A transition occurs when control of the association transfers from the developer, sometimes known as the declarant, to the members of the association. Many states mandate a point at which the developer must transfer control, such as a number of years after the establishment of the first board of directors, or once a certain majority of properties are sold. It can also occur sooner if the developer chooses to transfer control. Before transferring responsibility, however, it is important for the association to confirm that the developer complied with the standard practices for construction, property management, operating the board of directors, etc.
What should an association do if any construction defects or problems are found prior to the transition?
The first step is to present the nature of the defects to the developer and see what they say. One would then hope that the developer would address it. But it’s possible that the developer is no longer in business or outright refuses to take action. If either is the case, and if the defects prove to be substantial, it’s likely that the association will need to file a lawsuit. “However, it is critical to notify the developer in writing as soon as you even suspect a defect. Any delay may seriously lessen the association’s rights and remedies,” Greenstein said.
Oftentimes, when an association facing construction defects is not working with one of the larger development companies, Greenstein ex- plained, its recourse may not necessarily come from the developer or the contractors the developer used. Instead, the problem may be resolved through the insurance carriers and insurance policies that were taken out and maintained by the developer and contractors throughout the course of the construction. This is important for associations to remember, especially if they are dealing with substantial defects.
Prior to transition, the members of the developer’s board each have a fiduciary responsibility to address any defects discovered. In fact, the developer’s board has the same fiduciary responsibilities as the post-transition board. When members of a developer’s board are sued after a transition, Greenstein said, it is often for failing to resolve any defects or other such concerns. Thus, it is advisable to document how any problems were ad- dressed. Individual owners do not have much say in the matter prior to transition, as the board is still under the control of the developer.
Is there ever a situation where a developer will pay expenses out of their own pocket in order to keep assessments artificially low?
Yes, Greenstein noted, and that is almost always the case. However, case law exists at the national level which states that it is in violation of the board’s—developer and non-developer both—fiduciary duty to keep assessments artificially low. Furthermore, he said, it is usually required that the developer fund an association’s operations in a certain way through- out the course of the development, and to make disclosures regarding the same.
According to Greenstein, homeowners do not have the right to inspect a developer’s financial records, though they do have access to their association’s records. A developer is also required by the state to file certain documents pertaining to the approvals for building and selling units. Those records are presumed to be available to the public.
If the developer enters into a contract on behalf of the association, what happens after the transition?
Is the association held responsible for that contract? Perhaps, Greenstein said, but it would depend on with whom the contract is made and their relationship with the developer. Ideally, these kinds of contracts are addressed on an individual basis. “Contracts instated prior to the transition may be terminated by the owner controlled board of directors typically for up to two years from the time owner control of the board took place,” he said. It is recommended that all active contracts be reviewed by the new board after the transition. Contracts involving the association are not typically considered valid if the developer enters into them after the transition.