Transition litigation

What actually ends up in court

Four disputes account for most transition litigation. Construction defects in common elements, roofs, foundations, HVAC systems, parking structures, are the most visible. Underfunded reserves are another: if the developer-controlled board deferred reserve funding to keep dues low before selling out, the association inherits the shortfall. A third is self-dealing by declarant-appointed directors who protected the developer's interests instead of the association's. A fourth is a management, cable, or lease contract the developer-controlled board signed on terms that favored the developer.

Developer-appointed directors are not automatically in the wrong for voting with the developer, but they owe their fiduciary duty to the association, not to the company that put them on the board.

"developer-appointed board members have independent statutory and common law fiduciary duties to the association"

Source: Understanding Breach of Fiduciary Duty by Developer-Appointed Directors in Condominium Associations, Hirzel Law, PLC

A board that declines to investigate a construction defect, or votes down reserve funding, because doing otherwise would embarrass the developer, is the fact pattern that generates these claims. Whether a specific board's conduct crossed the line is decided case by case.

Deadlines that run whether anyone noticed or not

Two different clocks can bar a claim, and confusing them is the most common way an association loses a good case before it is ever heard. A statute of limitations starts when a defect is, or reasonably should have been, discovered. A statute of repose starts on a fixed calendar event, typically substantial completion or occupancy, and cuts off the claim after that period regardless of when the defect surfaces.

How long each clock runs, and which event starts it, varies by state; check your state's construction defect statute and your declaration. California is one verified example: under its Right to Repair Act, most construction defect claims are barred ten years after substantial completion, full stop.

"no action may be brought to recover under this title more than 10 years after substantial completion of the improvement"

Source: California Civil Code, section 941, California Legislative Information

A board that waits for a reserve study or an engineering report before calling a construction-defect attorney can burn years of a repose period it never gets back. Talk to counsel licensed in your state as soon as a defect is suspected, not after it is confirmed.

The declaration may have already picked the courtroom

Many declarations route disputes with the developer into arbitration instead of a public court, and this is usually a deliberate drafting choice made before the association existed to make its own decisions.

"common practice for real estate attorneys to include arbitration clauses in declarations for common interest communities"

Source: Enforceability of Arbitration Provisions in Disputes with Developers, Tinnelly Law Group

Some associations have used their amendment power to remove such a clause after turnover. Whether an arbitration clause binds the association, and whether it can be amended away after the fact, is a contested question that courts in different states, and even within one state, have answered differently. Get counsel's read on your specific declaration language before assuming either way.

The developer isn't automatically off the hook

Boards sometimes assume that once the developer exits, whether by selling its remaining rights, going bankrupt, or losing the project to foreclosure, any claims against it go with it. That is not the general rule.

Under the model act codified in states such as Nevada, a developer that transfers its remaining development rights to a successor is not released from obligations or liability that arose before the transfer. Losing control involuntarily, through foreclosure, a tax sale, or bankruptcy, ends the control period but does not erase what already happened during it. A new owner of the project is a different party to negotiate with going forward, not a reason to drop a claim against the original developer.