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My friend and I were discussing the problem of investment properties; a residence owned by someone but not actually their primary residence (the problem being market inflation and reduction of available homes). We got into a debate about adding a hypothetical "This property must be your primary residence for x years or you get to pay an additional [punitively large sum of money] to the seller, this clause must also be in your sales contract, with the punitive sum being equally divisible amongst all previous owners of the house" clause to the sales contract. The idea came from the GNU GPL v3 software licenses that say "if you use this library, you have to make your source code available and also use GPL v3"; essentially trying to reduce the pool of available investment properties by individual contracts.

It seems like nearly anything can be added to a clause, but a good lawyer can or sympathetic judge can also nullify those clauses. That said, at face value could such a clause be included and reasonably enforced?

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  • One way to do this would be with a forgivable loan
    – jmoreno
    Commented Nov 20, 2023 at 23:43
  • Of course, GPL relies on the fact that you're licensing the code, not exactly selling.
    – ilkkachu
    Commented Nov 22, 2023 at 17:15
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    One thing to explore: this seeems roughly equivalent in mechanics to the odious clause of requiring HOA membership. So maybe look at how that is done. Commented Nov 22, 2023 at 20:38
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    This already happens with HOAs. It's added to the sale contract that the purchaser must become a part of the HOA and include that same requirement of any future purchases. If it can be done with HOAs then surely it could be done here too Commented Nov 27, 2023 at 8:46
  • The premise sounds fine here in Britain where many people are forced to do or not to do things most owners take for granted, by covenants, codicils or riders attached to wills or bills of sale. Much of Britain's social housing was sold in the Right-to-Buy scheme of 1980, which almost verbatim compelled buyers to use the property as their primary residence for X years before selling it, on pain or repaying huge discocunts. I knew of a bequest to a health authority of a mansion and grounds, to be used forever 'as a hospital', or clawed back. More… Commented Nov 28, 2023 at 19:06

7 Answers 7

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It could be legal but a “punitively large sum of money” would not be

The remedy for a breach of contract is damages, not punishment; punishment is reserved for the state in response to an offence, not to an individual for a breach of contract. Such a clause would be void, and you would be left seeing for damages that you suffered by the breach which would appear to be approximately $0.

Furthermore, while you can require the subsequent owner to include a similar clause in a sale to a third-party, if they don’t, you have no cause of action against that third-party. In any event, you are still left seeking your $0 damages.

Other ways of achieving the outcome

Lease with an option to buy

Lease the property for 5 years with the use restriction with an option to buy if they complied.

Restrictive Covenant

Where local law permits, place the restrictive covenant on the land. For example, until 31 December 2028, the property may not be rented out. The reason I phrased it that way rather than “must be your primary residence” is that courts are extremely reluctant (as in almost never) to allow a person’s lifestyle choices like where they live to be restricted.

Note that such covenants can be set aside by government in some jurisdictions. For example, in any restriction that prohibits a use the council would allow, may be set aside on application.

Government Planning

If this is a worthwhile policy objective (see below), then it is likely more useful to engage government in the solution. For example, the NSW Government is going to allow the construction of residential units in commercially zoned areas but only if they are built-to-rent.

What problem are you and your friend trying to solve?

Restrictions on renting properties tend to make housing less affordable, not more affordable. Having a large number of investment properties available on the market tends to drive rent (and therefore housing) down, not up. So, I’m not exactly sure what “the problem of investment properties” is. Your solution would appear to make housing affordability worse.

If you are trying to address the problem of home ownership, then your solution seems counterproductive. Many first time property owners get into the market through buying an investment property rather than buying a home. If you have somewhere cheap to live (e.g. mum & dad’s house), this can be far more affordable than buying a place to live. Your plan closes this down. So, this solution could also make home ownership worse.

While encouraging home ownership is a laudable aim (maybe), doing so at the expense of affordable housing for people who can’t or don’t want to own a home seems counterproductive.

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  • Comments have been moved to chat; please do not continue the discussion here. Before posting a comment below this one, please review the purposes of comments. Comments that do not request clarification or suggest improvements usually belong as an answer, on Law Meta, or in Law Chat. Comments continuing discussion may be removed.
    – Dale M
    Commented Nov 22, 2023 at 3:47
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This is called a Use Clause

These are common in business real estate transactions (for example what you are doing with your property in a shopping mall). They are also fairly complex and in this case I think would tend towards real property law and not so much contract law. Real property law puts a high burden on the seller due to the assumption that people get to do what they want with their homes.

