The POA: Mend It or End It

From a New Jersey report on POAs, this sounds familiar to many who have discovered similar conditions in their own property owners associations:

Perhaps most alarming is the revelation that boards, or board presidents desirous of acting contrary to law, their governing documents or to fundamental democratic principles, are unstoppable without extreme owner effort and often costly litigation . . . .

In a disturbing number of instances, those owners with board positions use their influence to punish other owners with whom they disagree.  The complete absence of even minimally required standards, training or even orientations for those sitting on boards and the lack of independent oversight is readily apparent in the way boards exercise control.                                

Ever since humans realized that no one rules by divine right, political thinkers have wrestled with the problem of how to give necessary power to officeholders while keeping it within its proper bounds since few can be trusted to use it without becoming arbitrary and arrogant.  The most common way it is limited today is by shared agreement — the laws and contracts that regulate our actions.

For property owners associations, those limits are primarily established by state nonprofit corporation law which has not proved sufficient for controlling boards of owners associations.  Due to many instances of board overreach all across the country which have seriously affected members’ daily lives and property values, a movement has sprung up to adopt state laws specifically for greater control over POAs.  Such a bill was introduced into the 2014 legislative session in Mississippi but failed.

Other controlling authority for Diamondhead’s POA — the covenants, charter, bylaws, and takeover agreement — also contain little to keep a board in check.  These documents were drafted originally by the Purcell company which, naturally, had every intention of keeping as much power as possible in its own hands.  When authority was handed over, it was to the Diamondhead Country Club and Property Owners Association, already incorporated by Purcell in 1970, so the POA came to us with governing documents already set up to maximize board power and minimize that of owners.

With such insufficBoard1ient checks and balances, the POA will continue its overreach, causing one unnecessary controversy after another that only divide and harm the community.  What we have is a multi-million dollar organization where anyone can run and take office without qualifying standards, experience, or training and make all organizational decisions without due diligence, open discussion, opportunity for membership input, independent oversight, or full disclosure to the owners who are mandated to belong, to pay for whatever the board decides, and bear the costs of any litigation needed to enforce what meager protections the owners have.

With the end of covenants in sight, there is a chance for owners to finally have a voice in shaping our own community.  We can do that by either pulling the plug on the POA and becoming a full-fledged city, or amending the covenants to give owners some say over how their dues are spent.  Other appropriate limits could be added to the bylaws that would make the board truly accountable and transparent, but that would not be easy if the board chose to oppose them since most bylaws changes require board approval as well — and Purcell still has 471 votes to throw around.

Municipal government is already limited by plenty of checks and balances for keeping officials on the straight and narrow.  Elected officials get training, all meetings are open except for reasons cited by state law, legal counsel is present during their meetings, there is ample provision for citizen input and greater responsiveness to it, there’s plenty of oversight from state agencies, and if officials stray, remedies are readily available without citizens having to raise money for lawyers.  The zoning ordinances track the covenants as closely as possible and there’s better chance for strong enforcement by the city than has proved possible from the POA. Amenities could be gradually transferred to the city as originally advertised by the incorporation organizers; they are already completely open to the public and there is no reasonable basis for owners alone having to bear the cost.

On the other hand, if owners want to update covenants the appropriate way is found in attorney advice across the country:  appoint a broadly based committee, solicit as much input and support from owners as possible, communicate regularly keeping owners informed of progress, and when the initial draft is ready, provide a forum for owner comment, discussion, and suggestions for additional changes.  Only after all that does voting take place.  None of this has been done in Diamondhead.  Boards have been busy instead avoiding any worthwhile process by limiting inquiry and action to simply keeping covenants as they are and stopping their expiration.

It goes without saying that to change the covenants a legitimate effort must be made to get the required consent of owners.  That is a contractual obligation.  Diamondhead’s covenants are its most powerful contract with property owners, outranking all other POA governing documents including bylaws and charter as legal authority on property owner matters.   They contain precise requirements.  As most of them state, they are binding on all of us for their fifty year duration unless they are amended before then pursuant to their own terms, in most cases by consent of owners of 85% of the lots within the particular phase or unit that they cover.

For 46 years now, p
roperty owners have had to comply with all terms of the covenants or face penalties including fines, loss of voting rights, liens, and/or threat of foreclosure.  Many owners were penalized regardless of genuine hardships that made compliance impossible.  Now that the board has run into the hardship of compliance, it has sought a way around it altogether. 

Even if you can modify covenants through a pre-incorporation vote that meets none of the covenants’ requirements, which is doubtful, the board(s) have ignored other needed changes.  A glaringly obvious one is that the attempted covenants-into-bylaws extension would foolishly forever lock in the 85% approval requirement to amend although the common requirement today is anywhere from a majority to 67%.  Go figure how a board can reason that it’s impossible to amend the covenants by 85% approval so let’s amend them another way that keeps the 85% requirement to amend them.  Other obvious changes (recommended everywhere by practitioners of real estate/HOA law) are to delete all the Declarant language in the covenants and remove or modify provisions that no longer apply or are no longer enforced. 

Beyond that, provisions could and should be added that would institute some checks and balances on board power.  This is very hard to do through amending the bylaws since that takes 2/3 approval of owners voting plus approval of the board itself in most cases and it would be an unusual board that voted to diminish its own power.  The board, however, has no veto power over covenants.   

Among provisions that owners might want to consider are:

A. Imposing a spe
nding cap on capital improvement projects unless a greater amount is approved by owners.  Included should be a standardized definition of capital improvement as “any (i) substantial discretionary addition to the common areas, (ii) voluntary significant upgrade to common area materials, or (iii) discretionary material alterations to the appearance of the development.”

B. Performance standards for the amenities.  What we’ve got now under the Takeover Agreement is a condition standard – a very vague requirement that amenities be kept to the same standard as Purcell kept them (in the 1980’s) which allows boards and Purcell to insist on overspending on underused and underperforming amenities.
That conflicts with the clearly stated purpose of the covenants:  to enhance and protect the value, desirability and attractiveness of said real property and every part thereof.”  What’s needed is a set of standards and measurement that discloses to owners whether and which amenities actually are fulfilling the purpose of the covenants.  Being charged dues for those that are not doing so is breach of our contract.

Improving the POA will take reassessment and reformation of both covenants and bylaws, but without proper limits the board will forever be prone to running amuck — and their ability to do so will be pasted firmly into the bylaws by the declaratory judgment suit if it is allowed to succeed.   For those who want a better Diamondhead, the way there is through mending or ending the POA.