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of feudalism, the subtenant is regarded as holding of the prime tenant, not of the landlord. Consequently, there is no privity of estate between the landlord and the subtenant, and the landlord cannot enforce any of the obligations of the original lease against the subtenant. This includes the obligation to pay rent. If the subtenant defaults on the rent, the landlord’s only recourse is against the prime tenant.

Courts have devised a variety of tests for distinguishing between assignments and subleases, but the basic question is whether the original tenant is still in the picture or has transferred everything to the substitute tenant. The more significant point is that there are only two ways to transfer—assignment or sublease—and courts do not recognize any other arrangement. This is another example of the numerus clausus principle at work, and can be understood as reducing the information costs about the rights and obligations of the respective parties that third parties (such as creditors or other prospective tenants) would have to bear if a larger menu of options prevailed.

• Common Interest Communities

Leasing, as we have seen, is often used to achieve a division of managerial authority between common and separate facilities within a single complex of assets. Common interest communities are also used to achieve a division of managerial authority between common and separate facilities within a single complex of assets. The basic concept of a common interest community is that individual units, whether they be apartments or townhouses or freestanding homes, are usually owned in fee simple by individual owners. The individual unit owners then collectively organize themselves to manage certain common or shared facilities, whether it be the exterior shell, lobby, and heating plant in an apartment building, or swimming pools, driveways, and landscaping in a complex of buildings. Familiar examples of common interest communities include

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condominiums, cooperative apartments, and gated residential developments. Virtually every common interest community could also be organized by leasing (although leasing has broader applications, as in ground rent leases). Hence, common interest communities are an alternative choice for achieving one of the principal functional ends of leasing.

Common interest communities take one of two legal forms, both of which are expressly authorized by statute. In a condominium, individual units are held in fee simple and common areas and facilities are co-owned by the unit owners (without a right of partition). Unit owners are typically required to be members of a condominium association, which governs the common facilities. In a cooperative, individual units and common facilities are owned by a single entity, the cooperative corporation. Individuals then purchase shares in this corporation, which shares entitle them to a perpetual lease of a particular unit.

Under either of these legal forms, common interest communities function in practice as a kind of private government.14 Such communities are nearly always created by a single person or entity, typically a real estate developer (analogous to the founders of a new political entity). The developer will incorporate the plan for the common interest community in promises that are included in the deeds to the land and that run with the land (more on promises running with the land in Chapter 8). These deed promises are sometimes called covenants, conditions, and restrictions (CCRs). These promises provide the basic framework for the management of the common interest community (analogous to a constitution or city charter), and are binding on the managers of the common or shared facilities and the individual unit owners alike. The CCRs will typically provide that the individual unit owners constitute a

14.See Robert C. Ellickson, Cities and Homeowners Associations, 130 U. Pa. L. Rev. 1519 (1982); Clayton P. Gillette, Courts, Covenants, and Communities, 61 U. Chi. L. Rev. 1375 (1994).

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homeowners’ association (HOA), which will gather periodically or on special occasions to vote on matters of common concern to the community (analogous to the electorate of a state or city participating in elections or referenda). The CCRs will also typically provide for a governing board, which is in charge of managing the common or shared facilities and enforcing rules and regulations that control the behavior of the individual unit owners (analogous to a legislature or city council). Typically, the board consists of individual unit owners elected at a meeting of the HOA. The board may hire a manager (analogous to a city mayor or manager) and other employees to manage the common or shared facilities, or may enter into contracts with outside firms to provide these services. Importantly, the HOA will have the power to impose periodic assessments on the unit owners to cover the costs of providing common or shared facilities and services (analogous to taxes).

Given these organizational features, it is possible to describe the differences between leasing and common interest communities as being similar to the differences between dictatorship and democracy. Consider a residential complex consisting of a number of buildings containing multiple units, along with common facilities such as a swimming pool, recreation center, parking lot, and landscaping. If the complex is organized by leasing, the landlord has exclusive managerial authority over the common or shared facilities. The landlord can dictate what hours the swimming pool is open, whether free aerobics classes will be held in the recreation center, how often the parking lot will be resurfaced, and so forth. If the complex is organized as a common interest community, the common or shared facilities will be managed by the HOA or the governing board elected by the HOA. The HOA or the board will decide, typically by majority rule, what hours the swimming pool is open, whether free aerobics classes will be held, and how often the parking lot will be resurfaced.

