When does the HOA Belong to the Homeowners?

So you have done it.  You purchased that dream home.  It is brand new, and you worked with the builder for months, agonizing over each critical detail.  And it is yours!  Now it is time to protect that investment and turn your community into your village.  How do you go about doing that? 

Turnover of the property from the Developer to the owners themselves is an absolutely critical time for the health of the Association. Yet time and again, owners are not provided with the information, guidance, and counsel needed to make good decisions and take advantage of this moment. Instead, they end up with insufficient information and do a lot of this work in the dark, only addressing some of these issues after the statute of limitations has run, or as problems arise. If you are a new or expanding community, here are some important things for you to know about your rights and opportunities during the transition process under the Maryland HOA Act (note – check your state statute for specifics).

Declarant Control

If your home is part of a new development, then the seller is known as the “Declarant.”  Until 75% of the lots are sold to homebuyers, the Declarant is still in charge of the HOA.  They are responsible for holding meetings, setting and enforcing rules, maintaining common areas, collecting assessments, and other typical HOA functions.  As the builder, they are also responsible for creating long-term sustainable plans, such as a reserve fund that will pay for needed repairs and routine replacements or maintenance, a stormwater management system that will work, and covenants that will protect the quiet enjoyment and home values of neighbors.

Transition Meeting

Sixty days after the required 75% of lots are sold (unless the documents provide differently), the Declarant is required to hold a “transition meeting” to allow for the election of the new homeowner board.  This meeting is essential to starting a community off on the right foot, yet time and again homebuyers are not properly schooled in what to know or ask for at that meeting.  The owners are entitled to elect their own board and begin to govern themselves while the Declarant steps away.  This can also be an excellent time for the new board to put into place any document provisions using the Declarant’s ability to amend the covenants.   

Document and Record Turnover

The Declarant is required to turn over to the new homeowner board all of the records of the Association, including minutes, stormwater management, deeds to common areas, insurance documents, and owner rosters.  All of this must take place within 30 days of the Transition Meeting.  But oftentimes the owner board does not know all of their rights, or the significance of the documents they are receiving, because the only advisors involved at this step are the ones brought in by the Declarant.  A wise board or owner will enforce its rights and hold the Declarant to task, making sure to receive the documents to which it is entitled.

Declarant Amendment Rights

Under the documents, the Declarant often has the unfettered right to amend the documents. After transition, that will require a vote of a majority or more of the membership, which can be difficult and time-consuming. At the time of transition, a homeowner board can work with the Declarant to obtain needed updates to otherwise outdated and Declarant-focused CCRs and Bylaws. This is a little-utilized but powerful advantage that newly transitioned communities have available to them.

Cancellation of Contracts

During this same 30 day period, the new owner board has the right to cancel, without penalty or liability, nearly all contracts entered into by the Declarant, including property management, financial management, legal, and grounds maintenance.  So this is the opportune time for the new owners to band together and decide upon the contractors that they want to use for the long term, rather than those who were hand-picked by the Declarant. Managers, attorneys, landscapers, trash contractors, and more can all be reviewed and either retained or replaced at this time.  

What Next?

Now the truly challenging portion begins – the homeowners take over governance for themselves.  Some early issues to keep in mind and address:

Get an audit. Make sure that all monies were properly accounted for and turned over to the HOA.  An auditor may determine that the Declarant owes the association some additional funds.

Commission a transition study.  This report will tell the new association what issues the property currently has, including warranty and defect claims to bring against the Declarant.  There are very strict statutes of limitations on these claims so the new board should not delay.  This can tell you about stormwater maintenance and runoff, drainage matters, defects, grading problems, and a lot more.

Commission a reserve study.  This report tells the new board what issues they should be on the lookout for as the property ages.  How much will it cost to replace the sign at the front of the neighborhood, or the pool lining, and when should the community expect that expense?  This allows the Association to properly fund its reserves to responsibly protect itself for the long term.

Hire a property manager.  Up until now, the Declarant (and probably its property manager) have been handling the business of the Association.  Now the Board will need to choose the manager they want to work with.  

Hire a lawyer.  Note that the association will probably already have an attorney – one selected by the Declarant to tell them how to keep costs down and avoid lawsuits.  New legal counsel can advise the Board what rights they have against the Declarant, including recovery of funds and warranty claims. It cannot be overstated – the period for bringing claims against the Declarant for breaches of warranty and other failures of the construction is very brief. Do not delay in getting the Association its own independent counsel.  

Review your documents and set out clear policies where necessary.  If the covenants allow the board to create architectural guidelines or leasing rules, adopt them now so that owners and buyers can be made aware in advance of the rules governing the community. 

The Takeaway

Remember when you purchase in a new community that they Declarant wants to sell you a great product, but it is up to you to preserve it and make it your home.