Mixed-Use Development: Structuring Air Rights Condominiums and Other Common Interest Community Regimes

Transcription

1 Presenting a live 90-minute webinar with interactive Q&A Mixed-Use Development: Structuring Air Rights Condominiums and Other Common Interest Community Regimes Optimal Legal Structures and Core Drafting Challenges; Minimizing Potential Warranty Claims THURSDAY, NOVEMBER 9, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Ashley Haun, Esq., Ballard Spahr, Washington, D.C. Douglas M. Irvin, Of Counsel, Ballard Spahr, Washington, D.C. Emily J. Vaias, Of Counsel, Ballard Spahr, Washington, D.C. The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions ed to registrants for additional information. If you have any questions, please contact Customer Service at ext. 10.

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5 Mixed-Use Development: Structuring Air Rights Condominiums and Other Selecting the Optimal Legal Structure, Addressing Core Drafting Challenges, and Minimizing Potential Warranty Claims November 9, 2017 Ballard Spahr LLP Prepared and Presented by: Douglas M. Irvin, Esq Emily J. Vaias, Esq Ashley C. Haun, Esq

6 A. Zoning considerations and options for subdivision of air rights and horizontal developments B. Types of common interest developments: condominiums, planned communities, and reciprocal easement agreements ( REAs ) C. The air rights condominium as an ownership and development vehicle D. Structuring air rights condominiums and planned communities to address the challenges of mixed-use development: you have to keep them separated E. Addressing the for-sale residential component of a mixed-use development F. Defending builder contracts from purchaser termination claims G. Planning for transition and minimizing potential warranty claims H. Dealing with fractured or failed developments I. Questions & Answers 6

7 A. Zoning considerations and options for subdivision of air rights and horizontal developments 1. Zoning Controls (a) Determines uses and density (b) Sets development standards or envelope (c) Constitutional constraints 7

8 A. Zoning considerations and options for subdivision of air rights and horizontal developments (continued) 2. Subdivision of Land (a) Divides land for ownership and/or development (b) Creates a Record Lot (c) Controls the timing of development through review of adequate public facilities (APF) (d) Process (e) Exactions and dedications 8

9 A. Zoning considerations and options for subdivision of air rights and horizontal developments (continued) 3. Reasons to Avoid Subdivision (a) Time (b) Exactions and dedications (c) APF issues (d) Only need to change ownership 9

10 A. Zoning considerations and options for subdivision of air rights and horizontal developments (continued) 4. Alternatives to Traditional Subdivision (a) Ownership Lots or Tax Lots (b) Ground Lease (c) Reciprocal Easement Agreements (REA) (d) Condominium structures 10

11 B. Types of common interest developments: condominiums, planned communities, and reciprocal easement agreements ( REAs ) 1. General Characteristics: A group of property owners, residential, commercial or both, that are governed by a common scheme of rules (usually a recorded Declaration, Bylaws and/or REAs) intended to regulate the relationships of the owners and their use of individually and commonly owned property within the development. 2. Condominiums. (a) (b) (c) Condominiums are distinguished by the ownership of real estate in common by a group of Owners. When a Condominium is created, the property is divided into units, each of which is owned in fee simple by an Owner, and the Common Elements are owned as tenants in common by all unit owners. Common Elements may sometimes have their use restricted to particular Owners (examples include balconies, patios, and garage spaces) as "limited" or "restricted" Common Elements. The drafter usually has great deal of flexibility in how the units and Common Elements are defined. The responsibility for and the control of the Common Elements are vested in the Condominium Association. 11

12 B. Types of common interest developments: condominiums, planned communities, and reciprocal easement agreements ( REAs ) (continued) (d) Condominiums are highly regulated. The formation and sale of Condominium Units is the subject of extensive legislation in nearly every jurisdiction, including the requirement to register a Public Offering Statement prior to offering residential units for sale. 3. Planned Communities (or Homeowners Associations). (a) (b) (c) Homeowners Associations are found in situations where a group of property Owners need to, or wish to, act in concert in order to own and operate common facilities or to establish a set of common guidelines for ownership within a group of separately owned properties. A Homeowners Association can be distinguished from a Condominium in that its members do not own property in common. Common Areas are owned in fee by the legal entity that constitutes the Homeowners Association. Examples of the purposes for which Homeowners Associations are formed include: 12

