Differences and Similarities Between Contractual Communities, and Reasons for Their Success

Abstract

In this chapter we will focus principally on the differences and similarities between contractual communities; special attention will be given to their similarities, as this will enable us to shed further light on the phenomenon of contractual communities, and lay the basis for the arguments and proposals tabled in the ensuing chapters. We will also outline the reasons for the success of this type of communities, and put forward some conjectures about their future.

1 Differences and Similarities

1.1 Differences

At this point in our argument it is worth pinpointing some of the differences and similarities between the various forms of contractual communities discussed here, first dealing briefly with the differences in this paragraph, and exploring the similarities more extensively in the next. The key differences between the contractual communities under study are basically two, and concern the ownership regime and system of decision-making.

As for the ownership regime, in the case of the proprietary community the ownership of the land is undivided, and in the hands of a single owner, both for the individual lots and for the areas used for common activities; in the case of the homeowners association, the ownership of the land is instead divided up among individuals, and only certain areas are jointly owned and used for shared activities.

As for the decision-making setup, they differ in one fundamental way: in the case of the proprietary community the “collective” decisions are entrusted to a single owner that manages the real estate according to the rent agreement; in the case of the homeowners association, the “collective” decisions are entrusted to an elected body of association members, whose task is to implement the association’s founding principles.

1.2 Similarities

There are at least five basic features shared by the contractual communities under study: (1) recognised boundaries; (2) the importance of the institutional aspect; (3) the voluntary adherence; (4) the principle of contribution in terms of benefit; (5) the function of land rent; (6) the special role of leadership.

Recognised boundaries

The first feature in common is the fact that contractual communities are strictly tied to an identifiable territory, namely, a tract of land with distinct contours (whether or not these are physically present). In other words, the identification of a specific portion of space is an indispensable factor for all the various possible forms of contractual community. If its boundaries were not clearly defined, then the rights and duties of the community (and its members) regarding the use of that space would remain unclear.¹

The importance of the institutional aspect

The second feature in common is not only the element of “design”, but also—and chiefly—the relevance of the “juridical and institutional” aspect. This means that what counts is not simply the physical and architectural unity of the ensemble of buildings and spaces, but above all the institutional basis on which they depend. The crucial point is that both proprietary communities and homeowners associations are primarily “institutional bodies”, over and above the physical arrangements. Clearly, in such cases the mechanisms of private law represent the basic tools for creating the institutional entities in question.² As Boudreaux and Holcombe (2002, p. 289) write, the great variety in private contractual governments is easily understandable:

Different people prefer different types of government just like they prefer different types of homes, cars, music, or food. But there are many local governments already in existence, so the question arises as to why contractual governments might be desirable …. The answer lies not in the goods and services contractual governments provide, but in the rules they follow to produce those goods and services.

In this perspective, “the contractual government’s creator, then, is actually producing and selling constitutional rules” (p. 304).

As aptly pointed out by Nelson (2005), the recent boom of homeowners associations in America can be seen as a grandiose exploration of “local constitutionalism”. In reference to homeowners associations, Lee and Webster (2006, p. 28) note how the boom seems to indicate a “convergent process of institutional discovery” under way; in particular, “neighbourhood government is being re-invented in the US as a response to state failure, limits on local taxation and the demand for greater choice and greater local control”.³ Similarly, and in reference to the growing phenomenon of proprietary communities, MacCallum (2003, p. 15) observes that “the unexpected result logically implied by this real estate trend is nothing less than the qualitative transformation of government”. In short, contractual communities are an engine of institutional reform (Brunetta 2006, 2008).

An important aspect that should be stressed here—and which appears even more evident in the present case—is that the land and the relative buildings are not merely a “physical fact”, and what is leased or sold is by no means a mere “material thing”.

On the one hand, a given parcel of land is not important solely for its inherent physical features, but mainly for its location—not in the static sense of geographical place, but as regards its dynamic position within a broader network of external effects of a both positive and negative nature.

