Chapter 3 - § 3.8 • THE DECLARANT AND THE ASSOCIATION

• Jurisdiction: Colorado

§ 3.8 • THE DECLARANT AND THE ASSOCIATION

Initially, the relationship between the declarant and the association is that the former completely controls the latter. The CCIOA provides that the declaration may provide for a period of declarant control of the association,²²² during which the declarant or persons designated by the declarant may appoint and remove the officers and members of the governing board.²²³ As discussed below, during that period of declarant control, the declarant has certain obligations and then must provide for an orderly transfer of control of the association to the unit owners.

§ 3.8.1—Maintenance Expenses

Until the association makes a common expense assessment, the declarant must pay all common expenses.²²⁴ Once the association levies any assessment, the declarant, as the owner of unsold units, must pay assessments on those units just like any other unit owner.²²⁵ Additionally, the declarant alone is liable for all expenses in connection with real estate within the community that is subject to development rights.²²⁶ If the declarant fails to pay all those expenses, the association may pay them and they must then be assessed as a common expense against the real estate subject to development rights. The association may enforce the assessment under its statutory lien for assessments²²⁷ by treating the real estate as if it were a unit. If the association acquires title to real estate subject to the development rights — through foreclosure or otherwise — those development rights are not extinguished, and the association may succeed to any special declarant rights specified in a written instrument prepared, executed, and recorded by it in accordance with the requirements of the statute on transfer of special declarant rights.²²⁸

Under the CCIOA, any income or proceeds from real estate subject to development rights inures to the declarant unless the declaration provides otherwise.²²⁹

§ 3.8.2—Insurance

No later than the first conveyance of a unit to anyone other than a declarant, the association must maintain, to the extent reasonably available, commercial general liability insurance against claims and liabilities that arise in connection with the ownership, existence, use, or management of the common elements.²³⁰ The insurance must provide coverage for the governing board, the association, the management agent, and their respective employees, agents, and all persons acting as agents. The insurance must also include the declarant as an additional insured in the declarant's capacity as a unit owner and board member. It must cover claims of one or more insured parties against other insured parties.

One commentary also suggests that a declarant should consider, as a risk-mitigation measure, adopting reasonable board-member indemnity provisions in the declaration or articles of incorporation, but cautions that indemnity provisions that overreach may violate the CCIOA.²³¹ The CCIOA grants associations the power, without specific authorization in the declaration, to provide for indemnification of officers and directors.²³² The Nonprofit Corporation Act addresses the topic of indemnification extensively. In general, nonprofit corporations may indemnify against liability a current or prior director who is made a party²³³ to a proceeding²³⁴ because he or she is or was a director,²³⁵ providing the person's conduct was in good faith and he or she reasonably believed the conduct at issue was in the corporation's best interests where that conduct is in an "official capacity"²³⁶ and, in all other cases, the conduct was at least not opposed to the corporation's best interests, and the person had no reasonable cause to believe the conduct was unlawful where the proceeding is a criminal one.²³⁷ Indemnification in connection with a proceeding by, or in the right of, the corporation is limited to reasonable expenses incurred in connection with the proceeding.²³⁸ The Act also allows the corporation, when prescribed conditions are met, to pay for or reimburse reasonable expenses incurred by a director who is a party to a proceeding in advance of the final disposition.²³⁹ The Act requires a formal determination that indemnification is permissible.²⁴⁰ If a corporation indemnifies or advances expenses to a director in connection with a proceeding by, or in the right of, the corporation, it must give written notice to the voting members with or before notice of the next members' meeting.²⁴¹

The Act prohibits a nonprofit corporation from indemnifying a director in connection with (1) a proceeding by, or in the right of, the corporation in which the director was adjudged liable to the corporation, or (2) any other proceeding charging that the director derived an improper personal benefit, whether or not involving action in an official capacity, in which proceeding the director was adjudged liable for having derived an improper personal benefit.²⁴²

§ 3.8.3—Powers

As the party that drafts all the original documents and initially controls the association, the declarant has considerable authority, but is nonetheless governed by the CCIOA. The Act keeps declarants under its regulation by generally prohibiting the Act from being varied by agreement and by prohibiting the waiver of the rights conferred by it.²⁴³ Additionally, it prohibits declarants from acting under a power of attorney or from using any other device to evade the limitations or prohibitions of the Act or the declaration. Finally, the declaration may not impose limitations on the power of the association to deal with the declarant that are more restrictive than those imposed on the power of the association to deal with others.²⁴⁴ These statutory proscriptions, however, did not serve to prevent a declarant from placing a requirement in a declaration that construction defect claims be submitted to arbitration and adding that the arbitration mandate could not be amended without the consent of the declarant even after the declarant no longer owned units in the community.²⁴⁵

One power that many associations have the right to exercise and that is of special importance to declarants is architectural control. In Lookout Mountain Paradise Hills Homeowners' Ass'n v. Viewpoint Associates,¹⁴⁶ the developer of a subdivision recorded protective covenants that provided it with the right of architectural control and allowed it by "appropriate" agreement to assign or convey that right to any person, persons, or corporation or, in its sole discretion, it could form a nonprofit homeowners corporation to which it could assign its right of approval. More than 20 years later, a homeowners association received an assignment of the developer's rights and interests under the original covenants, including, but not limited to the right to approve building or other improvement plans for any structures in the subdivision. By that time, the original developer had conveyed to the appellee all of the lots remaining in the subdivision. The appellee argued that the association failed to prove that the authority to perform architectural review had been assigned to it by the original developer because the written assignment was invalid since it did not, on its face, designate an assignee. The court, however, said that no particular formality is required to constitute a valid assignment, although the intent to make the assignment must be apparent. The written document that was titled an "assignment" was signed by officers of the original developer. Although the grantee was not designated, the document was delivered to the association with an explanatory letter addressed to it. Given those facts, the appellate court found that the trial court did not err by concluding that there was a valid assignment to the association of the right of approval.

§ 3.8.4—Fiduciary Obligations²⁴⁷

In general, association officers and directors who are appointed by the declarant²⁴⁸ must, in the performance of their duties, exercise the care required of fiduciaries of the unit owners.²⁴⁹ The one "exception" is that in matters concerning the investment of association reserve funds, all officers and directors are subject to the Nonprofit Corporation Act statute on "general standards of conduct for directors and officers" which, in general, requires that they discharge their duties in good faith, with the care that an ordinarily prudent person in a like position would exercise under similar circumstances, and in a manner they reasonably believe to be in the best interests of the association.²⁵⁰

Colorado courts have not explored the extent of the fiduciary obligations of the declarant-appointed board or the consequences of the breach of those fiduciary obligations.²⁵¹ However, in Connecticut, a state that has adopted the Uniform Act, a court considered what damages should be assessed in an action for breach of fiduciary duty. The court found that while the developer-controlled association violated the declaration and bylaws by inter alia failing to hold governing board meetings, annual owners meetings, and budget meetings, there was no evidence those deficiencies harmed or financially damaged the unit owners, other than depriving them of information and participation to which they were entitled. Thus, there was no basis for an award of more than nominal damages of one dollar for each plaintiff.²⁵²

§ 3.8.5—Transfer of Control

Under the CCIOA, the declaration may provide for a period of declarant control of the association, during which the declarant or persons designated by the declarant may appoint and remove the officers and members of the governing board.²⁵³ While a declarant may voluntarily surrender the right to appoint and remove officers and board members before termination of the period of declarant control,²⁵⁴ the declarant may require, for the duration of that period, that specified actions of the association or board described in a recorded instrument executed by the declarant must be approved by the...