Home | Business News | Browse by Publication | F | Florida Bar Journal

The successor developer conundrum in distressed condominium projects.

Article Excerpt
"To be or not to be, that is the question." This issue was raised by a famous playwright centuries ago, although it is doubtful he had distressed condominiums in mind. A foreclosing lender or bulk purchaser acquiring unsold units in an unsuccessful condominium project (the acquirer) often has to weigh the puzzling considerations involved in intentionally or unintentionally becoming a successor developer. The Florida Condominium Act defines a developer as one "who creates a condominium or offers condominium parcels [i.e., units] for sale or lease in the ordinary course of business ...." (1) In essence, the statute creates two classes of developers: those who create the condominium by executing and recording the condominium documents and those who offer condominium units for sale or lease in the ordinary course of business. The focus of this article will be on one who sells or leases condominium units in the ordinary course of business, but did not create the condominium regime.

There are advantages that may accrue with the status as successor developer discussed in greater detail below. These advantages may include acquisition of certain developer-retained rights under the condominium documents and the ability to control the condominium association by electing or designating a majority of the directors of the condominium association board of directors. On the other hand, there may be certain disadvantages. These may include potential warranty liability or liability for financial mismanagement of the condominium association. Disadvantages may also include loss of the ability to control the condominium association.

The above advantages and disadvantages may seem contradictory with respect to the acquirer's ability to control the board of directors of the condominium association. This is the area of most confusion regarding successor developer status, which will be explored in some detail in the subsequent discussion.

Advantages of Becoming a Successor Developer

As noted above, there are certain advantages of becoming a successor developer. Frequently, the declaration of condominium reserves for the benefit of the developer rights, which are extremely important to the operation of the project. These may include the right to perform alterations to units without the approval of the condominium association, the right to maintain model units, the right to maintain a sales office and a leasing office, exclusion from certain restrictions on leasing, and the right to be excused from the payment of assessments on owned units by merely paying any deficit in operating expenses after collection of assessments from the other owners, frequently referred to as guaranteeing the budget.

An acquirer's ability to exercise these reserved rights may be dependent on the acquirer having obtained from the original developer an assignment of the original developer's rights under condominium documents. Even a partial assignment may confer certain rights such as the ability to transfer units without affording the condominium association a right of first refusal. (2) However, if the acquirer does not receive such an assignment, its ability to exercise such retained rights is more problematic. (3) The analysis in the arbitration cases in this area has focused on whether the declaration of condominium specifically provides for such rights to be exercised by a "successor or assign." In Palm Court Owners Ass'n v. Palm Bay Development Corp., Arb. Case No. 95-0131 (August 14, 1996.), the arbitrator determined that, without any assignment of the developer's rights, the successor developer was unable to continue to use a unit as a model unit and as a sales office. Alternatively, it could be argued that the developer rights under the condominium documents are contractual in nature, and without an express assignment they do not pass to an acquirer. The law in this area, however, is not well developed, so that an acquirer failing to obtain an assignment of developer's rights risks loss of such reserved rights after acquisition of the units.

Disadvantages of Becoming a Successor Developer

In addition to the disadvantages noted above, there may also be claims for prior mismanagement of the condominium association, such as failure to fund association deficits and reserves, failure to hold directors' meetings, and failure to elect a unit owner representative to the board of directors. Claims may relate to failure to produce association records if the transfer has triggered a required turnover of control of the condominium association to the nondeveloper owners.

The law in this area is extremely limited. An oft-cited case is Chotka v. Fidelco Growth Investors, 383 So. 2d 1169...

View this article FREE - Now for a Limited Time, try Goliath Business News
Free for 3 Days!