2007 Issue 5

TACTICS AND STRATEGIES
FOR ASSOciATIONS DURING TRANSITION

by Steven G. Berg, Esq.

 WHAT THE DEVELOPER MUST TURN OVER

Section 47-245 of the Connecticut General Statutes requires the declarant (developer) of a condominium to deliver the following and documents and records at the time the unit owners take over control of the association:

                        a.         The original or a certified copy of the recorded declaration as amended; the association articles of incorporation, if the association is incorporated; bylaws; minute books and other books and records of the association; and any rules and regulations which may have been promulgated;

                        b.         An accounting for association funds and financial statements, from the date the association received funds and ending on the date the period of declarant control ended. The financial statements shall be audited by an independent certified public accountant and shall be accompanied by the account’s letter, expressing either (A) the opinion that the financial statements present fairly the financial position of the association in conformity with generally accepted accounting principles of (B) a disclaimer of the accountant’s ability to attest to the fairness of the presentation of the financial information in conformity with generally accepted accounting principles, and the reasons therefor.  The expense of the audit shall not be paid for or charged to the association;

                        c.         Association funds or control thereof [including the two months of common charges collected from each unit owner at closing];

                        d.         All of Declarant’s tangible personal property that has been represented by the declarant to be the property of the association or, unless the declarant has disclosed in the public offering statement that all such personal property used in the common interest community will remain the Declarant’s property, all of the Declarant’ tangible personal property that is necessary for, and has been used exclusively in, the operation and enjoyment of the common elements, and inventories of these properties;

                        e.         A copy of any plans and specifications used in the construction of the improvements in the common interest community which were completed within two years before the declaration was recorded;

                        f.          All insurance policies then in force, in which the unit owners, the association, or its directors and officers are named as insured persons;

                        g.         Copies of any certificates of occupancy that may have been issued with respect to any improvements comprising the common interest community;

                        h.         Any other permits issued by governmental bodies applicable to the common interest community and which are currently in force or which were issued within one year prior to the date on which unit owners other than the declarant took control of the association;

                        i.          Written warranties of the contractor, subcontractors, suppliers and manufacturers that are still effective;

                        j.          A roster of unit owners and mortgagees and their addresses and telephone numbers, if known, as shown on the declarant’s records;

                        k.         Employment contracts in which the association is a contracting party; and,

                        l.          Any service contract in which the association is a contracting party or in which the association or the unit owners have any obligation to pay a fee to the persons performing the services.

GETTING COMPLIANCE

The statutory rules for transition of associations from declarant control tend to be observed in the breach, which is to say that it is rare for developers to do what they are supposed to do when they are supposed to do it.  If the declarant fails to hold a meeting to allow unit owners to elect their own Board of Directors, it may be necessary to bring a petition to the Superior Court for an order directing a meeting of unit owners be held.

If the developer fails to turn over the records required under the statute, the association may have to bring an action seeking a court order requiring that the records be produced and delivered to the association.  Even if the declarant’s company is no longer actively doing business, the principals of the company are likely to have the records.  On occasion, I have sought a court order against the developer’s principals requiring them to give up the documents.

WHAT TO LOOK FOR IN THE AUDIT

One of the most important documents which the developer is required to turn over to the association is an audit of the association finances during the period of declarant control. From the time the declarant sells the first unit to the point at which the developer reaches the point of selling sixty per cent of the units, the declarant is in control of the association’s funds. Moreover, until thirty percent of the units have been sold, Unit Owners are not entitled to any representation if on the Board of Directors.  So the members of the Board of Directors appointed by the developer decide how the monies collected from common charges are spent.

A close review of the audit can reveal a variety of improprieties.  I’ve seen the developers pay their phone bills, secretaries salaries and other development related expenses out of the association’s pocket instead of the developer’s funds. Other methods of misappropriating funds are more subtle.  For example, it is appropriate for the developer to pay routine maintenance and repairs of the common elements out of the association’s funds.  So the cost of plowing the parking lot, having the grass and changing light bulbs are clearly expenses which should be borne by the association.  However, if an exterior lighting fixture, for example,  proves to be defective in the first year of service, the cost of replacing it is not the association’s responsibility.  That component is still covered by the statutory warranty.  The developer should be paying the replacement cost out of his own pocket.  The same is true of fixing pot holes in the pavement, leaks in the common element plumbing, etc.  When the developer has possession of the association funds, that’s the checkbook he reaches for when it comes to pay bills. Rarely does the developer reach for his own wallet.

