Condominiums
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Chapter 10: Condominiums
Nyal D. Deems, Varnum LLP; Peter A. Schmidt, Varnum LLP
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CONTENTS
Condominium Documents
Site Condominiums
Commercial and Industrial Condominiums
The Developer’s Requirements for the Sale of a Condominium Unit
Association Assessments and Real Property Taxes
Issues for a Buyer in a Condominium Sales Transaction
Other Multiple-Unit Forms of Housing

I.   Introduction

A. In General

§10.1   Condominiums continue to be a popular form of real property ownership in our society and cover the whole spectrum of real property development. Traditionally, condominiums were thought of as a row of townhouses or structures with similar design with common walls between units and perhaps other common features. Now site condominium (similar to lots in a dedicated plat), with single-family detached housing or preconstructed units, are common. An urban high-rise building can be a condominium, either single use, such as residential or commercial, or mixed use with commercial unit floors and residential units. Condominiums may be created for marinas, campgrounds, recreational vehicle parks, and other uses. Older industrial buildings have been renovated and subdivided into condominiums with commercial and residential units. Condominiums are also used for industrial parks, in mobile home parks, and parking facilities. Any real estate that can be divided can be subdivided as a condominium. A condominium can consist of two units, hundreds of units, or thousands of units as the local land use regulations permit. Even an individual condominium unit can be further subdivided into multiple condominium units.

The potential uses of the condominium method are extremely varied and ever increasing. Condominiums also offer reduced construction costs. By building units closer together or connected, less physical construction is necessary, construction costs are lowered, and prime development sites and expensive recreational facilities become more affordable. In addition, by making the common facilities available to all individuals, a developer can enhance the value of each unit to be sold. The same technique can be used when subdividing a property in a plat by creating common areas. However, the Condominium Act, MCL 559.101 et seq., gives a legal structure to govern a development in this manner and therefore provides a clearer picture of how the different parties will interact with each other and be governed by Michigan law. In addition, the Condominium Act sets forth a method by which buildings may be remodeled and title restructured for multiple ownership. This structure is much less cumbersome than using party wall agreements and easements. Finally, common ownership and sharing maintenance expenses through monthly assessments fulfills a demand in the residential marketplace that no other form of property ownership satisfies. There are a number of people in the marketplace who do not wish to mow grass, snowplow driveways and walkways, care for the exterior of buildings, or perform other maintenance obligations required with home ownership, such as extensive painting and window washing. In the condominium market, these buyers find a form of ownership that suits many of their individual needs while providing lower maintenance costs and fewer obligations.

B. Historical Evolution

§10.2   The first multiple-owner housing was common-interest community housing marketed as cooperatives. In 1962, the Federal Home Administration promulgated a model condominium act that was the impetus for the adoption of horizontal real property acts by a number of states, including Michigan. MCL 559.1 et seq., repealed by 1978 PA 59. Despite the creation of Michigan’s Horizontal Real Property Act, the initial growth of this type of housing was slow because people were unfamiliar with the concept and financial institutions were uncertain whether it was prudent to make loans for the development or purchase of units in condominiums. However, during the 1970s condominiums started to become more accepted and widely used. In 1978, Michigan replaced its Horizontal Real Property Act with the Condominium Act, MCL 559.101 et seq.

The 1978 act is comprehensive. Its broad definitions cover nonresidential condominiums, such as commercial, industrial, time-share, marina, and campground condominiums. The language of the act, however, reads as if it is directed mostly toward residential condominium units constructed for ownership by a single party in fee. Other forms of condominiums are permitted, but less treatment is accorded them in the statute.

The initial language of the Condominium Act gave a governmental department responsibility for regulating condominiums. The presumption was that this protected consumers. It required that condominium documents be subject to the department’s prior review and approval before recording and marketing, ensuring a certain standard in all condominium documents.

C. State Deregulation

§10.3   In 1982 and 1983, the Condominium Act was amended to deregulate the condominium development process. Prior approval of the documents by the Department of Consumer and Industry Services (renamed to the Department of Energy, Labor, and Economic Growth and then the Department of Licensing and Regulatory Affairs (LARA)) is no longer required to market condominiums. The department’s role is now confined to creating The Condominium Buyer’s Handbook, forwarding complaints to the developer, and providing the public with information on the remedies available through the Condominium Act. The department no longer has authority to enforce the provisions of the Condominium Act or the administrative rules. Now, only a court may order an association or developer to comply with the Condominium Act, administrative rules, and bylaws. Condominium documents no longer need to be filed with the state. Once a master deed is recorded, the developer may close sales.

