COMMENTS TO
AMENDMENTS TO UNIFORM COMMON INTEREST OWNERSHIP ACT
GENERAL PROVISIONS
DEFINITIONS AND OTHER GENERAL PROVISIONS
Proposed Comment
REF: Page 11, ¶ (31) “Rule”
The definition of “Rule” distinguishes between rules “governing conduct” – which ought to be the subject by unit owner review before adoption – and procedures governing internal management of the association's business activities that the board or management company might adopt or amend at will.
Here are a few examples of the latter:
• The association is soliciting bids from potential contractors for a particular project
or service and adopts a procedure for soliciting, reviewing and accepting bids.
• The board approves a management contract with an outside management company. The management contract is full of procedures governing how the manager is going to carry out its duties with regard to the management of the association.
• The recreation committee adopts a sign-up procedure for using the pool table in the clubhouse.
Pasadena Floor Comment
REF: p. 14, [§ 1-104]
With all deference, an agreement cannot waive what the legislature has enacted. The UCC (of course) says the “effect” of its provisions may be waived, however. Let’s not spend floor time on this. (Fred)
Reporter's Comment
REF: Page 24, SECTION 1-209
This new section addresses once again the continuing issue of the scope of the Act. It should be considered in connection with the revised definition of “Common Interest Community” in Section 1-103 (9) [REF, Page 8].
The three sub-sections address 2 separate aspects of this issue:
1. whether contractual arrangements for cost sharing between two or more common interest communities requires creation of a third separate common interest community; and
2. whether contractual arrangements for cost sharing between an association and an owner of real estate located outside the common interest community’s boundaries requires creation of a separate common interest community.
The following analysis helps frame the issues posed in sub-sections (a) and (b).
There are numerous situations in which a declaration of easements or a covenant to share costs would suffice to establish the relationship between two parcels without the need to establish another association in which all the property owners are members to “manage” that relationship. Also, the sharing is not always a matter of shared use -- it might be a shared concern for maintenance of public rights-of-way through a community, or shared benefit of a roving security patrol, or sharing of costs of street lights on thoroughfares.
Here are some examples of common situations:
1) The homeowners association maintains the entry features, median and right-of-way landscaping, and sidewalks along a public street that also serves a commercial parcel (e.g., hotel or country club). The developer wants the hotel or country club to be obligated to pay a share of the costs that the association incurs in performing this maintenance, so he records a declaration on the club or hotel parcel with a covenant obligating the club/hotel to share costs incurred by the association in performing this responsibility and setting out a formula for computing its share. If both parties are agreeable, no purpose is served by another association.
2) Same situation except that the hotel is performing the maintenance instead of the association. The association is obligated under the covenant to share the costs to pay its share and a formula is set out in the covenant for computing the association’s share, which it then includes in its common expense budget and collects as part of its regular assessment, and pays to the hotel. Why do we need another association in which the property owners and hotel are members, with organizational documents, contracts, meetings, etc., to deal with this? The hotel doesn’t want to be subject to membership in an association controlled by other property owners. The existing association can adequately represent the interest of its members in dealing with the hotel.
3) Assume a vertical subdivision with a commercial parcel on the ground floor and a 15-story residential condominium above it. There is a recorded instrument creating reciprocal easements, obligating the condominium association to insure the entire building, among other things, and obligating the commercial owner to share certain costs incurred by the condominium association in accordance with a formula set out in the recorded instrument. Again, if the parties accept this arrangement, no purpose is served by mandating creation of another association.
4) Four residential condominiums share a common road. The first association to be created is responsible for maintaining the road. Each of the other three, at the time it is created, is made subject to a recorded covenant to share cost requiring it to pay 1/4 of the cost that the first association incurs in maintaining the road. Do we really need to create a master association to own and maintain the road?”
Basically, sub-section (a) makes clear that in the case of arrangements between associations, a separate association would not be required so long as the arrangement has not been entered into for purposes of evading the Act and so long as an allocation of costs between associations created by affiliated developers are reasonable.
In the case of arrangements between associations and third parties other than associations, sub-section (b) avoids the need for a separate association so long as the costs to be borne by the unit owners in the existing association are reflected in the periodic budget for the association and are subject to approval by the unit owners.
Reporter Notes (04/07)
REF: Page 24, SECTION 1-209
One commentator writes regarding Section 1-209:
“I agree that there are a number of cost sharing arrangements which should not be deemed to create additional common interest communities. However, I have some reservations about Section 1-209 as it is presently drafted. These are as follows:
1. The exemption applies both to agreements created by unit owner controlled associations acting in the best interests of the unit owners and to agreements created by declarants, whose primary motivation is profit. The limitation, at the end of 1-209(a) that the cost allocation be “reasonable” is not sufficient to protect the unit owners.
2. Cost is not the only concern of unit owners and their associations when it comes to sharing in the use of, and the expenses for, other land. In Connecticut, we have a number of situations, most of them dating back to before the adoption of UCIOA, in which developers would include amenities, such as clubhouses, swimming pools and tennis courts, as well as access roads, etc. in one community and then grant to a second community the right to use the facilities together with the obligation to pay a pro rata share of the cost of operation. The decisions concerning the operation and maintenance of the facilities, however, remain with the first community. These arrangements frequently breed frustration and acrimony, if not outright abuse. UCIOA, especially in some of the proposed amendments, recognizes the importance of giving unit owners their say, even on issues where the actual vote is to be taken by others. Surely this provision should apply as much to the operation and maintenance of real estate serving the community and paid for by the community as it does to the common elements.
3. If these arrangements are not considered to create a common interest community, the parties are left to the common law of easements, which, in many states, may not address a number of the issues that frequently arise, and there is no forum in which to address them other than litigation.
4. Several of the examples given in the comments illustrate, although I think inadvertently, the problems with the section. Comments 1 and 2 suggest that when a residential association and a commercial venture such as a hotel share certain common facilities and expenses, the hotel is as likely as not to defer to the association for the operation of these amenities as the other way around. In my experience, the hotel always wants to control everything. Since the hotel developer, if it is not the declarant itself, usually has a seat at the table while the overall structure of the community is being negotiated, while the individual unit owners do not, the hotel negotiates the deal it wants, often to the detriment of the unit owners. The deal as it is finally structured may contain some sort of a “reasonable” formula, but the control, decision making, etc., including the level of maintenance desired, will remain with the hotel.
5. I have had only limited experience with vertical mixed use common interest communities. In the few I have encountered, the commercial owners and the residential owners are often at loggerheads. Disputes arise out of situations that the declarant failed to anticipate when it prepared the documents. Sometimes they apply to circumstances that the declarant could not have anticipated. The commercial owner, which is usually a sophisticated real estate operator, speaks with one voice and has significant resources. The residential owners are already at a disadvantage. Denying them all the benefits of a community association structure, and the procedural safeguards and protections of the Act will only exacerbate the problem.
6. The comment concerning (b) seems to assume that the agreement with the other owner will not require the association to spend any money unless the expenditure is included in a budget approved by the unit owners. I am not sure how an adjoining property owner could enter into a shared cost agreement if the other party to the agreement could, in any given year, by a vote of its unit owners, refuse to pay its share of maintenance. If this provision were made clear in the easement agreement, I doubt any adjoining owner would participate.
CREATION, ALTERATION, AND
TERMINATION OF COMMON INTEREST COMMUNITIES
SECTION 2-107. ALLOCATION OF ALLOCATED INTERESTS.
New Comment
[to be added as a new paragraph following the last sentence of existing Comment 2]
REF: Page 32, [§2-107 (b)]
Questions have arisen concerning the drafters’ intent regarding the language in subsection (b), which prohibits the declaration from “discriminating in favor of units owned by the declarant.” Specifically, the question is whether this section imposes a special level of scrutiny on the allocation of votes and common expense liability to units that the declarant may own, compared to similar units that are owned by persons who are not declarants.
The answer is that the language means what it says: that is, if the allocated interests would change at the time the declarant sold the unit, then the allocated interests are improper because they discriminate in favor of the declarant’s ownership of that unit. However, if the allocation of common expenses and votes is permanent rather than dependent on the owner’s identity and one whose formula is identified in the declaration, then the allocation is proper. Subject to the obligations of good faith in Section 1-113 and the prohibition on unconscionable terms in Section 1-112, this would be true even if the effect of the allocation were to create a relative benefit in favor of units that the declarant or its affiliate intended to own for an indefinite period.
Example: A common interest community consists of a high-rise building containing 10 floors of equal size. There are 4 units on each floor except the top floor, where there is only 1 ‘penthouse’ unit. Even though the penthouse unit is four times the size of the units on the 9 other floors, and is clearly more valuable than the other 36 units, the declaration allocates an equal share of the common expenses to all the units, including the penthouse unit. The effect of this allocation is that the penthouse unit bears a 1/37th share of the common expenses - this is only 25% of the cost – on a per square foot basis – of the share borne by each unit owner on a lower floor.
Assume that the declaration properly contains the formula used for the allocation of common expenses among the units and properly discloses the material and unusual circumstance that the penthouse benefits substantially from the formula used to allocate expenses.
The fact that the declarant intends to retain ownership of the penthouse unit and live in that unit does not mean that the standard contained in section 2-107 (b) has been violated. However, the Act would be violated if the declaration provided that, upon the declarant’s sale of the penthouse, the formula for allocating common expenses would be changed to an allocation among all the units based on their relative sizes.
In the example, this appears to yield an unjust result and a court might be invited to consider the extent to which the declarant had acted in bad faith or unconscionably in making such an allocation. Nevertheless, any other rule would simply encourage challenges to any allocation of common expenses, since an argument can always be made that any allocation – whether done on relative size, number of rooms, “value’, location within a building, equality or any other basis - inevitably works to the relative disadvantage of some owners compared to others in the same community.
SECTION 2-117. AMENDMENT OF DECLARATION.
Reporter Note (04/07)
REF: pp. 43 and 44, [§2-117, (i) and (j)]
Subsections (i) and (j) are adapted from the Connecticut version of this Act, codified as C.G.S. § 47-237.
A version of subsections (i) and (j) has proved extremely useful in Connecticut. This draft expands the Connecticut statute by applying those provisions not only to communities created under UCIOA, but to pre-existing communities that now fall partially under the Act. Some of the most difficult mortgagee consent provisions can be found in the documents of older communities. These made some sense in the earlier days of development when most unit mortgages were held by local financial institutions concerned that unit owners might routinely adopt irresponsible amendments. However, now that most mortgages are held by distant entities unable to respond to requests for needed amendments in a timely way, these provisions frequently hamstring communities as they seek to adopt necessary changes in their documents.
MANAGEMENT OF THE COMMON INTEREST COMMUNITY
Pasadena Floor Comment
The A.L.I. has an ongoing project on principles relating to charities/nonprofits. A draft volume on governance is available. The draft principles go a bit further than the ABA nonprofit act.
You may want to get a copy from the ALI office in Phil. – K. Burnett - Maryland
SECTION 3-101. ORGANIZATION OF UNIT OWNERS' ASSOCIATION.
Pasadena Floor Comment
I think this Act needs a “Relation to Other Laws” provision (presumably a new section 3-101(b) or 3-102) that states this act/article is intended to supplement existing entity laws and be read consistently with them but in the event of any irreconcilable inconsistency this act/article shall control.Densborn - Indiana
New Comment
The Act restricts membership in the association to those persons who are ‘unit owners’ as that term is defined in Section 1-103 (32). This rule should be considered together with three other provisions of the Act: (i) the requirement in Section 2-101 (b) that at least in a condominium, a unit may not be ‘created’ until the structural components and mechanical systems of that unit are completed; (ii) the provision in Section 2-107 (b) that the declaration must allocate votes and a share of the common expense liabilities to each unit pursuant to formulas that do not discriminate in favor of units owned by the declarant; and (iii) the restriction in Section2-117 (d) that the allocations of votes and common expense liabilities to the units may not be amended except by unanimous consent of all the unit owners.
Taken together, these sections seek to avoid the potential for either intentional developer overreaching – by, for example, allocating more votes to units the declarant owns in order to extend control of the association beyond the timeframes allowed under the Act in Section 3-103(d) - or inadvertent uncertainty in failed projects as a result of allocating votes and common expense liabilities to ‘ghost’ or ‘paper’ units that are never built. Rather, the philosophy of the Act is to make certain that only persons with an actual economic interest in a ‘real’ unit will have a vote in the affairs of the association and that the patterns for voting and allocating the relative costs of maintaining the community’s property will not be subject to developer abuse.
This does not mean that the declarant should not or cannot participate in the activities of the association. First, it is clear under Section 2-110 (a) that the declarant is the initial owner of every unit when it is created. Accordingly, until that unit is sold, the declarant is a ‘unit owner’ and has the same rights to participate in the capacity as a unit owner as would any other person who owned that same unit.
In addition, the Act recognizes the unique role of the declarant during the development phase, and the expectations of the declarant’s lenders that the development can be constructed in accordance with the plans, free from the risks of interference by other unit owners and the association. Accordingly, the Act includes the important concepts of “Development Rights” [Section 1-103 (14)] and ‘Special Declarant Rights” [ Section 1-103 (29)]. Among the significant special declarant rights is the right to control the owners association during the time reasonably necessary to control the project and sell the units. [Cite to Barclay v. Deveau.] Taken together with the substantive provisions of the Act governing those concepts, the Act makes clear both that the developer will be meaningfully engaged in every aspect of the Association’s and the projects activities during the time when development is underway, and that the unit owners themselves will be free of the developer’s control at the appropriate time.
SECTION 3-102. POWERS AND DUTIES OF UNIT OWNERS' ASSOCIATION.
PASADENA TRANSCRIPT
Section 3-102 (4)
COMMISSIONER DONALD JOE WILLIS (Oregon):
I have a question on 3-102(4), the language at Line 28 [p. 56, line 2] where you provide authority for intervention and litigation and stuff in administrative matters. You use the term "on matters affecting the common interest community." Common interest community is a defined term. Did you intend to do anything to expand or try to contract prevailing law on standing issues to participate in either administrative proceedings or create a case or controversy if there is a constitutional obligation for that?
COMMISSIONER CARL H. LISMAN (Vermont):
The answer is no, we did not intend to change the scope of this provision from how it was originally first written in the 1977 Condominium Act. We have just carried it through. The only qualification here is now a reference to suits involving the developer.
COMMISSIONER WILLIS: We would still look to existing law and whatever it is in thestate, if your state law is different on standing issues. Perhaps that would answer the question.
COMMISSIONER LISMAN: That is correct.
COMMISSIONER RANDOLPH I am very pleased with Commissioner Lisman’s answer……. I am bombed by e-mails from dissatisfied homeowners engaged in disputes with their boards…..
It's in that spirit that I ask some questions here with respect to subsection (f). I note that in your citation to the comparison, New Jersey statute, the New Jersey statute addresses the question of whether unit owners are permitted to bring their own lawsuits in the event that the association elects not to bring a lawsuit to enforce the rules or regulations or declaration or other provisions. I don't see anything in your subsection (f) that deals with that. Is that dealt with elsewhere in the act? With a quick look I could find that. Do you leave that to the declaration?
COMMISSIONER WILLIAM R. BREETZ Commissioner, in Section 4-117 there is a provision that says that anyone who feels that there has been a violation of the act (or the declaration or bylaws) has the right to bring a suit for appropriate relief…..It would be my judgment that the fact that an individual homeowner was aggrieved by the fact there had not been an enforcement of a rule would have the right under that section to independently seek to enforce it.