13 B. Types of common interest developments: condominiums, planned communities, and reciprocal easement agreements ( REAs ) (continued) (i) (ii) (iii) Ownership of common facilities The ownership, maintenance and operation of common facilities such as open space, swimming pools, hiker/biker trails, storm water detention areas, and recreation facilities. Exterior maintenance of Owners' properties The HOA can provide painting, lawn maintenance and other services to Owners. Popular in turn-key projects where Owners wish to perform little maintenance themselves. Restrictive Covenants Enforcement of Restrictive Covenants to promote the appropriate use of the common areas and to protect the character of a community, typically including architectural controls. 4. Reciprocal Easement Agreements ( REAs ). (a) (b) (c) When an REA is used, there usually is no common property ownership among the participants. Common interests are regulated through agreements and easements that run with the land. Control and responsibility under an REA is often vested in a single participant. Enforcement of an REA can more difficult than with other Common Interest models because there may be no statutory funding or enforcement mechanism, as there is with a Condominium or Homeowners Association (these issues must be specifically addressed in the REA). 13

14 C. The air rights condominium as an ownership and development vehicle 1. What is an air rights condominium? (a) (b) (c) (d) Everyone is familiar with traditional subdivisions - typically created by a record plat prepared and recorded in accordance with local zoning ordinances. Common law concept - each lot owner owns the land from the center of the earth to the heavens. Condominium statutes allow the property owner to divide this traditional property interest into separate ownership units, which are typically stacked. Good example is a typical high-rise condominium in which each unit corresponds to the separate dwelling unit conveyed to each unit owner. Condominium statutes are generally very flexible regarding how a unit may be defined. For example, Chapter 4.2, Section of The Virginia Condominium Act defines land to include the following: Parcels of airspace constitute land within the meaning of this chapter. For purposes of our discussion today - an air rights condominium is one in which the units are cubes of airspace that are intended to include structures, or portions of structures, within the cube unit (as opposed to a traditional condominium unit that is located inside of a residential structure). Each such cube unit generally corresponds to the differing proposed uses of the structures, or portions thereof, such as Residential Unit Retail Unit Office Unit and Parking Unit. 14

15 C. The air rights condominium as an ownership and development vehicle (continued) 2. In many mixed use developments the preferred transaction structure is and air-rights condominium which permits a fee simple purchase of air rights. This structure is generally preferred by institutional debt and equity partners, and provides for a wider range of capital sources for the project. 3. A Ground Lease structure is an alternative that could be considered - but is generally not desirable if there is a for-sale component. 4. In many (if not most) jurisdictions the air rights condominium is the only means to divide air rights into separate ownership units, which may be separately owned and financed. However, some jurisdictions allow air space to be subdivided using a record plat or other administrative filing (e.g., DC & Arlington County,VA). 5. If vertical or air rights subdivision is allowed then an REA structure is possible as an alternative to an air-rights condominium. REAs are frequently used by commercial developers and property owners in more traditional settings (e.g., retail malls and shopping centers) that do not involved stacked ownership to address operation and maintenance issues among the property owners. If you do not need (or want) to use a condominium structure then an REA could be used if your jurisdiction allows the creation of air rights lots. 15

16 C. The air rights condominium as an ownership and development vehicle (continued) 6. Although in some cases parties express a preference for an REA (usually because of familiarity with the format), an REA is not really superior to a condominium structure. Issues of operation and maintenance of a commercial property are typically complex ( too complex is sometimes an argument used against the condominium structure) which results in a complex REA. 7. A distinct advantage of the condominium structure is that the condominium plats give you an opportunity to address structural complexities graphically on the plats which results in an easier to understand ownership structure and allocation of rights. 8. Hybrid is possible: de minimis condominium plus REA. If an REA approach is for some reason required (have had this as a result of party preference) then a condominium can be used to simply establish the air rights units, and then these units may be subjected to a separate REA. In this case the de minimis condominium has no real operational role in the property. 16

