Transitioning From Developer Control To Nondeveloper Co-Owner Control: Five Practical Steps Every Condominium Should Take

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Every community association in Michigan undergoes a transition or “turnover” phase whereby the control of the community association changes from developer control to owner control.  In Michigan, the transition process for condominiums is governed by the Condominium Act, MCL 559.110, et al. Unfortunately, homeowner associations are not included in the Condominium Act and are solely governed by the terms in the homeowner’s association documents.  Therefore, this article focuses on the transition from developer control to nondeveloper co-owner control within a condominium project and practical steps each new Board of Directors should take before, during and after the transition.  While the transition process may, at times, be somewhat complicated, the successful transition from developer control to owner control is crucial to the future success of a community association in Michigan.

Era of Developer Control

When a condominium is initially constructed, the developer commits significant resources and capital to construct the project, amenities and infrastructure.  During the initial construction phase of the condominium, the developer and its appointees serve as members of the Board of Directors.  MCL 559.152(1).  The Board must act as fiduciaries to the community association by acting “in good faith and with the degree of diligence, care, and skill that an ordinarily prudent person would exercise under similar circumstances in a like position.”  MCL 450.2541.

Unfortunately, there is an inherent conflict of interest when certain decisions may benefit the entire community association, but those decisions have a negative impact on the developer’s bottom line.  The developer is primarily concerned with building and selling units as quickly as possible in order to maximize its profits.  Due to the recent economic downturn, many developers have further problems with tighter budgets, less liquidity, reduced access to commercial markets, reduced workforces, and related problems that also may impact the quality of the construction work.  Given this inherent conflict of interest, the transitioning to nondeveloper co-owner control has a heightened importance for co-owners.

Era of Nondeveloper Co-Owner Control

In a perfect world, the transition away from the developer takes place gradually and smoothly and any issues are resolved cooperatively and efficiently.  Pursuant to MCL 559.110(7), the transitional control date means the “date on which a board of directors for an association of co-owners takes office pursuant to an election in which the votes that may be cast by eligible co-owners unaffiliated with the developer exceed the votes which may be cast by the developer.”  MCL 559.152(2) outlines the specific timing requirements for how the transition must take place including specific milestones at 25%, 50%, 75% and 90% of the units conveyed to nondeveloper co-owners.  MCL 559.152(2) states:

Not later than 120 days after conveyance of legal or equitable title to nondeveloper co-owners of 25% of the units that may be created, at least 1 director and not less than 25% of the board of directors of the association of co-owners shall be elected by nondeveloper co-owners. Not later than 120 days after conveyance of legal or equitable title to nondeveloper co-owners of 50% of the units that may be created, not less than 33-1/3% of the board of directors shall be elected by nondeveloper co-owners. Not later than 120 days after conveyance of legal or equitable title to nondeveloper co-owners of 75% of the units that may be created, and before conveyance of 90% of such units, the nondeveloper co-owners shall elect all directors on the board, except that the developer shall have the right to designate at least 1 director as long as the developer owns and offers for sale at least 10% of the units in the project or as long as 10% of the units remain that may be created.

While the statute provides for various other requirements, the basic premise is as the project progresses, more and more control is given to the nondeveloper co-owners.  In the real world, a gradual and smooth transition is not always possible and problems during this crucial phase can reverberate throughout the community association for years to come.

The co-owners should take control of the Board of Directors as quickly as possible so that the association can focus on the co-owners’ interests instead of the developer’s interests.  Below are five essential steps each Board of Directors should immediately take upon transition of control:

