By: Howard S. Goldman, Esq.
The condominium structure has been built, the infrastructure and amenities are in order, and unit owners are starting to buy – it’s transition time. And while it may seem inevitable that control of a condominium will somehow shift from a developer to an association of the unit owners, failure to attend to many crucial considerations can lead to inefficiency, uncertainty, and contentiousness between all the parties involved. This Client Update explores some of the transitional matters involved in the process, and suggests ways to ensure a smooth handoff from developer control to unit owner governance.
Condominium Creation to Transition
In Massachusetts, a condominium is created by recording a Master Deed, which establishes the boundaries of the common areas and units and designates the method of organization by which the unit owners will together own the common areas of the condominium. Typically, condominium associations are organized as trusts (rather than corporations or unincorporated associations), and although it is not required, the instrument setting out the rights and responsibilities of the trustees and unit owners, known as a Declaration of Trust, will be recorded along with the Master Deed. The person creating the condominium is known as the “declarant,” but is more commonly referred to as the “developer.” The developer can record a Master Deed before, during, or after the actual construction of the building, and the developer does not actually convey any property through the recording. Typically, the by-laws of the Declaration of Trust authorize the developer to appoint the initial trustees, allowing the developer to control the operation and management of the condominium during the developmental phases. These by-laws will also generally regulate the transition from a developer-controlled association to a unit-owner controlled association. Unlike many other states, Massachusetts does not regulate the timing of this transition. Usually, however, the by-laws will provide for a “triggering event” that sets the time limit on the transition of control to a unit owner-controlled association. Quite often, the triggering event will be some combination of the amount of units sold and a specified period of time. For example, the by-laws could establish:
“Once the Declarant has conveyed seventy-five percent (75%) of the Units in the entire Condominium development, or five (5) years after the date of filing the first Unit Deed in the Condominium, whichever occurs first, the number of Trustees shall be three (3), consisting of at least two unit owners, and the Declarant’s right to designate the Trustees shall terminate.”
Because Massachusetts does not set a specific limitation on the nature of a triggering, or turnover, event, developers will often insert provisions in the Declaration of Trust that allow them to maintain control as long as possible. In the 1981 case of Barclay v. DeVeau,[i] for example, the instrument creating the condominium trust allowed the developer to designate two of the three trustees until the developer owned less than twelve units of approximately 125 units in the condominium. Upon challenge, the court upheld this provision, explaining that developer control is necessary to protect the developer’s interests during the initial phases of a condominium project. “Absent overreaching or fraud by a developer,” the court held, “we find no strong public policy against interpreting [the Massachusetts Condominium Act] to permit the developer and unit owners to agree on the details of administration and management of the condominium . . . .”[ii] The court also stated that when no specific period of time for termination of developer control is provided in the condominium documents, the transitional time period is to be a “reasonable” one.
Important Factors in Transferring Control
When the triggering event occurs, the formal transition usually takes place at a special meeting held for the purpose of electing unit owners to serve as trustees. Once the unit owners obtain control, numerous transitional matters require immediate attention. By no means an exhaustive list, we outline some particularly important factors that deserve careful consideration.
Perhaps the most obvious necessity during this transitional period is the turnover of various documents from the developer to the new trustees of the condominium association. These documents include:
1. Operational Books and Records
- Declaration of Trust and Master Deed
- Bylaws and Rules and Regulations
- Accounting of association funds and financial statements
- Audits performed during the developer control period
- Documents relating to any past or pending claims
- Past and present budget information
- Current statement of account balances and invoices from developer control
- Association bank accounts, checking accounts, certificates of deposit, etc.
- All association insurance policies
- Complete roster of unit owners and their addresses, as well as mortgagees by unit
- Any and all contracts in which the association is a contracting party.
2. Physical Facilities Records
- Plans showing roads and parking areas, measurements and dimensions of structures, landscaping, recreational facilities, and storm and sewer systems
- Information on products and processes used in regular maintenance and repair of common areas
- Written warranties of the contractors, subcontractors, suppliers, and manufacturers involved in the construction and/or maintenance of the association’s facilities.
- Copies of any bonds or letters of credit posted with any state or local agency
- Confirmation of compliance with the local authorities as well copies of any bonds or letters of credit posted with state or local agencies
Reviewing the Developer’s Control
In addition to obtaining documents from the developer, the new unit owner-controlled association should carefully review the developer’s control of the condominium. First, it is crucially important for trustees of the new association, as well as all the owners, to determine whether all income and expenses were properly accounted for while the developer was in control. To this end it is recommended that an association hire an accounting professional to audit the financials during the developer’s control. As will be discussed later, this audit does not primarily serve as a springboard for potential litigation, but rather helps the association understand its financial condition and legal obligations. Second, the association should determine if there are any construction defects for which the developer might be responsible. As with the financial audit, it is recommended that the association hire a licensed inspector or engineer to examine the property and determine the state of its condition.
