AMENDMENTS TO UNIFORM COMMON INTEREST OWNERSHIP ACT interest ownership/ucioa... · amendments to...

D R A F T

FOR DISCUSSION ONLY

AMENDMENTS TO UNIFORM COMMON INTEREST OWNERSHIP ACT

NATIONAL CONFERENCE OF COMMISSIONERS

ON UNIFORM STATE LAWS

MEETING IN ITS ONE-HUNDRED-AND-FIFTEENTH YEARHILTON HEAD, SOUTH CAROLINA

JULY 7-14, 2006


WITHOUT PREFATORY NOTE AND WITH PROPOSED NEW COMMENTS

Copyright ©2006

By

NATIONAL CONFERENCE OF COMMISSIONERS

ON UNIFORM STATE LAWS

The ideas and conclusions set forth in this draft, including the proposed statutory language and any comments or

reporter’s notes, have not been passed upon by the National Conference of Commissioners on Uniform State Laws

or the Drafting Committee. They do not necessarily reflect the views of the Conference and its Commissioners and

the Drafting Committee and its Members and Reporter. Proposed statutory language may not be used to ascertain

the intent or meaning of any promulgated final statutory proposal.

DRAFTING COMMITTEE ON AMENDMENTS TO UNIFORM COMMON INTERESTOWNERSHIP ACT

The Committee appointed by and representing the National Conference of Commissioners onUniform State Laws in preparing this Act consists of the following individuals:

CARL H. LISMAN, 84 Pine St., P.O. Box 728, Burlington, VT 05402, ChairOWEN L. ANDERSON, University of Oklahoma, 300 Timberdell Rd., Norman, OK 73019MARION W. BENFIELD, JR., 10 Overlook Circle, New Braunfels, TX 78132DAVID D. BIKLEN, 153 N. Beacon St., Hartford, CT 06105ELLEN F. DYKE, 10400 Fernwood Rd., Dept. 52-923, Bethesda, MD 20817JOHN S. GILLIG, Office of the Speaker, State Capitol, Room 307, Frankfort, KY 40601DALE G. HIGER, 1302 Warm Springs Ave., Boise, ID 83712DONALD E. MIELKE, 7472 S. Shaffer Ln., Suite 100, Littleton, CO 80127HIROSHI SAKAI, 3773 Diamond Head Circle, Honolulu, HI 96815NATHANIEL STERLING, Law Revision Commission, 4000 Middlefield Rd., Suite D-1, Palo

Alto, CA 94303YVONNE L. THARPES, Legislature of the Virgin Islands, P.O. Box 1690, St. Thomas, VI

00804NORA WINKELMAN, Office of General Counsel, 333 Market St., 17th Flr., Harrisburg, PA

17101LEE YEAKEL, Western District of Texas, P.O. Box 164196, Austin, TX 78716-4196WILLIAM R. BREETZ, JR., Connecticut Urban Legal Initiative, 35 Elizabeth St. Rm K-202,

Hartford, CT 06105, Reporter

EX OFFICIO

HOWARD J. SWIBEL, 120 S. Riverside Plaza, Suite 1200, Chicago, IL 60606, PresidentLEVI J. BENTON, State of Texas, 201 Caroline, 13th Flr., Houston, TX 77002, Division Chair

AMERICAN BAR ASSOCIATION ADVISOR

GARY A. POLIAKOFF, 3111 Stirling Road, Ft. Lauderdale, FL 33312-6525, ABA AdvisorREBECCA ANDERSON FISCHER, 633 17th St., Ste. 3000, Denver, CO 80202, ABA Section

Advisor

EXECUTIVE DIRECTOR

WILLIAM H. HENNING, University of Alabama School of Law, Box 870382, Tuscaloosa, AL35487-0382, Executive Director

Copies of this Act may be obtained from:

NATIONAL CONFERENCE OF COMMISSIONERSON UNIFORM STATE LAWS

211 E. Ontario Street, Suite 1300Chicago, Illinois 60611

312/915-0195www.nccusl.org


TABLE OF CONTENTS

[ARTICLE] 1GENERAL PROVISIONS

[PART] 1DEFINITIONS AND OTHER GENERAL PROVISIONS

SECTION 1-101. SHORT TITLE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1SECTION 1-102. APPLICABILITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1SECTION 1-103. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1SECTION 1-104. VARIATION BY AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8SECTION 1-105. SEPARATE TITLES AND TAXATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8SECTION 1-106. APPLICABILITY OF LOCAL ORDINANCES, REGULATIONS, AND

BUILDING CODES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9SECTION 1-107. EMINENT DOMAIN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9SECTION 1-108. SUPPLEMENTAL GENERAL PRINCIPLES OF LAW APPLICABLE . . . 10SECTION 1-109. CONSTRUCTION AGAINST IMPLICIT REPEAL . . . . . . . . . . . . . . . . . . 11SECTION 1-110. UNIFORMITY OF APPLICATION AND CONSTRUCTION . . . . . . . . . . 11SECTION 1-111. SEVERABILITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11SECTION 1-112. UNCONSCIONABLE AGREEMENT OR TERM OF CONTRACT . . . . . 11SECTION 1-113. OBLIGATION OF GOOD FAITH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12SECTION 1-114. REMEDIES TO BE LIBERALLY ADMINISTERED . . . . . . . . . . . . . . . . . 12SECTION 1-115. ADJUSTMENT OF DOLLAR AMOUNTS . . . . . . . . . . . . . . . . . . . . . . . . . 12

[PART] 2APPLICABILITY

SECTION 1-201. APPLICABILITY TO NEW COMMON INTEREST COMMUNITIES . . . 13SECTION 1-202. EXCEPTION FOR SMALL COOPERATIVES . . . . . . . . . . . . . . . . . . . . . . 14SECTION 1-203. EXCEPTION FOR SMALL AND LIMITED EXPENSE LIABILITY

PLANNED COMMUNITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14SECTION 1-204. APPLICABILITY TO PRE-EXISTING COMMON INTEREST

COMMUNITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15SECTION 1-205. SAME; EXCEPTION FOR SMALL PRE-EXISTING COOPERATIVES

AND PLANNED COMMUNITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15SECTION 1-206. AMENDMENTS TO GOVERNING INSTRUMENTS . . . . . . . . . . . . . . . . 16SECTION 1-207. APPLICABILITY TO NONRESIDENTIAL AND MIXED-USE

COMMON INTEREST COMMUNITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16SECTION 1-208. APPLICABILITY TO OUT-OF-STATE COMMON INTEREST

COMMUNITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

[ARTICLE] 2CREATION, ALTERATION, AND

TERMINATION OF COMMON INTEREST COMMUNITIES

SECTION 2-101. CREATION OF COMMON INTEREST COMMUNITIES . . . . . . . . . . . . . 18SECTION 2-102. UNIT BOUNDARIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18SECTION 2-103. CONSTRUCTION AND VALIDITY OF DECLARATION AND

BYLAWS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19SECTION 2-104. DESCRIPTION OF UNITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19SECTION 2-105. CONTENTS OF DECLARATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20SECTION 2-106. LEASEHOLD COMMON INTEREST COMMUNITIES . . . . . . . . . . . . . . 24SECTION 2-107. ALLOCATION OF ALLOCATED INTERESTS . . . . . . . . . . . . . . . . . . . . . 25SECTION 2-108. LIMITED COMMON ELEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28SECTION 2-109. PLATS AND PLANS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28SECTION 2-110. EXERCISE OF DEVELOPMENT RIGHTS . . . . . . . . . . . . . . . . . . . . . . . . 31SECTION 2-111. ALTERATIONS OF UNITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33SECTION 2-112. RELOCATION OF UNIT BOUNDARIES . . . . . . . . . . . . . . . . . . . . . . . . . . 33SECTION 2-113. SUBDIVISION OF UNITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34[SECTION 2-114. EASEMENT FOR ENCROACHMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . 35[SECTION 2-114. MONUMENTS AS BOUNDARIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35SECTION 2-115. USE FOR SALES PURPOSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35SECTION 2-116. EASEMENT RIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36SECTION 2-117. AMENDMENT OF DECLARATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36SECTION 2-118. TERMINATION OF COMMON INTEREST COMMUNITY . . . . . . . . . . . 39SECTION 2-119 RIGHTS OF SECURED LENDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44SECTION 2-120. MASTER ASSOCIATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45SECTION 2-121. MERGER OR CONSOLIDATION OF COMMON INTEREST

COMMUNITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47SECTION 2-122. ADDITION OF UNSPECIFIED REAL ESTATE . . . . . . . . . . . . . . . . . . . . 48SECTION 2-123. MASTER PLANNED COMMUNITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48[NEW] SECTION 2-124. OTHER EXEMPT REAL ESTATE ARRANGEMENTS . . . . . . . . 49

[ARTICLE] 3MANAGEMENT OF THE COMMON INTEREST COMMUNITY

SECTION 3-101. ORGANIZATION OF UNIT OWNERS’ ASSOCIATION . . . . . . . . . . . . . 53SECTION 3-102. POWERS OF UNIT OWNERS’ ASSOCIATION . . . . . . . . . . . . . . . . . . . . 54SECTION 3-103. EXECUTIVE BOARD MEMBERS AND OFFICERS . . . . . . . . . . . . . . . . 62SECTION 3-104. TRANSFER OF SPECIAL DECLARANT RIGHTS . . . . . . . . . . . . . . . . . . 66SECTION 3-105. TERMINATION OF CONTRACTS AND LEASES OF DECLARANT . . . 69SECTION 3-106. BYLAWS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70SECTION 3-107. UPKEEP OF COMMON INTEREST COMMUNITY . . . . . . . . . . . . . . . . . 71SECTION 3-108. UNIT OWNER MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72[NEW] SECTION 3-108A. EXECUTIVE BOARD MEETINGS . . . . . . . . . . . . . . . . . . . . . . . 74SECTION 3-109. QUORUMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76SECTION 3-110. VOTING; PROXIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76

SECTION 3-111. TORT AND CONTRACT LIABILITY; TOLLING OF LIMITATIONPERIOD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79

SECTION 3-112. CONVEYANCE OR ENCUMBRANCE OF COMMON ELEMENTS . . . 80SECTION 3-113. INSURANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83SECTION 3-114. SURPLUS FUNDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86SECTION 3-115. ASSESSMENTS FOR COMMON EXPENSES . . . . . . . . . . . . . . . . . . . . . . 86SECTION 3-116. LIEN FOR ASSESSMENTS; FORECLOSURE . . . . . . . . . . . . . . . . . . . . . 88SECTION 3-117. OTHER LIENS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98SECTION 3-118. ASSOCIATION RECORDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100SECTION 3-119. ASSOCIATION AS TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103[NEW] SECTION 3-120. RULES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104[NEW] SECTION 3-121. LITIGATION INVOLVING THE DECLARANT . . . . . . . . . . . . . 105[NEW] SECTION 3-122. NOTICE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109[NEW] SECTION 3-123. RECALL OF OFFICERS AND DIRECTORS . . . . . . . . . . . . . . . 111[NEW] SECTION 3-124. ADOPTION OF BUDGETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113

[ARTICLE] 4PROTECTION OF PURCHASERS

SECTION 4-101. APPLICABILITY; WAIVER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116SECTION 4-102. LIABILITY FOR PUBLIC OFFERING STATEMENT

REQUIREMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116SECTION 4-103. PUBLIC OFFERING STATEMENT; GENERAL PROVISIONS . . . . . . . 118SECTION 4-104. SAME; COMMON INTEREST COMMUNITIES SUBJECT TO

DEVELOPMENT RIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121SECTION 4-105. SAME; TIME SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123SECTION 4-106. SAME; COMMON INTEREST COMMUNITIES CONTAINING

CONVERSION BUILDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124SECTION 4-107. SAME; COMMON INTEREST COMMUNITY SECURITIES . . . . . . . . 124SECTION 4-108. PURCHASER’S RIGHT TO CANCEL . . . . . . . . . . . . . . . . . . . . . . . . . . . 125SECTION 4-109. RESALES OF UNITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125SECTION 4-110. ESCROW OF DEPOSITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128SECTION 4-111. RELEASE OF LIENS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128SECTION 4-112. CONVERSION BUILDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129SECTION 4-113. EXPRESS WARRANTIES OF QUALITY . . . . . . . . . . . . . . . . . . . . . . . . 130SECTION 4-114. IMPLIED WARRANTIES OF QUALITY . . . . . . . . . . . . . . . . . . . . . . . . . 131SECTION 4-115. EXCLUSION OR MODIFICATION OF IMPLIED WARRANTIES

OF QUALITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132SECTION 4-116. STATUTE OF LIMITATIONS FOR WARRANTIES . . . . . . . . . . . . . . . . 133SECTION 4-117. EFFECT OF VIOLATIONS ON RIGHTS OF ACTION;

ATTORNEY’S FEES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134SECTION 4-118. LABELING OF PROMOTIONAL MATERIAL . . . . . . . . . . . . . . . . . . . . 135SECTION 4-119. DECLARANT’S OBLIGATION TO COMPLETE AND RESTORE . . . . 135SECTION 4-120. SUBSTANTIAL COMPLETION OF UNITS . . . . . . . . . . . . . . . . . . . . . . . 136

1

1 AMENDMENTS TO UNIFORM COMMON INTEREST OWNERSHIP ACT

2

3 [ARTICLE] 1

4 GENERAL PROVISIONS

5

6 [PART] 1

7 DEFINITIONS AND OTHER GENERAL PROVISIONS

8 SECTION 1-101. SHORT TITLE. This [act] may be cited as the Uniform Common

9 Interest Ownership Act.

10 SECTION 1-102. APPLICABILITY. Applicability of this [act] is governed by [Part]

11 2 of this [article].

12 SECTION 1-103. DEFINITIONS. In the declaration and bylaws (Section 3-106),

13 unless specifically provided otherwise or the context otherwise requires, and in this [act]:

14 (1) “Affiliate of a declarant” means any person who controls, is controlled by, or is

15 under common control with a declarant. A person “controls” a declarant if the person (i) is a

16 general partner, officer, director, or employer of the declarant, (ii) directly or indirectly or acting

17 in concert with one or more other persons, or through one or more subsidiaries, owns, controls,

18 holds with power to vote, or holds proxies representing, more than 20 percent of the voting

19 interest in the declarant, (iii) controls in any manner the election of a majority of the directors of

20 the declarant, or (iv) has contributed more than 20 percent of the capital of the declarant. A

21 person “is controlled by” a declarant if the declarant (i) is a general partner, officer, director, or

22 employer of the person, (ii) directly or indirectly or acting in concert with one or more other

23 persons, or through one or more subsidiaries, owns, controls, holds with power to vote, or holds

2

1 proxies representing, more than 20 percent of the voting interest in the person, (iii) controls in

2 any manner the election of a majority of the directors of the person, or (iv) has contributed more

3 than 20 percent of the capital of the person. Control does not exist if the powers described in

4 this paragraph are held solely as security for an obligation and are not exercised.

5 (2) “Allocated interests” means the following interests allocated to each unit: (i) In a

6 condominium, the undivided interest in the common elements, the common expense liability,

7 and votes in the association; (ii) in a cooperative, the common expense liability and the

8 ownership interest and votes in the association; and (iii) in a planned community, the common

9 expense liability and votes in the association.

10 (2A) “Assessment” or “Common Expense Assessment’ means the sums attributable to

11 each unit and due to the association as a result of the common expense liability allocated to each

12 unit. Assessments for common expenses are made in the manner described in Section 3-115.

13 (3) “Association” or “unit owners’ association” means the unit owners’ association

14 organized under Section 3-101.

15 (3A) “Bylaws” mean the document that contains the procedures for conduct of the

16 affairs of the association of a common interest community in accordance with Section 3-106,

17 regardless of the form of the association’s legal entity or the name by which the document

18 comprising the bylaws is identified.

19 (4) “Common elements” means (i) in the case of (A) a condominium or cooperative, all

20 portions of the common interest community other than the units; and (B) a planned community,

21 any real estate within a planned community which is owned or leased by the association, other

22 than a unit; and (ii) in all common interest communities, any other interests in real estate for the

23 benefit of unit owners which are subject to the declaration.

3

1 (5) “Common expenses” means expenditures made by, or financial liabilities of, the

2 association, together with any allocations to reserves.

3 (6) “Common expense liability” means the liability for common expenses allocated to

4 each unit pursuant to Section 2-107.

5 (7) “Common interest community” means real estate described in a declaration with

6 respect to which a person, by virtue of his ownership of a unit, is obligated to pay for a share of

7 real estate taxes, insurance premiums, maintenance, or improvement of or services or other

8 expenses related to common elements, other units or other real estate described in a that

9 declaration. However, arrangements described in Section 2-124 [Other Exempt Real Estate

10 Arrangements] do not create a common interest community. “Ownership of a unit” does not

11 include holding a leasehold interest of less than [20] years in a unit, including renewal options.

12 (8) “Condominium” means a common interest community in which portions of the real

13 estate are designated for separate ownership and the remainder of the real estate is designated for

14 common ownership solely by the owners of those portions. A common interest community is

15 not a condominium unless the undivided interests in the common elements are vested in the unit

16 owners.

17 (9) “Conversion building” means a building that at any time before creation of the

18 common interest community was occupied wholly or partially by persons other than purchasers

19 and persons who occupy with the consent of purchasers.

20 (10) “Cooperative” means a common interest community in which the real estate is

21 owned by an association, each of whose members is entitled by virtue of his ownership interest

22 in the association to exclusive possession of a unit.

23 (11) “Dealer” means a person in the business of selling units for his own account.

4

1 (12) “Declarant” means any person or group of persons acting in concert who (i) as part

2 of a common promotional plan, offers to dispose of his or its interest in a unit not previously

3 disposed of or (ii) reserves or succeeds to any special declarant right [, or (iii) applies for

4 registration of a common interest community under [Article] 5].

5 (13) “Declaration” means any instruments, however denominated, that create a common

6 interest community, including any amendments to those instruments.

7 (14) “Development rights” means any right or combination of rights reserved by a

8 declarant in the declaration to (i) add real estate to a common interest community; (ii) create

9 units, common elements, or limited common elements within a common interest community;

10 (iii) subdivide units or convert units into common elements; or (iv) withdraw real estate from a

11 common interest community.

12 (15) “Dispose” or “disposition” means a voluntary transfer to a purchaser of any legal or

13 equitable interest in a unit, but the term does not include the transfer or release of a security

14 interest.

15 (16) “Executive board” means the body, regardless of name, designated in the

16 declaration to act on behalf of the association.

17 (17) “Identifying number” means a symbol or address that identifies only one unit in a


19 (18) “Leasehold common interest community” means a common interest community in

20 which all or a portion of the real estate is subject to a lease the expiration or termination of which

21 will terminate the common interest community or reduce its size.

22 (19) “Limited common element” means a portion of the common elements allocated by

23 the declaration or by operation of Section 2-102(2) or (4) for the exclusive use of one or more

5

1 but fewer than all of the units.

2 (20) “Master association” means an organization described in Section 2-120, whether or

3 not it is also an association described in Section 3-101.

4 (21) “Offering” means any advertisement, inducement, solicitation, or attempt to

5 encourage any person to acquire any interest in a unit, other than as security for an obligation.

6 An advertisement in a newspaper or other periodical of general circulation, or in any broadcast

7 medium to the general public, of a common interest community not located in this State, is not

8 an offering if the advertisement states that an offering may be made only in compliance with the

9 law of the jurisdiction in which the common interest community is located.

10 (22) “Person” means an individual, corporation, business trust, estate, trust, partnership,

11 association, joint venture, government, governmental subdivision or agency, or other legal or

12 commercial entity. [In the case of a land trust, however, “person” means the beneficiary of the

13 trust rather than the trust or the trustee.]

14 (23) “Planned community” means a common interest community that is not a

15 condominium or a cooperative. A condominium or cooperative may be part of a planned

16 community.

17 (24) “Proprietary lease” means an agreement with the association pursuant to which a

18 member is entitled to exclusive possession of a unit in a cooperative.

19 (25) “Purchaser” means a person, other than a declarant or a dealer, who by means of a

20 voluntary transfer acquires a legal or equitable interest in a unit other than (i) a leasehold interest

21 (including renewal options) of less than 20 years, or (ii) as security for an obligation.

22 (26) “Real estate” means any leasehold or other estate or interest in, over, or under land,

23 including structures, fixtures, and other improvements and interests that by custom, usage, or law

6

1 pass with a conveyance of land though not described in the contract of sale or instrument of

2 conveyance. “Real estate” includes parcels with or without upper or lower boundaries, and

3 spaces that may be filled with air or water.

4 (27) “Residential purposes” means use for dwelling or recreational purposes, or both.

5 (27A) “Rule” or “Rules” means any rule, procedure or regulation of the association,

6 however denominated, that does not appear in the declaration or bylaws and that governs either

7 the management of the association or the common interest community or the conduct of persons

8 or property within the common interest community. Adoption of rules is governed by Section 3-

9 121.

10 (28) “Security interest” means an interest in real estate or personal property, created by

11 contract or conveyance, which secures payment or performance of an obligation. The term

12 includes a lien created by a mortgage, deed of trust, trust deed, security deed, contract for deed,

13 land sales contract, lease intended as security, assignment of lease or rents intended as security,

14 pledge of an ownership interest in an association, and any other consensual lien or title retention

15 contract intended as security for an obligation.

16 (29) “Special declarant rights” means rights reserved for the benefit of a declarant to (i)

17 complete improvements indicated on plats and plans filed with the declaration (Section 2-109)

18 or, in a cooperative, to complete improvements described in the public offering statement

19 pursuant to Section 4-103(a)(2); (ii) exercise any development right (Section 2-110); (iii)

20 maintain sales offices, management offices, signs advertising the common interest community,

21 and models (Section 2-115); (iv) use easements through the common elements for the purpose of

22 making improvements within the common interest community or within real estate which may

23 be added to the common interest community (Section 2-116); (v) make the common interest

7

1 community subject to a master association (Section 2-120); (vi) merge or consolidate a common

2 interest community with another common interest community of the same form of ownership

3 (Section 2-121); or (vii) appoint or remove any officer of the association of any master

4 association or any executive board member during any period of declarant control (Section 3-

5 103(d); (viii) control any construction or design review committee or process; (ix) attend

6 meetings of the unit owners and, except during an executive session, the executive board; or (x)

7 have access to the records of the association to the same extent as a unit owner (Section 3-118).

8 (30) “Time share” means a right to occupy a unit or any of several units during [five] or

9 more separated time periods over a period of at least [five] years, including renewal options,

10 whether or not coupled with an estate or interest in a common interest community or a specified

11 portion thereof.

12 (31) “Unit” means a physical portion of the common interest community designated for

13 separate ownership or occupancy, the boundaries of which are described pursuant to Section

14 2-105(a)(5). If a unit in a cooperative is owned by a unit owner or is sold, conveyed, voluntarily

15 or involuntarily encumbered, or otherwise transferred by a unit owner, the interest in that unit

16 which is owned, sold, conveyed, encumbered, or otherwise transferred is the right to possession

17 of that unit under a proprietary lease, coupled with the allocated interests of that unit, and the

18 association’s interest in that unit is not thereby affected.

19 (32) “Unit owner” means a declarant or other person who owns a unit, or a lessee of a

20 unit in a leasehold common interest community whose lease expires simultaneously with any

21 lease the expiration or termination of which will remove the unit from the common interest

22 community, but does not include a person having an interest in a unit solely as security for an

23 obligation. In a condominium or planned community, the declarant is the owner of any unit

8

1 created by the declaration. In a cooperative, the declarant is treated as the owner of any unit to

2 which allocated interests have been allocated (Section 2-107) until that unit has been conveyed

3 to another person.

4 SECTION 1-104. VARIATION BY AGREEMENT. Except as expressly provided in

5 this [act], its provisions may not be varied by agreement, and rights conferred by it may not be

6 waived. Except as provided in Section 1-207, a declarant may not act under a power of attorney,

7 or use any other device, to evade the limitations or prohibitions of this [act] or the declaration.

8 SECTION 1-105. SEPARATE TITLES AND TAXATION.

9 (a) In a cooperative, unless the declaration provides that a unit owner’s interest in a unit

10 and its allocated interests is real estate for all purposes, that interest is personal property. [That

11 interest is subject to the provisions of [insert reference to state homestead exemptions], even if it

12 is personal property.]

13 (b) In a condominium or planned community:

14 (1) If there is any unit owner other than a declarant, each unit that has been

15 created, together with its interest in the common elements, constitutes for all purposes a separate

16 parcel of real estate.

17 (2) If there is any unit owner other than a declarant, each unit must be separately

18 taxed and assessed, and no separate tax or assessment may be rendered against any common

19 elements for which a declarant has reserved no development rights.

20 (c) Any portion of the common elements for which the declarant has reserved any

21 development right must be separately taxed and assessed against the declarant, and the declarant

22 alone is liable for payment of those taxes.

23 (d) If there is no unit owner other than a declarant, the real estate comprising the

9

1 common interest community may be taxed and assessed in any manner provided by law.

2 SECTION 1-106. APPLICABILITY OF LOCAL ORDINANCES,

3 REGULATIONS, AND BUILDING CODES.

4 (a) A building code may not impose any requirement upon any structure in a common

5 interest community which it would not impose upon a physically identical development under a

6 different form of ownership.

7 (b) In condominiums and cooperatives, no zoning, subdivision, or other real estate use

8 law, ordinance, or regulation may prohibit the condominium or cooperative form of ownership

9 or impose any requirement upon a condominium or cooperative which it would not impose upon

10 a physically identical development under a different form of ownership.

11 (c) Except as provided in subsections (a) and (b), the provisions of this [act] do not

12 invalidate or modify any provision of any building code, zoning, subdivision, or other real estate

13 use law, ordinance, rule, or regulation governing the use of real estate.

14 SECTION 1-107. EMINENT DOMAIN.

15 (a) If a unit is acquired by eminent domain or part of a unit is acquired by eminent

16 domain leaving the unit owner with a remnant that may not practically or lawfully be used for

17 any purpose permitted by the declaration, the award must include compensation to the unit

18 owner for that unit and its allocated interests, whether or not any common elements are acquired.

19 Upon acquisition, unless the decree otherwise provides, that unit’s allocated interests are

20 automatically reallocated to the remaining units in proportion to the respective allocated interests

21 of those units before the taking, and the association shall promptly prepare, execute, and record

22 an amendment to the declaration reflecting the reallocations. Any remnant of a unit remaining

23 after part of a unit is taken under this subsection is thereafter a common element.

10

1 (b) Except as provided in subsection (a), if part of a unit is acquired by eminent domain,

2 the award must compensate the unit owner for the reduction in value of the unit and its interest

3 in the common elements, whether or not any common elements are acquired. Upon acquisition,

4 unless the decree otherwise provides, (i) that unit’s allocated interests are reduced in proportion

5 to the reduction in the size of the unit, or on any other basis specified in the declaration and (ii)

6 the portion of the allocated interests divested from the partially acquired unit are automatically

7 reallocated to that unit and to the remaining units in proportion to the respective allocated

8 interests of those units before the taking, with the partially-acquired unit participating in the

9 reallocation on the basis of its reduced allocated interests.

10 (c) If part of the common elements is acquired by eminent domain, the portion of the

11 award attributable to the common elements taken must be paid to the association. Unless the

12 declaration provides otherwise, any portion of the award attributable to the acquisition of a

13 limited common element must be equally divided among the owners of the units to which that

14 limited common element was allocated at the time of acquisition.

15 (d) The court decree must be recorded in every [county] in which any portion of the

16 common interest community is located.

17 SECTION 1-108. SUPPLEMENTAL GENERAL PRINCIPLES OF LAW

18 APPLICABLE. The principles of law and equity, including the law of corporations and any

19 other form of business organization authorized by law in this state [and unincorporated

20 associations], the law of real property, and the law relative to capacity to contract, principal and

21 agent, eminent domain, estoppel, fraud, misrepresentation, duress, coercion, mistake,

22 receivership, substantial performance, or other validating or invalidating cause supplement the in

23 [act], except to the extent inconsistent with this [act]. Without limiting the foregoing, the laws of

11

1 this State that apply to the association’s form of legal entity apply to the association except to the

2 extent that law is inconsistent with this Act, in which case this Act governs.

