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HOA Developer Turnover: How to Transfer an Illinois HOA From a Developer to The Owners

Whenever a new condominium or common interest community is created, there needs to be a transfer of control of the homeowners association from the developer to an owner-controlled board of managers. The Illinois Condominium Act and the Illinois Common Interest Community Association Act both include specific timelines and requirements to ensure that the transfer from the developer to the community association residents happens smoothly. However, there is no guaranty that the developer will transition the condominium or homeowners’ association to the unit owners in a timely or appropriate manner as required under the Illinois Condominium Act or the Illinois Common Interest Community Association Act.  Accordingly, it is important to consult a qualified HOA attorney to guide a homeowners association through the developer turnover process. This article will discuss how to transfer a homeowners association from developer control to owner control and what steps a community association should take if the developer does not comply with the Illinois Condominium Act or the Illinois Common Interest Community Association Act.

 

Developer Control of an Illinois Homeowners Association

“Developer Control” is defined by the Illinois Condominium Property Act as the period “prior to the election of the Board of Managers provided for in Section 18.2(b) of this Act.” The provisions regarding developer turnover to the unit owners are mirrored in the Illinois Common Interest Community Association Act and more specifically, at 765 ILCS 160/1-50.

Section 18.2(b) of the Illinois Condominium Property Act and Section 1-50(a) of the Illinois Common Interest Community Association Act both provide, in relevant part, that until the first board is elected that is comprised of a majority of unit owners other than the developer, all of the rights, titles, powers, privileges, trusts, duties and obligations of the board under the two acts and the condominium or common interest community association instruments are held and performed by the developer. However, and importantly, the homeowners association itself still has duties to the unit owners even before that election. See, e.g., Glickman v. Teglia, 388 Ill. App. 3d 141, 146, 902 N.E.2d 1256, 1260 (1st Dist. 2009) (Looking at the plain language of section 18.2(a), this provision operates to impose the responsibilities of the board of managers on the developer, not the responsibilities of the association itself). Therefore, even before developer turnover, a homeowners or condominium association has a responsibility to the unit owners to perform in accordance with the HOA bylaws and the two acts.

In accordance with Section 9 of the Illinois Condominium Property Act, until the time of the first conveyance, the developer is responsible for paying all common expenses incurred on behalf of the condominium, and no assessments can be levied against the association. Thereafter, the assessments are shared by the developer and the condominium association until such time as the developer no longer owns any units in the condominium. 765 ILCS 605/9. The Illinois Common Interest Community Association Act does not have a similar provision regarding the developer’s responsibility to pay common expenses, and as such, the underlying instruments will control as to the developer’s responsibility for such expenses.

 

Election of the First Unit Owner Board of Managers

Section 18.2(b) of the Illinois Condominium Property Act and Section 1-50 of the Illinois Common Interest Community Association Act provide the manner in which the first unit owner board is the be elected and states as follows:

    1.  The election of the first unit owner board must take place no later than 60 days after the conveyance of 75% of the units, or 3 years after the recording of the condominium declaration, whichever is earlier;
    2.  In a condominium, if the developer does not call the meeting for the election of the first unit owner board of managers in accordance with the timeframe above, unit owners owning 20% of the interest in the association may call the meeting by filing a petition with the developer and then sending notice of a meeting to the other unit owners; and
    3.  If the first unit owner board of managers is not elected in accordance with the timing of this section, the developer continues in place for 30 days and then must resign from the board.

 

Responsibilities and Rights of the First Unit Owner Board of Managers

The transition from developer control to a unit owner-controlled board is not always seamless. The developer may not be helpful, and if the units in the condominium are all sold, may not care about what goes on at the condominium any longer. Even further, the developer may not have been performing as it was required to do, especially if that meant that it had to expend monies on the development when the focus was just on selling units. Additionally, there are times when the developer has entered onerous service contracts, or contracts with its own related businesses, prior to the turnover with the attempt to force these contracts on the HOA. The Condominium Property Act and the Common Interest Community Association Act help the first unit owner board navigate each of those potential issues.

In order to avoid the situation where the developer simply disappears, Section 18.2(d) of the Illinois Condominium Property Act and Section 1-50(d) of the Illinois Common Interest Community Association Act require that the developer, within 60 days of the election of the first unit owner board, voluntarily provide all of the following documents:

(1) all original documents “as recorded or filed pertaining to the property, its administration, and the association, such as the declaration, by-laws, articles of incorporation, other condominium instruments, annual reports, minutes and rules and regulations, contracts, leases, or other agreements entered into by the Association”;

(2) a detailed accounting;

(3) all association funds (which are required to be segregated);

(4) a “schedule of all real or personal property, equipment and fixtures belonging to the association, including documents transferring the property, warranties, if any, for all real and personal property and equipment, deeds, title insurance policies, and all tax bills”; and

(5) a “list of all litigation, administrative action and arbitrations involving the association, any notices of governmental bodies involving actions taken or which may be taken concerning the association.”

If these deliverables are not provided, the first unit owner board must send a written demand to the developer by registered or certified mail seeking compliance within 10 days. If the developer still refuses to comply, the board can bring an action against the developer, and in any such action, recover attorneys’ fees and costs if it is found that the developer did not comply with the required deliveries. See e.g. Metro. Condo. Ass’n v. Crescent Heights, 368 Ill. App. 3d 995, 1005, 859 N.E.2d 271, 280 (2006) (“We recognize that it is incumbent upon unit owner boards to make clear to developers what sort of information they believe to be missing from documents initially produced by developers pursuant to their statutory duty to provide a detailed accounting.”)

