Avoiding Legal Landmines CAI Minnesota - CAVL Training - November 2, 2011 Michael D. Klemm, Severson, Sheldon, Dougherty & Molenda, P.A. Joseph P. Crawford, CMCA, AMS, PCAM 1. Applicability of MCIOA (Minnesota Common Interest Ownership Act Chapter 515B) a. Review Minn. Stat. 515B.1-102 b. 2010 and 2011 Amendments made significant changes to MCIOA c. Condominiums created under Chapter 515, 515A, 515B d. Planned Communities (townhomes, single-family homes) e. Cooperatives f. Different sections on certain topics, depending on date of creation of CIC g. Different sections on certain topics, depending on date of event 2. Supplemental Laws Minn. Stat. 515B.1-106, 108 a. Federal b. State c. Municipal 3. Supremacy of MCIOA Minn. Stat. 515B.1-104, 108 a. Provisions of MCIOA may not be varied by agreement, except as expressly allowed by MCIOA b. Rights under MCIOA may not be waived, except as expressly provided by MCIOA c. If other laws are inconsistent with MCIOA, then MCIOA prevails to the extent of the inconsistency 4. Conflict Among Laws and Documents - Minn. Stat. 515B.2-103(c) a. Hierarchy: MCIOA, Declaration, Bylaws, Rules and Regulations b. Apply the provisions that control c. Revise the documents to resolve the conflict 5. Amendment of Declaration - Minn. Stat. 515B.2-118 a. Generally, unanimous written consent of the unit owners is required to i. create or increase special declarant rights, ii. increase the number of units, iii. change the boundaries of a unit, iv. change voting rights, allocation of common expenses, or ownership of condominium common elements or of a cooperative association, v. change common elements to limited common elements or units, vi. change the authorized use of a unit from residential to nonresidential, or conversely, or vii. change the characterization of the unit owner's interest in a cooperative from real estate to personal property, or conversely. b. A declarant must execute any amendment that eliminates or modifies any special declarant rights held by that declarant. P a g e 1
c. The declaration may specify less than 67 percent for approval of an amendment, but only if all of the units are restricted to nonresidential use. d. MCIOA or the governing documents may require consent from mortgagees but generally consent is deemed granted if the association does not receive a mortgagee s refusal within 60 days after giving notice as required by Minn. Stat. 515B.2-118(a)(5) e. The amendment must be recorded in the county real estate records to be effective. 6. Contracts a. Parties b. Obligations c. Timelines d. Payment Terms e. Insurance f. Representations and warranties g. Termination h. Remedies for Default i. Indemnification and hold harmless provisions j. Approval and signature 7. Unconscionable Agreement or Term of Contract Minn. Stat. 515B.1-112 a. If a court determines that a contract or contract clause was unconscionable at the time the contract was made, the judge may refuse to enforce the contract, enforce the remainder of the contract without the unconscionable clause, or limit the application of any unconscionable clause in order to avoid an unconscionable result. b. In this section, the term contract includes a master declaration, declaration, articles of incorporation, bylaws or proprietary lease. c. Factors: i. the commercial setting of the negotiations; ii. whether a party has knowingly taken advantage of the inability of the other party reasonably to protect the other party's interests by reason of physical or mental infirmity, illiteracy, inability to understand the language of the agreement, or similar factors; iii. the effect and purpose of the contract or clause; and iv. if a sale, any gross disparity, at the time of contracting, between the amount charged for the property and the value of that property measured by the price at which similar property was readily obtainable in similar transaction, provided, that this factor shall not, of itself, render the contract unconscionable. 8. Obligation of Good Faith Minn. Stat. 515B.1-113 a. Every contract or duty governed by MCIOA imposes an obligation of good faith in its performance or enforcement. P a g e 2
9. Termination of Contracts, Leases, Licenses - Minn. Stat. 515B.3-105, 515B.3-1051 a. MCIOA allows an Association to terminate certain agreements made during the period of declarant control b. Deadline: Notice of termination must be given within two years following the termination of the period of declarant control 10. Notice Requirements Minn. Stat. 515B.1-115 a. Except as otherwise stated in MCIOA all notices required by MCIOA must be in writing and are effective (i) upon hand delivery, (ii) upon mailing if properly addressed with postage prepaid and deposited in the United States mail, or (iii) when given in compliance with section 515B.3-110(c), with respect to matters covered by that section (voting and proxies). 