NARRATOR: Thanks for joining this episode of the No. 86 lecture series, in which Professor Richard Epstein discusses property rules in the Roman Law. Episode 5 includes topics such as: How to properly determine restitution The rules that govern landlord and tenant arrangements Short-term and long-term leases 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: We still have several topics to cover on what the Romans can teach us about rules for private property. Let’s start with something that is frequently difficult to resolve in a legal settlement - restitution. How is appropriate restitution determined? Does it vary depending on the contractual relationship involved? RICHARD EPSTEIN: In order to deal with restitution what you really have to do is to start with the simplest case and Gaius does not treat restitution and Justinian does not treat restitution in its simplest form as being a property right relationship. They treat is a quote, "Quasi-contractual arrangement," which essentially gets it wrong. To take the simplest text from Gaius, suppose it turns out that what you do is you owe somebody $100 to purchase some particular goods and you give him a $500 bill and he only gives you $300 in change. You walk out of the store and then you realize that you're $100 worse and you go back to the guy and say, "You still owe me a hundred bucks." Then in a normal situation he says, "Sorry," and he starts to give it to you. "I kept the thing by way of mistake." The rules of restitution are not rules designed to essentially create new contracts. They're designed to make sure that there's going to be a discharge of the old contract and if somebody by mistake withheld money from you he cannot treat it as though it's a gift to him. Who's making gifts to merchants, right? When they forget to give change? So you have to pay the thing up. Why is this case extremely easy as a property rights case? It's because nothing has happened to the property from the time that the transaction started to the time that the refund has been given. So that $100 essentially could come out of the till and you could be very particular and say, "No, you should have given me these five twenties and now you're giving me two fifties," but that would have been a kind of discretion that he would have at the time of the original transaction so nobody says that you have a specific right to particular dollar bills. What you do is you have a right to a particular sum of money and they can discharge it in whatever way they want, and of course that's the rule which is applied today everywhere. My wife has never heard of the rules of restitution but she knows when she's been short-changed and she hurries back. The guy on the other side of the transaction of a reputable merchant says, "Hey, I'm not entitled to that money." So what happens is they both acknowledge the transaction and they do so in good natural law terms because they can't think of any reason why to deviate from it. If, in fact, you have a rule that so matches the custom and the practice of the area it's going to be enormously robust. There's nothing particularly Roman about it. It gets carried over into every modern legal system that's based on either the Roman or the common law position. Sometimes they call it quasi-contract because there's a relationship between the two of you. There's no formal agreement about the return of this money so it's kind of half a contract but it's part of a contract. Now if you treat this as a property relationship then you have to tie it in to the last section of property relationships that is developed in Gaius and Justinian. This goes under the following three headings. Accessio, confusio, and specificatio. These are terms that are necessarily going to put tears in the eyes of everybody who hears them. They're going to say, "What is in the world is this thing about?" So you start with the simplest kind of example and you can see the way in which the problem goes. Unlike the money situation that I just talked about it turns out it's not easy to unravel the transaction, to go back to the square because too much is done. The first illustration that is given in Gaius is a very instructive one. It turns out that you own a plot of land and by mistake I build a valuable house on that particular land. What happens is the house may be worth $1,000 to me and cost me 800 bucks so it looks like a win, but it's not sure that it's worth $1,000 to the other guy. It may be worth only 700 or it could be worth $900. We put aside for the moment the valuation questions which become a really big issue later on down the road to ask the situation what happened? So the first thing we do is we start looking at the rules for the transfer of property. If you're dealing with land the only way in which that land could be transferred is through a formal conveyance by one party to another. So when somebody by mistake starts to build on land that I own generally speaking he's not going to be able to tell me, "Hey, this turns out to be my land. Buzz off on this thing." Even if it's turned out he's prepared to pay compensation for the land that's taken. The basic rule in Roman law is that land has a hierarchical position over the various things that are put on the land by way of construction, the bricks and mortar, and so now it turns out I'm out of possession and he's in possession. The way in which the system of accessio works is I sue him in order to recover the land on which he has built this particular improvement. He says, "You can't take it back from me because you will be unjustly enriched, because when I made this particular improvement I thought I was the owner in good faith of the land in question and now you're going to get something for nothing unless it turns out that you compensate me." What happens is the rule as it develops is that compensation is now going to be required and the man can resist return of the property unless and until I pay him for the value, whatever that turns out to be, of the property in question. Now mind you, this is not a holdout, right? He can't say, "You can't get it together unless we agree on some price that you're going to do this." What he can only do, as in the river case, is to specify a number which you can find not by negotiation but by more or less inspection as to what it is. So what you now do is you get yourself a forced exchange. Now what the forced exchange is, this fellow is forced to give up the improvement on his property that he made on my property, rather, and I have to pay him for it. The theory is if you give him just compensation then you can start