Nicholas D,. Cowie

DEVELOPER TRANSITION MARYLAND CONDOMINIUMS Transition of Association Governance from Developer to Unit Owner Control INTRODUCTION “Developer transition,” the process by which the governance of a condominium association is transferred from developer to unit owner control. This article provides a brief overview of the legal requirements that govern the developer transition process for Maryland condominiums. This article also as well as a “transition checklist” for transitioning unit owner-controlled boards of directors. PERIOD OF DEVELOPER CONTROL A developer initially controls an association because it owns all unsold units or lots in the newly created community. As such, the developer has the controlling votes associated with majority ownership and can appoint its own employees as the initial members of the board of directors and thereby control how the condominium association conducts its affairs. This is referred to as the “period of developer control,” during which the developer makes all decisions on behalf of the association. The developer also creates an association’s governing documents, allowing it to dictate, subject to applicable law, the procedures and time periods under which control over the association’s board of directors will eventually be transferred to the homeowners. THE TRANSITION MEETING The period of developer control continues until a “transition meeting” is held to elect members of the board of directors from amongst the condominium unit owners. The transition meeting must be held within 60 days after the date that units representing 50 percent of the votes in the condominium have been conveyed by the developer to the purchasing unit owners. Maryland Condominium Act (“ MD Condo Act”) §11-109(c)(16)(i)1. The transition meeting can be held earlier if the developer specifies a lesser percentage of conveyances in the governing documents as a trigger for the 60 day period to commence. MD Condo Act §11-109(c)(16)(i)2. OVERLAPPING TERMS OF DEVELOPER-APPOINTED BOARD MEMBERS The terms of board members appointed by the developer during the period of developer control must end 10 days after a replacement board member is elected at the transition meeting. MD Condo Act §11-109(c)(16)(iii). This law is designed to prevent overlapping terms of developer-appointed and unit owner-elected condominium board members. DOCUMENT/ASSET TURNOVER Within 30 days following the transition meeting, a Maryland condominium developer is required to turn over specified documents and assets to the unit owner-elected board of directors. MD Condo Act §11-109(c)(16)(iv). This includes financial records, contracts, architectural plans, condominium funds, owner records, etc. A complete list of these items is set forth as an Appendix to this article. TERMINATION OF CONTRACTS Following the transition meeting, the newly-elected, owner-controlled board of directors has a right, without liability, and upon 30 days prior notice, to terminate association contracts entered into during the period of developer control for the purpose of handling the condominium’s financial matters, maintenance, or other services for the community. Condo Act §11-109(c)(16)(v) and HOA Act §11B-106.1(e). The association’s right to terminate, however, does not apply to contracts for the “the provision of utility services or communications systems.” Condo Act §11-109(c)(16)(v)2.B. TRANSITION CHECKLIST Below is a checklist of developer transition items to be addressed by the first unit owner-elected board of directors once it assumes control of the condominium association following the transition meeting. 1. Document/Asset Inventory & Request Conduct an inventory of association documents and assets. Make a formal written request of the developer to turn over all documents, funds and assets listed in Appendix A to the extent not already done so. These must be turned over within 30 days of the transition meeting. 2. Contract Review Review all contractual agreements entered into during the period of developer control to handle the association’s financial matters, maintenance, or other services. If there are any concerns, obtain competitive proposals from vendors and professionals for comparison purposes. Contracts that do not appear to be in the best interest of the condominium association can be terminated, without liability, upon 30 days in notice. 3. Audit Financial Records Have an independent auditor examine the association’s financial records during the period of developer control to ensure that all monies were properly collected, utilized and accounted for. An auditor can determine whether the correct amount of assessments were collected, whether the association’s reserve accounts were properly funded, or whether there was any inappropriate use of association funds to pay developer obligations. In some cases, an auditor may conclude that the developer owes the condominium association a substantial amount of money. 4. Transition and Reserve Studies Obtain transition and reserve studies in order to identify construction defects and determine whether the developer-created budget and reserve account are adequate to maintain, repair and replace the common areas of the community over time. For example, if a common element roof is found to be in need of immediate replacement because of construction defects, then a developer-created reserve budget based on a projected roof replacement in 30 years is grossly insufficient. The Transition Study: the purpose of a transition study (also referred to as a “deficiency report” or “warranty analysis”) is to evaluate construction of the common elements and common areas to identify construction deficiencies while warranties are still enforceable so they can be submitted to the developer for warranty repair. Timely transition studies are essential as part of the developer transition process because defects in newly constructed communities may not be apparent when unit owners first take control of the association. Defects in the original construction can remain hidden for years until they manifest themselves in the form of property damage. Left undiscovered and unrepaired, even minor construction deficiencies can result in extensive property damage requiring associations to borrow money and assess homeowners. Moreover, when defects are not identified in a timely manner, warranty rights may be barred by expiration of warranty periods