17 C. The air rights condominium as an ownership and development vehicle (continued) 9. Examples of mixed-use developments. (a) Historic precedents: Annapolis MD; Place Des Vosges, Paris France. (b) Modern examples: Bethesda Row, Montgomery County, MD; Annapolis Towne Centre, Annapolis, MD; The Wharf, Southwest Waterfront, Washington, DC. (c) Air-Rights Condominium Plats: Washington Harbour Condominium, a relatively simple example of an air rights condominium. Includes 2 air rights units: PARKING FACILITY UNIT and RESIDENTIAL UNIT. Example plats show: multiple levels; designations of common element features, e.g., stairwells, lobby area, pool & roof top amenities; subdivision of RESIDENTIAL UNIT into individual dwelling units. 17

18 Example Mixed Use Development: Annapolis, MD 18

19 Example Mixed Use Development: Place Des Vosges, Paris France 19

20 Example Mixed Use Development: Bethesda Row, Montgomery County, MD 20

21 Example Mixed Use Development: Annapolis Town Centre, Annapolis, MD 21

22 Example Mixed Use Development: Washington Harbour Condominium 22

23 Example Mixed Use Development: Washington Harbour Condominium 23

24 Example Mixed Use Development: Washington Harbour Condominium 24

25 Example Mixed Use Development: The Wharf, Washington, DC 25

26 Example Mixed Use Development: The Wharf, Washington, DC 26

27 Example Mixed Use Development: The Wharf, Washington, DC 27

28 D. Structuring air rights condominiums to address the challenges of mixed-use development: you have to keep them separated 1. Creation of cube units allows for the separate ownership and financing of air rights. 2. Complex air rights developments are typically multi-year efforts. Condominium statutes allow for phasing, so the cube units can be created in phases to match the development and construction schedule of a project. The initial units can be used to secure acquisition and construction financing on a phase by phase basis. 3. The condominium structure is a good means (particularly when coupled with clear and detailed condominium plats) of addressing site-wide issues of operation and maintenance. Shared amenities and building components (e.g., parking areas, courtyards and plaza areas, roofs, storm water management facilities, etc.) can be easily shown on the plats and responsibility for maintenance assigned. 28

29 D. Structuring air rights condominiums to address the challenges of mixed-use development: you have to keep them separated (continued) 4. Each unit is assigned a percentage interest which defines the unit owners ownership interest in the common elements, and their responsibility for common expenses. The obligation to pay assessments is typically lien supported. 5. The condominium provides a structure for addressing casualty and condemnation. The condominium association is typically assigned responsibility for obtaining and maintaining property and liability coverage, and for adjusting claims if and when they occur. 6. Public - Private Partnerships: The air rights condominium structure provides a good means for addressing special issues that arise in public private partnerships. Public entities typically do not want to be treated the same as other owners in the air rights development. Because the publicly owned space will be defined as a separate cube unit, it becomes fairly straight-forward to establish special provisions for that unit. 29

30 D. Structuring air rights condominiums to address the challenges of mixed-use development: you have to keep them separated (continued) 7. For example, public entities may not want to be involved in the day to day operations of the condominium. The condominium documents can be structured to establish the public entity as a silent partner that participates only in major decisions, such as document amendments or material capital improvements. 8. Public entities also typically want some type of control over the level of assessments (if any) that may be imposed against their units. The condominium instruments can establish assessment caps and exemptions. 30

31 E. Addressing the for-sale residential component of a mixed use development 1. Air rights projects typically include a residential component, both rental apartment and for-sale condominium. 2. The for-sale component will typically be established as a separate sub condominium regime within the cube RESIDENTIAL UNIT established by the master air rights condominium. The for-sale component will be covered by a registration application, including a public offering statement, for example in Virginia filed with the Virginia Department of Professional and Occupational Regulation (Common Interest Community Board). 3. It is important that the public offering statement and other disclosure materials for the for-sale component clearly describe the overall master air rights condominium and the relationship of the sub condominium to the master. 31

