Developer Rights: How To Get Them If You Need Them

Developer Rights: How to get them if you need them

In a “for sale” residential development the developer rights may include some or all of the following: control of the homeowners association until turnover (i.e. the right to appoint the members of the board of directors, set budgets and control costs); the right to add property to the declaration; the right to enforce the terms of the declaration and the rules and regulations of the association; the power to exercise architectural controls; the right to maintain sales and leasing offices; the right to conduct sales, marketing and leasing programs at the project; and special treatment concerning the payment of assessments with respect to lots or homes owned by the developer.

Many lenders do not understand the significance of developer rights and, as a result, do not obtain these rights when they foreclose or take a deed in lieu of foreclosure.  Many lenders do not even get a collateral assignment of these rights when they first make the development loan on a project. 

Generally, developer rights are personal rights of the developer that do not automatically go with ownership of the balance of a failed or stalled project.  In many situations it is critical for the entity which acquires the balance of a failed or stalled project to make sure they get the developer rights. A potential problem with taking the developer rights is that they may come with liability for acts of the original developer.  However, this is a risk that may need to be taken, although some declarations provide that an assignee of the developer rights is not liable for the acts of any prior developer. 

If there is property that still needs to be added to the declaration or if the developer has architectural control, then the acquiring entity probably needs to become the developer in order to exercise those rights unless it wants to, and it is feasible to, cut off the current declaration and record a new one.  This may not be an option where there is a significant amenity package that the acquiring entity wants to make available to its buyers. 

If an acquiring entity wants to become the developer, it needs to determine if the entity from which it would acquire the balance of the project can assign the developer rights to it.  If the acquiring entity is acquiring the balance of the project from the lender (or an affiliate of the lender) which took title by deed in lieu or foreclosure the acquiring entity needs to determine if the lender is in a position to assign the developer’s rights. Following are some basic questions to ask of the lender in such a situation: 

1. If the lender took title by deed in lieu, did the   lender get an assignment of the developer rights?

 2. If the lender took title by foreclosure, did the lender include a count in the foreclosure complaint covering the developer rights?  The lender would have had to obtain a collateral assignment of the developer rights as part of its loan in order to do this most effectively.

 3.  Do the documents attempt to protect the assignee of the developer rights from liability for acts of a prior developer?           


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