Is developer responsible to help with HOA shortfalls?

Q: We live in a community in South Carolina that was severely affected by the recession. Unfortunately, the original developer was unable to meet his obligations and the property was foreclosed upon. The original developer covered the HOA’s budget shortfalls each year prior to losing the partially completed development in a foreclosure.

The new developer, who purchased the property last year, holds a majority of the votes in the HOA, but refuses to provide any funding to meet the HOA’s budget shortfalls. Our question to you: Since the new developer owns and controls more than half the property in the development, is he legally obligated to pay dues on the lots he owns or cover the HOA’s budget shortfalls?

A: The answer depends entirely on what your community’s governing documents say. Since South Carolina has never enacted legislation similar to North Carolina’s Planned Community Act, the developer’s and homeowners’ rights are determined almost entirely by the language in your Declaration of Covenants, Conditions and Restrictions (“CCRs”) and your HOA’s bylaws.

It is common for developers to carve out partial or complete exemptions for themselves from payment of assessments on lots owned by the developer. Some CCRs require the developer to fund the HOA’s budget shortfall, while others may leave it to the developer’s discretion. I’ve seen other CCRs that say any amounts that the developer advances to the HOA to cover budget shortfalls can be treated as a loan, payable on demand from the developer.

The bottom line from a developer’s perspective is that if he wants to maintain a favorable reputation, he must leave the HOA in good financial shape when he is ready to exit the development – whether that means paying assessments on developer-owned lots, or covering the budget shortfalls until the HOA can become financially self-sustaining.

Beyond that, I can only suggest that you review your community’s governing documents carefully, and consult with an attorney experienced in HOA matters before taking action.

This column was originally published in the Charlotte Observer on October 9, 2014. © All rights reserved.

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