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A long-simmering dispute on Maui over the rights of a minority of apartment owners who don’t participate in a Kaanapali condominium’s hotel rental program has resulted in an arbitrator’s ruling that could force changes in the way condo-hotels, now a major segment of Hawaii’s visitor industry, are managed.

In a final ruling confirmed in court last month, retired Second Circuit Court Judge E. John McConnell ruled the Association of Apartment Owners of Kaanapali Hale violated the state’s condominium law, exceeded its legal authority, and breached its fiduciary duty to Steve and Andrea Clark, a couple who own an apartment in the complex but opted out of the AOAO’s hotel rental pool.

Kaanapali Hale operates under the name Maui Kaanapali Villas, or MKV, which has been trademarked by the AOAO. Its hotel rental pool is operated by Aston Hotels and Resorts.

Citing conflicts of interest, and the AOAO’s failure to comply with specific provisions of Hawaii’s condominium law, McConnell voided Aston’s lease of the project’s front desk for operation of the rental pool, and threw out several condominium rules, policies and fees charged to owners who do not rent through Aston. He also ordered the AOAO to pay more than $83,000 in attorneys’ fees and costs incurred by the Clarks, but declined to award them any monetary damages, which he concluded were not proven “with reasonable certainty.”

McConnell’s May 19 arbitration award was confirmed in Maui’s Second Circuit Court on Aug. 29.

Built-In Conflicts

McConnell found Aston’s ties to MKV created conflicts of interest for the condominium’s board of directors. Aston was not directly a party in the complaint filed against the Kaanapali Hale AOAO, but the company was front and center due to its overlapping and conflicting roles.

First, the AOAO contracted with Aston to serve as��managing agent for the condominium project, where it is supposed to represent the interests of the owners of all 260 units in day-to-day operations.

Second, the AOAO chose Aston as the rental agent to manage and market short-term vacation rentals for those owners who choose to be part of the Aston��Rental Program, which manages and markets units in two dozen resort condominiums around the state. Aston and several other large condo hotel operators wrap standard hotel amenities and services around the condominium apartments they manage, so that visitors may not necessarily know they are staying in a privately owned apartment rather than a traditional hotel room.

And, third, Aston leased the condominium’s front desk and associated office space, which it apparently used to service both the AOAO as a whole and the operations of its hotel rental pool.

“So I would have to wait in line at the Aston front desk just to get a key to inspect my own unit, often waiting behind groups of visitors trying to check in.” — Steve Clark

About 181 MKV units are enrolled in the Aston Rental Program and are referred to as Aston Participating Units, or APUs, while about 59 are marketed independently and are considered “Nonparticipating Units,” or NPUs, according to the final arbitration award.

The Clarks, and some other non-participating owners, say the board imposed policies favoring Aston and its participating units, creating hardships or costs for those owners who market and rent their apartments independently.

“Independent renters just didn’t get a fair shake,” Steve Clark said in a telephone interview last week.

Clark, a businessman and real estate manager who has lived on Maui for 50 years, said there were disputes over a new system of door locks, which gave Aston control over access to individual condominium units. There were complaints over a $40 check-in fee, and an inspection fee assessed only to guests of nonparticipating units. And there was resentment over what Clark called the board’s arrogance and refusal to listen to the complaints of owners.

“We wrote letters (to the board) for two years, and never heard a word back,” Clark said. “That’s when we knew we had a problem.”

“We just want to be treated fairly.”

Aston, through a representative, Theresa van Greunen, director of public relations and promotions for Aqua-Aston Hospitality, declined to comment on the case or the arbitrator’s decision.

Aston was a pioneer in taking over management of condominiums and operating them as hotels. It has about two-dozen Aston and Aqua-branded condominiums spread across the state. Other companies managing large inventories of resort condominiums include Castle Resorts and Outrigger. These properties are virtually indistinguishable from traditional hotels from a visitors point of view, although the underlying condominiums are supposedly run by and for all the owners, and are not businesses expected to operate at a profit.

Controlling Access

One of the triggering issues of the conflict between the MKV board of directors and owners who rent their units independently was over routine access.

In 2010, the board of directors of MKV voted to begin installing a new computerized system of locks that would allow the front desk to issue temporary card keys to visitors, as is now common in most hotels. But as part of the changeover from traditional locks and keys, they also adopted a policy requiring both visitors and owners to check in at Aston’s front desk in order to get a key.

The Clarks objected and asked to be allowed to keep their traditional locks in order to control access to their own apartment, but their request was denied by the board of directors, which said it was an issue of security and safety.

