| SHARED OWNERSHIP
Cooperative Living Arrangements
Q. What is a common interest community?
A. Thanks to creative developers, common interest communities
exist in various
configurations with a confusing array of names and forms of ownership.
Still, certain
characteristics are shared—they are designed specifically for a
certain type of community
living by a single developer (or in the case of existing buildings, a
single converter). They
are created by a specific set of documents, usually drawn up by the developer
and subject
to change by the membership. And when the developer or converter departs,
the
community's affairs are governed by an association of all unit owners
through its elected
board. The board has the authority to enforce the restrictions and collect
assessments to
pay for maintenance and improvements.
Because these ownership forms are governed by the laws of so many different
states, the terminology can be confusing. Whatever the general term, there
are three
distinct types of common interest communities with three distinct types
of ownership: the
cooperative, the condominium, and the planned community or planned unit
development
(PUD). You can't tell which is which by looking at the architectural form
of the buildings.
For example, in some states, "site condominiums" look just like
single-family detached
homes but the land—not the home—is part of the condominium.
However, the form of
ownership has significant legal implications. Be sure you know what type
yours is the
form of ownership is specified in the community's declaration, which is
essentially its
constitution.
By Any Other Name
“Common interest community" is
the term preferred by the National Conference of
Commissioners on Uniform State Laws, a group devoted to drafting model
laws for
adoption by state legislatures. But the Community Association Institute
(CAI), a national
trade group for anyone connected with this type of development, prefers
the term
"community association." Other terms in use
are "common interest realty association,"
"common
interest development," "residential community association,"
"common property
subdivision" and "interdependent covenanted subdivision."
Depending on who is talking,
the association might be a "community association," a "homeowners'
association," or a
"property owners association." If you're talking about these
developments with someone
from another area, make sure you're talking about the same thing. |
Q What's the difference between a cooperative and a condominium?
A. In cooperatives, found primarily in New York and Chicago,
the members are
stockholders in a corporation that owns the entire building, including
the residential units
and all common elements such as corridors, elevators, and tennis courts.
Stockholders
don't actually own any real estate; the corporation owns it all. Instead,
stockholders are
entitled to lease their individual units from the corporation. Each stockholder
pays a
monthly "maintenance charge," which is a proportionate share
of the corporation's cash
requirements for mortgage payments, operation, maintenance, repair, taxes,
and reserves.
The corporation, governed by an elected board of directors, may veto a
proposed transfer
of stock, so it has considerable control over potential buyers.
Condominium ownership provides exclusive title to the "airspace"
within your
own unit, and ownership of the common elements is shared among all unit
owners as
tenants in common. Within limitations, you are free to mortgage your unit
or sell it. As in
a cooperative, all unit owners must pay their share of the assessment
for operation,
maintenance, repair, and reserves. The association is responsible for
enforcing the rules
and managing the common elements, but it doesn't actually own anything.
Q. How does a planned community work?
A. A planned community, also called a "homeowner association,"
is a hybrid subdivision
combining certain aspects of cooperatives and condominiums. In these developments,
each owner holds title to a unit—in many cases, a single-family,
detached house. But all
common areas, such as parks and playgrounds, belong to the incorporated
association,
which all owners are required to join. The association is responsible
for maintaining
common areas and, in some cases, house exteriors. Homeowners pay a periodic
assessment for common area expenses and reserves.
Some planned communities include sections organized as condominiums or
cooperatives. Others include commercial or even industrial areas, designed
to allow
people to live within walking distance of stores and work. Some of these
developments are
huge—such as Reston, Virginia, a planned community of 19,000 units.
Further, several
adjoining community associations may belong to a master association, also
known as an
"umbrella association," a "master planned community,"
or a "mixed-use association,"
which charges an additional assessment to pay for certain community-wide
services.
Q. What kind of restrictions can be imposed in common-interest
communities?
A. The extent of restrictions imposed on owners varies. In a
planned community of freestanding
houses, rules may be limited to preserving the quality and cohesiveness
of the
development by requiring approval of any architectural or other exterior
changes.
