VV Home Owners Association:

Common Facilities Takeover

Collated by CPCN

March 8, 2015

Distilled Wisdom of Ages Collated together and unabshedly stolen from many sourcesSource: From the long experience of the people running their own Associations democratically for ages.

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Contents

1 LEGAL STANDING 3A Liability of Community Associations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3B Standing of a Community Association to Maintain an Action for Construction Defects Against the

Developer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3C Standing of Individual Unit Owners to Maintain Action for Construction Defects Against the Developer 3D Class Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

2 Necessity of Competent Legal Counsel 4A Step 1: Communication. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4B Step 2: Gradual Evolution of Self-Government. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

3 Professional architect or engineer 5

4 How to Avoid or Minimize the Risk of Litigation 5A The Selection of Independent Counsel for the Association . . . . . . . . . . . . . . . . . . . . . . . . . 6B Engineering Reports and Punch Lists . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7C Reserve study . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8D Comparison of construction with applicable plans and codes. . . . . . . . . . . . . . . . . . . . . . . . 8E Punch lists . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8F Who Are the Parties? The Association . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9G The Approving Authorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

5 A comprehensive risk-management program 11

6 Sample List of Documents to be Turned Over 11

7 What the board should do 12

8 Appendix A : Sample Common Faclities Transition Agreement and Release 13A Agreement & Release . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

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HOME OWNERS ASSOCIATION:

COMMON FACILITIES TAKEOVER

1 LEGALSTANDING

A Liability of Commu-nity Associations

Like a developer, a communityassociation and its directorscan face potential liability to

homebuyers under a variety of legaltheories. Many lawsuits against anassociation or its directors arise froman alleged breach of fiduciary duty.Community associations and their di-rectors cannot act in an arbitrary andcapricious manner toward individualhomeowners, nor can they single outcertain homeowners for disparate ordiscriminatory treatment. The fidu-ciary duty also requires that commu-nity associations and their directorsoperate the associations business andfinancial affairs with ordinary care,skill, and prudence. A communityassociation is normally charged withthe duty and responsibility to keepcommon areas in a state of repair andmaintenance. If this duty is breached,and someone is injured or killed as aresult of the unsafe condition of thepremises, the community associationcan be sued for damages in the samemanner as any other premises owneror occupant. Similarly, if a failureto maintain the common elements re-sults in damage to the property of ahomeowner, the community associa-

tion can be liable based on its neglectof the common elements.

B Standing of a Com-munity Association toMaintain an Action forConstruction DefectsAgainst the Developer

One cannot bring a lawsuit againstanother party unless he or she hasstanding to sue. Standing to suemeans that the party bringing suithas a sufficient stake in an otherwisejustifiable controversy to obtain a ju-dicial resolution of the controversy.The requirement of standing is metif it can be said that the plaintiff hasa legally protectible and tangible in-terest at stake in the litigation. Somecourts have taken the position that acommunity association has no stand-ing to sue a developer for construc-tion defects unless the community as-sociation has an ownership interest inthe defective property or is given theexpress authority to sue by virtue ofstate statute. Generally, if the com-munity association is suing the devel-oper for defects in the common ar-eas owned by the association or di-rectly under its control, the associ-ation is deemed to have standing tosue. However, most courts have con-cluded that the community associa-tion has no standing to sue a devel-oper for construction defects affecting

only individual homeowners.

C Standing of Individ-ual Unit Owners toMaintain Action forConstruction DefectsAgainst the Developer

As a general rule with regard to com-munity associations, there is no ques-tion but that an individual owner hasstanding to assert a claim against adeveloper due to the defective con-dition of his or her individual home.There is a split of authority as towhether individual owners can sue fordefects in the common areas underthe control of an association. Somejurisdictions would permit individualowners to bring suit against the de-veloper for defects in the commonareas, while other jurisdictions haveheld that associations have the exclu-sive right to bring suit for defects inthe common areas. In view of this, itshould be understood that the Com-munity Association woudld be failingthe owners if it fails to take legal re-couse, if necessary, or else they will befailing in their fiduciary responsibilitytowards the owners.

D Class Actions

A class action provides a means bywhich one or more individuals maysue as representatives of a large group

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of persons who are interested in theoutcome of a legal controversy. Classactions are particularly useful wheremembers of the class are so numer-ous as to make it impractical to bringthem all before the court as party-plaintiffs. Not surprisingly, class ac-tions are often utilized with regard tolawsuits brought against communityassociations or developers on behalfof numerous owners. Unfortunately,class action is not well developed inIndia and hence reliance on this isproblematic.

2 NECESSITY OFCOMPETENT

LEGAL COUNSEL

Competent legal representation of acommunity association will go a longway toward supporting a smoothand seamless turnover of controlfrom the developer-appointed direc-tors to the homeowner-elected rep-resentatives. The developers attor-ney is involved in drafting the salesdocuments, registering the commu-nity (as required by various state,and local laws and ordinances), pro-cessing sales, and otherwise coun-seling the corporate entity that isresponsible for the actual develop-ment and, possibly, construction ofthe project. The developers attorneyshould encourage the developer to ful-fill its contractual obligations and torespond promptly to punch list itemsand owner inquiries. The attorneyshould also follow up on any com-pliance issues related to constructionand development.

