Recent Amendments to the Connecticut Common Interest Ownership Act

Recent Amendments to the Connecticut Common Interest Ownership Act Home Builders Association of Connecticut, Inc., Developers Council November 5, 2009 Gregory W. McCracken During the previous regular session, the Connecticut General Assembly made the most significant amendments to the Connecticut Common Interest Ownership Act or the CIOA since the statute became effective in 1984. The amendments are in Public Act No. 09-225, which was Substitute House Bill No. 6672. In general, they will become effective on July 1, 2010, but some portions not relevant here have taken effect. The CIOA governs the creation, marketing, and operation of all common interest communities in Connecticut that have been created after 1983. Under the definition in the CIOA, a common interest community means real property described in a recorded declaration with respect to which a person, because of the ownership of a unit (which is a physical area intended for separate ownership or occupancy), must pay for a share of (1) real property taxes on, (2) insurance premiums on, (3) maintenance of, (4) improvement of, or (5) services or other expenses related to real property other than that unit. Common interest communities can be created in various configurations for a wide variety of purposes. At times, they are created inadvertently without complying with the requirements of the CIOA. For developers, the amendments to the CIOA are mostly good news. They provide new exceptions to the application of the CIOA for existing communities to share costs and for modest arrangements to share the costs of party walls, driveways, wells, and the like. They provide developers with new rights to build and market communities. They allow governmental entities or public charities to appoint some members of the governing board of a community. They provide developers with a right to cure construction defects to avoid litigation as the homeowners first step in dealing with construction defects. On the other hand, the amendments change the provisions covering meetings and governance of community associations, which will require more attention and effort by developers. They impose new insurance requirements that will limit the coverage of units by only policies that homeowners obtain. They impose new responsibilities on developers to provide public offering statements to purchasers for the sale of units. 1

This paper outlines the amendments to the CIOA that will be of the greatest interest to developers. As such, it does not provide an overview of all of the amendments. A newsletter published by Perlstein, Sandler & McCracken and available at http://www.ctcondolaw.com/summer.2009.text.pdf provides an overview of all of the amendments. Public Act No. 09-225 is available at http://www.cga.ct.gov/2009/act/pa/2009pa-00225-r00hb-06672-pa.htm. 1. Exceptions to the creation of common interest communities. Sections 8 and 9 of the amendments add new sections to the CIOA that exempt certain arrangements between property owners that otherwise would create a common interest community if they were recorded on the land records. The reasoning behind the new exemptions is that the CIOA should not apply to a situation in which a declaration of easements or a covenant to share costs would be sufficient to establish the relationship between two parcels of land, without the need to establish unit owners association to manage the relationship. Thus, the CIOA will not apply to: (a) An arrangement between the associations for two or more existing communities to share the costs of real property taxes, insurance premiums, services, maintenance or improvements of real property or other activities specified in their arrangement or declarations; (b) An arrangement between a community association and the owner of real property that is not part of the community to share the costs of real property taxes, insurance premiums, services, maintenance or improvements of real property or other activities specified in their arrangement; or (c) A covenant that requires the owners of 12 or fewer separately owned parcels of real property to share costs or other obligations associated with a party wall, driveway, well, septic system, or other similar use. 2. New special declarant rights. Under the CIOA, special declarant rights are rights that a developer may reserve under a declaration to finish the construction, configuration, marketing, and warranty work in a common interest community. Under the current version of CIOA, they include the rights complete improvements depicted on surveys and plans filed with the declaration; to exercise any development right to reconfigure rights of ownership and use in the community; to maintain sales offices, management offices, signs advertising the common interest community, and models; to use easements to make improvements within the community; to make the community subject to a master association; to merge or consolidate a community with another community of the same type; and to control the unit owners association by appointing or removing any officer or any executive board member. 2

