Process To Adopt Special Assessments
Recently, it was suggested to this author that condominium boards can adopt special assessments by declaring an emergency and bypassing statutory notice requirements. This month’s article examines the statutory process for adopting special assessments and concludes that while certain aspects of the statutory process are waived in emergency situations, the notice requirements do not appear to be waived.
Like much of the Illinois Condominium Property Act, 765 ILCS 605/1, et seq., the statutory requirements can be confusing because the Act itself is a patchwork quilt of special-interest and reform-minded amendments over the past few decades. Readers should also consult with the applicable condominium instruments to ensure that all requirements are being met.
Section 18(a)(8) of the Act
Section 18(a)(8) of the Act provides a statutory process for condominium associations to adopt a special assessment, which is also the process for adopting the annual budget. Unfortunately, this subsection of the Act does not flow methodically or logically. Also, many other sections of the Act must be referenced to fully understand §18(a)(8). Therefore, we will break the special assessment process into components to analyze it.
As an introductory roadmap, the subsections of §18(a)(8) address the following topics:
Section 18(a)(8)(i) provides that notice of the directors meeting to adopt the annual budget and to adopt special assessments must be in the same manner as that of a membership meeting.
Section 18(a)(8)(ii) provides for a unit owner referendum to attempt to overturn a special assessment, except when adopted pursuant to §18(a)(8)(iv) below.
Section 18(a)(8)(iii) provides that common expenses not included in the budget or shortfalls in the budget require special assessments.
Section 18(a)(8)(iv) provides that special assessments for emergencies or mandated by law are not subject to the referendum in §18(a)(8)(ii) or the unit owner approval in §18(a)(8)(v), and defines what constitutes an emergency.
Section 18(a)(8)(v) provides that assessments for additions or alterations to the common elements not in the annual budget require two-thirds unit owner approval.
Section 18(a)(8)(vi) provides that special assessments that cover more than one fiscal year may be adopted.
Like all of §18 of the Act, we must bear in mind that this lengthy section is essentially a list of minimum requirements that must be provided for in the condominium declaration or bylaws. The section begins with language that “[t]he bylaws shall provide for at least the following.”
What Is a Special Assessment?
A special assessment is an assessment of a common expense to unit owners outside of or in addition to the annual budget that should be adopted before the beginning of each fiscal year (which is usually also the calendar year). The Act also refers to special assessments as separate assessments. By definition, a special assessment is an assessment for “any common expense not set forth in the budget or any increase in assessments over the amount adopted in the budget.” 765 ILCS 605/18(a)(8)(iii). Thus, a board should adopt a special assessment if the directors realize that the budget is not sufficient to meet the annual common expenses.
Special assessments are often imposed for special projects to maintain, repair, or replace the common elements when sufficient funds have not been accumulated in advance to the association’s reserve account. There was a time when adopting a special assessment may have been perceived as a lack of planning by the board, but more frequently some unit owners today are averse to accumulating necessary reserves for maintenance, repairs, and replacement of capital improvements such as the roof, plumbing, masonry, and windows (notwithstanding statutory requirements that the board do so).
Who Adopts a Special Assessment?
Usually, special assessments are adopted by the board of directors at a directors meeting. The board is empowered to levy and expend assessments and to collect assessments from the unit owners, and this power includes levying, collecting, and expending special assessments. 765 ILCS 605/18.4(c) – 605/18.4(d).
Most special assessments are for budget shortfalls or to finance maintenance, repairs, and replacement of common elements, which are a board responsibility. Because maintaining, repairing, and replacing the common elements are a board responsibility, the unit owners are permitted to discuss special assessments at a meeting called to adopt a special assessment; the actual process of adopting the special assessment is a board action. On less common occasions, a special assessment may be adopted to make additions or alterations to the common elements. On such occasions, two thirds of the unit owners must approve the special assessment. However, we will focus on the more common situations in this article.
Some condominium declarations contain provisions requiring supermajority unit owner approval for expenditures over a certain sum. These provisions are not applicable to the maintenance, repair, and replacement of common elements.
Nothing in this subsection (a) shall be deemed to invalidate any provision in a condominium instrument placing limits on expenditures for the common elements, provided that such limits shall not be applicable to expenditures for repair, replacement, or restoration of existing portions of the common elements. The term “repair, replacement or restoration” means expenditures to deteriorated or damaged portions of the property related to the existing decorating, facilities, or structural or mechanical components, interior or exterior surfaces, or energy systems and equipment with the functional equivalent of the original portions of such areas. Replacement of the common elements may result in an improvement over the original quality of such elements or facilities. 765 ILCS 605/18.4(a).