COMMISSIONER RANDOLPH: Thank you.
Partial New Comment
REF: Page 59, [§ 3-102 (f)]
In drafting new sub-section (f) the Committee addresses an issue perceived as a significant problem by some commentators and activists in the field – the question of the Association’s authority to either ‘selectively enforce’ its rules or its obligation to enforce the rules to the letter in every instance, at the risk of being found by a court to have waived its right to enforce the rules in some instance as a consequence of its failure to enforce the rules in other instances.
As it considered its position, the Committee considered this hypothetical series of examples.
Happy Acres is a community of 200 side-by-side townhouses, in the town of Happy, Arizona. The units are located in 10 separate buildings; each unit has an assigned single car garage with an overhead door in a separate garage building. All roads within Happy Acres are private roads owned by the Association.
The Executive Board has long had a properly adopted rule that reads as follows:
“The display of any commercial advertising anywhere within the common interest community that is visible outside the units and the installation of satellite dishes for television reception, are strictly prohibited.”
Assume further that these possible violations of the rule come to the attention of the executive board:
1. Owner A owns a small pick-up truck with lettering on both doors that reads: “Call A’s Landscaping Services, Happy Arizona, tel. 402-777-5432.” For 3 years, A has driven her truck to and from work every day, and parks it in her garage, closing the door every night. No one has complained but everyone knows about the truck.
2. “A” buys a new car, but keeps her old truck. Since she only has one garage, she has taken to parking the new car in the garage, and leaves the truck parked in the driveway in front of her garage unit.
3. Owner B’s son owns a red sweat shirt with a very loud logo on both the front and back that reads: “Party at the Soft Rock Café”. He regularly walks to the Association’s swimming pool wearing that shirt and carrying a ‘boom box’ playing loud ‘hip hop’ music. Several retired lawyers regularly play cards around the pool; they do not care for either the sweatshirt or the music.
4. Owner C owns a real estate brokerage firm and specializes in selling units at Happy Acres. For every listing, “C” installs a sign post on the unit’s front lawn reading: “FOR SALE – Call C’s Brokerage – Your Neighborhood Broker”. The signs are small and quite tasteful. He has been doing this since before the rule on ‘no commercial advertising’ was adopted. At first, it was only 1 or 2 signs; today, there are 11 such signs, all over the complex. C is a member of the Executive Board.
5. Owner D is a competitor of C; he is not a member of the Board. When he secures his first listing at Happy Acres, he installs a sign on that front lawn that is three times the size of C’sign; it reads “D is D Broker for You – call 402-777-1234.”
6. After the Executive Board orders D to remove his advertising sign, D complains to the Board about C’s 11 existing signs and demands that the Board order C to remove his signs.
7. Owner E, also a member of the Executive Board installs a satellite dish without action taken to force its removal. When Owner F seeks to do the same, the Executive Board orders its removal.
In evaluating the alternative outcomes here, the extreme positions are clear. On the one hand, one could assert that the Board’s obligation is to strictly enforce or attempt to enforce every alleged breach of the rules, so that the board can never be accused of selective enforcement, favoritism, or waiver.
On the other hand, the board could be held free of any obligation to enforce at any time, without in any way constraining its ability to enforce the same rules at a later time against the same or different persons in those cases where the board decided it would do so.
In the middle is some rule of law that would guide the Board’s exercise of discretion. There are a number of theoretical standards that might guide the Board’s discretion; they include: (i) the ‘business judgment rule’; (ii) arbitrary and capricious; (iii) reasonableness; (iv) bad faith; (v) discriminatory or other improper purposes; (vi) “best interests of the association”; (vii) “good cause”; and (viii) perhaps the notion that the law does not care about insignificant matters.’
There have been legislative proposals in various states in response to the issue of discretionary rules enforcement, although there is no consensus position. For example, a 2005 bill in New Jersey provided as follows:
“Notwithstanding…, any other law or the association’s governing documents, an association shall not be required to enforce a violation of a rule, regulation or covenant when an association, its employees or agents cannot, in the ordinary discharge of their functions, objectively determine that a violation of such rules, regulations or covenants exists or where the association reasonably determines that enforcement would be imprudent, impractical or unduly burdensome, provided that the failure to enforce a violation would not have (i) a material detrimental impact on the value of some or all of the units; or (ii) impair the general welfare of the owners. Nothing herein shall prohibit an association from enforcing a violation that it is not required to enforce…. Any unit owner may enforce the rules, regulations or covenants of the association through an action filed with a court of competent jurisdiction, or by alternative dispute resolution proceedings in accordance with.... Any association refusing to enforce an alleged violation of a rule, regulation or covenant pursuant to the terms of this section shall have no liability to any unit owner or third party.”
Proposed New Comment
REF: p. 66 [§3-106] and p. 97 [§3-120].
New comments will address how bylaws must be consistent with §3-106, and rules with §3-120.
The definition of “bylaws” notes that the document for a particular common interest community need not be identified by that name. For example, if the association for a common interest community were organized as a limited liability company, the bylaws for the association might appear in the form of an operating agreement. However, regardless of the name of the instrument, this Act mandates the minimum contents of the bylaws or, in this instance, the operating agreement; see Section 3-106. Any provision of the State’s statutes governing the content of the bylaws or, as appropriate, the operating agreement, to the extent inconsistent with the requirements of Section 3-106, would be subject to this Act; see Section 1-108.
Draft Comment
RE: Applicability of Uniform Prudent Investor Act
The Uniform Prudent Investor Act, as drafted, would not apply to the association’s investment of reserves. The Drafting Committee has considered the question of whether UCIOA should be amended to require that the principles imbedded in UPIA should be applied to association boards; for the reasons stated below, we conclude that it should not so apply.
The drafters understand from anecdotal evidence that the reserves of most common interest community associations, as a matter of practice, are invested in cash or near-cash (i.e., short term bond fund) equivalents.
The UPIA by its terms applies to trust investing. It is the nearly universal practice for associations to be organized as corporations or – occasionally – other forms of business entities but rarely as trusts. In these cases, the business judgment rule rather than the prudence norm of trust law applies.
Beyond that, however, and regardless of the form of organization, the Committee concluded that it ought not to make special provision for association investments in this Act because actual or contingent liquidity needs will predominate in most circumstances affecting the association. Unlike a family trust, an association board is not meant to be doing long-term investing for capital growth and, accordingly, most such investing is appropriately done in interest-bearing cash equivalents.
Finally, because the subject has not been problematic in practice, the committee sees no need to make special provision for it. Of course, in those unusual cases where long term capital growth might be appropriate, and subject to the business judgment rule, UCIOA would not bar a board’s decision to invest the reserves in suitable vehicles designed to achieve that goal.
Proposed New Comment to 3-102(a)(11)
REF: p. 56 [§3-102(a)(11); p. 85 [§3-115]
Subsection 3-102 (a) (11) generally empowers the association to impose charges for late payments of assessments and reasonable fines for violations of the governing documents. Under UCIOA, fines levied by the Association may not be arbitrary nor may they be discriminatorily applied – thus we reach the same result as some have urged. Moreover, in an effort to minimize these potential abuse of the association’s powers, the 2007 amendments would bar any foreclosure of a unit if the only sums due are fines and related charges; see § 3-115. However, the Committee does not believe that there is a need either to go beyond these standards to codify the precise dollar amount of late charges or fines, or to detail the standards for conduct of a hearing. Thus, the Committee considered but declines to follow the enactments of States such as North Carolina which impose a default cap on the amount of late fees; see North Carolina 2005 Session Law 2005-422, § 47F-3-102, and detailed default provisions regarding the conduct of the hearing; Id., at § 47F-3-107.1.
The Committee has also voted to amend the Act to articulate a policy allowing the executive board to “suspend privileges or services provided by the association” [cf. North Carolina § 47F-3-102 (11)] but specifically precludes suspending the right to vote if a unit owner has not paid her assessments.
The Committee understands that in some circumstances a unit owner may be asked to “agree” to an action in writing, rather than authorizing an action by vote. The prohibition on suspending the right of an owner to vote includes a similar prohibition on participating in an “agreement.”
In any event, this comment will be expanded to confirm that fines must be reasonable and consistently applied, citing authority.
New Comment to May, 2007 Draft of UCIOA
Section 3-102 (a) (14)
REF: p. 57 [§3-102 (a) (14)
The Drafting Committee proposes to reverse the existing presumption in the Act as to whether the association may pledge its common expense assessments as security for a loan. Currently, the Act provides that the Association may only do so “to the extent the declaration expressly so provides.” Because many declarations do not so provide, the Act as drafted forces the Association to amend its declaration in order to borrow funds, since lenders will commonly require a pledge of the income stream as a condition to extending credit to the Association.
The Committee is aware of the increasing use of this important financing technique and the extraordinarily low default rate on such loans across the country. As a consequence, the Committee believes that the Act should be amended to empower the Association to borrow funds with a pledge of its income stream, subject only to the restrictions appearing in the declaration.
It may be entirely appropriate for the declaration to include some restrictions, such as a requirement that the proposal to borrow funds be put to a vote of the unit owners before the loan is closed. For example, the Committee has received suggestions from knowledgeable commentators that the Act require a majority vote of unit owners before the Association borrows any funds. While this may be an appropriate restriction in many cases, the Committee recognizes that in this, as in many cases, the Act ought to avoid a fixed rule that may be inappropriate in some communities, and instead chooses to defer such decision-making to the drafters of each community’s declaration or to the sound discretion of the executive board, or the unit owners, in a particular case.
Reporter Note
REF: p. 98 [§ 3-120(d)]
The 2006 proposed amendments to UCIOA include, in Section 3-120, a significant expansion of the association’s rule-making authority. Sub-section (c) of this section 3-102 has been relocated to new Section 3-120(d) in order to consolidate all of the Act’s provisions on rules in one section.
SECTION 3-103. EXECUTIVE BOARD MEMBERS AND OFFICERS.
PASADENA TRANSCRIPT
Section 3-103
COMMISSIONER GENIE OHRENSCHALL (Nevada):Have I missed it or is there any rule or regulation hat the board working would follow, say, either Robert's Rules of Order or Mason's Manual or something to keep the meeting from disintegrating ito chaos? I can't seem to find it.
COMMISSIONER CARL H. LISMAN (Vermont): You can't find it because it's not there.
COMMISSIONER OHRENSCHALL: Should it be?
COMMISSIONER LISMAN: We'll talk about hat among the committee. I think the practice has grown to be pretty standard now throughout the country that the bylaws of every association have a default rule which is to fall back either on Robert's or someone else. I must say that there have been times when I have done drafting that I have thought seriously of incorporating the Conference's rules for the Committee of the Whole as a functional way for a small association to be efficient in its meetings.
COMMISSIONER OHRENSCHALL: I think that would be an excellent suggestion for the committee to consider.
COMMISSIONER LISMAN: Thank you.
Proposed Comment to new (f)
REF: p. 62 [§3-103(f)]
1. This section is designed to accommodate the possibility, especially in senior living projects and in subsidized and ‘first time home buyer’ complexes, that it may be valuable and assist the long term viability of the project if a non-controlling percentage of the directors – appointed by persons other than unit owners – could provide independent outside expertise to the Board, even if those directors are not directly responsive to the owners themselves. As drafted, the new provision contains safeguards that the committee feels adequately guard against the potential for abuse by the original declarant or outside lenders.
2. The committee emphasizes that the fiduciary duty of the directors appointed by others is to the association – as it is with any director – and not to the appointing authority. We believe this clear statement of duty should ameliorate the concerns of undue influence that may flow from potential conflicting interests.
3. The final comments should discuss why we have 2 different standards of care – the declarant appointed directors have an inherent conflict of interest and the declarant has total control of the board during the period of declarant control; that is why we impose a higher duty.
4. The final comments on this subject need to articulate how all of the matters described in this sub-section will function.
5. As with any provision of the declaration this provision for ‛outside directors‛ can be amended out of the declaration by the vote or agreement of unit owners holding no more than 67% of the voting power in the association. Unless a higher percentage for such an amendment is required by the declaration, this will insure that if a significant majority of the unit owners conclude that the directorships are being abused, they can rid themselves of the system.
Proposed New Comment
REF: what do I reference here?
The Act continues to rely on the Business Judgment Rule as the basis for evaluating the actions of the Board.
“As long as directors of a corporation decide matters rationally, honestly, and without a disabling conflict of interest, the decision will not be reviewed by the courts.” Atkins v. Hibernia Corp., 182 F3d 320, 324, (5th cir. 1999) quoted in Block, Barton & Radin, The Business Judgment Rule, (5th ed. 1998) in 2002 Supp. Page 6.
The business judgment rule is a tool of judicial review, not a standard of conduct. The rule (1) shields directors from liability and protects decisions made by directors when the rule’s elements – a business decision, disinterestedness, and independence, due care, good faith and no abuse of discretion – are present and a challenged decision does not constitute fraud, illegality, ultra-vires conduct or waste, and (2) creates a presumption that directors have acted in accordance with each of the elements of the rule [Block et al at page 110.)
Reporter Note (04/07)
REF: p. 60 [§ 3-103].
In the Fall of 2007, the committee will consider whether to include this provision, adapted from Conn. Gen. Stat. 47-245 (h) and (i) [Cognate provision to UCIOA § 3-103]
(g) Within 30 days after unit owners other than the declarant elect a majority of the members of the executive board, the declarant shall deliver to the association all property of the unit owners and of the association held by or controlled by the declarant, including the following items:
(1) the original or a certified copy of the recorded declaration as amended; the association articles of incorporation, if the association is incorporated; bylaws; minute books and other books and records of the association; and any rules that may have been promulgated;
(2) an accounting for association funds and financial statements, from the date the association received funds and ending on the date the period of declarant control ends, audited by an independent certified public accountant and accompanied by the accountant's letter, expressing either:
(A) the opinion that the financial statements present fairly the financial position of the association in conformity with generally accepted accounting principles; or
(B) a disclaimer of the accountant's ability to attest to the fairness of the presentation of the financial information in conformity with generally accepted accounting principles, and the reasons therefor;
(3) association funds or control thereof;
(4) all of declarant's tangible personal property that has been represented by the declarant to be the property of the association or, unless the declarant has disclosed in the public offering statement that all such personal property used in the common interest community will remain the declarant's property, all of the declarant's tangible personal property that is necessary for, and has been used exclusively in, the operation and enjoyment of the common elements, and inventories of these properties;
(5) a copy of any plans and specifications used in the construction of the improvements in the common interest community which were completed within two years before the declaration was recorded;
(6) all insurance policies then in force, in which the unit owners, the association or its directors and officers are named as insured persons;
(7) copies of any certificates of occupancy that may have been issued with respect to any improvements comprising the common interest community;
(8) any other permits issued by governmental bodies applicable to the common interest community that are currently in force or issued within one year prior to the date on which unit owners other than the declarant took control of the association;
(9) written warranties of the contractor, subcontractors, suppliers and manufacturers that are still effective;
(10) a roster of unit owners and mortgagees and their addresses and telephone numbers, if known, as shown on the declarant's records;
(11) employment contracts in which the association is a contracting party; and
(12) any service contract in which the association is a contracting party or in
which the association or the unit owners have any obligation to pay a fee to the persons
performing the services.
