Declarant Defined
The "Declarant" is the person or entity that creates the association's original governing documents. The Declarant is generally the developer of the project and usually reserves certain rights and powers for himself, such as the right to sell units in the project and additional voting rights. The Davis-Stirling Act defines the Declarant as follows:
“Declarant” means the person or group of persons designated in the declaration as declarant, or if no declarant is designated, the person or group of persons who sign the original declaration or who succeed to special rights, preferences, or privileges designated in the declaration as belonging to the signator of the original declaration. (Civ. Code § 4130)
Most associations eventually restate their CC&Rs to eliminate all references to the Declarant, eliminate all legalese, and add pertinent provisions from the Davis-Stirling Act.
Developer Assessments
Start of Payments. When the Declarant starts paying assessments, it is normally found in the CC&Rs. In smaller, single-phase projects, assessments typically commence on the first day of the first month following the first close of escrow in the project. Larger projects are usually divided into smaller portions called phases. Assessments for all separate interests commence on a phase-by-phase basis, beginning on the first day of the first month following the first close of escrow for each phase.
Rental Community. Sometimes, the developer may keep a portion of a project and operate it as a rental community. The developer may not have to pay assessments if the rental community is separate from the common interest development. If the rental units are part of the common interest development, the CC&Rs may require the developer to begin paying assessments when the units are first rented.
Services for Assessments. Also, particularly in large master-planned communities, the developer may provide maintenance services in exchange for reduced assessments.
Developer Voting Rights
For a period of time, the developer of an association will have greater voting power, which is defined as Class B membership. It gives the developer three votes for each unit/lot held by the developer.
Alternative Dispute Resolution
On August 16, 2012, developers won a significant victory in the Pinnacle Museum Tower case. The California Supreme Court reversed direction from prior decisions. It held that homeowner associations are bound by arbitration provisions in their CC&Rs, even though those provisions were written and recorded by the developers. The Pinnacle decision eliminates an association's right to seek a trial before a judge and jury.
The expected benefit to developers is the elimination of large jury verdicts by removing juries from the process. Historically, monetary awards by judges and arbitrators are smaller than those given by juries. As a result of the Pinnacle decision, developers may offer smaller settlements for construction defects. If their offers are rejected, HOAs will be forced to prove their cases in binding arbitration. Even so, the arbitration process is streamlined and less expensive than litigation and could produce good results if the association can prove its case to the arbitrator.
Recommendation: If a development is less than ten years old, various statutes of limitations run on any defect claims the association may have. To avoid losing rights, boards should contact legal counsel to determine their best course of action. To read the entire case, see Pinnacle Museum Tower v. Pinnacle Market Development.
Developer Transition
At the outset, the developer has most of the votes, controls the board, and appoints the architectural committee. However, the California Department of Real Estate ("DRE") requires developers to gradually relinquish control in each area.
Voting Structure. Developers retain control by creating a two-class voting structure. Class A usually consists of homeowners, each of whom gets one vote for each lot or condominium owned. Class B is usually the developer. The developer has three votes for each lot or condominium he owns. In a single-phase project, Class B converts to Class A when either the total number of Class A votes equals the total number of Class B votes or on the second anniversary of the conveyance of the first lot or condominium in the project, whichever occurs first. In a multi-phase project, Class B converts to Class A either on the second anniversary of the first conveyance in the most recent phases or four years after the first conveyance in the project, whichever occurs first.
Even when the developer has voting control, the DRE requires approval by a majority of both Class A and Class B for certain votes, such as amendments to governing documents, effectively giving homeowners a veto on some issues.
Director Elections. Beginning with the first election, a procedure must be established to ensure that at least 20% of the directors are elected solely by homeowner votes. Once the homeowners elect a director, only the homeowners can remove the director. Eventually, as the homeowners get more votes and Class B converts to Class A, the homeowners will elect all of the directors. The timing will vary by project, depending on sales pace and the number of phases.
Architectural Committee/Design Review Committee. The developer has the right to appoint all of the committee members until one year after the first (or only) final subdivision public report for the project. After that, the board must have the right to appoint at least one committee member until either the close of escrow for 90% of the lots and condominiums in the project or five years after the first final subdivision public report was issued, whichever occurs first. After that, the board may appoint all committee members.
Caveat: The DRE may approve alternative arrangements, and its rules have changed over time. To determine when control is turned over for your association, you must read the articles of incorporation, bylaws, and CC&Rs. Also, the DRE's rules for master-planned communities (usually 500 or more homes) differ from those for smaller subdivisions. In general, developers are allowed to control master-planned communities for a much longer time.
Fiduciary Duties. Even when the developer controls the board of directors, he cannot use his power to his benefit at the association's expense. (Corp. Code § 7231, Raven's Cove v. Knuppe Development (1981) 114 Cal.App.3d 783)
Transfer of Records
Before the developer leaves the development, all records should be transferred to the association.
Successor in Interest
A “successor in interest” to the developer is a person or company that has acquired property and rights previously held by the original developer. Unless the CC&Rs state otherwise, an association is not the successor-in-interest to the developer. Instead, it is a separate entity with distinct obligations, duties, and goals that continue even after the developer ceases to exist. Associations generally do not need the developer's powers; they have their own powers under the CC&Rs, bylaws, the Davis-Stirling Act, and the Corporations Code.
Removing Declarant/Developer Provisions from CC&Rs
Declarant language can be very confusing to directors and members alike. Is the association a successor to the declarant? Does the association have the powers of the declarant? Is the association allowed to modify or delete declarant language? The association is not a successor to the developer and does not have the declarant's powers unless specifically assigned to it. Associations can delete declarant provisions once the declarant has completed construction of the development, has terminated construction activities, and has terminated his or her marketing activities for the sale, lease, or other disposition of separate interests within the development. (Civ. Code § 4230)
ASSISTANCE: Associations needing legal assistance can contact us. To stay current with community association issues, subscribe to the Davis-Stirling Newsletter.