Kiyokazu Tanaka, Department of Economics Sophia University Tokyo Japan.

E-mail: tanaka-k@sophia.ac.jp

Multimedia Edition 1994-1999

High or medium-rise condominiums called "mansions" are the major form

of housing in Japan, and they are widespread, not only in the cities, but also

in the countryside. If you buy a unit in a newly developed condominium com-

plex and start living there, you will participate in forming a new community

with unfamiliar people of diversified values and lifestyles. When you buy a

condominium, you buy into a residential unit, and other common property

such as the fabric of the building, its lot land and incidental facilities. Thus,

we need to make rules as to how the common property, i.e. common areas,

should be utilized, how they should be managed and maintained, and how

the costs should be shared. Now the questions are, when and how the rules

should be or are made, and what difficulties we would have when the rules

are actually implemented.

In many cases, inadequate rules seem to be the cause of many troubles we

encounter after the start of our new community life. Here, we see the re-

quirement for analysis from Public Choice theory and Constitutional Eco-

nomics. Now, how are the constitutional choices made in the condominium

community called "a small self-governing body"? I would like to clarify its

characteristics and problems, and examine what institutions are required.

The private developers' sales of condominiums were started in mid-1950s.

The condominiums were constructed around the center of Tokyo and the

numbers of them were not so many in 1960s. The 50 thousands units per

year were constructed all over cities around from 1970. The constructions

boomed from 1972 to 1974. In 1979 they reached in 10 thousands. The sup-

plies of over 10 thousands per year were continuing since then. They in-

creased again in 1989 and were beyond 180 thousands units. And the 1996

White Paper on Constructions described the following, "After the fiscal year of

1981, the number of condominiums sold has exceeded that of detached

houses. This shows that condominiums have been recognized among Japane-

se people as a rational form of residence which offers us a comfortable life,

particularly in metropolitan areas where land prices are relatively expen-

sive." ( p.594 )

As the results of increase of condominiums variety of troubles have

arisen.

The quality problems of buildings such as leaking water, unexpected

noise from neighbors and warp of rooms and so on, have been appearing.

They have been called problems of "defective condominium". The environ-

mental problems such as the right to sunlight which buildings deprive

neighbors of sunlight have also developed.

As the buildings have been getting older, the large scales of repairs, such

as the repainting of outer walls and replacements of waterproof roof-rubbers,

have been needed. The maintenance and management of buildings such as

how much unit-owners association should put aside for repair and the like

have been recognized as important matters. Further many serious problems

concerning the establishment of management association, the administra-

tion of association and everyday life troubles among residents in condomini-

um community have been one of major social problems.

In order to understand the present situation of the management of con-

dominiums, and the opinions of residents in condominium complexes, the

Ministry of Construction conducted "the Comprehensive Survey of Condo-

miniums" in 1993. Multi-replies were given by the 980 condominium associa-

tions to the survey, and "troubles with noise" ranked the first, accounting for

46.5%, followed by "troubles with pets", 43.9%, and "troubles with parking

lots", 39.5%.

The seeds of such troubles, it seems, already exist in the Association Rules

which are actually made by developers in the first place.

Now, as an explanation I would like to present a case of troubles with

parking lots.

1) Outline of the problems

The condominium complex of this example consisted of six buildings, with

394 units, and the term of its construction work was divided into two periods.

The first half of the building construction area was sold before the rest was

accomplished, and a unit owner of the condominium was assigned with a

temporary parking lot. The parking lots were defined in the contract such

that they would be formally reallocated after the completion of the second

half of the building construction area. Before a buyer signed the contract, the

seller gave an explanation of important matters; however, it did not include

any specific way about how the parking lots should be distributed. With the

completion of the second area, the ownership of a parking lot was about to be

given to the owners. But since 155 units were still left unsold, the developer

tried to obtain the parking lots that would be more beneficial for their future

sales of remaining condominiums, i.e. the method adopted by the developer

was to ignore the rights of existing purchasers.

Additionally, due to the developer's lack of consideration for social fair-

ness, the condominiums community had to go through various problems de-

spite of the fact that one parking lot was secured for each owner.

2) Structure of the problems

Because of the fact that condominium complexes are always accompanied

with common areas, various problems at a condominium complex are typical

questions of collective decision making in the view of public choice theory,

though the community scale of condominium is relatively small compared to

an area or national one. Particularly, the problems concerning parking lots

are a typical issue of collective decision making with which the residents of a

newly developed condominium complex are faced from the first. Therefore,

this example gives us materials through which we may examine the positive

or normative implications of public choice theory.