Another thing a developer frequently forgets to do is pay common charges on declared units. Without getting into a technical discussion about the manner in which condominium units are legally created, suffice it to say that units come into legal existence at the moment the declarant files a declaration or an amendment to the declaration one method to determine whether the developer has paid common charges as were due is to compare the audit against the recorded declaration and amendments.  If for example, on January 1, 2007 had declared thirty units, the audit should show that the association was receiving common charges on thirty units.  If fifteen of the thirty units had been sold, then the developer should be paying common charges on fifteen units and the owners who purchased the units should, collectively, be paying the common charges on the other fifteen units.

Once the unit is declared, the developer has to start paying common charges on it.  This is true whether or not the unit is habitable and the municipality has issued a certificate of occupancy for it.  Developers always seem to overlook this inconvenient truth.  They don’t pay any common charges to the association while units are sitting on the market waiting to be sold.  As a result, the association may be deprived of a significant amount of income.

WHO CAN YOU SUE?

Under the Connecticut Common Interest Ownership Act, the association has the right to sue the declarant under the express and implied warranties.  However, as a practical matter, developers usually do business through a limited liability company (LLC) or some other form of entity.  When all of the units are sold, the profit is distributed and the declarant entity is either dissolved or it becomes an inactive shell without any assets.

If the association acts quickly, it may be possible to obtain a lien on units which the declarant has not yet sold.  However, in most cases, by the time the unit owners have an opportunity to elect a Board of Directors, and the Board become aware of claims the association may have against the declarant, the entity which the developer used to create the common interest community is defunct.

The association may have the right to sue other parties. Under CIOA, the members of the Board of Directors who are appointed by the declarant have a fiduciary duty to the association.  In many instances, the directors appointed by the declarant are principals in the declarant entity.  If those directors “forget” to collect common charges from themselves, the association may be able to sue those directors personally for breach of fiduciary duty.

Another possible avenue is to file suit against the general contractor and subcontractors who were hired by the developer to perform the construction work. For many years, the law did not permit an end user, such as an association, to sue the general contractor or the subcontractors who provided labor and materials to the project.  The rationale was that the association did not have privity - a direct legal relationship - with the developer’s contractors and suppliers.  And it is still not permissible to sue them for breach of contract.  However, it is possible for the association to sue for negligence.  In order to prevail in such an action, the association has to allege and prove that:

1. The defendant had a duty to perform work in accordance with the generally accepted standard of care;
2. That the defendant breached the standard of care;
3. That the plaintiff association was damaged; and,
4. That the defendant could have reasonably foreseen that the association, an end user, would be damaged.

It should be noted that, unlike the three year statute of limitations on the express and implied warranties under the Connecticut Common Interest Ownership Act, the statute of limitations for negligence actions is two years.

It is not always easy to identify the sub-contractors who did work for the developer. One source of information is municipal records.  The town building department will have documents which disclose when the application for building permit was filed and who obtained the permit records indicating when the building official inspected the site and what observations were made during the inspections.  The statutes pertaining to the issuance of building codes impose a legal duty upon the party who obtained the permit. 

In cases where the developer has engaged in unfair and deceptive practices, the association may have a cause of action under the Connecticut Unfair Trade Practices Act (CUTPA), and the court may award punitive damages and attorneys fees.

It is not possible, in the scope of such a brief article, to discuss all of the legal remedies available to an association during and after transition.  The guiding principles for a new Board of Directors should be:

1. Engage your own attorney, accountant and engineer promptly;
2. Do your due diligence investigation as soon as possible; and,
3. Explore legal theories and remedies aside from those expressly laid out in CIOA.

Steven Berg is an attorney who represents condominium associations throughout central and western Connecticut. He maintains offices in Norwalk, Bridgeport and Newtown.