48 Questions
What percentage of the assessment on unsold units may the developer be obligated to pay in most condominium associations?
100%
What is a best practice for developers to eliminate shortfalls in reserves during transition?
Updating reserve studies during the developer control period
During the transition period, what is a significant potential liability for associations?
Fiduciary responsibility
What is a common area of concern for both developers and homeowner boards during the transition period?
Liability and litigation
What are three areas of developer activity that create the greatest potential for liability?
Construction, marketing, and sales
What is a recommended resource for those involved in the development process to educate themselves on liability and litigation issues?
CAI Press publications
Why is it important for developers and associations to understand theories of law regarding construction defects and warranties?
To avoid litigation and liability
What is a goal of developers and homeowner boards working together during the transition period?
To reduce problems and potential liabilities
What is exempt from the release of liability?
10-year warranty as to major structural defects provided by a third party insurer
What is the time frame for the Developer to commence repairs, replacements or improvements?
Within 30 days of the execution of this Agreement
What is the duration of the express warranty provided by the Developer?
12 months
What is the purpose of the resolution attached as Exhibit B?
To authorize the execution of the Agreement and Release
What is the time frame for the Developer to complete all repairs, replacements or improvements?
Within 180 days of signing this Agreement
What is released as part of the Agreement and Release?
Both (a) and (b)
What is the condition precedent for the Developer to commence all repairs, replacements or improvements?
Both (a) and (b)
What is the purpose of the Agreement and Release?
To settle the dispute between the parties
When does the warranty commence according to the agreement?
Upon written notification from the Developer that the work is complete
What is the duration of the warranty provided by the Developer?
Ten years
What is the limit for disputes to be resolved by binding arbitration?
Fifty Thousand Dollars
What is the responsibility of the Association after completion of all work?
To assist the Developer in securing a final release of bonds
What is implied by the waiver of claims in the Agreement?
The parties waive and relinquish their claims concerning any and all defects or deficiencies
What happens to disputes exceeding Fifty Thousand Dollars if not resolved by mutual agreement?
They will be resolved through civil action
What is the responsibility of the Developer after completion of all work?
To have no further responsibility to the Association
What is the purpose of the ten-year warranty as to major structural repairs?
To provide protection to the Association for major structural repairs
What is the primary role of homeowner committees during the early stages of development?
Addressing the community's social needs and welcoming new owners
What is the recommended approach for committees in terms of their responsibilities and goals?
Having clear goals and statements of responsibilities
What is the key benefit of effective communication between the board and owners in a community association?
It helps owners develop trust in the board members
What is the primary focus of the Maintenance Committee?
Inspecting the common area's physical elements and identifying needed repairs
At what stage of development is it recommended that homeowner committees should be functioning?
By the time half the homes are sold
Who makes the final decisions in the early stages of development?
The developer
What is the role of the Communication and Education Committee?
Developing effective communication systems for the association
What is the relationship between homeowner committees and the board of directors?
The committees advise and the board makes decisions
What type of insurance protects the association if an employee suffers a work-related injury or illness?
Workers' compensation insurance
What is the primary purpose of homeowner committees?
To provide valuable information about homeowners and cultivate homeowner board members
What is a best practice for the association regarding insurance coverage during the transition period?
Obtaining separate and distinct workers' compensation coverage
What may insurance be subject to during the transition period?
Federal National Mortgage Association guidelines
What is a significant potential liability for associations during the transition period?
Workers' compensation claims
What is the purpose of the developer-controlled transition period?
To transfer governance from the developer to the homeowners
What is a benefit of homeowner committees during the transition period?
They allow new residents to become familiar with association living and have a voice in their community
What is a recommended best practice for developers during the transition period?
Providing workers' compensation coverage for all employees involved in the association's development
What is a crucial aspect of homeowner involvement in the transition process?
Homeowner participation in document review and budgeting
What is a challenge for owner leaders when sales fall off during the transition period?
Motivating them to stay involved after losing enthusiasm
What is a best practice for developers to encourage homeowner involvement during the transition process?
All of the above
What is a consequence of decreases in the sales rate during the transition period?
Slowed progress toward owner control
What is a benefit of homeowner activities, even without developer sanction?
The benefits will still accrue to the homeowners
What is a recommended approach for developers to counter the effect of the sales rate?
Encouraging earlier education and greater owner participation
Why is it important for developers to provide homeowner board members with comprehensive information?
To ensure a smooth transition process
What is a consequence of a slow transition process due to decreased sales?
Homeowners are less prepared to accept association responsibility
Study Notes
Transition from Developer Control
- Developers may be obligated to pay 100% of the assessment on unsold units in most condominium associations and a smaller percentage in homeowners associations.
- Developers must provide an affirmative statement of this procedure from the first sale.
Best Practice
- Developers should eliminate shortfalls in reserves at transition by updating reserve studies during the developer control period.
Liability and Litigation
- Liability is a concern during the transition period for developers and homeowner boards.
- Construction defects, breach of warranties, fraud, negligence, and breach of fiduciary duty are potential areas of liability.
- Theories of law regarding construction defects vary from state to state.
Warranties and Arbitration
- A 10-year warranty is provided for major structural repairs.
- The Association has one year from the expiration of the warranty to commence an arbitration or civil action against the Developer.
- Disputes under $50,000 are resolved through binding arbitration with the American Arbitration Association.
Agreement and Release
- The Agreement and Release waive and relinquish claims concerning defects or deficiencies, except as provided in the 10-year warranty.
- Upon completion of all work, both parties have no further responsibility to each other, except as provided in the 10-year warranty.
- The Association shall use its best efforts to assist the Developer in securing a final release of the bonds posted with the municipality for public improvements.
Exclusions
- The release does not affect any claims asserted or arising out of reports prepared by the Developer or its representatives.
- The release does not affect any warranties, including those under the [State] New Home Warranty and Builders Registration Act, and the Planned Real Estate Development Full Disclosure Act.
- The 10-year warranty as to major structural defects provided by a third-party insurer is unaffected by the release.
Insurance
- Fidelity insurance may be subject to Federal National Mortgage Association guidelines that require a limit equal to three months' operating budget plus the entire reserve account.
- Workers' compensation insurance protects the association if an employee suffers a work-related injury or illness, even if the association does not have its own employees.
- BEST PRACTICE: The association obtains separate and distinct workers' compensation coverage when it becomes a legal entity.
Transition from Developer Control
- Homeowner committees provide valuable information about homeowners, an opportunity to cultivate homeowner board members, and a cadre of volunteers to help with numerous tasks.
- BEST PRACTICE: Developers encourage homeowner involvement by ascertaining their skills and interests, facilitating neighbor interactions, and creating committees.
- Transition is a process that depends on the rate of home sales, with decreases and increases in the sales rate each causing problems for associations.
- BEST PRACTICE: Developers counter the effect of the sales rate by encouraging greater owner participation and earlier education than the sales level might warrant.
Homeowner Involvement
- BEST PRACTICE: Developers provide homeowner board members with comprehensive information to facilitate their involvement.
- Homeowner committees are advisory in the early stages of development, when the developer makes the final decisions.
- Subsequently, committees will remain advisory and report to the board regardless of who controls it.
Homeowner Committees
- BEST PRACTICE: Each committee has a statement of responsibilities and clear goals.
- The more common homeowner committees include:
- Communication and Education Committee: responsible for effective communication between the board and owners to hinder cliques and factions and provide services that owners want.
- Maintenance Committee: responsible for inspecting the common area's physical elements and identifying needed repairs.
This quiz covers the responsibility of developers in paying assessments on unsold units in condominium associations and homeowners associations. It also discusses best practices for eliminating shortfalls in reserves at transition.
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