Written by: Nathan Westover

If you’re a developer building a new residential community in Utah, or a home buyer purchasing a brand-new house, it’s important to understand the unique relationship that you’re entering into. When a community is first built, the developer essentially wears two hats: they are both the builder of the neighborhood, and they are the initial, controlling board of the Homeowners Association (the “HOA”). For developers, this dual role comes with specific legal responsibilities. For home buyers, understanding these responsibilities is key to knowing what to expect when the neighborhood eventually transitions from developer control to homeowner control.

In 2009, the Utah Supreme Court decided a landmark case called Davencourt at Pilgrims Landing v. Davencourt, LC, which established a clear guideline for developers. In that decision, the court made it clear that, while developers remain in control of the HOA’s board, they owe the association a limited fiduciary duty. For developers, following these guidelines is the best way to prevent lawsuits from aggrieved homeowners. For home buyers, these are the standards you should expect your home’s builder to uphold before they turn the board over to the community.

In Davencourt, the Court articulated the following duties owed by developers prior to turnover of the HOA:

(1) to use reasonable care and prudence in managing and maintaining the common property;

(2) to establish a sound fiscal basis for the association by imposing and collecting assessments and establishing reserves for the maintenance and replacement of common property;

(3) to disclose the amount by which the developer is providing or subsidizing services that the association is or will be obligated to provide;

(4) to maintain records and to account for the financial affairs of the association from its inception;

(5) to comply with and enforce the terms of the governing documents, including design controls, land-use restrictions, and the payment of assessments;

(6) to disclose all material facts and circumstances affecting the condition of the property that the association is responsible for maintaining; and

(7) to disclose all material facts and circumstances affecting the financial condition of the association, including the interest of the developer and the developer’s affiliates in any contract, lease, or other agreement entered into by the association.

While these duties exist largely to protect homeowners, understanding and complying with them is vital for protecting developers from potential lawsuits. For example, in order to attract buyers, it may be tempting for a developer to subsidize certain HOA amenities so that the HOA dues remain low. However, this can create a real problem for homeowners after turnover when they discover that their dues will suddenly skyrocket because those subsidies are no longer around.

To avoid this trap, developers must establish a sound, realistic fiscal basis for the HOA from day one. If a developer chooses to subsidize costs to help with sales, they have a strict legal duty to fully and transparently disclose those subsidies to the buyers. Homeowners should understand the real costs of the HOA – such as the costs for maintaining the clubhouse, the pool, or landscaping – so that they can make an informed decision.

Additionally, Davencourt requires that developers run the association in a manner that can be replicated by the HOA’s actual board after turnover. As such, it is vital to keep clean, transparent accounting records to help ensure that when the homeowners take over, they aren’t left untangling years of messy accounting. Further, while it is common for developers to hire affiliated companies to work on the community, those relationships must be openly disclosed to the association. Developers should avoid binding HOA communities to long-term contracts, as those will likely be challenged in the future if better options are discovered later.

Developers also have a duty to take care of the HOA’s common areas. While they are in charge, they are responsible for using reasonable care to maintain the parks, roads, and clubhouses. If there are material issues with the property that the HOA is going to inherit, the developer has a duty to disclose this to potential buyers. Importantly, developers must also play by their own rules and enforce the community’s Covenants, Conditions, and Restrictions (CC&Rs) consistently, even while construction is still ongoing. Failing to do so can cause issues with future boards who will have to enforce the CC&Rs as written, but will have no track record of doing so to back them up.

If you are a developer, these duties might sound like a heavy burden, but they can actually protect you from lawsuits if you fulfill your obligations. In Utah, the Economic Loss Rule generally prevents owners from suing a developer under tort theories, such as negligence, when the damages suffered by the owner are purely economic. With limited exceptions, any duty owed by the developer must be spelled out in writing in a contract between the parties. However, if a developer breaches their Davencourt duties, they open the door for plaintiffs’ attorneys to bypass the Economic Loss Rule and bring tort claims (such as breach of fiduciary duty). By strictly treating the Davencourt duties as a compliance checklist, developers can protect themselves from costly post-transition lawsuits while setting the new community up for long-term success.

The transition from developer control to homeowner control doesn’t have to be a battleground. When developers act proactively and home buyers know what to expect, turnovers can be smooth and conflict-free. Whether you are a developer looking to prevent turnover-based lawsuits, a property manager, or a newly formed board learning to manage your HOA, proactive legal guidance is your best asset. Reach out to the team at Miller Harrison today to discuss how we can help safeguard your community’s transition.