Notice of Turnover...Now What?

Alan Tannenbaum, Esq.:

All right. It's 11:04 and we are going to begin. So I'm Alan Tannenbaum. Tannenbaum, Lemole & Kleinberg, we have offices in Orlando, Clearwater, Sarasota, and Fort Myers. And that basically defines the market that we work in. From the Space Coast across Central Florida, little bit north of Tampa Bay and down to Naples. We stay out of South Florida and stay out of North Florida. I won't go into the reasons why, but we do work also in Palm Beach County and above.

We are construction lawyers. We have extensive experience in taking groups, HOAs and condos, through the turnover process, handling turnover related claims. And those could include really buildings up to 10 years old, when you talk about construction defects. And we also do repair consulting, so groups come to us when they have a major repair project, we help prepare the contracts with the engineers and the contractors. Help enforce those contracts, help clean them up after, if a job goes south. Very much involved in that process.

I've been taking groups, personally, through turnover now for over decades, condos and HOAs. Personally, I've seen every variation on the theme. Turnovers that have gone very well, turnovers where groups have struggled to get information for years after turnover. What we're going to talk about today is a formula for a successful turnover.

I'm going to start the first segment, which I'm going to handle, is really the pre-transition part. I know there's some folks on the call who are pre-transition situation, and I'm going to go through some of the points about, if you're in a pre-transition situation, what can you do to get yourself ready for a transition that may be occurring in six months, a year or even two years? And here's my points.

Certainly attend board and association meetings to gather as much information there as possible. Not that most developers operating their boards of directors give out much information, but it's always good to stay involved. Attend, read the minutes that the developer may produce during the period of association developer control.

Certainly inspect the property. If you find conditions that are defective or deficient, place a developer on notice of those. And one thing that's really important is, whether it's a committee or a group of owners that have formed ad hoc, and they're reporting things to the developer, reporting problems is fine, but you don't have any authority to settle anything, agree to anything, sign off on anything. You don't have authority under the documents. You don't have the authority under statute.

Tell the developer everything that you see that's wrong in the property, or you think is a problem. But when the developer comes back and says, "This is what we intend to do to correct it." And says, "What do you think? Do you agree with it? Do you approve of it?" That's not the role of owners or even a committee pre-transition to sign off or agree on anything. You don't have the authority to do that. They'll sometimes put you in that position.

Meeting city and county authorities, border management district. I tell groups, pre-transition, go make friends at the building department. Go make friends at the planning department. If you're an HOA, get the development order for your property. Usually at some sort of planning department. See what it says. There may be a bond where the developer has some requirements to meet before the bonds release, and know what that is. Maybe you need to remind the public official about what their own development order says. You empower them to enforce it. Get your documents from those amenities that you've got. I ask everybody to be on mute, if you can. [inaudible 00:05:02]. I think we can still be able to find them. There we go. Okay.

You have the right to make document requests to the developer for association documents, not developer documents, but everything in the statutes that is an association record, as an owner, pre-transition, you're entitled to those records, so ask for them. There's a procedure under the statute. Sometimes you have to set it by certified mail. Now, with a condo, you have a state agency that you can go to. If the documents aren't produced, you can make a complaint to the state.

That same state agency does not perform the same service for HOA. Other than go to court, there's not much if you're in an HOA, and the developer association is not producing documents, there's no real penalty involved, unless you go to court. Condo association or you're in condo, you have much greater rights to get the state to enforce those requirements.

Certainly, study the documents for your development. What some groups do, since it's usually easier to amend the documents pre-transition, some groups either with the help of a general counsel or not, suggest to the developer, "Look, can you change these particular provisions in the documents to make operations easier?" And if the developer is amenable to it, it's much easier for the developer to do those amendments pre-transition than go through the amendment process post-transition. So some groups do that.

Remind the developer of its turnover obligations. Look at the statutes and the developer copy of the statute. If turnover of a condo is three months away, other than the audit, the developer's got to turn over all of those association records at the time of turnover. Well, they need to prepare to do that. So you might want to remind them of that. "Turnover is in three months. This is to remind you that these are your requirements." And it might spur the developer to get some of those things done. With an HOA, unfortunately, as we'll talk about, developer actually has 90 days after turnover to produce anything. But it's good to remind under either the 720 or 718, what their obligations are.

You want to make sure that turnover occurs on time. I have never advised a group, in 40 years, not to accept turnover as early as possible, because it gives you the power to take action. It gives you the power of the purse string. You're not waving anything by accepting transition of association control. I never see a benefit for trying to delay turnover. Sometimes developers have to be reminded that the threshold under the statute has been reached. So you got to keep tabs, or somebody should keep tabs of what the unit sales are, to know, let's say at an HOA that you're approaching the 90% sellout. Time to remind the developer it's time to schedule the meeting and go through the turnover process.

