Drafted by the
NATIONAL CONFERENCE OF COMMISSIONERS ON UNIFORM STATE LAWS
and by it
APPROVED AND RECOMMENDED FOR ENACTMENTIN ALL THE STATES
at its
ANNUAL CONFERENCEMEETING IN ITS ONE-HUNDRED-AND-SEVENTEENTH YEARIN BIG SKY, MONTANAJULY 18 – 25, 2008
WITH PREFATORY NOTE AND COMMENTS
COPYRIGHT 8 2008ByNATIONAL CONFERENCE OF COMMISSIONERSON UNIFORM STATE LAWS
December 8, 2008
The Uniform Law Commission (ULC), also known as National Conference of Commissioners on Uniform State Laws (NCCUSL), now in its 117th year, provides states with non-partisan, well-conceived and well-drafted legislation that brings clarity and stability to critical areas of state statutory law.
ULC members must be lawyers, qualified to practice law. They are practicing lawyers, judges, legislators and legislative staff and law professors, who have been appointed by state governments as well as the District of Columbia, Puerto Rico and the U.S. Virgin Islands to research, draft and promote enactment of uniform state laws in areas of state law where uniformity is desirable and practical.
The Committee appointed by and representing the National Conference of Commissioners on Uniform State Laws in amending this Act consists of the following individuals:
CARL H. LISMAN, 84 Pine St., P.O. Box 728, Burlington, VT 05402, Chair
OWEN L. ANDERSON, University of Oklahoma College of Law, 300 Timberdell Rd., Norman, OK 73019
MARION W. BENFIELD, JR., 10 Overlook Circle, New Braunfels, TX 78132
DAVID D. BIKLEN, 153 N. Beacon St., Hartford, CT 06105
ELLEN F. DYKE, 2125 Cabots Point Lane, Reston, VA 20191
JOHN S. GILLIG, P.O. Box 4285, 91 C Michael Davenport Blvd., Frankfort, KY 40604
DALE G. HIGER, 1302 Warm Springs Ave., Boise, ID 83712
DONALD E. MIELKE, 7472 S. Shaffer Ln., Suite 100, Littleton, CO 80127
HIROSHI SAKAI, 3773 Diamond Head Circle, Honolulu, HI 96815
NATHANIEL STERLING, 4180 Oak Hill Ave., Palo Alto, CA 94306
YVONNE L. THARPES, Legislature of the Virgin Islands, P.O. Box 1690, St. Thomas, VI 00804
NORA WINKELMAN, Office of General Counsel, 333 Market St., 17th Flr., Harrisburg, PA 17101
LEE YEAKEL, Western District of Texas, P.O. Box 164196, Austin, TX 78716-4196
WILLIAM R. BREETZ, JR., Connecticut Urban Legal Initiative, University of Connecticut School of Law, 35 Elizabeth St. Rm K-202, Hartford, CT 06105, National Conference Reporter
MARTHA LEE WALTERS, Oregon Supreme Court, 1163 State St., Salem, OR 97301-2563, President
WILLIAM H. HENNING, University of Alabama, Box 870382, Tuscaloosa, AL 35487-0382, Division Chair
GARY A. POLIAKOFF, 3111 Stirling Rd., Ft. Lauderdale, FL 33312-6525, ABA Advisor
REBECCA ANDERSON FISCHER, 633 17th St., Suite 3000, Denver, CO 80202, ABA Section Advisor
JOHN A. SEBERT, 111 N. Wabash Ave, Suite 1010, Chicago, IL 60602, Executive Director
Copies of this Act may be obtained from:NATIONAL CONFERENCE OF COMMISSIONERSON UNIFORM STATE LAWS111 N. Wabash Ave., Suite 1010Chicago, Illinois 60602312/450-6600
AMENDMENTS TO UNIFORM COMMON INTEREST OWNERSHIP ACT
TABLE OF CONTENTS
[ARTICLE] 1
GENERAL PROVISIONS
7 SHORT TITLE................................................. SECTION 1-101.7 APPLICABILITY............................................... SECTION 1-102.7 DEFINITIONS.................................................. SECTION 1-103.
52.............................
SECTION 1-104. NO VARIATION BY AGREEMENT.
92SEPARATE TITLES AND TAXATION............................ SECTION 1-105.
SECTION 1-106. APPLICABILITY OF LOCAL ORDINANCES, REGULATIONS, AND
23BUILDING CODES.....................................................43 EMINENT DOMAIN........................................... SECTION 1-107.63SUPPLEMENTAL GENERAL PRINCIPLES OF LAW APPLICABLE.... SECTION 1-108. 73 CONSTRUCTION AGAINST IMPLICIT REPEAL................... SECTION 1-109.73UNIFORMITY OF APPLICATION AND CONSTRUCTION........... SECTION 1-110. 73 SEVERABILITY............................................... SECTION 1-111.83UNCONSCIONABLE AGREEMENT OR TERM OF CONTRACT...... SECTION 1-112. 93OBLIGATION OF GOOD FAITH................................. SECTION 1-113. 93REMEDIES TO BE LIBERALLY ADMINISTERED.................. SECTION 1-114. 93 ADJUSTMENT OF DOLLAR AMOUNTS.................... SECTION 1-115.
SECTION 1-116. RELATION TO ELECTRONIC SIGNATURES IN GLOBAL AND
14NATIONAL COMMERCE ACT...........................................
24APPLICABILITY TO NEW COMMON INTEREST COMMUNITIES.... SECTION 1-201.
EXCEPTION FOR SMALL COOPERATIVES....................... SECTION 1-202.
SECTION 1-203. EXCEPTION FOR SMALL AND LIMITED EXPENSE LIABILITY
54PLANNED COMMUNITIES..............................................
SECTION 1-204. APPLICABILITY TO PRE-EXISTING COMMON INTEREST
64COMMUNITIES........................................................
SECTION 1-205. SAME; EXCEPTION FOR APPLICABILITY TO SMALL PRE-EXISTING
05PREEXISTING COOPERATIVES AND PLANNED COMMUNITIES.............05AMENDMENTS TO GOVERNING INSTRUMENTS................. SECTION 1-206.
SECTION 1-207. APPLICABILITY TO NONRESIDENTIAL AND MIXED-USE
35COMMON INTEREST COMMUNITIES....................................
SECTION 1-208. APPLICABILITY TO OUT-OF-STATE COMMON INTEREST
65COMMUNITIES........................................................65OTHER EXEMPT REAL ESTATE ARRANGEMENTS................ SECTION 1-209.
95OTHER EXEMPT COVENANTS.................................. SECTION 1-210.
06CREATION OF COMMON INTEREST COMMUNITIES.............. SECTION 2-101. 46 UNIT BOUNDARIES........................................... SECTION 2-102.
SECTION 2-103. CONSTRUCTION AND VALIDITY OF DECLARATION AND
56BYLAWS..............................................................76 DESCRIPTION OF UNITS....................................... SECTION 2-104.76CONTENTS OF DECLARATION................................. SECTION 2-105. 37LEASEHOLD COMMON INTEREST COMMUNITIES............... SECTION 2-106. 67ALLOCATION OF ALLOCATED INTERESTS...................... SECTION 2-107. 08LIMITED COMMON ELEMENTS................................ SECTION 2-108. 18 PLATS AND PLANS........................................... SECTION 2-109.
SECTION 2-110. EXERCISE OF DEVELOPMENT RIGHTS.
68........................
98 ALTERATIONS OF UNITS...................................... SECTION 2-111.09RELOCATION OF UNIT BOUNDARIES........................... SECTION 2-112. 29 SUBDIVISION OF UNITS....................................... SECTION 2-113.39 EASEMENT FOR ENCROACHMENTS........................... [SECTION 2-114.49 MONUMENTS AS BOUNDARIES............................... [SECTION 2-114.49 USE FOR SALES PURPOSES.................................... SECTION 2-115.59EASEMENT AND USE RIGHTS.................................. SECTION 2-116. 69AMENDMENT OF DECLARATION.............................. SECTION 2-117.
SECTION 2-118. TERMINATION OF COMMON INTEREST COMMUNITY.. . . . . . . . . . 102 SECTION 2-119. RIGHTS OF SECURED LENDERS...............................119 SECTION 2-120. MASTER ASSOCIATIONS.....................................120 SECTION 2-121. MERGER OR CONSOLIDATION OF COMMON INTEREST
COMMUNITIES....................................................... 123 SECTION 2-122. ADDITION OF UNSPECIFIED REAL ESTATE. . . . . . . . . . . . . . . . . . . . 126 SECTION 2-123. MASTER PLANNED COMMUNITIES............................127 SECTION 2-124. TERMINATION FOLLOWING CATASTROPHE... . . . . . . . . . . . . . . . . . 129
[ARTICLE] 3
MANAGEMENT OF THE COMMON INTEREST COMMUNITY
SECTION 3-101. ORGANIZATION OF UNIT OWNERS ASSOCIATION. . . . . . . . . . . . . . 131 SECTION 3-102. POWERS AND DUTIES OF UNIT OWNERS ASSOCIATION. . . . . . . . 133 SECTION 3-103. EXECUTIVE BOARD MEMBERS AND OFFICERS. . . . . . . . . . . . . . . . 142 SECTION 3-104. TRANSFER OF SPECIAL DECLARANT RIGHTS. . . . . . . . . . . . . . . . . . 148 SECTION 3-105. TERMINATION OF CONTRACTS AND LEASES OF DECLARANT.. . 154 SECTION 3-106. BYLAWS....................................................157 SECTION 3-107. UPKEEP OF COMMON INTEREST COMMUNITY.. . . . . . . . . . . . . . . . 158 SECTION 3-108. MEETINGS..................................................160 SECTION 3-109. QUORUMS QUORUM.........................................166 SECTION 3-110. VOTING; PROXIES; BALLOTS.................................167 SECTION 3-111. TORT AND CONTRACT LIABILITY; TOLLING OF LIMITATION
PERIOD.............................................................. 171 SECTION 3-112. CONVEYANCE OR ENCUMBRANCE OF COMMON ELEMENTS. . . 173 SECTION 3-113. INSURANCE.................................................177 SECTION 3-114. SURPLUS FUNDS............................................185 SECTION 3-115. ASSESSMENTS FOR COMMON EXPENSES......................185 SECTION 3-116. LIEN FOR ASSESSMENTS; SUMS DUE ASSOCIATION;
ENFORCEMENT. .....................................................189SECTION 3-117. OTHER LIENS...............................................199SECTION 3-118. ASSOCIATION RECORDS.....................................204SECTION 3-119. ASSOCIATION AS TRUSTEE. .................................208SECTION 3-120. RULES......................................................208
SECTION 3-121. NOTICE TO UNIT OWNERS....................................212
SECTION 3-122. REMOVAL OF OFFICERS AND DIRECTORS.. ...................213
SECTION 3-123. ADOPTION OF BUDGETS; SPECIAL ASSESSMENTS..............214
SECTION 3-124. LITIGATION INVOLVING DECLARANT.........................218
[ARTICLE] 4
PROTECTION OF PURCHASERS
SECTION 4-101. APPLICABILITY; WAIVER. ...................................222 SECTION 4-102. LIABILITY FOR PUBLIC OFFERING STATEMENT
REQUIREMENTS......................................................223 SECTION 4-103. PUBLIC OFFERING STATEMENT; GENERAL PROVISIONS........224 SECTION 4-104. SAME; COMMON INTEREST COMMUNITIES SUBJECT TO
DEVELOPMENT RIGHTS...............................................231 SECTION 4-105. SAME; TIME SHARES. .......................................233 SECTION 4-106. SAME; COMMON INTEREST COMMUNITIES CONTAINING
CONVERSION BUILDINGS.............................................234SECTION 4-107. SAME; COMMON INTEREST COMMUNITY SECURITIES. ........235SECTION 4-108. PURCHASER’S RIGHT TO CANCEL............................236SECTION 4-109. RESALES OF UNITS..........................................238SECTION 4-110. ESCROW OF DEPOSITS.......................................240SECTION 4-111. RELEASE OF LIENS..........................................242SECTION 4-112. CONVERSION BUILDINGS....................................243SECTION 4-113. EXPRESS WARRANTIES OF QUALITY. ........................245SECTION 4-114. IMPLIED WARRANTIES OF QUALITY..........................247SECTION 4-115. EXCLUSION OR MODIFICATION OF IMPLIED WARRANTIES
OF QUALITY.........................................................250 SECTION 4-116. STATUTE OF LIMITATIONS FOR WARRANTIES.................251 SECTION 4-117. EFFECT OF VIOLATIONS ON RIGHTS OF ACTION;
ATTORNEY’S FEES. ..................................................253SECTION 4-118. LABELING OF PROMOTIONAL MATERIAL. ....................255SECTION 4-119. DECLARANT’S OBLIGATION TO COMPLETE AND RESTORE.....255SECTION 4-120. SUBSTANTIAL COMPLETION OF UNITS........................256SECTION 4-121. EFFECTIVE DATE............................................256
SECTION 5-101. ADMINISTRATIVE AGENCY..................................257 SECTION 5-102. REGISTRATION REQUIRED...................................257 SECTION 5-103. APPLICATION FOR REGISTRATION; APPROVAL OF
UNCOMPLETED UNITS................................................258
SECTION 5-104. RECEIPT OF APPLICATION; ORDER OF REGISTRATION.. . . . . . . . . 261 SECTION 5-105. CEASE AND DESIST ORDERS.................................262 SECTION 5-106. REVOCATION OF REGISTRATION.............................262 SECTION 5-107. GENERAL POWERS AND DUTIES OF AGENCY..................263 SECTION 5-108. INVESTIGATIVE POWERS OF AGENCY. .......................265 SECTION 5-109. ANNUAL REPORT AND AMENDMENTS........................265 SECTION 5-110. AGENCY REGULATION OF PUBLIC OFFERING STATEMENT. . . . . 266
Introduction The 2008 proposed amendments to the Uniform Common Interest Ownership Act (“UCIOA”) are the product of a four year drafting committee effort. In its work, the committee sought primarily to address a range of significant controversies between common interest associations and individual unit owners that have arisen in the years since the Uniform Laws Commission last considered amendments to UCIOA in 1994. To a lesser degree, these amendments also address a range of other matters affecting common interest communities – that is, condominiums, cooperatives, and planned communities – that practitioners have identified throughout the country over the last decade.
