GUIDELINES FOR DC CONDO TRANSITION COMMITTEES

Transitioning from developer to unit owner control

By Nicholas D. Cowie, Washington DC Condominium & Construction Law Attorney

The transition of a condominium association board of directors from developer to unit owner control can be a complex and confusing process. This transition period can be challenging for the condominium developer and the first elected unit owner-controlled board of directors. The longer a condominium developer retains control over the condominium association, the greater the likelihood a conflict of interest will result in a breach of fiduciary duty claim against the developer for failing to act in the best interest of the association.

One effective way to bridge the transition gap and avoid conflicts of interest is the establishment of a “transition committee.” This committee is made up of non-developer affiliated unit owners authorized to act independently of the developer-controlled board to protect the interests of the condominium association. Washington DC condominium transition committees are most often created by developer control boards to investigate the construction of the condominium and resolve construction defect warranty claims with the developer

Transition Committees and Conflict of Interest During the “Period of Developer Control”  

Condominium associations for newly constructed or newly converted condominiums are initially controlled by the condominium developer. The developer creates the condominium association and appoints its own employees to the association’s board of directors (“developer-appointed board members”). The developer selects the first management company and legal counsel for the condominium who answer to the developer-appointed board members. This is called the “period of developer control” during which a condominium developer controls the actions and activities of the condominium association through its developer-appointed board members. Condominium developers want to keep control over a condominium association while they are selling units to the public. The slow sale of units can prolong the period of developer control. For an article discussing how and when a developer in the District of Columbia must turnover control of a condominium association to the unit owners, see Developer Transition for Washington DC Condominiums.  

A board of directors has a fiduciary duty to act in the best interest of the condominium association and its unit owner membership. DC Condominium Act § 42-1903.08(d). Developer-appointed board members cannot satisfy this fiduciary duty when the interests of the condominium developer and the unit owners are not aligned or conflict. Transition committees are designed to avoid conflicts of interest because they are made up of non-developer unit owners tasked with handling association responsibilities where the involvement of developer-appointed board members would create a conflict of interest, such as the investigation common element warranty claims or audits of association financial records.

Transition committee members should have no developer affiliation or financial interest in the condominium development or in any company involved in the design, construction, marketing, management, and/or sale of the condominium. The committee should also be allowed to act independently of the developer-controlled board, meaning that the committee alone should be made responsible for investigating and identifying construction defect warranty claims, financial irregularities, or other transition issues.

Transition Committees Created to Investigate Construction Defect Warranty Claims

Washington DC Condominium Transition Committees are most often established by developer-controlled condominium association boards to investigate the construction of the condominium and resolve construction defect warranty claims with the developer.

Association’s Duty to Investigate and Pursue Construction Defect Claims

A condominium association is responsible for the maintenance, repair, and replacement of the condominium common elements. This responsibility includes a duty the part of the association’s initial board of directors to investigate the construction of the condominium to ensure that it has been completed in accordance with the construction documents and to identify any construction defects before warranties and other legal claims expire so they can be brought to the attention of the developer for repair.

There is an inherent conflict of interest with a developer-controlled board investigating defects with developer’s own construction. Hence, the rationale behind creating a transition committee made up of non-developer unit owners to investigate and resolve construction defect warranty claims during the period of developer control.

Structural Defect Warranty Security Claims

In Washington DC a condominium association has many claims it can assert for construction defects. One time-sensitive claim is under the “Structural Defect Warranty Security Claim Program” administered by the District of Columbia Rental Conversion and Sales Division of the Department of Housing and Community Development (“RCSD”). A condominium developer is required to post a bond, letter of credit or other form of security (“warranty security”) with the District of Columbia that can be drawn upon if necessary to satisfy any costs that arise from the developer’s inability to fulfill its warranty obligations to construct condominium free of “structural defects.”

If a condominium association waits too long to file a claim with RCSD there may not be any warranty security left to make a claim against. This is because the condominium developer can begin reducing the amount of the warranty security it has posted beginning two (2) years after its conveyance of the first unit to a residential unit owner at the condominium. DC Condo Act § 42-1903.16(e)(3)(A). In some circumstances,  it is possible that within two years from the date of the first conveyance of a unit, the entire warranty security could be reduced by 100%. See The Washington DC Condominium Warranty Again Structural Defects. Thus, to ensure that the maximum amount of posted security will be available to satisfy an association’s structural defect claim against the posted security, an association or its transition committee should strive to identify any defects and bring them to the attention of the developer and file a warranty security claim with RCSD within that two year period.  Once the association’s structural defect warranty security claim has been filed with RSCD, the developer’s warranty security can no longer be reduce or release until the claim has been resolved and the warranty security funds have been made available to satisfy the developer’s responsibility to the claimant under the warranty. DC Condo Act § 42-1903.16(e)(8).For an article discussing the structural defect warranty and the DHCD security claim program, see The Washington DC Condominium Warranty Again Structural Defects.