The lack of prior state regulatory review has important implications for the practitioner. A buyer cannot presume that condominium documents are correct. Anyone representing a party purchasing a condominium must ensure that the documents adequately protect the buyer’s interests, which is not particularly simple. A total review of all the documents for a condominium project is time consuming and complicated. The cost of retaining an attorney to fully review these documents is prohibitive for many residential transactions.

The only prior review of the condominium documents may be by an escrow agent (generally a title insurance company). The act requires the residential developer to escrow funds from a buyer with an escrow agent until the unit is substantially completed and “must be built” improvements are constructed. MCL 559.203b. It is inappropriate to rely on the title company for review of the condominium documents for anything other than title of the real property. Title companies review record title. They will review the condominium documents solely for issues related to title to the real property. A title insurer will not review the condominium documents to check whether the rights reserved by the developer are objectionable, whether the documents give the association overbroad assessment powers, or whether the association or the developer may impose future amendments or easements on units in the condominium. These and other clauses are the types of issues that might be of concern to a buyer but will not be reviewed by a title insurer.

While deregulation of the Condominium Act ended state agency review of the condominium documents to ensure compliance with the statute, it has greatly enhanced the use of condominiums in the development of real estate projects. Review by the state agency was a slow and cumbersome process. Now condominium documents may be drafted and recorded at any pace the developer and its engineers and counsel can achieve. There is no longer the ingrained delay while the documents receive a regulatory review.

However, while deregulation eliminated all meaningful state review of condominium projects, many cities and townships now have ordinances requiring their prior review of condominium documents. Sometimes this is part of a site plan or land division review process. In some instances, local governments simply require review of the master deed before it is recorded. Presumably, this is to ensure that the condominium documents properly reflect the city’s or township’s various ordinances regarding road layout, yard setbacks, and other similar matters. When preparing to do a condominium project, check with the governmental authorities with jurisdiction about any condominium ordinances, regulations, or rules. If ordinances exist, get a copy to ascertain how it might affect the documents to be drafted. The ordinances, regulations, or rules must be reviewed because they may require adjustments to the wording in the master deed and condominium bylaws. Also in the normal course of events, engineers preparing the subdivision plan will ensure that their drawings of the streets, lots, buildings, common elements, and other condominium attributes correspond to the ordinances, regulations, or rules.

Be aware that few condominium documents are revised as a result of sale negotiations. The documents are generally presented as a take-it-or-leave-it proposition. The attorney’s focus must be to determine the general propriety of the condominium documents and to inform the client of their meaning. Any variation in the documents from a standard type of condominium transaction should be explored and explained. It is incumbent on a practitioner to have reviewed one or more sets of condominium documents and to have an understanding of the norms for those documents and their impact on a client’s rights.

Among the provisions that should be pointed out to a client are any reserved rights of the developer to adjust boundary lines or create easements and other powers that might cause changes in the condominium. If there are common elements designated as “need not be built,” point out to your client that these features may never be constructed. Review the proposed budget and the potential assessments that can affect the cost of condominium ownership. In essence, the potential buyer must be made to focus on the new type of ownership structure they are entering into, association governance, how it operates, and how the document language might affect them.

II.   Michigan’s Condominium Act

A. State Regulation

§10.4   Despite the deregulation discussed in §10.3, all condominium projects in Michigan come under the jurisdiction of LARA. Specifically, the Condominium Division of the Boundary Commission administers the provisions of the act within the department. Condominium units must be sold, mortgaged, or leased pursuant to the Condominium Act, MCL 559.101 et seq. The department has promulgated rules to interpret the act. See AC, R 559.101 et seq. They should be reviewed carefully when drafting or amending condominium documents and to assist in certain actions such as the handling of escrow accounts. They are available through LARA’s website. Before April 22, 2010, an out-of-state condominium marketed in Michigan had to be registered with LARA if it was subject to the Land Sales Act, MCL 565.801 et seq. If it was not governed by that act, the only requirement was that the parties marketing the units register as brokers and sales agents with the Licensing Division of LARA. See §§3.19–3.20. The Land Sales Act was repealed effective April 22, 2010, by 2010 PA 49 (see §18.41).

B. Units and Common Elements

§10.5   A condominium development typically consists of condominium units and common elements. Condominium units are those portions of the condominium project intended for separate ownership and use. MCL 559.104(3). Common elements are those portions of the condominium that are appurtenant to two or more units and therefore have common ownership or appurtenant to only one unit but subject to stated association controls. MCL 559.103(7).