3 SECTION 1-109. CONSTRUCTION AGAINST IMPLICIT REPEAL. This [act]

4 being a general act intended as a unified coverage of its subject matter, no part of it shall be

5 construed to be impliedly repealed by subsequent legislation if that construction can reasonably

6 be avoided.

7 SECTION 1-110. UNIFORMITY OF APPLICATION AND CONSTRUCTION.

8 This [act] shall be applied and construed so as to effectuate its general purpose to make uniform

9 the law with respect to the subject of this [act] among States enacting it.

10 SECTION 1-111. SEVERABILITY. If any provision of this [act] or the application

11 thereof to any person or circumstances is held invalid, the invalidity does not affect other

12 provisions or applications of this [act] which can be given effect without the invalid provisions

13 or applications, and to this end the provisions of this [act] are severable.

14 SECTION 1-112. UNCONSCIONABLE AGREEMENT OR TERM OF

15 CONTRACT.

16 (a) The court, upon finding as a matter of law that a contract or contract clause was

17 unconscionable at the time the contract was made, may refuse to enforce the contract, enforce

18 the remainder of the contract without the unconscionable clause, or limit the application of any

19 unconscionable clause in order to avoid an unconscionable result.

20 (b) Whenever it is claimed, or appears to the court, that a contract or any contract clause

21 is or may be unconscionable, the parties, in order to aid the court in making the determination,

22 must be afforded a reasonable opportunity to present evidence as to:

23 (1) the commercial setting of the negotiations;

12

1 (2) whether a party has knowingly taken advantage of the inability of the other

2 party reasonably to protect his interests by reason of physical or mental infirmity, illiteracy,

3 inability to understand the language of the agreement, or similar factors;

4 (3) the effect and purpose of the contract or clause; and

5 (4) if a sale, any gross disparity, at the time of contracting, between the amount

6 charged for the property and the value of that property measured by the price at which similar

7 property was readily obtainable in similar transactions. A disparity between the contract price

8 and the value of the property measured by the price at which similar property was readily

9 obtainable in similar transactions does not, of itself, render the contract unconscionable.

10 SECTION 1-113. OBLIGATION OF GOOD FAITH. Every contract or duty

11 governed by this [act] imposes an obligation of good faith in its performance or enforcement.

12 SECTION 1-114. REMEDIES TO BE LIBERALLY ADMINISTERED.

13 (a) The remedies provided by this [act] shall be liberally administered to the end that the

14 aggrieved party is put in as good a position as if the other party had fully performed. However,

15 consequential, special, or punitive damages may not be awarded except as specifically provided

16 in this [act] or by other rule of law.

17 (b) Any right or obligation declared by this [act] is enforceable by judicial proceeding.

18 SECTION 1-115. ADJUSTMENT OF DOLLAR AMOUNTS.

19 (a) From time to time the dollar amount specified in Section 1-203 must change, as

20 provided in subsections (b) and (c), according to and to the extent of changes in the Consumer

21 Price Index for Urban Wage Earners and Clerical Workers: U.S. City Average, All Items 1967 =

22 100, compiled by the Bureau of Labor Statistics, United States Department of Labor, (the

23 “Index”). The Index for December, 1979, which was 230, is the Reference Base Index.

13

1 (b) The dollar amount specified in Section 1-203 and any amount stated in the

2 declaration pursuant to that section, must change on July 1 of each year if the percentage of

3 change, calculated to the nearest whole percentage point, between the Index at the end of the

4 preceding year and the Reference Base Index is 10 percent or more, but

5 (i) the portion of the percentage change in the Index in excess of a multiple of 10

6 percent must be disregarded and the dollar amount shall change only in multiples of 10 percent

7 of the amount appearing in this [act] on the date of enactment;

8 (ii) the dollar amount must not change if the amount required by this section is

9 that currently in effect pursuant to this [act] as a result of earlier application of this section; and

10 (iii) in no event may the dollar amount be reduced below the amount appearing

11 in this [act] on the date of enactment.

12 (c) If the Index is revised after December, 1979, the percentage of change pursuant to

13 this section must be calculated on the basis of the revised Index. If the revision of the Index

14 changes the Reference Base Index, a revised Reference Base Index must be determined by

15 multiplying the Reference Base Index then applicable by the rebasing factor furnished by the

16 Bureau of Labor Statistics. If the Index is superseded, the Index referred to in this section is the

17 one represented by the Bureau of Labor Statistics as reflecting most accurately changes in the

18 purchasing power of the dollar for consumers.

19

20 [PART] 2

21 APPLICABILITY

22 SECTION 1-201. APPLICABILITY TO NEW COMMON INTEREST

23 COMMUNITIES. Except as provided in Sections 1-202 and 1-203, this [act] applies to all

14

1 common interest communities created within this State after the effective date of this [act]. The

2 provisions of [insert reference to all present statutes expressly applicable to planned

3 communities, condominiums, cooperatives, or horizontal property regimes] do not apply to

4 common interest communities created after the effective date of this [act]. Amendments to this

5 [act] apply to all common interest communities created after the effective date of this [act] or

6 subjected to this [act], regardless of when the amendment is adopted in this State.

7 SECTION 1-202. EXCEPTION FOR SMALL COOPERATIVES. If a cooperative

8 contains no more than 12 units and is not subject to any development rights, it is subject only to

9 Sections 1-106 (Applicability of Local Ordinances, Regulations, and Building Codes) and 1-107

10 (Eminent Domain) of this [act] unless the declaration provides that the entire [act] is applicable.

11 SECTION 1-203. EXCEPTION FOR SMALL AND LIMITED EXPENSE

12 LIABILITY PLANNED COMMUNITIES.

13 (a) If a planned community that is not subject to any development right:

14 (1) contains no more than 12 units; or

15 (2) provides, in its declaration, that the annual average common expense liability

16 of all units restricted to residential purposes, exclusive of optional user fees and any insurance

17 premiums paid by the association, may not exceed $300 as adjusted pursuant to Section 1-115

18 (Adjustment of Dollar Amounts), it is subject only to Sections 1-105 (Separate Titles and

19 Taxation), 1-106 (Applicability of Local Ordinances, Regulations, and Building Codes), and

20 1-107 (Eminent Domain) unless the declaration provides that this entire [act] is applicable.

21 (b) The exemption provided in subsection (a)(2) applies only if:

22 (1) the declarant reasonably believes in good faith that the maximum stated

23 assessment will be sufficient to pay the expenses of the planned community; and

15

1 (2) the declaration provides that the assessment may not be increased during the

2 period of declarant control without the consent of all unit owners.

3 SECTION 1-204. APPLICABILITY TO PRE-EXISTING COMMON INTEREST

4 COMMUNITIES. Except as provided in Section 1-205 (Same; Exception for Small Pre-

5 Existing Cooperatives and Planned Communities), Sections 1-105 (Separate Titles and

6 Taxation), 1-106 (Applicability of Local Ordinances, Regulations, and Building Codes), 1-107

7 (Eminent Domain), 2-103 (Construction and Validity of Declaration and Bylaws), 2-104

8 (Description of Units), 2-121 (Merger or Consolidation of Common Interest Communities),

9 3-102(a)(1) through (6) and (11) through (16) (Powers of Unit Owners’ Association), 3-111

10 (Tort and Contract Liability), 3-116 (Lien for Assessments), 3-118 (Association Records), 4-109

11 (Resales of Units), and 4-117 (Effect of Violation on Rights of Action; Attorney’s Fees), and

12 Section 1-103 (Definitions) to the extent necessary in construing any of those sections, apply to

13 all common interest communities created in this State before the effective date of this [act]; but

14 those sections apply only with respect to events and circumstances occurring after the effective

15 date of this [act] and do not invalidate existing provisions of the [declaration, bylaws, or plats or

16 plans] of those common interest communities.

17 SECTION 1-205. SAME; EXCEPTION FOR SMALL PRE-EXISTING

18 COOPERATIVES AND PLANNED COMMUNITIES. If a cooperative or planned

19 community created within this State before the effective date of this [act] contains no more than

20 12 units and is not subject to any development rights, it is subject only to Sections 1-105

21 (Separate Titles and Taxation), 1-106 (Applicability of Local Ordinances, Regulations, and

22 Building Codes), and 1-107 (Eminent Domain) unless the declaration is amended in conformity

23 with applicable law and with the procedures and requirements of the declaration to take

16

1 advantage of the provisions of Section 1-206, in which case all the sections enumerated in

2 Section 1-204 apply to that cooperative or planned community.

3 SECTION 1-206. AMENDMENTS TO GOVERNING INSTRUMENTS.

4 (a) The declaration, bylaws, or plats and plans of any common interest community

5 created before the effective date of this [act] may be amended to achieve any result permitted by

6 this [act], regardless of what applicable law provided before this [act] was adopted.

7 (b) An amendment to the declaration, bylaws, or plats and plans authorized by this

8 section must be adopted in conformity with any procedures and requirements for amending the

9 instruments specified by those instruments or, if there are none, in conformity with the

10 amendment procedures of this [act]. If an amendment grants to any person any rights, powers,

11 or privileges permitted by this [act], all correlative obligations, liabilities, and restrictions in this

12 [act] also apply to that person.

13 SECTION 1-207. APPLICABILITY TO NONRESIDENTIAL AND MIXED-USE

14 COMMON INTEREST COMMUNITIES.

15 (a) “Nonresidential common interest community” means a common interest community

16 in which all units are restricted exclusively to nonresidential purposes. Except as provided in

17 subsection (e), this section applies only to nonresidential common interest communities.

18 (b) A nonresidential common interest community is not subject to this [act] unless the

19 declaration otherwise provides.

20 (c) The If the declaration of a nonresidential common interest community provides that

21 the common interest community is subject to the Act, it may also provide that: (i) the entire [act]

22 applies to the community; or (ii) only Articles I and II apply; or (iii) only Sections 1-105

23 (Separate Titles and Taxation), 1-106 (Applicability of Local Ordinances, Regulations and

17

1 Building Codes), and 1-107 (Eminent Domain) apply.

2 (d) If the entire [act] applies to a nonresidential common interest community, the

3 declaration may also require, subject to Section 1-112 (Unconscionable Agreement or Term of

4 Contract), that:

5 (1) notwithstanding Section 3-105 (Termination of Contracts and Leases of

6 Declarant), any management contract, employment contract, lease of recreational or parking

7 areas or facilities, and any other contract or lease between the association and a declarant or an

8 affiliate of a declarant continues in force after the declarant turns over control of the association;

9 and

10 (2) notwithstanding Section 1-104 (Variation by Agreement), purchasers of units

11 must execute proxies, powers of attorney, or similar devices in favor of the declarant regarding

12 particular matters enumerated in those instruments.

13 (e) A common interest community that contains units restricted exclusively to

14 nonresidential purposes and other units that may be used for residential purposes is not subject to

15 this [act] unless the units that may be used for residential purposes would comprise a common

16 interest community in the absence of the nonresidential units or the declaration provides that this

17 [act] applies as provided in subsection (c) or (d).

18 SECTION 1-208. APPLICABILITY TO OUT-OF-STATE COMMON INTEREST

19 COMMUNITIES. This [act] does not apply to common interest communities or units located

20 outside this State, but the public offering statement provisions (Sections 4-102 through 4-108)

21 apply to all contracts for the disposition thereof signed in this State by any party unless exempt

22 under Section 4-101(b) [and the agency regulation provisions under [Article] 5 apply to any

23 offering thereof in this State].

18

1 [ARTICLE] 2

2 CREATION, ALTERATION, AND

3 TERMINATION OF COMMON INTEREST COMMUNITIES

4

5 SECTION 2-101. CREATION OF COMMON INTEREST COMMUNITIES.

6 (a) A common interest community may be created pursuant to this [act] only by

7 recording a declaration executed in the same manner as a deed and, in a cooperative, by

8 conveying the real estate subject to that declaration to the association. The declaration must be

9 recorded in every [county] in which any portion of the common interest community is located

10 and must be indexed [in the grantee’s index] in the name of the common interest community and

11 the association and [in the grantor’s index] in the name of each person executing the declaration.

12 (b) In a condominium, a declaration, or an amendment to a declaration, adding units may

13 not be recorded unless (i) all structural components and mechanical systems of all buildings

14 containing or comprising any units thereby created are substantially completed in accordance

15 with the plans, as evidenced by a recorded certificate of completion executed by an independent

16 [registered] engineer, surveyor, or architect [, or (ii) unless the agency has approved the

17 declaration or amendment in the manner prescribed in Section 5-103(b)].

18 SECTION 2-102. UNIT BOUNDARIES. Except as provided by the declaration:

19 (1) If walls, floors, or ceilings are designated as boundaries of a unit, all lath, furring,

20 wallboard, plasterboard, plaster, paneling, tiles, wallpaper, paint, finished flooring, and any other

21 materials constituting any part of the finished surfaces thereof are a part of the unit, and all other

22 portions of the walls, floors, or ceilings are a part of the common elements.

23 (2) If any chute, flue, duct, wire, conduit, bearing wall, bearing column, or any other

19

1 fixture lies partially within and partially outside the designated boundaries of a unit, any portion

2 thereof serving only that unit is a limited common element allocated solely to that unit, and any

3 portion thereof serving more than one unit or any portion of the common elements is a part of

4 the common elements.

5 (3) Subject to paragraph (2), all spaces, interior partitions, and other fixtures and

6 improvements within the boundaries of a unit are a part of the unit.

7 (4) Any shutters, awnings, window boxes, doorsteps, stoops, porches, balconies, patios,

8 and all exterior doors and windows or other fixtures designed to serve a single unit, but located

9 outside the unit’s boundaries, are limited common elements allocated exclusively to that unit.

10 SECTION 2-103. CONSTRUCTION AND VALIDITY OF DECLARATION AND

11 BYLAWS.

12 (a) All provisions of the declaration and bylaws are severable.

13 (b) The rule against perpetuities does not apply to defeat any provision of the

14 declaration, bylaws, rules, or regulations adopted pursuant to Section 3-102(a)(1).

15 (c) In the event of a conflict between the provisions of the declaration and the bylaws,

16 the declaration prevails except to the extent the declaration is inconsistent with this [act].

17 (d) Title to a unit and common elements is not rendered unmarketable or otherwise

18 affected by reason of an insubstantial failure of the declaration to comply with this [act].

19 Whether a substantial failure impairs marketability is not affected by this [act].

20 SECTION 2-104. DESCRIPTION OF UNITS. A description of a unit which sets

21 forth the name of the common interest community, the [recording data] for the declaration, the

22 [county] in which the common interest community is located, and the identifying number of the

23 unit, is a legally sufficient description of that unit and all rights, obligations, and interests

20

1 appurtenant to that unit which were created by the declaration or bylaws.

2 SECTION 2-105. CONTENTS OF DECLARATION.

3 (a) The declaration must contain:

4 (1) the names of the common interest community and the association and a

5 statement that the common interest community is either a condominium, cooperative, or planned

6 community;

7 (2) the name of every [county] in which any part of the common interest

8 community is situated;

9 (3) a legally sufficient description of the real estate included in the common

10 interest community;

11 (4) a statement of the maximum number of units that the declarant reserves the

12 right to create;

13 (5) in a condominium or planned community, a description of the boundaries of

14 each unit created by the declaration, including the unit’s identifying number or, in a cooperative,

15 a description, which may be by plats or plans, of each unit created by the declaration, including

16 the unit’s identifying number, its size or number of rooms, and its location within a building if it

17 is within a building containing more than one unit;

18 (6) a description of any limited common elements, other than those specified in

19 Section 2-102(2) and (4), as provided in Section 2-109(b)(10) and, in a planned community, any

20 real estate that is or must become common elements;

21 (7) a description of any real estate, except real estate subject to development

22 rights, that may be allocated subsequently as limited common elements, other than limited

23 common elements specified in Section 2-102(2) and (4), together with a statement that they may

21

1 be so allocated;

2 (8) a description of any development rights (Section 1-103(14)) and other special

3 declarant rights (Section 1-103(29)) reserved by the declarant, together with a legally sufficient

4 description of the real estate to which each of those rights applies, and a time limit within which

5 each of those rights must be exercised;

6 (9) if any development right may be exercised with respect to different parcels of

7 real estate at different times, a statement to that effect together with (i) either a statement fixing

8 the boundaries of those portions and regulating the order in which those portions may be

9 subjected to the exercise of each development right or a statement that no assurances are made in

10 those regards, and (ii) a statement as to whether, if any development right is exercised in any

11 portion of the real estate subject to that development right, that development right must be

12 exercised in all or in any other portion of the remainder of that real estate;

13 (10) any other conditions or limitations under which the rights described in

14 paragraph (8) may be exercised or will lapse;

15 (11) an allocation to each unit of the allocated interests in the manner described in

16 Section 2-107;

17 (12) any restrictions (i) on alienation of the units, including any restrictions on

18 leasing which exceed the restrictions on leasing units which executive boards may impose

19 pursuant to Section 3-102(c)(2), and (ii) on the amount for which a unit may be sold or on the

20 amount that may be received by a unit owner on sale, condemnation, or casualty loss to the unit

21 or to the common interest community, or on termination of the common interest community;

22 (13) the [recording data] for recorded easements and licenses appurtenant to or

23 included in the common interest community or to which any portion of the common interest

22

1 community is or may become subject by virtue of a reservation in the declaration; and

2 (14) provisions that either: (i) mandate that the association create and maintain

3 reserves for the replacement of common elements, together with a statement of the basis on

4 which those reserves are to be calculated and funded; or (ii) a statement that the association may

5 but is not required to create and maintain reserves;

6 Proposed NEW Comment78 The issue of whether state law should mandate that all common interest community9 associations create a reserve fund for the replacement of common elements as they become

10 necessary and, if so, the extent to which they should be mandated, is a subject of considerable11 scholarly debate and widely varying statutory treatment in the States.1213 As of 2006, some states – Florida and Hawaii, for example – either mandate that reserves14 be maintained [insert citations] or establish a default rule that such reserves be created in the15 absence of an affirmative vote by the association membership not to create reserves. Other16 states – Virginia and California for example, [insert citations] require that the association board17 undertake periodic studies of the association’s need for reserves. 1819 It is also true that the underwriting guidelines used by Fannie Mae when deciding20 whether to purchase mortgages in common interest communities, requires in condominiums –21 but not in planned communities – not only that the association maintain reserves but that those22 reserves be “adequate,” without defining the meaning of that word.2324 The evidence presented to the drafting committee suggested that the needs, practices and25 expectations of unit owners in common interest communities differ widely, depending on, for26 example, the size, age, location and design of the physical structures as well as the age,27 economic circumstances and other demographic characteristics of the unit owners. Evidence28 suggests, for example, that small, self-managed associations commonly will maintain minimal29 reserves and will typically self-assess for repairs as needed. Other larger common interest30 communities, particularly in high maintenance buildings, may choose to establish substantially31 higher reserves. On the other hand, it appears that very few associations that maintain reserves32 at a level which would be actuarially required by evaluating the useful life of each component of33 the building and then accumulating reserves through increases in the monthly common charges34 paid by each owner, based on a schedule reflecting each component’s useful life.3536 Associations confront the same choices that a single family homeowner confronts in37 thinking about, for example, the future need to replace the roof on her house. That owner has at38 least three choices: (i) she can set aside a sum of money each month in a segregated fund –39 perhaps even calling it a ‘reserve’ fund – so that when the roof or other parts of her home need to40 be replaced, she will have the needed funds; (2) she can maintain savings which are not

23

1 segregated and pay cash from those savings at the time the roof replacement occurs; or (3) she2 can borrow the needed funds, and pay that money back during the years when she is enjoying a3 dry home. Clearly, she can also use a combination of these techniques. Today, encouraged by4 state laws such as UCIOA § 3-102(a)(8) – enabling associations to pledge their future common5 charges as security for a loan, UCIOA § 3-112, enabling associations to mortgage the common6 elements as security for a loan, and UCIOA § 2-119 (confirming the rights of lenders to enforce7 conventional loan terms against associations) associations are increasingly engaged in borrowing8 as an alternative to self-funding of reserves by unit owners who may, in fact, be unable to realize9 the economic value of those reserve payments if the sell their units early in the life of the project.

1011 The committee was also mindful of the impact of a possible law mandating reserves on12 the needs of the elderly and those of limited economic means. In practice, older unit owners13 often resist reserves, while younger families may perceive a greater long term value in their14 creation. We were also made aware of the special concerns of lower income owners in common15 interest communities, where poorer owners may simply walk away from their mortgages and16 their units because of their inability to maintain mortgage payments and monthly common17 charges. If a statute were to mandate fully funded reserve payments, we would be concerned18 with two possible unintended consequences: first, such a mandate might so raise the monthly19 common charges that many potential buyers might be disqualified from homeownership; and20 second, the increases in charges might accelerate the collapse of common interest communities21 housing marginal income existing owners, who might abandon their units in increased numbers.22 Neither of these outcomes would be desirable. 2324 At the same time, the committee understands the natural interest of elected officials, who25 may often be faced with constituent demands that government ‘do something’ about a common26 interest community that has not prudently managed its affairs, with the result that needed repairs27 have not been made and the needed funding is not readily identifiable.2829 For these reasons, the drafting committee in the 2007 amendments to UCIOA determined30 that the most appropriate statutory means of addressing this concern was to have the declarant31 address the issue of reserves in the Declaration. The new provision does not require a particular32 outcome other than the fact that the declarant must affirmatively address the issue one way or the33 other. Presumably, once required to address the issue, the declarant and its professional advisors34 will draft a reasoned provision consistent with their best sense of the nature of the particular35 community and the likely financial circumstances of their purchasers.3637 Note that this provision does not in any way interfere with the necessary flexibility of a38 declarant in addressing this and many other subjects. The provision does not mandate reserves at39 all, nor fully funded reserves, nor ‘adequate’ reserves and it does not prevent future unit owners,40 after the end of the period of declarant control, from changing the initial result created by the41 declarant. Moreover, parallel amendments to UCIOA Section 4-109 confirms that this issue will42 be fully disclosed in the initial POS and later resale documents. 4344 Thus, what this amendment accomplishes is to make certain that the subject of reserves45 be consciously addressed by the party best suited at the time to understand the likely

24

1 expectations and requirements of the unit owners. Over the long term, however, better education2 of declarants and unit owners alike, and the growth of ‘best practices’ in the common interest3 community field under the leadership of national and state interest groups, must provide the4 optimal outcome in each particular circumstance.

5 (15) Any authorization pursuant to which the association may regulate the

6 display of American flags or political signs within the common interest community;

7 (16) any authorization pursuant to which the association may adopt rules to

8 establish and enforce construction and design criteria in the manner provided in Section 3-120;

9 and

10 (17) all matters required by Sections 2-106, 2-107, 2-108, 2-109, 2-115, 2-116,

11 and 3-103(d).

12 (b) The declaration may contain any other matters the declarant considers appropriate,

13 including any restrictions on the uses of a unit or the number or other qualifications of persons

14 who may occupy units.

15 SECTION 2-106. LEASEHOLD COMMON INTEREST COMMUNITIES.

16 (a) Any lease the expiration or termination of which may terminate the common interest

17 community or reduce its size [, or a memorandum thereof,] must be recorded. Every lessor of

18 those leases in a condominium or planned community shall sign the declaration. The declaration

19 must state:

20 (1) the [recording data] for the lease [or a statement of where the complete lease

21 may be inspected];

22 (2) the date on which the lease is scheduled to expire;

23 (3) a legally sufficient description of the real estate subject to the lease;

24 (4) any right of the unit owners to redeem the reversion and the manner whereby

25

1 those rights may be exercised, or a statement that they do not have those rights;

2 (5) any right of the unit owners to remove any improvements within a reasonable

3 time after the expiration or termination of the lease, or a statement that they do not have those

4 rights; and

5 (6) any rights of the unit owners to renew the lease and the conditions of any

6 renewal, or a statement that they do not have those rights.

7 (b) After the declaration for a leasehold condominium or leasehold planned community

8 is recorded, neither the lessor nor the lessor’s successor in interest may terminate the leasehold

9 interest of a unit owner who makes timely payment of a unit owner’s share of the rent and

10 otherwise complies with all covenants which, if violated, would entitle the lessor to terminate the

11 lease. A unit owner’s leasehold interest in a condominium or planned community is not affected

12 by failure of any other person to pay rent or fulfill any other covenant.

13 (c) Acquisition of the leasehold interest of any unit owner by the owner of the reversion

14 or remainder does not merge the leasehold and fee simple interests unless the leasehold interests

15 of all unit owners subject to that reversion or remainder are acquired.

16 (d) If the expiration or termination of a lease decreases the number of units in a common

17 interest community, the allocated interests must be reallocated in accordance with Section

18 1-107(a) as if those units had been taken by eminent domain. Reallocations must be confirmed

19 by an amendment to the declaration prepared, executed, and recorded by the association.

20 SECTION 2-107. ALLOCATION OF ALLOCATED INTERESTS.

21 (a) The declaration must allocate to each unit:

22 (i) in a condominium, a fraction or percentage of undivided interests in the

23 common elements and in the common expenses of the association (Section 3-115(a)), and a

26

1 portion of the votes in the association;

2 (ii) in a cooperative, an ownership interest in the association, a fraction or

3 percentage of the common expenses of the association (Section 3-115(a)), and a portion of the

4 votes in the association; and

5 (iii) in a planned community, a fraction or percentage of the common expenses of

6 the association (Section 3-115(a)), and a portion of the votes in the association.

7 (b) The declaration must state the formulas used to establish allocations of interests.

8 Those allocations may not discriminate in favor of units owned by the declarant or an affiliate of

9 the declarant.

10 NEW COMMENT1112 [to be added as a new paragraph following the last sentence of existing Comment 2]1314 Questions have arisen concerning the drafters’ intent regarding the language in15 subsection (b), which prohibits the declaration from “discriminating in favor of units owned by16 the declarant.” Specifically, the question is whether this section imposes a special level of17 scrutiny on the allocation of votes and common expense liability to units that the declarant may18 own, compared to similar units that are owned by persons who are not declarants. 1920 The answer is that the language means what it says: that is, if the allocated interests21 would change at the time the declarant sold the unit, then the allocated interests are improper22 because they discriminate in favor of the declarant’s ownership of that unit. However, if the23 allocation of common expenses and votes is permanent rather than dependent on the owner’s24 identity and one whose formula is identified in the declaration, then the allocation is proper. 25 Subject to the obligations of good faith in Section 1-113 and the prohibition on unconscionable26 terms in Section 1-112, this would be true even if the effect of the allocation were to create a27 relative benefit in favor of units that the declarant or its affiliate intended to own for an indefinite28 period.2930 Example: A common interest community consists of a high-rise building containing 1031 floors of equal size. There are 4 units on each floor except the top floor, where there are only 132 ‘penthouse’ unit. Even though the penthouse unit is four times the size of the units on the 933 other floors, and is clearly more valuable than the other 36 units, the declaration allocates an34 equal share of the common expenses to all the units, including the penthouse unit. The effect of35 this allocation is that the penthouse unit bears a 1/37 share of the common expenses - this isth

36 only 25% of the cost – on a per square foot basis – of the share borne by each unit owner on a

27

1 lower floor.23 Assume that the declaration properly contains the formula used for the allocation of4 common expenses among the units and properly discloses the material and unusual circumstance5 that the penthouse benefits substantially from the formula used to allocate expenses.67 The fact that the declarant intends to retain ownership of the penthouse unit and live in8 that unit does not mean that the standard contained in section 2-107 (b) has been violated. 9 However, the Act would be violated if the declaration provided that, upon the declarant’s sale of

10 the penthouse, the formula for allocating common expenses would be changed to an allocation11 among all the units based on their relative sizes.1213 In the example, this appears to yield an unjust result and a court might be invited to14 consider the extent to which the declarant had acted in bad faith or unconscionably in making15 such an allocation. Nevertheless, any other rule would simply encourage challenges to any16 allocation of common expenses, since an argument can always be made that any allocation –17 whether done on relative size, number of rooms, “value’, location within a building, equality or18 any other basis - inevitably works to the relative disadvantage of some owners compared to19 others in the same community.

20

21 (c) If units may be added to or withdrawn from the common interest community, the

22 declaration must state the formulas to be used to reallocate the allocated interests among all units

23 included in the common interest community after the addition or withdrawal.

