Presentation Transcript

1. TEXAS REAL ESTATE LAW 11E

   Charles J. Jacobus
2. Chapter 19 Condominiums and Cooperatives
3. Condominiums and Cooperatives The condominium is one of the cheapest and more efficient methods of homeownership. Condominiums have provided prestigious, high-security residences. Cooperatives are not as common in Texasand Texans have been hesitant to accept cooperative ownership. Only a few cities in Texas has been urbanized to the point that condominiums and cooperatives could become a common. There is no common-law derivation of the concept of condominium or cooperative in the United States. The creation of these two forms of housing has been one of statute and purely legal theory. As a result, this type of housing has been called housing built on a statutory foundation.
4. Condominiums Think of condominiums as ownership of single apartment units. Condos are generally cheaper to build than single-family houses or townhouses, and they constitute a very high utilization of land. More units can be built, and built faster, than single-family residences. Each unit has its own mortgage, as in other single-family residences. The units may be either new construction or be converted to condos from existing apartment projects.
5. Condominiums Texas has adopted the Texas Uniform Condominium Act (TUCA), which establishes the statutory guidelines for condominiums. TUCA applies to all commercial, industrial, residential, and other types of condominiums with a declaration recorded on or after 1994. If a condo declaration was recorded before 1994, it may be required to conform with TUCA if the owners vote to amend the declaration. Since most condominium projects have elected to follow the new statute, only the new statute will be discussed.
6. Statutory Definitions TUCA defines condominium as: “a form of real property with portions of the real property designated for separate ownership or occupancy, and the remainder of the real property designed for common ownership or occupancy solely by the owners of those portions. Real property is a condominium only if one or more of the common elements are directly owned in undivided interests by the unit owners. Real property is not a condominium if all the common elements are owned by a legal entity separate from the unit owners, such as a corporation, even if the separate legal entity is owned by the unit owners.”
7. Statutory Definitions TUCA defines Unit as: “a physical portion of the condominium designated for separate ownership or occupancy, the boundaries of which are described by the declaration.”
8. Statutory Definitions Limited Common Elements Defined under TUCA as“a portion of the common elements allocated by the declaration or by operation of TUCA for the exclusive use of one or more but less than all of the units.” general Common Elements Defined under TUCA as “common elements that are not limited common elements.”
9. Types of Ownership and Ownership Rights The condominium owner gets three separate, indivisible, and distinct types of ownership: 1. Fee simple to a portion of the common elements. 2. Fee simple title to the condominium unit. 3. An exclusive easement for air space.
10. Tenancy in Common Common elements can be described as all of the real property existing outside of the individual’s unit that belongs to all of the homeowners in undivided interests as tenants in common (it cannot be partitioned). The interests in the common elements must remain undivided and cannot be used such that they encroach on the rights of other owners. The unit owner’s portion of the common elements may be determined in two ways. First, it may be determined by the amount of square footage the owner occupies with respect to the entire condominium project. Second, it may be determined by the unit versus the number of units in the project.
11. Fee Simple to Unit The fee simple title to the unit refers only to the interior of the unit. Referred to as the air space contained inside the apartment unit itself. Load-bearing walls are not included because. The owner owns from paint to paint and from ceiling to carpet. If a unit is purchased unfinished the unit could include all space to the unfinished building structure. Each definition is defined in the condominium declaration and bylaws.
12. Easement The third type of ownership is an easement to the air space that the unit may occupy from time to time. Particularly functional in high-rise structures. It is understood that air space for the unit may shift due to a variety of factors, and this may affect the owner’s use. The air space that the unit may occupy from time to time is an easement for reasonable enjoyment and use. This gives the unit owner particular rights to permit access through his unit to part of the common elements that may be contained therein, whether it be a roof, foundation, certain plumbing fixtures, or other common element items that the other owners may have a right to.