(h) During the period of declarant control, the declarant, at least every six months, shall
provide the unit owners with a current financial statement of the association. The statement shall
be on a cash basis and need not be audited by an independent accountant. It shall include:
(1) all income and expenses for the calendar year to date;
(2) all accounts payable and receivable, including the ages of those accounts and showing all sums due to and from the declarant and affiliates of the declarant;
(3) the amount of any funded replacement reserves; and
(4) the balance of any other funds of the association.
SECTION 3-104. TRANSFER OF SPECIAL DECLARANT RIGHTS.
REF: p. 63, Line 5 (§3-104)
Should this be “Transferor” – (the grantor of the interest)?
Reporter Comment
REF: p. 67 [§3-106(a)(4)]
1. By deleting the words ‘if any,’ in sub-section (4), the Committee does not intend a substantive change. As re-drafted, the Act does not require the Board to delegate any of its power.
2. As drafted, the Act does not appear to prevent the bylaws from permitting the executive board from delegating all its powers to a manager or to another entity that might not be bound by the constraints of this Act.
New Comments
REF: p. 6 [§ 1-103 (5) Bylaws]; p. 67 [§3-106(a)(6)]
1. As the definition makes clear, the bylaws are intended to address procedural matters affecting the governance of the association. They are not intended to contain matters that might affect title to real property nor any of the covenants restricting the use of the units or the common property. That is one of the primary reasons why the Act requires that the declaration be recorded on the land records, but the bylaws need not be recorded.
2. The bylaws might include a broad range of qualifications for directors and officers. This Act neither imposes constraints on what these qualifications might be or mandates any such qualifications, other than the requirement that, after the period of declarant control ends, a majority of directors must be unit owners. Other law, of course, such as laws prohibiting various forms of discrimination, may independently impose limits on permissible qualifications.
3. § 3-106(a)(6) is amended to require the bylaws to state a method by which the unit owners may amend the bylaws. This would not preclude the bylaws from also providing a method by which the executive board or the officers might also amend them.
PASADENA TRANSCRIPT
Section 3-108
COMMISSIONER A. BRUCE COGGESHALL (Maine): In the case of a special meeting where the notice is sent out by the members rather than by the association, do the members specify the date and the place of the meeting?
COMMISSIONER WILLIAM R. BREETZ, JR.(Connecticut): That is what the section contemplates. But, of course, their right to do so only exists when the association itself has not acted on their request.
COMMISSIONER COGGESHALL: Right. But if the association does not act, for whatever reason, then the members can specify whatever place they want and whatever time they want.
COMMISSIONER BREETZ: That's correct.
****
COMMISSIONER DONALD JOE WILLIS (Oregon): On that emergency meeting exceptions, did the committee look at trying to define the emergency so that those who feel that being really angry at someone else and calling a meeting to get rid of them would not qualify?
COMMISSIONER CARL H. LISMAN (Vermont): The committee deferred defining "emergency" until it completed its definition of obscenity and pornography.
[Laughter]
COMMISSIONER WILLIS: I know that when I see it, and I won't tell you how often.
[Laughter]
COMMISSIONER LISMAN: Ultimately the committee concluded after extensive discussion that we would know an emergency when we saw it, and we would know when it wasn't an emergency.
COMMISSIONER WILLIS: I commend that to you because I have had some litigation of those types of things where it does seem to be fairly common that someone gets all exercised in these buildings and, you know, what an emergency is to some people is shocking to others.
COMMISSIONER LISMAN: That's right. We are hoping that the comment will flesh this out so that we do not have to statutorily define what qualifies as an emergency.
COMMISSIONER WILLIS: For consideration, one thing I have seen, just look at that with respect to physical problems with the structures and facilities and things like that that cut away the emotional baggage.
COMMISSIONER LISMAN: Thank you.
*****
COMMISSIONER RODNEY W. SATTERWHITE (Texas): In (b) you contemplate that if the association does not notify of a meeting that is called by 20 percent of the members, but in paragraph (c) -- the association has already refused or failed to act, but in paragraph (c) you mandate that the association give the notice. Should that not be changed just to say that the notification will be under those requirements as opposed to mandating that the association make that notice or give that notice?
COMMISSIONER WILLIAM R. BREETZ, JR. (Connecticut): Thank you, Commissioner. We will do that.
*****
COMMISSIONER J. SAMUEL TENENBAUM (Illinois): In (c)(1) there is supposed to be a statement of the general nature of a proposed amendment. Is there any reason that the committee opted not to require that any proposed amendment be provided in advance so people could actually study the precise language of the amendment?
COMMISSIONER WILLIAM R. BREETZ, JR.(Connecticut): We've debated at some length here precisely what to do with that language. The great issue, of course, is not whether the text is given or the general nature is given, but whether there can be amendments to the text at the meeting. Is it your sense that we ought to mandate that we provide the draft text or do you think that we ought to leave that to the discretion of the board?
COMMISSIONER TENENBAUM: I think a draft text with the understanding that amendments may be made and approved at the meeting is desirable. The reason for that, someone could give a general statement, we are going to amend the bylaws regarding leasing, and everybody shows up at the meeting and the proposed bylaw basically says we're not going to allow any leasing, we are only going to allow leasing to family members. It's a much more restrictive conceptive than what is stated in the general notice. That could happen with a variety of things. I'm just worried about how specific the statement has to be as opposed to actually seeing the language.
COMMISSIONER BREETZ: Commissioner, thank you. We will take that under advisement at our next meeting.
*****
New Comments [4-06]
REF: p. 70 [§ 3-108(e)]; p. 102 [§3-123]
1. The 2007 amendments mandate in subsection (e) that unit owners be provided the opportunity to address the executive board during each meeting of the unit owners. While this provision is an important part of the democratization process in community associations, it is implicit that the officers and executive board members have the inherent right to establish reasonable controls over the behavior of unit owners during the meetings. Thus, for example, it is clear that the board could prevent unit owners from interrupting the regular conduct of business and the time of other speakers, and could, as well, set reasonable limits on the number of speakers at any one meeting, the repetitiveness of unit owner comments, and the aggregate time that unit owners consumed during the meeting.
2. The Committee has also discussed the concept of permitting a unit owners’ meeting to be recessed – whether or not a quorum is present – to enable solicitation of votes or proxies in order to accomplish a particular result. The Reporter believes this could be done under current practice and that a comment may suffice – but I seek further guidance. In any event, that concept is imbedded in the new recall section – §3-123.
3. The Committee has not yet considered (i) the retroactive effect of this section on pre-existing common interest communities or (ii) the likely reaction of courts construing this section in the light of a board’s failure to satisfy statutory mandates. This may pose special difficulties for small associations.
4. The Committee has discussed the difficulties posed by mandating that advance agendas be distributed to unit owners. The two principal policy issues are: (i) is the association liable if it fails to distribute an accurate agenda [or alternatively, are actions taken at such a meeting voidable]; and (ii) may the listing of ‘new business’ on the agenda allow the executive board to add new items to the agenda, and, if so, why do we worry about sending out an agenda in the first place, since the requirement is so easily avoided? Does proposed sub-section (iii) provide an appropriate middle ground?
5. The Committee has discussed the adoption of “Best Practices” by association boards in lieu of legislation – but we have made scant headway.
6. The purpose of limiting the agenda of a special meeting to the items mentioned in the notice is to allow a member, who has no concern about the items listed in the notice, to decide not to attend the meeting, secure in the knowledge that other topics cannot be raised and voted on without his or her knowledge.
7. Similarly, a generic heading such as “New Business” is not sufficient to permit items to be taken up if they were not otherwise described in the notice.
8. In contract, of course, at an annual meeting, unit owners are entitled to adopt any changes to an agenda.
New Comment [10-06] Re Emergencies
REF: p. 70 [§ 3-108(d)]
This section requires comment to the effect that emergency meetings may not be used to avoid the need for notice. The concept includes the notion of “immediate irreparable harm” or other circumstances where the board must act promptly to either avoid an adverse outcome or fail to take advantage of an opportunity – and the further notion that there is insufficient time from the time the issue came to the attention of the directors to give complete notice to owners.
[10-06] ADD NEW COMMENT regarding the ability to make germane amendments to the proposed text contained in the notice.
[NEW] SECTION 3-108A. EXECUTIVE BOARD MEETINGS.
PASADENA TRANSCRIPT
SECTION 3-108A
T at 44
COMMISSIONER KEVIN C. POWERS (Nevada): Looking at new subsection (h) with regard to unanimous executive boards acting by unanimous consent, my suggestion would be add the introductory clause "unless the declaration or bylaws otherwise provide," giving the opportunity for the association to prohibit the executive board from acting by unanimous consent in always requiring a meeting. That would also parallel with paragraph (g) that deals with telephonic and other video conferences.
COMMISSIONER CARL H. LISMAN (Vermont):Thank you.
T at 45
COMMISSIONER J. SAMUEL TENENBAUM (Illinois): The provision that allows for executive session doesn't seem to reconcile with the provision about disclosing materials that are provided. There is no exception in the provision about disclosing materials for those materials that are provided for purposes of executive session. It seems to me that needs to be reconciled. In connection with the section on unanimous consent by the board in lieu of a meeting, it seems to me a good idea to require the declarant to have a meeting and have people come forward. But this section on unanimous consent seems to take that right away from the unit owners while the declarant is still in charge.
COMMISSIONER WILLIAM R. BREETZ, JR. (Connecticut): You won't be surprised, Commissioner, to learn that whether or not the declarant has to hold meetings during the period of declarant control is a hotly contested matter. The feeling is that if the developer is in charge of the project, whether he holds a meeting or whether he doesn't hold a meeting, he is going to move forward and make the decisions that he wants to make. The countervailing argument, of course, is that there ought to be an opportunity for unit owners to express their views to the declarant before the declarant acts. That is a subject, among many others, that the committee has spent a good deal of time debating. By virtue of your comment, I suspect we will debate it some more. Thank you.
*****
T at 46
COMMISSIONER TENENBAUM: Is there any comment about reconciling the disclosure obligation on materials versus executive session?
COMMISSIONER CARL H. LISMAN: Thank you, Commissioner. We will probably need to do that.
Just for the benefit of the floor, one of the abuses perceived to exist nationwide is the executive board's regular use of executive session when the subject matters to be discussed in that session probably don't justify the secrecy that an executive session allows. We looked at the open meeting laws of a number of different states and the public records laws of a number of states and tried to use them as models for this little subsection. Commissioner Tenenbaum correctly notes that we probably skipped something that we should not have skipped. This is a serious attempt, though, to limit the power of the board to act in secrecy. We will have to keep our overarching goal in mind when we carve the carveout that he suggested. I thank you for your comments.
COMMISSIONER WILLIAM R. BREETZ, JR: The countervailing consideration, of course, is the classic case when you're meeting in executive session to discuss litigation. Plainly, we need to be able to allow the executive board to retain whatever their attorney's memoranda, for example, might be to maintain that in confidence during the ongoing litigation. There is, obviously, some balancing to go on here. We appreciate your comments.
*****
T at 47
COMMISSIONER BRUCE A. COGGESHALL: I may have missed it, but is there something in the act that requires the minutes of the executive board be sent to or otherwise be made available to all the members?
COMMISSIONER BREETZ: Yes. The answer is yes, the minutes have to be made available. If you ask me where, you're going to embarrass me.
T at 48
COMMISSIONER COGGESHALL: Well, I'm embarrassed to have asked the question then.
[Laughter]
COMMISSIONER COGGESHALL: Is that true also of any actions taken at the executive sessions?
COMMISSIONER CARL H. LISMAN: No action can be taken in executive session. This act prohibits that. They can go into executive session to discuss some subject, perhaps a contract, they want to approve the contract. They have to come out of executive session and vote in an open meeting. That's very much the kind of transparency that we're striving to obtain by these amendments.
*****
COMMISSIONER DONALD JOE WILLIS: With respect to the potential litigation to upset a failure that is meaningless without apparently a court order upsetting it, what is the standard the court would look to?
COMMISSIONER LISMAN: Commissioner Willis, I'm not sure I caught your question.
COMMISSIONER WILLIS: Well, you have these requirements that certain things have to happen preceding the meetings for notices and giving these unit owners fair opportunity to participate.Then you say it doesn't make any difference, it doesn't invalidate things unless a court order sets it aside. What is the standard the judge would look to? You said it doesn't make any difference unless you go to court and get an order setting it aside.I could argue on behalf of somebody trying to set it aside that that's all I needed to do, every one of these requirements were mandatory if I was in court seeking a judge to, say, set aside. The other party would say, of course not, it has to be something far more gross than those detail things that don't mean anything. To me it's very confusing to say you can go get a judge to set it aside. But on what basis? What standard?
COMMISSIONER WILLIAM R. BREETZ, JR.: I would have thought, Commissioner, that your claim to set aside the meeting would be that the executive board had not acted in accordance with the standard set out in the statute. But if I missed that –
COMMISSIONER WILLIS: It wasn't clear to me. If that's what it is, then I think you could clarify that some in your language to point out -- I guess the only thing is that you're always protected unless somebody within 60 days files and proceeds in litigation successfully to show that you did not do it correctly. They could set it aside.
COMMISSIONER BREETZ: We can certainly take under consideration the possibility of adding that statement that that is what the standard for review would be by a court. But it is certainly, I think, the intention of the committee that there be an assumptions of validity unless within this very narrow window somebody challenges it.The reason for that is so many actions are taken by a board that we don't want every one of them be void or voidable for a long period of time when business has to be conducted.
COMMISSIONER WILLIS: I agree with that. It seems, thought, that if you go back and if I could file timely and just point out any of these failures, even though it may not have been particularly material or may not have caused by a particular unit owner to miss a meeting, those are the kind of things I'm struggling through to say, well, what would you do when you are in court to point out what it is I have to demonstrate in order to win and invalidate that action.
COMMISSIONER BREETZ: We appreciate it,
*****
T at 51
COMMISSIONER HAWKINS: …….The notice of the meeting seems to contemplate following the pattern of Freedom of Information Act, public notices, and the analog from the public sector. But one noticeable exception, and that is with respect to a meeting of a board for the public sector there is usually specificity as to the agenda or publication of what will be discussed at the meeting. I didn't see that here. Am I missing it? Or did you not contemplate telling the unit owners what will be discussed so that when they want to exercise their power to talk about it in section (d) they will have to come to every meeting of the board?
COMMISSIONER CARL H. LISMAN: I believe we have addressed this issue, but right now I can't tell you where it is. We haven't reached it yet. It may be in the notice provision.
*****
T at 52
COMMISSIONER RICHARD A. LORD: I have a couple questions about subsection (i). First, what kind of reliance is necessary in order to make a contract entered into with a third party binding?
COMMISSIONER WILLIAM R. BREETZ, JR.: Superficially I would admit that we simply used the word "reliance" -- or I used the word "reliance" assuming that there was a whole body of law on which one could draw in defining what that term meant. If the contract had been signed and the contractor had gone out and bought materials based on that contract, it seems to me that would be reliance. I'm certainly hoping we don't have to draft the details of what constitutes reliance. I could be wrong.
COMMISSIONER LORD: It wouldn't be enough simply to enter into the contract. There would have to be something done beyond that. Is that the idea?
COMMISSIONER BREETZ: I think that the law of reliance requires more than simply the entering into the contract. Although it may be that in a particular case you can argue that the time and energy that went into negotiating the contract was sufficient reliance. Again, I think we're assuming that the law of reliance is supplementing what we have written here.
