Every planned residential development or other kind of common interest development consisting of common areas and individual ownership interests, such as a condominium development, will need management, and a homeowners' association usually fills this role. The association can be a non-profit corporation or an unincorporated association which is set up to manage the development. These managing entities are called homeowners' associations (HOAs).
The developer, who is the person or business that buys the land and builds the residential units or has the units built, has a role in forming the HOA and selecting its initial board of directors. Although the developer can vote in the election of directors, the developer's control is somewhat limited by election rules. Also, developers may be held liable on certain kinds of claims concerning the project, such as construction defects.
Common Interest Developments
Common interest developments are created under state laws. In forming a residential common interest development, a develop will need to file several documents with government authorities:
- A declaration, which is a document containing a legal description of the development and any restrictions on ownership
- A condominium plan, if any exists
- A final map or parcel map if state law requires the recording of such a map for the common interest development
Typically, before selling any units in the project, the developer must notify the state real estate agency of his intention to sell units and must obtain a public report on the development from the state real estate commissioner. The commissioner won't issue a public report until he finds that the governing documents contain ''reasonable arrangements'' concerning the management, use and control of the development. Among other things, the reasonable arrangement regulations impose requirements relating to the form and powers of HOAs.
Developer's Role in the HOA
The life of a HOA begins with the first meeting of owners. Usually, this meeting must be held within a certain amount of time after the sale of the first unit. The first board of directors for the HOA must be elected at this meeting. Because the developer is a property owner, the developer can vote for directors. However, so long as a majority of the voting power of the association resides in the developer, or so long as there are two outstanding classes of membership in the association, a certain percentage of directors must be elected by the votes of non-developer owners.
After the election of the board of directors, operational control of the development is transferred from the developer to the board.
Liability of Developer
Developers of common interest developments are sometimes sued by unhappy homeowners. These lawsuits fall into one of three categories:
- Construction defect claims. These are claims relate to the actual design and construction of the project. Successful claims for construction defects are generally based on breach of implied warranty or negligence. On a breach of implied warranty claim, the homeowner alleges that in selling the home or unit, the developer guaranteed that it was fit for a particular purpose, and that it wasn't, in fact, fit for that purpose. In a negligence claim, the homeowner alleges that the developer had a duty to determine the structural condition of a home and prevent defects, that the developer violated that duty and that the homeowner was harmed as a result.
- Marketing misrepresentations. These are claims involving how the developer markets individual units to the public. The homeowner alleges that the developer made certain representations during the development phase of the project, that the homeowner had expectations based on those representations and that the representations weren't true.
- Breach of fiduciary duties. These are claims which involve the manner in which the developer manages and operates the HOA before turning control over to the homeowners. The homeowner alleges that the developer had a fiduciary duty to serve the HOA's best interest and that the developer violated that duty by acting in his own interest instead.
If you have any questions about the rights and responsibilities of the developer of a common interest development, contact a Residential Real Estate Lawyer in your area.
Questions for Your Attorney
- What should the homeowners do if the developer refuses to transfer operational control to the HOA's board of directors after they are elected?
- How do I get a copy of the public report for a common interest development?
- Can a second owner of a home in a planned residential development sue the developer for construction defects in the second owner's home, or are claims limited to the first buyer of a unit?