IT’S NEVER A BAD TIME TO REVIEW YOUR DELINQUENCIES

With the budgeting and annual meeting season in the rear-view mirror and with the opening of pool season still a couple of months away, now is the time to review your association’s assessment delinquencies.  There’s never a bad time to review delinquencies, but this is a particularly good time to determine if the owners are all carrying their fair share of the common expense.  I have never understood the thought that any percentage of owners who don’t pay as being acceptable or expected.  Setting an acceptable percentage of 10 or 10% of owners who are delinquent is really an arbitrary action.  Why should 20% of the owners be allowed to not pay their fair share?  The perfect storm of a mortgage foreclosure action coupled with a bankruptcy discharge could ultimately render an owner’s debt uncollectable, but absent the confluence of these events, very few delinquencies are uncollectable.

Recent Illinois Supreme Court decisions in Spanish Court Two and 1010 Lake Shore have recognized and respected condominium association lien rights.  Associations need to take advantage of the myriad of tools available to collect delinquent assessments.  Actions for possession under the Forcible Entry and Detainer Act, lien foreclosure and small claims actions all provide great opportunity to make associations whole.  While the landscape of community association governance has changed substantially over the past few years, one truth remains:  Diligent and aggressive assessment collection is a necessity.  Collection of assessments is the foundation of a board’s fiduciary obligation.  Associations cannot function properly when not fully funded.  In the competitive residential real estate market in which we now find ourselves, buyers are becoming more discriminating.  The financial health of a community is a much more substantial factor in determining whether a particular unit is desirable for purchase.  If a prospective owner has the choice between purchasing a unit in a well-funded community as opposed to one with substantial delinquencies and a looming large special assessment, what decision will this individual likely make?

Boards and management should not struggle with assessment collection.  A comprehensive assessment collection policy that affords the association’s counsel the opportunity to move files diligently without the need to constantly consult with the client will result in a greater success rate on delinquent files.  Regular reviews of an association’s delinquencies is also a must.  Boards and management should be reviewing their delinquencies minimally on a quarterly basis.  Our office also welcomes the opportunity to assist boards and management in reviewing delinquencies and making recommendations as to which accounts should be pursued and whether any debts should be written-off as uncollectable.  The jobs of board members and managers are complicated enough without having to be deeply engaged in the assessment collection process.  Utilize your professionals and allow your attorneys to take this important element of managing an association off your plate.  Don’t ignore your delinquencies.  The law provides great opportunity to minimize and eliminate them.

 

This article is being provided for informational purposes only.  This article does not constitute legal advice on the part of Keay & Costello, P.C. or any of its attorneys.  No association, board member or any other individual or entity should rely on this article as a basis for any action or actions.  If you would like legal advice regarding any of the topics discussed in this article and/or recommended procedures for your association going forward, please contact our office.

APPELLATE COURT PROVIDES SOME CLARITY ON SIX MONTHS RULE

Under Section 9(g)(4) of the Illinois Condominium Property Act, a foreclosure purchaser, other than a mortgagee, or a third-party who purchases a foreclosed unit from a mortgagee must pay to the association six months of common expenses attributable to the prior owner, as long as the association initiated collection against that prior owner.  Since its addition to the Act, this so-called “six months” rule has had relatively few opportunities for review by appellate courts.  However, the First District Appellate Court recently considered what parties are considered “mortgagees” under the Act and thus may pass on the responsibility for the six months to a subsequent third-party purchaser.  Specifically, in Wing Street of Arlington Heights Condominium Association v. Kiss the Chef Holdings, LLC, the court ruled a mortgagee’s wholly owned subsidiary is also a mortgagee under the Act and therefore is not liable for the six months; the six months would become due once that subsidiary sold the unit to a third-party.

