Who Is The Declarant? And Why Does It Matter?

Samuel B. Franck | Ward and Smith

The concept and designation of the “Declarant” arise from the formation of a planned community or a condominium. 

When the developer declares land to restrictions described in a “Declaration” for a planned community or a condominium, that developer has the opportunity to reserve certain rights to itself as the “Declarant.”  Although there is no requirement that the developer reserve such declarant rights, it is common practice to do so and very unusual for a developer to form a planned community or condominium without reserving declarant rights.  Subsequently, any party who holds any of the reserved declarant rights is a Declarant.

Although people often associate the concept of “developer” with a specific natural person, the Declarant is often an entity, such as a corporation or a limited liability company.  While a natural person may very well be authorized to act on behalf of a corporate Declarant, that authority does not vest the declarant rights in the natural person.  Similarly, other entities owned by the same person or by the Declarant itself, for that matter, are not a Declarant unless they have received an assignment or other transfer of declarant rights.

Declarant Rights

Declarant rights are reserved in the recorded Declaration for a planned community or condominium and are part of the contract among the lot or unit owners, the owners association, and the Declarant.  The developer of real property is generally free to restrict that real property however it sees fit.  Therefore, subject to only a very few statutory limitations, a Declarant is free to establish and reserve whatever declarant rights it wants at the time that a planned community or condominium is formed.  Although the North Carolina Planned Community Act and the North Carolina Condominium Act clearly contemplate declarant rights, define them, and, in some limited circumstances restrict the extent of those rights, there are no declarant rights created by statute.  If a declarant right is not expressly reserved in the Declaration, it does not exist.

There Are No Secret Declarants

Declarant rights can be transferred, in whole or in part, to other entities or persons.  Successors often include home builders, successor developers, and lenders.  Therefore, the Declarant identified in the original Declaration for a planned community or condominium may no longer be the Declarant or may share the declarant rights with other parties.  The current identity of the Declarant or Declarants can almost always be determined because the law requires that transfers of declarant rights be evident on the public records.  Transfers are not effective until the date that document is recorded or filed.

Transfer of Declarant Rights

The standard way to transfer declarant rights is pursuant to an Assignment of Declarant Rights, executed by both the Declarant-transferor and the new Declarant-transferee and recorded in the office of the Register of Deeds in the county where the planned community or condominium is located.  Technically, any recorded instrument that:  (i) adequately describes the declarant rights transferred, (ii) is executed by both the transferor and the transferee, and (iii) is recorded in the office of the Register of Deeds may be sufficient to transfer the rights.

In North Carolina, declarant rights can also be transferred without the consent of the Declarant through foreclosure, bankruptcy sale, tax sale, judicial sale, or receivership proceedings pursuant to an explicit statutory mechanism.  Although these non-consensual transfers are not all recorded in the Register of Deeds’ office, the others will be filed in other public record locations – either the office of the county Clerk of Court or the office of the Clerk of the Bankruptcy Court in the applicable federal judicial district.

The common element of all of these mechanisms is that, with sufficient research, one can determine the holder or holders of the declarant rights by researching and analyzing the public records.  Therefore, provided that you are willing to do the research, or retain legal counsel to do that research for you, you can identify the Declarant or Declarants of a North Carolina planned community or condominium.

There May Be More Than One Declarant

Because declarant rights can be transferred in whole or in part, there may be more than one Declarant of a planned community or condominium at any given time.  The division of declarant rights works cleanly when the rights transferred relate to specific parcels of real property, either property already included in the planned community or condominium, or development property subject to a Declarant’s right to incorporate the property into the planned community or condominium at a later time.  It is more difficult to divide control-oriented declarant rights.  For example, it creates a practical problem to have more than one Declarant authorized to appoint members to the board of directors of the owners association.

Another area where there may be multiple Declarants is in master communities that include condominiums or other sub-communities.  In such projects, which may include residential, commercial, or mixed use arrangements, there are often different Declarants from the beginning, one for the master community and others for each of the sub-communities.  It is important to evaluate the status of the Declarant for each community and condominium regime that impacts the property in which you are interested.

Owners, buyers, owners associations, and lenders should carefully consider any scenarios that include, or may include, multiple Declarants, not only to identify the Declarants for a particular project and the extent of each of their rights, but also with an eye toward identifying any problems that may arise out of competing interests in similar declarant rights.

