Annotations to An Amendment to the Code of Laws of South Carolina, 1976, by Adding to Chapter 1, Title 27 of the 1976 code
(so as to require the developer of a common interest community to gradually transfer control of the homeowners association)
Control of the Executive Board of a Common-Interest Ownership Development
The following comments and explanations have been added to the proposed law supported by Change The Board:
In the early days of developing a common-interest ownership property, the declarant rightfully establishes and maintains control of the executive board (typically called the board of directors). The function of the executive board is to provide governance of the community association (commonly known as the homeowners association). By initially controlling the board, the declarant, which has made a large investment in both time and resources, can protect its investment and proceed to construct and manage the development in accordance with all approved plans; budgets; and federal, state, and county mandates.
As more and more common-interest assets are conveyed to the community association, it is important that the declarant phase owners onto the executive board. In that way, owners learn their responsibilities, understand the many community issues that demand attention, and prepare to assume full control of the executive board when the declarant completes build-out and leaves the community.
When the development nears full build-out, the declarant prepares to transition any parts of the common areas not already conveyed to the community association. Serious negotiations often take place regarding issues with a development’s finances, construction methods, deeds and boundaries, engineering issues, environmental concerns, etc. Other issues may include payment for any expenses associated with restoring common-interest assets to their intended condition. It is therefore essential that owners, not the declarant, be in control of the governing board prior to complete transition.
The Community Associations Institute (CAI), the leading trade association for owners, developers, and others associated with common-interest properties, has long advocated “best practices” for transition of a development to owners. (Reference: CAI Best Practices and the Uniform Common-Interest Ownership Act, Section 3-103(d), has been enacted into law in multiple states from coast to coast.) Both the best practices and the law in the majority of states require a declarant to phase owners onto the executive board in stages and to pass total control of the executive board to owners when a significant majority of units have been sold to owners.
Owner control of the community association is vitally important for two reasons:
(1) After transition, owners will own all common-interest properties the declarant conveys to the community association. Therefore, it is both important and customary for owners to obtain an independent evaluation of these properties. To assure the sound status of the properties, owners may hire financial, legal, engineering, and/or environmental experts to determine their condition. However, the executive board must first allocate funds from the community association to hire the experts. If the board comprises a majority of declarant-appointed board members during transition, it is possible for the board to prevent allocation of the required funds. In that case, no independent evaluation could occur. Owners would have no assurance that all properties were in sound condition. Moreover, owners would be unable to identify and remediate any hidden property deficiencies with the declarant before the declarant completed build-out and exited the property.
(2) If the declarant still controls all or the majority of the governing board during the entire period of transition, a serious conflict of interest arises on behalf of owners. The parties to the transition must negotiate all costs relative to any deficiencies in the properties, finances, and records transferred from the declarant to the community association. If the declarant negotiates such issues with the governing board, and the governing board comprises a majority of declarant appointed members, neither party can properly represent the independent interests of the third party, the homeowners. The conflict of interest undermines the ability of owners to protect their interests and assume their rightful place in the governance of the property.
It is of utmost importance that the State of South Carolina ensure fair and equitable treatment to homeowners undergoing transition in common-interest ownership property developments. Therefore, the committee for a South Carolina HOA Control Law respectfully requests speedy and bipartisan passage of the above-proposed statute.