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How to Avoid Declarant Liability in a Condominium
Very often, a real estate developer is only active in a project until the subdivision plan is approved. At that point, the developer often sells some or all of the development rights to the builders who actually construct and sell the homes. The developer may not realize that it usually retains liability for the completion of the community, even though the developer and builder planned to pass that responsibility onto the builder. Why? Like most legal surprises, the reason is not taking care of the details of the transaction.
In Hillside Villas Condominium Association, Inc. v. Bottaro Development Company, a neighborhood was created using this typical model. The developer created a community in nine separate phases. The builder constructed the homes, and paid the developer every time a home was sold. This looks like a typical residential condominium project. Whenever a phase of the community was added, the developer assigned special declarant rights to the builder. This allowed the builder to construct and to legally declare the units. The developer retained all of the declarant rights that were not specifically transferred or assigned to the builder. So long as the builder sold at least four units per year, this relationship would continue until the community was sold out.
In all of these relationships, the problem comes when the builder fails to complete something. Here, the storm water management basins were not completed, and the roads required repairs totaling $900,000.00. The Association sued both the builder and the developer.
The developer said that it was not the declarant and, therefore, was not responsible for completing the common elements. The Commonwealth Court disagreed, finding both the builder and the developer to be declarants in this community. The reason that the developer remained on the hook is that it did not correctly assign special declarant rights to the builder. The Uniform Condominium Act provides for two kinds of assignments in this situation. If the developer assigns all of its declarant rights to the builder, then the developer is liable for all warranties and obligations that arose before the assignment. If the developer assigns some declarant rights but retains others, it is liable for all warranties and obligations – even after the assignment – relating to any elements in which the developer retains any rights. Since the developer only gave away a little bit of rights in each phase, they retained all of those warranty responsibilities for the common areas of the community.
How does a developer keep only the responsibilities that they want? The developer needs to be very specific with the assignments of special declarant rights with the builder. The developer would be better off saying that the builder has all declarant rights to the piece of property except for these very specific items that the developer retains control over. That way, the developer knows it only retains responsibility for what is on that list. It is very tempting to do it in the opposite direction, like they did in this case. That is, only assign specific rights to the builder. In some cases, that will be correct. But when the developer is looking to distance itself from the responsibility of all the issues in the community, the details of the assignment must be carefully reviewed.