32 E. Addressing the for-sale residential component of a mixed use development (continued) 4. The establishment of cube units at the master air rights condominium level provides the opportunity to shield the master developer from potential warranty liability associated with for sale condominiums. The cube RESIDENTIAL UNIT will typically be owned by a separate special purpose entity specifically formed to develop and sell residential condominium units. For example, the Virginia Condominium Act generally provides for a 2-year warranty against structural defects applicable to the units and common elements given by the declarant of the for-sale units. If the units are created and sold by a separate special purpose entity, then it will be this entity that gives the unit and common element warranties. 5. Governance issues are very significant. Condominiums are typically governed by a board of directors that is elected by the unit owners. The master air rights developer wants to avoid a scenario in which residential unit owners can control the operations of the air rights condominium. While tempting, it is not advisable to completely deny the for-sale residential unit owners any say in the operation of the air rights condominium. The best approach is to grant the for-sale unit owners the right to elect a designated number of directors (which should constitute a minority of the board) and to grant the commercial unit owner the right to elect a majority. 32

33 E. Addressing the for-sale residential component of a mixed use development (continued) 6. In addition to voting control, it is usually desirable to include specific protections and disclosures regarding the commercial activities within the condominium, particularly with regard to retail users (e.g., restaurants and bars). For example, it is typically desirable to include specific limitations on the ability of the air rights condominium to adopt rules or otherwise take actions that would have an adverse impact on the retail unit owners or users. Also, the public offering statement should include prominent disclosures regarding potential retail uses and the possibility that unit owners will experience noise, smells, traffic, etc. associated with these uses. 7. Divide & Conquer - it is also usually desirable to create parallel but separate governance structures within the air rights condominium, e.g., a Commercial Section and a Residential Section. Each section has its own executive committee, budget and enforcement authority within their respective sections. This can help to minimize undue interference by the residential owners in commercial operations. The master board is relegated to dealing with issues of site-wide importance, such as adjusting a major casualty to the property. 8. Conversion condominium - consideration should be given to subjecting any rental component to a shelf condominium for purposes of minimizing the impact of statutory provisions designed to apply to rental facilities that are converted to a for-sale condominium. This is typically accomplished by subjecting the rental facility to a condominium regime prior to the offer or rental of any units within the rental facility. 33

34 F. Defending builder contracts from purchaser termination claims 1. In times of market down turn builder s typically experience increasing contract rescission rates. This was particularly true in the post-2007 market where some projects experience rescission rates in excess of 30%. Knowledge of potential contract rescission claims is easily obtained and widespread. See e.g., Looking for Loopholes, Washington Business Journal, July 20, Incomplete Disclosures may mean contracts are unenforceable. Purchasers are entitled to complete disclosures and updates. Applicable Condominium and Homeowners Association Acts have specific disclosure requirements that must be followed. 3. Consumer Protection Act violations statutes typically proscribe unfair or deceptive trade practices. Violations can lead to enforcement actions and sanctions by local government authorities. 4. Doctrine of Mutuality - A contract that does not impose a binding obligation on both parties is illusory and may be deemed invalid for lack of mutuality. Excessive limitation of purchaser remedies in the event of seller default can render the contract illusory. Contract drafters must avoid the temptation of over zealous provisions in favor of seller. 5. Federal Interstate Land Sales Full Disclosure Act ( ILSA ) - Registration or exemption is required. ILSA generally applies to the sale or lease of lots in a subdivision by making use of interstate commerce or the mails, and unless the sale or lease is exempt under ILSA, the developer must register the subdivision with HUD. Improved Lot exemption typically used for fee simple lots located in a Homeowners Association, and requires that dwelling unit be completed within 2 years of purchaser s execution of sales contract. Recent amendments to ILSA have generally exempted for-sale residential Condominium projects. Remedies for failure to comply include the right of purchaser to rescind their contract within two years of signing. 34

