Colorado Real Estate Journal - November 19, 2014

Defining who is the declarant

When the Colorado real estate market was booming in the early years of the prior decade, developers executed and recorded documents – declarations – creating certain covenants, conditions and restrictions on new real estate developments.

These declarations were single-party “agreements” creating residential condominium regimes and planned communities. The declarant, as defined in these declarations, concurrently organized and incorporated nonprofit associations to act as an owners association for the real estate development.

In most instances, the declarations stated that the declarant intended to develop the property in accordance with the Colorado Common Interest Ownership Act. Although a detailed discussion of CCIOA is beyond the scope of this article, the creation of common elements and the ownership of those common elements have created current-day headaches for a variety of parties.

First, lenders that may have acquired the property through foreclosure or deed-in-lieu of foreclosure may discover that it does not own landscaping tracts or roadways to access platted lots. Second, potential buyers, often from lenders as contract sellers, determine during due diligence that they must purchase the common elements from the original declarant in addition to the developable lots. Third, associations may receive notice of tax liens or tax sales of common elements ostensibly owned by the association but title continues to be in the name of the original declarant.

Initially, lenders failed to require the borrower to deliver an assignment of declarant rights as part of the collateral securing acquisition or construction loans at loan origination. The legal description on the deed of trust typically describes the platted lots as collateral and does not include the common elements. Then, lenders that may have acquired the property through foreclosure or deed-in-lieu of foreclosure subsequently discover that the bank did not acquire title to the landscaping tracts or roadways tracts that provide necessary access to platted lots. Subs e q u e n t l y, lenders failed to require d e f u n c t b o r r o w e r s to deliver assignments of declarant rights in connection with foreclosure actions or deed-in-lieu transactions.

C o l o r a d o statute defines “Special Declarant Rights” as reserved rights that benefit the declarant, specifically, to complete improvements indicated on plats and maps filed with the declaration; to exercise any development right; to maintain sales offices, management offices, signs advertising the common interest community and models; to use easement through the common elements for the purpose of making improvements within the common interest community or within real estate, which may be added to the common interest community; to make the common interest community subject to a master associate; to merge or consolidate a common interest community of the same form of ownership; or to appoint or remove any office of the association or any executive board member during any period of declarant control.

Further, Colorado statute requires that in order to transfer these reserved rights, a recorded assignment of special declarant rights is required. The assignment must be recorded in every county in which any portion of the common interest community is located. Without an executed and recorded assignment, the special declarant rights remain with the declarant. Lenders should require borrowers to specify that the lender is assigned the special declarant rights exercisable upon foreclosure or delivery of a deed-inlieu. Colorado statute permits a lender to succeed to all special declarant rights and declare in the assignment that lender is holding the rights solely for transfer to another person. If the lender simply holds the special declarant rights, then the lender will not be subject to liability or obligations of the declarant.

Then, potential buyers, often from lenders as contract sellers, determine during due diligence that they must purchase the common elements from the original declarant in addition to the developable lots. Some purchasers, searching for the next great deal, fail to determine in due diligence that the property acquisition did not include all the tracts that constitute, or should constitute, common elements under the declaration. In each instance, the lenders and purchasers often own islands of property within a sea of common elements that continue to be owned by the original declarant. Unless the lender acquired title to the common elements, then the potential buyer must approach an often-disgruntled declarant to purchase the necessary tracts.

Last, associations may receive notice of tax liens or tax sales of common elements ostensibly owned by the association but title continues to be in the name of the original declarant. Many associations have discovered that the declarant failed to deed the tracts to the association. Relying on dedication language in recorded plats and development plans, associations mistakenly believe that common elements are owned by the association. In the meantime, taxes continue to accrue and remain unpaid on landscaping and roadway tracts.

Colorado common law states that dedications on a plat can only be made to public entities, so any dedication to an association is ineffective to convey ownership of the common elements to an association. An association should confirm that it has a recorded deed from the declarant for the common elements to the association.

Lenders, potential buyers and associations all are experiencing issues arising from the recession and developer failing to convey common elements to an association before the developer lost the property in a foreclosure action or conveyed the property by deed-in-lieu.

The ownership of these common elements is an important detail to examine during due diligence to acquire the lots or for a lender to loan on these residential developments in the next decade.