Publications
Developer Liability for Assessments
Published April 11, 1998 as
Determining liability of developer
New associations often inquire as to when the developer has to begin paying assessments to the association and what is their initial obligation before the homeowners are elected to the board. An association is created from the date that the legal documents (Declaration, By-Laws) are recorded by the developer. He may then set up an interim board with developer employees serving as directors. Before contemplating the legal consequences of developer liability, several things should be done by the board first.
The board should engage the services of a qualified accounting firm specializing in association accounting, to conduct an independent audit of the financial records. There are many qualified accounting firms concentrating in this area who know what to look for during the review. (NOTE: It is important to have an independent audit conducted on a regular basis, even after the developer has long departed.)
Second, the board must determine whether the developer, while running the association, ran costs of development through the association, if there were any financial improprieties and did the developer pay its fair share of expenses and/or assessments.
Third, the new board must understand that when dealing with a condominium association, the Illinois Condominium Property Act (specifically 765 ILCS 605/9) addresses this issue; "all common expenses incurred or accrued prior to the first conveyance...shall be paid by the developer." "...the developer [shall]...pay his proportionate share...commencing with the first conveyance."
If the developer collected a flat fee from each purchaser at the time of closing to fund the initial reserve account, that account should be turned over intact, plus accrued interest.
With regard to reserve accounts, a recent Illinois Appellate Court opinion has held that a developer owes a fiduciary duty to unit owners and may be in breach of that duty by failing to properly fund a reserve account. [Maercker Point Villas Condominium Association v. Gregory Szymski, 275 Ill.App3d 481, 655 N.E.2d 1192, 211 Ill.Dec. 809 (1995)] The court made this ruling based upon an engineering and reserve study performed for the board. The court relied upon the consultant’s calculations to determine the appropriate amount that should have been collected for reserves by the developer.
For homeowners’ and townhome associations, there is no statutory authority. The developer’s obligation is governed by what is contained in the declaration and by-laws. In most declarations the developer includes an exemption on paying any assessments. However, sometimes the developer has not protected itself with this type of "exculpatory language." The association auditor can then take an aggressive position in performing the audit by requiring the payment of full assessments for any unsold lots still owned by the developer. The developer might also be responsible for making up or putting back the difference.
In either case, it is always important to (1) have an audit, (2) review the law and (3) check the statutes and/or documents in order to determine developer liability.