  1. Perform an Initial Audit of the Documents Provided By the Developer. The Board should have all association books and records including, but not limited to, the following: 1) any original, recorded documents such as the Master Deed and Bylaws; 2) any declarations or disclosure statements; 3) the Articles of Incorporation and any amendments; 4) a complete set of the Board’s Meeting Minutes; 5) any and all Rules and Regulations; 6) all accounting information including any audits performed by the developer; 7) any and all escrow accounts or funds; 8) a current operating budget and all previous operating budgets; 9) any and all banking accounts and safety deposit boxes; 10) all state and federal tax returns; 11) any and all insurance policies; 12) any and all contracts entered into by the developer; 13) a complete list of all current owners with addresses and any other contact information; 14) any and all site plans including any as-built drawings; 15) a list of all contractors, manufacturers, subcontractors, suppliers involved with the project and any and all warranty information pertaining to same; 16) any documents by the local municipality pertaining to compliance with state statutes and local ordinances; 17) any and all documents related to any past or pending claims and 18) the tax identification number.  If the Board of Directors does not have this information, it should work cooperatively with the developer to obtain all of the above documents/information.  If the developer is not cooperative or is slow to respond, it may be a sign of additional underlying problems.
  1. Retain a Competent Certified Public Accountant. Critically important to a successful condominium association is an initial review of the condominium financials by a certified public accountant or an independent auditor competent in auditing community associations.  First, the Board should analyze all income and expenses during the developer’s control.  Typically, assessments are kept artificially low and do not adequately fund the condominium for the long term.  Second, MCL 559.205 and Administrative Rule 511 require a condominium association to maintain a minimum reserve fund that is equivalent to 10% of the association’s current annual budget on a noncumulative basis.  Every condominium should make sure this line item is included and often 10% is inadequate to fund capital improvements.  Third, consideration should be given as to whether the developer permitted co-owners to become significantly delinquent in paying association dues including the developer itself, if applicable.  The Board of Directors should immediately establish a comprehensive collection policy and uniformly enforce the policy to avoid a claim for selective enforcement.
  1. Hire a Professional Property Management Company. The newly elected Board of Directors should review whether the existing property management company—hired by the developer—is appropriate for the Association.  Pursuant to MCL 559.155, the Board may void the management contract with the developer or affiliates of the developer within 90 days of the transitional control date or with 30 days’ notice at any time thereafter for cause.  Typically, the management company remains the same after the transition and there are benefits for continuing to utilize the same property management company, however this should be reviewed on a case-by-case basis.
  1. Hire a Professional Engineer. The Board of Directors should hire a professional, licensed civil engineer or other qualified professional to analyze and inspect all of the common elements of the project including readily apparent construction defects, but also hidden defects such as 1) collapsing retaining walls resulting from improper installation; 2) cracking in the foundation or drywall caused by concealed foundation issues; 3) electrical wiring that is not properly installed within common element walls; 4) flooding caused by improper installation of the underground storm water drainage system; 5) heaving or cracking of concrete porches, driveways or sidewalks due to poor drainage; 6) leaks, mold and other water issues caused by improperly installed roofing, siding, flashing and/or windows; 7) noise related to insufficient insulation and poor sound protection; 8) pipe bursts that result from a failure to insulate common element pipes; 9) premature road failure resulting from failing to test and/or account for soil conditions, improper use of base course materials or drainage issues and 10) missing or improperly installed trusses, which compromise the structural integrity of the roofing and/or building.

The engineer will prepare a report outlining any construction defects, the cause of the defects, a proposed fix, whether any problems are covered by warranty and the estimated cost to fix the problems.  The engineering report will assist the Board and the condominium association’s attorney in evaluating the scope of the problems and determining the best course of action.  As part of the engineer’s report, the engineer should perform a reserve study which identifies the current status of the association’s financial health and the project’s physical condition.  The reserve study informs the property manager, the Board, the Association at large and prospective purchasers of anticipated major expenses in the future.  Based on the information from the reserve study, the Board can create a budget to reflect these anticipated costs thereby helping the association plan for the long term.  A condominium association should have a reserve study performed every three to five years to ensure that major problems do not arise.  In addition, given that the common elements will eventually need to be repaired and/or replaced, frequent reserve studies also ensure that the association’s contractors have not caused construction defects.

  1. Retain a Community Association Attorney. Typically, the Board of Directors will consult with a community association attorney prior to the transitional control date.  Once the transitional control date takes place, the Board of Directors then hires the attorney on behalf of the Association.  MCL 559.276 provides an association with three years from the transitional control date or two years from the date that a claim accrues to pursue a construction defect claim arising out of the development or construction of a condominium.  A claim for breach of contract against a contractor for a defect that arises from the repair or replacement of a construction defect, typically has a six year statute of limitations.  While the statute of limitations could be extended through various theories, such as fraudulent concealment, among others, an association’s odds of success are greatly increased by vigilance of the Board of Directors.  In addition, a developer or contractor often defends a construction defect claim by arguing that the defect was caused by natural wear and tear or improper maintenance by the association.  Accordingly, the sooner the association takes action, the better the chance of success.

In addition, the attorney will analyze any additional issues with the developer; determine whether the Master Deeds, Bylaws and Rules and Regulations need to be revised; review the collection policy and determine whether collection actions are necessary against delinquent co-owners; review contracts with vendors and address other transitional control issues which may arise.  As a practical matter, the first set of governing documents for the new condominium project were created by the developer, for the developer.  Thus, reviewing and revising the condominium documents is an important first step for any new Board.

