{"id":2480,"date":"2023-04-10T19:31:03","date_gmt":"2023-04-10T19:31:03","guid":{"rendered":"https:\/\/marylandcondominiumattorneys.com\/?page_id=2480"},"modified":"2024-12-03T21:14:24","modified_gmt":"2024-12-03T21:14:24","slug":"maryland-condominium-transition-committees","status":"publish","type":"page","link":"https:\/\/marylandcondominiumattorneys.com\/index.php\/maryland-condominium-transition-committees\/","title":{"rendered":"Maryland Condominium Transition Committees"},"content":{"rendered":"

\"Maryland<\/p>\n

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MARYLAND CONDO TRANSITION COMMITTEES<\/strong><\/h1>\n

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 \u201ctransition committee\u201d made up of non-developer unit owners authorized to act independently of the developer-controlled board to protect the interests of the condominium association.<\/p>\n

Transition Committees Created to Avoid Conflicts of Interest During the \u201cPeriod of Developer Control.\u201d <\/strong><\/h2>\n

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\u2019s first board of directors (\u201cdeveloper-appointed board members\u201d). This is called the \u201cperiod of developer control\u201d during which a condominium association is controlled by the developer through its developer-appointed board members. The developer selects the condominium association\u2019s 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<\/em><\/a>, by Nicholas D. Cowie<\/em>.<\/p>\n

A board of directors has a fiduciary duty to act in the best interest of the condominium association and its unit owner membership:<\/p>\n

\u201cThe most important duty of individual [members of a condominium association] board of directors is serving as a\u00a0fiduciary<\/u>\u00a0— one in whom members\u00a0have placed their utmost trust and confidence, who has the moral and legal obligation to manage\u00a0and protect members\u2019 property and finances, and\u00a0who will safeguard members\u2019 interests above\u00a0their own.<\/em>\u00a0Individual directors may not engage in activities that constitute, or could lead to, a\u00a0conflict of\u00a0interest.\u201d<\/p>\n

Montgomery County, Maryland. Commission on Common Ownership Communities<\/a>. See, Greenstein v. Council of Unit Owners of Avalon Court Six Condominium<\/a><\/em>, 201 Md. App. 186, 203 (2011). (\u201c\u2018[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\u2019\u201d).<\/p>\n

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.<\/p>\n

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.<\/p>\n

Developer-Created Transition Committees Established to Allow Condominium Associations to Investigate and Make Timely Construction Defect Claims. <\/strong><\/h2>\n

Association\u2019s Duty to Investigate and Pursue Construction Defect Claims<\/em><\/h3>\n

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\u2019s 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<\/em> 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<\/a><\/em>, 201 Md. App. 186 (2011). See article, Sue or be Sued?<\/a><\/em> by Nicholas d. Cowie<\/p>\n

Avoiding Conflict of Interest and Preventing Construction Defect Claims From Expiring During Period of Developer Control<\/em><\/h3>\n

There is an inherent conflict of interest with a developer-controlled board investigating defects with developer\u2019s\u00a0 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 \u201cperiod of developer control.\u201d<\/p>\n

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<\/a>, by Nicholas D. Cowie<\/em>. 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<\/a>, by Nicholas Cowie<\/em>. 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.<\/p>\n

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\u2019s 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.<\/p>\n

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\u2019s 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.<\/p>\n

Transition Committee Tasks Necessary to Investigate Construction Issues<\/em><\/h3>\n

The transition committee is tasked by the developer-controlled association with investigating the developer\u2019s 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.<\/p>\n

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)\u00a0 interviewing and retaining an attorney to advise the transition committee in protecting and preserving the association\u2019s 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<\/em><\/a>, by Nicholas D. Cowie.<\/em><\/p>\n

Transition Attorneys<\/em><\/h3>\n

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\u2019s interests in negotiating construction defect warranty claims with the developer.<\/p>\n

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.<\/p>\n

Transition Committee Confidentiality<\/strong><\/h2>\n

Transition committee members must consider confidentiality of the committee\u2019s communications. To be effective, it is important that the committee\u2019s internal strategic workings not be shared with the developer-appointed board members. \u00a0It does no good to set up an independent committee to represent the interests of the condominium association if the committee\u2019s communications are then shared with the developer. There are a number of steps that an experienced transition attorney will recommend to ensure committee\u2019s communications are kept confidential, even when the developer appointed board members are needed to approve funding for the committees\u2019 activities.<\/p>\n

Creation of a Transition Committee and Scope of Authority<\/strong><\/h2>\n

The scope of a transition committee\u2019s functions and powers are defined by a board of director\u2019s 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\u2019s 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\u2019s interests until such time as control over the board of directors has been turned over to the unit owners.<\/p>\n

Developer controlled-boards sometimes appoint a resident unit owner, not affiliated with the developer, as a member of the developer-controlled Board of Directors (\u201cunit owner representative on the board\u201d). 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.<\/p>\n

Other Potential Functions for a Developer-Created Condominium Transition Committee<\/strong><\/h2>\n

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 \u201chit the ground running.\u201d Transition committee activities along these lines can include:<\/p>\n