Really important, you have the ability to start interviewing legal general counsel, construction counsel, like our firm, engineers, reserve specialists, CPAs, insurance agents, bankers, the whole gamut. And they will. They will come to your property, they will speak to you. You can speak to the current vendors if they're willing to, to understand what their maintenance contract is, what they're doing.

Don't interfere with what they're doing, but many of those companies are very interested in being retained, post-transition, and they generally will be cooperative and attentive to your question. It's really a time to get ready for all the folks that you're going to hire, or should hire post-transition. You can certainly start interviewing them in advance. It's a good opportunity to get a head start.

And this last item, which is politicking. I've seen many very qualified and effective pre-turnover committee who's done a lot of hard work, they're very well prepared to be great board members, they don't get elected. Somebody who has no experience with the community may run and get elected, but there's something more sinister that happens within some associations, which is some of the very smart developers find people within the community who are friendly to them, one way or another, and they are able to get them enough votes to be on the initial board.

I have gone through turnover with groups where the developer's cousin is one of the three board members who get elected post-transition. I have seen contractors who work for the developer who live in the community, they get elected to the board post-transition because somebody has made a great effort to collect proxies, votes, and those folks get elected.

If you're going through a great pre-turnover process, doing all this hard work, and you don't do the politics to make sure that you get a great slate of board members elected, you're probably at the end doing your community a great disservice. Don't forget the politics. Don't forget to get that great board elected post-transition.

There's one question, can a transition committee and current expenses, engineering studies consultation before turnover, and have the HOA pay the expense? Or can that only happen after turnover? Well, some developers give ad hoc or owner committee some money to hire engineers or lawyers and so forth. Allowed to come out of the association budget. Sometimes that occurs. And with the developer's permission, they could spend that money. Question is, who's the contracting party?

If you hire a lawyer pre-transition and it's association money that's being spent, as the lawyer is now being hired by the developer control association, does it cause a conflict? They seem to get around that, but who controls the work product? So I'm a little bit worried about those relationships.

The owners certainly can raise money voluntarily, and hire somebody. But for the most part, we believe that pre-transition, it's the time to know who the good experts, who the good vendors are out there in preparation for hiring them after transition, not before. I've seen groups raise their own money and get some work done in advance. So I've seen both aspects. With that, I'm going to turn the-

Brian Tannenbaum, Esq.:
Can you talk a little bit about what a transition committee actually is, and whether there's any authority for a transition committee to do anything?

Alan Tannenbaum, Esq.:
Thank you for the question, Brian. A transition committee has no statutory basis, no basis under the documents. It's a group of owners taking action without any specific legal authority. Shouldn't be signing contracts, certainly shouldn't be settling anything. Doesn't have the authority to say we are representative of anybody. Sometimes folks have that illusion, but there is not the authority. It's maybe an advisory board. Maybe they can investigate. They can make recommendations. They should not be deciding or agreeing to anything that purports to bind the owners. With that, I'm going to turn the floor over to Brian Tannenbaum, who's going to talk about the actual transition process once the meeting is called.

Brian Tannenbaum, Esq.:
Okay. Good morning. While you're preparing, you're getting your committees ready, you're doing all that research and looking for all that information that we just spoke about, the important thing when you're actually getting towards the meeting is to make sure that, one, that the nominating and voting procedures are accomplished per the statutes and the documents. For the condo act, it's going to be chapters 718.301. And for HOA, it's going to be 720.307.

What's important is you need to collect proxies for your desired slates for the board of directors. As we discussed, just because there's been some involved owners for maybe years before turnover, doesn't necessarily mean they're going to get elected to the board. And then all that hard work is basically for not, unless you can get elected later.

So what that requires is for you to get proxies from owners who might not be as involved, might not show up at the meeting. And once that process is over, you need to get those owners who haven't submitted proxies to actually show up at the meeting and vote. Because if you don't get your slate elected, you're going to have no control over how your association is run.

Another thing you need to do is make sure that the developer has produced all of the documents that they're required to produce under both the Condo Act and the HOA Statute. And then once that board is elected, they need to elect directors. So I'm going to go through some of the things that are required for, first, condos. So the first-

Alan Tannenbaum, Esq.:
Brian, before you get into that, I have some carryover questions from the first segment. The main question is the developer appointment of the transition committee. So again, this is another intelligent business decision on the part of developers to try to control the transition committee process. So they appoint people to it. They'll give them space to hold their meetings. They say who's on the committee and who's not on the committee.

