TENTH SESSION
COMMISSIONER CARL H. LISMAN (
****
[The Chair’s Introductory Remarks]
Let me begin by asking
for a show of hands of those Commissioners whose primary or seasonal home is in
a common interest community.
Let me ask how many
aren't sure whether your primary home or seasonal home is in a common interest
community. You are in the distinct
minority.
[Why UCIOA is
important] Four out of every
five housing starts last year in the
This
committee is in its infancy. It has had
two weekend meetings so far. It has
pretty much scoped out the parameters of its task and it has begun to reach
consensus on some but not anywhere near all of the substantive issues that it
will be required to address.
[History of UCIOA] The Uniform Common Interest Ownership Act,
commonly referred to as UCIOA, traces its origins to the Uniform Land
Transactions Act, the drafters of which decided in the early 1970's that a
separate article or a part to cover condominium creation, management, and
consumer protection issues would be insufficient, hence the Uniform Condominium
Act. When the Conference concluded that
the condominium act was easily evaded by use of the alternative form, the
planned community, the Conference produced the Uniform Planned Community Act,
followed shortly thereafter by the Model Real Estate Cooperative Act.
Harmonization, a word
at that time that was considered positive, disparate treatment of issues in
UCA, UPCA, and MRECA, resulted in UCIOA in 1982, being revised in 1994.
[Purposes of UCIOA] At the heart of all of these acts was the
initial and correct perception that American consumers needed protection from
overreaching developers of residential housing stock and that shared amenities
or facilities and required owners to be members of an association responsible
for the maintenance, repair, and replacement of those shared amenities or
facilities.
Consequently, much of the original constituent acts and
UCIOA attempted to restrain the developer from overreaching and abusing by
imposing limitations on developer or developer‑controlled actions. It did so quite successfully. At the same time, those acts attempted to
create a framework, relatively skeletal, within which associations would be
governed without overreaching or abuse from developers. That too proved to be successful. But what we have learned since 1976 with the
original condominium act and 1982 with UCIOA and 1994 with the UCIOA amendments
is that while the task of problem‑solving can be relatively easily
handled, the problems keep popping up.
Developers still try to overreach and to abuse.
[Outline of Some
Current issues] For example, in
the last 15 years or so, construction defect litigation has become a cottage
industry in many of our more populous states, and for that reason developers
have written limitations into declarations, such as prohibiting suits against
the developer or providing that arbitration is the sole forum for resolution of
construction defect problems, or requiring that there be a very high majority
membership vote requirement before the association can sue the developer. We will seek your input on these subjects in
a few minutes.
More importantly, the
dominance of the developer‑association tension has given way to a
different issue, the perception or the reality, depending on where you are, of
oppression by unit owners by board members and paid managers. Accordingly, the committee has devoted most
of its first two meetings to understanding and then attempting to address this
issue.
Now, keep in mind that
UCIOA and its constituent acts adopted a drafting approach primarily of
enablement rather than micro management of association activity. You have in your ring binders a copy of
UCIOA, the most recent version, the 1994 version, marked to show changes that
we have tentatively made so far, as well as commentary, mostly in the form of
questions, some of which we hope to get answers to today. You also have a separate outline on your
chair or on your desk identified as the Drafting Committee List of Issues for
the Common Interest Ownership Act, just two pages. [Issues list is attached]
There is a widespread
belief that association boards in residential communities and their paid
professional managers are today's overreachers and
abusers and that something needs to be done.
The breadth of these charges stretches across the country and has
resulted in very focused and, we believe, frequently incorrect
legislation. The hue and cry has
coalesced into a dogma with a slogan, not necessarily a clearly enunciated
dogma, but a slogan which demands a homeowner bill of rights.
Most of the claimed overreaching and abuses have arisen not
in the condominium form of ownership but in the planned community form of
ownership. Every state has a condominium
law, roughly half have a uniform act or a version of a uniform act, but most
states have no laws regarding the planned community form of ownership.
[The forms of
Ownership] In our parlance, in a
condominium, a unit owner owns her own unit and she is a member of an
association, all of the unit owners together are the owners of the common
elements, and the association is responsible for the maintenance, repair, and
replacement of the common elements. The
association has the power to assess the unit owners for those purposes and a foreclosable
lien to enforce collection.
In a planned community,
a unit owner owns her own unit and there is an association, but the primary
distinction is that the association owns the common elements, not the unit
owners, and it is responsible for maintenance, repair, and replacement of the common
elements, and it has an assessment lien which it can foreclose.
In a real estate
cooperative, the association owns the units and the common elements, and the
members of the association have rights to occupy particular units, and the
association has a lien to pay for its maintenance, repair, and replacement of
the common elements. Those distinctions,
interestingly, drive how developers decide whether to create a condominium, a
planned community, or a cooperative.
We need to think about
what limitations, if any, should be imposed on association boards and
managers. Our threshold issues are
pretty significant. We start with asking
what mechanism we should use in the act to deal with what we are now calling
fusses between boards and managers on the one hand and unit owners on the other
hand.
We have identified so
far three approaches. In no particular
order, one is state‑supervised mediation over these types of disputes as
a condition precedent to litigation or arbitration. This process already exists in
A second alternative is
court supervision. If we go this way, we
then need to ask whether and to what extent courts should address these issues
de novo or whether they should give deference to board decisions using
something akin to the business judgment rule analysis of for‑profit
corporation law, which would avoid judicial substitution of board‑made
decisions.
A third possibility is
statutory rules, either as in the form of default rules or in the form of
specific mandates.
Or we could do some of
each, depending on the particular issue.
On this we seek your guidance.
A second critical
initial issue is the form which the association may take. As originally written, UCA and UCIOA require
the association to be formed as a profit or nonprofit corporation or a trust or
a partnership and allowed the states the option to allow associations to be
unincorporated. If the association is a
nonprofit corporation under the nonprofit corporation law of the state of its situs, a whole set of fiduciary rules apply to board
members and officers.
On the other hand, a
whole different set of rules would otherwise apply if the association takes the
form of a trust or a partnership, or, as we are currently proposing, a limited
liability company. And it's unclear what
rules would apply if it is an unincorporated association.
