The Texas Property Code allows developers and their attorney wide discretion on the types of provisions that may be set forth in a set of governance documents for a community. In our experience, we have noticed that many governance documents do not reserve all of the rights and privileges allowed for a developer and any applicable homebuilders under the law. The following contains provisions that your governance documents should always contain, in order to preserve maximum flexibility for the declarant and any applicable homebuilders in governance documents.
The “Development Period” is defined in Chapter 209 of the Texas Property Code as “a period stated in a declaration during which a declarant reserves: (A) a right to facilitate the development, construction, and marketing of the subdivision; or (B) a right to direct the size, shape, and composition of the subdivision.” The Development Period is a time period that must be reserved in the governance documents, and is not granted automatically in the statute. Fortunately, the statute does not limit the time period that the Development Period can last. Therefore, we recommend explicitly setting forth a time period that is not tied to property ownership (we recommend a period of at least 20 years) in the Declaration of Covenants, Conditions and Restrictions for the community whereby the declarant reserves certain rights needed to complete the development of the community (i.e., supermajority voting rights, architectural review rights, etc.). A set of governance documents without an explicit Development Period fails to provide the necessary bundle of rights that the developer will need to properly build out the community.
We frequently see governance documents that either (i) grant the board of directors full control over the architectural review process or (ii) vest architectural review authority in a separate architectural review or control committee (ARC), which is usually comprised of either representatives appointed by the board of directors of the association, or the board members themselves. At minimum, we counsel against vesting architectural control in the board of directors or structuring the composition of the ARC to be comprised of board members.
Regardless of whether the board members have been appointed by the declarant or elected by non-declarant owners, members of the board and committees of the board are held to a high standard of conduct under Chapter 22.221 of TBOC (General Standards for Directors), which provides that directors “shall discharge the director's duties, including duties as a committee member, in good faith, with ordinary care, and in a manner the director reasonably believes to be in the best interest of the corporation.”
In addition, recent changes in the law by the Texas State Legislature’s passage of Texas Senate Bill No. 1588 have expressly prohibited current board members from being appointed or elected to serve on an ARC for communities with more than 40 lots after the declarant’s Development Period has expired, with no such constraint during the Development Period.
We advise our clients that directors, regardless of whether appointed by the declarant or elected by non-declarant owners, should always act in their capacity as director in the best interest of the association. In our documents, we make sure to avoid potential conflicts on design review by electing not to vest architectural control in a committee of the association. Our best practice is to provide that, until expiration or termination of the Development Period, architectural review authority is not vested in the board of directors at all, but rather in a separate “reviewer” position, which is declarant or its designee. Thus the reviewer owes no duty to the association, and until declarant designates all or a portion of its reserved rights to the board, or expiration or termination of the Development Period, the association has no jurisdiction over architectural matters. Upon expiration or termination of the Development Period, the rights and jurisdiction of the Reviewer are assumed by an ARC which serves at the pleasure of the board, whose members may be appointed and removed by the board at any time.
We often see governance documents that grant the association the right to grant variances to certain rules, or allow the declarant to grant variances in certain limited circumstances. However, we frequently see developers who need to grant variances to correct a building error or to allow a purchaser’s last minute request. Why would a declarant want to limit its ability to grant variances? We recommend ensuring that the variance provision is as broad as possible in the Declaration of Covenants, Conditions and Restrictions to allow the declarant to grant a variance from the restrictions or the rules and regulations for any reason in the declarant’s sole discretion.
Assessment Exemptions and Delays
Oftentimes, governance documents will exempt the declarant from paying assessments to the association for Lots that declarant owns. However, we have found that the declarant may strike a deal with a homebuilder to exempt or delay the homebuilder from paying assessments for Lots that the homebuilder buys from the declarant. In this regard, we recommend not only reserving an exemption for declarant from assessments in the Declaration of Covenants, Conditions and Restrictions, but also allowing the declarant to file an external document at any point in the future to exempt, delay or reduce the amount of assessments paid by certain Lot owners during their ownership period. This will preserve flexibility in case the market requires the declarant to grant a reduction in the future to sell Lots.
Governance documents will usually contain an amendment provision, but all too frequently the declarant’s ability to amend the documents will be limited to certain allowable instances. Often, the declarant can only amend if there was an error in the documents and the amendment will not have an adverse effect on any other owner. Rather than constrain a developer, we recommend that the Declaration of Covenants, Conditions and Restrictions provide for an express provision that allows the declarant to amend the governance documents for any reason. When drafting governance documents, a practitioner cannot accurately predict what will occur in the community years down the line. Therefore, the ability to amend the Declaration of Covenants, Conditions and Restrictions to fix any changed conditions should be a required provision for any well drafted set of governance documents.