Broadly speaking, a mortgagee is the lender or other party that holds a mortgage on a piece of real estate.  In Wing Street, Village Bank & Trust foreclosed its mortgage on a condominium unit.  VBT Wing Street Condo, LLC, a wholly owned subsidiary of Village Bank & Trust, purchased the unit at the judicial sale.  After VBT sold the unit to Kiss the Chef Holdings, LLC, the association sued Kiss the Chef for unpaid assessments.  One of the issues in the case was whether VBT was a subsequent purchaser under 9(g)(4), in which case it would be responsible for the six months, or whether VBT was a mortgagee, in which case Kiss the Chef would then be the subsequent purchaser responsible for the six months.

            In deciding whether VBT was a mortgagee for the purposes of 9(g)(4), the appellate court looked to the Illinois Mortgage Foreclosure Law, which defines a mortgagee as “(i) the holder of an indebtedness or obligee of a non-monetary obligation secured by a mortgage or any person designated or authorized to act on behalf of such holder and (ii) any person claiming through a mortgagee as successor.”  735 ILCS 5/15-1208.  Using this definition, the court determined that, since VBT was acting on behalf of Village Bank & Trust when it purchased the unit at the judicial sale, VBT was a mortgagee and therefore not responsible for the six months under 9(g)(4).  As a result, Kiss the Chef was the subsequent third-party purchaser under 9(g)(4) and therefore responsible to pay the six months of unpaid common expenses.

            Because Wing Street involved a bank’s subsidiary, the court did not make any ruling as to whether other entities that commonly receive deeds following foreclosure sales, such as HUD, Fannie Mae, and Freddie Mac, are also considered mortgagees under 9(g)(4).  However, the court did leave some guidance, specifically that the proper definition to apply is the one found in the Illinois Mortgage Foreclosure Law.  If one of these entities acts on behalf of the lender or is a successor to the lender, it will likely also fit the definition of mortgagee and thereby not bear responsibility for the six months.  Given this is an area of law that has yet to be fully fleshed out by the courts, it is imperative that associations note the six months amount on post-foreclosure account statements in order to ensure the association will eventually recover the full amount to which it is legally entitled.

On December 3rd, the Illinois Supreme Court issued an opinion confirming the holding of the First District Appellate Court in the case of 1010 Lake Shore Association vs. Deutsche Bank National Trust Company. If you are reading this article, you probably know the facts of this case already. If not, in a nutshell, the case involved a foreclosed unit at 1010 Lake Shore that Deutsche Bank purchased at a foreclosure auction. The foreclosed-out owner owed a substantial balance to the Association at the time the foreclosure sale took place. Upon taking ownership of the unit, Deutsche Bank failed to pay any assessments. The Association ultimately sued Deutsche Bank in circuit court and the court entered judgment against Deutsche Bank for the pre-foreclosure balance. Deutsche Bank appealed the circuit court’s ruling and on appeal the First District Appellate Court held and the Illinois Supreme Court subsequently confirmed that under Section 9(g)(3) of the Illinois Condominium Property Act, a foreclosure purchaser must pay common expenses beginning the month after the sale. The Appellate Court and Supreme Court also held that if a foreclosure purchaser fails to pay assessments beginning the month after the foreclosure sale, the association’s lien for common expenses not paid by the foreclosed-out owner is not extinguished and the foreclosure purchaser then becomes obligated to pay the entire pre-foreclosure balance.

What does this mean for condominium associations and how should associations and management handle unpaid balances on foreclosed units?

