Assignment Of 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 of 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 as long as 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 in an attempt 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 in an effort 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.

Tags:Architectural Control,Developer,Douglas Sury

About the Author

Douglas J. Sury is a partner with the firm of Keay & Costello, P.C. He has been licensed in the State of Illinois and the United States District Court for the Northern District of Illinois since 1999. Mr. Sury is a member of the Illinois State Bar Association and the DuPage County Bar Association. Read more. | doug@keaycostello.com

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While the North Carolina General Assembly was finishing its two-year legislative session this past summer, House Bill 330 was signed into law. The bill, sponsored by Representative Rob Bryan (R-Mecklenburg) and Representative Paul Stam (R-Wake), was filed on March 3, 2013.  It passed its first reading the very next day and reached the Senate floor on May 7, 2013.  The bill was then sent to the Committee on Rules and Operations of the Senate, where it sat for over a year until it was withdrawn from that committee on May 16, 2014 and referred to the Senate Judiciary I Committee.  The Judiciary I Committee adopted a committee substitute which was quickly passed by both chambers. The bill was ratified on June 2, 2014 and became law when it was signed by Governor McCrory five days later.

It was unclear what special declarant rights could be transferred upon foreclosure, bankruptcy, or a voluntary transfer.

The long story of how House Bill 330 became a law makes the bill sounds like a complex piece of legislation, but in reality it simply clarifies the way in which special declarant rights can be transferred.  Its long road to ratification was created by a need for clarification regarding which special declarant rights could be transferred upon foreclosure, bankruptcy, or a voluntary transfer, and what obligations came with those transfers.

To begin, special declarant rights are rights that exist when a condominium, planned community, or common interest community is created.  The creation of a planned community requires a document called a declaration.  A declaration states the covenants and restrictions that run with the land on which the planned community is located.  The declarant is the one who creates the declaration and is typically the developer of the property.  The special rights given to the declarant can be found in North Carolina’s Planned Community Act, codified in N.C. Gen. Stat. 47F, and also North Carolina’s Condominium Act, codified in  N.C. Gen. Stat. 47C.

Special declarant rights are defined in N.C. Gen. Stat. 47F-1-103(28) as rights kept for the declarant’s benefit, which includes any right:

(i)                    to complete improvements indicated on plats and plans filed with the declaration;

(ii)                   to exercise any development right (HB 330 defined this to mean “any right or combination of rights reserved by a declarant in the declaration (i) to add real estate to a condominium; (ii) to create units, common elements, or limited common elements within a condominium; (iii) to subdivide units or convert units into common elements; or (iv) to withdraw real estate from a condominium”;

(iii)                  to maintain sales offices, management offices, signs advertising the planned community, and models;

(iv)                 to use easements through the common elements for the purpose of making improvements within the planned community or within real estate which may be added to the planned community;

(v)                  to make the planned community part of a larger planned community or group of planned communities;

(vi)                 to make the planned community subject to a master association; or

(vii)                to appoint or remove any officer or executive board member of the association or any master association during any period of declarant control.

The declarant can transfer these rights to another person or entity, whereby the transferee of all or any portion of the special declarant rights would become, by definition, the declarant.  Thus, a single planned community can have multiple declarants.

Originally, N.C. Gen. Stat. 47F-3-104 only allowed special declarant rights to be transferred by recorded instrument.

As evident by reading the rights, special declarant rights are rather powerful and in the right hands can be profitable.  Thus, it is important to know who has these rights, and who can obtain these rights.  House Bill 330 was created to answer these questions.

Originally, N.C. Gen. Stat. 47F-3-104 was a short statute that, barring a foreclosure on the planned community, only allowed special declarant rights to be transferred by a recorded instrument in the county in which the planned community is located.  Although it was concise, the original language governing the transfer of special declarant rights raised a lot of questions.

The legislature created House Bill 330 in an effort to resolve these issues.  First, the general rule is still in place, which is that any transfer of special declarant rights must recorded in the county in which the planned community is located.  However, several exceptions exist in order to accommodate a failing planned community.

One such exception is found in N.C. Gen. Stat. 47F-3-104-(c), which automatically includes within a deed of trust or mortgage instrument “the special declarant rights as part of the right, title, and interest” that the deed or instrument encumbers.  The practical effect is that deeds of trust will no longer be required to contain a separate provisions dealing with the special declarant rights or the assignability of these rights upon foreclosure, bankruptcy, or judicial sale.  However, these rights are not automatically obtained because subsection (c) requires the purchasing entity to formally request the rights that the entity wishes to obtain.

A purchaser of a planned community can now maximize the purchase by choosing the special declarant rights that are the most valuable.

As a result of House Bill 330, any purchaser of a planned community at a foreclosure sale, judicial sale, or bankruptcy can now maximize the purchase of the planned community by choosing the rights that are the most valuable.  This is important because these rights come with obligations, and depending on whether or not the successor is considered an affiliate of the declarant, these obligations can be avoided to a degree.

The new law enforces all obligations on anyone who is deemed to be an affiliate of the declarant, which is newly defined in N.C. Gen. Stat. 47F-1-103 as “any person who succeeds to any special declarant rights or who controls, is controlled by, or is under common control with a declarant.”  Thus, any successor who is an affiliate of a declarant is subject to all the rights and obligations as the declarant.

However, if the successor is not deemed to be an affiliate of the declarant, then all obligations may be avoided if the successor chooses to only succeed to the right to maintain sales offices, management offices, signs advertising the planned community, and models.  If the successor is not an affiliate of the declarant and chooses to accept any additional special declarant rights, then the successor is subject to any obligation within the declaration as well as the obligations imposed by Chapter 47F, but the successor will not be responsible for any misrepresentations by the transferor or for any obligations or breach of obligations made by the transferor or previous declarant not listed in the declaration.

Lastly, any person who succeeds to special declarant rights under subsection (c) and intends to hold these rights solely for the purposes of transferring them may do so, so long as this intention is recorded.  The purpose behind recording this intention is to benefit the entity intending to transfer those rights because that entity will not have any obligations during the period that it holds the special declarant rights for the purpose of transferring them.  Essentially, a purchaser of a planned community at a foreclosure sale who intends to quickly sell the planned community may hold the property without liability concerns other than liability for any acts or omissions.

House Bill 330 passed in order to clarify the rights, obligations, and recording requirements for parties involved in transferring special declarant rights.  Although this bill accomplishes very little on a practical basis, the clarifications contained in this new law will help those who live in a planned community, who interact with a planned community, or who intend to purchase a planned community.

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