CONDOMINIUM LAW RECODIFICATION Hawaii Real Estate Commission HCAAO Meeting March 11, 2004

1. CONDOMINIUM LAW RECODIFICATIONHawaii Real Estate CommissionHCAAO Meeting March 11, 2004

2. PRESENTATION OUTLINE I. Overview Why recodify HRS Chapter 514A?  Why should we care?  Corrections to Misinterpretations Basic Concepts  Recodification History II. Evolution of Recodification  Draft #1  Preliminary Draft #2

3. PRESENTATION OUTLINE(continued) II. Evolution of Recodification (continued)  Public Hearing Discussion Draft  Final Draft III. Selected Recodification Principles and Issues  Generally  Management  Development (time permitting) IV. Contact Information

4. Why Recodify? Purpose of Recodification: “[T]o update, clarify, organize, deregulate, and provide for consistency and ease of use of the condominium property regimes law.” ~ Act 213, Session Laws of Hawaii (2000)

5. Why Should We Care? • Prevalence of condominium ownership in Hawaii • More efficient use of Hawaii’s limited land resources • Hawaii’s housing stock and growth policies - “New development should pay its own way” (Private provision of “public” facilities and services)

6. Corrections to Misinterpretations • Fiduciary duty of board members has NOT been eliminated • Non-owners are NOT allowed to serve on boards • Approval of association meeting minutes by the board is CONSISTENT with Robert’s Rules • Members CAN STILL SUBMIT “quorum purposes only” proxies • Protecting “good faith effort” in calculating reserves does NOT shield board from liability for gross negligence

7. “Overview” - Basic Concepts • What is a “condominium?” “[R]eal estate, portions of which are designated for separate ownership and the remainder of which is designated for common ownership solely by the owners of those portions. Real estate is not a condominium unless the undivided interests in the common elements are vested in the unit owners.” Uniform Condominium Act (1980)

8. “Review” - Basic Concepts(continued) • Condominium Property Regime Acts are essentially land ownership, consumer protection, and community governance laws. They are enabling Acts, allowing people to: Build, sell, and buy condominiums Protect purchasers through adequate disclosures Manage the ongoing affairs of the condominium community

9. Recodification History Dec. 1995 Real Estate Commission recommends recodification of HRS Chpt. 514A May 2000 Legislature directs Commission to conduct recodification April 2001 Commission formally, continuously, - Dec. 2003 solicits public comment Jan. 2002 Recodification Draft #1 done; Blue Ribbon Recodification Advisory Committee convened

10. Recodification History Dec. 2002 Preliminary Recodification Draft #2 done May 2003 Legislature extends recodification Aug. 2003 Public Hearing Discussion Draft done Sept. - Oct. Statewide Public Hearings 2003 (Kauai, Maui, Kona, Hilo, Oahu) Dec. 2003 Final report to Legislature

12. Evolution of Recodification Draft #1 Based on Uniform Condominium Act and Uniform Common Interest Ownership Act Prelim. Based on HRS Chapter 514A, Draft #2 Uniform laws, and other sources Discussion Refinement of Preliminary Draft Draft, & #2 incorporating additional input Final Draft from stakeholders

13. Generally: Guiding Principles • Enhance clarity of Condominium Property Act • Recognize difficulty of “one-size fits all” approach to consumer protection and management provisions • Commission should require only information it will use or may find useful from a regulatory or consumer protection standpoint

14. Generally: Guiding Principles (continued) • Problems should be fixed where they are created • To extent practicable, standardize approval percentage requirements • Recodification should not increase cost of government

15. General Provisions and Definitions • Units and limited common elements precisely defined; common elements are everything else • Specifically allows for air/water space condominiums (removes impetus for creating semi-fraudulent “tool shed” condominiums) • Draws clear distinction between land use laws and land ownership provisions of condo law • Supports fair and efficient functioning of condominium communities by negating Hiner v. Hoffman (1999)

16. Management: Association Functions “Every [community association] has three functions - to serve as a business, a governance structure and a community.” ~ Community Associations Factbook (1999)

17. Management: Guiding Principles • Minimal government involvement; i.e., self-governance by the condominium community • Recognize the difficulty of a “one size fits all” approach to management provisions • Enhance clarity of Condominium Property Act