Despite the many years of drafting efforts beginning in 1976 with The Uniform Condominium Act, and culminating in the 1994 amendments to UCIOA, it had become increasingly clear by the time the drafting committee was created in 2005 that major tensions remained in the common interest community field that neither UCIOA or any of its constituent Acts – nor most State statutes in this field - adequately addressed. Those tensions principally involved the perception that individual unit owners were often unduly disadvantaged in their dealings with the elected directors and employee/managers of unit owner associations. Even in those few states that had adopted UCIOA more or less intact, and therefore were able to apply the detailed provisions of that Act to association activities, there has been a growing focus, both in the media and in professional conferences, on the intensity of owner/association disputes. State legislators were besieged with lobbying efforts to adopt narrowly focused special interest statutes intended to fix one or another association ‘problem’. Even the federal government became involved, enacting a federal statute to insure that associations of every form of common interest community must permit the display of the American flag on units, and another one that enabled individual unit owners to purchase individual cable television systems, notwithstanding widespread prohibitions on such purchases by unit owner associations.
Accordingly, the revised act – so-called "Version 3.0" – has systematically identified those areas where there have been allegations that those who control the decision-making apparatus of associations have either abused the rights of individual unit owners, or suffer from such inadequate legislation that they are unable to adequately assist their owners. The list is considerable and includes at least these matters:
•open meeting requirements on directors’ meetings, and limits on the rights ofdirectors to act behind closed doors;
Further, there has been considerable publicity across the country regarding alleged abuse in the foreclosure process when unit owners fail to pay sums due the association. To address this specific issue, the Act proposes new and considerable restrictions on the foreclosure process as it applies to common interest communities.
In all these respects, the 2008 amendments enhance the considerable protections for unit owners’ rights that exist under the existing provisions of UCIOA.
Beyond the unit owner/association issues, the revised Act addresses several other significant issues in the field. Among several subjects detailed below, they include:
A summary of all amendments made in 2008 can be found on the website for the Uniform Laws Commission; go to www.nccusl.org and follow the links to the Uniform Common Interest Ownership Act.
PREFATORY NOTE
The Uniform Common Interest Ownership Act (“UCIOA”) was adopted at the 1982 Annual Meeting of the National Conference of Commissioners on Uniform State Laws (the “ULC”). It combined, in a single comprehensive law, prior uniform laws in this area (the Uniform Condominium Act (1980), the Uniform Planned Community Act (1980), and the Model Real Estate Cooperative Act (1981)). By 1994, UCIOA had become the law in at least five States, while the Uniform Condominium Act, or substantially similar laws, exist in 21 States. The Uniform Planned Community Act is the law in one State.
In 1994, the ULC adopted significant amendments to UCIOA. Following an intensive
1
study of UCIOA by the Joint Editorial Board for Real Property Acts, the ULC appointed aDrafting Committee to write the necessary amendments and additions. Changes to UCIOA should result in corresponding changes in these prior laws; consequently, practitioners in approximately half the American jurisdictions need to have a basic understanding of the changes.
The following is a brief summary of the proposed changes:
However, in very large projects, a declarant’s ability to predict the future of a project to be built out over a longer period of time is very limited. Changes in market conditions, the economy, and demographics can occur without warning, forcing changes in even the most preliminary of plans. For that reason, a new Section 2-123 has been added. By its terms, if the declaration identifies the community as a “master planned community,” reserving the right to create at least 500 units for residential purposes and the declarant owns or controls more than 500 acres on which those units may be built, then much of the information which otherwise must appear in the declaration from the outset is not required until the declaration is amended as units are created. Further, the public offering statement requirements apply only to units being offered
The Joint Editorial Board was created in 1977 by joint agreement of the ULC and the American Bar Association’s Section on Real Property, Trusts and Probate Law to assist in the promulgation of Uniform Acts subject to its jurisdiction. Thereafter, the American College of Real Estate Lawyers became a co-sponsor of the JEB.
or which have been declared. Finally, the provisions of Section 3-103 regarding transition of control of the unit owners association are amended to permit longer declarant control. As a result, additional flexibility is given for “master planned communities,” but the declarant continues to be subject to the obligations of good faith and the standards of unconscionability.
3. Section 2-105(a)(12), as originally crafted, required that a declaration must contain “any restrictions (i) on use, occupancy, and alienation of units ... .” Taken literally, if a declaration does not contain any restrictions, none could be imposed by rule or regulation of the association. But compare Section 3-102(a)(1) (an association may adopt “rules and regulations”) and Section 3-102(a)(6) (an association may “regulate the use, maintenance, repair, replacement, and modification of common elements”).
In considering the implications of this result, the ULC agreed that uses or occupancy of a unit which affect other units or the common elements are appropriate for regulation, and that unit uses or occupancies with no measurable impact on other units or the common elements should be subject to a different approach to regime regulation as detailed in new Section 3-102(c).
For these reasons, Section 2-105 has been amended to (a) permit (rather than mandate) the declaration to contain restrictions on use and occupancy of units and (b) permit the association to adopt rules and regulations of units to prevent uses which violate the declaration, and to adopt reasonable rules and regulations regarding occupancy of or behavior in units insofar as the occupancy or behavior might affect other unit owners. Section 3-102 has been amended to add subsection (c).
4. As originally drafted, only the most basic provisions of UCIOA Section 1-203 applied if a planned community contained no more than 12 units and was not subject to development rights or if the declaration limited the common expense liability to a relatively small amount. Further, if a planned community contained more than 12 units or was subject to development rights, but the declaration limited the common expense liability to a slightly higher amount, no public offering statement was required to be delivered to an original buyer and no resale certificate was required on resale. See UCIOA (1982) Section 4-101(b)(7).
The 1994 Act has deleted Section 4-101(b)(7). An amendment to Section 1-203 expands that provision so that only the very basic provisions of the Act will apply if a planned community is not subject to development rights and either (1) contains no more than 12 units or
(2) is of any size so long as the annual average common expense liability, exclusive of optional user fees and insurance premiums paid the association, does not exceed $300 (subject to the adjustment provisions of Section 1-115).
However, because a declarant ought not to warrant the common elements for an inordinate period of time (which may be the result if the period of declarant control is substantial), Section 4-116(d) authorizes the declarant to cause an independent committee of the executive board, during the period of declarant control, to evaluate and enforce warrant claims involving the common elements.
This section has also been amended to require that a tort claim based on ownership of common elements be brought against the association, and not against individual unit owners.
13. UCIOA permitted a condominium association or a planned community association to convey or encumber common elements under the restrictions of Section 3-112(a). Subsection
(g) stated the general rule that a conveyance or encumbrance would not affect the priority or validity of pre-existing encumbrances. UCIOA (1994) better protects the rights of the holders of those interests.
The Underlying Concept of UCIOA
Nearly without exception, UCIOA achieves the goal of uniformity among all three forms of ownership simply by consolidating the three prior Acts of the Conference and adding a very few generic definitions. The principal new definition is “common interest community.”
Because of the use of consistent definitions and policies in the three Acts preceding UCIOA, consolidation of the three in the merged Act was a relatively simple task. The section numbering system of UCIOA is entirely parallel with the other three Acts, and the language of UCIOA tracks, as applicable, with the cognate sections of those three Acts. Differences in result between the three Acts are preserved where appropriate. At the same time, during the drafting of UCIOA, in a few instances, it became clear that some differences in result were of form rather than legitimate substance. In those cases, the substantive result of one or more of the three Acts was changed to reflect a policy generally applicable in all forms.
The result is that a State wishing to consider legislation in the common interest ownership field has a range of choices from which to select. Many States will wish to adopt comprehensive legislation, providing maximum flexibility and certainty to all developers, lenders, and title insurers, while at the same time providing all unit purchasers and their associations a uniform level of disclosure, warranty protection, and other rights. In those States, the consolidated Act is a workable and desirable long-term solution. Other States may wish simply to adopt a modern condominium statute to replace an existing but plainly outdated, statutory structure. In those States, UCA alone is the obvious choice. Finally, in States where existing “second” or “third” generation condominium statutes are seen as satisfactory, but a need for additional certainty and structure is desirable for planned communities or cooperatives, the two Acts governing those forms of ownership are available. Following adoption of one of the three constituent Acts, it would be very feasible, by a few carefully considered amendments, to adopt UCIOA and thereby extend coverage to include all forms of ownership in the field.
AMENDMENTS TO UNIFORM COMMON INTEREST OWNERSHIP ACT[ARTICLE] 1GENERAL PROVISIONS[PART] 1DEFINITIONS AND OTHER GENERAL PROVISIONS
SECTION 1-101. SHORT TITLE. This [act] may be cited as the Uniform Common Interest Ownership Act.
SECTION 1-102. APPLICABILITY. Applicability of this [act] is governed by [Part] 2 of this [article].
SECTION 1-103. DEFINITIONS. In the declaration and bylaws (Section 3-106), unless specifically provided otherwise or the context otherwise requires, and in In this [act]:
(iii) controls in any manner the election of a majority of the directors of the declarant,; or
(iv) has contributed more than 20 percent of the capital of the declarant.
(B) A a person “is controlled by” a declarant if the declarant:
persons, or through one or more subsidiaries, owns, controls, holds with power to vote, or holds proxies representing, more than 20 percent of the voting interest in the person,;
(iii) controls in any manner the election of a majority of the directors of the person,; or
(4)(6) “Common elements” means:
(i)(A) in the case of:
(A)(i) a condominium or cooperative, all portions of the common interest community other than the units; and (B)(ii) a planned community, any real estate within a planned community which is owned or leased by the association, other than a unit; and (ii)(B) in all common interest communities, any other interests in real estate for the benefit of unit owners which are subject to the declaration. (6)(7) “Common expense liability” means the liability for common expenses allocated to each unit pursuant to Section 2-107. (5)(8) “Common expenses” means expenditures made by, or financial liabilities of, the association, together with any allocations to reserves.
(6) “Common expense liability” means the liability for common expenses allocated to each unit pursuant to Section 2-107.
(7)(9) “Common interest community” means real estate described in a declaration with respect to which a person, by virtue of his the person’s ownership of a unit, is obligated to pay for a share of real estate taxes, insurance premiums, maintenance, or improvement of, or services or other expenses related to, common elements, other units, or other real estate described in a the declaration. The term does not include an arrangement described in Section 1-209 or 1–210. For purposes of this paragraph, “Ownership ownership of a unit” does not include holding a leasehold interest of less than [20] years in a unit, including renewal options.
(8)(10) “Condominium” means a common interest community in which portions of the real estate are designated for separate ownership and the remainder of the real estate is designated for common ownership solely by the owners of those portions. A common interest community is not a condominium unless the undivided interests in the common elements are vested in the unit owners.
(9)(11) “Conversion building” means a building that at any time before creation of the common interest community was occupied wholly or partially by persons other than purchasers and persons who that occupy with the consent of purchasers.
(10)(12) “Cooperative” means a common interest community in which the real estate is owned by an association, each of whose members is entitled by virtue of his the member’s ownership interest in the association to exclusive possession of a unit.
(11)(13) “Dealer” means a person in the business of selling units for his the person’s own account. (12)(14) “Declarant” means any person or group of persons acting in concert who that: (i)(A) as part of a common promotional plan, offers to dispose of his or it's the
interest of the person or group of persons in a unit not previously disposed of; [or]
(ii)(B) reserves or succeeds to any special declarant right [,; or
(iii)(C) applies for registration of a common interest community under [Article] 5].
(13)(15) “Declaration” means any instruments the instrument, however denominated, that creates a common interest community, including any amendments to those instruments the instrument.
(14)(16) “Development rights” means any right or combination of rights reserved by a declarant in the declaration to:
(i)(A) add real estate to a common interest community;
(ii)(B) create units, common elements, or limited common elements within a common interest community;
(iii)(C) subdivide units or convert units into common elements; or
(iv)(D) withdraw real estate from a common interest community.
(15)(17) “Dispose” or “disposition” means a voluntary transfer to a purchaser of any legal or equitable interest in a unit, but the term does not include the transfer or release of a security interest.
(16)(18) “Executive board” means the body, regardless of name, designated in the declaration or bylaws to act on behalf of the association.
(17)(19) “Identifying number” means a symbol or address that identifies only one unit in a common interest community.
(18)(20) “Leasehold common interest community” means a common interest community in which all or a portion of the real estate is subject to a lease the expiration or termination of which will terminate the common interest community or reduce its size.
(19)(21) “Limited common element” means a portion of the common elements allocated by the declaration or by operation of Section 2-102(2) or (4) for the exclusive use of one or more but fewer than all of the units.
(20)(22) “Master association” means an organization described in Section 2-120, whether or not it is also an association described in Section 3-101.
(21)(23) “Offering” means any advertisement, inducement, solicitation, or attempt to encourage any person to acquire any interest in a unit, other than as security for an obligation. An advertisement in a newspaper or other periodical of general circulation, or in any broadcast medium to the general public, of a common interest community not located in this state, is not an offering if the advertisement states that an offering may be made only in compliance with the law of the jurisdiction in which the common interest community is located.
(22)(24) “Person” means an individual, corporation, business trust, estate, trust, partnership, limited liability company, association, joint venture, public corporation, government, or governmental subdivision, or agency, or instrumentality, or any other legal or commercial entity.[In the case of a land trust, however,“person” the term means the beneficiary of the trust rather than the trust or the trustee.]