In partial response to
this issue, Article 3 has always contained numerous provisions. They look eerily like they came straight from
a nonprofit corporation statute, which is not surprising, since they did. And those apply regardless of the form that
the association actually takes. Should
we allow LLC associations? Should we
override the rule in the trust law or the partnership law or the LLC law and
say that certain corporate fiduciary principles apply to all associations
without regard to form? We seek your
input on that issue.
What we have done so
far is to consider provisions which, taken with what is already in UCIOA, would
together constitute a homeowner bill of rights. One of the tasks of this Drafting Committee
is to propose amendments to UCIOA, but this committee is also charged with the
responsibility of making similar amendment provisions to UCA, UPCA, and
MRECA. A third part of our charge is to
create a freestanding bill of rights for states that only want that part of
uniform legislation.
So, with this by way of
a longer background than you probably needed or wanted to hear, let's start
more or less, we propose, at the beginning of Article 3, Management of the
Common Interest Community.
****
COMMISSIONER CARL H. LISMAN (
****
The act has always said
that an association can adopt rules. The
act also says that unless there is a provision in the act that says otherwise,
the executive board acts for the association.
The question is, in the first instance, whether there ought to be a
requirement that before a board can adopt a rule, it has to give notice to
members of the association of its intention to do so, an opportunity to be
heard, and then substantively whether or not we should require that rules be
reasonable. Understand that there is
a broad gamut here of rules as simple as what time the pool closes at night to
what consequences there will be in terms of late fees and interest or penalties
for nonpayment of assessments, and everything in between.
COMMISSIONER
WILLIAM R. BREETZ, JR. (Reporter): I am
Bill Breetz, the reporter. Page 52.
Carl has drawn your attention to the text on Line 21, Page 52. The section to be considered in connection
with this section is the proposed new language on Page 87, which is Section 3‑120,
which would accomplish the things that Carl just talked about.
The first subsection of 3‑120,
again, assuming reasonableness is what you would all agree with, on Page 87 in
sub (a), we require prior notice to unit owners before rules are adopted.
In sub (b), we
specifically focus on issues
which have become very common in a number of places, which is architectural
and design rules, and we talk about that as a specific power of the board
and how that ought to be done.
In (c), we deal with a great range of anecdotal stuff that
has come to the committee regarding various restrictions that boards have
imposed, apparently, on for sale signs and religious symbols and American flags
or other kinds of flags. It's a big deal
in a number of communities and has created all sorts of fusses.
So the committee's out
of the box proposal is, looking on Page 87, sub (c), that neither the
declaration of a rule or regulation may prohibit the display of flags or
religious symbols or political signs or for sale signs, but the association can
adopt rules governing their size, location, and duration.
We have had lots of
other suggestions made to us that we ought to involve freedom of assembly and
all kinds of other things. This is sort
of, I think, the committee's consensus, subject to the floor's view, as to
whether we are moving generally in the right direction.
***
COMMISSIONER HARVEY A. FELDMAN (
COMMISSIONER BREETZ: Is it your sense that we ought to allow board
of directors to prohibit the display of Christmas trees or the display of mazzuzas or the display of American flags on the Fourth of
July, because that in fact is what is happening in a number of communities.
COMMISSIONER FELDMAN: Yes.
COMMISSIONER BREETZ: Okay.
COMMISSIONER CARL H. LISMAN (
Over time, people have
begun to realize that not only are these communities more attractive if there
are some differences among them, in many instances, but people don't fully
appreciate that when they move in, they give up a little bit of their own
autonomy and are subject ‑‑ again, choose your word carefully here ‑‑
to the reasoned decision/whim of the boards that say, no signs, no religious
displays, no motorcycles in the back yard, no whatever it may be.
Ultimately I think we
came down in the belief that, where possible, we ought to think twice about the
command and control model and allow, within reason, associations to allow
various kinds of things but to limit the authority of associations on other
kinds of things. Subject to our
limitations on location, size, and duration, we reached the conclusion that we
reached to enable rather than to disapprove.
CHAIRPERSON NIXON: Commissioner Feldman, follow‑up?
COMMISSIONER FELDMAN: I agree with all of that, Commissioner. I think all of these prohibitions are a bad
idea. That is not the issue. The issue is whether a community should be
able to choose for itself whether it is a good idea or a bad idea. And if the people in a community don't like a
ban on flags, the solution is the same solution in any democracy, vote these
people out of office and change the law.
COMMISSIONER HARRY J. HAYNSWORTH, IV
(
COMMISSIONER DONALD JOE WILLIS (Oregon): I wonder what consideration the committee has
given on this issue about how the homeowners association, or whatever you call
it, their ability to promulgate regulations later, should tie back to
disclosure from the developer at the initial sales point so that you don't get
the surprise of a person who thought they might be able to continue putting
their little American flag on their front door, or whatever, later.
That seems to me to be
quite an issue. I have little sympathy
for people who are told, if you buy this, we have CC&R's
which are going to be recorded, and those CC&R's
may put height limitations, sight or view blocking limitations. But it's another matter to say, and also
there will be an association created that has rulemaking power, and it doesn't
tell very clearly what those powers might be able to do.
I think that ties into
my concept, I think contrary to the statements of some of the other
Commissioners, that if you get a group of people, even though they are elected
to a private organization, that can control some significant events in a
person's life. And I daresay that in
this country, putting a flag up on your front door today is probably pretty
significant for many people. Prohibiting
one from doing that is very significant to others, as well as any religious
symbol.
As people begin to act
in exercising the same power that a governmental entity may exercise, I think
we are going to finally come to a clash where those powers might be reeled in
just because they are acting like a government, short of a vote of the
majority.
I don't know whether
you have considered it, but I would invite you to go back and consider
requiring some of those things up front so that the person who buys and then is
met after they purchase, after their first homeowner's association meeting,
with a bunch of rules that they don't like, at least they were made aware of
how deeply and how clearly those things could affect them.
CHAIRPERSON NIXON: Response from the committee.
COMMISSIONER WILLIAM R. BREETZ, JR.
(Reporter): I will try, and I am sure
other committee members will have their separate views.
The difficulty, Joe, is
that it's not the declarant typically that is the
source of these restrictions. It may
be. But it's very common in the life of
the project long after the developer is gone for a board to perceive some
particularly obnoxious activity of a unit owner or to have some particular
members of a board who have strong feelings to change the rules well after the
developer is out of the project.
