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Common Interest Community Law Changes Beginning August 1
By J. Patrick Brinkman

The Minnesota Common Interest Ownership Act, Minnesota Statutes Chapter 515B (“MCIOA”) was enacted into law effective June 1, 1994. In the 16 years since its enactment, MCIOA has served us well as the law governing development and operation of common interest communities (“CICs”), which include condominiums, cooperatives, and planned communities (e.g., townhouses, “quads” and twin homes).  However, recent economic changes have created new issues for common interest communities and there was a need to further develop MCIOA to keep up with times.

In 2007, the Council of the Real Property Law Section of the Minnesota State Bar Association appointed a committee chaired by David B. Eide, an attorney of Felhaber, Larson, Fenlon & Vogt, P.A., to draft a comprehensive update of MCIOA.  David and the rest of his committee spent over two years discussing, analyzing and drafting a comprehensive amendment (the “Amendment”) with an emphasis on (1) clarifying and upgrading buyer and homeowner protections, and (2) clarifying and upgrading key operating provisions affecting declarants and lenders.  The Amendment was adopted as law on April 22, 2010 and has an effective date for most sections of August 1, 2010.  While the Amendment is extensive, MCIOA’s basic philosophies, concepts and operating structure remain intact.

The following comments are of selected “highlights” and are not intended as a comprehensive or complete analysis of the entire Amendment.

APPLICABILITY

Most, but not all, of the sections of the Amendment are applicable to all existing CICs as of August 1, 2010.  Certain sections apply only to CICs created on or after August 1, 2010 and other sections have limits on applicability tailored to the section.  For example, the Amendment sections pertaining to Replacement Reserves apply only for owners’ associations’ fiscal years commencing on or after January 1, 2012.

SPECIAL DECLARANT RIGHTS: TRANSFER AND LIABILITY

The Amendment completely reorganizes the section dealing with special declarant rights and clarifies a variety of technical issues, primarily to address previously unrecognized problems that have arisen in foreclosures involving CICs. 

• The definition of “special declarant rights” is expanded to include any rights reserved and identified as special declarant rights in the declaration.  In addition to restating the existing special declarant rights, the Amendment adds the declarant rights to utilize an “alternative common expense plan” (discussed later in these highlights), to grant common element licenses, and to review and approve architectural changes.
• The Amendment clarifies the distinction between a voluntary transfer and an involuntary transfer of special declarant rights.  An involuntary transfer is typically the result of the foreclosure, termination, or cancellation of a security interest, foreclosure of a judgment lien, tax judgment sale, tax forfeited land sale, sale or transfer under bankruptcy code or receivership proceedings, or other sale or transfer approved by a court, or conveyance by deed in lieu of foreclosure.
• The Amendment imposes a number of requirements on voluntary transfers of special declarant rights that can result in multiple declarants with different rights and obligations. 
• While the substantive provisions relating to the liability of a transferor and transferee declarant are retained, clarification is provided regarding the rights and liabilities in cases involving multiple declarants.  In the case of voluntary transfers, multiple declarants have joint and several liability for operating deficits unless the transferor and transferee declarant provide otherwise in the transfer of special declarant rights document. 
• The Amendment also mandates that special declarant rights may be exercised only by a party who is the record owner of a unit or additional real estate in the CIC at the time of exercise of the special declarant right. 
• Special declarant rights, including the declarant’s unilateral right to add additional real estate, previously terminated 10 years after the date of the first conveyance of a unit to a person other than a declarant, subject to the declarants’s right to voluntarily surrender or convey the rights earlier. Now the special declarant rights may be extended beyond 10 years by a vote of unit owners entitled to cast 67% of the votes allocated to units not owned by a declarant.

The disclosure statement required by MCIOA must contain the name and principal address of each declarant holding any special declarant rights, a description of the special declarant rights held by each declarant, a description of the units or additional real estate to which the respective declarant rights apply, and a copy of any recorded transfer of special declarant rights.

For the most part, these changes are applicable only to CICs created on or after August 1, 2010.

MASTER DEVELOPER: DEFINITION

A master planned community may include one or more common interest communities and/or communities that are not common interest communities. The Amendment states the master developer of a master planned community may be a person other than the owner or owners of the real estate subject to the master declaration at the time it is recorded, but in the absence of a designation in the declaration, the owner or owners are the master developer.