(23)(25) “Planned community” means a common interest community that is not a condominium or a cooperative. A condominium or cooperative may be part of a planned community.
(24)(26) “Proprietary lease” means an agreement with the association pursuant to which a member is entitled to exclusive possession of a unit in a cooperative.
(25)(27) “Purchaser” means a person, other than a declarant or a dealer, who that by means of a voluntary transfer acquires a legal or equitable interest in a unit other than:
(i)(A) a leasehold interest (, including renewal options), of less than 20 years,; or
(ii)(B) as security for an obligation.
(26)(28) “Real estate” means any leasehold or other estate or interest in, over, or under land, including structures, fixtures, and other improvements and interests that by custom, usage, or law pass with a conveyance of land though not described in the contract of sale or instrument of conveyance. “Real estate” The term includes parcels with or without upper or lower boundaries, and spaces that may be filled with air or water.
(28)(32) “Security interest” means an interest in real estate or personal property, created by contract or conveyance, which secures payment or performance of an obligation. The term includes a lien created by a mortgage, deed of trust, trust deed, security deed, contract for deed, land sales contract, lease intended as security, assignment of lease or rents intended as security, pledge of an ownership interest in an association, and any other consensual lien or title retention contract intended as security for an obligation.
(29)(33) “Special declarant rights” means rights reserved for the benefit of a declarant to:
(i)(A) complete improvements indicated on plats and plans filed with the declaration (Section 2-109) or, in a cooperative, to complete improvements described in the public offering statement pursuant to Section 4-103(a)(2);
(ii)(B) exercise any development right (Section 2-110);
(iii)(C) maintain sales offices, management offices, signs advertising the common interest community, and models (Section 2-115);
(iv)(D) use easements through the common elements for the purpose of making improvements within the common interest community or within real estate which may be added to the common interest community (Section 2-116);
(v)(E) make the common interest community subject to a master association (Section 2-120);
(vi)(F) merge or consolidate a common interest community with another common interest community of the same form of ownership (Section 2-121); or
(vii)(G) appoint or remove any officer of the association or any master association or any executive board member during any period of declarant control (Section 3-103(d)).;
(H) control any construction, design review, or aesthetic standards committee or process;
(30)(34) “Time share” means a right to occupy a unit or any of several units during [five] or more separated time periods over a period of at least [five] years, including renewal options, whether or not coupled with an estate or interest in a common interest community or a specified portion thereof.
(31)(35) “Unit” means a physical portion of the common interest community designated for separate ownership or occupancy, the boundaries of which are described pursuant to Section 2-105(a)(5). If a unit in a cooperative is owned by a unit owner or is sold, conveyed, voluntarily or involuntarily encumbered, or otherwise transferred by a unit owner, the interest in that unit which is owned, sold, conveyed, encumbered, or otherwise transferred is the right to possession of that unit under a proprietary lease, coupled with the allocated interests of that unit, and the association’s interest in that unit is not thereby affected.
(32)(36) “Unit owner” means a declarant or other person who that owns a unit, or a lessee of a unit in a leasehold common interest community whose lease expires simultaneously with any lease the expiration or termination of which will remove the unit from the common interest community, but does not include a person having an interest in a unit solely as security for an obligation. In a condominium or planned community, the declarant is the owner of any unit created by the declaration. In a cooperative, the declarant is treated as the owner of any unit to which allocated interests have been allocated (Section 2-107) until that unit has been conveyed to another person.
1. The first clause of this section permits the defined terms used in the Act to be defined differently in the declaration and bylaws. Regardless of how terms are used in those documents, however, terms have an unvarying meaning in the Act, and any restricted practice which depends on the definition of a term is not affected by a changed term in the documents.
Example: A declarant might vary the definition of “unit owner” in the declaration to exclude himself in an attempt to avoid assessments for units which he owns. The attempt would be futile, since the Act defines a declarant who owns a unit as a unit owner and defines the liabilities of a unit owner.
To emphasize this outcome, the introductory language to Section 1-103 was amended in 2008 to delete the phrase "In the declaration and bylaws, unless specifically provided otherwise or the context otherwise requires, and...," leaving only the introductory words "In this Act". These words are deleted simply as surplus statutory text, without an intent to change the effect of the statute. The drafter of a declaration or bylaws is always entitled to use whatever words in lieu of defined terms as the drafter chooses, but this Act will override such a usage when a substantive requirement in this Act is avoided in a declaration or in bylaws.
2. The definition of “Affiliate of a declarant” (Section 1-103(1)) is similar to the definition of 12 U.S.C. Section 1730a, which prescribes the authority of the Federal Savings and Loan Insurance Corporation to regulate the activities of savings and loan holding companies, and in 15 U.S.C. Section 78c(a)(18), which defines persons deemed to be associated with a broker or dealer for purposes of the federal securities laws.
The objective standards of the definition permit a ready determination of the existence of affiliate status to be made. Unlike 12 U.S.C. Section 1730a(a)(2)(B), no power is vested in an agency to subjectively determine the existence of “control” necessary to establish affiliate status. Thus, affiliate status does not exist under the Act unless these objective criteria are met.
As a result of this definition, the association may, in some instances, be a declarant. Under the definition of “Affiliate of a declarant,” it is possible that 20% of the unit owners may “act in concert” to control the activities of the association. While the mere casting of these votes at an association meeting would not normally constitute “concerted action” by those unit owners, other acts by individual unit owners might constitute such concerted action. The consequences of that result are determined under Section 3-104.
3. Definition (2), “Allocated interests,” refers to all of the interests which this Act requires the declaration to allocate to the common interest communities.
“Allocated interests” is defined differently with respect to the three forms of Ownership.
First, the important interests, common to all projects, are the proportionate shares of common expense liabilities, and votes in the association, allocated to each unit. In either a cooperative, condominium, or planned community, every unit in the project must have a share of the votes and common expense liabilities.
Second, because the common elements are “owned” by the association in a planned community or cooperative, in contrast to a condominium, there is no common element interest allocated to unit owners in a planned community or cooperative.
Third, in a cooperative, because unit owners have traditionally had an ownership interest in the cooperative corporation, either in the form of stock or a membership certificate, the Act continues to require allocation of an “ownership interest in the association” to each unit.
The common element or ownership interest has limited significance. One situation in which the common element interest allocation would be important, however, is the distribution of insurance proceeds following a loss where an entire condominium project is not repaired or replaced and insurance proceeds are distributed to unit owners. See Section 3-113(h). See also Section 2-118(j)(2).
In a planned community, if that real estate is subject to the declaration – that is, it is “within the planned community” – it meets the definition of a common element. If that real estate is not within the planned community, title may be held by the association, but it is not a common element unless the declaration is amended in accordance with this Act to incorporate that real estate as part of the real estate subject to the declaration.
Most common interest communities are not likely to experience a need to acquire real estate in addition to the land originally submitted to the declaration. However, it is not difficult to envision cases where that result would be desirable to the unit owners – for example, to acquire additional parking areas or open space. There is no reason to either prohibit the association from securing this result, or to require the formalities of an amendment of the declaration to redefine the boundaries of the common interest community; this would typically require a two-thirds vote of the unit owners under Section 2-117(a).
This distinction will have practical consequences. For example, real estate which is not a common element may be taxed by the local assessor, unless exempt under other state law, notwithstanding the rule in Section 1-104 of the Act that the common elements may not be separately taxed. Further, non-common element real estate may be bought and sold by the association without the need to observe the requirements for conveying or encumbering common elements stated in Section 3-112.
In a condominium, fee title to the common elements is vested in the unit owners, not the unit owners association. Thus, in the condominium, all the real estate subject to the declaration, except the units, is a “portion of the common interest community” and therefore is a common element. Real estate which is not subject to the declaration is neither a unit nor a common element.
However, the desired substantive result discussed above is the same for all forms of common interest communities. Accordingly, the drafters contemplate that the condominium or cooperative association could also acquire title to real estate which is physically located outside the condominium or cooperative boundaries, in its own name, which would not automatically become a common element.
8. Definition (7) (9), “Common interest community,” is new to this Act. The term creates one comprehensive definition of those interests governed by the Act. This generic definition, derived from the definition of planned community in UPCA, is used through the Act to refer collectively to the three particular forms of common interest community: condominiums, cooperatives, and planned communities.
Each of those forms in turn, has a separate definition. “Condominium” and “cooperative” are defined precisely as they are in the Acts which apply to those forms. The definition of “planned community,” however, is new, and, under UCIOA, becomes a residual concept. Any ownership arrangement which is a common interest community but which does not meet the definition of either a condominium or cooperative, would be a planned community. Thus, there are but three forms of common interest community: (1) condominiums; (2) cooperatives; and (3) everything else.
The 2008 amendments to the definition of "common interest community" accomplish two main goals.
First, they make clear that the mutual obligations of unit owners - obligations which arise “by virtue of” that ownership - to pay a share of the project's expenses may include a share of services provided to unit owners or other expenses provided either to the common elements or the units. Second, the amended definition makes clear that several common real estate arrangements described in new sections 1-209 and 1-210 are excluded from the definition. Section 1-209 thus resolves the question of whether cost-sharing arrangements between an assocation and either another assocation or a 3d party require creation of a new association [they do not]. New section 1-210 also confirms that a variety of simple, traditional arrangements, such as a shared driveway, party wall, or shared well, which some have argued would technically satisfy the definition of “common interest community” in the Act as originally drafted, are not subject to the Act unless the drafter chooses that result.
The definition also recognizes the fundamental link between association membership and occupancy rights in providing that unit owners who are the members of the association are entitled to exclusive possession of their units under a proprietary lease – see Definition (24)
(26) – by virtue of their ownership interests in the assets of the association.
The ownership interest of a cooperative unit owner is a composite interest, which consists of the owner’s ownership interests in the association and his right to occupy a unit pursuant to a proprietary lease. This interest, since it includes the proprietary interest under a lease, may not, as a theoretical matter, exist until a proprietary lease has in fact been executed by the declarant for the units in the cooperative. The definition “unit” resolves this theoretical gap by providing that the declarant is treated as the owner of cooperative interests which have not yet been created.
12. Definition (11) (13), “Dealer,” is a newly defined term in UCIOA. It was not used in any of the three separate Acts. It replaces, in many sections, the words “person in the business of selling (either) real estate (or) cooperative interests for his own account.” Use of the term in UCIOA does not change the substantive results in any of the three Acts.
13. Definition (12) (14), “Declarant,” is designed to exclude persons who may be called upon to execute the declaration in order to ratify the creation of the common interest community, but who are not intended to be charged with the responsibilities imposed on all declarants by this Act if that is all they do. Examples of such persons include holders of pre-existing liens and, in the case of leasehold common interest communities, ground lessors. (Of course, such a person may become a declarant by subsequently succeeding to a Special declarant right.) Other persons similarly protected by the narrow wording of this definition include real estate brokers, because they do not offer to dispose of their own interest in a unit. Similarly, unit owners reselling their units are not declarants because these units were “previously disposed of” when originally conveyed.
If the association, itself, or in conjunction with another declarant, is offering units for sale to others, and if those units have not previously been sold or otherwise disposed of, then the association itself is a declarant.
Finally, a person who, while in control of the association, chooses not to exercise that control, is still a declarant.
The last bracketed clause in this definition must be deleted in any State which chooses not to enact Article 5 of the Act.
14. Definition (13) (15), “Declaration,” is defined as “any instruments the instrument, however denominated, that create a common interest community, including any amendments to those instruments the instrument.” Thus, the term would not only include the traditional condominium declaration with which most practitioners are familiar, or the declaration of covenants, conditions, and restrictions (CC & R’s) so common in planned unit developments. It would also include, for example, a series of deeds to units with common mutually beneficial restrictions, or to any other instruments which create the relationship which constitutes a common interest community. If those recorded instruments create that relationship, then those documents constitute a declaration and must contain, for new projects, the information required by Section 2-105.
The declaration of a cooperative does not include the proprietary leases of the individual units, although a sample of such a lease might be attached as an exhibit to the declaration.
Similarly, the definition of “declaration” of any common interest community does not refer to the bylaws of the association or the documents creating the association. Such documents do not “create” the common interest community, but merely regulate its use after creation. The bylaws may, but need not be, an exhibit to the declaration.
15. Definition (14) (16), “Development rights,” includes a panoply of sophisticated development techniques that have evolved over time throughout the United States and which have been expressly recognized and regulated in the case of condominiums, in an increasing number of jurisdictions, beginning with Virginia in 1974.
The concept of “development rights” lies at the heart of one of the principal goals of the Act, which is to maximize the flexibility available to a developer seeking to adjust the size and mix of a project to the demands of the marketplace, both before and after creation. The principal constraint on that flexibility is the obligation of disclosure, and its impact on marketing. Thus “development rights” include the rights to:
As a matter of simple logic, there are few other things that could be done to a real property regime which are not include within the concept of development rights. This great flexibility, particularly when coupled with the broad definitions of “unit” and “real estate,” the power to create leasehold projects, and the right to subordinate unit mortgages to blanket mortgage on either the units or common elements, is an important element in the Act.
For example, a declarant may be building (or converting) a 50-unit building on Parcel A with the intention, if all goes well, to “expand” the common interest community by adding an additional building on Parcel B, containing additional units, as part of the same common interest community. If he reserves the right to do so, i.e., to “add real estate to a common interest community,” he has reserved a “development right.”
In certain cases, however, the declarant may desire, for a variety of reasons, to include both parcels in the common interest community from the outset, even though he may subsequently be obliged to withdraw all or part of one parcel. Assume, for example, that in the example just given the declarant intends to build an underground parking garage that will expand into both parcels. If the project is a success, his documentation will be simpler if both parcels were included in the common interest community from the beginning. If his hopes are not realized, however, and it becomes necessary to withdraw all or part of Parcel B from the common interest community and devote it to some other use, he may do so if he has reserved such a development right “to withdraw real estate from the common interest community.” The portion of the garage which extends into Parcel B may be left in the common interest community (separated from the remainder of Parcel B by a horizontal boundary), or the garage may be divided between Parcels A and B with appropriate cross-easement agreements.
