Residential developers beware:
Under a recent court ruling, you may now face liability for unfunded reserves if you deficit-fund operating expenses for a homeowners association that you control.
Developers that control HOAs and have paid HOA operating expenses in excess of assessments received from lot owners have long taken advantage of section 720.308(1)(b), Florida Statutes, which provides such a developer the right to avoid paying its share of the "operating expenses and assessments" on the lots the developer controls. A major part of that benefit is now in jeopardy.
In
MacKenzie v. Centex Homes
, a case of first impression, the Fifth District Court of Appeal ruled that once a reserve account is established, a developer in control of the HOA has a continuing obligation to fund the account even if the developer is deficit-funding the HOA's operating expenses. The court rejected the developer's argument that by deficit-funding the HOA, it was excused from any obligation to fund the reserve account and ruled that the developer must continue to fund reserves until the reserves are terminated, reduced, or waived in accordance with Florida Statutes section 720.303(6). The MacKenzie court effectively held that the reserves at issue - as defined in and governed by the HOA declaration - did not constitute "assessments" within the meaning of section 720.308(1)(b).
The case has been sent back to the trial court for further proceedings, and additional appeals could follow. Until then, the decision is binding on all Florida trial courts and persuasive authority in the other appeals courts.
Post-MacKenzie, developers that control HOAs and deficit-fund HOA operating expenses should review their declarations to assess how well they are protected from potential liability to fund reserves. If the review persuades the developer that it must fund reserves, the next decision should be whether to terminate, reduce, or waive reserves in accordance with the statutory procedure, to eliminate the need to fund or reduce the amount of funding necessary. When contemplating future developments, care should be taken to draft declarations that maximize protection against potential liability for funding reserves.
Our statewide Land Development, Zoning, Environmental and Government Affairs team is available to work with clients to navigate this new terrain. We will continue to monitor the case on remand to the trial court and in the event of future appeals. If you have any questions, please contact Christian O'Ryan, Glenn Burhans or Bridget Smitha.
