Q & A -Covenants and Takeover Agreement
Editor’s note: The following is the opinion of an attorney hired by the Diamondhead Country Club and Property Owners Association, Inc’s board of directors. It was delivered to a “covenant committee”.
Beginning in 1970, the Diamondhead subdivision was developed incrementally, based on an original plan divided into three primary “Phases.” Each Phase was divided into two or more “Units,” with each Unit consisting of the individual residential lots. Each Unit is governed by a separate Declaration of covenants created at the time the Unit was developed. There are more than 30 different sets of covenants, with one applying to each different Unit in Diamondhead. Most, but not all, of the different covenants, incorporate the terms of the Declaration for Phase I, Unit 1, which are sometimes referred to as the “Master Covenants.” The covenants give two important rights to the Diamondhead POA: (1) the right to architectural control over the residential lots and (2) the right to assess dues and other payments from POA members as needed to maintain the common amenities. Each set of covenants includes a different expiration date, the earliest being June 17, 2020, the expiration date for the Master Covenants.
The POA believes that the vast majority of residents wish to see Diamondhead continue to be maintained in the current manner.
Accordingly, the POA is putting together a plan now to ensure enforcement of architectural standards for residential lots and maintenance of the common amenities beyond June 17, 2020.
In 2010, the POA addressed this issue when the membership voted to incorporate all the various covenant Declarations into the POA Bylaws without expiration dates. There is authority for this approach in Mississippi law, but the authority is untested. The POA is concerned that a last-minute legal challenge might leave insufficient time for a court to decide the issue prior to the covenants’ expiration. To address this concern and obtain a greater degree of certainty regarding the future of the covenants, the POA plans to ask a court to confirm that the incorporation of the covenants into the Bylaws is sufficient to extend the covenants past their expiration dates.
In addition, the POA is considering multiple other ways to ensure that it continues to have the ability to serve its long-standing purpose in the Diamondhead community past June 2020. It is likely the POA will proceed with one or more of the following:
- Amend each Declaration by the required super-majority: Each Declaration of covenants contains a provision on how to amend the Declaration, usually by approval of the owners of a super-majority of the lots covered by the Declaration. Amending the Master Covenants, for example, requires approval of the owners of 85% of the lots in Phase I, Unit 1. If such approval could be obtained, an amendment extending or removing the expiration date would be the most certain method. It is very unlikely, however, that super-majority approval could be obtained without incurring significant cost. Over the last decade, the percentage of lots represented in votes at annual meetings has been in the range of 20-35%. Obtaining a vote of 85% or more would require extensive work to personally contact every property owner and even then, it is not certain the required approval would be granted. This option is not currently considered to be viable.
- Judicial waiver of super-majority requirement: A court may waive the requirement of a super-majority vote and allow covenants to be extended by a simple majority. The American Law Institute urges courts to do so when a provision requiring approval of more than a majority unreasonably interferes with the ability of the community to manage the common property. This type of waiver has not yet been considered by Mississippi courts.
- Implied power to assess in the absence of covenants: As an alternative to extending the covenants, a court may allow them to expire but hold that the POA nevertheless has an implied power to assess members as necessary to cover the costs of maintaining the common amenities. The Supreme Court of Mississippi already has found an implied power to assess in a case where assessments were not allowed by the covenants but members derived benefits from common amenities. If a court ruled this way with respect to Diamondhead, the POA would continue to assess dues and maintain the amenities but would lose the right to architectural control over the residential lots.
- Legislative enactment: Some states have adopted a statute giving a POA the ability to amend covenants without meeting a super-majority requirement contained therein. These states have found it in the public interest to provide a vehicle by which a POA can continue to protect a development’s common plan and maintain the common areas, even though it is unable to obtain the percentage of approval required to extend the covenants. The Diamondhead POA is considering whether to seek passage of such a statute by the Mississippi legislature.
The following questions are addressed within the framework outlined above:
- When the covenants expire, will the residential lots be required to conform to the architectural standards prescribed in them? If so, by what authority, and how will enforcement be handled?
It depends. If the covenants are extended through judicial or legislative means, the POA will retain the same authority to enforce architectural control that it currently has. If the covenants expire, the POA will no longer play any role in enforcement of architectural standards; instead, the ordinances of the City of Diamondhead will govern.
- Will the POA “go away” when the covenants expire?