My belief is that you can reject the entire process and just form your own ad hoc committee that's outside of the realm of the developer. The exception is there's some really large HOAs where I've seen developer appointed committees being pretty effective, but I don't like the idea of the developer controlling who the makeup is. It's one thing for the developer to facilitate it, it's a totally different thing for the developer to say, who could be on it, who can't be on it.

If there's a developer who is trying to restrict who could be on that committee, my preference for folks is that they all walk out and say, "We're going to do this ourselves, because this is an owner process, and we don't know why you're mandating or directing it." So be wary of that. 

Brian Tannenbaum, Esq.:
So for a condo, the first thing that this says is that if owners other than developer own 15% or more of the units, that the unit owners other than the developer are entitled to elect at least one third of the board. What that means is you'll never have a majority, the developer will always have the majority. And basically it's a way for you to have a voice on that board, but ultimately it doesn't do much towards pushing the developer to do anything, unless you have a particularly agreeable developer.

It also can lead to some issues. If you are in that spot and you have hopes of being on the board later on once it's controlled by the owners, you may have the owners coming to you for any bad decisions the developer made while you were in that one third spot on the board.

Next, the three years after 50% of the units will be operated by the association have been sold is the turnover date. Or three months after 90% of the units have been sold. What's required under the Condo Act for a developer to turnover to the owners at the turnover meeting are, one, certified copies of the declaration, bylaws, articles, minute books, other books and records, rules and regulation, the resignation of the developer directors. That's very important. The developer is supposed to resign all of their board members prior to, or at the turnover meeting.

The financial records, including the source documents, that's very important. Now, the audit, which is also very important, the developer actually has 90 additional days from turnover to deliver the audit to the association. While you may receive some financial records, you're not going to get an accounting audit of your association until, hopefully, 90 days at the most. They'll also turn over the association funds, personal property.

Plans and specifications, that's very important. The statute says that they are supposed to contain a certificate that they're as-built, but 99% of the time, there is no as-built set of plans submitted to the building departments. So it will be difficult for you to obtain as-builts if they don't exist.

Alan Tannenbaum, Esq.:
Yeah. We call those the unicorns of the construction industry, as-built plan. We rarely actually see a real set of as-builts turned over.

Brian Tannenbaum, Esq.:
Another unicorn is the list of all contractors, subcontractors and suppliers, which is very important for any warranty claims, anything like that, it's important to know who actually built the buildings. But again, with some of these large developers, you don't usually get an accurate list of subcontractors. We've had multiple projects that we've represented where either none or very few of the subcontractors on that list actually did any work at that property.

You need to get a list of your insurance policies. Certificates of occupancy and permits are important. The certificate of occupancy triggers that statutory warranty under the Condo Act per building. You need to have your contractor, subcontractor warranties. A roster of unit owner is always important. Any leases, employment contracts, any other contracts, and a turnover inspection report by an architect and engineer.

The developers turnover report cannot be relied upon long term for maintenance repair, or any kind of defect or warranty claims against the developer or the contractor. What that report is, is basically a reserve study. It's a visual only inspection. They will fly a drone up to the roof. They may not even get on the roof. They don't look at any of the flashings, the underlayment. They don't do much. It's just a visual, for the most part. And there's also no guarantee that the developer is going to fix those problems just because they're in that turnover inspection. And then lastly, a certificate-

Alan Tannenbaum, Esq.:
There's even more of a trap there. So when you mention the roof situation, the engineer flies a drone, and finds that there's three broken roof tiles, and that's what's in the report. The roof's going to last 20 years, and there's three broken roof tiles. So the developer says, "I'll go up on the roof and I'll replace those three broken roof tiles."

Well, the determination by that engineer that the roof's going to last 20 years is based upon a drone flyover, which no engineer in their right mind could ever come up with a conclusion that that roof's going to last 20 years from a drone flyover. The tiles may not be appropriately attached. The flashings of the roof system may not have been done properly. The underlayment may not have been attached properly. You can't tell any of that from a drone flyover.

But we have had groups recently who have said, "Well, we don't need to get our own engineering report, post-transition, because we already got one from the developer." It's not the purpose of that report. And I really think developers put this requirement in the statute because they supported us, really so they could convince groups that, well, we fixed everything in the report, so we're good. And then the group goes on its very way. That's a dangerous trap. Go ahead, Brian.