24 (d) The declaration may provide: (i) that different allocations of votes shall be made to

25 the units on particular matters specified in the declaration; (ii) for cumulative voting only for the

26 purpose of electing members of the executive board; and (iii) for class voting on specified issues

27 affecting the class if necessary to protect valid interests of the class. A declarant may not utilize

28 cumulative or class voting for the purpose of evading any limitation imposed on declarants by

29 this [act] nor may units constitute a class because they are owned by a declarant.

30 (e) Except for minor variations due to rounding, the sum of the common expense

31 liabilities and, in a condominium, the sum of the undivided interests in the common elements

32 allocated at any time to all the units must each equal one if stated as a fraction or 100 percent if

28

1 stated as a percentage. In the event of discrepancy between an allocated interest and the result

2 derived from application of the pertinent formula, the allocated interest prevails.

3 (f) In a condominium, the common elements are not subject to partition, and any

4 purported conveyance, encumbrance, judicial sale, or other voluntary or involuntary transfer of

5 an undivided interest in the common elements made without the unit to which that interest is

6 allocated is void.

7 (g) In a cooperative, any purported conveyance, encumbrance, judicial sale, or other

8 voluntary or involuntary transfer of an ownership interest in the association made without the

9 possessory interest in the unit to which that interest is related is void.

10 SECTION 2-108. LIMITED COMMON ELEMENTS.

11 (a) Except for the limited common elements described in Section 2-102(2) and (4), the

12 declaration must specify to which unit or units each limited common element is allocated. An

13 allocation may not be altered without the consent of the unit owners whose units are affected.

14 (b) Except as the declaration otherwise provides, a limited common element may be

15 reallocated by an amendment to the declaration executed by the unit owners between or among

16 whose units the reallocation is made. The persons executing the amendment shall provide a

17 copy thereof to the association, which shall record it. The amendment must be recorded in the

18 names of the parties and the common interest community.

19 (c) A common element not previously allocated as a limited common element may be so

20 allocated only pursuant to provisions in the declaration made in accordance with Section

21 2-105(a)(7). The allocations must be made by amendments to the declaration.

22 SECTION 2-109. PLATS AND PLANS.

23 (a) Plats and plans are a part of the declaration, and are required for all common interest

29

1 communities except cooperatives. Separate plats and plans are not required by this [act] if all the

2 information required by this section is contained in either a plat or plan. Each plat and plan must

3 be clear and legible and contain a certification that the plat or plan contains all information

4 required by this section.

5 (b) Each plat must show or project:

6 (1) the name and a survey or general schematic map of the entire common interest

7 community;

8 (2) the location and dimensions of all real estate not subject to development

9 rights, or subject only to the development right to withdraw, and the location and dimensions of

10 all existing improvements within that real estate;

11 (3) a legally sufficient description of any real estate subject to development rights,

12 labeled to identify the rights applicable to each parcel;

13 (4) the extent of any encroachments by or upon any portion of the common

14 interest community;

15 (5) to the extent feasible, a legally sufficient description of all easements serving

16 or burdening any portion of the common interest community;

17 (6) except as provided in subsection (h), the approximate location and dimensions

18 of any vertical unit boundaries not shown or projected on plans recorded pursuant to subsection

19 (d) and that unit’s identifying number;

20 (7) except as provided in subsection (h), the approximate location with reference

21 to an established datum of any horizontal unit boundaries not shown or projected on plans

22 recorded pursuant to subsection (d) and that unit’s identifying number;

23 (8) a legally sufficient description of any real estate in which the unit owners will

30

1 own only an estate for years, labeled as “leasehold real estate;”

2 (9) the distance between non-contiguous parcels of real estate comprising the

3 common interest community;

4 (10) the approximate location and dimensions of any porches, decks, balconies,

5 garages, or patios allocated as limited common elements, and show or contain a narrative

6 description of any other limited common elements; and

7 (11) in the case of real estate not subject to development rights, all other matters

8 customarily shown on land surveys.

9 (c) A plat may also show the intended location and dimensions of any contemplated

10 improvement to be constructed anywhere within the common interest community. Any

11 contemplated improvement shown must be labeled either “MUST BE BUILT” or “NEED NOT

12 BE BUILT.”

13 (d) Except as provided in subsection (h), to the extent not shown or projected on the

14 plats, plans of the units must show or project:

15 (1) the approximate location and dimensions of the vertical boundaries of each

16 unit, and that unit’s identifying number;

17 (2) the approximate location of any horizontal unit boundaries, with reference to

18 an established datum, and that unit’s identifying number; and

19 (3) the approximate location of any units in which the declarant has reserved the

20 right to create additional units or common elements (Section 2-110(c)), identified appropriately.

21 (e) Unless the declaration provides otherwise, the horizontal boundaries of part of a unit

22 located outside a building have the same elevation as the horizontal boundaries of the inside part

23 and need not be depicted on the plats and plans.

31

1 (f) Upon exercising any development right, the declarant shall record either new plats

2 and plans necessary to conform to the requirements of subsections (a), (b), and (d), or new

3 certifications of plats and plans previously recorded if those plats and plans otherwise conform

4 to the requirements of those subsections.

5 (g) Any certification of a plat or plan required by this section or Section 2-101(b) must

6 be made by an independent [registered] surveyor, architect, or engineer.

7 (h) Plats and plans need not show the location and dimensions of the units’ boundaries or

8 their limited common elements if:

9 (1) the plat shows the location and dimensions of all buildings containing or

10 comprising the units; and

11 (2) the declaration includes other information that shows or contains a narrative

12 description of the general layout of the units in those buildings and the limited common elements

13 allocated to those units.

14 SECTION 2-110. EXERCISE OF DEVELOPMENT RIGHTS.

15 (a) To exercise any development right reserved under Section 2-105(a)(8), the declarant

16 shall prepare, execute, and record an amendment to the declaration (Section 2-117) and in a

17 condominium or planned community comply with Section 2-109. The declarant is the unit

18 owner of any units thereby created. The amendment to the declaration must assign an

19 identifying number to each new unit created, and, except in the case of subdivision or conversion

20 of units described in subsection (b), reallocate the allocated interests among all units. The

21 amendment must describe any common elements and any limited common elements thereby

22 created and, in the case of limited common elements, designate the unit to which each is

23 allocated to the extent required by Section 2-108 (Limited Common Elements).

32

1 (b) Development rights may be reserved within any real estate added to the common

2 interest community if the amendment adding that real estate includes all matters required by

3 Section 2-105 or 2-106, as the case may be, and, in a condominium or planned community, the

4 plats and plans include all matters required by Section 2-109. This provision does not extend the

5 time limit on the exercise of development rights imposed by the declaration pursuant to Section

6 2-105(a)(8).

7 (c) Whenever a declarant exercises a development right to subdivide or convert a unit

8 previously created into additional units, common elements, or both:

9 (1) if the declarant converts the unit entirely to common elements, the amendment

10 to the declaration must reallocate all the allocated interests of that unit among the other units as

11 if that unit had been taken by eminent domain (Section 1-107); and

12 (2) if the declarant subdivides the unit into two or more units, whether or not any

13 part of the unit is converted into common elements, the amendment to the declaration must

14 reallocate all the allocated interests of the unit among the units created by the subdivision in any

15 reasonable manner prescribed by the declarant.

16 (d) If the declaration provides, pursuant to Section 2-105(a)(8), that all or a portion of

17 the real estate is subject to a right of withdrawal:

18 (1) if all the real estate is subject to withdrawal, and the declaration does not

19 describe separate portions of real estate subject to that right, none of the real estate may be

20 withdrawn after a unit has been conveyed to a purchaser; and

21 (2) if any portion is subject to withdrawal, it may not be withdrawn after a unit in

22 that portion has been conveyed to a purchaser.

23

33

1 SECTION 2-111. ALTERATIONS OF UNITS. Subject to the provisions of the

2 declaration and other provisions of law, a unit owner:

3 (1) may make any improvements or alterations to his unit that do not impair the structural

4 integrity or mechanical systems or lessen the support of any portion of the common interest

5 community;

6 (2) may not change the appearance of the common elements, or the exterior appearance

7 of a unit or any other portion of the common interest community, without permission of the

8 association;

9 (3) after acquiring an adjoining unit or an adjoining part of an adjoining unit, may

10 remove or alter any intervening partition or create apertures therein, even if the partition in

11 whole or in part is a common element, if those acts do not impair the structural integrity or

12 mechanical systems or lessen the support of any portion of the common interest community.

13 Removal of partitions or creation of apertures under this paragraph is not an alteration of

14 boundaries.

15 SECTION 2-112. RELOCATION OF UNIT BOUNDARIES.

16 (a) Subject to the provisions of the declaration and other provisions of law, the

17 boundaries between adjoining units may be relocated by an amendment to the declaration upon

18 application to the association by the owners of those units. If the owners of the adjoining units

19 have specified a reallocation between their units of their allocated interests, the application must

20 state the proposed reallocations. Unless the executive board determines, within 30 days, that the

21 reallocations are unreasonable, the association shall prepare an amendment that identifies the

22 units involved and states the reallocations. The amendment must be executed by those unit

23 owners, contain words of conveyance between them, and, on recordation, be indexed in the name

34

1 of the grantor and the grantee, and [in the grantee’s index] in the name of the association.

2 (b) Subject to the provisions of the declaration and other provisions of law, boundaries

3 between units and common elements may be relocated to incorporate common elements within a

4 unit by an amendment to the declaration upon application to the association by the owner of the

5 unit who proposes to relocate a boundary. Unless the declaration provides otherwise, the

6 amendment may be approved only if persons entitled to cast at least [67] percent of the votes in

7 the association, including [67] percent of the votes allocated to units not owned by the declarant,

8 agree to the action. The amendment may describe any fees or charges payable by the owner of

9 the affected unit in connection with the boundary relocation and the fees and charges are assets

10 of the association. The amendment must be executed by the unit owner of the unit whose

11 boundary is being relocated and by the association, contain words of conveyance between them,

12 and on recordation be indexed in the name of the unit owner and the association as grantor or

13 grantee, as appropriate.

14 (c) The association (i) in a condominium or planned community shall prepare and record

15 plats or plans necessary to show the altered boundaries of affected units, and their dimensions

16 and identifying numbers, and (ii) in a cooperative shall prepare and record amendments to the

17 declaration, including any plans, necessary to show or describe the altered boundaries of affected

18 units, and their dimensions and identifying numbers.

19 SECTION 2-113. SUBDIVISION OF UNITS.

20 (a) If the declaration expressly so permits, a unit may be subdivided into two or more

21 units. Subject to the provisions of the declaration and other provisions of law, upon application

22 of a unit owner to subdivide a unit, the association shall prepare, execute, and record an

23 amendment to the declaration, including in a condominium or planned community the plats and

35

1 plans, subdividing that unit.

2 (b) The amendment to the declaration must be executed by the owner of the unit to be

3 subdivided, assign an identifying number to each unit created, and reallocate the allocated

4 interests formerly allocated to the subdivided unit to the new units in any reasonable manner

5 prescribed by the owner of the subdivided unit.

6 [ALTERNATIVE A]

7 [SECTION 2-114. EASEMENT FOR ENCROACHMENTS. To the extent that any

8 unit or common element encroaches on any other unit or common element, a valid easement for

9 the encroachment exists. The easement does not relieve a unit owner of liability in case of his

10 willful misconduct nor relieve a declarant or any other person of liability for failure to adhere to

11 any plats and plans or, in a cooperative, to any representation in the public offering statement.]

12 [ALTERNATIVE B]

13 [SECTION 2-114. MONUMENTS AS BOUNDARIES. The existing physical

14 boundaries of a unit or the physical boundaries of a unit reconstructed in substantial accordance

15 with the description contained in the original declaration are its legal boundaries, rather than the

16 boundaries derived from the description contained in the original declaration, regardless of

17 vertical or lateral movement of the building or minor variance between those boundaries and the

18 boundaries derived from the description contained in the original declaration. This section does

19 not relieve a unit owner of liability in case of his willful misconduct or relieve a declarant or any

20 other person of liability for failure to adhere to any plats and plans or, in a cooperative, to any

21 representation in the public offering statement.]

22 SECTION 2-115. USE FOR SALES PURPOSES. A declarant may maintain sales

23 offices, management offices, and models in units or on common elements in the common

36

1 interest community only if the declaration so provides and specifies the rights of a declarant with

2 regard to the number, size, location, and relocation thereof. In a cooperative or condominium,

3 any sales office, management office, or model not designated a unit by the declaration is a

4 common element. If a declarant ceases to be a unit owner, he ceases to have any rights with

5 regard thereto unless it is removed promptly from the common interest community in accordance

6 with a right to remove reserved in the declaration. Subject to any limitations in the declaration, a

7 declarant may maintain signs on the common elements advertising the common interest

8 community. This section is subject to the provisions of other state law and to local ordinances.

9 SECTION 2-116. EASEMENT RIGHTS.

10 (a) Subject to the provisions of the declaration, a declarant has an easement through the

11 common elements as may be reasonably necessary for the purpose of discharging the declarant’s

12 obligations or exercising special declarant rights, whether arising under this [act] or reserved in

13 the declaration.

14 (b) In a planned community, subject to the provisions of Sections 3-102(a)(6) and 3-112,

15 the unit owners have an easement (i) in the common elements for purposes of access to their

16 units and (ii) to use the common elements and all real estate that must become common elements

17 (Section 2-105(a)(6)) for all other purposes.

18 SECTION 2-117. AMENDMENT OF DECLARATION.

19 (a) Except in cases of amendments that may be executed by a declarant under Section

20 2-109(f) or 2-110, or by the association under Section 1-107, 2-106(d), 2-108(c), 2-112(a), or

21 2-113, or by certain unit owners under Section 2-108(b), 2-112(a), 2-113(b), or 2-118(b), and

22 except as limited by subsection (d) or pursuant to Section 2-119, the declaration, including any

23 plats and plans, may be amended only by vote or agreement of unit owners of units to which at

37

1 least [67] percent of the votes in the association are allocated, or any larger majority the

2 declaration specifies. The declaration may specify a smaller number only if all of the units are

3 restricted exclusively to nonresidential use or as permitted under Section 2-119.

4 (b) No action to challenge the validity of an amendment adopted by the association

5 pursuant to this section may be brought more than one year after the amendment is recorded.

6 (c) Every amendment to the declaration must be recorded in every [county] in which any

7 portion of the common interest community is located and is effective only upon recordation. An

8 amendment, except an amendment pursuant to Section 2-112(a), must be indexed [in the

9 grantee’s index] in the name of the common interest community and the association and [in the

10 grantor’s index] in the name of the parties executing the amendment.

11 (d) Except to the extent expressly permitted or required by other provisions of this [act],

12 no amendment may create or increase special declarant rights, increase the number of units,

13 change the boundaries of any unit or the allocated interests of a unit, in the absence of

14 unanimous consent of the unit owners.

15 (e) Amendments to the declaration required by the [act] to be recorded by the association

16 must be prepared, executed, recorded, and certified on behalf of the association by any officer of

17 the association designated for that purpose or, in the absence of designation, by the president of

18 the association.

19 (f) By vote or agreement of unit owners of units to which at least 80 percent of the votes

20 in the association are allocated, or any larger percentage specified in the declaration, an

21 amendment to the declaration may prohibit or materially restrict the permitted uses of or

22 behavior in a unit or the number or other qualifications of persons who may occupy units. The

23 amendment must provide reasonable protection for a use or occupancy permitted at the time the

38

1 amendment was adopted.

2 (g) The time limits specified in the declaration pursuant to Section 2-105(a)(8) (Contents

3 of the Declaration) within which reserved development rights must be exercised may be

4 extended, and additional development rights may be created, if persons entitled to cast at least 80

5 percent of the votes in the association, including 80 percent of the votes allocated to units not

6 owned by the declarant, agree to that action. The agreement is effective 30 days after an

7 amendment to the declaration reflecting the terms of the agreement is recorded unless all the

8 persons holding the affected special declarant rights, or security interests in those rights, record a

9 written objection within the 30-day period, in which case the amendment is void, or consent in

10 writing at the time the amendment is recorded, in which case the amendment is effective when

11 recorded.

12 (h) Provisions in the declaration creating special declarant rights which have not expired

13 may not be amended without the consent of the declarant.

14 (i) If any provision of this chapter or of the declaration of any common interest

15 community subject to this chapter requires the consent of a person holding a security interest in a

16 unit as a condition to the effectiveness of any amendment to the declaration, that consent shall be

17 deemed granted if no written refusal to consent is received by the association within forty-five

18 days after the association delivers notice of the proposed amendment to the holder of the interest

19 or mails the notice to the holder of the interest by certified mail, return receipt requested. The

20 association may rely on the last-recorded security interest of record in delivering or mailing

21 notice to the holder of that interest.

22 (j) If the declaration of a common interest community, whether created before or after the

23 effective date of this [act], contains a provision requiring that amendments relating to the use of

39

1 units, the relocation of boundaries between units and common elements or the extension or

2 creation of development rights may be adopted only by the vote or agreement of unit owners of

3 units to which more than eighty per cent of the votes in the association are allocated, such a

4 proposed amendment shall be deemed approved if:

5 (1) (A) Unit owners of units to which more than eighty per cent of the votes

6 in the association are allocated vote for or agree to the proposed amendment;

7 (B) No unit owner votes against the proposed amendment; and

8 (C) Notice of the proposed amendment is delivered to the unit owners

9 holding the votes in the association that have not voted or agreed to the proposed amendment

10 and no written objection of the proposed amendment is received by the association within thirty

11 days after the association delivers notice; or

12 (2) Unit owners of units to which more than eighty per cent of the votes in the

13 association are allocated vote for or agree to the proposed amendment but at least one unit owner

14 objects to the proposed amendment and, pursuant to an action brought by the association in the

15 Superior Court against all objecting unit owners, the court finds that the objecting unit owner or

16 owners do not have a unique minority interest, different in kind from the interests of the other

17 unit owners, that the voting requirement of the declaration was intended to protect.

18 Reporter Comment

19 Subsections (i) and (j) are adapted from the Connecticut version of this Act, codified as20 C.G.S. § 47-237.212223 SECTION 2-118. TERMINATION OF COMMON INTEREST COMMUNITY.

24 (a) Except in the case of a taking of all the units by eminent domain (Section 1-107) or

25 in the case of foreclosure against an entire cooperative of a security interest that has priority over

40

1 the declaration, a common interest community may be terminated only by agreement of unit

2 owners of units to which at least 80 percent of the votes in the association are allocated, or any

3 larger percentage the declaration specifies. The declaration may specify a smaller percentage

4 only if all of the units are restricted exclusively to nonresidential uses.

5 (b) An agreement to terminate must be evidenced by the execution of a termination

6 agreement, or ratifications thereof, in the same manner as a deed, by the requisite number of unit

7 owners. The termination agreement must specify a date after which the agreement will be void

8 unless it is recorded before that date. A termination agreement and all ratifications thereof must

9 be recorded in every [county] in which a portion of the common interest community is situated

10 and is effective only upon recordation.

11 (c) In the case of a condominium or planned community containing only units having

12 horizontal boundaries described in the declaration, a termination agreement may provide that all

13 of the common elements and units of the common interest community must be sold following

14 termination. If, pursuant to the agreement, any real estate in the common interest community is

15 to be sold following termination, the termination agreement must set forth the minimum terms of

16 the sale.

17 (d) In the case of a condominium or planned community containing any units not having

18 horizontal boundaries described in the declaration, a termination agreement may provide for sale

19 of the common elements, but it may not require that the units be sold following termination,

20 unless the declaration as originally recorded provided otherwise or all the unit owners consent to

21 the sale.

22 (e) The association, on behalf of the unit owners, may contract for the sale of real estate

23 in a common interest community, but the contract is not binding on the unit owners until

41

1 approved pursuant to subsections (a) and (b). If any real estate is to be sold following

2 termination, title to that real estate, upon termination, vests in the association as trustee for the

3 holders of all interests in the units. Thereafter, the association has all powers necessary and

4 appropriate to effect the sale. Until the sale has been concluded and the proceeds thereof

5 distributed, the association continues in existence with all powers it had before termination.

6 Proceeds of the sale must be distributed to unit owners and lien holders as their interests may

7 appear, in accordance with subsections (h), (i), and (j). Unless otherwise specified in the

8 termination agreement, as long as the association holds title to the real estate, each unit owner

9 and the unit owner’s successors in interest have an exclusive right to occupancy of the portion of

10 the real estate that formerly constituted the unit. During the period of that occupancy, each unit

11 owner and the unit owner’s successors in interest remain liable for all assessments and other

12 obligations imposed on unit owners by this [act] or the declaration.

13 (f) In a condominium or planned community, if the real estate constituting the common

14 interest community is not to be sold following termination, title to the common elements and, in

15 a common interest community containing only units having horizontal boundaries described in

16 the declaration, title to all the real estate in the common interest community, vests in the unit

17 owners upon termination as tenants in common in proportion to their respective interests as

18 provided in subsection (j), and liens on the units shift accordingly. While the tenancy in

19 common exists, each unit owner and the unit owner’s successors in interest have an exclusive

20 right to occupancy of the portion of the real estate that formerly constituted the unit.

21 (g) Following termination of the common interest community, the proceeds of any sale

22 of real estate, together with the assets of the association, are held by the association as trustee for

23 unit owners and holders of liens on the units as their interests may appear.

42

1 (h) Following termination of a condominium or planned community, creditors of the

2 association holding liens on the units, which were [recorded] [docketed] [insert other procedures

3 required under state law to perfect a lien on real estate as a result of a judgment] before

4 termination, may enforce those liens in the same manner as any lien holder. All other creditors

5 of the association are to be treated as if they had perfected liens on the units immediately before

6 termination.

7 (i) In a cooperative, the declaration may provide that all creditors of the association have

8 priority over any interests of unit owners and creditors of unit owners. In that event, following

9 termination, creditors of the association holding liens on the cooperative which were [recorded]

10 [docketed] [insert other procedures required under state law to perfect a lien on real estate as a

11 result of a judgment] before termination may enforce their liens in the same manner as any lien

12 holder, and any other creditor of the association is to be treated as if he had perfected a lien

13 against the cooperative immediately before termination. Unless the declaration provides that all

14 creditors of the association have that priority:

15 (1) the lien of each creditor of the association which was perfected against the

16 association before termination becomes, upon termination, a lien against each unit owner’s

17 interest in the unit as of the date the lien was perfected;

18 (2) any other creditor of the association is to be treated upon termination as if the

19 creditor had perfected a lien against each unit owner’s interest immediately before termination;

20 (3) the amount of the lien of an association’s creditor described in paragraphs (1)

21 and (2) against each of the unit owners’ interest must be proportionate to the ratio which each

22 unit’s common expense liability bears to the common expense liability of all of the units;

23 (4) the lien of each creditor of each unit owner which was perfected before

43

1 termination continues as a lien against that unit owner’s unit as of the date the lien was

2 perfected; and

3 (5) the assets of the association must be distributed to all unit owners and all lien

4 holders as their interests may appear in the order described above. Creditors of the association

5 are not entitled to payment from any unit owner in excess of the amount of the creditor’s lien

6 against that unit owner’s interest.

7 (j) The respective interests of unit owners referred to in subsections (e), (f), (g), (h), and

8 (i) are as follows:

9 (1) Except as provided in paragraph (2), the respective interests of unit owners

10 are the fair market values of their units, allocated interests, and any limited common elements

11 immediately before the termination, as determined by one or more independent appraisers

12 selected by the association. The decision of the independent appraisers must be distributed to

13 the unit owners and becomes final unless disapproved within 30 days after distribution by unit

14 owners of units to which 25 percent of the votes in the association are allocated. The proportion

15 of any unit owner’s interest to that of all unit owners is determined by dividing the fair market

16 value of that unit owner’s unit and its allocated interests by the total fair market values of all the

17 units and their allocated interests.

18 (2) If any unit or any limited common element is destroyed to the extent that an

19 appraisal of the fair market value thereof before destruction cannot be made, the interests of all

20 unit owners are: (i) in a condominium, their respective common element interests immediately

21 before the termination, (ii) in a cooperative, their respective ownership interests immediately

22 before the termination, and (iii) in a planned community, their respective common expense

23 liabilities immediately before the termination.

44

1 (k) In a condominium or planned community, except as provided in subsection (l),

2 foreclosure or enforcement of a lien or encumbrance against the entire common interest

3 community does not terminate, of itself, the common interest community, and foreclosure or

4 enforcement of a lien or encumbrance against a portion of the common interest community,

5 other than withdrawable real estate, does not withdraw that portion from the common interest

6 community. Foreclosure or enforcement of a lien or encumbrance against withdrawable real

7 estate, or against common elements that have been subjected to a security interest by the

8 association under Section 3-112, does not withdraw, of itself, that real estate from the common

9 interest community, but the person taking title thereto may require from the association, upon

10 request, an amendment excluding the real estate from the common interest community.

11 (l) In a condominium or planned community, if a lien or encumbrance against a portion

12 of the real estate comprising the common interest community has priority over the declaration

13 and the lien or encumbrance has not been partially released, the parties foreclosing the lien or

14 encumbrance, upon foreclosure, may record an instrument excluding the real estate subject to

15 that lien or encumbrance from the common interest community.

16 SECTION 2-119 RIGHTS OF SECURED LENDERS.

17 (a) The declaration may require that all or a specified number or percentage of the

18 lenders who hold security interests encumbering the units or who have extended credit to the

19 association approve specified actions of the unit owners or the association as a condition to the

20 effectiveness of those actions, but no requirement for approval may operate to (i) deny or

21 delegate control over the general administrative affairs of the association by the unit owners or

22 the executive board, or (ii) prevent the association or the executive board from commencing,

23 intervening in, or settling any litigation or proceeding, or (iii) prevent any insurance trustee or

45

1 the association from receiving and distributing any insurance proceeds except pursuant to

2 Section 3-113.

3 (b) A lender who has extended credit to an association secured by an assignment of

4 income (Section 3-102(14)) or an encumbrance on the common elements (Section 3-112) may

5 enforce its security agreement in accordance with its terms, subject to the requirements of this

6 [act] and other law. Requirements that the association must deposit its periodic common charges

7 before default with the lender to which the association’s income has been assigned, or increase

8 its common charges at the lender’s direction by amounts reasonably necessary to amortize the

9 loan in accordance with its terms, do not violate the prohibitions on lender approval contained in

10 subsection (a).

11 SECTION 2-120. MASTER ASSOCIATIONS.

12 (a) If the declaration provides that any of the powers described in Section 3-102 are to be

13 exercised by or may be delegated to a profit or nonprofit corporation [or unincorporated

14 association] that exercises those or other powers on behalf of one or more common interest

15 communities or for the benefit of the unit owners of one or more common interest communities,

16 all provisions of this [act] applicable to unit owners’ associations apply to any such corporation

17 [or unincorporated association], except as modified by this section.

18 (b) Unless it is acting in the capacity of an association described in Section 3-101, a

19 master association may exercise the powers set forth in Section 3-102(a)(2) only to the extent

20 expressly permitted in the declarations of common interest communities which are part of the

21 master association or expressly described in the delegations of power from those common

22 interest communities to the master association.

23 (c) If the declaration of any common interest community provides that the executive

46

1 board may delegate certain powers to a master association, the members of the executive board

2 have no liability for the acts or omissions of the master association with respect to those powers

3 following delegation.

4 (d) The rights and responsibilities of unit owners with respect to the unit owners’

5 association set forth in Sections 3-103, 3-108, 3-109, 3-110, and 3-112 apply in the conduct of

6 the affairs of a master association only to persons who elect the board of a master association,

7 whether or not those persons are otherwise unit owners within the meaning of this [act].

8 (e) Even if a master association is also an association described in Section 3-101, the

9 certificate of incorporation or other instrument creating the master association and the

10 declaration of each common interest community, the powers of which are assigned by the

11 declaration or delegated to the master association, may provide that the executive board of the

12 master association must be elected after the period of declarant control in any of the following

13 ways:

14 (1) All unit owners of all common interest communities subject to the master

15 association may elect all members of the master association’s executive board.

16 (2) All members of the executive boards of all common interest communities

17 subject to the master association may elect all members of the master association’s executive

18 board.

19 (3) All unit owners of each common interest community subject to the master

20 association may elect specified members of the master association’s executive board.

21 (4) All members of the executive board of each common interest community

22 subject to the master association may elect specified members of the master association’s

23 executive board.

