Chapter 10 - § 10.4 • THE SALE OF UNITS

• Jurisdiction: Colorado

§ 10.4 • THE SALE OF UNITS²³⁹

§ 10.4.1—Approval of Purchasers

Common interest community documents commonly permit associations to control resale of units either by providing for a right of first refusal or by requiring would-be purchasers to have prior association approval. The CCIOA requires the declaration to contain any restrictions on alienation of units or on the amount for which a unit may be sold.²⁴⁰ Thus, any restriction on alienation or sales prices that is not in the declaration will be unenforceable.

Some statutes in other states say that the rule on unreasonable restraints on alienation²⁴¹ will not be applied to defeat a provision restraining alienation of common interest community units or that the rule against perpetuities may not hinder restrictions on the transfer of units.²⁴² The CCIOA provides more generally that the rule against perpetuities does not apply to defeat any provisions of a declaration, bylaws, or rules and regulations,²⁴³ but the CCIOA does not mention unreasonable restraints on alienation.

The most common limitation on sales is a requirement that prospective purchasers be approved by the association before a closing occurs. Generally, sales restriction used to promote "communities of congenial residents" have been found acceptable.²⁴⁴ Typically, prospective purchasers must submit an application to the association. The association then may conduct — often through the professional manager — an "investigation" of the would be purchaser. Most often, that "investigation" consists of checking the applicant's credit status and any criminal record. The professional manager may actually perform the review, or may employ a company that specializes in these searches.²⁴⁵ Associations need to be aware that the process presents the potential for liability. The association could become subject to several possible causes of action:

• Tortious interference with contract;²⁴⁶
• Discrimination;²⁴⁷
• Defamation;²⁴⁸
• Violation of federal law regarding credit reports;²⁴⁹ or
• Negligence or breach of fiduciary duty.²⁵⁰

Concern about a discrimination cause of action increased in 2016 when the Office of General Counsel of the United States Department of Housing and Urban Development issued an opinion regarding restrictions on access to housing based on criminal history.²⁵¹ A policy or practice, states the opinion, that limits access to housing based criminal history has a disparate impact on individuals of a particular race, national origin, or other protected class, and that makes it illegal under the federal Fair Housing Act when the policy or practice is not required to serve a substantial, legitimate, nondiscriminatory interest or the interest could be served by another practice with less discriminatory effect. Moreover, a policy or practice that excludes individuals because of a prior arrest without conviction does not meet the requirement that the policy or practice be necessary to achieve a substantial, legitimate, nondiscriminatory interest. A "tailored" policy or practice, however, that excludes individuals with only certain types of convictions may be acceptable if it accurately distinguishes between criminal conduct that is a demonstrable risk to the safety of residents and/or property, and conduct that does not.

When the allegation against the association is not that it violated some common law or statutory right, but rather that it failed to follow its own procedures for approving purchasers, the selling unit owner may have an action against the association for failure to follow the documents.²⁵² The prospective purchaser probably lacks standing to bring suit, however.²⁵³

Practice Pointer
It is rather rare for associations to deny approval of a purchase, but it does happen. The association attorney should prepare in advance for the possibility, as well as the fallout, by advising the governing board that if at any point it is contemplating that action, it should contact the attorney. From that point forward, the attorney should maintain tight control of the process. He or she should determine whether any possibility could exist for a charge of discrimination or any other basis for liability. It is probably advisable for all further contact with the buyer and seller, or their agents, including notification of denial, to come from the attorney.

In many associations, an approval process is actually used either to gather information about new residents or to trigger an informational meeting with them to notify them of the rules, especially rules regarding move-in procedures. If that is the case, the association should consider requiring a "notice of sale,"²⁵⁴ a "new resident questionnaire," or a mandatory informational meeting for new residents at which they might be required to sign a statement acknowledging the existence of the rules and regulations and their obligation to abide by them.²⁵⁵

§ 10.4.2—Move-in Fee

Another kind of regulation on transfers of property is a "move-in" fee to cover costs incurred when new residents move into a building. One court found a move-in fee invalid because the community's documents granted "only one method for making an assessment for common elements expenses, a pro rata allocation of costs among all unit owners, thereby limiting the Board of Directors' power to impose a move-in fee under an alternative method of assessment."²⁵⁶ Implicit in the decision, however, is the proposition that if the documents provide for a move-in fee, one may be assessed. The CCIOA authorizes associations to "[i]mpose and receive any payments, fees, or charges for the use, rental, or operation of the common elements."²⁵⁷

§ 10.4.3—Right of First Refusal

Common interest community documents frequently create a right of first refusal.²⁵⁸ The documents may grant the association the right to purchase a unit on the terms stated in a binding contract for sale. The same right may also be granted to all the unit owners in addition to, or instead of, the association. The usual intent behind the right of first refusal is to give the association and/or the other unit owners an opportunity to purchase a unit on terms equal to that of a third party, but no more.²⁵⁹ An example of one of these declaration clauses reads:

In the event an owner of a unit desires to sell such unit and receives a bona fide offer for such sale, the unit shall be offered to the remaining owners who shall have a first right to purchase such offered unit for the same terms and conditions as the bona fide offer. Notice of such bona fide offer shall be given to the . . . Association, which shall be responsible to notify the remaining unit owners of such offer by mailing notice to the remaining owners. The remaining unit owners shall have five days from the date of such mailing to accept such offer, and if not accepted, the sale may be made to such third party offeree.²⁶⁰

When either the association or a unit owner exercises the right to purchase, the agreement to do so must accept the terms of the existing contract to purchase. If it does, it is binding on the parties,²⁶¹ and if it does not, it is not binding.²⁶² The association must carefully follow the document procedures concerning rights of refusal or risk liability. For example, in an Illinois case,²⁶³ a potential purchaser already owned a unit and wanted to purchase another. The association used its...