MARYLAND CONDO TRANSITION COMMITTEES
The transition of a condominium association board of directors from developer to unit owner control in Maryland can be a complex and confusing process fraught with challenges for the condominium developer and the first elected unit owner-controlled board of directors. The longer a condominium developer retains control over the condominium association, the greater the likelihood a conflict of interest will arise. One way in which to bridge the transition gap and avoid conflicts of interest is the establishment of a “transition committee” made up of non-developer unit owners authorized to act independently of the developer-controlled board to protect the interests of the condominium association.
Transition Committees Created to Avoid Conflicts of Interest During the “Period of Developer Control.”
A condominium association is initially controlled by the condominium developer. The developer of the newly constructed condominium creates the condominium association and appoints its employees to be the members who make up the association’s first board of directors (“developer-appointed board members”). This is called the “period of developer control” during which a condominium association is controlled by the developer through its developer-appointed board members. The developer selects the condominium association’s first management company and legal counsel who answer to the developer-appointed board members. Condominium developers want to keep control over a condominium association while they are selling units to the public. The slow sale of units can extend the period of developer control. For an article discussing how and when a Maryland condominium developer must turnover control of a condominium association to the unit owners, see Developer Transition for Maryland Condominiums, by Nicholas D. Cowie.
A board of directors has a fiduciary duty to act in the best interest of the condominium association and its unit owner membership:
“The most important duty of individual [members of a condominium association] board of directors is serving as a fiduciary — one in whom members have placed their utmost trust and confidence, who has the moral and legal obligation to manage and protect members’ property and finances, and who will safeguard members’ interests above their own. Individual directors may not engage in activities that constitute, or could lead to, a conflict of interest.”
Montgomery County, Maryland. Commission on Common Ownership Communities. See, Greenstein v. Council of Unit Owners of Avalon Court Six Condominium, 201 Md. App. 186, 203 (2011). (“‘[t]he association’s board of directors [has] a fiduciary relationship to the unit owners, comparable to the obligation that a board of directors of a corporation owes to its stockholders’”).
Developer-appointed board members cannot satisfy this fiduciary duty when the interests of the condominium developer and the unit owners are not aligned or “conflict.” Transition committees are designed to avoid conflicts of interest because they are made up of a group of non-developer unit owners tasked with handling association responsibilities where the involvement of developer-appointed board members would create a conflict of interest, such as with regard to the investigation and pursuit of construction defect warranty claims or audits of association financial records.
Transition committee members should have no developer affiliation or financial interest in the condominium development or in any company involved in the design, construction, marketing, management, and/or sale of the condominium. The committee members should also be authorized to act independently of the developer-controlled board, meaning that the committee alone should be made responsible for investigating and identifying construction defect warranty claims, financial irregularities, or other transition issues.
Developer-Created Transition Committees Established to Allow Condominium Associations to Investigate and Make Timely Construction Defect Claims.
Association’s Duty to Investigate and Pursue Construction Defect Claims
A condominium association is responsible for the maintenance, repair, and replacement of the condominium common elements. This brings with it several duties for the association’s initial board of directors, including the duty to investigate the construction of the condominium to ensure that it has been completed in accordance with the construction documents and to identify any construction defects before warranties and other legal claims expire so they can be brought to the attention of the developer for repair. A Maryland appellate court has held that a condominium association has a duty to timely investigate and pursue recovery from the developer for common element, construction defect, even filing suit, if necessary to preserve the associations legal claims for construction and design defects. Greenstein v. Council of Unit Owners of Avalon Court Six Condominium, 201 Md. App. 186 (2011). See article, Sue or be Sued? by Nicholas d. Cowie
Avoiding Conflict of Interest and Preventing Construction Defect Claims From Expiring During Period of Developer Control
There is an inherent conflict of interest with a developer-controlled board investigating defects with developer’s construction of the condominium. Hence, the rationale behind creating a transition committee made up of non-developer unit owners to investigate and resolve construction defect warranty claims during the “period of developer control.”
In Maryland, there are four statutory warranties that apply to construction defects, in newly constructed, or newly converted condominiums. See, Condominium Construction Defect Warranties in Maryland, by Nicholas D. Cowie. Additionally, or numerous other non-statutory claims that can be asserted with regard to construction defects in newly constructed, or converted condominiums, such as violation of the Maryland Consumer Protection Act, negligent misrepresentation, and negligent construction. See, Resolving condominium construction defect claims in Maryland, by Nicholas Cowie. In the absence of a tolling agreement, or some other exception, these legal claims must be asserted in a court of law by the newly created condominium association within a specified time or they will be forever barred.
In that developers sometimes retain control of the condominium association for extended periods of time, there is a risk that the time for making a construction defect claim may expire under the developer’s watch. Alternatively, there may not be sufficient time, after the period of developer control has ended, for a newly elected unit owner-controlled board to hire professionals to conduct engineering investigation of common element construction necessary to make a comprehensive and timely warranty claim.
The developer and developer-appointment board members can be subject to liability for breach of fiduciary duty if they fail to establish a transition committee. In short, establishing a transition committee avoids the risk of liability in situations where an association’s legal claims are in danger that expire during the period of developer control or shortly thereafter, leaving the association without sufficient time to assert its claims following the transition of control.