COMMISSIONER LORD: A follow-up question. Can you also explain the gist of the otherwise notwithstanding noncompliance? It makes it sound as though contracts entered into are being treated differently from other action. Is the idea there that other action can be challenged within the time frame set forth below but that contracts cannot be?
COMMISSIONER BREETZ: The notion here, with respect to third parties, third parties who rely, by virtue of that contract, have one standard. With respect to other sorts of behavior where there has not been a third party involved, an internal decision of the association, for example, there is no reason to extend special consideration, we think, to those folks. It seems to us that that ought to be much more subject to challenge than in the situation where a third party has relied.
Pasadena Floor Comments
REF: p. 70 [§ 3-108A]
(e) Specifies lots of the details about the notice of the board meeting, but neither it nor the cross-referenced 3-122 “Notice” provision state that the agenda or list of actions to be discussed at the board meeting be set forth so that unit owners would have reasonable notice that a particular subject would be discussed, thus making their right to be heard under paragraph (d) a more viable right. Almost all FOIA or open government statutes include such a prevision (which could be waived for genuine emergency). (B.C. Hawkins - Connecticut)
(g) Do you want to limit the percent of the members who can appear telephonically? It’s hard for the unit members to attend and have input if everyone (Exec. Bd) is joined by telephone (see p. 83 line 24). The 5 reasons for an exec. Board Mtg (§ 3-108A-(a)(1-5)) all seem very confidential and covered by the Exec. Session rules so they would not be open to unit members anyway. (Anon.)
(h) Did you consider and reject the possibility of the Executive Board using the unanimous consent for non-ministerial functions post declarant control for reasons of genuine emergency. You might even further liberalize it by providing that it will be effective pending the next scheduled meeting at which it could be ratified at a regular noticed meeting with proper quorum and vote. (B.C. Hawkins - Connecticut)
(i) Commissioner Willis asks: “Should we have a materiality requirement here?”
Consider term “detrimental reliance”. Law of Reliance clearer on damages when enforcing a contract standard in Rest § 90 is detrimental reliance (Ramasasty - WA)
1. Part of the difficulty in sub.(i) is caused by the failure to define several key words, including “contract,” “third party” and knowledge.” You may not want to define these terms, but without definition, it’s not clear whether only “unrelated” third parties are covered, or whether, for example, unit owners can be covered. Likewise, pre-contractual reliance may – and typically does – occur, so if the goal is to protect innocent, relying, non-executive-board members, you probably don’t want to limit coverage only to those who actually have contracts. Finally, “knowledge” usually means “actual knowledge” and not a “reason to know,” but without a definition, a court might construe it to mean reason to know, (which would, presumably, eliminate unit owners and others with access to the by-laws or declarations).
2. What’s the “real” distinction between contracts that are relied upon without knowledge that bind the association and other “improper” actions that are “binding and valid unless…”? Certainly, the provision doesn’t prevent a unit owner from challenging board action; so, does it just tell a court that, if X is a relying, no-knowledge contracting party, his contract, while subject to “typical” contract defenses (e.g., lack of consideration, illegality, etc.) is not subject to avoidance based on board non-compliance? If so, and a court still has to consider other formation issues as well as whether X had knowledge and whether he relied, I’m not sure why there should be a distinction between “relying, no-knowledge contractors” and other contractors (e.g., non-relying contractors) or non-contractors (e.g., parties who rely pre-contractually), or, for that matter, anyone else aggrieved by executive board non-compliance.
3. The time limits only apply to those who don’t have contracts, i.e., unit owners can challenge a contract without time limitations. So, a relying, no-knowledge contactor may actually be less well off than other third parties. (Just an observation)
(Rick Lord, North Carolina)
Reporter Comments
REF: p. 69 [§ 3-108A]
1. The Committee has had considerable discussion since the Pittsburgh meeting on this subject; the discussion revolved around the issues raised in comments by Commissioner Bebr – that is: (i) what is a “meeting” of the Executive Board; (ii) the need for more detail as to what subjects are appropriate for an executive session; and (iii) what are the consequences of a failure to give notice of a meeting of the executive committee.
As a consequence, Section 3-108A now requires quarterly meetings, and defines ‘meetings’ to exclude incidental or social gatherings of directors where no association business is conducted. See sub-section (b).
2. The section contains “open meeting” and broad executive session text, along the lines of several existing state provisions. See, eg, Virginia Stat. Ann. § 55-510.1, Alaska Stat. Ann. § 10-25-175. We also include a provision similar to that contained in Sec. 11 of the Uniform Environmental Covenants Act, insulating any decision made at a board meeting from challenge because of defective notice to unit owners unless reversed by court order. See subsection (i).
3. The reporter is directed to insert comments with examples of what might comprise valid notice to unit owners – referring to such means as web site, sandwich board at the entrance, posting at the clubhouse, use of a community newsletter or closed circuit TV channels.
4. The reporter will also insert a comment that if a unit owner asks a board member, officer, employee of the property manager or other agent of the association about the status of an executive board meeting, the agent would be required to provide that information to the Unit Owner.
SECTION 3-110. VOTING; PROXIES.
Reporter Notes (04/07)
REF: p. 73 [§ 3-110]
1. The 1994 version of the Uniform Common Interest Ownership Act does not contain any significant provision by which unit owners may cast ballots except during a physical meeting of the unit owners. Given the extraordinary growth of planned communities across the nation, it is clear that the ‘town meeting’ approach to voting – the model presently imbedded in the Act – is no longer suited to a considerable number of communities.
The Drafting Committee has already begun its consideration of this complex issue and expects to consider it at length during the 2007-2008 drafting meetings. In an effort to provide the Floor with some sense of the range of possibilities confronting the drafters, however, the Committee has included in this draft at least 4 possible approaches:
Alternative 1 is an amalgam of various state approaches which the Committee has already considered; much of the original text derived from Arizona Rev. Stat. § 10-3708, that state’s non-stock corporate law.
Alternative 2 is drawn largely from the Model Non-Stock Corporation Act as currently enacted in Connecticut.
Alternative 3 is adapted from the existing Florida law governing election of directors by ballot.
Alternative 4 is drawn from a 2005 legislative proposal in New Jersey.
2. The Drafting Committee has sought the views of a number of attorneys, including practitioners who are not among our official Observers and Advisors, who practice in this field. They have posed a number of questions. One commentator asks:
• How this section applies to the requirements of Section 2-117 which permits the declaration to be amended by the “vote or agreement” of the unit owners. Does the ballot substitute for the vote or for the agreement? Our practice has been to circulate what amount to petitions asking unit owners to sign off on proposed amendments. This is a separate useful procedure and I would suggest that it be made clear that the “agreement” called for under Section 2-117 is different than the ballot without meeting called for in Subsection 3-110(f).
• The subsection needs to specify how an action by ballot is invoked and by whom. Can the president alone order that a ballot be circulated? Does it require a vote of the executive board? Can some percentage of the unit owners initiate the process? If the unit owners can initiate the process, what happens if the leadership of the association fails to follow through and circulate the ballot? Procedures such as this are not, I believe, usually found in state corporation statutes yet.
• The time allowed for returning ballots should in no case be less than the minimum notice period for meetings. In fact, I would suggest, that the minimum period be not less than 14 days. Someone with a particular partisan position could, conceivably, circulate a ballot with little or no advance notice. The opposition would need some minimum period of time to get itself organized, and prepare and circulate a mailing to the unit owners setting our its position. If the voting period is too short, the unit owners will be forced to vote before they had heard bothsides of the issue.
In the same regard, if the ballot is circulated without some advance notice, many unit owners might sign and return the ballot quickly before they had an opportunity to hear the position of the other side. In that case, this attempt at opening up the democratic processes of the association could have the reverse affect. Perhaps we could require advance notice of the issue to be discussed and give an opportunity for all people wishing to comment to furnish comments which can be sent out by the association with the ballot itself. Under the current system where proxies are used, but not absentee ballots, it is not unusual for unit owners, as they learn more about the issues, to revoke one proxy and give another. Can they do the same with ballots?
3. As drafted, the Act imposes no limits on the permitted activities by which an action may be undertaken by balloting outside of a meeting. Thus, for example, unless limited by the declaration, those actions may include, without limitation, a meeting to remove a director pursuant to new Section 3-123 (formerly Section 3-103(g)).
4. The Committee assumes that electronic balloting will be governed by E-Sign and UETA.
Possible New Comments
REF: p. 81 [§3-113]
The words “damaged or destroyed” may cause confusion among unit owners since the line between the rules for dealing with “damage and destruction” on one hand and “maintenance, repair and replacement” on the other are not clear. Generally “damage or destruction” deals with items commonly covered by insurance and everything else is maintenance, repair or replacement. That is, a working distinction is that a portion of a common interest community is “damaged or destroyed” (or suffers damage or destruction) if it suffers physical damage that is of a type and is caused by an occurrence of a type commonly covered by the casualty insurance required by Section 3-113 of this Act or by the Declaration or for which insurance carried by the Association is in effect. Otherwise, to “maintain, repair and replace” (or to perform maintenance, repair and replacement) is the act of addressing and correcting deterioration, wear and tear, and obsolescence to the Property which is not covered by the casualty insurance required by Section 3-113.
Reporter Notes (04/07)
REF: p. 81 [§3-113]; p. 86 [§3-115(e)]
Some commentators discuss the consequences of large deductibles and how to allocate them.
One extreme is contained in current proposed Connecticut legislation which provides that “the amount of any deductible on any property and liability insurance maintained by the association is a common expense.” (CT HB 5286).
Other lawyers include in their declarations a provision that the amount of any deductible will be allocated among the units damaged, regardless of fault, or solely to the unit damaged if the owner was negligent.
See also proposed amendments to § 3-115(e).
A further unaddressed insurance issue arises when the association would prefer not to file a claim for a small loss, but the unit owner wishes to do so.
New Comment
REF: p. 85 [§3-114]
The requirements of this section track the requirements of the current Internal Revenue Code; see Rev. Rul. 70-607. The unit owners, of course, may vote to reverse this outcome. As a practical matter, in the everyday activities of the unit owners association, the matters addressed in this section are likely to arise only rarely.
SECTION 3-115. ASSESSMENTS FOR COMMON EXPENSES.
PASADENA TRANSCRIPT
Section 3-115
T at 66
COMMISSIONER J. SAMUEL TENENBAUM: The provision for not all of the unit owners using or paying for their use of a service may not always be practicable. For example, you may negotiate a satellite dish and also a cable line, a flat fee for both. Some unit owners want the cable, some want the satellite. You're not going to able to meter that usage in any kind of a practical way. There may be a time when you want on a per capita or per unit basis to allocate the cost. Basing it solely on use and consumption may not be an official way to allocate the cost.
COMMISSIONER WILLIAM R. BREETZ, JR: We read "use" in different ways. Using your example, if there was a flat fee of $100 a month for the satellite dish and there were 100 units but only 50 of them signed up, my assumption of the word "use" there would be that you could charge 50 people two dollars a month. That is what I thought "use" was, not the number of hours. If it was Commissioner Lisman, he is on the television all the time and doesn't have to pay any attention to what is going on in the drafting. You would like to charge him more, but I am prepared to give him just two dollars a month. Is that inconsistent with your reading of that?
COMMISSIONER TENENBAUM: At first blush reading, I read "use" to mean his sitting in front of the TV, as many hours a day as he is sitting in front of the TV. Perhaps just putting in the comment what "use" means or giving an example, that solves the problem.
COMMISSIONER BREETZ: Thank you, sir.
*****
T at 68
COMMISSIONER BRUCE A. COGGESHALL: As I understand this, the declaration has to provide for the separate assessment. I am just curious as to why you drafted the default rule in this fashion rather than saying if it is an individual service it's charged to the individual unit unless the declaration provides otherwise.
COMMISSIONER CARL H. LISMAN: I think the answer is that as the world of common interest communities evolve the services that the association provides has also evolved. We are now seeing senior retirement communities as planned communities or condominium ownership. With the consequence that those who get meal service or health services, the expectation here is that that is an exception to the general rule. We wanted fleshed out in the declaration to disclose to initial buyers in the public offering statement so that there is no question about who is going to get charged for what.
COMMISSIONER WILLIAM R. BREETZ, JR.: I agree with Commissioner Lisman. As he states, the general rule is the rule stated in (b), which is that except as provided, in the section you were focusing on, all common expenses are assessed in accordance with their allocated common expense assessment. That is the vanilla rule which works 99 percent of the time in most modest sized associations. When you get into associations which are providing these services, as Carl indicates, it's those situations where you want to have some flexibility and so you are going to depart from the basic rule which is statutorily imposed to allow the declaration to do these more unique things.
*****
T at 69
COMMISSIONER RODNEY W. SATTERWHITE (Texas): Page 102, Line 23, talking about assessments to pay judgments against the owners of the units at the time the judgment is entered. It would seem to me that it would be more appropriate to assess those who own the units at the time the cause of action that supports the judgment arose. I guess you might acquire a unit sometime after the cause of action but before the judgment and get assessed for something that you really didn't have an interest in.
COMMISSIONER CARL H. LISMAN: Thank you.
COMMISSIONER PATRICIA BRUMFIELD FRY(Missouri): **** My second question on this, if I may, pure question, is there any potential inconsistency between (d) and (e)? (e) says that in the event of misdeeds, to paraphrase, you can assess it all against a particular unit. It strikes me that those very misdeeds may be the source of a cause of action against -- that results in a judgment. Now, I realize you can't control who would be liable on that judgment if that judgment started from misconduct of a party.
COMMISSIONER CARL H. LISMAN: We take your point. It's not an issue that we have talked about, but we will. Our expectation is that (d) and (e) were intended to address different subjects, but you have pointed out to us that they could be the same. Thank you.
COMMISSIONER FRY: I just wanted to know how any of this affects Uncle Tony.
COMMISSIONER LISMAN: Uncle Tony is not subject to any of the rules of any of our acts including this one.
[Laughter]
*****
Pasadena Floor Comments
REF: p. 86,[§3-115]
Insert a comment on what “use” means in line 13.
Review subsection (b) with regard to the assessments and (c), (d) and (e).
Review subsection (d). Do we want to change the reference to the time the action was begun rather than the time the judgment was entered?
As to subsection (e) – it treats a different subject than subsection (d).
REF: p. 86 [§3-115(c)(2)
(c)(2) Isn’t there more flexibility if “must be assessed exclusively” becomes “may be…” or “may be assessed, in whole or in part, against…”.
I think the word “exclusively” as well as the mandate (must be) as blocking an effort to assess ordinary overhead to all units, actual use or particular use to specific units. (Pat Fry)
New Comment
REF: p. 86 [§3-115(c)(2)]
1. The amendment to subsection (c)(2) reflects the increasing practice in some associations of providing food, janitorial, nursing and other services to residents of individual units as part of the common expense budget of the association whether or not the occupants are the owners of those units. Clearly, this is not the only means by which those charges might be paid for; a more direct means would surely be to charge the beneficiaries of those services directly on a fee for service basis. The purpose of the amendment is simply to call to the drafter’s attention the concern that if these services are included in the common expense budget for the entire association, rather than being charged to individual service recipients, then the non-benefitted owners should not be assessed, and possibly have a lien against their units, for services provided to other persons.
As drafted, however, the default rule does not yield that result.
2. The drafters of the proposed Texas Planned Community Act have defined “services”; see Texas Act 83.009 (19) in a version of that Act subsequent to the one made available to the Committee in March 2005.
10-06 Reporter Note- Suppose declaration does not so provide?