11. Association meetings Minn. Stat. 515B.3-108 a. Requirements for annual meetings b. Notice requirements for annual meetings (21 to 30 days notice) i. Annual Report Minn. - Stat 515B.3-106 (c) c. Notice requirements for special meetings (7 to 30 days notice) d. Notice must be hand delivered or sent postage prepaid by U.S. Mail e. Notice must state the date, time, place, and purposes of the meeting and the procedure for appointing proxies, if permitted 12. Voting Minn. Stat. 515B.3-110 a. An Association cannot restrict a unit owner s right to vote based on nonpayment of assessments or violation of Association documents. b. Voting by mail or e-mail must comply with statutory procedures 13. Association Records Minn. Stat. 515B.3-118 a. Record Keeping b. Record Inspection c. Delivery of paper or electronic copies d. Copy fees, not to exceed i. the actual costs of making or electronically transmitting the copies and searching for and retrieving the requested records, including the cost of agent or employee time for responding to the request; or ii. if 100 or fewer pages of black and white, letter or legal size paper copies are requested, no more than 25 cents for each page copied, instead of actual costs. 14. Rules and Regulations a. Rule-making authority is based on Minn. Stat. 515B.3-102 and Declaration b. Rule-making authority is limited by state and federal statutes, such as i. Minn. Stat. 500.215 Right to display U.S. flag and Minnesota flag ii. Antidiscrimination laws federal fair housing, Americans with Disabilities Act, Minnesota Human Rights Act c. Minn. Stat. 515B.2-105 requires that the Declaration contain any material restrictions on use, occupancy, or alienation of the units, or on the sale price of a unit or on the amount that may be received by an owner on sale, condemnation or casualty loss to the unit or to the common interest community, or on P a g e 3
termination of the common interest community; provided, that these requirements shall not affect the power of the association to adopt, amend or revoke rules and regulations pursuant to section 515B.3-102. 15. Due Process Requirements - Minn. Stat. 515B.3-102 a. An Association must give notice and an opportunity to be heard before the board or a committee appointed by it before levying fines for violations of the declaration, bylaws, or rules and regulations. b. Fines must be reasonable. 16. Open Board Meetings Minn. Stat. 515B.3-103(g) a. Generally, meetings of the board of directors must be open to the unit owners. b. To the extent practicable, the board shall give reasonable notice to the unit owners of the date, time, and place of a board meeting. c. Notice is not required if the date, time, and place of meetings are: i. provided for in the declaration, articles, or bylaws, ii. announced at a previous meeting of the board, or iii. posted in a location accessible to the unit owners and designated by the board from time to time. d. Notice is not required if an emergency requires immediate consideration of a matter by the board. e. Failure to give notice does not invalidate the board meeting or any action taken at the meeting. f. Board meetings may be closed to discuss the following: i. personnel matters; ii. pending or potential litigation, arbitration or other potentially adversarial proceedings, between unit owners, between the board or association and unit owners, or other matters in which any unit owner may have an adversarial interest, if the board determines that closing the meeting is necessary to discuss strategy or to otherwise protect the position of the board or association or the privacy of a unit owner or occupant of a unit; or iii. criminal activity arising within the common interest community if the board determines that closing the meeting is necessary to protect the privacy of the victim or that opening the meeting would jeopardize investigation of the activity. 17. Standard of Conduct Minn. Stat. 317A.011, 317A.251, 515B.3-103, 515B.3-120 a. Officers and Directors elected by Unit Owners must act: i. in good faith, which is defined as honesty in fact in the conduct of an act or transaction, ii. in a manner the officer or director reasonably believes to be in the best interests of the association, and iii. with the care an ordinarily prudent person in a like position would exercise under similar circumstances. iv. An officer or director elected by Unit Owners who meets this standard is not liable as a result of being an officer or director. P a g e 4
b. Officers and Directors appointed by the Declarant are fiduciaries of the unit owners. i. MCIOA also states that officers and directors appointed by the declarant shall have a duty to fulfill, and to cause the association to fulfill, their respective obligations under the declaration, bylaws, articles of incorporation, and this chapter and to enforce the provisions of the declaration, bylaws, articles of incorporation, and this chapter against all unit owners, including the declarant and its affiliates, in a uniform and fair manner. 