Every Michigan condominium association goes through a transition in which control of the board of directors is transferred from developer control to co-owner control. In many condominium associations, it is not uncommon for a developer to attempt to retain control of all positions on the board of directors until the developer is ready to completely exit the condominium. However, the Michigan Condominium Act, MCL 559.101 et seq., requires a gradual transfer of control from the developer to the co-owners. As will be outlined below, MCL 559.152 outlines a process in which the developer creates an advisory committee, co-owners are added to the board of directors, the co-owners then elect a majority of the board of directors and then the co-owners elect all of the directors.
The Advisory Committee
The Michigan Condominium Act requires a developer to create an advisory committee of non-developer co-owners to meet with the developer-controlled board of directors to learn how the condominium association is operated. MCL 559.152(1) provides in pertinent part:
An advisory committee of nondeveloper co-owners shall be established either 120 days after conveyance of legal or equitable title to nondeveloper co-owners of ⅓ of the units that may be created or 1 year after the initial conveyance of legal or equitable title to a nondeveloper co-owner of a unit in the project, whichever occurs first. The advisory committee shall meet with the condominium project board of directors for the purpose of facilitating communication and aiding the transition of control to the association of co-owners. The advisory committee shall cease to exist when a majority of the board of directors of the association of co-owners is elected by the nondeveloper co-owners.
While a condominium developer is legally required to create an advisory committee, it is not uncommon for a developer to skip this step. However, an advisory committee is an important first step in transitioning from developer control to co-owner control of a condominium association to educate the co-owner directors on how the condominium is operated.
Electing the Initial Co-Owner Directors
After the advisory committee is created, the next step in transitioning a condominium association from developer to co-owner control is electing directors. MCL 559.152(2) provides the formula for electing co-owner directors and provides in pertinent part:
Not later than 120 days after conveyance of legal or equitable title to nondeveloper co-owners of 25% of the units that may be created, at least 1 director and not less than 25% of the board of directors of the association of co-owners shall be elected by nondeveloper co-owners. Not later than 120 days after conveyance of legal or equitable title to nondeveloper co-owners of 50% of the units that may be created, not less than 33- ⅓ % of the board of directors shall be elected by nondeveloper co-owners. Not later than 120 days after conveyance of legal or equitable title to nondeveloper co-owners of 75% of the units that may be created, and before conveyance of 90% of such units, the nondeveloper co-owners shall elect all directors on the board, except that the developer shall have the right to designate at least 1 director as long as the developer owns and offers for sale at least 10% of the units in the project or as long as 10% of the units remain that may be created.
Accordingly, the above formula contemplates that nondeveloper co-owners will be elected when 25% of the units that may be created are sold, 50% of the units that may be created are sold, 75% of the units that may be created are sold and that the transition will be completed when the developer offers for sale less than 10% of the units that may be created in the condominium.
In determining the total number of condominium units that may be created, MCL 559.152(6) states that “As used in this section, ‘units that may be created’ means the maximum number of units in all phases of the condominium project as stated in the master deed.” MCL 559.109(3) defines a phase of a condominium as follows:
(3) “Phase of a condominium project” means either of the following:
(a) The land and condominium units of the condominium project which may be developed under the initially recorded master deed without amendment to the master deed.
(b) Each additional parcel of land and condominium units added to the condominium project as provided in section 32.
Accordingly, if the condominium cannot be expanded pursuant to MCL 559.132, the calculation is determined by the total number of units that presently exist in the condominium. If the condominium project can be expanded, MCL 559.132 contains a six (6) year time period to exercise a right of expansion after the recording of the initial master deed. Until the six (6) year time period expires, and additional phases of the condominium can no longer be created, any potential units that may be created in the expandable area must be counted in the above calculation. After the expiration of the six (6) year time periods, the above percentages are based on the total number of units in the condominium at that time, as there are no longer condominium units that can be created as part of a phase.
Finally, it should be noted that MCL 559.152(7) exempts sales to a residential builder from the above calculations. Rather, the calculation is based on the number of sales by a developer or residential builder to co-owners that will occupy the condominium units.