“So I would have to wait in line at the Aston front desk just to get a key to inspect my own unit, often waiting behind groups of visitors trying to check in,” Clark said.

“Many older projects started as condominiums, with the hotel elements added later. That’s where the problems start.” — Terry Revere, attorney ��

He then requested a permanent key card. The answer, he said, was simple: “Nope, you can’t get one.”

Aston’s insistence on control of keys and apartment access also prevented owners from easily scheduling inspections, cleaning, or repairs and maintenance on their own apartments, Clark said.

And in a strange twist, owners arriving from out-of-state were required to provide advance notice by making “reservations” with Aston as if they were hotel guests, although they were just coming to their own apartments. Remember that these owners did not rent their units through Aston, and had no direct contractual relationship with Aston.

Gail Scott, a California resident, complained in a 2014 email to Aston’s manager at the time, Pat Flinn, and several board members, after she arrived on Maui without a “reservation” and was told she would not be allowed into her own apartment.

“The front desk said I wasn’t on the list of those arriving today so they couldn’t let me in,” she wrote.�� It took two hours of wrangling, including calls to Aston’s offices in Honolulu, for her to finally gain access.

“So, Pat who controls access to my property?” Scott’s email asked rhetorically. “Aston basically. Many NPUs do not like this … We should be the ultimate arbiters of who gets into our units and when. The front desk should not have that authority over the owners.”

The defensive and arrogant attitude of the AOAO’s officers added to the tensions. A May 2014 email from the board president to Donna Barnett, another independent owner, contained a classic example of “mansplaining.”

After referencing their prior conversations concerning the new lock system and other matters, he wrote: “Despite all this you and Gail continue to whine about the same things over and over while refusing to make any effort at all to understand anything anyone has been trying to explain to you about how things actually work at MKV… Each of the issues you have raised in your email below have been explained to you numerous times. You either are not listening or you are incapable of understanding what we are telling you.”

After the Clarks’ complaint was scheduled for arbitration, the AOAO agreed to make permanent master keys available to owners on request rather than requiring them to check in at the front desk on each visit. As a result, their complaint about the door locks was not addressed in the arbitrator’s final ruling.

Wagging The Dog

Honolulu attorney Terry Revere, who represents the Clarks, said the problems at Maui Kaanapali Villas are typical of a significant segment of the condo-hotel market, which were built before hotel-type provisions were included in their governing documents.

Condominiums are governed by their declarations, bylaws and house rules, as well as by the state’s condominium law, but this normal governance system can be corrupted when commercial rental pools are superimposed over the condominium legal framework.

“More modern and sophisticated condominium declarations will clearly state, ‘we’re a condo hotel.’ It’s sitting there in your condominium documents,” Revere said. “But many older projects started as condominiums, with the hotel elements added later. That’s where the problems start.”

“The basic problem is that the rental pool tail is too often allowed to wag the AOAO dog,” Revere said.

“This entire business model where the hotel rental pools end up de facto running the AOAO��leads to tons of waste, fraud and abuse,” Revere said. “The whole business model is corrupt, and unfair, and often is not disclosed to owners when they are buying into a condominium.”

The incestuous situations where the operator of a condominium rental pool also serves as managing agent of the AOAO, such as Aston at MKV, creates opportunities for profits or costs to be shifted either to the AOAO, where they are paid by all owners, or just to those who participate in the rental pool. Participating owners unfairly benefit to the extent that any costs can be shifted to the AOAO, and income to Aston or participating owners.

Revere rattled off several examples from other projects in which expenses primarily benefiting the rental pools were being charged off to all apartment owners.

And while there may be financial incentives supporting policies that favor the “official” rental pools, these policies or rules can go beyond the rulemaking powers of a condominium’s board.

McConnell’s decision rejected an MKV rule requiring nonparticipating�� units to be inspected and to meet Aston’s rental standards, pointing out that�� state law gives boards limited authority��to protect and enforce provisions of the declaration and bylaws.

“Otherwise, the association may not regulate any use of or behavior in units by means of the rules and regulations,” McConnell wrote, quoting from the statute.

“The inspection requirement’s purpose is to prevent negative internet reviews by guests that may impact future rentals,” McConnell wrote. “This may be a laudable purpose from a business perspective, but it is beyond the rulemaking powers of the Board.”

Revere believes the arbitrator’s decision will have a major impact in how condominiums with hotel rental pools will be managed in the future.

“It may be necessary to just have a separate management company running the AOAO, one that is distinct from Aston or other hotel pool operators,” Revere said.

This would allow arm’s-length relationships between the AOAO and the rental pool operator, avoiding the disputes that arise when their affairs are commingled.

Read the Clark award: