Preserving Developer Rights and Protecting Association Interests

Published on: December 15, 2016

By Stephen Marcus and Edmund Allcock

Relations between the developers who produce condominiums and the owners who purchase them are not always harmonious, to say the least. They clash over many issues, but disputes over retained developers’ rights and construction defects are among the most common. These disputes are also complex and often result in litigation.

One condominium community – Commercial Wharf in Cambridge – has actually spurred two seemingly contradictory court decisions on the retained rights issue.

parking-deck-438415_1920In the first (Commercial Wharf East Condominium Association v. Waterfront Parking Corp.) the developer had retained the right to control and manage the association’s parking garage. The declaration specified that the developer had the right “to control and collect” parking fees, and that the association was responsible for “maintaining and managing” the facility. The association argued that this was unfair – the developer got all the revenue and the association incurred all the costs while receiving none of the income. But the Supreme Judicial Court (SJC) agreed with the Land Court: Fair or not, the details of the arrangement were fully disclosed in the Master Deed; owners who objected could have negotiated different terms or refused to buy.

In the more recent case, Commercial Wharf East Condominium Assoc. v. CDK Realty Trust, our firm represented an association that objected when the developer transferred to others the right he had retained to use common area in the basement.

No Right to Transfer

Relevant provisions in the Master Deed reserved the developer’s rights to use those areas ‘for storage, shop use and other purposes related thereto.” The association argued that the developer could not transfer the rights because he had not specifically reserved that right. The Land Court agreed. The developer had retained the right to use the areas, the court said, but had not reserved the right to transfer the use.

The two Commercial Wharf decisions convey two clear messages:

  • Developers must describe clearly, specifically, and comprehensively the rights they intend to reserve.
  • Purchasers must review the condominium documents before they buy. In Commercial Wharf I, the court said the parking arrangement – allocating revenue to the developer and maintenance obligations to the association – may not have seemed fair, but it was disclosed.

While buyers should certainly review the documents before they buy, in this case, I think, the SJC focused too much on the disclosure of the parking arrangement and not enough on its equity.

contractor with phoneThe Developer’s View

There are at least two sides to every issue, however. And our firm, which represents both developers and condominium associations (though, obviously, not in the same disputes) has a good understanding of both perspectives. There is no question that buyers sometimes have good reason to complain about what developers do and don’t do.

But developers incur sizable risks – financial and otherwise – and so have good reason to maintain control over a project as long as necessary to ensure its completion. They also have good reason to reserve future development and other rights – again to protect their investment. And when it comes to litigation risks, developers should use all the reasonable measures available to them to protect themselves, just as condominium associations and buyers should use all reasonable measures to protect their interests. The obvious problem: Developers and associations with which they are at odds will not necessarily define “reasonable” in the same way.

The first Commercial Wharf decision restated a principle the Supreme Judicial Court articulated clearly in a 2011 decision (Scully v. Tilley) – developers and boards have great flexibility to create requirements and restrictions in condominium communities, and those terms are enforceable as long as owners are aware of them.

In Commercial Wharf, the court noted correctly, owners could have discovered the parking arrangement and objected to it had they read the condominium documents before buying. There is no question that most buyers fail to perform that basic due diligence and that is certainly cause for concern. But it shouldn’t undermine the ability of developers to protect their interests by reserving rights, maintaining control, or creating financial arrangements that benefit them.

Dealing with Defects

builders-1825689_1920When it comes to construction defects ― a common source of friction between developers and associations ─ it is obviously in the interests of both to avoid litigation. Toward that end, we advise developers to retain, possibly at their expense, an engineer acceptable to the board to evaluate the defects the association has identified and assess whether the developer’s proposed fixes are adequate.

We also suggest that developers include a mandatory arbitration requirement in the governing documents ― arbitration, in our view, providing a faster and far less expensive resolution than litigation. To ensure fairness, our provision specifies that:

  • Both parties select an arbitrator and those arbitrators select a third;
  • Each side pays its own arbitration costs;
  • The arbitrator can’t impose punitive damages (law suits alleging consumer protection act violations can bring treble damages); and
  • The arbitrator’s decision is final.

The most effective anti-litigation strategy for developers, of course, is to avoid the construction defects that might trigger litigation. Most developers do not intentionally create defective buildings; defects typically result from errors, oversights, or shoddy construction work of which the developer is unaware.

To avoid these problems, or at least to discover them before they are baked into a finished structure, we advise developer clients to hire one of the engineering firms condo associations typically hire to produce a transition conditions report to oversee the construction.

The engineer doesn’t have to be on site every day, but can review the ongoing work often enough and closely enough to ensure that it is consistent with the project’s plans and specifications, and to spot problems when they can be corrected easily and inexpensively, without tearing apart a completed structure.

We also advise developers to bring in a professional condominium manager to prepare the initial budget for the condominium association. This will demonstrate a good faith effort to prepare a realistic budget based on projected operating costs. It may not avoid allegations that the developer has intentionally low-balled the condominium fees to facilitate sales, but it will provide a good defense against them.

 


Marcus Errico Emmer & Brooks specializes in condo law, representing clients in Massachusetts, Rhode Island and New Hampshire.

Stephen Marcus and Edmund Allcock