Obligations of developer during delinquent transfer of POA to owners

I live in a neighborhood in Virginia that has technically had a POA since it was built in the 1970s. Unfortunately the developer never transferred the POA to the members as stated in the by-laws. The developer did keep the POA current with the state along with keeping insurance and the grass mowed, but that is about it. It does not appear that they have done anything particularly shady with the land owned by the POA, but I have a feeling they wanted to keep control to because they were considering purchasing a neighboring plot and knew there were easement issues. They have admitted to being in the wrong for not transferring the POA to the members as they should. On the other side they also never collected any dues from the members.

The second piece of land has now sold to a different developer so the original developer now wants the transfer the POA to the neighborhood. This has caused a lot of contention out of the gate, because most property owners were either not told about the POA or told that it was long defunct. We have been pretty successful collecting dues this first year, but the rate was set in the original by laws and will need to close to double just to meet expenses. Beyond that, our main problem is that if/when we take control of the POA we will have no reserve fund at all. This is a problem because we have close to 70,000 in playgrounds that have 0 or 1 year left on their life according to the capital reserve study we just completed. According to that study, we should have around 80,000 in the reserve fund at this point to deal with all of the assets that are close to their end of life.

My questions are:
- Does the developer have any legal obligation to pay for a capital reserve fund?
- If you were negotiating with the developer what would you expect?
- Will the capital reserve study pointing out the poor condition of our playgrounds cause an issue for our insurance down the road?
- How would you recommend that we deal with the playgrounds?

Do you have any other suggestions or advice you can give to our transition board.

Thanks in advance,
~Logan

Not that I see. Reserve funds are collected via assessments. As you stated, there were little if any assessments collected by the Developer as they paid for the operating expenses.


I would consult with my own attorney and have the following expectations:
1) all that was promised in the development has been built
2) An accounting of all financials since the Association was developed.
3) copies of all minutes, etc.
4) Any real estate taxes are paid at time of transfer
5) other items mentioned in the VPOAA

Did I mention to hire your own attorney vs. using the developers attorney?


I doubt it. Insurance companies typically don't ask for a copy of the Reserve Study. However, they might send an agent to walk the property.


If they are really bad, you might see if the Builder will kick in some cash or replace some of the items in the playground as compensation for failing to turn the association over when they should have. I don't think they would be required to do this - so when you are asking for it, ask politely.

Here are some links to threads about transition from developer to members:

HOA Transition from developer

What You Need to Know When the HOA Takes Over from the Developer

CAI Best Practices - Transistion

Transistion checklist

HOMEOWNER / CONDOMINIUM ASSOCIATION TRANSITION CHECKLIST

Hope this helps,

Tim

Logan - if your playgrounds are that old, they are probably out of date in terms of what new standards are for equipment and surface preparation. So you are really starting "fresh". You could even re-design them as family picnic areas or nature walk parks.

What "laws" did the owner break? You said the owner did not collect dues and did nothing. Neglect, perhaps, but where were all the homeowners during this time?

Your biggest job is going to be getting the homeowners to commit to an active HOA.

> I live in a neighborhood in Virginia that has technically had a POA since it was built in the 1970s. Unfortunately the developer never transferred the POA to the members as stated in the by-laws.

1. You mean in CC&Rs, right?

2. Is there a specific statement about turnover? Such complete build-out, or a date??

Don't know.

They should have turned the Association over to the membership but didn't. What harm did this do to the membership? What would make the membership whole?

These are the questions you would have to ask and answer prior to looking at any civil action. Based on your posting, it appears that most of the membership doesn't care that the Association wasn't turned over or the condition of the playgrounds.

Per, § 55-509.2, the Developer only has to turn over the Association to the membership when they no longer have the majority votes. Per your posting, the Developer still owns 5% of the lots. Typically, most governing documents give the developer more than 1 vote per lot, which usually gives the developer the majority of the votes even if the number of lots under developer control decreases. What do your documents say?

