TURNOVER FOR DEVELOPERS

By Neal McCulloh, Esquire

Previously, we presented an article on turnover from the Association’s perspective. At this juncture, it appears appropriate to analyze turnover (i.e., transition from Developer control) from the Developer’s perspective. A Developer has every bit as much to gain from properly preparing for and conducting turnover as does an Association. And the Developer has every bit as much to lose. We, at Clayton & McCulloh, are particularly attuned to both sides of the turnover process by virtue of the fact that approximately 40 percent of our legal practice is for Developers. Often, Developers and quite frankly, Developer counsel look at turnover only as a point in time just prior to or actually at the turnover meeting, and this is when they commence to deal with the turnover issues. In Clayton & McCulloh’s estimation, this is a tremendous mistake. Turnover needs to be planned for. Almost every action a Developer takes with respect to developing a subdivision or condominium needs to be evaluated from the long range perspective of the turnover process. This potentially includes, but is not limited to:

1. drafting the Declaration;

2. drafting the Articles of Incorporation;

3. drafting the Bylaws;

4. creating the plats;

5. legally establishing and properly administering the Association;

6. determining what will be the common properties to be owned and/or maintained by the Association;

7. implementing the infrastructure for the Association;

8. conveying title or easements for common properties to the Association;

9. properly budgeting revenues and expenses, including reserves, if appropriate;

10. properly assessing and collecting assessments;

11. accounting for Association funds and expenditure of funds;

12. analyzing roles of Master and Sub-Associations;

13. properly adding new phases to a community or adding Sub-Association lots or units to a Master Association;

14. properly adding new or additional common property to the Association;

15. accounting for reserves, if any;

16. full and proper disclosure to owners;

17. documenting actions of the Association; and

18. properly notifying owners of Association meetings, actions, budgets, etc., when required.

Realize that, after turnover, the non-Developer controlled Board of Directors will have an opportunity to evaluate whether the Association was improperly administered, whether the Association was run as a separate entity from the Developer (i.e., not as part of the Development entity), and whether the Governing Documents and the Florida Statutes were followed. Understand, to the degree that any of the above issues are answered in the negative, the Developer is at risk.

To many, it may seem far-fetched to consider the initial drafting of the Governing Documents, the platting of the subdivision and the initial operation of the Association from the standpoint of turnover, but if you think about what "turnover" means and the risks that potentially arise to the Developer upon turnover, it becomes clear why the above methodology makes sense.

In our previous article, we discussed what issues the Association should investigate upon turnover. We discussed issues such as construction defects, failure to construct that which was promised or represented, mismanagement of the Association, potential misuse or misappropriation of the Association’s funds, and failure to establishing proper reserves, if required. It is clear that each of the above issues as well as many others can generate risk to the Developer. As such, the earlier Developers analyzes what will occur at turnover of the Association and then plan accordingly, the better Developers will be able to avoid risk.

We, at Clayton & McCulloh, have been preaching for years that far too many of the Governing Documents that we see in our representation of Associations are not merely poorly drafted, but are pathetically drafted. Often, the Governing Documents do not interrelate, they conflict and/or they conflict with the Plat or Florida Statutes. The Developer’s own sales and marketing literature often depict a different community and/or amenities from what actually is intended to be created and/or currently exists. In fact, often it is apparent that the Governing Documents have not been drafted to create the type of community that is ultimately intended. Moreover, what is even a greater tragedy to Developers is that the Governing Documents have not been drafted from the perspective of protecting the Developers. As counsel both for some small Developers as well as national Developer(s), we feel that it is our duty to apprise our Developer clients of the significant and numerous ways that they can potentially avoid risk.

The process of counseling Developers about potential turnover risk may start with the drafting of the Governing Documents, but potential periodic amendments to these Documents may be needed as well. It is amazing how much risk can be avoided by careful drafting and/or amendment of the Governing Documents, rather than by just using some generic form that has been used for the last 20 years. What is even a greater problem is the fact that once the Documents are drafted, oftentimes the Developers, their management companies and/or their attorneys fail to ever understand the requirements of the Documents, thereby putting the Developers in jeopardy. As an example, we often see Homeowners’ Association documents which require Associations and/or the Developer in Homeowners’ Associations to fund reserve accounts. While in a Condominium structure, at least budgeting and usually funding of reserves is mandatory, in a Homeowners’ Association, there is no such requirement to budget or fund reserves unless the Governing Documents mandate it. Therefore, imposing this duty on the Developer, rather than affording the Developer an option, to fund reserves appears risky at best. There are countless other examples of these type of issues, but suffice it to say, the Governing Documents for a particular community need to be considered in conjunction with the actual subdivision or condominium being constructed, its size and the amenities intended to be located thereon. The Developer should also consider such issues as security, gated access and private versus public roads. Planning for these issues in advance is critical. Nevertheless, Clayton & McCulloh strongly discourages our Developer clients from using the word and/or print any commitment for "security".

