In the Association context, the term “Declarant” usually refers to the developer of the community. While the project is being developed, the Declarant is responsible for the management of the Association. Also, the Declarant initially holds the voting rights and appoints the first Board of Directors. When the Declarant is finished building the community and sells 75% of the units that may be created, “transition” occurs and control of the Homeowners Association is turned over to owners in the community. But wait! What happens if the Declarant files for bankruptcy protection before completing the project?
Against the recent backdrop of declining home sales, increasing foreclosures, and delinquent owners, the tumbling real estate market has also claimed some large builders as casualties. When a home builder goes bankrupt, everyone suffers. Here are some issues that communities are facing as a result of builder bankruptcy:
- Builder abandonment: Partially completed subdivisions and newer communities are more prone to suffering this problem. When a builder files for bankruptcy, subcontractors stop working. This leaves unfinished homes in various stages of completion as well as uncompleted clubhouses, pools, and parks.
- Maintenance of common areas amidst income shortfalls: Homeowners in communities with inadequately funded associations may face an increase in assessments to pay for amenities which have been reduced or may not have even been completed yet.
Despite the downfalls, there is a light at the end of the tunnel. If your community’s builder files for bankruptcy, you should look to the future and focus on positioning yourself for the eventuality of a new builder taking over the project. Here are some key areas that you can focus on to help your community recover:
- Understand the builder’s rights. If proper steps are not taken, the successor builder might not have declarant rights. For example, can the successor builder bring or “annex” newly completed residences into the community? If so, does the Association want them? What are the budgetary implications? If the Association does not want these additional homes annexed into the community, the builder might build without the support of the Association or create a new “sister” association. If this happens, there may be a merger of the two communities so that they can survive.
- Know what control and what rights the Association can exercise. What steps can the Association take to get control of the Associations finances?
- Know what the Association owns and what it’s responsible to maintain, especially when it comes to common areas.