developer to fund reserves prior to turnover SUBMITTED BY FRANK A. RUGGIERI, ESQ., THE RUGGIERI LAW FIRM, P.A.
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December 22, 2016, Florida’s Fifth District Court of Appeals released its initial opinion in Case No. 5D16-1254, styled Mackenzie v. Centex Homes, et al. Please note that the opinion issued by the Fifth District Court of Appeals is not final as of the date this article was written. The opinion’s focus is the interpretation of a developer’s obligation to fund reserve accounts where the developer elects to fund the budget deficit in accordance with 720.308(1)(b), Fla. Stat., in lieu of paying assessments. 720.308(1)(b) provides that while the developer is in control of the Association, it may be excused from payment of its share of the operating expenses and assessments during any period that the developer has obligated itself to pay any operating expenses incurred that exceed the assessments receivable from other members. This is commonly referred to as “deficit funding.” Several issues are implicated in this opinion. First and foremost, are reserves included in the “operating expenses incurred” which the developer is obligated to pay in lieu of paying assessments? How does the language in the Association’s “governing documents” impact the analysis? 720.303(6), Fla. Stat. makes reserve accounts mandatory for homeowners associations where (1) they were initially established by the developer or (2) a majority of the total voting interests elect to do so. Once established, reserve funds can only be waived or used for different purposes in accordance with the statute. The case, decided by the Fifth District Court of Appeals, involved a developer, Centex Homes, that established reserves prior to turnover of control and elected to fund the budget deficit in accordance with 720.308(1)(b) in lieu of paying assessments. However, Centex (much like any developer of a community subject to Chapter 720 which I am aware of ) interpreted the statute to limit the developer’s deficit funding obligation to the Association’s operating budget, exclusive of reserves. 14
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The Fifth District ultimately disagreed and ruled that the foregoing statutes, when read together and in conjunction with the Declaration, required that Centex fund the reserves as part of their deficit funding obligation. However, recall that reserves are not required unless they are 1) initially established by the developer or 2) a majority of the total voting interests elect to do so. The governing documents involved required reserves and Centex initially established reserve accounts, presumably in accordance with the documents. The Fifth District’s opinion certainly does not go so far as to create an obligation to initially fund reserve accounts where the statute does not already require it. However, if the reserves were initially established by the developer prior to transition, this opinion certainly provides a good faith basis to demand that a developer fund those reserves as part of its deficit funding obligation. With no express statutory requirement that homeowners associations initially establish certain reserve funds, developers effectively remain in control of their obligation to fund reserves prior to transition. The governing documents are initially established by the developer and an initial election to fund reserves is likewise within their control. A majority vote of the total voting interests to establish one or more reserve accounts is not likely to be achieved prior to transition. Time will tell if the Florida Legislature will eventually create a clear obligation to create and fund reserve accounts for capital expenditures and deferred maintenance for homeowners associations but the Fifth District’s opinion may certainly provide significant relief to some communities in the State of Florida in the meantime. Please consult your Association counsel should your community have questions regarding whether the developer properly addressed reserves, both prior to and after transition of control to the homeowners.