DECLARANT TRANSITION – PART II
DISTRICT OF COLUMBIA CONDOMINIUMS
A Checklist for Associations Transitioning From Developer Control
This article is a continuation of “Declarant Transition – Part I,” an overview of the laws governing the declarant transition process for unit owners’ associations in the District of Columbia. Part II, below, sets forth a transition checklist that should be addressed by the initial, unit owner-elected board once it assumes control of the association from the declarant.
Document/Asset Inventory & Request
Conduct an inventory of the unit owners’ 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. Appendix A 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.
Review all unit owners’ association contracts entered into during the period of declarant control. 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 the the District of Columbia Condominium Act by providing 90 days advanced notice.
Audit Financial Records
Have an independent auditor examine and 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 the declarant owes the unit owners’ association a substantial amount of money.
Transition and Reserve Studies
Obtain transition and reserve studies in order to identify construction defects and determine whether the declarant-created budget and reserve account 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, 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 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.
Retain Legal Counsel
General Counsel: Retain general counsel to work with the executive board 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 unit owners’ association can make informed decisions. This legal consultation should be requested as soon as the unit owner elected board assumes control of the association to ensure that no warranty and other legal rights are allowed to expire.
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 executive board members and officers as well as cap association liability to the amount of insurance coverage.
General Housekeeping Matters
There are a number of housekeeping matters not covered by this checklist involving condominium 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 executive 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 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.
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 TERMINOLOGY: As used in this article, the term “unit owners’ association” means a condominium association; the term “declarant” means a condominium developer; and the term “executive board” means a condominium board of directors. This is the terminology used in the DC Condo Act and adopted for this article.
NOTE ABOUT AUTHOR: Nicholas D. Cowie is a partner in the law firm of Cowie & Mott, P.A. and has been representing condominium associations for over 29 years. Mr. Cowie is licensed in Maryland and Washington DC and has extensive experience representing community associations with transition issues including developer assessment disputes and construction deficiency claims.
Cowie & Mott is a MD and DC Condo law firm that represents condominiums and homeowners associations in transition from developer to unit owner control throughout the state of Maryland and Washington DC (District of Columbia). The MD and DC Condo law attorneys at Cowie & Mott represent boards of directors in the legal matters that arise in the declarant transition process. Contact the MD and DC Condo law attorneys and lawyers at Cowie & Mott for references and a free consultation regarding your condominium’s transition law issues.