C O M M U N I T Y
confrontation.
Here are some guidelines:
• Draft governing documents that focus on the developer’s
right and ability to control the development of the project
and sale of the units rather than its right and ability to control
the board.
• Create governing documents that enable rather than impede
the business and financial management of the association.
• Create a governance structure that encourages involvement
by owners and other residents.
• Create a transition team within the governing documents.
• Include alternative dispute resolution in the governing
documents.
• Establish reasonable schedules for turnover.
The governing documents should provide for a transition
process that establishes:
• when and how elections of owners to the board occur
• who is entitled to vote and whether class voting is allowed
• how developer-appointed board members are removed or
resign
• the continued right of the developer to control the
development of the community association until completion
• what documents, financial audits or reports must be delivered
to the owner-elected board.
Communication
In order to minimise the risk of litigation, hire independent
specialists who help owner boards navigate the transition from
developer to owner control. This includes the engagement of
independent counsel and accountants for the association at an
early stage of transition, usually no later than the first transition
election when 25% of the units have been sold. Emerging
strategies to discourage litigation include a comprehensive
risk-management programme that would take place at the
completion of the architectural and engineering drawings,
and continue until the completion of construction, when the
owners take control of the association. It would include reviews
of the budget, building compliance, coordination between
architectural and engineering designs, and a punch list with
input from the home owners.
Checks and audits
And, before final handover, the board should do a physical
and common elements audit and an organisational audit, and
commission an engineering inspection of the property. The
engineering inspection will include checking the condition of
the physical property, a capital reserve study, a recommended
maintenance schedule, and a comparison of the actual
construction with the approved plans and applicable codes.
When doing the physical and common elements audit, the
association should:
• determine the condition of the common elements and other
physical portions of the community through appropriate
engineering or contractor inspections
• confirm with legal counsel that the association owns all the
common elements
• review the existing reserve study
• take a hard look at assessments and budgets.
The organisational audit consists of:
• corporate audit for the association
• governing document review
• covenant enforcement audit for issues of breach of covenants,
design review, consistency in enforcement, status of claims,
and possible waiver issues.
Insurance
Insurance provides protection for losses, so it is essential to
ensure there is no gap in cover during the transition process.
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Developers can be exposed to liability ranging from breach
of contract or fraud, to violating government statutes.
Homeowners associations can also be exposed to litigation
for breach of fiduciary duty, discrimination, or a failure to keep
common areas in a state of repair and maintenance. And lenders
Preventing litigation
E
Litigation
who loan money to developers can, in some instances, be liable
for construction defects or misrepresentations pertaining to the
development.
Effective communication is probably the most important element
in the success of any community association. Especially during
the developer control period, a successful communication
system can forestall the development of cliques and factions,
enable the association to provide services that owners want,
and help owners develop a sense of trust in the developer,
thereby reducing or eliminating the acrimony that often follows
the transition to owner control. An effective communication
programme is composed of several components, each of which
is an essential part of the programme. These are the home
owners, the on-site sales force and/or estate agents, managers,
the developers and the developers’ attorneys. Ideally the
developer should strive to create a community of residents who
are proud of their homes, and who view the developer as part of
the team committed to the success of their association.
L I V I N G