By: LARRY J. BERG
The Minnesota Common Interest Ownership Act (MCIOA) has recently undergone a major revision. Some of the changes became effective on August 1, 2010, but many will apply only to common interest communities (CICs) that are created on or after that date, or to future fiscal years. This article is intended to summarize the most significant changes.
A. Changes of Particular Importance to Lenders
1. Effectiveness of a CIC that is not consented to by an existing mortgagee. There have been instances where a CIC is created, but a person with an existing recorded interest in the real estate that becomes subject to a CIC does not join in or consent to the CIC’s declaration. There has been a question as to whether the CIC is effective and, if it is effective, the degree to which the person with the pre-existing recorded interest in the real estate is bound by the CIC’s declaration.
The modifications to § 515B.2-101(b), which became effective on August 1, 2010, makes it clear that the failure of that real estate interest holder to join in or consent to the declaration creating the CIC will not affect the validity of the CIC. That person will not, however, be bound by the CIC’s declaration unless that person: (i) signs a document that uses a legal description of part or all of the CIC, which is then recorded; or (ii) otherwise acknowledges the existence of the CIC in a recorded instrument.
This means that a mortgage lender who did not consent to or join in the declaration creating a CIC will become bound by that declaration if it acts as though the CIC existed by entering into a document, like a partial release of mortgage, that uses the CIC’s legal description and is recorded.
2. Obligation of a mortgagee to respond to a request for consent to an amendment. It has always been difficult for CIC associations to obtain consents from mortgagees to proposed amendments to the CIC’s articles, bylaws, or declaration. The modifications to § 515B.2-118(a)(5) will make it much easier for CIC associations to obtain required consents from mortgage lenders.
Beginning on August 1, 2010, if a mortgage lender is given a written request for consent to an amendment, which was sent by certified U.S. mail, return receipt requested, to the address the mortgagee has provided to the CIC association (or if no address has been provided, the address in the instrument creating the mortgage), the mortgagee’s consent will be deemed to have been given unless the mortgagee’s written refusal to consent is received by the association within 60 days after the mortgagee’s receipt of the request for consent. Please note that a mortgagee’s consent will not be deemed given under this provision for an amendment that would affect the priority of the mortgage or the mortgagee’s ability to foreclose.
3. Liability of a lender who forecloses a mortgage or accepts a deed in lieu of foreclosure on units or additional real estate owned by a declarant. Section 515B.3-104 continues to designate a transfer of declarant-owned units or additional real estate through foreclosure, conveyance by deed in lieu of foreclosure, under the bankruptcy code, pursuant to a judgment sale, and transfers of a similar nature as “Involuntary Transfers.” In an Involuntary Transfer, all Special Declarant Rights (see the discussion of Special Declarant Rights in Section C1 below) are automatically transferred to the person acquiring the property unless one of the following documents provides for the transfer of fewer than all Special Declarant Rights: (i) the document creating the security interest being foreclosed; (ii) the instrument effecting the Involuntary Transfer, or (iii) a separate instrument that is signed by the transferee and recorded within 60 days after the Involuntary Transfer. MCIOA defines a declarant to include “…any person who…succeeds under § 515B.3-104 to any special declarant rights….” Thus, a transferee who receives Special Declarant Rights, even if the transferee is unaware or does not use any Special Declarant Rights, is a declarant who may have liability for obligations imposed on a declarant under MCIOA or the CIC’s declaration.
