Given the current state of the housing market and our national economy, establishing a flexible development plan for a subdivision or condominium project that can respond to changing times and circumstances is important.
Flexibility for a developer is created by reserving development rights in covenants, declarations or other documents governing the development, use and operation of a project (the “Governing Documents”) when the project is first created or at least before any lots or units are sold. Otherwise, a developer is generally prohibited from amending the Governing Documents to add development rights unless all or a significant number of third-party lot or unit owners consent.
Here is a list of important development rights that will help maintain flexibility in a project:
Right to add or withdraw property.
Dividing a project into phases and then subjecting the phases to the Governing Documents for the project over time is the best way to maintain flexibility for the phases not yet added to the Governing Documents.
A developer using this approach would be able to elect not to subject these phases to the Governing Documents, thereby preserving the ability to modify the plans for these phases.
Right to grant utility and access easements for the benefit of adjacent land owned by the developer.
This right is particularly useful when a developer decides not to subject a phase of a development to the Governing Documents but needs to tie into the utilities or use the roads and sidewalks on the project in order to develop the phase.
Right to change the development plan.
This right is intended to permit a developer to change the uses, densities, mix of housing styles, restrictions, and other aspects of the project.
Right to control the association by appointing its board of directors.
Generally a developer will reserve this right until 75 percent of the lots or units are sold or 10 years after the Governing Documents are recorded, whichever is later.
Right to control the architectural review committee and establish and amend design guidelines.
These rights are generally reserved until all lots or units have been sold, but some developers relinquish these rights with the right to appoint the association’s board of directors.
Right to amend the Governing Documents.
Generally a developer reserves the right to unilaterally amend the Governing Documents before the first lot or unit is sold, and when the amendment will not have a material adverse effect on any lot or unit owner.
For any other amendments, the terms of the Governing Documents and applicable statutory and/or common law apply, which generally require the consent of a significant number of lot or unit owners, thereby making amendments to the Governing Documents difficult and time consuming.
Once a developer reserves development rights for a project, there are issues that can arise that might limit the developer’s ability to use some or all of the development rights, or that might subject the developer’s use of these rights to legal challenge.
A developer can generally minimize these risks by clearly disclosing any reserved development rights and the circumstances in which the developer can exercise these rights to prospective purchasers and by ensuring sales and marketing materials include disclosures, disclaimers and notations to inform prospective purchasers of the reserved development rights and the effect on the project if some or all of the development rights are exercised by the developer.
Richard S. Bailey is an attorney in the Vancouver and Portland offices of regional law firm Schwabe, Williamson & Wyatt, focusing his practice in the areas of real estate development and commercial lending. He can be reached at 360-905-1443 or rbailey@schwabe.com.
