Articles Posted in Developer Association Turnover

Condo & HOA Board Members May be

Neglecting the Duties You are Owed

Are you concerned that the developer of your condominium did not deliver on the promises made to you when you purchased your condominium unit?  Are you concerned with the construction of the condominium in which you live?  For most individuals the purchase of a condominium unit can be their most important investment.  However, many of the decisions impacting this investment are not up to the owner of the unit, but rather they are left up to a board of directors controlling the association.

At a specified time, the developer of a condominium is required to relinquish control of the association’s board of directors in favor of the unit owners.  The turnover of an association from developer to the unit owners presents the first opportunity for the association’s board to hire a lawyer, an accountant and an engineer to perform important and time-sensitive inspections of the condominium.  These inspections will identify construction defects and other concerns that may exist.  As such, it should not be surprising that a developer would want a “friendly” association board of directors following turnover.  But imagine the havoc an unscrupulous developer could inflict if the association’s newly elected board — or the attorney and engineer working for the unit owners — have financial ties to the developer.

A recent Miami-Dade grand jury report found that there was extensive fraud, mismanagement, stacking of boards and conflicts of interest among condominium association boards (click here for the complete report).  Such misconduct is not limited to Miami-Dade, however.  Perhaps surprisingly, one of the largest public corruption cases set in the fast-paced, scheming neon desert notoriously dubbed “Sin City” did not involve the usual Las Vegas suspects, but rather a contractor, a lawyer, and a stacked board of condominium directors.  In 2015, Leon Benzer, a construction company boss, was sentenced to 15 and a half years in federal prison for orchestrating a scheme to take control of association boards for the purpose of channeling construction defect repairs to Benzer’s company. Benzer’s scheme involved a network of recruited purchasers and real estate agents who would get elected to association boards, hire Benzer’s attorney, and award lucrative contracts to Benzer’s construction company. Through these unethical practices, these individuals violated the duties owed to the association and its unit owners.

Condominium unit owners are considered shareholders of the association, and act in a fiduciary relationship to each owner.  In such relationships, the law demands a higher than ordinary degree of care from each director and officer, with Florida law specifically demanding directors to discharge their duties in good faith.  Simply put, directors should act to protect the best interests of the association and its unit owners, rather than their personal interests or those of affiliated third parties.  The actions of the board members in Benzer’s scheme were in complete disregard of the unit owners’ rights, as they participated in rigging elections and seeking only personal gain.

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The residents of the Concord Station community north of Tampa in Land O’Lakes, Fla. recently shared their complaints and confusion with a reporter from one of their local television stations over their HOA’s use of a drone equipped with a camera in their community.

The residents indicate in the station’s report that they received an online notice from their HOA alerting them that it would be flying the drone, which the association confirmed that it operated over the community in addition to a vehicle equipped with a mounted camera.

The residents who expressed their opposition to the HOA’s use of a drone were concerned about the invasion of their privacy, especially if the drone is recording video of their backyards.  One of them indicates:  “If the drone is flying above my property, I’m going to consider that a trespass to our property and we’re going to take appropriate measures to make sure that we protect our privacy rights.”

d2-300x176The property management company for the association explains in the report that they are using the drone to chronicle all of the physical characteristics of the community in hopes of helping to avoid the possibility of homeowner hassles in the future.  The video from the drone is being used for documentation of the state of the community, which is now transitioning from a developer-controlled association to one that is controlled by the unit owners.  The company also noted that the aerial images and video could also be used for promotional and marketing purposes in the future.

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Michael-Hyman-srhl-lawThe firm’s Michael L. Hyman authored an article that appeared as a “Board of Contributors” guest column in today’s edition of the Daily Business Review, South Florida’s exclusive business daily and official court newspaper.  The article, which is titled “Association Deficits Don’t Excuse Developer From Funding HOA Reserves,” focuses on a recent decision by the Florida Fifth District Court of Appeal that found a developer was not excused from funding reserves while it remained in control of the association and was funding deficits in the operating expenses.  Michael’s article reads:

For the developer of the Sullivan Ranch community in Mount Dora north of Orlando, it appears that its decision to stop funding reserves after it established the account and began funding it in 2007 has significantly backfired. The Fifth District Court of Appeal recently overturned a lower court’s summary judgment, which concluded that the developer was excused from funding reserves while it remained in control of the association and was funding deficits in its operating expenses.

