Who's Responsible?

October 26th, 2009
Who's Responsible?

A 17 lot single family subdivision was built by an established developer in
2005 as an additional phase to an adjacent development with a National
Builder. There is no homeowners association. National Builder buys 7 lots
and walks on their option for the remaining 10 lots.

January 2007 the Developer and their Original Bank record Restrictive
Covenants for the remaining 10 lots. Five lots are purchased, built on and
sold.

Fall of 2008, burdened by others developments and the weak market, Developer
deeds the 5 remaining lots to the Original Bank. As often happens, there was
a Participating Bank in the deal and its the Participating Bank that lands
up with ownership in the 5 lots.

With the Developer gone and the Original Bank out of the picture, Who's
Responsible to enforce the Restrictive Covenants? An attorney I consulted
said the homeowners were-which makes sense. Because once any development is
built out the developer is typically out of the picture. But this next
situation isn't so clear.

When the lots were platted the signed development agreement included a
Letter of Credit from the Original Bank, which has since expired. And a time
limit on a "punch list" which is soon to expire. So the City's consulting
engineer inspects the streets. And he finds little stuff so minor, like
tubes left in the catch basin, and debris in a ditch, that it would have
been quicker to correct them when he was out there than to write them up.
But write them up he did. So, who is responsible to fix them? The City
contacts the Participating Bank-who was never a party to the Developer's
Agreement. In my view, the Participating Bank is no different than the other
12 lot owners in the subdivision and has no liability for the punch lists.

So who is responsible for the punch list items?

The Edgewater Development in Rogers has 173 finished lots with 50 owned
occupied homes, 5 builder owned spec houses and 118 vacant lots. The Rogers
City Council, on September 22nd, voted to obtain bids for an estimated
construction cost of $470,125 to finish the paving, install mailboxes, fix
the defective curb and sidewalks, etc. However, the council hasn't
determined exactly who to asses for the improvements that were supposed to
be completed by the developer, Heritage Development, in 2006. Heritage
defaulted in 2007. The council and property owners all want to go after
Heritage Development for the $470,125 dollars. And if they can't get the
money from Heritage, then who pays? If you spread the estimated construction
costs equally it comes out to $2,717 per lot. However, many of the vacant
lots owe multiple years of property taxes-including the handful that
Heritage still owns.

Even as our housing market recovers, I believe we'll see more situations
like these.

P.S. Thanks to Kriss Griebenow at Venture Bank for his comment on last
week's column on the Real Estate Cycle: "Real Estate is a 10-year cycle with
a 5-year memory.".