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 article 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 and Transition
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 the transition from developer to unit owner control. 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. The courts have held that “[a]bsent overreaching or fraud by a developer,” there is “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 . . . .”i The courts have also held 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. First, the new board must collect the condominium’s operational books and records (e.g. Declaration of Trust, Master Deed, accountings, audits, and insurance policies) as well as it physical facilities records (e.g. plans showing dimensions of structures and facilities, warranties of contractors, and information on products and maintenance procedures).
Second, the new unit owner-controlled association should review the developer’s control of the condominium. This should include a determination of whether all income and expenses were properly accounted for while the developer was in control. A certified public accountant can perform an audit and 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. The association should also 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. A professional engineer’s study will also produce a punch-list of steps that need to be taken, from more involved structural work to the build-out of amenities and landscaping. 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.
Third, 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.
Finally, the new association should consider hiring a property manager and consulting with an attorney. 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 and manage any rentals of 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. 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. Once transition begins, the association should form a strategic plan, 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 those pitfalls and help ensure a smooth transition for all parties involved.
Attorney Howard Goldman is a principal at the law firm of Goldman & Pease in Needham, MA.