Brian Tannenbaum, Esq.:
Right. And another thing we've seen developers do with that engineering report is not tell the owners that it's a statutorily mandated report. So we've had groups that come to us and say, "Look at this nice report that the developer did for us on their time. They're so nice. Look what they did for us." Not understanding that the developer is required to do that under statute. It's not a free inspection because the developer is being especially nice, it's a statutorily required inspection.

Next we're going to talk about homeowners associations. So under 720.307, you have three months after 90% of the parcels in all phases of the community are conveyed, or such other percentage of the parcels has been conveyed to members, or such other date or event has occurred as set forth in the governing documents. Now, you'll find this a lot with homeowners associations. Most of the rules are dictated by what is in the governing documents.

Now, the developer wrote the governing documents. That's important to remember. The developer's attorney wrote those documents to put the developer in the best position at turnover, not the owners. Again there's a list of things required for the developer to turn over. Except for an HOA, they don't need to be turned over until 90 days after turnover. So here you have deeds, the CCRs, the bylaws, the articles, minutes, other books and records, resignation of directors, same kind of things, financial records.

Now, if you don't have the financial records until 90 days after turnover, it's very difficult to run an association. So make sure that you're pushing the developer to get you those things as quickly as possible. Again, a list of contractors and subcontractors, again, not going to be accurate. Insurance policies, permits, warranties, roster of homeowners, employment service contracts and an audit. What you don't see on here is plans or an engineering inspection. For an HOA, those things are not required, which is a big distinction. What makes it even more important for a new board to get those things done as quickly as possible after turnover.

Alan Tannenbaum, Esq.:
One of the things that's important, if you're an HOA, you better make friends with the planning department and the building department, because that maybe the only place you're ever going to find plans for your project or the water management district. That may be the only source of those documents that you'll ever have, because it's not required by the statute. So very important to, especially for an HOA to make friends with the government. Go ahead, Brian.

Jon Lemole, Esq.:
Brian, why is the list of subcontractors important?

Brian Tannenbaum, Esq.:
Well, the list of subcontractors is very important for an association to have for any kind of common area warranty that you may have to figure out who built the property to get any information later on if you have to bring any claims. And again, it's not always going to be accurate. There's not really a way to verify the accuracy of the subcontractor list until there's some sort of dispute with the developer, and they're required by a court to provide the correct list.

Alan Tannenbaum, Esq.:
All right. Let's get into the next section, which is post-transition. So you've done all your great work. Developers produced all their documents. You've elected a great board at transition. The board's now elected its directors. Jon, what should they be doing?

Jon Lemole, Esq.:
Okay. Well, we're finally in the section of the presentation where you have an owner control board that can actually start to make some decisions and do some things effectively. And so there's a handful of best practices that this newly minted owner control board should keep in mind and take a look at. The first is to retain general counsel, construction counsel, CPAs, engineers, reserve specialists, or at least consider retaining those folks. And here's why.

On day one after transition, the owner control board of directors comes into exclusive responsibility for operating millions of dollars worth of capital improvements. And, probably most importantly, the responsibility to budget for the maintenance and repair of those improvements in the best interests of the association. So when you think about the typical condominium, or homeowners association board, you have a handful of people who have probably great life experience, or have been very successful business people in their lives.

But I would venture that, in many cases, despite that experience, having responsibility for things like roads, drainage systems, lift stations, multifamily building exteriors and roofs. That's not something that most people have ever had to deal with. And so engaging the right folks to assist and provide good counsel to the board in discharging their obligations is a very good thing. So for example, you may have gotten, or you will have gotten a ... especially if you're in a condo, you will have gotten a turnover report and a developer audit.

I always liken that to buying a house and accepting a seller's inspection report. Brian touched on it a little bit in the sense that these reports that you get from the developer, they're designed to discharge the developer's statutory duty, but they don't provide a whole lot of great information. They're not detailed. They're not in-depth. They're not what you would expect from a detailed, for example, engineering report. They're more in the nature of a reserve report.

And in discharging its duties to act in the best interest of the association, a post-turnover board ought to make an independent investigation of the state of the capital improvements, and timeline to maintain, repair and replace these items. I mean, if one thing Champlain Towers has taught us, it's taught us all of the need to make accurate budgeting decisions from day one, so that reserves are there when the need arises.

Carlos, going back to one of the questions that was asked, Carlos, and I have to find his question, but he asked, what exactly is a construction defect? Is it just something that the homeowners are saying, "Hey, there's a problem with this thing?" In any kind of claim against a developer for construction defects, they're going to be motivated by things which constitute legally supportable claims.

What are legally supportable claims? They are claims that relate to violations of the building code. So construction and design practices that violated the Florida Building Code. They'll be motivated potentially by claims which address the deviation from the standard of care. In other words, what does a typical contractor performing the work that was performed, what do they do? What is a typical architect in designing these features or these elements of a building or the site improvements, what are those typical design elements?