It is not appropriate for thedevelopers attorney to also represent

the community association. There istoo much potential for conflict of in-terest, as the rights and concerns ofthe owners diverge from the businessinterests of the developer. All asso-ciation directors, on pre- and post-transition boards, have a fiduciaryduty to the membership that requiresthem to place the interests of the as-sociation and its members ahead oftheir personal interests. Some statelaws hold developer-appointed direc-tors to a higher standard of duty andcare, and attach significant personalliability to breach of that duty. Priorto transition, the association attor-ney must make sure that the associ-ation board meets the documentaryand statutory requirements for regu-lar and special member board meet-ings, keeping of minutes, maintenanceof financial records, rosters, and soon. Beyond the procedural and le-gal requirements, there are steps tobe taken to lay the groundwork forthe eventual transition of the associa-tion. The association attorney shouldencourage the developer-board to in-volve the owners in the governanceprocess through two basic steps.

A Step 1: Communica-tion.

The association attorney should makesure meeting notices are posted ordistributed to all owners. Workingwith the professional manager, the at-torney can assist in the creation ofa newsletter or other type of regu-lar communication between the boardand the owners. Working with the ac-counting professional, the associationattorney can make sure that legallyrequired financial statements are pro-duced and distributed, and that the

financial records are kept in accor-dance with applicable laws. The flowof information bears a direct rela-tionship to the degree of membershipsatisfaction. Both the attorney forthe developer and the attorney forthe developer-controlled associationshould encourage the developer to beavailable to the buyers and ownersas the sales and build-out progress.When owners feel that the developerrepresentatives are available to themand are willing not only to listen butalso to be responsive, the owners de-velop more confidence and trust inthe transition process.

B Step 2: GradualEvolution of Self-Government.

The attorney for the developer shouldproduce an initial set of documentsthat include the appointment of acommittee made up of non-developerowners, perhaps at the point at which50 percent or so of the dwellings havebeen sold. The committee would at-tend board meetings and could beused to assist the developer-board inoperating the association, enforcingthe documents, developing rules, andthe like. The association attorneycan assist the committee membersin understanding the governing doc-uments, the rights and responsibili-ties of the individual owners, and therespective roles of the developer, theboard, the manager, and the owners.Such a committee could also assistwith annual meetings, help with theorientation of new owners and resi-dents, and be used to provide experi-ence in governance for eventual non-developer board members. The asso-

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ciation attorney should train commit-tee members regarding the scope ofboard authority, the duty to maintainthe common property, and statutoryand documentary procedural require-ments. As time for turnover of the as-sociation draws near, this group canbecome the transition committee. Atthe turnover meeting, the associationattorney can preside over and facili-tate the election of the non-developerdirectors. The attorney would alsoassist in the organizational meeting ofthe board at which the association of-ficers are elected. Because the associ-ation attorney does not represent thedeveloper, he or she is in a positionto answer questions and educate theowners on the legal aspects of tran-sition. Once the owners other thanthe developer have taken over gov-ernance responsibilities, the associa-tion attorneys obligation is to guidethe board through the process of pre-serving and protecting the legal rightsof the association and its members.As part of the boards fiduciary dutyto maintain, repair, and replace com-mon property, the board should ar-range for a professional inspection ofany property for which it is responsi-ble.

3 PROFESSIONALARCHITECT OR

ENGINEER

A report from a professional architector engineer will bring to light any con-struction issues. In addition, it canserve as a basis for short and long-term planning for the maintenance ofcommon property and the establish-ment and funding of reserve accounts.

The association attorney should beinvolved in reviewing and negotiatingthe contract, in reviewing the reportwith the architect or engineer, andin addressing the issues raised withthe developer. The professional com-munity association manager can as-sist in the evaluation process, work-ing with the board and the associ-ation attorney to collect owner sur-veys and coordinate repairs and ac-cess to the common property for con-tractors if work has to be done. Inaddition, the board has a duty to pro-tect the common funds. It is appro-priate for the association attorney torecommend that the post-transitionboard engage the services of an ac-counting professional to review theassociations financial records. Somestate laws require a final report or anaudit to be produced by the devel-oper at the time of transition. Theremay also be working capital accountsand reserve account funding issues.The developer may owe assessmentsor other charges. Again, the attorneyshould review the contract as well asthe final financial report for the ac-counting professional.

4 HOW TO AVOIDOR MINIMIZETHE RISK OFLITIGATION

With the rapidly increasing popu-larity of community associations, acadre of specialists has evolved whoare available to help owner boardsnavigate the transition from devel-oper to owner control so as to prop-erly discharge their fiduciary duty

to their constituents. These profes-sionals include managers, attorneys,engineers, and accountants who areknowledgeable within their respectiveareas of expertise and can provideconstructive assistance in achieving asuccessful transition. Simultaneously,developers have become increasinglyaware of the potential for liability tocommunity associations for defects inthe common property and for finan-cial mismanagement. The more pro-gressive, therefore, have endeavoredto establish procedures of their ownto help effect a smooth transition toowner control and to minimize theirpotential liability. These include theengagement of independent counseland accountants for the associationat an early stage of transition. Justas importantly, professional manage-ment companies are often retainedby developers at the outset to man-age association affairs and maintainthe common property. Some of thesemanagement companies are indepen-dent, while others are affiliated withthe developers. Affiliated manage-ment firms are not as effective a shieldagainst liability, because they can beheld liable for the improper dischargeof their duties. However, regardless ofwhether the management company isindependent, the developer is still ex-posed to claims for improper mainte-nance and administration of the as-sociation during the period of de-veloper control. Nevertheless, prac-tices such as these can be most ef-fective to foster a level of confidenceand trust among owners that oftenis non-existent when the developer-controlled board does not try to es-tablish the association as a discreteentity that functions independentlyof the developer and its consultants.

