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Condominium Law FLASHPOINTS July 2021

Kenneth Michaels, Jr., Bauch & Michaels, LLC, Chicago
312-588-5000 | E-Mail Kenneth Michaels, Jr.

Responsibilities in Maintenance of Condominium Property

Since the tragedy at Champlain Towers South in the Miami area a couple weeks ago, lawyers throughout the country are receiving inquiries about condominium management. As often occurs in such situations, almost everyone has an opinion, whether founded or not. This month we will review the processes provided for in the Condominium Property Act, 765 ILCS 605/1, et seq., relating to building maintenance, repairs, and replacement. Regular condominium practitioners know this material by rote, so this month’s article is directed to the lawyer who occasionally receives a condominium inquiry.

Who Is Responsible for Condominium Property Management?

The condominium association is responsible for administering the condominium property through its board of directors. 765 ILCS 605/18.3. The board is empowered to provide for the operation, care, upkeep, maintenance, replacement, and improvement of the common elements. 765 ILCS 605/18.4(a). Upon the condominium declaration being recorded, the land and improvements upon it are submitted to the Act, 765 ILCS 605/6, except to the extent any land or portions of the building(s) on the land are expressly excluded in the declaration.

The question of who is responsible for managing the property depends on whether we are discussing the units, the common elements, or limited common elements. Let us begin by identifying the units. The units are the interior spaces of the building as designated on the condominium plat of survey recorded with the declaration. Units can generally be visualized as the cubes within the building surrounded by the interior surfaces of the perimeter walls of the cube and the interior surfaces of the ceiling and floor. 765 ILCS 605/4.1(a)(2). The declaration usually provides that facilities such as HVAC, plumbing, and electrical systems within a unit are common elements to the extent they are shared by more than one unit and usually part of the unit to the extent the facilities serve only that unit with the point of demarcation being where the facility is no longer shared. Chutes, bearing walls, and other apparatus within a unit serving only that unit are part of the unit, 765 ILCS 605/4.1(a)(3), but to the extent facilities passing within serve more than a unit, such facilities are common elements. Any portion of the building not constituting part of the unit constitutes part of the common elements. 765 ILCS 605/2(e). For example, the space and contents between the interior surface of perimeter walls constituting part of the unit and the exterior walls of the building are common elements. Similarly, the area above the ceiling surface of the top floor unit to the roof and below the floor surface to the ceiling surface of the unit below are common elements. The land on which the building is situated is part of the common elements. The common elements are owned by all the unit owners as tenants in common based on the percentage ownership assigned to each unit in the declaration.

To the extent certain common elements are designed to serve one unit, they are limited common elements. 765 ILCS 605/4.1(a)(5). Examples of limited common elements include patios, perimeter doors, windows, and storage lockers. Parking spaces may be treated in the declaration as either deeded units or as limited common elements assigned by the developer to respective units. Limited common elements are usually so designated on the plat of survey, but they may also exist simply based on the design of the building and units where there was a clear manifested intent of exclusive use and possession, such as an exterior balcony accessible only through a unit.

Who Pays for the Repairs?

The declaration should always be reviewed carefully to ascertain who is responsible for paying for maintenance, repair, and replacement of common elements or the units. Unit owners are generally responsible for maintenance, repairs, and replacement of their units. They are also responsible for the finished surfaces and coverings of their floors, walls, and ceilings. Additionally, to the extent unit owners cause damage to other units or to the common elements, the unit owners may be responsible for the cost of repairing such, but responsibility for performing the repairs will usually lie with the association.

The association is responsible for providing for maintenance, repair, and replacement of the common elements. This includes limited common elements, although some associations may incorrectly tell unit owners that they are responsible for the limited common elements. The responsibility should lie with the association. The Act provides that the declaration may provide for passing through the costs of maintaining, repairing, or replacing limited common elements to the benefited unit owners of the limited common element. 765 ILCS 605/9(e). Some declarations direct this pass-through of costs is mandatory. Others treat the pass-through as permissive. A few troublesome declarations even provide that the association must bear these costs as common expenses, which tends to lead to accusations of neglect and hard feelings among unit owners.