Reporter Note (04/07)
REF: p. 86 [§3-115(c) and §3-115(e)]
One commentator proposes to include in (c) “whether or not” before “included as part of the budget....”
Possible alternative to subsection (e):
“If the association carries at least the minimum casualty insurance requested by the declaration and this [act], then any casualty loss in excess of insurance proceeds (caused by the negligence or misconduct of any unit owner or the owner’s guests or invitees,) may be assessed exclusively against that unit.
SECTION 3-116. LIEN FOR ASSESSMENTS; ENFORCEMENT .
PASADENA TRANSCRIPT
Section 3-116
T at 75
COMMISSIONER J. SAMUEL TENENBAUM: I was wondering about the following situation and how it would be taken care of. You have a developer who retains units in the development or retains retail space in the development. That developer owes the association money for items that are undone, breaches of warranty to common elements, things like that, and there are claims. Does this provision allow or could it be amended to allow for the association to have a lien against the units that the developer has retained so that the developer is at economic risk if he doesn't do what he is supposed to do with respect to the development? The only place where I see it might is if you get a judgment against the developer and then apply it against the units that he owns. It seems to be putting the developer at risk for the units that he has retained in the development. The money he owes the association is an effective economic tool to get the developer's attention. I am going to talk a little bit more about that in comments on the later section about resolving developer disputes. It seems to me that this is one place where you can at least give the association some real economic leverage against the developer.
COMMISSIONER CARL H. LISMAN: That is a very perceptive question. If you go back to the top of 3-116(a) on Page 104 you will see kind of a strange phraseology there about the association having a statutory lien for unpaid assessments. But as Commissioner Tenenbaum points out, it doesn't go beyond that. We have not as a committee given as much attention as we need to to the issue of protecting the association against the developer in construction defect type claims other than the one provision that we will get to later this afternoon. We can certainly put that on the agenda for our fall meeting. We do have some rules that don't get as far as a lien on unsold units to secure unmade claims. But we do, for instance, say that the statute of limitations on construction defect claims does not begin to run until control has been transferred to the unit owners. There is an incentive for the developer to want to move control faster. Let me have Bill make the point that he wanted to make about this as well.
COMMISSIONER WILLIAM R. BREETZ, JR: Carl and I may be reading (a) in different ways. I read (a) to include in the statutory lien all those sums which are described on Lines 7, 8, and 9. I read 7, 8, and 9 to include that judgment against the developer as creating a lien on the units that he has. The other observation that I would make on the developer side generally is that we have intentionally imposed on the developer during the period of declarant control a very high standard of behavior. If he is not paying those obligations, if he is not managing the association in an appropriate way, the association has significant claims against him because of his breach of his fiduciary duty to the association. I think there is a pretty good panoply of rights here against the developer. Certainly that has been a subject of some continuing conversation. Carl may interpret (a) differently than I do.
COMMISSIONER CARL H. LISMAN: I agree with you, Commissioner Tenenbaum. We are not where you want us to be. I don't, and I never have read the proposed language in (a) on Page 104 to get to the issue that you raised, which is the lien against the units before suit begins. It works if there is a judgment. But it doesn't get you there if you want to have this collateral -- sort of like a prejudgment attachment. This does not get us there.
T at 78
COMMISSIONER TENENBAUM: In case of improper reserving by the developer during the period of time he is in the development is another area. And where this really gets important is, if you have the right, the same right that you have vis-a-vis assessments for these other claims, then you can prime mortgages that the developer may then put on his property and rendering himself -- he takes himself out of the picture. There are no other assets to collect once you get to the point of a judgment. Sure, if you have a judgment lien you can enforce against whatever property he has left, but he may not have anything left by that point.
CHAIRPERSON WYNN: Further comment.
MR. GARY A. POLIAKOFF (ABA Advisor): While your ideas might be admirable, I think it would have a chilling effect on anyone wanting to develop a condominium, and it would certainly create collateral title to any unit being conveyed because it would be total uncertainty as whether or not there were claims against the units being sold. I think the better way to address this is as we have tried to do under the warranty provisions of the statute and under the other provision which impose the obligations as we have indicated during the period of the developer control.
*****
T at 86
Pasadena Floor Comments
REF: p. 87 [§3-116]
(a) Consider the case of Gary v. Tannenbary?
(b) Look at New Jersey case
REF: p. 92 [§3-116(m)
(m) This section appears to be unclear whether the payment plan failure or rejection must come after the 3 month period or can the association start with the payment plan offer at Month 2, have a failure or rejection and then start foreclosure after Month 3. If you have to start with the plan after 3 months, you will bump up against the 6 month priority before you can foreclose the units. (B.C. Hawkins - Connecticut)
New Comment
REF: p. 88 [§3-116(f)]
1. Subsection (f) and Official Comment 4 confirm that creation of the lien for assessments under this section does not mean that the individual unit owner is not personally liable for the assessments. The proposed amendment to subsection (f) simply emphasizes that outcome.
Reporter Notes (04/07)
REF: p. 92 [§3-116(m)
1. The issue of how the association protects itself from non-payment of assessments may be of concern in a state with a homestead exemption. Either direct foreclosure of the association’s statutory lien for unpaid assessments, or foreclosure of a perfected judgment lien which the association might have secured in lieu of foreclosure, may conflict with existing homestead statutes. Further consideration of this issue in those states, in order to reconcile conflicting statutes, would then be appropriate.
2. The association bar in CT takes issue with new (m). An observer writes:
“I recognize the importance of the association offering a repayment plan. We counsel all of our association clients to offer repayment plans and we do so routinely in our collection practice. However, if the offer and acceptance of a repayment plan is a precondition to foreclosure, I can foresee endless delaying litigation over whether the plan offered by the association complied with the requirements of this subsection and whether the payments made by the unit owner complied with the plan. Some standards are needed.
Subsection 3-116(m)(1). It is important to keep in mind that since the association’s lien has only a very limited priority over that of a first mortgage, anything which delays the commencement and completion of a foreclosure by the association, but does not result in the unit owner bringing his or her account current, simply raises the cost to the association, and, therefore, to all of the other unit owners who are paying their common charges on time. It is one thing to stamp out abuses, it is another to do so by abusing the unit owners who pay on time. Keep in mind that there is no for-profit corporation involved and no deep pockets, all there is are the other unit owners.
Some documents give the association the power to accelerate unpaid common charges.
Can accelerated common charges be counted in determining whether the amount owed is
equal to at least three months of common expenses.
Subsection 3-116(m)(4). I recommend that this subsection be bracketed and a note added that the subsection should be used only in those jurisdictions where an association could obtain a foreclosure for fines or charges for services but the defendant unit owner could not have a judicial hearing on the fines or other changes. In those states, such as Connecticut, where a defendant in an association foreclosure can raise defenses challenging the creation or validity of the change, I cannot see the purpose of requiring the association to obtain a money judgment against the unit owner and then, in order to enforce the judgment, a second judgment of foreclosure. Admittedly, the second action would be a suit on a previous judgment, but it still would require two lawsuits. This, in addition would be guaranteed to irritate many judges whose dockets would be crowded with even more condominium cases then there are now.
A few other practical observations, at least based on our experience in Connecticut. The regular civil docket moves much more slowly then the foreclosure docket. As such, it could be several years before the association was able to obtain a personal judgment on a contested fine. This is a great encouragement to the unit owners who are violating the documents to delay. The fact that the association cannot bring any meaningful pressure on the unit owners who are fined will have the major impact of causing people to take the fines less seriously.”
3. The Reporter also notes that small claims actions offer little comfort to association lawyers: no fees are typically awarded and, in contested claims, compromised decisions are universal.
New Comment [4/06]
REF: p. 87 [§3-116]
1. Few issues have been more contentious than the prospect of unit owners losing their homes as a consequence of non payment of common charges – and the loss of all or most of their equity – when the association foreclosures. The reaction in state legislatures in recent years has been widespread, as evidenced, for example in North Carolina (see, e.g., 2205 Session Act No. 422).
At the same time, it is crucial that the association be able to secure timely payment of common charges in order to provide services to all the residents of the common interest community.
In an effort to balance these competing interests, the drafting committee proposes additional procedures governing foreclosure of liens for unpaid common charges. These new procedures may be summarized as follows;
First, the Act bars foreclosure for sums that are less than 3 months of common charges;
Second, the Act bars any foreclosure for fines alone unless the association first secures a personal judgment against the unit owner.
Third, the Act requires the association board to expressly approve each foreclosure action;
Fourth, the Act requires that payments of delinquent assessments be applied first to principal rather than interest and fees, in order to avoid accruing additional interest charges as the monthly fees remain unsatisfied while the attorneys fees and interest are paid first.
Finally, we require that if a foreclosure does go forward, any sale of a unit must be commercially reasonable.
These special procedures would comprise an overlay on existing state foreclosure procedures, whether judicial or non-judicial. Taken together, the drafting committee believes they respond in a concise but responsible way to the widespread reporting of abuses in this field. Hopefully, they will also be viewed by the various States as a responsible and balanced response to the issues confronting our elected officials.
2. At the same time, the committee was sensitive to the legitimate concerns of association representatives who participated in the committee’s deliberations. It is clearly imperative that the association be able to collect the common charges from recalcitrant unit owners in a timely way. To address those concerns, the committee proposes two amendments:
First, it proposes to add the cost of the association’s attorneys fees and court costs to the total value of the association’s existing ‘super lien’ – currently, 6 months of regular common assessments. This amendment is identical to the amendment adopted by Connecticut in 1991. See C.G.S. 47-258(b). The increased amount of the association’s lien has been approved by Fannie Mae and local lenders and has become a significant tool in the successful collection efforts enjoyed by associations in Connecticut.
Second, the committee adds a clarifying amendment to subsection (f) to emphasize that the association has a variety of other remedies available against a unit owner in addition to the foreclosure remedy. In many cases, the committee believes, an action for sums due will be less costly, less disruptive and more efficient than a foreclosure action.
3. The Drafting Committee considered a variety of alternative approaches to this issue and has rejected them in favor of the less expansive alternative texts described here. For example, the committee first considered the extensive provisions adopted by North Carolina’s approach to fines enforcement and collection, as reflected in legislation adopted there in September, 2005.
4. Uniform Non-Judicial Foreclosure Act Approach. The Committee has also considered but rejected the possibility of tracking the extensive borrower protections contained in the Uniform Non-Judicial Foreclosure Act. That act contains provisions dealing with:
Default Notice;
Content and Manner Of Giving;
A mandated meeting before Foreclosure;
A Period Of Limitation For Foreclosure;
Judicial Supervision Of Foreclosure;
Redemption.
5. In the only reported case of foreclosure arising under an adoption of UCIOA, the cases required that the sale be reasonable. See Will v. Mill Condominium Owners Association et al, 176 VT 380, 848 A2d 336 [2004].
Such an outcome is consistent with cases arising under Article 9 in the Bankruptcy courts where the sales price is not determined to constitute ‘reasonably equivalent value” – see Madrid and others. [get citations]
SECTION 3-118. ASSOCIATION RECORDS.
PASADENA TRANSCRIPT
Section 3-118
COMMISSIONER PATRICIA BRUMFIELD FRY: One, because I feel almost compelled, and the other one perhaps more seriously. In (a)(9) you refer to written contracts. May I suggest contracts embodied in a record or something like that? You don't want to get that specific on the media.
Secondly, in your provisions on how the records are to be made accessible or available to the unit owner, you do specify electronic communication, but the unit might well want to deliver electronic media rather than a communication. I just suggest you broaden that a little bit.
COMMISSIONER CARL H. LISMAN: Thank you.
T at 87
COMMISSIONER PATRICK A. RANDOLPH, JR.: I apologize, my notes on this relate back to the previous section that you covered. I hope that you will bear with me.There was a recent judicial decision in New Jersey, I think that some of the members of the committee might be familiar with it, that had the impact of possibly prioritizing the lien of the homeowners association over the title that a foreclosing lender, who otherwise would have priority, was able to sell following the foreclosure. Are you familiar with that decision?
No? Well, I will cover it. It was a controversial decision. It gave the association a possibility of getting priority even after a prime lender had foreclosed. I think it ought to be fixed. I will send it to you.
COMMISSIONER WILLIAM R. BREETZ, JR: Commissioner Randolph, when you make reference to the New Jersey decision, can you tell us what you would change in our section to accomplish the result you are seeking?
COMMISSIONER RANDOLPH: I think it's probably a change in the sections that you haven't deal with the priority. Don't you have language that gives priority to a first mortgage lender over assessments after a certain period of time?
COMMISSIONER BREETZ: -- well, yes. The association's lien primes first mortgages to the extent of six months worth of common charges and with this change, plus reasonable attorney's fees and court costs. But those charges prime the first mortgage. It seems to me that if the first lender were foreclosing, the first lender would take title subject to the association's lien, just as he takes title subject to existing state municipal real estate taxes.
COMMISSIONER RANDOLPH: I understand. You will have to see the case. It's too complicated to go over here.
*****
Reporter's Notes
REF: p. 94 [§3-118]
1. There are two significant policy issues connected with the association’s records: first, what records to maintain, and second, who has access to those records.
Section 3-118 of UCIOA [1994] deals with these matters in a minimalist way. Regarding record maintenance, the first sentence of 3-118 requires only that the association maintain those records needed to comply with Section 4-19 – that is , the obligation to provide a resale certificate. This minimum requirement is far less expansive than the provisions of, for example, the mandates of even the Revised Model Non-Profit Corporation Act promulgated and last amended by the American Bar Association in ____; it plainly does not address the significant issues of records maintenance that have arisen since UCIOA was first promulgated 25 years ago.
Section 3-118 is similarly superficial on issues of records access; here, it mandates that ‘all’ records of the association be ‘reasonably available for examination by any unit owner or his authorized agent’ – leaving questions as to whether the word reasonable” modified ‘all …records’ as well as “available”, and leaving unanswered the large range of issues that courts and legislatures have struggled with in this field over the last quarter century.
2. The Committee recommends that the Conference replace the ‘minimalist’ provisions of UCIOA Section 3-118 with provisions generally consistent with the cognate provisions of the Revised Model Nonprofit Corporation Act, supplemented by specific provisions from other more modern State enactments and proposals in the homes association field.
In this latter regard, the drafting committee specifically recommends that UCIOA : (i) authorize a unit owner to have access to a mailing list of unit owners, although the association may retain the right to mail materials to unit owners at their last known addresses, in order to maintain the unit owners’ privacy; and (ii) insure that minutes of all meetings must be kept.
3. The Committee identified several possible drafting policies in both areas. This draft incorporate the Committee’s collective judgment regarding a balanced approach to both issues.
4. During the drafting process, the comments will be further supplemented to address these subjects:
a. Detailed Financial Records. First, the comment will focus on the level of detail that this Act requires for the Association’s records. Two ends of the spectrum are clear.
At one extreme, the Committee rejects the proposal that the Act should require that records be maintained in accordance with “generally accepted accounting principles”; there are simply too many associations for which that would be an unnecessary and burdensome requirement.
At the other extreme, as mandated in sub-section (a) (8), the records must be sufficiently detailed to enable the association to complete a resale certificate as provided in Section 4-109.
b. Attorneys Files. At the 2006 Annual Meeting, a Commissioner observed from the floor that the rules of the various Bar associations make it imprudent for this Act to characterize the files of an attorney representing the association as property of the association and thereafter to assert that those files are nevertheless exempt from disclosure. For that reason, the current draft does not address the status of an attorney’s records.
