Own a Home?
- October 31st, 2011
- in Yachting
Own a Home? Join the Club
Recently, a client handed me a fairly thick document, with a look of trepidation on his face. It was the by-laws of the Homeowner's Association (HOA), and Declaration of Covenants, for a property he was buying. It's easy to be intimidated by these documents. Many people don't even read them. Some people hate the whole concept.
I decided, therefore, to compile a list of the top five reasons that purchasers seem to be put off by covenants and by-laws:
• They're never short documents
• You can't opt out of the HOA–once you buy the land membership is mandatory
• The Association or developer can charge you fees every year for maintenance
• They contain lots of rules for things you either must do, or can't do on your own property
• They use intimidating words, like charge, caution, lien, restrictions etc. in relation to your property if you don't follow those rules
Restrictive covenants are agreements restricting the use of property by both present and future owners of that property. They attach to (or burden) the property, and under BVI law they must also confer some benefit on land owned by another person. Typically in the BVI, the covenants are mutual–they benefit of all the properties contained within a particular development or neighbourhood, and similarly burden all those properties.
Once this mutual benefit and burden is demonstrated to the Registrar of Lands, usually by proving the existence of a scheme of development, the covenants are endorsed on the title to the land as an incumbrance.
Once the covenants are endorsed on the title, they bind all future owners. Another method used to ensure that all future owners are bound is a requirement that the first purchaser must include the covenants in any future transfer of the property.
HOAs are formal legal entities, usually limited companies, created to ensure that the restrictive covenants attaching to the property, are adhered to. Membership is mandatory for all property owners within the development and are usually charged mandatory fees. HOAs also typically have the authority to enact and enforce maintenance and design standards. However, there are also quite a few reasons to like, even love the idea of an HOA and covenanted property.
The purpose of restrictive covenants and the HOAs that monitor them, is to maintain the quality of the properties in a development or neighborhood. They do this by keeping common areas looking attractive, making sure no one's fixing cars in the street or running a flea market out of their driveway, and reducing the potential for people putting up eyesores, by seeing to it that buildings and renovations are in keeping with the general architectural concepts and standards of the area. Of course to do all these things, funding is necessary, which can lead to fee increases that cannot be declined (unless sufficient votes are garnered to change the by-laws).
All told, the foregoing helps to preserve property values, which is the core underlying rationale of HOAs and covenants. Your decision on whether to buy into a neighbourhood governed by covenants and an HOA should take into account the following:
• Read the Declaration of Covenants recorded against the property and make sure you can live with the conditions and restrictions contained in the document prior to signing a sale and purchase agreement.
• Find out what amenities are provided.
• Find out what the current dues are, and what they've been over the past 5-7 years to get an idea of the trend. Will you be able to withstand future increases or will you have to sell up and move? Once you buy the property, you can't decline to pay the dues. If you do, a charge can be placed on your property, which can then be sold to liquidate the debt. Annual fees can range from hundreds to thousands per year, depending on the property and the amenities provided by the community.
• Find out if the HOA has cash reserves.
• Determine if there are term limits for the Board, and how easy it is to replace board members. In some developments it is impossible to change board members or by-laws because the developer retains an absolute majority of voting rights.
• Determine if there is litigation pending involving the HOA. One current suit in the BVI involves the community association suing a member for running a professional office in the property. In another community, the owner sought and obtained the consent of the other property owners for the operation of a light commercial enterprise, which was not viewed as detrimental to the property values.
Whether or not to buy into one of these communities is an individual but very important decision, that should be made with the benefit of as much information as possible.