By: Matthew O’Malley [1]
There are many pros to living in condominium associations, as they are often one of the more affordable options in urban environments and especially in many areas in the City of Chicago. Condos can provide a great sense of community and allow individuals to focus on just maintaining their unit without having to worry about some other maintenance issues such as roofs, masonry, snow removal, or landscaping.
With that said, purchasing a condo is a considerable investment and I am not just talking about an initial down payment or mortgage. Life within condo associations also has significant financial and legal implications. Below are some of the basic frequently asked questions our office receives from recent purchasers or those exploring the market.
So what exactly is a condo association and what do we think of when we think of condo ownership?
- Owning a condo gives you an interest in the common elements held with other unit owners and your own separate interest of your dwelling unit.
- You are not just purchasing a physical unit or space within a building with great amenities or a unit with a nice view.
- There is a lot involved and taking place in the day-to-day and behind the scenes.
What are governing documents? What are some examples of governing documents?
- Declaration, Bylaws, Rules and Regulations, Amendments, Commercial Agreements, etc.
- The instrument by which the condo’s property is submitted to. In laymen’s terms, think of a Declaration as an operating agreement.
- Declaration is usually a 30-plus-page document. It includes many sections but almost always has a table of contents and a definition page. You will want to review those items first to get a sense of your operating documents.
- The Declaration is going to have several articles, which will discuss maintenance obligations, insurance, restrictions, assessments, how Board meetings are held, how Boards are elected, leasing issues, general provisions and other catch all’s.
Laws that govern condominiums in Chicago:
- The Illinois Condominium Property Act or the Condo Act.
- Chicago and Cook County Municipal Codes (these govern issues related to building codes)
- Illinois Forcible and Entry and Detainer Act (arises in situations where a party is being evicted or possession is being sought)
- Internal structure and rules/governing documents
What are some common legal issues that condo boards face?
- Building code violations
- Collections against unit owners for unpaid assessments
- Enforcement actions against unit owners to remedy a breach of the governing documents
- General corporate work
- Litigation from unit owners
- Disputes between unit owners
- Disputes between vendors
- Contract review for maintenance projects
- Education
- Elections, voting, and Board Meetings
What are common elements?
- The exact definition will be located in your Declaration but typically these are all portions of the condo except units, including limited common elements unless otherwise specified.
- Examples: pools, gym facilities, roofs, internal pipes and HVAC running to multiple areas of the building, laundry rooms, hallways, lobbies, elevators, etc.
What are limited common elements?
- Again, this will be defined in your Declaration, but these are areas that are reserved for the use of a certain unit or units and to the exclusion of other units, including but not limited to: balconies, terraces, patios and parking spaces.
What is a special assessment?
- A special assessment is usually a one-time additional assessment to address needed work (i.e. a broken elevator, or pipes freezing in the winter) and they are usually costly and several times the average monthly regular assessment.
A healthy condominium association is one that is financially sound. However, proper accounting, budgeting, evaluation of risk and engaged membership are other factors to ensure your association is healthy. An association’s finances include accounts payable and receivable, like any other corporation. While an Association is a not-for-profit, it has regularly occurring expenses and in order to pay such, the Board is tasked with collecting assessments from unit owners. Condo health is more than finances. It includes care for the physical structures, care for the unit owners and a Board of Directors that acts within the bounds of the law.
Each condominium association is different and making a good consumer decision means being informed. Given the importance of a building’s finances, you want to be aware of and review financial information before you decide to become part of the Association. As part of any major purchase, an important part of that process is doing proper due diligence. Many homeowners generally think they are in good shape with home inspection, an appraisal, lead and radon disclosures and exchange between the buyer and seller’s attorney to negotiate the deal. When it comes to condos, there is more. Illinois law triggers what we call a Section 22.1 disclosure. It is called this because the disclosure is referenced in Section 22 of the Illinois Condominium Property Act and this disclosure by the seller must include:
- The Declaration, by-laws, and any other condominium rules and regulations
- The name and mailing address of the owner’s association’s principal officer (or another specially designated agent)
- Any liens, unpaid assessments, or other charges due on the unit
- The unit owner’s association’s projected budget and capital expenditures for the next two fiscal years, as well as their financial status for the previous fiscal year
- Any funds reserved or earmarked for reserves and/or specified projects
- Any lawsuits or legal cases that the association is involved in as a party
- Information on the insurance coverage provided for owners by the association
- A statement on any improvements or alterations made to the unit
When the buyer and their representatives request this disclosure information, the board’s designated officer (usually a Board member or property manager) must furnish it in writing within 30 days. It’s not only important to be provided this information but you need to review it. We recommend you retain an attorney besides your real estate counsel to review documents. It is worth the minor expense upfront to better understand what you are buying into. These documents are complex and discuss many issues, but importantly they address the duties of Board members and also of unit owners. The 22.1 disclosure is so important because it is your opportunity as a prospective new condo owner to get an inside peek and learn more information about the history of the condo association’s fee increases to get a sense of how they’ll rise in the future and also garner more information about the financial health of the building as well as your unit and likely expenses. Having this knowledge beforehand is much better than being surprised after a purchase.
Living in condominiums are beneficial and often a wonderful investment, especially if you prefer to have upkeep handled by others, but it is very important you understand what you are signing up for. You want to be sure that Boards are operating within their legal duties and maintaining the financial and physical health of the Association.
For more information about this article, contact Tressler LLP attorney Matthew O’Malley [1] at momalley@tresslerllp.com [2].