Serving Two Masters: Developer-run Associations

In every Subdivision's infancy, the Developer most often has to take control as the de facto leader of the Board of Directors for the Homeowners Association -- a reality that can create a conflict of interest for the Developer. Developer-appointed Directors are often caught in a dilemma: who do they serve? the Association for which they were appointed, or, the Developer from whom they derived the appointment (with all presumed loyalties attached thereto)? And what about "self dealing?" When are actions taken for the Association really for the betterment of the Association? The Developer-led Association treads a slippery slope when it comes to liability avoidance and justification of its actions.

Here are some areas that a Developer-led Association must be wary of lest it incur liability for not acting in behalf of the Association, and the membership homeowners, who pay dues in expectation that the Board of Directors is serving their community's interests.

1. Contracts and Leases. Directors have a clear duty to act in the best interests of the Association and to only enter into agreements that further those interests. Contracts must be examined for economic and business impact upon the Association, and not towards any perceived detriment to the Developer, even though one might arise from the contract performance. Developer-appointed Directors must exercise good business judgment, disclosure, and control when considering these obligations.

2. Assessments and Budgets. Self-dealing in this arena evokes a failure to adequately determine a budget for the Association and/or assess consistent maintenance charges for both owner-controlled and Developer-controlled lots within the Subdivision.

3. Acceptance of Common Elements. Most communities develop their common areas by close negotiating and project management with their Developers. This relationship usually terminates with a release by the Association upon completion of the common area development/construction objectives. This process contemplates construction and upkeep, not ownership. But in the case of Developer-led Associations, there is a commonality of interest and it may be hard to discern between the acceptable condition of common area elements when the construction and acceptance of same are all controlled or governed by the same entity, the Developer.

4. Maintaining Adequate Records. Commingling of funds and poorly-kept records are scourges in this area of concern. The wise Developer maintains accounts for the development enterprise separate and apart from the Association's funds while maintaining adequate books and records of payables and receivables.

5. Enforcing Developer's Obligations towards the Association. Oftentimes, a Developer may refrain from enforcing architectural controls and regulations against its own lots (or against all lots) in the Subdivision because of the perceived notion that enforcement will inhibit sales of future units. This perception opens the door to liability against the Association for breach of fiduciary duty alleged by the membership. Better that the Developer-led Association enforce the rules and regulations for a community so that development proceeds according to the plan set forth in the dedicatory instruments.

*special thanks to Wayne S. Hyatt, Condominium and Homeowner Association Practice: Community Association Law (3rd Ed., 2006) from which excerpts were taken to create this article.