Section 1 of the amendments expands Subsection 47-202 of the CIOA to include the following additional special declarant rights to protect a developer s interests in a community: (a) To control any construction and design review processor aesthetic standards committee or process; (b) To attend meetings of the unit owners and the executive board, except during an executive session; and (c) To have access to the records of the association to the same extent as a unit owner. 3. Appointment of some members of the executive board by a governmental entity or public charity. Section 20 of the amendments adds Subsection 47-245(g) to the CIOA. It allows the declaration to provide for the appointment of specified positions on the executive board by either a governmental subdivision or agency or a nonstock corporation exempt from taxation as a public charity under 26 U.S.C. 501(c)(3) and 26 U.S.C. 4940(d)(2), during or after the period of declarant control. It also allows the declaration to provide a method for filling vacancies in those specified positions other than by election by the unit owners. After the period of declarant control, however, the appointed members may not constitute more than one-third of the board may have no greater authority than any other member of the board. Subsection 47-245(g) is intended to accommodate the possibility, especially in senior living projects and in subsidized first time home buyer complexes, that it may assist the long term viability of the project if a non-controlling percentage of the directors that is appointed by persons other than unit owners could provide independent outside expertise to the executive board, even if those directors are not directly responsive to the owners themselves. Such directors could sit on the board only if the declaration provided for such an outcome. 4. Right to cure construction defects as an alternative to litigation. Section 38 of the amendments creates a new right for developers to cure construction defects in a community, as long as the developer complies with requirements for transition of control of the association to the unit owners. The right to cure follows a multi-step process in which both the developer and the association have to take action to address the construction defects. The process limits the authority of an association to institute and maintain a proceeding alleging a construction defect with respect to the community, whether by litigation, mediation, arbitration or administratively, against a declarant or an employee, independent contractor or other person directly or indirectly providing labor or materials to a declarant. 3

In general, the process takes the following steps: (a) The association provides written notice of its claims for construction defects to the developer and any other persons that the association seeks to hold liable for the claimed defects. The written notice must be sufficient communicate the general nature of the association s claims. A list of the claimed defects is adequate. Requirements for delivery of the notice are flexible, as long as the developer and other persons actually learn of the claims or the method of delivery would be adequate begin a proceeding against those persons. (b) The association may not start a proceeding against a person until 45 days after it sends notice of its claim to that person. However, the association can seek equitable relief, a remedy in aid of arbitration, or a prejudgment remedy without regard to this limitation. (c) During the 45-day period, the developer and any other person to whom the association gave notice may present to the association a plan to correct the construction defects described in the notice. (d) If the association does not receive a timely plan from the persons receiving notice of the defects, or if the association does not accept the terms of any plan submitted, the association may institute a proceeding against the person. (e) If the association receives one or more timely plans to correct the construction defects, the association s executive board must promptly consider those plans and notify the persons presenting the plan of whether the plan is acceptable as presented, acceptable with stated conditions, or not accepted. (f) If the association accepts a plan from the developer or another responsible person, or one of those persons agrees to conditions that the association adds to an otherwise acceptable plan, the parties must agree on a period to perform the plan. As long as the developer and other persons diligently perform the plan, the association may not institute a proceeding against them. (g) After the initial 45-day period, a proceeding may be instituted by the following persons, whether or not the association agrees to a plan to correct the construction defects in the community: (1) The association against a person receiving notice of the defects who fails to submit a timely remediation plan, who submits an unacceptable plan to the association, or who fails to pursue diligent implementation of that plan; and (2) A unit owner with respect to the owner s unit and any limited common elements assigned to that unit, regardless of any action of the association. 4

Section 38 of the amendments tolls any statute of limitation affecting the association s right of action against a declarant or other person during the 45-day period and during any extension of that time from the diligent pursuit of the plan to correct the construction defects. Section 38 prohibits the declaration from requiring a vote by any number or percentage of unit owners as a condition to beginning a proceeding for construction defects. It disqualifies any developer from the right-to-cure process if the developer fails to relinquish its control of the association as required under Subsections 47-245(d), (f) and (h) of the CIOA. Among other things, these provisions require the unit owners to elect the association s entire executive board after the sale of 60 percent of the units that may be created, unless termination of control occurs sooner by the passage of two years without the creation or sale of units, and they require the developer to deliver the association s property within 60 days of the election. 4. New requirements for meetings of an association. Section 25 of the amendments adds many new requirements to Section 47-250 for meetings of an association. The requirements will require developers to devote more attention and effort to the governance of the community before transition of control occurs. Under the CIOA in its current form, it is not unusual for the executive board to act entirely by unanimous written consent of the members appointed by the developer, such that there are no meetings of the board, and for the association to hold a short annual meeting solely to give the unit owners the opportunity to ratify the annual budget. Now, developers will have to comply with the following requirements. (a) Not more than 20 percent of the unit owners in a community can request a meeting of the association. If the association does not notify the unit owners of the requested meeting in 15 days, the unit owners can give the notice of the meeting to the unit owners themselves and hold a valid meeting. (Of course, they will need to comply with the bylaws and rules of parliamentary procedure in other respects.) (b) Unit owners are entitled to a reasonable opportunity at any meeting of the association, whether of the unit owners or the executive board, to comment on any matter affecting the common interest community. (c) The association s executive board must meet at least two times a year at the community or a location convenient to it, even before transition of control. The unit owners must receive advance notice of and an agenda for all executive board meetings. (d) Meetings of the executive board must be open to unit owners. However, executive sessions are permitted for specified reasons in the CIOA. (e) Although it remains possible for an executive board to act by unanimous written consent of its members as long as it holds at least two meetings a year, the 5

