Working with successor Developers: What Condo Associations Need to Know

 

Background: What is a Successor Developer?

Many mortgage lenders, municipalities, and real estate investors are surprised to learn that they may suddenly be treated as a “successor developer” under Michigan condominium law after simply acquiring ownership of certain units in a condominium project. Under MCL 559.106(2), a “developer” is defined as “a person engaged in the business of developing a condominium project as provided in this act.” A “successor developer” under MCL 559.235 is defined as: “a person who acquires title to the lesser of 10 units or 75% of the units in a condominium project, other than a business condominium project, by foreclosure, deed in lieu of foreclosure, purchase, or similar transaction.”

In other words, entities such as banks, municipalities, and individual real estate investors can unexpectedly become successor developers if they acquire enough units. For example, if a “developer” obtains a mortgage loan and defaults on the loan causing the lender to foreclose on the units, the mortgage lender would become a “successor developer” if it acquires ownership of 10 or more units in the condominium. For condo associations, identifying a successor developer early allows the association to secure assessments, press warranty obligations, and verify authority for any expansion, contraction, or bylaw amendments.

 

Obligations of a Successor Developer under Michigan Condominium Law

For boards and managers, these statutory duties define what you can require from a party that steps into developer rights and how you should monitor sales activity, warranties, and construction issues.

The Michigan Condominium Act, MCL 559.101 et seq., imposes requirements upon both original developers who create condominium projects and those who qualify as “successor developers.” The rights and responsibilities that come with the title of “successor developer” are significant.

Under Michigan Condominium Law MCL 559.235(2), a “successor developer” is legally required to do both of the following:

• Comply with this act in the same manner as a developer before selling any units.
• Except as provided in subsection (3), assume all express written contractual warranty obligations for defects in workmanship and materials undertaken by its predecessor in title. A successor developer shall not be required to assume, and shall not otherwise be liable for, any other contractual obligations of its predecessor in title.

Essentially, a “successor developer” in Michigan must follow the rules set in place by the Michigan Condominium Act the same way the original developer would before selling any units. They must honor the prior developer’s express written warranties (warranties that define what defects are covered, for how long, and how to make a claim for workmanship and materials). However, they do not automatically take on any of the prior developer’s other contract obligations. For boards, confirming these obligations early helps protect assessments, enforce written warranties, and keep control over project changes as the successor developer begins marketing and selling units.

 

Spelling Out the Developer Requirements Under the Michigan Condominium Act: New Responsibilities

The requirement under MCL 559.235(2)(a) to “comply with this act in the same manner as a developer before selling any units” includes, among other items:

MCL 559.235(2)(b) requires a successor developer to assume all express written contractual warranty obligations for defects in workmanship and materials that were undertaken by the predecessor in title to the successor developer. In short, whatever the last developer put in writing as a warranty, the successor is responsible for fulfilling under Michigan Condominium Law. If no express written contractual warranty obligations were issued by the predecessor in title, then a successor developer would not be required to assume other contractual obligations of its predecessor. For boards, confirming that these steps are in place before any unit is marketed or sold helps protect purchasers and gives the association leverage if a successor developer starts sales without complying.

 

 

Special Exceptions to Understand: Alternative Scenarios, Rights, and Responsibilities as a Successor Developer

It is important to note that there are several alternative scenarios in which an organization may become a successor developer, beyond what is outlined in the Michigan Condominium Act, which Condo boards should keep an eye out for. Below we will explore each of these scenarios, and the specific roles and responsibilities assigned to the organization/successor developer in each case.

 

Understanding Developer Vs. Successor Developer Duties

First, it is important to reiterate the difference between a developer and successor developer’s duties in Michigan Condominium Law. Consistent with MCL 559.235(2)(b), MCL 559.237 provides: “the

This means that the developer’s duties to buyers and the association don’t disappear just because the developer sells or transfers its stake in the condo project. These obligations continue to exist. A successor developer can satisfy the prior developer’s written warranty obligations either by formally assuming them, buying insurance that covers them, or setting up an escrow fund to pay valid warranty claims.

 

Successor Developer Exceptions for Residential Builders

One notable exception to the definition of a “successor developer” is set forth in MCL 559.235(5) which provides that a residential builder who neither constructs nor refurbishes common elements in a condominium project and who is not an affiliate of the developer is not considered a successor developer in the absence of a specific assignment of obligations or rights from the developer. However, a residential builder that sells a condominium unit is required by law to deliver to the purchaser of that unit the condominium documents that the developer is required to deliver to the purchasers under MCL 559.184a(1).

In sum, a residential builder isn’t a “successor developer” if it didn’t build or refurbish common elements. Additionally, it isn’t affiliated with the original developer unless the developer specifically assigns it those rights or duties. On the other hand, if that builder sells a condo unit, it must still give the buyer the required condominium documents under MCL 559.184a(1).

 

Michigan Condominium Law is Not the Only Ruling Force at Play: Other Ways You Might Become A Successor Developer

Lastly, in addition to the statutory definition of a successor developer, many condominium master deeds define “developer” to include the original developer and its successors and assigns. This means that even if someone does not meet the statutory threshold under MCL 559.235, they may still become a “developer” for purposes of that condominium’s governing documents if they acquire units from the original developer or obtain a written assignment of developer rights.

In Walnut Brook Dev Co v DeFlorio, unpublished per curiam opinion of the Court of Appeals, issued October 9, 2014 (Docket No. 314554), the Michigan Court of Appeals held as follows when analyzing whether a successor in interest to the original developer obtained a right of first refusal that was reserved to the original developer in the master deed:

Thus, under the Bylaws and the Amended Master Deed, the right of first refusal was held by the “Developer,” which was RHREDC and its successors and assigns. The term “successors” is not defined in the Amended Master Deed or the Bylaws. A dictionary may be consulted to ascertain the plain and ordinary meaning of a term that is not defined in a contract. … A “successor” is “a person or thing that succeeds or follows” or “a person who succeeds another in an office, position, or the like.” Random House Webster’s College Dictionary (2001). “Succeed” is defined in relevant part as “to follow or replace another by descent, election, etc.,” “to come next after something else in an order or series,” “to come after and take the place of, as in an office,” and “to come next after in an order or series, or in the course of events; follow.” … A corporation that acquires assets but not liabilities has been characterized as a “successor” in Michigan case law. … Because successor status in Michigan case law does not hinge on an assumption of the predecessor’s liabilities, defendants’ argument that plaintiff could not be RHREDC’s successor because it did not assume RHREDC’s liabilities lacks merit.Therefore, even if an entity is not a “successor developer” under the state statute, the condo’s master deed or bylaws may still treat them as the “developer” if the entity buys units from the original developer or receives an assignment of developer rights. Michigan case law also says an entity can be a “successor” without taking on the prior developer’s liabilities, so certain developer-reserved rights (like a right of first refusal) can pass to them even if the liabilities don’t.

 

Similarly, in Infinity-Brownstown LLC v Dove’s Pointe Homeowners Ass’n, unpublished per curiam opinion of the Court of Appeals, issued May 27, 2021 (Docket No. 351827), the Michigan Court of Appeals held as follows when analyzing a situation where a party became a successor developer despite not acquiring ownership of any units from the original developer:

As applied here, plaintiff is a “successor and assign” of King/Inkster II because it obtained title to the condominium project through the covenant deed and the otherwise valid chain of title. … Thus, title to the condominium project was conveyed from King/Inkster II to IOTA, and from IOTA to plaintiff. Plaintiff is therefore a “successor and assign” of King/Inkster II. Further, the fact that plaintiff was not a direct “successor and assign” of King/Inkster II is not of importance. The Master Deed refers to “Developer” as a singular entity, thus contemplating that at any given time, there only will be one “Developer.” But Article III, Section 12 of the Master Deed refers to “successors and assigns” in the plural, thus contemplating that there may be more than one “successor and assign.” It logically follows that a “successor and assign” need not obtain its title directly from King/Inkster II. Otherwise, the Master Deed would use those words in the singular, not the plural. For these reasons, we conclude that plaintiff is the “successor and assign” of King/Inkster II under Article III, Section 12 of the Master Deed.

Accordingly, an organization can be treated as the “successor developer” under a master deed even if it didn’t buy units directly from the original developer, as long as it obtained title through a valid chain (i.e. through intermediate owners). The court read the deed’s use of “successors and assigns” in the plural to mean that indirect successors still qualify.

 

Takeaways for Condominium Associations Working with Successor Developers

Condominium associations must be prepared to address a wide range of legal issues when a successor developer is involved in a condominium project. Common issues often relate to the proper allocation and payment of assessments, the ability of the association to record liens against incomplete units owned by the successor developer, and amendments to the governing documents made by successor developers.

 

Conclusion

To summarize, when a new party steps into developer rights, the condo board’s job is to verify status under the Michigan Condominium Act and your governing documents, then ensure purchaser protections and written warranties are honored before any sales proceed. Taking those steps early protects association finances and common elements and keeps the board in control of amendments and project changes. If your community is facing a potential successor developer or proposed document changes, Hirzel Law’s condominium and HOA attorneys can determine whether the party qualifies under MCL 559.235 or by assignment, enforce express written warranty obligations, and oversee compliance with purchaser safeguards before sales move forward.