Conclusion

With the appropriate professional team in place, transitioning from developer control to nondeveloper co-owner control can be a seamless process, even when problems arise.  Having an educated Board of Directors with qualified professionals assisting in the transition process, a condominium has a greater likelihood for a smooth transition which is crucial to the future success of the condominium.

Joe Wloszek is an attorney with the law firm of Cummings, McClorey, Davis & Acho, P.L.C. where he focuses his practice on dispute avoidance, condominium law, commercial litigation, commercial real estate, large contractual disputes, and title litigation. He has extensive litigation and trial experience in state and federal courts involving commercial litigation issues and real estate matters. He can be reached at (734) 261-2400 or jwloszek@cmda-law.com.

Free Speech and your Community Association: Will the New Jersey Supreme Court’s ruling in Dublirer v 2000 Linwood Avenue Owners, Inc impact campaigning in Michigan Condominium Association elections?

free-speechIn Dublirer v 2000 Linwood Avenue Owners, Inc the New Jersey Supreme Court considered the issue of whether or not an owner in a cooperative had a right to distribute campaign materials in seeking election to the co-op’s board of directors.  The Co-Op had a house rule that barred soliciting and distributing any written materials and the Co-Op denied Mr. Dublirer’s request to distribute campaign materials.  Mr. Dublirer challenged the Co-Op’s rule as unconstitutional and claimed that it violated his free speech rights under the New Jersey Constitution.  The provision of the New Jersey Constitution at issue provides as follows: “Every person may freely speak, write and publish his sentiments on all subjects, being responsible for the abuse of that right. No law shall be passed to restrain or abridge the liberty of speech or of the press.” N.J. Const. Art I, Section 6.  On December 4, 2014, the New Jersey Supreme Court held that while federal law requires state action to invoke the protections of the First Amendment, the New Jersey Constitution did not.  In ruling that Dublirer had right to distribute his campaign materials under the New Jersey Constitution, the Court indicated that the New Jersey Constitution protects against unreasonable or oppressive conduct by private entities, in addition to government entities.

Article I, Section 5 of the Michigan Constitution provides as follows: “Every person may freely speak, write, express and publish his views on all subjects, being responsible for the abuse of such right; and no law shall be enacted to restrain or abridge the liberty of speech or of the press.”  The language of Article I, Section 5 of the Michigan Constitution is almost identical to that of Article I, Section 6 of the New Jersey Constitution.  However, the Michigan Courts have previously ruled that “the federal and the Michigan constitutional provisions guaranteeing free speech do not extend to private conduct, but have been limited to protection against state action.”  Prysak v RL Polk Co, 193 Mich App 1, 10, 483 NW2d 629, 634 (1992).  Accordingly, it is unlikely that a Michigan Court would disallow a community association from regulating the use of campaign materials on constitutional grounds as community associations are private actors.

Kevin Hirzel is a partner at Cummings, McClorey, Davis & Acho, P.L.C.  He frequently represents Builders, Community Associations, Condominium Associations, Cooperatives, Co-Owners, Developers, Homeowner Associations, Investors, Property Owners and Property Managers throughout the State of Michigan. Mr. Hirzel can be contacted at (734) 261-2400 or khirzel@cmda-law.com. Please view http://www.cmda-law.com or http://www.micondolaw.comfor additional resources on Michigan Community Association Law.

A Board of Directors’ Guide to Resolving Common Element Construction Defects in a Michigan Condominium

Michigan condominium associations are responsible for the maintenance and repair of the general common elements.  While many condominium associations budget for repairs and maintenance of the common elements over an extended period of time, most associations are unprepared to address common element construction defects caused by a developer’s inadequate design, use of defective or substandard materials, insufficient site testing or inferior workmanship.  The failure of a board of directors to appropriately investigate and respond to construction defects immediately after the transition control date can be financially devastating to a condominium association.

During the initial construction of a condominium, a developer is primarily concerned with building and selling units as quickly as possible in order to maximize its profits.  Often times a developer will take shortcuts with the construction in order to save time or money, which often results in construction defects.  In addition, due to the recent economic downturn, many developers have further problems with tighter budgets, less liquidity, reduced access to commercial markets, reduced workforces, and related problems that also may impact the quality of the construction work.  This article addresses the appropriate steps a post-transition control board of directors should take with respect to discovering and resolving construction defects attributable to the developer and construction defects caused by contractors in older condominium associations.

What is a construction defect and how is it discovered?