Condominiums and cooperatives tend to have much more extensive rules and
regulations,
because generally people are living much closer together and often in
the same building.
Mid-rise and high-rise condominiums rely on the concept of the "airspace
block".
The title to a single-family house or townhouse often includes the land
underneath it and
the air above it, but if you own a high-rise apartment there are other
owners above and
below. So you hold title, in effect, to a block of air—within four
walls, a ceiling, and a
floor.
Within that airspace block, you may alter or remove non-supporting walls,
replace
the light fixtures, change the carpet however you wish, and make other
changes that don't
infringe on your neighbors' property rights. On the other hand, you are
responsible for the
maintenance and repair of paint, wallpaper, fixtures, and appliances,
except for wires and
pipes running through your walls that serve other units. Sometimes people
accustomed to
rental apartments are surprised to learn that their condo building manager
isn't responsible
for fixing their hot water heater.
Legal Rights and Restrictions
Q. What federal laws apply to common interest communities?
A. Few federal laws directly affect the organization and operation
of common interest
communities, but two consumer-oriented federal laws apply directly. Under
the Fair
Housing Amendments Act, effective since March, 1989, developments may
no longer
discriminate against families with children unless the development meets
the act's strict
qualifications for senior citizen developments. Otherwise, it is no longer
legal to advertise
a development as being for adults only or to steer would-be buyers elsewhere
because
their children wouldn't be welcome. It is still legal to prohibit occupancy
by, for example,
people forty years old or younger, but even then a forty-five-year-old
with legal custody of
a child under 18 couldn't be denied access to housing.
The Fair Housing Amendments Act also prohibits discrimination against
disabled
persons. Developments must permit construction of facilities for disabled
residents,
although the disabled resident may be required to remove the construction
upon leaving.
Further, all new multi-family buildings must provide access for the disabled
in every unit
on the ground floor or accessibility by elevator. Under HUD regulations,
this includes
wide doors, free passage for wheelchairs through units, bathroom walls
strong enough for
grab bars, and access to at least a representative portion of the amenities.
Q. How do state laws apply to common interest communities?
A. Most of the substantive law—and confusion—lies
in an ever-changing patchwork of
state statutes. The governance of cooperatives falls under state statutes
governing
corporations and non-profit corporations, because residents of a cooperative
own stock in
the corporation that owns their building. The same statutes apply to the
associations
governing planned communities, which likewise own the common areas.
Condominiums, however, do not have a corporation responsible for liabilities,
taxes, and governance. That is why each state has a special set of laws
detailing how
condominiums must be organized and operated. These laws require each condominium
to
file a declaration and bylaws, with specific requirements regarding the
rights and duties of
the association. Planned communities require no specific statute, but
some states include
them in an act governing all common interest communities.
Condominium statutes vary considerably, from state to state, and many
lack
protections for consumers. While some states provide only the barest framework
for
creating a condominium, others are incredibly complex and detailed. For
example,
Florida, where nearly three million people live in condominiums, understandably
has the
most complex, extensive regulation of all the states.
Uniform Condominium Act
In hopes of bringing some uniformity to the law, the National Conference
of
Commissioners on Uniform State Laws has proposed model laws in the
area, which
twenty-three states have adopted or adapted, and numerous others are
considering. The
Uniform Condominium Act (UCA) allows flexibility for developers while
offering
protection to consumers, such as requiring extensive disclosure before
sale. It covers such
matters as insurance, tort, and contract liability. The Uniform Common
Interest
Ownership Act (UCIOA) extends the same provisions to cooperatives
and planned
communities. So far, only a handful of states have adopted UCIOA. |
Q. What else governs a common interest community?
A. Along with federal and state laws, each individual community
is governed by its own
declaration and articles, a set of bylaws, and various regulations and
decisions
promulgated by the association board. Finally, given the extensive litigation
over the
authority of particular associations, various courts have interpreted
statutes, rules, and
regulations, often based on common law (nonstatutory) principles.