to keep the thing. Well then the question is how do you determine the just compensation that's appropriate for this thing under these particular circumstances? That is not a very easy thing to do. Recall the point that I made before, that it may well be that the cost to the guy who builds is in fact going to be less than his perceived value but normally real estate is kind of customary and so his costs may be higher than my value or may be lower than my value. So you now have to figure out what these things are. Since this is not a voluntary transaction, you don't have a contractual figure to deal with, the contractual rule being if you own something that I want to buy essentially you can set whatever price for it that you want, then if I don't like it I can buy it from somebody else. But this is not a free market situation. This is a bilateral monopoly situation so you have to do it. Essentially what they do is they develop rules and what is the rule they develop? Well, if it turns out that the value to the owner of the property is less than the fair market value of the stuff that's on it he pays that value so he's not unjustly enriched. If it turns out that the value he attaches is more than the cost to the other guy but less than the value he attaches to it he pays the cost. He pays the lower of costs to him, cost to the other guy, or value to him, the theory being that we skew the compensation system in order to give the natural advantage to the fellow who's entitled to keep the property in the first place and you could start to see how when you start doing this kind of question it sets the template of what's going to happen when the government wants to condemn land where the basic rule is if it condemns private property for public use it must pay just compensation for the system. The reason why the Romans spent so much time working about these variations is they realized that this is the breakdown of the voluntary system that they have where essentially people can set their own prices for things that they buy and sell, so to have to spend an inordinate amount of time to figuring out exactly how much they're going to have to pay under any given type of situation. Essentially what the rule is first, you have to figure out who it is that's entitled to keep the thing and then you have to figure out how much money you have to pay to the outsider in order to restore this to the status quo ante. Now, this is the case with respect to real estate but there are many other cases with which the same problem can arise and it often turns out that you get rather different kinds of responses. So to give you the polar opposite kind of case that you start to have, assume that what happens is I have this wonderful piece of bronze or this wonderful piece of stone. It's very, very high quality but it's kind of a generic kind of property. What happens is this stone gets mixed in with your property and you now start to build on it as if it's your own. We're still dealing with the mistake case, so this is not a case of theft where you want to really stop somebody. It's a case of innocent conversion. So now the guy basically what he does is he works the piece of stone or the piece of wood, chips away lots of it so there's actually less material there than there was before and the guy comes back and he says, "Give me my stuff." You look at this and you say, well now wait a second. It's quite clear that if you're trying to make a guess, the guy that creates this unique creation has a higher subjective value for it than some guy whose thing was done, so you essentially change the rule. Now you let the guy who has altered this thing keep the property but what is his correlative duty? You can put it one of two forms. Form number one is to say okay, find a comparable piece of wood or a comparable piece of metal or a comparable piece of whatever it is, stone, and you give that to the other guy. What he does is he gets a fungible that leaves him perfectly equivalent, right, and you get to keep all the value associated with the surplus, but again it's a forced exchange and it turns out you're trying to do so in a way which makes sure that the surplus goes to the fellow who put the distinctive labor into this. Or you can say, "You know what we do is, we don't want a new stone. You have to pay for it." Now what's the advantage of this? Well, if you're trying to do it it's kind of a trade off. If you say that you're using ... You got to give a piece of stone or a piece of wood or a piece of steel the two things may not be perfectly fungible. There may be some differences at which point you're going to have to make a cash correction with respect to the thing and that's difficult. On the other hand if you give money there's the other problem, which is at what time do you value the thing that is being taken? At the time the thing was stolen or the time that the request was given and it's kind of uncertain as to which things that you want to do under these circumstances. If it's a real big fluctuation you may want to get the market value but if there's small fluctuations it might not be worth it. So you then get this long discussion in the secondary literature about the way in which you deal with these particular cases associated with accessio. Essentially what happens is you put the two things together. You have to answer both those questions. Now the modern philosophers, when they talk about this, always take the wrong tack. What they do is they ask the question as to whether or not the identity of the thing has been preserved through the various transformations in question. I'm not very good on the theory of identity and nor does it turn out is anybody else, so if you just avoid that question and ask where is the distinctive value with respect of this thing located, you then take the two questions in sequence and you first figure out who gets to keep the thing and then you figure out how much gets to be paid to the other side and this becomes the template for all forced exchanges that are done by the individuals or by the state. Now there are other kinds of transactions and I'll just mention these fairly briefly and then we'll call it a day. The first of them in confusio. It turns out that let's suppose I have some grain and you have some grain and all of a sudden by mistake what happens is we put them into a common pool and the question is how do we sort them out? Ideally I would like each grain that I have back and you would like to have each grain that you have back, but that's an impossibility. So the rule is if the two things are homogeneous what we do