DEVELOPER TRANSITION – MARYLAND CONDOMINIUM & HOA LAW – PART I

DEVELOPER TRANSITION – PART I

MARYLAND CONDOMINIUM & HOA LAW

Transition of Association Governance from Developer to Homeowner Control

LEGAL REQUIREMENTS SUMMARY

INTRODUCTION

This is a two-part article dealing with “developer transition,” the process by which the governance of a Maryland condominium association or homeowners association (HOA) is transferred from developer to homeowner control ( “unit owner -control” for Maryland condominiums and “lot owner -control” for Maryland HOAs). This article also discusses the immediate responsibilities for the newly elected homeowner controlled board following transition of the association from developer control. Part I, below, is an overview of the legal requirements that govern the transition process under Maryland condominium and HOA law. Part II contains a “transition checklist” for transitioning homeowner-controlled boards of directors.

PERIOD OF DEVELOPER CONTROL

A developer initially controls an association because it owns all unsold units or lots in the newly created community. As such, the developer has the controlling votes associated with majority ownership and can appoint its own employees and representative as the initial members of the board of directors and thereby controls how the association conducts its affairs. This is referred to as the “period of developer control,” during which the developer makes all decisions on behalf of the association through the developer appointed board members.

The developer also creates an association’s governing documents, allowing it to dictate, subject to Maryland condominium and HOA law, the procedures and time periods under which control will eventually be transferred to the homeowners.

THE TRANSITION MEETING

The period of developer control continues under Maryland condominium and HOA law until a “transition meeting” is held to elect members of the board of directors from amongst the association’s homeowner membership (i.e., the condominium “unit owners” or, in the case of an HOA, the “lot owners”). A developer-controlled Maryland condominium association must hold the transition meeting within 60 days after the date that units representing 50 percent of the votes in the condominium have been conveyed by the developer to the purchasing unit owners. Maryland Condominium Act (“Condo Act”) §11-109(c)(16)(i)1. A developer-controlled Maryland HOA must hold the transition meeting within 60 days from the date that at least 75% of the total number of lots are sold to the public for residential purposes. Maryland Homeowners Association Act (“HOA Act”) §11B-106.1(a)(1).

Under Maryland condominium and HOA law the transition meeting can be held earlier if the developer specifies a lesser percentage of conveyances or sales in the governing documents as a trigger for the 60 day period to commence. Condo Act §11-109(c)(16)(i)2 and HOA Act §11B-106.1(a)(2).

OVERLAPPING TERMS OF DEVELOPER-APPOINTED BOARD MEMBERS

The terms of board members appointed by the developer during the period of developer control must end 10 days after a replacement homeowner board member is elected at the transition meeting. Condo Act §11-109(c)(16)(iii) and HOA Act §11B-106.1(c). These provisions of Maryland condominium and HOA law are designed to prevent overlapping terms of developer-appointed and owner-elected board members.

DOCUMENT/ASSET TURNOVER

Under Maryland condominium and HOA law, within 30 days following the transition meeting, a condominium developer is required to turn over specified documents and assets to the newly-elected homeowner board of directors. Condo Act §11-109(c)(16)(iv), §11-132 and HOA Act §11B-106.1(d). This includes financial records, contracts, architectural plans, condominium funds, owner records, etc. A complete list of these items is set forth as the Appendix to this article.

TERMINATION OF CONTRACTS

For 3 years following the date when non-developer unit owners acquire a majority of the votes among the membership of the association (an event which typically occurs within a few months of the transition meeting), the condominium association has a right, without liability, and upon 30 days prior notice, to terminate any association contracts entered into during the period of developer control for the purpose of handling the financial matters, maintenance, or other services for the condominium. MD Condo Act §§ 11-133(a) and 11-109(c)(16)(vi). The condominium association’s right to terminate, however, does not apply to contracts for the “the provision of utility services or communications systems” or any “contract or grant between the association and any governmental agency or public utility.” MD Condo Act §§ 11-109(c)(16)(vi)2.B and 11-133(b). Maryland Homeowners Associations have a virtually identical right to terminate contracts. HOA Act §11B-106.1(f)(3). However, unlike condominiums, the HOA statutory language is unclear as to when the right ends. For a more detailed discussion of an HOA’s right to terminate contracts following the transition meeting, see article, “Declarant Transition for Maryland Homeowner’s Associations” under heading “Termination of Contracts.”

TRANSITION CHECKLIST

Part II of this article contains a transition checklist of items to be addressed by the initial homeowner-controlled board of directors once it assumes control of the association following the transition meeting.