The Fifth DCA’s decision in Sara R. Mackenzie and Ralph Mackenzie v. Centex Homes et al. illustrates the importance for developers of HOA communities to tread carefully whenever they attempt to avoid funding for association reserves. Condominium developers are provided with a statutory mechanism to avoid funding for reserves if they guarantee a set minimum level for the association’s entire annual budget during its first two years of existence, but the laws governing HOAs do not include this exemption.

dbr-logo-300x57Based on the circumstances in this case, it appears that the developer of the community was either unaware of its statutory requirements governing the funding of reserves or it failed to adequately think through its actions. After establishing the account for the association’s reserves and funding it in 2007, the developer opted to pay Sullivan Ranch’s operating expenses in lieu of making any contributions to the reserve account in the following years, claiming that it had made no guarantee to fund the reserves.

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Gary M. Mars

The firm’s Gary M. Mars authored an article that appeared in today’s edition of the Daily Business Review, South Florida’s exclusive business daily and official court newspaper.  Gary’s article, which was titled “Ruling Reminds New Associations to Watch for Developers Waiving Reserves,” focuses on a recent appellate ruling regarding the issue of developers waiving their funding of reserves prior to the turnover of an association for a new community from the developer to the unit owners.  His article reads:

A recent appellate ruling shined a spotlight on the all-too-common issue of developers improperly waiving their funding of reserve accounts while they retain control of an association for a new community before its turnover to the unit owners.

The ruling served as an important reminder for the owners at new developments of the careful vigilance that they need to exercise for any questions involving the funding and use of reserves by developers.

The ruling was filed by the Fifth District Court of Appeal in the case of Meritage Homes of Florida v. Lake Roberts Landing Homeowner Association. Meritage, the developer of the subdivision located in Winter Garden, appealed the trial court’s final judgment in favor of the homeowner association, which found that the requirement for HOA reserve accounts in the city code of Winter Garden cannot be waived as Meritage had attempted.

Meritage based its appeal on its contention that the lower court’s ruling created an impermissible conflict with section 720.303(6)(f), Florida Statutes, which expressly grants homeowner associations the right to waive reserves. The developer’s initial annual budget planned for the HOA’s operating expenses as well as an $11,000 deferred maintenance reserve account, but it later approved a budget that completely waived its funding of the reserves.

dbr logo-thumb-400x76-51605Meritage asserted that it issued written notice to all of the association members, which included several homeowners at that point, but none of the members other than Meritage attended the budget meeting in which the board members approved the budget sans reserves.

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MichaelHyman.jpgThe firm’s Michael L. Hyman wrote an article that appeared in today’s edition of the Daily Business Review, South Florida’s only business daily and official court newspaper, about the recent decision by the First District Court of Appeal in the case of Silver Shells v. St. Maarten at Silver Shells Condominium Association. His article reads:

The First DCA’s decision in the case of Silver Shells v. St. Maarten at Silver Shells Condominium Association stems from a lawsuit by the Destin condominium association for one of the towers in a multi-building property against the developer.

The suit sought to require the developer to turn over control of the master association to the unit owners and convey a “beach property” that was initially included in the common properties which it was required to convey to the master association at the time of turnover.

The appellate court found that the association’s claim that the developer improperly amended restrictive covenants to effectively remove the beach property in question from the common properties is barred by the statute of limitations.

The opinion held that the five-year limitations period began to run when the association for the building was turned over to the unit owners, and the association’s action had not been filed within five years of that date.

Michael’s article concludes:

The takeaway from this ruling for this condominium association as well as other new condo associations in similar master-association communities is that the clock starts ticking on their limitations period to challenge any of the developer’s actions on the date in which their building’s association is turned over by the developer to the unit owners.