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Perhaps the two key principles tobe observed by both developers andowners in attempting to effect a suc-cessful transition are to communi-cate effectively with the other sideand to avoid litigation except as alast resort. In the first instance,this means that, beginning with thedate of the first closing, the developershould understand and assume theinitiative to educate the owners aboutthe role and operation of the asso-ciation. Further, the owners shouldbe involved as soon as possible in as-sociation activities through commit-tee operations, newsletters, public fo-rums, and other appropriate means.The lines of communication must bekept open at all times between thedeveloper and the owner leadership,especially during the critical stagesof transition negotiations. Far toooften, one or both sides communi-cate solely through their attorneys orother professional consultants, whichmay promote an adversarial relation-ship rather than one of mutual un-derstanding. With respect to theavoidance of litigation, it doesnt takemuch experience to understand thatin todays world of high legal fees,the cost of prosecuting or defendingpractically any relatively simple casebetween an association and a devel-oper will reach five figures for eachparty well before trial, if it is compli-cated and vigorously contested, suchas a construction-defect case, a seven-figure fee for each sides attorney isnot uncommon. Expert fees alsosubstantially increase the total costsfor all parties. Clearly this moneywould normally be much better spentby both sides to help remedy anyreal problems that exist with respectto the physical property maintained

by the association, or to fund fu-ture reserves, rather than in pursu-ing expensive lawsuits with uncer-tain results over an extended periodof time. Therefore, litigation shouldbe a last resort only after there hasbeen a total breakdown in construc-tive communication. Even then, af-ter the issue is joined, the parties andtheir attorneys should continue to re-establish a positive dialogue and at-tempt to settle the material claimsas early as possible in the litigationprocess. However, it must be recog-nized that, as a practical matter, se-rious settlement negotiations in stan-dard construction claims cannot takeplace without an exchange of expertreports. Therefore, the sooner thesereports are obtained, the greater thepotential for an earlier settlement.Moreover, it is important for the as-sociation board to completely weighboth the merits of its claims and theeconomics of litigation before autho-rizing litigation, even though it maybe recommended by its attorney, whomay not be totally objective.

A The Selection of In-dependent Counsel forthe Association

A delicate issue that faces every de-veloper and its attorney during thetransition process is the selection ofan independent attorney. Both thedeveloper board members and thedevelopers counsel have an inherentconflict of interest when and if theymust address matters bearing on therelationship between the developerand the association, such as warrantyand construction defect issues. How-ever, there are different constraints

on their respective roles. Developerboard members have a fiduciary dutyto the members of the association toexercise a prudent business judgmenton behalf of the association notwith-standing such conflict. In practice,however, it is more likely that (1)the developer-controlled board takesno action at all that would be ad-verse to the developer, (2) the de-veloper representatives abstain whensuch an issue arises, or (3) the rightsand claims of the association againstthe developer are preserved for therecord in the minutes of the associ-ation. On the other hand, counsel forthe developer has ethical constraintsagainst acting on behalf of the associ-ation in any matter where its interestsare adverse to the developer. Theseconflicts may appear with increasingfrequency as the association maturesand more owners move in. It is a seri-ous mistake for the developers coun-sel to represent the association in anycapacity at any time, because in anysubsequent litigation between the as-sociation and the developer there isa very real risk that the developersattorney would be disqualified fromrepresenting either side. Accordingly,it is recommended that the develop-ers attorney never represent the asso-ciation and that he limit his advice tomatters dealing with the administra-tion of the association. In addition,all legal fees for work on association-related matters should be billed di-rectly to the developer, who may, butprobably should not, seek reimburse-ment from the association. Further,the developers attorney should statein writing to the association that herepresents the developer only, not theassociation.

This inherent conflict dictates

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that the association obtain indepen-dent counsel as soon as possible- notwithstanding the reluctance ofmost developers to introduce a poten-tial adversary into the scenario, espe-cially as the developer will be respon-sible for a significant portion of thefees unless a transition fund has beenestablished to cover this expense withcontributions from each purchaser atclosing. There are two ways to solvethis problem. The first and mostcommon is to select independent gen-eral counsel for the association; theother, less frequent method is to re-tain ad hoc special counsel as conflictsarise between the developer and theassociation. Although the latter ap-proach may initially seem less threat-ening and more economical to the de-veloper, it is not necessarily either.Generally, selecting an independentgeneral counsel for the association isthe preferred method of dealing withconflicts. Most owner board memberswill begin to lobby for an indepen-dent association attorney soon afterthe first transition election, particu-larly if the developer-controlled boardis not responding properly to ownergrievances or is not managing the as-sociation properly. Sometimes politi-cal reasons alone will fuel the pressureto have separate counsel for the asso-ciation. Often, however, because thedeveloper has a propensity to resistthis idea for the reasons previouslystated, either no independent coun-sel will be retained during the periodof developer control, or, if an inde-pendent attorney is retained, it tendsto occur much closer to surrender ofcontrol to the owners. The postpone-ment of the selection of independentcounsel is not necessarily in the bestinterest of the developer. Indepen-

dent counsel presence can help in-crease the comfort level of owners andhelp build and maintain communica-tion bridges with the developer, espe-cially if the attorneys approach is con-ciliatory rather than adversarial. Asfor the method of selecting an associ-ation attorney during developer con-trol, perhaps the best way is to let theowner members of the board choosefrom a list of qualified attorneys iden-tified by the developer or the manag-ing agent. The developer should ap-prove the attorney selected, for if heis not acceptable to the developer ornot qualified, his selection may not bea constructive step for the associationand will certainly impede the transi-tion process. Similarly, if the devel-oper selects the attorney without in-volving or getting the approval of theowner representatives on the board, itis often counterproductive because ofthe stigma attached to the attorneyand the resulting negative impact onhis credibility.