  • Actively monitoring foreclosures continues to be important. Those associations that work with our office know how frequently we track foreclosure cases for our clients. We have consistently advised our clients the importance of knowing the status of pending foreclosure actions. The holding in this case makes knowing whether a unit has recently been sold at foreclosure auction more critical than ever as not being on top of the status of a sold unit could result in an association losing out on its right to collect pre-foreclosure amounts.
  • Don’t write off balances. Writing off a pre-foreclosure balance without consulting with counsel could result in an association walking away from money it is legally entitled to recover.
  • If the purchaser of a unit at foreclosure (a lending institution, a quasi-governmental agency, or a third-party investor) fails to timely pay the assessment due the month after the foreclosure sale is conducted, turn the account over to association counsel for collection. Do not wait 60, 90 or 120 days after confirmation of the foreclosure sale to turn the account over if there is a pre-foreclosure balance and the new owner has not paid any post-foreclosure assessments.
  • Once an account has been turned over to counsel for collection, do not accept any payments without first discussing the matter with counsel. Accepting a payment will most likely preclude an association from collecting any portion of the pre-foreclosure balance.
  • It does not matter if an association has been included as a defendant in a foreclosure action. The obligation to promptly pay post-foreclosure assessments applies to all foreclosure actions, whether the association has been named as a defendant or not. Further, the Supreme Court also appeared to state that if an association is not named as a defendant in the foreclosure action, the association’s lien is not extinguished even if post-foreclosure assessments are paid.

Because Deutsche Bank did not pay any post-foreclosure assessments, the Supreme Court did not address the timing of when a foreclosure purchasers’ ability to extinguish the pre-foreclosure lien by paying the post-foreclosure assessments expires. The only statement the Supreme Court made on the issue is Section 9(g)(3) “provides an incentive for prompt payment,” but it did not include any definition of what “prompt” means. Therefore, the Court did not impose any set deadline for payment. Accepting a payment, regardless of when the payment is made, most likely eliminates an association’s ability to collect the pre-foreclosure balance. Without any additional guidance from the Court, the best recommendation we can make is to be aggressive in turning accounts over post-foreclosure if the accounts have a pre-foreclosure balance and once accounts are turned over for collection, do not accept any payments.

While the General Assembly has not been responsive to efforts made by those who advocate on behalf of condominium associations to afford some additional relief related to the loss of assessment revenue that usually accompanies a foreclosure, the Illinois Supreme Court has unanimously recognized the obligation of foreclosure purchasers to promptly make payments upon taking ownership of units. If a foreclosure purchaser fails to promptly make post-foreclosure assessment payments and if an association acts diligently, it will put itself in position to recover pre-foreclosure amounts it may have believed were lost once ownership of the unit transferred.

DISPLAY OF AMERICAN FLAG and MILITARY FLAG BY OWNERS

An issue that comes up every now and again in associations is the display of flags by owners. Some association declarations contain complete prohibitions on the display of any flags by owners, while other declarations may be wholly silent on the issue of flags. Fortunately for associations, there is statutory guidance regarding the display of some of the most commonly displayed types of flags, namely the American flag and military flags. The display of other types of flags is not addressed by this article, and will likely depend upon the specific terms of a particular association’s declaration.

For condominium associations, the Illinois Condominium Property Act (765 ILCS 605/18.6(a) and referred to as “Condo Act”) provides, and for associations subject to the Illinois Common Interest Community Association Act (765 ILCS 160/1-70(a) and referred to as “CICAA”) that act provides, that regardless of what other language may be within an association’s declaration, bylaws or rules, the association board “may not prohibit the display of the American flag or a military flag, or both, on or within the limited common areas and facilities of a unit owner or on the immediately adjacent exterior of the building in which the unit of a unit owner is located.” However, while a board may not prohibit the display of the American flag or a military flag by an owner, it may “adopt reasonable rules and regulations, consistent with Sections 4 through 10 of Chapter 1 of Title 4 of the United States Code, regarding the placement and manner of display of the American flag” and “may adopt reasonable rules and regulations regarding the placement and manner of display of a military flag.” Thus, owners within associations governed by either of these statutes are given the right to display an American flag and military flag, but the board may adopt reasonable rules and regulations regarding how such flags are displayed and placed.

Similarly, for any homeowner, property owner or townhome association that is incorporated as an Illinois Not-For-Profit Corporation, the Illinois Not-For-Profit Corporation Act (805 ILCS 105/103.30(a) and referred to as “NFP Act”) contains language permitting owners in such associations, regardless of what language may be contained in the applicable declaration, bylaws or rules of the association, to display the American flag and military flag on the owner’s property. The manner and placement in which such flags may be displayed by owners can be regulated by the Board through reasonable rules and regulations.