MASTER DEVELOPER CONTROL PERIOD

MCIOA states the master developer control period will terminate upon the earliest of; (i) the voluntary surrender of the right to appoint directors; (ii) 10 years after the date the master declaration is recorded; (iii) the termination date, if any, in the articles of incorporation; or (iv) the date when at least 75% of the units have been conveyed to third persons other than a master developer, master association, declarant, or association.  The Amendment changes (iii) from Articles of Incorporation to declaration and allows the 10 year date in (ii) to be extended by an amendment to the master declaration approved in writing by the master developer and 67% of the votes of the master association members other than the master developer.

REDUCED ASSESSMENT PLAN FOR DECLARANTS

MCIOA currently authorizes the declarant, for each unit owned by it, to pay a reduced assessment equal to 25% of the operating expense portion of the assessment.  Based on experience the 25% formula did not work for all CIC projects. 

• The Amendment provides for a new “alternate common expense plan” that allows the declarant (through the declarant-appointed board) to levy an assessment against all units, but for itself to elect to pay only the aggregate operating expenses over and above those paid by the non-declarant unit owners’ assessments. The Amendment does however still require the Declarant to pay the full share of replacement reserves for units owned by the declarant. 
• The alternate common expense plan must be authorized by the declaration, and if elected by the declarant, disclosed to prospective buyers in the disclosure statement required by MCIOA.
• If a declarant utilizes an alternate common expense plan, the declarant must arrange and pay for an audit to be delivered to the association within 90 days after the termination of the declarant control period.  If the audit reports a cumulative operating deficit from the time the CIC was created, the declarant is obligated to make up the deficit within 15 days after delivery of the audit report to the association, and the association has a claim against the declarant and a lien against declarant-owned units for the amount equal of the deficit.
• The Amendment also expressly authorizes the levying of special assessments for certain limited purposes.  MCIOA currently contains no reference whatsoever to special assessments but this is a type of assessment that is authorized by virtually all declarations.
• The disclosure statement required by MCIOA must contain a description of any alternate common expense plan, and a statement that the alternate common expense plan will have no effect on the level of services or amenities in the CIC, or a statement describing how the services or amenities may be affected.

This section of the Amendment applies only to CICs created on or after August 1, 2010.

REPLACEMENT RESERVES

As a consequence of the economic downturn over the past years and the resulting increased number of troubled CIC projects, it is common for replacement reserves to have been underfunded or “pirated” for operating expenses or uses other than their intended purpose.  Lenders, unit mortgage insurers and mortgage buyers in the secondary market, such as FHA, FNMA, and Freddie Mac, have tightened their replacement reserve requirements.

• The Amendment requires the replacement reserves be kept in an account or accounts separate from the association’s operating funds, and prohibits the use of or borrowing from replacement reserves to fund the association’s operating expenses. 
• The association is required to re-evaluate the adequacy of its budgeted replacement reserves at least every third year after the recording of the declaration but it is not required to acquire a so-called “reserve study.” 
• The Amendment includes a flexibility provision whereby, unless prohibited by the declaration, following the termination of the period of declarant control the association may fund certain replacement costs through assessments other than annual assessments (for example, limited assessments or special assessments) provided that such a plan is approved by the board and by owners, other than the declarant or its affiliates, of units to which 67% of the votes in the association are allocated.
• The disclosure statement required by MCIOA must include the components of the CIC for which the reserves are budgeted and the amounts of the reserves, if any, that are allocated for the replacement of each of those components.  The disclosure statement must also include a statement as to those components of the CIC whose replacement will be funded by assessments other than by replacement reserves included in the annual budget.

This section does not apply to non-residential CICs unless otherwise required by their declarations, and applies to all other common interest communities only for fiscal years commencing on or after January 1, 2012.

ASSOCIATION FINANCIAL STATEMENT REVIEW

Presently, MCIOA provides that a review of the association’s financial statements shall be made by a licensed, independent certified public accountant at the end of the association’s fiscal year, unless the requirement is waived at a meeting or by mail ballot by unit owners of units to which at least 30% of the votes in the association are allocated.  This allowed the declarant’s and declarant affiliates’ votes to be counted.  The Amendment changes this to exclude the declarant’s and declarant affiliates’ votes in approving a waiver. 

