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Taking Over – The first year is the key to the transition process

Date

October 12, 2004

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6 minutes

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Until a substantial number of units are sold, the developer appointed board of directors operates the new condominium association. When the owners meet to elect the first unit owner board of directors, they will assume responsibility for both the physical structure and the financial operations of the condominium association. The new directors must recognize that the first year from the turnover meeting is the most significant period for the new association.

During this one year period, the new board must review the construction and finances of the association; notify the developer of warranty and financial claims; revise the association budget; and develop rules and policies for running the association. Why the rush for the owners to take on this responsibility? For two reasons — owners and the board have a limited time period (usually one year) to assert warranty claims; and once the units are sold and closed, the developer entity may no longer exist. Associations who wait to “”accept”” turnover are losing their rights and the ability to recover claims from a viable developer.

The turnover to unit owner control takes place when either three-fourths of the units are sold, or three years after the declaration is recorded, whichever is earlier. Within sixty days of the date, the developer must call a meeting of the ownership on 21 days’ notice to elect the first unit owner board. If the developer does not call this meeting, within the required time period, 20 percent of the unit owners may hold the meeting by filing a petition with the developer and then send a notice of the meeting to the owners. Owners must take this initiative if the developer does not schedule the meeting.

Section 18.2 of the Illinois Condominium Act is the key turnover provision for new condominium boards. This section contains a timetable for electing the new board; a checklist for obtaining documents and information from the developer; and gives the unit owners the right to cancel long term developer contracts.

Within 60 days following the election of the unit owner board, the developer must deliver to the new directors certain documents, an accounting, and the funds belonging to the association. The documents consist of four categories: construction information, association legal documents, contracts and accounting records. The Condominium Act was amended last year to give new associations the right to file suit and recover attorneys’ fees against a developer who fails to timely deliver association property to the new board.

The most important items of information from the developer are the construction plans and specifications. An outside engineer appointed by the board should review the plans and specifications for the property and inspect the physical facility. The new board wants the engineer to determine if the work promised by the developer was done and completed in accordance with the plans. In the case of a conversion, the engineer should also confirm that the property report correctly represented the condition of the property by the developer.

The new board must also review the accounting records submitted by the developer. Financial records consist of receipts and expenditures relating to the maintenance and operation of the property, copies of all insurance policies, and bank statements for association funds. With the assistance of an accountant specializing in this area, the board should confirm that funds held by the developer were transferred to the association’s account; the developer paid assessments for unsold units; and did not use assessments for expenditures relating to the construction of the property.

Association’s counsel will assist the new board in reviewing the list of pending contracts to which the developer was a party. If the term of a developer agreement runs more than two years from the date of the turnover election meeting, the unit owners may cancel the contract by a majority vote held within 180 days of the turnover.

With the assistance of a rules and regulations committee, the board will prepare a set of rules for the conduct of unit owners. The subject matter of the rules is taken from the declaration which references those subjects the board may regulate through its rule-making power.

Newly elected boards should avoid the temptation to overregulate, but should develop a clear set of guidelines for use and occupancy of the property. Keeping in mind that the association is better served with fewer rules that are strictly enforced, the board and its committee should tailor their regulations to the particular building and enact only those rules which are absolutely necessary for operation of the property.

In past years, new unit-owner boards have often taken three courses of action: sue the developer, raise the assessments and fire the management company. Each of these alternatives is an expensive proposition which, through due diligence, the directors may avoid.

Litigation may arise if the developer has failed to repair or construct items that do not comply with plans, failed to complete the items listed in the property report, failed to pay assessments on unsold units or used assessments for items not classified as common expenses. Effective communication between the board and the developer may avoid this knee jerk reaction.

The newly elected board can assume that assessments represented to them during the selling phase were artificially low; or, at best, only a good faith estimate of projected operating costs.

In reviewing the developer budget, new owners should expect an assessment increase. The developer budget does not anticipate exact operating expenses. The developer budget may have excluded an allocation for reserves. Professional fees to guide the board on legal, engineering and financial issues are additional costs the association will incur during this transition phase.

Litigation will arise if the developer ignores its legal obligations to the new unit owners and prefers to focus attention solely on new projects. Similarly, a unit owner board who simply views the developer as the enemy will spend significant legal fees without any corrections or improvements to the property. The better approach for both parties is to focus on the key issues relating to construction and finances. While no developer builds a perfect project, owners are entitled to receive the benefit of the project represented to them.

Copyright © 2000 Levenfeld Pearlstein. This article contains general commentary on legal matters. It should not be relied upon as a substitute for legal advice as to any particular situation.

Circular 230 Disclaimer
In conformity with U.S. Treasury Department Circular 230 this document and any tax advice contained herein is not intended to be used, and cannot be used, for the purpose of avoiding penalties that maybe imposed under the Internal Revenue Code, nor may any such tax advice be used to promote, market or recommend to any person any transaction or matter that is the subject of this document. The intended recipients of this document are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this document.

 


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