13. Creation The condominium developer files a master deed, master lease, or declaration to create the condominium regime with the county clerk. The declaration must contain: the legal description of the land. the location of each building. a general description of each unit. its square footage and location. aplat of each floor. number of each unit. ageneral description of each garage, carport, or any other area subject to individual ownership. a description of the common elements and limited common elements. a statement of the fractional or percentage interest that the unit bears. other information as required by TUCA.
14. Creation The condominium declaration, which establishes the guidelines for the operation of the condominium project, creates significant contractual rights and obligations for the owners of the units in the project. Any purchaser of a unit takes title subject to those restrictions. Almost anything can be regulated, so long as it is not unconstitutional. For instance, age restrictions can be imposed. Late charges can be imposed on maintenance fees without being usury. If maintenance fees are not paid, there is case precedent in Texas that the condominium unit can be foreclosed on even if it is a homestead. The declaration may only be amended at a meeting of the apartment owners at which the amendment is approved by holders of at least 67% of the ownership interest in the condominium.
15. Control and Maintenance The council of co-owners means all of the owners in a condo project. The council forms a homeowners’ association for maintaining the common elements and the day-to-day activity of the condo project. All co-owners must contribute pro rata toward the administration of the maintenance and repairs of the common elements. This is accomplished by the owners’ monthly contributions to a maintenance fund. The council of owners decides how the premises are to be maintained. TUCA makes meetings of the association subject to open meetings requirements. The association must record a certificate in the real property records indicating who is responsible for the management of the association.
16. Termination TUCA has a very specific provision concerning the right to terminate. Unless the declaration provides otherwise, a condominium may be terminated only by the agreement of 100% of the votes in the association and each holder of a deed of trust or vendor’s lien. The declaration may not allow a termination by fewer than 80% of the votes in the association if any unit is restricted exclusively to residential uses.
17. Casualty Insurance A recurring problem of condominium ownership is casualty insurance. Normally, the council of co-owners maintains a casualty insurance policy in the event of fire, accident, or other hazard. An association must maintain property insurance on the insurable common elements and commercial general liability insurance, including medical payments insurance, covering all occurrences, insured against for death, bodily injury, and property damage arising out of or in connection with the use, ownership, or maintenance of the common elements. If insurance is not available, the association must give notice of that fact to all unit owners and lien holders. The insurance policies must provide that each unit owner is an insured person under the policy.
18. Consumer Protection TUCA requires a condominium information statement before offering to the public any interest in the unit. The statement must contain at least 11 items required by the statute and also requires a projected budget. An owner must provide to the buyer the declaration, bylaws, and association rules before the buyer executes a contract of sale. If not provided, the purchaser may cancel the contract before the sixth day after the date the purchaser received those documents. The owner must also furnish the purchaser a resale certificate. The resale certificate must contain the current operating, any right of first refusal, amount of assessments, capital expenditures approved, and certain liabilities that may be pending against the association.
19. Taxation Acondominium management association may elect to be treated as a tax-exempt organization. Then the association is not taxed on fees, membership dues, and assessments. The association’s taxable income is only the excess of the gross income over operating costs, less any deductions and exempt income. To qualify for the tax-exempt qualification, substantially all of the units must be used as residences. The association must derive at least 60% of its gross income solely from dues, fees, and assessments. At least 90% must be expended to acquire, construct, manage, maintain, care for, or improve association property.
20. Tort Liability Tort liability is an area that has come under controversy in recent years. Take, for instance, the fact situation where a young 28-year-old neurosurgeon breaks his hands on a negligently maintained exercise machine owned by the homeowners’ association. The homeowners’ association should have insurance in that case. If the limit on the policy is too low, where does the doctor turn? There is at least one authority who holds that a plaintiff may be able to take his cause of action against the homeowners individually. It’s not a dessert!
21. Security Regulations The most significant problem in purchasing a condominium unit is in the area of securities regulations. If the unit may be construed to be a security, rather than an interest in real estate, it will fall under the jurisdiction of the SEC. If a condo may be rented to others when it is not in use by the owner, and the owner expects profits from that investment through the efforts of a third-party manager, the unit will be construed to be a security. Condo ownership is not simply an interest in real estate, and a sale may be subject to regulation and disclosure requirements of the SEC.