The distinction between dictatorship and democracy must be qualified, however, because there are other important constraints

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that operate in both contexts. The landlord is constrained by the terms of the leases entered into with individual tenants and by legal duties such as the IWH. If the landlord agrees in the leases to keep the swimming pool open until midnight and to provide free aerobics classes, then the landlord will be contractually bound by these commitments. And the landlord cannot allow the property to descend into unsafe and unsanitary conditions without running the risk of liability under the IWH. Similarly, the CCRs in the common interest community may include promises that run with the land and constrain the discretion of the homeowners’ association and the board. If the CCRs include promises about the hours of the swimming pool, aerobics classes, and so forth, then the HOA and the board will be bound by these promises.

Also, both the dictatorial landlord and the majoritarian HOA will be constrained by market forces. If the landlord refuses to resurface the parking lot, and huge potholes develop, tenants may decline to renew their leases and the landlord may have trouble attracting new tenants. Similarly, if the board in a common interest community refuses to raise assessments to pay for resurfacing the parking lot, unit owners may suffer damage to their cars and the market value of their units may decline. Once a majority of the unit owners decides the board has been too stingy about the parking lot, this will predictably lead to a change in policy by the HOA or the election of new board. In short, the persons who occupy individual units in a leased complex have exit options, and the persons who occupy individual units in a common interest community have voice options.15 The explicit or implicit threat of exercising these options constrains whoever is exercising managerial authority over the common or shared assets.16

15.See generally Albert O. Hirschman, Exit, Voice, and Loyalty: Responses to Decline in Firms, Organizations, and States (1970).

16.Exit from polities is often more inconvenient, and sometimes nearly impossible as in the case of actual dictatorships.

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for residential rental property is competitive, these tax deductions should be reflected in lower monthly rental payments, offsetting or perhaps exceeding the tax benefits from owning an individual unit.18 Furthermore, the use of common interest communities has spread to contexts such as gated communities of freestanding houses, where the use of the common interest community provides no tax advantage, because the individual units would almost certainly be owned rather than leased whether or not there is a common interest community. So in this context at least, taxes cannot explain the popularity of the common interest device.

Another explanation might be that people prefer to live in a selfgoverned community rather than in a community run by a dictatorlandlord. It is undoubtedly true that some people are attracted by attending meetings of HOAs and serving on governing boards. But there is also significant anecdotal evidence that many people find these duties tiresome and are irritated by the often petty politics associated with disputes over assessment levels and pet policies.19 Given the difficulties of managing property by majority rule, the “transaction costs” of daily life in a common interest community are probably higher than in a rental community. Also, common interest communities can impose significant restraints on the ability of unit owners to exit, insofar as board approval is required for transfers of units (this is especially common with cooperative apartments). Thus, it is doubtful that governance advantages can account for the growing popularity of common interest communities, except perhaps for a subset of persons who find participatory governance structures a positive attraction.

18.As covered in courses on tax law, there is an additional advantage to owneroccupancy. A tenant must pay rent to the landlord out of after-tax income, whereas an owner enjoys the benefits of occupancy without have to pay tax on this “imputed income.” This may be the most important tax benefit of owner-occupancy.

19.See Nahrstedt v. Lakeside Vill. Condo. Ass’n, Inc., 878 P.2d 1275 (Cal. 1994) (recounting a major squabble over three cats).

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A third explanation, which is consistent with the general theme of this chapter, is that, at least in the residential context, people increasingly find that common interest communities provide a better dividing line in the allocation of managerial authority between the common and separate facilities. We can call this the “designer kitchen” phenomenon. If the individual units in a residential complex are leased, then the tenants have general managerial authority over their individual units. They can decide what kind of furniture will be put in the unit, what the window treatments will look like, and of course they will have authority over who can enter the unit as a guest, whether the TV or the stereo is on at what hours, and so forth. But if the unit holders want to undertake a more dramatic change in the interior space, such as installing a designer kitchen, leasing presents problems. The landlord will be reluctant to pay for a designer kitchen, if the landlord has doubts about whether future tenants will be willing to pay higher rents to defray the costs of this improvement. The tenant will be reluctant to pay for the kitchen (assuming the landlord consents to this), because the improvements would be fixtures that would belong to the landlord when the lease terminates. So an individual who craves a designer kitchen will have difficulty getting one in a leased unit. (In many commercial tenancies, leases last much longer and each tenant is expected to remodel interior space according to its needs.)

In contrast, if the complex is organized as a common interest community, the designer kitchen presents few problems. The interior space is understood to be owned by the unit holder in fee simple. Thus, if the unit holder wants a designer kitchen, and is willing to pay for it, the unit holder can have the designer kitchen. The effect of the designer kitchen on the future value of the unit, for better or worse, will be borne entirely by the unit owner, not the other owners with interests in the complex. The point of course is not limited to designer kitchens, but applies also to remodeled bathrooms, tearing down or moving walls, combining two units into one, and so forth.