The Disappearing Declarant

More and more associations these days are experiencing the “disappearing declarant” phenomenon: The original developer suffers such financial difficulties that their unsold units are abandoned or foreclosed upon – or the declarant itself files bankruptcy or goes into receivership. Sometimes the construction stops mid-stream, leaving partially developed lots unfinished and buildings unoccupied. Clearly these associations are experiencing some down times at the very early stages of their existence. But associations should know that even under these circumstances, down is not out. Associations can take advantage of the shared goals of its members to preserve and increase their property values through the various situations discussed below.

     Association Paralyzation

A declarant who disappears prior to turnover of the association to the homeowners affects the Association’s very ability to govern. For example, if three of the five board members are to be appointed by the declarant and only two elected, it is unlike that the board can meet its 50% quorum requirement if declarant board members have not been appointed or do not attend board meetings. Without a quorum, the board cannot act on behalf of the association. Once those units are sold or taken over by the bank, however, the Association should be able to elect all board members.

If the declarant has truly disappeared as opposed to just being inactive, the remedy in this situation is to initiate a lawsuit similar to those brought by shareholders of other corporations to ask a court to ask to have a receiver appointed to run the association. In that situation, the receiver has the power to govern the association in the best interest of the association and is not necessarily bound by all terms of the governing documents.

     Units in Limbo

 

If the declarant’s units have been foreclosed by the bank, the bank is responsible for assessments just as any owner would be. However, the more common situation is where the bank has the right to foreclose (the declarant is in default of the loan obligation), but the bank does NOT foreclose, knowing that it then becomes responsible for paying assessments. In this case, where there are a substantial number of units in that situation and where the units are delinquent in paying assessments, the association may want to pursue foreclosure of the units.

 

Initiating foreclosure is not without its expense and pitfalls, however. While it is possible that the bank will step in

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