Common Interest Property Ownership-Module 5 of 5

Common Interest Property Ownership-Module 5 of 5


Module 5: Common Interest Property Ownership

 

Common Ownership

A common interest property, or “community interest” property, is real estate where the owner, by virtue of his ownership of a partial interest or unit, must pay for the maintenance, improvement, insurance of common areas described in a declaration and administered by an association. Types of “common interest community” include condominiums, planned communities and homeowners’ associations and timeshares. Common interest properties are gaining in popularity as more people live in condos or use timeshares for vacations.

Despite potential variances by state, there is a uniform law that guides the development of laws affecting community interest property. 

The Uniform Common Interest Ownership Act, published by the National Conference of Commissioners on Uniform State Laws in 1980, addresses the formation, operations, and termination of a common interest community.[1]  

The Act is a consumer protection law, but it defines condominiums and planned communities and mandates disclosure of key facts about the property to a buyer at the time of sale.[2] The law also requires a common interest property seller to tell a buyer if the property is being resold and whether any warranties attach to the sale. The Act also gives a buyer right to rescind a real estate sale agreement in certain circumstances and requires deposits on any sale contracts to be held in escrow until the transaction is finalized. [3]

 

Planned Communities

Planned communities, also known as planned unit developments, are properties developed with common open space, resource protection, and other special protocols addressing ownership and occupation.  The most popular planned communities are those comprised of single-family homes and a single planned community can cover several acres. 

A comprehensive plan is a collection of information and materials designed to guide the future development of a planned community and will demonstrate how a single property fits into the larger planned community. It provides a framework and policy context within which to make decisions relating to future development. Every state has its own laws regarding planned communities, but local zoning board approval is required for the development of a planned community anywhere across the country. 

A.    Planned Communities-Formation and CC&Rs

The Covenants, Codes and Restrictions, a legal document that imposes a comprehensive system of covenants running with the land, is akin to the community's constitution and is filed with the county recording office in the same way deeds and other covenants are filed, before the sale of any units. Recording this document puts potential buyers on notice of the restrictions in the community and binds buyers to obey them. 

The CC&Rs govern what an owner can, cannot, or must do with respect to his home. For example, it can lay out:

·       how many pets an owner can have;

·       where an owner can park her vehicles;

·       where an owner can mount flags or outdoor décor; and

·       the circumstances under which a property owner can alter her property.[4]

B.    Planned Communities-HOA Governance 

A homeowner’s association, often set up as a nonprofit corporation, manages, oversees, and regulates a planned community.  A single homeowner will own a “lot,” and the association will own the common areas and amenities like private tennis courts and outdoor playgrounds. Every property owner in a planned community automatically becomes an association member of the association and he must pay homeowner’s association dues. Property owners can participate in association governance, including voting at meetings and inspecting business records.[5] 

According to the U.S. Census Bureau, average annual homeowner’s association dues are $396. These dues cover the costs of maintaining and operating a community’s common areas, systems equipment, and shared amenities. An association’s board of directors, elected by community residents, determines the annual fee using factors such as projected annual maintenance expenses.  

The homeowner’s association can discipline property owners who don’t comply with the community’s rules. Disciplinary hearings are governed by state law. In California, for example, hearings are governed by Civil Code 5850 and 5855A and require written notice to the homeowner at least 10 days before the hearing, informing the homeowner of the date, time and place of the meeting, the nature of the alleged violation and notification that the member may address the board at the meeting. Within 15 calendar days of the hearing, the association must, in writing, inform the homeowner how he will be disciplined.  

A homeowner unhappy with a homeowner’s association decision can seek judicial recourse, but when a court reviews the association’s decision-making, it tends to defer to the association in nearly all cases.[6] A court will not second-guess the choices made by an association board unless the board acted in bad faith. Additionally, the challenger has the burden to demonstrate one of these impermissible purposes, so the presumption is in all cases that a board acts in good faith.  

The facts of the case Rywalt v. Writer Corp., demonstrate the difficulty in mounting these challenges. There, a group of plaintiff homeowners sought to stop the association from building a second tennis court near their property line. The plaintiffs argued that the board’s decision to build the tennis court was arbitrary because it didn’t consider parking and sanitation needs for the second court prior to approving construction. The Colorado Court of Appeals reversed a decision granting the injunction halting construction and concluded, “the good faith acts of directors of profit or non-profit corporations . . . within the exercise of an honest business judgment are valid” and that “courts will not interfere with or regulate the conduct of the directors in the reasonable and honest exercise of their judgment and duties.”[7]

 

Condominiums

A condominium is a property ownership structure that involves both individual ownership and joint ownership.  It’s one of a group of housing units where each homeowner owns their individual unit space, and all the dwellings share ownership of common use areas. A condominium owner typically owns her home, but condominium owners own all common areas jointly, so they are all responsible for maintaining buildings, stairways, roofs, and recreational areas.[8]

Living in a condo offers many advantages. First, all owners share many major costs for repairs affecting all condominiums. Second, a prospective buyer will typically spend less on a condo than a similarly-size single-family home. Obviously, the cost of a condo versus a house depends on nearby property values of the neighborhood and the cost of living in the area, but a buyer will spend less, especially in higher-cost markets. For example, if someone wanted to buy a 2,400-square-foot town home condominium in a pricey Boston suburb, she’d pay an average of $725,000, while a similar-sized, single-family house in the same area would cost over $1 million.[9]

A.    Condominium-Formation and Declaration

A developer can form a condominium by filing a contract known as a condominium declaration and a condominium plat, which shows the location of private units and common areas.