Now, when those rules
were adopted, they apply certainly prospectively to owners who aren't there
yet. But if the board adopts the rules
today, they would apply, under the act as drafted, those rules would apply to all
the unit owners that are there today.
It is certainly true
that in the exercise of a perfect democracy, the owners could rise up and throw
out the rascals and change the rules.
That is in theory the case. The
fact is, in a large community, it is a practical difficulty to accomplish that
outcome.
You run into two
issues, as I see your suggestion, which basically I agree with. If people know about these rules in advance,
it's much easier to respond to the Feldman approach. But the rules can apply to people who are
already there. And while it is true they
have a right to speak on that issue, it may not be a very effective right. That is the tension we are dealing with. That is why we seek comment from the floor.
COMMISSIONER WILLIS: My point is, I think if you look back to the
point ‑‑ I'm not talking about initial sales, so you've got the
person who hasn't been met yet with the new rules. Frankly, it doesn't bother me. They can make any rule they want to as long
as it's lawful and doesn't violate some other substantive rule of law. If the people know about it. But I am concerned about those initial
instances. The developer does all the
stuff. He files the CC&R's. And typically they will provide for the
creation of the homeowners association, without any real indication ‑‑
and I would even go so far as to have you at least consider, and I haven't done
this, but at least to consider letting the developer, the developer originally,
put some binders on the ability for some of these rules and perhaps work out
some sort of a notice provision so that originally this is set.
COMMISSIONER CARL H. LISMAN (
So even if we say that
the developer must create a list of rules that will initially govern the
project ‑‑ can't park your car in the driveway. You have to park it either behind the house
or in the garage. You can't park your
boat anywhere on the property except in a designated place for which you must
pay a fee. You can't have a charcoal
grill anywhere on your property. You
can't use the elevator for moving furniture except between
COMMISSIONER WILLIS: The point I am trying to make is ‑‑
I understand that is how it works now.
But could you not let the original developer put binders on that
association to say that the association will be created, however, because of ‑‑
and you could even put an interest, I think, maybe in the land, that everybody
else have a reversible right. They could
not prohibit you from having a 12 by 12 religious symbol or a 12 by 14 inch
flag. Or conversely, at least to state
they will be able to do all those things.
COMMISSIONER LISMAN: You could, with the understanding that that
document is amendable, and that limitation or empowerment can be eliminated.
COMMISSIONER WILLIS: But I don't think it could be, Carl, if you
do make it a reversible interest within reach of the unit owners. That is my only point. It sounds like you have considered it and I
will quit taking any more of your time.
COMMISSIONER MARION W. BENFIELD, JR.
(
COMMISSIONER CURTIS R. REITZ
(Pennsylvania): Please correct me if I
am wrong, but I believe this act applies to ownership interests whether they
are in a single building, the old apartment‑style building, high‑rise
building with multiple units using a common entrance, with hallways that are
the access, elevators and hallways, as well as the widely dispersed suburban
tract development that would look to an outsider as if it was an ordinary
suburban development but happens to have had a developer that set up a planned
community of some kind but the individual residences look like houses, with
yards and driveways and garages and the like.
If I am right, and I
think I am right, this act applies regardless of how close or how physically
connected the residential units are or the way in which they are connected.
It seems to me any
notion that you could by law determine the proper standard that each community
might decide for itself is the right kind of display of this kind of material
would be, I think, probably impossible.
I live in a high‑rise
condominium with 776 units, with one entrance.
We have a lot of rules about the way in which that building operates,
for the advantage of all of us, that would be inconsistent with this provision
in many respects. I don't believe that
what we are doing is in any offensive or wrong.
I would urge you not to
think that when you are legislating restrictions on the community's self‑organization
that you keep in mind that you have this enormous variety of living
arrangements that you are addressing, and the extent to which your community
can impose restrictions, I think, varies, in my view should vary, with the
physical layout of the ownership.
COMMISSIONER
COMMISSIONER FISHER: Well, that is very true. That is exactly why the board adopted
it. But the issue became one of
controversy as to whether they can only restrict the sticker on the outside of
the unit, like a flag, or whether or not the inside of the unit, by the
windows, for example, your religious or decorations ‑‑ you're
certainly not going to prohibit decorations in a condominium unit inside, I
don't think you are, by the window.
The second question,
which you just go on to, if you will.
What is the effect of a new development where the prospectus in the
condominium documents, and particularly the prospectus, tells those who are
buying units that they can buy this for investment and lease by the week, by
the month, et cetera. In other words,
what is the effect of a prospectus versus the declarations on those investors
who buy the unit for investment only where it says in the prospectus, you have
a right to lease this on a weekly, monthly basis, and they're buying it for
that purpose?
COMMISSIONER WILLIAM R. BREETZ, JR.
(Reporter): The response to the first
question, I believe, is that the act would permit restrictions on the use of
the units, inside the unit, only in a much more restrictive way than can be
accomplished by restrictions on your unit that might be visible outside.
So, it's possible I
could write a declaration that would prohibit you from doing all sorts of
things in your unit, but those provisions would have to appear in the
declaration, which is a much more rigorous process versus the ‑‑
COMMISSIONER FISHER: Including the security issue that I brought
up?
COMMISSIONER BREETZ: Right.
But I think consistent with Commissioner Reitz's perspective, projects
differ a great deal, and we have always recognized that, and the act today
simply says that if these restrictions are only inside your unit and don't
really affect people outside the unit, then they have to appear in the
declaration. But until this moment in
time, this drafting round, we haven't gotten into the question of those such as
are laid out in 3‑120(c), whether there have been particular issues of
concern.
That is with respect to
the first question. Carl, do you want to
deal with the second?
COMMISSIONER CARL H. LISMAN (
Under the uniform acts,
there are four operative documents in every common interest ‑‑ actually
five ‑‑ in every common interest community. In no particular order of importance.
There is the
declaration. Under our uniform acts, the
declaration is a title document. It is
not a disclosure document. It's a
document that goes in the land records.
We don't expect that most buyers and sellers of homes can fully
appreciate what a title document is any more than we expect that they can
understand commercial leases or even residential mortgages.
