.terminating Common Interest Communities With Horizontal Boundaries Under Ccioa
| Publication year | 2022 |
| Pages | 41 |
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REAL ESTATELAW
BY RICHARD LINQUANTI
This article discusses the termination of common interest communities with horizontal boundaries under the Colorado Common Interest Ownership Act.
This article reviews some fundamentals of the Colorado Common Interest Ownership Act[1] (CCIOA or Act) concerning the termination of common interest communities (CICs)[2] with horizontal boundaries. The Act's termination provisions seem straightforward.[3] That may be true for planned communities and condominiums where units own the land beneath and the sky above, because normally such ownership is unaffected upon termination; what changes is simply the community's legal form.[4] It may also be true for cooperatives, where termination results in a transfer of ownership to tenancy in common with possessory rights.[5] But complications can arise when a horizontal-boundary condominium or planned community is terminated, particularly if the termination agreement requires the sale of all units as well as the common property.[6]
Termination Generally
Community terminations are not commonplace in Colorado, and currently no relevant cases involve terminations under CCIOA. Terminations may be more likely to occur in the future as CIC improvements age and become too expensive to maintain or replace.[7] Terminations may also result from other situations (as has occurred in other jurisdictions), such as a major casualty (e.g., a wildfire), where a new project f ails and the purchaser in foreclosure wishes to re-purpose the project, or if market conditions provide a strong economic incentive for an investor to acquire the underlying real estate for re-purposing or redevelopment.
Termination of a CIC is not inherently good or bad. If an event occurs that causes some unit owners to consider terminating their CIC, they should seek expert advice appropriate to the situation and try to reach consensus on a course of action. Ideally, the best outcome—one that can potentially produce an optimal result for the greatest number of owners in the community—is reached where there is unanimous agreement about whether and how to terminate the CIC and, if a sale of all of the property is involved, how to obtain the best price. Mandatory sale of the property is not always the best solution, and open communication within the CIC may produce alternatives to mandatory sale. For example, the author is familiar with a Colorado resort property where the CIC brought in a developer to increase the project's density and is using the resulting proceeds to update rather than terminate the CIC.
However, owners are driven by different interests. Some owners may find termination an ideal opportunity to liquidate their investment, others may want to sell to an investor looking to force a termination, and still others may not wish to sell their units under any circumstances. Because CCIOA allows a termination agreement adopted by less than all unit owners to mandate a property sale in a CIC where the units have horizontal boundaries, the first step is to determine if the units in a condominium or planned community have horizontal boundaries.
Determining Horizontal Boundaries
If all CIC units have horizontal boundaries, the termination agreement may require all units to be sold,[8] and a super-majority of owners can force a sale of all units on unwilling CIC owners. Accordingly, CCIOA's termination provisions might result in harm to some owners in a way that is not possible with other forms of CICs.[9] If some or all units do not have horizontal boundaries, the termination agreement may require only the common elements—not the units—to be sold, unless the declaration provides otherwise or all unit owners consent.[10] CCIOA contains no provision for the mandatory sale of property upon the termination of a cooperative. Rather, it converts each unit owner to the owner of an undivided interest in the community as tenants in common with an exclusive right of possession in the apartment.[11] CCIOA defines "horizontal boundary" as "a plane of elevation relative to a described benchmark that defines either a lower or an upper dimension of a unit such that the real estate respectively below or above the defined plane is not apart of the unit."[12] Condominiums typically have horizontal boundaries, creating a unit of air space. Even if a unit has no unit above or below it, condominium declarations usually define units by horizontal boundaries, describing the upper boundary as the unfinished surface of the ceiling and the lower boundary as the unfinished surface of the floor, with the structural spaces above and below these boundaries designated as common elements.[13]
It is possible that the Act did not intend to permit mandatory sale upon termination to apply to properties in which all units have no other units (as opposed to common elements) above or below them. The official comments to the Uniform Common Interest Ownership Act (UCIOA) version upon which CCIOA is based describe projects subject to mandatory sale as "a typical high rise building" as contrasted to units not having horizontal boundaries, "single family homes, for example."[14] However, CCIOA's provisions are not as narrowly written as the pre-2021 version of UCIOA. If the ground beneath townhouses is a common element in a condominium or is owned by the association in the case of a planned community, units in such communities technically have horizontal boundaries and may be made subject to mandatory sale.
CCIOA's Application to Pre-CCIOA Communities
The properties more likely to be candidates for termination in Colorado are those developed in the 1960s and 1970s where age, under-utilization of density allowances, or the unlocked value of the land are significant factors.[15] This raises the question whether CCIOA's termination section is worth studying now because the termination of communities created before July 1,1992, when CCIOA became effective, is governed by the Colorado Condominium Act (CCA)[16] rather than CCIOA.[17] But CCA has no specific provisions relating to condominium termination, so the details are left to relevant provisions in condominium declarations.[18] Further, terminations subject to pre-CCIOA declarations may require unanimous approval, in which case terminations are unlikely, because every CIC unit owner would have to be satisfied with that solution and how to carry it out.
However, CCIOA's "opt-in" provision may be used to allow CCIOA to govern terminations of pre-CCIOA communities and override more strict termination requirements that may be contained in pre-CCIOA declarations.[19] CCIOA allows any community created before its effective date, regardless of its declaration provisions, to opt in to CCIOA with a vote of 67% of persons present at a duly constituted meeting of the members.[20] Depending on how many unit owners attend a meeting (in person or by proxy) with minimum quorum requirements, the proposal might be approved by only a minority of all unit owners. Once a pre-CCIOA community opts in, CCIOA's termination and amendment provisions apply.[21] Therefore, counsel for the condominium or planned community association (association) must understand these provisions before advising the association client about the advantages and disadvantages of opting in to CCIOA.
Termination as a Replacement for Partition
When multiple parties own real property, an owner can file a partition action asking the court to divide the ownership into separate parcels or to sell the property and divide the proceeds among the owners.[22] The court has broad discretion to "promote the ends of justice" and "direct the payment and discharge of liens and have the property sold free from any lien or may apportion any lien."[23] The court appoints a disinterested commissioner "to fairly and impartially make partition of the property."[24] A CIC is a form of common ownership; its unit owners own the common elements in common, either directly in the case of a condominium[25] or in directly through membership in a planned community association.[26] However, as in most states, the Act (unlike the CCA) prohibits partition actions, with only limited exceptions.[27] Thus, instead of partition, termination under the Act may be used to force a disposition if all units have horizontal boundaries. The Act does not provide for judicial supervision of the termination process or appointment of a disinterested party to handle the property disposition. Rather, termination is accomplished through agreement by most (but not necessarily all) unit owners,[28] and that agreement may include a mandate to sell all of the units as well as common elements. In addition, a CIC declaration may require approval of all mortgagees to terminate,[29] which would likely make approval more difficult to achieve. But if the termination agreement provides sufficient funds to pay all outstanding mortgages in full, lender approval remains feasible.[30]
The termination may be administered by the condominium association, as trustee for the unit owners,[31] but that administration is subject to the termination agreement, whose terms are set by a number of owners, not the association. Consequently, once the association's attorney learns that termination is "in the air," counsel should educate the board of directors about how CCIOA terminations work and suggest avenues for early and open communication among CIC members to resolve the situation. Once the requisite number of unit owners reaches a termination agreement, all owners may be locked into its terms.
Unit Owners' Approval of the Termination Agreement A termination agreement is effective upon its execution or ratification by 67% of the allocated votes in the CIC or any larger percentage the declaration...
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