The condominium declaration, also called a master deed or master lease, is recorded in the public records, binding all current and future condo owners to its terms and conditions.  It includes restrictive covenants on condominium owners that regulate the use of both common areas and private condominium units.[10]  This declaration will include the name of the condominium association and the legal description of the entire property and boundaries of individual units and common areas. 

The condominium declaration will lay out the common areas and limit the areas in use to specific times, persons or circumstances.[11]  The declaration will describe the condominium’s governance structure, including the condominium association’s rights and restrictions. Any restrictive covenants or prohibitions on owners’ activities or use of property must be included in the condominium declaration to be binding, and the document will include a method of amendment to prevent contradiction.[12]   Finally, a condominium declaration will describe how and under what circumstances condominium ownership can be terminated. A condominium declaration that does not follow the requirements of the jurisdiction is usually invalid, which can have serious legal implications on any subsequent sales of the individual units.

The community association is the homeowner’s association equivalent for a condominium. The association is created at the time once the developer records the declaration and a title owner automatically becomes a member of the association upon purchasing a condo.[13] It provides for the care, upkeep, and physical maintenance of the common elements and must enforce the provisions of the founding documents, and establish, publicize, and enforce rules and penalties approved by the members. It is also responsible for procuring adequate insurance coverage as required by the legal documents. It must establish sound fiscal policy, keep proper records, establish budgets and assessment rates, and support the business needs of the community. One of the ways in which it fulfills its responsibilities is to elect a board of directors from among the unit owners.

The condominium declaration describes the election process for the board of directors and will specify the board's role and responsibility within the association. The board is responsible for making all the business decisions that affect the association. It has fiduciary responsibility, legal oversight, and overall management responsibility for all the association's business and is also responsible for enhancing, maintaining, and protecting the property’s value.[14]

The board will operate and govern according to the condominium association bylaws set forth the rules and regulations by which the association must operate. The bylaws include some of the same information as the articles of incorporation, but bylaws include much greater detail. The bylaws would include terms regarding how leadership is selected, how meetings are to be held, and how voting will be carried out. Bylaws can also address rules regarding common areas and key rights and responsibilities of unit owners. Bylaws are not always filed in the public records, but they can have substantial impact on a person’s use and enjoyment of his or her unit and must be provided to a perspective buyer before sale.[15]

B.    Condominium-Governance

The Uniform Condominium Act was developed in 1980 to address under-regulation of condominium associations in many jurisdictions.[16]  The UCA has been adopted in 14 states, creating a uniform standard for the creating, financing, management, and termination of a condominium development.[17]  The law also establishes consumer protection policies and creates standards for the prioritization of mortgages and encumbrances on condominium property. For example, under the UCA, tenants of existing residential buildings that are being developed into condominium units are entitled to an option to purchase their unit within 60 days and, if not, receive at least 120 days’ notice to vacate the property.[18] The UCA also includes several terms regarding structure and governance of condominium associations, creating a useful standardization of the many ways a condo building can be managed.[19]

Most condominium associations are controlled by the condominium developer until most or all units are sold.  Thereafter, a condominium association is operated as a nonprofit corporation according to its articles of incorporation and bylaws. The articles of incorporation form the basic corporate charter for the nonprofit association, and the articles must be filed with the Secretary of State in the proper jurisdiction for the condominium association to legally exist. While specific requirements vary from state to state, articles of incorporation for a condominium association will include the name of the incorporator and the association, its purpose, the duration of the association, its registered agent and office, and criteria for becoming an owner or member.[20]

C.    Condominium Ownership Liabilities

Condominium unit owners are responsible for the expenses and responsibilities of maintaining the property.  Condominium owners must pay taxes and upkeep on their individual units, as well as the taxes and maintenance costs associated with common areas. Taxes, upkeep, and insurance costs are covered by assessments levied by the association against each condominium owner’s unit. The amount of the assessment is determined by the condominium association based on guidelines in the bylaws and condominium declaration.[21]

If a condominium owner does not pay the assessment on a unit, he or she faces substantial legal and financial risk. A condominium association can enforce an assessment through civil litigation or by placing a lien on the owner’s property that can be enforced by a forced sale.[22] Unpaid assessment liens are usually not recorded, so buyers must inquire with the condominium association whether it has placed any liens on the unit in question before purchasing a condo.  

As co-owners of common areas, condominium owners can be exposed to liability for any damages that occur on common areas.[23] Typically, this liability is covered by insurance maintained by the condominium association and paid for through assessments.[24] However, all insurance coverage is managed by the condominium association, so individual owners have little control over their liability exposure.