There is a document
called a public offering statement. That
is the informational packet which every developer must give to every first‑time
buyer from the developer. That is a
disclosure document, and we require that the declaration be attached to
it. That is a document that is regulated
by this act in Part 4, in 4‑102, I think.
Maybe it's 4‑103. As is the
declaration and the contents of the declaration in Article 2, in 2‑105,
6, 7, 8, and so forth.
So, those are two
documents. We require that associations
have bylaws. We perceive the bylaws under
the uniform acts to be procedural rules like you would find in a very small
corporation. How do you give notice of
meetings, where do you hold your meetings, stuff like that. That is in Part 3 of these acts. That's four documents.
There is a set of
rules. What goes in the declaration
includes rules. We say in 2‑105
and then again in 3‑103 the types of substantive rules that can go into a
declaration. You want to change the
declaration, it requires a vote of the members of the association. It may or may not require approval from their
individual unit mortgagees. If you have
rules, those are adopted by the board, currently, without any input from the
members. Those can be adopted at any
time and changed at any time by a vote of the board.
We also require ‑‑
here is the fifth document ‑‑ something called a resale
certificate. Every subsequent purchaser
gets from the association a copy of the governing documents and a statement ‑‑
this is 4‑109, I think ‑‑ that contains information that
every buyer ought to be getting before buying a home. Is the association subject to a lawsuit? If so, what is the likelihood we are going to
win? Are there reserves set aside? How much are they? Does my seller owe any unpaid assessments
that I might get tagged for? The list is
in the act. You can read them.
All of that is by way
of background to your question about, to what degree can you rely on what the
developer says when the developer is trying to sell you investment units? And then three months later, after the
developer loses control of the association, the documents are amended and out
you go.
The answer in a more
specific way is two‑fold. As long
as you had notice of the amended provisions of the declaration, if that is
where this language is, then you will be bound by the change even though you
were told that you could have an investment unit and rent it out. But in 3‑103(c), Page 56 of the
materials, you will see that we have a specific limitation on this subject that
says, unless the declaration specifically deals with this, the association can
only adopt a rule regarding primary occupancy in rental units to comply with
secondary mortgage market requirements.
COMMISSIONER
COMMISSIONER LISMAN: The declaration always trumps.
COMMISSIONER FISHER: The declaration trumps everything.
COMMISSIONER LISMAN: The statute trumps both.
COMMISSIONER FISHER: Then you go to the offering circular, which
is a prospectus and which is not filed of record.
COMMISSIONER LISMAN: Correct.
COMMISSIONER FISHER: Does that trump anything?
COMMISSIONER LISMAN: No.
COMMISSIONER FISHER: So, in other words, you could have the
offering circular and the declaration be in conflict, is what you are saying.
COMMISSIONER LISMAN: No. I
would think that our private cause of action provision in Article 4 would give
you a cause of action against the developer if they were inconsistent, but you
probably have no claim against the developer for saying something in the public
offering statement that is true at the time it's made even though the
association changes the game later on.
COMMISSIONER FISHER: With the chair's permission, I have one other
question. I don't know if this is
covered. As you know, it's quite
prevalent to make condominium pre‑construction offerings, et cetera, et
cetera. There have been circumstances
that I have seen in my practice that people will follow a developer. And, for example, $50,000 down, you're in a
lottery and you get picked. Is that in
any way covered by this act? Because
there have been circumstances where with the increase in values of condominiums,
there have been a number of instances where the developer pulls, reserves a
right to pull the development, for whatever reason ‑‑ economic
reason. Then they re‑offer it, but
they increase the price.
COMMISSIONER LISMAN: Thank you, Commissioner Fisher. Two responses to that come to my mind. One is, the act follows a process, in large
part to avoid developer abuse by taking deposit money and then either not
building or not building according to the plans and specs or the
representations. So, we have a rule that
until a buyer is given a public offering statement, there can be no binding
contracts to purchase. There can be
nonbinding reservations agreements. We
use those all the time, until the public offering statement is given. Then there can't be a closing until the unit
is substantially completed as evidenced by an architect's certificate or a
CO. So that is part of that. The deposits have to be kept in escrow. The developer can't get her hands on them
until certain events have occurred.
This act would
specifically allow what you just described, that the developer could condition
an offering of units on satisfaction of certain conditions. If those conditions didn't occur, then the
developer could withdraw the offer. That
is not to say that that wouldn't cause problems under the Interstate Land Sales
Full Disclosure Act and other laws and that is not to say that these auction
and auction‑type transactions that are happening all over the country,
given the heat of the market, shouldn't maybe be regulated, but they are not
specifically regulated in this act.
COMMISSIONER HARRY J. HAYNSWORTH, IV
(
It seems to me that a
lot of things we have been talking about, if there is any kind a change, a
significant change in what the deal was or there is a significant change in
what the overall regulatory scheme is, then that is something that the owners
perhaps should reserve the right to vote on or to approve and that the board
shouldn't be given a carte blanche to make rules and regulations that can
affect in some material way what goes on.
I think if you look at
it that way, then maybe you can decide, well, okay, these things are important
enough. If it has to be in a
declaration, fine, if it has to be approved by the owners. Then only other things can be done by the
board, and just sort of parse that through.
The other thing I was
going to say. Commissioner Breetz said that, no, you're not going to regulate what is
inside. But I suggest to you that you
had better rethink that. Health and
safety issues are certainly something that you would be willing to regulate on
if there was some kind of a fire hazard, for example, created by a unit.
I had this come up,
incidentally, in our own unit, because the insurance company took a position
that Christmas trees were a fire hazard and therefore were going to affect the
condo insurance on the overall building.
I think that you've got to be aware of things like that and you've got
to allow for some kind of flexibility in terms of being able to regulate in a
situation like that. And there are other
fire and hazard and health and safety situations that could come up.
COMMISSIONER WILLIAM R. BREETZ, JR.
(Reporter): We certainly agree with the
commissioner. Chairman Lisman made reference to Section 3, (c)(3) on Page 56. The only distinction that the act makes is
the particular document in which the restrictions have to appear. But there is no question that in appropriate
cases the kinds of restrictions you are concerned about could be addressed
either in the declaration or the rules, depending on the interpretation of
(c). No doubt that that is the case.