or statute of limitations. Architectural and engineering firms can identify construction defects early on and investigate suspicious conditions before warranty rights expire so timely notice can be given to the developer. Once defects have been identified and corrected by the developer, the association can establish an accurate reserve budget. The Reserve Study: A reserve study does not seek to evaluate construction. Rather, its purpose is to determine the amount of annual assessments that should be placed into a reserve account to pay for future repair or replacement of the major community components for which the association is responsible, such as roofs, exterior walls, sidewalks, roadways, stormwater management ponds, clubhouses, etc. A normal useful life, or “life expectancy,” is assigned to each of these components (e.g., a 30-year club house roof), as well as an estimated cost to repair or replace those components at the end of their useful life. Based on these projections, a reserve analyst estimates the amount of money that the association should allocate to its reserve account each year so that the necessary funds will be available for future repairs and replacement. This type of planning avoids a one-time huge assessment for major repair/replacement projects. 5. Retain Legal Counsel General Counsel: Retain general counsel to work with the board members and the association’s management company to handle the wide variety of general legal issues that face Maryland condominiums and their associations, such as interpreting governing documents, preparing legal opinions, collecting delinquent assessments, reviewing and negotiating proposed contracts, dealing with threatened litigation, amending governing documents, and complying with applicable laws. Warranty/Construction Defect Legal Counsel: Request a free consultation from an attorney with expertise in condominium  association construction defect law. Such an attorney can advise the association when applicable warranties and other legal claims expire and how to preserve the association’s legal claims while negotiating proper repairs with the developer. Armed with such information, a transitioning association can make informed decisions. This legal consultation should be requested as soon as the newly elected board assumes control of the association to ensure that no warranty and other legal rights are allowed to expire. 6. Review Insurance Coverage Review association insurance coverage obtained during the period of developer control. Make sure coverage complies with governing documents, industry standards, and applicable laws (e.g., master policy, property insurance, comprehensive general liability insurance, fidelity insurance, directors and officers/errors and omissions policy). In the event of a lawsuit, having proper coverage will not only provide the association with a legal defense and pay any judgment, but can also provide immunity to members of the board of directors and officers as well as cap association liability to the amount of insurance coverage. 7. General Housekeeping Matters There are a number of housekeeping matters not covered by this checklist involving association governance and business that will need to be addressed by the first board to transition from developer control. An association’s property manager and/or its attorney typically guides the board in these matters. Some examples include: selecting officers (President, Vice President, Secretary and Treasurer); appointing committees (e.g., architectural review committee); scheduling meetings required by the governing documents (e.g., annual and regular meetings of association); defining maintenance obligations and establishing a maintenance schedule; amending developer-created governing documents and promulgating new rules and regulations based on the needs of the owner-controlled association, etc. APPENDIX  DEVELOPER TRANSITION DOCUMENTS & ASSETS TO BE TURNED OVER BY DEVELOPER Articles of incorporation, recorded declaration, and all recorded covenants, bylaws, plats, and restrictions of the condominium All books and records, including financial statements, minutes and completed business transactions Policies, rules, and regulations The financial records from the date of creation to the date of transfer of control, including budget information regarding estimated and actual expenditures by the condominium and any report relating to the reserves for repairs and replacement of common elements All contracts to which the condominium is a party The name, address, and telephone number of any contractor or subcontractor employed by the condominium Insurance policies in effect and all prior insurance policies Any permit or notice of code violation issued to the condominium by the county, local, State, or federal government Any warranty in effect Drawings, architectural plans, or other suitable documents setting forth the necessary information for location, maintenance, and repair of all condominium facilities Individual owner files and records, including assessment account records, correspondence, and notices of any violations A roster of current unit owners, including mailing addresses, telephone numbers and unit numbers The condominium funds, including operating funds, replacement reserves, investment accounts and working capital The tangible property of the condominium NOTE ABOUT TERMINOLOGY: Under the Maryland Condominium Act, a condominium association is referred to as a "council of unit owners," which the legal entity that governs the affairs of the condominium as set forth in Sections 11-101(f) and 11-109 of the Maryland Real Property Article, Annotated Code of Maryland. A council of unit owners can be an incorporated or unincorporated and its members are comprised of all unit owners. NOTE ABOUT AUTHOR: Nicholas D. Cowie is a partner in the law firm of Cowie & Mott, P.A. and has been representing condominium associations for over 25 years. Mr. Cowie is licensed in Maryland and Washington DC and has extensive experience representing condominiums with developer transition issues, including developer financial disputes and construction deficiency claims. Mr. Cowie participated in the drafting and efforts to obtain passage of Maryland laws that benefit transitioning Maryland condominiums and their associations by requiring condominium developers to turnover specified documents and extending warranty periods.

