Understanding the 2010 Covenants Vote

The pretty story put out nowadays is that the 2010 vote gave owners the necessary opportunity to vote on covenants extension, that those covenants-into-bylaws amendments were passed by a “huge majority,” and that those amendments have already effectively extended the covenant provisions perpetually, so the board’s recently filed declaratory judgment suit is nothing but a petition asking for a judge’s seal of approval.

Here’s the rest of the story.

The covenants are a legally binding contract to which you automatically became a party when you bought property here. They are the head honcho of governing documents — they trump the charter, bylaws, supplemental agreements, rules and regulations as legal authority on how to run Diamondhead, and in most cases they state that they shall terminate in 2020. That provision can be changed, and they spell out how — in most cases, by getting the consent of owners of 85% of lots in each phase or unit.

That would be very hard. It’s supposed to be. Prior to incorporation as a city, the covenants were the controlling factor in how the community developed here, as they are everywhere they exist. Changing their terms can vitally affect every property owner, so amending them requires a supermajority vote, much more than a majority to ensure that most owners are on board with the change.

When covenant expiration looms, the normal way to deal with it is to appoint a broadly based committee, seek as much input and hoasupport from owners as possible, keep them regularly informed of progress, and provide forums for owner comment, discussion, and suggestions for additional changes. All language concerning the “Declarant” (developers) would be deleted since they should be out
of the picture by now. Any provisions that no longer apply or are enforced would be deleted, any modifications or additions that seemed to have widespread support would be made, and finally owners would vote.

Even if you think you cannot get the required consent, expiration should trigger a community wide discussion and attempt to come to agreement about what should be done, and a fully informed vote of property owners on whether to consent to revisions and renewal if any. That way, the process is transparent and has every chance of creating community harmony. At least then you have tried to do it the right way so even if it fails you’ve built support for trying another way through the courts instead of building anger and distrust.

The board in 2010 decided not to even try.* It was impossible, they said, to get consent of the contractually required supermajority, so they hired lawyers to try to find a way around it. The lawyers found a 1986 court case that they thought could maybe give the board a way to achieve extension — by amending the bylaws instead of the covenants. Although it was not clear that this was either legal or effective, by deciding to use it, the board could dramatically reduce the consent requirement — from owners of 85% of lots down to just two-thirds of the minority of owners (20% to 35%) who normally vote at annual membership meetings.

The proposition, in its accompanying letter to the membership, was said to be a simple, inexpensive way to ensure that the covenants continue as long as the POA is in existence. Nobody said you’ll have to go to court to find out if that’s really so, or that it would renew Purcell’s right to dues-free votes, or that by keeping the 85% requirement and adding a requirement of board approval that isn’t in most of the covenants you’ll never be able to amend any of their terms without a very expensive trip back to a judge.

At the 2010 annual meeting, 2,147 votes were cast in favor of amending bylaws to incorporate covenants and 449 against. Of the favorable votes, more than 800 were the dues-free Purcell corporation’s, so just 1,347 votes came from dues-paying owners. Keep in mind that those are not numbers of owners who voted, they are numbers of lots that were voted because on all POA matters (except board elections) owners get one vote per lot owned on which they pay dues. There are 7,747 platted lots in Diamondhead so the 2,147 lots voted in favor means that they got consent from owners of just 27% of lots in Diamondhead.

On that very minority vote, the board today wants a judge to say, sure, you can impose the covenants as-is, still keeping your “impossible” 85% requirement and all of Purcell’s involvement in your affairs forevermore, without ever having explained all these things to the owners of Diamondhead. Many other lawyers see strong arguments against this attempt to bypass the covenants, and now that the current board wants to test it in court, they’ll likely be spending another $80,000 to find out whether the 2010 vote was legal or effective.

Meanwhile, all this lawyerly argle-bargle, behind closed doors with none of their advice revealed to owners until they ran to the courthouse to file suit, has done nothing for Diamondhead but drive further wedges into an already deeply divided community.
*This isn’t meant to bash the 2010 board. Undoubtedly they were faced with some very worrying concerns then, including Katrina’s recent devastation, the yet unaccomplished city incorporation, rejection of the proposed transfer of all amenities to the future city by negotiating parties (POA, Purcell, and the Incorporation Committee), and Jacobs casino knocking at the door, to name a few. It’s possible to see why they tried this route back then, but in today’s light it turns out to have been an unfortunate one.

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