If the association feels that the developer might be liable, either for mishandling of condominium finances or construction defects, and the developer is unwilling to cooperate in resolving the problems out of court, the association should consider whether it is worth litigating the issues. This decision will turn on a balance of several factors, including the monetary value of the damages, whether the developer has assets and/or insurance, the costs of litigation, and the likelihood of proving liability at trial. Consultation with an attorney will help clarify these considerations, particularly the likelihood of success. In the case of construction defects, for instance, there are many complicating factors such as statutes of limitations, which limit claims based on the date that the plaintiff discovered or should have discovered the problem; statutes of repose, which limit claims based on a date of substantial completion; and spoliation of evidence, which concerns whether evidence is precluded because it has been destroyed or significantly altered. An attorney will also be able to provide guidance in dealing with potential “poison pill” provisions in the condominium documents, which intend to prevent the association from suing the developer.
Forming a Strategic Plan
The final component to an effective transition to unit owner control is the formation of a clear and comprehensive strategic plan for the condominium association moving forward. What this looks like will depend, in large part, on where the condominium stands in its stage of completion. All associations, however, will want to consider the following two questions:
- What is the state of our finances, buildings, and common areas?
As mentioned above, hiring professionals to conduct studies of the financial and physical states of the condominium is recommended. With respect to the physical state of the condominium, a professional engineer’s study will produce a punch-list of steps that need to be taken, from more involved structural work to the build-out of amenities and landscaping. This study also gives the new association understanding of permits, warranties, utility-line locations, and other important pieces of information that will help the trustees better run the condominium. It is important to have a transition study performed as soon as possible so as to avoid potential claims being barred by a statute of limitations or statute of repose or specific warranties. With respect to the financial state of the condominium, a certified public accountant or building engineer can perform a reserve study, which helps the association understand how much money should be allocated to the reserve fund annually in light of the expected life and cost of replacement for major capital items, including as roofs, furnaces, and driveways. As a general rule, the condominium association should resist the urge to perform either of these studies by itself in an attempt to save money. Not only are most associations unqualified to perform this type of work, but also hiring a professional reserve study company will protect the association from potential liability.
- Should we hire a property manager and/or attorney?
One of the first actions a unit owner-operated association should consider is whether to hire a professional property manager and/or an attorney with experience in condominium law. A good management company can aid the association by recommending vendors, helping plan the annual budget, attracting and interacting with new owners, and handling numerous day-to-day tasks. The following represents some of these tasks, which, if not delegated to a property manager, the association will have to tackle:
- Maintain security of the condominium
- Collect monthly fees and maintain records
- Prepare and maintain all association correspondence, minutes, and records
- Enforce rules and regulations as direct by the association
- Manage any rentals of condominium common areas
- Provide escrow information when homes are sold
- Identify, coordinate, and record maintenance work
Obtaining legal representation also has many benefits for an association. An attorney with experience in condominium law can review contracts with vendors; evaluate potential breaches of the association’s governing documents by owners; take collection actions, as needed, against owners failing to pay condominium fees; and help review the developer’s work to determine whether there might be liability. Early coordination with professional management as well as legal counsel will help the unit owner-controlled association ensure a smooth transition and set its more long-term plans and goals.
Transitioning from developer to unit owner control of a condominium is no simple task. If unprepared or inadequately advised, the new unit owner-controlled association can stumble into many costly pitfalls. In Massachusetts, these problems can be further complicated by the fact that developers have the ability to define the events that trigger transition, allowing them to maintain control for longer periods of time than in other states. Once transition begins, the new condominium association should thoughtfully consider numerous factors. First, the unit owner-controlled association should ensure that it obtains many critical documents and records from the developer. Second, the association should review of the developer’s control to determine whether the developer might be liable for mishandling finances and/or construction defects, and if so, whether litigation is worthwhile. Finally, the association should form a strategic plan moving forward, hiring professionals to determine the state of the condominium’s finances, buildings, and common areas. The association should also strongly consider hiring professional management and legal counsel to attend to the numerous tasks and challenges facing a condominium association. Through utilizing these resources, a new unit owner-controlled association can avoid costly pitfalls and help ensure a smooth transition for all parties involved.