The right “to create units, common elements, or limited common elements” has frequently been useful in the case of commercial or mixed use common interest communities, where the declarant needs to retain a high degree of flexibility to meet the space requirements of prospective purchasers who may not approach him until the common interest community has already been created. For example, an entire floor of a high-rise building may be intended for commercial buyers, but the declarant may not know in advance whether one purchaser will want to buy the whole floor as a single unit or whether several purchasers will want the floor divided into service units, separated by common element walls and served by a limited common element corridor. This development right is sometimes useful even in purely residential common interest communities, especially those designed to appeal to affluent buyers. Similarly, the development rights “to subdivide units or convert units into common elements” is most often of value in commercial common interest communities, but may be useful in certain kinds of residential common interest communities as well.
Although often thought of in two-dimensional terms, real estate is a three-dimensional concept, and the third dimension is usually important in the condominium and planned community context. Where real estate is described in only two dimensions (length and width), it is correctly assumed that the property extends indefinitely above the earth’s surface and downwards to a point in the center of the planet. In most condominium and planned communities, however, as in so-called “air rights” projects, ownership does not extend “from the center of the earth to the heavens” because units are stacked on top of units or units and common elements are interstratified. In such cases, the upper and lower boundaries must be identified with the same precision as the other boundaries.
22. The definition of “residential purposes” includes “recreational purposes.” This common sense definition is used in order to avoid repeated use of a lengthier defined term, such as “residential or consumer owned recreational purposes.”
The Act contemplates that “recreational purposes” would be “consumer owned” recreational purposes commonly marketed for sale to individual owners – uses such as dock spaces for boats, campgrounds, airplane tie downs, etc. By including these kinds of uses within the definition, the Act intends to provide the same consumer protections which it offers to individual residential purchasers – persons who typically buy for their own use – as distinguished from commercial users. Thus, the definition would exclude commercial recreational facilities which are operated as a business or available to the public on a fee for use basis, such as movie theaters, athletic or country clubs, golf courses, and the like.
Further, the definition is not intended to override, and thus perhaps expand on, existing local zoning ordinances which permit only “residential” use.
However, by including these recreational purposes within the defined term “residential purposes,” no change in the plain and traditional meaning of the word “residential” is intended. Thus, the drafters recognize that owners of residential units – i.e., a unit which is designed for use as a residential dwelling – may hold those units for investment purposes, or that individual owners may occasionally or regularly rent their units on an individual or rental pool basis. This is a common practice, for example, with residential communities built near ski or ocean resort areas. Rental occupancy does not change the residential character of the common interest community, or the consumer protections that must be offered to purchasers.
Any person who possesses a special declarant right would be a “declarant,” including any who succeed under Section 3-104 to any of those rights. Thus, the concept of special declarant rights triggers the imposition of obligations on those who possess the rights. Under Section 3-104, those obligations vary significantly, depending upon the particular special declarant rights possessed by a particular declarant. These circumstances are described more fully in the Comments to Section 3-104.
The 2008 amendment created three new "special declarant rights" and, like all special declarant rights, they are rights which exist only to the extent they are "reserved for the benefit of a declarant" in the declaration. See § 2-105(a)(8). The most unusual of the 3 is the right to control what is commonly called a design review committee. Under the amended Act, no such committee may exist unless properly authorized in the declaration. See § 2-105(a)(14).
In contrast, the new special declarant rights to attend unit owner meetings and to access records of the association resolve questions that have arisen in practice and that track the reasonable expectations of the parties.
25. Definition (30) (34), “Time share,” is based on Section 1-102(14) and (18) of the Model Real Estate Time-Share Act.
When this Act was first promulgated in 1982, such concepts as “time share” and “interval ownership” were relatively new; they were neither fully developed nor generally accepted in the marketplace. Moreover, the nature of the relationship between the various forms of common interest ownership and time fractionalization of real estate was not at all clearly understood.
In these circumstances, the Conference adopted a “minimalist” approach in dealing with the concept of time sharing. To that end, the Act simply defined the term “time share” in Section 1-103(24) (34) and then required disclosure of any time share provisions in the common interest community; see Section 4-105. Otherwise, this Act did not attempt to regulate time sharing or any of the other forms of interval ownership. That task was left to the Model Real Estate Time Sharing Act.
Experience over the intervening dozen years suggests that this minimalist approach remains appropriate. Without a doubt, the evolving field of interval ownership of both personal and real property poses important issues of public policy. However, this Act does not regulate those substantive issues. Instead, whether or not a particular interval ownership project must comply with this Act depends on whether or not the ownership arrangement meets the definition of a “common interest community.” If it does, then the Act would apply in the same degree as it would to any common interest community.
26. Definition (31) (35), “Unit,” describes a tangible, physical part of the project rather than a right in, or claim to, a tangible physical part of the property. Therefore, for example, a “time-share” arrangement in which a unit is sold to 12 different persons, each of whom has the right to occupy the unit for one month does not create 12 new units – there are, rather, 12 owners of the unit. (Under the section on voting (Section 2-110), a majority of the time-share owners of a unit are entitled to cast the vote assigned to that unit.)
Similarly, in a cooperative, the unit remains a physical part of the real estate; its legal title is vested in the association while the right to possession is held by the unit owner under a proprietary lease. The definition, however, makes it clear that the associations’s interest in the unit is unaffected by transfers of interests in that unit to or by unit owners. The unit owner’s interest is a composite interest, which consists of an ownership interest in the association, coupled with the right to occupy a unit pursuant to a lease.
The definition makes clear that in the case of a cooperative, if a unit owned by a unit owner is sold, conveyed, or encumbered or otherwise transferred by the unit owner, the interest in such unit which is affected is the right to possession of that unit under a proprietary lease, coupled with the allocated interests of that unit. In recognizing the relationship between the physical “unit” and the nature of a unit owner’s interest in that unit, and by describing that relationship concisely in the definition, the merged Act was able to delete the definition of “cooperative interest” as it was used in MRECA.
27. Definition (32) (36), “Unit owner,” contemplates that a seller under a land installment contract would remain the unit owner until the contract is fulfilled. As between the seller and the buyer, various rights and responsibilities must be assigned to the buyer by the contract itself, but the association would continue to look to the seller (for payment of any arrears in common expense assessments, for example,) as long as the seller holds title.
The definition makes it clear that a declarant, so long as he owns units in a common interest community, is the unit owner of any unit created by the declaration, and is therefore subject to all of the obligations imposed on other unit owners, including the obligation to pay common expense assessments. This provision is designed to resolve ambiguities on this point which have arisen under several existing state statutes.
In the special case of a cooperative, the declarant is treated as the owner of a unit or “potential unit” to which allocated interests have been allocated, until that unit is conveyed to another.
28. The 2008 amendments create five new definitions: “Assessment” [Section 1-103(3)]; “Bylaws”, [Section 1-103(5)], “Common expense liability” [Section 1-103 (7)], “Record” [Section 1-103(29)] and “Rule” [Section 1-103(31)].
By defining the term “assessment” as the “sum attributable to each unit and due to the association pursuant to Section 3–115", the Act ties the term directly to the common expense liability of each unit, and to those sections of the Act where each unit’s common expense liability is calculated. It also distinguishes each unit’s assessment from the other sums that may be due from a unit owner - such as the sums described in Section 3-116(a) - which are not a part of the association's budget and therefore are not included in that unit's assessment but which “are enforceable in the same manner as unpaid assessments.”
The definition of “bylaws” reflects the common functional meaning of that term, regardless of what different phrase might be used in the declaration to describe this instrument. The definition makes clear that: (i) the bylaws is the instrument that “contains the procedures for conduct of the affairs of the association” - as distinguished from the substantive role played by the declaration; (ii) the functional role of the bylaws remains consistent under the Act even if the association is organized as, for example, a limited liability company where the term “bylaws” is not used in the statute authorizing such entities and the instrument serving that function is identified as an “operating agreement”; and (iii) amendments to the bylaws are incorporated into the amended document for purposes of this Act.
However, regardless of the name of the instrument used in the declaration, this Act mandates the minimum contents of the bylaws; see Section 3-106. Further, 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 overridden by this Act; see Section 1-108.
Third, “common expense liability” is defined primarily by reference to the substantive section of the Act where the term is used. The term appears in earlier versions of the Act without being defined.
The new definition of “Record” in Section 1-103 (29) makes clear that the definition applies only when the term is used as a noun. The definition derives directly from federal and statute statutes governing electronic signatures; the term is commonly substituted for the word “writing” or “written” in other law.
The new definition of “Rule” in Section 1-103 (31) focuses on the activities to which they apply. That is, rules either “govern the conduct of persons” or they “govern...the use or appearance of property.” In either case, the policy of the Act as expressed in Section 3-120 is that such restrictions ought to be the subject by unit owner review before adoption, and they must in all instances be reasonable; see Section 3-120(h).
In contrast, Section 3-120(g) states that the “association’s internal business operating procedures need not be adopted as rules”. This distinction permits the association’s executive board or its management company to adopt or amend at will the wide variety of internal management procedures that govern the association's daily business activities - as opposed to the conduct of persons or the use and appearance of property. It may be helpful to provide a few examples of what the drafters contemplate might be typical internal business procedures that need not be adopted as rules:
SECTION 1-104. NO VARIATION BY AGREEMENT. Except as expressly
provided in this [act], the effect of its provisions may not be varied by agreement, and rights
conferred by it may not be waived. Except as otherwise provided in Section 1-207, a declarant
may not act under a power of attorney, or use any other device, to evade the limitations or
prohibitions of this [act] or the declaration.
Comment
1. The Act is generally designed to provide great flexibility in the creation of common
interest communities and, to that end, the Act permits the parties to vary many of its provisions. In many instances, however, provisions of the Act may not be varied, because of the need to protect purchasers, lenders, and declarants. Accordingly, this section adopts the approach of prohibiting variation by agreement except in those cases where it is expressly permitted by the terms of the Act itself.
4. The following sections permit variation:
Section 1-103 (Definitions). All definitions used in the declaration and bylaws may be varied in the declaration, but not in interpretation of the Act.
Section 1-105 (Separate Titles and Taxation). This section permits the declarant of a cooperative to determine whether unit owners’ interests are real or personal property.
Section 1-107 (Eminent Domain). The formulas for reallocation upon taking a part of a unit, and for allocation of proceeds attributable to limited common elements, may be varied.
Article 1, Part 2, Sections 1-202, 1-203, 1-205, 1-206, and 1-207, permit a variety of elections to declarants and unit owners with respect to applicability.
Section 2-102 (Unit Boundaries). The declaration may vary the distinctions as to what constitutes the units and common elements.
Section 2-105 (Contents of Declaration). A declarant may add any information he desires to the required content of the declaration.
Section 2-108 (Limited Common Elements). The Act permits reallocation of limited common elements unless prohibited by the declaration.
Section 2-109 (Plats and Plans). There is a presumption regarding horizontal boundaries of units, unless the declaration provides otherwise.
Section 2-111 (Alterations Within Units). Subject to the provisions of the declaration, unit owners may make alterations and improvements to units.
Section 2-112 (Relocation of Boundaries Between Adjoining Units). Subject to the provisions of the declaration, boundaries between adjoining units may be relocated by affected unit owners.
Section 2-113 (Subdivision of Units). If the declaration expressly so permits, a unit may be subdivided into two or more units.
Section 2-115 (Use for Sales Purposes). The declarant may maintain sales offices, management offices, and model units only if the declaration so provides. Unless the declaration provides otherwise, the declarant may maintain advertising on the common elements.
Section 2-116 (Easement to Facilitate Exercise of Special Declarant Rights). Subject to the provisions of the declaration, the declarant and unit owners have easements for the purposes described.
Section 2-117 (Amendment of Declaration). The declaration of a non-residential common interest community may specify less than a two-thirds vote to amend the declaration. Any declaration may require a larger majority.
Section 2-118 (Termination). The declaration may specify a majority larger than 80 percent to terminate and, in a non-residential common interest community, a smaller majority. The declarant may require that the units be sold following termination even though none of them have horizontal boundaries.
In a cooperative, upon termination, the declaration may specify that association creditors have priority over the rights of unit owners, and their creditors.
Section 2-119 (Rights of Secured Lenders). The declaration may require lender approval of specified actions of unit owners or the association.
Section 2-120 (Master Associations). The declaration may provide for some of the powers of the Executive Board to be exercised by a master association.
Section 2-122 (Addition of Unspecified Real Estate). The declaration of a planned community may grant a declarant the right to add additional real estate to the project without stating the location of that real estate in the original declaration.
Section 3-102 (Powers of the Association). The declaration may limit the right of the association to exercise any of the listed powers, except in a manner which discriminates in favor of a declarant. The declaration may authorize the association to assign its rights to future income.
Section 3-103 (Executive Board Members and Officers). Except as limited by the declaration or bylaws, the Executive Board may act for the association.
Section 3-106 (Bylaws). Subject to the provisions of the declaration, the bylaws may contain any matter in addition to that required by the Act.
Section 3-107 (Upkeep of the Common Interest Community). Except to the extent otherwise provided by the declaration, maintenance responsibilities are set forth in this section, and income from real estate subject to development rights inures to the declarant.
Section 3-108 (Meetings). The bylaws may provide for special meetings at the call of less than 20 percent of the Executive Board or the unit owners.
Section 3-109 (Quorums). This section permits statutory quorum requirements to be varied by the bylaws.
Section 3-110 (Voting; Proxies). A majority in interest of the multiple owners of a single unit determine how that units’ vote is to be cast unless the declaration provides otherwise. The declaration may require that lessees vote on specified matters.