47

1 SECTION 2-121. MERGER OR CONSOLIDATION OF COMMON INTEREST

2 COMMUNITIES.

3 (a) Any two or more common interest communities of the same form of ownership, by

4 agreement of the unit owners as provided in subsection (b), may be merged or consolidated into

5 a single common interest community. In the event of a merger or consolidation, unless the

6 agreement otherwise provides, the resultant common interest community is the legal successor,

7 for all purposes, of all of the pre-existing common interest communities, and the operations and

8 activities of all associations of the pre-existing common interest communities are merged or

9 consolidated into a single association that holds all powers, rights, obligations, assets, and

10 liabilities of all pre-existing associations.

11 (b) An agreement of two or more common interest communities to merge or consolidate

12 pursuant to subsection (a) must be evidenced by an agreement prepared, executed, recorded, and

13 certified by the president of the association of each of the pre-existing common interest

14 communities following approval by owners of units to which are allocated the percentage of

15 votes in each common interest community required to terminate that common interest

16 community. The agreement must be recorded in every [county] in which a portion of the

17 common interest community is located and is not effective until recorded.

18 (c) Every merger or consolidation agreement must provide for the reallocation of the

19 allocated interests in the new association among the units of the resultant common interest

20 community either (i) by stating the reallocations or the formulas upon which they are based or

21 (ii) by stating the percentage of overall allocated interests of the new common interest

22 community which are allocated to all of the units comprising each of the pre-existing common

23 interest communities, and providing that the portion of the percentages allocated to each unit

48

1 formerly comprising a part of the pre-existing common interest community must be equal to the

2 percentages of allocated interests allocated to that unit by the declaration of the pre-existing


4 SECTION 2-122. ADDITION OF UNSPECIFIED REAL ESTATE. In a planned

5 community, if the right is originally reserved in the declaration, the declarant in addition to any

6 other development right, may amend the declaration at any time during as many years as are

7 specified in the declaration for adding additional real estate to the planned community without

8 describing the location of that real estate in the original declaration; but, the amount of real

9 estate added to the planned community pursuant to this section may not exceed 10 percent of the

10 real estate described in Section 2-105(a)(3) and the declarant may not in any event increase the

11 number of units in the planned community beyond the number stated in the original declaration

12 pursuant to Section 2-105(a)(5).

13 SECTION 2-123. MASTER PLANNED COMMUNITIES.

14 (a) The declaration for a common interest community may state that it is a master

15 planned community if the declarant has reserved the development right to create at least [500]

16 units that may be used for residential purposes, and at the time of the reservation that declarant

17 owns or controls more than [500] acres on which the units may be built.

18 (b) If the requirements of subsection (a) are satisfied, the declaration for the master

19 planned community need not state a maximum number of units and need not contain any of the

20 information required by Section 2-105(a)(3) through (14) until the declaration is amended under

21 subsection (c).

22 (c) When each unit in a master planned community is conveyed to a purchaser, the

23 declaration must contain (i) a sufficient legal description of the unit and all portions of the

49

1 master planned community in which any other units have been conveyed to a purchaser; and (ii)

2 all the information required by Section 2-105(a)(3) through (14) with respect to that real estate.

3 (d) The only real estate in a master planned community which is subject to this [act] is

4 units that have been declared or which are being offered for sale and any other real estate

5 described pursuant to subsection (c). Other real estate that is or may become part of the master

6 planned community is only subject to other law and to any other restrictions and limitations that

7 appear of record.

8 (e) If the public offering statement conspicuously identifies the fact that the community

9 is a master planned community, the disclosure requirements contained in [Article] 4 apply only

10 with respect to units that have been declared or are being offered for sale in connection with the

11 public offering statement and to the real estate described pursuant to subsection (c).

12 (f) Limitations in this [act] on the addition of unspecified real estate (Section 2-122) do

13 not apply to a master planned community.

14 (g) The period of declarant control of the association for a master planned community

15 terminates in accordance with any conditions specified in the declaration or otherwise at the time

16 the declarant, in a recorded instrument and after giving written notice to all the unit owners,

17 voluntarily surrenders all rights to control the activities of the association.

18 [NEW] SECTION 2-124. OTHER EXEMPT REAL ESTATE ARRANGEMENTS.

19 (a) An agreement between two or more common interest communities to share the costs

20 of real estate taxes, insurance premiums, services, maintenance or improvements of real estate or

21 other activities specified in their agreement or declarations does not create a separate common

22 interest community unless the cost sharing agreement was intended to evade the limitations of

23 this Act. If the declarants of those common interest communities are affiliates, the agreement

50

1 may not unreasonably allocate the costs among those common interest communities.

2 (b) An agreement between an association for a common interest community and the

3 owner of real estate which is not part of that common interest community to share the costs of

4 real estate taxes, insurance premiums, services, maintenance or improvements of real estate or

5 other activities specified in their agreement does not create a separate common interest

6 community so long as the assessments against the units in the common interest community are

7 included in the periodic budget for the common interest community and are subject to unit owner

8 approval under Section 3-124 [Adoption of Budgets].

9 (c) An arrangement between two separately owned parcels of real estate for sharing costs

10 associated with a common law party wall, shared driveway or shared well does not create a


12 REPORTER’S COMMENT

13 This new section addresses once again the continuing issue of the scope of the Act. It14 should be considered in connection with the revised definition of “Common Interest15 Community” in Section 1-102 (7). 1617 The three sub-sections address 3 separate aspects of this issue: 1819 1. whether contractual arrangements for cost sharing between two or more common20 interest communities requires creation of a separate common interest community;2122 2. whether contractual arrangements cost sharing between an association and an owner23 of real estate located outside the common interest community’s boundaries requires creation of a24 separate common interest community; and 2526 3. whether three very traditional common law real estate arrangements – party walls,27 shared driveways and shared wells – come within the definition of the Act. 2829 The following analysis from Attorney Joanne Stubblefield, a prominent practitioner in30 the field, helps frame the issues posed in sub-sections (a) and (b). She writes:3132 “There are numerous situations in which a declaration of easements and/or covenant to33 share cost would suffice to establish the relationship between two parcels without the

51

1 need to establish another association in which all the property owners are members to2 “manage” that relationship. Also, the sharing is not always a matter of shared use -- it3 might be a shared concern for maintenance of public rights-of-way through a community,4 or shared benefit of a roving security patrol, or sharing of costs of street lights on5 thoroughfares.67 Here are some examples of common situations I encounter:89 1) The homeowners association maintains the entry features, median and

10 right-of-way landscaping, and sidewalks along a public street that also11 serves a commercial parcel (e.g., hotel or country club). The developer12 wants the hotel or country club to be obligated to pay a share of the costs13 that the association incurs in performing this maintenance, so he records a14 declaration on the club or hotel parcel with a covenant obligating the15 club/hotel to share costs incurred by the association in performing this16 responsibility and setting out a formula for computing its share. If the17 club/hotel is ok with this, why do we need another association?1819 2) Same situation except that the hotel is performing the maintenance20 instead of the association. The association is obligated under the covenant21 to share the costs to pay its share and a formula is set out in the covenant22 for computing the association’s share, which it then includes in its23 common expense budget and collects as part of its regular assessment, and24 pays to the hotel. Why do we need another association in which the25 property owners and hotel are members, with organizational documents,26 contracts, meetings, etc., to deal with this? The hotel doesn’t want to be27 subject to membership in an association controlled by other property28 owners. The existing association can adequately represent the interest of29 its members in dealing with the hotel.3031 3) Vertical subdivision with a commercial parcel on the ground floor and32 a 15-story residential condominium above it. There is a recorded33 instrument creating reciprocal easements, obligating the condominium34 association to insure the entire building, among other things, and35 obligating the commercial owner to share certain costs incurred by the36 condominium association in accordance with a formula set out in the37 recorded instrument. If the commercial owner is ok with this38 arrangement, why do we need another association?3940 4) Four residential condominiums share a common road. The first41 association to be created is responsible for maintaining the road. Each of42 the other three, at the time it is created, is made subject to a recorded43 covenant to share cost requiring it to pay 1/4 of the cost that the first44 association incurs in maintaining the road. Do we really need to create a45 master association to own and maintain the road?”

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12 Basically, sub-section (a) makes clear that in the case of arrangements between3 associations, a separate association would not be required so long as the arrangement has not4 been entered into for purposes of evading the Act and so long as an allocation of costs between5 associations created by affiliated developers are reasonable.67 In the case of arrangements between associations and third parties other than8 associations, sub-section (b) avoids the need for a separate association so long as the costs to be9 borne by the unit owners in the existing association are reflected in the periodic budget for the

10 association and are subject to approval by the unit owners.1112 Finally, sub-section (c) confirms the conventional assumption that the Act was never13 intended to apply to the traditional arrangements identified in that section.

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1 [ARTICLE] 3

2 MANAGEMENT OF THE COMMON INTEREST COMMUNITY

3

4 SECTION 3-101. ORGANIZATION OF UNIT OWNERS’ ASSOCIATION. A unit

5 owners’ association must be organized no later than the date the first unit in the common interest

6 community is conveyed. The membership of the association at all times consists exclusively of

7 all unit owners or, following termination of the common interest community, of all former unit

8 owners entitled to distributions of proceeds under Section 2-118 or their heirs, successors, or

9 assigns. The association must be organized as a profit or nonprofit corporation, trust, limited

10 liability company, [or] partnership [, [unincorporated association] [or] any other form of legal

11 entity authorized by the laws of this State [ or as an unincorporated association].

12 NEW COMMENT1314 The Act restricts membership in the association to those persons who are ‘unit owners’ as15 that term is defined in Section 1-103 (32). This rule should be considered together with three16 other provisions of the Act: (i) the requirement in Section 2-101 (b) that at least in a17 condominium, a unit may not be ‘created’ until the structural components and mechanical18 systems of that unit are completed; (ii) the provision in Section 2-107 (b) that the declaration19 must allocate votes and a share of the common expense liabilities to each unit pursuant to20 formulas that do not discriminate in favor of units owned by the declarant; and (iii) the21 restriction in Section2-117 (d) that the allocations of votes and common expense liabilities to the22 units may not be amended except by unanimous consent of all the unit owners.2324 Taken together, these sections seek to avoid the potential for either intentional developer25 overreaching – by, for example, allocating more votes to units the declarant owns in order to26 extend control of the association beyond the timeframes allowed under the Act in Section 3-27 103(d) - or inadvertent uncertainty in failed projects as a result of allocating votes and common28 expense liabilities to ‘ghost’ or ‘paper’ units that are never built. Rather, the philosophy of the29 Act is to make certain that only persons with an actual economic interest in a ‘real’ unit will30 have a vote in the affairs of the association and that the patterns for voting and allocating the31 relative costs of maintaining the community’s property will not be subject to developer abuse.3233 This does not mean that the declarant should not or cannot participate in the activities of34 the association. First, it is clear under Section 2-110 (a) that the declarant is the initial owner of

54

1 every unit when it is created. Accordingly, until that unit is sold, the declarant is a ‘unit owner’2 and has the same rights to participate in the capacity as a unit owner as would any other person3 who owned that same unit.45 In addition, the Act recognizes the unique role of the declarant during the development6 phase, and the expectations of the declarant’s lenders that the development can be constructed in7 accordance with the plans, free from the risks of interference by other unit owners and the8 association. Accordingly, the Act includes the important concepts of “Development Rights”9 [Section 1-103 (14)] and ‘Special Declarant Rights” [ Section 1-103 (29)]. Among the

10 significant special declarant rights is the right to control the owners association during the time11 reasonably necessary to control the project and sell the units. [Cite to Barclay v. Deveau.] Taken12 together with the substantive provisions of the Act governing those concepts, the Act makes13 clear both that the developer will be meaningfully engaged in every aspect of the Association’s14 and the projects activities during the time when development is underway, and that the unit15 owners themselves will be free of the developer’s control at the appropriate time.16

17 SECTION 3-102. POWERS OF UNIT OWNERS’ ASSOCIATION.

18 (a) Except as provided in subsection (b) and other provisions of this [act], and subject to

19 the provisions of the declaration, the association [, even if unincorporated,] may:

20 (1) must adopt and amend bylaws and rules and regulations; consistent with

21 section 3-106 and may adopt reasonable rules and regulations consistent with section 3-120;

22 PROPOSED NEW COMMENT

23 The definition of “bylaws” notes that the document for a particular common interest24 community need not be identified by that name. For example, if the association for a common25 interest community were organized as a limited liability company, the bylaws for the association26 might appear in the form of an operating agreement. However, regardless of the name of the27 instrument, this Act mandates the minimum contents of the bylaws or, in this instance, the28 operating agreement; see Section 3-106. Any provision of the State’s statutes governing the29 content of the bylaws or, as appropriate, the operating agreement, to the extent inconsistent with30 the requirements of Section 3-106, would be subject to this Act; see Section 1-108. 31

32 (2) must adopt and amend budgets for revenues, expenditures, and reserves

33 pursuant to section 3-124 and collect assessments for common expenses from unit owners and

34 may invest any reserves funds of the association;

55

1 Draft Comment

2 RE: Applicability of Uniform Prudent Investor Act

3 The Uniform Prudent Investor Act, as drafted, would not apply to the association’s4 investment of reserves. The Drafting Committee has considered the question of whether UCIOA5 should be amended to require that the principles imbedded in UPIA should be applied to6 association boards; for the reasons stated below, we conclude that it should not so apply.78 The drafters understand from anecdotal evidence that the reserves of most common9 interest community associations, as a matter of practice, are invested in cash or near-cash (i.e.,

10 short term bond fund) equivalents.1112 The UPIA by its terms applies to trust investing. It is the nearly universal practice for13 associations to be organized as corporations or – occasionally – other forms of business entities14 but rarely as trusts. In these cases, the business judgment rule rather than the prudence norm of15 trust law applies.1617 Beyond that, however, and regardless of the form of organization, the Committee18 concluded that it ought not to make special provision for association investments in this Act19 because actual or contingent liquidity needs will predominate in most circumstances affecting20 the association. Unlike a family trust, an association board is not meant to be doing long-term21 investing for capital growth and, accordingly, most such investing is appropriately done in22 interest-bearing cash equivalents.2324 Finally, because the subject has not been problematic in practice, the committee sees no25 need to make special provision for it. Of course, in those unusual cases where long term capital26 growth might be appropriate, and subject to the business judgment rule, UCIOA would not bar a27 board’s decision to invest the reserves in suitable vehicles designed to achieve that goal.28

29 (3) may hire and discharge managing agents and other employees, agents, and

30 independent contractors;

31 (4) may institute, defend, or intervene in litigation or administrative proceedings

32 in its own name on behalf of itself or two or more unit owners on matters affecting the common

33 interest community subject to, in the case of litigation involving the declarant, the provisions of

34 Section 3-121;

35 (5) may make contracts and incur liabilities;

56

1 (6) may regulate the use, maintenance, repair, replacement, and modification of

2 common elements;

3 (7) may cause additional improvements to be made as a part of the common

4 elements;

5 (8) may acquire, hold, encumber, and convey in its own name any right, title, or

6 interest to real estate or personal property, but (i) common elements in a condominium or

7 planned community may be conveyed or subjected to a security interest only pursuant to Section

8 3-112 and (ii) part of a cooperative may be conveyed, or all or part of a cooperative may be

9 subjected to a security interest, only pursuant to Section 3-112;

10 (9) may grant easements, leases, licenses, and concessions through or over the

11 common elements;

12 (10) may impose and receive any payments, fees, or charges for the use, rental, or

13 operation of the common elements, other than limited common elements described in Section

14 2-102(2) and (4), and for services provided to unit owners;

15 (11) may impose charges for late payment of assessments and, after notice and an

16 opportunity to be heard, levy reasonable fines for violations of the declaration, bylaws, and rules,

17 and regulations of the association;

18 Proposed New Comment to 3-102(a)(11)

19 Subsection 3-102 (a) (11) generally empowers the association to impose charges for late20 payments of assessments and reasonable fines for violations of the governing documents. Under21 UCIOA, fines levied by the Association may not be arbitrary nor may they be discriminatorily22 applied – thus we reach the same result as some critics have urged. Moreover, in an effort to23 minimize these potential abuse of the association’s powers, the new amendments would bar any24 foreclosure of a unit if the only sums due are fines and related charges; see § 3-115. However,25 the Committee does not believe that there is a need either to go beyond these standards to codify26 the precise dollar amount of late charges or fines, or to detail the standards for conduct of a27 hearing. Thus, the Committee considered but declines to follow the enactments of States such as

57

1 North Carolina which impose a default cap on the amount of late fees; see North Carolina 20052 Session Law 2005-422, § 47F-3-102, and detailed default provisions regarding the conduct of3 the hearing; Id.,at § 47F-3-107.1.45 The Committee has also discussed but has not yet determined whether to amend the Act6 to articulate a policy on the extent to which the executive board may “suspend privileges or7 services provided by the association” [cf. North Carolina § 47F-3-102 (11)] including, for8 example, the right to vote if a unit owner has not paid her assessments.9

10 In any event, this comment will be expanded to confirm that fines must be reasonable11 and consistently applied citing authority.12

13 (12) may impose reasonable charges for the preparation and recordation of

14 amendments to the declaration, resale certificates required by Section 4-109, or statements of

15 unpaid assessments;

16 (13) may provide for the indemnification of its officers and executive board and

17 maintain directors’ and officers’ liability insurance;

18 (14) may assign its right to future income, including the right to receive common

19 expense assessments, but only except to the extent limited by the declaration expressly so

20 provides;

21 (15) may exercise any other powers conferred by the declaration or bylaws;

22 (16) may exercise all other powers that may be exercised in this State by legal

23 entities of the same type as the association;

24 (17) may exercise any other powers necessary and proper for the governance and

25 operation of the association; and

26 (18) by regulation rule, may require that disputes between the executive board

27 and unit owners or between two or more unit owners regarding the common interest community

28 must be submitted to nonbinding alternative dispute resolution in the manner described in the

58

1 regulation rule as a prerequisite to commencement of a judicial proceeding.

2 (b) The declaration may not impose limitations on the power of the association to:

3 (i) deal with the declarant which are more restrictive than the limitations imposed

4 on the power of the association to deal with other persons; or

5 (ii) commence litigation against any person, but (A) the association must comply

6 with Section 3-121, if applicable, before commencing any proceeding against any person in

7 connection with construction defects; and (B) the executive board shall promptly provide notice

8 to the unit owners of any litigation filed by or against the association [other than a proceeding

9 involving enforcement of rules and claims for common charges].

10 (c) Unless otherwise permitted by the declaration or this [act], an association may adopt

11 rules and regulations that affect the use of or behavior in units that may be used for residential

12 purposes only to:

13 (1) prevent any use of a unit which violates the declaration;

14 (2) regulate any behavior in or occupancy of a unit which violates the declaration

15 or adversely affects the use and enjoyment of other units or the common elements by other unit

16 owners; or

17 (3) restrict the leasing of residential units to the extent those rules are reasonably

18 designed to meet underwriting requirements of institutional lenders who regularly lend money

19 secured by first mortgages on units in common interest communities or regularly purchase those

20 mortgages.

21 Otherwise, the association may not regulate any use of or behavior in units.

22 Reporter Note

23 The 2006 proposed amendments to UCIOA include, in Section 3-120, a significant

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1 expansion of the association’s rule-making authority. Sub-section (c) of this section 3-102 has been2 relocated to new Section 3-120(d) in order to consolidate all of the Act’s provisions on rules in one3 section.45 (d)(c) If a tenant of a unit owner violates the declaration, bylaws, or rules and regulations

6 of the association, in addition to exercising any of its powers against the unit owner, the

7 association may:

8 (1) exercise directly against the tenant the powers described in subsection (a)(11);

9 (2) after giving notice to the tenant and the unit owner and an opportunity to be

10 heard, levy reasonable fines against the tenant for the violation; and

11 (3) enforce any other rights against the tenant for the violation which the unit

12 owner as landlord could lawfully have exercised under the lease or which the association could

13 lawfully have exercised directly against the unit owner, or both.

14 (e)(d) The rights granted under subsection (d)(c)(3) may only be exercised if the tenant or

15 unit owner fails to cure the violation within 10 days after the association notifies the tenant and

16 unit owner of that violation.

17 (f)(e) Unless a lease otherwise provides, this section does not:

18 (1) affect rights that the unit owner has to enforce the lease or that the association

19 has under other law; or

20 (2) permit the association to enforce a lease to which it is not a party in the

21 absence of a violation of the declaration, bylaws, or rules. and regulations.

22 (f) [NEW] The association need not act with respect to an alleged or actual

23 violation of the declaration, bylaws or rules if the executive board, acting with due care, in good

24 faith and without a conflict of interest, concludes that a response to the violation would be

25 impractical, excessively expensive compared to the benefit conferred or unlikely to result in

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1 compliance. An association’s action or failure to act on any one occasion does not affect its right

2 to enforce or not enforce those instruments on another occasion but the executive board’s course

3 of performance with respect to enforcement of the declaration, bylaws and rules is relevant to

4 show whether the executive board has waived its right to enforce any provision or whether that

5 provision has been modified.

6 Reporter’s Notes

7 To date, the Committee has not voted to enable a private action to force enforcement of a8 rule either in this section or in section 4-117.9

10 Partial New Comment1112 In drafting new sub-section (f) the Committee addresses an issue perceived as a13 significant problem by some commentators and activists in the field – the question of the14 Association’s authority to either ‘selectively enforce’ its rules or its obligation to enforce the15 rules to the letter in every instance, at the risk of being found by a court to have waived its right16 to enforce the rules in some instance as a consequence of its failure to enforce the rules in other17 instances.1819 As it considered its position, the Committee considered this hypothetical series of20 examples.2122 Happy Acres is a community of 200 side-by-side townhouses, in the town of Happy,23 Arizona. The units are located in 10 separate buildings; each unit has an assigned single car24 garage with an overhead door in a separate garage building. All roads within Happy Acres are25 private roads owned by the Association.2627 The Executive Board has long had a properly adopted rule that reads as follows: 2829 “The display of any commercial advertising anywhere within the common interest30 community that is visible outside the units and the installation of satellite dishes31 for television reception, are strictly prohibited.”3233 Assume further that these possible violations of the rule come to the attention of the34 executive board:3536 1. Owner A owns a small pick-up truck with lettering on both doors that reads:37 “Call A’s Landscaping Services, Happy Arizona, tel. 402-777-5432.” For 3 years, A has driven38 her truck to and from work every day, and parks it in her garage, closing the door every night. 39 No one has complained but everyone knows about the truck.

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1 2. “A” buys a new car, but keeps her old truck. Since she only has one garage,2 she has taken to parking the new car in the garage, and leaves the truck parked in the driveway in3 front of her garage unit. 45 3. Owner B’s son owns a red sweat shirt with a very loud logo on both the front6 and back that reads: “Party at the Soft Rock Café”. He regularly walks to the Association’s7 swimming pool wearing that shirt and carrying a ‘boom box’ playing loud ‘hip hop’ music.8 Several retired lawyers regularly play cards around the pool; they do not care for either the9 sweatshirt or the music.

1011 4. Owner C owns a real estate brokerage firm and specializes in selling units at12 Happy Acres. For every listing, “C” installs a sign post on the unit’s front lawn reading: “FOR13 SALE – Call C’s Brokerage – Your Neighborhood Broker”. The signs are small and quite14 tasteful. He has doing this since before the rule on ‘no commercial advertising’ was adopted. At15 first, it was only 1 or 2 signs; today, there are 11 such signs, all over the complex. C is a16 member of the Executive Board.1718 5. Owner D is a competitor of C; he is not a member of the Board. When he19 signs up his first listing at Happy Acres, he installs a sign on that front lawn that is three times20 the size of C’sign; it reads “D is D Broker for You – call 402-777-1234.”2122 6. After the Executive Board orders D to remove his advertising sign, D23 complains to the Board about C’s 11 existing signs and demands that the Board order C to24 remove his signs.2526 7. Owner E, also a member of the Executive Board installs a satellite dish27 without action taken to force its removeal. When Owner F seeks to do the same, the Executive28 Board orders its removal2930 In evaluating the alternative outcomes here, the extreme positions are clear. On the one31 hand, one could assert that the Board’s obligation is to strictly enforce or attempt to enforce32 every alleged breach of the rules, so that the board can never be accused of selective33 enforcement, favoritism, or waiver.3435 On the other hand, the board could be held free of any obligation to enforce at any time,36 without in any way constraining its ability to enforce the same rules at a later time against the37 same or different persons in those cases where the board decided it would do so.3839 In the middle is some rule of law that would guide the Board’s exercise of discretion. 40 There are a number of theoretical standards that might guide the Board’s discretion; they41 include: (i) the ‘business judgment rule’; (ii) arbitrary and capricious; (iii) reasonableness; (iv)42 bad faith; (v) discriminatory or other improper purposes; (vi) “best interests of the association”;43 (vii) “good cause”; and (viii) perhaps the notion that the law does not care about insignificant44 matters.’45

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1 REPORTER COMMENT23 There have been legislative proposals in response to this issue, although there is no clear4 answer. For example, a 2005 bill in New Jersey provided as follows:56 “Notwithstanding…, any other law or the association’s governing documents, an7 association shall not be required to enforce a violation of a rule, regulation or8 covenant when an association, its employees or agents cannot, in the ordinary9 discharge of their functions, objectively determine that a violation of such rules,

10 regulations or covenants exists or where the association reasonably determines11 that enforcement would be imprudent, impractical or unduly burdensome,12 provided that the failure to enforce a violation would not have (i) a material13 detrimental impact on the value of some or all of the units; or (ii) impair the14 general welfare of the owners. Nothing herein shall prohibit an association from15 enforcing a violation that it is not required to enforce…. Any unit owner may16 enforce the rules, regulations or covenants of the association through an action17 filed with a court of competent jurisdiction, or by alternative dispute resolution18 proceedings in accordance with.... Any association refusing to enforce an alleged19 violation of a rule, regulation or covenant pursuant to the terms of this section20 shall have no liability to any unit owner or third party.” 2122 “COMMISSIONER’S FLOOR COMMENT IN PITTSBURGH”2324 “Section 3-102(f) should be subject to other principles of law and equity, including the law of25 waiver and course of performance. If the second sentence of 3-102(f) is intended to modify26 these principles, some more clarification seems appropriate. The policy set forth in the second27 sentence is worthwhile, but the law of waiver and course of performance should be entirely28 displaced.”29

30 (g) [NEW] the association may compromise any claim made by or against it, [including

31 claims for unpaid assessments].

32 SECTION 3-103. EXECUTIVE BOARD MEMBERS AND OFFICERS.

33 (a) The declaration must create an executive board. Except as provided in the

34 declaration, the bylaws, subsection (b), or other provisions of this [act], the executive board may

35 act in all instances on behalf of the association. In the performance of their duties, officers and

36 members of the executive board appointed by the declarant shall exercise the degree of care and

37 loyalty to the association required of a trustee. Officers and members of the executive board not

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1 appointed by the declarant shall exercise the degree of care and loyalty to the association

2 required of an officer or director of a corporation organized under [insert reference to state non-

3 profit corporation law] and are subject to the conflict of interest rules governing directors and

4 officers of that law. The standards of care and loyalty described in this section apply regardless

5 of the form of legal entity in which the association is organized.

6 Proposed New Comment78 The Act continues to rely on the Business Judgment Rule as the basis for evaluating the9 actions of the Board.

1011 “As long as directors of a corporation decide matters rationally, honestly, and without a12 disabling conflict of interest, the decision will not be reviewed by the courts.” Atkins v.13 Hibernia Corp., 182 F3d 320, 324, (5 cir. 1999) quoted in Block, Barton & Radin, Theth

14 Business Judgment Rule, (5 ed. 1998) in 2002 Supp. Page 6. th

1516 The business judgment rule is a tool of judicial review, not a standard of conduct. The17 rule (1) shields directors from liability and protects decisions made by directors when the rule’s18 elements – a business decision, disinterestedness, and independence, due care, good faith and no19 abuse of discretion – are present and a challenged decision does not constitute fraud, illegality,20 ultra-vires conduct or waste, and (2) creates a presumption that directors have acted in21 accordance with each of the elements of the rule [Block et al at page 110.)2223 (b) The executive board may not act on behalf of the association to amend the declaration

24 (Section 2-117) or the bylaws (Section 3-106), to terminate the common interest community

25 (Section 2-118), or to elect members of the executive board or determine the qualifications,

26 powers and duties, or terms of office of executive board members (Section 3-103(f)), but the

27 executive board may fill vacancies in its membership for the unexpired portion of any term.

