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Condo and HOA Turnover – It’s Like Purchasing a Business Except . . .

If you ever been involved in purchasing a business, you likely know of the concept of “due diligence.” If there is physical plant or inventory involved, you would be foolhardy if you didn’t inspect the property, equipment and inventory.

By Alan Tannenbaum, Esq.

Typical Due Diligence in Purchasing a Business

If you ever been involved in purchasing a business, you likely know of the concept of “due diligence.” If there is physical plant or inventory involved, you would be foolhardy if you didn’t inspect the property, equipment and inventory. Certainly nobody would buy an ongoing business without looking at the books, and going over the numbers with their accountants. Then, of course, once there was a level of comfort with the physical plant, equipment and the books (and, of course, the purchase price and terms), you would take the deal to your lawyer and have your lawyer draw up a purchase and sale agreement with appropriate representations by the seller as to the accuracy of the information provided.

Consider that the transition of a developer-controlled condominium association or HOA is in many ways akin to the purchase by the unit or lot owners of a business, often times a very big business.
There is physical plant transferred certainly. Assets, financial records and audits are supplied. The incoming Board of Directors is responsible for all of the duties and responsibilities for operation that the exiting Board was responsible. What’s the difference? Little due diligence.

Sure, the owners may have had a seat on the developer Board. But for most developments, that lone owner representative was left out of the loop on pertinent information and was outvoted on the key decisions regarding operation. Individual owners may have requested information as they were entitled to by Chapters 718 or 720, but most often complete information was not provided. As far as engineering or accounting review, rarely do transition committees raise money voluntarily to secure engineering or accounting studies pre-transition. As far as legal, some counsel advise transition committees gratis, but primarily the advice concerns how the transition process is supposed to work.

Typical Due Diligence in Taking Over Control of a Condo Association or HOA

The reality for newly transitioned condominium associations and HOAs is that the new Board has limited information upon purchase (“transition”) about this business (“community”) it now has the responsibility to operate. It is not too late for “due diligence” however. The incoming unit or lot owner Board of Directors by statute (Chapters 718 and 720) has a fiduciary duty to the owners. To meet this duty, consider that it is incumbent upon the incoming Board of Directors to perform after purchase (transition) the due diligence that in a commercial setting would have been done pre-purchase.

It is in the context of “due diligence” that forensic engineering and accounting investigations should be ordered, general counsel retained to assist in getting operations and compliance in order, and turnover counsel retained to assist in the choice of the forensic engineering and accounting firms, determining the scope of the investigations, and pursuing relief from the seller (“developer”).

Can Due Diligence Wait?

Can the due diligence wait, after all we the incoming Board of Directors has a lot on its plate the first year without having to spend time and money “looking under the hood?” The simple answer is that it really can’t wait. First, with repair and maintenance of the common property being the foremost obligation of the association, a timely engineering study is an essential tool for the Board to perform its oversight, planning and budgetary functions on repair and maintenance. Second, warranty periods and statutes of limitation affecting potential claims may be at risk of expiring. For condos, the main developer warranty is tied for projects with buildings more than three years old to discovery of defects within one year of turnover.

Summary

Condominiums and deed-restricted developments are big businesses, sometimes multi-million dollar businesses. By statutory and documentary design, until sale (“transition”), the seller (“developer”) holds all of the cards. It is only in the period after sale (“post-transition”) can the incoming Board of Directors take steps to ascertain the cards the owners have been dealt. This is after-the-fact due diligence, but given this design, the Legislature and the courts have provided associations with recourse if the developer has left the community with deficits, be they infrastructure, regulatory, building or financial.