Tag: homeowners’ associations

The Florida Legislature Is Called Upon To Act To Put A Stop To Developers Who Require HOA Members To Purchase Their Community Clubhouse And/Or Clubhouse Operations After Turnover

Building property subject to a homeowners’ association (HOA) should not entitle a developer to be in a position to financially gouge the association’s members month after month by using the assessment regime to continually line its pockets. Essentially, that is what association member Gundel argued in court against his association’s developer, Avatar Properties, who built out the Solivita Homeowners’ Association. In this HOA the club facilities, including a spa and fitness center, dining venues, indoor and outdoor pools, parks, tennis courts, and more, were not subjected to the declaration, but rather remained under the exclusive ownership and control of Avatar, the developer, and therefore were not a part of the common areas. This means that as a part of the turnover process, the developer was not required to turn over the club facilities and operations to the now member-controlled HOA but rather retained ownership and control of those facilities. Can you imagine paying hundreds of thousands of dollars for a beautiful new home in a gorgeous community, which includes access to a sprawling clubhouse with dining rooms, spas, and all of the amenities and yet, even though those club amenities are in the middle of the community, they are  owned by a corporation not subject to Chapter 720, Florida Statutes, in any fashion, with the intent being that such club amenities will never be under the control of the HOA’s members?

In the case, Avatar Properties Inc. v. Gundel, Case no. 6D23-170, decided June 22, 2023, by Florida’s Sixth District Court of Appeal, the Court (which, in our opinion, was the correct decision) explained that within the Solivita Declaration, the developer included language for each association member to pay as a part of the annual assessment a sum of money unilaterally determined by the club operator for both club operations and what also was just pure profit as argued by owner Gundel.

The Court explained that the assessment imposed by Avatar (the developer) for the mandatory club membership had two components. One component was the amount required for club expenses to be shared proportionately by each resident. The second component was for a membership fee that represented, according to the Court, an annual profit charge to each owner that was due and payable to Avatar. In fact, if a member did not pay, then their home could even be subject to the lien and foreclosure process by the association.

In the trial court’s summary judgment hearing, the Court ruled in Gundel’s favor, finding that assessments for the club, which constituted profit, were improper because pursuant to Section 720.308 of the Florida Statutes, assessments cannot be levied for profits, but only for expenses.

In response to this case and possibly for other reasons, at least one developer designed a new HOA community with a big difference: it made the clubhouse building and the dirt upon which it was constructed to be a part of the common areas of the HOA. Then through a complicated process laid out in the declaration, the developer provided that the clubhouse operations were not owned by the HOA and that after turnover of control of the HOA to the members, the members must purchase the “operations” of the club at what many consider a grossly inflated price. Should the association members decide not to make the purchase, then the developer maintains the right to sell the club operations to a third party for which the assessment paying members will be at the financial mercy of the club operator forever. No doubt the association membership is already paying for the clubhouse operations through their monthly assessments, and in our opinion to now require the membership to spend millions of dollars to buy those clubhouse operations is just plain wrong!

Let’s break this alternate scheme down. Although previously disclosed in the declaration and its attached club plan, either i) the association membership agrees to purchase the club operations at an inflated price for millions of dollars (and for what—the right to operate their own clubhouse?);  or (ii)  the developer retains the right to sell the club operations to a third party who will then be entitled to charge members assessments to both fund the operations and, like any business, earn a profit for doing what should have been handed over to the membership as a part of the turnover process. After all, what clubhouse operator is going to operate at cost and not expect a profit? Either way, the members lose, lose, and lose.

This type of plan ultimately hurts owners as it will likely create a five figure per member assessment obligation either in the nature of paying back the loan necessary to purchase the clubhouse operations or to be forced to pay a new clubhouse operator. The only money a post-turnover association member should have to pay for their clubhouse operations is the actual money expended for operations (i.e., what it costs to provide the restaurant, spa and pool services, etc.). Common area facilities were never designed or even contemplated to be a continual profit center for a developer or developer-related entity.

Worse still, it appears that these types of schemes have no room for negotiation. The purchase price has been pre-determined by the developer years ago when it initially recorded the community’s governing documents. While the developer can argue it is all disclosed in the governing documents (and therefore proposed buyers/future members have notice of this issue), it takes a fairly sophisticated legal mind to understand how this process is going to work. In this author’s experience, the financial obligations associated with either having to buy the clubhouse and/or the clubhouse operations is often quite a surprise to the members.

In short, requiring the membership to purchase the clubhouse operations based on an unreasonable financial formula requires that the association borrow the millions of dollars necessary to pay the developer. In the end the obligation to pay the loan will be wrapped up in the assessment regime which means, once again just like in the Avatar case, the developer is improperly requiring the association to levy assessments for the developer’s (or third-party club operator’s) gross profit rather than only the legitimate expenses as contemplated by Section 720.308 of the Florida Statutes.

In our opinion, it is evident the Florida legislature needs to protect the citizens of the State of Florida by declaring such schemes unlawful. Clearly, the clubhouse operations should be turned over to the association membership as part of the turnover process, and the membership should not be charged for that which they should already own. If it is the clubhouse structure issue which needs to be purchased because it was not included in the overall purchase price of the houses within the community, then certainly the developer is entitled to recoup its legitimate expenses associated with the buildout; but post turnover the developer should not be entitled to profit at the expense of the association membership. If the developer wants to profit from the clubhouse in the clubhouse operations, then certainly the developer could have included those sums within the purchase price of each member’s home. Their decision not to do so and to artificially deflate the price of a home as a result thereof should not be allowed.

One cannot help but wonder if these types of clubhouse schemes could rise to the level of violating Florida’s Deceptive Trade and Practices Act as set out in Chapter 501, Fla. Stat. In fact section 501.24, Fla. Stat., provides in relevant part that unfair methods of competition, unconscionable acts or practices, and unfair or deceptive acts or practices in the conduct of any trade or commerce are hereby declared unlawful. While the developer can argue that the clubhouse scheme is fully disclosed, it is our opinion the owners can certainly argue that this practice is, at best,  unfair and at worst unconscionable.

Board members and members who live in an association with these types of obligations are strongly urged to discuss their options with competent legal counsel so as to make informed decisions whether to buy the clubhouse and/or the clubhouse operations or consider filing a lawsuit against the association’s developer, arguing as Gundel did in the Avatar case, that this type of profit making activity is unlawful. Also, it must be noted that while the Sixth District Court of Appeal fully agreed with the outcome of the trial court, it certified a question to the Florida Supreme Court regarding the matter. However, the Florida Supreme Court declined review. Therefore, it appears the Gundel opinion remains valid. Nevertheless, it does not go far enough to protect association members from having to purchase their clubhouse and/or clubhouse operations after turnover. Therefore, the Florida legislature needs to do its job and protect the citizens of the state by outlawing this process altogether and requiring an HOA developer to turn over the HOA clubhouse and all of its operations to the association as a part of turnover process.