Many planned developments include a clubhouse and associated recreational facilities. Although such facilities can be structured as common areas of the community for use by all members of the association, an alternative is to structure such facilities as a mandatory membership club with membership appurtenant to homes in the community. In its simplest form, the clubhouse and associated facilities can be structured as a mandatory membership club owned by the developer that can be later sold to the homeowners’ association or a third party. Several factors should be considered to determine whether a mandatory membership club structure is feasible for a project. If a mandatory club membership is feasible, it must be properly structured and documented to avoid potential claims or disputes.
A mandatory social membership club is created by recording covenants that run with the land comprising a residential community. The covenants require that each owner within the community pay social membership dues or club charges to the club owner. Such covenants must contain specific provisions associated with operating costs and fees, club charges, and the club owner’s lien rights. It is important that club covenants be recorded in a manner so that club charges have priority over any community association liens, and the community documents should contain provisions clarifying the lien priority of the club charges. In addition, it is important to preserve certain rights in favor of the club owner in the community documents.
Social membership dues have two components: a pro rata share of the club’s operating costs and a facility or membership fee. Operating costs generally include all of the costs of owning and operating the club and may be shared equally by all homeowners or may be allocated to homeowners on another reasonable basis. The initial membership fee per home should be set forth in the club covenants, which should also contain a formula relating to increases in such fees as well as a cap on such fees after a certain period of time. Care must be taken in setting the club membership fees; the membership fee must be proportionate to the value of the recreational facilities and the amount charged for membership benefits must be at “market rate.” The facility or membership fee belongs to the club owner and is a profit stream that can be pledged or sold.
Other issues to be considered are the ownership structure of the club, the right of homeowners to purchase the club in the future, the mechanism for triggering such sale, and the formula for determining the purchase price.
Proper disclosure of the club structure should be made to all purchasers. In addition, it is important to market the homes and the recreational arrangements as a total package, not separate products. If structured and documented properly, and properly disclosed, a mandatory membership club structure can provide additional revenue and other benefits to a developer. If not properly structured or documented, however, a mandatory club membership structure can result in claims and disputes with homeowners, including scrutinizing the enforceability of the club documents.