This article recently appeared in the summer edition of Lancaster Builder, a publication of the Building Industry Association of Lancaster County.
Many homebuilders are familiar with the general structure of condominiums and planned communities in Pennsylvania, and the purposes of the associations that manage them. However, due to the complexities of these communities and the statutes that govern them (68 Pa.C.S.A. Sections 3101, et seq. (condos) and 5101, et seq. (planned communities)) (the “Acts”), there are many opportunities for developers to make mistakes during the formation and turnover process. Below is a summary of five areas where we see errors (and omissions) from a legal perspective and suggestions on how to avoid them.
1. Know your Unit Boundaries. It is best practice for developers to thoroughly understand the structure of the community they are working in. While common elements are generally easy to identify up front (storm water facilities, open space areas, amenities, etc.), the unit boundaries are not always straightforward. Units can consist of lots, building footprint areas, or a combination of the two. These variations in unit boundaries impact what needs to be completed to comply with the Acts. For example, building footprint units require additional information on the plats and plans, and certificates of completion to be recorded with the deed for each unit to certify the unit has been completed and the boundaries of the unit are consistent with the plats and plans.
2. Understand the Turnover Process. The Acts provide a laundry list of items that need to be turned over to the association when a developer concludes a project. Audits, governing documents, management agreements, prior budgets, and as-built plans are a few examples of those items that must be provided to the association. Consider adopting a checklist for turnover that outlines these requirements. It is also important to remember to change the association’s address to the management company (or homeowner) that will receive corporate notices going forward. A good way to document turnover is to have the association sign a turnover agreement that acknowledges completion of turnover and receipt of the required items. Note that the recently adopted Corporate Transparency Act creates additional turnover responsibilities, as it is incumbent upon the developer to update the names and addresses of the directors with FinCEN to meet the beneficial owner reporting requirement.
3. Ensure that Common Facilities Have Been Completed Per the Governing Documents.
A less known requirement of the Acts is that certificates of completion are required for community improvements that will be turned over to the association. Certificates of completion are signed by a licensed surveyor or engineer as evidence that the improvements have been finished as required by the governing documents. When developers convey private streets, community amenities, storm water facilities, or other improvements to the association, they should ensure that certificates of completion are recorded with the conveyance instruments. These certificates help to provide a backstop for developer liability for association claims of incomplete improvements. Consider also scheduling a joint inspection with the association prior to conveyance of common elements to allow the association to ask questions and verify the condition of the improvements being turned over.
4. Know When Reduced Assessments Are Allowed (or Not). Some developers do not track the payment of assessments for lots they own. There is an ongoing discussion among planned community and condominium experts as to whether reduced assessments are allowed. For example, can a builder pay no assessments for vacant lots that the builder owns? The discussion revolves around a provision of the Acts that allows for modification of assessments if a unit does not benefit from the assessments. This can be used to support the position that no assessments should be due for vacant lots since they do not put the same demands on the community as an occupied lot. When preparing a budget, developers should consider how the financial health of the association could be affected if full assessments are not paid. Since the budgets must be turned over to the association, they will be subject to scrutiny and there must be a reasonable basis for the absence (or reduction) of builder assessments.
5. Track Warranty Responsibilities. There are two important warranty considerations that developers should be aware of. The first is that there is a two (2) year warranty requirement for structural defects in a unit. The builder of a home (whether it is the declarant or an approved builder) must verify that its warranty for structural defects is consistent with the Acts, and provides for a procedure to remedy structural defects if they arise within the two (2) year period. Second, in lot takedown scenarios where the builder is not the declarant, it is important to distinguish which party is covering the statutory warranties required by the Acts. Typically, the declarant will warrant the common facilities it is constructing, while the homebuilder will warrant against structural defects to the homes it is building. It is important that these warranty responsibilities are delineated in the governing documents for the community. The public offering statement should disclose who is warranting what, and provide copies of those warranties for purchasers to review. Consider also including specific procedures for how warranty claims are made. For example, homebuilders should expressly disclaim warranty claims related to the improvements that the declarant is constructing. The declaration should also spell out each party’s responsibilities for completing the various improvements in the community. This aids in transparency and buyer understanding of how the community will be built out.
Obviously, there are many other areas where mistakes are possible. The Acts are complicated and have requirements buried throughout. Most importantly, developers should have good templates for their governing documents that include the vast majority of these requirements, and that can be tailored for each project. A good set of documents includes a declaration, bylaws, rules and regulations, form certificate of completion, public offering statement, turnover checklist, and settlement checklist. With a comprehensive set of templates, it can help to make compliance with and understanding of the Acts less daunting.
If you have questions about the formation and turnover process of a condominium or planned community, please contact attorney Reilly Noetzel or any member of Barley Snyder’s Real Estate Practice Group.