Will turning control of the Association over to the membership make it whole? Well, per your post, the developer has no problem doing this. Therefore, why file a civil action to order him to turn it over.


Per your posting a Reserve Study was completed and showed that the Reserves are lower then they should be.

The Reserves are low because there were low or zero assessments. As you stated, Per § 55-514.1, there is no requirement that the Association actually fully fund the Reserves. It just says that the Board should make adjustments to the Assessments as appropriate. Bad decisions by the Board do not always support civil action. Therefore, will having control of the finances make the membership whole? Again, per your posting, the Developer is willing to turn the financial responsibility over to the members. Why go through the process of a court order to make this happen.

Personally, I think that the membership just needs to take control and then move forward. Establish an initial level of assessments to cover operating expenses. Perform a new Reserve Study (if needed) then adjust assessments to properly fund the Reserves from this point forward.

If you can talk the Developer to kick in some money to update the playground, great. If not, consider a special assessment or develop a plan to slowly update the playgrounds over the next x years.

Tim

A complaint would have to look like this

The developer, with malice aforethought, maintained assessments at a very low level, to the financial advantage of the owners, to delude them into thinking that facilities that they had access to without cost would continue forever to be without cost.

The plaintiff sues for enough money to correct the misconceptions of the owners.

Login,

As I stated before, I am not an attorney and I do not work within the legal profession. I am willing to offer you a laymans opinion based on what you posted, my understanding of the VPOAA and, hopefully, some common sense.


Per your posting the Developer had intend on adding another section to the development. It is only after it was known that this was not going to happen that the developer now wants to transfer the Association to the membership.

Per your posting, you believe that it is the Developers responsibility to initiate the transfer. Based on your posting, the developer is now trying to do this. I don't see any culpability.

VA law, § 55-509.2, specifies that there are two conditions that must be met prior to transfer of control:
1) the majority of the members of the board of directors are owners of improved lots in the association
and
2) the Declarant no longer holds a majority of the votes in the association,

Your posting infers that there no owners of improved lots on the Board. Your postings also stated that the Declarant still owns approx. 5% of the community. As I posted earlier, most CC&Rs or Bylaws give multiple votes per lot that is owned by the Declarant. This typically allows the Declarant to have a majority of the votes when owning very few lots. Sometimes, as little as one lot.

Since you never responded to my question on what your governing documents specify this number to be, I can not be positive, but it's possible that the developer still maintains the majority vote within the Association. If true, not turning the development over until now would be within compliance of VA law.


Possibly. However, many developers keep assessments artificially low and make up the difference out of their own pocket. This is done to attract buyers.

If a development has private roads, clubhouse, pool and other recreation equipment and the members are paying $50 per month - isn't it just as negligent for the members to not realize that this little amount barely pays the landscape fees for the common area?

I don't know if this is your first time buying within a covenanted community or not. If it is I can understand the shock to find all of this stuff out (it was for me). The best advice I can offer is to learn as much as you can and become involved with the running of the Association. If not elected to the Board, volunteer for committees, attend board meetings, review minutes, etc. as it's the members responsibility to ensure that those they elect to make the decisions about the Association on their behalf make intelligent decisions. Typically, this can not be done after the fact.


As an owner, you were aware that there were common elements. As an owner, you were aware that there were deed restrictions (CC&Rs) on your property. Were you given a copy? If not, did you ask for a copy?

As a buyer, you signed many many papers when purchasing your home - did you read and understand all of them?

Per VA law, § 55-509.4, "If the contract does not contain the disclosure required by subsection A, the purchaser's sole remedy is to cancel the contract prior to settlement." and "Any rights of the purchaser to cancel the contract provided by this chapter are waived conclusively if not exercised prior to settlement. "

All I can say is to consider this a lesson learned for the next time you purchase within a coveted community.

I know that this isn't what you really wanted to hear. I'm sorry fot that but that is my opinion based on what you provided.

Hope it helps,

Tim

Yep, per VA Nonstock Corporation Act, § 13.1-838, annual meetings of the membership were to be held. If your Association is incorporated under this act, then that law would apply. Did you ever question why the meetings weren't held before now?