Obviously, residents of a newly developed condominium complex are all

new to each other, therefore community is not established yet among them.

"A veil of ignorance" - a concept in "A Theory of Justice" by John Rawls

(1971)- is too extreme to be applied here, but "a veil of uncertainty" - a con-

cept by Buchanan and Tullock (1962)- may be applied to this community.

Generally, a condominium is not a commodity, which we buy so many times

in a lifetime. In addition, the issue is about the ownership of the common

area -specifically but the distribution of parking lots or more precisely, how

the allocation should be made-not an importantly central issue for the unit

buyer in comparison with, e.g. the price of the unit, etc. Therefore, only peo-

ple with extreme prudence would check out such issues before they sign the

contract. On the other hand, the developer group companies (which consist of

the builder, the sales company, the property management company etc.,)

have accumulated know-how from their sales experiences in the past. Here

exists the typical asymmetry between the information of buyers and sellers.

When people face troubles which seem to be the responsibility of the de-

veloper soon after they move to their new residence, the " Prisoner's Dilem-

ma problem" is likely to arise. That is, there is a problem in sorting out who

should take initiative, or who should incur expense to settle down the trou-

bles which they share. The company is aware that it is not easy for the

residents to become united, thus they know the importance of controlling the

Board of Directors, which is the key to the movement of the unit owners as-

sociation. Also, in this case, the Board of Directors played a particularly im-

portant role. In accordance with "the Agreement of Administrative matters "

(which was a document setting out the transition process of management

from the developer to the unit owners association), the management com-

pany of the developer group companies selected the directors for the first

term. The residents had to accept those people automatically. Moreover, the

directors were not selected immediately after the residents moved to their

condominium in the first construction area, but only after about 9 months,

that was four days after the determination by lot for the allocation of parking

lots. After that, the first meeting of the Board of Directors was held, and

the management authority was transferred to the unit owners association.

Until then, the seller, the Developer Company, was responsible for the man-

agement. The term of first directors was for two years, but the "Administra-

tive Covenant"[KANRIKIYAKU] stated that the second and later directors

would be selected in the General Meeting of unit owners, and their term

would be for one year.

As expressed in the catchphrase of the industries of management compa-

nies- "Administrative Covenants are the Constitution for condominium com-

plexes"-, the importance of the Administrative Covenant has been more rec-

ognized. The existence of the "Agreement of Administrative matters", which

was accepted when the contract was signed, virtually influenced the solution

of the problems later.

3) Problems with the method of allocation of the parking lots

In the "Statement of Important Matters" [JUYOUJIKOU

SETUMEISHO], the parking lots were described in the clauses of special

policy conditions as follows: "Owners of a parking lot should enter into the

appointed contract on the usage of the parking lot with the unit owners asso-

ciation, and each unit owner should use the appointed parking lot. Further-

more, a method should be specified by the vendor, with which the parking

lots are distributed, either temporarily before, or permanently after the com-

pletion of the second building area." The residents were generally informed

that the distribution would be done by the drawing of ballot. Actually, the

Management Company on behalf of the vendor who had arranged the ballot

controlled the distribution. At first, the whole parking lots were divided into

seven blocks, and the residents were asked to respond to a questionnaire as

to which block they preferred. When the lot was drawn, some unit owners

missed the block they applied because its rate of competition happened to be

more than one. In short, at the first stage, the unit owners were only allowed

to chose the block, but not the actual parking lot. In addition, the rate of

competition for each block was not announced beforehand, thus, no opportu-

nity was given for the unit owners to change their preferred block. Later, the

second lot was organized for those who missed their block: the lot was ar-

ranged to prioritize the unit owners to select their parking lot from the re-

maining. The choice was only available within the remaining area; however,

it should be noted that the object of the second lot was not the blocks but the

individual parking lots. In that way, the lot was organized by two stages.

The parking lots were divided into blocks by the location, i.e. under-

ground, indoors or outdoors, and by the category if they are the grounds level

or with the mechanical equipment. Mechanical parking had three levels, i.e.

top, middle and bottom, and it had limitation with the weight and height of a

car. Each type had different merits or demerits, and required different rental

fees. Furthermore, the Association Rules prescribed that when a unit owner

transferred or rented his own unit, his initial ownership of the parking lot

should also be transferred to the new unit owner. Therefore, the initial as-

signment of the exclusive right to use a parking lot was very important for

the unit owners.

