to understand about these nuisance rules, whether they're the rules dealing with pollution or the rules dealing with support, is that they only cover a small fraction of the total issue that we have in terms of relationships between neighbors. And the Romans, therefore, developed a very sophisticated body of law, which has endured quite well, and they called this a unified system of servitudes. And a servitude meant that there was a dominant tenement and there was a servient tenement, and the dominant tenant would have certain kinds of claims over the servient tenant. And there were two kinds of claims that you can start to put into these places. The first kind of claim is something which I can do on your particular property, which would otherwise be a trespass, but is now protected by what we call as an easement. And an easement simply involves the kind of situation where I have my land, and I need to get my animals to the water, and there's a defined path and I can take my animals back and forth across that path and bring them to the water and you can not enjoy me from doing. And sometimes the easements may be even more bold, so I can start taking vehicles and put them on. Sometimes they may be less inclusive, so that I can only walk on the land, but I can't take my animals there and so forth. And what the Roman's did is they tended to limit the kinds of easements that you created because their recordations systems were so weak that they wanted to have standardized forms. Modern easements are like huge contracts, in which you specify all sorts of arrangements having to do with the time of day, it may be that there's a vertical dimension or a horizontal dimension, a repair dimension of one kind of another. But the Roman's had relatively few types of things like this, and the basic intuition that you have, is it's much more efficient to create an easement than it is to sell that little plot of land. PUBLIUS: Why would an easement be more efficient? RICHARD EPSTEIN: Because if the easement goes down the middle of the property, and you start selling it, then the owner of the property can't get from his one side to the other side because you've got this little sliver of land that blocks everything. But if it's an easement, it means that you have a right of way, but it doesn't deny the fact that he also can use the property in a limited fashion. What it does do is it restricts his ability to build on that particular easement in a way that starts to obstruct the right of way. But it allows him to go back and forth across the same thing that you have, because it's relatively rare to see an easement that is going to be exclusive to the holder of a dominant question. We also call this easement a property relationship instead of a contract relationship, because of the same problem that we prefer to before. It is sometimes the case that the person who owns the servient tenement wants to sell that property to somebody else. And it turns out that if he can sell the property and rid himself of the particular easement, this is strategic incentive to sell, independent of the fact that the buyer values the land more than the seller. And so what happens is we say that theses easements continue to buy people who are subsequent takers. One of the things that make this work fairly well, is that it is usually pretty obvious when somebody has an easement, so that the third property will be on notice of the interest and can adjust the price if in fact it turns out this is an inconvenience, or walk away from the deal if it turns out that the easement is incompatible with what he wants, or go back to the owner of the dominant tenement and buy that interest out, so that he can have unified property with nothing there,. Or say, " I'll tell you what. Let's renegotiate the easement, push it from here, to there," and then make cash payment. If you start giving notice, it turns out that all of these permutations start to become are reasonably possible. And the same thing is true on the dominant side, which is if you were to sell this property to somebody else, and this person also has a form that also has cattle, that also have to get lead to the water, it would be absolutely suicidal to have an arrangement in which he buys the land, can't use the easement, and so therefore all his cattle will die. And we don't to create a situation where he has to buy it anew from the other fellow because of the holdout problem. So essentially what we say on both the dominant and on the servient side, is that these particular easements tend to run with the land. That is their property type interest, they're not contract type interest, because land is a durable asset, and we have to expect that it's going to transfer control. Sometimes it's by sale, but even in cases where there's no sale, it's often that it's going to transfer because of the death of one person means it's, somebody else is going to move into the property. Or there's going to be a divorce, or something like that. Now the second half of the easement problem, or not the easement problem, the servitude problem, is the question of when you're entitled to impose restrictions on somebody else's land, which you can not do in the absence of what we call today a restrictive covenant, or an equitable servitude. And thus for example, I want to make sure that I get light on my property, and the basic rule is between two neighbors, is each of them can build as high as they want and block the light of the other. But we want to make a deal. Why would we want to make a deal? Well think of it in the terms of the single owner who's selling these properties out, and what you do is you're on a hillside and you have nice views of the water. If you don't have height limitations, the guys on the bottom could build very, very high and block the views of everybody who's above him. If in fact you can have restrictive covenants, it's generally going to be a situation that having more people with respectable views on the hillside is going to be more valuable than one guy hogging the whole thing. And so you can enter into a contract where everybody can build only 30 feet high, 30 feet high, 30 feet high. That is, you keep on going up and terracing so that everybody starts to get these views and you have exactly the same kind of problem you had before. You don't want these things to be only personal licenses, like sitting in the classroom or in the movie theater. You want them to be able to survive if either the property, which is subject to the restrictive covenant, or the property that benefits from the restrictive covenant, can do so, so these covenants follow with the land. Now these are tricky in many ways, because if you see a building which is only 30 feet high, it's not perfectly obvious when you look at this thing whether you decided to build the 30 feet high, because they didn't need to do the extra and could