DÉJÀ VU ALL OVER AGAIN: DECLARANT RIGHTS

For those of you who live in a condominium, townhome or single-family community association that was built during the last development boom, you may find that where you now live doesn’t look exactly as you expected it to when you first made your decision to buy. Vacant lots, unfinished units, foundations poured (but no home built), are all scenarios that many who live in a community association now find themselves. While none of the foregoing are an ideal living situation, at least we can all relax knowing that the builder/developer of the community, who no one liked anyway and went bankrupt or was foreclosed out of any property that it may have owned, will never come back, right? As Yogi Berra once said, “It ain’t over ‘til it’s over.” Some unfinished communities are now finding that rumors of a rebound in the residential real estate market are not exaggerated as new investors are purchasing vacant lots or unfinished units with the intention of completing construction. In some cases, the purchaser of the unfinished lots/units is a builder that is new to the community, in others the same builder who didn’t complete the project the first time around is back, just with a different name. In either case, communities must brace for the headaches and disturbances created by construction activity. Beyond the disruption to the peace and quiet, owners may notice the new (or old) builder engaging in activities that violate the association’s declaration. What rights does this new (or old) builder have? What rights do the owners and the association possess? Is this new builder going to run its operations with an iron fist like Mike Ditka or with kindness like Love Smith and what will this mean for the owners? The following provides a general description of the role of declarant, declarant rights, and the relationship between a party holding declarant’s rights and an association that has already been turned over to the owners.

Who or What is the Declarant?

The declarant is the owner of a property that becomes the condominium/common interest community. The declarant gives life to the condominium or common interest community by recording a declaration against the property that will ultimately comprise the association. The declarant is also the party that forms the not-for-profit corporation that will become the association. As the entity that most likely owns the entire tract of property upon which the association will ultimately be located, the declarant is vested with a great deal of authority to establish all the covenants and restrictions under which the future owners will be expected to live. Along with the ability to establish total association governance, the declarant can create certain exceptions to the covenants, often favoring itself. These exceptions are referred to as declarant’s rights.

What Are Declarant’s Rights?

The reserved rights of the declarant are found within an association’s declaration. While not necessarily an exhaustive list of all possible declarant’s rights, the following are typical rights reserved by the declarant:

1. Promotion: This allows the declarant to maintain model homes, a sales office within an existing building or unit, construct a temporary building for housing of a sales office and erect advertising or signage promoting the project and the sale of units;
2. Construction: This allows the declarant to make alterations, additions, or improvements to the property that it deems necessary or advisable for the project. This often includes landscaping and the storage of construction equipment and materials upon the property, without the payment of any fee;
3. Easement and dedication: Easement rights allow the declarant to provide access to the property to any governmental authority, public or other utilities serving any lot or unit. Dedication rights allow the declarant to dedicate or transfer portions of an association’s common area to a county, municipality or other governmental authority that has jurisdiction over the property;
4. Architectural control: This allows the declarant to formulate and bind all of the owners to certain standards governing the appearance of units/homes and the community as a whole;
5. Amendment: In addition to possessing the authority to add property to the development, declarants typically have the unilateral ability to amend an association’s governing documents. In addition, any amendments the membership wishes to pass are also typically required to be approved by the declarant. If the declarant does not agree and its approval is needed, an amendment to the association’s governing documents will fail;
6. Assessment payment exemption: Most declarations include an assessment payment exemption for the declarant. Often the obligation to pay assessments for a particular unit or lot does not commence until the declarant sells to a third party;
7. Assignment: The right to assign allows the declarant to transfer to a third party all or some of the rights granted in the declaration. There will be a discussion of this right later in this article.

How Long Do Declarant’s Rights Exist?

Declarant’s rights cannot be asserted forever. However, they can survive turnover of the association to the owners. While there is no state law governing how long declarant’s rights may be asserted, most declarations provide that these rights may be exercised if the declarant holds or controls title to any portion of the development. For a condominium association, if the declarant still owns single unit, declarant’s rights remain. For a common interest community, if the declarant owns any lots upon which homes may be constructed or any portion of the common areas, declarant’s rights may be exercised.

When Can Declarant’s Rights Be Assigned and What Is the Impact of an Assignment?

Absent contrary language in an association’s declaration, declarant’s rights are freely assignable. This means declarant’s rights can be transferred between parties without association approval. The declarant can transfer its rights from one corporation to another related or unrelated corporation, to an individual or to its lender. The ability to assign declarant’s rights is often not tied to the original declarant maintaining an interest in the development. This means that even if the original declarant no longer owns any property in the development, if it is currently under bankruptcy protection, has completed bankruptcy, or has otherwise gone out of business, it may still assign its rights to a third party. An assignment of declarant’s rights allows the new builder to step into the shoes of the original builder and assert those same rights described above.

What Should an Association Do If the New Builder has Been Assigned Declarant’s Rights?

If an association finds that another builder is asserting declarant’s rights, the first thing it should do is ask to see the assignment. An assignment can only be accomplished through a written instrument. If the new builder cannot produce this document, it most likely does not have declarant’s rights and it should not be permitted to assert them. If a valid assignment is produced, the association must first understand that contacting its legal team to mount a legal challenge to the new builder’s assertion of declarant’s rights would most likely be unsuccessful. Since a legal attack is not a good option, the board and owners should shift their collective focus to working with and establishing a relationship with the new builder. This can be difficult if the “new” builder is really the old builder, just with a different name, but the interests of the association and the new builder are not necessarily always at odds. Even if “Otis Wilson Builders” has returned to the scene as “Mamma’s Boy Construction,” the builder wants to provide attractive homes for sale, fast. The association wants its neighborhood completed and more homes paying assessments. While the new builder armed within assignment of rights can assert more control over the community than the owners would like, it will still have to work within the confines of the association’s declaration, not to mention any annexation or planned unit development agreements that may be on fi le with the municipality and which were created at the time of initial construction.

If an association finds that the builder is seeking to construct homes that look substantially different from what was previously constructed and the builder produces a valid assignment of declarant’s rights, unless the association’s declaration contains architectural controls regulating the exterior appearance of homes that are being ignored, a legal challenge is once again not the best response. Keep the lines of communication open with the builder and express the association’s concerns. A builder just wants to construct and sell homes. It does not want to be bogged down with association-related issues. To that end, open communication to tackle problems early in the process will benefit both parties.

If the builder is not as receptive to the association’s concerns, any changes in the appearance of homes that deviates from the annexation or planned unit development agreements must be approved by the appropriate municipal authorities (zoning board, plan commission, village board, etc.). It is during these municipal proceedings that any objections to the new builder’s plans should be voiced as they provide the association’s best chances of impacting what is ultimately constructed and the appearance of the community upon completion.