What does “transition” really mean when it relates to condominium and community associations? In brief, it encompasses many functions and does not occur overnight. Transition is one of the most critical processes that any association will face. Attention to detail is vital to protect the association. The purpose of this article is to provide a fundamental framework for the transition process and helpful practice pointers every attorney in this field should understand.
Generally, a developer of an association controls the Board of Trustees until 75 percent of the units are sold. See N.J.S.A. 46:8B-12.1a (condominiums); N.J.S.A. 45:22A-47 (all common interest communities). This important shift in control commences the transition process. But it does not end there. As construction is completed and units are sold, performance bonds are released and the developer may begin to wind up operations and move on to its next project. As such, it may become more difficult to address issues with the community without resorting to litigation. Furthermore, even if litigation is successful, a prevailing association-plaintiff may simply have a judgment against a defunct entity. For these reasons, it is important for an association to be careful, deliberate and detailed during the transition process and its investigation, as this process represents a unit owner-controlled association’s best opportunity to hold the developer and its subcontractors accountable for their work.
Hiring Transition Team
It is unfortunate that the transition process—perhaps the most important function during an association’s existence—occurs when the unit owner-controlled association is in its infancy with volunteer members who are unfamiliar with the process. Thus, a well-qualified and experienced team of professionals is an essential prerequisite to a successful transition process. The transition process is extremely nuanced and detailed, and therefore hiring an attorney and community association manager who are familiar with the process is a necessity. An experienced attorney can not only advise an association as to the various laws and regulations applicable to the transition process, but, along with the community association manager, can serve as a point person and referral for other essential team members.
Concurrent with or shortly after hiring an attorney, an engineer must be retained to perform a transition inspection. The transition inspection will identify construction issues with the property and its common elements, which will then serve as a catalyst and drive the remainder of the transition process (see below). The engineer will analyze whether the developer constructed the community in accordance with applicable plans, specifications, codes, manufacturer’s instructions and industry standards. Due to the importance of the transition inspection, hiring an engineer with particularized experience is vital.
An accountant should also be retained to perform a transition audit. In condominiums, a developer is obligated to provide “an accounting of all association funds, including capital accounts and contributions.” N.J.S.A. 46:8B-12.1d(7). Such an accounting is likewise required for all common interest communities under the Planned Real Estate Development Full Disclosure Act (PREDFDA). N.J.S.A. 45:22A-47(c). An accountant should review the developer and association’s records and perform a “benefits-derived” analysis to ensure the developer has fulfilled all of its financial obligations to the association.
After assembling a team, it is important that all information relating to the development be gathered. Under the Condominium Act, the developer must provide certain information and documentation after control of the association shifts to the unit owners. N.J.S.A. 46:8B-12.1d. The same applies to other common interest communities under PREDFDA. N.J.S.A. 45:22A-47(c). Other than requesting documents from the developer directly, sources of documents may also include:
- County Clerk: All recorded documents pertaining to the development must be obtained. These include copies of the master deed, bylaws and amendments thereto, as well as easements, deed restrictions and other instruments affecting the property.
- Township: The township (in particular, the zoning and construction offices) will likely have on file site plan applications and approvals, municipal resolutions, information about performance bonds and certificates of occupancy. Townships may require a practitioner to file an OPRA request in order to access these documents.
- Department of Community Affairs (DCA): The public offering statement, annual reports and other documentation required to be submitted pursuant to law and regulation should be on file with the DCA.
- Engineers, Architects, etc.: If the developer is missing documentation pertaining to the development, it is advisable to contact the professionals it retained in order to obtain proper site plans, surveys, drawings, etc.
As noted above, the association’s engineer will conduct an inspection of the property in order to identify any deficiencies with the common elements. The engineer will then prepare a report, noting said deficiencies and recommending what remedial measures are prudent. However, more than one inspection and multiple reports are often necessary to determine the full extent of damages. This can take much time to develop as inspections (invasive and otherwise) need to be scheduled (sometimes with unit owners for interior inspections), and reports must be drafted. But this is necessary to eventually obtain an accurate estimate to cure the deficiencies. The forward-thinking practitioner should have an open dialogue with the engineer concerning the potential cost for remedial measures, as this will become important while engaging with the developer concerning possible resolutions.
An engineer should also perform a capital reserve analysis by comparing the initial reserve study included in the governing documents with a current reserve study to determine if there is any deficiency for which the developer is responsible. For example, the developer may be liable if it omitted certain common elements from the study or underestimated the cost of materials and labor for replacement and maintenance.
In addition, an engineer should prepare a current capital reserve study to determine if the association’s reserves are adequate or if adjustments need to be made (for example, if the cost of materials and labor has increased). Having a well-capitalized reserve fund in the beginning will help prevent future shortfalls and special assessments and will leave the association prepared for future replacements and maintenance.
Engaging with the Developer
The engineer reports noted above will serve as a springboard for dialogue with the developer. The association, through counsel, will request remedial measures addressing deficiencies cited in the reports. Due to statutes of limitations and statutes of repose that may be ticking (see below), it is prudent when engaging with the developer or its counsel to set reasonable deadlines for responses. Resolution of deficiencies cited can take the form of a developer paying money to the association to address the deficiencies, the developer performing the repairs to address the deficiencies directly, or a combination of the two.
Statute of Limitations and Statute of Repose Considerations
If negotiations with the developer are unsuccessful and the developer refuses to address any or all deficiencies, the association may need to consider litigation. In so considering, it is important to “keep an eye on the clock” and act quickly to ensure the association’s claims do not run afoul of any statute of limitations or statute of repose. Under N.J.S.A. 2A:14-1, a construction defect action must be commenced within six years “after the cause of any such action shall have accrued.”
In The Palisades at Fort Lee Condominium Association v. 100 Old Palisade, the Supreme Court considered when, under N.J.S.A. 2A:14-1, a cause of action accrues in the context of a transitioning condominium association. 230 N.J. 427. In Palisades, the trial court ruled that the statute of limitations began to run in May 2002, when the building was substantially complete. The Appellate Division reversed, concluding that the construction claims accrued in June 2007, when the unit owner-controlled association had received its engineer report. The Supreme Court reversed and remanded, holding that the six-year statute of limitations does not commence until a plaintiff knows, or through the exercise of reasonable diligence should know, of the facts that form the basis for an actionable claim. 230 N.J. at 454. Therefore, the case was remanded for the lower court to analyze and determine when the accrual clock began to tick. 230 N.J. at 455. It should be noted that the Palisades case involved the conversion of rental apartments to condominiums and not the more common situation of new construction in connection with a common interest community.
It should also be noted that N.J.S.A. 2A:14-1.1(a) provides for a statute of repose of 10 years for construction claims, beginning from the date of a project’s substantial completion. Determining the date of “substantial completion” with respect to common interest communities is difficult, as construction is typically performed in phases over many years.
With respect to the statute of limitations and the statute of repose, it is prudent to analyze when substantial completion may have occurred, when control of the association shifted to the unit owners and when deficiencies first became known. At the same time, a unit owner-controlled association should promptly engage its transition team and move forward with diligence.
Due to the uncertainty of when a cause of action may accrue in connection with construction deficiencies, it is extremely important for a transitioning association to promptly assemble its experienced team, gather information and conduct its due diligence. This will help facilitate a productive dialogue with the developer prior to the developer withdrawing from the community and in the event litigation is necessary, help the association meet any applicable statute of limitations and statute of repose periods.
David R. Dahan is a partner with Hyland Levin in Marlton. He focuses his practice on commercial litigation and business counseling. William F. Hanna, an associate with the firm, practices in the areas of real estate, franchise law and community associations.