Help Has Arrived for "Successor" Developers Under the Florida Condominium Act

During the past two years, lenders and investors have confronted many challenges as they have begun to acquire distressed condominiums. It has become readily apparent that the provisions of the current Florida Condominium Act (the “Condominium Act”) did not contemplate or adequately address the problems that occurred as a result of the distressed condominium market, particularly with respect to warranty liability, other financial liabilities and control of the condominium regime.

One of the many effects of the massive downturn in the Florida condominium market has been a lot of panicked new owners of condominium buildings with significant concerns about inheriting warranty liabilities from the previous developers and potential responsibility for poor decisions and inappropriate actions of the previous developers. Many lenders and investors have been scared away from taking ownership of condominium buildings based on the very prospect of being liable for mistakes that were made prior to their acquisition.

In recognition of these issues, the Florida Legislature presented Governor Charlie Crist with a bill – a portion of which is entitled the Distressed Condominium Relief Act (the “Distressed Condo Act”) – to be added to the Condominium Act as Part VII. On June 1, 2010, the Governor executed Senate Bill 1196, making the Distressed Condo Act a new law. It took effect on July 1, 2010.

Relevant Provisions of the Distressed Condominium Relief Act

The following definitions are added to the Condominium Act:

Section 718.703(1) – Bulk Assignee defined

A Bulk Assignee is a person who “acquires more than seven condominium parcels as set forth in s. 718.707; and receives an assignment of some or all of the rights of the developer … by a written instrument recorded as an exhibit to the deed or as a separate instrument in the public records …” An assignment of developer rights for purposes of a Bulk Assignee can come from the original developer or a previous Bulk Assignee.

Section 718.703(2) – Bulk Buyer defined

A Bulk Buyer is a person who:

acquires more than seven condominium parcels as set forth in s. 718.707, but who does not receive an assignment of developer rights, other than the right to conduct sales, leasing and marketing activities within the condominium; the right to be exempt from the payment of working capital contributions to the condominium association arising out of, or in connection with, the bulk buyer’s acquisition of a bulk number of units; and the right to be exempt from any rights of first refusal which may be held by the condominium association and would otherwise be applicable to subsequent transfers of title from the bulk buyer to a third party purchaser concerning one or more units.

The definition of developer under the Condominium Act was also revised to provide that a Bulk Assignee and a Bulk Buyer are not included within the definition of developer. It is not clear whether a person or entity who acquires seven or fewer units would be considered a developer, as the new law does not address this scenario. It could therefore be possible for a person or entity who acquires seven or fewer units to be a developer if such person or entity is offering units for sale or lease in the ordinary course of business.

Under the Distressed Condo Act, there can only be one Bulk Assignee at any particular time, but there may be multiple Bulk Buyers. If multiple people or entities obtain assignments of developer rights, the Bulk Assignee is the party who records the assignment in the public records first. In order to qualify as a Bulk Assignee or a Bulk Buyer, the person must acquire the units prior to July 1, 2012.

Although based on various provisions in the Distressed Condo Act, an argument can be made that the benefits under the law apply to any person or entity who owns units and falls under the respective definitions as of the date the law takes effect. However, the Division of Condominiums, Timeshares and Mobile Homes is taking the position that the benefits of the Distressed Condo Act only apply to those taking title between July 1, 2010, and July 1, 2012, and will not approve amendments to condominium filings submitted by those who owned units prior to July 1, 2010, even if they otherwise satisfy the requirements of the new law. It is possible that this position will be changed through court or administrative proceedings.

Note also that Bulk Assignee’s or Bulk Buyer’s failure to substantially comply with all requirements under the Distressed Condo Act will result in the loss of any and all protections or exemptions provided. An assignment of developer rights does not release the original developer from liabilities under the declaration of condominium or the Condominium Act.

Bulk Buyer Benefits

A Bulk Buyer “is liable for the duties and responsibilities of the developer under the declaration and this chapter only to the extent provided in this part, together with any other duties or responsibilities of the developer expressly assumed in writing by the bulk buyer.”¹

A key benefit to being a Bulk Buyer is that there are no warranty liabilities. In addition, although a Bulk Buyer is not statutorily entitled to control the board of directors of the condominium association, once turnover has occurred, a Bulk Buyer is not precluded (as a Bulk Assignee would be) from using its votes to acquire control of the board.

A Bulk Buyer must comply with the requirements contained in the declaration of condominium regarding any transfer of a unit, including sales, leases and subleases. Further, a Bulk Buyer is not entitled to any exemptions afforded a developer or successor developer under the Condominium Act regarding the transfer of a unit, except to the extent that an assignment of rights in favor of the Bulk Buyer exempts the Bulk Buyer from being subject to any right of first refusal in favor of the condominium association.

Bulk Assignee Exemptions

A Bulk Assignee assumes and is liable for all duties and responsibilities of the developer under the declaration and the Condominium Act, except the following:

• Warranty liabilities of the developer under Section 718.203 (warranties relating to new construction), except for construction, development, design or repair work performed by or on behalf of the Bulk Assignee. A Bulk Assignee is also not responsible for warranty liabilities under Section 718.618 (warranties relating to conversions), except as expressly provided by the Bulk Assignee in the purchase contract executed with a unit purchaser pertaining to any construction, development, design or repair work performed by or on behalf of the Bulk Assignee.
• The obligation to fund converter reserves for a unit that the Bulk Assignee did not acquire. This appears to indicate that there would be converter reserve liability on the Bulk Assignee’s part as to units that it does purchase, to the extent that the converter reserve has not previously been funded on the particular unit.
• The requirement to provide the condominium association with a cumulative audit of the association’s finances from the date of creation of the condominium association as required by Section 718.301(4)(c). The Bulk Assignee is only required to provide an audit for the period during which the Bulk Assignee elects a majority of the members of the board of directors.
• Any liability arising out of or in connection with actions taken by the previous board of directors or the developer-appointed directors prior to the Bulk Assignee electing a majority of the members of the board of directors.
• Any liability for, or arising out of, the developer’s failure to fund previous assessments or to resolve budgetary deficits in relation to a developer’s right to guarantee assessments, except as set forth in Section 718.704(2), as discussed below.