In order to avoid the situation where the developer has entered into long-term or onerous contracts on behalf of the homeowners association, Section 18.2(e) of the Illinois Condominium Property Act and Section 1-50(e) of the Illinois Common Interest Community Association Act provide a mechanism for an owner-controlled board to terminate those contracts. The timing and mechanism for doing so is different, however.  Under the Illinois Condominium Property Act, after the election of the first unit owner board, any contract made prior to the election that extends more than 2 years from the date of that election can be cancelled by a majority vote of the unit owners (other than the developer) at a special meeting called within the first 180 days after the election. Under the Illinois Common Interest Community Association Act, any contract that extends more than 2 years beyond the date of the recordation of the declaration may be canceled by a majority vote of non-developer owners within the 90 days leading up to the expiration of the 2-year period from the date of recordation. At least 60 days before the expiration of these aforementioned periods (180 days after the election of a unit owner board in a condominium or 2 years after the recording of the declaration in a common interest community association), the board (or the developer in a common interest community association if transition has not occurred) must send notice to every unit owner identifying each contract impacted and the procedure for calling the meeting to vote on the contract. Importantly, the other party to any such contract may also cancel the contract within the aforementioned periods. In a condominium, any cancelation (whether by the association or the contracted party) is deemed effective 30 days after mailing notice by certified mail.

 

What Should The Initial Board of Managers for an Illinois Homeowners Association Do After Developer Turnover?

As said above, control of the board in a new condominium association or community interest association involves multiple steps and Illinois law provides for steps to be taken in a timely manner by both the developer and the board. More specifically:

    1.  If you are a unit owner who purchases a unit from a developer, be cognizant of the amount of units sold and the date of recording of the declaration;
    2.  If 75% of the units sell, or 3 years elapses from the date of the recording of the declaration, be aware that an election must take place within 60 days;
    3.  If the developer does not set the date for the election of the first unit owner board of managers, gather 20% of more of the unit owners and send out notice to the developer and set a date for the election;
    4.  Hold the election for the first unit owner board of managers in accordance with the operative instruments (declaration and bylaws);
    5.  Hire competent counsel for the community association to help the bard navigate through any issues and educate the board members on the Illinois Condominium Property Act, or the Illinois Common Interest Community Association Act, as well as Illinois’ General Not for Profit Act;
    6.  Audit the books and records provided to the board by the developer, and if the first unit owner board has not been provided with the statutorily-required documents pursuant to Section 18.2(b) of the Illinois Condominium Property Act or Section 1-50 of the Illinois Common Interest Community Association Act, make a demand on the developer outlining all of the information or documentation that is missing, and if the demand does not work, consider filing a lawsuit against the developer;
    7.  Compile a list of all service agreements that cover the condominium or common interest community, and if necessary, look to terminate those agreements in accordance with the time periods identified in the section above;
    8.  If there is not one in place, consider hiring a property manager to assist the board and the association as a whole;
    9.  Hire a competent accountant, This step can be of the utmost importance to a board of managers because the accountant can: (a) analyze the accounting of the association while it was under the control of the developer; (b) analyze whether or not assessments were set correctly by the developer because, in many instances, they are kept low on purpose by the developer and will not fund the condominium or common interest community on a going forward or long term basis; (c) help set the amount of reserves necessary (Section 9 of the Condominium Property Act requires all budgets adopted by a board of managers to provide for “reasonable reserves for capital expenditures and deferred maintenance for repair or replacement of the common elements”); and (d) assist in reviewing the financial records to confirm that other unit owners are not delinquent in the payment of assessments; and
    10.  Hire a professional engineer to inspect the common elements of the condominium or common interest community for construction defects, and if any defects are found, analyze the best manner to seek recovery from the responsible parties. Importantly, if a claim is to be asserted against the developer, Section 18.2(f) of the Condominium Property Act and 1-50(f) of the Common Interest Community Association Act state that the statute of limitations for any such claim does not start to run until the election of the first unit board.

 

Conclusion

The success of a new condominium, or common interest development, can be greatly increased by following the above steps and retaining a qualified professional team of engineers, property managers and an HOA attorney. It is also important for the board to be educated in the provisions of the Illinois Condominium Act and the Illinois Common Interest Community Association Act (depending on which one applies), as well as Illinois’ General Not for Profit Act, because such education will put the board in a position to better be able to deal with any issues that may arise before, during and immediately after the transition from the developer.

Adam Toosley is a member at Hirzel Law, PLC and focuses his practice on real estate litigation, zoning and land use, construction, and financial services litigation. Over the course of his career, he has represented property owners, landlords, condominium associations, lenders and all parties in the construction chain, handling all aspects of real estate-related disputes, including construction defect cases, payment and landlord-tenant disputes as well as real estate foreclosures, mechanic’s lien cases and fraud and business tort claims in state and federal court as well as in mediations and arbitrations throughout the United States. He is licensed in both Michigan and Illinois. He can be reached at (312) 626-4535 or at atoosley@hirzellaw.com.

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