CONDOMINIUM UNITS IN FORECLOSURE DURING A RISING REAL ESTATE MARKET

In 2017, Illinois had the fourth highest rate of foreclosure filings in the United States. While the overall number of foreclosures being filed is decreasing, foreclosures continue to present issues for condominium associations throughout the state.

Generally speaking, a mortgage foreclosure of a condominium unit is a straight forward process.  When a condominium unit owner fails to pay his or her mortgage, the bank files a lawsuit asking that the condominium unit be sold at public auction and that the funds from the sale be applied to the unpaid mortgage.  Over the past decade, it has been a near certainty that a condominium unit sold at foreclosure auction would fetch a price less than what was owed to the bank.  While the condominium association was named as a defendant in the foreclosure action, there was typically no need for it to expend time and money participating, as there was no money left over from the foreclosure sale to go towards unpaid common expenses.

Now, however, this is not always the case for condominium associations.  Rising home values have resulted in an increasing number of condominium units being sold at foreclosure auction for an amount greater than what the bank is owed.  This results in a “surplus,” which is to be used to pay other lien holders, including condominium associations, which have a lien for unpaid common expenses pursuant to Section 9(g)(1) of the Illinois Condominium Property Act and their respective Declaration.

Unfortunately, it’s not always as easy as just asking a court to turn over the surplus funds to the Association.  Assuming the condominium association was named as a defendant in the lawsuit (as Section 9(g)(1) of the Illinois Condominium Property Act requires), by the time the association realizes a surplus exists it is likely the association has been held in default for failing to take action once served with the foreclosure suit.  Some judges have found that a condominium association that has been held in default is not entitled to recover unpaid common expenses from the surplus funds.  Even more frustrating, it is possible these surplus funds will be turned over to the former owner of the condominium unit, despite the fact that this owner failed to pay their proportionate share of the common expenses during their period of ownership!

Beyond preserving its right to collect any surplus funds, there is another reason for a condominium association to strongly consider participating in the foreclosure of a unit.  Section 9(g)(4) of the Illinois Condominium Property Act provides that the purchaser of a condominium unit at a foreclosure sale (or, in the event the unit is purchased by the foreclosing bank, the subsequent purchaser) must pay any unpaid common expenses for the unit which became due during the 6 months “immediately preceding institution of an action to enforce the collection of assessments.”  In short, while the foreclosure of a condominium unit extinguishes the association’s lien for unpaid common expenses, the association is still able to collect 6 months of unpaid common expenses provided it instituted an action to collect them.  One option a condominium association has is to institute their collection action by filing a counter-claim against the owner in the foreclosure case itself.  While instituting a collection action may seem onerous, the Illinois Condominium Property Act also affords a condominium association the right to collect the attorney’s fees and costs form this future owner, along with the 6 months of unpaid common expenses.

To summarize, increasing home values are causing a dramatic increase in frequency and amount of surplus funds being available after foreclosure sales.  In the event a condominium association fails to appear and file a responsive pleading in the foreclosure, it could be precluded from collecting unpaid common expenses from the surplus finds.  Further, and regardless of whether the foreclosure sale results in a surplus, a condominium association is able to collect 6 months of assessments, attorney’s fees, and costs from a future owner, provided that it has instituted an action to collect these unpaid common expenses.  This means that, except in limited circumstances, a condominium association should strongly consider filing an appearance and responsive pleading when served with a foreclosure, as doing so will entitle it to recover unpaid common expenses in the event of a surplus, obtain 6 months of assessments, attorneys, fees, and costs from a future owner of the unit, or both.

NEW CHICAGO ORDINANCE DETERS OWNERS FROM ENTERING INTO SHORT-TERM AND VACATION LEASES IN VIOLATION OF COMMUNITY ASSOCIATION GOVERNING DOCUMENTS

Many, if not most, community association declarations prohibit owners from leasing their units for transient or hotel purposes.  While these types of restrictions have historically been uncontroversial and infrequently violated, the increasing popularity of peer-to-peer rental services such as AirBnB, VRBO, and HomeAway are quickly changing this.  These services make short-term and vacation leasing by owner very convenient and in turn created enforcement and administrative nightmares for community association boards of directors.

On June 22, 2016, the Chicago City Council passed an ordinance further regulating short-term and vacation leasing, including adding additional registration requirements for owners within community associations leasing looking to lease their units for short-term or vacation purposes.  A link to the text of the ordinance is contained here, and below is an outline of some of the changes that significantly affect community associations:

 The ordinance:

  1. Allows community associations to submit an affidavit stating that short-term and vacation leasing is prohibited within the community association. This affidavit can attest that the prohibition was established be either 1) a vote of the Board (i.e., an amendment to the rules and regulations) or 2) a restrictive covenant contained in the association’s declaration or bylaws.  Upon receipt of this affidavit, the commissioner must maintain a “Prohibited Buildings List,” which shall be posted on the City of Chicago’s website.  In the event a community association is included on this “Prohibited Buildings List,” an owner cannot obtain a license to lease his or her unit for short-term or vacation purposes.

(While it has long been our opinion that most community associations have the right to restrict leasing via a board adopted rule (see Apple II Condominium Association v. Worth Bank & Trust Co.) this provision would appear to be the City of Chicago’s recognition that short-term and vacation leasing can be prohibited by a community association’s board of directors, not soley through a restriction approved by the members.  While this acknowledgement by the City of Chicago is far from an absolute guarantee that a courts will uphold short-term and vacation leasing restrictions adopted via rule, it certainly aids a community association’s efforts to defend such a rule’s validity and enforceability.)

