Get the Association started the right way:
how to conduct a developer turnover

by: Jeffrey A. Goldberg

The developer turnover is the birth of a condominium and homeowners' association, and therefore it is very important for the unit owners to take control of the situation and make sure everything is done properly.

The unit owners are at a distinct disadvantage at a developer turnover. They usually have not been organized and do not have the information and experience necessary to make decisions. Yet the situation often demands they make decisions which can have a significant future impact.

• Before turnover

• The most important time for the unit owners to be organized and to ensure that the developer is operating properly is the time when the developer remains in control of the Association and still owns units (so that it has a stake in the property and it has not dissipated its assets). Section 19 of the Condominium Property Act specifically grants to the unit owners the right to inspect certain books and records of the Association. ( Section 18.5 of the Act, which applies to many non-condominium homeowners' associations, also contains this right). It is important for the unit owners to exercise this right and to carefully review the financial situation of the developer-controlled board.

  The unit owners should make certain that the developer is paying its assessments, funding reserves, adequately budgeting for maintenance and repair work, and that the developer is not running construction costs through the Association's operating budget. In general, the developer board has all of the same duties and requirements under the law as an ordinary unit owner board. The unit owners should take whatever action is necessary to make sure this happens, and not wait until the turnover to begin organizing and obtaining legal representation.

  It is very important that unit owners refuse to serve as an appointed advisory board for the developer-controlled board. This is a scheme put together by the developers to try to insulate themselves from liability to the unit owners. If the developer wants the unit owners to participate in management of the Association, the developer should organize a turnover meeting. Otherwise, the owners should refrain from participation in the developer-controlled board's activities.

• Know your rights during turnover

• The turnover must occur not later than 60 days after the conveyance by the developer of 75% of the units, or 3 years after the recording of the declaration, whichever is earlier. Because Section 18.5 of the Act applies to non-condominium homeowners association, this requirement extends to homeowners associations with declarations recorded on or after August 10, 1990.

  To protect themselves, it is imperative that the unit owners know what they are entitled to receive at the turn-over, and that they act to protect their rights. Within 60 days after election of the board of managers, the developer must deliver to the new board:

  A. All original documents as recorded or filed pertaining to the property, its administration, and the association

  B. the declaration, by-laws, articles of incorporation, and other condominium instruments (If any original documents are unavailable, a copy may be provided if certified by affidavit of the developer, or an officer or agent of the developer, as being a complete copy of the actual document recorded as filed)

  C. annual reports (do you need to change the registered agent?)

  D. minutes of all board and homeowner association meetings.

  E. rules and regulations

  F. contracts, leases, or other agreements entered into by the Association.

  G. a detailed accounting by the developer, setting forth the source and nature of receipts and expenditures in connection with the management, maintenance and operation of the property

  H. copies of all insurance policies

  I. list of any loans or advances to the association which are outstanding

  J. association funds

  K. a schedule of all real or personal property, equipment and fixtures belonging to the association

  L. documents transferring all property

  M. warranties, if any, and deeds for all real and personal property and equipment,

  N. title insurance policies

  O. all tax bills

  P. a list of all litigation, administrative action and arbitration involving the association

  Q. any notices of governmental bodies involving actions taken or which may be taken concerning the association

  R. engineering and architectural drawings and specifications as approved by any governmental authority

  S. all other documents filed with any other governmental authority

  T. all governmental certificates

  U. correspondence involving enforcement of any association requirements

  V. copies of any documents relating to disputes involving unit owners

  W. originals of all documents relating to all of the above

• Certain Agreements May be Canceled by the Association

• The law provides a procedure for the new unit owner board to cancel certain agreements entered by the developer board. In order to exercise that right, the following conditions must be met: 1. it is a contract, lease, or other agreement by or on behalf of unit owners, individually or collectively, the unit owners' association or the board of managers; 2. that was made prior to the election of a majority of the board of managers (other than the developer) 3. that extends for a period of more than 2 years from the date of the recording of the declaration.

  If the agreement meets the above conditions, the board may cancel the agreement as follows: 1. the cancellation is approved by a vote of more than ½ of the votes of the unit owners (other than the developer); 2. the votes are cast at a special meeting of members called for that purpose during a period of 90 days following expiration of the 2 year period. 3. At least 60 days prior to the expiration of the 2 year period, the board of managers shall send notice to every unit owner, notifying them of this provision, what contracts, leases and other agreements are affected, and the procedure for calling a meeting of the unit owners for the purpose of voting on termination of such contracts, leases or other agreements. 4. During the 90 day period the other party to the contract, lease, or other agreement shall also have the right of cancellation.

• Special statute of limitations for lawsuits available to the Association

• A statute of limitations is the deadline for bringing legal action against a person. The Condominium Property Act provides that no statute of limitations will begin to run until the unit owners have elected a majority of the members of the board of managers. It is essential, therefore, that the new board make sure as soon as possible that the Association has not been damaged by the conduct of any person. If so, the new board needs to take swift action to hire an attorney and protect its rights.

  One of the first areas of investigation is to look into potential latent and patent construction defects in the property that should be corrected by the developer. If the Association does not ensure that the developer corrects any defects, then the Association and unit owners ultimately will have to pay to correct these problems. This issue should be addressed without delay. We recommend a thorough inspection of the property by a qualified engineer and a detailed report of the condition of the property. If the report shows significant material defects, the Association must retain legal counsel and pursue its rights to whatever extent necessary.

• Hire Trusted Professionals

It is essential that the board make sure it trusts its management company, accountant, investment advisors and attorney. If not, it is important for the board to act swiftly to find competent and trusted professionals to assist the new board in this important time for the Association. We strongly recommend that professional advisors be selected by the Association board itself rather than delegating this function to a third-party management company. It is essential for the board to have a direct relationship with its professional advisers.

The attorneys of Barnett Law Firm, Ltd. have experience and knowledge in developer oversight and turnover. We urge unit owners in developer-controlled associations to secure legal representation as soon as possible and not wait until the turnover. That way, they can begin oversight of the developer board and prepare themselves for the difficult times. Certainly at the time of the turnover, the unit owners must be represented by counsel. If the unit owners are and remain vigilant with respect to the developer, the Association will be operated properly from the beginning and all will benefit because the Association will carry out is affairs for the improvement of the property and the health and safety of the unit owners in an efficient and economic manner.