Mixed-Use Developments – Conflicts

Mixed-used condominium projects have been steadily increasing throughout Illinois. It is unsurprising, considering that locating commercial spaces within condominium projects can benefit both the residents within these communities, as well as the owners of these establishments. But, what happens when the perceived burdens imposed by these commercial units outweigh the benefits? Is there anything that a condominium board can do to address issues with commercial unit owners? The reality is that residential and commercial unit owners have competing interests. Residential unit owners may be more interested in maintaining a quiet and peaceful community, while commercial unit owners’ natural focus is profit. Logically, this may give rise to conflicts that boards must address. Therefore, it is essential that boards understand how to deal with and anticipate potential conflicts.

Condominium Projects

The first step that a board must take is to understand the composition of the condominium project. Typically, mixed-use condominium projects are composed as: 1). Condominium projects that includes commercial units as part of the condominium project; 2). Condominium projects that “carve out” commercial units and contain legal instruments (REA’s) that govern the relationship between the association and the commercial units; and 3). Condominium projects that carve out commercial units, but are not accompanied by a legal instrument that governs the relationship between the association and the commercial units. Understanding the condominium project’s composition will assist a board in understanding the rights and obligations that the parties owe to each other.

Commercial Units Subject to the Declaration

The language of the declaration and the recorded plat will identify whether these units are included within condominium project, or whether they have been “carved out.” Commercial units that are incorporated as part of the condominium project are subject to the condominium’s declaration and the Illinois Condominium Property Act (“Act”). The declaration and the Act govern the operation of the condominium association and defines the rights and obligations of each unit owner, including commercial unit owners. Because the declaration and the Act places the responsibility of managing and operating condominium projects on the Association’s board, boards can exercise considerable control over the activities that a commercial unit can undertake, such as its leasing activities.

In fact, case law has recognized that boards have broad control over a commercial unit owner’s activities.This power was evident in a 2014 Circuit Court of Illinois case, 1751 W. Div. Condominium Ass’n v. CB Holdings of Illinois, LLC, which involved a mixed-use condominium project. In this case, the plaintiff acquired one of the commercial units in the building and leased the property years later. The lessees planned to use the commercial unit as a restaurant, so they began construction. At that time, the declaration did not restrict the use of the commercial unit as a restaurant. However, the board opposed the construction of the restaurant and an amendment was properly passed and approved by all, but the plaintiff. The court, citing Apple II Condominium Ass’n v. Worth Bank and Trust Co., held that even though the plaintiff had a signed lease agreement prior to the passing of the amendment, the amendment was nonetheless enforceable against the commercial unit owner, even if it had the effect of invalidating the lease agreement. The holding in the CB Holdings case expands on the Apple II holding, which holds valid amendments that are passed and effectively sever prior leasing agreements, by applying it to mixed-use properties. However, further case law limits the validity of changes in the acceptable use of units to only apply to amendments, and not to board imposed rules, such as bylaws, as these rules lack “the strong assumption of validity.”

Another common issue that may arise with commercial units is unpaid assessments. Because the commercial units are subject to the declaration and the Act, the association is able to impose fees and any other relief that is granted under the declaration or the Act. The provisions within the declaration and the Act can be used as tools by the boards to compel commercial unit owners to bring their accounts current.

Carved-Out Commercial Units Accompanied by Legal Instruments

Carved-out commercial units are commonly accompanied by a legal instrument, such as a reciprocal easement agreement (REA), which governs the relationship between the association and the commercial units. In these situations, the board is unable to exercise as much power as they would, had the units been included as part of the condominium project. The written agreement places the association and the commercial units in privity of contract, where the rights and obligations are explicitly outlined. However, the Board is likely unable to exercise control over the activities undertaken by the commercial units, outside of the terms of the written document. Thus, if the commercial unit uses the property in a way that inconveniences the association residents, the association is unable to restrict the commercial unit’s use of the property. Unlike commercial units that are subject to a condominium’s declaration, an association’s remedies for breaches by commercial unit owners may be limited to filing of a lawsuit by the association to enforce the terms of the agreement between the parties. However, it is important to note that REA’s may contain arbitration clauses that may require that all disputes be submitted to arbitration. A recent 2018 case, Radiant Star Enterprises, LLC v. Metropolis Condominium Association, held that courts will enforce valid arbitration clauses. Thus, associations must comply by the terms of a valid arbitration clause for disputes, if one exists.

Carved-Out Commercial Units Without Legal Instruments

Although not as common, there are condominiums that have commercial units that have been carved-out from the condominium project, but do not have a legal instrument governing the rights and obligations between the association and these commercial units. The most common scenario involves associations sharing parking lots with commercial units. These scenarios are a bit more complicated, in that the rights and obligations of the parties are unclear. There is no declaration and no legal instrument that sets forth the how the shared areas are administered. So how can associations seek relief from commercial unit owners? In these cases, contract claims are barred as there is no privity of contract between the parties. However, associations are able to seek equitable relief in court, regardless of whether or not there is an instrument that governs the relationship between the parties.

It is in the board’s best interest to understand the rights and obligations between commercial unit owners and the association. However, there may be situations where the language found within the declaration or REA is either ambiguous or unclear, or where a written agreement does not exist. In these cases, it is important that boards consult a community association attorney, so that they can get a clear understanding of the rights and responsibilities of the parties involved. This will go a long way in maintaining good relationships with all unit owners in the association, as well as with preparing boards in case of disputes.