Articles Posted in Turnover or Transition

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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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.