COMMISSIONER REX BLACKBURN (
I appreciate fully what
problem the committee is attempting to address, but I anticipate if we
eventually get an act and have to take it to the states that we are going to
meet considerable opposition from developers, because to a certain extent it is
restricting their rights and activities.
I fear that they're going to seize on what in a particular instance is a
potential lightning rod.
Here is what I
envision. What do we say, if this were
enacted in its current form, to a legislator who says, do you mean that we
cannot prohibit the display of a Nazi flag in a window in a condominium? We can only make it smaller. Or that we cannot prohibit a political sign
such as we see sometimes on cars, on bumper stickers, that all of us presumably
find offensive, at least in the choice of words, if not the selection of a
particular candidate, that is addressed.
These are things that
are going to be very difficult to answer.
I don't want to have to address those sorts of questions, particularly
in a state like mine where the notion somehow of property rights gains a
politically charged element to it.
I am very sympathetic
to Commissioner Haynsworth's suggestions, that
instead of attempting to address the medium, as you are doing here, perhaps you
can attempt to address the nature of the content in that medium. But I think that is a pretty slippery
slope. The obscenity commission couldn't
do it, and they perhaps had more time and ability than we do in this particular
area.
I think the proper
approach is perhaps to focus on the notice, potential notice that is provided
to both initial purchasers and subsequent purchasers and to consider some of
the entity governance concepts that we see in the unincorporated entity acts,
things like super majority votes, restrictions on the ability to change the
rules of the game during the course of the game if it deals with fundamental
issues. But I think this is going to be
a very difficult concept to sell. Thank
you.
COMMISSIONER WILLIAM R. BREETZ, JR.
(Reporter): Do I understand then, Commissioner,
that you would propose to delete subsection (c)?
COMMISSIONER
The other is to perhaps
require some sort of super majority vote for fundamental changes in the rules
of the game, after the initial disclosure.
COMMISSIONER RAYMOND P. PEPE (
Whether 3‑120 is
necessary seems to me to depend in part upon what is intended by adding the
word "reasonable" in front of "regulations." If on one hand what is intended is to provide
a very broad grant of authority to an association to adopt any regulation that
is reasonable in the constitutional substantive due process sense, then
something like 3‑120 seems very appropriate.
Of course, if you
incorporate substantive due process principles, that means the board can do
anything that isn't so arbitrary and capricious that it shocks the
conscience. On the other hand, if your
intent is to limit the power of a board by requiring rules to be reasonable,
then you may not need 3‑120.
However, if you are going in the direction of saying that rules must be
reasonable, then I think you further need to think about, well, what does that
really mean? Does that mean that, upon
review, it's a question, a legal question for a court to determine de novo
based on a preponderance of the evidence whether or not a rule is
reasonable?
COMMISSIONER CARL H. LISMAN (
That rule was helpful
for two reasons. First, it got courts
out of the business of second guessing at least the rules that were in the
declarations, and, secondly, it cut down on the amount of litigation, because
these started to show up in declarations rather than in rules.
Whether that is the
current state of the law, I can't say in every state, but it's pretty
close. That is why we are toying with
thinking that we ought to add the word "reasonable" in 3‑102(a)(1). As to how 3‑102(a)(1) and 3‑120
relate, we intend them to relate. We may
not have said it very well yet.
COMMISSIONER PEPE: I would commend the committee for going in
that direction. I seems like an
excellent approach. I would urge you to
provide guidance either in comment or in the statute as to the practical
implication of having the word "reasonable" in front of
"rules," because absent some guidance, it, of course, can be
interpreted in vastly different ways. It
seems to me that when you are dealing with rules that restrict the use of
private property rights, that if "reasonable" is intended to be a
broad grant of authority as opposed to a limitation on authority, then
something different than substantive due process standards are appropriate.
It sounds like what you
told me is that you're in fact intending to go in the opposite direction, and
any further guidance you can provide in that direction would, I believe, be
helpful.
COMMISSIONER J. SAMUEL TENENBAUM
(Illinois): Having been an attorney for
developers, for condo members who have sued their associations, having been on
a condo board, having owned a condo that I was subject to what I thought was
unreasonable rules, I have worn every hat that can come into play as a result
of this.
I agree with the last
Commissioner. I think the concept of
putting in the statute a reasonableness requirement is a good one. I think it provides an initial check on
boards that sometimes is not present.
Board attorneys will tell their boards that before you pass a rule, you
need to be reasonable. In my experience
across the board, when people have been reasonable, it actually cuts down on
disputes and lawsuits and things like that.
Second point. One of the other Commissioners mentioned,
well, what if somebody wants to display a Nazi flag? If you live in a townhome
right next to someone where there is no agreement between the parties, you
share a common wall, and that person wants to put a Nazi flag in his window,
you can't stop him. The fact that you
bought a unit in a building I don't think necessarily should change that. There is a sense of neighborliness that has
gotten lost in many of these communities.
You have disputes about security signs, and there is a rationale for
that. There are disputes about what kind
of electronic devices you can utilize because the condo association makes a
deal with a cable company or a phone company.
One of our neighbors
puts up a 12‑foot snowman on his little balcony in our condo at Christmas
time and we all love it. But in another
community, some people might not. But
you know what? It's his balcony and he
wants to have a 12‑foot snowman out there, so we've all decided that's
okay.
It seems to me that the
concept of reasonableness under the circumstances is a good test, because that
covers almost all of the situations that can arise. I commend the committee for going in that
direction, because I think it is important that it be written into the statute
as opposed to having courts grapple with whether it should be the standard or
not.
COMMISSIONER KEVIN SUMIDA (
COMMISSIONER CARL H. LISMAN
(Vermont): In part we think we already
have addressed those types of issues by allowing rules that affect the use of
the common elements and having a hierarchy already for rules as to what can go
on inside a unit and attempted to limit those to the ones in 3‑102(c),
Page 56, which are limitations on rulemaking power on what can go on inside a
unit to the three that are listed there.
COMMISSIONER CURTIS R. REITZ (
If you're looking for
some standard that would apply to common ownership interests regardless of the
physical form they take, I think that also would be misguided. What would be reasonable in one physical
context might not be reasonable in another.