In addition to granting owners within associations the right to display the American flag and military flag, the aforementioned statutes also grant owners the right to install flagpoles for the display of the American flag and a military flag. Both the Condo Act (765 ILCS 605/18.6(a)) and the CICAA (765 ILCS 160/1-70(a)) provide that an association board “may not prohibit the installation of a flagpole for the display of the American flag or a military flag, or both, on or within the limited common areas and facilities of a unit owner or on the immediately adjacent exterior of the building in which the unit of a unit owner is located, but a board may adopt reasonable rules and regulations regarding the location and size of flagpoles.” Likewise, the NFP Act (805 ILCS 105/103.30(a)) states that a property owner, townhome or homeowner association that is incorporated as an Illinois Not-For-Profit Corporation may not prohibit the installation of a flagpole by an owner for the purpose of displaying the American flag and a military flag, but the association may adopt reasonable rules and regulations regarding the size and location of such flagpoles. Therefore, each of these statutes grant owners the rights to install flagpoles for the purpose of displaying the American flag and a military flag, but an association may regulate the size and location of such flag poles.

With respect to what flags are covered by the aforementioned statutes, the “American flag” is the flag of the United States of America. As for what constitutes a “military flag”, this means “a flag of any branch of the United States armed forces or the Illinois National Guard” according to the Condo Act (765 ILCS 605/18.6(b)), the CICAA (765 ILCS 160/1-70(b)), and the NFP Act (805 ILCS 105/103.30(b)).

Going into more detail as to what constitutes a “flag”, each of the aforementioned statutes provides that for purposes of this right granted to owners, a flag includes any American flag or military flag “made of fabric, cloth, or paper displayed from a staff or flagpole or in a window, but…does not include a depiction or emblem of [the American flag or a military flag] made of lights, paint, roofing, siding, paving materials, flora, or balloons, or any other similar building, landscaping, or decorative component.” (765 ILCS 605/18.6(b), 765 ILCS 160/1-70(b), and 805 ILCS 105/103.30(b)). So, in short, the right is granted to owners to display actual flags, but not necessarily a decorative depiction of an American flag or military flag painted onto a building or otherwise created out of materials not typically thought of as a “flag”.

In summary, owners within associations are reserved the right by statute to display the American flag and a military flag, and to install flagpoles for the display of such flags. However, association boards may adopt reasonable rules and regulations regarding the display and placement of these flags, and the size and location of flagpoles. With respect to any rules and regulations adopted regarding the display of the American flag, these should be consistent with the United States Code provisions regarding the display of the American flag. The United States Code contains a number of detailed provisions regarding the display of the American flag which I have not included in this article for the sake of brevity. An association considering adopting restrictions on the display of the American flag and military flags would be prudent to consult with its attorney regarding what types of restrictions might be considered reasonable as well as what restrictions would be consistent with the United States Code. If your association is considering adopting restrictions on the display of the American flag and military flags, or already has such restrictions in place and would like them reviewed, please feel free to contact our office and one of our attorneys would be happy to assist you.

 

This article is being provided for informational purposes only. This article does not constitute legal advice on the part of Keay & Costello, P.C. or any of its attorneys. No association, board member or any other individual or entity should rely on this article as a basis for any action or actions. If you would like legal advice regarding any of the topics discussed in this article and/or recommended procedures for your association going forward, please contact our office.