Section 3-112 (Conveyance or Encumbrance of Common Elements). The declaration may vary the percentages of unit owners whose approval is required to convey or encumber common elements.
The declaration may also provide that a conveyance or encumbrance of common elements defeats prior encumbrances on those common elements.
Section 3-113 (Insurance). The declaration may vary the provisions of this section in non-residential common interest communities, and may require additional insurance in any community.
Section 3-114 (Surplus Funds). Unless otherwise provided in the declaration, surplus funds are paid or credited to unit owners in proportion to their common expense liabilities.
Section 3-115 (Assessments for Common Expenses). To the extent provided in the declaration, common expenses for limited common elements must be assessed against the units to which they are assigned, common expenses benefiting fewer than all the units must be assessed only against the units benefitted, insurance costs must be assessed in proportion to risk, and utility costs must be assessed in proportion to usage.
Section 3-116 (Lien for Assessment). Unless the declaration provides otherwise, fines, late charges, and other fees are treated as assessments for lien purposes.
Section 4-101 (Applicability; Waiver). All of Article 4 is modifiable or waivable by agreement in a common interest community restricted to non-residential use.
Section 4-115 (Warranties). Implied warranties of quality may be excluded or modified by agreement.
Section 4-116 (Statute of Limitation on Warranties). The six-year limitation may be modified by agreement of the parties.
5. While freedom of contract is a principle of this Act, and variation by agreement is accordingly widely available, freedom of contract does not extend so far as to permit parties to disclaim obligations of good faith, see Section 1-113, or to enter into contracts which are unconscionable when viewed as a whole, or which contain unconscionable terms. See Section 1-112. This section derives from Section 1-102(3) of the Uniform Commercial Code.
1. Subsection (a) of this section follows the MRECA provisions. The classification of the unit and its allocated interests as real property or as personal property is significant for purposes of such matters as tenure, sales, recordation, transfer taxes, property taxes, estate and inheritance taxes, testate and intestate succession, mortgage lending, the perfection, priority and enforcement of liens, and rights of redemption.
Subsection (a) resolves an important theoretical and practical issue which pervades the cooperative field: whether a unit owner in a cooperative holds an interest in real or in personal property. Subsection (a) permits the declarant to decide that issue for each cooperative on a project-by-project basis.
The issue arises from the fact that the unit owner’s interest in the cooperative typically has elements of both real and personal property. His interest includes both a beneficial interest in the association – either through stock ownership or membership – which is clearly a personal property interest, and a long term “proprietary” or ownership interest under a proprietary lease in an apartment – clearly an interest in real estate.
While this is in many ways a highly theoretical issue, it has many practical consequences. For example, if the unit owner’s interest is a real estate interest, then that interest – aside from the association’s interest – may be subject to real property taxes and conveyance taxes; the recording laws would apply to conveyance of those interests; and real estate foreclosure laws would apply to foreclosure of a lien against those interests. Moreover, a security interest in the unit owner’s stock or membership certificate would not be effective against the stock without a security instrument being recorded on the land records. In general, none of Article 9 of the Uniform Commercial Code would be applicable to that interest, and all of the conveyancing rules would apply.
On the other hand, if the interest is a personal property interest – the result required by this section in the absence of a provision in the declaration that the interest is real property – then all of Article 9 of the Uniform Commercial Code would apply to security interests in the unit, the real estate conveyancing rules would not apply, and the interest would be treated for all purposes as personal property.
Under one theory, because real estate taxes are liens on real estate which have priority over all subordinate interests, foreclosure of the real estate tax lien on a unit could result in partial termination of the common interest community, and thus remove the unit from the common interest community. This result would follow if the tax lien were treated under Section 2-118(l) as a “lien . . . against a portion of the real estate comprising the common interest community [which] has priority over the declaration . . . .”
Such a result, however, is inconsistent with the expectations of other unit owners in the complex. The appropriate result is that because, under this section, each parcel of real estate is a separate parcel for tax purposes, foreclosure of a tax lien on that parcel simply results in a sale or transfer of an interest in that parcel, as part of the common interest community, unless the parcel being foreclosed is withdrawable real estate.
SECTION 1-106. APPLICABILITY OF LOCAL ORDINANCES,
REGULATIONS, AND BUILDING CODES.
(a) A building code may not impose any requirement upon any structure in a common
interest community which it would not impose upon a physically identical development under a
different form of ownership.
(b) In condominiums and cooperatives, no zoning, subdivision, or other real estate use
law, ordinance, or regulation may prohibit the condominium or cooperative form of ownership
or impose any requirement upon a condominium or cooperative which it would not impose upon
a physically identical development under a different form of ownership.
(c) Except as provided in subsections (a) and (b), the provisions of this [act] do not
invalidate or modify any provision of any building code, zoning, subdivision, or other real estate
use law, ordinance, rule, or regulation governing the use of real estate.
Comment
1. The purpose of this section is to resolve the relative roles of the state and local
communities in regulating the creation of common interest communities. The underlying concept is to make clear that the municipality has a legitimate interest in regulating the use of real estate, in accordance with long established zoning, building code, and similar practices, and that such practices continue to have equal applicability to common interest communities as they do to purely rental projects. With respect to forms of ownership, however, this Act, as a state enactment, preempts the field and accordingly, except as provided in the Act, the municipality may not regulate the form of ownership, as opposed to the use of that real estate.
(d) The court decree must be recorded in every [county] in which any portion of the
common interest community is located.
Example 1: Suppose that all allocated interests in a nine-unit common interest community were originally allocated to the units on the basis of size. If eight of the units are all equal in size and one is twice as large as the others, the allocated interests would be 20% for the largest unit and 10% for each of the other eight units.
Suppose that one of the smaller units is removed from the common interest community by a condemning authority. Subsection (a) provides that the allocated interests would automatically shift, at the time of the taking, so that the larger unit would
%.9/1% while each of the small units would have 119/2have 22
Example 2: Suppose, in Example 1, that the condemnation only reduced the size of one of the smaller units by 50%, leaving the remaining half of the unit usable.
%91/5Subsection (b) provides that the allocated interests would automatically shift to 5
for the partially taken unit, 21other units. Note that the fact that the partially taken unit was reduced to half its former size does not mean that its allocated interests are only half as large as before the taking. Rather, that unit participates in the reallocation in proportion to its reduced size. That is
01
% for each of the91/01% for the largest unit, and 1091/
% rather than 5%.91/5why the partially taken units’ reallocated interests are 5
3. An important issue raised by this section is whether or not a governmental body acquiring a unit by eminent domain has a right to also take that unit’s allocated interests and thereby assume membership in the association by virtue of its power of eminent domain. While there is no question that a governmental body may acquire any real property by eminent domain, there is no case law on the question of whether or not the governmental body may take a unit as part of a common interest community or must take the unit and have the unit excluded from the common interest community.
Subsection (a) merely requires that the taking body compensate the unit owner for all of his unit and its allocated interests, whether or not any common elements are acquired. The Act also requires that the allocated interests are automatically reallocated upon taking to the remaining units unless the decree provides otherwise. Whether or not the decree may constitutionally provide otherwise in the case of a particular taking (for example, by allocating the allocated interests to the government) is an unanswered question.
4. In the circumstances of a taking of part of a unit, it is important to have some objective test by which to measure the portion of allocated interests to be reallocated. Subsection (b) sets forth a formula based on relative size, but permits the declaration to vary that formula to some other more appropriate formula in a particular circumstance. The right to vary the formula in the declaration is important, since it is clear that the formula set forth in the statute may in some instances result in gross inequities.
Example 1: Suppose in a commercial common interest community consisting of four units, each unit consists of a factory and parking lot, and the declaration provides that each unit’s common expense liability, including utilities, is equal. Suppose further that the area of the factory building and parking lot in unit number one are equal, and that ½ the parking lot is taken by eminent domain, leaving the factory and ½ the lot intact. Under the formula set out in the statute, unit number one’s common expense liability would be reduced even though its utilities might not be reduced at all, thus resulting in a windfall for the unit owner.
Example 2: Suppose that a common interest community contains ten units, each of which is allocated a 1/10 undivided interest in the association. Suppose further that a taking by eminent domain reduces the size of one of the units by 50%. In such case, the ownership interest of all the units will be reallocated so that the partially-taken unit has a 1/19 undivided interest in the common elements and the remaining nine units each has a 2/19 undivided interest in the common elements. Thus, the partially-taken unit has a common element interest equal to ½ of the common element interest allocated to each of the other units. Note that this is not equivalent to the partially-taken unit having a 5% undivided interest and the remaining nine units each having a 10% undivided interest.
5. Even before the amendment formally acknowledging the reallocation of percentages required by this section is recorded, the reallocation is deemed to have occurred simultaneously with the taking. This rule is necessary to avoid the hiatus that otherwise could occur between the taking and the reallocation of interests, votes, and liabilities.
Legislative Note – (11/07): The practice of the states may vary with respect to the documentation of eminent domain awards, and the word “decree” should therefore be considered for amendment as appropriate.
SECTION 1-108. SUPPLEMENTAL GENERAL PRINCIPLES OF LAW
APPLICABLE. The principles of law and equity, including the law of corporations [,] [and]
any other form of organization authorized by the law of this state [,and unincorporated
associations], the law of real property estate, and the law relative to capacity to contract, principal and agent, eminent domain, estoppel, fraud, misrepresentation, duress, coercion, mistake, receivership, substantial performance, or other validating or invalidating cause supplement the provisions of this [act], except to the extent inconsistent with this [act].
SECTION 1-109. CONSTRUCTION AGAINST IMPLICIT REPEAL. This [act] being a general act intended as a unified coverage of its subject matter, no part of it shall be construed to be impliedly repealed by subsequent legislation if that construction can reasonably be avoided.
This section derives from Section 1-104 of the Uniform Commercial Code.
SECTION 1-110. UNIFORMITY OF APPLICATION AND CONSTRUCTION. This [act] shall be applied and construed so as to effectuate its general purpose to make uniform the law with respect to the subject of this [act] among states enacting it.
This Act should be construed in accordance with its underlying purpose of making the law uniform with respect to all forms of common interest communities, as well as the purposes stated in the Prefatory Note of simplifying, clarifying, and modernizing the law of common interest communities, promoting the interstate flow of funds to common interest communities, and protecting consumers, purchasers, and borrowers against common interest community practices which may cause unreasonable risk of loss to them. Accordingly, the test of each section should be read in light of the purpose and policy of the rule or principle in question, and also of the Act as a whole.
SECTION 1-111. SEVERABILITY. If any provision of this [act] or the application thereof to any person or circumstances is held invalid, the invalidity does not affect other provisions or applications of this [act] which can be given effect without the invalid provisions or applications, and to this end the provisions of this [act] are severable.
Legislative Note: Include this section only if this state lacks a general severability statute or a decision by the highest court of this state stating a general rule of severability.
SECTION 1-112. UNCONSCIONABLE AGREEMENT OR TERM OF CONTRACT.
This section is similar to Section 2-302 of the Uniform Commercial Code and Section 1-311 of the Uniform Land Transactions Act. The rationale and Comments provided in those sections are equally applicable to this section.
SECTION 1-113. OBLIGATION OF GOOD FAITH. Every contract or duty
governed by this [act] imposes an obligation of good faith in its performance or enforcement.
This section sets forth a basic principle running throughout this Act: in transactions involving common interest communities, good faith is required in the performance and enforcement of all agreements and duties. Good faith, as sued in this Act, means observance of two standards: “honesty in fact,” and observance of reasonable standards of fair dealing. While the term is not defined, the term is derived from and used in the same manner as in Section 1-201 of the Uniform Simplification of Land Transfers Act, and Sections 2-103(i)(b) and 7-404 of the Uniform Commercial Code.
(a) The remedies provided by this [act] shall be liberally administered to the end that the aggrieved party is put in as good a position as if the other party had fully performed. However, consequential, special, or punitive damages may not be awarded except as specifically provided in this [act] or by other rule of law.
(b) Any right or obligation declared by this [act] is enforceable by judicial proceeding.
The 2008 deletion of subsection (b) in Section 1-114 does not substantively amend the Act, since the same concept is embedded in amended Section 4-117 of the Act.
In 1987, the Bureau of Labor Statistics did in fact change the CPI for Urban and Clerical Workers, which used a 1967 base year, by adopting a rebasing factor. The new Index uses a base year of “1982-84 = 100.”
While the index referenced in this Uniform Act is now obsolete, the drafters declined to modify the Uniform Act to delete reference to the old index. As of mid-1993, all the States which had adopted a version of UCIOA incorporated this indexing section. There is no reason to suggest that those adoptions were in error or that they even require amendment, since the statute as drafted has a functioning and mandatory self-correction mechanism.
However, States which choose to adopt this Act after 1994 should revise subsection (a) – as Nevada did, for example – to refer to “1982-84 = 100,” rather than “1967 = 100.”
Subsection (c) of the Act requires an adopting State to revise the Reference Base Index when, as is now the case, the “revision of the index changes the Reference Base Index.” The rebasing factor for the 1967 Index furnished by the Bureau of Labor Statistics is 0.3357175. Applying that rebasing factor to the original December, 1979 Reference Base Index of 230 yields a Revised Reference Base Index of 77.215, or 77.
The December 1994 Index (using the 1982-84 = 100 Base) was 147.2. Accordingly, a recalculation of the $300 figure in Section 1-203 as of July 1, 1995 would be done as follows:
December 1979 Index = 77(1967 Reference Base Index of 230, multiplied by the rebasing factor and rounded to the nearest whole percent).
December 1994 Index = 147.0 (Using 1982-84 = 100 Index for the end of 1994, the year preceding 1995, rounded to the nearest whole percent).
Difference = 70.0
70 is 90.9% of the Reference Base Index, or more than a 10% increase. Thus, on July 1, 1995, the $300 amount specified in Section 1-203 would increase. Because the amount of increase “in excess of a multiple of 10% must be disregarded,” the dollar amount of $300 increases by 90%, or $270. Therefore, as of July 1, 1995 the triggering dollar amount would be $570, or $47.50 per month.