In the past, the liability of a transferee for the obligations of a declarant was sometimes unclear. For Involuntary Transfers that take place on or after August 1, 2010, there is greater clarity. A transferee under an Involuntary Transfer will become liable for all obligations that MCIOA imposes on a declarant that arise after the effective date of the Involuntary Transfer. A transferee will not be liable for obligations that arose prior to the Involuntary Transfer, but will be liable for express warranties under § 515.4-112 that the transferee makes to a purchaser before or after the effective date of the transfer. A mortgagee who acquires Special Declarant Rights as a result of foreclosure or acceptance of a deed in lieu of foreclosure (and any other transferee who acquires Special Declarant Rights through an Involuntary Transfer) will be able to limit its liability, if the transferee is not an affiliate of the declarant, by recording a document within 60 days after the acquisition, which states either: (i) that the transferee elects to acquire only the Special Declarant Rights described in § 515B.1-103(33) (i), (ii), and (iv) of MCIOA (i.e., the right to complete improvements indicated on a CIC Plat, add additional real estate to the CIC, and maintain and use sales offices, management offices, signs, and models in the common elements); or (ii) that the transferee elects to acquire the Special Declarant Rights solely for subsequent re-transfer to another person who acquires title to units or additional real estate from the transferee.
If the recorded document states that the transferee elects to acquire only the Special Declarant Rights described in § 515B.1-103(33) (i), (ii), and (iv) of MCIOA, then the transferee is liable as a declarant only to the transferee’s own purchasers and only for the obligations of a declarant under the following sections of MCIOA:
- § 515B.401-1(b) – The obligation to provide a purchaser with a current disclosure statement;
- § 515B.4-102(b) – The obligation to appropriately amend a disclosure statement to reflect changes in information required under MCIOA;
- § 515B.4-109 – The obligation to appropriately hold and release escrow deposits;
- § 515B.4-110 – The obligation to release liens that: (i) the purchaser does not agree in writing to take subject to or assume; (ii) if foreclosed, would deprive the purchaser of access; and (iii) are not identified in the disclosure statement as a lien on the unit being purchased that will remain in effect after conveyance;
- § 515B.4-111 – The obligation to conform to MCIOA’s provisions relating to conversion property;
- § 515B.4-113 – The obligations of declarants for implied warranties;
- § 515B.4-117 – The obligations of declarants relating to promotional material; and
- § 515B.4-118 – The obligation to complete improvements shown on the CIC Plat unless the item is labeled thereon as “Need Not Be Built.”
If the recorded document states that the transferee elects to acquire the Special Declarant Rights solely for subsequent re-transfer to another person who acquires title to units or additional real estate from the transferee, then the only Special Declarant Right that may be exercised by the transferee is the right to appoint or remove any officer or director of the CIC association during the period of declarant control. The transferee may not sell any units except to someone who acquires one or more Special Declarant Rights held by the transferee that relate to the units or additional real estate sold. The transferee will not be obligated to make up any operating deficit under § 515B.3-115(a)(2)(iv) relating to an alternate common expense plan, and will be liable for the obligations of a declarant only under the following sections of MCIOA:
- § 515B.3-103 – The operation of the Board of Directors;
- § 515B.3-111 – The transferee’s own tort and contract liability; and
- § 515B.3-120 – Duties relating to turning over declarant control if and when applicable during its period of ownership.
Section 515B.3-104(j) has made it clearer that Special Declarant Rights can be exercised only by someone who, at the time of exercise, holds record title to one or more units or additional real estate. Please note that the transferee’s Special Declarant Rights also will end on the earlier of the date the transferee: (i) voluntarily surrenders its Special Declarant Rights; or (ii) 10 years after the date of conveyance of the first unit in the CIC to someone who was not a declarant.
Please note that because a mortgage lender who acquires declarant-owned units through foreclosure or deed in lieu of foreclosure (or other transferee who acquires Special Declarant Rights in an Involuntary Transfer) is a declarant, when the mortgage lender sells a unit it is obligated to provide purchasers with a disclosure statement under § 515B.4-102 rather than a resale disclosure statement under § 515B.4-107. Mortgage lenders in this position are generally liable to their purchasers for any materially false statement contained in the disclosure statement and for breaches of express warranties. Thus, lenders will have to do some careful due diligence in order to be certain that nothing stated in the disclosure statement is incorrect. Mortgage lenders will also be wise to check all promotional material and limit the ability of agents and other sales people to create or expand express warranties.
Please note that a unit owner who acquires title to a unit pursuant to foreclosure, deed in lieu of foreclosure, or other manner described in § 515B.3-104 of MCIOA must, when requesting a resale foreclosure statement, indicate to the association whether or not that owner is a declarant, as defined in § 515B.1-103(33) of MCIOA.
