What is a transition? Guerra explained, “In Michigan, in the condominium sense again, the Condominium Act talks about the ‘transitional control date,’ and it is the date on which the management and the administration of the condominium is transferred from a board of directors controlled by the developer to a board of directors controlled by the non-developer owners. A similar scenario happens in an HOA. At some point in time the declarant is no longer the only party who can vote and the only party who administers the association and the declaration, and there’s actually a board of directors elected by the non-declarant owners to govern the association. That is considered to be the transition.”
In this case, homeowners would hope for the developer to take it upon itself to address those issues. However, Guerra explained that in many cases this does not happen. “Before transition, the board is controlled by the entity that presumably would be responsible. So, while something could and should be done before transition, the fact is that issues are rarely addressed, because the people in charge would basically be looking to impose liability on themselves,” said Guerra. He explained prior to the transition, in the condominium sense, there is a period of time during which an advisory committee made up of non-developer owners is formed. This committee brings issues to the attention of the developer-run board of directors that are brought to their attention by other non-developer owners.
Is there ever a situation where a developer will pay expenses out of their own pocket to keep assessments artificially low?
Guerra said yes, and that this frequently happens. “If after transition the association finds that its assessments have been kept artificially low, or in another sense it finds they overpaid a bunch of expenses or the developer is claiming it made a loan to the association for which it now wants reimbursement, there is legal recourse against a developer. Case law exists nationally indicating that for a developer-controlled board to artificially keep assessments low for the purpose of selling units, is a violation of the fiduciary duty owed to the membership,” he said. Associations have the right to pursue that scenario judicially.
Homeowners themselves do not have the right to inspect a developer’s financial records. “Although the members have the right to inspect the association’s books and records, absent litigation, you’re never going to be able to inspect the developer’s financial records. You don’t have any specific rights. You can get the right to look at developer financial transactions once you file a lawsuit through discovery procedures,” Guerra said.
If the developer enters into a contract on behalf of the association, what happens after transition? In this case, is the association responsible?
“Under the Michigan Condominium Act, after the transitional control date, if the developer has contracted with itself or its affiliate for the purposes of providing management or other services to the association beyond the transitional control date, the association has statutory rights to terminate that arrangement,” he said.
“If you have a long-term management agreement, and you can show it’s the developer or an affiliate of the developer, you can cancel that portion beyond one year according to our statute as well.”