THE NEW (2000) AMENDMENTS TO THE MICHIGAN CONDOMINIUM ACT – KNOW THE CHANGES THAT WILL AFFECT YOUR ASSOCIATION

After approximately 26 months of work by the Real Property Law Section of the State Bar of Michigan, and its committee on Condominiums, Cooperatives and PUDs, both the House and Senate of the State Legislature enacted Senate Bills 612 and 613 before recessing for the term. The Bills were signed by the Governor on December 31, 2000 and given immediate affect. They are now known as Acts 379 and 380 of the Public Acts of 2000.
 
This legislative effort represents the first extensive and comprehensive amendments to the Michigan Condominium Act since 1982/83. There are roughly 34 substantive changes in the Act which are made by this legislation. While many of the provisions of this legislation affect the establishment of Condominiums, and the obligations of developers related to that process, there are a number of provisions that significantly change the rights and responsibilities of condominium associations, what can and cannot be done with the condominium documents, and the administration of condominium associations. It is the intent of this Article to highlight only those substantial changes in the Act which bear directly upon condominium associations and their operations.
 
The following is a sequential list of those changes with an explanation of the significance of the change to condominium associations in this State.
 
In the definition sections of the Act, Section 6(1), defining a “Co-owner”, has been changed to specifically indicate that both land contract vendees and land contract vendors are to be considered Co-owners, and are jointly and severally liable under the Act and the condominium documents for compliance therewith. This new definition is to apply only if the condominium documents do not specifically provide otherwise. In that many condominium documents do not contain language defining whether land contract vendors or vendees are to be considered Co-owners under the documents and Act, this change will remove the uncertainty which would result from a lack of definition contained in the documents. Unless the condominium documents expressly provide otherwise, both land contract vendees and vendors are considered Co-owners, and can be held jointly and severally responsible for all obligations under the Act and the condominium documents. If the condominium documents already expressly provide that one or the other is to be considered a Co-owner for the purposes of enforcement of the obligations contained in the documents or the Act, the Association has the option of retaining that designation or amending the condominium documents to remove that designation, thereby making both vendors and vendees jointly and severally liable pursuant to this amendment.
 
The rights of handicapped individuals to make modifications to units and common elements to facilitate access has also been modified and broadened. Under the existing Section 47a of the Act, it was unclear whether a Co-owner only had the right to make improvements under this Section for themselves or a member of their family residing in the unit. The amendments to the Act clarify that a Co-owner has the right to make improvements under this Section to facilitate access to or movement within the unit for persons with disabilities who reside in or regularly visit the unit. Although there can still be some confusion or argument concerning the meaning of the phrase “regularly visit the unit”, such confusion is unlikely to arise from a practical standpoint. It is highly unlikely that a Co-owner would incur the expense of such modifications unless they were truly needed. An occasional visit by a handicapped individual would hardly justify such expense.

Under the old Section 47a, the Association could require removal of the alteration upon sale or lease of the unit, unless the Co-owner who made the alteration conveyed or leased the unit to a person with disabilities needing the same type of improvement, or to a person whose parent, spouse or child, who resided with them in the unit, needed the same type of alteration or modification. Under the revised Section 47a a Co-owner is given a 12 month safe harbor. If a Co-owner is expected to be temporarily absent from the unit for a period not to exceed 12 months, and intends to again resume residing in the unit, the Association may not require removal of the alteration. Furthermore, if the unit is conveyed or leased to any person who has a person residing with them in the unit needing that type of modification or alteration, the Association cannot require removal. Through this change, the person with the qualifying disability need no longer be a part of the Co-owner’s immediate family.
 
Under the old Section 47a the Co-owner making the improvement had an obligation to carry adequate liability insurance to cover personal injuries that may be caused by the exterior improvement or modification. The new provision also requires the Co-owner to name the Association as an additional insured on all such policies. The old Section 47a required the Association to maintain the modification or alteration unless the maintenance could be reasonably included with the regular maintenance performed by or paid for by the Association. The old provision was hard to administer and quantify since it was unclear what maintenance might “be reasonably included in the Association’s regular maintenance”. It was also somewhat unfair to require the Association to increase its maintenance costs due to the existence of such a personal modification. Consequently, the revised Section 47a now specifically provides that the Association is responsible for maintenance, repair and replacement of the improvement or modification only to the extent of the cost currently incurred by the Association for maintenance, replacement and repair of the common elements covered or replaced by the improvement or modification. All excess costs are to be borne by the Co-owner performing the alteration or modification. Based on the Association’s current expenses, the Association can now quantify its obligation for such maintenance, repair and replacement. In no case can the Association incur more expense than it would have for the common element involved in an unaltered state.
 
