Equity club developers and equity club members often view turnover and member due diligence completely differently. The typical developer position is: “The Club will be turned over to the members ‘where is, as is’ in accordance with the club documents.” The typical equity member view is: “We want to find out if there is any problem with the Club facilities, membership program or Club finances, and we expect the developer to fix any problem.” Which position is right?
The developer is generally correct that all it is required to do is turn over the Club in accordance with the club documents, and most club documents provide for a “where is, as is” turnover. However, the club documents may include title, deficit funding, reserve, and accrued liability payment requirements. Turnover must comply with such requirements.
Club members may also look beyond the club documents, and claim certain rights by virtue of side agreements, correspondence, representations in marketing materials, and even alleged verbal representations. These materials should be reviewed, as well as any Club document disclaimers regarding such ancillary materials and representations.
Members often expect a developer to provide and pay for more than the club documents or any even ancillary documents expressly provide. Members may argue that the Club documents imply or equitable considerations require certain obligations, such as turning over the Club facilities without encroachments, environmental hazards or major deferred maintenance problems, notwithstanding the absence of express requirements regarding these items. They expect a developer to fund working capital, future property and equipment replacements, and even new or larger facilities, even when there is no basis for such demands in the Club documents.
A developer’s willingness to address members’ demands often depends on factors such as whether the developer has unsold property in the neighboring residential community or memberships. The developer may want satisfied members who promote the club and community in order to enhance the marketability of the developer’s unsold memberships or real estate. Sometimes, the developer wants concessions itself, such as veto rights over major changes or control over membership marketing, which the Club documents do not give the developer. The developer will want a turnover agreement in which concessions on both sides are reflected.
It is important that a developer consider all turnover related issues and has a strategy for implementing turnover.