The amount of preparation and work that is expended in adopting a special assessment is often a function of how large a burden the special assessment will impose on unit owners. When construction projects are involved, such as new windows or tuckpointing, it is best to perform all the work to get to the stage at which the association is ready to sign a contract before adopting a special assessment. The costs may substantially exceed initial estimates. The unit owners are less likely to have confidence in a board that has not done its homework, obtained architectural or engineering specifications, issued requests for proposals or bids, and completed at least preliminary discussions with its preferred contractor(s) before adopting a special assessment. This does not mean that the board should not discuss the need for a special assessment early in the process, but the board may want to avoid putting a price tag on the project at the beginning and then later tell unit owners that the cost is substantially greater.
As a best practice, the condominium association’s attorney should draft a resolution to support the board’s adoption of a special assessment. This practice eliminates or reduces the likelihood of confusion or failed memories later. It also memorializes what was done in a manner that meeting minutes cannot capture. In the event that a unit owner defaults on a payment or a dispute arises over the terms of a special assessment, a written resolution signed by the association secretary (or better still, signed by all the directors voting in favor), will be indispensable for proving who, what, where, and when.
Additionally, as often occurs with larger projects, a special assessment may securitize a bank loan for the project. Section 8.4(m) of the Act grants the board the power “to assign the right of the association to future income from common expenses or other sources, and to mortgage or pledge substantially all of the remaining assets of the association.” A written resolution is helpful in documenting the loan and is indispensable when the association attorney needs to issue an opinion letter.
Required Notice to Unit Owners
Subsection 18(a)(8)(i) requires that each unit owner must receive notice — “in the same manner as provided in this Act for membership meetings” — of a directors meeting to adopt a special assessment. Under §18(b)(6), notice of a membership (unit owners) meeting requires a 10 to 30-day written notice mailed or delivered to each unit.
Section 18. Contents of bylaws. The bylaws shall provide for at least the following:
* * *
(6) that written notice of any membership meeting shall be mailed or delivered giving members no less than 10 and no more than 30 days notice of the time, place and purpose of such meeting except that notice may be sent, to the extent the condominium instruments or rules adopted thereunder expressly so provide, by electronic transmission consented to by the unit owner to whom the notice is given, provided the director and officer or his agent certifies in writing to the delivery by electronic transmission. 765 ILCS 605/18(b).
The notice of the directors meeting, unlike usual notices of directors meetings, should state the purpose of the meeting, namely to adopt a special assessment (and transact other business).
It is important to note here that §18(a)(9)(E) of the Act permits notice to be given by “acceptable technological means” (which includes e-mail) as defined in §2(z) of the Act — if the unit owner has consented in writing to receipt of notice by such means. If the association does not have a written consent on file for any unit owner(s) to conduct business by acceptable technological means, then the association must deliver notice to that unit owner by mail or personal delivery. 765 ILCS 605/18(b)(6).
On the question of electronic transmission of notice, a potential conflict may someday need to be addressed because §18(b)(6) requires the condominium instruments or rules and regulations to provide for electronic notice; however, §18(a)(9)(E) does not require that the association has adopted such language in its condominium instruments or rules and regulations. Arguably, the more recently adopted §18.8 regarding signatures and voting by acceptable technological means has resolved this potential conflict.
Experience tells condominium lawyers that many boards or management companies do not have consent from unit owners on file for using acceptable technological means, even when the parties have conducted business based on e-mail notice of meetings, without objection, for years. The question has not been presented yet, at least in a citable opinion having precedential value, whether a unit owner can be estopped or has waived objections to electronic notice by his or her conduct, but there is nothing like a financial burden being imposed to a dissenting unit owner to trigger testing the waters. Therefore, it is a good practice to make sure notice is mailed to any unit owner who has not submitted written consent authorizing e-mail notice.
Another point to consider is that the special notice under §18(a)(8)(i) applies to any directors meeting “concerning the adoption of the proposed annual budget and regular assessments pursuant thereto or to adopt a separate (special) assessment.” It may be a matter of contention whether this special notice is required only for the meeting in which the board considers adopting the special assessment or any meeting in which the board intends to discuss adopting the special assessment. Some may argue that special notice is required only for the meeting in which the board actually adopts the special assessment. Probably, preliminary discussions with regard to the underlying project or reason for the special assessment do not require special notice, but any meeting in which the board intends to discuss the amounts or specifics of the special assessment should be specially noticed, along with the meeting in which the special assessment is adopted.
Emergency Situations and Unfunded Legal Mandates
Section 18(a)(8)(iv) defines an emergency for special assessment purposes as “an immediate danger to the structural integrity of the common elements or to the life, health, safety or property of the unit owners.” Courtyard beautification and repairs would probably not constitute an emergency, but mold remediation or balcony replacement probably would constitute emergencies from the health and safety perspective. An interesting question is whether window replacement or tuckpointing to stop water infiltration causing damage to the units or personal property in the units could constitute an emergency. Except in the most egregious situations, these water infiltration problems probably are not presenting an immediate danger to the unit owners’ property.