B Engineering Reportsand Punch Lists

In recent years it has been a com-mon practice for the initial owner-controlled boards of community asso-ciations to commission an engineer-ing inspection of the property, whichthe association is obligated to main-tain in order to fulfill the boards fidu-ciary duty to the owners. If an asso-ciation elects to avail itself of the en-tire scope of services recommended,the resultant reports generally haveseveral distinct components. Theseinclude (1) a description of the con-dition of the physical property, (2)a capital reserve study, (3) a recom-mended maintenance schedule, and

(4) a comparison of the actual con-struction with the approved plansand applicable codes. In reality, onlythe first three elements are necessaryto discharge the boards fiduciary re-sponsibility to maintain the property;the plan and code comparison focusesmostly on the possibility of potentialclaims against the developer. Never-theless, most reports are all-inclusive.It is important that a new owner-controlled board understands the rel-evance of the engineering report tothe transition process and particu-larly to the responsibility of the de-veloper. Far too often this report isviewed and utilized indiscriminately,impeding transition negotiations withrespect to the developers constructionand warranty responsibilities. Prob-lems commonly arise as follows: Thephysical condition of the property.First, it is recommended that a de-scription of the physical condition ofthe property focus on the major itemsand not list every minor defect to befound. However, the latter approachis understandable given the engineersconcern about liability for oversight.Frequently, the engineer or the asso-ciations attorney does not take thetime to edit the initial report in or-der to distinguish between significantand minor problems. As a result,when the developer and its attorneyare presented with the report, theminor problems (such as birds nestsin the gutters and minor cracking inthe concrete) obscure the essential ar-eas to be addressed, and the credibil-ity and good faith of the associationare impugned. There is a school ofthought that the parties should spendtheir time and effort negotiating awaythe smaller items before addressingthe ones that count. Sounder prin-

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ciples of negotiation, however, sug-gest that if the more important issuesare addressed at the outset, there is agreater chance for a successful resolu-tion of all the problems. Otherwise,there is a very real risk that the ne-gotiations will flounder or the partieswill polarize over the details of thelesser matters, and the problems thattruly count will never be addressed.Accordingly, it is recommended thatthe association or its consultants givepriority to the major physical defectsincluded in the engineers report, sep-arating them from the minor ones inan independent portion or summaryof the report as well as during nego-tiations.

Failure of the engineering re-port to discern between constructiondefects and the lack of proper main-tenance is a related problem. A de-veloper generally has warranty re-sponsibility for the former, but itdoes not necessarily follow that adeveloper-controlled board is liablefor maintenance problems. This isespecially true in associations wherean independent management com-pany is responsible for the physi-cal maintenance and where minorityowner board members have partici-pated in the selection of the com-pany or have not objected to its per-formance during the period of devel-oper control. Further, if the main-tenance of the project was deficientduring this time, it does not logicallyfollow that the developer or its ap-pointed board members should bearthe entire financial burden of rem-edying the maintenance deficiencies.If this were the case, then the de-veloper would have a similar claimagainst the owner board members in-dividually for the cost of remedying

any maintenance deficiencies that oc-curred after the owners assumed con-trol, which is certainly not the case.The foregoing discussion is not in-tended to suggest that maintenancedeficiencies should not be identifiedin the engineering report. Obviouslythey must be addressed by the owner-controlled board in light of the engi-neers recommendation and the pro-posed schedule of maintenance. But,unless the maintenance deficienciesare clearly separated from construc-tion defects in the report and theresulting transition negotiations, thelikelihood for a breakdown or failurein the settlement discussions is signif-icantly heightened.

C Reserve study

The reserve study is another compo-nent of the engineering report thatis frequently misconstrued. Unin-formed, owner-controlled boards anddevelopers are often led to believethat the developer is liable when-ever the reserve study prepared bythe associations engineer shows that agreater amount should be set aside forcapital repair and replacement thanthe amount originally included inthe reserve component of the budgetthat was incorporated in the public-offering statement. This is not neces-sarily the case.

D Comparison of con-struction with applica-ble plans and codes.