SECTION 1-116. RELATION TO ELECTRONIC SIGNATURES IN GLOBAL
AND NATIONAL COMMERCE ACT. This [act] modifies, limits, and supersedes the federal
Electronic Signatures in Global and National Commerce Act, 15 U.S.C. Section 7001, et seq.,
but does not modify, limit, or supersede Section 101(c) of that act, 15 U.S.C. Section 7001(c), or
authorize electronic delivery of any of the notices described in Section 103(b) of that act, 15
U.S.C. Section 7003(b).
In 2000, Congress enacted the "Electronic Signatures in Global and National Commerce Act", 106 PUB.L.NO. 229, 114 Stat. 464, 15 U.S.C. § 7001, et seq. (popularly known as “ESign”). E-Sign largely tracks the Uniform Electronic Transactions Act (UETA). Section 102 of E-Sign, entitled "Exemption to preemption", provides in pertinent part that:
15 U.S.C. § 7002(a). The inclusion of this section is necessary to comply with the requirement that the act “make[] specific reference to this Act” pursuant to 15 U.S.C. § 7002(a)(2)(B) if the act contains a provision authorizing electronic records or signatures in place of writings or written signatures.
[PART] 2 APPLICABILITY
SECTION 1-201. APPLICABILITY TO NEW COMMON INTEREST COMMUNITIES. Except as otherwise provided in Sections 1-202 and 1-203 this [part], this [act] applies to all common interest communities created within this state after [the effective date of this [act]. The provisions of [insert reference to all present statutes expressly applicable to planned communities, condominiums, cooperatives, or horizontal property regimes] do not apply to common interest communities created after [the effective date of this [act]. Amendments to this [act] apply to all common interest communities created after [the effective date of this [act] or subjected made subject to this [act] by amendment of the declaration of the common interest community, regardless of when the amendment is adopted in this state to this [act] becomes effective.
1. The question of the extent to which a state statute should apply to particular common interest communities involves two major conceptual problems: (1) whether the statute should require or permit different results for common interest communities created before and after the statute takes effect; and (2) whether differences in the forms of ownership, and the history of their development, requires different levels of applicability to those various forms.
Two conflicting policies are posed when considering the applicability of this Act to “old” and “new” common interest communities in the enacting State. On the one hand, it is desirable, for reasons of uniformity, for the Act to apply to all common interest communities located in a particular State, regardless of whether the common interest community was created before or after adoption of the Act in that State. To the extent that different laws apply within the same State to different common interest communities, confusion results in the minds of both lenders and consumers. Moreover, because of the inadequacies and uncertainties of common interest communities created under prior law, if any, and because of the requirements placed on declarants and unit owners’ associations by this Act which might increase the costs of new common interest communities, different markets might tend to develop for common interest communities created before and after adoption of the Act.
On the other hand, to make all provisions of this Act automatically applicable to “old” common interest communities might violate the constitutional prohibition of impairment of contracts. In addition, aside from the constitutional issue, automatic applicability of the entire Act almost certainly would unduly alter the legitimate expectations of some present unit owners and declarants.
Accordingly, the philosophy of this part reflects a desire to maximize the uniform applicability of the Act to all common interest communities in the enacting State, while avoiding the difficulties raised by automatic application of the entire Act to preexisting common interest communities.
In carrying out this philosophy with respect to “new projects, the Act applies to all common interest communities “created” within the State after the Act’s effective date; at the same time, special limitations on that applicability are provided in the case of certain new cooperatives and planned communities in the following sections. This is the effect of the first sentence of the section. The second sentence makes clear that the provisions of old statutes expressly applicable to common interest communities do not apply to common interest communities created after the effective date of this Act.
“Creation” of a common interest community pursuant to this Act occurs upon recordation of a declaration pursuant to Section 2-101; however, the definition of “Common Interest Community” in Section 1-103(7) contemplates that de facto common interest communities may exist, if the nature of the ownership interest fits the definition, and the Act would apply to such a project. Any real estate project which includes individually owned units meeting the definition is therefore subject to the Act if created within the State after the Act’s effective date. No intent to subject the project to the Act is required, and an express intention to the contrary would be invalid and ineffective.
The reference in this section to “all present statutes expressly applicable to condominiums or horizontal property regimes” is intended to distinguish between a State’s condominium and other enabling statutes and those statutes which apply not only to common interest communities, but to other forms of real estate, such as taxation statutes or subdivision statutes. Thus, reference to the State’s condominium or horizontal property regime enabling statutes should be included here, while references to taxation, subdivision, or other statutes which are not restricted solely to condominiums should not be included.
2. The 1994 amendment makes clear that if an amendment to the Act is adopted after the Act is initially adopted in any State, the same body of law will thereafter apply to all common interest communities created under the Act or subjected to it. This is the corporate model, and avoids perpetuating the retroactivity issue which this Act addressed initially in Sections 1-204, 1-205, and 1-206. Note that the amendment would not automatically apply to common interest communities created before the original effective date of the Act even though limited provisions of the Act do apply retroactively. Instead, an “old” project would have to be “subjected” to the Act by vote of its unit owners under Section 1-206.
Since the Act permits the declaration to vary the default results under the Act, the drafters also contemplate that, in those cases where the pre-existing declaration conflicts with the new amendment to the Act, the old declaration will prevail, unless the owners vote to amend the declaration to change that result.
SECTION 1-202. EXCEPTION FOR SMALL COOPERATIVES. If a cooperative
contains no more than 12 units and is not subject to any development rights, it is subject only to
Sections 1-106 (Applicability of Local Ordinances, Regulations, and Building Codes) and 1-107
(Eminent Domain) of this [act] unless the declaration provides that the entire [act] is applicable.
SECTION 1-203. EXCEPTION FOR SMALL AND LIMITED EXPENSE LIABILITY PLANNED COMMUNITIES.
(a) If a planned community that is not subject to any development right:
(1) contains no more than 12 units; or
SECTION 1-204. APPLICABILITY TO PRE-EXISTING COMMON INTEREST COMMUNITIES.
bylaws, and (b) the substance of the amendment does not violate this Act. In addition, as in the case of “new” projects, special exceptions are provided, in Section 1-205, for “small” projects.
3. Elaboration of the principles described in the last Comment may be helpful.
First, Section 1-204 provides that the enumerated provisions automatically apply to common interest communities created under pre-existing law, even though no action is taken by the unit owners. Many of the sections which do apply should measurably increase the ability of the unit owners to effectively manage the association, and should help to encourage the marketability of common interest communities created under early condominium statutes, or under common law. To avoid possible constitutional challenges, these provisions, as applied to “old” common interest communities, apply only to “events and circumstances occurring after the effective date of this Act;” moreover, the provisions of this Act are subject to the provisions of the instruments creating the common interest community, and this Act does not invalidate those instruments.
Example 1: Under Section 1-204, Section 4-109 (Resale of Units) automatically applies to “old” common interest communities. Accordingly, unit owners in common interest communities established prior to adoption of the Act would be obligated after the Act’s effective date to provide resale certificates to future purchasers of units. However, the failure of a unit owner to provide such a certificate to a purchaser who acquired the unit before the effective date of the Act would not create a cause of action in the purchaser, because the conveyance was an event occurring before the effective date of the Act.
Example 2: Under Section 1-204, Section 3-118 (Association Records) automatically applies to “old” common interest communities. As a result, a unit owners’ association of an “old” common interest community must maintain certain financial records, and all the records of the association “shall be made reasonably available for examination by any unit owner and his authorized agents,” even if the “old” law did not require that records be kept, or access provided. If the declaration or bylaws, however, provided that unit owners could not inspect the records of the association without permission of the president of the association, the restriction in the declaration would continue to be valid and enforceable.
Second, the prior laws of the State relating to common interest communities are not repealed by this Act because those laws will still apply to previously-created projects, except when displaced. Some States at one point made certain provisions of their condominium statutes automatically applicable to pre-existing condominiums. In certain instances, this attempted retroactive application has raised serious constitutional questions, has caused doubts to arise as to the continued validity of those condominiums, and has created general confusion as to what statutory rules should be applied.
Third, the Act seeks to alleviate any undesirable consequences of “old” law, by a limited “opt-in” provision, as provided in Section 1-206. More specifically, Section 1-206 permits the owners of a pre-existing common interest community to take advantage of the salutory provisions of this statute to the extent that can be accomplished consistent with the procedures for amending the project instruments as specified in those instruments and in the pre-existing statute or common law.
Example 3: Under most “first generation” condominium statutes, unit owners have no power to relocate boundaries between adjoining units. Under Section 2-112 of this Act, unit owners have such power, unless limited by the declaration. While Section 2-112 does not automatically apply to “old” common interest communities, if the unit owners of a pre-existing community amend their declaration to permit unit owners to relocate boundaries, this section would validate that amendment, even if it were invalid under old law.
4. The 2008 amendments to this section add several existing and new sections of the Act that apply to projects created before the effective date of this Act in a particular state. Those new sections are:
Section 1-206, which addresses amendments to governing instruments of a project;
Section 2-102, dealing with Unit boundaries;
Section 2-117 (h) and (i), which ease the amendment process, both for amendments that require lender consent and for amendments requiring a greater than 80% vote of unit owners;
Section 2-124, a new section dealing with termination of a project following a catastrophe;
Section 3-103 dealing with the make-up of the executive board and the declarant's right to control the association at the outset of the project;
Section 3-108 dealing with meetings of unit owners and of the executive board; and
Section 3-124, a new section dealing with litigation involving the declarant.
5. In considering which sections of the Act might be applied automatically to projects created under other law, the drafters remain concerned to avoid constitutional infirmity as a consequence of challenges under Article I, Section 10 of the United States Constitution, which bars a State - but not the federal government - from passing any law "...impairing the Obligation of Contracts...."
That subject, which was addressed in Comment 3 to this section in the original version of this Act, has subsequently been raised in a number of litigated cases, with mixed results. Compare, e.g., Fourth La Costa Condominium Owners Ass'n v. Seith, 159 Cal. App. 4th 563 (2008) (statute not unconstitutional) with Association of Apartment Owners of Maalaea Kai, Inc.
V. Stillson, 116 P.3d 644 (Hawaii 2005) (statute unconstitutional as applied).
The policy issues are not free from difficulty. On the one hand, for reasons of consistent management, judicial interpretation and consumer expectations among common interest communities in the same State, a single body of law that applies with equal force to all common interest communities in a State regardless of when created, would be greatly preferable. This, of course, is the general result in the field of corporate law, where all amendments to corporate statutes generally apply to all corporations in a state, regardless of whether they have retroactive application.
On the other hand, aside from the issue of possible constitutional infirmity, at least one practical reason - that being the "law of the project", which is known to all residents of a common interest community from the time they first became residents - is often raised to justify a refusal to apply new real estate laws retroactively to older projects.
The 2008 amendments continue to strike a middle ground between these positions.
SECTION 1-205. SAME; EXCEPTION FOR APPLICABILITY TO SMALL PREEXISTING PREEXISTING COOPERATIVES AND PLANNED COMMUNITIES. If a cooperative or planned community created within this state before [the effective date of this [act] contains no more than 12 units and is not subject to any development rights right, it is subject only to Sections 1-105 (Separate Titles and Taxation), 1-106 (Applicability of Local Ordinances, Regulations, and Building Codes), and 1-107 (Eminent Domain) unless the declaration is amended in conformity with applicable law and with the procedures and requirements of the declaration to take advantage of the provisions of Section 1-206, in which case, all the sections enumerated in Section 1-204(a) apply to that cooperative or planned community.
Recognizing that pre-Act cooperatives or planned communities of fewer than 12 units ought not to be subject to more rigorous requirements than small cooperatives or planned communities created under the Act, this section provides that only the same sections applicable to small new cooperatives or planned communities will apply to small pre-Act cooperatives and planned communities, unless the declaration of a small pre-Act cooperative or planned community is amended to take advantage of the amendment provisions of Section 1-206. If such an amendment is made pursuant to Section 1-206, the small pre-Act cooperative or planned community would be subject to all of the provisions applicable to large pre-Act cooperatives and planned communities, and further elections under Section 1-206 would then be possible.
(a) The declaration, bylaws, or plats and plans of any common interest community created before [the effective date of this [act] may be amended to achieve any result permitted by this [act], regardless of what applicable law provided before this [act] was adopted.
(b) Except as otherwise provided in Section 2-117(i) and (j), an An amendment to the
declaration, bylaws, or plats and plans authorized by this section must be adopted in conformity
with any procedures and requirements for amending the instruments specified by those
instruments or, if there are none, in conformity with the amendment procedures of this [act]. If
an amendment grants to any a person any a rights right, powers power, or privileges privilege
permitted by this [act], all any correlative obligations obligation, liabilities liability, and or
restrictions restriction in this [act] also apply applies to that the person.
Example: Assume “old” state law required that 5% of the purchase price of each unit sold by a declarant must be held in escrow until all the common elements in the condominium are completed. Assume further that a declarant created a condominium under “old” law, sold 10 units to purchasers prior to the effective date of the Act, and now is holding 5% of the purchase prices for those 10 units in escrow, since the common elements are not yet completed. Immediately following the effective date of the Act, the declarant amends the declaration pursuant to Section 1-206 to provide that no escrow of any portion of the purchase price is required. The amendment is approved by the requisite votes – all held by declarant – but not by any of the 10 unit owners. On its face, the amendment would appear to comply with the provisions of this Act, since it accomplishes a result – no escrow – which is permitted by this Act and was not permitted by “old” law. Whether that amendment is effective, however, to either permit the declarant to terminate the escrow with respect to the 10 unit owners, or even to terminate the escrow scheme with respect to future unit owners (since the original 10 owners may reasonably have expected that 5% of all purchase prices would be held in escrow) is not addressed by this Act. That determination must be based on the contractual and constitutional rights of the original purchasers.
