DECLARANT TRANSITION – PART II
WASHINGTON DC CONDOMINIUM LAW
TRANSITION CHECKLIST
for DC Condominium Associations Transitioning From Developer Control
By Nicholas D Cowie, Washington DC Condominium Law Attorney
DECLARANT TRANSITION ARTICLE
This article is a continuation of article “Declarant Transition – DC Condominium Law -Part I,” a general overview of the declarant transition process under DC Condominium Law, with reference to laws governing the declarant transition process. Part II of the article, below, contains a declarant transition checklist for an initial, unit owner-elected condominium association board of directors once it takes over control of governance of the condominium association from the declarant.
NOTE ON DC CONDOMINIUM LAW TERMINOLOGY
Under Washington DC condominium law, a condominium developer is referred to as a “declarant,” and that term is used throughout this article.
Under Washington DC condominium law a condominium association is referred to as a “unit owners’ association” and a condominium board of directors is referred to as the “executive board.” In this declarant transition article I have used the more common terms of Washington DC “condominium association” and “board of directors.”
DECLARANT TRANSITION CHECKLIST
1. Document/Asset Inventory & Request
Conduct an inventory of the condominium association’s documents and assets. Make a formal written request of the declarant to turn over all documents, funds and assets to the extent not already done so. The Appendix below contains a list of items taken from the Maryland Condominium Act that can be used as a guide in determining what if anything needs to be requested from the declarant following the period of declarant control.
2. Contract Review
As part of the declarant transition process, the initial unit owner-elected board of directors should review all association contracts entered into during the period of declarant control over. Obtain competitive proposals from vendors for comparison purposes. Certain contracts that are not in the best interest of the condominium association can be terminated without penalty under Washington DC condominium law by providing 90 days advanced notice.
3. Audit Financial Records
Have an independent auditor or accounting consultant examine or audit the association’s financial records during the period of declarant control to ensure that all monies were properly collected and accounted for. For example, an auditor can determine whether the correct amount of assessments were collected, whether the association’s reserve accounts were properly funded, or whether there was any inappropriate use of association funds to pay declarant obligations. In some cases, an auditor may determine that under DC Condominium law, the declarant owes the unit owners’ association a substantial amount of money.
4. Transition and Reserve Studies
As part of the declarant transition process, the initial unit owner-elected board of directors should obtain transition and reserve studies in order to identify construction defects and determine whether the declarant-created budget and reserve account ,required to be established under Washington DC condominium law, are adequate to maintain, repair, and replace the condominium common elements over time. For example, if a common element roof is found to be in need of immediate replacement because of construction defects, then a declarant-created reserve budget based on a projected roof replacement in 30 years is grossly insufficient.
The Transition Study: the purpose of a transition study (also referred to as a “deficiency report” or “warranty analysis”) is to evaluate construction and identify construction defects while warranties are still enforceable so construction defects can be submitted to the declarant for warranty repairs. Timely transition studies are essential because deficiencies and defects in newly constructed condominiums may not be apparent when condominium unit owners first take control of the association. Defects in the original construction can remain hidden for years until they manifest themselves in the form of property damage. Left undiscovered and unrepaired, even minor construction defects can result in extensive property damage requiring associations to borrow money and assess unit owners. Moreover, when defects are not identified in a timely manner, structural warranty claims and other legal rights may be barred by expiration of warranty periods or statute of limitations under Washington DC condominium law and other applicable DC laws. Architectural and engineering firms can identify construction defects early on and investigate suspicious conditions before warranty rights expire so timely notice can be given to the declarant. Once defects have been identified and corrected by the declarant, the unit owners’ association can establish an accurate reserve budget.
The Reserve Study: A reserve study does not seek to evaluate construction. Rather, its purpose is to determine the amount of annual assessments that should be placed into a reserve account to pay for future repair or replacement of the major common element components for which the association is responsible, such as roofs, exterior walls, sidewalks, roadways, etc. A normal useful life, or “life expectancy,” is assigned to each of these components (e.g., a 30-year roof), as well as an estimated cost to repair or replace those components at the end of their useful life. Based on these projections, a reserve analyst estimates the amount of money that the unit owners’ association should allocate to its reserve account each year so that the necessary funds will be available for future repairs and replacement. This type of planning avoids a one-time huge assessment for major repair/replacement projects. For more information on condominium reserve studies in Washington DC, see article “Reserve Studies in the District of Columbia.”