28 (c) Within [30] days after adoption of any proposed budget for the common interest

29 community, the executive board shall provide a summary of the budget to all the unit owners,

30 and shall set a date for a meeting of the unit owners to consider ratification of the budget not less

31 than 14 nor more than 30 days after mailing of the summary. Unless at that meeting a majority

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1 of all unit owners or any larger vote specified in the declaration reject the budget, the budget is

2 ratified, whether or not a quorum is present. In the event the proposed budget is rejected, the

3 periodic budget last ratified by the unit owners must be continued until such time as the unit

4 owners ratify a subsequent budget proposed by the executive board. [Moved to New section 3-

5 124.]

6 (d)(c) Subject to subsection (e)(d), the declaration may provide for a period of declarant

7 control of the association, during which a declarant, or persons designated by him, may appoint

8 and remove the officers and members of the executive board. Regardless of the period provided

9 in the declaration, and except as provided in Section 2-123(g) (Master Planned Communities), a

10 period of declarant control terminates no later than the earlier of: (i) [60] days after conveyance

11 of [75] percent of the units that may be created to unit owners other than a declarant; (ii) [2]

12 years after all declarants have ceased to offer units for sale in the ordinary course of business;

13 (iii) [2] years after any right to add new units was last exercised; or (iv) the day the declarant,

14 after giving written notice to unit owners, records an instrument voluntarily surrendering all

15 rights to control activities of the association. A declarant may voluntarily surrender the right to

16 appoint and remove officers and members of the executive board before termination of that

17 period, but in that event the declarant may require, for the duration of the period of declarant

18 control, that specified actions of the association or executive board, as described in a recorded

19 instrument executed by the declarant, be approved by the declarant before they become effective.

20 (e)(d) Not later than [60] days after conveyance of [25] percent of the units that may be

21 created to unit owners other than a declarant, at least one member and not less than [25] percent

22 of the members of the executive board must be elected by unit owners other than the declarant.

23 Not later than [60] days after conveyance of [50] percent of the units that may be created to unit

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1 owners other than a declarant, not less than [33-1/3] percent one third of the members of the

2 executive board must be elected by unit owners other than the declarant.

3 (f)(e) Except as otherwise provided in Section Sections 2-120(e) and 3-103(f), not later

4 than the termination of any period of declarant control, the unit owners shall must elect an

5 executive board of at least three members, at least a majority of whom must be unit owners. The

6 Unless the declaration provides for the election of officers by the unit owners, the executive

7 board shall elect the officers. The executive board members and officers shall take office upon

8 election or appointment.

9 (g) Notwithstanding any provision of the declaration or bylaws to the contrary, the unit

10 owners, by a two-thirds vote of all persons present and entitled to vote at any meeting of the unit

11 owners at which a quorum is present, may remove any member of the executive board with or

12 without cause, other than a member appointed by the declarant.

13 [Moved to New Section 3-123.]

14 [NEW] (f) The declaration may provide for the appointment of members of the

15 executive board before or after the period of declarant control and the method of filling

16 vacancies in appointed memberships, rather than election of those members by the unit owners.

17 However, appointed members:

18 (i) shall not be appointed by the declarant or an affiliate of the declarant;

19 (ii) shall not comprise more than [one third] of the entire board; and

20 (iii) have no greater authority than any other member of the executive board].

21 PROPOSED COMMENT to new (f)2223 1. This section is designed to accommodate the possibility, especially in senior living24 projects and in subsidized and ‘first time home buyer’ complexes, that it may be valuable and25 assist the long term viability of the project if a non-controlling percentage of the directors –

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1 appointed by persons other than unit owners – could provide independent outside expertise to the2 Board, even if those directors are not directly responsive to the owners themselves. As drafted,3 the new provision contains safeguards that the committee feels adequately guard against the4 potential for abuse by the original declarant or outside lenders.56 2. The committee emphasizes that the fiduciary duty of the directors appointed by others7 is to the association – as it is with any director – and not to the appointing authority. We believe8 this clear statement of duty should ameliorate the concerns of undue influence that may flow9 from potential conflicting interests.

1011 3. The final comments should discuss why we have 2 different standards of care – the12 declarant appointed directors have an inherent conflict of interest and the declarant has total13 control of the board during the period of declarant control; that is why we impose a higher duty.1415 4. The final comments on this subject need to articulate how all of the matters described16 in this sub-section will function.171819 SECTION 3-104. TRANSFER OF SPECIAL DECLARANT RIGHTS.

20 (a) A special declarant right (Section 1-103(29)) created or reserved under this [act] may

21 be transferred only by an instrument evidencing the transfer recorded in every [county] in which

22 any portion of the common interest community is located. The instrument is not effective unless

23 executed by the transferee.

24 (b) Upon transfer of any special declarant right, the liability of a transferor declarant is

25 as follows:

26 (1) A transferor is not relieved of any obligation or liability arising before the

27 transfer and remains liable for warranty obligations imposed upon him by this [act]. Lack of

28 privity does not deprive any unit owner of standing to maintain an action to enforce any

29 obligation of the transferor.

30 (2) If a successor to any special declarant right is an affiliate of a declarant

31 (Section 1-103(1)), the transferor is jointly and severally liable with the successor for any

32 obligations or liabilities of the successor relating to the common interest community.

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1 (3) If a transferor retains any special declarant rights, but transfers other special

2 declarant rights to a successor who is not an affiliate of the declarant, the transferor is liable for

3 any obligations or liabilities imposed on a declarant by this [act] or by the declaration relating to

4 the retained special declarant rights and arising after the transfer.

5 (4) A transferor has no liability for any act or omission or any breach of a

6 contractual or warranty obligation arising from the exercise of a special declarant right by a

7 successor declarant who is not an affiliate of the transferor.

8 (c) Unless otherwise provided in a mortgage instrument, deed of trust, or other

9 agreement creating a security interest, in case of foreclosure of a security interest, sale by a

10 trustee under an agreement creating a security interest, tax sale, judicial sale, or sale under

11 Bankruptcy Code or receivership proceedings, of any units owned by a declarant or real estate in

12 a common interest community subject to development rights, a person acquiring title to all the

13 property being foreclosed or sold, but only upon his request, succeeds to all special declarant

14 rights related to that property held by that declarant, or only to any rights reserved in the

15 declaration pursuant to Section 2-115 and held by that declarant to maintain models, sales

16 offices, and signs. The judgment or instrument conveying title must provide for transfer of only

17 the special declarant rights requested.

18 (d) Upon foreclosure of a security interest, sale by a trustee under an agreement creating

19 a security interest, tax sale, judicial sale, or sale under Bankruptcy Code or receivership

20 proceedings, of all interests in a common interest community owned by a declarant:

21 (1) the declarant ceases to have any special declarant rights, and

22 (2) the period of declarant control (Section 3-103(d)) terminates unless the

23 judgment or instrument conveying title provides for transfer of all special declarant rights held

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1 by that declarant to a successor declarant.

2 (e) The liabilities and obligations of a person who succeeds to special declarant rights

3 are as follows:

4 (1) A successor to any special declarant right who is an affiliate of a declarant is

5 subject to all obligations and liabilities imposed on the transferor by this [act] or by the

6 declaration.

7 (2) A successor to any special declarant right, other than a successor described in

8 paragraph (3) or (4) or a successor who is an affiliate of a declarant, is subject to the obligations

9 and liabilities imposed by this [act] or the declaration:

10 (i) on a declarant which relate to the successor’s exercise or nonexercise

11 of special declarant rights; or

12 (ii) on his transferor, other than:

13 (A) misrepresentations by any previous declarant;

14 (B) warranty obligations on improvements made by any previous

15 declarant, or made before the common interest community was created;

16 (C) breach of any fiduciary obligation by any previous declarant or

17 his appointees to the executive board; or

18 (D) any liability or obligation imposed on the transferor as a result

19 of the transferor’s acts or omissions after the transfer.

20 (3) A successor to only a right reserved in the declaration to maintain models,

21 sales offices, and signs (Section 2-115), may not exercise any other special declarant right, and is

22 not subject to any liability or obligation as a declarant, except the obligation to provide a public

23 offering statement [,] and any liability arising as a result thereof [, and obligations under

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1 [Article] 5].

2 (4) A successor to all special declarant rights held by a transferor who succeeded to

3 those rights pursuant to a deed or other instrument of conveyance in lieu of foreclosure or a

4 judgment or instrument conveying title under subsection (c), may declare in a recorded

5 instrument the intention to hold those rights solely for transfer to another person. Thereafter,

6 until transferring all special declarant rights to any person acquiring title to any unit or real estate

7 subject to development rights owned by the successor, or until recording an instrument

8 permitting exercise of all those rights, that successor may not exercise any of those rights other

9 than any right held by his transferor to control the executive board in accordance with Section

10 3-103(d) for the duration of any period of declarant control, and any attempted exercise of those

11 rights is void. So long as a successor declarant may not exercise special declarant rights under

12 this subsection, the successor declarant is not subject to any liability or obligation as a declarant

13 other than liability for his acts and omissions under Section 3-103(d).

14 (f) Nothing in this section subjects any successor to a special declarant right to any

15 claims against or other obligations of a transferor declarant, other than claims and obligations

16 arising under this [act] or the declaration.

17 SECTION 3-105. TERMINATION OF CONTRACTS AND LEASES OF

18 DECLARANT. Except as provided in Section 1-207, if entered into before the executive board

19 elected by the unit owners pursuant to Section 3-103(f) takes office, (i) any management

20 contract, employment contract, or lease of recreational or parking areas or facilities, (ii) any

21 other contract or lease between the association and a declarant or an affiliate of a declarant, or

22 (iii) any contract or lease that is not bona fide or was unconscionable to the unit owners at the

23 time entered into under the circumstances then prevailing, may be terminated without penalty by

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1 the association at any time after the executive board elected by the unit owners pursuant to

2 Section 3-103(f) takes office upon not less than [90] days’ notice to the other party. This section

3 does not apply to: (i) any lease the termination of which would terminate the common interest

4 community or reduce its size, unless the real estate subject to that lease was included in the

5 common interest community for the purpose of avoiding the right of the association to terminate

6 a lease under this section, or (ii) a proprietary lease.

7 SECTION 3-106. BYLAWS.

8 (a) The bylaws of the association must provide for:

9 (1) the number of members of the executive board and the titles of the officers of

10 the association;

11 (2) election by the executive board or, if the declaration so requires, by the unit

12 owners, of a president, treasurer, secretary, and any other officers of the association the bylaws

13 specify;

14 (3) the qualifications, powers and duties, terms of office, and manner of electing

15 and removing executive board members and offices and filling vacancies;

16 (4) which, if any, of its powers the executive board or officers may delegate to

17 other persons or to a managing agent;

18 Reporter Comment

19 1. By deleting the words ‘if any,’ in sub-section (4), the Committee does not intend a20 substantive change. As re-drafted, the Act does not require the Board to delegate any of its21 power.2223 2. As drafted, the Act does not appear to prevent the bylaws from permitting the24 executive board from delegating all its powers to a manager or to another entity that might not25 be bound by the constraints of this Act.2627 (5) which of its officers may prepare, execute, certify, and record amendments to

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1 the declaration on behalf of the association; and

2 (6) a method for amending the bylaws by vote of the unit owners;

3 (7) any provisions that may be necessary to satisfy requirements in this [act] or

4 the declaration concerning meetings, voting, quorums and other matters concerning the activities

5 of the association; and

6 (8) any other matters required by the laws of this State to appear in the bylaws of

7 legal entities organized in the same manner as the association .

8 (b) Subject to the provisions of the declaration, the bylaws may provide for any other

9 matters the association deems necessary and appropriate unless the declaration or this [act]

10 requires that those provisions appear in the declaration.

11 New Comment1213 As the definition makes clear, the bylaws are intended to address procedural matters14 affecting the governance of the association. They are not intended to contain matters that might15 affect title to real property nor any of the covenants restricting the use of the units or the16 common property. That is one of the primary reasons why the Act requires that the declaration17 be recorded on the land records, but the bylaws need not be recorded.1819 The bylaws might include a broad range of qualifications for directors and officers. This20 Act neither imposes constraints on what these qualifications might be or mandates any such21 qualifications, other than the requirement that, after the period of declarant control ends, a22 majority of directors must be unit owners. Other law, of course, such as laws prohibiting various23 forms of discrimination, may independently impose limits on permissible qualifications. 242526 SECTION 3-107. UPKEEP OF COMMON INTEREST COMMUNITY.2728 (a) Except to the extent provided by the declaration, subsection (b), or Section 3-113(h),

29 the association is responsible for maintenance, repair, and replacement of the common elements,

30 and each unit owner is responsible for maintenance, repair, and replacement of his unit. Each

31 unit owner shall afford to the association and the other unit owners, and to their agents or

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1 employees, access through his unit reasonably necessary for those purposes. If damage is

2 inflicted on the common elements or on any unit through which access is taken, the unit owner

3 responsible for the damage, or the association if it is responsible, is liable for the prompt repair

4 thereof.

5 (b) In addition to the liability that a declarant as a unit owner has under this [act], the

6 declarant alone is liable for all expenses in connection with real estate subject to development

7 rights. No other unit owner and no other portion of the common interest community is subject to

8 a claim for payment of those expenses. Unless the declaration provides otherwise, any income

9 or proceeds from real estate subject to development rights inures to the declarant.

10 (c) In a planned community, if all development rights have expired with respect to any

11 real estate, the declarant remains liable for all expenses of that real estate unless, upon

12 expiration, the declaration provides that the real estate becomes common elements or units.

13 SECTION 3-108. UNIT OWNER MEETINGS. A meeting of the association must be

14 held at least once each year. Special meetings of the association may be called by the president,

15 a majority of the executive board, or by unit owners having 20 percent, or any lower percentage

16 specified in the bylaws, of the votes in the association. Not Except in cases of emergency

17 meetings that may be held without prior notice, not less than [10] nor more than [60] days in

18 advance of any regular or special meeting of the unit owners, the secretary or other officer

19 specified in the bylaws shall cause notice of that meeting to be hand-delivered to each unit

20 owner by any means described in Section 3-122 or sent prepaid by United States mail to the

21 mailing address of each unit or to any other mailing address designated in writing by the unit

22 owner. The notice of any meeting must state the time and place of the meeting and the items on

23 the agenda, including : (i) a statement of the general nature of any proposed amendment to the

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1 declaration or bylaws, (ii) a statement that in the absence of objection from any unit owner

2 present at the meeting, the president may add items to the agenda; (iii) any budget changes, and

3 (iv) any proposal to remove an officer or member of the executive board. Regardless of the

4 agenda, unit owners shall be given a reasonable opportunity at any meeting to offer comments to

5 the executive board regarding any matter affecting the common interest community

6 NEW COMMENTS [4-06]

7 1. The 2006 amendments mandate that unit owners be provided the opportunity to8 address the executive board during each meeting of the unit owners. While this provision is an9 important part of the democratization process in community associations, it is implicit that the

10 officers and executive board members have the inherent right to establish reasonable controls11 over the behavior of unit owners during the meetings. Thus, for example, it is clear that the12 board could prevent unit owners from interrupting the regular conduct of business and the time13 of other speakers, and could, as well, set reasonable limits on the number of speakers at any one14 meeting, the repetitiveness of unit owner comments, and the aggregate time that unit owners15 consumed during the meeting.1617 2. The Committee has also discussed the concept of permitting a unit owners’ meeting to18 be recessed – whether or not a quorum present – to enable solicitation of votes or proxies in19 order to accomplish a particular result. The Reporter believes this could be done under current20 practice and that a comment may suffice – but I seek further guidance. In any event, that21 concept is imbedded in the new recall section – §3-123.2223 3. The Committee has not yet considered (i) the retroactive effect of this section on pre-24 existing common interest communities or (ii) the likely reaction of courts construing this section25 in the light of a board’s failure to satisfy statutory mandates. This may pose special difficulties26 for small associations.2728 4. The Committee has discussed the difficulties posed by mandating that advance29 agendas be distributed to unit owners. The two principal policy issues are: (i) is the association30 liable if it fails to distribute an accurate agenda [or alternatively, are actions taken at such a31 meeting voidable]; and (ii) may the listing of ‘new business’ on the agenda allow the executive32 board to add new items to the agenda, and, if so, why do we worry about sending out an agenda33 in the first place, since the requirement is so easily avoided? Does proposed sub-section (iii)34 provide an appropriate middle ground?3536 5. The Committee has discussed the adoption of “Best Practices” by association boards37 in lieu of legislation – but we have made scant headway.3839

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1 [NEW] SECTION 3-108A. EXECUTIVE BOARD MEETINGS.

2 (a) A meeting of the executive board must be held at least quarterly. Special meetings

3 of the executive board may be called by the president or a majority of the executive board. For

4 purposes of this section, “meetings of the executive board” do not include incidental or other

5 informal gatherings of two or more directors for social or other purposes or any meetings where

6 no decisions are made or discussed regarding association business. The executive board and

7 individual directors shall not use incidental or social gatherings of directors or other devices to

8 evade the open meeting requirements of this section.

9 (b) Except when a schedule of meetings has been distributed to unit owners that

10 identifies the meeting in question or in cases of emergency meetings that may be held without

11 prior notice, the secretary or other officer specified in the bylaws shall cause notice of any

12 regular or special executive board meeting to be delivered to each unit owner by any means

13 described in Section 3-122 not less than [10] nor more than [60] days in advance of the meeting

14 (but not later than the time notice of the meeting is sent to members of the executive board). The

15 notice must state the time and place of the meeting and the items on the agenda, including an

16 opportunity for unit owners to offer comments to the executive board regarding any matter

17 affecting the common interest community.

18 (c) [After the period of declarant control ends,] All meetings of the executive board shall

19 be open to the unit owners except for executive sessions held for purposes of (i) consulting with

20 the association’s lawyer regarding, or board discussion of, litigation, mediation, arbitration or

21 administrative proceedings or any contract matters; (ii) labor or personnel matters; or (iii)

22 discussion of any complaint from or alleged violation by a unit owner, when the executive board

23 determines that public knowledge would violate the privacy of the unit owner.

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1 (d) In lieu of a meeting, the executive board may act by unanimous consent as

2 documented in a record signed by all its members, but the executive board may not act by

3 unanimous consent to: (i) adopt a rule, budget or special assessment, (ii) impose a fine or take

4 action to enforce the declaration, bylaws or rules, (iii) buy or sell real property, (iv) borrow

5 money, or (v) contract for any sum greater than one percent [1%] of the association’s annual

6 budget . The secretary shall promptly notify all unit owners of any action taken by unanimous

7 consent.

8 (e) A unit owner may maintain a civil action for injunctive or other appropriate relief if

9 the executive board fails to comply with this section. Actions taken at an Executive Board

10 meeting in violation of this section are voidable but a contract entered into with a third party who

11 had no knowledge of that failure is not invalid solely because of the board’s failure to give notice

12 of the meeting at which the contract was approved.

13 Reporter Comments1415 The Committee has had considerable discussion since the Pittsburgh meeting on this16 subject; the discussion revolved around the issues raised in comments by Commissioner Bebr –17 that is: (i) what is a “meeting” of the Executive Board; (ii) do we need more detail as to what18 subjects are appropriate for an executive session; and (iii) what are the consequences of a failure19 to give notice of a meeting of the executive committee.2021 As a consequence, Section 3-108A now requires quarterly meetings, and defines22 ‘meetings’ to exclude incidental or social gatherings of directors. See sub-section (a). 2324 Thereafter, the section contains ‘open meeting” and broad executive session text, along25 the lines of several existing state provisions. See, eg, Virginia Stat. Ann. § 55-510.1, Alaska Stat.26 Ann. § _____. . We also include a provision similar to that contained in Sec. 11 of the Uniform27 Environmental Covenants Act, insulating any decision made at a board meeting from challenge28 because of defective notice to unit owners. 2930 The Committee has discussed but not yet decided whether the executive board may take31 any action in executive session which is not disclosed to unit owners.3233

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1 SECTION 3-109. QUORUMS.

2 (a) Unless the bylaws provide otherwise, a quorum is present throughout any meeting of

3 the association if:

4 (1) persons entitled to cast [20] percent of the votes that may be cast for election

5 of the executive board are present in person or by proxy at the beginning of the meeting; or

6 (2) ballots solicited in accordance with Section 3-110 (f) are [delivered to the

7 secretary] [cast] in a timely manner by persons who, together with those physically present at the

8 meeting, would comprise a quorum for that meeting.

9 (b) Unless the bylaws specify a larger percentage, a quorum is deemed present

10 throughout any meeting of the executive board if persons entitled to cast [50] percent of the

11 votes on that board are present at the beginning of the meeting.

12 SECTION 3-110. VOTING; PROXIES.

13 (a) If only one of several owners of a unit is present at a meeting of the association, that

14 owner is entitled to cast all the votes allocated to that unit. If more than one of the owners are

15 present, the votes allocated to that unit may be cast only in accordance with the agreement of a

16 majority in interest of the owners, unless the declaration expressly provides otherwise. There is

17 majority agreement if any one of the owners casts the votes allocated to that unit without protest

18 being made promptly to the person presiding over the meeting by any of the other owners of the

19 unit.

20 (b) Votes allocated to a unit may be cast pursuant to a proxy duly executed by a unit

21 owner. If a unit is owned by more than one person, each owner of the unit may vote or register

22 protest to the casting of votes by the other owners of the unit through a duly executed proxy. A

23 unit owner may revoke a proxy given pursuant to this section only by actual notice of revocation

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1 to the person presiding over a meeting of the association. A proxy is void if it is not dated or

2 purports to be revocable without notice. A proxy terminates one year after its date, unless it

3 specifies a shorter term. No person may hold or cast proxies representing units owned by more

4 than [ ] unit owners in the common interest community.

5 (c) If the declaration requires that votes on specified matters affecting the common

6 interest community be cast by lessees rather than unit owners of leased units: (i) the provisions

7 of subsections (a) and (b) apply to lessees as if they were unit owners; (ii) unit owners who have

8 leased their units to other persons may not cast votes on those specified matters; and (iii) lessees

9 are entitled to notice of meetings, access to records, and other rights respecting those matters as

10 if they were unit owners. Unit owners must also be given notice, in the manner provided in

11 Section 3-108, of all meetings at which lessees are entitled to vote.

12 (d) No votes Votes allocated to a unit owned by the association may not be cast

13 and shall not be calculated either in a quorum or in any percentage of unit votes needed for any

14 action by the unit owners.

15 (e) Except in cases where a greater percentage or fraction of the votes in the

16 association is required by this [act] or the declaration, a majority of the votes cast in person or

17 by proxy at a meeting of unit owners where a quorum is present shall determine the outcome of

18 any action of the association where a vote is taken.

19 (f) [NEW] Action By Ballot Without Meeting

20 (i) Unless prohibited or limited by the declaration or bylaws, any action

21 that the association may take at any meeting of members may be taken without a meeting if the

22 association delivers a written or electronic ballot to every member entitled to vote on the matter.

23 A ballot shall set forth each proposed action and provide an opportunity to vote for or against

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1 each proposed action.

2 (ii) All solicitations for votes by ballot shall: (A) indicate the number of

3 responses needed to meet the quorum requirements; (B) state the percentage of approvals

4 necessary to approve each matter other than election of directors; and (C) specify the time by

5 which a ballot must be delivered to the association in order to be counted, which time shall not

6 be less than [3] days after the date that the association delivers the ballot.

7 (iii) Approval by ballot pursuant to this section is valid only if: (A) the

8 number of votes cast by ballot equals or exceeds the quorum required to be present at a meeting

9 authorizing the action; and (B) the number of approvals equals or exceeds the number of votes

10 that would be required to approve the matter at a meeting at which the total number of votes cast

11 was the same as the number of votes cast by ballot.

12 (iv) Except as otherwise provided in the declaration or bylaws, a ballot

13 shall not be revoked after delivery to the association by death, disability or revocation by the

14 person who cast that vote.

15 Reporter Notes1617 1. Much of this text derives from Arizona Rev. Stat. § 10-3708, that state’s non-stock18 corporate law.1920 2. An alternative approach was proposed in New Jersey in 2005, as follows:2122 “Any vote permitted [by the unit owners under New Jersey law] may, at the23 election of the executive board, be made electronically provided that (1) the24 association is able to verify that the vote is cast by a unit owner having the right25 to do so, and (2) the ballot may be cast anonymously or, when that is not26 reasonably practicable, the identity of the unit owner and selection indicated on27 any ballot shall be known only to a person or persons appointed to count the28 ballots, which person or persons shall not be a member of the executive board and29 who shall subscribe to an oath not to divulge the identity of, or selection indicated30 by, any unit owner. If the anonymity of an electronic ballot cannot be guaranteed,31 electronic voting shall be permitted provided that a unit owner is given the option

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1 of casting an anonymous written ballot. A unit owner voting by electronic means2 shall be deemed to be present at a meeting provided that no person shall be3 authorized to vote with respect to any matter not appearing on the electronic4 ballot unless the unit owner submits a proxy pursuant to subsection b. of this5 section.”67 3. As drafted, the Act imposes no limits on the permitted activites by which an action8 may be undertaken by balloting outside of a meeting. Thus, for example, unless limited by the9 declaration, those actions may include, without limitation, a meeting to remove a director

10 pursuant to new Section 3-123 (formerly Section 3-103(g)).1112 4. The Committee assumes that electronic balloting will be governed by E-Sign and13 UETA; we will confer with Commissioner Fry at the annual meeting in Hilton Head.141516 SECTION 3-111. TORT AND CONTRACT LIABILITY; TOLLING OF

17 LIMITATION PERIOD.

18 (a) A unit owner is not liable, solely by reason of being a unit owner, for an injury or

19 damage arising out of the condition or use of the common elements. Neither the association nor

20 any unit owner except the declarant is liable for that declarant’s torts in connection with any part

21 of the common interest community which that declarant has the responsibility to maintain.

22 (b) An action alleging a wrong done by the association, including an action arising out of

23 the condition or use of the common elements, may be maintained only against the association

24 and not against any unit owner. If the wrong occurred during any period of declarant control and

25 the association gives the declarant reasonable notice of and an opportunity to defend against the

26 action, the declarant who then controlled the association is liable to the association or to any unit

27 owner for (i) all tort losses not covered by insurance suffered by the association or that unit

28 owner, and (ii) all costs that the association would not have incurred but for a breach of contract

29 or other wrongful act or omission. Whenever the declarant is liable to the association under this

30 section, the declarant is also liable for all expenses of litigation, including reasonable attorney’s

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1 fees, incurred by the association.

2 (c) Except as provided in Section 4-116(d) with respect to warranty claims, any statute

3 of limitation affecting the association’s right of action against a declarant under this [act] is

4 tolled until the period of declarant control terminates. A unit owner is not precluded from

5 maintaining an action contemplated by this section because he is a unit owner or a member or

6 officer of the association. Liens resulting from judgments against the association are governed

7 by Section 3-117 (Other Liens).

8 SECTION 3-112. CONVEYANCE OR ENCUMBRANCE OF COMMON

9 ELEMENTS.

10 (a) In a condominium or planned community, portions of the common elements may be

11 conveyed or subjected to a security interest by the association if persons entitled to cast at least

12 [80] percent of the votes in the association, including [80] percent of the votes allocated to units

13 not owned by a declarant, or any larger percentage the declaration specifies, agree to that action;

14 but all owners of units to which any limited common element is allocated must agree in order to

15 convey that limited common element or subject it to a security interest. The declaration may

16 specify a smaller percentage only if all of the units are restricted exclusively to non-residential

17 uses. Proceeds of the sale are an asset of the association, but the proceeds of the sale of limited

18 common elements must be distributed equitably among the owners of units to which the limited

19 common elements were allocated.

20 (b) Part of a cooperative may be conveyed and all or part of a cooperative may be

21 subjected to a security interest by the association if persons entitled to cast at least [80] percent

22 of the votes in the association, including [80] percent of the votes allocated to units not owned

23 by a declarant, or any larger percentage the declaration specifies, agree to that action; but, if

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1 fewer than all of the units or limited common elements are to be conveyed or subjected to a

2 security interest, then all unit owners of those units, or the units to which those limited common

3 elements are allocated, must agree in order to convey those units or limited common elements or

4 subject them to a security interest. The declaration may specify a smaller percentage only if all

5 of the units are restricted exclusively to nonresidential uses. Proceeds of the sale are an asset of

6 the association. Any purported conveyance or other voluntary transfer of an entire cooperative,

7 unless made pursuant to Section 2-118, is void.

