Trust and community: the common interest community as metaphor and paradox.

• Author: Franzese, Paula A.
• Position: Symposium: A Festschrift in Honor of Dale A. Whitman

1. INTRODUCTION

   This Article explores the power of trust to shape where we live and how we live. (1) It aims to provide a new set of first principles to reshape the common interest community (CIC) (2) paradigm, so that the promise of social trust, rather than control and punishment, (3) can enhance the cultural and economic success of this Goliath of residential living.

   What is at stake is quite substantial. Over the past several decades, common interest communities (an umbrella designation that includes planned single-family home developments, gated and walled communities, condominiums and housing cooperatives all under the aegis of a homeowners association) have become the standard template for new residential development in the United States. (4) Yet, the CIC paradigm is palpably deficient in many ways, premised, since its inception, on a "command and control" rule regime that attempts to regulate all manner of land use and behavior. The legal straightjacket of rules, in many cases, has lead to confusion, misunderstanding, inefficiency and the abridgement in some instances of the personal autonomy of CIC homeowners.

   Free market advocates have argued that the CIC movement and standardized template is nothing more or less than the product of consumer demand for privatized communities, and, in particular, demand for privatized communities that incorporate a tightly controlled regime of rules aimed at maintaining and enhancing property values. (5) Those commentators further argue that, because the CIC rule regime is a natural outgrowth of the demands of the housing marketplace, the regime should remain undisturbed by meddlesome legislators and regulators. (6)

   We reject both of those notions. We argue instead that the standard CIC rule-template is far from the inevitable by-product of unfettered market forces. Its continued dominance is, rather, a product of distorted market forces--just as the underlying CIC movement persists as a consequence of skewed markets.

   The source of that market distortion is three-fold. First, mounting evidence suggests that the CIC phenomenon is, increasingly, the direct product of conscious and deliberate government policy aimed at load-shedding municipal functions and services onto newly created CICs. (7) We have termed this policy "public service exactions," by which we mean a formal or informal policy of local government that requires developers, as a condition of subdivision approval, to establish a homeowners association as the mechanism to carry out functions and services that traditionally were the responsibility of the municipality itself. (8) For this reason, the privatization of new communities is occurring even in those instances when the market would not otherwise have "chosen" the same, or even the establishment of a CIC in the first place. (9)

   Second, even in circumstances when they are not the direct result of public service exactions, CICs are not necessarily the product of well-functioning market forces. Quite the contrary, the housing market for them often falls far short of the conditions that characterize efficient markets. A well-functioning marketplace usually requires some rough equality of bargaining power between the market players, or, in the alternative, a strong governmental role in protecting the consumer. Further, healthy markets typically depend on market players having meaningful access to all of the information needed to make informed decisions. Then too, consumer-oriented markets require that consumers be afforded meaningful choices among different types of products. In key United States real estate markets dominated by CIC housing, few, if any, of those factors are present. (10)

   The third form of market distortion arises as a consequence of the unique role of the developer in the establishment of each new CIC, imposing on a cookie-cutter basis a standardized template for homeowners association governance and a similarly standardized comprehensive declaration of covenants, conditions and restrictions (commonly known as CC&Rs). The latter regulate in onerous detail all sorts of matters affecting land use and resident behavior. In particular, the developer makes the most critical decisions concerning CIC organization and governance long before the CIC is constructed and the first homeowner has taken occupancy.

   Of course, if the interests of developers and the interests of homeowners were to correspond in every respect, this disjuncture between the political organizer (i.e., the developer) and the ultimate political constituent (i.e., the homeowner) would not pose a problem. But developer and homeowner interests are not congruent. Nor is the disjuncture resolved by the influence of consumer preferences on critical pre-construction decisions made by CIC developers with respect to the organization and governance of the CIC. (11)

   As a practical matter, housing consumers in high-growth parts of the United States simply cannot "vote with their feet" with respect to CIC organization and governance because, at present, there exists no meaningful consumer choice amongst CIC organizational structures. (12) In general, developer imposed CIC templates are remarkably uniform. (13) Nor can it be said that CIC homeowners are free to amend the governing documents once the developer has surrendered control. Amendments typically require a supermajority vote of the owners, an outcome that, as a practical matter, is extremely difficult to accomplish.

   Thus, the "dead hand" of the developer all too often bequeaths to the CIC a rule regime that does not necessarily comport with the needs of the residents themselves or, more broadly stated, the needs of the housing market. Buyers are left to contend with a draconian package of restrictions that, unfortunately, is remarkably resistant to change.

   In this Article we propose a new framework that more closely aligns CICs with market forces and public choice. The rule-bound boilerplate that governs the traditional CIC is best replaced by a legal template that places far less emphasis on regimentation and punishment and far greater reliance on the power of social trust and community. We do not suggest, however, that those social virtues alone can do the work best achieved by a combination of intrinsic ethical and cultural norms with relevant legal constructs. Hence, we suggest that the promise of social capital be supported by a legal foundation that includes: (1) a new set of governance choices afforded to CIC homeowners based on the sunsetting of the developer-imposed servitude regime once the developer relinquishes control of the CIC; (2) clear and immutable statutory rights accorded to CIC residents; (3) a fair, equitable and affordable alternative dispute resolution process; (4) an ombudsman with a mandate to resolve homeowner issues and provide relevant information before those matters metastasize into full-blown legal conflicts; and (5) procedures to promote transparent management and accountability.

   Just as important as the substance of this proposed CIC reform model is a realistic and workable program to achieve it--with respect to new as well as existing CICs. This will require state statutory reform, as well as a modification of municipal land-use policies. (14) No less important is a change in the attitude of the key actors. In this regard, mandatory leadership training programs as well as fiscal integrity training for all CIC board members are appropriate and warranted. Such programs are the norm in both governmental and private sectors, and have been shown to be effective in inculcating leadership skills and ethical responsibility. (15)

   CIC board members are entrusted with responsibility for budget-making, service-delivery, revenue collection, rulemaking, informal adjudication, and land-use review. They must be properly trained to perform those complex tasks. Certainly, effective training is needed to render board members conversant with applicable legal strictures, ethical responsibilities, management basics and, perhaps most essentially, the rule of reasonableness.

   Still, a broad program of statutory reform and training initiatives, although necessary, is not sufficient. The elusive but essential social virtues of trust and community must be consciously cultivated, tended to and reinforced by CIC leadership and, most importantly, by CIC residents themselves. Neighborliness works. When all is said and done, the power of social trust and cooperation must be given the chance to do its job.

2. THE RISE OF THE COMMON INTEREST COMMUNITY IN THE UNITED STATES

   The CIC (16) is a private organization formally established by the developer of a new suburban subdivision. Many CICs maintain streets and parks, provide curbside refuse collection, operate water and sewer service, regulate land use and home occupancy, impose rules of general applicability on constituent homeowners, and collect fees from homeowners that are in many ways the functional equivalent of property taxes. (17) Those are functions and services that traditionally were performed by local government. But in many fast growing areas of the United States, municipal provision of those and other services is rapidly becoming a distant memory. (18)

   In recent years, the number of CICs in the United States has grown dramatically. In 1980, there were an estimated 36,000 CICs in existence throughout the country. (19) Today, that number stands at approximately 286,000. (20) CICs are home to roughly 1 in 5 Americans--almost 60 million people. (21) In the largest metropolitan areas, more than fifty percent of new home sales are connected to a homeowners association. (22) Indeed, "'[i]n many rapidly developing areas ... nearly all new residential development is within the jurisdiction of residential community associations.'" (23) The number of community associations presently exceeds the number of municipalities by a factor of eight. (24)

   The nature and sources of...