A common element construction defect is defined as a deficiency in the 1) design 2) materials and/or 3) workmanship in the common elements of a condominium.  The defect typically poses a safety hazard, shortens the life expectancy of the common element and/or makes the common element partially or fully unusable.  Construction defects, whether due to a deficiency in design, materials or labor, are classified as either patent defects or latent defects.

A patent defect is readily apparent and discoverable based upon a reasonable inspection of the common elements.  Examples of patent defects include visible holes in a building, missing gutters or downspouts, missing handrails or missing chimney caps.  Patent defects are typically discovered by board members, co-owners or property managers through a casual observation of the common elements.

In contrast, a latent defect is concealed and not readily observable.  Latent defects will only appear after the passage of time and they are not something that would typically be discovered during the initial municipal inspection.  Examples of common latent defects are as follows:  1) Collapsing retaining walls resulting from improper installation; 2) Cracking in the foundation or drywall caused by concealed foundation issues; 3) Electrical wiring that is not properly installed within common element walls; 4) Flooding caused by improper installation of the underground storm water drainage system; 5) Heaving or cracking of concrete porches, driveways or sidewalks due to poor drainage; 6) Leaks, mold and other water issues caused by improperly installed roofing, siding, flashing and/or windows; 7) Noise related to insufficient insulation and poor sound protection; 8) Pipe bursts that result from a failure to insulate common element pipes; 9) Premature road failure resulting from failing to test and/or account for soil conditions, improper use of base course materials or drainage issues and 10) Missing or improperly installed trusses, which compromise the structural integrity of the roofing and/or building.  Given that latent defects are not discovered by a casual observer, a latent defect is typically only discovered after major problems occur or the condominium association commissions a detailed inspection of the common elements by a licensed engineer or other professional construction expert.

What is a reserve study and does my condominium need it?

A properly run condominium association will commission a reserve studyimmediately after the developer turns over control of the association to the co-owners.  A reserve study is a budget planning tool that focuses on the current status of the condominium association’s reserve funds for anticipated major common element expenditures in the future.  While a reserve study can take multiple forms and vary in detail, the board of directors should hire a professional engineer to thoroughly inspect the common elements.  After the inspection is performed, the engineer will prepare a report that identifies any defects that were discovered, the cause of the defect, a proposed fix and an estimated cost to repair.  Additionally, for any common elements that are not defective, the reserve study will also identify the proposed life expectancy of the major common elements and the proposed costs of future repair and/or replacement.  This information is invaluable to the preparation of the association’s budgets and long term stability.  A condominium association should have a reserve study performed every three to five years to ensure that major problems do not arise.  In addition, given that the common elements will eventually need to be repaired and/or replaced, frequent reserve studies also ensure that the association’s contractors have not caused construction defects.

Who is liable for common element defects in a new condominium project?

In Michigan, responsibility for construction defects in a new condominium is attributable to the developer(s), the contractor(s) hired by the developer(s) and/or the association’s board of directors.  Before holding a developer responsible for construction defects, a condominium association must identify the identity of the “developer” which often proves a difficult task.  The Michigan Condominium Act defines a developer of a condominium as “a person engaged in the business engaged in the business of developing a condominium as provided in this act.”  MCL 559.106(2).  While real estate brokers and residential builders, in certain circumstances, are excluded from the definition of a “developer” under the Michigan Condominium Act, it is clear that the definition of a developer is extremely broad and may often encompass more than one person and/or corporate entity.  Accordingly, while the master deed, bylaws, disclosure statement and purchase agreement likely identify a single “developer”, it is important to look beyond these documents to determine the identify of every person or corporate entity that could fit within the definition of a “developer” under MCL 559.106(2).  Accordingly, any person or corporate entity that participated in the construction, design, financing, marketing and/or planning the condominium could arguably be defined as a “developer”.

Additionally, the identity of a “developer” is further clouded by the fact that the entity identified as the “developer” in the master deed, bylaws and/or disclosure statement is often a shell company.  Sophisticated developers will often advertise under a trade name and establish separate corporate entities for each condominium project in an attempt to avoid liability.  After the sales are completed, the proceeds of the sales are then transferred to a different entity, leaving an unfunded, ‘out-of-business’ entity as the “developer”.  As such, in many cases, theories of joint venture, partnership or piercing the corporate veil are used to establish liability against several entities that may constitute the “developer.”

