Developer Transition for Maryland Condominiums 

Legal Requirements and Transition Checklist

for

Association Board Members 

“Developer transition,” as it pertains to Maryland Condominiums, is the process by which the governance of a condominium association is transferred from developer to unit owner control. This article contains an overview of the legal requirements governing the transition process and a “transition checklist” for transitioning unit owner-controlled boards of directors.

OVERVIEW OF

 LEGAL REQUIREMENTS

DEVELOPER TRANSITION – MARYLAND CONDOMINIUMS

PERIOD OF DEVELOPER CONTROL

Developer transition in Maryland Condominiums begins with the fact that a condominium developer initially controls governance of a condominium association by reason of the fact it owns all unsold units in the newly created condominium association. As such, the developer has the controlling votes associated with majority ownership and can appoint its own employees and representatives as the initial members of the board of directors and control how the 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 condominium association and has the power to direct the actions of the condominium association through its developer-appointed members on the board of directors.

The developer also creates a Maryland condominium association’s governing documents, allowing the developer 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 unit owners.

Thus, all Maryland condominiums begin their existence under the control of a condominium developer. The term “developer transition” refers to the condominium association’s transition from this  “period of developer control,” to control by the resident unit owners, which occurs when non-developer affiliated unit owners are elected to the board of directors by the unit owner membership at a transition meeting. “Developer transition” also refers to the period immediately following the transition meeting takeover of governance of the a Maryland condominium association and the responsibilities of the newly elected unit owner-controlled board of directors to ensure that the the condominium association gets off to a proper start.

Sometimes condominium developers create “transition committees” during the period of developer control. These committees consist of resident unit owners who are tasked with acting on behalf of the condominium association so as to avoid a conflict of interest.  However, a transition committee’s authority is limited and subject to the influence and ultimate authority of the developer-controlled condominium board of directors. See article entitled: “Maryland CondominiumTransition Committees.”

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 the condominium unit owners. A developer-controlled condominium association must hold the transition meeting 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 condominium developer specifies a lesser percentage of conveyances or sales 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 board members.

DOCUMENT/ASSET TURNOVER

Within 30 days following the transition meeting, a 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), §11-132. This includes financial records, contracts, architectural plans, condominium funds, unit owner records, etc. A complete list of these items is set forth as an Appendix to this article.

TERMINATION OF CONTRACTS

For 3 years following the date when non-developer unit owners acquire a majority of the votes among the membership of the association (an event which typically occurs within a few months of the transition meeting), the condominium association has a right, without liability, and upon 30 days prior notice, to terminate any association contracts entered into during the period of developer control for the purpose of handling the financial matters, maintenance, or other services for the condominium. MD Condo Act §§ 11-133(a) and 11-109(c)(16)(vi). The condominium association’s right to terminate, however, does not apply to contracts for the “the provision of utility services or communications systems” or any “contract or grant between the association and any governmental agency or public utility.” MD Condo Act §§ 11-109(c)(16)(vi)2.B and 11-133(b).

TRANSITION CHECKLIST

DEVELOPER TRANSITION – MARYLAND CONDOMINIUMS

Below is a transition checklist of items to be addressed by the first unit owner-elected board once it assumes control over the association from the developer.

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 (below) to the extent not already done so. These must be turned over within 30 days of the transition meeting.

2. Contract Review

Review all contracts 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 vendor proposals for comparison purposes. Contracts that do not appear to be in the best interest of the association can be terminated, without liability, upon 30 days in notice.

3. Audit Financial Records

Have an independent auditor examine and audit the association’s financial records during the period of developer control to ensure that all monies were properly collected 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 determine that the developer owes the condominium association a substantial amount of money.

4. Transition and Reserve Studies

Obtain a transition study and a reserve study in order to identify construction defects and determine whether the developer-created budget and reserve account are adequate to maintain, repair and replace the condominium common elements 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.

a. 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 to identify construction defects while warranties are still enforceable so they can be submitted to the developer for warranty repair. Timely transition studies are essential because defects in newly constructed condominiums 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 unit owners. Moreover, when defects are not identified in a timely manner, warranty rights may be barred by expiration of warranty periods or the applicable 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 then corrected by the developer, the condominium association can establish an accurate reserve budget. See article “Importance of Obtaining Timely Transition Study to Identify Construction Defects.”

b. 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 condominium components for which the association is responsible, such as roofs, exterior walls, sidewalks, roadways, etc. A normal useful life, or “life expectancy,” is assigned to each of these components (e.g., a 30-year 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 condominium 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. Maryland laws, effective October 1, 2022, require Maryland condominium associations to obtain reserve studies every 5 years and fund reserves based on those studies.  Click here for details on the Reserve Study Funding Requirements in Maryland

5. Retain Legal Counsel

a. General Counsel: Retain general counsel to work with the board members and its management company handling a the wide variety of general legal issues that face a Maryland condominium association, such as interpreting governing documents, preparing legal opinions, delinquent assessment collection, contract negotiation, dealing with threatened litigation, amending governing documents, etc.

b. Warranty/Construction Defect Legal Counsel: Few law firms have expertise in both general counsel and condominium construction defect law.  If general counsel is not experienced in condominium construction defect law, request a free consultation from an attorney who does have expertise in condominium construction defect law. Such expertise is crucial. An experienced condominium construction defect attorney can advise the association when applicable Maryland 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 condominium association can make informed decisions. This free 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. For more information see article “Resolving Condominium Construction Defect Claims in Maryland.”