Per your posting, you were informed about the POA at closing. Granted, they didn't linger on it but you were informed about it. Did you start research about Associations at that time or only when you were informed that the Association was going to be turned over to the membership?

As far as the State is concerned, the only requirements are to make the annual reports. I know that you must file a budget or income/expenses with when you file a report with the CIC Board. Therefore, just because the membership wasn't aware of the budget, I suspect that budgets and financial statements were created. As a member, you certainly have a right to request copies of those statements. However, I do not recall any requirement that the Association provide them to the you or the membership prior to you, or someone, initiating the request.

Based on your posting, the developer did not hold meetings. In reality, you just know that you are not aware of any meetings that were held. For the sake of argument, lets say that the developer did not hold any of the required meetings. You could certainly seek a court order requiring him to hold the meetings. Wait, per your posting the Developer wants to turn over control of the Association to the membership. Therefore, by the time the case is placed on the docket and heard, the issue might be mute as control may have transferred by then. What I'm trying to point out is that the remedy for not holding meetings is that the meetings now start to be held. You suffered no financial damages because the meetings weren't held.

Per your posting, control of the Association should have happened 20+ years ago. When it didn't happen, why didn't the membership seek a court order to make it happen. I suspect that the answer is because people were happy with the way things were. Now that the members are having to take full control of the Association they are no longer happy.

I'm glad that your on the transition committee. Your questions show that you are concerned. The problem I see is that the members should have been concerned 20 years ago.

If I can summarize the main issue you are concerned about (at least as I understand it) - A reserve study shows that if a reserve fund was established at a specific date in the past, and if that fund was fully funded, there should be around $80,000 in that fund. As you know, the funding of reserves are based on the amount of Annual Assessments paid. Since the the Board of Directors chose not to fully fund those reserves and keep the assessments at a low level, the Board of Directors (in this case the developer) should make up the difference. You are basing this on the presumption that had the Board held annual meetings and/or informed the membership that assessments were too low to properly pay for the operating expenses and fund the reserves and/or turned control of the Association over to the members in 1990 vs. 2011 as required by the governing documents, the membership would have supported an increase in assessments to fully fund the Reserves.

I only have one issue with that. Where was the membership in 1991, 1992, 1993, 1994, etc. asking for control of the Association? Doesn't the membership have some responsibility to ensure the Board complies with their own governing documents? Wouldn't the membership be equally responsible, culpable or (some might say) negligent in failing to demand meetings, ask for financial statements or insist on transfer of control?

Login,

If I was on the jury, based on what you have provided, I would say that the membership would lose the case. If there were sufficient documentation (letters, court filings, etc.) to show that the members attempted to become involved and turned down, I might think otherwise. I know from personal experience that the membership does not always support increasing the annual assessments.

No matter how it's done - the membership pays for the maintenance, repair and replacement of all common area elements. They can pay higher annual assessments so that some money can be set aside in a Reserve fund or they can pay a large amount (special assessment) when repairs and replacement become necessary. Another option the members have is to let the common area fall into disrepair.

Right now, based on the information you provided, I am of the opinion that the membership is ticked because the Board of Directors kept the assessments low and now it appears that they will have to either pay a large special assessment, incur a large increase in annual assessments or a combination of both. Because of this, they don't want to accept their responsibility or inaction and want to find someone else to pay for their negligence and inaction.

Claiming that they weren't told or told incorrectly isn't a defense. I could tell you that you don't need to pay taxes but if you followed that advice you would be in for a rude awakening when the IRS discovered that you haven't paid.

Irregardless of what the members were told, had the members looked into the issues, read their documents, asked questions and, if needed, file legal action for the Board to comply with the governing documents and turn control of the Association over to them 20 years ago, then maybe this wouldn't be an issue now and because they failed to do this, they are at least 50% responsible for this happening. Some might even say that they are 100% responsible because an Association is made up of it's membership.