In my view, people like
me, who have elected to have 775 neighbors sharing a building, we know that we
have to give up a lot of freedom in order to make that building work. If all 776 of us decided we wanted to kind of
march to our own drummer, in effect, in how we lived and the way we lived in
that building, it would be chaos. We are
too close. We are too proximate. We share too much in the way of common
elements.
As you move to a more
dispersed community, what might be reasonable or not reasonable by way of
requiring the shrubbery to be trimmed or keeping the grass green or not using
chemical fertilizer, whatever it is, it becomes, to me, a rather different
level of concern, because individuals who buy into that kind of common
ownership have not elected to live cheek‑by‑jowel
with so many other people in such close proximity.
Even a standard of
reasonableness, if it applies across the board, it seems to me, has to be
adaptable to the physical arrangements that people have with each other.
COMMISSIONER LEE YEAKEL (
Part of the discussion
in the committee around that has not been so much based on social issues as
it's been based on the types of issues that have come up in litigation
involving restrictions that impinge on constitutional issues such as religious
freedoms, political freedoms, and your right to sell your property. So that discussion so far centered more in
that regard than on particular social issues.
COMMISSIONER ELLEN F. DYKE (
By the way, there are
many, many organizations where the rules can be changed by a board of
directors, because that is the power that is given to the board but not
necessarily by the owners or the members of that association to overrule those
rules. So, there is kind of a play and
tension through all this.
COMMISSIONER KEVIN SUMIDA (
COMMISSIONER JAMES M. BUSH (
CHAIRPERSON NIXON: I am not sure he heard you, Commissioner.
[Laughter]
COMMISSIONER BUSH: With respect to the word
"reasonable," I am not sure whether there is something about this
subject that seems to require the term "reasonable" to be applied
more than I have seen it in other acts of this Conference. But we have reasonable rules and
regulations. It seems to me that when
somebody is given the authority to adopt rules and regulations, it seems
implicit that they would be reasonable.
But I find in here we have reasonable rules, we have reasonable charges,
we have reasonable fines. Why not
reasonable budgets?
I agree with the Commissioner who spoke a few minutes
ago. It doesn't seem to me that adding
the word "reasonable" does much to clarify things, but just creates further
problems.
Section 3-102 (a) (1) – Powers of the Association –
Investment
of Reserves/ Prudent Investor Rule
COMMISSIONER
CARL H. LISMAN (
I represent associations that have multiple of
millions of dollars in reserves from time to time as well as associations that
might not have a hundred dollars in the bank.
The whole issue of reserves, fiduciary obligations to create them,
maintain them, grow them, and sustain them is a separate issue. But the fundamental issue here is the Prudent
Investor Act. Any thoughts?
CHAIRPERSON
NIXON: Comments from floor? Seeing none,
we will move to the next section.
COMMISSIONER LISMAN: ****
We are looking at
Section 3‑103(a). And again to set
the stage, the issue here is, regardless of the form of entity of the
association, should the obligations of the members of the executive board and
the officers be the same?
This section has
already been amended once in 1994, when we added the sentence that begins on
Line 5, where we incorporated by reference the fiduciary obligations of the
Nonprofit Corporation Act.
We are now proposing to
add on Line 8 and 9 what some of us already thought was there, that the
fiduciary obligations included the conflict of interest rules. But the relevant issue for you is on Lines 9
and 10, that if the association is formed as an LLC or a trust or a limited
partnership or as unincorporated, the duties of loyalty and care flow from the
Nonprofit Corporation Act.
COMMISSIONER REX BLACKBURN (
Do they supplant other
standards of care and loyalty that may be expressed in different statutory
forums that are applicable specifically to the type of entity, or do they
augment them?
COMMISSIONER LISMAN: No.
They supplement. As currently
proposed, they would supplant.
COMMISSIONER
I am not certain that
you have captured all of the standards of care and loyalty that are embodied in
the various unincorporated association acts or entity acts that the Conference
has adopted. So, I would urge the committee
during the next year to evaluate whether you really want to supplant those or
whether you wish to identify those standards of care and loyalty that are
specific to entities engaged in these sorts of activities and have them simply
be augmentive.
Thank you.
COMMISSIONER HARRY J. HAYNSWORTH, IV
(
COMMISSIONER WILLIAM R. BREETZ, JR.
(Reporter): The issue, of course, that
confronts us is if two associations are performing essentially the same
function, one is organized as a nonstock corporation,
one is organized as a limited liability company. If the statutory standards of care were
different in those two, one could argue, well, that's a choice that the declarant made and there should be different consequences
that flow. On the other hand, if they
are performing essentially the same function, the concern of the committee is,
shouldn't they be held to the standard of care?
That is the tension we are dealing with.
COMMISSIONER HAYNSWORTH: Analytically, if you analyze the statutes of
all the incorporated, unincorporated entities except for the Nonprofit
Association Act, unincorporated ones, they all get to the same point. They all have basically the same standards,
although they are worded differently.
Now, when you get to
the unincorporated nonprofit association, there are no standards that are in a
statute. However, I would submit to you,
there are common law principles that would apply that would get you to the same
place.
So, I don't think
you're talking about much difference.
Now, where you could get into some discussion is, well, under all of
these acts, including the corporate act, you can waive and modify to some
degree these, quote‑unquote, fiduciary duties, and that is an issue I
know that you, Commissioner Breetz, happen to feel
very strongly about, but they would be allowed under any of these
statutes. The way you have worded this
wouldn't prevent that either.
COMMISSIONER BREETZ: That is an interesting philosophical question
perhaps you and I can share a cocktail over.
COMMISSIONER HAYNSWORTH: And I would oppose any attempt to try to
prevent that from happening as well.
CHAIRPERSON NIXON: Seeing no other comment from the floor, we
will move to the next section.
COMMISSIONER CARL H. LISMAN (
As I said earlier, all
the associations that are covered by the acts have a statutory lien for unpaid
assessments charges and interest costs, legal fees and so forth. The act gives the association the power to
foreclose that lien historically by reference to the foreclosure law of the
state of the situs of the property.
For those of you who
watch the television news, slash, entertainment programs or read newspapers
that like to focus on excess and sensationalism, you have read or heard dozens
of stories in the last two or three or four years of people who have lost their
home because they failed to pay assessments to the association in small
amounts.
