Buyer Beware: A Developer’s Duties in Planned Communities

For most people, their home is their largest asset and biggest investment. Many homebuyers assume that buying a brand-new house in a new community means less surprise issues than perhaps that 100-year-old farmhouse. Unfortunately, many buyers’ “house fever” overshadows conscientious due diligence in the home buying process. Issues which should be readily apparent may be overlooked in the rush to close, and later morph into buyer’s regret once the dust settles and the boxes are moved in. What’s a buyer to do?

With the increasingly common sight of heavy equipment felling trees, leveling land and feverishly working to construct new communities for the numerous families looking for a great single-family or townhome in Montgomery and surrounding counties, prudent buyers should slow down and make sure to understand their rights and obligations, as well as the rights and obligations of the developer and the association of which they will become a member.

In Pennsylvania, communities created after February 2, 1997 are governed by the provisions of the Uniform Planned Communities Act (“UPCA”), 68 Pa.C.S.A. §§ 5101 et seq. The UPCA sets forth the rights and obligations of the unit owners as well as the association; delineates boundaries between common and individual property and elements; and provides the structure for governing the community, including how the association makes decisions regarding maintenance, any fees to be charged and, in some cases, expansion of the community. If, however, you are a member of a small (less than 12 unit) planned community, or one that was developed prior to February 2, 1997, the UPCA does little to shed light on those same issues. Fortunately, the Commonwealth Court has recently clarified the developer’s duties and its relationship with the eventual homeowners and association in Laurel Road Homeowners Association, Inc. v. Freas, 2018 WL 3578588 (Cmwlth.Ct., July 26, 2018).

Laurel Road involved an association with nine units which could not be subdivided, and the developer did not reserve the right to add additional units or convert any of the remaining real estate into more units at a later date. Therefore, the association was not governed by the provisions of the UPCA. After the developer sold a number of units to buyers, the association sued the developer for, among other things, not allowing the unit owners to participate in the governance of the association or have members on the executive board who were elected by the unit owners, failing to keep any financial records for the association, not making financial and other records available for examination by unit owners, failing to create and maintain a reserve fund for the association, and attempting to amend the association’s declaration – the association’s governing document – without explaining the impact on the unit owners to the unit owners.

Though the Laurel Road association was not governed by the UPCA, the Commonwealth Court determined that this did not relieve the developer of its duties prior to transferring control to a unit owner-controlled association. Furthermore, the court held that the developer was not entitled to amend the declaration if the modification “would have a material effect on the character of the development or place an unfair burden on existing owners” unless the declaration explicitly put unit owners on notice that the developer retained the ability to modify the declaration.

Therefore, if you live in a planned community, whether governed by the UPCA or not, the Commonwealth Court in Laurel Road has clarified that the developer owes fiduciary duties to the association and its members. What is a fiduciary duty? A “fiduciary” is someone who stands in position of trust with another. The duties or obligations which arise as a result of the fiduciary’s position of trust are referred to as “fiduciary duties.”

A developer, specifically, as a fiduciary of the community and the association which he or she creates, owes duties of good faith, exercising proper management of the association, and avoiding conflicts of interest. As the Laurel Road court set forth, before a developer transfers control of the association to its members – usually once a certain number of units are sold to people other than the developer – the developer must “(1) [use] reasonable care in managing common property, (2) ensure that association finances were handled responsibly, (3) enforce the servitude regime, including payment of assessments, and (4) to disclose certain matters to the association.”

Whether a development/association is properly managed has a significant impact on the values of the properties in the development, and thus on your investment, as well as the assessments charged, and thus your monthly or annual budget. If the developer failed in its fiduciary duties, engaged in self-dealing or conflicts of interests which caused the association to require either higher annual assessments or any special assessments, the wary homebuyer may see that as a red flag. Fortunately, once the developer transfers control to the association, the members are in charge of managing all aspects of the community.

As a prospective buyer, you have the right to review the association’s finances and governing documents prior to closing. You should carefully review these documents to determine whether the association has properly budgeted for necessary and regular maintenance, as well as capital expenditures (e.g. replacing the roof on the clubhouse), and to ensure that you understand what constitute common elements – which are therefore maintained by the association – versus an element incorporated as part of a unit – for which the unit owner is responsible (e.g. sidewalks, driveways, lawns).

If you believe that your community has been mismanaged, or if you have questions or concerns regarding your association or potential purchase within a community, or would like assistance in completing your due diligence before buying, contact an experienced attorney.

Faye C. Cautin, Esquire recently joined the law firm of Wolf, Baldwin and Associates, P.C., which has offices in Pottstown, West Chester, and Reading.  The firm has represented employers and employees in business matters and litigation for over 40 years.  She may be reached by calling 610.323.7436, or by e-mail at fcautin@wolfbaldwin.com.

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