 

SECURED OR UNSECURED, NO LONGER A QUESTION: ASSOCIATIONS MUST FILE PROOF OF CLAIM BY THE DEADLINE IN ORDER TO BE INCLUDED IN CHAPTER 13 BANKRUPTCY PLANS

A recent federal court decision highlights the importance of an association’s manager or board contacting the association’s attorney whenever a homeowner files for bankruptcy protection. When an individual files for chapter 13 bankruptcy protection, she is allowed to repay her debts over a period of up to five years through a court-approved payment plan, and her creditors are barred from attempting to collect on those debts unless first granted permission by the bankruptcy court. The plan is administered by the bankruptcy trustee, an official who collects money from the individual in bankruptcy (known as the “debtor”) and pays the creditors. In order to be included in the chapter 13 payment plan, a creditor, such as an association, must file a legal document with the bankruptcy court known as a “proof of claim.” The proof of claim sets forth the amount the debtor owed to the creditor as of the date she filed for bankruptcy protection (the “pre-petition debt”). Unless the debtor successfully objects to the proof of claim (i.e., convinces the court of some legal reason why the money is not owed or should not be paid through the bankruptcy), the creditor should be included in the plan and receive payments toward the pre-petition debt.

Because unpaid assessments are a lien on a homeowner’s unit in favor of the association, an assessment obligation is a “secured” debt (The lien on the unit “secures” the obligation.). The Federal Rules of Bankruptcy Procedure provide a deadline for when a proof of claim must be filed if a creditor wishes to be included in a chapter 13 plan. However, while it is well accepted that “unsecured” debts such as credit card debt will not be paid through the plan unless the creditor files a proof of claim by the deadline, there has been some confusion over whether this deadline applies to creditors, such as associations, holding secured claims.

The federal Seventh Circuit Court of Appeals, whose jurisdiction includes Illinois, settled this confusion in May 2015 with its decision in In re Pajian. For the first time, the Seventh Circuit clarified the proof of claim deadline established by the Rules of Bankruptcy Procedure applies to both unsecured and secured creditors. If a secured creditor does not file its proof of claim by the deadline, it may not be included in the chapter 13 plan and will not receive payments from the bankruptcy trustee.

The upshot of Pajian for associations is managers and board members, in order to ensure the association receives payments to which it is entitled, must notify the association’s attorney immediately upon receiving notice that a homeowner has filed for bankruptcy protection. The notice typically mailed to creditors by the bankruptcy court includes the proof of claim filing deadline. Given the ruling in Pajian, the proof of claim must be filed by this deadline in order for the association to receive payments through the plan. While a secured debt, even if not included in the plan, survives a discharge in a chapter 13 bankruptcy, collecting that debt five years down the road can be a much more cumbersome process when all that could have been required was filing a form with the bankruptcy court. Therefore, when the association’s manager or board becomes aware of a bankruptcy, notify the association’s attorney so she may, if necessary, file a proof of claim.

THE DISH ON SATELLITE DISHES AND TELEVISION ANTENNAS IN ASSOCIATIONS

A frequent topic that arises in all types of associations is the placement of satellite dishes and television (“TV”) antennas by owners. Many associations simply have in place a blanket requirement prohibiting owners from installing these items without the prior approval of the board. While such prior approval requirements are common, and typically enforceable, for most exterior additions and changes in associations, federal law governs what types of restrictions associations may place on satellite dishes and TV antennas.

Specifically, the federal Telecommunications Act of 1996 empowered the Federal Communications Commission (“FCC”) to adopt rules regarding what types of restrictions associations may place on satellite dishes and TV antennas, which prompted the FCC to adopt the Over-the-Air Reception Devices (“OTARD”) rule, which has been in place since 1996 and amended several times since then. This rule applies for all TV antennas designed to receive local channels and all satellite dishes that are one (1) meter in diameter or less.

In general, the OTARD rule prohibits restrictions adopted by associations that: 1) unreasonably delay or prevent the installation, maintenance or use of a satellite dish or TV antenna; 2) unreasonably increases the cost of installation, maintenance or use of a satellite dish or TV antenna; or 3) preclude reception by an owner of an acceptable quality signal from a satellite dish or TV antenna.