Naturally enough, the company's arbitrariness was not avoided when the

parking lots were divided into blocks. In this example, the problem was

further complicated by the fact that not all the condominiums had been sold

by when the parking lots should be allocated. Although the Developer Com-

pany announced in advance that it would apply for the blocks on behalf of

the right of 155 unsold units, this distribution was to ignore the right of ex-

isting unit owners for the advantage of future sales of the Developer Com-

pany. That is to say, while each unit owner participated in the lot individu-

ally as a dwarf, the Developer Company did so as a single decision-maker,

Gulliver, as it were, with the power to control 155 units. In addition, if you

compare the actual number, after the company distributed its 155 rights into

each block, with the proportionally divided number, obviously the situation

was in favor of the Developer Company. This lead to the infringe of the own-

ership of common areas protected by the Civil Code and the Law for Com-

parted-ownership, etc. of Building.

The ill-prepared thing was that the Management Company made and

drew the lot in no presence of a third party, thus no transparency was ob-

tained. Moreover, the suspicion was aroused since the results from the lot

were not disclosed. However, the Board of Directors did not understand the

essence of these problems, and on their own judgment, the Board of Directors

interpreted the result was satisfactory to the most of the unit owners. The

Board of Directors was at the company's beck and call, and they did not have

a recognition that each unit owner's right of exclusive use of the parking lot,

the shared area, is the right which should not infringed under the name of

the majority. This incident corresponded to the questions of the Representa-

tive Democracy and the Constitutional Democracy, which deal with the in-

fringes on the constitutional right by the Majoritarian Democracy.

Condominium complexes are spatial and physical goods consisting of

residential areas, buildings, lots and other common areas of incidental facili-

ties. At the same time, they consist of "the set of Association Rules", such

rules as to how the common areas should be used, how the maintenance

should be administered, how the costs should be shared, and how the com-

munity life should be led. Thus, the condominium complexes are classified as

"club goods".

The Association Rules are accompanied by constitutional rules, i.e. the

administrative covenant, and by post-constitutional rules, i.e. the detailed

rules for using parking lots - for cars and bicycles - and meeting rooms.

It is almost impossible to draft and enforce, Association Rules with the

suggestions exclusively from unit owners, since it is not likely that every unit

owner buys or moves to a new residence at the same time. For this reason,

many of the Association Rules are drafted by developers or management

companies, and put into effect after acknowledgement by unit owners.

Generally, newly developed condominium complexes are still under con-

struction when they are on sale; thus "Model Rooms" are used for sales pro-

motions. Due to this style of sales, you cannot check the common areas in

detail when you should make a decision whether or not to buy. Moreover,

advertising brochures do not contain any information about Association

Rules. The actual situation is that you will be finally given a sample copy of

Association Rules at the last moment you decide to buy. You will sign the

contract without having enough time to examine the rules, and all you can

get is a quick talk about the rules under the vendor's obligation to explain

the Statement of Important Matters.

You will think about buying a condominium when you are not completely

satisfied with your current residence. The big portion of the dissatisfaction

arises from the small residential area and inconveniences. Therefore, when

you visit a model room, it is natural for you to carefully examine the layout of

rooms, convenience, and new equipment in the room. The next issue you

should seriously think about is the payment. Almost all the people will have

to make a loan, which will continue as long as a few decades. You should

make a great deal of effort to go through all the procedures and to think

about juggling money for the loan.

Under these circumstances, it is natural that you would not have any

serious concerns about the Association Rules until you face certain problems

after you have moved to the new residence.

You will pay attention to the assessments, as it will affect the repayment

of loan, but you will not fully examine the articles in the contract regarding

after-sales management services given by the Management Company.

Just like the "Rational Ignorance Hypothesis" within voting activity, the

difference of the rate of relative concern within your activity, i.e. to buy a

condominium can be explained by the degree of the satisfaction influenced by

the results of your efforts.

By getting information and learning about the exclusive unit areas, you

can influence the result and you can get more reactions, depending on how

much effort you have made, and the getting of information has direct effects

for the individuals. On the other hand, as for the issues concerning collective

decision making of Association Rules, getting information and learning re-

quires an effort to go through the process of collective decision making. Be-

cause uncertain factors are always unavoidable, the result is not returned

directly to the individual who made the effort. Therefore, this is judged as

not worth the effort.

