Virginia House legislators fast track condo termination bill

By Deborah Goonan, Independent American Communities

As Virginia investors jump on the condo termination band wagon, state Legislatures may make it easier to force condo owners to sell and move out — perhaps even at a loss.

 

Will HB 1548 harm condominium owners?

Following in the footsteps of states like Florida, Illinois, and Arizona, special interests are proposing to re-write statutes to make it easier to deconvert or redevelop condominiums.

This post examines the current draft of House Bill 1548, a bill that seems very unfriendly to condo owners.

Let’s take a look at some of the proposed amendments.

Here’s a screenshot of section G in the most recently amended text of the bill, dated February 4, 2020:

Virginia State Legislature Screen capture Feb. 10, 2020

Arbitrary changes to property rights

With respect to proportionate share of ownership, HB 1548 completely changes the rules of the condo game.

Allow me to explain.

Currently, the Declarations and related governing documents of a condominium association clearly define each unit’s proportional share (interest) in the entire association.

Usually, the governing documents contain a written schedule, listing each unit and its share of ownership.

For example, a 2-bedroom condo unit represents a higher share of the condominium association than a 1-bedroom condo unit. Commercial units often claim a higher share of ownership than some individual residential units. The penthouse would represent a higher proportion of ownership than a 2nd floor studio apartment.

That’s important, because a condo unit’s assigned share determines not only the unit owner’s financial obligation for paying condo assessments, but also the unit owner’s proportional voting interest in the association.

The larger the unit, the higher its condo fees, and the greater its voting rights.

 

The investors and bulk buyers get to write the condo termination agreement

But..as currently drafted, HB 1548 allows the owners organizing the termination (usually an investor group or developers) to completely ignore this contractually-assigned share of rights in the common property.

Instead, the majority investors who are pushing for termination can arbitrarily assign rights as they see fit.

The people who stand to benefit from the termination — including bulk buyers or developers — can allocate more money to themselves, as well as their allies who are willing to vote in favor of termination in exchange for a higher sale price.

Effectively, the bill, as written, makes it legal for the perpetrators of a termination to buy votes in favor of ending the condominium association.

But it gets even worse than that in Section I.

 

Sticking it to the minority shareholders in the condo association

In the screenshot below, take note of the three yellow boxes, which highlight specific proposed amendments to current statute. (Click on any image to enlarge it.)

Now look at item number 1, …the respective interests of the unit owners shall be as set forth in the termination agreement. 

Skip down to item number 3. It reads, If the method of determining the respective interests of the unit owners in the proceeds of sale or disposition is other than the relative fair market values,…

Translation: the condo association does not have to use fair market value to determine a unit’s relative value in the association.

So, if a unit owner is able to negotiate a higher sale price from buyer-investors who control the condo association, that unit owner also obtains more voting power in the association.

Majority voters hold the advantage in approving a termination agreement that works in their favor.

Virginia State Legislature Screen capture Feb. 10, 2020

The not-so-independent appraisal

Also, under item number 3, note that any unit owner disputing the interest to be distributed to his unit may require that the association obtain an independent appraisal of the condominium units.

Now hold on a minute.

Can a unit owner getting a lowball offer for her unit feel confident that the condo association’s appraisal will be truly ‘independent?’

Notice that the unit owner cannot choose her own appraiser?

No matter who does the ‘independent’ appraisal, that single unit owner’s appraised value will be compared to the  proportional values as assigned by the termination agreement.

If the association’s hand-picked ‘independent’ appraisal is at least 10% higher than arbitrary values written into the termination agreement, then all of the units will be revalued at fair market value.

But, if the ‘independent’ appraisal is less than 10% higher than what’s in the termination agreement, the unit owner is out of luck. Not only is he stuck with the lowball termination sale offer for his unit, he’s also on the hook for the cost of the association’s appraisal.

 

Dissenting owners must pay outstanding liens and mortgages

Worst of all, item number 5 really sticks it to the folks who oppose termination.

Unless the termination agreement provides otherwise, each unit owner shall satisfy and cause the release of any mortgage, deed of trust, lease, or other lien or encumbrance on his unit at the time required by the termination agreement.

The current draft of HB 1548 says that a unit owner gets stuck paying any liens or mortgages on their unit(s). Imagine the hardship that creates for an owner that is forced out of his home by investors, especially if the proceeds of the termination aren’t enough to pay off the owner’s mortgage or disputed condo assessment liens.

Also, if the unit is leased — whether residential or commercial — both the unit owner and the tenant are expected to absorb the costs of breaking the lease agreement.

The owner loses future rental income. The tenant is forced to move on short notice. And commercial tenants, who often hold long-term leases, have to forfeit any business investments they have made in the property.

It certainly appears that condo investors want to force unit owners to sell at great personal financial loss. HB 1548 would enable investors to take private property without any financial obligations to buy out the unit owner’s lease, mortgage, or condominium lien.

All in all, that’s a rotten deal for condo consumers. The only ones who might benefit from such atrocious legislation are the aggressive vultures seeking to deconvert or redevelop the condominium after termination.

If the Senate and the Governor approve HB 1548 as written, it will undoubtedly lead to more lawsuits filed by condo unit owners and commercial tenants that disagree with the lopsided terms of a termination agreement.

 

Status of House Bill 1548

HB 1548 passed the House of Delegates earlier this week by a wide margin. (81 votes in favor, 18 votes opposed.) Now the bill moves to State Senate.

Concerned condo owners and property rights advocates can track the progress of HB 1548 here.

HB 1548 Common interest communities; termination of condominium, respective interests of unit owners.

Virginia residents should contact their Senate Representatives to express their concerns. ♦♦

Legal Source:

Proposed Virginia Legislation Would Empower Developers to Oppress Rights of Unit Owners in Sale of Terminated Condominium Developments
FEB 6,2020 / BY JOHN COLBY COWHERD | Words of Conveyance