The OTARD rule does not necessarily apply to all areas governed by an association, however. Specifically, the OTARD rule does not apply to common areas owned by an association or to common elements owned collectively by owners within a condominium association, except in areas where an owner has the exclusive use and control of the area. Therefore, in a townhome or homeowner association community, an association’s rules related to satellite dishes and TV antennas on the common area would not be restricted by the OTARD rule. In a condominium association, the association’s rules related to satellite dishes and TV antennas on the common elements would not be restricted by the OTARD rule. But, the OTARD rule restrictions would apply for any areas an owner owns (such as the owner’s home or townhome in a homeowner or townhome community) or that the owner has exclusive use and control over (such as a balcony or patio in many condominium associations). Restrictions related to these portions of the property must not conflict with the OTARD rule. Any association with a question about whether or not an area is, or is not, subject to the OTARD rule should consult with the association’s attorney as this will likely be dictated by the association’s particular governing documents.

With respect to an association that wishes to require prior approval by the board before an owner installs a satellite dish or TV antenna, the FCC has ruled that such prior approval requirements are generally not enforceable unless the prior approval is required for a legitimate, written, safety or historical preservation purpose. If an association establishes a prior approval requirement and asserts this is for a safety and/or historical preservation purpose, if challenged the burden will be on the association to prove that its requirement does not violate the OTARD rule.

Now almost twenty (20) years old, the OTARD rule has been the subject of a number of FCC rulings. Fortunately for association boards and property managers, the FCC has established a summary guide related to this rule with some frequently asked questions that are quite informative. These can be found at https://www.fcc.gov/guides/over-air-reception-devices-rule.

While the FCC guide and frequently asked questions can offer a good summary and outline on a number of topics related to association restrictions on satellite dishes and TV antennas, an association would be prudent to consult with its attorney regarding how to draft restrictions within a declaration and/or rules and regulations governing satellite dishes and TV antennas in the association’s community. If your association is considering adopting restrictions on satellite dishes and antennas, or already has these in place and would like them reviewed for any conflicts with the OTARD rule, please feel free to contact our office and one of our attorneys would be happy to assist you.

This article is being provided for informational purposes only. This article does not constitute legal advice on the part of Keay & Costello, P.C. or any of its attorneys. No association, board member or any other individual or entity should rely on this article as a basis for any action or actions. If you would like legal advice regarding any of the topics discussed in this article and/or recommended procedures for your association going forward, please contact our office.

Senate Bill 1374 Signed Into Law: Developers’ Loophole Closed

On July 14, 2015, Governor Rauner signed Senate Bill 1374 (Public Act 99-0041), which was sponsored by Senator Mike Hastings and Representative Kelly Burke, and authored by Douglas Sury of Keay & Costello, P.C., as a member of the Association of Condominium, Townhouse and Homeowners Association’s (ACTHA) Legislative Action Committee. The bill closed a loophole that was being exploited by developers when establishing non-condominium communities. Over the past couple of years, Doug had seen a number of new townhome communities formed by developers not as not-for-profit corporations, but rather as limited liability companies. Forming associations as limited liability companies allowed developers to avoid subjecting their communities to the governance of the Common Interest Community Association Act (CICAA) and the mandatory turnover provisions found within Section 1-50(b). A plain reading of CICAA appears to only subject communities formed as not-for-profit corporations to its governance. Since the newly formed communities were not subject to CICAA, a developer could record a declaration that allowed it to retain control of the board and the association’s finances for whatever time period it deemed appropriate. That is no longer the case, as now associations formed as not-for-profit corporations and limited liability companies are subject to CICAA and its mandatory turnover provisions. In addition to amending CICAA, Senate Bill 1374 amended portions of the Forcible Entry and Detainer Act to clarify that common interest communities formed as limited liability companies may use the Forcible Act to collect unpaid assessments.

Public Act 99-0041 is effective immediately and a link to the entirety of the Public Act is below. Doug would like to extend his thanks to Senator Hastings, Representative Burke, ACTHA, ACTHA’s lobbyist John Carr and the Illinois Chapter of CAI for their hard work and support of this bill that will have a significant impact for all newly-formed common interest communities.

 http://www.ilga.gov/legislation/publicacts/fulltext.asp?Name=099-0041

 

IT’S JULY, DO YOU KNOW IF YOUR INSURANCE COMPLIES WITH ILLINOIS LAW?