4. The last sentence of Section 1-206 addresses the potential problem of a declarant seeking to take undue advantage of the amendment provisions to assume a power granted by the Act without being subject to the Act’s limitations on the power. The last sentence insures that, if declarants or other persons assume any of the powers and rights which the Act grants, the correlative obligations, liabilities, and restrictions of the Act also apply to that person, even if the amendment itself does not require that result.
Example: Assume that, pursuant to the provisions of “old” condominium law, a declarant may exercise control over the association for only three years from the date the condominium is created, but the control may be maintained during that period for so long as declarant owns any units. In the absence of any amendment, a provision in the declaration taking full advantage of the “old” law would be valid and enforceable. Assume further that, in the second year following creation of the condominium in question, this Act is adopted. The declarant then properly amends the declaration pursuant to Section 1-206 to extend the period of declarant control for five years from the date of creation. The amendment would effectively extend control for two additional years, because Section 3-103(d) does not limit the number of the years the declarant may specify as a control period.
Nevertheless, if the declarant, before that extended time limit has expired, conveys 75
percent of the units that may ever be a part of the condominium, or fails for two years to exercise
development rights or offer units for sale in the ordinary course of business, the period of
declarant control would terminate by virtue of the limitations in Section 3-103(d). That
limitation is imposed on the declarant even if the amendment called for retaining control for so
long as any units were owned by declarant, and despite the provision in the “old” law permitting
such a restriction.
At the same time, lawyers in the field have long recognized that the amendment process can be fatally impeded by provisions commonly found in the declarations of existing communities. Two of the most significant are requirements that amendments cannot be effective unless approved by a specified number of unit lenders, or unless approved by very large and often unrealistic majorities of unit owners. Recognizing this issue, Connecticut approved amendments to Connecticut's version of Section 2-117(i) and (j) in 1995 which are very similar to those appearing here; see Connecticut Public Act 95-187. Practice under those amendments demonstrates the significant value these relaxed procedures add in accomplishing desired amendments in pre-act declarations.
SECTION 1-207. APPLICABILITY TO NONRESIDENTIAL AND MIXED-USE COMMON INTEREST COMMUNITIES.
Building Codes), and 1-107 (Eminent Domain) apply to the community.
(d)(c) If the this entire [act] applies to a nonresidential common interest community, the declaration may also require, subject to Section 1-112 (Unconscionable Agreement or Term of Contract), that:
(e)(d) A common interest community that contains units restricted exclusively to nonresidential purposes and other units that may be used for residential purposes is not subject to this [act] unless the units that may be used for residential purposes would comprise a common interest community that would be subject to this [act] in the absence of the nonresidential units or the declaration provides that this [act] applies as provided in subsection (b) or (c) or (d).
1. The 1994 amendments to this section permit all nonresidential common interest communities to “opt out” of the Act; the original section was limited to planned communities.
However, the 2008 amendment to subsection (b)(3) now precludes the possibility that the declaration for a non-residential project organized as a condominium may provide that only Sections 1-105 (Separate Titles and Taxation), 1-106 (Applicability of Local Ordinances, Regulations and Building Codes), and 1-107 (Eminent Domain) apply to the community. The judgement of the drafters was that, by definition, a condominium was a creature of statute and it was therefore statutorily improper to suggest that a statutorily created form of ownership could exist without the other provisions of the statute also applying to it.
However, except for mixed use projects, the revised section continues to be restricted to common interest communities which contain only nonresidential units. The term “residential purposes” is defined and discussed in detail in Section 1-103(27) and its Comments.
In addition, the revised section offers the declarant of a nonresidential common interest community significantly more flexibility than was allowed in the original section. This change responds to those concerns which commentators have identified as important to developers of commercial common interest communities.
The default rule is that the Act does not apply at all to a nonresidential common interest community.
However, the declarant may want the Act to apply in at least some circumstances. Therefore, subsection (c) (b) provides a mechanism by which the declarant may elect simply to have the Act’s rules on eminent domain, separate taxation, and applicability of local ordinances apply to the project. These three sections all establish default rules which are likely to be desirable from both the declarant’s and future owners’ perspectives.
The 2008 amendment to subsection (b) of this section increases the flexibility of document drafters in non-residential projects. Previously, the drafter was limited to 3 choices: (i) applying the default rule, that is, none of the Act applies, which would require a very substantial drafting effort to address all the issues covered by the statute; (ii) the entire Act applies, which brings the consumer protection complexities of Articles 3 and 4 of the Act, even with the drafting exceptions permitted by subsection (c), or (iii) only 3 sections of the Act apply, which resolve important issues of other state statutes but are otherwise insignificant in the drafting process.
With the new option contained in (b)(2), the drafter has an additional choice, and that is to apply only Articles 1 and 2 of the Act to the non-residential project. By electing this option, the document drafter can take advantage of the provisions validating legal structures of the common interest community, and thus allow shorter, clearer and more certain documents for non-residential projects than practice has permitted under the existing Act.
2. Finally, a declarant may find the full range of the Act to be a desirable outcome, particularly in light of those many sections which permit waiver or variation by agreement. Those sections already permitting waiver are detailed in the Official Comments to Section 1-104.
However, even in that case, the revised section provides two additional major enhancements to flexibility.
First, the section contemplates that the declaration may provide that the entire Act applies but that the declarant may require that the association must continue certain contracts and leases in place after turnover, even though such contracts would otherwise be subject to cancellation by the Association under Section 3-105.
Second, the section allows the declarant to use proxies, powers of attorney, or other devices to accomplish other results which would be prohibited in the case of residential common interest communities. The sole limitation in both instances is the rule of unconscionability in Section 1-112.
3. Subsection (e) (d) addresses the Act’s applicability to mixed use projects. The default rule is nonapplicability unless the definition of a common interest community would be met “in the absence of the nonresidential units.” Thus, if the “residential” units and their obligations under the declaration did not satisfy the definitional threshold in Section 1-103(7) – basically, a payment obligation on the unit extending by covenant to “non-unit” expenses – the Act would not apply.
SECTION 1-208. APPLICABILITY TO OUT-OF-STATE COMMON INTEREST COMMUNITIES. This [act] does not apply to a common interest communities community or units located outside this State, but the public offering statement provisions (Sections 4-102 through 4-108)state, but Sections 4-102 and 4-103 and, to the extent applicable, Sections 4-104 through 4-106, apply to all a contracts contract for the disposition thereof of a unit in that common interest community signed in this state by any party unless exempt under Section 4-101(b) [and the agency regulation provisions under [Article] 5 apply to any offering thereof in this state].
This section reflects the fact that there are practical as well as constitutional limits regarding the extent to which a State should or may extend its jurisdiction to out of state transactions. A State may, of course, properly exercise its authority to protect its citizens from false or misleading information regarding common interest communities located in other States but sold in that State. However, where sales contracts are executed wholly outside the enacting State and relate to common interest communities located outside the State, it seems more appropriate for the courts of the jurisdiction(s) in which the common interest community is located and where the transaction occurs to have jurisdiction over the transaction.
(a) An arrangement between the associations for two or more common interest communities to share the costs of real estate taxes, insurance premiums, services, maintenance or improvements of real estate, or other activities specified in their arrangement or declarations does not create a separate common interest community.
(b) An arrangement between an association and the owner of real estate that is not part of a common interest community to share the costs of real estate taxes, insurance premiums,
services, maintenance or improvements of real estate, or other activities specified in their
arrangement does not create a separate common interest community. However, assessments
against the units in the common interest community required by the arrangement must be
included in the periodic budget for the common interest community, and the arrangement must
be disclosed in all public offering statements and resale certificates required by this [act].
This section, adopted in 2008, addresses once again the scope of the Act. It should be considered in connection with the revised definition of “Common Interest Community”. The sub-sections address two separate aspects of this issue:
The following analysis may help frame the issues.
First, there appear to be 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 unit owners association 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 examples of common situations:
1) A homeowners association maintains the entry features, median and right-ofway 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 it 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. There is no need here for another association in which the property owners and hotel are members, with organizational documents, contracts, meetings, etc. The hotel doesn’t want to be subject to membership in an association controlled by other property owners and 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 condominium projects 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. Again, there is little benefit conferred in mandating creation of a master association to own and maintain the road.
Subsection (a) makes clear that in the case of arrangements between associations, a separate association would not be required in any of the foregoing instances.
However, the drafters did not intend that the section result in an arrangement where the unit owners are left without a remedy in those instances where, for example, the sharing arrangement appears to unreasonably allocate the costs or other important aspects of the arrangement between the parties.
Cost, of course, would be only one concern of unit owners and their associations arising out of an agreement to share in the use of and expenses for other land. The drafters are aware of situations in which developers have included amenities, such as clubhouses, swimming pools, tennis courts, as well as access roads, 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. Such arrangements have the potential to breed frustration, acrimony, and abuse.
One of the examples above suggests that a residential association and a commercial venture such as a hotel share certain common facilities and expenses and that the hotel might defer to the residential association for the operation of these amenities. This may not always be realistic. 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 developer of the hotel may seek to negotiate a deal best suited to its needs, perhaps to the detriment of the unit owners. Whether or not the deal as it is finally structured contains some semblance of a “reasonable” formula for cost sharing, the other, non-financial terms of the arrangement may vest control, decision making, etc., including the level of maintenance desired, solely with the hotel.
In several provisions, the Act does offer remedies for such circumstances, and those provisions would apply here with equal force. By way of example, if the arrangement were created for purposes of avoiding the limitations of the Act, if the organizers of the arrangement had not acted in good faith, or if the allocated interests between the associations were unconscionable, the mandates of sections 1-104, 1-108 and 1-112 would apply.
In the case of arrangements between associations and third parties other than associations, sub-section (b) avoids the need for a separate unit owner 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.
SECTION 1-210. OTHER EXEMPT COVENANTS. A covenant that requires the
owners of separately owned parcels of real estate to share costs or other obligations associated
with a party wall, driveway, well, or other similar use does not create a common interest
community unless the owners otherwise agree.
While these various forms of simple shared arrangements might arguably satisfy the definition of “common interest community,” there is no policy reason to vary common practice, which is to treat these arrangements as governed exclusively by the agreement of the parties, supplemented by common law. Accordingly, the 2008 amendments expressly exclude these arrangements from the Act.
[ARTICLE] 2CREATION, ALTERATION, ANDTERMINATION OF COMMON INTEREST COMMUNITIESSECTION 2-101. CREATION OF COMMON INTEREST COMMUNITIES.
1. Under subsection (a), a common interest community is created pursuant to this Act only by recording a declaration. As with any instrument affecting real estate, the declaration must be recorded in every recording district in which any portion of the common interest community is located and must be indexed in the manner described in subsection (a). Specific indexing rules are suggested in brackets and should be used in those States where this result would not otherwise occur. For example, the declaration commonly has not been indexed in the grantee’s index in the name of the common interest community. Moreover, when multiple persons execute the declaration, the declaration has often been indexed solely in the name of the declarant and not in the name, for example, of lenders and other persons who might have executed the declaration. Because it is important that the names of the association and all persons executing the declaration appear in the index in order to locate all instruments in the land records, that language is not included in brackets.
In the case of a cooperative, there is a second requirement for creation in addition to the recording requirements applicable to all common interest communities discussed above. The declarant must convey the real estate subject to that declaration to the association, since the association (in the form of a corporation, trust, or other entity described in Section 3-101) must hold title to that real estate. This requirement may contrast with the current practice in some jurisdictions under which the declarant may retain title to the real estate until proprietary leases for all or most units have been executed. This requirement tracks the language of the Model Real Estate Cooperative Act.
If a condominium were said to consist from the beginning of a certain number of units, even though some of those units had not yet been completed or even begun, serious problems would arise if the remaining units were never constructed and if no obligation to complete the construction could be enforced against any solvent person. If the insolvent owner of the unbuilt units failed to pay his common expense assessments, for example, the unit owners’ association might be left with no remedy except a lien of doubtful value against mere cubicles of airspace. Moreover, votes in the unit owners’ association could be assigned to units, and those votes could be cast, even though the units were never built. The Act, therefore, requires that significant construction take place before units are assigned an interest in the common elements, a vote in the association, and a share of the common expense liabilities, and before units are conveyed. This requirement of substantial structural and mechanical completion (or the alternative bonding procedure and other assurances required by Section 5-103) reduces the possibility that a failure to complete will upset the expectations of purchasers or otherwise harm their interests in case the declarant becomes insolvent and no solvent person has the obligation to complete the unit.
The Date of Substantial Completion of the Work . . . is the date certified by the
Architect when construction is sufficiently complete, in accordance with the
Contract Documents (that is, the owner-contractor agreement, the conditions of
the contract, and the specifications and all addenda and modifications), so the
Owner can occupy or utilize the Work . . . for the use for which it is intended.
This standard is also one often used by building officials in issuing certificates of occupancy. It does not suggest that the unit is “entirely completed” as that term is understood in the construction industry; lesser details, such as sticking doors, leaking windows, or some decorative items, might still remain, and the Act contemplates that they need not be completed prior to lawful conveyance.
SECTION 2-102. UNIT BOUNDARIES. Except as provided by the declaration:
1. It is important for title purposes, for purposes of defining maintenance responsibilities, and for other reasons to have a clear guide as to which parts of a common interest community constitute the units and which parts constitute common elements. This section fills the gap left when the declaration merely defines unit boundaries in terms of floors, ceilings, and perimetric walls, and is particularly useful in the case of cooperatives, in which the recording of plats and plans is not required. See Section 2-105(a)(5).
The provisions of this section may be varied, of course, to the extent that the declarant wishes to modify the details for a particular common interest community.