Section 18(a)(8)(iv) permits the board to adopt a special assessment relating to an emergency (presumably the intention here is to remediate the emergency situation) or for expenditures “mandated by law.” An example of a special assessment mandated by law could include bringing the condominium property into compliance with municipal codes. In Dedic v. Board of North Shore Towers Condominium Ass’n, 2018 IL App (1st) 171842, 105 N.E.3d 821, 423 Ill.Dec. 413, which involved deteriorating railings and balconies, the appellate court held that the expenditures were not only for an emergency but were also mandated by law. “The record also clearly shows that the dangerous conditions did not comply with the local building code requirement that the balcony railings be capable of withstanding 200-pound point load pressure. Thus, the balconies not only posed safety risks that constituted an ‘emergency,’ but also their remediation was ‘mandated by law.’ ” 2018 IL App (1st) 171842 at ¶48. See August 2018 Condominium Law FLASHPOINTS (available in the IICLE® Online Library to subscribers).
Notice of Directors Meetings in Emergency Situations
Some people have suggested that when special assessments are adopted by the board relating to emergency situations or expenditures mandated by law, special notice need not be given. This author’s belief is that this position is, until a court holds otherwise, incorrect for two reasons.
First, §18(a)(8)(i) provides for special notice. The emergency and legal mandate in §18(a)(8)(iv) makes reference to §18(a)(8)(ii) not being applicable but is silent as to §18(a)(8)(i). Therefore, the legislature arguably could have also provided that §18(a)(8)(i) was inapplicable in emergency situations but did not do so. So, the better view would be that the special notice provision applies to emergency and legal mandate situations.
Second, §18(a)(21) was added to the Act, effective June 1, 2016, to provide for board ratification of expenditures relating to emergencies:
[T]he board may ratify and confirm actions of the members of the board taken in response to an emergency, as that term is defined in subdivision (a)(8)(iv) of this Section; that the board shall give notice to the unit owners of: (i) the occurrence of the emergency event within 7 business days after the emergency event, and (ii) the general description of the actions taken to address the event within 7 days after the emergency event.
The intent of the provisions of Public Act 99-472 adding this paragraph (21) is to empower and support boards to act in emergencies. 765 ILCS 605/18(a)(21).
This provision implies that in emergencies, as defined in §18(a)(8)(iv), an officer can act (i.e., vote, outside of a properly noticed meeting relating to the emergency), provide notice of the actions it took within seven business days, and then at a properly constituted meeting can ratify the board’s conduct. Section 18(a)(21) does not provide details of the process, but presumably the officer at least would want to poll board members to ensure that they will support ratification of his or her actions before taking action.
Unit Owner Referendum To Overturn a Special Assessment
Section 18(a)(8)(ii) provides for a process by which 20 percent of the unit owners can call for a special unit owners meeting to consider overturning a budget or special assessment — if the sum of all budgets and special assessments in the current year exceed 115 percent of the prior fiscal year’s aggregate budgets and adopted special assessments. However, as addressed in §18(a)(8)(iv), if the special assessment is to pay for emergencies or expenses mandated by law, then the unit owners have no referendum right to reverse the special assessment. The referendum requires more than 50 percent of the total percentage of votes of the unit owners to overturn the special assessment adopted by the directors. The need for the board to call a special membership meeting to conduct the referendum is triggered by a written petition of at least 20 percent of the unit owners (by percentage ownership) being delivered within 21 days of the board adopting the special assessment. Upon delivery of the petition, the board has 30 days to call the special membership meeting. Unless more than 50 percent of the unit owners vote to reject the special assessment, it is ratified.
Regarding the question of whether unit owners may vote by proxy for the referendum, §18(b)(9)(A) of the Act provides that unit owners can vote by proxy except in certain circumstances relating to elections. Additionally, §107.50 of the Illinois General Not For Profit Corporation Act of 1986, 805 ILCS 105/101.01, et seq., provides for members voting by proxy unless explicitly prohibited by the corporation’s articles of incorporation or bylaws. 805 ILCS 105/107.50.
Takeaway. Special assessments can be problematic for a board by their very nature, especially as we see many condominium buildings aging and substantial maintenance, repair, and replacement costs accruing. It is especially important for condominium association attorneys to pay attention to the rules for adopting special assessments because a flaw in the process may expose the special assessment to a legal challenge. Experienced practitioners know that some boards cannot be expected to study the rules and follow the required legal process. Therefore, condominium attorneys need to lead the process and ensure that their boards and managers are familiar with these rules.
For more information about condominium law, see CONDOMINIUM LAW (ILLINOIS) — 2016 EDITION. Online Library subscribers can view it for free by clicking here. If you don’t currently subscribe to the Online Library, visit www.iicle.com/subscriptions.