is we treat ourselves as co-owners of the thing and as co-owners of the thing what we then do is have a simple division. So you take your 40% of the grain and I take 60% of my grain and nobody cares which grains are in which stack. In fact, that's exactly what happens when many people store grain in silos. If the quality is uniform when you go back to take your grain out you take whatever grain comes first out of the spot and so forth. This cannot be done in the situation with the statutes or with the land because if you create partners there's no easy way to divide these kinds of thing, so what happens is instead of a partnership or co-ownership what you do is you have one person with the thing and the other person with a lien on it and you figure out the various relationships between them. But you can do it with respect to these things so long as it turns out that they're uniform. If it turns out the mixture takes place and my stuff is a high quality and yours are low quality, then what you have to do is you have to give the 60/40 division perhaps, but you then have to make cash compensation in order to make sure that there's not an implicit transfer of wealth from one thing to another. The third case that you have to worry about, and we'll end on this one, is known as specificatio. We take your grapes and my grapes and we put them together and we make wine in one way or another, or we take your metal and my metal and we put it together and one of us makes a sculpture. So each of us has a physical input which was not the case in the earlier situation that I gave with accessio. Under these circumstances what's the appropriate rule for the division? I think the answer is almost in every case if it turns out that the combined thing has greater value than it did before, figure out first the amount that people put in in terms of the physical inputs and then if only one person supplied the labor figure out that. Divide the non-labor part into half and give the guy full labor and you get ... The Romans actually had quite a dumb rule on this situation, which they said that if you built the sculpture and you melt it down again then you just divided the metal, which means that all the labor is going to be lost under these cases. So it has never been followed. The correct rule then is to follow the older rule which is if one guy is the maker of the sculpture the other guy gets his pro rata share of the metal and the other guy gets to keep the thing. Of course, the last thing you want to do is to destroy some value by knocking down these particular elements. Then in the other cases where it turns out it's a homogenous good then you treat it like the confusio case. If there's a barrel of wine in there and you're a 60% owner and I'm a 40% owner we divide it that way. So if you go through all of these rules why is it that they're put in the possession rules? It's because these are cases in which you acquire property by ways that don't involve voluntary transfer. The override, which I have yet to mention but it's implicit in everything that I've said, is if somebody tries to take somebody's property in bad faith knowing it belongs to him what we do is we give him nothing to the labor that he adds because we're trying to discourage the theft to begin with. That distinction between good faith and bad faith converters is one that exists to this very day in virtually every legal system in the world. If you're a bad faith converter you get nothing but the back of the hand and a criminal sanction. If you're a good faith guy then we go through all these various situations to answer our two questions in succession and the rule of forced exchange that will develop there carries over 100% to modern times, because there's absolutely nothing that you can talk about, 20th century wine making, which differentiates it from second century wine making. The same thing is with building on somebody's house or with essentially creating art work with somebody else's stuff. The Romans spend more time on this question than they do on the law of sale in some of their early introductory texts. Why is that? It's not because this is more important but because conceptually it's more difficult. What we then have to do is to move from these cases onto the later cases having to do with consensual transfers of various kinds of property, both in outright form and in terms of division. PUBLIUS: Assuming you acquire property in a consensual transfer, are you allowed to develop it in any way you want? RICHARD EPSTEIN: Well, when we start looking at Roman law and stress the acquisition of land and of chattels and animals, the key question, of course, is exactly what do you get by virtue of having taken possession? The answer is pretty much anything that you can claim with respect to the particular asset. With respect to land we've already discussed this particular issue in the following sense, by saying that you own it indefinitely on the one hand in the temporal dimension, and you also own it from the bowels of the earth to the top of the sky in the physical dimension. So you've got this very large element. It turns out in many cases people want to keep this thing in exactly this particular form, but there are many other cases in which it turns out that there are enormous gains from trade which come from the creation of divided interests or with respect to this large blob in any kind of asset. Now exactly which kinds of assets are divided is a point that has to be instructive and generally speaking the best analysis starts with the following simple observation. It is always costly to create arrangements which divide interests in property. Therefore you have to be able to get gains from that division which exceed the cost of putting it together. What are the costs that you have to deal with? The first situation is that you have to make sure that when you divide something between two parties they understand the boundary lines between them so that the interests create neither gaps nor overlaps. You also have to make sure that the state of the title is clear enough so that outsiders know whom they can deal with when it comes to the question of leasing, question of buying, the question of mortgaging a piece of property. This has the following tendency. If you allow perfect freedom of contract people might create very complicated arrangements which would create a real tax on the system for enforcement and create a real knowledge problem with respect to third parties. So early legal systems are conscious of the fact that there's no rule for recordation which could allow you to spread the