Washington DC transition committees are often tasked specifically with resolving structural defect warranty security claims and given the express authority to agree to the release the developer’s posted security with the District of Columbia. Although, transition committees should seek to preserve the association’s rights, a transition committee should never released the association’s legal rights as against the developer or its affiliates while the developer is in control of the association’s board of directors. Any settlement or release of rights against the developer should not occur until after control of the condominium association board of directors has been transferred to the the resident unit owners, and the unit owner controlled board has had the terms reviewed by its own independent legal counsel (i.e., an attorney that has not been hired by the developer-controlled association, or hired by the community management company hired by the developer).

Preventing Legal Claims from Expiring Under Developer’s Watch

There is a danger of legal claims expiring whenever a developer retains control of the association’s board of directors for extended periods of time. For example, if the period of developer control encompasses the initial two-year period from the date of the first conveyance of a unit to a residential unit owner, the warranty security posted by the developer with the District of Columbia becomes subject to reduction and release, and statute of limitations as to legal claims become time sensitive. Therefore, establishing a transition committee as early as possible, is necessary to avoid the situation where a condominium association’ transition committee is unable to to protect the condominium associations legal interests.

If the transition committee is not established early enough, there may not be sufficient time for a condominium association to hire engineering professionals to conduct a comprehensive investigation of the condominium’s construction necessary to timely identify construction defects and make a timely construction defect claim. Failure to act in a timely manner, will result in condominium association’s legal rights becoming waived and barred by the statute limitations. Thus, unless the developer intends to turn over the association to the unit owners in relatively short order, establishing a transition committee as early as possible is the best way to avoid conflict of interest between the developer, the developer-controlled board, and the unit owners during the period of developer control.

In circumstances where the developer retains control over the condominium association, a transition committee (properly advised by a qualified, independent transition attorney not retained by the developer-controlled board) is essential to ensuring the association’s claims are protected and preserved, thereby promoting a smooth and successful transition.

Tasks Necessary to Investigate Construction Issues

If the transition committee is tasked by the developer-controlled association with investigating the developer’s construction of the condominium and resolving construction defect claims with the developer. These tasks should include: (1) collecting all relevant construction documents (e.g., approved and as-built plans and specifications) for the condominium to be shared with the association’s engineering consultant firm; (2) interviewing and retaining a engineering firm to review construction document and inspect condominium common areas with the ultimate goal of identifying any construction defects, and if any are found, preparing a construction deficiency transition report that can be provided to the developer and DHCD; and (3)  interviewing and retaining an attorney to both advise the transition committee in representing the association with regard resolving its warranty claims, and also ensuring that all warranty time periods and other legal deadlines are met by the condominium association so it does not waive any of its legal rights with regard to construction defects.

In most cases, the attorney brought on by the transition committee will need to obtain a tolling agreement from the developer to stop the statute of limitations from running on the associations warranty rights and other legal claims it may have relative to construction defects. The tolling agreement serves as a “time out” and preserves the associations while it negotiates a resolution of construction defects with the developer/declarant and builder. For an article on Tolling agreements, see Using Tolling Agreements to Preserve Association Warranty Claims during Construction Defect Negotiations with Developers.

Note also that it is important for the attorney hired to advise the transition committee to have input as to which engineering firm should retained to investigate the developer’s construction of the condominium, including reviewing any engineer proposals and agreements. For this reason, it is preferable that the attorney be hired before engineer.

Transition Attorneys

Transition committees must maintain their independence from the developer-controlled board of directors and a separate transition attorney should be retained for the association to advise the transition committee. It is not recommended that a transition committee utilize the services of an attorney previously hired by the developer-controlled board of directors. Even if that attorney can act independently of the developer-controlled board that hired it, there will always be an appearance or inference of conflict of interest. It is for this reason that many law firms will not simultaneously represent a developer-controlled condominium association and serve as legal counsel advising a transition committee in representing the condominium association’s interests in negotiating construction defect warranty claims with the developer.