And so it's not just simply a matter of this doesn't look right, or something appears to be wrong, a developer's not going to be very motivated by that. They're going to be motivated by things that are supportable in court. And that's where a good engineering report comes in.

Alan Tannenbaum, Esq.:
Yeah. It's also a deviation from the file plan specifications, which is why your engineer will look and see what the plans called for to ensure that what was actually built met what was in the permit documents. It's pretty evident with defects. I mean, if your building is cracking, and it's six months after transition, you know that that building's only going to get worse as time goes on. And that's the reason to get the engineering study is to have some support for, what's a visually obvious building defect?

Jon Lemole, Esq.:
Right. Okay. These are the types of professionals that the post-turnover board should be looking at. General counsel is an obvious thing. Every association should have a general counsel on retainer. That's a lawyer who's guiding the board through decisions regarding meetings, regarding violations of covenants. You need to have a lawyer that's there providing legal guidance on what the statutory requirements are for meeting notices and agendas, and also taking on the ability of the association to perform its assessment role and enforcement of covenants, because that's a big area that an association typically is involved with.

Construction counsel. We're construction lawyers. We think, and certainly good counsel to consult with a construction lawyer post-turnover, and especially if as Carlos has indicated in his question, there are concerns, or there's definite visual evidence of some potential problems, or maybe you've had a history pre-turnover that you're aware of, problems with lift stations, problem with drainage, problem with ponds.

That's where it's very important to consult with construction counsel, and see whether you have a claim, potentially. What is the potential value of that claim? And what action should the association may be take in regards to that? Folks, you all know that there's a statute of repose, and that there's a statute of limitations in Florida. We've talked about this a lot. The clock ticks, and if you wait too long on claims that you want to bring against the developer or the builder, you may find that the courthouse door is closed to you. And these may be sizable claims.

In any situation where you're able to bring a claim against the developer, the builder, subcontractors, you're essentially recouping money that may otherwise have to be a hundred percent funded by the association's members to fix a problem.

A CPA. Why is a CPA important? You're going to get an audit, and that's going to come within 90 days, or at least statutorily, within 90 days after turnover, in either the condo or the HOA regime. That audit is arranged for by the developer. There's no question in my mind that a turnover, a post-turnover association should obtain an independent audit of the books and records, because you want to know whether that developer has funded reserves correctly. And this happens a lot. We've seen this, that developer expenses have been paid out of association funds.

And there's time and time again where an independent audit has found money that's due to the association, where reserves haven't been properly funded. This is a very small subset of condo cases, but some of you may be familiar with condo conversions. That maybe a coming down the line in Florida, with all of the apartment buildings that are being constructed. Eventually there will be probably a handful of conversions of apartments into condominiums.

And under the conversion portion of the condominium statute, if certain reserves are not properly funded, then that conversion developer owes statutory warranties, whereas they would not owe statutory warranties if they fund reserves properly and fully according to the statute. So that's a very, very important thing to be looking out for.

An engineer. We've talked about engineers a lot in these discussions. But it gets back to the idea that the developer's engineering report, or the developers' turnover report, it can be done by an architect or an engineer, but that report is a very, very limited investigation of the building. And a lot of times, even though there are problems, as Alan said, the report is going to say that the roof still has 20 years of life left. The pavement still has 40 years of life left, and so on and so forth. It's not until you get a really good forensic engineer who gets in there and looks at all of these things in detail, that you may find that, no, that report is really not complete. There are other things that should be addressed.

And that goes hand in hand with a reserve specialist. Have an independent reserve specialist look, and especially after an engineering report, look at what the reserve requirements should be, what kind of reserve funding the association should be implementing. And we've seen that this is vitally, vitally important with some of the recent things that have happened in South Florida. Just as an anecdote, I saw an article this week. I think it was the City of Miami or Miami-Dade County is shutting ... Condemning, I think it was an apartment, but another high rise building, failed its 50 or 40-year inspection, and is being basically shut down and people are being told to get out.

Alan Tannenbaum, Esq.:
Jon, I like to make a point about engineering reserve studies. The purpose of getting an engineering study, the main purpose of it is to create a baseline for the new board in the determination of their maintenance and repair responsibility. I mean, how do you know what to budget? How do you know what the long term maintenance plan should be? Unless you know precisely what you're dealing with. The main purpose of that engineering report is to create a knowledge base for the board in confronting, potentially, years of repair maintenance and reserve determinations.

