DEVELOPER TRANSITION – PART II

MARYLAND CONDOMINIUM LAW

MARYLAND HOA LAW

Checklist for Associations Transitioning From Developer Control

TRANSITION CHECKLIST

This article is a continuation of “Developer Transition – Maryland Condominium & HOA Law – Part I,” an overview of laws governing the developer transition process for Maryland condominium associations and Maryland homeowners associations (HOAs). Part II, below, is a transition checklist that should be addressed by the initial homeowner-controlled board once it assumes control over the association from the developer.

1. Document/Asset Inventory & Request

Conduct an inventory of association documents and assets. Make a formal written request of the developer to turn over all documents, funds and assets listed in the Appendix below to the extent not already done so. These must be turned over within 30 days of the transition meeting.

2. Contract Review

Review all contracts entered into during the period of developer control to handle the association’s financial matters, maintenance, or other services. If there are any concerns, obtain competitive vendor proposals for comparison purposes. Contracts that do not appear to be in the best interest of the association can be terminated, without liability, upon 30 days in notice. The association’s right to terminate does not apply to contracts for the provision of utility services or communications systems.

3. Audit Financial Records

Have an independent auditor examine and audit the association’s financial records during the period of developer 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 developer obligations. In some cases, an auditor may determine that the developer owes the association a substantial amount of money.

4. Transition and Reserve Studies

Obtain transition and reserve studies in order to identify construction defects and determine whether the developer-created budget and reserve account are adequate to maintain, repair and replace the common areas of the community over time. For example, if a common element roof is found to be in need of immediate replacement because of construction deficiencies, then a developer-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 of the common elements and common areas to identify construction defects while warranties are still enforceable so they can be submitted to the developer for warranty repair. Timely transition studies are essential because defects in newly constructed communities may not be apparent when homeowners 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 deficiencies can result in extensive property damage requiring associations to borrow money and assess homeowners. Moreover, when defects are not identified in a timely manner, warranty rights may be barred by expiration of warranty periods or statute of limitations. 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 developer. Once defects have been identified and corrected by the developer, the 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 community components for which the association is responsible, such as roofs, exterior walls, sidewalks, roadways, stormwater management ponds, clubhouses, etc. A normal useful life, or “life expectancy,” is assigned to each of these components (e.g., a 30-year club house 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 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. New Maryland laws, effective October 1, 2022, require Maryland condominium associations and most homeowners associations (HOAs) to obtain reserve studies and fund reserves. Click here for details on the Reserve Study Funding Requirements in Maryland

5. Retain Legal Counsel

General Counsel: Retain general counsel to work with the board members and the association’s management company to handle the wide variety of general legal issues that face a community 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 and homeowners association 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 developer. Armed with such information, a transitioning association can make informed decisions. This legal consultation should be requested as soon as the newly elected board assumes control of the association to ensure that no warranty and other legal rights are allowed to expire.

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., master policy, 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 association with a legal defense and pay any judgment, but can also provide immunity to members of the board of directors and officers as well as cap association liability to the amount of insurance coverage. For a more details regarding the  types and levels of insurance that provide  immunity to directors and officers of Maryland Condos and HOAs, see article “Statutory Immunity From Lawsuits for Condominium and HOA Directors and Officers.”

7. General Housekeeping Matters

There are a number of housekeeping matters not covered by this checklist involving association governance and business that will need to be addressed by the first board to transition from developer control. An association’s property manager and/or its attorney typically guides the board 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 governing documents (e.g., annual and regular meetings of association); defining maintenance obligations and establishing a maintenance schedule; amending developer-created governing documents and promulgating new rules and regulations based on the needs of the owner-controlled association, etc.

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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 appeared as a two part series on Developer Transition in the Community Associations Institute, Chesapeake Region Chapter, publication  “The Beacon.” 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 ABOUT AUTHOR: Nicholas D. Cowie is a partner in the law firm of Cowie Law Group, P.C. He has been representing community associations 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 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 homeowners association 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

410-327-3800 | 202-670-6289 | 301-830-8315

cowielawgroup.com

Cowie Law Group is an MD Condo and HOA law firm that represents condominiums and homeowners associations throughout the state of Maryland and Washington DC (District of Columbia). The MD Condo and HOA law attorneys at Cowie Law Group represent boards of directors in the legal matters that arise in the developer transition process. Contact the MD Condo and HOA law attorneys and lawyers at Cowie Law Group for references and a free consultation regarding your community’s transition issues.