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NEW LAW AMENDING THE CONDOMINIUM PROPERTY ACT CLARIFIES A BOARD OF DIRECTORS’ ABILITY TO SECURE LOANS

Public Act 099-0849 was signed into law by Governor Rauner on August 19, 2016.  The new law changes the Condominium Property Act to clarify the inconsistency in within Section 18.4 of the Act.  The amendment to Section 18.4 (m) of the Act permits boards of directors, by majority vote, to execute various bank documents to secure a loan on behalf of an association.  Currently the language of Section 18.4 (m) has a qualifier relating to the “condominium instruments” and there is a concern that some old condominium declarations and by-laws may require up to two-thirds of the owners to vote when either pledging an association’s assets or assigning future income.  This change makes it clear that a board of directors, without owner approval, by majority vote can assign future income of an association and pledge the assets of an association.

This change in the Condominium Property Act takes effect January 1, 2017.

 

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. 

 

 

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.

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.

RULES AND REGULATIONS:
HOW ARE THEY CREATED? HOW ARE THEY ENFORCED?

I. What are they?

While the adoption of rules and regulations is not required of any community association in Illinois, most find it advantageous to do so. As compared to the declaration, which creates/establishes the condominium or common interest community, and the bylaws, which deal primarily with the obligations and duties of the board and governance of the community, the rules and regulations provide an opportunity to govern the details, operation and day-to-day living at the entire property.

II. How do rules and regulations differ from the declaration and bylaws?

A. Declaration

With respect to condominium associations, Section 4 of the Illinois Condominium Property Act (the “ICPA”) requires that certain provisions be included in each condominium declaration. Some of these provisions are:

a. the legal description of the property;
b. legal description of each unit;
c. the name of the condominium association;
d. the name of the city and county in which the condominium is located;
e. the percentage of ownership in the common elements assigned to each unit, and;
f. a description of the common and limited common elements. (765 ILCS 605/4)

The declaration for each an association must also be recorded in the county in which the community is located. The recording of the declaration informs the public that the common interest community has been created and that all property within the community is subject to its provisions, covenants and restrictions.

B. Bylaws.

The Illinois Condominium Property Act sets forth certain provisions that must be included in each set of bylaws for condominium associations. Some of these provisions are:

a. the procedures for the election of a board of managers;
b. the powers and duties of the board;
c. the mechanism for removal of board members;
d. notice requirements to the owners regarding adoption of the association’s annual budget;
e. the mechanism for filling vacancies on the board;
f. maintenance, repair and replacement of the common elements and the method of payment therefore, and;
g. the mechanism for calling special meetings

The bylaws for an association prescribe the operations and dealings of the board, which is the governing authority for the community. The bylaws also play an important role by establishing the rules for payments made in conjunction with the maintenance, repair and replacement of the common elements.

C. Rules and Regulations.

Unlike the declaration and bylaws, an association’s rules and regulations are not required to include any particular provisions. As stated in the introduction, there is no requirement that an association, be it condominium, townhome or other, adopt rules and regulations at all. But there are a number of day-to-day concerns of individual owners, and the community as a whole, that are not typically included in declarations and/or bylaws and must therefore be addressed and codified in a separate document. That document is a set of rules and regulations.

III. What types of provisions are appropriate for inclusion in a set of rules and regulations?

The specific needs and concerns of a community truly dictate what provisions would be appropriately included in a set of rules and regulations. For illustrative purposes, the following areas of concern are routinely addressed by way of rule:

A. parking;
B. storage of personal items;
C. exterior appearance of units/homes (architectural controls);
D. disposal of refuse;
E. use and enjoyment of common areas;
F. appearance and use of limited common areas;
G. landscaping on individual lots;
H. use and storage of play equipment;
I. pets, and;
J. satellite dishes/over-the-air reception devices.

IV. Procedures and considerations for creating, adopting and enforcing rules and regulations.

A. Creation.

One of the first questions a community should ask, and answer, prior to adopting certain rules is whether or not the proposed rule is necessary. If the item of concern is already addressed in either the association’s declaration or bylaws, the additional rule may be superfluous. Further, if the declaration and/or bylaws specifically address the issue at hand, the association may not change the language contained in the declaration and/or bylaws by adopting a rule. Any rule that is contrary or in conflict with a similar provision in the declaration and/or bylaws will be invalid and unenforceable. The only way to modify, alter or overturn a provision in the declaration and/or bylaws is to amend that specific document. The declaration and/or bylaws may not be amended, modified or rescinded by passage of a rule. If, however, the declaration and/or bylaws contain no provisions addressing the association’s specific concern, adopting a rule to govern the desired conduct is appropriate. Lastly, the rule adopted by the community may not conflict with statutory law.

Other than determining whether a proposed rule conflicts with the law or the association’s declaration and/or bylaws, the most important consideration when drafting a rule is to avoid vagueness. If an owner does not know what he or she is permitted or prohibited from doing, the association will have a difficult time enforcing the rule. Therefore, all rules should be drafted as narrowly as possible to avoid any “gray areas” or confusion.

B. Adoption.

For common interest communities, there are no specific statutory procedures to be followed for adopting rules and regulations. For those communities, the declaration and bylaws must be consulted to determine the appropriate process. Should the governing documents be silent, the discussion below with respect to condominium associations and the procedures to be employed would be appropriate for all such communities. The procedures for adoption are significant as if an owner challenges a rule, a court will be called upon to determine: 1) whether the rule is enforceable and 2) whether the owner violated the rule. The association must follow its own procedures established by its governing documents or, for condominium associations, those procedures established by the ICPA. Should those procedures not be followed, then the rule is not likely to be enforceable. Attention to procedure is of critical importance to assure the enforceability of an association’s rules.