4. Replacement Reserves. As more fully described in Section B1 of this Summary, associations may, following the end of the period of declarant control, elect to fund the replacement of certain components of a CIC by levying special assessments or, for items that benefit fewer than all unit owners, assessments against the benefited unit owners under § 515B.3-115(e). Please note that if a mortgage lender takes back units in a CIC where cash reserves are not being maintained to fund the replacement of some components of the CIC, the mortgage lender may encounter unexpected liability if an unfunded component requires replacement and a special assessment is levied during the mortgage lender’s period of ownership.
5. Assessments Owed by a Foreclosing Mortgagee. Section 515B.3-116 provides that a foreclosing mortgage lender takes title to a foreclosed unit subject to a lien in favor of the association for unpaid assessments for common expenses that became due, without acceleration, during the 6 months immediately preceding the end of the foreclosed owner’s period of redemption. The changes to § 515B.3-116(c) of MCIOA, which became effective on August 1, 2010, provide that the common expenses are to be based on the association’s then-current annual budget, notwithstanding the use of an alternate common expense plan. Alternate common expense plans are more fully discussed in Section C3.
B. Changes of Particular Importance to Associations
1. Reserves. Section 515B.3-114 of MCIOA continues to require that associations maintain an “adequate” replacement reserve to cover the cost of replacing those items for which the association is responsible. The big changes, which become effective and apply to CICs for their fiscal years commencing on or after January 1, 2012, are as follows:
- The adequacy of the replacement reserve must be reevaluated at least every 3 years.
- An association may adopt a plan under which, in lieu of maintaining a cash reserve, the replacement of certain items will be funded through assessments pursuant to an approved plan.
- It is now clear that no reserve is required for items having a remaining useful life longer than 30 years.
In order to adopt a plan to fund some costs that otherwise would have been the subject of a cash replacement reserve, the plan must be approved by: (i) the board; and (ii) 51 percent of the voting power of the owners other than the declarant. The approval is effective only for the current year and the three following fiscal years, but can be extended from time to time. Please note that a plan of this kind can be adopted only after the period of declarant control ends, and cannot apply to fiscal years that begin prior to January 1, 2012.
2. Effectiveness of CIC. It is now clearer that a CIC is effective even though the declaration was not joined in or consented to by a person holding an interest in the property subject to the CIC declaration. Please see Section A1 above.
3. Effect of a Mortgagee’s Failure to Respond to a Request for Consent to an Amendment. Mortgage lenders who receive a written request to consent to an amendment of the articles of incorporation, bylaws, or declaration, but who do not provide a rejection that is received by the requesting association within 60 days after the mortgage lender’s receipt, will be deemed to have given its consent. Please see Section A2 above.
4. Initial Appointment of Directors; Enforcement of the Governing Documents Against the Declarant. Section 515B.3-103 of MCIOA, which became effective on August 1, 2010, makes it clearer that the first board of directors must be appointed or elected no later than the date the CIC is created. The appointment or election must be reflected in the association’s records. This section also provides that the officers and directors appointed by the declarant have a duty to cause the association to enforce the governing documents and the provisions of MCIOA against all unit owners, including the declarant and its affiliates, in a uniform and fair manner. Please note that directors appointed by the declarant continue to be held to a very high standard – that of a fiduciary.
5. Election of Directors; Turn-Over Meeting. When the period of declarant control ends, the board is obligated to call a meeting, to be held within 60 days after the end of the period of declarant control, at which the board will be elected or appointed by all members. Likewise, if the period of declarant control remains in effect at the time that 50 percent of the units that a declarant is authorized (by the declaration) to create have been conveyed, the board is obligated to hold a meeting within 60 days thereafter at which one-third of the directors will be elected by unit owners other than the declarant or its affiliates. Section 515B.3-103(d)(2) of MCIOA, which became effective on August 1, 2010, provides that if the board fails or refuses to call such a meeting, the unit owners may cause the meeting to be called and, for purposes of establishing a quorum, the declarant and its affiliates shall be deemed to be present.