35 G. Planning for transition and minimizing potential warranty claims 1. Transition is a Process not an Event (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) The builder should actively run the association, and encourage early homeowner involvement in community. By the time of transition homeowners should be familiar with the association and its operations. Utilize governing documents that foster a sense of community and encourage homeowner participation in community. Establish ad hoc and advisory committees and/or appoint or elect homeowner representatives to the governing body. Identify positive leaders in the community and enlist their assistance. Provide training to homeowners. Create a community website/intranet-fosters communication and involvement; appoint a homeowner committee to do this (delegate!). Establish a community newsletter (print and/or electronic). Appoint complainers to resolution committees. Appoint a homeowner-controlled Common Area walk-through/warranty committee (avoids conflict of interest)-seek a written agreement. Clearly communicate Developer s reserved rights (and the need/rationale for the same) to avoid misunderstandings when homeowners gain control. Utilize a skilled management company to facilitate transition. 35

36 G. Planning for transition and minimizing potential warranty claims (continued) 2. Benefits of Transition (a) (b) (c) (d) (e) (f) Homeowner involvement enhances sense of community. Engaged homeowners are positively energized homeowners-helps establish unique nature of development (enhances value). Discourages negative homeowners. Relieves developer and its employees of much of the operational burden. Provides orientation of association operations for homeowners. Developer can maintain control of development without having control of the association. Control of architecture. Use restriction exemptions. Reduced/abated assessments. Reserved easements for development purposes and utilities. Annexation rights. 36

37 G. Planning for transition and minimizing potential warranty claims (continued) 3. Items to be Addressed by Builder at the Time of Transition (a) (b) The builder should confirm compliance with all statutory requirements regarding turn-over of books and records. Maryland: The Maryland Condominium Act requires that drawings, architectural plans, or other suitable documents, setting forth the necessary information for location, maintenance, and repair of all Condominium facilities, to the extent that they exist, shall be turned over to the council of unit owners upon transfer of control by the developer. MD Real Prop. Code Ann Virginia: The Virginia Condominium Act requires that, within forty-five (45) days from the expiration of the period of declarant control, the declarant shall deliver to the president of the unit owners' association or his designated agent certain enumerated books and records. Va. Code Ann Virginia: The Property Owners Association Act requires that, unless previously provided to the board of directors of the association, once the majority of the members of the board of directors are owners of improved lots in the association and the declarant no longer holds a majority of the votes in the association, the declarant shall provide to the board of directors or its designated agent certain enumerated books and records. Va. Code Ann The builder should confirm that all outstanding association issues have been or are in the process of being addressed in some manner. While it is not necessary for all outstanding association issues to be completely resolved prior to transition, it would not be advisable to ignore any significant issues. 37

38 G. Planning for transition and minimizing potential warranty claims (continued) (c) (d) (e) (f) At the transition meeting the books and records of the association should be turned over to the new homeowner members of the Board of Directors. It would be advisable, with the assistance of the management agent, for the builder to provide the new Board with a summary of the status of association affairs. The builder should review all association files to confirm that they are complete and contain any necessary documents (such as current contracts). The builder should assemble the corporate records, such as copies of the organizational meeting minutes and other corporate resolutions, together in a single place for inclusion in the corporate minute book for the association. These documents should be provided to the Board at transition. Records showing the current financial condition of the association, including current information regarding assessment collections and the association s accounts, should be collected and reviewed for delivery to the Board in connection with transition. With the assistance of the management agent the builder should review and be prepared to discuss the financial status of the association. Although not necessarily required, a pretransition audit of the association s financial records would be useful in documenting that the association s affairs were in good order when transition of control occurred. Any deficit amount paid by the builder should be included in the financial documentation provided to the homeowners. 38

39 G. Planning for transition and minimizing potential warranty claims (continued) (g) (h) (i) (j) (k) With the assistance of the builder s management agent the current status of covenant enforcement and architectural control should be reviewed. A summary of the status of these matters should be provided to the Board at transition. Although it is not necessary to completely resolve all outstanding covenant and architectural control violations prior to transition, the builder should confirm that some action has been taken, or that a process has been set in motion, with regard to any outstanding violations. To the extent possible, any easements, agreements or other instruments needed in connection with the development of the project that must be signed on behalf of the association should be executed and recorded (if applicable) prior to transition. Any remaining common area to be conveyed to the association should be conveyed at this time. Any lots that remain to be annexed within the association should be annexed at this time. The builder should review all meeting notices, calls for nominations, proxy materials and other documents prepared by the management agent in connection with the transition meeting to confirm that they are in accordance with the Bylaws of the association. 39