As of June 1, 2015, all condominium associations were required to have insurance consistent with recent changes to Section 12 of the Condominium Property Act. Public Act 98-0762, which was signed by former Governor Quinn on July 16, 2014, became law June 1, 2015 and it modified certain insurance requirements for condominium associations. Note that this Public Act modified only condominium insurance requirements. Common interest communities, master associations and cooperatives were not impacted by this Public Act. The changes to Section 12 of the Condominium Property Act can be summarized as follows:

Property Insurance

Property insurance maintained by the association upon the common elements and units must now also include coverage not only for the full replacement cost of the insured property, but also coverage sufficient to rebuild the property in compliance with current municipal codes and ordinances in effect at the time of rebuild (“ordinance coverage”)

  • An association’s property insurance policy must provide coverage for all costs of demolition and increased costs of construction
  • The combined total coverage for costs of demolition and increased costs of construction must be either 10% of each insured building’s value or $500,000, whichever is less
  • If an association’s property insurance covers betterments and improvements within the units, the policy now also insures any additions, alterations or upgrades installed or purchased by the unit owners

Directors & Officers Coverage

All D & O policies must now cover claims that seek non-monetary relief (i.e. suits for injunctive relief, declaratory actions) and breach of contract actions

  • The D & O policy provides coverage to all currently-serving board members in addition to former and future board members
  • The managing agent, the managing agent’s employees and any employees of the board must be covered under the association’s D & O policy

Public Act 98-0762 also removed the statutory authority of a condominium association to purchase insurance on behalf of an owner who fails to do so. This is a codification of what many have found over the years to be a commercial impossibility. Insurers have been unwilling to write these policies for associations often citing the lack of an insurable interest. As a result, if an association has a governing document provision requiring unit owner insurance and should an owner fail to maintain the coverage, the board’s only option compel purchase of the required insurance is to file an action in circuit court.

If an association has not done so already, it should consult with its insurance professional to verify its coverage is in compliance with the recent changes to Illinois law. There is no exception that allows a board to wait until renewal to come into compliance and only policies that are consistent with the current language of Section 12 of the Condominium Property Act may be written by insurers or renewed by associations.

 THE RETURN OF LEASING AND RESTRICTIONS AT ASOCIATIONS

As Illinois and the rest of the nation recovers from the crash of the residential real estate market, the issue of leasing restrictions has, again, arisen. Many associations having survived the onslaught of foreclosures are awaking to realize that the formerly owner occupied properties are quickly being bought up by groups of investors. Sometimes this has occurred over a number of years, but for some associations it seems like it happened overnight. Associations may quickly see the number of rental properties in their communities go from a comfortable five to ten percent, to a painful or problematic thirty percent.

The increase in rental units can be concerning to community associations for a myriad of reasons. When such concerns arise, boards and the owners have choices when it comes to who may occupy individual living units. The first choice to be made is whether leasing of units should be restricted in any fashion. If the answer to that question is yes, there are several leasing restriction options available for consideration. Whether an association chooses to allow leasing or not, it is important for boards and the owners to know their rights with respect to enacting leasing restrictions.

When an association decides to enact a leasing prohibition, either outright, with a grandfather clause or a cap, the association must determine whether to include such prohibition or restriction as a rule or by an amendment to the declaration containing a restrictive covenant. The difference between a rule and a covenant could determine the enforceability of the prohibition/restriction. In Illinois the seminal case on leasing restrictions is Apple II Condominium Association v. Worth Bank and Trust Co., 277 Ill.App.3d 345 (1st Dist. 1995).

The unit owners in Apple II were investment owners who purchased their property at a time when the association had no leasing restrictions. However, the appellate court stated that “neither the fact that there were no restrictions on the property when the [complaining unit owners] purchased their unit nor the fact that the [complaining unit owners] purchased the property for investment purposes is relevant.” Additionally, the court in Apple II acknowledged that while leasing restrictions put in place by rule are legal, courts will employ a greater level of scrutiny since the rule was adopted solely by a board and not the owners.

