J. Patrick Sutton Cases & Issues Blog

KAOS, CONTROL: Declarant Turnover Of HOA

I'm calling this post "KAOS and CONTROL" because of the complexity, confusion, and bumbling in the process of subdivision developers' turnover of power to the HOA's of the subdivisions they create. KAOS is that period after some homes are sold in a new subdivision but before all homes are sold or before the developer has fully relinquished CONTROL. (And of course, KAOS is the arch-nemesis of CONTROL). It's a rickety scaffolding for an in-joke, but hey, I'm not above strained analogies.

There is often a lengthy period of years when owners are in the dark about what is happening as their community gets built, extended, and even radically changed during the many years the original developer still has almost complete control over the subdivision and its HOA. During that time, developers can engage in abuse or shenanigans to the detriment of the owners who previously bought in under a certain set of assumptions — how big the community would be, how expensive the assessments would be, what amenities would get built, what kinds of homes would be built, etc. Owners are surprised to learn that developers have so much power under the governing documents and Texas law that the developers can maintain almost complete control for not just years, but decades. Any idea that the HOA represents the owners is a joke because the developer controls all or most board of directors seats indefinitely, and developers routinely appoint their friends, family, and employees to those HOA Boards. Obviously, those directors are beholden to the developer, not the community at large, despite the fact that they have fiduciary duties to the community. Often, they just ignore those duties and rubber-stamp whatever the developer needs and wants.

In the old days, before the HOA-Industrial Complex was the great revenue-earning, property-rights-seizing machine it would ultimately become, a developer would usually finish the last home, sell it, and be gone forever, a process lasting a couple-few years. The developer — usually called the "declarant" because the developer records a "declaration of covenants, conditions, and restrictions" in the land records — would simply turn over the subdivision to the nonprofit corporation that would function as the mandatory HOA. Yes, there were shenanigans by developers sometimes, but there was usually a fairly clear line between the developer control period and the owner control period.

Now, however, with the rise of large, multi-phase subdivision developments involving bigger players, especially bigger law firms churning out absurdly complex "Declarations" that no layperson owner could possibly understand, developers maintain control for years. The governing documents set out elaborate governing schemes involving both hierarchies of boards and horizontal "neighborhood" groups of boards, along with weighted voting (guess whose votes have the most weight?), "phantom" votes held by developers for completely undeveloped land, and many other provisions that add up to the near-impossibility of the owners effectively having a voice in their own communities.

This problem has become acute as developments now entering their second and third decades remain unfinished yet still have many hundreds or thousands of owners. Those owners struggle to get basic information about community governance, and the developers, who retain control, refuse to relinquish control, often amending the governing documents over and over to extend their development powers seemingly indefinitely. It goes so far as developers retaining the right to continue adding new land to the development and designating that land, arbitrarily, as planned "lots" which afford the developer huge additional number of votes, often votes that are multiplied in weight relative to other owners.

I now routinely get calls from exasperated owners trying to understand the most basic things about their rights in their own communities. They face enormously powerful developers, association management firms, and lawyers who have a veritable lock on power and control and the money to record whatever new legal documents serve the developer's interests. Since the HOA boards are full of developer appointees, there is no one looking out for the owners, and the best the owners can hope for is crumbs of information. An example of where I see real harm is the contract for association management. The managers are always the ones originally appointed by the developer, ones complicit in the HOA-Industrial Complex and ones with great power in the Texas legislature. They usually charge substantially more in management fees than the smaller, independent management firms, yet the community cannot dislodge the expensive managers imposed upon the community and thereby reduce the dues every owner pays. The HOA Board is plainly NOT acting in the best interest of a community if it is overspending on management fees.

Nor, for that matter, is an HOA board acting in the best interest of the community in failing to advise the owners about all the steps required for the owners to (finally) get a measure of control over their community.

I'll have more to say in subsequent posts, but suffice it to say that what are in effect small cities and towns are being run like fiefdoms, and for decades on end, because government has abdicated its responsibility to give ordinary citizens in new subdivisions the same protections that citizens in cities and towns have. Government has handed the reins to developers, who then profoundly control the lives of hundreds or thousands of families with virtually no checks and balances.
J. Patrick Sutton Cases & Issues Blog