What is a transition?
Transition is the event where control of the association transfers from the developer to the association. When transition occurs is set by law – three years after the recording of the original CCRs, when 75% of the units have been sold or when the developer willingly hands control over to the members, which- ever occurs first. In Illinois, we generally refer to transition as “turnover”.
What if construction defects are found prior to the transition?
If there are construction defects in the common elements, the developer cannot give itself a pass. The law states that the statute of limitations for any claims the association has will not begin to accrue until turnover. Thus, the association will be able to go after the developer, assuming it is still in business. A more proactive approach is to notify the developer of the issue while it controls the board. While it is in control, the developer acts as a fiduciary to the association and its members. Thus, if it were to make a decision that hurts the association but helps its own interest, it could be challenged. If the developer refused to address the issue, the members could file a derivative lawsuit against the developer. If the developer still has units to sell, it has assets the association could try to seize.
What actions can the board take before the actual transition takes place?
In Illinois, the developer fills the role of the board before transition. The developer is required to take all necessary actions to protect the association.
What about the actual date of transition — is this something that is important to note?
Prince noted that it is important to know when transition is required to occur. At the latest, power should transition to the members three years after the declaration is recorded. However, even though transition is supposed to occur, a lack of membership participation may delay turnover if a quorum cannot be reached to hold the turnover meeting. Since the statute of limitations (the time period a lawsuit has to be filed in) begins to run at turnover for association issues, advancing or delaying turnover could be strategic for the developer and the members of the association.
What is the role of the advisory committee made up of non-developer owners?
Prince stated that the advisory committee has no power in Illinois. It is unusual to even have one. The committee’s main role should be to funnel information between the developer and the members to assist in a harmonious development of the association.
Is a developer allowed to pay expenses out of their own pocket to keep assessments artificially low?
Prince said that this occurs quite often. Developers generally want to keep assessments low to attract homebuyers. The developer pays any shortfall caused by the lower assessments. When transition occurs, the association can then approve a budget that does not rely on a developer shortfall.
Do homeowners have the right to inspect a developer’s financial records?
Prince said that owners do not have the right to inspect the developer’s records. They do have the right to inspect the association’s records. When transition occurs, the developer will have to turnover all of the association’s records to the new board.
Before the transition, does the association board need to fulfill all the same requirements that a post-transition board would?
Prince said that the pre-transition board has the exact same duties as the board does after transition occurs.
If a developer enters into contracts on behalf of the association, what happens after the transition?
Is the association responsible to uphold the terms of those contracts? Contracts that are made by the developer on behalf of the association are enforceable. However, if a contract extends more than two years after transition, the newly elected board can opt out of the contract through a specific process. When turnover occurs, all contracts should be reviewed to address these potential rights.