Throughout the legislation, changes have been made to recognize the emergence of site condominiums as a substantial form of condominium development. In the case of many site condominiums, the developer will transfer ownership of a unit to a residential builder for the purpose of construction of a residential dwelling and sale to the ultimate third party purchaser. Because this scenario was not prevalent at the time the Condominium Act was written, a number of provisions of the Act required obligations to be met by the developer and triggered such things as the transitional control date, based upon the number of units sold by the developer. Because site condominium ownership was not prevalent at that time, it was not contemplated that the sale of a unit by a developer would not be to the ultimate third party purchaser. Consequently, a number of the amendments deal with recognition of this type of sale to a residential builder, and exempt these transfers as a sale of a unit for the purpose of determining the timing of events required under the Act. One example of this type of change can be found in Section 52 dealing with the establishment of an advisory committee. The amendments now specifically provide that the sale of a unit by the developer to a residential builder does not qualify as a sale of a unit under this provision until such time as the residential builder conveys that unit with a completed residence on it, or until the unit contains a completed residence which is actually occupied.
 
A new Sub-Section (3) has been added to Section 67 of the Act to deal with the problem created by perpetually incomplete Condominium projects. Under the existing Act, there is no time limit for the completion of a Condominium project. As long as the developer exercised its contraction and expansion rights within the six (6) year period from the date of recording the Master Deed, there was no further requirement that the units shown on the amended Condominium Subdivision Plan actually be constructed. In many cases, Condominium projects remained incomplete for a substantial number of years, causing administrative difficulties for the Association, since the percentages of value were determined in the amended documents based upon units which were legally created but not yet in existence. Recognizing these difficulties, this new Sub-Section has been added by the amendatory legislation. In essence, if the entire Condominium project, including proposed improvements (whether identified as must be built or need not be built), has not been completed within a period ending ten (10) years from the date of commencement of construction of the project, or within six (6) years from the date the developer last exercised its expansion or contraction rights, the project must be closed. This is accomplished in one of two ways. First, the developer has an unrestricted right to remove from the development at this point all undeveloped lands and units. If the developer chooses to do so, these lands automatically receive the benefit of easements over the existing Condominium project for utility and access purposes. If the developer does not choose to remove the undeveloped portions of the land and units within this timeframe, the undeveloped land remains a general common element of the project and all rights to construct units upon that land cease. In such a case, a Co-owner or the Association of Co-owners shall have the right to petition a court of competent jurisdiction for revision of the percentages of value to reflect only those units which were created and completed within the requisite timeframe.
 
The amendatory legislation makes a number of changes dealing with the rights of Associations to amend Condominium Documents, and to obtain the approval of mortgagees for that purpose. The existing Act required the consent of mortgagees in cases where the amendment was deemed material, however, materiality was never defined. Materiality is now defined in Section 90(1) and new Section 90A(9) of the amendatory legislation. Material amendments now specifically include 1) termination of the Condominium project, 2) a change in the method or formula used to determine the percentage of value assigned to a unit which is subject to a mortgagee’s mortgage, 3) a reallocation of responsibility for maintenance, repair and replacement or decoration of a Condominium unit and its appurtenant limited and general common elements, 4) the proposed elimination of a requirement for the Association to carry insurance on the project as a whole, or on a unit subject to a mortgagee’s mortgage, or a reallocation of responsibility for obtaining or maintaining insurance from the Association to the Co-owner of the unit subject to the mortgagee’s mortgage, 5) the modification or elimination of an easement benefiting a Condominium unit subject to a mortgagee’s mortgage, and 6) the partial or complete modification, imposition or removal of leasing restrictions for Condominium units in the project. In case amendments arise which are not contemplated by this legislative list, a catch all provision is contained in the revised Act indicating that an amendment is NOT to be considered material if, in the written opinion of an appropriate licensed real estate appraiser, the proposed change does not detrimentally change the value of any unit affected by the change. The effect of these revisions will be to substantially reduce the number of amendments which need to be approved by mortgagees, and to restrict mortgagee approval to those situations where the value of the mortgagee’s security is truly at issue.
 
Most Associations attempting to obtain mortgagee approval have found the process increasingly difficult both because of the increasing number of mortgage assignments as well as the general apathy and reluctance of mortgage companies to satisfy this legislative requirement of approval. Under the new Section 90A, a specific procedure is set forth for the obtaining of mortgagee approval by written ballot. Once an Association has notified a mortgagee of the pendency of an amendment as required by this new Section, with a statutory notice containing all required documentation under this Section, a mortgagee has 90 days in which to vote upon the amendment. If the mortgagee does not respond within the 90 day period, the mortgagee’s silence is deemed approval under these new provisions. The Association is then obligated to tabulate all of its votes under this procedure within 100 days from the date of mailing of the notice to the mortgagees. Through these amendments, the Association can be assured that the voting by mortgagees will take no longer than 100 days after the mailing of the notice. Associations must exercise particular care to follow the specific requirements of the new Section regarding the notice that must be sent, and the information that must be contained in that notice.
 