There are various theories of liability that can be utilized to establish liability against a developer after the “developer” is identified.  Michigan law imposes a duty on a developer to construct the common elements in a good and workmanlike manner.  Moreover, a developer impliedly warrants that the common elements of the condominium are habitable, i.e. that they can be used for their intended purpose, in addition to any express warranties that are provided. Accordingly, theories of breach of contract, breach of covenant, breach of warranty and/or negligence can be utilized to hold a developer responsible for construction defects.  Additionally, developers often make representations regarding the quality and fitness in the disclosure statement required by MCL 559.184a, the master deed, bylaws or other sales materials.  Accordingly, various fraud based claims may be available to an association, including but not limited to fraud, innocent misrepresentation, negligent misrepresentation, silent fraud or a violation of the Michigan Consumer Protection Act.  In certain circumstances, an association may also be able to recover attorney’s fees for establishing a violation of the Michigan Consumer Protection Act and/or a violation of the condominium association’s governing documents.  Finally, liability for construction defects can be established based on a theory of breach of fiduciary duty if the developer and/or its agents served on the association’s board of directors and failed to take action to correct construction defects.

While a developer of a condominium is responsible for construction defects caused by its agents, it may be appropriate to attempt to hold the architect, civil engineer, contractors or suppliers responsible for construction defects.  Given that an agent of the developer does not have a direct contract with the condominium association, the association would need to establish that it was a third-party beneficiary of the contract between the developer and its agent to confer liability under a breach of contract theory.  Alternatively, if the association is able to establish that the developer’s agent owed a duty to the association, separate from any contractual duty, it may be possible to establish a negligence claim as well.

Finally, the board of directors of a condominium association often fails to realize that they may have personal liability for failing to investigate and/or remedy construction defects.  MCL 450.2541 requires that each director act “in good faith and with the degree of diligence, care, and skill that an ordinarily prudent person would exercise under similar circumstances in a like position.”  MCL 450.2541 specifically requires that directors discharge their duties by acting in good faith when they rely upon the advice of their attorney and other professionals.  Accordingly, directors that ‘stick their heads in the sand’ when faced with construction defects may be liable for failing to take appropriate action against the developer and/or its agents to remedy the same.

Who is liable for defects resulting from repair and replacement of the common elements?

Seasoned community associations have construction defect issues that arise from projects to repair and replace the common elements after they have outlived their useful life.  With respect to projects for repair and replacement of the common elements, the condominium association, through the board of directors, typically enters into a written contract with the contractor that will perform the repair or replacement.  Accordingly, the above described theories of breach of contract, breach of covenant and breach of warranty could be utilized to hold a contractor responsible for construction defects.  In order to establish a negligence claim against a contractor, however, the association would need to establish a duty that is owed to the association that is separate and distinct from the contractor’s contractual obligations.  Typically, fraud-based theories of liability are not available in a direct claim against a contractor.  Unlike a developer who provides a disclosure statement and sales materials, a contractor does not usually provide anything other than a written contract and warranty.  Therefore, fraud claims are less prevalent against contractors.

In the event that a contractor utilizes a subcontract to complete a repair or replacement, the condominium association may also have a claim against the subcontractor.  Similar to the situation with a developer, a breach of contract claim based upon a third party beneficiary theory would need to be established.  Alternatively, if the condominium association is able to establish that the subcontractor owed a duty to the association, which was separate and distinct from a contractual obligation, it may be possible to establish a negligence claim against a subcontractor.

Finally, the board of directors of a condominium association has a fiduciary obligation to investigate and resolve construction defects caused by a contractor who inadequately repaired or replaced common elements.  Prior to commencing a major construction project, it is crucial that the condominium association has its attorney review the contract for two primary reasons.  First, the association’s attorney should safeguard the association from most common problems which may arise.  Second, having an attorney involved also protects the directors from individual liability pursuant to MCL 450.2541 which authorizes directors to rely upon the opinion of counsel in discharging their fiduciary duties.  As such, directors entering into major contracts without the advice of counsel and/or that fail to hold contractors responsible for construction defects may have exposure to liability.

How should the board of directors resolve common element construction defects?