Transition Committee Tasks Necessary to Investigate Construction Issues
The transition committee is tasked by the developer-controlled association with investigating the developer’s construction of the condominium and resolving construction defect claims with the developer. In this manner, the developer can take the position that the association is acting independently of developer influence, so there is no conflict of interest.
The transition committee’s tasks should include: (1) collecting all relevant construction documents (e.g., approved and as-built plans and specifications) for the condominium; (2) interviewing and retaining a engineering firm to review construction document and inspect condominium common areas as necessary with the ultimate goal of identifying any construction defects, and if they are found, preparing a construction deficiency transition report can be provided to the developer; and (3) interviewing and retaining an attorney to advise the transition committee in protecting and preserving the association’s interests with regard to construction defects so that all of the warranty time periods, statute of limitations and and other legal deadlines are met. In most cases, the attorney brought on by the transition committee will need to obtain a tolling agreement from the developer to stop the statute of limitations from running on the associations warranty rights and other construction defect legal claims. See Using Tolling Agreements to Preserve Association Warranty Claims during Construction Defect Negotiations with Developers, by Nicholas D. Cowie.
Transition Attorneys
Transition committees must maintain their independence from the developer control board of directors. It is not recommended that a transition committee utilize the services of an attorney previously hired by the developer-controlled board of directors. Even if that attorney can act independently of the developer-controlled board that hired it, there will always be an appearance or inference of conflict of interest. It is for this reason that many law firms will not simultaneously represent a developer-controlled condominium associations and serve as legal counsel advising a transition committee in representing the condominium association’s interests in negotiating construction defect warranty claims with the developer.
Furthermore, not all condominium attorneys have extensive experience advising transition committees and handling transition issues let alone trying, litigating, settling and/or otherwise resolving condominium construction defect disputes. Such experience will streamline the activities of the transition committee allowing it to make informed and timely decisions while avoiding pitfalls and problems that can arise in protecting the associations interests.
Transition Committee Confidentiality
Transition committee members must consider confidentiality of the committee’s communications. To be effective, it is important that the committee’s internal strategic workings not be shared with the developer-appointed board members. It does no good to set up an independent committee to represent the interests of the condominium association if the committee’s communications are then shared with the developer. There are a number of steps that an experienced transition attorney will recommend to ensure committee’s communications are kept confidential, even when the developer appointed board members are needed to approve funding for the committees’ activities.
Creation of a Transition Committee and Scope of Authority
The scope of a transition committee’s functions and powers are defined by a board of director’s resolution creating the committee and appointing its members. The committee is typically authorized to hire an engineers, attorney, accountants and other professionals to represent the interests of the condominium association and guide the transition committee members through the process of making sure all necessary construction has been completed in accordance with the building codes and plans and specifications, and identifying any construction deficiencies to be brought to the developer’s attention for agreed-upon repairs before warranties and other construction defect claims expire. Attorneys and financial consultants can also assist the transition committee in collecting and reviewing financial accounts, projected budgets, and other important condominium association documents. In this manner, the committee can protect the condominium association’s interests until such time as control over the board of directors has been turned over to the unit owners.
Developer controlled-boards sometimes appoint a resident unit owner, not affiliated with the developer, as a member of the developer-controlled Board of Directors (“unit owner representative on the board”). This individual is been chosen to serve as the chairperson and secretary of the transition committee, and to act as a liaison between the committee and the developer-controlled board of directors. Although there is a unit owner representative on the board, the board remains under developer control until a majority of the board members are unit owners that are not affiliated with the developer.
Other Potential Functions for a Developer-Created Condominium Transition Committee
The purpose of a transition committee can also be to ensure that the transition from developer to unit owner control over the governance of the association is smooth and efficient. For example, sometimes transition committees are created by the developer-controlled boards to educate unit owners and prepare them for taking over control of the association. The transition committee can receive an orientation from management, allowing committee members to become familiar with the on-going operations of the condominium association so that unit owners can “hit the ground running.” Transition committee activities along these lines can include:
- Collecting and reviewing the condominium’s financial records to determine whether budgets are adequate for funding, ongoing operations and reserve accounts for future maintenance repair and replacement of common areas.
- Collecting and reviewing condominiums financial records and statements to ensure that the associations funds have been utilized properly.
- Collecting and reviewing the association’s contractual agreements with vendors such as for community management, property maintenance, cleaning, etc.
- Collecting and reviewing the associations, governing documents, including bylaws and rules and regulations to understand how the condominium is run and how rules are enforced.
Members of the transition committee may subsequently run for positions on the first unit owner-controlled board of directors or can participate as committee members or volunteers assisting the first unit owner-controlled board as it takes over control of the operations of the condominium association.
Reasons Why a Developer Controlled Condominium Association Might Want to Created a Transition Committee
In addition to promoting a smooth transition from developer to unit under control, other goals of a developer in creating a condominium transition committee include the following:
Retain a Level of Control Over the Transition Process:
Creating a transition committee allows the developer to retain a level of involvement and control over association/developer warranty claim negotiations and other position issues that may need to be resolved, does claims involving the use of association funds.