  1. Provides limits on the number of units within a community association building that can be leased for short-term or vacation purposes. In community association buildings with two (2) to four (4) units, only one unit per building can be rented.  In community association buildings with more than five (5) units, short-term and vacation rental leases will be limited to either six (6) units or one-quarter (1/4) of the total number of units, whichever is less.
  1. Requires that any owner seeking to list his or her unit as a short-term or vacation rental first register with the City of Chicago and pay a licensing fee. Further, this application requires the owner to attest that the 1) community association has not adopted prohibitions of vacation rentals, and that that 2) the leasing limits (discussed above) have not been reached.
  1. Prohibits on-line platform companies (i.e., Airbnb, VRBO, HomeAway, etc.) from permitting advertisements of units ineligible to be leased for short-term or vacation purposes, including, advertisements for those units within a community association on the City of Chicago’s “Prohibited Building List.” Further, the ordinance provides penalties for on-line platform companies failing to comply this prohibition on advertising ineligible units.
  1. To ensure compliance, the ordinance establishes certain penalties for those violating the ordinance., including fines of $1,500 to $3,000 per offense, with each day that a violation exists treated as a separate and distinct offense. More egregious violations, such as criminal activity or public nuisance, will be subject to a fines of $2,500 to $5,000 per offense.

The passage of this ordinance is definitely good news for community associations struggling with owners leasing units in violation of short-term and vacation leasing restrictions, as it unquestionably discourages such violations.  That being said, the restrictions created by this ordinance are only enforceable by the City of Chicago, and therefore its effectiveness will be completely dependent upon the City of Chicago’s willingness, and ability, to enforce its provisions.  While community associations located within the City of Chicago which prohibit short-term and vacation leasing should certainly take the necessary steps to be included on the City of Chicago’s “Prohibited Building List,” ultimate enforcement may still fall at the hands of the board.

If you or your community association within the City of Chicago are interested in this topic, please contact me to set up a review of your current governing documents and outline the necessary steps to allow your community association to take full advantage of this ordinance.  I can be reached at ben@keaycostello.com or 630-690-6446 x 11.

How to implement electronic voting and notices within your association

Public Act 98-1042 took effect on January 1, 2015. This Public Act contains changes to both the Illinois Condominium Property Act (“Condominium Act”) and the Illinois Common Interest Community Association Act (“CICAA”) concerning associations’ ability to utilize electronic communications in sending notices and voting. Prior to adoption of the Public Act, an association wishing to send notices via email or take votes of the membership online were typically forced to amend their declarations and/or bylaws to do so, which often required approval of the members. Thanks to the recent changes in the law, associations can now take advantage of modern technology (and the efficiency and costs savings that come with it) without the need to obtain the approval of the membership. While many board members are aware of these recent changes to the law and the advantages of utilizing technology, many also have questions on how to actually implement these procedures within their association. This article will provide a general outline as to what steps must be taken before an association can begin sending notices and conducting elections electronically.

Step One: Preparation of the Rule

First, the association must prepare a rule which authorizes the board to send out notices to the members electronically. The rule should include such details as how a member may authorize the association to send notices electronically (email, fax, text, etc.) and that a member may revoke the authorization at any time. Further, the rule should provide that the member may also include an electronic address or a physical address to serve as the member’s address on any list of members which the association is required to provide upon request.

Next, the rule should set forth that proxies are not allowed for elections, but that a member is only allowed to vote either i) in person at the election meeting or ii) by the electronic system adopted by the association. The rule should also provide that instructions regarding the use of electronic means for voting are to be distributed to all unit owners not less than 10 and not more than 30 days before the election meeting, and that unit owners should have at least 21 days’ prior written notice of the deadline for a member to give the association notice of their candidacy.

Step two: Adopting the Rule

For a condominium, the association must first hold a meeting of the unit owners called for the specific purpose of discussing the proposed rule. The meeting should be called and held in the same manner as any other member meeting except that the notice of this meeting must contain the full text of the proposed rule, and no quorum is required at the meeting unless the declaration, bylaws or other condominium instrument expressly provides to the contrary. Once the meeting is held, the Board should vote to approve the rule at a duly called board meeting. For an association subject to CICAA, the meeting of the members is not required, and the rule can simply be voted on at a meeting of the board. But, a common interest community will need to review its own governing documents to determine if any specific procedures have been established concerning rule adoption. If the association is subject to the Condominium Act, any rule allowing elections to be conducted via electronic means must have been approved at least 120 days prior to the board election for it to be effective for that particular election.

Step three:         Obtaining owner consent and information

Both the Condominium Act and CICAA provide that, in order for an association to conduct business with an owner via electronic transmission or other technological means, the owner must give his or her written authorization. If an owner does not give his or her written authorization, the association must, at the association’s expense, conduct its business with the owner without using electronic transmission. As such, once the rule allowing electronic notices and elections is approved, the association should distribute forms to the owners allowing them to 1) authorize and consent to the use of electronic notices and 2) provide the association with the address/number to which notices should be directed.

With the adoption of a rule providing for electronic notices and voting, associations can operate much more efficiently and cost effectively, as well as potentially alleviating many of the concerns regarding how to conduct business in light of the decision in Palm v. 2800 Lake Shore Drive Condominium Association, et. al.