  1. Inspect the Common Elements. The board of directors and/or the property manager should perform regular visual inspections of the common elements.  Additionally, the board of directors should ensure that a reserve study is performed immediately after the developer turns over control to the co-owners and that a reserve study is performed every three to five years thereafter.
  2. Consult with an Attorney. After the board of directors becomes aware of a potential construction defect, the board should immediately consult with an attorney to determine the potential claims and ensure that the claims are not time barred by the statute of limitations. MCL 559.276 typically provides an association with three years from the transitional control date or two years from the date that a claim accrues to pursue a construction defect claim arising out of the development or construction of a condominium.  A claim for breach of contract against a contractor for a defect that arises from the repair or replacement of a construction defect, typically has a six year statute of limitations.  While the statute of limitations could be extended through various theories, such as fraudulent concealment, among others, an association’s odds of success are greatly increased by vigilance of the board of directors.  In addition, a developer or contractor often defends a construction defect claim by arguing that the defect was caused by natural wear and tear or improper maintenance by the association.  Accordingly, the sooner the association takes action, the better the chance of success
  3. Consult with an Engineer. After the board of directors consults with an attorney, the board should hire a civil engineer or other qualified professional to prepare a report outlining the construction defects, the cause of the defects, a proposed fix and the estimated cost to fix the problems. The engineering report will assist the board of directors and the condominium association’s attorney in evaluating the scope of the problems and determining the best course of action.
  4. Negotiate with the Contractor/Developer. After the board of directors becomes aware of a potential construction defect, the association should attempt to negotiate a resolution with the responsible parties. The process is typically started by sending a demand letter to the contractor or developer.  The demand letter should 1) outline the known construction defects, 2) offer a proposed solution to the defects and 3) summarize the potential costs involved.  If settlement negotiations prove unsuccessful, the board of directors should evaluate whether a lawsuit should be filed or whether the association should repair the problem itself.
  5. File a Lawsuit or Repair the Defect. The board of directors has a fiduciary duty to ensure that the common elements are appropriately maintained and it must take action when learning of construction defects.  A condominium association has two options with respect to dealing with a construction defect that a developer or contractor is unwilling to repair: 1) file a lawsuit or 2) fix the defect.  The board of directors must decide whether the association is going to levy an additional assessment to fund a lawsuit or levy an additional assessment to repair the construction defect.  While imposing an additional assessment is typically not popular with the co-owners, an unplanned expenditure is often unavoidable when a construction defect is discovered.  Typically speaking, the assessment to pursue the lawsuit is cheaper than paying the entire cost of the repair.  Accordingly, it is often more prudent for the board to pursue the developer and/or contractor that caused the construction defects instead of shifting that burden to the co-owners.

Kevin Hirzel is a partner at Cummings, McClorey, Davis & Acho, P.L.C.  He frequently represents Builders, Community Associations, Condominium Associations, Cooperatives, Co-Owners, Developers, Homeowner Associations, Investors, Property Owners and Property Managers throughout the State of Michigan. Mr. Hirzel can be contacted at (734) 261-2400 or khirzel@cmda-law.com. Please view http://www.cmda-law.com or http://www.micondolaw.comfor additional resources on Michigan Community Association Law.

Understanding the Difference between a Designated Voter Representative Form (DVR) and a Proxy in Michigan Condominium Association Elections

ballot-boxMichigan condominium associations are often a hotbed for politicking prior to an election of directors or other votes that take place at an annual or special meeting. It is common for board candidates, or other co-owners, to go door to door and solicit the right to vote on behalf of their fellow co-owners prior to an association meeting. In many cases, co-owners will be asked to complete a designated voter representative form (DVR) or a proxy so that a fellow co-owner can vote for them if they are unable to attend a meeting. However, many co-owners do not understand the difference between a DVR and a proxy. The failure to understand the difference between a DVR and a proxy often leads many co-owners to unknowingly give away important rights.

In Michigan, a DVR form is a creation of the condominium bylaws. There is nothing in the Michigan Condominium Act or the Michigan Nonprofit Corporation Act that requires a co-owner(s) to designate a voting representative. However, if the condominium bylaws require that a co-owner(s) designate a voter representative, the co-owner(s) must complete a DVR form and provide it to the condominium association upon acquisition of a unit. The failure to complete a DVR form may subject the co-owner(s) to a bylaw infraction. In cases where a unit is owned by a single person, the co-owner will often designate them self as the voting representative. However, if the co-owner lives out of town, it is not uncommon for the co-owner to designate somebody that is local as designated voter representative. The DVR form was primarily created to handle situations where a unit was owned by more than one person or by a corporate entity. In cases where there are multiple owners of a unit, or a unit is owned by a corporate entity, the DVR form puts the condominium association on notice of the one (1) person that will be allowed to vote at meetings of the association and identifies who will receive all notices from the association. By way of example, if a husband and wife both own a unit, and both show up to the annual meeting, only the person designated as the DVR will be allowed to vote at the association meeting, as each unit will only be entitled to one (1) vote.