When the pass-through of limited common element costs is permissive, it is important that the association develop policies on passing through costs to treat unit owners equally and stick with these policies. For example, in an association the author represented, each unit had bathtubs with a plug on the plumbing pipe inside the wall behind the bathtub. Over decades these plugs began to wear away in a couple units and leak water onto the ceiling of the unit(s) below. Technically, the plug was defined as a unit owner’s responsibility because under the particular declaration it was part of the plumbing system serving only that unit. Insurance would not pay the repair costs or damages because the damage was not from a sudden occurrence but was from a slow wearing or deterioration of the capital improvements. The association determined that out of fairness it could not expect unit owners to rip open their bathroom wall periodically (which also could be a violation of the declaration for damaging the common elements without board prior approval) to determine if the plug was leaking. So, the board adopted a written resolution that any damage flowing from leaking plumbing plugs in this proximate location of the units would be treated as a common expense rather than a unit owner expense.

The Association’s Budget, Assessments, and Special Assessments

Condominium association financing is premised on assessing among all the unit owners the projected operating expenses and capital maintenance, repair, and replacement costs (referred to as the common expenses) for the forthcoming year, plus accumulating a pool of funds, called the reserves, for paying for future capital projects and maintenance. As with any improvements, as each day passes an association’s condominium property is depreciating and coming closer to a time when work will need to be done to repair or replace the improvement. Section 18.4 of the Act empowers the board to prepare, adopt, and distribute the annual budget for the property; to levy and expend assessments; and to collect assessments from unit owners. 765 ILCS 605/18.4(b) – 605/18.4(d). Section 9 of the Act provides for the sharing of expenses and creates a statutory association lien against each unit for past due assessments. Once the first unit is conveyed in a condominium project, all common expenses are to be paid by all the unit owners, including the developer, based on each unit’s percentage ownership. 765 ILCS 605/9(a).

“Common expenses” are defined in the Act as “the proposed or actual expenses affecting the property, including reserves, if any, lawfully assessed by the Board of Managers of the Unit Owner’s Association.” 765 ILCS 605/2(m). Section 9(c) of the Act provides basic elements of what needs to be considered in a budget and especially what the board must consider in determining annual reserves as part of the budget, and the courses of action a board can follow if there is a surplus or deficit at the end of the operating year. Section 9(f) states that “[p]ayment of any assessment shall be in amounts and at times determined by the board of managers.” Typical assessment charges include landscaping, cleaning common areas, snow removal, general maintenance, parking lot cleaning, trash removal, insurance, management costs, reserves, and specific line-item charges such as cable fees or metered costs.

Assessments do not include unpaid fines, interest, late charges, attorneys’ fees, or collection costs. These items are not assessed in the beginning of the year as part of the budget for the proposed or actual expenses affecting the property. These items are charges that arise based on the conduct of individual unit owners independent of the budgeted costs of maintaining the property. However, under sections of the Act and state eviction laws, unpaid fines, interest, late charges, attorneys’ fees, or collection costs may become collectible and lienable as part of a unit’s unpaid assessments.

The board may and should budget for any capital (common element) repair or replacement projects for the coming year in its budget. The budget may reflect that such projects are to be paid from either reserves or the operating budget, i.e., the current assessments for the year, or a hybrid of the two. Some boards seem to think that they do not need to reflect projects in the budget that will be paid from the reserves, but this is an error on the board’s part.

Meetings to adopt a budget require notice of a special unit owners meeting, that is, 10 – 30 days’ notice. 765 ILCS 605/18(b)(6). However, the board, not the unit owners, vote to approve the budget. 765 ILCS 605/18(a)(8)(i). Each unit owner should be provided a copy of the proposed budget so it is received at least 25 days prior to the budget’s adoption and the proposed budget should indicate which portions are intended for reserves, capital expenditures or repairs, or (if applicable) payment of real estate taxes. 765 ILCS 605/18(a)(6). The manager or association lawyer should check the association’s declaration because some provide for more notice of the budget, often 30 days.