8 (c) An agreement to convey common elements in a condominium or planned

9 community, or to subject them to a security interest, or in a cooperative, an agreement to convey

10 any part of a cooperative or subject it to a security interest, must be evidenced by the execution

11 of an agreement, or ratifications thereof, in the same manner as a deed, by the requisite number

12 of unit owners. The agreement must specify a date after which the agreement will be void unless

13 recorded before that date. The agreement and all ratifications thereof must be recorded in every

14 [county] in which a portion of the common interest community is situated, and is effective only

15 upon recordation.

16 (d) The association, on behalf of the unit owners, may contract to convey an interest in a

17 common interest community pursuant to subsection (a), but the contract is not enforceable

18 against the association until approved pursuant to subsections (a), (b), and (c). Thereafter, the

19 association has all powers necessary and appropriate to effect the conveyance or encumbrance,

20 including the power to execute deeds or other instruments.

21 (e) Unless made pursuant to this section, any purported conveyance, encumbrance,

22 judicial sale, or other voluntary transfer of common elements or of any other part of a

23 cooperative is void.

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1 (f) A conveyance or encumbrance of common elements or of a cooperative pursuant to

2 this section does not deprive any unit of its rights of access and support.

3 (g) Unless the declaration otherwise provides, if the holders of first security interests on

4 80 percent of the units that are subject to security interests on the day the unit owners’ agreement

5 under subsection (c) is recorded consent in writing:

6 (1) a conveyance of common elements pursuant to this section terminates both the

7 undivided interests in those common elements allocated to the units and the security interests in

8 those undivided interests held by all persons holding security interests in the units; and

9 (2) an encumbrance of common elements pursuant to this section has priority

10 over all preexisting encumbrances on the undivided interests in those common elements held by

11 all persons holding security interests in the units.

12 (h) The consents by holders of first security interests on units described in subsection

13 (g), or a certificate of the secretary affirming that those consents have been received by the

14 association, may be recorded at any time before the date on which the agreement under

15 subsection (c) becomes void. Consents or certificates so recorded are valid from the date they

16 are recorded for purposes of calculating the percentage of consenting first security interest

17 holders, regardless of later sales or encumbrances on those units. Even if the required

18 percentage of first security interest holders so consent, a conveyance or encumbrance of

19 common elements does not affect interests having priority over the declaration, or created by the

20 association after the declaration was recorded.

21 (i) In a cooperative, the association may acquire, hold, encumber, or convey a

22 proprietary lease without complying with this section.

23

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1 SECTION 3-113. INSURANCE.

2 (a) Commencing not later than the time of the first conveyance of a unit to a person

3 other than a declarant, the association shall maintain, to the extent reasonably available:

4 (1) property insurance on the common elements and, in a planned community,

5 also on property that must become common elements, insuring against all risks of direct physical

6 loss commonly insured against or, in the case of a conversion building, against fire and extended

7 coverage perils. The total amount of insurance after application of any deductibles must be not

8 less than 80 percent of the actual cash value of the insured property at the time the insurance is

9 purchased and at each renewal date, exclusive of land, excavations, foundations, and other items

10 normally excluded from property policies; and

11 (2) liability insurance, including medical payments insurance, in an amount

12 determined by the executive board but not less than any amount specified in the declaration,

13 covering all occurrences commonly insured against for death, bodily injury, and property

14 damage arising out of or in connection with the use, ownership, or maintenance of the common

15 elements and, in cooperatives, also of all units.

16 (b) In the case of a building that is part of a cooperative or that contains units having

17 horizontal boundaries described in the declaration, the insurance maintained under subsection

18 (a)(1), to the extent reasonably available, must include the units, but need not include

19 improvements and betterments installed by unit owners.

20 (c) If the insurance described in subsections (a) and (b) is not reasonably available, the

21 association promptly shall cause notice of that fact to be hand-delivered or sent prepaid by

22 United States mail to all unit owners. The declaration may require the association to carry any

23 other insurance, and the association in any event may carry any other insurance it considers

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1 appropriate to protect the association or the unit owners.

2 (d) Insurance policies carried pursuant to subsections (a) and (b) must provide that:

3 (1) each unit owner is an insured person under the policy with respect to liability

4 arising out of his interest in the common elements or membership in the association;

5 (2) the insurer waives its right to subrogation under the policy against any unit

6 owner or member of his household;

7 (3) no act or omission by any unit owner, unless acting within the scope of his

8 authority on behalf of the association, will void the policy or be a condition to recovery under

9 the policy; and

10 (4) if, at the time of a loss under the policy, there is other insurance in the name of

11 a unit owner covering the same risk covered by the policy, the association’s policy provides

12 primary insurance.

13 (e) Any loss covered by the property policy under subsections (a)(1) and (b) must be

14 adjusted with the association, but the insurance proceeds for that loss are payable to any

15 insurance trustee designated for that purpose, or otherwise to the association, and not to any

16 holder of a security interest. The insurance trustee or the association shall hold any insurance

17 proceeds in trust for the association, unit owners, and lien holders as their interests may appear.

18 Subject to the provisions of subsection (h), the proceeds must be disbursed first for the repair or

19 restoration of the damaged property, and the association, unit owners, and lien holders are not

20 entitled to receive payment of any portion of the proceeds unless there is a surplus of proceeds

21 after the property has been completely repaired or restored, or the common interest community is

22 terminated.

23 (f) An insurance policy issued to the association does not prevent a unit owner from

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1 obtaining insurance for his own benefit.

2 (g) An insurer that has issued an insurance policy under this section shall issue

3 certificates or memoranda of insurance to the association and, upon written request, to any unit

4 owner or holder of a security interest. The insurer issuing the policy may not cancel or refuse to

5 renew it until [30] days after notice of the proposed cancellation or non-renewal has been mailed

6 to the association, each unit owner and each holder of a security interest to whom a certificate or

7 memorandum of insurance has been issued at their respective last known addresses.

8 (h) Any portion of the common interest community for which insurance is required

9 under this section which is damaged or destroyed must be repaired or replaced promptly by the

10 association unless (i) the common interest community is terminated, in which case Section 2-118

11 applies (ii) repair or replacement would be illegal under any state or local statute or ordinance

12 governing health or safety, or (iii) [80] percent of the unit owners, including every owner of a

13 unit or assigned limited common element that will not be rebuilt, vote not to rebuild. The cost of

14 repair or replacement in excess of insurance proceeds and reserves is a common expense. If the

15 entire common interest community is not repaired or replaced, (i) the insurance proceeds

16 attributable to the damaged common elements must be used to restore the damaged area to a

17 condition compatible with the remainder of the common interest community, and (ii) except to

18 the extent that other persons will be distributees (Section 2-105(a)(12)(ii)), (A) the insurance

19 proceeds attributable to units and limited common elements that are not rebuilt must be

20 distributed to the owners of those units and the owners of the units to which those limited

21 common elements were allocated, or to lien holders, as their interests may appear, and (B) the

22 remainder of the proceeds must be distributed to all the unit owners or lien holders, as their

23 interests may appear, as follows: (1) in a condominium, in proportion to the common element

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1 interests of all the units and (2) in a cooperative or planned community, in proportion to the

2 common expense liabilities of all the units. If the unit owners vote not to rebuild any unit, that

3 unit’s allocated interests are automatically reallocated upon the vote as if the unit had been

4 condemned under Section 1-107(a), and the association promptly shall prepare, execute, and

5 record an amendment to the declaration reflecting the reallocations.

6 (i) The provisions of this section may be varied or waived in the case of a common

7 interest community all of whose units are restricted to non-residential use.

8 SECTION 3-114. SURPLUS FUNDS. Unless otherwise provided in the declaration,

9 any surplus funds of the association remaining after payment of or provision for common

10 expenses and any prepayment of reserves must be paid annually to the unit owners in proportion

11 to their common expense liabilities or credited to them to reduce their future common expense

12 assessments.

13 NEW COMMENT

14 The requirements of this section track the requirements of the current Internal Revenue15 Code; see Rev. Rul. 70-607. The unit owners, of course, may vote to reverse this outcome. As a16 practical matter, in the everyday activites of the unit owners association, the matters addressed in17 this section are likely to arise only rarely.181920 SECTION 3-115. ASSESSMENTS FOR COMMON EXPENSES.

21 (a) Until the association makes a common expense assessment, the declarant shall pay

22 all common expenses. After an assessment has been made by the association, assessments must

23 be made at least annually, based on a budget adopted at least annually by the association.

24 (b) Except for assessments under subsections (c), (d), and (e), all common expenses

25 must be assessed against all the units in accordance with the allocations set forth in the

26 declaration pursuant to Section 2-107(a) and (b). Any past due common expense assessment or

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1 installment thereof bears interest at the rate established by the association not exceeding [18]

2 percent per year.

3 (c) To the extent required by the declaration:

4 (1) any common expense associated with the maintenance, repair, or replacement

5 of a limited common element must be assessed against the units to which that limited common

6 element is assigned, equally, or in any other proportion the declaration provides;

7 (2) any common expense or portion thereof included as part of the common

8 expense budget, but benefitting fewer than all of the units, including any fees for services

9 provided by the association to occupants of individual units must be assessed exclusively against

10 the units benefitted based on their use and consumption of services; and

11 (3) the costs of insurance must be assessed in proportion to risk and the costs of

12 utilities must be assessed in proportion to usage.

13 (d) Assessments to pay a judgment against the association (Section 3-117(a)) may be

14 made only against the units in the common interest community at the time the judgment was

15 entered, in proportion to their common expense liabilities.

16 (e) If any common expense is caused by the misconduct of any unit owner or her guests

17 or invitees, the association may assess that expense exclusively against her unit.

18 (f) If common expense liabilities are reallocated, common expense assessments and any

19 instalment thereof not yet due must be recalculated in accordance with the reallocated common

20 expense liabilities.

21 NEW COMMENT

22 1. The amendment to subsection (c)(2) reflects the increasing practice in some23 associations of providing food, janitorial, nursing and other services to residents of individual24 units as part of the common expense budget of the association whether or not the occupants are

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1 the owners of those units. Clearly, this is not the only means by which those charges might be2 paid for; a more direct means would surely be to charge the beneficiaries of those services3 directly on a fee for service basis. The purpose of the amendment is simply to call to the4 drafter’s attention the concern that if these services are included in the common expense budget5 for the entire association, rather than being charged to individual service recipients, then the non-6 benefitted owners should not be assessed, and possibly have a lien against their units, for7 services provided to other persons.89 As drafted, however, the default rule does not yield that result.

1011 2. The drafters of the proposed Texas Planned Community Act have defined “services”;12 see Texas Act 83.009 (19) in a version of that Act subsequent to the one made available to the13 Committee in March 2005.141516 SECTION 3-116. LIEN FOR ASSESSMENTS; FORECLOSURE.

17 (a) The association has a statutory lien on a unit for any assessment levied against that

18 unit or fines imposed against its unit owner. Unless the declaration otherwise provides,

19 reasonable attorneys fees and court costs, other fees, charges, late charges, fines, and interest

20 charged pursuant to Section 3-102(a)(10), (11), and (12) and any damages due to the association

21 under the declaration, this [act] or as a result of an administrative or judicial decision are

22 enforceable as assessments under this section. If an assessment is payable in installments, the

23 lien is for the full amount of the assessment from the time the first installment thereof becomes

24 due. Unless the declaration provides for a different rate of interest, interest on unpaid

25 assessments shall accrue at the rate provided in [insert State statute governing interest on

26 judgment liens].

27 (b) A lien under this section is prior to all other liens and encumbrances on a unit except

28 (i) liens and encumbrances recorded before the recordation of the declaration and, in a

29 cooperative, liens and encumbrances which the association creates, assumes, or takes subject to,

30 (ii) a first security interest on the unit recorded before the date on which the assessment sought to

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1 be enforced became delinquent, or, in a cooperative, the first security interest encumbering only

2 the unit owner’s interest and perfected before the date on which the assessment sought to be

3 enforced became delinquent, and (iii) liens for real estate taxes and other governmental

4 assessments or charges against the unit or cooperative. The lien is also prior to all security

5 interests described in clause (ii) above to the extent of: (i) the common expense assessments

6 based on the periodic budget adopted by the association pursuant to Section 3-115(a) which

7 would have become due in the absence of acceleration during the six months immediately

8 preceding institution of an action to enforce the lien; and (ii) reasonable attorneys fees and court

9 costs incurred by the association in foreclosing the association’s lien. This subsection does not

10 affect the priority of mechanics’ or materialmen’s liens, or the priority of liens for other

11 assessments made by the association. [The lien under this section is not subject to the provisions

12 of [insert appropriate reference to state homestead, dower and curtesy, or other exemptions].]

13 (c) Unless the declaration otherwise provides, if two or more associations have liens for

14 assessments created at any time on the same property, those liens have equal priority.

15 (d) Recording of the declaration constitutes record notice and perfection of the lien. No

16 further recordation of any claim of lien for assessment under this section is required.

17 (e) A lien for unpaid assessments is extinguished unless proceedings to enforce the lien

18 are instituted within [3] years after the full amount of the assessments becomes due.

19 (f) This section does not prohibit actions against unit owners in their own names to

20 recover sums for which subsection (a) creates a lien or prohibit an association from taking a deed

21 in lieu of foreclosure.

22 NEW COMMENT

23 1. Subsection (f) and Official Comment 4 confirm that creation of the lien for assessments

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1 under this section does not mean that the individual unit owner is not personally liable for the2 assessments. The proposed amendment to subsection (f) simply emphasizes that outcome.3

4 (g) A judgment or decree in any action brought under this section must include costs and

5 reasonable attorney’s fees for the prevailing party.

6 (h) The association upon written request shall furnish to a unit owner a statement setting

7 forth the amount of unpaid assessments against the unit. If the unit owner’s interest is real

8 estate, the statement must be in recordable form. The statement must be furnished within [10]

9 business days after receipt of the request and is binding on the association, the executive board,

10 and every unit owner.

11 (i) In a cooperative, upon nonpayment of an assessment on a unit, the unit owner may be

12 evicted in the same manner as provided by law in the case of an unlawful holdover by a

13 commercial tenant, and the lien may be foreclosed as provided by this section.

14 (j) The association’s lien may be foreclosed as provided in this subsection and

15 subsection (m):

16 (1) In a condominium or planned community, the association’s lien must be

17 foreclosed in like manner as a mortgage on real estate [or by power of sale under [insert

18 appropriate state statute]];

19 (2) In a cooperative whose unit owners’ interests in the units are real estate

20 (Section 1-105), the association’s lien must be foreclosed in like manner as a mortgage on real

21 estate [or by power of sale under [insert appropriate state statute]] [or by power of sale under

22 subsection (k)]; or

23 (3) In a cooperative whose unit owners’ interests in the units are personal

24 property (Section 1-105), the association’s lien must be foreclosed in like manner as a security

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1 interest under [insert reference to Article 9, Uniform Commercial Code.]

2 [(4) In the case of foreclosure under [insert reference to state power of sale

3 statute], the association shall give reasonable notice of its action to all lien holders of the unit

4 whose interest would be affected.]

5 [(k) In a cooperative, if the unit owner’s interest in a unit is real estate (Section 1-105):

6 (1) The association, upon non-payment of assessments and compliance with this

7 subsection, may sell that unit at a public sale or by private negotiation, and at any time and place.

8 Every aspect of the sale, including the method, advertising, time, place, and terms must be

9 reasonable. The association shall give to the unit owner and any lessees of the unit owner

10 reasonable written notice of the time and place of any public sale or, if a private sale is intended,

11 or the intention of entering into a contract to sell and of the time after which a private disposition

12 may be made. The same notice must also be sent to any other person who has a recorded interest

13 in the unit which would be cut off by the sale, but only if the recorded interest was on record

14 seven weeks before the date specified in the notice as the date of any public sale or seven weeks

15 before the date specified in the notice as the date after which a private sale may be made. The

16 notices required by this subsection may be sent to any address reasonable in the circumstances.

17 Sale may not be held until five weeks after the sending of the notice. The association may buy at

18 any public sale and, if the sale is conducted by a fiduciary or other person not related to the

19 association, at a private sale.

20 (2) Unless otherwise agreed, the debtor is liable for any deficiency in a

21 foreclosure sale.

22 (3) The proceeds of a foreclosure sale must be applied in the following order:

23 (i) the reasonable expenses of sale;

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1 (ii) the reasonable expenses of securing possession before sale; holding,

2 maintaining, and preparing the unit for sale, including payment of taxes and other governmental

3 charges, premiums on hazard and liability insurance, and, to the extent provided for by

4 agreement between the association and the unit owner, reasonable attorney’s fees and other legal

5 expenses incurred by the association;

6 (iii) satisfaction of the association’s lien;

7 (iv) satisfaction in the order of priority of any subordinate claim of record;

8 and

9 (v) remittance of any excess to the unit owner.

10 (4) A good faith purchaser for value acquires the unit free of the association’s

11 debt that gave rise to the lien under which the foreclosure sale occurred and any subordinate

12 interest, even though the association or other person conducting the sale failed to comply with

13 the requirements of this section. The person conducting the sale shall execute a conveyance to

14 the purchaser sufficient to convey the unit and stating that it is executed by him after a

15 foreclosure of the association’s lien by power of sale and that he was empowered to make the

16 sale. Signature and title or authority of the person signing the conveyance as grantor and a

17 recital of the facts of non-payment of the assessment and of the giving of the notices required by

18 this subsection are sufficient proof of the facts recited and of his authority to sign. Further proof

19 of authority is not required even though the association is named as grantee in the conveyance.

20 (5) At any time before the association has disposed of a unit in a cooperative or

21 entered into a contract for its disposition under the power of sale, the unit owners or the holder of

22 any subordinate security interest may cure the unit owner’s default and prevent sale or other

23 disposition by tendering the performance due under the security agreement, including any

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1 amounts due because of exercise of a right to accelerate, plus the reasonable expenses of

2 proceeding to foreclosure incurred to the time of tender, including reasonable attorney’s fees of

3 the creditor.]

4 (l) In an action by an association to collect assessments or to foreclose a lien for unpaid

5 assessments, the court may appoint a receiver to collect all sums alleged to be due and owing to

6 a unit owner before commencement or during pendency of the action. The receivership is

7 governed by [insert state law generally applicable to receiverships]. The court may order the

8 receiver to pay any sums held by the receiver to the association during pendency of the action to

9 the extent of the association’s common expense assessments based on a periodic budget adopted

10 by the association pursuant to Section 3-115.

11 (m) The following restrictions apply to any action by the associaton to foreclose its lien

12 under this section:

13 (1) no foreclosure action may be commenced unless the unit owner, at the time

14 the action is commenced, owes a sum equal to at least three (3) months of common expense

15 assessments based on the periodic budget last adopted by the association pursuant to Section 3-

16 115(a); and

17 (2) the executive board expressly votes to commence a foreclosure action

18 against that specific unit.

19 (3) The association shall apply any sums paid by unit owners who are delinquent

20 in paying assessments as follows: (i) first, to unpaid assessments; (ii) then to late charges; (iii)

21 then to attorneys fees and other reasonable collection charges and costs; and (iv) finally, to all

22 other unpaid fees, charges, penalties, interest and late charges.

23 (4) If the only sums due with respect to a unit consist of fines and related sums

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1 levied against that unit, a foreclosure action may not be commenced against that unit unless the

2 association has first secured a judgment against the unit owner with respect to those fines and

3 has perfected a judgment lien against the unit under [insert reference to State statute on

4 perfection of judgment liens].

5 (5) Any sale or other disposition conducted in connection with a foreclosure

6 action under this section shall be commercially reasonable.

7 NEW COMMENT [4/06]89 1. Few issues have been more contentious than the prospect of unit owners losing their

10 homes as a consequence of non payment of common charges – and the loss of all or most of their11 equity – when the association foreclosures. The reaction in state legislatures in recent years has12 been widespread, as evidenced, for example in North Carolina (see 2205 Session Act No. 422);13 other citations. 1415 At the same time, it is crucial that the association be able to secure timely payment of16 common charges in order to provide services to all the residents of the common interest17 community.1819 In an effort to balance these competing interests, the drafting committee proposes20 additional procedures governing foreclosure of liens for unpaid common charges. These new21 procedures may be summarized as follows;2223 First, the Act bars foreclosure for sums that are less than 3 months of common charges;2425 Second, the Act bars any foreclosure for fines alone unless the association first secures a26 personal judgment against the unit owner.2728 Third, the Act requires the association board to expressly approve each foreclosure29 action;3031 Fourth, the Act requires that payments of delinquent assessments be applied first to32 principal rather than interest and fees, in order to avoid accruing additional interest33 charges as the monthly fees remain unsatisfied while the attorneys fees and interest are34 paid first.3536 Finally, we require that if a foreclosure does go forward, any sale of a unit must be37 commercially reasonable.3839 These special procedures would comprise an overlay on existing state foreclosure

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1 procedures, whether judicial or non-judicial. Taken together, the drafting committee believes2 they respond in a concise but responsible way to the widespread reporting of abuses in this field. 3 Hopefully, they will also be viewed by the various States as a responsible and balanced response4 to the issues confronting our elected officials.56 2. At the same time, the committee was sensitive to the legitimate concerns of7 association representatives who participated in the committee’s dliberations. It is clearly8 imperative that the association be able to collect the common charges from recalcitrant unit9 owners in a timely way. To address those concerns, the committee proposes two amendments:

1011 First, it proposes to add the cost of the association’s attorneys fees and court costs to the12 total value of the association’s existing ‘super lien’ – currently, 6 months of regular common13 assessments. This amendment is identical to the amendment adopted by Connecticut in 1991.14 See C.G.S. 47-258(b). The increased amount of the association’s lien has been approved by15 Fannie Mae and local lenders and has become a significant tool in the successful collection16 efforts enjoyed by associations in Connecticut. 1718 Second, the committee adds a clarifying amendment to subsection (f) to emphasize that19 the association has a variety of other remedies available against a unit owner in addition to the20 foreclosure remedy. In many cases, the committee believes, an action for sums due will be less21 costly,less disruptive and more efficient than a foreclosure action.2223 3. The Floor may appreciate that the Drafting Committee has considered a variety of24 alternative approaches to this issue and has rejected them in favor of the less expansive25 alternative texts described here. For example, the committee first considered the extensive26 provisions adopted by North Carolina’s approach to fines enforcement and collection, as27 reflected in legislation adopted there in September, 2005. These provisions amend the North28 Carolina Planned Community Act and the North Carolina Condominium Act. Taken together,29 the appropriate excerpts from the North Carolina statutes read as follows:3031 § 3-102. Powers of owners’ association.3233 Unless the articles of incorporation or the declaration expressly provides to34 the contrary, the association may:35 …3637 (11) Impose reasonable charges for late payment of assessments, not to38 exceed the greater of twenty dollars ($20.00) per month or ten percent (10%)39 of any assessment installment unpaid and, after notice and an opportunity to40 be heard, suspend privileges or services provided by the association (except41 rights of access to lots) during any period that assessments or other amounts42 due and owing to the association remain unpaid for a period of 30 days or43 longer;44 ….”45

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1 § 3-107.1. Procedures for fines and suspension of planned community2 privileges or services.34 Unless a specific procedure for the imposition of fines or suspension5 of planned community privileges or services is provided for in the declaration,6 a hearing shall be held before the executive board or an adjudicatory panel7 appointed by the executive board to determine if any lot owner should be8 fined or if planned community privileges or services should be suspended9 pursuant to the powers granted to the association in G.S. 47F-3-102(11) and

10 (12). Any adjudicatory panel appointed by the executive board shall be11 composed of members of the association who are not officers of the12 association or members of the executive board. The lot owner charged shall13 be given notice of the charge, opportunity to be heard and to present evidence,14 and notice of the decision. If it is decided that a fine should be imposed, a fine15 not to exceed one hundred fifty dollars ($150.00) ($100.00) may be imposed16 for the violation and without further hearing, for each day more than five days17 after the decision that the violation occurs. Such fines shall be shall be18 assessments secured by liens under Section 3-116. If it is decided that a19 suspension of planned community privileges or services should be imposed,20 the suspension may be continued without further hearing until the violation or21 delinquency is cured. The lot owner may appeal the decision of an22 adjudicatory panel to the full executive board by delivering written notice of23 appeal to the executive board within 15 days after the date of the decision.24 The executive board may affirm, vacate, or modify the prior decision of the25 adjudicatory body.”2627 “§ 3-116. Lien for assessments.2829 (a) Any assessment levied against a lot remaining unpaid for a30 period of 30 days or longer shall constitute a lien on that lot when a claim31 of lien is filed of record in the office of the clerk of superior court of the32 county in which the lot is located in the manner provided herein. Unless33 the declaration otherwise provides, fees, charges, late charges, and other34 charges imposed pursuant to G.S. 47F-3-102, 47F-3-107, 47F-3-107.1,35 and 47F-3-115 are enforceable as assessments under this section. The36 Except as provided in subsections (a1) and (a2) of this section, the37 association may foreclose the claim of lien in like manner as a mortgage38 on real estate under power of sale under Article 2A of Chapter 45 of the39 General Statutes.4041 (a1) An association may not foreclose an association assessment42 lien under Article 2A of Chapter 45 of the General Statutes [that is, non-43 judicial foreclosure] if the debt securing the lien consists solely of fines44 imposed by the association, interest on unpaid fines, or attorneys’ fees45 incurred by the association solely associated with fines imposed by the

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1 association. The association, however, may enforce the lien by judicial2 foreclosure as provided in Article 29A of Chapter 1 of the General3 Statutes. 45 (a2) An association shall not levy, charge, or attempt to collect a6 service, collection, consulting, or administration fee from any lot owner7 unless the fee is expressly allowed in the declaration. Any lien securing a8 debt consisting solely of these fees may only be enforced by judicial9 foreclosure as provided in Article 29A of Chapter 1 of the General

10 Statutes.1112 ****13 (e) A judgment, decree, or order in any action brought under this14 section shall include costs and reasonable attorneys’ fees for the15 prevailing party. If the lot owner does not contest the collection of debt16 and enforcement of a lien after the expiration of the 15-day period17 following notice as required in subsection (e1) of this section, then18 reasonable attorneys’ fees shall not exceed one thousand two hundred19 dollars ($1,200), not including costs or expenses incurred. The collection20 of debt and enforcement of a lien remain uncontested as long as the lot21 owner does not dispute, contest, or raise any objection, defense, offset, or22 counterclaim as to the amount or validity of the debt and lien asserted or23 the association’s right to collect the debt and enforce the lien as provided24 in this section. The attorneys’ fee limitation in this subsection shall not25 apply to judicial foreclosures or to proceedings authorized under26 subsection (d) of this section or G.S. 47F-3-120.2728 (e1) A lot owner may not be required to pay attorneys’ fees and29 court costs until the lot owner is notified in writing of the association’s30 intent to seek payment of attorneys’ fees and court costs. The notice must31 be sent by first-class mail to the property address and, if different, to the32 mailing address for the lot owner in the association’s records. The notice33 shall set out the outstanding balance due as of the date of the notice and34 state that the lot owner has 15 days from the mailing of the notice by35 first-class mail to pay the outstanding balance without the attorneys’ fees36 and court costs. If the lot owner pays the outstanding balance within this37 period, then the lot owner shall have no obligation to pay attorneys’ fees38 and court costs. The notice shall also inform the lot owner of the39 opportunity to contact a representative of the association to discuss a40 payment schedule for the outstanding balance as provided in subsection41 (e2) of this section and shall provide the name and telephone number of42 the representative.4344 (e2) The association, acting through its executive board and in the45 board’s sole discretion, may agree to allow payment of an outstanding

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1 balance in installments. Neither the association nor the lot owner is2 obligated to offer or accept any proposed installment schedule.3 Reasonable administrative fees and costs for accepting and processing4 installments may be added to the outstanding balance and included in an5 installment payment schedule. Reasonable attorneys’ fees may be added to6 the outstanding balance and included in an installment schedule only after7 the lot owner has been given notice as required in subsection (e1) of this8 section.9

10 ****1112 Uniform Non-Judicial Foreclosure Act Approach. The Committee has also13 considered the possibility of tracking the extensive borrower protections contained in Uniform14 Non-Judicial Foreclosure Act. That act contains provisions dealing with:1516 1. Default Notice [tracking UNJFA sec. 202]1718 2. Notice Of Foreclosure: Manner Of Giving. [Tracking UNJFA Sec. 203]1920 3. Notice Of Foreclosure: Content.[Tracking UNJFA Sec. 204] 2122 4. Meeting To Object To Foreclosure.[Tracking UNJFA Sec. 206]2324 5. Period Of Limitation For Foreclosure. [tracking UNJFA sec. 207]2526 6. Judicial Supervision Of Foreclosure. [tracking UNJFA sec. 208] 2728 7. Redemption [tracking UNJFA sec. 209] 2930 [In the only reported case of foreclosure arising under an adoption of UCIOA, the cases31 required that the sale be reasonable. See Will v. Mill Condominium Owners Association et al,32 176 VT 380, 848 A2d 336 [2004].3334 Such an outcome is consistent with cases arising under Article 9 in the Bankruptcy courts35 where the sales price is not determined to constitute ‘reasonably equivalent value” – see Madrid36 and others. [get citations] 373839 SECTION 3-117. OTHER LIENS.