With respect to the comparison be-tween the actual construction and theapproved plans, specifications, andrelevant codes, there are several prob-lem areas. One is the expectation

that is created among owners thatthere should be monetary compensa-tion or that the construction shouldbe brought into conformance withthe approved documents or applica-ble codes regardless of the natureof the discrepancy. This reaction isunderstandable, but it fails to takeinto consideration factors such as fieldchanges necessitated by unexpectedconditions during construction, anyapprovals by governmental inspectorsand agencies of such changes, alter-native methods of compliance withcodes, if any, and, finally, the impactof such variations on the durabilityand usefulness of the project improve-ments at issue. Clearly, where thereis a serious health or safety prob-lem, or a substantial economic issuesuch as significantly higher mainte-nance costs, the association shouldseek to hold the developer account-able. However, far too frequentlyowner-controlled associations assertthat they are entitled to redress forevery such discrepancy and run therisk of impeding an effective dialoguewith the developer regarding the ma-jor problems. For instance, doesit really matter if the landscapingis in a different location or if thespecies vary from the approved planif the maintenance costs and aesthet-ics are generally comparable? The fo-cus should be on items that count,such as fire-safety measures, struc-tural soundness, and so forth.

E Punch lists

Finally, a related topic is the use ofpunch lists, of which there are twogeneral types. The first is a list in ab-breviated form of all of the defects setforth in the engineers report. Com-

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monly this is prepared by the owner-controlled boards or the developersengineer and is used as a tool to facili-tate dialogue between owners and thedeveloper. Although it has workedeffectively in many instances, such apunch list also can detract from thediscussion of any major problems thatmay exist. The other type of punchlist summarizes the results of a ques-tionnaire submitted to owners by theowner-controlled board or its engi-neer. This instrument solicits inputfrom owners as to any defects thatthey perceive to exist in the commonelements appurtenant to their home,and often goes so far as to solicit in-put about defects in their homes. Un-fortunately, this punch list does notand cannot take into account suchfactors as the difference between con-struction and maintenance defects,the lapse of war- anty periods, or themateriality of the defect. Therefore,although some engineers will defendsuch a document as necessary to iden-tify every problem in their exercise ofdue diligence, this type of question-naire can have a significant negativeeffect on transition negotiations if itis given to the developer without ap-propriate editing. More importantly,it frequently creates an expectationamong owners who expect that anyitems that they list ultimately willbe remedied by the developer or theassociation. When they are not, itis often much more difficult for anowner-controlled board to garner thesupport of its constituents. Accord-ingly, this type of punch list shouldbe used with caution and with ap-propriate admonitions to the ownersas to its purpose and relevance. Tosummarize, engineering reports andpunch lists commissioned by owner-

controlled boards should be used ju-diciously and their purpose and im-pact should be understood. To trans-mit engineering reports to a devel-oper in an unedited form and with-out having established priorities canimpede constructive dialogue. Also,it should be kept in mind that theengineer who writes the reports ul-timately may have to back them upwith testimony in court; therefore,the content of the reports and theengineers experience and record asan expert witness are very impor-tant. Above all, an owner-controlledboard should keep in mind that thebest engineering report is a clean en-gineering report. Accordingly, if theboard receives a good report from acompetent engineer, it should resistany suggestion to shop around for aless favorable report that could helpfuel questionable claims and litigationfrom which neither side usually ben-efits.

F Who Are the Parties?The Association

The association is governed by anelected board that represents the in-terests of its members. It is impor-tant to understand that transition isthe process of assuming responsibil-ity for the governance of the associ-ation and that it is not limited todealing with construction issues, asis oftentimes thought. Transition be-gins very early, with the establish-ment of the association as an entity,governed by representatives initiallyappointed by the builder. Home-owner members of the association be-come actively involved with the tran-sition process after the first electionmeeting, at which typically one or

two members of the association areelected to a board of directors. Fol-lowing the initial election, the home-owner members of the board begin tobecome familiar with the governingprocess as outlined in the documentsof the association. While at this stagethey typically represent a minority in-terest on the board, they nonethe-less are responsible as board mem-bers for conducting business on be-half of those they representthe home-owners. Their responsibility includeshiring professional advisors, biddingand awarding contracts for servicesprovided to the association, estab-lishing and enforcing rules and re-strictions as permitted by the gov-erning documents, and insuring theproper operation and administrationof the association. At this point inthe transition process, the associationbegins to take on a profile or person-ality, because rules and regulations,policies and procedures, and architec-tural control issues begin to evolvewith the input and influence of thehomeowner board members. Furtherinto the development process, typi-cally after 75 percent of the homesto be built have been conveyed tohomeowners, another election is held.Following this election, homeownerswill represent a majority interest onthe board, with the developer usu-ally maintaining a minority vote (orsometimes a non-voting seat on theboard). It is common at this pointfor the board to begin hiring a pro-fessional team to conduct the inves-tigations related to the boards duediligence. This team should includea manager, an independent account-ing firm, an attorney, and an engi-neer, all of whom will play a signif-icant role in the transition process.

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The focus of transition at this stage ismore specifically on what the builderhas provided. The boards responsi-bility to the association is to ensurethat the promises of the builder asoutlined in the public offering havebeen fulfilled. It is important atthis juncture to differentiate associ-ation issues from homeowner issues.The board will commonly receive in-put from homeowners concerning is-sues related to their individual unitsrather than the common elements.Individual homeowner issues must behandled directly by the homeownersthemselves, in conjunction with war-ranties that have been provided. Theboard should focus on what is com-monly owned by all homeowners- thecommon elements as defined in themaster deed or declarations. The bestpractice is to retain a manager firstbecause the manager will coordinatethe efforts of the other professionals.The manager also can be expected tohave valuable input regarding otherlocal professionals that might be mosteffective in the specific circumstanceof the association. When consideringprofessional management, the boardwill want to consider the incumbentmanager hired by the developer or al-ternative managers in the area. Theadvantage of retaining the incumbentlies to a large degree in the base ofknowledge this manager has regard-ing issues that have been identifiedsince the beginning of the managerstenure. The downside of retainingthe incumbent rests primarily in theperception that he was hired by thebuilder and may harbor a continu-ing affiliation that could cause a con-flict of interest. This issue shouldbe examined carefully, inasmuch asit is often a perception as opposed