association s secretary must give prompt notice to all unit owners of any action taken by unanimous written consent. (f) All meetings of the association must be conducted in accordance with the most recent edition of Robert s Rules of Order, Newly Revised, unless the declaration or bylaws provide otherwise or two-thirds of unit owners present at a meeting vote to suspend those rules. 5. New limitations on proxies. Section 27 of the amendments revise Subsection 47-252(c)(6) of the CIOA to impose new limitations on proxy appointments. As revised, this provision prohibits any one individual from casting votes representing more than 15 percent of the votes in the association in accordance with undirected proxies. It will limit the ability of a developer or other investor who owns units from appointing proxies to cast their votes if they own units with more than 15 percent of the votes in the association. Thus, they will have to appoint multiple people to exercise their proxies or use directed proxies. 6. New requirements for the insurance of units. Section 29 of the amendments expanded the requirements of the association s master insurance policy to cover units under Subsection 47-255(b) of the CIOA. If a building in a community contains units divided by horizontal boundaries, e.g., planes that follow floors or ceilings, or by vertical boundaries that constitute or are located within common walls between units, the association s master insurance policy now must cover the units. Previously, units that were separated by common walls, such as townhouses, did not have to be covered by the association s master insurance policy. Rather, unit owners would have to insure their units themselves. As a practical matter, the new requirement will increase the coverage and premiums of the association s master insurance policy, which in turn increases the common expenses assessed against units, and it will bring the claims history of all units to the underwriting for the master policy, which may increase premiums, depending on casualties to units. It will increase the common charges that developers must disclose in a public offering statement to purchasers of units. 7. New requirements for public offering statements. Section 47-202 of the current version of the CIOA defines dealers as persons who own six or more units or more than half of the units in a community, and the CIOA now imposes few requirements on dealers. Section 39 of the amendments changes Subsection 47-263(c) to impose a significant new obligation on dealers. Now, dealers who sell units in a community will have to provide a public offering statement or POS for the units, even if the dealers are not declarants or successor declarants under the CIOA. For example, they could be builders who buy and improve undeveloped lots that are units in a community. In addition, the dealers, as well as successor declarants who did not prepare a POS for the units, will now be responsible for any false or misleading 6

statements in the POS and for any omission of material fact from the POS, regardless of whether they prepared the POS. As a result, dealers and successor declarants will need to carefully review the information in a POS for units that they are selling, and they may want to prepare their own amendments to the POS to correct or supplement the information in it as necessary to protect them from liability to purchasers. 8. Biographical and contact information for Gregory W. McCracken. Greg is a member of Perlstein, Sandler & McCracken, LLC. He is a graduate of the University of California at Davis (B.A., Linguistics, 1985), the University of the Pacific, McGeorge School of Law (J.D., with distinction, 1993), and the University of Illinois (M.U.P. 2000). He obtained membership in Phi Beta Kappa, Phi Kappa Phi, the Order of the Coif, and the Traynor Honor Society, and he received a Citation for Outstanding Performance in Linguistics, the American Institute of Certified Planners Outstanding Student Award, the Outstanding Masters Thesis Award, and the Elliff Planning Law Prize. He served on the board of editors of a journal of international law and on his law school s international moot court competition team. Greg s practice emphasizes common interest community law and land use, planning and zoning law. He represents developers, property owners, and community associations. Before he joined Perlstein, Sandler & McCracken, he was an attorney at Robinson & Cole LLP for six years. Before he moved to Connecticut in 2000, Greg litigated cases involving professional liability, fair housing, endangered species, inverse condemnation, natural resources, public lands, environmental law, and real estate in California. He was a Fellow of the College of Public Interest Law at the Pacific Legal Foundation from 1994-95. Greg s bar admissions include Connecticut, California (inactive), Illinois (inactive), the U.S. Supreme Court, and the Ninth Circuit of the U.S. Court of Appeals. He is a member of the Community Associations Institute, the Developers Council of the Connecticut Home Builders Association, the Executive Committee of the Real Property Section of the Connecticut Bar Association, the Planning and Zoning Section of the Connecticut Bar Association, and the Hartford County Bar Association. He is the reporter of the forthcoming second edition of the Common Interest Ownership Manual, which the Connecticut Bar Association will publish. He is listed in the 2009 New England Super Lawyers for real estate. You may contact him at: Gregory W. McCracken Perlstein, Sandler & McCracken, LLC 10 Waterside Drive, Suite 303 Farmington, CT 06032-3084 (860) 677-2177 (voice) (860) 677-1147 (facsimile) www.ctcondolaw.com 7