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., property insurance, comprehensive general liability insurance, fidelity insurance, directors & officers/errors & omissions policy). In the event of a lawsuit, having proper coverage will not only provide the condominium association with a legal defense and pay any judgment, but can also provide immunity to directors and officers and cap association liability to the amount of insurance coverage.For a more detailed discussion of the types and levels of insurance that can provide statutory immunity to directors and officers of Maryland Condos, see article “Statutory Immunity From Lawsuits for Condominium and HOA Directors and Officers.”

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 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); updating resident agent information with the State Department of Assessments and Taxation; 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 and concerns of the unit owner-controlled association, etc.

APPENDIX

DOCUMENTS & ASSETS TO BE TURNED OVER BY DEVELOPER

1. Articles of incorporation, recorded declaration, and all recorded covenants, bylaws, plats, and restrictions of the condominium
2. All books and records, including financial statements, minutes and completed business transactions
3. Policies, rules, and regulations
4. 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
5. All contracts to which the condominium is a party
6. The name, address, and telephone number of any contractor or subcontractor employed by the condominium
7. Insurance policies in effect and all prior insurance policies
8. Any permit or notice of code violation issued to the condominium by the county, local, State, or federal government
9. Any warranty in effect
10. Drawings, architectural plans, or other suitable documents setting forth the necessary information for location, maintenance, and repair of all condominium facilities
11. Individual owner files and records, including assessment account records, correspondence, and notices of any violations
12. A roster of current unit owners, including mailing addresses, telephone numbers and unit numbers
13. The condominium funds, including operating funds, replacement reserves, investment accounts and working capital
14. The tangible property of the condominium

Maryland and Washington DC Condominium and HOA Attorneys

410-327-3800 | 202-670-6289 | 301-830-8315

cowielawgroup.com

FOR MORE INFORMATION ABOUT DEVELOPER TRANSITION FOR MARYLAND CONDOMINIUMS, CONTACT AUTHOR NICHOLAS D. COWIE AT NDC@COWIELAWGROUP.COM

NOTE ABOUT AUTHOR: Nicholas D. Cowie is a partner in the law firm of Cowie Law Group, P.C. and has been representing Maryland condominiums for over 25 years. Mr. Cowie is licensed in Maryland and Washington DC and has extensive experience representing condominium associations with developer transition issues for Maryland condominiums, including financial disputes regarding payment, collection and use of assessments as well as construction defect claims. Mr. Cowie participated in the drafting and efforts to obtain passage of Maryland laws that benefit Maryland condominiums and their associations in the transition process by requiring developers to turnover the specified documents referred to above and by extending warranty periods for Maryland condominiums and HOAs. Click here for an article on the Maryland legislation drafted by Nicholas D. Cowie that extends warranties for Maryland condominium associations and HOAs.

NOTE ABOUT ARTICLE: The original version of this article entitled “Developer Transition for Maryland Condominiums” appeared as a two-part series in the Community Associations Institute, Chesapeake Region Chapter, publication  “The Beacon.” Part I appeared in the Summer 2017 issue at pages 16-17 and Part II appeared in the Fall/Winter 2017 issue at pages 20-21. Unlike this blog post, which deals solely with Developer Transition for Maryland Condominium Associations,  the referenced Beacon articles combined Developer Transition for Condominium Associations and Declarant Transition for Homeowners Associations into a single two-part article discussing the laws applicable to transition under the Maryland Condominium Act and the Maryland Homeowners Association Act. Click here for an article dealing with declarant transition for Maryland homeowners associations. Click here for an article dealing with the inherent conflict of interest that occurs during the period of developer control, and how the doctrine of adverse  domination can extend statue limitations on association claims for developer wrongdoing occurring during the period of developer control.

NOTE ABOUT TERMINOLOGY: Under the Maryland Condominium Act, a condominium association is referred to as a “council of unit owners,” which is the legal entity that governs the affairs of the condominium as set forth in the MD Condo Act §§11-101(f) and 11-109 (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. For purposes of convenience and simplicity, this article refers to a Maryland council of unit owners as a “condominium association.”