The Termination of Declarant Rights

A Declarant’s authority ends when all of the declarant rights for that particular Declarant expire or terminate.  There are some limited statutory provisions that require the expiration of certain specific declarant rights, but otherwise, the declarant rights will endure until they either expire by their own terms or are voluntarily terminated by the Declarant.  In a North Carolina condominium, the Declaration must describe a time period after which the declarant rights must terminate, but for most rights, there is no limit on the allowable length of that time period.  No such requirement is imposed on planned communities in North Carolina, and we often find declarant rights for planned communities that have no specific expiration date.

The survival of declarant rights after the time period that a Declarant is actually exercising those rights is a problem for all concerned.  Those rights carry potential liability for the Declarant, which makes them an undesirable asset after the Declarant no longer has a use for them.  It is also awkward for owners and owners associations to function and flourish when stale declarant rights remain.  Although a Declaration may provide that some or all of the declarant rights expire upon the Declarant’s sale of the last lot, they often do not.  Furthermore, the development activity for a planned community or condominium may well be completed long before the last Declarant sells its last unit or lot.

Conclusion

Determination of the identity of the Declarant or Declarants is an important aspect of any party’s evaluation of a planned community or condominium.  Whether evaluating the asset as a successor developer, a lender, an owners association or a homeowner in a planned community or condominium regime, it is important to know which party or parties hold the declarant rights.  The longer the developer period for a project, the more complex the inquiry, but the holders of declarant rights may always be determined with careful and thorough review of the public records.

Common Charges In Mixed Use Condominiums

Smith Gambrell & Russell | September 16, 2019

Condominium boards that operate buildings with both commercial and residential units frequently ask us for assistance in disputes involving the calculation of common charges.

Determining common charges in buildings that are completely residential is typically straightforward — the board develops a budget and then divides the projected common expenses among the units based on each unit’s respective percentage of the common interest. However, in a mixed use building where there are both commercial and residential units, the New York Condominium Act permits them to be allocated common charges differently where authorized by the condominium’s declaration and bylaws. Unfortunately, in our experience, boards and managing agents often refer to the condominium’s offering plan for a description of how common charges are to be billed, without checking the bylaws and declaration as recorded in the City Register, resulting in mischarges.

For example, an offering plan might provide that costs are allocated to the residential and commercial units based on the costs attributable to the operation of each. Using this method of allocation, only a small percentage of the condominium’s labor expenses might be allocated to the commercial unit (on the assumption, for example, that doormen serve only the residential units) even though the commercial unit’s percentage of the common interests might be substantial. Referencing the offering plan, the condominium’s managing agent might then use this method of cost allocation when preparing budgets, and continue using the method year after year, until and unless someone checks the condominium bylaws and declaration as recorded with the City Register, and discovers that they allocate costs differently.

Based on the language of the Condominium Act and prevailing case law, the provisions of the bylaws and declaration as recorded with the City Register supersede the offering plan. However, once a discrepancy is found between the bylaws and declaration and what has been charged historically, both the board and the commercial unit owner are bound by a six year statute of limitations insofar as recovering past charges is concerned. Each party may also argue that this six year period has been effectively shortened by the doctrine of “waiver” where the other party knew about the discrepancy for a meaningful period of time and failed to act. The success of this argument will depend on the specific facts of the situation.

Recalculating past charges is typically called a “true-up”. If the commercial unit owner owes past charges based on the true-up and fails to pay, the board can exercise the same remedies it normally has for unpaid common charges, including filing a common charge lien against the unit. If the discrepancy is substantial, litigation sometimes ensues.

No Coverage for Sink Hole Loss

Tred R. Eyerly | Insurance Law Hawaii | May 13, 2019

    The federal district court found there was no coverage under the commercial property policy for loss suffered by the insured condominium association due to a sink hole. Bahama Bay II Condo. Ass’n. v. Untied Nat’l Ins. Co., 2019 U.S. Dist. LEXIS 67487 (M.D. Fla. April 11, 2019).

    The plaintiff condominium association had thirteen buildings inside their complex. On December 9, 2016, a sinkhole appeared near Building 43. The building was vacated and declared unsafe. Plaintiff’s board excused Building 43 owners from paying association dues. 