The developer will continue to have the “power of the pen” to implement any amendments that it sees fit to the covenants for the master association while it maintains control during the build out of the community, so it is incumbent on the associations for the individual towers that have already been turned over to the unit owners to maintain a careful eye on all of the developer’s amendments and, when necessary, challenge them before their limitation periods expire.

In this case, the association’s challenge to the developer’s amendment that enabled it to retain ownership of the beach property, which apparently included a lucrative ongoing revenue stream for the rental of beach chairs and umbrellas, may have prevailed had it been filed before the five-year limitations period had expired.

Our firm congratulates Michael for sharing his insight on this new appellate decision with the readers of the Daily Business Review. Click here to read his complete article in the newspaper’s website (registration required).

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Community associations may only have to go through it once, but the turnover of the association from the developer to the unit owners is of critical importance for the long-term financial health of associations. Here is a helpful overview for the community associations that are now undergoing the process:

Turnover, which governs the transfer of control of the association from the developer to the unit owners, begins with granting the unit owners a director seat on the board of directors when the developer reaches a set percentage of units sold and closed. If the community’s governing documents do not specify, then the developer must adhere to the statute which provides that turnover must take place within three years after 50 percent of units are conveyed to purchasers, within three months after 90 percent of the units are conveyed, or within seven years after the recording of the declaration of condominium. After these trigger dates, unit owners other than the developer are entitled to elect at least a majority of the board of directors.

Pursuant to Florida law, the developer has to “turnover” all of the association’s documents to the unit-owner controlled association. These include, but are not limited to, the original recorded declaration of condominium, articles of incorporation and bylaws, the minute books, financial records, bank accounts and statements, personal property of the association (e.g., indoor and outdoor furniture, office equipment, computers, etc.), and all of the construction plans and specifications including a list of names and addresses of all of the contractors, subcontractors and suppliers utilized in the construction or remodeling of the condominium. iStock_000004444042Medium.jpg The developer must also provide copies of all of the insurance policies, certificates of occupancy, permits, warranties, unit-owner roster, and all of the contracts that the developer controlled association may have executed for services such as for management, cable, telephone, security and other services.

Two of the most critical items that must be provided by the developer to the unit owner controlled association are an inspection report, which must be completed and signed by an architect or engineer, and a financial audit, which must be prepared by an independent certified public accountant. The inspection report must consist of a detailed list of the required maintenance, useful life and replacement costs for the roof, structure, fire protection systems, elevators, heating/cooling systems, electrical, plumbing, pool, pavement, drainage, irrigation, and paint. If the unit owners are already seeing problems with any of these elements as the report is being issued, they must immediately compare what they are actually seeing and experiencing with the information in the report in order to determine if there is a defect.

For the financial report, the developer’s accountant must complete and submit a detailed audit in order to determine whether expenditures were for association purposes and if the billings, cash receipts and related records reflect whether the developer was charged and paid for the proper amount of assessments. If the association disagrees with the audit or wishes to verify the sums that the developer’s financial audit shows, the association should immediately retain its own accountant to evaluate the audit. This should also be the same approach with the inspection report, as associations that believe there is a defect that is overlooked in the developer’s report should hire their own engineer to complete inspections and submit a report that addresses the construction issues. Both of these reports as well as all of the records above are required to be turned over to the association within 90 days after the date of turnover, otherwise the developer could face a lawsuit in which it will very likely be made to immediately provide the reports as well as pay the association’s legal fees in the matter.

Associations also have to go through the process of the resignations of the previous directors under the prior administration as well as the transfer of the bank account(s), which will require new signature cards for the new officers. Associations should also carefully review and assess the contracts that the developer has entered into in order to determine their duration and termination provisions, as vendors may have sold the developer on long-term contracts. However, the Condominium Act provides that unit-owner controlled associations can cancel long-term contracts entered into by the developer with a 75 percent vote by the members.

In general, associations would be well advised to immediately address any construction or financial issues with the developer during the turnover process rather than afterwards. The longer that an association waits before addressing any construction issues, the easier it becomes for the developer to be able to claim that the problem may be due to improper maintenance rather than a defect for which it could be liable. Our attorneys work very closely with community associations going through the turnover process, and we encourage association directors and members to contact us with any questions about the process.