6. Annual Report. In a companion provision to the changes in § 515B.3-114 of MCIOA, which become effective as to association fiscal years beginning after January 1, 2012, § 515B.3-106 of MCIOA has been amended to provide that the annual report not only state the total reserves, but also the components of the CIC for which the reserves are set aside, and the amount of the reserves that the board has allocated for the replacement of each such component.
7. Electronic Voting. Section 515B.3-110(c), which became effective on August 1, 2010, has been modified to permit voting by electronic means (in addition to mailed ballot or at a meeting), but only if authorized by the statute under which the association was created, and not prohibited by the governing documents of the CIC. Please note that voting by electronic means may not be combined with voting by other means (i.e., an association cannot accept votes by a combination of electronic votes, in-person votes, and mailed ballots).
8. Insurance. Section 515B.3-113 of MCIOA, which became effective on August 1, 2010, now requires a statement as to whether heating, ventilating, and air conditioning equipment serving a single unit is covered by the property insurance maintained by the association.
9. Audit at End of Period of Declarant Control. If a declaration provided for an alternate common expense plan and the declarant has elected to utilize that plan, then the declarant is required to provide the association, within 90 days after the end of the period of declarant control, with an audited balance sheet and profit and loss statement paid for by the declarant. The audited balance sheet and profit and loss statement must be prepared by a licensed, independent, certified public accountant who is not an employee of the declarant or its affiliates, is professionally independent of the declarant or its affiliates, and who meets the American Institute of Certified Public Accountants’ tests for independence. If the audit discloses an operating expense deficit, the declarant must make up that deficit.
10. Waiver of Year-End Financial Review. MCIOA permits the members of an owners’ association to agree, within 60 days after the end of the association’s fiscal year, to waive the review of the association’s financial statement for that fiscal year. To do this, the affirmative vote of 30 percent of the voting power of the members is required. Beginning August 1, 2010, this 30 percent vote must come from members other than the declarant or its affiliates.
11. Parking and Storage Licenses. It has become common, in recent years, for common interest declarations to structure parking stalls and storage lockers as common elements, but to allocate parking stalls and storage lockers to the exclusive use of a benefited unit through a licensing program. Typically, the common element parking stalls and storage lockers are initially assigned to the declarant. The declarant subsequently re-assigns the parking stalls and storage lockers to individual unit owners as part of the process of conveying the living units. This method of allocation is an alternative to structuring parking stalls and storage lockers as limited common elements or as separate parking or storage units. The MCIOA amendments formally recognize the validity of this structure, and provides some additional guidance. If a declaration creating such an assignment program was recorded prior to August 1, 2010, the assignment will be subject to any different licensing provisions in the declaration. On and after August 1, 2010, such assignments of common element parking spaces and storage lockers will be considered common element licenses, which must be evidenced by a separate instrument initially signed by the declarant, that identifies the licensed common element, the unit identifier of the unit to which it is appurtenant, and a reference to the section of the declaration governing common element licenses.
12. Resale Disclosure Statements. The statutory form of resale disclosure statement has changed. Two new provisions are included: (i) a provision in which the association is to describe any common element facilities (such as common element parking stalls or storage lockers) that are being licensed, pursuant to § 515B.2-109(e) of MCIOA, to the unit that is the subject of the resale disclosure statement; and (ii) a provision describing that the replacement of certain items is funded by assessments levied only against the unit or units served by the component pursuant to § 515B.3-115(e)(1) or (2) of MCIOA. Section 515B.3-115(e)(1) relates to assessment of costs of maintenance, repair, or replacement of a limited common element against the unit(s) to which that limited common element is assigned, and § 515B.3-115(e)(2) relates to common expenses for items that benefit fewer than all of the units. Assignment of common element parking spaces, storage lockers and the like is discussed in Section 10 above.