40 G. Planning for transition and minimizing potential warranty claims (continued) 4. Addressing Warranty Issues at Transition (a) (b) (c) (d) The builder should consider conducting a walk-thru with the homeowners at the time of transition. Ideally the builder and homeowners will develop a punch list of common area items to be addressed at the time of transition. Timing is Important. If the walk-thru is done prior to transition there is some issue as to the authority of the homeowners to conduct a meaningful walk-thru. Ideally the walkthrough is done with members of a homeowner elected board or their delegates. Is this a Good Idea? This depends on the association and the relationship of the builder and the homeowners. It is possible that a walk-thru could create issues. If certain corrective or remedial measures are to be taken by the builder at the time of transition, the builder should consider obtaining a release from the homeowners in exchange for performing such corrective actions. The common area and reserve study is typically performed by the new homeowner board at or shortly following transition. Such studies are probably necessary for the homeowner board to satisfy their fiduciary duty to their members. 40

41 H. Dealing with fractured or failed developments 1. What is a fractured condominium? (a) (b) (c) Mixed-use projects include office, retail and residential components. The residential component is often stacked over 1 or more lower levels of office and/or retail, hence the need for establishing the residential component as a condominium. A fractured condominium simply refers to any residential for-sale condominium project in which for market reasons a determination is made to halt sales to consumer purchasers. The options for disposition of the fractured condominium are varied: the original developer may offer the unsold units as rentals; the original developer may seek to unwind the condominium; the unsold units may be sold in bulk to a successor developer; the lender may foreclose on the unsold units. 2. The options for disposition of a fractured condominium depend greatly upon the status of the condominium documents and unit sales. (a) The easiest case is where no or very few units have been sold to consumer purchasers and there have been no settlements. In this case it is likely that the condominium does not yet exist (i.e., no recorded documents). Here, the developer or its successor can simply terminate the sales program and offer all units as rentals. 41

42 H. Dealing with fractured or failed developments (continued) (b) (c) Any pending contract purchasers must be addressed. In a down market it is typically not difficult to persuade contract purchasers to consent to contract termination. However, the developer or its successor must be prepared for the possibility that some purchasers will demand compensation. In multi building/phase projects it may be possible to offer an alternative unit. If a significant number of units have been sold and/or settled and the condominium has been established, it may not be practical to unwind the condominium. Termination of a condominium regime typically requires a high percentage of unit owner and mortgagee approval. Maryland - 80% of unit owners must approve termination , Maryland Condominium Act. Virginia four-fifths of the unit owners must approve termination :1, Virginia Condominium Act. District of Columbia - four-fifths of the unit owners must approve termination , D.C. Condominium Act. 3. If unwind of regime not possible, due diligence review of condominium documents becomes critical. (a) Assuming that the unsold units will be offered on a rental basis, the developer or its successor must determine if the condominium documents allow the unsold units to be offered as a rental facility within the existing condominium structure. 42

43 H. Dealing with fractured or failed developments (continued) (b) Most residential condominium documents contain restrictions on the conduct of commercial/business activities. The documents may also contain express limitations and/or prohibitions on unit leasing. 4. Control - issues with condominium documents may be minimized or overcome if the developer or its successors can control the council of unit owners of the condominium. (a) (b) (c) Control can be exercised as a result of voting rights appurtenant to unsold units retained by developer or its successors, or as a result of specific powers granted to the Declarant entity in the condominium documents. Can the developer or its successor control the council of unit owners by the election of a majority of the Directors? Do the documents grant the Declarant entity direct rights of control that would be of benefit to the developer or its successors in the operation of a rental facility? For example, the documents may contain: specific exemptions from the restrictions on commercial/business activities; specific exemptions from architectural controls; specific grants of easements and other rights to lease units and conduct business operations within the condominium. 5. Ability to control council of unit owners may be critical to the conduct of leasing activities. 43