    Plaintiff submitted a claim to the insurer for benefits under the policy. The insurer inspected and accepted coverage for Building 43 under the policy’s Catastrophic Ground Cover Collapse (CGCC) provision and issued a check for $290,000 for immediate repairs. The insurer denied coverage for Buildings 42, 44, and 45; repairs to the foundation of all buildings, the retaining wall and outdoor fences; land, landscaping, and patios, uncollected association dues, and condominium unit owner property. 

    Only Building 43 meet the requirements for CGCC coverage, which included:

a) The abrupt collapse of the ground cover:

b) A depression in the ground cover clearly visible;

c) Structural damage to the building;

d) The insured structure being condemned and ordered to be vacated. 

Buildings 42, 44 and 45 had not been condemned or ordered to be vacated. Therefore, the insurer was entitled to summary judgment on the counts seeking coverage for Buildings 42, 44 and 45.

    Coverage for damage to the retaining wall and fence was excluded because they were not connected to any building. Another exclusion barred coverage for patios, foundations of buildings, trees, shrubs or plants. The insurer was entitled to summary judgment on plaintiff’s claim for damage on these items. 

    The uncollected association dues for Building 43 were akin to lost business income and an economic loss. The policy only provided coverage for physical property damage, not economic losses. So the insurer was entitled to summary judgment on this claim, as well. 

    Finally, plaintiff made no argument that condominium property within individual units, owned by unit owners, qualified as Covered Property under the policy. Florida law was clear that property insurance issued to a condominium complex did not cover property within individual units. Therefore, the claim was properly denied by the insurer. 

    The insurer argued that plaintiff failed to mitigate damages. Whether plaintiff took “all reasonable steps to protect the property and whether other reasonable steps existed and should have been taken were questions of fact for a jury. Summary judgment for this proposition was denied. 

Construction Defect Claim Must Be Defended Under Florida Law

Tred R. Eyerly | Insurance Law Hawaii | February 7, 2018

The Eleventh Circuit found that the insured caused property damage to areas beyond its own work, obligating the insurer to defend. Addison Ins. Co. v. 4000 Island Blvd. Condo. Ass’n, 2017 U.S. App. LEXIS 26870 (11th Cir. Dec. 28, 2017).

The condominium association contracted with Poma Construction Corp. to replace the building’s aging concrete balcony railings with new aluminum and glass railings. Poma subcontracted with Windsor Metal Specialties, Inc. to paint the new railings. Work was completed on February 24, 2012. Poma issued a 10-year warranty covering its installation of the railings. Windsor issued a 20-year limited warranty covering the paint job.

In October 2014, the association sued Poma and Windsor, alleging that the new railings were defective and would need to be removed and replaced. Claims for breach of contract, breach of implied warranty, and breach of express warranty were asserted. The amended complaint alleged that the defective railing system, including Windsor’s defective paint finishes on the railings, caused damage to other property such as the railing post pockets, the balcony concrete slabs, and finishes on the balcony concrete slabs.

Addison, Windsor’s insurer, sued for a declaratory judgment that it had no duty to defend. The policy provided that Windsor’s coverage did not apply to property damage to Windsor’s own work product or to that particular property that must be repaired because Windsor’s work “was incorrectly performed on it.”

Addison moved for summary judgment, arguing that the association had sued Windsor for breach of warranty, rather than for property damage. Windsor argued that a genuine issue of material fact existed as to whether the damage alleged in the association’s complaint constituted “property damage” to which no policy exclusion applied. An affidavit submitted with Windsor’s opposition stated there was railing failure and damage to the areas where the railings were installed.

The district court denied Addison’s motion for summary judgment. Addison appealed.

The Eleventh Circuit affirmed. Windsor’s work product was the paint finishes on the railings, and the railings were the particular part of the property on which Windsor’s work was allegedly performed incorrectly. The underlying complaint alleged that “the defective railing system, including the defective paint finish has caused and will continue to cause damage to other property . . . including but not limited to the railing post pockets, the balcony concrete slabs and finishes on the balcony concrete slabs.”

These allegations alleged facts that brought the action within the policy. Therefore, Addison had a duty to defend.

As New Condominiums Rise in Florida, Will There Be a Surge in New Construction Defects Suits?

