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When It’s Time to Change: Considerations When Taking the Reins of the Association from the Developer

by | Mar 31, 2023 | Firm News |

There is a special time in every young residential association’s life when it is time for control of the association to transfer from the developer to the association’s members—those who own lots or units in the community who are not the developer. This transition is important for an association as, among other things, it is the time when members will come to grips with managing the community. This will usually require a clear-eyed review of the association’s finances and its fiscal situation. Assuming responsibility for managing the association is always a learning experience and is sometimes a disillusionment for the first non-developer controlled board.

When Does the Transition Happen?

In the case of a condominium association, the transition is a process and is governed by the Michigan Condominium Act (the “Act”), MCL 559.152 (“Section 52”). While I do not want to exhaustively discuss the ins and outs of Section 52, by the time of actual transitional control, under Section 52 there already should have been established an advisory committee of non-developer Co-owners and some directors should have been elected by non-developer Co-owners. While, hopefully, the requirements of Section 52 have been observed and Co-owners have at least a window into Association operations in advance, the reality is that developers not infrequently fail to abide by the requirements of Section 52 and so Co-owners may need to call the developer to account at some point even before the time for transitional control is reached. Under Section 52, within 120 days of conveyance of 75% of the units that may be created and before conveyance of 90% of such Units, non-developer Co-owners may elect all directors, with the developer still allowed to appoint one director so long as it owns and offers for sale at least 10% of units. The “transitional control date” is defined under the Act as “the date on which a board of directors for an association of co-owners takes office pursuant to an election in which the votes that may be cast by eligible co-owners unaffiliated with the developer exceed the votes which may be cast by the developer.” Even if a developer has complied with the requirements of Section 52, Co-owners will not have actual control until the transitional control date and therefore, despite legal requirements that Association documents be available for review of members, Co-owners may be in the dark about certain matters until that date.

For a traditional subdivision, there will often be specific thresholds or milestones in the governing documents for turnover of control of the association to homeowners. Homeowners in a newer subdivision should review provisions of governing documents related to that closely as each homeowners association is different.

Considerations Leading up to Transfer of Control from the Developer to Non-Developer Members

The following is a non-exhaustive summary of areas association members should be aware of as the transitional control date approaches:

(1) Right to review documents, review of financial records: It is a good idea for Co-owners to obtain records such as financials in advance of the transitional control date. If the Developer has followed Section 52, members may already have a view into the Association’s working, however, members have a right to see Association records and can enforce this right, if appropriate and necessary. In any case, soon after transition of control to members, the Association should have financial records reviewed by a financial professional. An audit may be appropriate, and the Act has financial review or audit requirements in any case. MCL 559.157(2).

(2) Statute of limitations considerations: The Act, MCL 559.276, provides that a cause of action arising out of the development or construction of the common elements or management, operation, or control of a condominium project that accrues on or before the transitional control date may not be brought more than 3 years after the transitional control date. If there are verified, substantial shortfalls, high-dollar defects, or other claims of a substantial nature that exist, the Association needs to keep in mind the time limits for bringing any actions on such claims as set forth in the Act.

(3) Reserve study: The Association should order a reserve study shortly after the transitional control date, to be done by an engineer, to evaluate the condition of the common elements throughout the community, to give the board reliable, professional information regarding the status of items for which the Association has responsibility and what is realistically needed to plan and budget for near and long-term repair and replacement.

(4) Reserve account properly funded: Michigan Administrative Rule 559.511 provides that the Association’s reserve fund must be properly funded at the transitional control date and the Developer is liable for any deficiency.

(5) Management contracts, other contracts and professionals: Because a developer will have engaged its own professionals to run the Association, it is almost always appropriate to consider new property managers, new accountants, new legal counsel, and other service providers for the Association at the time of transitional control. The Act provides that management contracts and contracts with the developer or affiliates of the developer are voidable at or around the transitional control date.

(6) Assignments of developer rights: Depending on the governing documents and nature of the community, it is often desirable or even critical to get written and recordable assignments of certain developer rights from the developer before it disappears from the community so that the Association is on solid legal ground as it steps in to perform important community functions into the future. This is especially often a concern for homeowners associations.

Leading up to transition, members often, understandably and correctly, have concerns and questions about dealing with a developer, which may be substantial corporation of national size and scope. Likewise, boards that are newly no longer developer controlled can often feel at sea or can be left dealing with serious developer-caused issues. We are experienced in these matters and here to help should you have questions about any issues related to transitional control. Please reach out to us at (248) 349-6203 or email us using the form below.

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