title out on the paper, so they tend to economize by limiting the kinds of interest that you can create in order to make sure that the gains from trade are not overwhelmed by the complexities that follow once that division has taken place. In this particular cause then, you have to start to figure out what kinds of situations will moderate some degree of separation? Here they're the following kinds of arrangements, each of which I think should be talked about in order. The first of the kind of arrangements that you have is basically what is called a family settlement, both in Roman law and in English law. The most obvious kind of situation is you have this valuable asset that it's worth dividing and it turns out that you're thinking of making an estate plan which in the typical case would be protection for the widow or the widower, but usually the widow, and then after the widow has been protected to try to create ways in which the remainder of the property can go for the benefit of the children. In English law we call this a life estate and you're allowed under English law to create as many of these things as you would want, but on Roman law there was only one type of life estate that you could create and that was called the usufruct, which quite literally means the use and the fruits from a particular piece of property, and it could only go to the person who was in possession of the land. You could not create a usufruct to take place after the first usufruct was incurred. In addition to that what also happens is that the usufruct was generally, under Roman law, regarded as a non-alienable estate. What that meant is that the usufructuary, the guy who holds this interest, was not entitled to sell that particular interest or to give it away to a third party. This goes against the standard grain which says that there's full alienation of land so that the trading values can essentially produce wins for the buyer and wins for the seller. Why this particular exception under Roman law? The best explanation about this is that this is not simply if you're selling a usufructuary interest a trade off between you, the seller, and you, the buyer, there's also the interest of the third party to consider, to wit that party who happens to have the so-called bare proprietary interest under Roman law, a rather inept name, or the remainder interest under Anglo-American law which basically refers to the same situation. PUBLIUS: Can you explain more specifically what problems arise from third party interests? RICHARD EPSTEIN: The great fear that you have is if you substitute in somebody for the original party he may be abusive with respect to the use of the land in question and by essentially overusing it in one capacity or another compromise the value of the bare proprietorship. In order to protect him from that particular situation we have two sets of rules. The first set of rules is the transfer rule, which means essentially the only way that this third party can take an interest which is going to be valid is in fact to surrender the property to the landlord, the bare proprietor, who then issues a second usufruct to the other fellow and the appropriate cash payments can be made if such are desired to deal with this. Where you are dealing with situations where these are family settlements with spouses and children, generally speaking, there's a relatively low priority with respect to the sale of the land in question to outsiders, but there is a very difficult question that you have to have which is exactly what kind of uses that you can make. The law of usufruct essentially develops an enormous topology and a categorization and an analysis of what is going on. The notice is simple one, if in fact there is some overlap and interest between parents and children, this problem will not typically be acute, but even under these good situations there are lots of problems that can necessarily arise and you have to figure out what some of them are. So, the first thing that you do is if you're in these particular premises, what can you do with the land? Can you farm the land? And the answer is surely yes with that particular stuff because the very notion of a usufruct is that the tenant in possession is entitled to use the land for occupation on the one hand, and to gather the fruits of the land for the other. But what kind of farming can you make, and here the great problem that you always have to face, is if the cultivation of the land is so intense, it may well be that usufructuary will do very well out of this, but the value of the land at the time of this person's death will be depleted because there's been excessive soil waste of one thing or another. So, what you have to do is try and find some way to balance off these two interests, and you start talking about reasonable husbandry. The test that you would use, in order to make this thing work, is what sometimes is called a single owner test. If you did not have property that was divided between two persons, but was owned by simply one person, how intensive would the use would that person make knowing that he gets the benefit from short-term intensive gains, but also bears the loses from long-term depreciation of the asset? So, when you start talking about the good tenant, the bonus verde, the good man under these circumstances, the kind of idealization that the Romans put together which is still valid today, is you were to say that the tenant for life, the use of frippery, you can sorta do with the land what a good outright owner would do with the land because that meant that the amount of danger to the bad proprietorship is gonna be controlled and it would be exactly the same as if you had this particular single owner. So, you have norms of that particular sort. Then in effect suppose you're not talking about farming, but suppose you're now talking about structures, and the question that you now have to ask is, exactly how do you treat these sorts of structure? There is a conception that gets developed implicitly in Roman law which carries over today, is that if you start to live in premises of one sort or another, as time goes on they're going to be subject to what is usually called ordinary wear and tear. What that means in effect is that if you use the place, it kinda wears out a little bit, because you can't expect tiles or fabrics to remain perfect in condition, if in fact they're going to be sat on or walked on at every time, and then the tear is from time to time there will be small routine injuries that will start to take place and generally speaking when you're dealing with the single owner