18. Prohibited Unilateral Actions by Board Minn. Stat. 515B.3-103(b) a. Cannot amend the declaration b. Cannot terminate the common interest community c. Cannot elect directors to the board (but may fill vacancies for the unexpired portion of any term unless director was removed by vote of the association members) d. Cannot determine the qualifications, powers and duties, or terms of office of directors 19. Reliance - Minn. Stat. 317A.251, Subd. 2 a. General Rule: A director is entitled to rely on information, opinions, reports, or statements, including financial statements and other financial data, prepared or presented by: i. an officer or employee of the corporation whom the director reasonably believes to be reliable and competent in the matters presented; ii. attorneys, public accountants, or other persons as to matters that the director reasonably believes are within the person's professional or expert competence; or iii. a committee of the board on which the director does not serve as to matters within its designated authority, if the director reasonably believes the committee to merit confidence. b. Exception: A director is not entitled to rely on information, opinions, reports, or statements if the director has actual knowledge concerning the matter in question that makes such reliance unwarranted. 20. Presumption of Assent - Minn. Stat. 317A.251, Subd. 3 a. A director who is present at a board meeting when an action is approved by a majority vote is presumed to have assented to the action approved, unless the director i. objects at the beginning of the meeting to the transaction of business because the meeting is not lawfully called or convened and does not participate in the meeting, ii. votes against the action at the meeting, or iii. is prohibited from voting because of a conflict of interest. 21. Delegation a. By Directors. The board may establish committees and delegate specific powers to committees by resolution. Directors remain subject to the standard of P a g e 5
conduct for directors despite delegation of power to a committee. Committee members are subject to the same standard of conduct as directors. See Minn. Stat. 317A.241 b. By Officers. Unless prohibited by the articles or bylaws or by a board resolution, an officer may, without the approval of the board, delegate some or all the duties and powers of an office to other persons. An officer who delegates the duties or powers of an office remains subject to the standard of conduct for an officer with respect to the discharge of the delegated duties and powers. Minn. Stat. 317A.351 22. Indemnification - Minn. Stat. 317A.521 a. An association must indemnify a person made or threatened to be made a party to a proceeding by reason of the former or present official capacity of the person against judgments, penalties, fines, attorney fees and other expenses, if the person: i. acted in good faith, ii. received no improper personal benefit from the conduct at issue and did not violate conflict of interest prohibitions, iii. reasonably believed that the conduct was in the best interests of the association, iv. in the case of a criminal proceeding, had no reasonable cause to believe the conduct was unlawful, and v. has not been indemnified by another organization. b. Subject to certain requirements, the association also must advance reasonable disbursements, including attorneys fees. c. The association s obligations regarding indemnification and advancements can be modified in the articles or bylaws, subject to certain statutory requirements. 23. Upkeep of Common Elements - Minn. Stat. 515B.3-107 a. Generally the association is responsible for maintenance, repair and replacement of Common Elements b. The Association is responsible for damage to any Unit resulting from acts or omissions of the Association or its agents 24. Insurance Requirements Minn. Stat. 515B.3-113 a. Property Insurance b. Commercial General Liability Insurance i. Associations should maintain liability coverage of at least $1,000,000 so Unit Owners (except the Declarant) will not have tort liability for covered events based on ownership of the Common Elements c. The declaration may require other insurance d. The association may carry any other insurance it considers appropriate to protect the association, the unit owners, or officers, directors or agents of the association e. The amount of coverage is determined by the association s governing documents or else by the board. f. Review policy terms and requirements (e.g., promptly reporting claims). P a g e 6
25. Replacement Reserves for fiscal years commencing on or after January 1, 2012 - Minn. Stat. 515B.3-1141 a. For fiscal years commencing on or after January 1, 2012, annual budgets must include replacement reserves projected by the board to be adequate (together with past and future contributions to the reserve account) to fund the replacement of those components of the CIC which the association is obligated to replace by reason of ordinary wear and tear or obsolescence. b. The evaluation of adequacy must be based on the estimated remaining useful life of each component. The association must reevaluate the adequacy of replacement reserves at least every third year. c. Replacement reserves must be kept in an account separate from the association s operating funds and cannot be used or loaned to cover operating expenses, but replacement reserves may be pledged as collateral for a loan to the association. d. For fiscal years commencing on or after January 1, 2012, replacement reserves are not required by MCIOA for the following components, unless otherwise required by the declaration: i. Components that have a remaining useful life of more than 30 years. ii. Limited Common Elements whose replacement will be funded by assessments against the units to which they are