A unit owner who acquires title to a unit pursuant to foreclosure, deed in lieu of foreclosure, or other manner described in § 515B.3-104 of MCIOA must, when requesting a resale foreclosure statement, indicate to the association whether or not that owner is a declarant, as defined in § 515B.1-103(33) of MCIOA. The association is not liable for any loss or damage out of the requesting party’s misrepresentation of its representation or its declarant status.
C. Changes of Particular Importance to Declarants
1. Special Declarant Rights. The Special Declarant Rights described in MCIOA are being expanded for CICs created on or after August 1, 2010. Previously, Special Declarant Rights included only such things as the right to add additional real estate, having and using certain easements, the right to complete certain improvements, the right to maintain marketing facilities, and the right to control the owners’ association. There might be other rights for the benefit of a declarant created in a declaration, but those rights were not Special Declarant Rights, and did not automatically transfer to a lender on foreclosure or deed in lieu of foreclosure. For CICs created on or after August 1, 2010, “Special Declarant Rights” will mean any rights in the CIC’s declaration that are reserved for the benefit of a declarant, which, among other rights, may include the right to: (i) complete improvements indicated on a CIC Plat and to have and use easements through the common elements for that purpose; (ii) add additional real estate to the CIC; (iii) subdivide or combine units or convert units into common elements, limited common elements and/or units; (iv) maintain and use sales offices, management offices, sign, and models and to use easements through the common elements for those purposes; (v) appoint or remove officers or directors during the period of declarant control; (vi) utilize an alternate common expense plan; (vii) grant certain common element licenses; and (viii) review and approve or disapprove the design of exterior improvements or alterations. Please note that a declarant may not exercise any Special Declarant Right after that declarant no longer owns a unit or any additional real estate.
2. Meetings Relating to Change in Status of Declarant Control. If the board of directors does not call a meeting to elect directors at the expiration of the period of declarant control, or when otherwise required by MCIOA (such as when 50 percent of the permitted units have been sold), the unit owners (other than the declarant or its affiliates) may call a meeting of the members. Whether or not the declarant or its affiliates attends the meeting, the declarant is considered present for purposes of determining whether there is a quorum. (Please see Section B5 above.)
3. New Alternate Common Expense Plan. The right of a declarant to pay assessments pursuant to an alternative assessment plan will be replaced by the ability to include in a declaration for a CIC created on or after August 1, 2010, an alternate common expense plan. Under an alternate common expense plan a declarant must pay: (i) a full share of the replacement reserve that would otherwise have been payable on the declarant-owned units; and (ii) an amount equal to the difference between the accrued expenses of the CIC and the amount of those expenses payable by the units owned by non-declarant owners. The declarant is still obligated to make up any operating expense deficit that exists at the end of the period of declarant control, but at least in theory, the declarant is obligated to pay those deficits as they arose, making it much less likely that a significant unfunded deficit will exist at the end of the period of declarant control. The deficit to be made up must be determined by an audit prepared by an independent certified public accountant at the declarant’s expense, which must be completed within 90 days after the end of the period of declarant control. If the audited profit and loss statement shows a deficit, the declarant has to make up the deficit within 15 days after the audit is delivered to the association. The association has a claim against the declarant and a lien on the declarant’s units for the amount due. Note: If there are multiple declarants, each declarant is jointly and severally liable. The lien on each declarant-owned unit can be proportionately released.
The declaration and disclosure statement have to describe the alternate common expense plan, and the declarant has to give the association written notice that it is exercising its right to employ the alternative common expense plan. If a declarant has started to use the alternative assessment plan, the declarant can end the plan prior to the end of the period of declarant control by giving the association 30 days’ notice. Please note that if the declarant utilizes an alternate common expense plan, the declarant is obligated to provide the association with an audited balance sheet and profit and loss statement paid for by the declarant, and to make up any operating deficit, all as more fully described in Section B9 above.
4. Penalty for Not Giving a Disclosure Statement That Materially Conforms to MCIOA’s Requirements. The penalty for not giving a disclosure statement that materially complies with the requirements of MCIOA is being increased from $1,000 to $5,000 per unit, and the limitation period is being increased from 6 months to 1 year. The extension of the limitation period applies only to CICs created on or after August 1, 2010. The increase in the amount that may be recovered by a purchaser became effective on August 1, 2010.