Furthermore, not all attorneys experienced in condominium law have extensive experience trying, litigating, settling and/or otherwise resolving condominium construction defect disputes. The attorney selected by the committee should have extensive experience advising transition committees and handling transition issues to protecting the association’s interests. For a more comprehensive article discussing how to resolve and negotiate condominium construction defect claims in the District of Columbia, see: “Resolving Condominium Construction Defect Claims in Washington DC”

Transition Committee Confidentiality

Transition committee members must consider confidentiality of the committee’s communications. To be effective, it is important that the committee’s internal strategic workings not be shared with the developer-appointed board members.  It does no good to set up an independent committee to represent the interests of the condominium association if the committee’s internal communications are then shared with the developer.  There are a number of steps that an experienced transition attorney will recommend to ensure committee’s communications are kept confidential, even when the developer appointed board members are needed to approve funding for the committees’ activities.

Creation of a Transition Committee and Scope of Authority

A transition committee’s scope of authority and powers are defined by a board of director’s resolution creating the committee and appointing its members. The committee is typically authorized to hire an engineer, attorney, accountant and other professionals to represent the interests of the condominium association. These professionals will guide the transition committee members through the transition process, including making sure all necessary construction has been completed in accordance with  building codes and plans and specifications, and identifying any construction deficiencies to be brought to the developer’s attention for agreed-upon repairs before warranties and other construction defect claims expire. Attorneys and financial consultants can also assist the transition committee in collecting and reviewing financial accounts, budgets, and other important condominium association documents. In this manner, the committee can protect the condominium association’s interests until such time as control over the board of directors has been turned over to the unit owners.

Developer controlled-boards sometimes appoint a resident unit owner, not affiliated with the developer, as a member of the developer-controlled Board of Directors (“unit owner representative on the board”). This individual is chosen to serve as the chairperson and secretary of the transition committee, and to act as a liaison between the committee and the developer-controlled board of directors. Although there is a unit owner representative on the board, the board remains under developer control until a majority of the board members are unit owners that are not affiliated with the developer.

Other Potential Functions for a Condominium Transition Committee

A Washington DC condominium transition committee can also be used to ensure a smooth transition from developer to owner control. Separate transition committees can be established by the developer-controlled board to educate unit owners and prepare them for taking over control of the association. The transition committee can receive an orientation from management, allowing it to become familiar with the on-going operations of the condominium association so that unit owners can “hit the ground running.” Transition committee activities along these lines can include:

• Collecting and reviewing the condominium’s financial records to determine whether budgets are adequate for funding, ongoing operations and reserve accounts for future maintenance repair and replacement of common areas.
• Collecting and reviewing condominiums financial records and statements to ensure that the associations funds have been utilized properly.
• Collecting and reviewing the association’s contractual agreements with vendors such as for community management, property maintenance, cleaning, etc.
• Collecting and reviewing the associations, governing documents, including bylaws and rules and regulations to understand how the condominium is run and how rules are enforced.

Members of the transition committee may subsequently run for positions on the first unit owner-controlled board of directors or can participate as committee members assisting the first unit owner-controlled board as it takes over control of the operations of the condominium association.

Reasons Why a Developer-Controlled Boards Might Establish a Transition Committee

In addition to promoting a smooth transition from developer to unit under control, other goals of a developer in creating a condominium transition committee include the following:

Retain a Level of Control Over the Transition Process:

Creating a transition committee allows the developer to retain a level of involvement and control over association/developer warranty claim negotiations and other transition issues to which the committee is tasked.

Although the transition committee technically has independence, its powers and authorities are limited by the board resolution creating the transition committee. Some transition committees are only given advisory power. In other words, any actions the committee believes a condominium association should take are merely recommendations made to the developer-controlled board of directors, and the committee itself has no power to implement those recommendations without board approval. Even in cases where the transition committee has authority to take independent actions, all funding needed to take such actions, such as hiring consultants, usually must be approved by the developer-controlled board of directors.

A transition committee’s authority is often limited to negotiating and resolving condominium association claims, with no authority to pursue litigation, arbitration or mediation with the condominium developer should an impasse be reached. Nonetheless, if the transition committee, under the advice if the association’s transition attorney, makes reasonable advisory recommendations to protect the condominium associations interests, they should be followed by the developer-controlled board of directors, or they may be subject to conflict of interest breach of fiduciary duty claims for any resulting damages.