5. Retain Legal Counsel
General Counsel: interview and retain general counsel to work with the board of directors and the association’s management company to handle the wide variety of general legal issues that face a unit owners’ association, such as interpreting governing documents, preparing legal opinions, collecting delinquent assessments, reviewing and negotiating proposed contracts, dealing with threatened litigation, amending governing documents, and complying with applicable laws.
Warranty/Construction Defect Legal Counsel: Request a free consultation from an attorney with expertise in condominium construction defect law. Such an attorney can advise the association when applicable warranties and other legal claims expire and how to preserve the association’s legal claims while negotiating proper repairs with the declarant. Armed with such information, a transitioning Washington DC condominium association can make informed decisions and take actions on a timely basis to preserve warranty claims and other legal rights. This legal consultation should be requested as soon as possible after the unit owner elected board assumes control of the association to ensure that no warranty and other legal rights are allowed to expire. For more information on legal claims that condominium association can assert in Washington DC for construction defects, see article “Resolving Condominium Construction Defect Claims in Washington, D.C.“
6. Review Insurance Coverage
Review association insurance coverage obtained during the period of developer control. Make sure coverage complies with governing documents, industry standards, and applicable laws (e.g., property insurance, comprehensive general liability insurance, fidelity insurance, directors and officers/errors and omissions policy). In the event of a lawsuit, having proper coverage will not only provide the unit owners’ association with a legal defense and pay any judgment, but can also provide immunity to board of director members and officers as well as cap association liability to the amount of insurance coverage. For a more detailed discussion regarding the types and levels of insurance that can be purchased by a condominium association to obtain statutory immunity for its board members and officers, see article “Condominium Board Member Immunity From Personal Liability Lawsuits in the District of Columbia.”
7. General Housekeeping Matters
There are a number of housekeeping matters not covered by this developer transition checklist involving Washington DC condominium law, governance and business that will need to be addressed by the first executive board to transition from developer control. An association’s property manager and/or attorney typically guides the board of directors in these matters. Some examples include: selecting officers (President, Vice President, Secretary and Treasurer); appointing committees (e.g., architectural review committee); scheduling meetings required by the condominium instruments; updating contact information for government agencies, utilities and vendors: defining maintenance obligations and establishing a maintenance schedule; reviewing adequacy of budgets; updating resale certifications to ensure they comply with applicable law; etc.
APPENDIX
Documents & Assets To Request from Declarant
- Articles of incorporation, recorded declaration, and all recorded covenants, bylaws, plats, and restrictions of the condominium
- All books and records, including financial statements, minutes and completed business transactions
- Policies, rules, and regulations
- The financial records from the date of creation to the date of transfer of control, including budget information regarding estimated and actual expenditures by the condominium and any report relating to the reserves for repairs and replacement of common elements
- All contracts to which the condominium is a party
- The name, address, and telephone number of any contractor or subcontractor employed by the condominium
- Insurance policies in effect and all prior insurance policies
- Any permit or notice of code violation issued to the condominium by the county, local, State, or federal government
- Any warranty in effect
- Drawings, architectural plans, or other suitable documents setting forth the necessary information for location, maintenance, and repair of all condominium facilities
- Individual owner files and records, including assessment account records, correspondence, and notices of any violations
- A roster of current unit owners, including mailing addresses, telephone numbers and unit numbers
- The condominium funds, including operating funds, replacement reserves, investment accounts and working capital
- The tangible property of the condominium
NOTE ABOUT AUTHOR: Nicholas D. Cowie is a partner in the law firm of Cowie Law Group, P.C. and has been representing condominium associations for over 29 years. Mr. Cowie is a Maryland and Washington DC condominium and HOA attorney licensed in Maryland and the district of Columbia, and has extensive experience representing condominium associations with transition issues including developer assessment disputes and construction defect warranty claims.
Washington DC Condominium Law Attorneys
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Cowie Law Group is a Washington DC condominium law firm known for representing condominiums and homeowners associations in transition from developer to unit owner. The Washington DC condominium law attorneys at Cowie Law Group represent boards of directors in the legal matters must be pursued following once the association takes control of the condominium association, including repairing and making warranty claims, reviewing contracts, and amending bylaws declarant transition process. Contact the MD and DC Condo law attorneys and lawyers at Cowie Law Group for references and a free consultation regarding your condominium’s transition law issues.
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