18. Management: Powers, Duties, Generally • Reorganizes entire part for clarity (e.g., consolidates provisions on similar issues, minimizes statutory requirements for governing documents while incorporating certain provisions of HRS Sec. 514A-82 in more appropriate statutory sections) • Clarifies powers, duties, and limitations of associations and boards • Clarifies borrowing authority of associations (which helps avoid special assessments against owners)

19. Management: Powers, Duties, Generally • Permits board to take direct action to control behavior of tenants if owner/landlord fails to do so • In certain situations, allows judicial excuse of compliance with provisions in governing documents that unreasonably interfere with association’s ability to manage property • Allows entirely non-residential condominiums and small condominiums (i.e., 5 units or less) to opt out of the statutory management provisions

20. Management: Elections and Meetings • Improves notice and proxy provisions • Explicitly allows use of e-mail notice to unit owners who agree to receive such notice • Explicitly allows mail and e-mail voting by directed proxy • Allows owners to send out requests for proxies, at association expense, on an 8 1/2” by 11” sheet of paper (instead of current 100 word restriction)

21. Management: Elections and Meetings • Allows boards to meet by telephone conference call and video-conferencing (and allows associations to do so if provided for in the declaration or bylaws) • Improves executive session provisions by allowing executive session for attorney-client privileged matters and when association negotiating contracts, leases, and other commercial transactions • Provides definition of conflict of interest for directors (from Robert’s Rules of Order)

22. Management: Operations • Requires managing agents to distribute information from Real Estate Commission to unit owners • Allows associations to terminate of contracts and leases of developer if unconscionable when entered • Prohibits developers from inserting into governing documents clauses that impair the ability of the association to deal with the developer as it does any other owners • Outlines procedures for transfer of developer rights

23. Management: Operations • Permits associations to maintain and repair “high risk components” (e.g., washing machine hoses, water heaters, toilet “O” rings) before they fail (which will help to control insurance premiums) • Protects unit owners from contract or tort liability of the association • To avoid harm to an elderly resident’s self or others and to avoid disruption to the condominium community, limits liability of association in requesting functional assessment and recommendations for services

24. Management: Operations • Improves insurance provisions (e.g., distinguishes between attached and detached unit condominiums; requires general liability insurance; allows associations to require unit owners to carry liability insurance) • Continues assessment liens’ limited priority over mortgage liens (Act 80, SLH 2003) • Allows associations to deposit funds into federally insured out-of-state financial institutions • Requires that association records be kept on the island where the project is located

25. Management: Alternative Dispute Resolution • Allows any party to request mediation (not just owners or board) • Requires parties to file for trial de novo within thirty days of written demand or lose right to trial de novo • Recognizing scope, complexity, and importance of issue, recommends that Legislature direct Legislative Reference Bureau to conduct study on improving alternative dispute resolution provisions of condominium law

26. Development: Guiding Principles • Adequate disclosure to prospective condominium purchasers is the foundation of consumer protection in the condominium law • Disclosure of material facts involves more than disclosures for real property sales in non-condominium projects • Risk to purchasers’ funds should be correlated with the rights and obligations of developers

27. Development: Sales/Disclosures • Requires additional disclosures for special types of projects (e.g., condominiums on agricultural land; assisted living units) • Streamlines public report process (i.e., requires one public report vs. preliminary, contingent final, and final public reports; supplemental public report for material changes)

28. Development: Sales/Disclosures(continued) • Clarifies right to cancel and statutory rescission rights provisions • Clarifies circumstances under which additional public reports should be required; implications • Repeals owner-occupant presale notice requirement

29. Development: Project Development • Permits exchange of limited common elements besides parking stalls among unit owners • Clarifies when purchasers’ funds may be released for construction of project • Clarifies when project common elements may undergo change in use • Revises parking requirements (under HRS Chapter 514A, one stall per unit except in certain cases) to follow county law

31. Recodification Contact Information • Write: Mitchell Imanaka & Gordon Arakaki DCCA - Real Estate Branch 333 Merchant Street, Room 335 Honolulu, HI 96813 • Call: 586-2643 • E-Mail: Gordon.M.Arakaki@dcca.hawaii.gov • Recodification Drafts and information available online at www.hawaii.gov/hirec/

32. CONDOMINIUM LAW RECODIFICATION