11/09/2018 : 5 steps new condo associations should take
By Benny L. Kass
November 09, 2018
Q. I live in a condominium complex with a large number of units. Recently, the developer notified each owner it will turn over control of the association to us, and a meeting has been scheduled for early next month. I have talked with a number of owners, and none of us have any idea what this means. Specifically, what should we be doing in anticipation of this meeting? What are our rights and responsibilities when transition is made?
A. In the past few years, there has been a dramatic increase in the number of new condominium units in the Washington area.
Every condominium is governed by a condominium association through its board of directors. Many residents don’t realize that when the first unit in a condominium complex is sold, the association is already in existence. The developer appoints the first board of directors, which controls the association until turnover takes place. In general, the laws in the surrounding jurisdictions require that control be turned over to the unit owners within two years of the first sale, or when 75 percent of the units have been sold, whichever comes first.
Unfortunately, many developers do not understand the importance of working with unit owners so they will be prepared to run the association themselves. It is not good practice, in my opinion, for a developer merely to announce that a meeting will be held when you will elect a new board of directors to govern and manage the association.
You should call a meeting of the owners. Have it in the social hall, the main lobby or even in someone’s apartment. Once you learn who is interested in taking an active role in the association, contact the developer and ask to schedule a preliminary meeting for the purpose of raising your concerns and asking your questions. In fact, some developers actually advance some funds for an attorney to be hired to participate in such a meeting.
The meeting your developer scheduled is for the purpose of electing a new board. I find it interesting that unit owners vote for members of a board that will control their destiny without having any information on who these prospective members are or what they stand for. If possible, a notice should be circulated to all the owners informing them there will be a meeting before the election, when residents can campaign for seats on the board. In my opinion, a condominium association is a mini-democracy, and just as we have political campaigns for government officials, we should also have campaigns for directors of the condominium association.
Once you are in control, there are at least five steps that must be taken:
- The new board must decide whether to retain the existing management company – which has been selected by the developer – or to select a totally independent management company. The association may decide to forego hiring such a company and become “self-managed” but I do not recommend this. Any association – regardless of size – needs formal management to assist in the numerous issues affecting the condo.
- Open a bank account in the name of the association or transfer any current accounts for board member signatures.
- An independent auditor or a certified public accountant must examine the association’s books. It is important for members of the new board to be satisfied that the developer, while controlling the association, properly paid all of its obligations to the association – and that those payments came from the developer’s funds and not from the association. Keep in mind that while the developer is in control of the association, they also have access to the association funds. Often, this access is unlimited. You want to make sure that funds which should have been paid by the developer are not inadvertently paid out of association proceeds.
Developers handle the question of payment of condominium fees in different ways, but under any circumstances, they must be held accountable for all their legitimate obligations. Additionally, in many instances the developer, while serving as a board member, may have allowed many unit owners to become seriously delinquent in paying their condominium fees. The new board must establish a careful and comprehensive collection policy that will be applied uniformly.
- The association should retain a lawyer to guide it in its activities. The lawyer will have to deal not only with developer problems, such as warranty issues, but also will have to assist the association in its day-to-day activities. A condominium association is not only a mini-democracy, it is also a business, and must function in that capacity as well.
- The board should consider hiring an engineer to inspect the complex as soon as possible. The engineer should determine if there are any warranty defects that should be called to the attention of the developer. For example, in the District, a developer must post some form of security – such as a letter of credit – with the mayor to assure that any warranty issues can be paid in the event the developer tries to avoid payment. The engineer can also help the board determine the proper level of reserves that are needed.
Turnover of developer control is probably one of the most important functions to assure the future success of a condominium. It is often not understood by developers who don’t want to encourage active participation by the new board fearing it will be too conscientious in reviewing their activities.
Good dialogue among unit owners, the developer and board goes a long way toward creating a successful condominium.
Benny L. Kass is a Washington and Maryland lawyer. This column is not legal advice and should not be acted upon without obtaining legal counsel. Send questions to [email protected].