A community association gains its authority from the legal documents that
created
it: the declaration, articles, and bylaws. State statutes often back up
that authority, whether
in the statutes governing non-profit corporations, the specific condominium
or commoninterest
community act, or both. Broadly speaking, a community association may
hold
property, sue and be sued, receive gifts and bequests, make charitable
contributions, make
contracts, borrow or invest money, and assess unit owners for their share
of the expense of
maintaining and operating the community. Some state statutes grant even
more farreaching
powers.
By law, each common interest community must file a set of master regulations,
plus subsidiary documents called articles, plus a set of bylaws. For planned
communities,
the master regulations are called the covenants, conditions, and restrictions.
The same
document for a condo is called a declaration or a "master deed.
A condominium declaration describes the land, building, and other improvements;
the location of each unit; the common elements; and the intended use of
each unit.
Basically, the declaration involves the physical arrangement, including
a floor plan with
tax lot numbers for the various units. But under the laws of many states,
it need not
contain much in the way of operational detail.
The articles of incorporation, called articles of association in non-incorporated
associations, involve the legal establishment of the association, including
the name,
address, and purpose of the association; the aggregate number of shares
permitted;
whether cumulative voting is permitted; and, in general, the power of
the board to make,
alter, and repeal reasonable bylaws.
Q. What do the bylaws regulate?
A. Bylaws dictate how the managing board will be elected and
define their duties and
powers. Bylaws cover such matters as whether the board will manage the
property or
engage a management firm; rules critical to settling disputes that might
arise; how
assessments and reserves are to be determined; what restrictions apply
to the lease and
sale of units; and to what extent board decisions bind unit owners.
Although bylaws in most corporations may be altered freely by the board
or by a
simple majority of the members, many condominium statutes require a two-thirds
or even
three-quarters majority to change them. States that have adopted the Uniform
Condominium Act allow a bit more flexibility, to reduce the chance that
a subdivision will
be unable to adapt to changing conditions. Wherever you live, though,
get used to your
development's bylaws because they are rarely changed.
Challenging Association Rules
In the course of operating the association, boards periodically enact
other rules and
regulations regarding the details of community life, such as how parking
spaces are
allocated. These are subject to judicial review if a unit owner believes
that the board
overstepped its authority in a given regulation. In reviewing regulations,
courts tend to
consider four questions:
• Is the rule consistent with the
declaration and other superior documents?
• Was the rule
adopted in a good faith effort to serve a purpose of the subdivision?
• Are the means adopted to serve the purpose reasonable?
• Is the rule consistent with public policy?
If a court rules that the answer to one of these questions is no,
it might throw out the rule
in question. |
The Board of Directors
Q. How is the board established?
A. The board of directors is elected by the membership to carry
out day-to-day operations
and oversee enforcement of the rules. A typical board has five to seven
members who are
elected on a rotating basis. The board in turn elects officers, such as
a chairman or
president, secretary, and treasurer.
Q. What is the role of the board of directors in managing a multi-unit
dwelling?
A. Typically, the board has broad powers under state law. The
board may raise or lower
assessments and impose special assessments to cover specific repairs or
improvements. It
also may insist that unit owners obey the policies of the association.
Major restrictions on
the purchaser's right to lease, finance, or resell his or her unit may
exist.
Many multi-unit associations grant the board of directors a right of first
refusal to
buy a unit. The way this generally works in practice is that the owner
must offer to sell the
unit to the board before offering it for sale to any other person.
Q. How does the board enforce the association's rules?
A. When a unit owner ignores the rules, the board usually levies
fines against the owner. If
the fines pile up and the owner refuses to pay, the board may file a lien
against the
property and, if necessary, foreclose on it to get the money. Another
approach is for the
association to sue the violator, seeking an injunctive order to stop the
practice in question.
A violator who refuses to follow the court order could be in contempt
of court.
In theory, any unit owner may sign a complaint against a neighbor to initiate
a
process that could lead to fines. In practice, though, most unit owners
are hesitant to sign
formal complaints against people next door, even though they voice their
concerns loudly
to the board. If the community hires a management company—standard
practice in larger
communities—the company's routine maintenance inspections include
checking for
violations of the rules. The employee who discovers the infraction then
serves as a
complaining witness to the board, which more than likely will start by
sending someone to
talk to the violator. Most board members try to be even-handed in their
enforcement, as
they don't want to be criticized for punishing one violator and showing
leniency towards
another.