to a reality. Other professionals thatshould be considered at this pointinclude an independent accountant,an engineer, and an attorney. Onceall of the professionals have been re-tained, the board might appoint asubcommittee of two or three individ-uals to deal directly with the managerand other professionals on transition-related matters. If a subcommitteeis appointed, it should have an estab-lished structure for regularly report-ing back to the board regarding itsprogress. Once a refined set of reportsis established, the full board shouldreview and approve them and sub-mit them to the developer for com-ment. From this point forward, thefull board should maintain close com-munication and monitoring of the ne-gotiation process (assuming that is-sues for developer action have beenidentified), utilizing its subcommitteeand professional advisers to conductthe actual discussions. Once all par-ties are in agreement as to the res-olution of any identified issues, thefull board should accept the resolu-tion and execute any necessary docu-ments as provided by legal counsel.

The primary role of theboard, therefore, can be summa-rized as one of reviewing information,directing professional advisers, andmaking decisions regarding the tran-sition process. These decisions relatenot only to construction and account-ing matters, but to governance, ad-ministrative, and operational issuesas well.

G The Approving Au-thorities

At the time that a project is con-ceived and permitted, there is no

owners agent representing the inter-est of the future association. So, tosome degree, the approving author-ities provide some oversight. Thedeveloper appears before various lo-cal, state, and central agencies to se-cure the necessary approvals for thedesign, specifications, and construc-tion practices for the project. Theseagencies are charged with protect-ing the public interest, which mayor may not coincide with the futureowners interests. Generally speak-ing, a public agency enforces stan-dard codes and specific regulations ofthe state or local government. Thesestandards protect the health and wel-fare of the community and assurea minimum level of structural in-tegrity. By enforcing these stan-dards, the approving agency is pro-viding minimal representation for theowners interest. The project approvalprocess may also include negotiatedstandards. These standards are nothard and fast; rather they may pro-vide certain concessions or induce-ments for the developer to proceedas an essential community develop-ment project. For example, the mu-nicipality might grant a developer alower specification for road construc-tion, trash storage space, or buriedutilities, because they are privatelyowned on the project site. In re-turn, the developer might agree toreceiving reduced municipal services.The outcome of these negotiations,while favorable to the approving au-thority and the developer, often isnot in the best interest of the futureowners. For example, future own-ers may bear an undue municipal-taxburden for a lower level of public ser-vices, or be prohibited from negoti-ating public assistance for repair of

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roads that have become public thor-oughfares. During the constructionphase, agents of the approving au-thority charged with the enforcementof codes and standards make peri-odic inspections of the property tomake sure that the project is proceed-ing in accordance with standards, de-signs, and specifications. Ultimately,the approving authority will issuea certificate of occupancy based onthese periodic and final inspections.Critical parts of the inspection in-clude, but are not limited to, plumb-ing, electrical, fire-safety, and energycodes. While code-enforcement in-spections can assure that the projectmeets major standards (design ap-proval of the architects or engineersplans) and some smaller details (po-larity of outlets) they may miss sub-stantial defects (for example, substi-tuted water-service fittings that cor-rode more rapidly or obstructed eaveventilation that leads to ice dams).

In some jurisdictions, munici-pal leaders have adopted enabling leg-islation for planned urban develop-ments. In some cases, the municipal-ity has the power to grant approving-authority status to the developer.The developer then will oversee thebuilders compliance with codes and,with the municipality, issues certifi-cates of occupancy. During transitionand discussion of construction de-fects, the approving authority can beinvolved as a disinterested party. Thecertificate of occupancy is an impor-tant document. On occasion, own-ers allege that the approving author-ity and its agent, the code- enforce-ment officer or inspector, is negligentfor accidentally or willfully overlook-ing code violations during construc-tion inspections. In the final analysis,

the approving authorities have twosubstantial effects on the outcome oftransition and the communitys futurewell-being. First, through negotiatedagreements and concessions, they setthe stage for conditions that futureowners might consider project short-comings and defects. Second, diligentcode enforcement brings a consider-able amount of information to thetransition discussion, and has the po-tential to detect and eliminate faultsduring construction.

5 A COMPREHEN-SIVERISK-

MANAGEMENT

PROGRAM

A comprehensive risk-managementprogram such as this would take placeat the completion of the architec-tural and engineering drawings, andcontinues through the completion ofconstruction, when the owners takecontrol of the association. It wouldinclude: 1) A review of the designdrawings to confirm coordination be-tween the architectural and engineer-ing designs at the interface points be-tween the two. A typical exampleis the discharge of the roof drains(downspouts), which are shown onthe architectural drawings, and thesite grading and drainage, which areshown on the engineering plans. 2) Areview of the description of the com-munity included within the govern-ing documents for conformance to theactual final design shown on the ar-chitectural and engineering drawings.3) A review of the budget included

within the governing documents toconfirm that the reserve study accu-rately represents the materials andquantities shown on the design draw-ings, and that the cost of mainte-nance for the common and limitedcommon elements is also accuratelyreflected. 4) A review of the as-builtconstruction as it is taking place toconfirm that it is in general confor-mance with the design documents.In some cases, punch lists are alsodeveloped at this time to be givento the subcontractors for repair be-fore they leave the site. 5) A reviewof the final as-built construction im-mediately prior to the owners takingcontrol, so the potential for extensivetransition report punch lists are min-imized. Although the approaches arevaried, they all share the goal of en-suring that owners participate in thedecision process, rather than havingit made behind closed doors by theboard and the associations attorney.