Although the transition committee technically has independence, its powers and authorities are limited by the board resolution creating the transition committee. Some transition committees are only given advisory power. In other words, any decisions or actions the committee believes a condominium association should take are merely recommendations to the developer-controlled board of directors, and the committee itself has no power to implement those recommendations without board approval. Even in cases where the transition committee has authority to take independent actions, all funding needed to take such actions, such as hiring consultants, usually must be approved by the developer-controlled board of directors.
The resolution creating the committee can also limit its authority to resolving claims with the developer by giving it the power to negotiate on behalf of the condominium association, but not authorizing it to pursue litigation, nutrition or mediation with the condominium developer should the committee be unable to resolve construction defects warranty disputes or financial claims.
Prevent Breach of Fiduciary Duty Claims Arising out of Conflict of interest:
Allowing a transition committee to investigate potential condominium association legal claims where the developer has an interest, can avoid prevent future legal claims by a condominium association against a developer, its affiliates and the developer-appointed board members, for breached of fiduciary duty to the association and its unit owner members.
Avoid Liability for Allowing Warranties to Expire Under the Developer’s Watch:
An association’s warranty claims are time sensitive. Warranty claims for common element construction defects must be asserted within a specified time period or they will expire and become forever bared. If the association’s warranty claims are allowed to expire during the period of developer control, the developer can be held liable for failing to cause the association to make a timely warranty claim while under its control.
In Maryland, expiration of Title 11 statutory warranty claims is no longer so much of a concern because of legislation drafted by Nicholas D. Cowie and passed the Maryland legislature which extends the warranty period for the Title 11 condominium warranties (as well as Title 11B HOA common area warranties) so that that it can never expire earlier than two years after the developer turns over majority control of the board of directors to non-developer affiliated resident unit owners. See article Legislation, Extending Time Period for Bringing Maryland Construction Defect Warranty Claims by Nicholas D. Cowie. This legislation ensures that the warranty period in Maryland will never expire during period of developer control over the association.
Nonetheless, there are other statutory warranty claims (Title 10 warranty claims) as well as non-warranty, construction defect claims that can expire during the period of developer control if not timely asserted by the association. Since the developer-controlled board cannot make such claims against itself without a conflict of interest, a transition committee should be established if the developer retains control over the association for an extended period of time that threatens to leave the association without sufficient time to investigate, resolve and/or make a timely claim if necessary.
Start Statute of Limitations Running on Association non-warranty Claims:
The “statute of limitations” is the time within which a legal claim must be filed in a court of law, or it becomes forever bared. During the period of developer control, the statute of limitations on some association legal claims against the developer are “tolled” under the “adverse domination doctrine”. Tolling means that the statute of limitations time periods for bringing a legal claim stop running. For an article on tolling of association legal claims during the time that a developer adversely dominates the association’s board of directors, see: Adverse Domination Doctrine Tolls Association Legal Claims During the Period Of Developer Control. The creation of a transition committee to deal a potential legal claim against the developer, allows the developer to argue that the adverse domination doctrine does not apply to toll statute of limitations on that legal claim once the transition committee is established with the authority to investigate and bring the claim on behalf of the association “independently” of, and without interference from, the developer-controlled board of directors.
Transition Committees Created by Unit Owner-Controlled Condominium Associations After the Period of Developer Control
Sometimes owner-controlled condominium associations find it useful to establish a transition committee following the transition meeting at which control is transferred to the unit owners. This circumstance arises whenever a developer representative(s) remains as a minority board member on a unit owner-controlled board of directors (“developer representative on the board”). Because the developer representative on the board has a right to access to the inner workings of the unit owner-controlled Board of Directors, legal strategy and other confidential matters are at risk of being shared with the developer. In such a case, a transition committee created by the unit owner-controlled board of directors of the condominium association (i.e., a board made up of a majority unit owners who are not affiliated with the developer),can maintain confidentiality by creating a transition committee consisting only of unit owners and board members who have no ties to the developer. In this manner, developer representatives on the board are effectively recused from all matters involving potential claims against the developer that are being investigated by the transition committee. In setting up such a transition committee, an association should consult with experienced transition legal counsel to ensure that transition committee confidentiality is maintained. For example, documentation created by or for the transition committee containing negotiation strategy and other confidential matters may be available to the developer (if it owns a unit or has a representative on the board) unless proper steps are taken to maintain confidentiality.
The Maryland Condominium Act is designed to prevent overlapping terms of developer-appointed and unit owner-elected board members. See Developer Transition for Maryland Condominiums, by Nicolas D. Cowie. However, there are situations were developer representatives become elected or remain on the board after the transition meeting or otherwise have access to documentation as “unit owners” by reason of owning units that are still for sale at the condominium.
Conclusion – Successful Transition Committees
Transition committees can serve a useful purpose for both developers and condominium associations by ensuring that the associations legal rights are protected and conflicts of interest avoided during the period of developer control. Transition committee should be sufficiently independent, with the ability to retain its own independent construction, financial, and legal professionals to advise committee members on how best to protect the association’s interests.
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