Developer Turnover: 8 Things Michigan Condo Associations Must Know when Negotiating with a Developer to Avoid Paying for Construction Defects
Successfully transitioning control of a condominium association from the developer to the co-owners is critical for the long-term success of any Michigan condominium. When a developer exits a condominium project, it often requests a release of liability from the co-owner controlled board of directors. An experienced developer has an inherent advantage in negotiating a release with a condominium association, as most volunteer board members have never been through the process. Unfortunately, in many cases, this allows a developer to shift the burden of repair costs onto the co-owners for construction defects. In other cases, the developer may avoid fulfilling financial obligations, such as payment of proportionate share of expenses, assessments, or funding the reserve fund. Accordingly, this article will attempt to level the playing field for condominium associations and provide best practices for negotiating a release with a condominium developer.
1. Be aware of the statute of limitations on claims against the developer.
Many condominium associations make the mistake of delaying negotiations with the developer as part of the turnover process. In Michigan, the statute of limitations for claims against the developer is tied to the transitional control date. MCL 559.110(7) defines the transitional control date as the date the board takes “…office pursuant to an election in which the votes that may be cast by eligible co-owners unaffiliated with the developer exceed the votes which may be cast by the developer.” The following statute of limitations applies to claims against a developer by a condominium association:
| Claims arising on or before the transitional control date | 3 years after the transitional control date or 2 years after the date that the claim accrued, whichever is later. |
| Claims arising after the transitional control date
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2 years after the date the claim accrued. |
Given these time limits, new board members should promptly investigate potential construction defects. Negotiations with a developer may take months or years to complete, depending on the size of the condominium. Some developers may delay negotiations to avoid liability or gain settlement leverage. If the statute of limitations is a concern, a condominium association should propose a tolling agreement so the parties can continue to negotiate in good faith without waiving any rights. Waiting too long may force a condominium association to accept a “take it or leave it” offer, or immediately pursue litigation, which may lead to a less favorable outcome.
2. Hire a civil engineer or other experts to identify construction defects.
Hiring a civil engineer, or other construction experts, is crucial for condominium associations when negotiating with a developer. MCL 450.2541 permits a director of a nonprofit corporation, such as a condominium association, to rely on reports from an engineer or other experts in discharging their fiduciary duties. Directors of a condominium association that rely on the advice of an expert, such as an engineer, will be shielded from liability under the business judgment rule. In addition to avoiding liability, a civil engineer can identify construction defects, suggest repairs, and help find vendors for cost estimates, strengthening the association’s negotiating position.
3. Make sure the developer’s settlement offer is fair.
After hiring an expert to prepare an initial report, a new condominium board often conducts a site walk-through with the developer to review the construction defects contained in the engineering report. Developers may agree to repair or replace certain construction defects, but disputed defects might lead to a monetary offer in exchange for a global release of liability. Often, a developer will propose a hybrid solution—addressing some repairs and offering money for the rest. The board of directors should obtain quotes on any repairs that the developer does not make, to understand if the developer’s monetary offer is reasonable. The board should also verify that the developer has paid proportionate share of expenses, assessments, or funded the association’s reserve fund when evaluating any monetary settlement offer. Construction defects that are not fixed will become the responsibility of the co-owners and have an impact on future condominium assessments. Accordingly, it is important for the board to properly evaluate any monetary offers from the developer.
4. Require the developer to provide important documents to the condominium association.
Many developers will forget to provide key documents that the condominium association will need for future operations during the turnover process. It is best to specifically identify a list of key documents for the developer to produce under any settlement agreement. Examples of key documents a condominium association should request from a developer, if the association does not have the documents, are as follows:
Construction Documents
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- Construction Plans
- Contractor Contact Information
- Materials List
- Warranties
Corporate Records
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- Annual Reports
- Architectural Control Committee Approvals
- Contracts
- Co-Owner and Mortgagee contact information
- Corporate Transparency Act filings
- Insurance Policies
- Leases and Tenant Information
- Meeting Minutes
- Modification Agreements
- Resolutions
Financial Records
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- Assessment Records
- Banking Records
- Budgets
- Financial Statements, including Audits and Reviews
- Reserve Studies
- Tax Returns
Governing Documents
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- Articles of Incorporation
- Master Deed, Condominium Bylaws, and any amendments
- Rules and Regulations
5. Determine if the developer failed to disclose any potential liabilities.
When negotiating a settlement agreement with a developer, condominium associations should request that the developer represent and warrant that no major undisclosed liabilities exist to avoid any surprises. Common examples of representations or warranties that a condominium association may request are as follows:
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- The developer has filed all required documents with governmental entities and will continue to provide information to complete required filings.
- The developer has not assigned or transferred any rights to third-parties.
- The developer’s disclosure statement under MCL 559.184a is true, accurate, and it did not omit any material facts.
- The developer does not have knowledge of any pending or threatened legal proceedings related to the condominium.
- The developer does not have knowledge of any violations of municipal, state, or federal law related to the condominium.
If a developer is unwilling to make these representations and warranties, it may be a red flag to condominium associations that there are issues that should be further investigated.
6. Carefully review the scope of the release requested by the developer.
Condominium associations should carefully negotiate the scope of the release with the developer. Key items to consider are as follows:
- Under MCL 559.160, condominium associations have standing to settle claims related to the common elements on behalf of the co-owners, but cannot release claims that belong to an individual co-owners related to their unit.
- Clarify whether the release is partial or complete, as developers may request partial releases as construction progresses.
- Determine if the release is mutual or applies only to the developer, as developers have sometimes sued condominium associations after exiting the community.
7. Request an assignment of the developer’s rights.
The master deed and condominium bylaws may require a developer to assign its rights to a condominium association in writing when exiting the projects. Examples of rights may include architectural control authority, the ability to grant easements over the condominium, or the ability to effectuate certain amendments to the condominium documents. If the master deed and condominium bylaws do not automatically transfer the developer’s rights, such a transfer should be included as part of a settlement agreement. Additionally, the developer may have received warranties related to workmanship or materials from contractors or suppliers. If any of the warranties are transferable, a condominium association should receive an assignment of the developer’s contractual warranty rights to ensure that warranty claims can be made.
8. Be careful with the confidentiality clause.
Developers often request confidentiality clauses in settlement agreements, but agreements with condominium associations are unique. MCL 559.157 and MCL 459.2487 provide certain document inspection rights to the co-owners. If the co-owners were to exercise their statutory rights, the condominium association would have little control over who the individual co-owner may share information. Additionally, the condominium association may need to share the agreement with professionals, such as accountants, attorneys, engineers, or mortgage companies, or in court proceedings. Accordingly, confidentiality clauses should also permit the terms of the settlement agreement to be shared without penalty in these circumstances.
Conclusion
Successfully negotiating a settlement agreement with the developer is crucial for the long-term success of a condominium association. By being proactive, seeking expert advice, and carefully considering all aspects of the release, the association can avoid shouldering the burden of costly common element construction defects. A well-structured settlement will safeguard the association’s future and promote the financial health of the community. However, if negotiations stall, litigation is always an option, so condominium associations should not feel forced to accept an unfavorable offer from the developer.
Kevin Hirzel is the Managing Member of Hirzel Law, PLC and concentrates his practice on commercial litigation, community association law, condominium law, Fair Housing Act compliance, homeowners association law and real estate law. Mr. Hirzel is a fellow in the College of Community Association Lawyers, a prestigious designation given to less than 175 attorneys in the country. Mr. Hirzel has been recognized as a Michigan Super Lawyer’s Rising Star in Real Estate Law by Super Lawyers Magazine, a Leading Lawyer in Condominium & HOA law by Leading Lawyers Magazine, and as a Best Lawyer in Real Estate Law by U.S News and World Report’s Best Lawyers Publication. Hirzel Law, PLC represents community associations, condominium associations, cooperatives, and homeowners associations, in Michigan and Illinois. He may be reached at (248) 986-2290 or kevin@hirzellaw.com.