Another persistent problem in the past for Associations were the provisions of the Act requiring approval of two-thirds (2/3) of the Co-owners for amendments to the condominium documents. This requirement, in conjunction with the language of most condominium documents restricting delinquent or non-compliant Co-owners from voting often had the net affect of increasing the number of approvals which were needed from a smaller pool of Co-owners, since certain Co-owners were deemed not able to vote. The amendatory legislation adds a new Sub-Section (8) to Section 90 of the Act to correct this problem. This Sub-Section now specifically indicates that the affirmative vote required for passage of an amendment is two-thirds (2/3) of all Co-owners entitled to vote as of the record date for such votes. Consequently, under this new provision, the two-thirds (2/3) is not applied to all Co-owners, but only to all Co-owners who are entitled to vote under the condominium documents as of the record date. This change should make passage of amendments much easier, especially in complexes that have a high delinquency rate.
 
One of the most significant changes in this legislation concerns the right of a condominium Association to collect attorneys fees in actions involving an alleged default of a Co-owner. Under the old provisions of the Act, the right to reasonable attorneys fees was placed within the discretion of the Trial Judge. Attorneys fees could only be collected if they were determined to be reasonable, and the Trial Judge found it appropriate to make such an award. Since the award was discretionary, appeal standards made it extremely difficult to overturn the decision of a Trial Judge. Many Judges were reluctant to award attorneys fees to condominium Associations in cases where compliance was achieved on the eve of trial, or where the amount of costs and fees occasioned by the Co-owner’s default exceeded the monetary default itself. Most Judges relied upon the discretionary provisions of the Condominium Act even in the face of contrary provisions contained in condominium documents which made an award of attorneys fees to the Association a matter of right. Due to these difficulties, it was deemed appropriate to remove the discretion of the Trial Judge in these cases. Initial attempts to simply amend the Act to provide that an award of attorneys fees would be mandatory in cases where the Association was successful were met with substantial opposition by the State Bar of Michigan. What resulted from this contest was a compromise provision which is now contained in Section 106(b) of the revised Condominium Act. Under the new provision, either a Co-owner or the Association shall be awarded costs and reasonable attorneys fees in any proceeding arising because of an alleged default by a Co-owner, if that party is successful, AND IF THE CONDOMINIUM DOCUMENTS EXPRESSLY SO PROVIDE. In essence, the change mandates that courts of law shall follow the dictates of the condominium documents in awarding fees and costs in the case of an action brought due to the alleged default of a Co-owner. If the condominium documents do not provide an absolute right to the Association to recover fees and costs, they will not be recovered. While many more modern condominium documents already restrict or eliminate the right of a Co-owner to collect fees and costs when suing the Association, they do not specifically require that the Association must be awarded costs and fees if it is successful. Therefore, in order to obtain the benefit of the new amended Section, condominium Associations must make sure that they amend their condominium documents to specifically state that the Association shall recover its costs and attorneys fees if successful in pursuing a Co-owner in default. Equally as important, the condominium documents must specifically indicate whether a Co-owner suing an Association will be entitled to such fees and costs if he or she is successful. Once these provisions are contained in the condominium documents, under the new amendatory legislation, Courts are required to follow the provisions of the documents.
 
Under the existing Act, the statutory lien for unpaid assessments was required to be filed without including future assessments that may become due, interest, costs, collection fees and fines. This gave rise to a question as to whether or not the statutory lien secured any of these other sums that may be due and payable through assessment by the Association. Under the amendatory legislation, Section 108(1) has been revised to specifically provide that the statutory lien secures payment of collection and late charges, advances made by the Association to protect its lien, attorneys fees, fines and interest. While there has been no change to the provision that requires that a lien being filed only recite current assessments unpaid, it is now made statutorily clear that upon foreclosure of that lien, all additional charges and fees are secured by that lien. Furthermore, due to confusion caused by the laws pertaining to foreclosure of mortgages, it has now been made clear in Section 108(2) of the amendatory legislation that the redemption period following foreclosure of a statutory Condominium assessment lien is six (6) months from the date of sale, except in the case of abandoned property, where the redemption period is reduced to one (1) month from the date of sale. The added Sub-Section(8) of Section 108 also specifically makes it clear that a Co-owner subject to foreclosure, as well as any purchaser, grantee, successor or assignee of the Co-owner’s interest in the unit, is liable for assessments by the Association chargeable to that unit that become due before expiration of the period of redemption, together with interest, advances to protect the lien, costs and attorneys fees incurred by the Association in collection.
 
