Many lenders are taking back half-built projects that are subject to the Colorado Common Interest Ownership Act (“CCIOA”). CCIOA governs planned communities, condominiums and cooperatives in Colorado and contains many detailed provisions regarding the ongoing right of a developer (or a “Declarant”) to develop the community and control the board of directors. These rights are referred to as “Special Declarant Rights” under CCIOA.
When entertaining a possible deed in lieu transaction or a foreclosure, lenders need to be aware of any Special Declarant Rights that exist under the project documents and should evaluate whether those Special Declarant Rights might be valuable to a future purchaser of the property. In doing so, a lender also needs to be aware of its possible successor liability if it takes over these Special Declarant Rights and how the lender might avoid such successor liability.
Generally, Special Declarant Rights may be transferred only in a signed and recorded document. However, CCIOA recognizes that in a foreclosure, it may not be possible to get the borrower/original Declarant to execute an assignment of Special Declarant Rights. As such, CCIOA allows a foreclosing lender to unilaterally record an assignment of Special Declarant Rights. This unilateral right to record an assignment of Special Declarant Rights does not apply in a deed in lieu situation.
If a lender takes an assignment of Special Declarant Rights from a borrower, it remains liable for the liabilities and obligations imposed on the borrower/old Declarant under CCIOA or the project declaration, except:
- warranty obligations;
- breach of fiduciary duties; or
- any obligation that is imposed on the borrower/old Declarant after the date of the assignment.
In a foreclosure situation, a lender can avoid this successor liability if the unilaterally recorded document states that the lender is only taking these Special Declarant Rights for the purpose of transferring them to a third party (such as some future buyer of the property). If that limitation is included, the lender can still exercise the rights to appoint board members, but cannot exercise any other Special Declarant Right. While the lender’s liability will be limited under that approach, any future buyer who takes an assignment of the Special Declarant Rights will have the successor liability described above. Because the unilateral right to record an assignment of Special Declarant Rights does not apply in a deed in lieu situation, lenders who take a deed in lieu do not have the ability to limit the effect of the assignment and thus limit their successor liability.
Because lenders are not in the development business, utilization of this procedure makes sense. It allows a foreclosing lender to preserve the Special Declarant Rights for a future buyer of the remainder of the project, and doesn’t force a lender to take on liability. It is important to remember that the right to unilaterally record an assignment document and limit liability does not apply in a deed in lieu transaction. When a lender is deciding whether or not to foreclose or take a deed in lieu, this fact should be considered.