Regulations Adopted for Transition from Developer to Owner-Control of Homeowners’ Associations

Author: Donna M. McMillan Date: 01/25/2010

Categories: Real Estate Law

The Maryland legislature has adopted a new statute intended to regulate the transition of control from developer to owners in homeowners’ associations. This statute adds new Section 106.1 to the Homeowners Association Act, found in Section 11B of the Real Property Article of the Maryland Code (hereinafter the “Statute”). It will seem very familiar to developers and builders already conversant with similar transition of control provisions in the Condominium Act, Section 11 of the Real Property Article.

Subsection (A) of the Statute requires that a meeting of the members of the homeowners’ association (hereinafter, “HOA”) be held to elect a governing body of the HOA (a Board of Directors in most cases) within sixty (60) days from the date that at least 75% of the total lots that may be included in the HOA are sold to members of the public, or at such earlier time as may be specified in the HOA documents. Notice of the date, time and place of this meeting must be given to the owners as provided in the statute. Ten days following this meeting, provided that a replacement board member has been elected, the term of any director appointed by the Developer is to end.

The Statute acknowledges the possibility of expanding projects and makes it clear that the percentage requirement applies to the total number of lots that are planned for the HOA and not just the number of lots that may be subject to the HOA’s Declaration from time to time. This aspect of the new statute appears to make an effort to balance the rather substantial and vested interest that the Developer has in the project against the growing interest of the owners in governing their own community. However, despite the title of the Statute, the language of the Statute itself does not automatically require the transition of control to the homeowners if, as is often the case the HOA Declaration has been drafted specifically to reserve to the Developer a greater number of votes per lot than is given to the owners. This creates a tension between what the legislature clearly intended to accomplish and what the practical effect of the Statute is when applied in the context of this type of Declaration.

Though a meeting must be held to elect a Board of Directors, a transition to owner control will only occur if the owners themselves have the right to cast a majority of the votes needed to elect their candidates. Often, this is not the case. Many Declarations reserve to the Developer a large number of votes per lot. This ensures that the Developer has a majority vote even after 75% of the lots have been sold. Other Declarations provide for a Developer Control Period during which the Developer has the right to cast all of the votes attributable to the lots. This Period usually ends only after all of the lots have been sold. If an election is held in either of these scenarios, the owners will not have the number of votes necessary to elect an owner controlled Board of Directors and take control of the Association from the Developer appointed or elected Board.

While the transfer of control to the owners may not technically be required to occur at the 75% owner mark the title of the new Statute clearly indicates a legislative intention that, at that point in the project, the owners be allowed to control their association’s affairs. The Developer must decide what approach is best designed to balance the Developer’s need for control against the time, expense and negative energy of a hearing before the Division of Consumer Protection for claims of a failure to abide by the law as the legislature intended it to be applied. This decision depends in part upon the Developer, the management company and the community itself.

By the mid-point of every project, the Developer generally has a sense of the types of individuals in the community and those persons with whom the Developer can work. Experience has shown that the transition to owner control, whenever it occurs, is easier and more productive for both the Developer and the HOA if owners have been added to the Board of Directors early in the project. Since the Developer generally has the power in the governing documents to appoint the members of the Board, the Developer can select those individuals in the community that seem able to work with the Developer in a reasonable fashion and keep the lines of communication open. Depending upon what the Declaration provides, these owners can be appointed as advisory members only, or as full Board members but in a minority position. Some owners can be appointed to HOA committees. These selected individuals spend time learning about association affairs and act as liaison between the Developer and the other owners. With that experience, they are often selected by the owners as their initial owner board when the true transition election occurs. This approach requires a certain self confidence on the part of the Developer and the management company, but is well worth the effort in most cases. This early involvement of the owners can also assist the Developer in determining whether to comply with the Statute even if not technically required to do so, or to choose some middle ground of a partial transition that could still reduce the likelihood of a consumer complaint.

When approving declarations for new projects in the future, Developers will also find themselves faced with the issue of whether or not to include weighted voting or other methods of maintaining Developer control in light of the new statute. This will be a judgment call for each Developer, though as long as the Developer reserves unto itself the right to terminate the weighted votes at its discretion, there could be some utility to retaining the power until the Developer is able to determine the nature of the community as it grows.