The problem of first mortgage priority is also addressed in the amendatory legislation. Under the existing Act, it was simply stated that a first mortgagee of record had priority over a Condominium assessment lien. Unfortunately, unless the Association’s counsel was diligent in reading legal notices to determine when mortgages were foreclosing, an Association often only obtained knowledge of a mortgage foreclosure after it was too late for the Association to protect its interest. The amendatory legislation adds a new Sub-Section(9) to Section 108 of the Act requiring notification by a mortgagee of its foreclosure proceeding. Such notification is required to be made upon the Association by notice addressed to the resident agent of the Association, at the agent’s address as shown on the records of the Michigan Corporations and Securities Bureau. The Association may also provide a different address to mortgagees of record if desired. By having notice as soon as possible of a pending mortgage foreclosure sale, the Association will have time in which to take action to preserve or protect its secondary lien status. It is therefore incumbent upon Associations to make sure that the information on file with the Michigan Department of Consumer and Industry Services, Corporations and Securities Bureau, is at all times accurate and up to date. A mortgagee’s obligation to send notice is specifically related only to that information which is on file with the State.
 
Section 111 has been clarified to provide that upon sale of a unit, not only unpaid assessments, but also all unpaid fines, collection charges, attorneys fees, interest and late charges are due and payable from closing proceeds. The addition of this language makes absolutely clear that upon the sale of a unit, the closing agent must withhold all sums due the Association from closing proceeds, not just unpaid Condominium assessments.

The amendatory legislation also changed Section 112 of the Act regarding rental rights. Under the language of the existing Act, and certain Court of Appeals decisions in the State, it was uncertain that an Association could amend those provisions of the condominium documents relative to rights and restrictions on rental of units. The changes to this Section now make clear that before the transitional control date, no such change in rental rights and restrictions can be made without the developer’s approval, however, following the transitional control date, the Association may amend the Condominium Documents to change rental rights and responsibilities and terms of occupancy as provided in Section 90(4). Such an amendment made by the Association will not affect the rights of existing lessors and lessees under a written lease otherwise in compliance with the amended Section. Changes were also made relative to a notification of the Association of leases within the complex. Previously, notification was only required if a lease form was being used. Sub-Section(2) of Section 112 has now been amended to indicate that notice must be given to the Association not only in the case of a written lease but in the case of any agreement granting possession of a Condominium unit to another party. In such cases, the Association must be notified by either the Co-owner or developer so granting possession of the name and address of the potential lessee or occupant, the rental amount and due dates for rent under the proposed agreement. Finally, Section 112 has been further amended to expressly provide that in cases where the Association has provided a tenant a notice to pay rent directly to the Association due to a Co-owner default, the Association now specifically has the right to summarily evict and remove from the premises any tenant who does not comply with such notice.
 
The final significant change contained in the amendatory legislation concerns actions against the developer for defects in the common elements. The existing Michigan Condominium Act contained no statute of limitations or guidance as to how or when an Association was obligated to put a developer on notice of claims involving common elements. In cases of complexes which took many years to build, the Association of Co-owners would be controlled by the developer long past the applicable general statutes of limitations for such claims. Judicial interpretation of general statutes of limitation in such cases was inconsistent. In cases where the statutes were modified by Courts, it was based upon a recognition that the Association members neither had the control or access to information necessary to make a claim prior to assuming control of the Association. Furthermore, in such cases it was highly unlikely that a developer would take action against itself on behalf of the Association even though it had a legal fiduciary duty to do so. Consequently, the amendatory legislation adds to the Act Section 176 which provides a statute of limitation relative to actions against those responsible for construction of Condominium projects. In essence, actions against developers, residential builders, licensed architects, contractors, sales agents or managers of a Condominium project arising out of the development or construction of the common elements or the management, operation, or control of a Condominium project, cannot be brought more than three (3) years from the transitional control date or two (2) years from the date the cause of action accrues, which ever occurs later. This means that an Association of Co-owners must take action against any of the parties responsible for the management, construction or operation of the Association for defects or deficiencies within three (3) years of the transitional control date. This applies to any claim or action which is known or reasonably discoverable within that time. This timeframe does not apply to what are truly considered latent defects in the common elements. In the case of latent defects, the Association must take action within two (2) years of the date on which it knew or should have known of the defect in question. This is determined by the general accrual of actions provisions of the Revised Judicature Act.


Obviously, a number of these Sections have a material impact upon administration of condominium projects throughout the State of Michigan. In that the amendatory Act is to be given immediate effect, it is incumbent upon all condominium Associations to review their condominium documents and policies to ensure compliance with the revised Sections. To the extent that amendments to the condominium documents are necessary in order to reap the benefits of the amendatory language, such amendments should be proposed as quickly as possible. It is therefore appropriate that all condominium Associations consult with their legal advisors and managers in a timely fashion to make whatever changes are necessary to get the most benefit from the amended provisions of the Michigan Condominium Act. Current knowledge is essential.
 


 
© January 10, 2001, Mark F. Makower. All rights reserved.
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