wear and tear is something that they normally put up with, but on the other hand, if what you do is engaged in something which would be at the opposite pole, willful destruction of the property in question, then in effect everybody's gonna start to raise eyebrows because now what happens is the tenant gets all the benefit from this intensive destruction on the one hand, and the person who holds the proprietary interest suffers all of the harm. PUBLIUS: How do you construct laws that encourage good tenants but penalize bad ones? What sort of property uses should be permissible or not? RICHARD EPSTEIN: So, what you then start to do is to develop other rules about what can happen with these premises. Well, can you change the paint on the walls? The answer, in this particular case, turns out to be yes. Can you change the structure of the rooms? The answer to that question, generally speaking, is going to be no, on the grounds that the guy who has the backend should not have to put up with an odd or inconvenient arrangement because the tenant in possession wants to have this. Now is this an ideal situation? The answer to that question is no, and here is what the problem turns out to be, is when you say that somebody is a usufructuary, it means that they have it for their life, but this is not the same thing as a lease where you know that the interest is going to last for three years, four years, or five years, you don't know whether this life, given the uncertainties of life in Roman law, is going to be a life which lasts for a year or two or 10 or for 20, and if in fact, you're talking about making improvements and you knew for certain that somebody was going to live for 20 years, and the particular improvement that was gonna be created would exhaust its useful value in 15 years, and the property would revert to its original state, you wouldn't care very much because it's not going to affect somebody who only takes possession of the property five years later, but if it turns out that you put one of these improvements in place that you regard as an improvement and it's gonna last for 15 years, and you die after five years, then for the next 10 years the other fellow is going to be saddled with that improvement. What makes this extremely hard is when you're doing these kinds of calculations, market value is not the test of whether something is generally good or generally bad. What happens is whenever you start decorating a home or start changing walls it's quite clear that market value and subjective value are at best only loosely aligned. This means in effect that you may put something in which the tenant for life, usufructuary, really enjoys, but something which the person in remainder, the bad proprietor, really finds entirely distasteful, and so what do is you've got this jointness of interest in which there's no way in which you can make a change for the one person unless you necessarily make a change with respect to the other person and this becomes extremely difficult to adjudicate. If in fact, you say that the bad proprietor's got the dominant interest, this would make sense if the usufructuary was very short, but if you assume that the tenant for life, the usufructuary, is gonna be around for 30 or 40 years, the value of the interest on top of that, if you discount the present value, is in the order of one or two percent of the value of the total property, and so you get this odd situation then if you prevent structural improvements from taking place, then what you're going to do is to say that the person who has 97% of the value in a particular piece of property, is gonna be powerless to shape or to change that property to the work in which the way in which they want. So, the Roman law spends an enormous amount of time asking what kinds of changes you can that you can make in structures and so forth. Then the next question they start to ask, is sorta what kind of uses can you make if it turns out you're a usufructuary. So, one question is can you lease the premises out to somebody else, and if so under what kind of term? Generally speaking, if you want to rent a room in the back of the house to a tenant, on bed and breakfast kind of arrangement, it's not gonna have much impact on things in the way in which they work, but if you decide that you would like to lease out, for a long period of time, the entire premises to a given person, that lease now starts to look more like an outright conveyance in the sense that this guy is gonna take total control and what he does with the property is going to be extremely prejudicial, perhaps to the fellow in the remainder. So, what you do is you have to then distinguish between which kinds of leases you're going to allow and which kinds of leases that you're not going to allow, in order to make sure that you prevent the extra burden from being placed on the reversioner under circumstances where there's nothing he can do in order to stop the transaction. You can say, well the best way to handle it, is often to do so by contract, but this turns out to be extremely difficult to do in these cases. The reason is the person who has the bad proprietorship, well it may be one person you know in a given time, but perhaps that person then dies and then the interest goes to the children, and they have divided ownership of this thing so now you have to negotiate with two or three or four people, and you know this kind of situation can become extremely vexing. What happens is the basic rules here, although subject to variation by agreement, tend to be extremely sticky and rigid because of the difficulties of renegotiation that start to take place, and indeed when you do want to create more sophisticated arrangements than the bare bones standardized rules that happen the way in which it is done today, and probably to less extent was done in Roman time, is that the person who creates the interest at the time that it's created tries to tell you what the arrangement is going to be between the person who's in present possession and the person who turns out to be in future possession, and that could be either the original grantor if the property essentially remains with him, but in some cases what you do is you deduct a "usufruct" from the property, and then sell the rest of the property to a third party and you can try to specify those arrangements. In modern English settlements, in which you have these divided properties, essentially what happens is as people become more sophisticated they realize that they have to tailor these things much more discreetly to particular cases on these questions having to