For example, in a townhouse project structured as a condominium or planned community, it may be desirable that the unit boundaries constitute the exterior surfaces of the roof and exterior walls, with the center line of the party walls constituting the perimetric boundaries of the units in that plane, and the undersurface of the bottom slab dividing the unit itself from the underlying land. Alternately, the boundaries of the units at the party walls might be extended to include actual division of underlying land itself. In those cases it would be inappropriate for walls, floors, and ceilings to be designated as boundaries, and the declaration would describe the boundaries in the above manner.
SECTION 2-103. CONSTRUCTION AND VALIDITY OF DECLARATION AND
BYLAWS.
declaration, bylaws, or rules, or regulations adopted pursuant to Section 3-102(a)(1).
bylaws, the declaration prevails except to the extent the declaration is inconsistent with this [act].
affected by reason of an insubstantial failure of the declaration to comply with this [act].
Whether a substantial failure impairs marketability is not affected by this [act].
Suppose the declaration allocates common element interests to all the units, but fails to indicate the formula for the allocation as required by Section 2-107. This would be a substantial defect if the assigned interests were unequal, but if all units were assigned identical interests it would be possible to infer that the basis of the allocation was equality – and the failure of the declaration to say so would be an insubstantial defect. Were this to happen in a common interest community where the right to add new units is reserved, however, it should be noted that a subsequent amendment to the declaration adding new units could not use any formula other than equality for reallocating the common elements interests unless a different formula were specified pursuant to Section 2-107(c).
Other examples of insubstantial defects that might occur include failure of the declaration to include the word “condominium,” “cooperative,” or “planned community,” as required by Section 2-105(a)(1), or failure of the plats or plans in the case of condominium and planned communities, to comply satisfactorily with the requirements of Section 2-109(a) that they be “clear and legible,” so long as they can at least be deciphered by persons with proper expertise. Failure to organize the unit owners’ association at the time specified in Section 3-101 would not be a defect in the declaration at all, and would not affect the validity or marketability of titles in the common interest community. It would, however be a violation of this Act, and create a claim for relief under Section 4-117.
5. Each State has case or statutory law dealing with marketability of titles, and the
question of whether substantial failure of the declaration to comply with the Act affects marketability of title should be determined by that law and not by this Act.
SECTION 2-104. DESCRIPTION OF UNITS. A description of a unit which sets forth the name of the common interest community, the [recording data] for the declaration, the [county] in which the common interest community is located, and the identifying number of the unit, is a legally sufficient description of that unit and all rights, obligations, and interests appurtenant to that unit which were created by the declaration or bylaws.
(a) The declaration must contain:
1. Many statutes and other regulatory schemes in the multi-owner project field do not separate the functions of a recorded declaration and an unrecorded public offering statement or disclosure documents. As a result, many of the developer’s representations and assurances concerning his future plans must appear in the declaration as well as the public offering statement, even though they have nothing to do with the legal structure or title of the project. This results in duplicative requirements and unnecessarily complex declarations.
This Act makes a functional distinction between the declaration and the public offering statement. It only requires the declaration to contain those matters which affect the legal structure or title of the common interest community. This includes the reserved powers of the declarant to exercise development rights within the common interest community. A narrative description of those rights, however, and the possible consequences flowing from their exercise, are required to be disclosed only in the public offering statement and not in the declaration.
In the case of condominiums and planned communities, plats and plans are made part of the declaration by Section 2-109, and their content may in part provide some of the information required by this section.
In theory, a declarant might overstate the maximum number of units in an attempt to artificially extend the period of declarant control, since the time might never come when a declarant had sold 75% of that number of units. As a practical matter, however, as the following example points out, such a practice would not likely achieve long-term control.
Example: A declarant reserves the right to build 100 units, even though zoning would permit only 75 units on the site, and the declarant actually plans on building only 50 units. As a result of the reservation, the declarant would not loss control of the association under the 75% rule stated in Section 3-103(d)(i) even when all 50 units had been built and sold, because that percentage applies to all potential units, not units actually built. See Section 3-103(d)(i)(1).
However, there are practical constraints on the declarant’s decision in this matter. Substantial exaggeration of the future density of the development might tend to impede sales of units in that project. Moreover, such a statement might also produce negative governmental reaction to proposals which might require local approval.
Even if the declarant did overstate the number of units to retain control, however, other limitations imposed by Section 3-103(d) will require turnover at an appropriate time. In the example, once the declarant had exercised the right to add the last of the 50 units which he intended to build, the two-year period imposed by Section 3-103(d)(ii) and (iii) would begin to run and the declarant would lose the right to control the association two years from the time the last units were added, even though he had reserved the right to add more units.
Specifically, these amendments describe the pattern of what use and occupancy restrictions must appear in the declaration, what amendment procedures must be used to change those use and occupancy restrictions, what discretion the executive board has in enforcing such restrictions, and what protection the Act provides to unit owners, either to be free of regulation inside their units, or to be protected from new restrictions on a once permitted activity.
This is a complex subject, and amendments in several sections of the Act were required.
The amendments begin in Section 2-105. Previously, the Act required all use, occupancy, and alienation restrictions to appear in the declaration; see old Section 2-105(a)(12). No amendment to a “use” restriction was allowed, except with unanimous consent; see old Section 2-117(d). The Act was unclear as to whether or not such things as leasing restrictions or pet rules were “use” restrictions requiring unanimous consent.
The 1994 amendment to this section makes made two important changes. First, leasing restrictions which exceed the restrictions allowed by the secondary mortgage market, see Section 3-102(c)(2), still must appear in the declaration. No other use or occupancy restrictions must appear in the declaration, but any such restrictions may so appear. See Section 2-105(b). Presumably, a provision in the declaration pursuant to this subsection (b) could permit the executive board to develop evolving use restrictions, in its discretion.
New subsection (b) also seeks generally to distinguish between “uses of a unit” and “the number or qualifications of persons who occupy units;” this distinction emphasizes that “occupancy” focuses on characteristics of individual persons while “use” focuses on the purposes to which the space is devoted.
Amendments to other sections bear on these issues in important ways. See, e.g., Section 2-117(d) and (f) and Section 3-102.
14. Subsection (a)(14) was adopted in 2008; it requires that if the unit owners association is to be authorized to establish and enforce construction and design criteria or aesthetic standards, that authority must appear in the declaration. This mandate tracks the requirement that if the declarant is to have that power during the time it is developing the project, the declarant must treat that power as a special declarant right; see Section 1-103 (33)(H).
If the association is so empowered, then, pursuant to Section 3-106(a)(4) and (7), the bylaws would have to provide for administration of that program if administration is to be done by any committee or officer other than the executive board. Further, under Section 3-120(c), the association would adopt criteria for consideration of design criteria, and procedures for enforcing them.
Taken together, these requirements are intended to instill a reasonable and transparent process regarding a subject which has been controversial in the common interest community field.
SECTION 2-106. LEASEHOLD COMMON INTEREST COMMUNITIES.
(a) Any lease the expiration or termination of which may terminate the common interest
community or reduce its size [, or a memorandum thereof,] must be recorded. Every lessor of
those leases in a condominium or planned community shall sign the declaration. The declaration
must state:
may be inspected];
Subsection (b) is intended to protect the leasehold condominium or planned community “unit owner” regardless of whether he is a lessee, sublessee, or even further down in a chain of transfer of leasehold interests. See Section 1-103(32). Thus, for example, if the “unit owner” is a sublessee, the term “lessor (or) his successor in interest” includes not only the lessor, but also the lessee.
Subsection (b) further protects the unit owner by assuring that he will not share with his fellow unit owners any collective obligations toward their common lessor. All obligations are instead fractionalized so that no unit owner can be made liable or otherwise penalized for a default by any of his fellows. Thus, a default by the association in payment of the rent due to a lessor, in a case where the lease of common elements ran to the association, would not permit the lessor to terminate continued use of those common elements by those unit owners who then pay their share of the rent.
Subsection (b) does not address the issue of whether a unit owner’s tenant may cure a default by the unit owner under the unit owner’s lease so as to prevent termination of the unit owner’s lease.
Example: Assume that A leases 100 acres of land to B for 50 years. B, in turn, leases the same 100 acres to C, for the duration of the 50 year term. C creates a condominium on the leasehold land, and thereby becomes the declarant; thereafter, he leases a unit in the condominium to D, together with a lease of this allocated undivided interest in the leasehold underlying the unit, for the duration of the 50 year term. D then leases his unit to E for a term of five years.
Both A and B must execute the declaration; see Section 2-106(a). So long as D meets his obligations to C – or any other persons – under the declaration and his sublease, D’s interest in the leasehold may not be terminated by either A, B, or C; see Section 2-106. For that reason, A and B will likely take appropriate steps to protect their interests in the event that D makes timely payment to C, if called for in the declaration or lease, but C fails to meet his obligations to either A or B. If D fails to make timely payment to C – or to B or A if those persons have so required – then D’s interest may be terminated by the person entitled to payment, unless E is entitled to cure. E may cure and thereby prevent default, however, only if other law of the State permits transferees of partial interests to cure defaults of his transferor. Since E is not a unit owner, he is not entitled to rights under this Act.
However, this section does not permit a unit owner in a cooperative to preserve his interest in the cooperative by paying his pro-rata share of the rent in the event the association fails to pay rent due under a ground lease. This distinction flows from the differences in the nature of a cooperative and a condominium or a planned community, and it tracks the distinction made by UCA and UPCA, and MRECA.
5. Subsection (d) considers the problems created when termination of a lease reduces the size of a common interest community. In the event that some units are thereby withdrawn from the common interest community, reallocation of the allocated interests would be required; the section describes how that reallocation would occur.
SECTION 2-107. ALLOCATION OF ALLOCATED INTERESTS.
(a) The declaration must allocate to each unit:
(iii) in a planned community, a fraction or percentage of the common expenses of the association (Section 3-115(a)), and a portion of the votes in the association.
(b) The declaration must state the formulas used to establish allocations of interests. Those allocations may not discriminate in favor of units owned by the declarant or an affiliate of the declarant.
(c) If units may be added to or withdrawn from the common interest community, the declaration must state the formulas to be used to reallocate the allocated interests among all units included in the common interest community after the addition or withdrawal.
1. Subsection (a) treats allocated interests differently in each type of common interest community. The distinctions made in parts (i) - (iii) track those made in the corresponding subsection of UCA, UPCA, and MRECA, for condominiums, planned communities, and cooperatives, respectively.
2. Most existing condominium statutes and cooperative documents require a single common basis, usually related to the “value” of the units, to be used in the allocation of common element interests, or ownership interests in cooperatives, votes in the association and common expense liabilities. Following UCA, UPCA, and MRECA, this Act departs radically from such requirements by permitting each of these allocations to be made on different bases, and by permitting allocations which are unrelated to value.
Thus, a common interest community’s applicable allocations might be made equally among all units, or in proportion to the relative size of each unit, or on the basis of any other formula the declarant may select, regardless of the value of those units. Moreover, “size” might be used, for example, in allocating common expenses and common element interests (or ownership interest), while equality is used in allocating votes in the association. This section does not require that the formulas used by the declarant be justified, but it does require that the formulas be explained. The sole restriction on the formulas to be used in these allocations is that they not discriminate in favor of the units owned by the declarant. Otherwise, each of the separate allocations may be on any basis which the declarant chooses, and none of the allocations need be tied to any other allocation.
allocations on particular questions. Different allocations may be appropriate, for example, in a project where common expense liabilities, or questions concerning rules and regulations, affect different units differently.
Example: In a mixed commercial and residential project, the declaration might provide that each unit owner would have an equal vote for the election of the Board of Directors. However, on matters concerning ratification of the common expense budget, where the commercial unit owners pay a much larger share than their proportion of the total units, the vote of commercial unit owners might be increased so that they exceed the number of votes the residential owners hold. Alternatively, of course, it might be possible to treat this question as a class voting matter, but the draftsman is provided flexibility in this section to choose the most appropriate solution.
8. This section recognizes that there may be certain instances in which class voting in the association would be desirable. For example, in a mixed-use planned community or condominium consisting of both residential and commercial units, there may be certain kinds of issues upon which the residential or commercial unit owners should have a special voice, and the device described in Comment 7 is not desired. To prevent abuse of class voting by the declarant, subsection (d) permits class voting only with respect to specified issues directly affecting the designated class and only insofar as necessary to protect valid interests of the designated class.
Example: Owners of town house units, in a single project consisting of both town house and high-rise buildings, might properly constitute a separate class for purposes of voting on expenditures affecting only the town house units, but they might not be permitted to vote by class on rules for the use of facilities used by all the units.
The subsection further provides that the declarant may not use the class voting device for the purpose of evading any limitation imposed on declarants by this Act (e.g., to maintain declarant control beyond the period permitted by Section 3-103).
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 for an indefinite period 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 2-108. LIMITED COMMON ELEMENTS.
(a) Except for the limited common elements described in Section 2-102(2) and (4), the
declaration must specify to which unit or units each limited common element is allocated. An
allocation may not be altered without the consent of the unit owners whose units are affected.
(b) Except as the declaration otherwise provides, a limited common element may be
reallocated by an amendment to the declaration executed by the unit owners between or among
whose units the reallocation is made. The persons executing the amendment shall provide a copy thereof to the association, which shall record it. The amendment must be recorded in the
names of the parties and the common interest community.
(c) A common element not previously allocated as a limited common element may be so
allocated only pursuant to provisions in the declaration made in accordance with Section
2-105(a)(7). The allocations must be made by amendments to the declaration.
4. See also Comments 7 and 8 to Section 2-105.
SECTION 2-109. PLATS AND PLANS.
(a) Plats and plans are a part of the declaration, and are required for all common interest
communities except cooperatives. Separate plats and plans are not required by this [act] if all the
information required by this section is contained in either a plat or plan. Each plat and plan must be clear and legible and contain a certification that the plat or plan contains all information required by this section.
(b) Each plat must show or project: