Publications

Turnover of the New Association

Published September 11, 1999 as
Clearing up misconceptions on associations

The operation and administration of a condominium or homeowner’s association lies with the board of directors. The most common misunderstanding among new unit owners is that at some point after they buy, the developer will "create" an association. There is also a common misconception that if the unit owners "join" this association they will lose all of their rights against the developer for various wrongs and the developer will leave and not have any further liability. Nothing could be further from the truth!

The following is a step by step process outlining the transition from developer to owner control.

Developer Controlled Board

Section 18.2 of the Illinois Condominium Property Act, as well as most declarations, outlines the rights and privileges of a board of directors controlled by the developer. When the developer initially records the declaration and by-laws for the association, the association comes into existence. Once the first units are occupied, the association must now function in administering and maintaining the common areas.

In theory, the developer is supposed to select a board from the very beginning. However, most developers operate without the formality of a board and make individual decisions. This presents a potential for conflicts of interest. The developer is most interested in a quick turnover of unsold units, which translates into low assessments and minimal reserves. Generally, the reserve is established by the initial purchasers with a token payment at closing to be held aside by the developer and later turned over. Some unscrupulous developers may even attempt to run development expenses through the association budget or not pay their fair share of assessments on the unsold units.

Some developers may create a "de facto" board and appoint a representative who is obviously looking out for the developer’s interests rather than the homeowners. Since a board of directors is deemed to be acting in a fiduciary capacity relative to the owners, this compounds the potential for conflicts of interest.

In a perfect world, the developer will appoint several interested homeowners to sit on a board with the developer’s representatives to begin the process of transfer of control. However, all too often, the transfer of responsibility does not take place until the first annual meeting of members.

Ad-Hoc Committees

While the developer is operating the association, certain owners will get frustrated with the pace or the way things get done. A small group of owners should begin to meet to act as a transition team. These owners may also choose to consult with a management company who can help, by recruiting intelligent, business-oriented people, to form such committees.

The committee can then begin planning, meeting with the developer, becoming familiar with contracts, providing input for budgeting and generally become educated in association operations. Ideally, this group will have enough experience and name recognition, so at the first meeting of members, they are assured of election to the board.

Remember, the type of people elected to the first board will have a significant effect on how the association functions in the future.

First Annual Meeting of Members

Contrary to popular notion, this meeting called by the developer does not "create" the association. As previously stated, the association is already in existence, even if it is passively administered. Section 18.3 of the Illinois Condominium Property Act ("Act") holds a condominium association and its board to the same standards of an Illinois Not-For-Profit Corporation, even if the developer neglected to have the association incorporated.

The election of the initial board of a condominium or master association must take place no later than 60 days after the sale of 75% of the units, or three years after recording the declaration, whichever is earlier [Section 18.2(b) and 18.5(f)(2)of the Act]. Some homeowner association declarations require 100% of the units to be sold, with no time restrictions.

Once the deadline passes, the developer must send out notice to hold a meeting of members to elect a board. The Act contains penalties for failure to do so, and a court order should be relatively easy to obtain if a developer refuses to hold the election.

In order to convene an annual meeting, a notice must be sent out announcing the time and place of the meeting, not less than 10 days nor more than 30 days in advance. Generally, proxies, nominating petitions and other materials are sent out. Although I have seen first elections conducted from the floor with hand votes, written ballots should be required.

Usually there is a small group of active homeowners who have been involved with the association prior to this time, that form a core to elect to the board [see Ad-Hoc Committees]. At the meeting, a board is elected and the transfer of power "symbolically" takes place. The books, records and monies are transferred over, though not necessarily at the meeting itself. The officers are elected by the board members (not the owners) at a subsequent board meeting (sometimes held the same evening after the owners meeting). If the developer has worked with a transition group, the turnover should be very smooth.

Once the board is elected, they will need to have several organizational meetings to set up procedures and rules within a short time.

The First Year

The first year is critical in the planning and operation of an association. The following are steps that must be taken immediately to assure a successful start:

The board elects officers.
The board selects or reaffirms management. Whether it is the board itself, an individual or a professional company, financial management must commence immediately. Even if a board is self-managed, independent financial consultation must be sought to guarantee establishing proper proceedings and to avoid the appearance of impropriety.
Selection of legal counsel. A qualified and experienced attorney must be selected. A board has a dual role of operating a business funded by other peoples’ money and running a government (passing and administering laws) and must have competent advise when questions arise. Because board members have potential exposure for personal liability, they should seek an attorney experienced in dealing with community associations, to get the right answers.
Selection of an accountant. A prompt review of all financial records is a must at the initial stage. A qualified, experienced accountant can determine whether the developer has paid his fair share and that all monies are properly accounted for. Recent Illinois decisions have required developers to turn over associations with adequate reserves.
Establishment of committees. Standing committees that act as advisory commissions to the board will make the board's job much easier. Buildings and grounds, finance, recreation, rules and regulations, etc. are some areas well suited to committee formation. The committees are also the logical training ground for future board members.
Additional tasks. In addition, the new board should be looking to implement the following:
- Adopt rules and regulations.
- Inspect the property, compile list of defects in common properties, review working drawings and punch lists for unremedied builder defects and warranty claims.
- Review all existing contracts to assure that they are up to date and performed satisfactorily.
- Engage an architectural/ engineering firm to inspect the buildings and common areas and assist in preparing a reserve study.
- Review all insurance coverage with the insurance company's representative.
- Establish strict policies on the frequency and conduct of board meetings.

Once all of the foregoing areas are addressed and procedures are in place for a smooth and efficiently operating association, the board will be able to fulfill its primary objectives, i.e., to preserve, protect and enhance property values, maintain the quality of life for its members and act on their behalf to promote the safety and welfare of the property.