do with alteration and occupation. PUBLIUS: What about tenants who not only occupy the land, but help the owner to derive profit by extracting natural resources? RICHARD EPSTEIN: The third major category that comes up here again, is one which continues to take place virtually every time, and that's the question about what are you supposed to do about mining minerals from property that exists. And here, because the question is when you take property out from a mine, that stuff is perpetually lost, that is you just can't get it back again. So, the Romans started to have a system which kinda looks something like this, which it said that if a mine was already open, you continue to mine it and the subtext usually was at the level of intensity that would been done previous to the time that you opened it. Which is a good rule of thumb, but not a perfect rule of thumb, because if the mineral become more valuable you'd like to increase the intensity of use, less value they like to slow it down, but since you're not dealing with a sole owner who can make these things for his own account, but are dealing with somebody who has to worry about the value of the mine that's left after he's gone, you have much less freedom in the way in which you can alter in response to these types of situations. What you then start to see, is again the situation where you can continue this stuff under an imperfect regime. Now, it also happens that sometimes you want to open up a new mine, and if you say to the usufructuary that you can't open up anything because it didn't exist before it may well be that this mine would be extremely value, this person may stay in property for 20 or 30 years, and you now immobilize the property for a very long period of time. So, the question is, what do you do? You can start saying you can open up the mine and act as reasonable owner, it's interesting enough that when you start getting to more modern times we start having very powerful solutions to problems for which the Romans did not have the mechanisms to deal with. So in the modern situation, what we do is we say if you open a mine and take the stuff out, this thing is a wasting asset because at the beginning you have a 100 tons of stuff in the ground, then 90, 80, 70, 60, and 50, and what you'd like to do is essentially is to make sure that the division is divided between the present tenant in possession, and the remainderman in rough proportions to the duration of the issue. So, in the modern situation we tend to create trusts, and what we do with the trusts is we take the proceeds of sale and we realize that some of this goes to the tenant for life, the usufructuary, and some of it goes to the bad proprietor, and so what we do is we put all of this money into trust and then we identify an interest rate and we pay interest out to the tenant for life, and preserve the principal for the remainderman. If, as sometimes is the case, the tenant in possession lives for a very long time, you get a lot of annual payments and so there's relatively little left for the remainderman, the value of the corpus will be exactly the same as it was before, but since you have to wait 30 years to get it the value goes down, whereas, if you die very quickly the corpus comes into possession very quickly as well and so it's worth more. So the way in which we try today to adjudicate the differences between a tenant in possession on the one hand and a remainderman on the other hand, is to create a trust to put the proceeds of sale into that particular trust, figure out an interest rate, so that we can have a smooth distribution as between the two parties. The great advantage of going that, is if in fact you make sure that the distributional question, who gets what what when, is separated from the production question, then what you want the tenant for life to do under all cases, is to adopt that strategy which maximizes the total revenue over the life of particular project in question, knowing that the distributional issues will be handled by a separate set of rules. Today, the reason why we have trillions upon trillions of dollars in trust subject to these kind of management rules, is that we have very precise forms of financial accounting today, as to what counts as interest, as to what counts as principal, what you do with stock dividends, and the more liquid your assets, that is the more they look like money and can be infinitely partible, the more accurate kind of divisions that you can start to make. So, what you do when you start to look at the Roman stuff with respect to the usufructuary kind of arrangement, is you come up with the conclusion, they absolutely understood what the nature of this particular problem was, that you have a single asset and it turns out that whatever you do for the tenant for life, you're gonna have to do for the remainderman, and their preferences may differ, and their time preferences may differ, and the consumption rates may differ, and so they're trying to figure out a way in which they get this balance. There may be cases at the margin which they get wrong, but for the most part if you had only a one shot operation at this and you looked at the 50 or 60 cases that the Romans talk about, you'd say they had an implicit understanding of what was going on, and in fact if you understand formally what the problem is, you can see in modern times how the trust arrangement has managed to deal with it. PUBLIUS: The situations you’ve just described mostly deal with long-term relationships or arrangements. What about short-term commercial transactions, like a simple property lease? RICHARD EPSTEIN: So once one worries about the transfers by way of usufructuary, these are strong property interests that are created in the measure which I have talked, but it's also possible in some cases to have leases, and leases are generally regarded as commercial, rather than, family interest, so there's very little sentiment for having a situation in which the life of the party in possession is gonna determine the respective value of the two parties involved. These are also cases in which it turns out that there's generally gonna be a consideration moving from the party in possession, the tenant, to the landlord, and there's gonna be a bunch of services that the landlord may have to provide the tenant, in terms of the upkeep and organization of the land. These can vary from one end to another, if you're turning about a lease of bare property generally speaking what the landlord does is gets a land rent and has nothing that he has to do whatsoever, but at the opposite extreme you have a