The condominium bylaws will identity the information that is required to be contained in a DVR form, which is typically the unit number, the name and address of the co-owner(s) of the unit and the name and address of the designated voting representative. Often times the condominium association or property manager will have a form that meets the requirements of the condominium bylaws than can easily be filled out and returned. While a co-owner could use this form to identify someone they would want to vote on their behalf, the use of a DVR form can be dangerous. Specifically, once a DVR form is executed, that co-owner will no longer receive notice of any future meetings of the association, notice of any bylaw infractions, notice of any annual, additional or special assessments and they will not have the right to vote at any future meetings of the association. While a co-owner could always change their DVR, many co-owners do not understand the potential consequences of providing a DVR to their neighbor. By way of example, if a co-owner provided their neighbor with a DVR and the association imposes a special assessment, the co-owner will still be responsible for payment of the assessment even though they will not receive notice of the same. If the holder of the DVR forgets to pass along the notice to the co-owner, the co-owner’s unit could be liened, the unit could be foreclosed upon and/or the co-owner may be forced to pay late fees and/or attorney’s fees and costs if the special assessment is not paid in a timely manner.

In contrast, a proxy is a creation of the Michigan Nonprofit Corporation Act. Specifically, MCL 450.2421 indicates that a person may provide a proxy to vote at a condominium association meeting unless otherwise prohibited by the articles of incorporation or bylaws. The holder of the DVR, which is often one of the co-owners, can provide a proxy to vote at a meeting of the association. Pursuant to MCL 450.2421(2), a proxy is valid three (3) years from the date of its execution unless otherwise provided in the proxy. Accordingly, most proxies are limited to voting at a specific meeting that the holder of the co-owner or DVR cannot attend. Similar to a DVR form, a proxy can be revoked at any time and many associations have blank proxy forms that can be utilized upon request. MCL 450.2421 requires that a proxy be in writing and be signed in order to be valid. The proxy should also contain sufficient information to identify who is providing the proxy and who is the holder of the proxy. The holder of the proxy only receives the right to vote at a meeting. Unlike a DVR, the holder of a proxy does not have the right to receive meeting notices, bylaw infractions, notices of assessments, etc. Accordingly, if a co-owner cannot attend a meeting, it is recommended that they provide a proxy that is limited in scope to voting at a specific meeting, rather than executing a DVR form in order to avoid giving away additional rights.

Kevin Hirzel is a partner at Cummings, McClorey, Davis & Acho, P.L.C. He frequently represents Builders, Community Associations, Condominium Associations, Cooperatives, Co-Owners, Developers, Homeowner Associations, Investors, Property Owners and Property Managers throughout the State of Michigan. Mr. Hirzel can be contacted at (734) 261-2400 or khirzel@cmda-law.com.

E-Mail Messages Can Create Binding Contract

The Michigan Court of Appeals recently held that a settlement agreement was binding, even though it was negotiated through a series of -email messages exchanged between the plaintiff’s attorney and the defendant’s attorney. In an e-mail message, the plaintiff’s attorney stated that he had confirmed his client would accept payment of $48,000 in exchange for a release of all possible claims. In response, the defendant’s attorney stated that the offer was accepted. Documents reflecting the agreement were prepared, but the plaintiff refused to sign.

The Court of Appeals held that the e-mail messages between the parties constituted a binding settlement agreement. The Court determined the e-mail from the plaintiff’s attorney constituted a settlement offer, and the e-mail from the defendant’s attorney constituted acceptance of that offer. Therefore, a binding contract was created between the parties, even though it was done through e-mail messages.

The Court also held that the e-mails satisfied the requirement that the agreement be in writing and “subscribed” by the party. The e-mail messages contained the ‘signature” of the attorneys because each attorney typed or attached his name at the end of the e-mail message. The Court noted, however, that it is not sufficient to include the attorney’s name at the top in the e-mail heading; a signature must be at the bottom of the e-mail to be valid.

Court Rules: Electrical Inspector’s Actions Not Cause of Plaintiffs’ Injuries

Gregory R. Grant, an attorney in the Firm’s Traverse City office, obtained dismissals of two cases on behalf of a Northern Michigan County building official and electrical inspector.  In June 2011, the decedent, a 17-year-old male, and his friend were walking along a floating dock at a busy City-owned marina.  The decedent jumped off the dock and into the marina water and was immediately electrocuted.  His best friend, and plaintiff in the companion case, jumped in to save the decedent.  He was also electrocuted.  Decedent subsequently died as a result and his friend survived with alleged injuries.