There is legislation in
a number of states now that prohibits or attempts to prohibit or restrict or
attempts to restrict associations from taking people's homes for small amounts
of money or nonpayment of assessment.
These people generally defend on the ground that they didn't understand
that they were delinquent or they didn't know the consequences of nonpayment,
including the woman who was a major investor in real estate who was a cause celebres in
introduced there.
The issue that is
before you on Page 83 is whether and to what extent this act ought now to build
in protections not by reference to the state's otherwise foreclosure law, but
to deal specifically with foreclosure of an association lien for
nonpayment. What you see in italics on
the bottom of 83, the top of 84, is what we are talking about. Any reaction?
COMMISSIONER WILLIAM R. BREETZ, JR.
(Reporter): Let me add a few more
factors that I think make this a big issue for the committee. First of all, in many of the states that this
issue arises in you have nonjudicial foreclosure, so
there is no judicial supervision of the sale.
A number of the cases that have arisen have been transactions in which,
as Carl suggests, the amount of the foreclosure, the amount for which the lien
is being foreclosed, is a nominal sum compared to the true fair market value of
the property and there was no requirement for a commercially reasonable sale, a
result that has been changed in Vermont, as the comment suggests, but that is
not the case in a number of these reported decisions.
Another couple of
factors that are significant are that there are alternative means of seeking to
enforce the lien. You could, for
example, require a suit on the sums due rather than as a condition of seeking
foreclosure.
The third thing, of
course, is that the act imposes a super priority for the association's lien for
at least the first six months of common charges. The effect of that is that if the
association's lien really is foreclosed in a nonjudicial
foreclosure, the underlying bank mortgage also gets wiped out. Some of us think that is just a silly
outcome, but then if the banks don't protect themselves, shame on them.
These are some of the
factors that come into play as the committee considers what to do.
COMMISSIONER HARVEY A. FELDMAN (
CHAIRPERSON NIXON: Is the committee clear on that comment?
COMMISSIONER CARL H. LISMAN (
COMMISSIONER J. SAMUEL TENENBAUM (
The second is that I
would not do anything to get rid of the association's super priority. I think that it serves a very useful and
important function for associations and provides a very important protection,
and, frankly, a mortgage holder, if somebody owes $1,000 in assessments, a
mortgage holder has a significant mortgage on the property. They should be willing to protect that
interest.
COMMISSIONER WILLIAM R. BREETZ, JR.
(Reporter): We agree.
COMMISSIONER HARVEY A. FELDMAN (
COMMISSIONER CARL H. LISMAN (
CHAIRPERSON NIXON: Seeing no other comments from the floor, we
will move to the next section.
COMMISSIONER LISMAN: Now we are going to jump back to Page
53. I apologize for bouncing you around
here. This is the authority of the
association in 3‑102(a)(4), which appears on Lines 9 through 11 on Page
53.
The history is that
under the old FHA model act, the association could sue in the name of two or
more unit owners and maybe or maybe not in its own name. As the condominium world was in its infancy,
there were lots of defenses to suits, saying that the association, because a
condominium association owns nothing, had no standing to sue, save for a defect
in the common elements. So that
historically, 3‑102(a)(4) was an empowerment provision to make it clear
that associations do have standing to begin, defend, terminate, intervene in
litigation now, and arbitration as well.
The issue has now sort
of turned itself on its head. It would
be inappropriate for me to say that there is a condominium bar in many states
who make a considerable amount of money collecting assessments. There are reported cases from
To commence litigation
against the developer is a separate issue.
To commence litigation to foreclose an assessment lien. It was proposed in
We hear an awful lot
about boards willy‑nilly spending association money in suits which if the
membership were asked would say, we just don't care about the outcome of
that. Why are you even bothering to sue?
So the question that is
before you now, to the extent that you have a position, is, should we rein in
the power of the board and vest some of the power in the membership when it
comes to the subject of litigation and arbitration?
CHAIRPERSON NIXON: Any comment from the floor? Commissioner Tenenbaum.
COMMISSIONER J. SAMUEL TENENBAUM (
It seems to me that is
one way that you provide some level of control over what litigation the
association gets involved in.
COMMISSIONER WILLIAM R. BREETZ, JR.
(Reporter): I share your experience that
that in fact is a practical limitation.
I know that to be true. But this
has been a subject, as Carl suggested, that has arisen in various contexts, and
that is certainly one possible response.
CHAIRPERSON NIXON: Seeing no other comment from the floor, we
will move to the next section.
COMMISSIONER CARL H. LISMAN (
Is there any sense that
what (g) ‑‑ "proposes" is not necessarily the precise
language" ‑‑ is bad policy?
CHAIRPERSON NIXON: The chair sees no comment from the
floor. Do you want to move to the next
section.
COMMISSIONER LISMAN: Page 67, 3‑108(a). We think that (a) currently says that
regardless of the decision that is made by the executive board, the membership
of the association at a special or general meeting can always overrule it,
which we think is an important safeguard to those who feel oppressed by the
board. Do you think we need to be more
explicit about that?
CHAIRPERSON NIXON: I see no comment from the floor. We will move to the next section.
COMMISSIONER LISMAN: I will call then to your attention (b), (c)
and (d) of 3‑108, since we are there.
Again, provisions that we are proposing that require in (b) that there
be meetings of the executive board, that agendas, schedules of those meetings
be given to the owners, and that agendas and times and places of meetings be
given to owners and an opportunity to be heard at board meetings, which is what
sub (d) says.
Many associations
consider it best practices to have a 10‑minute or 15‑minute or half‑hour
time slot at the beginning of every board meeting for any unit member to stand
up and speak. No action can be taken
during that time period, but they get a chance to vent, and sometimes that is
good, and they get a chance to bring ideas, and sometimes that's good. But not all associations do that. Sub (d) would require it.
I have in mind
Commissioner Reitz's comments about the great diversity of associations. Understand that there are associations now in
the
COMMISSIONER GENE N. LEBRUN (
COMMISSIONER LISMAN: We have a general provision in Article 4 that
gives a cause of action to any person who is injured by a violation of the act
and authorizes a court to give appropriate relief, including awarding of
attorney's fees.