landlord who has a complicated building and he leases portions of it out to various individuals, the landlord is typically gonna be more efficiently positioned to provide services for the benefit of all these tenants by cleaning up the outside of the building, for example, and making sure the hallways are clean, and so that they will undertake these things in exchange for an increase in the rent. The rature of terms that you start to see in different leases is of course highly varied as you start move from type of uses and type of an arrangement. All of this is perfectly consistent with the Roman framework, when you do this, the question then is, what's the legal status between the tenant in possession on the one hand and the remainderman? The key thing to understand about this is, is that the lease is not regarded as a transfer of property interest under the Roman law, it is regarded as a personal contract between the landlord on the one hand and the party who moves into possession on the other. So, what's the difference between talking about a real relationship, that is one which is involved with the transfer of land, and personal relationship, which is if everything goes well as between the two parties, which is the typical case, not much turns upon the description, the tenant stays in possession of the property, and the landlord continues to get the rent that is necessary, and the landlord provides whatever services start, but if it turns out there's a disagreement or a disruption, then the difference between a personal relationship, and a real relationship will start to matter. So, in the Roman system, the first question is that the landlord decides, in effect, that he would like to take repossession of the property even though the lease has more time to go, and generally speaking, under the Roman situation, the only remedy that was had by the tenant was damages for the early eviction equal by the fair market value of the lease typically, which is the extent to which the property is worth more than the rent that he had to take it, for the full duration of the arrangement, but you did not get what is called specific performance, which would allow you to stay in the premises if in fact the landlord wanted to boot you out. The second problem that one had, had to do with third parties. If some person came in and dispossessed you from the land and threw you off, what happened is that the only remedy that was given for this particular situation, was given to the landlord, since the lease was a personal contract, the possession of the tenant was not possession in law, it was the tension or use and so forth, the landlord then gets the whole type of situation, which leaves this tenant in a very precarious position. So, the question you really want to ask is, do you want somebody to have only a personal relationship, if he has these vulnerabilities, first to the landlord, and second to the outsiders, and as the history goes forward what you start to see are two answers to this question. Sometimes yes, sometimes no. If it turns that you think that the protection ought to be stronger, what you do is you call this thing a lease, and then you say it's a property interest, under modern law you're allowed to register that property interest, and that means that the landlord can be told to stay off until the termination of the lease, unless he has just cause under the lease to enter, and that the tenant in possession has a right to sue and recover the property from any third person who wants to take it from him. This generally, makes perfectly good sense, if you have one tenant and one landlord. Things become a much more complicated; however, if it turns out that what you have, what we call today, a license type arrangement, where in effect it makes perfectly good sense to say that a tenant is going to be precarious. The kind of situation which captures this to the best, is you have a movie theater, and people come into the theater and they sit down in their respective seats, and the question is whether or not if the landlord tries to eject them from this situation they're gonna be able to stay, and most people say, "What a second, the landlord's gonna eject you? It may be humiliating, we can certainly give you damages, you can watch the movie at some other theater at some other time." So, if you really say that this guy's got a property interest in this thing, it's gonna make it awfully difficult to run the theater, and so we no longer call this a lease, we now call it a license, and a license is generally terminable at will at the instance of the landlord, where in some cases damages are gonna be appropriate, and other cases it's not. It also means if you wanna sell the movie theater, none of the particular people who bought tickets to future shows and so forth, can block the particular sale. That transaction is extremely valuable, and again the relatively small value of a ticket is gonna usually take place by honoring the agreement, and even if you don't honor it, the tenant or the licensee rather, under these circumstances, can sue for the value of the lost opportunity to see a show, equal to the difference between the value of watching that show on the one hand, and the amount that you pay for the ticket. PUBLIUS: You just mentioned that a lease and a license differ. Can you elaborate on that? How do these arrangements look in modern law? RICHARD EPSTEIN: So, modern law basically now divides this into two kinds of arrangements, strong protection for leases, weak protection for licensees, and basically the stronger, the more exclusive, the interest of the tenant in a particular possession, the more powerful it goes. Now the next variation that one has on this is also important in Roman law, and in modern law, and it turns to the question of what it is that the particular tenant can do if they want to change the occupation or the possession of the land during the pendency of a lease. There are, in modern law, two ways in which you could execute this. One of them, is to try to create an assignment to third parties, which means as I'm in possession of this lease and the third party takes it over, and by and large for the most part, people are very uneasy about the free assignment of leases for the same reason that they're very uneasy about the free assignment of the use of usufructuary interest, which is the new person who comes in may make an intensity of use which is greater than that of the previous guy; thereby, increasing the cost to the landlord. The new fellow may, in fact, be a bigger credit risk than the old fellow, so putting him into