Not necessarily. If the covenants are extended through judicial or legislative means, the POA will continue to exist and function in the same way that it does now. If, however, the covenants expire but a court finds that the POA has an implied power to assess, then the POA will continue to maintain the common amenities but will no longer play any role in enforcing architectural standards. If the covenants expire and the court refuses to find an implied power to assess, the POA may find that it has no further reason to exist. However, the POA is a corporate entity and will continue to exist until it is dissolved, regardless of what happens to the covenants.
- How will the amenities be funded?
If the covenants are extended through judicial or legislative means, or if a court allows the covenants to expire but holds that the POA has an implied power to assess, then the maintenance of the common facilities and amenities will continue to be funded by member dues and assessments in the same manner as is done now.
If the covenants expire and the court refuses to find an implied power to assess, the POA would have two options. It could either sell the amenities or else restructure in an entirely new way to fund their maintenance without mandatory assessments on all property owners.
- Will the POA have a legal right to collect dues from lot owners after the covenants expire?
It will if the covenants are extended through judicial or legislative means or if a court holds that the POA has the implied power to assess in order to maintain the common amenities. Otherwise, no.
- If the POA sells or otherwise disposes of the amenities will all lot owners share in the value received?
It is unlikely but possible. If the covenants expire and the POA fails in its efforts to secure the continued right to assess through judicial means, then it may need to sell some or all of the common amenities if it can find no other way to fund their maintenance. But the POA would not necessarily need to sell all the amenities at once. It might decide, for example, to sell one amenity in order to fund the continued maintenance of another for a number of years. If all the amenities are sold off, any remaining proceeds of the sale would be distributed at the time the corporation is dissolved. After all debts are paid, the members would need to vote on how to distribute any assets remaining upon dissolution, as there are currently no provisions in the POA Charter or Bylaws relating to such distribution. At that point, the members could vote to distribute any assets amongst themselves. It is important to note, however, that until such a vote takes place, members have no individual vested ownership interests in the common amenities or any portion thereof.
- Will the City, with appropriate ordinances, be able to maintain standards equal or better than with covenants onthe properties?
To be determined
- Can the existing covenants be renewed?
Yes. There are four ways the covenants might be extended beyond their expiration dates: (1) amendment by supermajority approval of members (unlikely), (2) judicially, by confirmation that the covenants have been incorporated into the Bylaws with no expiration date, (3) judicially, by waiver of the supermajority requirement, along with approval of the owners of 50% of the lots, and (4) legislatively, through enactment of a statute allowing amendment by simple majority. None of these methods guarantee extension of the covenants.
- Will the areas that have covenants that do not have expiration dates be responsible for funding the amenities after the other covenants begin to expire?
No. Very few parts of Diamondhead have covenants without expiration dates. This issue arises only if the POA is unsuccessful in all its efforts to extend the covenants and the court refuses to find an implied power to assess. In that event, the POA would either sell the amenities or restructure in an entirely new way to fund their maintenance without mandatory assessments on all property owners.
- Will the City assume the operation of the amenities?
The City would assume operation of the amenities only if common property owned by the POA is sold or donated to the City. At present, there are no plans for that to happen.
- Can a court extend the expiration dates of the covenants or reduce the percentage of votes needed to amend (extend) the covenants of each area?
Yes, a court has the discretion (a) to confirm that the covenants will extend past June 17, 2020, because they have been incorporated into the Bylaws without an expiration date, (b) to waive the supermajority requirement and allow members to extend the covenants by a simple majority vote, or (c) to find that the POA has the power to impose assessments on members as necessary to maintain the common amenities, even if the covenants expire. There is no guarantee, however, that a court will do any of these things.
- Will lot owners still be required to be a member of the POA?
Membership in the POA is mandatory for all lot owners under the POA’s Charter of Incorporation. That requirement will not change unless the Charter of Incorporation is amended (no current plans to do so) or the POA corporate entity is dissolved.
- Will Purcell or any other developer of unsold lots be required to pay dues?
This issue is governed not by the covenants, but by a lengthy written agreement with Purcell that also expires in 2020. Under that agreement, Purcell, Inc., the successor to the original developer of Diamondhead, pays no dues or assessments on lots it owns. There are various other factors relating to that agreement that need to be considered before the POA decides whether or not it should pursue an extension of the agreement. The POA has not yet reached a decision. The referenced agreement applies only to Purcell. Owners of other undeveloped lots have always been required to pay dues and assessments.
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