The transition process typically begins when the Declarant-run Board of Directors is replaced by Directors elected by the unit owners.  However, transition is not simply the transfer of leadership.  This critical process continues as the newly elected Board starts to identify and preserve any potential claims that the Association may have in connection with the physical conditions of the common element property, the financial condition of the Association, and the management of the Community.

One of the first actions a newly elected Board of Directors typically undertakes is to hire independent and experienced legal counsel to coordinate the transition process.  Legal counsel can assist the Association with identifying and securing all documentation relevant to the creation, construction and operation of the Community from its inception to the turnover of control to the Association.  Additionally, it is the newly elected Board of Directors’ responsibility to determine whether the common element property has been turned over to the Association in the condition promised by the developer.  In this regard the Board will often retain an independent professional engineer to conduct a thorough inspection and evaluation of the property for defects and/or deficiencies in the construction of the Community.  In our experience, legal counsel’s coordination with the Association’s engineer is essential; counsel can ensure that the engineer understands the warranty provisions applicable to the property, and they can evaluate the findings of the engineer to determine whether the Association has any claims for the defects and/or deficiencies identified by the engineer.  Legal counsel also assists the Board in evaluating the Association’s financial condition which may include the hiring of an independent accountant to determine whether all required capital contributions and all regular assessments owed by the developer have been paid as well as whether all expenses paid out of the Association’s account were expenses of the Association as opposed to the Developer’s expenses. 

The results of the inspections and analyses conducted by the Association as part of the transition process must be evaluated by the Association to determine whether there are any potential claims which the Association should be pursuing on behalf of the Community.  While it is always the Association’s goal to resolve matters amicably with the Declarant, to the extent the Declarant fails to correct the construction defects and deficiencies identified by the Association, otherwise breaches its obligations to the Association, or is uncooperative with respect to the transition process, litigation may be the Association’s only recourse. Multiple questions arise as the Association navigates through the transition process.  What are the Association’s damages?  Who is responsible for the damages?  What is the likelihood that the Association can recover the damages from the responsible parties?  Does the Association have the right to pursue a claim for such damages?  What is the statute of limitations for pursing such claims?  If the Declaration does not correct the defects, who will bear the costs of repair?

All of the foregoing issues should be carefully evaluated by the Board and its legal counsel.  The Board must weigh the costs of pursuing such claims against the cost to the Association and its unit owners should they choose to correct the defects themselves.  While the transition process may be time consuming and often requires the Association to make certain expenditures, our experience has clearly demonstrated that the Association’s failure to properly evaluate the overall condition of the Association can be much more costly in the long term.  In the latter event, not only will the unit owners ultimately have to bear the costs of correcting the defects that should have been the responsibility of the developer, but the newly elected Board may find themselves exposed to liability where the prompt identification and assertion of such claims would have protected the interests of the Association and its unit owners.

If you have any questions about the transition process for your Association, contact Adam Marcus or Keely Carr at Marcus & Hoffman.

One of the primary differences between a condominium and homeowners' association relates to the ownership of common elements.  In a condominium association, the unit owners each own an undivided interest in the common element property.  Accordingly, there is not a separate deed conveying the common element property to the condominium association.  In a condominium association when the developer conveys a unit to a buyer, the developer is also conveying an interest in the common element property to each unit owner in conjunction with the deed to the unit.  However, in a homeowners' association, the association owns the common elements.  Accordingly, the developer of a homeowners' association must separately convey the common elements to the association.  Therefore, separate deeds for the common element property from the developer to the homeowners' association must be prepared and recorded.

It is important to determine whether the common elements and open space in your community have been conveyed to your association.  Fox example, when overlooked, issues may arise with respect to the taxation of common element property.  Common element property is taxed in a homeowners' association by including the interest of each unit owner in the common element property (by virtue of their membership in the association) as part of the determination of the assessed value of each unit.  We have encountered separate tax bills for common element property in various communities as a result of the failure of the developer to properly convey the common element property to the homeowners' association.

The conveyance of common elements and open space to the homeowners' association typically takes place during your community's transition process from the developer to the unit owner controlled homeowners' association.  A review of the final recorded development plans, tax records and recorder of deeds records is necessary to determine whether the developer has properly conveyed the appropriate real estate parcels to the association as required under the association's governing documents.

Our firm has extensive experience in providing associations with the information they need to successfully navigate through the transition process.  Our involvement in the transition process generally includes working directly with the Board of Directors or its duly designated transition committee, the association's engineers, accountants and the local municipality to complete the transition process and to protect the association's rights with respect to any potential claims in this regard.

If you have any questions or concerns in connection with the association's ownership of its common elements or transition in general, please feel free to contact us.

Associations will often focus on the event of transition - that being the election at which time control of the association is turned over from a Declarant run Board of Directors to a Board where the majority of the  Members are elected by the unit owners other than the Declarant.  While this event is an important step in transition, it is only the beginning of the process of transition.

Following this key election, Board Members typically find themselves with a host of responsibilities from governing the association, focusing on budgetary and contractual matters, working with the management company and reviewing and understanding the governing documents.  It is imperative that Boards be educated from the beginning regarding the transition process, including, but certainly not limited to:

1.         Hiring key professionals:

            -  Accountant to work with the Association and the Declarant in completing a transition audit;

            -  Engineer to create a property transition report and reserve study;

            -  Insurance agent to ensure proper coverage as required under the governing documents; and

            -  Legal counsel to help understand the responsibilities of the Declarant under the governing documents and approved plans, an explanation of certain statutory warranties provided under state law; and to insure that the Declarant's responsibilities are fully met within the required timeframe.

2.         Understanding the role of the local municipal government in approving the development and their continuing role with escrow accounts, punch lists, and ensuring completion of certain public improvements.

3.         Understanding the importance of the association's governing documents and either following the documents as drafted or beginning the process of reviewing provisions which should be added, deleted or modified.

Educating new Board Members right from the beginning on the transition process will help ensure that communities start off on the right foot and avoid having to play catch up.  If you are working with a newly elected unit owner controlled Board and would like to schedule a transition meeting with legal counsel, please call Adam Marcus at 610-565-4660.