Timeshares

For those who want to own property but intend to use it only a few weeks per year, they may consider purchasing a timeshare. Timeshares offer an interval ownership structure that can be highly profitable and are heavily marketed by resorts and vacation destinations. A timeshare interest is an interest purchased in a timeshare plan that grants the buyer occupancy and right of use to accommodations, facilities or recreation sites.[25] 

A timeshare ownership arrangement can take several legal forms, but each will entitle a person to use a home or resort unit for a limited amount of time every year.[26] The two most common forms of timeshare interests are fee simple ownership in the underlying real estate and a lease or license arrangement permitting ownership rights for a specified period. In a fee simple ownership arrangement, the buyer has an undivided interest and an exclusive right to occupy the premises during a designated time. The buyer receives a deed, title to the property, and the rights to rent, assign, sell, or transfer the property. 

With a lease or license timeshare arrangement, the timeshare buyer doesn’t own the property, but can use it for a specified period, after which the title to the timeshare property reverts to the developer. This form of ownership conveys to the buyer a license, lease or similar type of contractual right governed by the terms of the timeshare agreement.

Timeshares are complex arrangements, and at times they have been vehicles by which unethical business people perpetrate frauds and schemes.  As a result, states with timeshares have adopted complex statutory schemes to protect timeshare buyers. Most U.S. timeshares are in Florida and the Florida Vacation and Timesharing Act is the country’s most thorough state regulatory scheme.[27]

A key provision of the Timesharing Act allows the buyer of a timeshare interest to initiate a private action against anyone who violates it and can seek damages, injunctive relief, or declaratory relief against a seller, developer, escrow agent, or managing entity. Additionally, the buyer may recover reasonable attorney's fees if he successfully shows that a seller acted in bad faith.

The most important provision of the Act is that it provides a timeshare buyer with cancellation rights.[28] The buyer can cancel the purchase contract until midnight ten days after the later of the contract’s execution date.

Conclusion

Thank you for participating in our program on real estate transactions. We also plan to offer more in-depth programs on certain aspects of real estate, such as mortgages. We hope you will enjoy those as well.



[2] UCIOA at Article 2.

[3] Id at Section 4.

[4] See e.g. Colony Hill v. Ghamaty, 143Cal.App.4th 1156 (2006) (upholding HOA’s rule prohibiting the lease of a unit to anyone not having a pre-existing familial relationship with the unit owner).

[5] Grimm, B., “17 Legal Rights of Homeowners Living in HOAs,” Educational Community for Homeowners (2017) available at https://www.echo-ca.org/article/17-legal-rights-homeowners-living-hoas

[8] See Liebler v. Point Loma Tennis Club,40 Cal. App. 4th 1600 (1995) (explaining the division of control between private units and common areas in a condominium association).

[10] Hinkel, D., Essentials of Practical Real Estate Law 448 (6th ed. 2016); see also Nahrstedt v. Lakeside Village, 8 Cal. 4th 361, 372 (1994).

[11] Fourth La Costa Condominium Owners Association v. Seith, 55 Cal.App.4th 472 (1997); see also Liebler supra note 7.

[12] See Ekstrom, supra note 1.

[13] WAYNE S. HYATT, CONDOMINIUMS AND HOME OWNER ASSOCIATIONS: A GUIDE TO THE DEVELOPMENT PROCESS § 1.04 (1985).

[15] Hinkel, D., Essentials of Practical Real Estate Law 450 (6th ed. 2016)


[16] National Conference of Commissioners on Uniform State Laws, Uniform Condominium Act (1980) available at http://www.uniformlaws.org/shared/docs/condominium/uca_80.pdf.

[17] Id. at Article 2.

[18] Id. at Section 4-112.

[19] Id. at Article 3.

[23] Martinez v. Woodmar IV Condo.Homeowners Ass'n, 189 Ariz. 206, 221 (1997)(holding condo unit owners not liable for liabilities arising on common areas because owners delegated control to the association); cf. Pekelnaya v Allyn. 25 A.3d 111 (N.Y. October 25, 2005)(refusing to impose liability on the condominium association for injury that occurred on common areas because no special duty exists between the association and non-owner guests).

[24] 15A Am. Jur. 2d Condos. And Coop. Apartments §27.


[25] Bowen, David, Timeshare Ownership: Regulation and Common Sense, 18 Loy. Consumer L. Rev. 459, 466 (2006).

[26] See e.g. State Dept. of Commerce vCarriage House Associates, 585 P2d 1337 (Nev. 1978) (allowing “vacation licensing” as a form of time sharing that divides the occupancy rights at a single property among multiple people);

[27] RCI, Resort Timesharing in the United States - 2003 Edition Summary Report (2003), available at http://www.rci.com/CDA/HTML/PDF_Conversion_Files/US_Timeshare_Industry_2003_Summary_Mar_31_03.pdf.

[28] Fla. Stat. 721.06(1) (2005).

 

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