The remainder of the Statute (i) lists those items and the information that must be delivered to the owner-controlled Board upon transition, (ii) provides that the owner-controlled Board has the right to terminate certain types of contracts entered into by the developer-controlled Board, and (iii) gives owners a right of recourse should the Developer not abide by the law.

Subsection (D) of the Statute lists the documentation and information that must be delivered to the owner-controlled Board within thirty (30) days following the transition meeting. A copy of these items is attached as Schedule 1 at the end of this article. For the most part, these items are what any Board of Directors would want to have available to it when it took office. The list acts as a good reminder of what needs to be gathered and maintained, generally with the HOA’s management company, during the development of the community so that the transition of control can occur without a great deal of effort. In addition, when the Developer makes the HOA aware of maintenance requirements for any facilities owned by the HOA, the Developer creates a potential defense against a warranty claim should the HOA fail to take the maintenance actions required or recommended. This is even more important in a condominium regime.

Subsection (E) of the Statute applies to contracts entered into by a developer-controlled Board of Directors on behalf of the HOA after October 1, 2009 [the effective date of the Statute] except those relating to the provision of utility services or communication systems. While the language of this subsection seems a bit unclear, the intention is not. Once the transition meeting from developer-controlled Board of Directors to owner-controlled Board of Directors occurs, the HOA has the right to terminate any contract for financial, maintenance or other services [excluding utility or communication services] that was entered into by the developer-controlled Board upon not less than thirty (30) days notice.

Finally, Subsection (F) of the Statute provides that any owner or owners aggrieved by the action or inaction of the Developer under the new law may submit a complaint to the Division of Consumer Protection of the Office of the Attorney General under Section 11B-115(c) of the Real Property Article. This section directs one to the Consumer Protection Act set forth in Section 13 of the Commercial Law Article of the Code. A full discussion of the impact and treatment of such a complaint is beyond the scope of this article but will be explored in a subsequent article posted to this site.

The passage of this Statute clearly indicates an intention by the legislature to afford homeowners some increased measure of control over the affairs of their communities. Regardless of whether the Developer is required to transition the Board of Directors of the HOA to owner control at the 75% owner mark, the Developer should recognize the legislature’s intention and act accordingly to enable owner participation in the process and be mindful of its other obligations during the process of transition.

This same session of the legislature also produced amendments to section of the Condominium Act relating to the transition of control [Section 11-109 of the Real Property Article]. Builders and developers should be mindful of those amendments as well.

Schedule 1

Items to be delivered to the HOA on Transition:

  1. The deeds to the common areas;
  2. Copies of the homeowners association’s filed articles of incorporation, declaration, and all recorded covenants, plats, restrictions, and any other records of the primary development and of related developments;
  3. A copy of the bylaws and rules of the primary development and of other related developments as filed in the depository of the county in which the development is located;
  4. The minute books, including all minutes;
  5. Subject to the restrictions of §11B-112 of this title, all books and records of the homeowners association, including financial statements, minutes of any meeting of the governing body, and completed business transactions;
  6. Any policies, rules, and regulations adopted by the governing body;
  7. The financial records of the homeowners association from the date of creation to the date of transfer of control, including budget information regarding estimated and actual expenditures by the homeowners association and any report relating to the reserves required for major repairs and replacement of the common areas of the homeowners association;
  8. A copy of all contracts to which the homeowners association is a party;
  9. The name, address, and telephone number of any contractor or subcontractor employed by the homeowners association;
  10. Any insurance policies in effect;
  11. Any permit or notice of code violations issued to the homeowners association by the county, local, State, or federal government;
  12. Any warranty in effect and all prior insurance policies;
  13. The homeowners association funds, including operating funds, replacement reserves, investment accounts, and working capital;
  14. The tangible property of the homeowners association;
  15. A roster of current lot owners, including their mailing addresses, telephone numbers, and lot numbers, if known;
  16. Individual member files and records, including assessment account records, correspondence, and notices of any violations; and
  17. Drawings, architectural plans, or other suitable documents setting forth the necessary information for location, maintenance, and repairs of all common areas.