THE BLOG
07/30/2014 12:08 pm ET | Updated Sep 29, 2014

Rule-of-Law and Property-Rights Crisis in Houston?

Houston has developed a reputation as the entrepreneurial capital of Texas, if not the United States. It is the fourth-largest city in the nation and is poised to supplant Chicago as number three by next year. It is a magnet for enterprises ranging from startups to Fortune 500 companies. It is, in fact, second only to New York when it comes to the number of Fortune 500 firms in a city. It has developed this reputation because of a very business-friendly economic environment of sensible regulations and a competitive tax rate. In spite of this, there is a dark cloud overshadowing the Bayou City because of a lawsuit pursued by the neighbors of a high ­rise in one of the city's most affluent neighborhoods.

Houston is famous for having the most flexible property-rights laws of any major city in the United States. There are, essentially, no zoning laws in the city, and it is not unusual to see major businesses several feet away from quiet neighborhoods. Virtually all real-estate restrictions are limited to deed restrictions in specific communities. Other than that, Houston has largely had a very free attitude when it comes to business development. This is one of the reasons Houston has become so attractive to business. There have been attempts to try to create zoning laws to mirror most major cities around the country. Those attempts have always failed to get the support of the voting public. Then came the Ashby High ­Rise.

An investment group acquired property in central Houston near Rice University in 2007 and sought a permit to build a high rise in a mostly ­residential neighborhood that had no tall buildings in the area. It is a warm and friendly location with beautiful ivy on the walls of old buildings, and the vast majority of the commercial enterprises are made up of single-story retail spaces. Those investors wanted to build a luxury high ­rise in this pristine neighborhood. The grueling process included neighborhood opposition (calling the project the "Tower of Traffic"), numerous revisions of the application, a constant back-and-forth struggle with the City of Houston, followed by a federal lawsuit against the City, and finally a settlement in 2012. In the end the developer obtained approval for a 21­-story project with mandated amenities. The project was clearly in compliance with all restrictions on the property.

But the story did not end there. Recently I interviewed one of Houston's most prominent business attorneys, Lee Kaplan, on the subject. He gave me an update on the saga. Residents in the vicinity sued, and a jury determined that the project (not even built yet) would constitute a nuisance to 20 owners and awarded damages. Kaplan said that the "trial court ultimately upheld the nuisance finding but decided not to become a 'one-man zoning board' for a city that has consistently rejected zoning." Since the remedies of injunction and damages were mutually exclusive -- enjoining the project would mean that residents would not be damaged -- the court was open to awarding damages only after the project was completed and if the problems regarding the high rise proved true. Kaplan went on to say that the court awarded lost-market-value damages because those damages had already occurred but rejected future lost-market-value damages as speculative.

After this project is completed, and if the neighbors can prove it has adversely affected home values, they will be able to take the high rise and its owners back to court for damages. This not only creates a dicey environment for the owners and residents of Ashby but for any other high-rise developers who could decide to build in the city. In fact, it creates a precarious situation for any future businesses considering a serious building project in Houston. At least with restrictive laws you know what you are dealing with and your limitations before you build, but if the destiny of an enterprise is dependent on future court decisions after something is built, without any legal basis, that creates an environment reminiscent of developing countries where things are only constructed with political pandering and corruption.

This case not only creates problems when it comes to property rights, but to the rule of law itself, which is a fundamental principle of a free society. According to Kaplan:

The case should have been tossed shortly after filing. If the Texas Supreme Court wants to rule explicitly that "nuisance" -- which most of us think of as a cause of action for being subjected to a noisy, smelly pig farm next door, or bright lights and extreme noise penetrating one's home -- extends to tall buildings with more cars, then it may choose to extend the law that way. But it has not done so yet, and I doubt seriously that it will do so in the foreseeable future.

Nor should this be a decision made by nearby aggravated residents and a single judge. He goes on to say that "applying 'nuisance' to a building on a property that has no height restrictions and meets all city permit requirements opens the door" for action from a higher court. Will the next lawsuit complain that a high rise blocks their backyard sunlight? That denies the reality of Houston's future growth, which will inevitably evolve into more density by building upward, not outward. In spite of the vast amount of land around the city, all major cities grow up and not merely out. We are already seeing that in Houston. If the use of property is subject to the arbitrary will of the mob, rule of law itself will be trampled upon.

Kaplan points out that Ashby's neighbors were not mere victims of the high ­rise. They knew where they lived. The attorney said, "Houston has traditionally been governed by neighborhood restrictions. This decision fails to account for the fact that residents who purchase a home in a given neighborhood can look up the restrictions on their own neighborhood as well as adjacent areas. The possibility of a tall building on a thoroughfare such as Bissonnet has existed for decades. And they knew it." He went on to say that "the uncertainty created here will hurt the city."