If it reveals problem, instead of discretionary act on the part of the board as to whether it wants to get into a claim situation or not. But we're a proponent that every board, whether it's an HOA or condo, coming through transition, because maintenance and repair is a main responsibility for a condo or an HOA, either association-owned property in an HOA or common elements in a condo, that's the major responsibility.

The engineering report is a crucial piece of information by which, for the board and management to make some great decisions. And that's why the investment should be made. And if certain groups decide on the basis of that engineering report, or an audit that is an interest in having somebody else pay for that, those repairs, then we certainly can get involved, but every group should know about their infrastructure and know what they're repairing and maintaining.

Please contact us about which engineers to get in there, because there's some that are appropriate for the purpose, who are willing to get into a claim situation that's necessary. So we like to get in there early to give some advice on who to retain for those purposes. I personally like the reserve study to be done by a different engineer or a different company that does the defect study, or the engineering investigation, because it could eventually cause problems later in trial.

And I've seen it where an engineer has called out significant problems, let's say in a roof, and they're in trial. And somebody pulls out this reserve study that they did at the same time that put a 20-year roof life on the roof. And they have to explain why they put that 20-year figure on there, because that didn't presume any defects in that roofing system.

Again, putting a number on that type of roofing system in a general fashion is something that lasts 20 years, but it could be a defective installation of that type of roofing system, which may need to be replaced at three years. And they're caught by the fact they put this 20 year statement. So they serve a different purpose. I say get a reserve specialist to do the reserve study, hire an engineering firm, to do the building analysis, and it ends up avoiding that potential conflict. Go ahead, Jon. I'm sorry.

Jon Lemole, Esq.:
Thanks. There's a question. What is the statute of limitations for claims against the developer? I'm going to talk about that really quickly. The statute of limitations on construction defect claims is four years. And that's four years from discovery, or four years from when the defect should have reasonably been discovered. Now, understand there's a slight wrinkle in condo land, because the statute of limitations is to hold until turnover. So that doesn't run until turnover occurs.

That's a pretty short period of time. I mean, I know four years sounds long, but it's really not that long, and it comes up quickly. And especially if you have obvious open patent types of things, like you're seeing problems with your ponds, you've got lift station problems, you've got stucco that's obviously cracking and failing. You don't want to wait for that because there's a lot of things that need to happen before you file that claim in order to put yourself in the best position. Don't ever wait. If you see these things, you ought to be talking to a construction lawyer, and evaluating what needs to be done from there. All right, we're going to some of these other ... Sorry.

Alan Tannenbaum, Esq.:
Let me just avoid some confusion on warranties versus statute of limitations. So if you're a condo, there are specific warranty periods during which you need to discover the defect in order to take advantage of the statutory warranty. You then have four years under the statute of limitations to take action on that.

But another important deadline is 10 years. So 10 years is the outside period for a latent defect, a defect that was not discovered early on to take action on that. So if you're in a building that's nine years old, and a problem comes up for the first time that you've never seen before, under the statute of repose, you have one year left to take action on that defect. So there's a 10-year absolute outside period for a late defect to take action. So be wary of that. Go ahead, Jon. Sorry.

Jon Lemole, Esq.:
Okay. Review existing contracts to determine if any should be canceled, and interview possible replacement vendors. So after turnover, you will have inherited a bunch of contracts relating to the operation, maintenance, and management of the association. It's a good policy to take a look at those contracts, and determine whether any of them may need to be replaced. Now, there's some important things you need to know about this, depending upon if you're in a condo or in an HOA. The condominium statute at 718.302 ... Hey Brian, can I share my screen real quick? Can you ... All right. Thanks.

718.302 addresses canceling or effectively changing contract for the operation, maintenance, or management of a condominium. I could probably spend 15 minutes. This is how long the statute is. Okay. But the key takeaway here is that, and I've highlighted some of the important information here, any contract made by the association prior to the assumption of control of the association by unit owners other than the developer that provides for the operation, maintenance, or management of the condominium, first of all, it needs to be fair and reasonable.

If the association operates only one condominium, so we're going to assume that for the time being, just for purposes of this conversation, unit owners other than the developer and the unit owners other than developer have assumed control of the association. The cancellation of a contract for the operation, maintenance, or management of the condominium shall be by concurrence of the owners of not less than 75% of the voting interest, other than the voting interest owned by the developer.

So there are some very detailed rules in the condominium statute, dealing with what you can do with those contracts when you inherit them from the developer after turnover. So I just want you to be aware of that. Certainly if you have a question about that, talk to general counsel. If you're not sure of who to talk to, feel free to run the question by us, and we'll provide some assistance to you in that regard.

