A vast number of clubs around the country are located within, or adjacent to, a master planned residential community governed by a homeowners or other form of community association (HOA). As a result, these clubs and HOAs are inextricably intertwined and dependent on one another to a certain extent. The degree to which they are intertwined depends on various factors such as their particular legal structure, governing documents and applicable state statutes. Regardless, most of these clubs and HOAs recognize the intrinsic and tangible value of having a cooperative and mutually beneficial relationship.
There are several common questions about the relationships between clubs and HOAs and certain legal implications associated with such relationships. Their relationships can vary greatly because the club and HOA co-exist within a variety of legal frameworks. Thus, it is important to first identify the types of legal frameworks that developers most frequently use when creating these types of developments.
The three most common legal frameworks for residential communities with substantial recreational facilities are:
- Two Separate Entities: Some developments are established with a club that has a corporate existence entirely separate from the corresponding corporation which is the HOA entity. The HOA is generally a statutorily established nonprofit corporation while the club may be for profit or nonprofit depending on the plan for the development. In either case, each of these two entities have their own articles of incorporation, bylaws and governing documents, as well as their own boards. Property owners may be required to join the club or membership may be optional, depending on the governing documents. However, membership in the HOA is automatic upon obtaining title to the lot or home acquired.
- One Bundled Entity: Some developments are established from inception with only one entity, the HOA. Under this plan of development, the HOA serves the functions of both the homeowners association and the club. In this framework, homeowners are generally entitled to use of the recreational facilities by virtue of the ownership of property within the development and their membership in the HOA, without the need to acquire a separate club membership. Property owners in this situation do not have the ability to opt out of club membership entirely, although there may be higher categories of membership which could be optional, depending on the governing documents.
- One Merged Entity: In some cases, a developer will establish two separate entities initially but then, after turnover, the members of the club and HOA realize there are benefits of having only one single entity. In these instances, when it is legally and logistically possible, the two entities will statutorily merge and the HOA will remain as the surviving entity. Similar to one bundled entity, property owners in this situation do not have the ability to opt out of club membership entirely, although there may be higher categories of membership which could be optional, depending on the governing documents. In addition, certain “grandfathered” property owners may be exempt from the membership requirements with respect to the recreational facilities.
Roles, Rights and Obligations
Once the legal framework is identified, the roles and responsibilities of a particular HOA board will vary depending on the applicable state statutes and the governing documents of the development. Although some states have adopted the Uniform Common Interest Ownership Act, the majority of states still have their own community legislation which impact the HOA. In addition, the governing documents of each development define the rights and obligations of the respective parties. Some say very little about these matters, while others go into great detail about the financial and administrative responsibilities of the parties with respect to a variety of expenses and tasks to shared areas, golf courses and/or other amenities. Thus, each situation must be considered in light of the applicable state laws and governing documents.
Once the statute is considered and the governing documents are understood, there may still be questions regarding the financial relationship and division of responsibilities between the club and the HOA. Once again, the answers depend primarily upon the legal framework of the community. In the case of bundled and merged entities, there is only one board responsible for all of the community assets, including the recreational facilities. While there may be committees, subcommittees and departmental divisions in connection with the facilities and amenities, the ultimate responsibility rests with the board. However, when there are two separate entities, the club and HOA are governed separately by different boards, and each will maintain their own facilities and administer their own operations separately, subject to any shared elements or responsibilities set out in their governing documents.
Nevertheless, with the changes that have occurred, and will likely continue to occur within the golf industry, many clubs and HOAs that have remained separate seek creative ways to co-exist and partner together to achieve their mutual goals. Some of them have simply created joint committees or subcommittees to serve and promote their common interests. Others have taken their cooperation one step further and have formed a joint board consisting of officers of both entities. The responsibilities of these joint boards typically are governed by a charter that outlines key matters of interest to the club and HOA. Still others have formally organized and created a third entity, which is a joint venture of both the club and the HOA. These new entities have organizational agreements and governing documents that outlines the key terms and conditions of their relationships. Whatever option is selected, each club and HOA divide the administrative responsibilities and financial obligations based on various factors such as availability of personnel, ability to pay, restrictions contained in the governing documents and applicable law. Regardless, each of these partnerships work to benefit the interest of the homeowners and the community as a whole, which necessarily includes the club and its members.
On several occasions across the nation, clubs and HOAs that initially worked together with informal arrangements, joint committees or joint boards eventually formally merged. As with any corporate merger, the steps to be taken are determined by state statute. Generally speaking, the process requires negotiation and preparation of a Plan of Merger, Articles of Merger and amendments to the Declaration of Covenants and Restrictions (the Declaration) for the community. The Plan of Merger sets out the critical details of the proposed merger including issuance of recreational based memberships in the surviving entity (i.e., the HOA) to be received by members of the club. Amendments to the Declaration incorporate those provisions of the club governing documents which are to be retained as well as the changes to be made in the governance of the HOA post-merger. In order for the merger to be effective, it must be approved by the boards of both the club and the HOA, and it must be approved by the members of the club and the HOA separately. This is true even if the members of the club are the same individuals as the members of the HOA. Without each set of members voting in favor, the merger may not occur. While the process may seem difficult at first, many have found that the benefits of merger far outweigh the challenges of getting it accomplished. The benefits reported by merged clubs and HOAs include:
Unification: One single board rather than two results in a reduction of governance redundancy unavoidable with two separate boards. Committee meetings and administration is reduced. Any potential for friction between the two boards is eliminated. Members/homeowners have only one point of contact when questions arise.
Operational Synergies: Reductions in operational expenses such as legal and accounting.
Economies of Scale: Larger organizations tend to have an economic advantage in the market place and benefit from stronger buyer power than smaller organizations.
Liens for Delinquencies: In most states, liens for delinquent amounts payable to HOAs are enforceable by foreclosure, even if amounts owed to the club would not be. When combined, the statutory lien extends to all such amounts.
Tax Savings: While no merger should be proposed solely for tax advantages, a merger for proper purposes could result in significant savings on sales tax, ad valorem property tax and other similar taxes depending on applicable state laws.
While there are other potential benefits of a merger, it is not the perfect solution for all clubs that co-exist with HOAs. Factors such as mandatory membership, the complexity of the governing documents of both the club and the HOA, and the status of the development must be considered prior to making the decision to pursue merger. Fortunately, there remain multiple alternatives for those who ultimately decide to remain as separate entities, yet desire to maximize the benefits available when working together.
Michelle Tanzer, Esq., is chair of the Global Club and Branded Residence group at the law firm of Nelson Mullins. She serves on the National Club Association board of directors and has represented the Club Spa & Fitness Association. Tanzer arbitrates club-related disputes for the American Arbitration Association’s National Golf Industry Panel and authored “The Club Litigation Book: Keeping Clubs out of Court.” She can be reached at 561-866-5700 or [email protected]