44 H. Dealing with fractured or failed developments (continued) (a) (b) (c) (d) (e) Control, if exercised as a Declarant right may be limited. FHA/HUD generally requires that developer relinquish control of the council of unit owners on the earlier of the date that is 120 days after the sale of 75% of the units, or a specified period of time following the sale of the first unit (3 to 5 years in the case of a single phase condominium, 5 to 7 years in the case of an expandable condominium). Section 6, HUD Handbook , Appendix 24, dated October, 1980 Fannie Mae old requirements provided that the developer had to transfer voting control within 120 days after 75% of the units had been conveyed to the initial purchasers. Documents may still contain these provisions. Maryland a meeting of the council of unit owners must be held within 60 days after units representing 50% of the votes in the condominium have been conveyed by the developer to the initial purchasers to elect the board of directors , Maryland Condominium Act. Virginia any right of the Declarant to control the condominium must terminate upon expiration of the time limit specified in the condominium instruments (which may not exceed 5 years for an expandable condominium, 3 years for a condominium containing convertible land, or 2 years in all other cases), which time limit may be extended for a period not to exceed 15 years from the settlement of the first unit to be sold in any portion of the condominium or after units to which three-fourths of the undivided interests in the common elements appertain have been conveyed, whichever occurs first. See, VA. CODE (2012 Repl.Vol.). 44

45 H. Dealing with fractured or failed developments (continued) (f) (g) District of Columbia any right of the Declarant to control the condominium must terminate on the earlier of expiration of any time limits specified in the condominium instruments (which may not exceed 3 years for an expandable condominium or a condominium containing any convertible land, 2 years for any other condominium containing convertible land, or 2 years in all other cases); provided that not later than the time that units to which 25% of the undivided interests in the common elements appertain have been conveyed, not less than 25% of the members of the executive board shall be selected by unit owners other than declarant, and not later than the time units to which 50% of the undivided interests in the common elements appertain have been conveyed, not less than 33 1/3% of the members of the executive board shall be selected by unit owners other than declarant. See, D.C. CODE ANN (2001). Critical question - Is the developer or its successor controlling the council of unit owners by virtue of its voting rights as a unit owner, or by virtue of rights reserved to the Declarant entity? 6. May need to address rights and obligations of successor Declarant. Becoming a successor Declarant typically requires some form of written assignment. In some cases successor rights and obligations will be defined by statute. 45

46 H. Dealing with fractured or failed developments (continued) (a) (b) (c) Maryland Condominium Act does not expressly provide for transfer of Declarant rights. A written assignment is typically necessary. However, because the statute defines the Developer as any person who subjects his property to the condominium regime established by this title it is possible for inadvertent transfers of Declarant status to occur. MD. REAL PROP. CODE ANN (g) (2010 Rep.Vol.). See, Starfish Condominium Ass'n v. Yorkridge Service Corp., 295 Md. 693, 458 A.2d 805 (1983) (successor entity that acquires failed condominium project from original builder, completes construction and acts as vendor of units is liable for breach of statutorily implied warranties). Virginia Condominium Act specifically addresses the transfer of special declarant rights to successor. No special Declarant rights may be transferred except by recorded document. An unaffiliated successor Declarant is generally subject to obligations imposed by the condominium instruments and the Act, except for misrepresentations, warranties and breaches of fiduciary duty made by the prior Declarant. See, VA. CODE :3 (2012 Repl.Vol.). District of Columbia Condominium Act specifically addresses the transfer of special declarant rights to successor. No special Declarant rights may be transferred except by recorded document. An unaffiliated successor Declarant is generally subject to obligations imposed by the condominium instruments and the Act, except for misrepresentations, warranties and breaches of fiduciary duty made by the prior Declarant. See, D.C. CODE ANN (2001). 46

47 I. Questions & Answers Thank you! 47