5. Subsection (b)(1) might be further reworded Subsection (i) to read as follows:
(i) Only during reasonable business hours or, if the records are kept or maintained by an officer of the association, other hours reasonably convenient for such officer, and at the location where the records are ordinarily maintained, or at another mutually convenient time and location.
6. A commentator writes:
Section 3-118(a). Many of the associations we represent, especially the smaller ones, do not have a complete set of records going back to the organization of the association. This is usually not the fault of the associations or their current leadership.
Declarants do not keep adequate records or fail to turn them over at transition. Managers fail to turn records over when their contracts expire or are terminated. In either of these cases, the cost of suing to obtain the missing records is prohibitive, or at least out of proportion to the loss or inconvenience caused by the missing documents. In many smaller communities, the minutes and other non-financial records are kept by a volunteer officer of the association. If someone dies, is taken ill or moves away quickly, the records are often lost. I am neither encouraging or defending these omissions, but they do happen. I am concerned that the absence of records not be used by dissident unit owners to flog associations for omissions made by prior officers, directors, or managers.
Subsection 3-118(b)(i). This subsection permits the parties to agree on a mutually acceptable time and place for the inspection of the records. If they do not agree, the subsection says that the inspection shall take place “only during reasonable business hours”. I suggest that this subsection be revised to read “(i) Only during reasonable business hours and at the location where the records are ordinarily maintained, or at another mutually convenient time and location.” Another concern has to do with smaller self-managed associations where the records may be kept by a unit owner who works during the day. If the volunteer treasurer cannot easily leave his or her job during the day to meet with a unit owner, it may be unreasonable to insist that the unit owner, or the unit owner’s attorney or accountant, have the power to make the treasurer take a day off from work. Smaller associations find it hard enough as it is to find and keep competent volunteer officers and directors.
PASADENA TRANSCRIPT
Section 3-120
T at 95
COMMISSIONER LYLE W. HILLYARD (Utah): I always get nervous when I see the word "notify." That is on Page 119, Line 21. I looked very quickly in the definitions, and there is no definition of "notify." Do I send a letter out? Do I hammer something on the door? It's a pretty important thing to have notice of the rule. When you say we must notify all unit owners, I wonder what you mean by that, if it's defined elsewhere?
COMMISSIONER WILLIAM R. BREETZ, JR.: If we used "give notice" would that go to the definition of "notice"?
COMMISSIONER HILLYARD: I think you have a definition, mailed to the last known address five days before some time period.
COMMISSIONER CARL H. LISMAN: Page 126, Section 3-122, which we haven't read yet, is the notice provision.
T at 97
COMMISSIONER SULLIVAN: I can think of small condominium projects where an undertaking to do all of the multiple things that we are talking about here is, first of all, going to make sure that nobody wants to be on the board, yet they are going to have to be. Second, that is fairly complex stuff to follow it and make sure you comply with. I have to believe it gets very expensive.
COMMISSIONER LISMAN: That certainly is an intuitively correct statement. Whether in fact that proves to be true is less clear. I don't know of any formal studies that have been made that would test out that theory. I do know that for many of the small associations that I represent in my practice, most of what we have tried to draft in this law is pretty close to what we thought was common sense. If you now leaven the common sense with a little bit of fairness, when boards take actions, whether they are aware of the statute or not, whether they have paid management or legal advice as they are acting, in the great majority of times what they do is both fair and reasonable and done without regard to what the law is.
COMMISSIONER SULLIVAN: Let's say we have the developer out of the picture now and it's just the 13 of us sitting around the table, we're still in a situation where we basically can opt out of most of what we have put forth here.
COMMISSIONER LISMAN: That's right. Unless you amend the declaration, in for a dime, in for a dollar. But if you choose to amend the declaration, yes, you could probably opt out under those circumstances.
COMMISSIONER SULLIVAN: If I amend the declaration, which I can do if, we have the developer out of there so it's just "usns" that own these places. At that juncture we can amend it and get ourselves out of complying with most of the things you are talking about here.
COMMISSIONER LISMAN: If you can convince your neighbors that the benefits of this act are outweighed by its burdens and you otherwise would be a small planned community under the act, you could opt out.
COMMISSIONER SULLIVAN: What do you mean by "small planned community otherwise"? Does that get away from the 12 number?
COMMISSIONER LISMAN: That's the 12 number with no development rights reserved.
COMMISSIONER SULLIVAN: Let's assume that I am above the 12 number, though.
COMMISSIONER LISMAN: No, you can't. Then you could not opt out.
COMMISSIONER SULLIVAN: Even if it is just 13 or 14 people? They can't avoid it.
COMMISSIONER LISMAN: Correct.
*****
T at 100
COMMISSIONER PATRICK A. RANDOLPH, JR: Speaking again for the disaffected crazies. The section dealing with passing rules to restrict the leasing of residential units, I wonder -- of course, this is an extremely controversial area. It is one that has engendered a great deal of heat particularly in situations in which the demographics of an association change, it moves from, say, a resort community to a retirement community, and the retirees don't want their neighbors to rent, and those who are renting have made their economic investment based upon their ability to rent, but they find themselves in the minority. My concern here, and I wonder whether you have thought about this, is the impact upon those who are renting at the time such regulation prohibiting renting is passed, assuming that is what the association does. Shouldn't they be given some time to dispose of their units rather than simply have to throw the lessees out? For instance, at least be able to run out the length of their leases. It seems to me that these sorts of situations, if we are talking about a homeowner's bill of rights, might be addressed in the statute. Although, of course, they are somewhat detailed, it seems to me, that one of the purposes of this whole enterprise was to try to identify some protections for minority interests.
COMMISSIONER CARL H. LISMAN: In response, the language on Page 120 in subsection (e) is existing language now under the Common Interest Ownership Act. It was just moved from one provision to another, which is why it is underlined. Secondly, all that this does -- we have always seen this as a limitation on the authority of the board because it limits the board to adopting a rule with respect to leasing only to the extent that the rules so adopted are required to comply with the underwriting requirements of the secondary mortgage market. Third, what this really says is that if the members want to prohibit leasing or prohibit the leasing of a portion of the units in the common interest community different than the Fannie and Freddie requirements, then they are going to have to do it by an amendment to the declaration. In every instance where I have seen that done, in order to get the requisite vote to amend the declaration, they end up grandfathering in one form or another the people who are renting so that they can get their vote.
COMMISSIONER RANDOLPH: Two comments. We don't know where Fannie and Freddie will be in the future, of course. Also, as I understand it, you have now made it a lot easier to amend the declaration because you only need an 80 percent rather than a hundred percent vote.I guess I would just like to think about
17 this a little bit more because it is an area of terrific controversy around the country. Thank you.
CHAIRPERSON WYNN: Committee response.
MR. GARY A. POLIAKOFF (ABA Advisor): To alleviate your concerns, the courts in all 50 states constitutionally have been very consistent, that there can be no restriction that is enacted that will apply retroactively. In response to your concern that they could perhaps pass a leasing restriction causing someone who is already in occupancy under a lease to be removed from a community, that is just not the case. Now, obviously, when that tenancy is over, and the courts have ruled, then a renewal of their lease is a continuation of a lease so that individual could stay during the entire time and/or renewal of their leases. The law would only take effect after that lease expired.
COMMISSIONER RANDOLPH: Thank you. If that is so, that alleviates my concerns to a certain degree.
Another concern I had, people that are economically invested in leasing their property may require a period of time during which they can sell.As you say, well, the tenant is right there, but maybe they are leasing vacation properties. There are lots of circumstances, it seems to me, where there is a major economic impact on a unit owner coming by surprise where it wasn't in the declaration and under the statute his neighbors have decided to amend the rules to take away his economic benefits. Maybe a period of time would be appropriate to permit him to dispose of his unit rather than have a fire sale. It's just a consideration.
*****
T at 104
COMMISSIONER DONALD JOE WILLIS: A question about the requirement that all rules be reasonable. I take it that if a unit owner violated a rule, what would the association do, try to enforce it through Article 4? And then they would defend on the basis that it's an unreasonable rule? I assume that is what would happen. Do you think it's wise to consider putting a time limit in there for those who have actual knowledge of the rule, that if they want to claim it's unreasonable they do so in advance or not be able to do it later?
COMMISSIONER WILLIAM R. BREETZ, JR.: Honestly, Commissioner Willis, we have not considered that subject. It's an interesting dynamic. The question of whether the rule should be reasonable or not is a subject of considerable controversy in the field because it opens up a whole area of litigation compared to what is –
COMMISSIONER WILLIS: But that is what I do.
[Laughter]
COMMISSIONER BREETZ: It depends on where your bread is buttered, I guess.
5 But it's certainly the case today under the business judgment rule. This standard is probably not the one that a court would apply.
COMMISSIONER WILLIS: It's a necessary, the substance of what is reasonable, which is an objective standard, but it's just the timing. I guess my life's experience tells me that many people would look at a rule and say, hey, it's fine, until it starts to apply to them. Then you may wind up generating litigation, whereas I think if you gave them fair notice and actual knowledge of the rule and required them to act within 60 days, like in some of your other attacks on actions taken by the board, that you might cut off some of that. It might give you more stability.
COMMISSIONER WILLIAM R. BREETZ, JR. It's a good thing for us to consider.Thank you.
MR. GARY A. POLIAKOFF (ABA Advisor): There is a whole body of law that has evolved in this field that has defined reasonableness when it relates to community association adopted rules. The courts establish different standards from restrictions placed in recorded covenants as compared to those that are enacted by the boards. Many of the statutes, and I don't recall if we have it in this one right now, require actual notice to unit owners of meetings of the boards when rules that affect unit uses are adopted.
*****
T at 106
COMMISSIONER RONALD W. DEL SESTO (Rhode Island): What is the prevalent rule today about "for sale" signs? How does your proposed act change any of that?
COMMISSIONER CARL H. LISMAN: Darned if I know. The real estate broker organizations have in many states been successful in getting laws passed that override the restrictive covenants that would be in a declaration or the rules adopted by an association. We have not done a complete state by state study. The National Association of Realtors receives copies of our drafts. They have been invited to appoint an observer to the act. We have not heard from them through the process so far. We will use your comment, Commissioner Del Sesto, to see if we can stir their interest a little bit.
MR. GARY A. POLIAKOFF (ABA Advisor): Without dwelling on this point -- I am not sure where the commissioner is who asked the question -- a very important case decision just came out of New Jersey last week, the Twin River case. The New Jersey Supreme Court pretty much summarized what is the law across the country as it relates to community associations and also to "for sale" signs. That case specifically dealt with restrictions placed on the placement of and size of "for sale" signs. The New Jersey Supreme Court held, No. 1, that community associations do not rise to the level of state actors. Secondly, that reasonable restrictions on the placement of signs are valid and enforceable.
COMMISSIONER DEL SESTO: I'm just wondering, do we agree with that New Jersey rule or should we have our own rule? If there is that much controversy or uncertainty why don't we deal with that issue?
COMMISSIONER LISMAN: The state action issue or the sign issue?
COMMISSIONER DEL SESTO: Not the state action, but the "for sale" sign I always understood was under commercial free speech, but we look at things differently in Rhode Island.
COMMISSIONER LISMAN: In any event, the committee will at its fall meeting return to this issue and discuss it further.
*****
Pasadena Floor Comments
REF: p. 98 [§3-120(d)]
Proposed re-write:
(d) “Unless the declaration otherwise provides, no rule may prohibit display on a unit or on a limited common element adjoining a unit the flag of the United States, the flag of one of the states of the United States or signs…those displays, provided that a rule regulating display of the flag of the United States must be consistent with federal law.” Powers - Nevada
1. How about “for sale” signs?
2. Compare this text to the decision in Twin Rivers.
REF: p. 98 [§3-120(f)]
Should there be a time limit within which an affected person is required to raise the issue of whether a sale is reasonable, say 60 days?
Post Pasadena Comments
REF: p. 98 [§3-120(e)]
COMMENT From Greg McCracken, CT CAI:
Here's the idea I raised at the meetings of the CAI Lawyers Council for handling use and occupancy under the revisions to UCIOA.
The defined unit boundaries, together with the provisions for amendment of the declaration under Section 2-117 and powers of the association under Section 3-102 are the critical points of reference.
As a general concept, the use of a unit in the zoning sense of the word and anything that goes on within the boundaries of the unit--call it what you will--must be set forth in the declaration and subject to amendment only by vote or agreement of 80 percent of the voting power of the association. Regardless of whether an amendment makes these terms of the declaration more or less strict, the 80 percent vote is necessary, as unit owners may base their expectations on the terms staying the way they are.
The association's regulatory authority over units would stay largely the same. Assuming that use has the zoning sense of the word, Subsection 3-102(c)(1) could stay the same.
Then, Subsection 3-102(c)(2) could state something to the effect of regulating anything that goes on within the boundaries of the unit--call it what you will--that violates the declaration or adversely affects the use and enjoyment of other units or the common elements. The term use and enjoyment here has more of a nuisance sense to it; my intention would be to catch any negative externalities to other units or the common elements from what goes on within the boundaries of any unit, allowing the association to handle it by rule. If the declarant or the unit owners wish to place such matters in the declaration, to avoid having the executive board change them without a vote of the unit owners, they could be amended by the vote or agreement of 67 percent of the voting power of the association.
I believe this approach is more in line with people's expectations about what they can do within their own unit, and it is consistent with some of the trends towards bills of rights for unit owners. It also avoids the circularity and uncertainty of "use and occupancy" under the current version of UCIOA. Coming up with an apt term for anything that goes on within the boundaries of the unit will be difficult. Whatever it is, I believe that the term will have to be a single thing, rather than a compound thing, such as "use and occupancy," and that it must replace "use and occupancy" as currently used in UCIOA to work properly
Draft Comment
REF. p. 97 [§3-120]
1. The association’s power under this section is subject to any reserved special declarant right to control any construction or design review process during the development process.
2. It is increasingly common throughout the United States for associations to assume the power to establish and enforce design criteria and control the exterior appearance of units, whether those units are in high rise condominiums, townhouses or single family homes on large lots. It is often asserted that the power of the association to maintain a uniformly attractive and consistent appearance throughout a community adds considerably to the value and desirability of many of these communities.
At the same time, anecdotal evidence suggests that many of the decisions made during the design approval process have been controversial and, in some instances, subject to abuse by those charged with enforcing the design criteria.
The original UCIOA was silent on this subject, relegating it simply to the general reserved powers of the association. However, because of the importance of the subject, the Drafting Committee suggests significant amendments to the design approval process. These changes are intended to confirm the ability of the association to adopt such a process, but subject to significant constraints intended to protect the interests of individual unit owners.
Accordingly, this section first makes clear in subsection (b) that the ability of the association to regulate the design process must be affirmatively reserved in the declaration.
Second, the section requires that the rules of the design committee must be formally promulgated by the executive board, including a procedure for prompt consideration of an application. The drafting committee intends that if the design committee or other group charged with enforcement of the criteria fails to act on an application within the time frame stated, then the effect of that failure is that the application will be deemed approved. At the same time, the Committee expects that the parties to an application pending before a design committee may choose to formally agree to extend the time within which the committee is otherwise required to act, and nothing in this Act is intended to affect the parties’ ability to do so.
Reporter Note (04/07)
REF: p. 98 [§3-120(e)]
1. CT practitioners express reservations about our use of the phrase “use of or behavior in units” in subparagraph (e). I hope to secure written recommendation on text from those attorneys.
