Developer-HOA Transitions (Navigating the Process)
Many community associations begin life under the sole management of a real estate development company. Then there is a transition period in which the real estate developer passes control of the association to the community’s homeowners. In Florida, the process and timing of a developer transition are closely regulated by Florida Statute 720.307 – Transition of association control in a community (with respect to homeowners’ associations). The statute states that the developer must hand over the association to the homeowners within three months after the point in which 90% of the units under the association’s control have been transferred to homeowners. Once a transition occurs, the homeowners can move to elect a majority of the members of the association’s board.
There could be a period of time in which both the developers and the members of the community enjoy a degree of control over the board. In cases of partial control, members other than the developer can begin electing at least one member to the Board of Directors once 50 percent of the land in the community has been purchased and occupied. At the other end of the spectrum, the developer may appoint at least one board member in situations where it still holds for sale a minimum of 5% of the community’s units.
For legal purposes note that the phrase “members other than the developer” does not include parties such as third-party builders who purchase land to make improvements and “flip” or sell the property.
Developer Insolvency: An Extenuating Circumstance
There are other situations in which a developer will be forced to transition ownership as a result of financial hardship. These include the following situations:
- If a developer abandons or deserts its obligation to finish building or (in the case of finished infrastructure) maintain common area amenities as required in the associations governing documents
- If a developer files for chapter 7 Bankruptcy
- If the developer loses the property title due to foreclosure or is otherwise forced to surrender the deed in lieu of foreclosure where the new owner does not assume developer rights
- If a court-appointed receiver acting for the developer is not discharged within 30 days after its/their appointment.
Communities governed by developer-owned associations where the developer is experiencing financial difficulties should act quickly to retain legal counsel so as to initiate a developer transition if one of the above situations occurs.
The Importance of the Handover to the Association
The turnover process marks a pivotal moment for the members of the community in which it affects. Homeowners are taking control of their community from those who built it. This includes all legal control. After the handover is completed, the community accepts responsibility to manage the community and handle the various challenges that communities face in their early years.
Newly turned over communities must review:
- financials in a formal audit to uncover any existing financial claims
- the association’s marketing materials with a view to determining whether the community provides the amenities as advertised
- whether infrastructure is built in compliance with building code specifications, according to industry standard and in line with the building plans
Any review should take place in a timely manner to allow for remediation of any items discovered.
“There could be a period of time in which both the developers and the members of the community enjoy a degree of control over the board.”
A series of meetings between the developer and the new members of the association is required in which the parties deliver and receive turn over documents, discuss the appointment of advisors (lawyers, accountants, engineers and other consultants), review any of the community’s promotional materials, discuss any construction claims as a result of the review of building plans and specifications, review accounts to determine any open or potential financial claims.
Developers turning over property are required to provide, within 90 days, the following documents to the new members of the board:
- A certified copy of the articles of incorporation of the association
- A copy of all contracts currently in force with the association
- A copy of all new policies, rules, and regulations which have been adopted.
- A copy of all warranties in effect.
- A copy of the bylaws
- A copy of the certificates of insurance for all policies covering the association and its property.
- All books and records of the association to date
- All meeting minutes taken to date
- Any government permits issued to the association
- Deeds to all common property owned and managed by the association
- Proof of handover of ownership and control of all tangible property of the association.
- Proof of handover of ownership and control of the associations funds
- The associations financial records (including a current audited financial statement) starting from the date of original formation
- The association’s declarations of covenants and restrictions
- The community roster showing current homeowners and listing their properties and contact details
- The names, contracts and contact details of all contractors, subcontractors, and employees of the association
- The written resignations of the developer’s directors.
All of the above documents must be provided at the developers’ expense.
Advisors to the Process
Developer Transitions are a complex process that requires a multidisciplinary team of advisors to provide legal and engineering expertise to allow the process to move smoothly. If the process becomes contentious and mediation, arbitration or litigation is required then it is likely that even more experts would be required to advise both sides of the dispute. Both the developer and the community association are likely to require a team of attorneys and paralegals, accountants and engineers to successfully complete the handover process.
The Importance of a Good Legal Counsel
As developer transitions are governed by legislation it is imperative that both sides of the process work with an experienced attorney with established practice areas in construction and HOA law. It is important to ensure that the legal team of the law firm has the depth to handle in a timely fashion the sheer volume of documentation required during a developer transition. At the same time, the law firm would ideally assign partner-level attorneys to the process making sure that those with the most expertise are involved with the day-to-day matters of the transition.
South Florida Law
Our dedicated team of legal professionals including partners, associates and paralegals are experienced in association turnovers and will work with either developers or associations to ensure that the rights and responsibilities of all parties are respected and that the handover occurs in a timely, efficient and compliant manner. If you are preparing a community for handover, then reach out to us today for representation via our contact form or by phone at (954) 900-8885.