DECLARANT STANDARD OF CONDUCT AND TURNOVER OF ASSOCIATION CONTROL

The Amendment now codifies an express fiduciary duty and standard of care for association officers and directors appointed by the declarant. The officers and directors appointed by the declarant have a duty to fulfill, and to cause the association fulfill, their respective obligations in a uniform and fair manner for all unit owners, without deference or special consideration to the declarant or its affiliates.

The Amendment also authorizes unit owners other than a declarant and its affiliates to call a meeting of the association to turn over control of the board if the declarant fails or refuses to do so in a timely manner. 

• To avoid allowing a master developer or declarant to defeat a quorum necessary at such a meeting, the Amendment states that a master developer or declarant is deemed to be present for purposes of establishing such a quorum, regardless of a failure to attend the meeting.

MORTGAGEE CONSENTS

MCIOA currently provides that a mortgagee/secured party that does not consent to the declaration upon its recording is not bound by the declaration, but then more generically provides that the secured party may subsequently be bound by acknowledging the existence of the CIC and the recorded instrument. 

• The Amendment clarifies the means by which a secured party may acknowledge the existence of the CIC by expressly referencing the execution of a recorded instrument that includes a legal description of part or all of the CIC.

Presently, obtaining mortgagee consent for, by way of example, an amendment to the declaration requiring mortgagee consent, has been a daunting, time consuming and expensive task. 

• The Amendment eases this burden by authorizing the obtaining of a secured party’s consent to an amendment by way of a certified mailing to the secured party.  If the secured party does not object to the amendment within 60 days after receipt of the notice, the amendment is deemed approved by that mortgagee. 
• The subsection does not apply to a declaration amendment that affects the authority of a secured party’s security interest or the ability of the secured party to foreclose its security interest. 
• The Amendment is consistent with the current FNMA regulations concerning mortgagees’ consents to declaration amendments, and provides to associations a more practical alternative for obtaining such consents. 

This section applies only to CICs created on or after August 1, 2010.

GARAGE STALL, STORAGE LOCKER, COMMON ELEMENT SPACE LICENSES

While currently common practice, the Amendment now expressly empowers the declarant, if authorized by the declaration, to grant to a unit buyer an excusive license for the use of a common element designed to serve as a garage stall, storage locker or other similar common element space.  The Amendment specifies that the common element license shall not be recorded and provides guidance to the CIC association for internal record keeping with respect to the licenses and their transfer. 

This section applies only to CICs created on or after August 1, 2010.

ELECTRONIC NOTICES AND VOTING

The Amendment authorizes notices and voting by electronic means (i) if given in compliance with the statute under which the CIC association was created and (ii) if the electronic notice is not limited or prohibited by the articles of incorporation, bylaws or declaration governing the CIC.  However, electronic voting may not be used in combination with a vote taken at a meeting of the unit owners (where proxies are the authorized method of voting in absentia).

DISCLOSURE STATEMENTS

In addition to the other disclosure statement changes covered in the previous sections of this Summary, the Amendment:

• Requires a purchase agreement for a lot or other parcel that may be subject to a master association, even though it is not part of a common interest community subject to the Act, to include a notice that if requested by the buyer, the master developer is required to provide a disclosure statement regarding the master association.  The master developer is required to deliver the disclosure statement within 10 days of the buyer’s request.
• Increases the penalty for failure to deliver a disclosure statement that complies with the Act from $1,000 to $5,000 per purchaser, in addition to damages or other amounts recoverable under the Act. 
• Increases the statute of limitations period for bringing an action for failure to deliver a disclosure statement that complies with the Act from 6 months to 1 year. 

As stated earlier, these brief comments highlight only selected provisions of the Amendment.  The Amendment is extensive and needs to be reviewed in its entirety to understand its full extent.  The Amendment will require careful modification of declarations, disclosure statements and other documents used in existing common interest communities and master communities.

If you have any questions or comments regarding the Amendment or its relevance to any CIC matter you may be dealing with, please contact a member of the Felhaber, Larson, Fenlon & Vogt, P.A. Real Estate Section.

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