Consequently, many of the future unit owners will not refer to, or exam-

ine, the Association Rules when they think about the issues concerning col-

lective decision making, but they simply make an inquiry to the developer

and they will interpret the response in their own way and be convinced.

Due to the characteristics of condominium complexes as an economic good,

developers do not expect purchaser as a repeater; thus, they tend to give easy

sales talks. After you move to the new residence, you will face troubles be-

tween the developer and the residents, such as inadequacies or different in-

terpretation within the contract, Association Rules, and detailed rules of us-

age. Again, this will cause the phenomenon of "the Prisoner's Dilemma", with

which forming the cooperation among the residents becomes difficult. As a

result, even though the purchasers are completely aware that problems are

the developer's fault, they have difficulties to get united in order to fight

against the developer.

The unit owners association is regarded as being established immediately

after the occupation of the residents. At the same time, Association Rules are

regarded as taking effect. However, it is the developer who gives an adminis-

tration until the first meeting of the Board of Directors is held. Sometimes,

such agreement may be acknowledged when you sign the sales contract that

the residents have to automatically accept the Directors recommended and

selected by the developer for the first term. As you see in this example, with

their accumulated know-how, the developers can make the method only for

their convenience. As for the directors after the first term, since they are

generally selected by automatic order, the unit owners association is said to

not function for about three years after its establishment.

In the worst case, the Board of Directors may deviate from the Associa-

tion Rules when the parties concerned have mutual interest, e.g. the reduc-

tion in effort of the Board of Directors, or rent-seeking activity by the direc-

tors, and the management company of developer's group may have the same

interest. However, you have no way to finally check whether or not the Board

of Directors has a deviation, since the General Meeting is held by force under

the name of majority in the letter of attorney.

Before the proposal for institutional improvements of condominium

problems, I briefly describe the current laws and regulations concerning con-

dominiums

Before the establishment of the Law for Comparted-ownership, etc. of

Building, only one article, that is, old Article 208 of the Civil Code could

regulate the case when ownership was given for each divided area of a

building. It was a simple rule; legislated with the assumption that it would

mainly handle a tenement house partitioned vertically into some units.

In order to secure fair dealings of building lots and buildings, the Build-

ing Lots and Buildings Transaction Business Law was enacted in 1952. Since

then, with several amendments, the law system was attempted to be well

maintained. As a matter of fact, condominium complexes are categorized as

building lots and buildings; thus the Transaction Business Law regulates

them.

A block of building was divided horizontally and each unit became an ob-

ject of ownership. This was a community of apartment house called a "man-

sion", and people began to live in communities. In 1962, Article 208 of the

Civil Code was deleted, and instead, so-called Comparted-ownership law,

consisting of 37 articles, was established in order to confront the new situa-

tions.

The Housings and Building Lots Council recognized that each developers

or management companies made the different and insufficient contents of

Administrative Covenant for avoiding the troubles. So they demanded the

Ministry of Construction to make a Standard Administrative Covenant, ex-

clusive for housings, assuming medium-sized condominiums for residential

purpose with 50 to 100 units of the same size as a model, and to guide all the

parties concerned to use it actively as a guideline when they make an Ad-

ministrative Covenant for a newly developed condominium complex.

It was becoming obvious that the management of buildings was some-

times difficult, because a change of common-use portion could not be done

without unanimous consent of the unit owners, and the written unanimous

agreement of the unit-owners was required in order to establish, alter or

abolish the covenant. The purpose of the amendment was to clarify the roll of

condominium associations.

The registration system was introduced in order to promote the reason-

able management of condominiums by leading and training management

companies, and by securing proper business operations of those companies.

Mansions (The Official Notice from the Ministry of Constructions in 1992).

"If a building lots and buildings dealer or management company made a

draft of Administrative Covenant, they should also present the draft of Stan-

dard Administrative Covenant, together with the concerned draft, to the

condominium association, and try to make the context well-known, and try to

explain the major differences between the two drafts."

The same process was required for the Management Entrustment Con-

tract and the Standard Management Entrustment Contract.

In order to keep the level of living condition at a condominium complex

and to maintain its quality as a building, an adequate implementation of

major reform plan is important. However, such activity was not always fully

conducted. Therefore, as a premise required for smooth implementation of

major reform, it was decided that the task of making a long-term reform plan

would be defined as the condominium association's responsibility.

