Avoid the Potential Pitfalls of Sharing Common Areas Among Communities
How It Happens
Master associations come in different flavors, but Kevin Hirzel, managing member of Hirzel Law, PLC, a Michigan-based firm that works with numerous community associations, says he usually sees them when multiple “sub-associations” in the same geographic vicinity share certain common amenities or roads. That might include pool and golf courses or irrigation systems, roads, and parking lots.
“They all pay dues to the master association to take care of those,” Hirzel says.
The relationships can vary as to where the power lies.
“When a developer develops a property,” says David Muller, a shareholder and board-certified specialist in condominium and planned development law with the Naples, Fla., office of Becker & Poliakoff, “it has a vision in mind as far as whether the master association will be the dominant governance entity, or whether it will have a minor responsibility — like for a clubhouse — and the sub-associations will be where the action is.”
The subs, for example, might be responsible for any amenity or common area they specifically own. In some cases, though, a master may assume maintenance obligations for a sub’s amenities, generally to keep costs down (due to economies of scale) or simply to streamline. So a master might sign on with a single vendor to handle the landscaping for all of the subs.
“Where I do most of my work, in Collier County, you see some very strong master associations with 20 or 30 sub-associations or more underneath the master umbrella,” Muller says. “Typically, the amenities are on master association property, and the master association has the budget.”
According to Hirzel, though, the set-up isn’t always so straightforward: “Where I see a lot of difficulty is when the developer doesn’t create the master association before it starts selling units. To impose it after the fact is often pretty challenging because you typically need unanimous consent.
“But you need some mechanism to make decisions because otherwise you’re just operating in a world of chaos.”
The Three Cs
When negotiating (or re-negotiating) a master association or other type of sharing agreement, the parties must address some critical areas.
“Sometimes the members of the master association are the sub-associations themselves and sometimes they’re the owners,” Muller says. “You could end up with 20 members or with 4,800 members.”
Hirzel says that difference plays a role in who’s on the board and what the voting rights are.
“Who’s going to be in control if, for example, you have a community of 60 units next to one of 40. If representation on the master association is proportional in terms the amount of assessments paid, the smaller associations can feel like things are being foisted upon them as opposed to having a voice in decisions.” Establishing fair representation is essential for good relations.
Muller says elections can be conducted several ways.
“One common approach is for everyone in the community to vote in the election for the master board. For example, the master association is broken into seven groups, with nine board members,” he says.
“The top vote-getter who owns a home in Group 1 gets the Group 1 position on the board, and so on. The next two top vote-getters, who didn’t win their individual group elections, get at-large spots, regardless of which group they belong to.” Alternatively, the board has no at-large positions, and owners in a specific group can vote only for candidates in their group.
“I’ve also seen where the president of each of the sub-associations becomes a director for the master,” Muller says.
“A common point of contention is the amounts the subs pay the master association as part of the cost-sharing for maintenance,” Muller says. “Sometimes you’ll see agreements that were drafted many years ago, perhaps by the board rather than an attorney, and now the amount the subs are paying to the master is wildly out of sync with the market rate for the service.”
To avoid this problem, he counsels his clients to include clauses with cost increases or a caveat that the cost is subject to future agreement.
In addition, the parties must confirm that that any cost-sharing or assignment of responsibilities for common areas is allowed by the governing documents.
“You have to keep in mind what the governing documents say about what’s a proper common expense,” Muller says. “Is it broadly defined or more specific? If you want an agreement where the sub is going to take on certain responsibilities that were earmarked for the master, can that be done?”
Unfortunately, Hirzel says, “sometimes it’s not real clear who’s responsible for what between a master and a sub. Both sets of governing documents will include a responsibility.” In such circumstances, once agreement is reached, the documents may required amending. Associations should, of course, consult with their attorney on this point and throughout negotiations.
Like any association, master associations must anticipate defaults on assessments.
“If the master is set up with the individual owners as members, and the master will collect fees from them, you have to make sure there are lien rights in the agreement,” Hirzel says.
The remedies are different if the sub-associations are the members. “You can’t impose a lien,” Hirzel says, “but, as long as the master agreement permits the prevailing party to recovery attorneys’ fees, that’s usually a strong enough hammer to get payments from subs.”