TRANSITION OF ASSOCIATION CONTROL
PART I, CONDOMINIUMS
This is the first part of a three part series concerning the transition of control of community associations to the non-developer owners. In this part, we will address the technical requirements for transitions of Condominium Associations.
TRANSITION -- WHAT IS IT?
'Transition' is really nothing more than the point in time when the non-developer owners elect a majority of the Board of Directors and take control of the operation of the association. Consistent with that concept, Section 718.301(4), Florida Statutes (FS), states in relevant part as follows:
(4) At the time that unit owners other than the developer elect a majority of the members of the board of administration of an association, the developer shall relinquish control of the association, and the unit owners shall accept control.....
That being said, Chapter 718, FS, and Chapter 61B of the Florida Administrative Code (FAC) contain specific requirements which address when and how the transition must occur which make the event more formal and regimented. The following is a summary of those requirements.
1. What Laws Apply?
Sections 718.301 and 718.302, FS, and Rules 61B-22.0062 and 61B-23.003, FAC contain most of the requirements for when and how transitions of condominium associations must occur.
2. When Is Transition Required?
Section 718.301, FS, requires that developers give up control of condominium associations based on the following schedule:
a. The non-developer owners must be allowed to elect at least one-third of the board members when they own 15 percent or more of the units;
b. The non-developer owners must be allowed to elect at least a majority of the board members when the earliest of the following events occur:
i. Three years after 50 percent of the units have been conveyed to the non-developer owners;
ii. Three months after 90 percent of the units have been conveyed to the non-developer owners;
iii. When all units have been built, some have been sold, but none of the others are being offered for sale;
iv. When some of the units have been sold, but none of the others are being constructed or offered for sale; or
v. Seven years after the recording of the Declaration of Condominium.
3. Can the Non-Developer Members Refuse to Take Control of the Association?
Even though members occasionally attempt to do so, the law simply does not permit them to refuse to take control of an association. In fact, if the members refuse to participate in the transition process, the association will ultimately find itself without any board members and possibly facing receivership.
4. Transition Committees/Continuing Obligations of the Developer:
Rule 61B-23.003(2), FAC, permits, but does not require, that condominium developers establish transition committees allowing unit owners to involve themselves in the operation of the condominium in an advisory capacity. The law does not address whether the developer or the association will fund such committees, therefore each transition event may be treated differently.
That being said, pursuant to Section 718.301(5), FS, developers remain responsible for violations of Chapter 718 and the Florida Administrative Rules until they relinquish control of the association. Therefore, because developers remain subject to administrative penalties and are liable to third parties for violations, transition committees should not expect to have a great deal of say in the operation of the association.
5. When Do the Elections Occur?
According to Section 718.301(2), FS, within 75 days after the unit owners are entitled to elect at least one-third of the board members, and again within 75 days after the unit owners are entitled to elect at least a majority of the board members, the developers must call for the appropriate elections.
6. What Election Process Must be Used?
According to Section 718.301(2), FS, the association must use the traditional secret ballot election process provided for in Section 718.112(2)(d), FS, for all transition elections.
7. Transfer of Property and Assets:
Except for the financial records addressed below, simultaneously with the election of a majority of the board members, the developer must deliver to the association all property of the unit owners and of the association which is held or controlled by the developer. While too long to reproduce in this article, Section 718.301(4), FS, includes the list of those items. All expenses incurred in complying with this obligation must be funded by the developer.
8. Financial Reporting:
Unlike the other property which must be delivered to the non-developer owners at the time of transition, Section 718.301(4), FS, and Rule 61B-22.0062, FAC, provide that developers have up to 90 days after the date of transition to deliver the association’s financial records. One of the most important of these records is an audit which is required by Section 718.301(4)(c), FS. Unless audits have been performed each year, the 'transition' audit must cover the period beginning with the date of incorporation of the association, and ending with the date of the transition.
9. Receipt for Property and Assets:
Rule 61B-23.003(6), FAC, requires that the developer obtain a receipt from the non-developer owners at the time of transition for all items delivered to the association. However, while both the developer and the association must keep the receipt for 7 years, the same rule provides as follows:
Said receipt shall not constitute a waiver of unit owner or association rights with respect to completeness and accuracy of the transfer of condominium documents or preclude administrative remedies available to the division.
10. Notification of First Election by Developer to the Division:
Rule 61B-23.003(5), FAC, requires the developer to supply the Division with the name and mailing address of the first elected non-developer board member within ten (10) business days after the election. Strangely, there is no requirement for any additional notifications to the Division as the transition process continues.
11. Right to Compel Transitions:
According to Section 718.302(6), FS, if a developer fails or refuses to comply with any of the transition requirements, a lawsuit may be brought using the 'fast track' procedures provided for in Section 51.011, FS. In any such action, the prevailing party is entitled to recover reasonable attorney's fees.
12. Developer’s Rights After Transition:
Even though a developer must allow the members to elect board members using the above outlined schedule, the developer retains the following rights after the transition occurs:
a. Right to Have One Board Member:
According to Section 718.301(1)(e), FS, if the developer continues to sell units, it has the absolute right to elect one member to the Board, so long as it owns at least 5 percent of the units in condominiums with fewer than 500 units or at least 2 percent of the units in condominiums with more than 500 units.
b. Limited Right to Vote:
According to Section 718.301(1)(e), FS, developers retain the right to vote for their units in the same manner as any other unit owner except that they may not use their votes to either:
i. Reacquire control of the association; or
ii. Select the majority of the Board of Directors.
c. Right to Market and Sell Units:
According to Section 718.301(3), FS, if developers continue to sell units, then neither of the following actions may be taken without the developer’s written approval:
i. Assess the developer for capital improvements; or
ii. Take actions which would be detrimental to the sales of units.
d. Construction Defect Claims:
According to Section 718.301(7), FS, no claim may be made by an association against a developer which alleges a defect in design, structural elements, construction, or any mechanical, electrical, fire protection, plumbing, or other element that requires a licensed professional for design or installation under chapter 455, chapter 471, chapter 481, chapter 489, or chapter 633, unless the alleged defect has been first examined and certified by an appropriately licensed Florida engineer, design professional, contractor, or otherwise licensed Florida individual or entity.
13. Multi-Condominiums and Bulk Sales:
The above analysis assumes that the association operates only one condominium. It also assumes that the sales of units occur in the ordinary course of business. If an association operates more than one condominium or if bulk sales occur, the transition outline above may not apply. In these instances, you should seek legal counsel.
The next edition of e-Lawyer will address the transition process for homeowners’ associations.
The firm of Taylor & Carls, P.A., with offices located in Maitland, Melbourne, Tampa and Palm Coast, Florida, was founded in 1981 and has practiced in the area of community association law since that date. This edition was prepared by Robert L. Taylor, Esq. of Taylor & Carls, P.A. The information contained in The Association e-Lawyer should not be acted upon without professional legal advice. The opinions expressed herein are as of the date hereof, and this law firm undertakes no obligation to advise the Association of subsequent changes in the law.
©2007 Taylor & Carls, P.A. All Rights Reserved.
The firm can be reached Toll Free at 1-800-395-6235 or locally at 407-660-1040.
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