Once an annual budget is adopted, the Act does not provide specifically for amending or changing the budget. It would stand to reason that a budget could be amended by following the same process as that originally adopting the budget. However, the Act does direct “that any common expense not set forth in the budget or any increase in assessments over the amount adopted in the budget shall be separately assessed against all unit owners.” 765 ILCS 605/18(a)(8)(iii). These separate assessments are more commonly referred to as special assessments. Most special assessments are for budget shortfalls or to finance maintenance, repairs, and replacement of common elements, which are a board responsibility.

Unit Owner Referendum To Overturn a Special Assessment

Subparagraph 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 would exceed 115 percent of the prior fiscal year’s aggregate budgets and adopted special assessments. However, as addressed in subsection (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 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 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. So, it appears that unit owners may vote by proxy at a referendum to overturn a budget or special assessment.

What About Emergency Situations?

Section 18(a)(8)(iv) of the Act bars the referendum in which the board adopts a special assessment for maintenance, repairs, or replacement of common elements (including limited common elements) where the work to be done is mandated by law or an emergency situation that requires actions to prevent personal injury or property damage. Work mandated by law usually refers to work required to correct municipal building code violations. The Act defines an “emergency” in this context as “an immediate danger to the structural integrity of the common elements or to the life, health, safety or property of the unit owners.” 765 ILCS 605/18(a)(8)(iv). When a board acts in an emergency situation, it must provide certain notices to unit owners of the actions taken within seven days of doing so. 765 ILCS 605/18(a)(21). For an excellent case on emergency situations, see Dedic v. Board of North Shore Towers Condominium Ass’n, 2018 IL App (1st) 171842, 105 N.E.3d 821, 423 Ill.Dec. 413.

How Are Reserves Determined?

Larger condominium associations often hire firms specializing in advising the board about foreseeable work that will be required for the common elements. These reports are called reserve studies. A smaller association may effectively accomplish the same by hiring a reputable general contractor to investigate the property and recommend the useful life remaining for certain common elements such as the roof, windows, and parking lot and to determine the status of the masonry and plumbing. The contractor is asked to provide cost estimates for future work with the understanding that construction costs are unpredictable. Under either approach the board has at least some independent analysis of how much the association should be saving in reserves over the coming years. The Act provides the following guidance in calculating reserves:

To determine the amount of reserves appropriate for an association, the board of managers shall take into consideration the following: (i) the repair and replacement cost, and the estimated useful life, of the property which the association is obligated to maintain, including but not limited to structural and mechanical components, surfaces of the buildings and common elements, and energy systems and equipment; (ii) the current and anticipated return on investment of association funds; (iii) any independent professional reserve study which the association may obtain; (iv) the financial impact on unit owners, and the market value of the condominium units, of any assessment increase needed to fund reserves; and (v) the ability of the association to obtain financing or refinancing. 765 ILCS 605/9(c)(2).

Subparagraph (iv) is a double-edged sword because generally unit owners do not want to finance reserves, especially in associations with a high turnover of units. On the other hand, these same unit owners are the ones who will likely be wailing when they find their units less marketable or of lower market value because the association needs imminent work and far too little money was set aside to fund the work.

Takeaway

The association’s board of directors hold fiduciary responsibility not only for current operations but for ensuring that adequate funding is accumulated for foreseeable future maintenance, repairs, and replacement of the common elements. This is why unit owners need to be vigilant to elect directors not based on their likability or friendship but rather their intelligence and decision-making skills, resolve to do what needs to be done, and self-discipline to gather and study information to make good decisions.

However, unit owners are also responsible for managing their expectations. Any condominium unit owner who does not understand the necessity to maintain improvements on the property and that the improvements are in a constant state of depreciation needs to consider alternatives such as rental apartment dwellings.

For more information about condominium law, see CONDOMINIUM LAW: DAILY OPERATION CHALLENGES (IICLE®, 2021). 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.

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