So, could it be written so that it's enforceable? Almost certainly, though getting someone to agree to it as a buyer would likely be the problem. The mortgage bank might not be so interested in the non-standard sales contract either.

As to your idea that a good lawyer or sympathetic judge can invalidate any contact, that would be a bold assumption. Most real estate contracts have been through all that and are fairly well perfected against loopholes, plus are protected by statute from most disputes.

Use Clauses

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    The OP is asking about restrictions after sales, not on leases.
    – Dale M
    Commented Nov 21, 2023 at 8:52
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    Do shops ever own the property they use in a shopping mall? I thought that shops in shopping malls were universally tenants, not owners.
    – gerrit
    Commented Nov 21, 2023 at 9:47
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    The mortgage issue is going to be a real problem. The mortgage contract is not a sales contract, so it basically opens up a loophole. To "sell" your house, you remortgage it to the buyer, and fail to pay. But if the original sales contract prevents mortgages, the pool of buyers shrinks massively.
    – MSalters
    Commented Nov 21, 2023 at 10:31
  • Presumably this is USA. Any particular states? You might like to tag your post with the relevant jurisdiction. Commented Nov 21, 2023 at 11:06
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    @gerrit the large tenants often own their buildings. Sears was a huge real estate holder back in the day, mostly in malls.
    – Tiger Guy
    Commented Nov 21, 2023 at 13:28
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I see no reason why it would be illegal. On the other hand, I would require a significant rebate to buy this house. Making a purchase decision, I would work under the assumption that it is legal and enforceable.

I would ask them to explain what happens if I die (and obviously stop living there), if I fall on hard times and can’t afford my mortgage payments, and other things.

Under the right conditions, that is if the difference between sales price and market value is enough to cover my risk, I might agree to it, but it wouldn’t be cheap.

And of course the mortgage lender might have a problem with this.

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This doesn't need to be handled via the sales contract, but can be done by registering a restriction on the real estate itself. Since all real estate are register goods, and all sales are notarized, you don't need GPL-style tricks. There's direct legal support for this ("kwalitatieve verplichting", Art 6:252 BW).

The contract route is also possible, and well understood ("kettingbeding"). This has the advantage that you can use it for positive obligations (must do X), whereas registered restrictions are more limited (can't do Y). "Must use as primary residence" is a positive obligation, "Can't rent it out" is not.

Similar to the observations in other answers, adding such a restriction is possible when you're the unencumbered owner (no mortgage), and will hamper future buyers seeking to obtain a mortgage. That's why these restrictions are publicly registered. And a "kettingbeding" will be called out by the notary during a real estate sale.

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Something like this could be put as a restrictive covenant that runs with the freehold. This binds anyone who owns the property to observe the restriction. However as Dale M has noted, the punitive damages clause would not be enforceable. It would be for any party who believes they have been harmed by the breach to sue for damages.

So for instance you might have a covenant saying that you can't store vehicles on your front drive unless they are roadworthy (because lots of junk cars up on bricks are bad for property prices), then if Alice has such a car, and her neighbour Bob believes he got a worse price for his house as a result, then Bob could sue Alice for the difference. Bob might also be able to get an injunction over the issue. However the law on enforcing covenants is complex. See the link for a brief outline, but a real situation is going to call for advice from a solicitor.

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This started off as a comment but got more complicated.

You can do this in the United States. You would approach the problem as a "Deed Restriction". You can make up whatever rules you want as long as you disclose the restriction and it is not discriminatory (against a protected class). See https://www.azfamily.com/2023/09/14/sedona-deed-restriction-program-aims-protect-homeowners-short-term-rentals/ as an example.

Local laws need to be followed in this regard, and of course, you have to have something that allows people to get loans. But deed restrictions can be as silly as you want. Now, rather or not you can find a buyer, or if that buyer could find a lender, that is a totally different question.

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It depends on what you want to accomplish. Such a clause in the sales contract could only be enforced against the buyer. Generally speaking, two people can contractually agree to anything that is not illegal. How it could be enforced is an issue. But you could run into a situation where the buyer is a "straw man" who immediately sells the property to someone else, who is not bound by the terms of the contract. Then the property that you wanted to remain a primary residence might become a rental property soon after the original sale.

On the other hand, if you want the property to remain a primary residence even for successive buyers, you would have to put this in the deed, as a covenant. That covenant could be attacked by a subsequent buyer as being against public policy. That attack might well be successful.

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