5. Conversion CICs. Section 515B.4-111(g) will affect the purchase rights of tenants in property being converted from rental property to a CIC. So long as a tenant is notified before signing a lease that the leased premises will be converted into a CIC, the tenant will not have an option to purchase the premises the tenant is leasing or any of the other rights provided to tenants when rental property is converted to a CIC. This section will preempt conflicting local ordinances. The conversion must take place within 2 years after such a notice or the tenant will have the ordinary rights that relate to tenants whose apartments are being converted to a CIC.
6. Voluntary Transfers of Special Declarant Rights. The amendments confirm that Special Declarant Rights (described in Section C1 above) do not run with the land, and may be voluntarily transferred only by a separate transfer instrument that is titled “Transfer of Special Declarant Rights” that is signed by both the transferor and the transferee. That document is not effective until recorded, and the transferee must be the record owner of a unit or additional real estate at the time the transfer is recorded. The transfer may include fewer than all of the Special Declarant Rights held by the Transferor. If as a result of the transfer there will be multiple declarants holding Special Declarant Rights, the recorded transfer document must describe the allocation of each Special Declarant Right between or among the transferor and each transferee, including, at a minimum, a description of the units or additional real estate to which each respective Special Declarant Right applies and the name and address of the record owner of the respective units or additional real estate at the time the transfer document is recorded. The obligations of the transferor and the transferee in a voluntary transfer are as follows:
- Liability of the Transferor. The transferor of Special Declarant Rights will remain liable following a voluntary transfer for all obligations under MCIOA that arise on or before the effective date of the transfer. The transferor is not liable for the performance of any obligations that arise after the effective date of the transfer, or for breach of express warranties that a transferee makes to a purchaser. If the transferor and transferee are affiliates, then both are jointly and severally liable for all obligations that MCIOA imposes upon a declarant, no matter when those obligations arise.
- Liability of the Transferee. The transferee of Special Declarant Rights will be liable for all obligations that MCIOA imposes on a declarant that arise after the effective date of the transfer. The transferee is not liable for the performance of any obligations that arise before the effective date of the transfer, except that the transferee is liable for any express warranties the transferee makes to a purchaser before or on the effective date of the transfer.
- Liability of a Transferor if the Transferee Makes a Subsequent Transfer. If there is a subsequent transfer or Special Declarant Rights, the prior transferor remains liable for the obligations that MCIOA imposes on a declarant to the extent that its transferee remains liable, and is relieved of liability to the same extent that its transferee is relieved of liability upon the subsequent transfer.
- Liability of a Transferor and Transferee if the Transferor Retains Some Special Declarant Rights. If the transferor retains some Special Declarant Rights, the transferor and transferee remain jointly and severally liable for the performance of the obligations imposed by MCIOA on a declarant that arise after the effective date of the transfer, except that the transferee is not liable for the following: (i) the duty to deliver a disclosure statement pursuant to § 515B.4-101(b); (ii) the duty to amend a disclosure statement if the information in the disclosure statement materially changes, pursuant to § 515B.4-102(b); (iii) a purchaser’s escrow deposits under § 515B.4-109; (iv) the obligation to release liens under § 515B.4-110; (v) obligations relating to conversion property under § 515B.4-111; (vi) express warranties under § 515B.4-112; (vii) implied warranties under § 515B.4-113; (viii) labeling of promotional material under § 515B.4-117; or (ix) the declarant’s obligation to complete items shown on the CIC Plat and not labeled as “need not be built” under § 515B.4-118. Please see Section A3 above for a description of the liability of a transferor and transferee under an Involuntary Transfer.
7. It is now clearer that in any transfer in which a disclosure statement (as opposed to a resale disclosure statement) is required, the declarant, before conveying the unit, must record or furnish to the purchaser recordable releases of all liens that, if foreclosed, could deprive the buyer of title to or the right to occupy the unit being purchased.