DEVELOPER TRANSITION
MARYLAND CONDOMINIUMS
Transition of Association Governance from Developer to Unit Owner Control
INTRODUCTION
“Developer transition,” the process by which the governance of a condominium association is transferred from developer to unit owner control. This article provides a brief overview of the legal requirements that govern the developer transition process for Maryland condominiums. This article also as well as a “transition checklist” for transitioning unit owner-controlled boards of directors.
PERIOD OF DEVELOPER CONTROL
A developer initially controls an association because it owns all unsold units or lots in the newly created community. As such, the developer has the controlling votes associated with majority ownership and can appoint its own employees as the initial members of the board of directors and thereby control how the condominium association conducts its affairs. This is referred to as the “period of developer control,” during which the developer makes all decisions on behalf of the association.
The developer also creates an association’s governing documents, allowing it to dictate, subject to applicable law, the procedures and time periods under which control over the association’s board of directors will eventually be transferred to the homeowners.
THE TRANSITION MEETING
The period of developer control continues until a “transition meeting” is held to elect members of the board of directors from amongst the condominium unit owners. The transition meeting must be held within 60 days after the date that units representing 50 percent of the votes in the condominium have been conveyed by the developer to the purchasing unit owners. Maryland Condominium Act (“ MD Condo Act”) §11-109(c)(16)(i)1. The transition meeting can be held earlier if the developer specifies a lesser percentage of conveyances in the governing documents as a trigger for the 60 day period to commence. MD Condo Act §11-109(c)(16)(i)2.
OVERLAPPING TERMS OF DEVELOPER-APPOINTED BOARD MEMBERS
The terms of board members appointed by the developer during the period of developer control must end 10 days after a replacement board member is elected at the transition meeting. MD Condo Act §11-109(c)(16)(iii). This law is designed to prevent overlapping terms of developer-appointed and unit owner-elected condominium board members.
DOCUMENT/ASSET TURNOVER
Within 30 days following the transition meeting, a Maryland condominium developer is required to turn over specified documents and assets to the unit owner-elected board of directors. MD Condo Act §11-109(c)(16)(iv). This includes financial records, contracts, architectural plans, condominium funds, owner records, etc. A complete list of these items is set forth as an Appendix to this article.
TERMINATION OF CONTRACTS
Following the transition meeting, the newly-elected, owner-controlled board of directors has a right, without liability, and upon 30 days prior notice, to terminate association contracts entered into during the period of developer control for the purpose of handling the condominium’s financial matters, maintenance, or other services for the community. Condo Act §11-109(c)(16)(v) and HOA Act §11B-106.1(e). The association’s right to terminate, however, does not apply to contracts for the “the provision of utility services or communications systems.” Condo Act §11-109(c)(16)(v)2.B.
TRANSITION CHECKLIST
Below is a checklist of developer transition items to be addressed by the first unit owner-elected board of directors once it assumes control of the condominium association following the transition meeting.
1. Document/Asset Inventory & Request
Conduct an inventory of association documents and assets. Make a formal written request of the developer to turn over all documents, funds and assets listed in Appendix A to the extent not already done so. These must be turned over within 30 days of the transition meeting.
2. Contract Review
Review all contractual agreements entered into during the period of developer control to handle the association’s financial matters, maintenance, or other services. If there are any concerns, obtain competitive proposals from vendors and professionals for comparison purposes. Contracts that do not appear to be in the best interest of the condominium association can be terminated, without liability, upon 30 days in notice.
3. Audit Financial Records
Have an independent auditor examine the association’s financial records during the period of developer control to ensure that all monies were properly collected, utilized and accounted for. An auditor can determine whether the correct amount of assessments were collected, whether the association’s reserve accounts were properly funded, or whether there was any inappropriate use of association funds to pay developer obligations. In some cases, an auditor may conclude that the developer owes the condominium association a substantial amount of money.
4. Transition and Reserve Studies
Obtain transition and reserve studies in order to identify construction defects and determine whether the developer-created budget and reserve account are adequate to maintain, repair and replace the common areas of the community over time. For example, if a common element roof is found to be in need of immediate replacement because of construction defects, then a developer-created reserve budget based on a projected roof replacement in 30 years is grossly insufficient.
The Transition Study: the purpose of a transition study (also referred to as a “deficiency report” or “warranty analysis”) is to evaluate construction of the common elements and common areas to identify construction deficiencies while warranties are still enforceable so they can be submitted to the developer for warranty repair. Timely transition studies are essential as part of the developer transition process because defects in newly constructed communities may not be apparent when unit owners first take control of the association. Defects in the original construction can remain hidden for years until they manifest themselves in the form of property damage. Left undiscovered and unrepaired, even minor construction deficiencies can result in extensive property damage requiring associations to borrow money and assess homeowners. Moreover, when defects are not identified in a timely manner, warranty rights may be barred by expiration of warranty periods or statute of limitations. Architectural and engineering firms can identify construction defects early on and investigate suspicious conditions before warranty rights expire so timely notice can be given to the developer. Once defects have been identified and corrected by the developer, the association can establish an accurate reserve budget.