COMMISSIONER LEBRUN: Just to follow up. I am assuming that any action taken would not
be void or voidable as a result of such failure.
COMMISSIONER LISMAN: That is a good point. We haven't fully discussed that, but we
will.
COMMISSIONER LEBRUN: Thank you.
COMMISSIONER HARRY J. HAYNSWORTH, IV
(
COMMISSIONER WILLIAM R. BREETZ, JR.
(Reporter): We think we covered it on
Line 4 of subsection (d) on Page 68 by permitting executive sessions in regard to
personnel matters.
COMMISSIONER HAYNSWORTH: Okay.
Personnel matters relating to the condominium. That would answer that question. But are there other circumstances under
freedom of information laws where there are exemptions for executive sessions? Maybe just look at that a little bit.
COMMISSIONER BREETZ: We will be glad to do that.
COMMISSIONER NORA WINKELMAN (
COMMISSIONER BREETZ: Thank you.
COMMISSIONER J. SAMUEL TENENBAUM (
COMMISSIONER BREETZ: What guidance would you suggest for us,
Commissioner? You're not going to make
us do all that work. [Laughter]
COMMISSIONER TENENBAUM: If I knew, I would tell you.
COMMISSIONER HARVEY A. FELDMAN (
COMMISSIONER BREETZ: Interesting idea. Thank you.
COMMISSIONER
COMMISSIONER BREETZ: Commissioner, on Page 86, a section which we
haven't yet turned to, on association records, the comment there suggests that,
quote, "the committee as a matter of policy wishes to ensure that minutes
of all minutes must be kept."
COMMISSIONER FISHER: How would that affect the executive sessions
that you list there?
COMMISSIONER BREETZ: We don't have any provision in the documents
yet with respect to that. I think common
practice is for executive session minutes to be confidential, but the act as
drafted today does not have any provision on that subject.
COMMISSIONER FISHER: My question is, would there be a requirement
that minutes be kept even if they are not distributed, of executive
sessions?
COMMISSIONER BREETZ: I think we haven't addressed the executive
session piece yet.
COMMISSIONER CURTIS R. REITZ (
We recently entered
into a contract with a new cable provider that took a lot of effort on the part
of the board. If that had been
negotiated or discussed in the open, I can't believe it ever would have been
concluded. So I just urge you to look
again at that list.
The other point I would
make to you goes back to the question, what is a meeting? In my condominium, the practice has been for
many years, the board meets at least once a month in private and at least once
a month there is an open meeting where the residents can raise, for an
indefinite amount of time, not limited by the other agenda of the board, any
issues that concern them. This practice
has worked well in our building. So, we,
in effect, have bifurcated the meeting.
There is an open meeting and a closed meeting every month.
As I read the draft,
what we are doing would not be permitted under the language you have, unless
there is something about a meeting that I don't understand. It seems to me that a lot of condominium
business, at least in a building like the one I live in, is pretty complicated
business that has to be done with some discretion and could not be done with
all 776 of us kibitzing at the negotiating table.
COMMISSIONER DAVID D. BIKLEN (
COMMISSIONER REITZ: I am sorry.
I didn't see that. I thank
you.
COMMISSIONER SUE ANN DERR (
COMMISSIONER WILLIAM R. BREETZ, JR.
(Reporter): That is a fair subject. We appreciate you calling it to our
attention.
COMMISSIONER NORA WINKELMAN (
The other side of it is
that the quorum issue, the quorum provisions ameliorate some of that, but they
wouldn't help his situation, but government officials who deal with the
sunshine act always have to worry about whether they all got together for lunch
and they had a quorum. And they have to
be careful what they talk about. That is
just a matter of life in the public life.
I wonder whether to
address some of these what is a meeting issues you might look at sunshine act
provisions to see if you can incorporate some of those requirements.
COMMISSIONER DONALD MIELKE (
CHAIRPERSON NIXON: Thank you.
Seeing no further comment, we will move to the next section.
COMMISSIONER CARL H. LISMAN (
We have always had in
these acts an Article 5 on establishing a state agency with authority to
approve, to review and approve public offering statements, the constituent
documents, and so forth. No state that
has enacted any of these acts has ever enacted Article 5. There are all the fiscal issues that come up
with a state agency, creating a new agency, grafting the responsibility on to
another agency. But for the first time
there is some traction to the idea that a third party mediator might go a long
way to resolving the perception, if not the reality, of oppression.
Commissioner Sterling
from
So, two questions for
you. Does this make any sense
politically? The second question is, if
it does, is this the best way to get to a solution to this problem?
COMMISSIONER HARRY J. HAYNSWORTH, IV
(
I think this is
probably true in many, many states where there is no recognized mechanism for
getting any kind of an expedited hearing so that you can fork through these
problems.
COMMISSIONER WILLIAM R. BREETZ, JR.
(Reporter): You know if you were in
Judge Yeakel's court, who sits on this committee, he
would tell you, I think he will tell you today, that he is perfectly able to
resolve these in an expeditious way and we don't need this arbitration
business, that courts are intended to resolve disputes and, by God, in Texas,
that is what they do. [Laughter]
COMMISSIONER BREETZ: Now, Lee, do you want to add to that thought?
COMMISSIONER LEE YEAKEL (
COMMISSIONER REX BLACKBURN (
That said, if we go in
front of the legislature, at least in my state, and we ask for a tax of any
kind, it is problematic. I would
encourage the committee to pursue it, draft a provision, and bracket it as an
alternative that would be available to those jurisdictions that are more
progressive than mine. Thank you.
CHAIRPERSON NIXON: Commissioner, the chair is advised that we
need to limit debate. I am going to
limit each commissioner to one minute.
COMMISSIONER ELIZABETH KENT (
COMMISSIONER
COMMISSIONER NORA WINKELMAN (
COMMISSIONER JOAN ZELDON (
CHAIRPERSON NIXON: Mr. President, the Committee of the Whole
rises and reports that it has had under consideration amendments to the Uniform
Common Interest Ownership Act, has progress and asks leave to sit again.
PROCEEDINGS IN THE COMMITTEE OF THE WHOLE
Reported by:
RICHARD S. ADAMS
(417) 742‑3817