40 (a) In a condominium or planned community:

41 (1) Except as provided in paragraph (2), a judgment for money against the

42 association [if recorded] [if docketed] [if [insert other procedures required under state law to

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1 perfect a lien on real estate as a result of a judgment] ], is not a lien on the common elements, but

2 is a lien in favor of the judgment lien holder against (i) all of the other real property of the

3 association; and (ii) all of the units in the common interest community at the time the judgment

4 was entered. No other property of a unit owner is subject to the claims of creditors of the

5 association.

6 (2) If the association has granted a security interest in the common elements to a

7 creditor of the association pursuant to Section 3-112, the holder of that security interest shall

8 exercise its right against the common elements before its judgment lien on any unit may be

9 enforced.

10 (3) Whether perfected before or after the creation of the common interest

11 community, if a lien, other than a deed of trust or mortgage (including a judgment lien or lien

12 attributable to work performed or materials supplied before creation of the common interest

13 community), becomes effective against two or more units, the unit owner of an affected unit may

14 pay to the lien holder the amount of the lien attributable to his unit, and the lien holder, upon

15 receipt of payment, promptly shall deliver a release of the lien covering that unit. The amount of

16 the payment must be proportionate to the ratio which that unit owner’s common expense liability

17 bears to the common expense liabilities of all unit owners whose units are subject to the lien.

18 After payment, the association may not assess or have a lien against that unit owner’s unit for

19 any portion of the common expenses incurred in connection with that lien.

20 (4) A judgment against the association must be indexed in the name of the

21 common interest community and the association and, when so indexed, is notice of the lien

22 against the units.

23 (b) In a cooperative:

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1 (1) If the association receives notice of an impending foreclosure on all or any

2 portion of the association’s real estate, the association shall promptly transmit a copy of that

3 notice to each unit owner of a unit located within the real estate to be foreclosed. Failure of the

4 association to transmit the notice does not affect the validity of the foreclosure.

5 (2) Whether or not a unit owner’s unit is subject to the claims of the association’s

6 creditors, no other property of a unit owner is subject to those claims.

7 SECTION 3-118. ASSOCIATION RECORDS. The association shall keep financial

8 records sufficiently detailed to enable the association to comply with Section -109. All financial

9 and other records must be made reasonably available for examination by any unit owner and his

10 authorized agents.

11 (a) [Maintenance of Records] [Adapted from the Revised Model Non-Profit Corporation

12 Act]

13 The association shall maintain the following records in written form or in another form

14 capable of conversion into written form within a reasonable time:

15 1. Detailed records of receipts and expenditures affecting the operation and

16 administration of the association and other appropriate accounting records. All financial books

17 and records shall be kept in accordance with generally accepted accounting practices.

18 2. Minutes of all meetings of its members and executive board, a record of all

19 actions taken by the members or executive board without a meeting, and a record of all actions

20 taken by a committee of the executive board in place of the board or directors on behalf of the

21 association.

22 3. A record of its members in a form that permits preparation of a list of the

23 names and addresses of all members, in alphabetical order by class, showing the number of votes

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1 each member is entitled to cast and the members’ class of membership, if any; and

2 4. In addition, the association shall keep a copy of the following records at its

3 principal office: (1) Its original or restated certificate of incorporation and bylaws and all

4 amendments to them currently in effect; (2) the minutes of all members’ meetings and records of

5 all action taken by members without a meeting for the past three years; (3) any financial

6 statements and tax returns of the association prepared for the past three years; (4) a list of the

7 names and business addresses of its current directors and officers; (5) its most recent annual

8 report delivered to the Secretary of the State; and (6) financial and other records sufficiently

9 detailed to enable the association to comply with Section 4-109.

10 (b) Subject to the provisions of subsection (c), all books and records kept by the

11 association, including the association’s membership list and address, and aggregate salary

12 information of employees of the association, shall be available for examination and copying by a

13 unit owner or his authorized agent so long as the request is made in good faith and for a proper

14 purpose related to the owner’s membership in the association. This right of examination may be

15 exercised (i) only during reasonable business hours or at a mutually convenient time and

16 location, and (ii) upon [5] days’ written notice reasonably identifying the purpose for the request

17 and the specific books and records of the association requested.

18 (c) Books and records kept by an association may be withheld from inspection and

19 copying to the extent that they concern:

20 1. Personnel matters relating to specific persons or a person’s medical records;

21 2. Contracts, leases, and other commercial transactions to purchase or provide

22 goods or services, currently in or under negotiation;

23 3. Pending or threatened litigation;

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1 4. Matters involving state or local administrative or other formal proceedings

2 before a government tribunal for enforcement of the declaration, bylaws or rules;

3 5. Communications with legal counsel which are otherwise protected by the

4 attorney-client privilege or the attorney work product doctrine;

5 6. Disclosure of information in violation of law;

6 7. Meeting minutes or other confidential records of an executive session of the

7 executive board; or

8 8. Individual unit owner files other than those of the requesting owner.

9 (d) An attorney’s files and records relating to the association are not records of the

10 association and are not subject to inspection by owners or production in a legal proceeding for

11 examination by owners.

12 (e) The association may charge a fee for providing copies of any books and records under

13 this section but that fee may not exceed the actual cost of the materials and labor incurred by the

14 association.

15 (f) The right to copy records under this section includes the right to receive copies by

16 xerographic or other means, including copies through an electronic transmission if available and

17 so requested by the unit owner.


19 1. There are two significant policy issues connected with the association’s records: first,20 what records to maintain, and second, who has access to those records.2122 Section 3-118 of UCIOA [1994] deals with these matters in a minimalist23 way. Regarding record maintenance, the first sentence of 3-118 requires only that24 the association maintain those records needed to comply with Section 4-19 – that25 is , the obligation to provide a resale certificate. This minimum requirement is far26 less expansive than the provisions of, for example, the mandates of even the27 Revised Model Non-Profit Corporation Act promulgated and last amended by the

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1 American Bar Association in ____; it plainly does not address the significant2 issues of records maintenance that have arisen since UCIOA was first3 promulgated 25 years ago.45 Section 3-118 is similarly superficial on issues of records access; here, it6 mandates that ‘all’ records of the association be ‘reasonably available for7 examination by any unit owner or his authorized agent’ – leaving questions as to8 whether the word reasonable” modified ‘all …records’ as well as “available”, and 9 leaving unanswered the large range of issues that courts and legislatures have

10 struggled with in this field over the last quarter century.1112 2. The Committee recommends that the Conference replace the ‘minimalist’ provisions13 of UCIOA Section 3-118 with provisions generally consistent with the cognate provisions of the14 Revised Model Nonprofit Corporation Act, supplemented by specific provisions from other15 more modern State enactments and proposals in the homes association field. 1617 In this latter regard, the drafting committee specifically recommends that UCIOA : (i)18 authorize a unit owner to have access to a mailing list of unit owners, although the association19 may retain the right to mail materials to unit owners at their last known addresses, in order to20 maintain the unit owners’ privacy; and (ii) insure that minutes of all meetings must be kept.2122 3. The Committee identified several possible drafting policies in both areas. This draft23 incorporate the Committee’s collective judgment regarding a balanced approach to both issues.242526 SECTION 3-119. ASSOCIATION AS TRUSTEE. With respect to a third person

27 dealing with the association in the association’s capacity as a trustee, the existence of trust

28 powers and their proper exercise by the association may be assumed without inquiry. A third

29 person is not bound to inquire whether the association has power to act as trustee or is properly

30 exercising trust powers. A third person, without actual knowledge that the association is

31 exceeding or improperly exercising its powers, is fully protected in dealing with the association

32 as if it possessed and properly exercised the powers it purports to exercise. A third person is not

33 bound to assure the proper application of trust assets paid or delivered to the association in its

34 capacity as trustee.

35

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1 [NEW] SECTION 3-120. RULES.

2 (a) Before adopting or substantially amending any rule, the executive board must notify

3 all unit owners of (i) its intention to adopt the proposed rule and (ii) a date on which the

4 executive board will convene a meeting to receive comments on them from the unit owners.

5 (b) If the right is reserved in the declaration pursuant to Section 3-102 (a) (16), the

6 association may adopt rules to establish and enforce construction and design criteria and

7 aesthetic standards. If it does so, the association must also adopt procedures for enforcement of

8 those standards and for approval of applications, including a reasonable time within which the

9 association must act after an application is submitted The association’s power under this section

10 is subject to any reserved special declarant right to control any construction or design review

11 process during the period of declarant control.

12 Draft Comment

13 It is increasingly common throughout the United States for associations to assume the14 power to establish and enforce design criteria and control the exterior appearance of units,15 whether those units are in high rise condominiums, townhouses or single family homes on large16 lots. It is often asserted that the power of the association to maintain a uniformly attractive and17 consistent appearance throughout a community adds considerably to the value and desirability of18 many of these communities.1920 At the same time, anecdotal evidence suggests that many of the decisions made during21 the design approval process have been controversial and, in some instances, subject to abuse by22 those charged with enforcing the design criteria.2324 The original UCIOA was silent on this subject, relegating it simply to the general25 reserved powers of the association. However, because of the importance of the subject, the26 Drafting Committee suggests significant amendments to the design approval process. These27 changes are intended to confirm the ability of the association to adopt such a process, but subject28 to significant constraints intended to protect the interests of individual unit owners. 2930 Accordingly, this section first makes clear in subsection (b) that the ability of the31 association to regulate the design process must be affirmatively reserved in the declaration.3233 Second, the section requires that the rules of the design committee must be formally

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1 promulgated by the executive board, including a procedure for prompt consideration of an2 application. The drafting committee intends that if the design committee or other group charged3 with enforcement of the criteria fails to act on an application within the time frame stated, then4 the effect of that failure is that the application will be deemed approved. At the same time, the5 Committee expects that the parties to an application pending before a design committee may6 choose to formally agree to extend the time within which the committee is otherwise required to7 act, and nothing in this Act is intended to affect the parties’ ability to do so.89

10 (c) No rule may prohibit display of the flag of the United States or this State or

11 supporting candidates for public office signs, but if the declaration pursuant to Section 2-

12 105(a)(16) so permits, the association may adopt rules governing the size, location, illumination

13 and duration of the display of those flags and signs.

14 (d) [Previously §3-102(c)] Unless otherwise permitted by the declaration or this [act], an

15 association may only adopt rules that affect the use of or behavior in units that may be used for

16 residential purposes only to:

17 (1) prevent any use of a unit which violates the declaration;

18 (2) regulate any behavior in or occupancy of a unit which violates the declaration

19 or adversely affects the use and enjoyment of other units or the common elements by other unit

20 owners; or

21 (3) restrict the leasing of residential units to the extent those rules are reasonably

22 designed to meet underwriting requirements of institutional lenders who regularly lend money

23 secured by first mortgages on units in common interest communities or regularly purchase those

24 mortgages.

25 (e) All rules adopted by the association must be reasonable.

26 [NEW] SECTION 3-121. LITIGATION INVOLVING THE DECLARANT.

27 (a) Notwithstanding the association’s authority under Section 3-102 (a)(3) to commence

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1 and pursue litigation involving the common interest community:

2 (1) [mandated notice] Before the association commences litigation, arbitration or

3 any administrative proceedings against a declarant or any person employed by a declarant

4 involving any alleged construction defect with respect to the common interest community, the

5 association shall provide written notice of its claims to the declarant and those persons whom the

6 association seeks to hold responsible for the claimed defects (the “responsible persons”). [form

7 of notice] The text of the notice may be in any form reasonably calculated to put the responsible

8 persons on notice of the general nature of the association’s claims including, without limitation,

9 a list of the claimed defects. [method of service] The notice may be delivered by any method of

10 service and may be addressed to any person provided that the method of service and the person

11 who is actually served either:(i) provides actual notice to the responsible persons named in the

12 claim; or (ii) the method of service used would be sufficient under local law to confer personal

13 jurisdiction over the responsible person in connection with commencement of a lawsuit by the

14 association against that person.

15 (2) [Delay in commencement of Litigation; Tolling of Statute] The association

16 may not commence litigation, arbitration or any administrative proceedings against a responsible

17 person for a period of [ ] days after the association sends notice of its claim to that responsible

18 person.

19 (3) [Presentation of Proposed Repair Plans] During the [ ] day period, the

20 declarant and any other responsible person may present to the association a plan to repair or

21 otherwise remedy the construction defects described in the notice. If the association does not

22 receive a timely remediation plan from each responsible person to whom it directed notice, the

23 association shall be entitled to commence any proceedings against that responsible person as the

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1 board determines to be appropriate.

2 (4) If the Association does receive one or more timely plans to repair or otherwise

3 remedy the construction defects described in the notice, then the Association board shall

4 promptly consider those plans and then notify the responsible persons of whether or not each

5 such plan is acceptable as presented, acceptable with stated conditions, or not accepted.

6 (5) If the association accepts a repair plan from a responsible person, or if a

7 responsible person agrees to stated conditions to an otherwise acceptable plan, then the parties

8 shall agree on a timeframe for implementation of that plan, and the association shall not

9 commence litigation, arbitration or any administrative proceedings against that responsible

10 person during the time that the plan is being diligently implemented.

11 (6) [Consequences of No Agreement] If a responsible person submits a timely

12 repair plan but the association and the responsible party have not agreed in writing to the terms

13 of the plan or its implementation, then [ Alt. 1 - the association is entitled to commence litigation

14 etc. ] or [Alt. 2 – either party is entitled to binding arbitration.]

15 (7) [Tolling of Limitation Period] Except as provided in Section 4-116(d) with

16 respect to warranty claims, any statute of limitation affecting the association’s right of action

17 against a declarant or other responsible person under this [act] is tolled during the [ ] day

18 period described in (2) and during any extension of that time because the responsible person has

19 commenced and is diligently pursuing the remediation plan. [taken from UCIOA sec. 3-111(c).

20 (8) [Other Suits] After the time described in subsection (a)(3) expires, Whether

21 or not the association agrees to any repair plan, nothing in this section or otherwise bars to the

22 commencement of litigation by:

23 (a) the association against a responsible person who fails to submit a

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1 timely repair plan or whose plan is not acceptable or who fails to diligently pursue

2 implementation of that plan; or

3 (b) A unit owner with respect to his unit and any limited common

4 elements assigned to that unit, regardless of any actions of the association.

5 (9) [Emergency Repairs] Nothing in this section precludes the association from

6 making emergency repairs to correct any defect that poses a significant and immediate health or

7 safety risk.

8 (10) [No Unit Owner Vote] Subject to the other provisions of this section and the

9 declaration, the determination of whether and when the association may commence any

10 proceedings may be made by the executive board and nothing in this section requires a vote by

11 any number or percentage of unit owners a pre-condition to litigation.

12 Reporter’s Notes1314 1. This policy and much of the proposed text is taken from the CAI proposal dated Oct.15 31, 2003.1617 2. This text was drafted without reference to other statutory text that may have been18 adopted in this or similar contexts in other states.1920 3. This text does not address: 2122 (a) issues arising under the warranty provisions of UCIOA; see Sec. 4-11323 through 4-116;2425 (b) litigation against the declarant under other theories;2627 (c) express prohibitions limiting the right of the association to sue the declarant28 [except to the extent addressed now in UCIOA – see 3-102(a): 2930 The declaration may not impose limitations on the power of the association to deal with31 the declarant which are more restrictive than the limitations imposed on the power of the32 association to deal with other persons.”3334 In theory, this section might allow the declaration to prohibit commencement of any suit

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1 by the board in the absence of a unit owner vote. But there is a proposed amendment to 3-102(a)2 on this subject.34 [4/06] There are other questions here:56 1. Benefield – suppose the builder just does not build what he promised, what does that7 do under this section?89 2. Exclusion of warranties – diamond says bracket the text excluding warranties until we

10 get there.1112 3. Nora – we need to add “failure to build”1314 4. “Cure text of the Uniform Commercial code – we can look at that….1516 5. Mielke – on109, lines 25-27 – add the home builder “responsible person” [?]171819 [NEW] SECTION 3-122. NOTICE.

20 (a) When this [act] or the declaration or bylaws requires that any notice be given to unit

21 owners, then, notwithstanding any specific form of notice required by this [act] or those

22 documents, that notice may be: (i) hand-delivered to each unit owner; (ii) sent prepaid by United

23 States mail to the mailing address of each unit or to any other mailing address designated in

24 writing by that owner; or (iii) sent by electronic means in the manner described in sub-section

25 (b).

26 (b) An association provides effective notice of a meeting or effectively delivers

27 information to a unit owner by electronic means if: (i) The unit owner gives the association prior

28 written authorization to provide that notice, together with an electronic address; and (ii) An

29 officer or agent of the association certifies in writing that the association has provided the notice

30 as authorized by the unit owner.

31 (c) Notice or delivery by electronic means is ineffective if: (i) the association is unable

32 to deliver two consecutive electronic notices; and (ii) the inability to deliver the electronic

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1 transmission becomes known to the person responsible for sending that transmission of if the

2 unit owner has designated a mailing address to which written notice must be sent;

3 (d) The inadvertent failure to deliver notice by electronic means does not invalidate any

4 meeting or other action.

5 Reporter Comments67 1. The alternatives listed in sub-section (a) include all the forms of notice currently8 authorized in UCIOA section 3-108, which requires that unit owners be given notice of9 meetings. The new additional forms of notice are electronic transmissions and posting on

10 bulletin boards, both as discussed in Phoenix.1112 2. This text on electronic transmissions is taken from a 2004 Maryland statute, § 11B-13 113.1. Additional editing of this text is plainly required, but the text highlights some of the14 issues raised by such a form of notice.1516 3. As suggested in Phoenix, I have superficially searched for other uniform act17 provisions on electronic notice and have failed to locate any appropriate text. I plan to make18 further inquiry.1920 4. My Phoenix notes indicate these further discussion points [none of which are reflected21 in this draft]:2223 a. CAI/Ms. Foley-Healy- we ought not to assume that drafters will get the notice24 text right in their documents – specific statutory guidance would be helpful.2526 b. The Chair – It may be that the statute just has to require the bylaws to specify27 how the notice is to be given; and state that the notice must be reasonably calculated to give the28 unit owner notice of the time date and location of the meeting and the subject matter.2930 c. Ms. Stubblefield – Perhaps a solution would be to define “notice” and then31 simply require that notice be given. It may not be our task to say how notice is to be given or that32 is has to be given. We might also state that unit owners should get the same meeting notice to33 which the executive board is entitled.3435 d. Mr. Diamond – offered to send me paragraph 11.5 [of some document]36 addressing “new technology”.3738 e. Finally, we suggested that the comment might state that the Act doesn’t39 designate how or when to give notice. [Note that this is a departure from the current Act].4041 f. Other thoughts:

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1 1. Is this section intended to enable email, or do we intend that email can2 be used even if the declaration requires hand delivery or US mail?34 2. Intent = [said someone] – if the documents require notice to be given by5 other than hand or US mail, [life, eg , fed ex or certified mail] then you have to give it that way.678 [NEW] SECTION 3-123. RECALL OF OFFICERS AND DIRECTORS [formerly

9 section 3-103 (g)]. The unit owners, by a two-thirds vote of all persons present and entitled to

10 vote at any meeting of the unit owners at which a quorum is present, may remove any member of

11 the executive board with or without cause, except that: (i) a member appointed by the declarant

12 may not be removed by a unit owner vote during the period of declarant control, and (ii) a person

13 appointed under subsection (h) may only be removed by the person that appointed that member.

14 Reporter’s Note1516 This alternative Draft for the Committee’s consideration seeks to incorporate the ideas17 expressed in the Comments.181920 (a) The unit owners may consider the question of whether to remove a member of the

21 executive board either (1) at any meeting of the unit owners at which a quorum is present if that

22 subject was listed in the notice of the meeting, or (2) at a special meeting called for the purpose

23 of removing a member of the executive board, whether or not a quorum is present, so long as the

24 voting at the special meeting is conducted in the manner described in sub-section (x).

25 (b) At any meeting at which a vote to remove a member of the executive board is to be

26 taken, the executive board shall provide a reasonable opportunity to speak before the vote to all

27 persons favoring and opposing removal of that member, including without limitation the member

28 being considered for removal.

29 (c) If a special meeting is called for the purpose of removing a member of the executive

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1 board, then the following rules apply, whether or not a quorum is present at that meeting in

2 person or by proxy:

3 1. After all persons present at the meeting have been given a reasonable

4 opportunity to speak, the meeting shall be recessed for a period calculated in the manner

5 described in sub-section 2.

6 2. Promptly following the recess, the association shall notify all unit owners of

7 the recessed meeting and inform the unit owners of their opportunity to cast votes either in favor

8 or against removal during the [ ] day period following the day that the notice is sent.

9 3. The notice sent to unit owners shall specifically inform them of their right to

10 cast votes either: in a secret written ballot, on a form provided to the unit owners; or by

11 electronic means. [The Reporter needs assistance in describing this procedure.][We undoubtedly

12 require additional provisions].

13 (d) Notwithstanding sub-section (a), a member of the executive board appointed by the

14 declarant may not be removed by a unit owner vote during the period of declarant control, and a

15 member of the executive board appointed under subsection (g) of Section 3-102 may only be

16 removed by the person that appointed that member.


18 1. In early discussions, two particular concerns were: (1) how practical is it in most cases19 to require a quorumed meeting for a recall, and (2) how could one ever consider recall in a large20 association? 2122 2. The consensus seemed to be that this is a real world problem. 2324 3. These additional views were expressed:2526 a. Ms. Foley-Healy [CAI] – there is a number somewhere between the statute’s27 current requirement of 2/3 of those present at a quorumed meeting, and whoever shows up at a28 meeting, whether or not there is a quorum present, that is the appropriate number.

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1 b. Don Mielke - We definitely need a clearer procedure23 c. The Chair - UCIOA has already dealt with this – see 3-102(g).45 4. My notes then suggest that I “pull some of these things out”:67 a. Change 2/3s to something else – perhaps a majority of those who vote at a8 meeting.9

10 b. Can we use proxies in a removal fight. [Why not?]1112 c. Should the vote be on removal of x and y as directors AND election of their13 successors?1415 d. Owen Anderson – Responding to # 3, he asserted that the model should be16 judicial retention – that is, the new election is a separate decision from removal of the17 incumbent.1819 e. Make certain that the removal section does not apply to removal of appointed20 directors2122 f. There ought to be an opportunity to talk [at the removal meeting – or perhaps23 at every meeting] and then include some procedures for extended voting and for electronic24 voting or extended voting or whatever.2526 g. The vote on the removal ought not to take place until after that point in time27 when the talk takes place.2829 h. The act should require the association to have a meeting and then allow30 balloting by mail – instead of simply a vote at that time.3132 i. Marion Benfield – I would not require quorums but I would make it easy to33 vote – ok to be done by ballot and no quorum needed.3435 j. Elections should also be easy.363738 [NEW] SECTION 3-124. ADOPTION OF BUDGETS. [Previously Section 3-103

39 (c), amended as shown]

40 (a) The executive board shall, at least annually, prepare a proposed budget for the

41 common interest community for consideration by the unit owners. Within [30] days after

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1 adoption of any proposed budget, the executive board shall provide a summary of the budget,

2 including any reserves, to all the unit owners, and shall set a date for a meeting of the unit

3 owners to consider ratification of the budget not less than 14 nor more than 30 days after mailing

4 of the summary. Unless at that meeting a majority of all unit owners or any larger vote specified

5 in the declaration reject the budget, the budget is ratified, whether or not a quorum is present. In

6 the event If the a proposed periodic budget is rejected, the periodic budget last ratified by the

7 unit owners must be continued until such time as the unit owners ratify a subsequent budget

8 proposed by the executive board.

9 (b) In addition to adoption of its regular periodic budget, the executive board may at any

10 time propose a budget which would require a special assessment against all the units. If the

11 executive board determines by unanimous vote that the special assessment is necessary in order

12 to respond to an emergency, then: (i) the special assessment shall become effective immediately

13 in accordance with the terms of the vote; (ii) notice of the emergency assessment shall be

14 promptly provided to all unit owners; and (iii) the executive board shall spend the funds paid on

15 account of the emergency assessment solely for the purposes described in the vote. Otherwise,

16 as a condition to the adoption of a budget funded through a special assessment, the executive

17 board shall follow the procedures for adoption of a periodic budget described in subsection (a).


19 1. The Drafting Committee has discussed the subjects of Special Assessments, Transfer20 Fees and so-called “Capital Investment” fees and Seller conveyance taxes due to the association. 21 Various committee members and advisors expressed opinions and offered comments. Some of22 them were these:2324 a. Whether UCIOA ought to address the issue of special assessments at all. Note25 that at least Virginia [Sec. 55-514] does address this subject.2627 b. Some documents have provisions on these matter; some require a selling unit

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1 owner to make a contribution to a 501(c) (3) tax exempt organization at the time of sale; others2 apparently, require a 3% or 5% ‘kicker’ paid at the time of sale to the declarant.34 c. One advisor notes that California prohibits a payment of ‘transfer fees’ but that5 she drafts a mandated transfer fee into her clients’ documents at times for ‘good purposes’ –6 such as common area reserves or improvements.78 d. Another advisor also discussed Separate Assessments, Fines and Other9 Charges. He gave examples of insurance deductibles, user fees, charges for trimming the hedge

10 when owner failed to do it, amenity charges. 1112 e. We also considered situations where there are tiered assessments [such as a13 master association?]1415 At a minimum, the subject ought to be addressed in Sec. 4-103(a)(7) – POS disclosures16 [if there are to be no restrictions] or in a separately drafted section if the Committee intends any17 fee restrictions. An amendment has been proposed there.1819 Otherwise, at present there is nothing in UCIOA that is intended to limit the imposition20 of such fees. It is not clear that we can usefully deal with the subject of transfer fees and capital21 investment fees, except as a matter of disclosure.

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1 [ARTICLE] 4

2 PROTECTION OF PURCHASERS

3

4 SECTION 4-101. APPLICABILITY; WAIVER.

5 (a) This [article] applies to all units subject to this [act], except as provided in subsection

6 (b) or as modified or waived by agreement of purchasers of units in a common interest

7 community in which all units are restricted to non-residential use.

8 (b) Neither a public offering statement nor a resale certificate need be prepared or

9 delivered in the case of:

10 (1) a gratuitous disposition of a unit;

11 (2) a disposition pursuant to court order;

12 (3) a disposition by a government or governmental agency;

13 (4) a disposition by foreclosure or deed in lieu of foreclosure;

14 (5) a disposition to a dealer;

15 (6) a disposition that may be canceled at any time and for any reason by the

16 purchase without penalty; or

17 (7) a disposition of a unit restricted to nonresidential purposes.

18 COMMISSIONER’S COMMENT1920 7. Section 4-101(b) Applicability – add a disposition by operation of law due to the21 death of the owner. “D. Behr – Alaska”222324 SECTION 4-102. LIABILITY FOR PUBLIC OFFERING STATEMENT

25 REQUIREMENTS.

26 (a) Except as provided in subsection (b), a declarant, before offering any interest in a

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1 unit to the public, shall prepare a public offering statement conforming to the requirements of

2 Sections 4-103, 4-104, 4-105, and 4-106.

3 (b) A declarant may transfer responsibility for preparation of all or a part of the public

4 offering statement to a successor declarant (Section 3-104) or to a dealer who intends to offer

5 units in the common interest community. In the event of any such transfer, the transferor shall

6 provide the transferee with any information necessary to enable the transferee to fulfill the

7 requirements of subsection (a).