By the same token, what is sold or rented out is not strictly a “thing” as such (i.e., a piece of land and/or a building), but effectively a certain type of “social jurisdiction” on a thing (i.e., on a piece of land and/or building). The market transactions are therefore not simply material transactions, but socio-juridical ones: exchange is “wholly social, denoting a change in human relationships; it is behind all physical processes, a matter of title and jurisdiction over physical things” (Heath 1957, p. 99). To put it yet another way, the right to use a given piece of real estate does not so much entitle a relationship over a thing, as involved a relationship between a plurality of individuals in relation to the use of a thing (Baron 2006, p. 1425; Needham 2006, p. 32).

Voluntary adherence

The third similarity concerns the principle of voluntary adherence on the part of the lessees or association members. In the case of proprietary communities and homeowners associations one can effectively speak of communities based on free contract choices (Fennell 2004).⁴ As pointed out by Foldvary (2006, p. 23), private forms of governance are distinct from their public counterparts—based on the notion of sovereignty—because they pivot on “explicit voluntary contracts among persons of equal legal standing”.⁵ Voluntary contracts are positive-sum contracts: in this case each party is gaining value; otherwise, the parties would not enter the agreement (Foldvary 2009).

Ellickson (1982, p. 1520) also suggests that the main difference between “cities” (as public entities) and contractual communities like “homeowners associations” is “the sometimes involuntary nature of membership in a city, versus the perfectly voluntary nature of membership in a homeowners association”. In brief, “public entities have involuntary members when they are first formed… By contrast, membership in a private organization is wholly voluntary” (p. 1523).

Obviously, what is strictu senso voluntary here is the entrance and adherence to the contractual agreement; once the agreement is accepted, the terms and conditions became mandatory.

Given that the rules of cohabitation are automatically adhered to at the moment of purchase or leasing a property in a given place, basically the adherence to the “social contract” is automatically unanimous. In this sense it is not necessary to resort to a hypothetical social contract—as instead one must for political sovereignty—which the individuals would supposedly underwrite if they had been in an “original position” (Rawls 1971), or resort to an implicit social contract, which assumes that individuals accept it for the mere reason of not leaving the place in which certain laws obtain (Locke 1690). In fact, in the case of contractual communities, the contract is a real social contract—it is to all effects accepted and expressly undersigned by all concerned. Nelson (2005, p. 91) observes that this case is “one of the few instances in the real world where all the governed have actually given their consent on the dotted line”.⁶

Contribution on the basis of benefit

The fourth similarity concerns the special meaning that the “levy” assumes in contractual communities. In the case of proprietary communities and homeowners associations, the quotas paid by the lessees and the members differ in some respects from the traditional levies paid to the local public bodies.

First, quotas are paid on the basis of a voluntary agreement. The principle of contribution is intrinsic to the voluntary agreement, and is linked to a levy that the lessees pay to the single owner (in the case of a proprietary community), and a fee that the association members pay to the board (in the case of the homeowners association). To put it another way, there is no coercive form of taxation to finance services for the common enjoyment, as the necessary quota is already included in the freely accepted contract.

Second, the quotas have been established in direct ratio to the benefits expected in return; in other words, those who pay are entitled to a corresponding benefit of exactly the type they have paid for. In economic science this is known as the “benefit principle” (Musgrave and Musgrave 1976). In this case the “levies” are conceived as “costs”, with consequent advantages in terms of allocative efficiency.

Third, the quotas are established once and for all beforehand in the original contract, and cannot be arbitrarily modified with legislative “innovations” (updates): in the case of proprietary communities, the levy and its possible revisions are stipulated in the rental contract; in the case of homeowners associations, the membership quota and the way it is calculated and updated are both fixed in the declaration of covenants, conditions and restrictions.

Fourth, levies tend to come after any upgrading carried out on the property, rather than before (as instead usually happens with local public administrations).