With the growing number of troubles concerning the use of a condomini-

um complex such as the use of parking lots, the reform of the exclusively-

owned portion, the required revision was decided to be made by adding new

rules to the standard Administrative Covenant, so that the fairness can be

secured for unit-owners and the condominium complex can be managed

properly.

With the sudden popularity of so-called "mansions", two types of condo-

minium complexes have been increasing: one is an apartment style of "man-

sion" consisting of more than one building, and the other is a "mansion"

which has portions for two different purpose, that is, for dwelling and shop.

However, the existing Standard Administrative Covenant is not applicable

for such condominium complexes unless it is amended. Therefore, it has been

decided that the traditional Standard Administrative Covenant would be

only applicable for condominiums of one building, and new Standard Ad-

ministrative Covenant would be made in order to clarify the relations be-

tween each building of the apartment style, and the relations between the

portion of dwelling and shop of the complex style.

The problems of a unit owners association have not been investigated

from Public Choice and Constitutional Economics perspective in Japan. In

this paper I tried to apply those ideas to the characteristic problems of con-

dominium. And they need to be analyzed more vigorously. However commu-

nity residents are expecting that those problems would soon be relieved and

dissolved. So, I will try some proposals toward their institutional improve-

ments.

Even if the context of the Administrative Covenant and the Entrustment

Agreement of Management differ from the Standard Administrative Cove-

nant and the Standard Entrustment Agreement of Management, dealers still

can make their specific ones and let a buyer sign them, by describing the

reasons why there are differences. From this background, it is natural for

dealers to make an Administrative Covenant, which will be convenient for

their sales, and to implement the Entrustment Agreement of Management.

An experienced dealer can predict troubles that may happen to those people

who started their new life after their move to the new residence. However,

when dealers make the administrative covenant and the entrustment

agreement of management, they tend to put more value on the sales rather

than taking care for preventing such troubles to occur. Then, the troubles

occur as the dealer predicted, and the residents of the community suffer. In

order to eliminate those troublesome effects, we should have a closer look at

the current institutions once again.

1) If we interpret the Association Rules as ones which should be

made by the unanimous agreement of the unit owners, they

should be left open until the condominiums are sold, and some

ideas should be taken into the system which makes the new

buyers-owners to consider the important issues of "Constitu-

tional Rule". For example, a campaign such as strategic slogans

"Owners to Make the Rules!" (In spite of the fact it impose them

the tremendous transaction costs of consensus), or a change

from a well-known Japanese catchphrase "Buy Administration!"

[MANSYON HA KANRIO KAE] to "Buy Rules!" [RU-RUO

KAE], etc. It is actually important that dealers should always

be posed with the limitation as "an agent" within "principal-

agent-relationship" between dealers and buyers.

2) An organization should be established which can inspect ad-

ministrative covenants by comparing them with the Comparted-

ownership Law, and the Building Lots and Buildings Transaction

Business Law, and the concerning official notices, to see if there

are any violations, and if there's an obvious violation, the organi-

zation would make a recommendation.

3) The some articles of administrative covenants should be made

optional for the association, and an article defining the require-

ment of revision should be added so that the covenant need to be

finally agreed by all the members of the owners, with a certain

amount of time after their settlement to the condominium.

4) The problems are not only within the context of the adminis-

trative covenant itself, but also within the agreement of adminis-

trative matters, which are presented when, you sign the contract.

The written agreement is approved between a seller and a buyer,

and it deals with issues such as how the administration should

be conducted before the establishment of the condominium asso-

ciation, how the first board of directors should be elected and

how long the term will be, and issues coming up with the sales.

The context of this agreement is very different from that of the

Administrative Covenant, and in most cases it is made for the

convenience of dealers who understand everything about the

possible future problems from their long experience. On the con-

trast, buyers have only little experience, so it is difficult for them

to check the context of the agreement. From this background,

when the administration is transferred to the association, there

is such confusion as the discretionary decisions made before the

establishment of the association may not be conforming to the

administrative covenant. There may be also other seeds of trou-

ble for the community. Once the rules are set towards the wrong

direction, unrecoverable trouble may occur which cannot be

eliminated as far as the community exists. Therefore, institu-

tions are required that would check the context of the agreement

beforehand.

*Comments from Gay Meeks and Mariko Shibasaki on earlier draft have substantially improved this paper.

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