assigned. iii. Components whose replacement is planned to be paid for by special assessments authorized by the declaration or by assessments levied exclusively against the benefitted units, subject to the following conditions: (a) the period of declarant control must have terminated; (b) the funding plan must be approved by the board; (c) the funding plan must be approved by owners, other than a declarant or its affiliates, of units to which 51% of the votes are allocated; and (d) approval is effective for no more than the association s current and three following fiscal years, subject to modification or renewal by the same approval standards. e. Caution: Inadequate replacement reserves may continue to affect eligibility for project approvals from the Federal National Mortgage Association (FNMA), Federal Home Loan Mortgage Corporation (FHLMC), Department of Housing and Urban Development (HUD) or Department of Veterans Affairs (VA) 26. Assessments for Common Expenses Minn. Stat. 515B.3-115, 515B.3-1151 a. Assessments must comply with allocations under MCIOA and the Declaration. b. If the declarant uses an alternative assessment program (with reduced assessments against units owned by declarant), then after turnover the declarant is obligated to make up any operating deficit from the period of declarant control. c. Typically, the Bylaws state when the Association must give notice of the annual budget and annual assessments. P a g e 7
27. Resale Disclosure Certificates Minn. Stat. 515B.4-107 a. An association must provide a Resale Disclosure Certificate, including all of the information required by the statute, within ten days after a request by a unit owner or authorized representative. b. A purchaser is not liable for any unpaid common expense assessments, including special assessments, not listed in the certificate. c. A purchaser is not liable for the amount by which the annual assessments or special assessments exceed the amount of annual or special assessments stated in the certificate for assessments payable in the year in which the certificate was given, except to the extent of any increases subsequently approved in accordance with the declaration or bylaws. 28. Accounting Controls Minn. Stat. 515B.3-121 a. MCIOA requires a review of the association's financial statements by a licensed, independent CPA at the end of the association's fiscal year, unless waived by vote of the owners as provided in the statute. b. The reviewed financial statements must be delivered to all members of the association within 180 days after the end of the association's fiscal year. c. The declaration or the board may require additional or greater accounting controls, such as an audit. d. Specific Questions about the differences in review/audit/compilation should be directed to the Association s CPA. 29. Transfer of a garage stall, storage locker or similar space a. First, determine whether it is (i) a Unit, (ii) a Limited Common Element or (iii) part of the Common Elements licensed or assigned to an Owner b. Units are transferred by deed, subject to restrictions in the Declaration. Resale disclosure requirements may apply. c. Limited Common Elements are transferred by amending the Declaration and, if necessary, the CIC Plat. Minn. Stat. 515B.2-109(f) d. Areas of the Common Elements that are licensed or assigned to a Unit Owner are transferred as provided in MCIOA and the Declaration. See Minn. Stat. 515B.2-109(e) 30. Transfer of Special Declarant Rights Minn. Stat. 515B.3-104, 515B.3-1041 a. Voluntary transfer b. Involuntary transfer by operation of law c. Rights and obligations of transferor and transferee 31. Litigation to Enforce MCIOA / Governing Documents Minn. Stat. 515B.1-114(b), 515B.4-116 a. Any right or obligation declared by MCIOA is enforceable by judicial proceeding, unless the provision declaring it provides otherwise. b. If an association violates MCIOA or the governing documents, any person adversely affected may bring a claim against the association. c. The court may award reasonable attorney's fees and costs of litigation to the prevailing party. d. Punitive damages may be awarded for a willful failure to comply. P a g e 8
32. Statutes of Limitation a. A Statute of Limitation prevents an Association or Unit Owner from bringing a claim after a certain period of time b. Statutes of Limitation for Warranties - Minn. Stat. 515B.4-115, 515B.4-1151, 515B.4-1152 c. Other Statutes of Limitation 33. Declarant s Tort and Contract Liability Minn. Stat. 515B.3-111 a. If a tort or contract violation occurs during the period of declarant control, the declarant is liable to the Association or any Unit Owner for i. losses not covered by insurance, ii. costs resulting from the violation, and iii. litigation expenses and attorneys fees but only if the Association or a Unit Owner gives the declarant reasonable notice of and opportunity to defend against the lawsuit. Disclaimer: This summary does not cover all of the legal issues that may affect common interest communities. The information in this summary is general information and does not constitute legal advice regarding action to be taken in any particular case, which may vary depending on the facts, applicable statutes, and governing documents. P a g e 9