Evidence indicated that a wire from an electrical junction box located underneath the dock had been leaking electricity into the water.  Plaintiffs sued a number of defendants on gross negligence theories including the City and its City dockmaster, the general contractor who constructed the marina, the project engineers, the electrician, the County building official and electrical inspector.  The County building official was dismissed voluntarily early in the case.  Mr. Grant filed a motion for summary disposition before the close of discovery on behalf of the County electrical inspector arguing that the inspector properly approved the electrical system at the marina and that it was compliant with all applicable codes and regulations.  The court agreed that the electrical inspector did not breach any legal duty and that his actions were not the proximate cause of Plaintiffs’ injuries.  The claims against the electrical inspector were dismissed with prejudice.

Attorney Wins on Appeal

Karen Daley, an attorney in our Livonia office, recently obtained a favorable result for a local municipality. The Plaintiff tripped and fell on a raised portion of a sidewalk. Our Firm filed a Motion for Summary Disposition based upon the doctrine of governmental immunity, which was denied.  Ms. Daley, head of the Firm’s appellate department, filed an appeal.

The Court of Appeals reversed the trial court and remanded the case for entry of summary disposition in favor of our client.  The Court found that the Plaintiff failed to present any evidence that the concrete slab height differential rendered the sidewalk not reasonably safe and convenient for public travel.  The Court relied on testimony that there were a lot of walkers and kids playing in the area without incident. Also, the Court disregarded the testimony of the Plaintiff’s expert, reasoning that, even if his assertion that the sidewalk was a trip hazard was true, such an assertion does not tend to show that the sidewalk was not reasonably safe.

Karen M. Daley, an attorney in our Livonia office, concentrates her practice on appellate law and municipal law.  She can be reached at (734) 261-2400 or kdaley@cmda-law.com.

Attorney Defeats Environmental Nuisance Claim

Timothy Young, a partner in our Livonia office, successfully defeated an environmental nuisance claim presented on behalf of 13 homeowners.  The homeowners alleged that daily noise and diesel fumes from the property of Mr. Young’s client interfered with the peaceful and quiet enjoyment of their property.

The depositions of each of the plaintiffs and their noise expert revealed that the plaintiffs did not sustain personal property damage, real property damage or diminution in the value of their property as they alleged.  In addition, the depositions revealed the plaintiffs did not suffer the significant harm required by the law governing nuisance.

Mr. Young’s client obtained a summary disposition order dismissing the case before trial.   The keys to the victory were the extensive depositions to refute the plaintiffs’ claims, in addition to the outstanding contributions by the real estate expert and the acoustical engineers, which Mr. Young retained on behalf of his client.

Attorney Gets Case Against Circuit Court Judge, County Prosecutor Dismissed

In December, 2014, Jim Acho, a senior attorney in our Livonia office, defended a sitting Circuit Court Judge and her predecessor, a now-retired Circuit Court Judge, as well as the County Prosecutor, in a case brought by a Plaintiff who was found guilty and sentenced on a charge of providing false information to police officers.  The Plaintiff alleged his guilty verdict stemmed from his polygraph results in his pre-sentence report being admitted into evidence, thereby violating his Constitutional rights, and that the Prosecutor and Judges had conspired to allow same. The Plaintiff filed one action against the Prosecutor, and later, a second action against the sitting Judge and the retired Judge. The cases were assigned to two federal judges and not consolidated, as Mr. Acho filed immediate 12(b)(6)Motions to Dismiss with both counts, based on prosecutorial immunity and failure to state a claim upon which relief could be granted. Both Judges granted CMDA’s motions and dismissed the Plaintiff’s case with prejudice.

Michigan Court of Appeals rules that a Governmental Entity is not liable for Condominium Assessments after Tax Foreclosure

foreclosure

In Harbor Watch Condominium Association v Emmet County Treasurer, the Michigan Court of Appeals recently ruled that the Emmet Country Treasurer was not obligated to pay $97,366.09 in condominium assessments, late fees and interest to the Harbor Watch Condominium Association.  In 2011, the Emmet County Treasurer acquired 37 units in Harbor Watch after foreclosing on the units due to unpaid taxes.  The Court of Appeals upheld the trial court’s ruling that the Country Treasurer was not responsible for the payment of assessments under the Michigan Condominium Act and the Michigan Condominium Act, even though it was a co-owner, as it did not voluntarily acquire the units.  Specifically, the Court of Appeals held that the Emmet County Treasurer could not be held liable for the payment of assessments after it had fulfilled its statutory obligation to foreclose on the units under the Michigan General Property Tax Act.  While not raised in this case, the logic applied by the Court of Appeals would also presumably absolve a governmental entity from successor developer responsibility under MCL 559.235 as well.

Please click here to read the full text of the opinion.