IX. Condominiums and Cooperatives

IX. Condominiums and Cooperatives

A. Condos

1. Essential Features

a. Unit ownership

i. each individual unit is owned spearately in fee simple

ii. can also be a leasehold in some cases

iii. each unit takes out a separate mortgage

b. Common areas

i. owned by all owners of the units as tenants in common

2. Creation

a. Declaration of master deed

b. promulgation of rules

i. this is where most of the conflict has come from in these cases -- rules generally upheld if reasonable

3. Restriction on transfer

a. Restraint on alienation - problem b/c each owner owns a fee simple (see above rules on alienation)

i. what is reasonable

a) See Laguna v. Darger

ii. adminstrative regulations

a) state often defines what is a reasonable restraint on alienation

b. Preemptive right to buy by association

i. A preemptive option in a condo agreement or homeowners association has generally been held reasonable if the preemption is limited in time and fives the association the riht eithe to match a bona fide offer or to purchase at market price

ii. allows association to control who comes into the association

c. Illegal racial discrimination

i. See Fair Housing Act

d. unconstitutional state action

i. if condo association is seeking to prevent a constitutionally allowed action then it probably will not be upheld

4. Laguna Royale v. Darger

a. Facts

i. ∆ tried to create a time share

ii. subassignment agreement has a clause in it that requird the approval of the Assoc b/f owner could lease to someone

iii. court adds a reasonable term to this clause

b. Test

i. whether the reason for withholding approval is rationally related to the protection, preservation or proper operation of the property and the purposes of the Assoc as set forth in the governing instruments and

ii. whether the power was exercised in a fair and non-discriminatory manner

c. Points

i. how do condos come up with the rules that limit freedom of individual owners

ii. is it appropriate for the court to apply this rational standard?

iii. Once the court adopts it, does the court actually apply it or is there some higher standard?

5. Lawsuits stemming from objectionable activity

a. Nahrstedt v. Lakeside Villate Condo Assoc., Inc.

i. Facts

a) π is challenging blanket restriction on pets

ii. Test

a) majority requires reasonableness test --- reasonable and enforceable when they prohibit conduct which, while otherwise lawful, in fact interferes with, or has a reasonable likelihood of interfering with, the rights of other condo owners to the peacefule and quiet enjoyment of their property

iii. Arguments for the rule

a) she moved in after the rule was established

b) why couldn't she have bargained for the cats?

c) what if she didn't have a choice?

iv. What if the rule is created after a person has already moved in?

a) purpose of rule -- to gang up on one person to get him out of the association?

b) what if the person could easily move elsewhere

b. O'Buck v. Cottonwood

i. Facts

a) roofs repaired after leaking and antennas prohibited -- cable provided

ii. Rule

a) it is necessary to balance the importance of the rule's objective against the importance of the interest infringed upon

c. Trustees of the Prince Condo Trust v. Prosser

i. Outcome

a) A system that would tolerate a unit owner's refusal to pay an assessment b/c the unit owner asserts a grievance, even a seemingly meritorious one, would threaten the financial integrity of the entire condo operation

B. Cooperatives

1. Basic form

a. a corporation holds legal title to an apartment building

b. Shares of stock are sold to the persons who will occupy the apartments

c. the amount of stock required depends on the value of the apartment

d. occupants also receive leases from the corporation

e. residents are both tenants and owners of the cooperative corporation

2. Basic Characteristics

a. entire building subject to a blanket mortgage

b. risk of foreclosure from the blanket mortgage means that each tenant is in effect obligated to come up with any deficiency if other tenants fail to pay the rent

3. Restrictions on transfer

a. General policy

i. most coops require the approval of the board for membership for sale of shares prior to sale or lease

ii. most courts require that this approval be reasonable

b. Interests of other owners?

i. if an individual coop owner defaults on a loan, the bank will foreclose on the whole building and everyone is affected

ii. accordingly, you may care who is living in your building more in a cooperative than in a condo assoc because you bear some of the risk of their defaulting

c. General rule

i. the restriction must be reasonably tailored to the purposes of assuring financial responsibility and social compatibility

4. Advantages over ordinary leases?

a. tenant control of the bldg

b. capital gains

c. property taxes and mortgage interest are tax deductible

C. Condo Conversion controls

1. Principal reason for conversion --- Muth and Berger (see below)

a. income tax treatment of income from owner occupied housing

i. mortgage and property taxes are deductible

ii. tax incentive particularly appealing during periods of inflation

2. Other reasons? --- Prof Berger

a. dearth of newly built single family homes

b. the inordinate cost of single family detached units

c. the energy crisis

d. the readiness of homeowners to invest greater capital

e. the loss of a tax shelter benefits for the original owner of rental apartments

f. the emergence of condo format

g. emergence of conversion industry?