8 (c) Any declarant or dealer who offers a unit to a purchaser shall deliver a public

9 offering statement in the manner prescribed in subsection 4-108(a). The person who prepared all

10 or a part of the public offering statement is liable under Sections 4-108 and [,] 4-117 [, 5-105,

11 and 5-106] for any false or misleading statement set forth therein or for any omission of a

12 material fact therefrom with respect to that portion of the public offering statement which he

13 prepared. If a declarant did not prepare any part of a public offering statement that he delivers,

14 he is not liable for any false or misleading statement set forth therein or for any omission of a

15 material fact therefrom unless he had actual knowledge of the statement or omission or, in the

16 exercise of reasonable care, should have known of the statement or omission.

17 (d) If a unit is part of a common interest community and is part of any other real estate

18 regime in connection with the sale of which the delivery of a public offering statement is

19 required under the laws of this State, a single public offering statement conforming to the

20 requirements of Sections 4-103, 4-104, 4-105, and 4-106 as those requirements relate to each

21 regime in which the unit is located, and to any other requirements imposed under the laws of this

22 State, may be prepared and delivered in lieu of providing two or more public offering statements.

23

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1 SECTION 4-103. PUBLIC OFFERING STATEMENT; GENERAL PROVISIONS.

2 (a) Except as provided in subsection (b), a public offering statement must contain or

3 fully and accurately disclose:

4 (1) the name and principal address of the declarant and of the common interest

5 community, and a statement that the common interest community is either a condominium,

6 cooperative, or planned community;

7 (2) a general description of the common interest community, including to the

8 extent possible, the types, number, and declarant’s schedule of commencement and completion

9 of construction of buildings, and amenities that the declarant anticipates including in the

10 common interest community;

11 (3) the number of units in the common interest community;

12 (4) copies and a brief narrative description of the significant features of the

13 declaration, other than any plats and plans, and any other recorded covenants, conditions,

14 restrictions, and reservations affecting the common interest community; the bylaws, and any

15 rules or regulations of the association; copies of any contracts and leases to be signed by

16 purchasers at closing, and a brief narrative description of any contracts or leases that will or may

17 be subject to cancellation by the association under Section 3-105;

18 (5) any current balance sheet and a projected budget for the association, either

19 within or as an exhibit to the public offering statement, for [one] year after the date of the first

20 conveyance to a purchaser, and thereafter the current budget of the association, a statement of

21 who prepared the budget, and a statement of the budget’s assumptions concerning occupancy

22 and inflation factors. The budget must include, without limitation:

23 (i) a statement of the amount, or a statement that there is no amount,

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1 included in the budget as a reserve for repairs and replacement;

2 (ii) a statement of any other reserves;

3 (iii) the projected common expense assessment by category of

4 expenditures for the association; and

5 (iv) the projected monthly common expense assessment for each type of

6 unit;

7 (6) any services not reflected in the budget that the declarant provides, or

8 expenses that he pays and which he expects may become at any subsequent time a common

9 expense of the association and the projected common expense assessment attributable to each of

10 those services or expenses for the association and for each type of unit;

11 (7) any initial or special fee due from the purchaser [or seller] at closing the time

12 of sale, together with a description of the purpose and method of calculating the fee;

13 (8) a description of any liens, defects, or encumbrances on or affecting the title to

14 the common interest community;

15 (9) a description of any financing offered or arranged by the declarant;

16 (10) the terms and significant limitations of any warranties provided by the

17 declarant, including statutory warranties and limitations on the enforcement thereof or on

18 damages;

19 (11) a statement that:

20 (i) within 15 days after receipt of a public offering statement a purchaser,

21 before conveyance, may cancel any contract for purchase of a unit from a declarant,

22 (ii) if a declarant fails to provide a public offering statement to a purchaser

23 before conveying a unit, that purchaser may recover from the declarant [10] percent of the sales

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1 price of the unit plus [10] percent of the share, proportionate to his common expense liability, of

2 any indebtedness of the association secured by security interests encumbering the common

3 interest community, and

4 (iii) if a purchaser receives the public offering statement more than 15

5 days before signing a contract, he cannot cancel the contract;

6 (12) a statement of any unsatisfied judgments or pending suits against the

7 association, and the status of any pending suits material to the common interest community of

8 which a declarant has actual knowledge;

9 (13) a statement that any deposit made in connection with the purchase of a unit

10 will be held in an escrow account until closing and will be returned to the purchaser if the

11 purchaser cancels the contract pursuant to Section 4-108, together with the name and address of

12 the escrow agent;

13 (14) any restraints on alienation of any portion of the common interest

14 community and any restrictions: (i) on use, occupancy, and alienation of the units, and (ii) on the

15 amount for which a unit may be sold or on the amount that may be received by a unit owner on

16 sale, condemnation, or casualty loss to the unit or to the common interest community, or on

17 termination of the common interest community;

18 (15) a description of the insurance coverage provided for the benefit of unit

19 owners;

20 (16) any current or expected fees or charges to be paid by unit owners for the use

21 of the common elements and other facilities related to the common interest community;

22 (17) the extent to which financial arrangements have been provided for

23 completion of all improvements that the declarant is obligated to build pursuant to Section 4-119

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1 (Declarant’s Obligation to Complete and Restore);

2 (18) a brief narrative description of any zoning and other land use requirements

3 affecting the common interest community;

4 (19) all unusual and material circumstances, features, and characteristics of the

5 common interest community and the units; and

6 (20) in a cooperative, (i) whether the unit owners will be entitled, for federal,

7 state, and local income tax purposes, to a pass-through of deductions for payments made by the

8 association for real estate taxes and interest paid the holder of a security interest encumbering the

9 cooperative, and (ii) a statement as to the effect on every unit owner if the association fails to

10 pay real estate taxes or payments due the holder of a security interest encumbering the

11 cooperative.

12 (b) If a common interest community composed of not more than 12 units is not subject

13 to any development rights and no power is reserved to a declarant to make the common interest

14 community part of a larger common interest community, group of common interest

15 communities, or other real estate, a public offering statement may but need not include the

16 information otherwise required by paragraphs (9), (10), (15), (16), (17), (18), and (19) of

17 subsection (a) and the narrative descriptions of documents required by subsection (a)(4).

18 (c) A declarant promptly shall amend the public offering statement to report any material

19 change in the information required by this section.

20 SECTION 4-104. SAME; COMMON INTEREST COMMUNITIES SUBJECT TO

21 DEVELOPMENT RIGHTS. If the declaration provides that a common interest community is

22 subject to any development rights, the public offering statement must disclose, in addition to the

23 information required by Section 4-103:

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1 (1) the maximum number of units, and the maximum number of units per acre, that may

2 be created;

3 (2) a statement of how many or what percentage of the units that may be created will be

4 restricted exclusively to residential use, or a statement that no representations are made

5 regarding use restrictions;

6 (3) if any of the units that may be built within real estate subject to development rights

7 are not to be restricted exclusively to residential use, a statement, with respect to each portion of

8 that real estate, of the maximum percentage of the real estate areas, and the maximum percentage

9 of the floor areas of all units that may be created therein, that are not restricted exclusively to

10 residential use;

11 (4) a brief narrative description of any development rights reserved by a declarant and of

12 any conditions relating to or limitations upon the exercise of development rights;

13 (5) a statement of the maximum extent to which each unit’s allocated interests may be

14 changed by the exercise of any development right described in paragraph (3);

15 (6) a statement of the extent to which any buildings or other improvements that may be

16 erected pursuant to any development right in any part of the common interest community will be

17 compatible with existing buildings and improvements in the common interest community in

18 terms of architectural style, quality of construction, and size, or a statement that no assurances

19 are made in those regards;

20 (7) general descriptions of all other improvements that may be made and limited

21 common elements that may be created within any part of the common interest community

22 pursuant to any development right reserved by the declarant, or a statement that no assurances

23 are made in that regard;

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1 (8) a statement of any limitations as to the locations of any building or other

2 improvement that may be made within any part of the common interest community pursuant to

3 any development right reserved by the declarant, or a statement that no assurances are made in

4 that regard;

5 (9) a statement that any limited common elements created pursuant to any development

6 right reserved by the declarant will be of the same general types and sizes as the limited common

7 elements within other parts of the common interest community, or a statement of the types and

8 sizes planned, or a statement that no assurances are made in that regard;

9 (10) a statement that the proportion of limited common elements to units created

10 pursuant to any development right reserved by the declarant will be approximately equal to the

11 proportion existing within other parts of the common interest community, or a statement of any

12 other assurances in that regard, or a statement that no assurances are made in that regard;

13 (11) a statement that all restrictions in the declaration affecting use, occupancy, and

14 alienation of units will apply to any units created pursuant to any development right reserved by

15 the declarant, or a statement of any differentiations that may be made as to those units, or a

16 statement that no assurances are made in that regard; and

17 (12) a statement of the extent to which any assurances made pursuant to this section

18 apply or do not apply in the event that any development right is not exercised by the declarant.

19 SECTION 4-105. SAME; TIME SHARES. If the declaration provides that ownership

20 or occupancy of any units, is or may be in time shares, the public offering statement shall

21 disclose, in addition to the information required by Section 4-103:

22 (1) the number and identity of units in which time shares may be created;

23 (2) the total number of time shares that may be created;

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1 (3) the minimum duration of any time shares that may be created; and

2 (4) the extent to which the creation of time shares will or may affect the enforceability of

3 the association’s lien for assessments provided in Section 3-116.

4 SECTION 4-106. SAME; COMMON INTEREST COMMUNITIES

5 CONTAINING CONVERSION BUILDINGS.

6 (a) The public offering statement of a common interest community containing any

7 conversion building must contain, in addition to the information required by Section 4-103:

8 (1) a statement by the declarant, based on a report prepared by an independent

9 [registered] architect or engineer, describing the present condition of all structural components

10 and mechanical and electrical installations material to the use and enjoyment of the building;

11 (2) a statement by the declarant of the expected useful life of each item reported

12 on in paragraph (1) or a statement that no representations are made in that regard; and

13 (3) a list of any outstanding notices of uncured violations of building code or

14 other municipal regulations, together with the estimated cost of curing those violations.

15 (b) This section applies only to buildings containing units that may be occupied for

16 residential use.

17 SECTION 4-107. SAME; COMMON INTEREST COMMUNITY SECURITIES.

18 If an interest in a common interest community is currently registered with the Securities and

19 Exchange Commission of the United States, a declarant satisfies all requirements relating to the

20 preparation of a public offering statement of this [act] if he delivers to the purchaser [and files

21 with the agency] a copy of the public offering statement filed with the Securities and Exchange

22 Commission. [An interest in a common interest community is not a security under the

23 provisions of [insert appropriate state securities regulation statutes].]

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1 SECTION 4-108. PURCHASER’S RIGHT TO CANCEL.

2 (a) A person required to deliver a public offering statement pursuant to Section 4-102(c)

3 shall provide a purchaser with a copy of the public offering statement and all amendments

4 thereto before conveyance of the unit, and not later than the date of any contract of sale. Unless

5 a purchaser is given the public offering statement more than 15 days before execution of a

6 contract for the purchase of a unit, the purchaser, before conveyance, may cancel the contract

7 within 15 days after first receiving the public offering statement.

8 (b) If a purchaser elects to cancel a contract pursuant to subsection (a), he may do so by

9 hand delivering notice thereof to the offeror or by mailing notice thereof by prepaid United

10 States mail to the offeror or to his agent for service of process. Cancellation is without penalty,

11 and all payments made by the purchaser before cancellation must be refunded promptly.

12 (c) If a person required to deliver a public offering statement pursuant to Section

13 4-102(c) fails to provide a purchaser to whom a unit is conveyed with that public offering

14 statement and all amendments thereto as required by subsection (a), the purchaser, in addition to

15 any rights to damages or other relief, is entitled to receive from that person an amount equal to

16 [10] percent of the sale price of the unit, plus [10] percent of the share, proportionate to his

17 common expense liability, of any indebtedness of the association secured by security interests

18 encumbering the common interest community.

19 SECTION 4-109. RESALES OF UNITS.

20 (a) Except in the case of a sale in which delivery of a public offering statement is

21 required, or unless exempt under Section 4-101(b), a unit owner shall furnish to a purchaser

22 before the earlier of conveyance or transfer of the right to possession of a unit, a copy of the

23 declaration (other than any plats and plans), the bylaws, the rules or regulations of the

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1 association, and a certificate containing:

2 (1) a statement disclosing the effect on the proposed disposition of any right of

3 first refusal or other restraint on the free alienability of the unit held by the association;

4 (2) a statement setting forth the amount of the periodic common expense

5 assessment and any unpaid common expense or special assessment currently due and payable

6 from the selling unit owner;

7 (3) a statement of any other fees payable by the owner of the unit being sold;

8 (4) a statement of any capital expenditures approved by the association for the

9 current and succeeding fiscal years;

10 (5) a statement of the amount of any reserves for capital expenditures and of any

11 portions of those reserves designated by the association for any specified projects;

12 (6) the most recent regularly prepared balance sheet and income and expense

13 statement, if any, of the association;

14 (7) the current operating budget of the association;

15 (8) a statement of any unsatisfied judgments against the association and the status

16 of any pending suits in which the association is a defendant;

17 (9) a statement describing any insurance coverage provided for the benefit of unit

18 owners;

19 (10) a statement as to whether the executive board has given or received written

20 notice that any existing uses, occupancies, alterations, or improvements in or to the unit or to the

21 limited common elements assigned thereto violate any provision of the declaration;

22 (11) a statement as to whether the executive board has received written notice

23 from a governmental agency of any violation of environmental, health, or building codes with

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1 respect to the unit, the limited common elements assigned thereto, or any other portion of the

2 common interest community which has not been cured;

3 (12) a statement of the remaining term of any leasehold estate affecting the

4 common interest community and the provisions governing any extension or renewal thereof;

5 (13) a statement of any restrictions in the declaration affecting the amount that

6 may be received by a unit owner upon sale, condemnation, casualty loss to the unit or the

7 common interest community, or termination of the common interest community;

8 (14) in a cooperative, an accountant’s statement, if any was prepared, as to the

9 deductibility for federal income tax purposes by the unit owner of real estate taxes and interest

10 paid by the association;

11 (15) a statement describing any pending sale or encumbrance of common

12 elements; and

13 (16) a statement disclosing the effect on the unit to be conveyed of any

14 restrictions on the owner’s right to use or occupy the unit or to lease the unit to another person.

15 (b) The association, within 10 days after a request by a unit owner, shall furnish a

16 certificate containing the information necessary to enable the unit owner to comply with this

17 section. A unit owner providing a certificate pursuant to subsection (a) is not liable to the

18 purchaser for any erroneous information provided by the association and included in the

19 certificate.

20 (c) A purchaser is not liable for any unpaid assessment or fee greater than the amount set

21 forth in the certificate prepared by the association. A unit owner is not liable to a purchaser for

22 the failure or delay of the association to provide the certificate in a timely manner, but the

23 purchase contract is voidable by the purchaser until the certificate has been provided and for

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1 [five] days thereafter or until conveyance, whichever first occurs.

2 SECTION 4-110. ESCROW OF DEPOSITS. Any deposit made in connection with

3 the purchase or reservation of a unit from a person required to deliver a public offering statement

4 pursuant to Section 4-102(c) must be placed in escrow and held either in this State or in the State

5 where the unit is located in an account designated solely for that purpose by [a licensed title

6 insurance company] [an attorney] [a licensed real estate broker] [an independent bonded escrow

7 company or] an institution whose accounts are insured by a governmental agency or

8 instrumentality until (i) delivered to the declarant at closing; (ii) delivered to the declarant

9 because of the purchaser’s default under a contract to purchase the unit; or (iii) refunded to the

10 purchaser.

11 SECTION 4-111. RELEASE OF LIENS.

12 (a) In the case of a sale of a unit where delivery of a public offering statement is required

13 pursuant to Section 4-102(c), a seller

14 (1) before conveying a unit, shall record or furnish to the purchaser releases of all

15 liens, except liens on real estate that a declarant has the right to withdraw from the common

16 interest community, that the purchaser does not expressly agree to take subject to or assume and

17 that encumber:

18 (i) in a condominium, that unit and its common element interest, and

19 (ii) in a cooperative or planned community, that unit and any limited

20 common elements assigned thereto, or

21 (2) shall provide a surety bond or substitute collateral for or insurance against the

22 lien as provided for liens on real estate in [insert appropriate references to general state law or

23 Sections 5-211 and 5-212 of the State Uniform Simplification of Land Transfers Act].

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1 (b) Before conveying real estate to the association, the declarant shall have that real

2 estate released from: (1) all liens the foreclosure of which would deprive unit owners of any

3 right of access to or easement of support of their units, and (2) all other liens on that real estate

4 unless the public offering statement describes certain real estate that may be conveyed subject to

5 liens in specified amounts.

6 SECTION 4-112. CONVERSION BUILDINGS.

7 (a) A declarant of a common interest community containing conversion buildings, and

8 any dealer who intends to offer units in such a common interest community, shall give each of

9 the residential tenants and any residential subtenant in possession of a portion of a conversion

10 building notice of the conversion and provide those persons with the public offering statement

11 no later than 120 days before the tenants and any subtenant in possession are required to vacate.

12 The notice must set forth generally the rights of tenants and subtenants under this section and

13 must be hand delivered to the unit or mailed by prepaid United States mail to the tenant and

14 subtenant at the address of the unit or any other mailing address provided by a tenant. No tenant

15 or subtenant may be required to vacate upon less than 120 days’ notice, except by reason of

16 nonpayment of rent, waste, or conduct that disturbs other tenants’ peaceful enjoyment of the

17 premises, and the terms of the tenancy may not be altered during that period. Failure to give

18 notice as required by this section is a defense to an action for possession.

19 (b) For [60] days after delivery or mailing of the notice described in subsection (a), the

20 person required to give the notice shall offer to convey each unit or proposed unit occupied for

21 residential use to the tenant who leases that unit. If a tenant fails to purchase the unit during that

22 [60]-day period, the offeror may not offer to dispose of an interest in that unit during the

23 following [180] days at a price or on terms more favorable to the offeree than the price or terms

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1 offered to the tenant. This subsection does not apply to any unit in a conversion building if that

2 unit will be restricted exclusively to non-residential use or the boundaries of the converted unit

3 do not substantially conform to the dimensions of the residential unit before conversion.

4 (c) If a seller, in violation of subsection (b), conveys a unit to a purchaser for value who

5 has no knowledge of the violation, the recordation of the deed conveying the unit or, in a

6 cooperative, the conveyance of the unit, extinguishes any right a tenant may have under

7 subsection (b) to purchase that unit if the deed states that the seller has complied with subsection

8 (b), but the conveyance does not affect the right of a tenant to recover damages from the seller

9 for a violation of subsection (b).

10 (d) If a notice of conversion specifies a date by which a unit or proposed unit must be

11 vacated and otherwise complies with the provisions of [insert appropriate state summary process

12 statute], the notice also constitutes a notice to vacate specified by that statute.

13 (e) Nothing in this section permits termination of a lease by a declarant in violation of its

14 terms.

15 SECTION 4-113. EXPRESS WARRANTIES OF QUALITY.

16 (a) Express warranties made by any seller to a purchaser of a unit, if relied upon by the

17 purchaser, are created as follows:

18 (1) any affirmation of fact or promise which relates to the unit, its use, or rights

19 appurtenant thereto, area improvements to the common interest community that would directly

20 benefit the unit, or the right to use or have the benefit of facilities not located in the common

21 interest community, creates an express warranty that the unit and related rights and uses will

22 conform to the affirmation or promise;

23 (2) any model or description of the physical characteristics of the common

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1 interest community, including plans and specifications of or for improvements, creates an

2 express warranty that the common interest community will conform to the model or description;

3 (3) any description of the quantity or extent of the real estate comprising the

4 common interest community, including plats or surveys, creates an express warranty that the

5 common interest community will conform to the description, subject to customary tolerances;

6 and

7 (4) a provision that a purchaser may put a unit only to a specified use is an

8 express warranty that the specified use is lawful.

9 (b) Neither formal words, such as “warranty” or “guarantee,” nor a specific intention to

10 make a warranty, are necessary to create an express warranty of quality, but a statement

11 purporting to be merely an opinion or commendation of the real estate or its value does not

12 create a warranty.

13 (c) Any conveyance of a unit transfers to the purchaser all express warranties of quality

14 made by previous sellers.

15 SECTION 4-114. IMPLIED WARRANTIES OF QUALITY.

16 (a) A declarant and any dealer warrants that a unit will be in at least as good condition at

17 the earlier of the time of the conveyance or delivery of possession as it was at the time of

18 contracting, reasonable wear and tear excepted.

19 (b) A declarant and any dealer impliedly warrants that a unit and the common elements

20 in the common interest community are suitable for the ordinary uses of real estate of its type and

21 that any improvements made or contracted for by him, or made by any person before the creation

22 of the common interest community, will be:

23 (1) free from defective materials; and

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1 (2) constructed in accordance with applicable law, according to sound

2 engineering and construction standards, and in a workmanlike manner.

3 (c) In addition, a declarant and any dealer warrants to a purchaser of a unit that may be

4 used for residential use that an existing use, continuation of which is contemplated by the parties,

5 does not violate applicable law at the earlier of the time of conveyance or delivery of possession.

6 (d) Warranties imposed by this section may be excluded or modified as specified in

7 Section 4-115.

8 (e) For purposes of this section, improvements made or contracted for by an affiliate of a

9 declarant (Section 1-103(1)) are made or contracted for by the declarant.

10 (f) Any conveyance of a unit transfers to the purchaser all of the declarant’s implied

11 warranties of quality.

12 SECTION 4-115. EXCLUSION OR MODIFICATION OF IMPLIED

13 WARRANTIES OF QUALITY.

14 (a) Except as limited by subsection (b) with respect to a purchaser of a unit that may be

15 used for residential use, implied warranties of quality:

16 (1) may be excluded or modified by agreement of the parties; and

17 (2) are excluded by expression of disclaimer, such as “as is,” “with all faults,” or

18 other language that in common understanding calls the purchaser’s attention to the exclusion of

19 warranties.

20 (b) With respect to a purchaser of a unit that may be occupied for residential use, no

21 general disclaimer of implied warranties of quality is effective, but a declarant and any dealer

22 may disclaim liability in an instrument signed by the purchaser for a specified defect or specified

23 failure to comply with applicable law, if the defect or failure entered into and became a part of

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1 the basis of the bargain.

2 SECTION 4-116. STATUTE OF LIMITATIONS FOR WARRANTIES.

3 (a) Unless a period of limitation is tolled under Section 3-111 or affected by subsection

4 (d), a judicial proceeding for breach of any obligation arising under Section 4-113 or 4-114 must

5 be commenced within six years after the [claim for relief][cause of action] accrues, but the

6 parties may agree to reduce the period of limitation to not less than two years. With respect to a

7 unit that may be occupied for residential use, an agreement to reduce the period of limitation

8 must be evidenced by a separate instrument executed by the purchaser.

9 (b) Subject to subsection (c), a [claim for relief] [cause of action] for breach of warranty

10 of quality, regardless of the purchaser’s lack of knowledge of the breach, accrues:

11 (1) as to a unit, at the time the purchaser to whom the warranty is first made

12 enters into possession if a possessory interest was conveyed or at the time of acceptance of the

13 instrument of conveyance if a nonpossessory interest was conveyed; and

14 (2) as to each common element, at the time the common element is completed or,

15 if later, as to (i) a common element that is added to the common interest community by exercise

16 of development rights, at the time the first unit which was added to the condominium by the

17 same exercise of development rights is conveyed to a bona fide purchaser, or (ii) a common

18 element within any other portion of the common interest community, at the time the first unit is

19 conveyed to a bona fide purchaser.

20 (c) If a warranty of quality explicitly extends to future performance or duration of any

21 improvement or component of the common interest community, the [claim for relief] [cause of

22 action] accrues at the time the breach is discovered or at the end of the period for which the

23 warranty explicitly extends, whichever is earlier.

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1 (d) During the period of declarant control, the association may authorize an independent

2 committee of the executive board to evaluate and enforce by any lawful means warranty claims

3 involving the common elements, and to compromise those claims. Only members of the

4 executive board elected by unit owners other than the declarant and other persons appointed by

5 those independent members may serve on the committee, and the committee’s decision must be

6 free of any control by the declarant or any member of the executive board or officer appointed

7 by the declarant. All costs reasonably incurred by the committee, including attorney’s fees, are

8 common expenses, and must be added to the budget annually adopted by the association under

9 Section 3-115. If the committee is so created, the period of limitation for claims for these

10 warranties begins to run from the date of the first meeting of the committee, regardless of when

11 the period of declarant control terminates.

12 SECTION 4-117. EFFECT OF VIOLATIONS ON RIGHTS OF ACTION;

13 ATTORNEY’S FEES.

14 (a) If a declarant or any other person subject to this [act] fails to comply with any of its

15 provisions or any provision of the declaration or bylaws, any person or class of persons

16 adversely affected by the failure to comply has a claim for appropriate relief. Punitive damages

17 may be awarded for a willful failure to comply with this [act]. The court, in an appropriate case,

18 may award court costs and reasonable attorney’s fees.

19 (b) Parties to a dispute arising under this [act], the declaration, or the bylaws may agree

20 to resolve the dispute by any form of binding or nonbinding alternative dispute resolution, but:

21 (1) a declarant may agree with the association to do so only after the period of

22 declarant control passes unless the agreement is made with an independent committee of the

23 executive board elected pursuant to Section 4-116(d); and

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1 (2) an agreement to submit to any form of binding alternative dispute resolution

2 must be in a writing signed by the parties.

3 New Comment45 The language of sub-section (a) is intentionally broad, and emphasizes the traditional6 authority of a court in equity to fashion a remedy suited to the circumstances of the case. 7 Importantly, the provisions of this section would apply with equal force to a violation of either8 this Act or the declaration or by-laws by “any person” besides the declarant – including, for9 example, the association in its dealings with unit owners, a property manager or unit owners

10 whose own behavior violates those same laws or instruments.1112 In appropriate cases involving association or executive board activities, the court might13 grant relief in the form of a requiring new elections, removal of officers from office, and orders14 requiring offending parties to make the association whole for improperly expended funds. These15 examples are not intended to exhaust the traditional authority of a judge to grant “appropriate16 relief”, and that authority is emphasized by the specific grant of discretion to authorize punitive17 damages or attorneys fees, as the circumstances warrant.18

19 SECTION 4-118. LABELING OF PROMOTIONAL MATERIAL. No promotional

20 material may be displayed or delivered to prospective purchasers which describes or portrays an

21 improvement that is not in existence unless the description or portrayal of the improvement in

22 the promotional material is conspicuously labeled or identified either as “MUST BE BUILT” or

23 as “NEED NOT BE BUILT.”

24 SECTION 4-119. DECLARANT’S OBLIGATION TO COMPLETE AND

25 RESTORE.

26 (a) Except for improvements labeled “NEED NOT BE BUILT,” the declarant shall

27 complete all improvements depicted on any site plan or other graphic representation, including

28 any plats or plans prepared pursuant to Section 2-109, whether or not that site plan or other

29 graphic representation is contained in the public offering statement or in any promotional

30 material distributed by or for the declarant.

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1 (b) The declarant is subject to liability for the prompt repair and restoration, to a

2 condition compatible with the remainder of the common interest community, of any portion of

3 the common interest community affected by the exercise of rights reserved pursuant to or created

4 by Section 2-110, 2-111, 2-112, 2-113, 2-115, or 2-116.

5 SECTION 4-120. SUBSTANTIAL COMPLETION OF UNITS. In the case of a sale

6 of a unit in which delivery of a public offering statement is required, a contract of sale may be

7 executed, but no interest in that unit may be conveyed, until the declaration is recorded and the

8 unit is substantially completed, as evidenced by a recorded certificate of substantial completion

9 executed by an independent [registered] architect, surveyor, or engineer, or by issuance of a

10 certificate of occupancy authorized by law.

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