The 54 Month Rule
The formula contained in MCL 559.152(2) applies until 54 months after the developer sells the first unit if 75% of the units that may be created have not yet been sold. However, if more than 54 months passed from the date that the developer sold the first unit, and the developer has not yet sold 75% of the units that may be created, a different formula is used to determine the number of directors that are elected by the nondeveloper co-owners. MCL 559.153(3) provides in pertinent part:
Notwithstanding the formula provided in subsection (2), 54 months after the first conveyance of legal or equitable title to a nondeveloper co-owner of a unit in the project, if title to not less than 75% of the units that may be created has not been conveyed, the nondeveloper co-owners have the right to elect, as provided in the condominium documents, a number of members of the board of directors of the association of co-owners equal to the percentage of units they hold and the developer has the right to elect, as provided in the condominium documents, a number of members of the board equal to the percentage of units which are owned by the developer and for which all assessments are payable by the developer. This election may increase, but does not reduce, the minimum election and designation rights otherwise established in subsection (2). Application of this subsection does not require a change in the size of the board as determined in the condominium documents.
Accordingly, the timing of the sale of the condominium units by the developer is important in determining how many seats that the nondeveloper co-owners will have on the board of directors.
The Fractional Director Rule
One of the potential problems with the above formulas is the possibility that the developer would be able to appoint a fractional director and the non-developer co-owners would be able to elect a fractional director. In order to resolve this problem, MCL 559.152(4) provides a tiebreaker as follows:
If the calculation of the percentage of members of the board that the nondeveloper co-owners have the right to elect under subsection (2), or if the product of the number of members of the board multiplied by the percentage of units held by the nondeveloper co-owners under subsection (3) results in a right of nondeveloper co-owners to elect a fractional number of members of the board, then a fractional election right of 0.5 or greater shall be rounded up to the nearest whole number, which number shall be the number of members of the board that the nondeveloper co-owners have the right to elect. After application of the formula contained in this subsection, the developer has the right to elect the remaining members of the board. Application of this subsection does not eliminate the right of the developer to designate 1 member as provided in subsection (2).
Conclusion
The Michigan Condominium Act contemplates a gradual transition from developer to nondeveloper co-owner control of the board of directors. The gradual transition contemplated by the Michigan Condominium Act is important as it provides the co-owners with on the job training to learn what is necessary to operate the condominium association. However, in practice, not all developers create an advisory committee or hold elections for nondeveloper co-owners while the condominium is still being developed. Accordingly, co-owners must hold a developer accountable for transitioning control of a condominium association in a timely manner.
MCL 559.110(7) defines the transitional control date as “the date on which a board of directors for an association of co-owners takes office pursuant to an election in which the votes that may be cast by eligible co-owners unaffiliated with the developer exceed the votes which may be cast by the developer.” Accordingly, while transition should be a gradual process, it does not officially happen until the co-owners can outvote the developer at an election and the election takes place. Given that transition from developer control to co-owner control is one of the most critical times in the life cycle of a condominium association, we encourage you to review our checklist of the items that should occur in order to ensure a successful transition from developer to co-owner control in a Michigan condominium.
Kevin Hirzel is the Managing Member of Hirzel Law, PLC and concentrates his practice on commercial litigation, community association law, condominium law, Fair Housing Act compliance, homeowners association and real estate law. Mr. Hirzel is a fellow in the College of Community Association Lawyers, a prestigious designation given to less than 175 attorneys in the country. He is also a member of the Community Associations Institute’s (“CAI”) National Board of Trustees. Mr. Hirzel has been a Michigan Super Lawyer’s Rising Star in Real Estate Law from 2013-2020, an award given to only 2.5% of the attorneys in Michigan each year. Mr. Hirzel has been named a Leading Lawyer in Condominium & HOA law by Leading Lawyers Magazine from 2018-2020, an award given to less than 5% of the attorneys in Michigan each year. He represents community associations, condominium associations, cooperatives, homeowners associations, property owners and property managers throughout Michigan. He may be reached at (248) 450-0339 or kevin@hirzellaw.com.