To this point, it may appear as if this article is primarily dealing with drafting of Governing Documents and platting. Actually, this is not the case. However, to properly prepare for turnover you must properly analyze and draft your Governing Documents and Plats to be in a position to avoid significant risk and liability. To the degree that the Governing Documents have not been properly drafted, the Developer ostensibly can be at substantial risk. As such, the Developer, prior to turnover, needs to have reserved within the Governing Documents the right to make certain unilateral amendments and should consider amending the Documents to take care of any shortfalls or deficiencies therein prior to turnover. In short, Developers need to make sure that, with respect to whatever Documents are in place, they either follow them or amend them.

Because poorly drafted Governing Documents and inaccurate or inconsistent Plats can create risk and liability, it is imperative that the Developer and its counsel, prior to turnover, understand the requirements imposed therein, and make sure that those requirements are being fulfilled not only by the Developer, but also by the Association. If a deficiency is determined, then sufficient remedial steps need to be taken to correct the deficiency. Again, this may be accomplished by amending the Documents/Plat(s) or performing some other task required by the Documents/Plat. Understand, waiting until after turnover to try to correct issues usually significantly increases risk to the Developer. At that juncture, the Developer has lost control of the Association and therefore, the ability to unilaterally, or at least more easily, correct any deficiency.

As you can see, turnover for the Developer, in large part, is a process that should commence well in advance of the actual date when the election of non-Developer Directors occurs. In fact, with proper foresight, many risks can be eliminated, avoided or at least substantially reduced. Unfortunately, it appears that many Developers only focus on sales, and the creation and operation of the Association is only an afterthought or a minor, unimportant aspect of the Developer’s business. This attitude can expose Developers to tremendous liability which, potentially, could easily be avoided. Along these same lines, utilizing counsel well-versed in Community Association law to avoid these risks appears to be often viewed as unnecessary or an unnecessary expense. To the contrary, proper utilization of counsel to avoid the risks that can arise at turnover is probably cheap insurance for Developers. Not having such "insurance" is the reason that Associations have been so successful in making and collecting on claims against Developers. In fact, a primary reason we have been retained by Developers is to literally reduce the risks and liabilities associated with firms like Clayton & McCulloh who have for years effectuated sizable, and often avoidable, recoveries for Associations.

While the numerous issues and concepts that can be employed to reduce Developer liability is far beyond the scope of this limited article, consider the following scenario:

Many projects, whether Condominium or Homeowners’ Association, have Developers actually spending more funds than they are required on the project and on the Association. Nevertheless, Developers rarely receive credit for all the funds expended. In fact, we have one very large Developer client who is funding an astronomical deficit for its Association and is literally getting no credit or benefits from this. In fact, many of the members still see the Developer as the enemy despite the Developer’s benevolence and assistance. In this instance, we have provided our client with some relatively easy solutions which can save it thousands and thousands of dollars.

We have advised our Developer client that it has the unilateral right to:

1. quit paying the subsidy (i.e., pay significantly less by switching from paying the subsidy to paying pro rata on the relatively few lots it continues to own); and

2. cease paying reserves.

Therefore, this Developer ostensibly can switch from paying the subsidy to paying assessments only on the relatively few remaining lots it owns. Thereafter, even if the Developer wants to keep helping the Association, ostensibly it can loan the funds to the Association, take a note back from the Association for the funds it loans, and then at turnover, offer to forgive the Association’s debt to the Developer upon the Association releasing the Developer from any and all future liability. Understand what this accomplishes. First, in the interim, it can significantly reduce the amount of money the Developer has to pay. Secondly, if the Developer elects, it provides a mechanism whereby the Association is not crippled. Thirdly, it corrects the imbalance and unfairness that currently exists and shifts the balance back in favor of the Developer. And lastly, it enables the Developer to forgive the debt at turnover, while at least receiving some benefit for having provided significant funds well above and beyond any legal requirement that it had.

A Developer should also be prepared for the turnover meeting. First, it should be prepared to turn over all of the official records of the Association as provided in Florida Statute 718 and/or 720 depending on whether it is a Condominium or a Homeowners’ Association. Secondly, the Developer should have the Association notice a Board of Directors meeting immediately following the membership turnover meeting. The purpose of that meeting initially is probably to elect officers. However, at that meeting, provided both sides are amenable to it, the parties could already be postured to resolve any and all outstanding differences and to provide a mutual release so each party can go its own way. (Note - it is unlikely that Associations would want to settle anything at that meeting, especially if the Association had not hired independent counsel before that date. Nevertheless, this is an option the Developer should consider, especially if the concept of settlement has been broached and pursued prior to the date when the actual new non-Developer Board of Directors is elected.)

Lastly, if settlement at the turnover meeting cannot be accomplished, the Developer should consider amicably dealing with any reasonable requests of the Association. By "reasonable" we mean any items to which the Association is entitled. However, if the Developer has properly prepared for turnover since inception of the community, then the Developer should already be in a posture to evaluate and deal with the remaining risk and liability at the turnover meeting or very shortly thereafter.

In summary, turnover is perhaps the most critical event in the "life" of a Condominium or Homeowners’ Association. With foresight and planning, Developers and their counsel can avoid significant unnecessary risk and liability.

Neal McCulloh is an attorney specializing in the field of real estate and condominium law with the law offices of Kenneth M. Clayton in Orlando, Florida. He is a member of the American Bar Association, Orange County Bar Association and Florida Bar.  

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