The Reserve Study: A reserve study does not seek to evaluate construction. Rather, its purpose is to determine the amount of annual assessments that should be placed into a reserve account to pay for future repair or replacement of the major community components for which the association is responsible, such as roofs, exterior walls, sidewalks, roadways, stormwater management ponds, clubhouses, etc. A normal useful life, or “life expectancy,” is assigned to each of these components (e.g., a 30-year club house roof), as well as an estimated cost to repair or replace those components at the end of their useful life. Based on these projections, a reserve analyst estimates the amount of money that the association should allocate to its reserve account each year so that the necessary funds will be available for future repairs and replacement. This type of planning avoids a one-time huge assessment for major repair/replacement projects.
5. Retain Legal Counsel
General Counsel: Retain general counsel to work with the board members and the association’s management company to handle the wide variety of general legal issues that face Maryland condominiums and their associations, such as interpreting governing documents, preparing legal opinions, collecting delinquent assessments, reviewing and negotiating proposed contracts, dealing with threatened litigation, amending governing documents, and complying with applicable laws.
Warranty/Construction Defect Legal Counsel: Request a free consultation from an attorney with expertise in condominium  association construction defect law. Such an attorney can advise the association when applicable warranties and other legal claims expire and how to preserve the association’s legal claims while negotiating proper repairs with the developer. Armed with such information, a transitioning association can make informed decisions. This legal consultation should be requested as soon as the newly elected board assumes control of the association to ensure that no warranty and other legal rights are allowed to expire.
6. Review Insurance Coverage
Review association insurance coverage obtained during the period of developer control. Make sure coverage complies with governing documents, industry standards, and applicable laws (e.g., master policy, property insurance, comprehensive general liability insurance, fidelity insurance, directors and officers/errors and omissions policy). In the event of a lawsuit, having proper coverage will not only provide the association with a legal defense and pay any judgment, but can also provide immunity to members of the board of directors and officers as well as cap association liability to the amount of insurance coverage.
7. General Housekeeping Matters
There are a number of housekeeping matters not covered by this checklist involving association governance and business that will need to be addressed by the first board to transition from developer control. An association’s property manager and/or its attorney typically guides the board in these matters. Some examples include: selecting officers (President, Vice President, Secretary and Treasurer); appointing committees (e.g., architectural review committee); scheduling meetings required by the governing documents (e.g., annual and regular meetings of association); defining maintenance obligations and establishing a maintenance schedule; amending developer-created governing documents and promulgating new rules and regulations based on the needs of the owner-controlled association, etc.
APPENDIX
 DEVELOPER TRANSITION
DOCUMENTS & ASSETS TO BE TURNED OVER BY DEVELOPER
Articles of incorporation, recorded declaration, and all recorded covenants, bylaws, plats, and restrictions of the condominium
All books and records, including financial statements, minutes and completed business transactions
Policies, rules, and regulations
The financial records from the date of creation to the date of transfer of control, including budget information regarding estimated and actual expenditures by the condominium and any report relating to the reserves for repairs and replacement of common elements
All contracts to which the condominium is a party
The name, address, and telephone number of any contractor or subcontractor employed by the condominium
Insurance policies in effect and all prior insurance policies
Any permit or notice of code violation issued to the condominium by the county, local, State, or federal government
Any warranty in effect
Drawings, architectural plans, or other suitable documents setting forth the necessary information for location, maintenance, and repair of all condominium facilities
Individual owner files and records, including assessment account records, correspondence, and notices of any violations
A roster of current unit owners, including mailing addresses, telephone numbers and unit numbers
The condominium funds, including operating funds, replacement reserves, investment accounts and working capital
The tangible property of the condominium
NOTE ABOUT TERMINOLOGY: Under the Maryland Condominium Act, a condominium association is referred to as a “council of unit owners,” which the legal entity that governs the affairs of the condominium as set forth in Sections 11-101(f) and 11-109 of the Maryland Real Property Article, Annotated Code of Maryland. A council of unit owners can be an incorporated or unincorporated and its members are comprised of all unit owners.
NOTE ABOUT AUTHOR: Nicholas D. Cowie is a partner in the law firm of Cowie & Mott, P.A. and has been representing condominium associations for over 25 years. Mr. Cowie is licensed in Maryland and Washington DC and has extensive experience representing condominiums with developer transition issues, including developer financial disputes and construction deficiency claims. Mr. Cowie participated in the drafting and efforts to obtain passage of Maryland laws that benefit transitioning Maryland condominiums and their associations by requiring condominium developers to turnover specified documents and extending warranty periods.

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