6 SAMPLE LIST OFDOCUMENTS TO

BE TURNEDOVER

1. Declarant should deliver thesedocumentssome are mandatedby state law:

2. Certified copy of the declara-tion, as amended, and all sup-plements

3. Associations corporate recordsand rules and regulations

4. Associations funds or control ofthose funds

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5. All personal property of the as-sociation

6. Copies of the plans/specificationsused in the construction of thecommon elements

7. All insurance policies and war-ranties in effect

8. Copies of all certificates of oc-cupancy issued for common el-ements

9. All other governmental permits

10. Warranties in effect

11. A roster of names, addressesand phone numbers of owners.

12. Employment and service con-tracts

13. Documentation supporting allmeetings

14. Documentation regardingcovenant enforcement and de-sign review

15. Resignations of declarant mem-bers of executive board and of-ficers

16. Certificate of good standingfrom the secretary of state

17. Signature cards and bankingresolutions for money accounts

18. Prior years and current budgets

19. All state and central income taxreturns

20. Tax identification numbers

21. Information regarding all ser-vice suppliers

22. Documentation regarding allliens and claims of the associ-ation

7 WHAT THEBOARD SHOULD

DO

1. Physical and common elementsaudit

2. Determine the condition of thecommon elements and otherphysical portions of the com-munity through appropriate en-gineering or contractor inspec-tions

3. Confirm with legal counsel thatassociation owns all common el-ements

4. Compete new or review existingreserve study

5. Take a hard look at assessmentsand budgets are they suffi-cient?

6. Organizational audit

7. Corporate audit for association

8. Governing document reviewwillthese work for the association?

9. Covenant enforcement audit forissues of breach of covenants,design review, consistency inenforcement, status of claims,possible waiver issues

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8 APPENDIX A : SAMPLE COMMON FACLITIES TRANSITIONAGREEMENT AND RELEASE

A Agreement & Release

THIS AGREEMENT made by and between the - Condominium Association, Inc., a [State]Corporation, with offices at - - , (hereafter, the Association) andat - a [State] Corporation, with offices at -.

WHEREAS,-is the developer of a Common Interest Development community located in the, , State, known as (hereafter, the CID); and WHEREAS, the Associationis responsible for, and maintains the common elements and property of the CID and represents the concerns ofindividual unit owners of the CID with respect to such common elements; and

WHEREAS, various disputes have arisen between and the Association concerning certainrepairs to and conditions of said common elements of the CID; and WHEREAS, representatives of the Associationand - have met on numerous occasions to discuss resolution of disputed issues between the Associationand - arising out of the development of the CID; and WHEREAS, the Association received anddelivered to engineering reports prepared by - dated - (the Engineers Reports);and WHEREAS, numerous letters and supplemental reports have been delivered by both - andthe Association; and

WHEREAS, subsequent to the issuance of the Engineers Reports, and the Association conductedwalkthroughs of the CID in an effort to narrow and resolve the outstanding issues between them; and WHEREAS,the Association and desire to resolve this matter and mutually release each other from any and allclaims regarding the repair or construction of the Condominium, provided, however, all conditions enumerated beloware complied with;

NOW, THEREFORE, in consideration of the mutual promises contained herein, andthe Association agree as follows:

1.agrees to perform all work more particularly described in Exhibit A, attached hereto andincorporated herein. This work shall be completed within the time frames more specifically set forth in Paragraph 5.

2.agrees to make a one-time contribution of $ to the Association. This settlementamount will be paid within 30 days from the date this Agreement is signed.

3. Release:The Association hereby absolutely releases and discharges -, and any of subsidiaries,

subcontractors, affiliates, agents and related entities and any and all past and present officers, directors, shareholders,agents, sub- contractors, or employees of any said entities, including but not limit - any of the , any subsidiary of any of the foregoing entities and any and all former members of the board of directorsof the Association (Board) heretofore designated by -or otherwise selected to serve on the Board onbehalf of in their individual capacities (all such related entities and persons shallhereafter collectively be referred to as the ) from and against any and all liabilities, damages, promises,covenants, agreements, causes of action, judgments, claims, or determinations in law or in equity or any costs orexpenses including but not limited to attorneys fees, arising from or in connection with any and all claims which theAssociation, and its members (as claims of such members relate to the common ele- ments themselves and not toclaims arising from the Purchase Agreement or the indi- vidual unit) shall or may have against and/or, and particularly any and all claims arising out of or asserted, whether, or not involving actions takenor not by - and/or the , in connection with (i) the approval and creation of the CID, (ii)the prepa- ration, approval and satisfaction of the documents required for its creation, includ- ing but not limited to

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any Public Offering Statements filed in [State], any amend- ments thereto, the plans and/or specifications referredto therein or related to the CID and the land use documents, (iii) the construction, repair and mainte- nance ofthe CID, (iv) the management of the Association monies including any reserve funds, and (v) any other matter forwhich - and/or the - might be responsible in connection with the Condominiumincluding but not limited to:

(A) Any and all defects in the CID whether latent or patent, and whether now existing or hereafter arisingor discovered, including any deviation from applicable building codes;

(B) Any deviations between the plans and specifications referred to in the Public Offering Statement, amend-ments thereto and exhibits thereto, or on file with any governmental agency, and the CID as actually constructed;

(C) Any deviations between the plans, including site plans and amendments thereto, for the Condominiumreferred to in documents filed with any applicable planning board or board of adjustment or on file with any buildingdepartment, building official or any other governmental agency including but not limited to, use or bulk variances,parking requirements, construction plans, etc.