2. To change a permitted “use occupancy, or behavior” in 3-120(e)(2), is a 67% or 80% vote required?
SECTION 3-121. LITIGATION INVOLVING THE DECLARANT.
PASADENA TRANSCRIPT
Section 3-121
T at 113
COMMISSIONER SHELDON F. KURTZ (Iowa): Mine may be nothing more than a technical question. I notice in subsection (3), (4), and (6), I think I caught them all, you refer to "directed notice." I am assuming that that means the notice -- the person to whom it was sent pursuant to subsection (2). I am almost quibbling about the word "directed."
COMMISSIONER WILLIAM R. BREETZ, JR.: That is what it refers to. You are correct. Your assumption is an accurate one.
COMMISSIONER KURTZ: My assumption is accurate or inaccurate?
COMMISSIONER BREETZ: Is accurate.
COMMISSIONER KURTZ: Would it not be "to whom it is sent notice" be better wording? The reason I am asking, when I read the words "directed notice," I think of a memo that might have said to A, B, C, D and E. But under (2) we have a notice that is required to be sent. I am wondering whether you really mean "sent" there. I know it's a small thing. Think about it. I don't mean to belabor it.
COMMISSIONER BREETZ: Thank you.
*****
T at 114
COMMISSIONER J. SAMUEL TENENBAUM: I want to preface my remarks about this section by saying that I live in a condo, I have represented unit owners, associations, developers, I have been on a board, I have been sued as a board member, and I have sued as a board member. I have worn probably every hat there is when it comes to these kinds of problems. I think if you have a responsible developer that this section is unnecessary. My fear is that this section provides the irresponsible developer just yet another excuse and more delay in doing what they promised to do and didn't do. It creates an entire procedure that you have to go through before you can file a lawsuit without reaching the real problem, in my mind, which is, how do you create a economic incentive on the developer to do what he promised to do? Now, one of the things that I have been working on in Chicago with our local aldermen, we have a system whereby developers can sell units with a temporary certificate of occupancy. The permanent certificate sometimes never gets issued or gets issued way down the road. One of the things that we are looking at is putting a bonding requirement on a developer to be able to sell when he gets his temporary CO to be sure that he will be there at the end. Now, will that have a chilling effect? We don't think so. All it does is it changes the economics a little bit. Maybe it affects the pricing because the developer will figure in what the bond will cost, which would be an appropriate reserve that he should be setting up anyway, to make sure that he has got the money to do all the repairs or whatever other kinds of work or if there are defects to take care of those. But my real fear about this section is that you are just giving the unscrupulous developer whole bunch of ways that he can continue to play games with the association as opposed to getting him into court where he is going to have to deal with the judge and he is going to have to face the music in terms of either a specific performance suit or he is going to be facing a monetary judgment before he runs out of money. This could give him time to sell more units and further exacerbate the problem. That's just a general problem I have with this unless there is some kind of an economic penalty on the developer for what he is doing in the process. I don't see where this is really going to help. The responsible developer is going to do what he is going to do and he is going to follow this procedure implicitly without the requirement of it being in a statute.
COMMISSIONER CARL H. LISMAN: Thank you for your comments. It may help the floor to understand the derivation of this provision and therefore why we have written it. For a number of years some large developers have been writing into their documents prohibitions against the association bringing construction defect actions against the developer. One would think that courts when faced with a motion to dismiss a construction defect case by an association under those circumstances would strike down the provision, ostensibly prohibiting that suit. One would think the courts would do that. Not all courts have done that. Even for the courts that have done that, that language in a declaration, which restricts the association, has the effect of at least making it more costly for the association to sue the developer. It's just one more trip wire to have to avoid. At the same time the developers have been writing language like that into their declarations, there is one national association of stakeholders in common interest communities, the National Association of Home Builders, that has done a pretty good job of going around the country and getting enacted similar, but more onerous, provisions to 3-121. It was the thinking of the committee that a more balanced approach to the draconian National Association of Home Builders legislation might get a better reception in state legislatures and at the same time might actually serve a salutary Again with all that by way of background, Commissioner, your point is very well made. Every time you give a bad guy another opportunity to bob and weave, the bad guy will bob and weave.
We will take it upon ourselves to try to address that issue next time.
T at 118
COMMISSIONER JOSEPH DeMARIA (Florida): We have a provision, relatively recent, in our condominium law like this. I think, first of all, the unscrupulous developer even in litigation is going to bob and weave. I can tell you from personal experience, litigation will go on for years. Just because that developer is in litigation, it is not going to get resolved any time quickly. The statute that you have here, which we have in Florida, a very detailed provision that requires the association and the developer to be speaking, and the general contractor and the subcontractors, it really does avoid litigation, a litigation that courts don't want to see. Courts don't like construction litigation. It's very complex, detailed and expensive. From my experience, this provision has been a very good provision because sometimes an association will want to run off and file a lawsuit. They have their own lawyers guiding them. There are usually attorney's fees provisions in these statutes. And there may be an economic incentive sometime to build up that fund that the association uses for its other expenses. That may even lead to litigation against a good developer. This statute gives the good developer and the good association a chance to kind of calm down, quiet down, get the engineers out there, the experts out there, and resolve this without getting the courts involved. I can tell you, in the recent times we have used it in Florida, it has been a very good statute. I just think the unscrupulous developer is going to tie you up in litigation, he's going to tie you up outside of litigation. And I think this is good for the scrupulous developer and the honest association to work out their problems without having to get into litigation. It's a good provision.
Pasadena Floor Comments
REF: p. 99 [§3-131(a)]
The cross reference should be to §3-102(a)(4) and not (a)(3) which deals with hiring managers. (B.C. Hawkins - Connecticut)
Reporter's Notes
REF: p. 99 [§3-121]; p. 120-122 [§4-113 through 4-116]; p. 55 [§3-102]
1. This policy and much of the proposed text is taken from the CAI proposal dated Oct. 31, 2003.
2. This text was drafted without reference to other statutory text that may have been adopted in this or similar contexts in other states.
3. This text does not address:
(a) issues arising under the warranty provisions of UCIOA; see Sec. 4-113 through 4-116;
(b) litigation against the declarant under other theories;
(c) express prohibitions limiting the right of the association to sue the declarant [except to the extent addressed now in UCIOA – see 3-102(a):
The declaration may not impose limitations on the power of the association to deal with the declarant which are more restrictive than the limitations imposed on the power of the association to deal with other persons.”
In theory, this section might allow the declaration to prohibit commencement of any suit by the board in the absence of a unit owner vote. But there is a proposed amendment to 3-102(a) on this subject.
[4/06] There are other questions here:
1. Benefield – suppose the builder just does not build what he promised, what does that do under this section?
2. Exclusion of warranties – diamond says bracket the text excluding warranties until we get there.
3. Nora – we need to add “failure to build”
4. “Cure text of the Uniform Commercial code – we can look at that….
10-06 COMMENT: On Litigation §3-121(a)(7) – need to have declarant’s claim period against subcontractors also extended.
There are a number of technical issues with the text as it now stands that need to be addressed. These include the following:
Subsection 3-121(a)(1). The reference to commencing administrative proceedings may be overly broad, especially if it applies to participating in land use hearings and appeals. If a declarant files an application for a zone change, site plan approval, etc. relating to a community and the community chooses to object to the application in part because it believes the declarant failed to construct the existing facilities properly, the declarant could argue that the intervention by the association “involved” a construction defect. In the case of land use proceedings, the deadlines, which are often short, are set by land use statutes. If the association is responding to a land use issue initiated by someone else or is making a filing within the time limit set by the land use statute, how can it take the time to give prior notice to the declarant, let alone engage in the exchange of proposals which the statute contemplates.
An association discovers that a roof on one of the buildings is falling down. A major part of any plan of remediation would include inspection of the roofs. If the association notifies the declarant that one of the roofs is falling down and they suspect that others may be defective as well, is that sufficient notice?
Subsection 3-121(a)(2). The caption speaks of tolling the statute of limitations but this subsection says nothing about it.
Subsection 3-121(a)(3) thru (a)(6). I expect there will be many situations in which the association will send a notice to the declarant which the declarant will not consider to be sufficiently specific or where the declarant will respond to the association’s notice with a plan that the association considers to be completely inadequate and rejects out of hand. If the association then sues the declarant, I can envision arguments over whether or not the association had satisfied the preconditions for suit, the declarant will move to dismiss the suit and, if the statute of limitations on the claim has run in the meantime, the association will be without remedy. Surely the Act, which is generally described as remedial, does not intent such a harsh result? A better approach might be to provide that if the court determines that the preconditions have not been met, the court can order further proceedings stayed until the preconditions have been addressed.
On that note, it might be better to let the suit to be brought and then provide that if the parties have not attempted to negotiate a settlement earlier, the court can order them to go through mediation, under court supervision, or under the supervision of an appropriate state agency, before proceeding with the suit.
Subsection 3-121(a)(7). The rules of procedure of most states mandate that certain claims by one party against another party must be joined in a single suit or they are deemed abandoned. Is it possible that, under the law of some states, that two claims against the declarant, one having to do with construction defects and the other not, must be joined in a single action. If this is the case, how does an association proceed when one of its claims, and the statute of limitations that applies to it, has been tolled, while the other claim and its statute have not?
PASADENA TRANSCRIPT
Section 3-122
T at 120
COMMISSIONER PATRICIA BRUMFIELD FRY: With respect to your provision for electronic notice, I suggest you take a look at the E-Sign Act with its specific provisions for sent to receive notice electronically. I realize it relates to consumer transactions. I suppose some of your transactions are. You might want to take a look at those provisions. I can give you a cite to them if you want them.
7 With all due respect, I think you need to get rid of "designated in writing" throughout this section. Just for next time.
*****
T at 121
COMMISSIONER J. SAMUEL TENENBAUM: This notice provision is inconsistent with the notice provision in 121 where you are giving notice to the declarant. I don't know if it was done on purpose or not. The notice provision in 121 says either actual notice or else basically whatever the state rule is about service. I don't know if you want to look at that and change that.
*****
T at 122
COMMISSIONER DONALD JOE WILLIS: A follow-up point on that. The language says "unless required or permitted by the declarations." I think you should take a careful look at the word "permitted" in there because if the declaration permits something different you may have blocked the ability to use the safe harbors that you have got below. I am not sure I am right on that, but it hit me that way.
COMMISSIONER WILLIAM R. BREETZ, JR.: Thank you, Commissioner.
*****
COMMISSIONER LANE SHETTERLY (Oregon): Thank you. I just ask you to take a look at this notice provision in 3-122 in comparison also with notice provisions in 3-108 sub (c) that talks about notice by United States mail to any mailing address the unit owner designates in writing. Somehow to harmonize those two sections as well.
COMMISSIONER WILLIAM R. BREETZ, JR: Thank you, Commissioner.
*****
Pasadena Floor Comments
REF: p. 101 [§3-122]
Notice in a writing - use notice in a record
Also, E-sign – see 15 USC 7001, I believe sub-section (b). Your 3-122(a)(3) should be rephrased to “…if the unit owner has given the association prior consent in compliance with…” Call if you want to talk through. (Pat Fry)
Reporter Comments
REF: p. 101 [§3-122]; p. 68 [§3-108]
1. The alternatives listed in sub-section (a) include all the forms of notice currently authorized in UCIOA section 3-108, which requires that unit owners be given notice of meetings. The new additional forms of notice are electronic transmissions and posting on bulletin boards, both as discussed in Phoenix.
2. This text on electronic transmissions is taken from a 2004 Maryland statute, § 11B-113.1. Additional editing of this text is plainly required, but the text highlights some of the issues raised by such a form of notice.
3. Finally, we suggested that the comment might state that the Act doesn’t designate how or when to give notice. [Note that this is a departure from the current Act].
4. Other thoughts:
a. Is this section intended to enable email, or do we intend that email can be used even if the declaration requires hand delivery or US mail?
b. Intent = [said someone] – if the documents require notice to be given by other than hand or US mail, [life, eg , fed ex or certified mail] then you have to give it that way.
SECTION 3-123. REMOVAL OF OFFICERS AND DIRECTORS
PASADENA TRANSCRIPT
Section 3-123
T at 125
COMMISSIONER SHELDON F. KURTZ (Iowa): I am assuming at the meeting there could be persons present who haven't decided yet whether they are in favor or oppose removal. If I read (b) correctly, they are not entitled to a reasonable opportunity to speak.
COMMISSIONER CARL H. LISMAN: No. We think those people shouldn't be allowed to talk at all.
COMMISSIONER KURTZ: That's what I figured. I would like you to rethink that, if you could take a look at (b). I assume what you're trying to say is that everybody at the meeting should be provided a reasonable opportunity, but maybe I've got it wrong.
*****
Reporter Note (04/07)
REF: p. 102 [§3-123]; p. 74 [§3-110(f)]
[The Reporter needs assistance in describing the procedure in subsection (c)(2).]We undoubtedly require additional provisions.
One observer writes:
Subsection 3-123(c). If I understand the basic concept of this subsection correctly, it is concerned that a vote of those present at a meeting of the association, even those present either in person or by proxy, will not, somehow, as truly reflect the will of the unit owners as a referendum. Subsection 3-110(f) of the proposed revisions already provides for a referendum, and I do not see why it could not be used for a recall as well. The issue that is the subject of a standard referendum is not first discussed at a meeting. It is proposed for a ballot from the beginning. For some reason, which is not clear to me, a separate procedure is proposed for a recall meeting in which the referendum takes place after the meeting is adjourned. I have several questions about this procedure as it is described in the draft:
1. The text is silent as to who gets to decide whether to recess the meeting.
2. The power to recess a meeting ordinarily belongs to the individuals entitled to
vote at the meeting. I find it hard to believe that the group that holds the majority
of votes at a recall meeting would ever want to recess the meeting. Ordinarily it
would want to take a vote so that its will could prevail.
3. If someone else is permitted to recess the meeting, the action would be perceived
to be, and indeed would be, undemocratic in that it was thwarting the will of the
majority of those present at the meeting.
4. If the recall is to be debated at the meeting but then voted on by people who were
not at the meeting, the entire purpose of debating the recall is nullified or at least
undermined. If the recall is to be by some sort of ballot, provision should be made
for circulating arguments and position papers with the ballot.
Subsection 3-123(d). We still need to guard against recalls by small numbers of unit owners. The default quorum under the Act is 20% and our practice in Connecticut is to provide that a quorum consist of whoever shows up. This is fine for making sure that the association can conduct its business in uncontroversial times without risking the absence of a quorum. It doesn’t work so well concerning issues such as recalls. I suggest that the subsection be changed to read
“. . . only if the number of votes cast in favor of removal both: (i)
exceeds the number of votes cast in opposition to removal; and (ii) is
greater than one-third of the total votes in the association.”
Other Comments on Section 3-123. I think proxies should be permitted in recall votes. Generally, if both sides are soliciting proxies, and keeping in mind that a unit owner can always cancel an earlier proxy by giving a later one, the unit owners are given a realistic opportunity to choose between positions and, in my experience, they usually do. For the most part, people who complain that proxies are being misused have no real basis for complaint except that the other side got more proxies than they did.
Ordinarily, where there is a successful recall, more than one director is removed. In my experience, most recalls (and the resignations that sometimes accompany or precede them) remove either all or a majority of the board members. For this reason, it is crucial that new directors be elected at the same meeting or referendum at which the prior directors were recalled. Otherwise there may be no one to tend to the affairs of the association.