build another 30 feet if he wanted to, or is it the case that the arrangement is binding because of the covenant, so that he could not build any higher, unless he secured a release from the other party. And so restrictive covenants are harder to put into place, even though they follow exactly the same premises, until you get to more modern times. Because the great innovation in modern times is a system of recordation. And now when you start looking at each plot of land, you can buy one device or another, know not only who's the owner of the basic interest, but you can also identify the servitudes that are being put on it. Both by way of entry on the one hand, and by way of restriction on the use on the other. PUBLIUS: Can you explain why it’s so important to identify potential restrictions on a property? RICHARD EPSTEIN: Well there's again a kind of a very powerful simple theorem that wants to be understood. Is if you are talking about land, which is relatively arid and cheap and you got large spreads, generally speaking, easements and covenants are not going to be particularly important. Particularly covenants. If you're land is 1,000 acres, and you build a four story house on the thing, there's going to be nobody who's 500 feet away, wants to say, "Oh, you got to build it only to three story." But if you're on coastal lands and these views are worth 30% of the property, now all of a sudden it really does make sense to figure out whether or not you can improve things by these covenants. Or what happens is then is how are these things implemented? And there are two ways in which it's possible. One of which almost never happens, and the other which has become de rigueur in modern times. It is very difficult if people start with separate ownerships, to come together and start to negotiate these sorts of things. Because there's no unique price at which these easements can be set, so there's going to be a lot of haggling and a lot of disputes. And if you're trying to talk about cases where you have to have easements over multiple properties in order to get to the water, then you're going to have each tenant demanding too much to give the easement, and the whole things will break down. So the modern solution to this problem is you start with a single owner. And what that single owner does is says, "Look, I'm going to try to figure out what set of easements and covenants will maximize the total value of the whole. And I understand every time I put an easement on somebody's property, it will go down. But somebody else's property is going to go up and benefit. What I'm going to have to do is to estimate whether the loss on the one side is greater than the gain on the other side, or vise versa." And since he's going to get revenues from both sources, he's the single owner, he has very strong incentive, first with the easements and then with the covenants, to figure out exactly what the ideal mix is going to be. And in addition, since he has the master deed, he doesn't have to negotiate with anybody when he puts these things out. He can simply establish the table, and give everybody "take it or leave it" rules, and if he's done things right, for the most part people will be prepared to take it or leave it, because there's no other way that they can configure the property to get a larger gain than they had before. What you then have to do is to make sure that, doesn't matter when you buy the particular property that you have. So you don't want an early tenement or an early purchaser to have a better deal than a later purchaser or a later purchase to have a better deal than an earlier purchaser. The values of the properties might change, but there's no reason whatsoever to let the temporal position in which people acquire interest to influence the rise that they have against other parties. And so what you do is you have a recordation system and you make it very clear that your rights are going to be binding against not only the current owner, but all subsequent takers, and the other way around. Your duties are going to be subject to all of these people, regardless of when they take it. And so by using these common plans, what happens is you can maximize the total value. And as the value of real estate becomes more... More, it increases and becomes much more valuable, all of a sudden what happens is you're now willing to bear the transactions cost to put these things together. Because those things rise much less rapidly than the values that you have. So modern plan unit developments buy beaches, condominiums and so forth, figure these arrangements. And what one has to understand about it is the basic building tools were put into place a very long time ago by the Roman system, but their use and utility increases a) as the value of property goes up and b) as the ability to create a common recordation system means that people are going to be less surprised. Because before they'd buy, they not only can look at the property and inspect it to see what seems to be going on, and to ask neighbors what's happening, but they've got a much more authoritative record out there, which will strengthen it. And so what we can say about this is the Romans had the right conceptual solution, what they did not have was a strong institutional arrangement, which allowed these things to fully flourish. But if you actually look at the substantive doctrines that are involved, the unified law of servitude that was created by the Romans, in many ways was much tidier than the English rule, in which the servitude stuff and the covenant stuff tend to develop by very different roots, and it took a long, long time before they were created into a unified system. And so that's always been the kind of Roman advantage, is you have one set of an arrangement that starts to be built in at the front end, whereas under the Anglo-American law, the history of easements, the history or real providence, the history of equitable servitudes, all subtle kinds of arrangements took place in very different orders. In the end, the unified system, which is damages for past breaches and injunctions against future breaches, with abilities to renegotiate, is as close as you can get to the optimal solution. And you have huge, huge amounts of investments today which follow this very model. NARRATOR: Thank you for listening to this episode in the Roman Law unit of the No. 86 lecture series. The spirit of debate of our Founding Fathers animates all of the No. 86 content, encouraging discussion and critical reflection relative to how each subject is widely understood and taught in law schools and among law students. Subscribe to the No. 86 Lecture series on your favorite podcast platform to have each episode delivered the moment it’s released. You can also go to fedsoc.org/no86 for more lectures and videos on Property, Contracts, and the Common Law. Thanks for listening. See you in class!