 

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APPENDIX

DOCUMENTS & ASSETS TO BE TURNED OVER BY MARYLAND CONDOMINIUM DEVELOPER 

1. Articles of incorporation, recorded declaration, and all recorded covenants, bylaws, plats, and restrictions of the condominium
2. All books and records, including financial statements, minutes and completed business transactions
3. Policies, rules, and regulations
4. 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
5. All contracts to which the condominium is a party
6. The name, address, and telephone number of any contractor or subcontractor employed by the condominium
7. Insurance policies in effect and all prior insurance policies
8. Any permit or notice of code violation issued to the condominium by the county, local, State, or federal government
9. Any warranty in effect
10. Drawings, architectural plans, or other suitable documents setting forth the necessary information for location, maintenance, and repair of all condominium facilities
11. Individual owner files and records, including assessment account records, correspondence, and notices of any violations
12. A roster of current unit owners, including mailing addresses, telephone numbers and unit numbers
13. The condominium funds, including operating funds, replacement reserves, investment accounts and working capital
14. The tangible property of the condominium

DOCUMENTS & ASSETS TO BE TURNED OVER BY MARYLAND HOA DEVELOPER 

1. Deeds to the common areas
2. Articles of incorporation, declaration, and all recorded covenants, plats, restrictions, and any other records of the primary development and of related developments
3. By laws and rules of the primary development and of other related developments as filed in the depository of the county
4. The minute books, including all minutes
5. All books and records, including financial statements, minutes of any meeting of the governing body, and completed business transactions
6. Policies, rules, and regulations
7. 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 homeowners association and any report relating to the reserves required for major repairs and replacement of the common areas
8. All contracts to which the homeowners association is a party
9. The name, address, and telephone number of any contractor or subcontractor employed by the homeowners association
10. Any insurance policies in effect;
11. Any permit or notice of code violations issued to the homeowners association by the county, local, State, or federal government
12. Any warranty in effect and all prior insurance policies
13. The homeowners association funds, including operating funds, replacement reserves, investment accounts, and working capital
14. The tangible property of the homeowners association
15. A roster of current lot owners, including their mailing addresses, telephone numbers, and lot numbers, if known
16. Individual member files and records, including assessment account records, correspondence, and notices of any violations
17. Drawings, architectural plans, or other suitable documents setting forth the necessary information for location, maintenance, and repairs of all common areas

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NOTE ABOUT ARTICLE: The original version of this article was published as two part series on Developer Transition in the Community Associations Institute publication  “The Beacon”  (Chesapeake Region Chapter). Part I appeared in the Summer 2017 issue at pages 16-17 and Part II appeared in the Fall/Winter 2017 issue at pages 20-21.

NOTE REGARDING USE OF TERM DEVELOPER: Under the Maryland Condominium Act, the entity that creates a condominium is referred to as the “developer.” In the Maryland Homeowners Association (“HOA”) Act, the entity that creates an HOA is referred to as the “declarant.” For purposes of simplicity, the term “developer” has been used to refer to both a condominium developer and a HOA declarant.

NOTE ABOUT AUTHOR: Nicholas D. Cowie is a partner in the law firm of Cowie Law Group, P.C.  who practices Washington DC and Maryland condominium and HOA law. He has been representing Condominiums and HOAs for over 25 years. Mr. Cowie contributed to the drafting, and worked to obtain passage, of House Bill 667, enacted on October 1, 2009, which created the laws discussed above that strengthen the rights of Maryland condominium and homeowners associations in the transition process. Mr. Cowie also drafted the legislation that extends Maryland condominium an HOA warranties. Click here for an article discussing the laws that extends warranties for Maryland condominium associations and HOAs that drafted by Nicholas D. Cowie. Mr. Cowie is licensed in Maryland and Washington DC and has extensive experience representing Maryland condominium associations and HOAs with transition issues including developer assessment disputes and construction deficiency claims. Contact Mr. Cowie regarding Declarant Transition Maryland Homeowners Associations Legal Matters.

Maryland and Washington DC Condominium and HOA Attorneys

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Cowie Law Group is a community association law firm practicing Maryland and Washington DC condominium and HOA law. Our condominium and HOA attorneys provide legal advise and representation to condominium and homeowners associations throughout the state of Maryland and Washington DC (District of Columbia). Cowie Law Group represents association boards of directors in the legal matters that arise prior to and following the developer transition process. Contact the Maryland and Washington DC condominium attorneys and and Lawyers at Cowie Law Group for references and a free consultation regarding your condominium or HOA community transition issues.