Guarantee of Assessments

Under Section 718.704(2), a Bulk Assignee receiving the assignment of developer rights to guarantee the level of assessments and fund budgetary deficits pursuant to Section 718.116 assumes and is liable for all obligations of the developer with respect to such guarantee from and after the date that the Bulk Assignee takes title, including any funding of reserves as required by law, for as long as the guarantee remains in effect. A Bulk Buyer, or a Bulk Assignee who does not receive such assignment, must pay assessments in the same manner as all other owners of condominium units and does not have the ability to assume the guarantee.

Control of the Board of Directors and Turnover

A Bulk Assignee is entitled to elect a majority of the board of directors for so long as a developer would be able to control the board under the Condominium Act. Therefore, if a Bulk Assignee is entitled to elect a majority of the members of the board of directors, a unit acquired by the Bulk Assignee is [not]² deemed to be conveyed to a purchaser, or owned by an owner other than the developer, until the unit is conveyed to an owner who is not a Bulk Assignee.

The Bulk Assignee must follow the turnover requirements set forth in Section 718.301, “as if the Bulk Assignee were a developer.”³ This appears to mean that if turnover is triggered after a Bulk Assignee takes title to the units, for example if the Bulk Assignee chooses only to lease units and not to offer any units for sale, then the Bulk Assignee would not be able to vote on behalf of the units that it owns to acquire control of the board or to elect a majority of the members of the board, as this would be prohibited by a developer after turnover.

At turnover, the Bulk Assignee is required to deliver all items required by Section 718.301(4), except for those items and documents that the Bulk Assignee did not receive from its seller. After making a good faith effort to obtain all documents required to be given to the unit owners upon turnover, the Bulk Assignee must certify in writing to the association a list of the documents that were not obtainable by the Bulk Assignee.

The Bulk Assignee, while in control of the board of directors, may not authorize on behalf of the association the waiver of reserves, the reduction of funding of reserves or the use of reserves for other purposes pursuant to Section 718.112(2)(f)(3) unless approved by a majority of the voting interests not controlled by the developer, Bulk Assignee and Bulk Buyer.

The Distressed Condo Act does not specifically address the Bulk Buyer’s rights with respect to turnover, but a step-by-step reading of the new language appears to indicate that although a Bulk Buyer cannot statutorily control the board prior to turnover, the Bulk Buyer would not be prohibited from using its votes after turnover to acquire control of the board (so long as it owns enough units to in fact acquire control of the board).

Filing with the Division of Condominiums, Timeshares and Mobile Homes

Before offering units for sale or lease for more than five years, a Bulk Assignee or a Bulk Buyer must file the following documents with the Division of Condominiums, Timeshares and Mobile Homes (the “Division”) and provide these documents to a purchaser or tenant:

• An updated prospectus or a supplement to the prospectus (including all exhibits such as the declaration of condominium, articles of incorporation, bylaws, form of contract for sale or lease, estimated operating budget and management agreement, among many other documents). Note that the form of contract must comply with Section 718.503(2) entitled Non-Developer Disclosure.
• The frequently asked questions.
• An escrow agreement (if required by Section 718.202).
• Financial information required by Section 718.111(13) (unless such financial information does not exist for the fiscal year before the Bulk Assignee or Bulk Buyer acquired title, in which case there is a required disclosure to be put in the contract stating this).
• A disclosure statement must be provided to a prospective purchaser. The disclosure must contain a description of any rights of the developer which have been assigned to the Bulk Assignee or Bulk Buyer, and certain disclosures, in conspicuous type.⁴

Conclusion

The Distressed Condo Act will undoubtedly benefit those who find themselves voluntarily, or somewhat involuntarily, electing to take title to distressed condominium projects in Florida. Whether it makes more sense for a person or entity to be a Bulk Assignee or a Bulk Buyer will be very fact intensive, and will require a detailed analysis of the specific transaction. Either way, the clarity provided by the Legislature with respect to warranty liability is a tremendous benefit to foreclosing lenders and bulk purchasers, allowing such entities and individuals to strategically take title to distressed projects without incurring unintended and unquantifiable liabilities, and increasing the likelihood that lenders and investors will proceed into these types of transactions more readily than has occurred over the past couple of years now that the liability cloud has been lifted (or at least made much less gray).

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¹ Section 718.704(3), Florida Statutes.

² The bracketed word “not” does not appear in the statute; however the provision as drafted does not make sense without the word and we believe it to be a scrivener’s error.

³ Section 718.705(2), Florida Statutes.

⁴ The statute only requires that a Bulk Assignee file this disclosure document with the Division. However, part of the disclosure statement relates to any rights of the developer that a Bulk Buyer was assigned. Therefore, in an effort to be fully compliant, it is recommended that a Bulk Buyer also file this disclosure document with the Division.