(D) Any and all claims asserted or arising out of or in connection with any matters set forth in any reportsprepared by or any representatives or employees of that firm, any documents referred to in thosereports, and/or any other engineers or consultants engaged by the Association.

(E) Any and all warranties, whether express or implied, including but not limited to any warranties under the[State]statutes. Notwithstanding the above, to the extent that the 10-year warranty as to major structural defectsprovided by a third party insurer has not yet expired, same shall be unaffected by this release, but only as to therights against such insurer.

(F) The turnover of documents pursuant to the [applicable state statute].4. Simultaneous with the signing of this Agreement, the Association shall also adopt a resolution (attached

as Exhibit B) by which the Board of Trustees authorizes the execution of this Agreement and Release, and ratifiesthe settlement of this matter.

5. Subject to weather conditions and the availability of materials, - will commence all repairs,replacements or improvements as specified above within 30 days of the execution of this Agreement. Within 180days of signing this Agreement, Developer will complete all repairs, replacements or improvements as specified above,unless, by its terms, such repairs or improvements are not to be made or completed until some time later.

6. shall provide the Association with an express warranty for a period of twelve (12) monthsas to the quality of workmanship and materials for the work set forth in Exhibit A. This warranty shall commenceupon written notification from that the work is complete. Developer is not providing any impliedwarranties to the Association. The Association shall have one (1) year from the expiration of the aforesaid warrantyto commence an arbitration or civil action against Developer, or forever release - from any such claimspursuant to the warranty.

7. It is the intent of the Agreement and Release that both parties waive and relin- quish their claimsconcerning any and all defects or deficiencies, alleged or real, reported or not, discovered or not, except as providedin the ten (10) year warranty as to major structural repairs as set forth in Paragraph 3(E).

8. Should any work or matter set forth in this Agreement in an amount not to exceed Rs Fifty Thousand,not be completed or resolved to the mutual satisfaction of - and the Association, such dispute shall beresolved by binding arbitration in accordance with the rules of the Indian Arbitration Association with an arbitratoras to responsibility, methods and cost allocation. Such ruling shall be binding upon both parties and may be reducedto judgment. Any dispute concerning an amount in excess of Rs Fifty Thousand may only be arbitrated upon themutual written agreement of the parties.

9. Upon completion of all work as set forth in this Agreement, - and the Association shall haveno further responsibility to each other with regard to the development and creation of the CID Community, exceptas provided in the ten (10) year warranty as to major structural repairs as set forth in Paragraph 3(E).

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10. The Association shall use its best efforts to assist in securing a final release of the bondsposted with the municipality for public improve- ments as set forth in connection with all approved site plans. Uponcompletion and acceptance by Associations engineer of the work under this Agreement, the Association agrees notto assert any objections to the release of the bonds by the municipality.

11. This Agreement and the Exhibits attached hereto shall not constitute an admis- sion of liability or serveas evidence of liability on the part of and/or any related entities.

12. The Association accepts the promises and covenants set forth in the Agreement in full satisfaction anddischarge of all rights and/or claims now and forever due and owing.

13. This Agreement shall be binding upon all successor Boards of Trustees for the Association, its successorsand/or assigns.

14. This Agreement including the Exhibits attached hereto contains the entire agreement between theparties as to the settlement of their disputes and no amendment, modification or addendum to this Agreement shallbe effective unless in writing dated subsequent to the date hereof and executed by the duly authorized officers ofthe respective parties. The requirement for such a writing shall apply to any waiver of the requirement of a writtenmodification pursuant to this Paragraph and shall be deemed an essential term of the Agreement.

IN WITNESS WHEREOF, the parties have set their hands and seals this day of , 20.ATTEST: HOme Owners ASSOCIATION. - by:-Secretary PresidentATTEST: - by:-Secretary

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LEGAL STANDING Liability of Community AssociationsStanding of a Community Association to Maintain an Action for Construction Defects Against the DeveloperStanding of Individual Unit Owners to Maintain Action for Construction Defects Against the DeveloperClass Actions

Necessity of Competent Legal CounselStep 1: Communication.Step 2: Gradual Evolution of Self-Government.

Professional architect or engineerHow to Avoid or Minimize the Risk of LitigationThe Selection of Independent Counsel for the AssociationEngineering Reports and Punch ListsReserve studyComparison of construction with applicable plans and codes.Punch listsWho Are the Parties? The AssociationThe Approving Authorities

A comprehensive risk-management programSample List of Documents to be Turned OverWhat the board should doAppendix A : Sample Common Faclities Transition Agreement and ReleaseAgreement & Release