If the board decides to resort to the courts, it must do so promptly or
risk losing the
authority to enforce the rule. If the rules say you cannot build a tool
shed and you do it
anyway, board members cannot walk past it every day for a year and then
sue to have you
remove it.
Q. How does the board handle assessments?
A. One of the most onerous tasks of an association board is raising
the monthly
assessment that pays for maintenance and various services, from trash
collection to snow
removal. Some state statutes mandate certain levels of reserves to guard
the community's
financial stability and prepare for inevitable capital expenditures. Even
without a mandate,
a board is wise to build up a substantial reserve to avoid having to require
a massive
special assessment when the furnace needs to be replaced.
In some states, associations may not raise the assessment higher than
a set amount
without membership approval. In Illinois, for example, condominium boards
must hold a
referendum of unit owners if the budget increase rises above 15 percent.
Many
condominium declarations adopted ten or fifteen years ago set similar
dollar caps on
assessments without owner approval.
When unit owners are doing well, they may grouse about the assessment
but
chances are they will pay it. But what if a unit owner is in serious financial
trouble, with
several thousand dollars worth of assessments unpaid? If the owner goes
bankrupt, the
creditors line up for their share of what is left—and the community
association is normally
far down the line, well behind the bank that holds the mortgage. If the
association cannot
obtain the bankrupt owner's assessment, all the other property owners
in the community
will have to cover it.
One provision of the Uniform Common Interest Ownership Act, in effect
in
Connecticut, Alaska, and several other states, gives community associations
a "superpriority
lien," putting them first in line for the bankrupt unit owner's share
of the past sixmonth's
assessments. Numerous states are considering this provision, although
it is
opposed by the banking lobby.
Q. What can I do if the board isn't doing its job?
A. Most problems arise if a board neglects the enforcement of
rules or misuses the funds
entrusted to them. If you suspect financial problems, you are entitled
to review the
association's financial documents, including its budget, financial report,
bank loan
documents, and record of reserves. Together with other concerned unit
owners, you may
hire an independent accountant for an audit even if the board refuses
to do so.
If you believe the board has become autocratic and tyrannical, review
the minutes
of the board meetings to see whether decisions were made in accordance
with the
association's bylaws, rules, and regulations. Was there proper notice
of meetings? Were all
procedures proper? If not, some of the board's actions may be void.
When the board has seriously mismanaged its responsibilities, you have
two basic
options. One is to file a lawsuit against the board for breaching its
duties. Be aware,
though, that the board has a right to assess the unit owners to pay for
its own defense, so
you will be paying for both sides. Arbitration or mediation may be a less
costly approach,
if your bylaws permit them. The other option is to run for a position
on the board yourself
and convince some well-qualified neighbors to do the same. In the long
run, that's
probably the best solution.
Handling Problems
Q. Can an owner obtain a variance from the association rules?
A. Under the rules of most community associations, you cannot
make changes to the
exterior of your home without the consent of the board. Normally the board
delegates the
review of plans to an architectural control committee, which sets standards
and uses them
to rule on whether you can add a skylight or put on a screen door. As
a homeowner, you
submit your plans to the committee and cross your fingers. Be aware, though,
that courts
have found that covenant committees do not have the authority to approve
major
violations of the restrictive covenants.
If the board denies your request, you will either have to change your
plans or steel
yourself for a major battle. One New Jersey homeowner sued his association
in 1982 after
its board denied him permission to build a deck. The case was in and out
of court for
years, with neither side willing to budge.
Q What can I do if my neighbor is a problem?