Conceptually, purchasing or selling a condominium unit is similar to other real estate sales transactions, except that the documents are more complicated because of the relationship of the owners and the common ownership of certain areas. Because a condominium consists of privately owned units and commonly owned elements, any condominium has multiple owner relationships among the unit owners, sometimes called co-owners. Fee title exists in the owner of each particular unit. In addition, all of the owners of the units have undivided common ownership of the general common elements. The owner of a condominium unit may own a particular piece of real property, airspace, or a building. A unit owner will also own appurtenant rights in different limited and general common elements.

Probably the most unusual aspect of condominiums is the concept of common elements. There are two types of common elements: general and limited. General common elements are those parts of a project that are owned by and usually open to common use or provide common support or utilities for all units. For example, the main entrance to a single-building project is a general common element. Similarly, a clubhouse for an entire condominium project is a general common element. A private road in a condominium is usually a general common element.

In contrast, limited common elements are those common elements that appertain to one or more units but not all units. Limited common elements are appurtenant to the units that benefit from or need that element. For example, a patio or balcony accessible to only one unit may be a limited common element appurtenant to that unit. Similarly, a hallway on a particular floor of a condominium project building may be a limited common element appurtenant only to the units on that floor or the units in that building. A common driveway serving two units is a limited common element appurtenant to those two units.

The cost of maintenance, repair, and replacement of limited common elements is usually assessed to the owners of the units to which the common element is appurtenant. For example, if a limited common element like a small courtyard is shared by two units, the two owners usually share the cost of maintenance equally. However, this is not always true. General common elements are normally maintained by the condominium association. The condominium association’s expenses for maintenance of common elements are charged to all owners equally or, alternatively, proportionally to each unit’s assigned percentage of ownership under the master deed. The master deed and condominium bylaws must be reviewed carefully on this issue.

It is more and more common for condominiums to have a number of maintenance obligations for the care of the various limited common elements be performed by the association and paid through the assessments collected by the association. For example, the condominium master deed might provide that all of the driveways and sidewalks be repaired, resurfaced, and snowplowed by a service hired by the association. Alternatively, the association may only provide for the snowplowing of the driveways and only certain walkways. Similarly, the association may be responsible for lawn mowing and the exterior maintenance of all of the units in the condominium. This type of broad service condominium where the windows, doors, and exteriors of the building are cleaned and painted by a maintenance service, the lawn is mowed, the hedges trimmed, and all of the snowplowing performed is ever more attractive to people who do not want to do house maintenance. A broad service condominium often allows these owners to maintain their garden or flower pots while enjoying doing other things with their lives. These maintenance issues require review of the documents to ensure how the master deed and condominium bylaws delineate ownership of the units, use of the common elements, and the maintenance obligations of the common elements.

Forms and Exhibits

Form 10.01 Preliminary Reservation Agreement -- Residential Condominium Unit
Form 10.02 Escrow Agreement for Condominium Reservation
Form 10.03 Purchase Agreement for Site Condominium Unit (No Preliminary Reservation Agreement)
Form 10.04 Addendum to Buy-and-Sell Agreement (Condominium Unit)
Form 10.05 Escrow Agreement for Condominium Purchase Agreement
Form 10.06 Master Deed for Site Condominium
Form 10.07 Master Deed Language (Large Mixed-Use Residential Condominium)
Form 10.08 Master Deed Language (Small Mixed-Use Commercial and Residential Condominium)
Form 10.09 Bylaws for Residential Site Condominium (with Alternative Language for Commercial Site Condominium)
Form 10.10 Disclosure Statement for Residential Site Condominium
Form 10.11 Articles of Incorporation -- Condominium Association
Form 10.12 Bylaws -- Condominium Association
Form 10.13 Checklist for Creation of a Site Condominium
Form 10.14 Property Owner's Consent to Submission of Real Property Project to Condominium Project
Form 10.15 Mortgagee's Consent to Submission of Real Property Project to Condominium Project
Form 10.16 Notice of Intent to Establish Condominium Directed to Governmental Entities
Form 10.17 Notice of Intent to Establish Condominium Project
Form 10.18 Affidavit of Mailing Notice of Intent to Establish Condominium
Form 10.19 Waiver of Nine Business Day Waiting Period of Condominium Act
Form 10.20 Assignment of Developer Rights in Condominium

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