Legal ruling could impact strata developments

Several developers, including Chamber of Commerce President Paul Pearson, say a change in the law to regulate how and when they hand over control of strata developments to owners is unnecessary and would hamper their ability to build and sell.

Vacation home owners won a legal judgment last month against the developer of East End’s Castaway Cove in a landmark case that ensures stratas must be run as “community democracies.”

For-sale-sign-(Read-Only)Justice Ingrid Mangatal struck down bylaws that lawyers argued gave Thompson Resorts Ltd. a “permanent controlling interest” in running the beachside holiday resort.

In that case, the bylaws gave Thompson an automatic majority in all owner votes for 50 years or until all the units were sold to third parties. The judge ruled the bylaws were “ultra vires” – outside of the law – and that the intent of the Strata and Titles Registration Law was that owners should have a say in decisions impacting their property from the moment they buy a unit.

She recommended Cayman’s politicians look again at the laws governing strata ownership, particularly for resort properties, to more clearly define when and how a developer must cede a share of control to owners.

While most developers approached by The Cayman Islands Journal acknowledge that retaining control for 50 years is extreme, they say it is common and necessary for them to keep control during the building and sales phase to ensure consistency of design and operations. How long that period should be for different types of development, and whether legislation is required to guide the process, is a matter of debate. Under the judge’s interpretation of the current law, developers effectively cede total control once half the units are sold, though they would retain a significant voting block, proportionate to how many units they still owned.

Pearson, of Davenport Development – and the president of the Chamber of Commerce – said he does not think more legislation is the answer. He said buyers could read their contract and decide if they thought it was fair, and developers who didn’t do the right thing would face the consequences in the market place.

Davenport, which has completed a range of residential developments, including Lantern Point and San Sebastian, and is part way through building Vela on South Sound, typically retains control for at least five years or until 95 percent of the units are sold. Pearson said developers need to be able to ensure decisions don’t negatively impact future phases.

“If we are building Vela and the first group of people that move in decide they want to vote to paint it pink, then how can we sell the rest of them?”

He said running a strata is typically a headache for developers, but is necessary in the early stages to ensure everything runs smoothly and buyers get what they paid for in terms of quality of operations. He said developers that do not offer a fair deal would ultimately be punished by word-of-mouth damage to their reputation.

“This area is regulated enough,” Pearson said. “It is up to buyers to do their due diligence and read the strata bylaws before they buy, and it is up to developers to be very conscious of their reputation and don’t do anything that means no one will buy the next time you build.”

The issue is complicated by the diversity of types of stratas in Cayman. Realtor Kim Lund believes tensions arise most often in “condo-tels,” similar to Castaway Cove, where there are shared facilities between owners and guests, and in condominium stratas where some properties are in a rental pool.

He said the current law is a “catch all” that doesn’t adequately cater to the specific needs of each type of development.

“All of these stratas operate differently and the current law is too broad to deal with the differences,” he said. “The issues come from use and cost of maintenance of the common areas, for example a condo-tel with an elevator that has to allocate maintenance costs being used for hotel rooms and condominium residences.”

He said the judge’s decision leveled the playing field for owners, particularly in mixed condo, hotel, developments, empowering them to have a say in operations and dealing with conflicts of interest.

He said developers still need to have control over the build-out, but owners are entitled to a say in operations of the completed phases.

Dale Crighton said most developers cede control once the majority of the units are sold. But he said it is not always so simple, since they need to be sure decisions of the strata will not adversely impact future development or other planned phases. He said this is particularly relevant for timeshare developments.

“A timeshare development is a completely different animal than a standard condo development or land development. As the owners of most timeshare developments are vacationers who often make monthly payments, it’s usually the first luxury that is cast aside the minute the economy takes a negative turn. At that point, who will subsidize any shortfalls?

“If the onus is on the developer to ensure the continuity of the development and to fund shortfalls to protect his assets, why shouldn’t he have a vehicle of control?”

The Castaway Cove case was brought by U.S. resident Carl Clappison on behalf of multiple owners who believed they were being overcharged by Thompson Resorts’ Kel Thompson, who contracted his own company to run the resort, which forms one part of Wyndham Reef Resort, prior to the sale of any units.

According to an affidavit from Clappison, the vacation home owners felt they were being charged unreasonably high strata fees, essentially subsidizing the Wyndham Reef Resort, which Thompson operates on the same property with shared facilities.

When they questioned the fees and rejected the strata’s annual budget plan, Thompson invoked bylaws giving the developer an automatic majority in any poll, and pushed the budgets through, the court documents indicate.

Judge Mangatal did not make a ruling on whether the residents’ complaints were justified, but said they were entitled to a democratic say in how the strata was run. She suggested clearer rules are needed to govern the process.

“It is my considered view that the legislature should examine the specific concerns raised in this case and the tensions that undoubtedly exist between the interests of developers and proprietors of strata units in a strata development forming part of a resort. I would urge the legislators to decide if there is a need for an appropriate amendment to the legislation.”