Jeffrey S. Wertman | Berger Singerman LLP | September 6, 2016

As construction of condominiums in Miami continues, developers have migrated north and are building new residential condominium towers in Broward County, including in Downtown Fort Lauderdale and Fort Lauderdale Beach area. According to published reports, developers are constructing 17 new condominium buildings with units in the Downtown Fort Lauderdale and Beach area. An additional 27 new condominium buildings with nearly 2,600 units are in the planning or pre-sale phase of development in the Fort Lauderdale market. Robust condominium construction is also taking place in Palm Beach County.

Many expect the enormous volume of condominium construction to lead to a surge in the number of construction defect cases. Condominium defect cases involve one or more of the following defects: (1) design deficiencies (a failure caused by an architect or engineer in the design of the building or system); (2) material deficiencies (a failure due to defective or damaged building materials); and (3) construction deficiencies (a failure caused by poor quality workmanship). These cases are complex, costly and time-consuming to litigate as they often involve dozens of parties, including the association, developer, general contractor, subcontractors, architects, engineers, material suppliers, and product manufacturers.

Following the 2008 housing bubble, there was a vast increase in the number of construction defect cases both with residential and commercial properties. Inundated developers were unable to keep up with demand. Quality suffered due to untrained contractors, unsupervised labor, and untested products.Today, with high land and construction prices, narrow profit margins, and shortages of skilled construction workers, the potential for a new tide of defect cases is real. However, unlike in the past, many developers have implemented better construction practices, and improved quality control by hiring their own third-party inspectors and keeping more detailed and accurate records of the construction. Building codes have also become more stringent and code inspections have improved.

An increase in construction defect claims and ensuing lawsuits is expected by the sheer volume of condominiums being built and which will be turned over by developers to owner-controlled Boards of Directors. However, a recent legal development may affect the number of future construction defect lawsuits. The Florida Supreme Court will soon decide a significant issue involving Chapter 558, Florida Statutes, also known as Florida’s construction defect law. Chapter 558 sets forth a notice and opportunity to cure procedure for associations, owners, contractors, and others who design and construct improvements to real property, to resolve claims before filing a construction defect lawsuit.

After developers and contractors receive a notice of defects, officially called a “notice of claim,” claim, under Chapter 558, they typically notify their insurance carriers to trigger insurance coverage. This often requires that insurance carriers provide a defense to developers and contractors during the Chapter 558 pre-suit process, including paying for experts and attorneys to assist in the investigation.

A recent Florida Federal District Court case addressed whether insurance companies issuing insurance policies in Florida must provide a defense to their insureds from construction defect claims. (Altman Contractors, Inc. v. Crum & Forster Specialty Ins. Co., No. 13-80831-CIV (S.D. Fla. June 4, 2015)). The District Court ruled in favor of the insurance company deciding that a notice of claim is not a ‘suit’ under Section 558 and the insurance company is not required to defend the contractor, including paying for fees, such as including the insured’s expert’s fees.

That ruling is on appeal to the Eleventh Circuit Court of Appeals.

On August 2, 2016, the Eleventh Circuit stated it would greatly benefit from the guidance of the Florida Supreme Court on the meaning of the policy at issue here and its relationship to Chapter 558. (Altman Contractors, Inc. v. Crum & Forster Specialty Ins. Co., No. 15-12816 (11th Cir. Aug. 2, 2016)). The Eleventh Circuit asked the Florida Supreme Court to decide whether the defect notice and cure process in Chapter 558 of the Florida Statutes is a ‘suit’ within the meaning of a comprehensive general liability policy.

The Florida Supreme Court’s decision will have important implications for the construction industry. If the pre-litigation process in Chapter 558 is a “suit”, insurance companies with policies containing similar language will be required to pay expert’s fees and attorney’s fees incurred because of a Chapter 558 notice of claim as part of the duty to defend. This could curtail an increase in condominium defect lawsuits because early insurance carrier participation during the Chapter 558 process, including payment of the investigation costs, may resolve defect disputes before costly and time-consuming litigation ensues. A contrary ruling could have the opposite effect. Developers and contractors could abandon pre-suit proceedings to avoid incurring extraordinary out-of-pocket costs by opting out of the Chapter 558 process in their contracts with owners. As new condominiums rise in Florida, only time will tell if a surge in new construction defect lawsuits is on the way.