As the condominium market imploded in 2008, the Florida landscape was strewn with new, partially sold condominiums. Developers ensnared by the rapidly evaporating sales market were unable to support the operations of condominiums in which only a small portion of units were sold. Developer distress led to condominium association distress, and unlucky buyers purchasing at the top of the market saw both their equity and the anticipated level of condominium maintenance vanish.
It was against this background that general agreement arose that something had to be done to encourage the absorption of an enormous amount of unsold condominium units. The anticipated acquisitions by vulture funds never materialized at the level expected. Opportunistic investors displayed a great reluctance to bulk purchase unsold units in light of the unsettled state of the law regarding potential successor-developer liability.
The Florida legislature attempted to remedy this problem in 2009 with the enactment of a shield law from potential successor-developer liability for bulk purchasers. Although a bill passed the Florida House, it became entangled in the amendment process in the Florida Senate, and the session ended without enactment of a bill. Similar legislation was submitted in the 2010 legislative session and passed both houses. This legislation, known as the Distressed Condominium Relief Act, was enacted as SB 1196 and was signed into law by Governor Christ on June 1.
The act creates two classes of bulk purchasers: “bulk assignees” and “bulk buyers,” each with different rights and responsibilities. In order to qualify as either, a purchaser must acquire at least seven condominium units. A bulk assignee is one acquiring “some or all” of developer's rights under the condominium documents, while a bulk buyer may acquire only certain specified limited developer rights. While the intent of those involved in this legislation was to permit a purchaser to qualify as a bulk buyer without the acquisition of any developer rights, the legislation, as drafted, does not clearly provide this result; it clouds the distinction between each type of bulk purchaser, since a bulk buyer acquiring a certain amount of the specified limited rights attributable to a bulk buyer might also be deemed to qualify as a bulk assignee by acquiring “some” developer's rights.
Specific exclusions from liability are afforded to bulk assignees. These include protection against warranty liability for existing construction, the obligation to fund converter reserves in a condominium conversion, and liability for unfunded assessments and reserves by the prior developer. In addition, limited exclusions are provided for audits of the condominium association's financial records; the bulk assignee is obligated only for the period it assumes control over the board of directors. It is not obligated to produce documents required to be delivered by a developer to the association after making a good faith effort to obtain them.
The treatment of a bulk buyer is very different under the act. Except in limited instances, a bulk buyer is treated in the same manner as someone acquiring a single unit. If the bulk buyer holds a majority of the units in the condominium, it may control the condominium through its election of the board of directors without the necessity of ever turning over control to the other owners. The other side of the coin, however, is that a bulk buyer is not exempted from those provisions in the declaration of condominium imposing restrictions on sales or leases or requirements for a working capital contribution imposed on buyers from the original developer, notwithstanding that the section defining a bulk buyer appears to allow such an exemption. There are no requirements imposed on the bulk buyer's operation of the condominium association except in the limited case of contracts made by the condominium association while the bulk buyer controls the board of directors. In this limited instance, the bulk buyer's contracts are subject to the provisions of the Condominium Act governing developer-controlled associations. The agreements need to be “fair and reasonable” and are rescindable by a vote of 75 percent of the owners once bulk buyer yields control of the condominium association.
Both bulk assignees and bulk buyers are subject to the Condominium Act's filing requirements if they elect to sell their units. In other words, both sets of purchasers would have to file offering materials with the Division of Florida Condominiums, Timeshares and Mobile Homes before entering into any sale contracts. Both would have to disclose in any offering materials any lack of required financial information from prior operations of the condominium if they were unable to obtain such information. In addition, a bulk assignee is required to specify the extent of the developer's rights obtained and provide specific disclosure indicating the absence of warranties or converter reserves in connection with its sale.
The act contains a sunset provision. A purchaser acquiring condominium units and recording its deed for these units after July 1, 2012 will not qualify for the benefits of the act. While passage of the act is a welcome addition to the Condominium Act, it will require some “unglitching” to realize its full efficacy.
— Martin A. Schwartz is a partner with Bilzin Sumberg Baena Price & Axelrod LLP.