Now, let's look at the HOA section relating to that same subject, and it's a very different section, 720.309. Here's the thing that's important here. Any contract that has a term greater than 10 years that is made by an association before control of the association is turned over to the members other than the developer, and that provides for operation, maintenance, or management of the association or common areas, must be fair and reasonable. Only contracts over 10 years must be fair and reasonable.

So any contract that's less than 10 years in term, it may not be fair and reasonable. So that's why it's important to take a look at these. I will anecdotally just say that for those of you that are dealing with rec leases, there is a whole another set of provisions that address rec lease contracts. One of the big takeaways on that is that those leases cannot contain escalation clauses, but I don't want to get into that. It's a little bit beyond the scope of this discussion, but just be aware that there's a whole set of provisions relating to rec leases. Brian, you can share your screen again.

Alan Tannenbaum, Esq.:
So the takeaway, Jon, if you're in a condo, there's a procedure for canceling any contract that was made by the developer pre-transition. If you're in an HOA, it's got to be a contract more than 10 years, and has to be unreasonable. And there's no immediate ability to cancel it. You would've to go to court, in theory, to try to cancel it. HOA has got the short stick on that one. Go ahead, Jon.

Jon Lemole, Esq.:
Okay. The next area is establish banking relationships. Here's why this is important. There may come a time, for example, where the association needs a line of credit to fund a repair project, let's say. And many lenders, many banks will only provide lending to customers or associations that also give them their assessment collection, lockbox, general banking business.

When you're looking at banks, there's the initial need for a banking relationship for assessment collection, where you're going to have your operating and reserve accounts, lockbox services and all of that stuff. Choose wisely there. Because if there comes a time where you may need some funding of some sort, you may either be with a bank that doesn't really provide that, or doesn't provide it on very good terms. That's not their area. That's not something that they're very interested in. That may happen.

You don't want to have to switch banks for all of your regular business banking, all of a sudden, because you find yourselves in need of a line of credit. So take a real good look at those banking relationships. And when you're talking to those bankers to ask them about the potential for lending in the future if it's needed, and whether they provide it, and make smart decisions on the front end, so you can save yourselves some headaches on them.

Alan Tannenbaum, Esq.:
Jon, you got five minutes, so let's highlight the main points of the rest of your portion.

Jon Lemole, Esq.:
Got it. Consider document amendments. Again, Brian said the documents are drafted by the developer, and they're drafted with a view towards providing the developer maximum protection. Especially in the area of HOA maintenance and repair obligations, and especially with multifamily buildings. Those are documents that need to be very carefully looked at, because a lot of time those maintenance and repair provisions are not clear, and they can create a lot of problems for an association.

You may have an association having the obligation to maintain and replace roof coverings, but not necessarily roof framing. And so what happens if in the course of doing a re-roofing project, you find that there's framing damage, who covers that? Who's supposed to pay for that? Window is another big area. Everybody excludes windows, but what happens if the windows are the source of water intrusion, and that window water intrusion is now causing problems for stucco underneath, and the windows need to be replaced because they weren't installed right? Who's going to replace those if the association doesn't have standing to do that?

So it's very important to be looking at the governing documents and running them by an attorney to see if they make sense for the association being able to effectively operate, maintain, and repair the things that it's going to need to maintain and repair.

Establishing rules and regulations, and setting up architectural review. This is pretty common sense. You want to have consistent rules relating to design aesthetics and basically lifestyle issues in the community. You want to have a really good protocol for how owner request to do renovations are handled. And it's important to have those protocols. Why is that important? Because you want to avoid a charge of selective enforcement.

There are a lot of cases where associations have been, and this is a legal term, stopped from enforcing certain covenants relating to renovations or changes in design styles, because initially they didn't enforce them and then they choose to enforce them down the road, because they realized they made a mistake in not enforcing them. And that can get associations into a lot of trouble. So being very consistent in how you handle those things and having some protocol right up front is going to save the association from potential claims by owners in the future.

Alan Tannenbaum, Esq.:
Jon, with no discussion, can you just go down the rest of the items on your list?

Jon Lemole, Esq.:
Push developer to complete the turnover obligations. Gather remaining records from public entities. We talked about that a little bit earlier. Undertake reserve and engineering studies. We've probably exhausted that in the earlier discussions. CPA review of developer audit, I talked about that a little bit earlier. We covered that.

Establish warranty response and repair protocols. You want to know right at the very beginning, what is the association going to be responsible for? If it's a warranty claim, you need to be having a protocol for telling owners, no, you need to contact the developer or the builder directly for that, as opposed to-

Alan Tannenbaum, Esq.:
For unit issues.

