By Deborah Goonan, Independent American Communities
The Arizona Legislature just took three steps forward toward protecting the rights of homeowners and shareholders in association-governed communities.
Governor Doug Ducey has signed all three of the following bills, which are now law in Arizona.
HB-2262: Condominium Termination Compensation
In Arizona, the condominium association termination trend has picked up in recent years, as previously explained here on IAC.
A decade ago, the HOA industry, led by trade groups including Community Associations Institute state chapters, created termination provisions that allowed for 80% of voting interests in a condominium to approve a plan to dissolve the condominium corporation, opening the door to conversion of condos to rental apartments, or resale and redevelopment of the site by developers.
Prior to the “80% provision,” many condominium governing documents required unanimous approval by owners in order to terminate the association.
The industry touted the condo termination statute — now enacted in virtually every state — as an “escape hatch” for distressed associations, and a way for owners of older condominiums to “cash out” by reselling the entire housing project to investors or a developer. By eliminating unanimous consent, a few “hold out” owners could not block a deconversion or sale of the association.
However, the ugly reality is that condo terminations often resulted in hostile investor takeovers of the corporation. Typically, aggressive investors would employ a collection of intimidation tactics to convince condo owners to sell their units.
Initially, as investors acquired condo units, one or a few at a time over months or years, sellers were able to negotiate fair or even generous purchase offers. But, once the investors reached a supermajority threshold of voting interests, they elected themselves to the board of directors.
As a hostile board took control of the community, it was common for member owners to face huge special assessments and punitive fines, to experience deferred maintenance or disruptive renovations, to deal with difficult neighbors as the board leased multiple units to unscreened or unsupervised tenants, and, eventually, a to face a forced termination of the condo association.
The worst part of being a minority owner in a forced termination: the condo association board — a group of self-interested investors or developers — had the absolute right to choose a real estate appraiser, resulting in lowball sale proceeds disbursed to hold out condo owners.
Under those conditions, condo owners were not only forced to give up their homes, but many with mortgages were left with no cash proceeds after paying off their lender. In some cases, former owners were still on the hook for the unpaid mortgage balance.
While it won’t end condo terminations, HB 2262, which amends chapter 235, will help to ensure that condo owners receive a fair market value for their property.
According to Dennis Legere, lobbyist for Arizona Homeowners Coalition (AZHOC), “HB-2262 was significantly modified in both the House and Senate based on our input, and truly provides fair and equitable compensation for any unit owner in a condominium that is forced out of their home by investors that have bought out the interest of 80% of the units and want to terminate the Condominium and sell the entire property, forcing the remaining 20% of homeowners to leave. This bill provides for a true pre-termination assessment value for the individual unit in addition to a 5% relocation rider to defray the cost of moving.”
Specifically, HB 2262 states that, if a condo owner is dissatisfied with the appraisal provided by the association board initiating the termination:
ANY UNIT OWNER MAY OBTAIN A SECOND INDEPENDENT APPRAISAL AT THE UNIT OWNER’S EXPENSE AND, IF THE UNIT OWNER’S INDEPENDENT APPRAISAL AMOUNT DIFFERS FROM THE ASSOCIATION’S INDEPENDENT APPRAISAL AMOUNT BY FIVE PERCENT OR LESS, THE HIGHER APPRAISAL IS FINAL. IF THE TOTAL AMOUNT OF COMPENSATION OWED AS DETERMINED BY THE SECOND APPRAISER IS MORE THAN FIVE PERCENT HIGHER THAN THE AMOUNT DETERMINED BY THE ASSOCIATION’S APPRAISER, THE UNIT OWNER SHALL SUBMIT TO ARBITRATION AT THE ASSOCIATION’S EXPENSE AND THE ARBITRATION AMOUNT IS THE FINAL SALE AMOUNT. AN ADDITIONAL FIVE PERCENT OF THE FINAL SALE AMOUNT SHALL BE ADDED FOR RELOCATION COSTS FOR OWNER‑OCCUPIED UNITS.
Legere says that these terms help to level the playing field, and will go a long way toward prevention of predatory condo takeovers and forced termination tactics.
HB2065 – Public body open meeting laws and penalties
AZHOC was also instrumental in amending state law with regard to open meeting of public bodies, meaning governmental units such as municipalities, counties, or special districts.
Amendments clarify that email communication by a quorum of board members constitutes a meeting, which, according to Arizona law, must be open to the public for observation and comment. Minutes must be recorded for each meeting, including the names and votes of each member on any motion considered at a meeting.
Penalties can be imposed against board members of public bodies, for failure to conduct proper open meetings and to record appropriate minutes. Enforcement action can result in fines of $500 for a first offense, and $2,500 for second and subsequent offenses against the offending parties, and public funds cannot be used to cover the cost of these violations against a board member.
According to Legere, “HB-2065 dealt with the definition of meetings for public bodies and included the 2005 Attorney General Opinion that significantly limited the use of e-mails between board members as they were deemed to violate the open meeting laws. This bill also imposes significant and increasing fines on board members that violate the open meeting law including forced removal from office.”
Although MB 2065 pertains to public units of government (not “private government”), it provides a framework for amending similar open meeting statutes as they pertain to association-governed communities.
And, at the same time, the law increases accountability of local government officials, some of whom approve or deny development plans for association-governed communities.
HB 2238 Administrative law judge decision appeals
Up until the passage of HB 2238, if an association member engaged in dispute resolution with the Arizona Office of Administrative Hearings, it was nearly impossible for an aggrieved owner or resident of an association-governed common interest community (HOA) to appeal the decision of an Administrative Law Judge (ALJ) to a higher court.
Now, when an association member believes that the ALJ’s decision was ill-advised, that member can request a new trial in civil court. Furthermore, the court no longer needs to give deference to the ruling of the ALJ. The court also need not limit legal review to the narrow scope of common interest community law and contractual governing documents of the association.
The court can review the case with reference to relevant case law and Common Law as it pertains to property rights of association members and homeowners.
All of these amendments provide legal advantages to individual property owners, as opposed to HOAs.
Homeowners Association Dispute Process, Arizona Department of Real Estate