Question: Our governing documents have a provision that limits rental agreements to 12 months except for extenuating situations approved by the board. Since the HOA has not been turned over yet by the developer, is the developer the “board” and does this give him the power to change the rules for his own benefit? For example, the developer rented several units for 18 months.

Answer: Yes, prior to turnover, the developer controls the board and can grant himself an “extenuating circumstance” although this would be a clear conflict of interest. Since the developer controls the board, it puts a lot of responsibility on the developer to govern equitably meaning he should not grant himself special favors. But developers want and need to sell units and sometimes bend the rules when necessary to make a sale.

It often comes in the form of granting a buyer some special right (for example, like installing a fence) that is prohibited in the governing documents. In most cases, these are verbal agreements since the developers know it will come back to haunt them if they put it in writing. Usually, the rules developers bend are minor since major ones could have some nasty consequences when the turnover board takes over. If a developer is grossly out of line during his control period, the new board can hold him legally and financially accountable (read “sue him”). That said, during down real estate markets, developers are forced to do things they did not plan to do, like rent units, until the market recovers. Failing to take measures like these would likely force the developer into bankruptcy or foreclosure by the bank. Banks are generally not good substitutes for the developer so it may behoove the current owners to be somewhat flexible with the developer if he is struggling but doing his best to fulfill his developer obligations.

Regenesis publishes The Regenesis Report, a monthly newsletter for HOA boards, developers and managers. To subscribe, go to Regenesis.net. He can be contacted by email at rich@regenesis.net.