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How
Developers can regain control of an Association and what you can do to prevent
it
By Walter Anderson
Timesharing Today
The
Trusted Independent Voice of Vacation Ownership since 1991
Issue #103 Jan/Feb, 2009
One of the main values of timeshare ownership
has always been that, ultimately, the individual owners controlled the
operation of the properties when they elected a majority of the members of the
Board of Directors. The owner-elected Board then makes decisions related to the
maintenance and operation of the property, including determining what the
maintenance fees would be and, most importantly, monitors the financial aspects
of the resort.
The Board elected by the individual owners is
in a position to protect the individual owner's rights when the Developer or
Management Company is not performing. Clearly, without this oversight, the
Developer or Management Company is free to do whatever it wants.
There is little question that a Developer
should be able to control the management of a resort during the selling phase
to ensure that the resort is operated in a manner that allows him to sell what
he created. Most Master Deeds and Bylaws provide that the Developer can elect
the Board of Directors until all but a few of the units are owned by him. Some
states, such as Florida, have enacted laws require the turnover of control to
the individual owners as the property is sold, with a final time period for
transition.
Without owner oversight, the
Developer/Manager is free to use Association funds to upgrade and maintain
portions of the property used for sales that an owner-controlled Board might
recognize had no reasonable benefit for the existing owners.
Without oversight by an owner-controlled
Board, a Developer can change all the signage on a property to reflect a change
in ownership or name of the Developer and charge the cost (which can be many
thousands of dollars) to the Association based on the premise that the signs
are on Association property.
Without oversight, the Association's
insurance can include coverage, with its related premium, for materials and
activities, including business interruption insurance and building contents
that would not be on the site if it were not for sales activity.
Without ownership control of the Board, the
owners who are paying the maintenance fees do not have control over how their
money is being spent or how their resort is being maintained and operated.
What is of even more concern are Developers
who seek to regain control by electing owners who are disinterested, or worse,
the Developer's employees. If the Developer/Management Company's activities are
being questioned by the owner-controlled Board, the Developer/ Management
Company may move to remove the Board rather than address the issues.
There have been a number of ways Developers
regained control of a Board even when they did not have a majority of the
Board. These include:
1. Having the proxy state that "If no
name is given on the proxy, the Management Company or Developer will have the
proxy for the owner and can cast the owner's vote as it chooses." Since
there are generally many more proxies submitted than owners attending Annual
meetings, this provides the Developer/Manager with an overwhelming number of
votes.
2. At the time of purchase, have the new
purchasers sign a long term proxy to the Developer. The Developer can then cast
the owner's vote as it chooses until and unless the owner issues a new proxy or
attends the meeting.
3. The Developer/manager creates a proxy that
states that "this proxy can only be used for determining a quorum."
Because the Developer generally will have several hundred voting interests, either
through purposely retained unit/weeks or mortgage foreclosures, the Developer
can have a majority of the votes of those present at the meeting. Even if there
are several thousand proxies given to the owner-controlled Board that would
vote for owner representation on the Board, these votes cannot be counted, and
the Developer can select owners or employees that they have undue influence
over.
4. A number of Developers are contacting
fixed week owners and converting them into Club Programs and, as part of the
conversion process, the owners are assigning their voting rights to the Club
or, in some cases, deeding their ownership interest to the club. The Developer
then uses the votes assigned to the club to elect a Board of its choosing.
5. A Developer of a points program declares
that it has one vote for a relatively small number of points or the smallest
points package being sold, when the provisions of the Documents provides that
each purchaser has only one vote regardless of the number of points. This can
create a situation where the Developer has many times the voting power of an
owner for the same number of points owned or percentage of ownership of the
resort.
6. The Developer obtains unit weeks that have delinquent
maintenance fees from the Association and instead of selling them, puts them
into a club and retains the voting rights. If the Developer obtains voting
rights of 51% of a quorum of the owners (which can be as little as 8% of the
ownership), they may be able to elect their own staff to the Board unless a
large percentage of the owners return their proxies and assign their voting
rights to the owner-controlled Board.
There would be little to say if a Developer
had a majority of the total ownership interests in a resort. In that situation,
the Developer would have every right to elect a majority of the Board Members.
But, this is not what is happening. Because the quorum of members of Timeshare
Associations is generally low, often at 15% or less of the membership, a
Developer through the methods above, can have the majority of the votes at a
meeting while actually owning only a small percentage of the total ownership
himself.
There are several things that an
owner-controlled Board can do to protect the owners against having a Developer
retake control of the Board from the individual owners.
1. The Developer/Manager should not be able
to manipulate the owners to their benefit by modifying the proxy. The Board
should pass a resolution that the proxy format must be approved by the
owner-controlled Board. The Board can then specify that, if no name is filled
in on the proxy, the Board will have the right to vote the proxy. The proxy
must also not have a provision that restricts its use to just being used for
obtaining a quorum.
2. The Board can also make a concerted effort
to get the owners to all send their proxies back in to the owner-controlled
Board. This can be done with the notice of the annual meeting and in
newsletters and other mailings.
3. Contact all owners and inform them that if
they are considering converting their ownership interest into a club program,
they check to determine if they are giving up their voting rights. Further,
advise the owners that they should take into consideration, when joining a club
program which does not let the members retain their voting rights, that they
are giving up any oversight protection they had and are relying on the
Developer (and any other entity to which the Developer sells their club) to
maintain and operate the Club with no oversight by the members.
4. Have the Association attorney review the
documents and ensure that the meeting and notice is proper and correct and
retain all voting rights with the owners.
5. Have the Association attorney attend the meeting.
This can protect the Association from the Developer/Manager seizing control
from the owner-controlled Board with a questionable interpretation of the
documents or state statutes. Once a Developer/ Manager regains control of the
Board and Association funds, it can be very difficult for the owners to again
control the Board without expensive legal action.
It should be remembered that once an
individual purchases a timeshare interest whether it is a unit week or points
or some other variation of ownership, it is no longer the Developer's property,
it belongs to the individual owner and not to the Developer. The owners should
be the ones who determine which owners will represent them as Board Members.
Any attempt by a Developer/ Manager to regain control of a Board through
manipulating an election raises the question of the Developer/Manager's motives
and the ethics they are exhibiting.
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