Condo (Strata) Termination Trend Goes Worldwide

By Deborah Goonan, Independent American Communities Blog

A few of my readers have shared articles on efforts in British Columbia, Canada and Western Australia to enact legislation that would allow less than unanimous consent of condo owners to terminate or “wind up the affairs” of their owners’ associations.

In British Columbia, a proposed change to the Strata Property Act would allow an 80% membership vote to terminate a condo (strata) association, rather than requiring unanimous consent from all members. However, in addition to meeting the required vote threshold, the termination process would require a court order. Requiring court approval is intended to give dissenting owners a chance to present their concerns, and to better ensure all members receive fair market value for their property. (1, 2)

In Western Australia, policy makers are proposing a majority approval of flat (condo) owners to force a termination upon the remaining minority of owners.  (3)

The main rationale for making this controversial change, a change that effectively limits the property rights of minority condo (strata) association members: it will solve the problem of replacing older projects of relatively few units, by allowing for redevelopment of more modern buildings containing a greater number of housing units on the same parcel of land.

Proponents of these legislative proposals like to present them as beneficial for owners that no longer want to sink money into old buildings in need of extensive repairs. Instead, it is claimed, members can democratically decide to invite bids from real estate developers. They might even walk away with a substantial profit – and rid themselves of the burden of paying more money in strata fees than their units are worth.

But are real estate interests painting a realistic picture of what owners can expect, should these proposals become the law of the land?

The truth about making it easier to terminate condo associations

Clearly, real estate developers, investors, and government officials interested in increasing property density are watching what has been going on in the US. In 2007, the Florida Legislature enacted Statute 718.117, allowing for optional termination of condominiums with 80% membership vote of approval, providing no more than 10% dissent to the termination.

However, the new law has been more beneficial for developers than condo owners.

The very nature of condo corporations is that one’s voting power is tied directly to one’s share of property ownership. The law has made it relatively easy for investors (or suspected developer affiliates) to acquire undervalued units in bulk, and then take control of the board, unilaterally casting the 80% vote needed to force termination.

Shortly after the 2007 law was enacted, condo owners who had purchased their units at inflated prices during the height of the market were being forced to sell their units back to investor groups for less than half of what they had paid. Hundreds of condo projects were terminated, but only a handful of them involved owner-occupants voluntarily voting to put their condo association on the open market, seeking competitive bids. Most terminations were the result of hostile takeovers.

Back in 2006 and 2007, owner advocates had warned of this very consequence, and in 2006, then FL Governor Jeb Bush vetoed the initial attempt at passing legislation allowing optional termination at 80% rather than 100% membership approval.

Unintended consequences?

Nevertheless, the FL Legislature was swayed by the very same arguments being made in Canada and Australia. The poor owners of obsolete condos will finally have an escape route, and an opportunity to “cash out” by selling to a developer and starting fresh in a new home.

After the law took root in Florida, it was quietly passed in other states.

However, for decades, the 80% approval for termination provision has been embedded into the Uniform Condominium Act (1977, amended 1980) which is intended to serve as a model for state condominium statutes in the US.

§ 2-118. [Termination of Condominium].
(a) Except in the case of a taking of all the units by eminent domain (Section 1-107), a condominium may be terminated only by agreement of unit owners of units to which at least 80 percent of the votes in the association are allocated, or any larger percentage the declaration specifies. The declaration may specify a smaller percentage only if all of the units in the condominium are restricted exclusively to non-residential uses

The realities of condo termination

Besides the now obvious danger of exploitation of owners by hostile takeover, the reader should consider the following:
  • Lawmakers can be heavily swayed by special interest groups that benefit from easier termination, because it increases their opportunities to make a great deal of profit with the resulting redevelopment.
  • The added bonus of allowing older or ailing condo associations to terminate – local governments are relieved of the cost burden of providing services when the cash-strapped association fails to do so. At the same time, redevelopment almost always increases the number of housing units, thereby increasing tax revenue for the municipality or county.
  • More often than not, redevelopment replaces modestly priced housing with more expensive housing, and often displaces owners and tenants who are then unable to obtain comparable housing nearby.
  • The most distressed condo projects, the ones most in need of a buy out and redevelopment, are not generally wanted by developers. Either the location is not desirable, or the condition is too far gone for renovation. Builders tend to choose only the best opportunities for redevelopment, while the majority of older projects continue to fall into a state of disrepair and often struggle with abandonment, tax delinquencies, and crime.
Property owner groups around the world should pay close attention to legislative proposals that remove property rights of owners, especially when they are written for the advantage of influential and wealthy land developers and the entities that finance them.

That said, at least one property owners’ group is paying attention in Western Australia:

Property Owners Association…Secretary Rhonda McDonald claims it [the proposal allowing a majority of owners to force the minority to terminate the strata association and sell their units] would encroach on homeowners’ rights.

“It would be giving too much to the bigger people, the people with money,” she said.

“It would ride roughshod over little people, and create insecurity and there is too much of that in this world as it is.” (3)

Well said, Ms. McDonald. Well said.

References:

(1) Changes support tenants, landlords, strata corporations (B.C., Canada)

(2) Changes to Strata Property Act pave the way for strata redevelopment (B.C., Canada)

(3) Forced-sale plan for older flats (Western Australia)

 

Here are some examples of “unintended consequences” in the US, particularly in Florida and Illinois:

Chicago developer de-converting condos

Do Condominium Associations Remain Vulnerable to Hostile Takeover?

Tampa Bay couple in ‘awful situation,’ forced to sell as condo converted to rental


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