These voting rights sections in CC&Rs will also typically address when these voting rights expire. And define exactly who has these voting rights. The example of a voting rights section below is from a single-family HOA in North Carolina. This language will vary from state to state and HOA to HOA.
“ARTICLE ELEVEN: MEMBERSHIP & VOTING RIGHTS IN THE ASSOCIATION; RIGHTS, RESPONSIBILITIES, AND THE ESTABLISHMENT OF HOMEOWNERS ASSOCIATIONS
Section 11.1 Membership. An individual or legal entity who is a recorded Owner with a fee simple interest, in a Lot or Dwelling within the Association is subject to or party to by such legal filing and any and all other declarations made in connection herewith to all rights, responsibilities, and assessments of the Association and thus is a legal Member of the Association.
Section 11.2 Voting Rights. The Association can have up to three (3) classes of voting memberships or voting rights:
a) Class I. The Class I Members shall be all Owners of Lots or Dwellings within the Association, other than the Declarant/Developer as long as Class II membership is still in existence. Any Class I Member within the Association shall be entitled to one (1) vote for each Lot or Dwelling which it legally owns. In the event of multiple ownership of any Lot or Dwelling, those multiple Owners shall be treated collectively as one Owner, one vote.
b) Class II. The Class II Member shall be the Declarant/Developer, who shall be entitled to six (6) votes for each Lot or Dwelling owned by the Declarant/Developer within the Association. When the following occurs and not before, the Class II membership shall expire and then be converted to Class I membership on the occurrence of the first to occur of the following events:
i. Declarant/Developer has closed the sale of 90.1 of all Lots and Improved Lots within the association, or
ii. September 15, 2036.
In the event the Class II membership has been terminated or has expired and subsequently additional properties owned by the Declarant/Developer thereafter become subject to this Declaration pursuant to Section 1.8a, the Class Il membership shall immediately and without prejudice be reinstated as of the date such properties become subject to this Declaration and shall not terminate until Declarant/Developer has closed the sale of 90.1% of all Lots and Improved Lots within the entirety of the property then comprising the Association.
c) Class III. Class III Members shall be owners of real property in neighborhoods outside of the Association that has entered into an agreement with Declarant/Developer or the Association for membership in the Association. This is subject to the terms and conditions of a filed Supplemental Declaration. Class III Members shall have the same rights and obligations of Class I Members unless otherwise described in the filed Supplemental Declaration or Declarations.”
As noted above in subsection b), the developer has six votes for every lot they still own within the HOA. This multiple is difficult to overcome in most HOA voting situations. With “Class II” voting rights the developer maintains control of the HOA board of directors. It is common for the developer to place themselves, an employee, or even family members on the HOA board of directors.
There are state statutes that require the developer to, at certain points, appoint members of the association to the board of directors. For example, at 50% buildout, one person from the membership must be appointed to the board, another person at 75% buildout, etc. Some state statutes may require the developer to appoint an advisory panel made up of the membership to address membership concerns to the developer.
Another issue that does occur, primarily when a developer becomes financially insolvent, and this does not necessarily have much to do with voting rights, however, it illustrates how much control a developer has over the property. Many developers obtain financing from third-party lending institutions. Real problems can begin if the developer happens into financial difficulties and is forced to relinquish the unsold lots back to the lender. The membership may find themselves even more powerless with the lending institution than when the developer was calling all the shots.
There was an HOA’s membership in South Carolina in 2009 that was at war with their developer. There was a small group in the membership who were determined to cause as much trouble for this developer that they possibly could. Because of the economic conditions, the developer had made a great many promises and he had come up short on almost all of those promises. This was an HOA with around 1,700 lots. The developer had financed and purchased the land right before the real estate crash in 2008. The HOA members had the misfortune of buying into this new development shortly thereafter.
This was an upscale community that was marketed as estate homes. Around fifty of these homes were completed right before the bottom fell out in 2008. These homes were all built on the main street into the larger property right after the elaborate entrance. These newly constructed homes ranged in price from $450,000 to $600,000.
As the crisis got worse the developer kept dropping balls around the HOA. At first, he attempted to communicate with the membership and reassure them the economy was going to rebound. The HOA’s membership became more and more frustrated with the external real estate environment and the HOA’s declining appearance. Declining in that the developer had reduced the main entrance landscaping to every ten days and stopped cutting the grass on the vacant lots altogether. The more vocal the membership became, the developer effectively ceased communicating with them, especially communicating with the most vocal group.
The most vocal homeowners began trying to cause even more problems for the developer. One contacted the local news affiliate and did an interview on his front lawn running down the HOA and the developer. Another homeowner had his attorney start sending threatening letters to the developer. Several of the members who lived on the main street at the front entrance went as far as putting signs in their yards advising people, “Do not buy here. The developer is a crook.”
The developer at some point in 2009 handed everything back to the lending institution that held the liens on all the remaining unsold real estate. This seemed to make the most vocal group happy for a time. The lending institution had difficulty in maintaining the property, assumedly because of all the other properties they had to take back because of the economic downturn.
In 2011, the lending institution sold all the lots to another developer, who was also a builder. This developer came in and the way the deeds and governing documents were written, the association could be broken up into sub-associations. This developer/builder is known for building homes in the price range, at that time, of between $150,000 and $200,000. This association today when you drive in the homes at the front part of the association dwarf the homes in the rest of the association.
The only time that voting classes are brought up and the developer is no longer in the picture, is when the board wishes to amend their governing documents. A board will have an issue with something in the governing documents, typically within the CC&Rs, that they want to have amended. The board while reviewing the CC&Rs they come across the developer’s voting rights section and see that it is unnecessary now. Granted, after the developer is out of the picture, this language is no longer relevant. However, amending the declarations can be difficult, if not impossible in some cases. Amendments and all the work that goes into passing an amendment need to be limited to issues that need to be amended.