possession is going to be a very risky type thing. So, given the fact that there's a retained interest, what is typically said is that the landlord can block the transaction, and the question then comes up, both under Roman and modern law, can they block it for any reason, for any cause, at which point did the value of the property's gone up and the tenant wants to assign it, the landlord can hold him for some stuff or is this a case in which the landlord wants to keep the other guy out, not to extract part of the rent in a rising market, but to make sure that the premises are gonna come back to him intact. The modern compromise that you in most places, is that the landlord has to give consent, but it cannot be unreasonably withheld. The question one has to ask then, is what does the word reasonable mean in this particular context? Is it just a kind of a fake word that gives you no information whatsoever, it's hopelessly ad hoc, or is it a term which has some kind of substance to it. The answer, as is usual, any term that endures, like the word unreasonable, is gonna endure because it actually has some useful function to serve or otherwise people would have jettisoned it to begin with, and so typically the way in which you analyze it, is you take the two risks in seriatim and ask the questions as follows. Is the particular tenant who is coming in a greater text credit risk than the guy who's going out, and if he has a stronger balance sheet instead of a weakest balance sheet you can't say the answer is yes, if he has a weaker balance sheet, than sometimes the appropriate answer is to take a rent in advance or to ask the original tenant to remain on as a guarantor of the particular obligation so as to remove that risk. Then when you start looking at the uses to which the tenant wants to look at the property, you say is it gonna increase the wear and tear above and beyond what it was on the earlier use, and so in the typical easy case, you have one person who is using this place as an office with relatively low intensity and somebody else wants to talk it into a bakery or into a factory of some sort, where you're gonna have heavy physical equipment coming in there which will damages the floor, generally speaking the landlord can block that particular transfer. The tenant will come back and say I'll tell you want I'm going, I'm gonna give you a security bond to cover any kind of cost of damages, and I covenant that I will repair the premises at the time that I leave so as to leave you indifferent, So if you actually look at what's going on here, what the whole point of this reasonable requirement is, is to say that the landlord can make sure that he's not going to be left worse off after the transfer on either the credit or the use dimensions, but he's not allowed to block the transfer in order to get a rent increase. Is this an efficient solution? The answer is yes, because the first two kinds of restrictions on credit risk on the one hand, and on use risk on the others are real social loses, the holdup value is essentially just a wealth transfer from one party to another, and in fact nobody in the ex-ante position wants to put yourself in a place where you're gonna face one of these games down the road because you know when you have those types of blockade situations both parties lose. So, essentially what happens is, the word unreasonable is used to make sure that the blockade positions don't take place, but allow for the legitimate interest, and this is the kind of thing which makes perfectly good sense. Now there's another kind of an arrangement is that sometimes you don't want to do the whole thing, and the question is what happens if somebody has a large premise and wants to sublet a bedroom or some portion of the business to somebody else. You use the word sublet, in this particular case, for a very precise reason. It means that there is no privity, no direct contractual arrangements between the subtenant on the one hand, and the principal owner of the property on the other. Everything is mediated through the tenant in possession. Now why is this essentially a good arrangement? Because for one thing if you're the guy at the top, the last thing you want to do is have a partial assignment of property, which means now that you have to chase after two people instead of one people: a) for the rent and b) for any danger with respect to the premises in question. By and large if you multiply the number of individuals who owe an obligation to a given party, that simple division is in fact an externality which makes things more difficult than otherwise, so you don't want to be involved in it at all, and if you keep the original tenant on the lease for the whole property for the whole rent, for the whole use, essentially the burdens that are gonna be created are going to be reduced. And then from the point of view of the actual tenant in possession, generally speaking, they want to keep control over the whole tenant property, and if they assign this one room out, so that they don't have their landlord clout, they're gonna be reduced in their capacity to control what their tenant does. So from the point of view of both parties these sub- tenancies, for portions of the land, make much more sense than it does with respect to an assignment for the whole. And if you think about this, you can create endless layers, you can have leases, subleases, subleases over subleases, and so forth. There comes a point when the chains become sufficiently large that nobody benefits from them, but it's very common to see three, sometimes even four levels, and you're doing it in exactly this form for exactly this kind of reason. You want to protect the landlord from the multiplicity of risk, and you want to make that the tenant keeps control over the present. So, the tenant is happy to assume all the financial risk because he's gonna be in a much better position to either evict his subtenant or to take a security deposit in advance to control the situation. Now the overall lesson that you start to draw from this, which is extremely important, is that the kinds of considerations that you're talking about here are as relevant today as they were 2,000 years ago. It may be that we have different ways of wrecking premises and making noise, then we did then, but the basic economic dynamics start to take place. So, the Roman relationships, and the variations on them, have a tremendous staying power, and if you understand the way they worked in Roman law, you'll understand how they work in common law, as well. 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!