Once an association determines that a leasing amendment restriction would be beneficial to their community, a decision must be made as to the nature and extent of such a restriction. Does the association want to completely ban leasing of all units? Does the association want to limit leasing only to those units that are leased as of the time the amendment is passed? Does the association want to allow all current owners the opportunity to lease their units but prevent any subsequent purchasers from being able to enter into leases? Does the association want to impose a percentage cap?   Each of these decisions need to be carefully considered and properly documented in the language of any proposed amendment.

If a board and the owners at an association decide that restricting leasing of units would be beneficial to the association, the board should take several steps. First, the board should consult the association’s governing documents and review what they say about leasing. The next step the board and the owners must determine is the nature and extent of leasing restriction to be enacted. Finally, the best approach is for the board to propose an amendment to the governing documents and then have the proposed amendment voted on by the owners. While there are several options available to the board and the owners, it is up to the board and the owners to decide which leasing restriction best suits their community before it’s too late.

CONDOMINIUMS vs. COMMON INTEREST COMMUNITIES

A common source of confusion among property managers, association boards, and even attorneys is how to calculate the amount of charges that must be a paid by a third-party buyer (i.e., not the foreclosing bank) when a foreclosed property is sold, the so-called “six months.” Perhaps the greatest confusion is the fact the Illinois General Assembly established different rules for condominiums and common interest communities. A brief discussion of the similarities and differences between the two should provide some guidance for manager and boards and help to ensure the association receives the maximum amount to which it is legally entitled.

The six months rule for condominiums is established by Section 9(g)(4) of the Condominium Property Act. According to this Section, a third-party buyer is obligated to pay those common expenses that came due in the six month period preceding the institution of a collection action against the prior owner. Therefore, at a minimum, the subsequent purchaser must pay the unpaid charges attributable to the prior owner that came due during the six month period before the association started a collection action against the prior owner. Furthermore, Section 9(g)(5) also provides the foreclosure sale notice that is published in the newspaper must state any potential buyer, in addition to the six months, will be also be responsible for the legal fees required by Section 9(g)(1) of the Condominium Property Act. According to Section 9(g)(5) these fees must also be paid by a third-party buyer. Therefore, when calculating the total amount due from that buyer, a condominium association, in addition to the common expenses that came due in the six months preceding the initiation of a collection action against the prior owner, may also include in the total any legal fees incurred by the association in that collection action. Also, the six month limitation does not appear to apply to the legal fees; the full amount of legal fees, regardless of when they were incurred, may be added onto the six months of unpaid common expenses.

The six months rule for common interest communities is found in Section 18.5(g-1) of the Condominium Property Act. This provision is similar to the rule for condominiums in that a third-party buyer is also responsible for six months of common expenses that came due prior to the association starting collection against the prior owner. However, unlike Section 9(g)(5) which provides the buyer must pay all of the legal fees incurred in the collection case against the old owner, Section 18.5(g-1) limits this responsibility to court costs (e.g., court filing fees, process server fees, etc.). Therefore, a common interest community can recover the court costs but not the attorney’s fees it incurred in the previous collection action.

In summary, both condominium and common interest communities can recover six months of unpaid common expenses when a third-party purchases a foreclosed property. A condominium may also include the attorney’s fees and court costs it incurred in pursuing a collection action against the prior owner, while a common interest community may only include the court costs. In order for the six months rule to apply at all, both provisions of the statute require the association to initiate collection against the owner prior to the foreclosure sale taking place. While the association will incur legal fees in doing so, some (or in the case of condominiums, all) of those expenses can eventually be charged to the third-party that ultimately receives title to the property. Therefore, when the manager or board receives notice that a unit is in foreclosure and the owner is delinquent on assessments, the board should consider its rights under the applicable six months rule and how much of the delinquency it will be able to recover in the event it proceeds to initiate a collection action.