For a condominium association, section 18.4 of the ICPA governs the procedures condominium associations must employ when seeking to adopt or amend rules and regulations. First, once the board has developed the rule or rules it seeks to adopt, the same should be prepared in written form, suitable for distribution to the owners. Section 18.4(h) of the ICPA requires that all owners be given the full text of the proposed rules along with the notice of the meeting at which discussion of the rules will take place. Notice of such a meeting, which must include a copy of the full text of the proposed rule or rules, is to be delivered to the owners not more than 30 and not less than 10 days prior to its scheduled date. Voting on whether to adopt or amend rules and regulations is within the specific purview of the board. Once the meeting to discuss the rules has been held, the board, by majority vote, will determine whether the rules are adopted.

C. Enforcement.

The two concepts that all communities seeking to enforce its rules and regulations must be cognizant of are uniformity and reasonableness. It is imperative that an association, when enforcing a specific rule, does so equally and without prejudice as to all owners. This is true whether an owner is delinquent in his or her assessment payments, is a chronic violator of the rules, or is one of your friends. All owners must be viewed and treated the same when evaluating a violation of the rules and regulations.

As for reasonableness, this is a difficult concept to define. How can a board make a determination as to whether a rule or regulation is reasonable? Obviously, there can be a myriad of opinions as to what rules an association should enact. Since a true and complete consensus on most rules is most likely unattainable, finding some common ground is the goal. If the association can develop a rule or set of rules that a majority of the owners can live with, while perhaps not agreeing with the specifics of each rule, that association is probably acting “reasonably.” When an association’s rules and regulations reflect that certain compromises and concessions concerning personal tastes and preferences must be made when living in a common interest community, reasonableness has probably been achieved.

a. Notices of violation.

It may seem obvious, but it is important to remember that an owner cannot be determined to have violated a rule without first being notified of the violation. While no specific form of notice is required, the owner should be informed of the rule he or she has allegedly violated, along with the time, date and location of the violation. The notice should also set forth whether the alleged violation is the first, second, etc. occurrence and the fine that could be levied in the event the board determines that the violation did in fact occur. The notice should also afford the owner an opportunity to request a hearing with the board. The association can handle this in a couple of different ways. First, the notice can set forth a specific date and time at which the owner is welcome to appear before the board and present facts supporting her contention that the violation did not occur or why any fine to be levied in conjunction with the violation is inappropriate. Alternatively, the association can merely inform the owner that he or she has the right to request a hearing before the board by notifying the association in writing of the request. As my discussion below will establish, the failure to provide an owner the opportunity for a hearing (i.e. some form of due process) prior to levying a fine could invalidate any such fine levied by the association. Section 18.4 (l) of the ICPA and Section 1-30 (g) of the CICAA require an association provide the owner with an opportunity to be heard. This means the hearing (or at least the opportunity) must come before the fine.

b. Hearing.

Once again, there is no set method for conducting hearings on violations of the rules and regulations. Minimally, the owner should be afforded an opportunity to tell his or her side of the story to the board. The owner should also be allowed to present witnesses on his or her behalf. There is no requirement that the person who reported the violation be present at the hearing or that the owner be provided an opportunity to question the reporting witness. Once the owner has presented his or her side of the story, no further process is required prior to the board making its ruling. Please note that Section 18.5(c)(4) of the ICPA and Section 1-40(b)(5) of the CICAA allow the board to conduct hearings on violations of the rules and regulations in closed, executive session. If the board conducts the hearing in executive session, the board must re-convene to the open portion of the meeting for voting on the alleged violation and fine.

Following the board’s determination, a letter should be sent to the owner setting forth the ruling, what fine (if any) has been levied against the owner’s account and if a fine has been levied, the amount of time the owner has to pay the fine before it is considered late.

c. Fines.

As indicated by the discussion above, the ICPA and the CICAA provide associations with the ability to levy fines against owners who fail to abide by the rules and regulations. Any fines so levied will be added to and become part of the owner’s common expense account with the association. In order for fines to be considered valid and levied properly, the consequences for failing to abide by the rules and regulations must be specifically spelled out. Failure to put the owners on notice that a violation of the rules and regulations may result in a monetary fine could result in the association’s inability to collect the fine.

Courts are generally reluctant to award substantial amounts to associations as a result of owner violations of the rules or other governing documents. Therefore, while a board may think that a $500.00 fine will compel owners to clean up after their pets, in all likelihood, if the owner does not pay and the association takes the owner to court, the fine will not be upheld. Simply put, fines are acceptable, but the amount of the fine cannot be greatly disproportionate to the offense and damage to the association/owners resulting therefrom. Acceptable fine structures usually start with either a written warning or a small fine (i.e. $25.00) upon the finding of a first violation. From the first fine forward, the association may adopt a graduated scale of fines for subsequent violations (i.e. $50.00 for the second violation, $100.00 for the third violation and $100.00 for each such subsequent violation of the same rule). Should an owner fail to pay any fines properly levied, the association may pursue the unpaid fines as it would unpaid assessments. Most governing documents also allow an association to recover the attorney’s fees and court costs it incurs in pursuing such an action.