What's the deal on the Seawall?

A dispute exists between the seawall lot Owners and the Club. The dispute relates to how the costs of maintaining, repairing, and replacing the seawall are allocated between the seawall lot Owners or the Owners of the Club (i.e., all 560 Owners). The seawall has a replacement cost of about $9 million (which may be higher now in light of higher construction costs). To save you the trouble of doing the math, $9 million (actually around $7.5 million when you take out the portion attributable to the 17th hole of the Nicklaus course and the community dock) divided by 32 is about $235,000 and divided by 560 is about $14,000. So whether the seawall Lot Owners or the Club is responsible for the replacement of the seawall ought to be a matter of concern to all Owners.

In 2019, the Club hired the law firm of Nelson Mullins to conduct a title search and review of the facts and governing documents relating to the seawall. By way of background:

• There are three phases to the seawall:
• The J-Lots which run from the 17th hole of the Nicklaus golf course down to the Seven Oaks property adjacent to the community dock. This phase includes the seawall on the 17th hole and the seawall at the community dock. There are 12 J-Lots.
• The four M-Lots on High Ponds Road.
• The 16 Phase II lots, which follow the river down Oak Tree. 
• Other Lots adjacent to the marsh also have seawalls. But those seawalls are not at issue and are solely the responsibility of the Lot Owner.
• The Club holds legal title to the seawall abutting the river.
• But the responsibility for repairing, maintaining, and replacing the seawall is defined in the Seawall Covenants. Legal ownership of the seawall is irrelevant to determining who is responsible for the costs of repair, maintenance, and replacement. 
• Different Lots are covered by different Seawall Covenants and three lots are not covered by any Seawall Covenants.
• The Original Seawall Covenants govern most of the J-Lots and a couple of the M-Lots.
• The Amended Seawall Covenants govern the remainder of the J-Lots and M-Lots, as well as 13 of the 16 Phase II Lots.
• The remaining three Phase II Lots are governed by the common law.

The Club received a legal opinion from Nelson Mullins explaining the Club's rights and responsibilities under the Seawall Covenants and the common law.

An Owner asked about the seawall at the December 2020 Annual Meeting and was told that the matter was "privileged" and that the Club would provide no information to the Owners. This claim was remarkable because the Club had already sent a 13-page letter to the J-Lot owners setting forth its analysis and understanding of the relevant facts (which breaks privilege). In January 2021, the Club sent a similar letter to the Phase II seawall Lot Owners. I received a copy of the January 2021 letter (after I had resigned from the Board). Email me and I'll be happy to send you a copy of the letter. The bottom line is that each seawall lot Owner has been provided with the Club's legal analysis, but this analysis has not been hidden from the Owners.

In early October 202, the Board declared that the seawall would not be discussed at the Town Hall meeting. At some point between that declaration and the Town Hall meeting later that month, the Board reconsidered and briefly addressed the seawall. In short, the Board declared that they were in settlement discussions and that they expected to settle the dispute. They also declared that the sequence would be: settle first and let the Owners know about the settlement later. In other words, the Owners--who will collectively be responsible for any costs incurred by the Club in settling the dispute--would be informed after the fact of the obligations that the Board had incurred on their behalf.

You may ask: "can the Board really do that?" And you may be surprised to learn that the Board has the power to settle disputes without Owner approval. In addition, the Board has the power to spend money in the replacement reserve fund in its discretion. So the Board could hypothetically agree to use $1 million from the replacement reserve fund to settle the dispute without asking the Owners. And, of course, the $1 million taken from the replacement reserve would not be available to maintain the assets of the Club. Perhaps this "loophole" should be addressed when the Club's governing documents are updated (spoiler alert: the draft revisions  to the governing documents place no such restrictions on the Board). So the only remedy available to an Owner would be to sue the Club for abusing its power under the governing documents. Not only is such a lawsuit difficult to win, the governing documents provide that if an Owner sues the Club, the Owner is responsible for the Club's legal expenses. Nice, huh?

At the Annual Meeting, the Board disclosed that the seawall negotiations had not yet been successful. My guess would be that the seawall Lot Owners believe that they can get the Club to make even more concessions in the settlement.

Why do the seawall Lot Owners believe that the Club should be responsible for some portion of the costs assigned to the seawall Lot Owners under the Seawall Covenants and the common law? To be fair, the Seawall Covenants are quite complicated--hence the 13 page letter from Nelson Mullins explaining the Club's analysis to the Owners whose interests are adverse to the Club's.

The two equitable arguments made in the past by the seawall Lot Owners are:

• The seawall Covenants require that the Club establish a reserve for the repair, maintenance, and replacement of the seawall and the Club has not done so.
• The Club's failure to establish a reserve results in the past owners of seawall Lots not having paid their "fair share" of the cost of the repair, maintenance, and replacement of the seawall
• The Club was negligent in performing inspections and preventive maintenance relating to the seawall.
• Therefore, the Club should pay for its negligence.

The legal response to these two arguments is:

• The law provides that the seawall Lot Owners were charged with knowledge of the Seawall Covenants when they bought their lots. And the seawall Lot Owners should have inquired about the status of the reserve fund when they bought their property. In the eyes of the law, the seawall Lot Owners bought the property with an understanding of both the documents governing the seawall and the state of the Club's compliance with those documents. And their purchase price reflected those risks.
• There is a fact dispute about whether the Club was negligent. And if the Club was, in fact, negligent (a concession that--to my knowledge--has not been made by the Club), there is a fact issue about the "damages" that would have resulted from such negligence. In short, if it takes (for example) $1 million to repair the seawall, how much of the $1 million is due to the Club's alleged negligence and how much is due to 25 years of wave action and the passage of time? The burden of proving damages falls on the seawall Lot Owners and is not a trivial exercise. But it's safe to say that a considerable portion of the "damages" are due to wave action and the ordinary wear and tear on the seawall.

There may be other arguments made by the seawall Lot Owners, but I'm not aware of them.

So what alternatives are available to the Club?

• Continue to negotiate with the seawall Lot Owners.
• This tactic has been pursued since 2018--perhaps it's time to change course.
• At a minimum, the seawall Lot Owners should pay the disputed amounts into escrow. If they ultimately prevail, they get their money back.
• Ask a court to decide the matter. There's a legal procedure where each side submits its version of the facts and law to a judge. The judge conducts a trial to resolve the factual disputes and the judge then applies the law to the facts and states which party is responsible for what. All the filings are public and the Owners of the Club can read the filings and understand the dispute. If the court agrees with the seawall lot Owners and disagrees with the Club's analysis, then the Club will pay as required by the court. What's wrong with this alternative?

What's a "fair" settlement? Speaking only for myself, I think a fair settlement would be for the Club to:

• Require the seawall Lot Owners to reimburse the Club for all expenses incurred by the Club to date relating to the repair and maintenance of the seawall.
• The Club uses the funds reimbursed to the Club by the seawall lot owners to establish a reserve fund for future repair, maintenance, and replacement costs relating to the seawall. 
• The Club and the seawall Lot Owners each make an annual contribution to the reserve (as required by the Seawall Covenants) in an amount sufficient to provide for the repair, maintenance, and replacement of the seawall.
• All seawall Lot Owners and the Club enter into new Seawall Covenants that make it crystal clear which party is responsible for what in the future.

Although this dispute is quite complicated, it poses a significant financial risk to the Club and the Owners should be aware of the facts relating to this long-standing dispute. Don't take my word for it--get a copy of the letter sent to each seawall lot Owner and read the Club's analysis yourself.

This is yet another example of where the "Board knows best" philosophy does not meet the reasonable need of 560 Owners to understand what's going on in their Club.