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Sales of Lots from Developers to Builders: Legal Rights, Obligations and Risks

When a builder purchases lots within a common interest community, a number of issues must be examined carefully by both the developer and the builder. Some of these issues, which are discussed below, can be adequately addressed with careful planning by the parties. Although there are some similarities between the condominiums and homeowners associations, condominiums will typically involve special issues which will be discussed separately.

Completion and Conveyance of Common Areas

It is important to ascertain who has the responsibility for the proper completion and conveyance of the common areas within the project. Typically, the developer will have this responsibility, but in some cases, a builder who is purchasing a large portion of a project may purchase the common area that is adjacent to the lots being acquired. The common areas may consist of private roads, green space or recreational amenities, each of which may be important to the successful development of the project.

If the common areas are not completed or conveyed, problems may arise. In some cases, additional building permits may not be issued if common areas have not been conveyed or completed and therefore it is important to consider escrows or other means of insuring the timely completion and conveyance of the common areas. Even though the lot purchase price may have contemplated the completion or conveyance of common areas, if the developer experiences financial problems, the builder may have no alternative but to complete these areas, either to meet the project approval requirements and/or to fulfill commitments made to purchasers.

A few years ago, a small project in Maryland had common area consisting of parking spaces and driveways. Unbeknownst to the homeowners, the common areas had never been conveyed to the homeowners association. Royal Plaza Comm. Assoc. v. Bonds, 884 A. 2d 130 - Md. 2005. Because the homeowners association didn't own the property, they never received the property tax bills on the property and it ultimately was purchased by a third party at a tax sale. The purchaser of the common area at the tax sale notified the homeowners of his intention to lease the common areas to the homeowners for access and parking. Fortunately for these homeowners, the tax sale was set aside because notice of the sale had never been given to the homeowners association. This is but one example of what can happen when common areas are not completed or conveyed.

Assignment of Declarant Rights

One of the most important entitlements held by a builder or developer within a homeowners association are the declarant rights. These may include special voting rights in the association, reduced assessments, exemptions from architectural controls and reserved easements. The failure to create or acquire some or all of these rights may significantly restrict the ability to build homes within the development. Builders do not want to be subject to the uncertainty of architectural approval, have their construction activities disrupted by use restrictions or subject to exorbitant fees and assessments by the association.

If easements are not reserved for utilities and other development rights, the ability to complete construction and development may be hampered. Virtually all declarant rights can be created and reserved in the declaration of covenants, conditions and restrictions. Since there are generally no statutory restrictions on the declarant rights which can be established in the declaration, such rights should be broadly drafted to ensure that the declarant has all reasonable rights to complete the project.

Although it is important for the declarant to have very broad rights reserved in the declaration, these rights should not automatically be conferred upon others. Although some of the declarant rights may be beneficial to the builders within the project, these rights should be assigned with care to ensure that the exercise of such rights by others does not result in disruption to the overall development of the project.

From the builder's standpoint, care should be taken to ensure that generally, only rights, and not obligations, are acquired. This is not always an easy task since the grant of declarant rights may imply an obligation to assume declarant obligations. Such an implication becomes even stronger when the original declarant ceases to exist or defaults on its obligations. Consequently, any assignment of declarant rights should be carefully drafted to insure that the declarant retains these rights which are necessary to complete the development without disruption, as well as to prevent the assignee from acquiring unintended declarant obligations.

Special Condominium Issues

Although there are some similarities to the conveyance of unimproved lots within a homeowners association and the conveyance of unimproved property within an expandable condominium regime, there are many significant differences. Since condominiums are creatures of statutes, those statutes have a significant influence on the rights and obligations of developers and builders. With condominiums, there is no conveyance of common area; common elements are created by the expansion of the condominium regime. Upon such expansion, each unit owner acquires an undivided interest in all of the common elements and this makes the acquisition of declarant rights quite complicated and risky. To the extent problems arise with the common elements, it is difficult to sort through the legal liabilities of the parties. In many cases, if common element problems arise, the condominium association will seek recourse from anyone with declarant status.

The most prudent course of action is to generally avoid assuming declarant status within an existing condominium regime. A better alternative to assuming declarant status is to create a separate condominium regime and to the extent there are common amenities to be shared, have this done by a cross-easement agreement. Otherwise, the successor declarant may assume more obligations than what was ever intended.

In Conclusion

The legal rights, obligations and risks associated with the development of common interest communities by multiple builders is a somewhat common occurrence these days. With proper planning, these rights and obligations can be allocated in a manner which ensures successful completion of the project without unintended risks being assumed.

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