Jon Lemole, Esq.:
Unit issues. Interior unit issues. It's always best practice to have interior unit issues referred first for warranty repair by the developer committees.

Alan Tannenbaum, Esq.:
Jon, let me make a point there, which is, you don't have to let the developer in to do whatever it wants to do. So a warranty response is a response by the developer that is going to be effective and long term. Not slapping some caulk up on a problem that's much more serious than that would entail. You're only obligated to let them in to do a long term intelligent repair. Go ahead, Jon.

Jon Lemole, Esq.:
Okay. Established committees. Look, the board is running a very large business, essentially. Three to five people can't do it all. So committees are very important, and they provide cover under the business judgment rule, so that the board can delegate certain functions to committees who can report back to the board so that the board is fully informed. And if they make a decision, they've made it based upon adequate evidence, information, due diligence, and that always is a good thing, especially when it comes to the business judgment rule, which provides protection to the board and the decisions that they make.

Inform the developer and other responsible parties of claims through construction counsel. That's just the general theme that we've run through here. If you've got potential issues that you want to bring to the attention of the developer, that should be handled right away. Don't delay. Delay can be fatal to seeking some satisfaction from the developer, the builder, subcontractors, whoever it may be. Get counsel involved, take a look at what claims you may have, and address them right up front. We're getting close to the end. I know we want to answer some questions, so I'll turn it back over to Alan.

Alan Tannenbaum, Esq.:
Yeah. Let me tie this all together. First of all, our outline is available. So whoever wants it, let Michelle Colburn know, and will get it to you, because this obviously covers the points that we covered today. We offer a free consultation of at least an hour for any group that's anticipating transition, who has gone through transition, to go over your individual situations in detail. Certainly take advantage of that, because every association's different, has different needs. And we also could give advice on general counsel, CPAs, engineers, reserve study folks who we feel are best situated to do the best work for you. So we are available for those referrals also.

We can stay on for a few minutes, a few folks who want to answer our poll, and we will let you know soon what is available next time. This program is available, will be available online within a matter of days. You can always go to our website if you want to listen to it again or refer it to somebody, the program will be available for that purpose. Or if you get tired and can't sleep one night and want something to put you asleep, you can watch it for that purpose, whatever purpose you want. We'll answer some questions. We'll stay on for a few minutes, but we are officially concluded. Let's see if there's any follow-up questions that we did not respond to.

Brian Tannenbaum, Esq.:
I've put them there on the screen for you.

Alan Tannenbaum, Esq.:
X out of it. Okay. There it goes. All right. I think we answered the first one, which was you need an engineer to verify that there is in fact a defect. You can't rely on the lay person within your community. The issue about appointment at turnover, I'm going to have to defer that question to one of our learned general counsel. And I think they're divided on that.

For instance, at turnover, it's a board of five, and there's only three people get elected. I would say that those three would be able to fill the other two seats. But there may be general counsel who might not agree with me, but that seems logical. If there's only two elected, I don't think those two can fill three seats, but three can fill the other two seats.

If there's not an audit within 90 days is one of the questions. If you're a condo, you can go see the state, and say that the developer failed to comply with that section of the statute, and the state can find the developer, then take action. If you're an HOA, you're out of luck, unless you want to go to court. That's what the legislature unfortunately left HOAs with. But a condo association can go ask the state for relief on that.

Okay. The developer failure to fund reserves. Yes, that is a potential claim against the developer going back, to try to recover the full funding of reserves. Understand in a condo, developer reserve fundings are required after at least the first two years of association operation. HOAs, a lot of times the reserve requirement is optional, not a required obligation of developer. It says a developer may fund reserve accounts.

You won't be able to enforce that if the developer in fact didn't do it, or underfunded them when it was a voluntary act on the part of developer under the HOA documents. Some attorneys say that since turnover is statutorily mandated lack of quorum does not hinder the election in a turnover meeting. Not going to touch that one. That would be a great debate between general counsel.

We talked about the reserves. Would it be considered a conflict of interest for the commercial condo developer attorney to be retained by the association? That's a difficult one. There are lawyers who serve as association counsel pre-transition who end up being the post-transition attorney. If they personally are representing the developer, then I think it would be problematic for that same lawyer to represent the association after turnover, if they were actually the developer's counsel.

I'm very curious as to why it is that that lawyer got hired by the post-transition association, if they were in fact a developer's lawyer. There's probably a really interesting story behind that one. Good luck with it. We've hit 12:07. I think we've answered all the questions. I hope that you found the session valuable, and we will see everybody next month. Thank you.


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