Developer Control of Architectural Review Committee post turnover

Background: I own in a subdivision in IL (with approx. 40 one acre lots) that was started circa 2005. Due to the financial meltdown, only 7 homes have been built to date. The homes that have been built to date are all custom homes with brick/stone all around, cedar shake roof and range in size from 6,250 to 10,000 finished square feet. Of the lots that have not been built on, the original developer owns 11, several other builders own between one and five lots, and a few lots have private individual owners. The community was intended to be higher end with all of the existing homes costing well over a million dollars to build. Most of the lots that have been sold by the developer were sold in the $350k to 525k range prior to the meltdown; a couple went through foreclosure last year and sold in the $165k range. The required turnover date per the Declaratin was more than two years ago, but is only now in process with a target completion date of January 2012.

Situation: The original developer, which is under financial distress and is looking to exit, has entered into a contract to sell 10 of his 11 lots (for fire sale price of approx. $70k per lot) to a lower end developer whose focus has been townhouses and tract homes at much lower price points. It appears that the proposed buyer intends to focus on the minimum building requirements in the declaration (e.g., 3,250 square feet) and use floor plans from his tract home developments (substituting all brick and cedar shake roof as specified in our declaration).

The transaction has not been completed yet, but our understanding is that it has a targeted closing date of late December 2011.

Declaration/Bylaw Provisions:

Transfer of "Developer" status under the Declaration. The Declaration defines "Developer" as the initial developer and its successors and assigns, and also provides that "All rights which are specified in this Declaration to be rights of the Developer or Declarant are mortgageable, pledgeable, assignable or transferable. Any successor to, or assignee of, the rights of the Developer or Declarant hereunder (whether as the result of voluntary assignment, foreclosure, assignment in lieu of foreclosure, or otherwise) shall hold or be entitled to exercise the rights of Developer or Declarant hereunder as fully as if named as such party herein."

Control of Architectural Review Committee (ARC). The Declaration provides that the ARC is a "Committee of the Association" and futher provides that that "The objectives of the Declarant is to assure that all Dwellings, improvements or changes in the Development Property will be of good and attractive design, in harmony with the natural setting of the area, built with high quality workmanship, incorporating attractive materials and generally compatible with the other homes and other improvements in the Subdivision, so as to preserve and enhance the value of all of the Dwellings and the aesthetics of the Subdivision." ... To achieve Declarant's objectives, an Architectural Control Committee consisting of three (3) members, appointed by the Developer prior to the time that the Developer or Declarant no longer owns any interest in the Development Property, and by the Board after such time, is designated as agent with power to administer this Declaration with regard to approving or disapproving those matters which are expressed herein to be within the jurisdiction of Developers' objectives. The Committee shall have full power to approve or disapprove individual building plans and to create such architectural design guidelines as It may deem appropriate ("Architectural Design Guidelines"). Matters requiring approval of the Committee shall be submitted to it prior to construction and shall be subject to the Architectural Design Guidelines as set forth by the Committee.

The Declaration provides for a minimum sf (e.g., 3,250 above grade for a two story house), and specifies all brick or stone siding and cedar shake roofs.

Amendment of the Declaration requires 75% vote of Owners (existing developer's 11 lots represent 27%) and, if the amendment adversely affects a right of the developer, the written consent of the developer. Same requirements apply to Bylaw amendments.

Control of Board: We expect (in coalition with non-selling builders who are lot owners) to gain control of the Board (which are elected by a plurality standard, with one vote per lot and no cumulative voting). However, it does not appear that the turnover will be completed until after the proposed sale by the developer is completed.

The Board is authorized in the declaration to interpret the declaration, bylaws and rules and to settle all disputes between lot owners. The bylaws authorize the Board to adopt reasonable rules and regulations.

Issues/Questions: Any thoughts/input/experience on the following would be welcome and greatly appreciated.

1. The ARC currently is comprised of the initial developer, his sales agent (who also will be the sales agent for the proposed buyer), and a non-selling builder/lot owner. The non-selling builder/lot owner has expressed concerns and intends to carefully vet any proposed plans. However, he is only 1 of 3 votes. The Declaration and Bylaws do not state the required vote of the ARC to act.

(a) Can the developer really maintain complete control over the composition of the ARC after the Board has been turned over to the owners by maintaining ownership of a single lot? Or by assigning "developer" status to the proposed purchaser of lots representing less than 30% of the buildable lots in the community? Seems inequitable that the majority of owners (of unbuilt lots and total lots) have no say or influence on ARC matters. Is there a way for the majority to gain control of the ARC?

(b) What if the ARC approves projects that meet the specified minimums, but that the Board and the majority of lot owners believe fails to meet the stated objective to "preserve and enhance the value of all of the Dwellings and the aesthetics of the Subdivision"? What options are available in this circumstance?

(c) What is the required vote threshold if one is not specified? Can the required ARC vote be set by the Board via a bylaw amendment? What if the ARC (which is a Committee) has adopted or seeks to adopt its own rules?

(d) The developer and sales agent in their capacity as ARC members have personal interests that are not aligned with those of all lot owners. Is there a breach of fiduciary duty by ARC members who act on projects in which they have a financial interest? If yes, what remedies are available?

2. Is the existing developer breaching his fiduciary duties to lot owners by engaging in this proposed sale transaction? If not by the mere sale, what if he holds on to one lot in order to maintain control over the ARC and agrees with his buyer to appoint buyer's designees to the ARC? If yes, what remedies are available?

3. Given that the Board turnover will not (and we are told cannot prudently) be completed prior to the closing of the proposed sale by the Developer, what is the recourse of the non-selling lot owners if the developer uses his current positions on Board/ARC to rubber stamp his buyer's building plans prior to the new Board coming to power?

4. Can the violation of the Declaration by the developer in not turning over the Association to owners when required serve as a basis to eliminate his ability to control the ARC? Or is the remedy limited to handing over Board control as was required?

5. Anything current lot owners could/should do prior to the closing of the proposed sale by the developer? E.g., Letters or meetings with developer or proposed buyer? If so, what?

Thanks.

Mark - WHEN was the original turnover supposed to happen?

Is it based on a number of years OR when a certain percent of the property or homes sold in the development?

The new owner of the lots may not meet the threshhold for becoming the "declarant" but might just be a owner of several parcels.

If so, he/she still must abide by the CCRs in terms of home construction and size.

Like Tim suggested - get a "turnover " before this guy buys his properties within the subdivision. He may not even qualify to be a declarant anyway.

Better to start a new thread, JoyceR. Maybe be a little more specific since some or many of us might not be familiar with Multi-associations in one place (or whatever it is you're describing)