Reporter Note [10-06]
Here is the text of the Model Non-Profit Corporation Act regarding removal of directors, as adopted in Connecticut:
Sec. 33-1088. Removal of directors by members or directors. (a) The members entitled to vote for the election of directors or, if there are no such members, the directors, may remove one or more directors with or without cause unless the certificate of incorporation provides that directors may be removed only for cause.
(b) If a director is elected by a class of members only the members of that class may participate in the vote to remove him.
(c) If cumulative voting is authorized, a director may not be removed if the number of votes sufficient to elect him under cumulative voting is voted against his removal. If cumulative voting is not authorized, a director may be removed only if the number of votes cast to remove him exceeds the number of votes cast not to remove him.
(d) A director may be removed by the members entitled to vote for directors or, if there are no such members, the directors, only at a meeting called for the purpose of removing him and the meeting notice must state that the purpose, or one of the purposes, of the meeting is removal of the director.
Reporter’s Notes
1. In early discussions, two particular concerns were: (1) how practical is it in most cases to require a quorumed meeting for a recall, and (2) how could one ever consider recall in a large association?
2. The consensus seemed to be that this is a real world problem.
3. These additional views were expressed:
a. Ms. Foley-Healy [CAI] – there is a number somewhere between the statute’s current requirement of 2/3 of those present at a quorumed meeting, and whoever shows up at a meeting, whether or not there is a quorum present, that is the appropriate number.
b. Don Mielke - We definitely need a clearer procedure
c. The Chair - UCIOA has already dealt with this – see 3-102(g).
4. My notes then suggest that I “pull some of these things out”:
a. Change 2/3s to something else – perhaps a majority of those who vote at a meeting.
b. Can we use proxies in a removal fight. [Why not?]
c. Should the vote be on removal of x and y as directors AND election of their successors?
d. Owen Anderson – Responding to # 3, he asserted that the model should be judicial retention – that is, the new election is a separate decision from removal of the incumbent.
e. Make certain that the removal section does not apply to removal of appointed directors
f. There ought to be an opportunity to talk [at the removal meeting – or perhaps at every meeting] and then include some procedures for extended voting and for electronic voting or extended voting or whatever.
g. The vote on the removal ought not to take place until after that point in time when the talk takes place.
h. The act should require the association to have a meeting and then allow balloting by mail – instead of simply a vote at that time.
i. Marion Benfield – I would not require quorums but I would make it easy to vote – ok to be done by ballot and no quorum needed.
j. Elections should also be easy.
SECTION 3-124. ADOPTION OF BUDGETS. [Previously Section 3-103 (c), amended as shown]
PASADENA TRANSCRIPT
Section 3-124
T at 127
COMMISSIONER PATRICK A. RANDOLPH, JR.: I have been waiting for this one. This is the one area in which I think I would like to ask the opinion of the assembly with respect to a policy issue that I know is controversial and has been talked about a lot about on the committee as well. This relates not to a provision of the language but to a provision in the comments. Comment 2 on Page 135. This comment indicates that it would be appropriate for the association to levy a transfer tax -- it's called a fee, but it's nothing less than a tax -- on any transfer of a unit to raise money essentially to pay association expenses out of the pocket of individual unit owners who choose to sell their units. This is a recent practice that is starting to crop up in some associations. Most people view it as heinous -- well, most of my friends view it as heinous and sinful. Association boards, of course, view it as the next greatest thing because it permits them to raise money without raising assessments. It passes on the cost of general costs of managing the association to individual unit owners who are leaving and aren't going to vote for association leadership in the future. Essentially, it violates the entire principle of unit owners bearing their pro rata expenses in accordance with an established plan. Instead, it permits the association board to load the cost of association activities on to a small number of unit owners who for one reason or another choose to sell.
I am authorized to say that Benny Kass, a life member of NCCUSL and from D.C., feels the same as I do and wishes NCCUSL to find a way to legislate against this activity in UCIOA. I feel the same way. I think this is a terrible practice. In fact, it's got some germs elsewhere. If you think it's only going to happen in associations, there are some developers now who are trying to create covenants running with the land that would permit them to collect a transfer tax, whenever property is sold, perpetually into the future off of lots that they develop. This whole practice of just because you control things at one point, you're allowed to assess people when they resell is, I think, difficult. I don't know that a motion is required. I would like to hear what the attitude of the committee is. I have a feeling you have discussed it. I would like to hear whether others on the floor think that we ought to take another look at this practice and see if we should not permit it in UCIOA. Thank you.
CHAIRPERSON WYNN: Thank you, Commissioner. Does the committee wish to offer a response?
COMMISSIONER CARL H. LISMAN: We would rather hear from the floor first.
CHAIRPERSON WYNN: The committee will comment on that at the appropriate time. Microphone 6, Commissioner Tenenbaum.
MR. J. SAMUEL TENENBAUM: I agree with what my fellow commissioner just said with one exception, and that is there are some costs that an association bears that are directly related to the transfer. It seems to me appropriate that there be a recovery of those costs by the association. If that is what was meant by these transfers fees, perhaps that could be clarified in the comment.
COMMISSIONER RANDOLPH: That is not what was meant. I certainly agree that that sort of an expense could be recovered.
CHAIRPERSON WYNN: Other comments from the floor with regard to the comments made by Commissioner Randolph.Does the committee wish to offer a
comment at this time?
COMMISSIONER CARL H. LISMAN: the committee has not taken a position yet on the issue of transfer fees. It hasn't because there are lots of legitimate reasons for imposing transfer fees and there are lots of illegitimate reasons. Many declarations provide that initial purchasers, in addition to paying the purchase price from the developer, pay some multiple of a monthly assessment into a capital reserve fund to kick start the reserve fund. Sometimes that is so the developer doesn't have to put in her money. Sometimes that is so the association can start to act on its own to do things that the unit owners may want, like build a swimming pool which the developer hasn't offered to the members but has provided a means by which the members could fund it. Very frequently the transfer fee is used in connection with a 501 organization affiliated with and frequently controlled by the association to maintain wetlands, marshlands, to operate a library or a civic center. And then the concept of the transfer fee has a different legitimacy to it. The committee will further discuss this. We will take a position for you next summer, but I don't know yet what it will be.
Proposed NEW Comment
REF: p. 103 [§3-124]
The issue of whether state law should mandate that all common interest community associations create a reserve fund for the replacement of common elements as they become necessary and, if so, the extent to which they should be mandated, is a subject of considerable scholarly debate and widely varying statutory treatment in the States.
As of 2006, some states – Florida and Hawaii, for example – either mandate that reserves be maintained [insert citations] or establish a default rule that such reserves be created in the absence of an affirmative vote by the association membership not to create reserves. Other states – Virginia and California for example, [insert citations] require that the association board undertake periodic studies of the association’s need for reserves.
It is also true that the underwriting guidelines used by Fannie Mae when deciding whether to purchase mortgages in common interest communities, requires in condominiums – but not in planned communities – not only that the association maintain reserves but that those reserves be “adequate,” without defining the meaning of that word.
The evidence presented to the drafting committee suggested that the needs, practices and expectations of unit owners in common interest communities differ widely, depending on, for example, the size, age, location and design of the physical structures as well as the age, economic circumstances and other demographic characteristics of the unit owners. Evidence suggests, for example, that small, self-managed associations commonly will maintain minimal reserves and will typically self-assess for repairs as needed. Other larger common interest communities, particularly in high maintenance buildings, may choose to establish substantially higher reserves. On the other hand, it appears that very few associations that maintain reserves at a level which would be actuarially required by evaluating the useful life of each component of the building and then accumulating reserves through increases in the monthly common charges paid by each owner, based on a schedule reflecting each component’s useful life.
Associations confront the same choices that a single family homeowner confronts in thinking about, for example, the future need to replace the roof on her house. That owner has at least three choices: (1) she can set aside a sum of money each month in a segregated fund – perhaps even calling it a ‘reserve’ fund – so that when the roof or other parts of her home need to be replaced, she will have the needed funds; (2) she can maintain savings which are not segregated and pay cash from those savings at the time the roof replacement occurs; or (3) she can borrow the needed funds, and pay that money back during the years when she is enjoying a dry home. Clearly, she can also use a combination of these techniques. Today, encouraged by state laws such as UCIOA § 3-102(a)(8) – enabling associations to pledge their future common charges as security for a loan, UCIOA § 3-112, enabling associations to mortgage the common elements as security for a loan, and UCIOA § 2-119 (confirming the rights of lenders to enforce conventional loan terms against associations) associations are increasingly engaged in borrowing as an alternative to self-funding of reserves by unit owners who may, in fact, be unable to realize the economic value of those reserve payments if they sell their units early in the life of the project.
The committee was also mindful of the impact of a possible law mandating reserves on the needs of the elderly and those of limited economic means. In practice, older unit owners often resist reserves, while younger families may perceive a greater long term value in their creation. We were also made aware of the special concerns of lower income owners in common interest communities, where poorer owners may simply walk away from their mortgages and their units because of their inability to maintain mortgage payments and monthly common charges. If a statute were to mandate fully funded reserve payments, we would be concerned with two possible unintended consequences: first, such a mandate might so raise the monthly common charges that many potential buyers might be disqualified from homeownership; and second, the increases in charges might accelerate the collapse of common interest communities housing marginal income existing owners, who might abandon their units in increased numbers. Neither of these outcomes would be desirable.
At the same time, the committee understands the natural interest of elected officials, who may often be faced with constituent demands that government ‘do something’ about a common interest community that has not prudently managed its affairs, with the result that needed repairs have not been made and the needed funding is not readily identifiable.
For these reasons, the drafting committee in the 2007 amendments to UCIOA determined that the most appropriate statutory means of addressing this concern was to address the issue of reserves during the budget adoption process. The new provision does not require a particular outcome other than the fact that the budget must affirmatively address the issue one way or the other. Presumably, once required to address the issue, the association, even during the period of declarant control, and the association's professional advisors will draft a reasoned provision consistent with their best sense of the nature of the particular community and the likely financial circumstances of their purchasers.
Note that this provision does not in any way interfere with the necessary flexibility of a declarant in addressing this and many other subjects. The provision does not mandate reserves at all, nor fully funded reserves, nor ‘adequate’ reserves and it does not prevent future unit owners, after the end of the period of declarant control, from changing the initial result created by the declarant. Moreover, parallel amendments to UCIOA Section 4-109 confirms that this issue will be fully disclosed in the initial POS and later resale documents.
Thus, what this amendment accomplishes is to make certain that the subject of reserves be consciously addressed by the party best suited at the time to understand the likely expectations and requirements of the unit owners. Over the long term, however, better education of declarants and unit owners alike, and the growth of ‘best practices’ in the common interest community field under the leadership of national and state interest groups, must provide the optimal outcome in each particular circumstance.
Reporter’s Notes
1. The Drafting Committee has discussed the subjects of Special Assessments, Transfer Fees and so-called “Capital Investment” fees and Seller conveyance taxes due to the association. Various committee members and advisors expressed opinions and offered comments. Some of them were these:
a. Whether UCIOA ought to address the issue of special assessments at all. Note that at least Virginia [Sec. 55-514] does address this subject.
b. Some documents have provisions on these matter; some require a selling unit owner to make a contribution to a 501(c) (3) tax exempt organization at the time of sale; others apparently, require a 3% or 5% ‘kicker’ paid at the time of sale to the declarant.
c. One advisor notes that California prohibits a payment of ‘transfer fees’ but that she drafts a mandated transfer fee into her clients’ documents at times for ‘good purposes’ – such as common area reserves or improvements.
d. Another advisor also discussed Separate Assessments, Fines and Other Charges. He gave examples of insurance deductibles, user fees, charges for trimming the hedge when owner failed to do it, amenity charges.
e. We also considered situations where there are tiered assessments [such as a master association?]
At a minimum, the subject ought to be addressed in Sec. 4-103(a)(7) – POS disclosures [if there are to be no restrictions] or in a separately drafted section if the Committee intends any fee restrictions. An amendment has been proposed there.
Otherwise, at present there is nothing in UCIOA that is intended to limit the imposition of such fees. It is not clear that we can usefully deal with the subject of transfer fees and capital investment fees, except as a matter of disclosure.
2. An observer writes this regarding special assessments:
Subsection 3-124(b). I am glad to see this concept added. In Connecticut we have included a similar provision in most of our declarations since 1984 in order to prevent the executive board from doing, by special assessment, what the unit owners would not permit it to do as part of the budget. I do have a few concerns with the current language:
1. Special Assessments. The term “special assessment” is not defined. It is sometimes used to refer to any assessment that is not part of the budget, or any assessment that is not payable in equal monthly installments, or any assessment which is not assessed against all of the units, etc. We need a clear definition which should be, I believe,
“any assessment not part of the budget proposed and ratified under Subsection 3-124(a) which is greater than [15%] of such budget.”
With that definition, Subsection 3-124(b) will work properly.
2. Transfer Fees. There is a serious division of opinion as to whether UCIOA limits or prohibits the imposition of transfer fees. A transfer fee is, by definition, not assessed against all units in accordance with their percentages as required by Subsection 3-115(b) and it doesn’t fall within any of the exceptions in Subsections 3-115(c) through (f). Some courts, reviewing similar statutory provisions, have held that transfer fees are not permitted. Micheve, LLC vs. Wyndham Place at Freehold Condominium Association. 885 A.2d 35 (N.J. Super. Ct. App. Div. 2005. I for one believe it would be very helpful if the Act permitted transfer fees, provided:
a. That they were specifically authorized in the declaration;
b. That they apply broadly (perhaps they apply whenever state conveyance tax applies); and
c. That there be some reasonable method of limiting their amount. This might be done by limiting the amount to some multiple of the current annual assessment against the unit, a percentage of its fair market value, or something similar.
Many of the associations we represent would like to impose such a fee, though we are unable to give them clear advice as to how to do it.
PROTECTION OF PURCHASERS
SECTION 4-101. APPLICABILITY; WAIVER.
Commissioner's Comment
REF: P. 105 [§4-101]
7. Section 4-101(b) Applicability – add a disposition by operation of law due to the death of the owner. “D. Behr – Alaska”
SECTION 4-113. EXPRESS WARRANTIES OF QUALITY.
REF: p. 120 [§4-113]
[10-05 COMMENTS] - Law of Principal and Agent apply
SECTION 4-117. EFFECT OF VIOLATIONS ON RIGHTS OF ACTION; ATTORNEY'S FEES.
New Comment
REF: p. 124 [§4-117]
The language of sub-section (a) is intentionally broad, and emphasizes the traditional authority of a court in equity to fashion a remedy suited to the circumstances of the case. Importantly, the provisions of this section would apply with equal force to a violation of either this Act or the declaration or by-laws by “any person” besides the declarant – including, for example, the association in its dealings with unit owners, a property manager or unit owners whose own behavior violates those same laws or instruments.
In appropriate cases involving association or executive board activities, the court might grant relief in the form of requiring new elections, removal of officers from office, and orders requiring offending parties to make the association whole for improperly expended funds. These examples are not intended to exhaust the traditional authority of a judge to grant “appropriate relief”, and that authority is emphasized by the specific grant of discretion to authorize punitive damages or attorneys fees, as the circumstances warrant.
[10-06 COMMENT] = A civil action may lie, in an appropriate case, for failure of the executive board to comply with the “open meeting” requirement of §3-108.
Add Comment on Private Enforcement.