Developer / Transition Control

“Transition” is a word that carries with it, with respect to community associations of all kinds, a great significance.

In the community association context, it describes the process by which control of a community association, together with responsibility for that communities’ common elements and/or facilities, is transferred from a developer to the owners. There are considered two (2) parts of “transition”: (I) “transition” of control; and, (ii) “transition” of responsibility.

Transition of control involves the gradual process by which owners of lots, homes, interests, etc. assume control over the community’s association’s governance. Once owners assume control (signified by occupying a ‘majority’ of seats on the association’s board), the owners have the power to make all decisions that up to that point had been made by the association, albeit controlled by the developer (i.e., adopting of budgets, setting assessments, deciding on contractors). This ‘transfer’ is governed by both New Jersey’s Condominium Act, N.J.S.A. 46:8B-1 et seq. (the “Act”), and New Jersey’s Planned Real Estate Development Full Disclosure Act, N.J.S.A. 45:22A-21 et seq. (“PREDFDA”), together with the contents of the particular association’s declaration, master deed and/or bylaws. Developers are permitted to retain one (1) seat on a community’s board of trustees, so long as that developer holds at least one (1) lot, unit or interest for sale in the regular course of business. Both the Act and PREDFDA contain provisions intended to safeguard developers from various forms of harm subsequent to the owners’ control of an association, but prior to that developer’s sale of its last unit, lot, interest, etc.

Transition of responsibility involves the process by which the association assumes maintenance, repair and/or other responsibilities over the common elements and/or property, and by which it is determined whether the developer paid assessments and other funds to that association with respect to unsold units, in development, in accordance with PREDFDA. The goal here is to ensure, before the owners assume these obligations into perpetuity, that the developer improved and/or constructed the project correctly, and contributed funds in accordance with New Jersey law. The association engages independent consultants, including architects, engineers and accountants to aid it in these determinations. During this process an association will obviously have to make various repairs. In order to preserve the association’s rights, those repairs must be made to avoid the spoliation of evidence.

The transition process is complex, involved and time consuming but perhaps the most important time in the history of a community association. Aside from the Act and PREDFDA, it may involve New Jersey’s Municipal Land Use law and New Jersey’s New Home Warranty and Builders’ Registration Act, N.J.S.A. 46:3B-1 et seq. (“HOW”). The association’s selection of independent counsel during, prior to or subsequent to transition is crucial. Understanding the scope and content of insurance policies maintained by an association’s developer is also crucial. An association must also ensure it is mindful of the time limits within which claims against a developer must be brought, such as those set by warranties, by contract principles or New Jersey’s statute of repose.