The positive role of land rent

The fifth similarity concerns the positive utilisation of certain aspects of the phenomenon of “land rent”. It is particularly interesting to note that the influence of some actions and interventions on the land is, in the case of both the proprietary communities and the homeowners associations, the very thing that allows contractual solutions to the complex issues of coexistence be found. In other words, the fact that the properties “incorporate” an increase in value owing to the enhancement of infrastructure and supply of services, is what allows for a “voluntary exchange” to this end. The increases in value of the land due to certain enhancements are, in this case, not a problem, but the condition that makes it possible to guarantee the collective services, accruing and sharing out indirectly the advantages among all the members of a contractual community.

To sum up: “The ownership of sufficient territory so that the rent generated by the goods can be collected enables the owners to eliminate free-riders and determine the profit-maximising level of collective goods to provide” (Foldvary 1994, p. 41). In other words:

When a private agency owns the territory (estate) serviced by a territorial collective good, it can simultaneously provide the good and collect the rent generated by it, satisfying the conditions of simultaneity, benefit and voluntarism. … Consensual rent collection is an economic equivalent of government land-value taxation, except that the equilibrating agents operate by a market rather than a political process (Foldvary 1994, p. 42).

It is therefore clear that, in the case of the contractual communities, the land rent should not be seen merely as a form of exploitation by owners who benefit passively, but instead becomes a component of a more articulated active operation for the enhancement of the territory.⁷

The function of private leadership

The sixth similarity concerns the particular role of leadership performed, in one case, by the single owner and, in the other, by the board of the association. What is interesting to point out is that, in both these specific cases, the agent acting out the role of leadership has a more clearly defined field in which to act compared to traditional public bodies, but also a more vested interest in the success of its actions.

First, the agent operating the leadership cannot alter his or her range of action, and is closely bound to complying with private law and with forms of mandates that are explicitly geared to a specific end; in other words, the agent cannot alter the private originating declaration from which he or she takes its role—as instead public authorities do with increasing disregard. Should some contravention occurs, the private leadership can be dragged before the court by any one of the lessees or association members. About the role of the single owner in a proprietary community, MacCallum (1970, p. 88) observes: “In comparison with that of a sovereign official, the role of an owner is clearly defined. His obligations towards his tenants are detailed in the lease agreements negotiated with each”.

Second, in many cases the leadership has a more direct interest in the success of his actions: paradoxically, the private dimension within which he performs his duties increases the responsibility of the decision-maker. The very programming of the duties to perform—complying with a specific schedule, a budget, and the auditing of the results, etc.—is in many cases more accurate and transparent than what takes place with the public authorities in corresponding operations. In short, in certain situations the incentives to toe the line are more transparent and direct for private leadership than in public administration.⁸

In pointing this out, it is not opportune to generalise indiscriminately beyond the forms of organisation under study here, nor should we conceal the drawbacks and failings that inevitably befall any kind of leadership; that said, we must not underestimate certain decisive structural features that connote the performance of leadership in certain specific private areas and which manage to forge particularly close links between authority, responsibility, and efficacy.

As we shall see further on (Chap. 4), this is not a call for the end of the public body, but simple to radically re-examine its role, and not expect it to perform beyond its means.

2 Plural Motives for the Emergence of Contractual Communities

As explained earlier, contractual communities are spreading, and have recently been gaining ground in the United States in particular. Taking for granted the fact that this expansion come about if (and where) a favourable legal framework prevails, and if (and where) the local administrations are not opposed to such schemes,⁹ we will now take a look at the question of demand and supply.