The resolution creating the committee can also limit its authority to resolving claims with the developer by giving it the power to negotiate on behalf of the condominium association, but not authorizing it to pursue litigation, nutrition or mediation with the condominium developer should the committee be unable to resolve construction defects warranty disputes or financial claims.

Prevent Breach of Fiduciary Duty Claims Arising out of Conflict of interest:

Allowing a transition to investigate potential legal claims where the developer has an interest, avoids the potential for future legal claims by a condominium association against a developer, its affiliates, and the developer-appointed board members for breached of fiduciary duty to the association and its unit owner members.

Avoid Liability for Allowing Warranties to Expire Under the Developer’s Watch:

A condominium association’s warranty claims are time sensitive. Warranty claims for common element construction defects must be asserted within a specified period of time or they will expire and become forever bared. If the association’s warranty claims are allowed to expire during the period of developer control, the developer can be held liable for interfering with, or preventing, the association’s ability to make a timely warranty claim while under its control. Since the developer-controlled board cannot make such a warranty claim against the developer without the appearance of a conflict of interest, a condominium transition committee allows an association to make timely warranty claims during the period of developer control.

Start Statute of Limitations Running on Association non-warranty Claims:

The “statute of limitations” is the time within which a legal claim must be filed in a court of law, or it becomes forever bared. During the period of developer control, the statute of limitations time on some association legal claims against the developer is “tolled” under the “adverse domination doctrine”. Tolling means that the statute of limitations time periods for bringing a legal claim stop running. For an article on tolling of association legal claims during the time that a developer adversely dominates the association’s board of directors, see: Adverse Domination Doctrine Tolls Association Legal Claims During the Period Of Developer Control.  The creation of a transition committee to deal with a potential legal claim against the developer, allows the developer to argue that the adverse domination doctrine does not apply to toll statute of limitations on that legal claim once a transition committee is established with the authority to investigate and bring the claim on behalf of the association “independently” of the developer-controlled board of directors.

Condominium Transition Committees Created by Unit Owner-Controlled Boards 

Sometimes owner-controlled condominium associations find it useful to establish a transition committee following the transition meeting at which control is transferred to the unit owners. This circumstance arises whenever a developer representative(s) remains as a minority board member on a unit owner-controlled board of directors (“developer representative on the board”). Because the developer representative on the board has a right to access to the inner workings of the unit owner-controlled Board of Directors, legal strategy and other confidential matters are at risk of being shared with the developer. In such a case, a transition committee created by the unit owner-controlled condominium association, made up of non-developer affiliated unit owner board members and/or unit owner residents, can maintain confidentiality by effectively causing the developer representative to be recused from all matters involving potential claims against the developer.

For an article discussing how board member elections can result in overlapping terms of developer-appointed and unit owner-elected board members during the period of developer control, see Developer Transition for Washington DC Condominiums.

Conclusion – Successful Transition Committees

Transition committees can serve a useful purpose for both developers and condominium associations by ensuring that the associations legal rights are protected and without conflict of interest during the period of developer control. Transition committee should be sufficiently independent, have their own independent professionals advising them on how best to protect the association’s interests (experienced construction consultants, legal counsel, and financial professionals), maintain a level of confidentiality, and act in a timely manner to protect association’s interest. Transition committees can also be used to facilitate a smooth transfer over the governance of a condominium association from developer to unit owner control.

Washington DC Condominium Attorney Complimentary Consultation

If you are a unit owner in a developer-controlled Washington DC condominium, you should be aware of the importance of the transition committee and the role that it can play in protecting the interests of the condominium association and its unit owner membership. If you have any questions about the transition committee or about construction defect claims, you should contact an experienced Washington DC condominium attorney at Cowie Law Group, P.C. for a free consultation. We will review your association’s pertinent documents and meet with the transition committee members without fee or obligation.

 

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

cowielawgroup.com

Bing Places  •  Google  •  Facebook 

Cowie Law Group Google Business Site

NOTE ON TERMINOLOGY: Under Washington DC statutory law (DC Condominium Act), a condominium association is referred to as  “unit owners’ association;” a condominium developer is referred to as a “declarant;” and a condominium board of directors is referred to as an “executive board.” These more commonly used terms are utilized in this article in lieu of the statutory terminology.