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Court Decision Clarifies HOA Developer Reserve Funding Obligations

reserve funding

Last month, Florida’s Fifth District Court of Appeals issued yet another opinion in Mackenzie v. Centex Homes, by Centex Real Estate Corp., Case No. 5D16-1254 (Fla. 5th DCA, December 22, 2016) reinforcing that a developer is obligated to contribute money to an association’s statutory reserve accounts prior to turnover, even when the developer has chosen to deficit fund the association’s operating expenses in lieu of paying regular assessments. The case clarifies an ambiguity in the Homeowners Association Act and provides additional help for communities that may otherwise find themselves in financial turmoil when significant repairs are required to maintain private roads, drainage infrastructure, clubhouses, and other common amenities.

The case involved a community called Sullivan Ranch, made up of 692 residential lots divided into two subdivisions, one of which is a fifty-five and older community. In 2007, Centex Homes made an initial contribution to the association’s reserve account in the amount of $32,300. However, Centex Homes later stopped contributing to the reserve funds even though it continued to include a line item for reserve funds in the budget, and collected reserve funds on the non-developer owned properties. Centex Homes opted to pay Sullivan Ranch’s operating expenses in lieu of making any contributions to the reserve accounts. In 2015, the Board was turned over from Centex Homes to the members of Sullivan Ranch.

The statutes at issue in the case are Section 720.308(1)(b) and Section 720.303(6) Florida Statutes. Section 720.308(1)(b) states that a developer is not required to pay “its share of the operating expenses and assessments” if the developer agrees to deficit fund the association’s operating expenses.  However, Section 720.303(6)(b) states that once reserve accounts have been established, they must continue to be fully funded unless they are waived or reduced by a vote of the association’s members.

The owners who filed the lawsuit claimed that Centex Homes was obligated to make contributions to the association’s reserve accounts based upon Section 720.303(6). Centex Homes argued that by agreeing to deficit fund pursuant to Section 720.308(1)(b), it was excused from all other expenses and assessments, including reserve contributions. They also claimed not to have made any guarantees that they would fund the reserve accounts.

The trial court initially entered a summary final judgment in the favor of Centex Homes, finding that the language of Section 720.308(1)(b) excusing developers from paying assessments while deficit funding is broad enough to include reserve funding obligations. However, the appellate court disagreed, holding that this interpretation relied upon the inherent ambiguity of Section 720.308(1)(b), and would create a direct conflict with the requirement in Section 720.303(6) that statutory reserves be fully funded once established, unless properly waived by the association’s members.  In order to give meaning to both Sections of the statute, the appellate court concluded that 720.308(1)(b) only applied to regular assessments for operating expenses, and not to statutory reserve funding, and that Centex Homes should have contributed to the reserve accounts prior to turnover.

While there are still some remaining ambiguities regarding the funding of reserves in the Homeowners Association Act, this case reaffirms the recent trend of holding developers responsible for funding prior to turnover.  If your community has recently turned over from developer control, or is approaching turnover, it is imperative that the association take a close look at its reserve accounts and budgets dating back to the beginning of the community.  If reserve funding has been discontinued or reduced by the developer prior to turnover, your association may be entitled to compensation. Even if a developer attempted to waive or reduce reserves funding, it may have failed to follow the necessary procedures required by statute to do so.

Posted in Arias Bosinger, Community Association, Real Estate Law, Tenant/Landlord
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