Join the club Featured

7:00pm EDT February 23, 2009

Tens of thousands of people belong to hundreds of private clubs in the state of Florida. Yet, few club members are aware of the fact that their rights and obligations as members are subject to change.

For some members, changes are understood as progress and improvement. For others, change can be disconcerting and can undermine their investment plans.

On the other hand, the club directors feel that modifying club bylaws and other governing documents is critical to a club’s survival and its ability to overcome adverse economic cycles and demographic changes.

“It is important for an applicant to a private club to understand that the privileges and obligations of membership are subject to change by a process that can itself be changed,” says Michael D. Katz, a shareholder with Katz Barron Squitero Faust.

Smart Business spoke with Katz about private clubs and the legal issues involved in their internal changes.

Do private club members have vested rights that protect against membership changes?

The concept of vested rights means that members have certain rights related to their club memberships that cannot be changed or taken away. There are few, if any, vested rights in most private clubs. This is because the documents that create the members’ rights can be amended. The courts have generally held that membership rights (and obligations) are subject to change as the governing documents themselves change. If the procedures for amending the governing documents are followed, the changes apply to both existing and new members.

What are the procedures for amendment of the bylaws and other club documents?

It depends on the requirements of each club’s documents. If the club was created as part of a residential community and if the developer is still active in that pursuit with a retained board presence, the right to amend will often repose solely with the board of directors and may require a super-majority vote, which allows the developer to block the amendment as a defensive matter. Super-majority voting may be limited to matters that could negatively impact construction or sales, but more often it is not, at least until the development is sold out.

In club communities where the developer has exited, most amendments will require approval by the board of directors. Others may require approval by the members, such as those modifying limiting provisions of club documents concerning the imposition of capital assessments. Super-majority votes may be required at the board level, the membership level, or both, on key matters such as sale of the club property. In cases where clubs suffer financial distress or, over time, find their real estate to be in great demand for redevelopment, clubs have lawfully sold excess land, golf courses and other amenity parcels for redevelopment.

What kinds of changes can be made to the club documents?

There is no limit on the changes that can be made. While most clubs take pride in preserving their character, they also recognize the need to adapt to what their members want and the economic model required to achieve it. Clubs are inevitably in competition with one another and may need to evolve their membership structures to attract and retain the most desired members.

Bylaw changes can involve minor procedural matters or the members’ substantive interests. For example, a club can change the terms of admission or resignation. The classes of membership and privileges appurtenant to each class may also be changed by amendment. Bylaw changes may alter voting rights and the ways and means of imposing capital and operating assessments.

Incidentally, condominium and homeowners’ associations have the same latitude to change their governing documents. For example, Florida courts have upheld amendments that restrict or prohibit owners from leasing their units on a ‘rule of reason’ analysis. The amendments are binding on existing owners who are leasing their property as well as on new owners. The ‘vested rights’ assertion has been rejected in those cases.

What if there is a disagreement over the meanings of the club documents?

Florida courts grant very broad authority and discretion to the board of directors of a private club to determine if a governing document is ambiguous and, if it is, to determine its meaning. Generally, as long as the interpretation is not patently arbitrary or unreasonable, the courts will not interfere.

The courts have also declared themselves hands off where disciplinary processes are concerned. The club itself is the sole judge of what conduct warrants sanction, which can take the form of monetary fines, suspension or even expulsion. As long as there is notice and an opportunity to be heard, and any other requirements of the club documents are observed, the outcome of the disciplinary process is not subject to review by the courts. Mention should be made that the opportunity to be heard is not necessarily the equivalent of a ‘hearing,’ and that club policy may not allow a member the right to be represented by counsel, nor do rules of evidence or civil procedure apply.

Also, it is important to understand the relationship of real estate ownership in a private club community to the club itself, as well as any master community association. Such communities provide unique amenities and wonderful lifestyle experiences, but come with the risk — and often the necessity — of future change.

MICHAEL D. KATZ is a shareholder with Katz Barron Squitero Faust. Reach him at MDK@katzbarron.com.