2.1 Questions of Demand

From the point of view of demand, our conviction is a follows: in their attempt to account for the emergence of certain phenomena, the usual “single-cause psycho-sociological explanations” prove to be completely inadequate, because they tend to reduce the “consumers” of certain forms of contractual communities to a single, univocal psychological type, driven by crude and antisocial impulses. The reality instead is that many individuals are doing nothing more than exercising their liberty to willingly enter contractual communities in their quest for good-quality living environments, for services that address their needs, for greater guarantee of an increase in value of their real estate investment, and for more direct forms of involvement in the running and care of their neighbourhood, and so forth. Factors of this kind are combined variously (Glasze et al. 2006a). The concern for personal safety and security, which many writers continue to see as the primary obsession of people choosing private residential communities, is therefore only one of the elements of a more complex whole of motives, and furthermore not always the purchaser’s and tenant’s priority.¹⁰

As observed by Glasze et al. (2006b, p. 2) in their Introduction to a book that brings together varied research into the phenomenon of residential contractual communities all around the world: “security is only one service that residents want and in both conventional and private neighbourhoods it is generally packaged up with other services. Locational choice is made on the basis of subjective evaluation of bundles of civic goods”. The same point is endorsed in the book’s Conclusion:

Contrary to much of the media coverage about secured communities, security seems to be only one motivation for moving into this form of neighbourhood. It is often not as important as the desire to secure the supply, more generally, of a bundle of rights including the rights to goods and services and freedom from risk of all kinds (Webster and Glasze 2006, p. 232).

Generally speaking, the question of safety and security is more layered (Kilburn and Shrum 1998) than some rather simplistic readings continue to obtain; and many assumptions that have come to be accepted without question should be critically revised.¹¹

2.2 Questions Regarding Supply

On the supply side, it goes without saying that real estate developers and market agents tend to prioritise and favour forms of settlements in which lessees or owners are willing to make a larger investment. For their part, developers have contributed and will continue to contribute and/or administer certain types of goods and services in a way that guarantees them significant economic returns. This is not so much because [as claimed by McKenzie (2005, 2006) and Winokur (1994)] the physical conformation of certain contractual communities—usually with a dense layout and ample collective spaces—allow for particular savings in their construction, as for the fact that contractual communities are distinctive “institutional subjects” that guarantee certainty and quality over time, and are therefore appealing to the market.

It is interesting to note here that developers are likewise taking greater account of environmental issues and sustainability—also when creating settlements that are specifically intended for contractual community management—given the growing interest in the public and market in these issues. In addition to the better-known cases (for example what took place at the island of Hilton Head in the United States¹²), there is a growing occurrence of contractual communities that make proper care for the environment one of their main priorities.¹³

3 The Role of Technological Innovation in Fostering Possible Further Development of the Contractual Communities

As we near our conclusions, a considerable aspect worth highlighting is that instances of contractual community may undergo a surge as a result of certain forms of technical advances that can significantly alter the supply of certain types of services.

Generally speaking, it is worth noting that very often political and economic theory assumed technology as a given (Foldvary and Klein 2003b). Part of the justification for attributing a decisive role to the state in so many fields is tied to the habit of considering certain forms of technology as fixed elements of our world. In truth, many technical advances under way actually favour the freeing up of various sectors. As Foldvary and Klein (2003b, p. 1) observe, the technological advancement under way tend to favour the case for free-enterprise action; it reduces the relevance of market-failures arguments and the case for public intervention:

Most market-failures arguments boil down to claims about invisible-hand mechanisms being obstructed by some kind of transactions costs. If technology trims transaction costs – by making it easy to charge users, define and enforce property rights, exit and utilise substitutes, gather information, gain assurance of quality and safety, enter and compete in markets – the invisible hand works better.

This aspect is particularly important for our discussion of contractual communities, as they are in a position to exploit these technological advances as a means of securing certain basic resources for themselves. In this way they eliminate the need to link up to (and depend upon) the statutory supplier network.

A case in point is the opportunity of improving solar energy transformation for domestic use; another opportunity is to create independent water processing and recycling plants—in particular, closed-circuit systems (Foldvary and Klein 2003a). To get such innovations off the ground would clearly require radically rethinking the traditional methods of supplying services, and would entail creating the conditions for significant alterations to administration and social organisation.