A. The first step is to check the bylaws and regulations governing
the association to see
whether the practice in question is a violation. Then talk about it, first
to the neighbor
posing the problem and then to one of the members of the board, which
often acts as a
mediator to help unit owners informally work things out. If one party
is clearly violating
the rules, the board may ask you to sign a formal complaint to begin a
proceeding that
could lead to fines against your neighbor or even a court injunction to
stop the behavior. If
the problem isn't addressed in the documents and a polite request doesn't
help, one option
is to try alternative dispute resolution. Again, it is important to act
promptly if a neighbor's
behavior makes life unpleasant for you. If you have put up with it without
comment for
ten years, you may have trouble proving your point.
Q. What can you do if the community has too many rental tenants?
A. Owner-occupants often object to renters, who are perceived
as not caring about the
property enough to maintain it properly. Likewise, absentee owners generally
want to
keep up the rental value but don't want to pay for extras. And although
restrictions apply
to tenants as well as to owner-occupants, they are more difficult to enforce.
But if the
board slaps a lien on a unit owner because of the tenant's behavior, the
owner may well
terminate the tenant. If a majority of the unit owners believe the number
of renters is a
problem, they may be able to band together and convince the board to call
for a vote on a
change to the bylaws that would restrict leases.
Q. What can be done if the converter of a cooperative defaults?
A. Although cooperative ownership is rare in most parts of the
country, it is the primary
form of home ownership in New York City. Over the past few years, a glut
of cooperative
conversions in New York and some changes in the laws governing them have
put some
conversion sponsors in deep financial trouble.
When the owner of an apartment building decides to convert it to a cooperative,
the building's residents have a legal right to remain as rent-controlled
tenants for as long
as they wish, unless 50 percent of them decide to buy. The result is that
a typical building
being converted has a large number of rental apartments owned by the sponsor,
who is
responsible for paying more in monthly maintenance fees than he receives
in rent. Many
sponsors have defaulted, whether for not paying maintenance on unsold
shares, not paying
the mortgage, or both. The entire corporation then faces foreclosure or
bankruptcy.
If that happens to your cooperative, there are several ways to avoid disaster.
If the
sponsor has financed the unsold shares, the sponsor's lender would do
well to begin
paying maintenance on those apartments as quickly as possible to protect
the value of the
collateral, then try to sell the shares to the tenants or pay them to
move and resell the units.
If not, the shareholders need to take control of the board of directors,
terminate the
sponsor's proprietary lease, and cancel the sponsor's stock. Then the
rent goes to the
corporation. Quick action is critical to keep the building from deteriorating
in the
meantime.
Q. What can I do if I have a problem with the developer?
A. In an increasing number of cases, condominium associations
have sued their
developers over shoddy construction, breach of contract, negligence, or
fraud. These
lawsuits are complex, time-consuming, and expensive, often involving hundreds
of people
and millions of dollars. But the law expects a developer who cuts corners
on construction
or breaks promises to the unit owners to make up for the damage.
If only your unit is involved in the problem, it is up to you to engage
an attorney
and try to settle the matter out of court, if possible. But if the problem
involves common
areas or common funds, the association may assess all unit owners to pay
its legal fees in
pursuing the developer. In some cases the developer may agree to arbitration
to save the
time and expense of a lawsuit. The important thing, though, is to act
quickly because the
longer you wait, the harder it is to find witnesses or collect a judgment.
Is Your Association Adequately Insured?
Condominium associations typically carry several insurance policies
to cover damage to
building exteriors and common elements, as well as liability for injuries
on the premises.
In a common-interest community containing attached dwellings or dwellings
within a
single building, most lenders and enabling statutes require a single
policy of property
insurance covering the entire building or all of the buildings in
the project. This policy
should not name the unit owners as insureds, but name the association
or a trustee as
insured for the benefit of unit owners and their mortgage lenders.
In such a community
you would only have to purchase property insurance covering your unit's
contents,
including paint, wall paper, furniture and possibly appliances, carpeting
and the
customized built-in portions of the unit. Your unit owner's insurance
should also include a
small amount, from $1,000 to $2,500, covering uninsured losses to
the overall community.
This coverage would pick up your share of large deductibles in the
community association
insurance or it may cover losses which are not covered by the association's
insurance.
In an attached-unit project, liability insurance should be maintained
by the
association to cover the entire project. |
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