22. Homestead Provisions The last problem to be discussed is one that is peculiar to Texas. Condo ownership is protected by the constitutional homestead provisions available to all other residential units. Difficulty is when an owner refuses to pay his maintenance fund fees for maintenance and improvement of the common areas. It is assumed that due to the homestead laws, there is virtually no action one can take against such a unit owner. However, maintenance fees are intertwined with the unit ownership and a failure to pay is a violation of the purchase money mortgage.
23. Timesharing The objective of timesharing has been to provide the consumer with the exclusive right to use and occupy a structure during a particular time of year. The arrangement can be of two types: (1) a fee ownership for the requisite ownership period. (2) a “right-to-use” timeshare. The “right-to-use” type of timeshare is characterized as nothing more than a license allowing the owner to reserve his unit for a time period. No title is conveyed, and no definite time period is assigned . It is little more than an available hotel room. All timeshare interests in Texas are considered to be “real estate” within the meaning of the Texas Real Estate License Act.
24. Registration All timeshare properties must now be registered with TREC. All registrations must be accompanied by the timeshare disclosure statement, which is required by the statute. TREC has the duty to investigate all matters relating to the application of the developer and may even require an inspection.
25. Disclosures – Promotions The Timeshare Act requires extensive disclosures to prospective purchasers. The following information must appear in advertisements to the prospective purchaser: (1) a statement the promotion is intended to solicit purchasers. (2) that any person whose name is obtained may be solicited. (3) the full name of the developer and seller of the timeshare. (4) the full name and address of any marketing company involved.
26. Disclosures – Timeshare Fees The managing entity is must make a written annual accounting of the operation of the timeshare to each purchaser who requests one. The statement must represent collections and expenditures, a balance sheet, an income and expense statement, and the current budget. Also provide the name and address members of the board of directors. Must provide an annual audit. Knowingly furnishing false information is a DTPA violation. Failure to provide the Timeshare Fee and Expense Statement is punishable by a penalty up to $1,500 per day, not to exceed $30,000.
27. Right to Cancel Any purchaser can cancel his contract to purchase before the sixth day after the date his contract is signed or if the purchaser does not receive a copy of the contract at the time the contract is signed. The purchaser may not waive the right of cancellation.
28. The following statement must be contained in the contract: “PURCHASER’S RIGHT TO CANCEL.” “(1) BY SIGNING THIS CONTRACT YOU ARE INCURRING AN OBLIGATION TO PURCHASE A TIMESHARE INTEREST. YOU MAY, HOWEVER, CANCEL THIS CONTRACT WITHOUT PENALTY OR OBLIGATION BEFORE THE SIXTH DAY AFTER THE DATE YOU SIGN THE CONTRACT. IF YOU DO NOT RECEIVE A COPY OF THE CONTRACT AT THE TIME THE CONTRACT IS SIGNED, YOU MAY CANCEL THIS CONTRACT WITHOUT PENALTY OR OBLIGATION BEFORE THE SIXTH DAY AFTER THE DATE YOU RECEIVE A COPY OF THE CONTRACT.” “(2) IF YOU DECIDE TO CANCEL THIS CONTRACT, YOU MAY DO SO BY EITHER HAND-DELIVERING NOTICE OF CANCELLATION TO THE SELLER OR BY MAILING NOTICE BY PREPAID UNITED STATES MAIL TO THE SELLER OR THE SELLER’S AGENT FOR SERVICE OF PROCESS. YOUR NOTICE OF CANCELLATION IS EFFECTIVE ON THE DATE SENT OR DELIVERED TO (INSERT NAME OF SELLER) AT (INSERT ADDRESS OF SELLER). FOR YOUR PROTECTION, SHOULD YOU DECIDE TO CANCEL YOU SHOULD EITHER SEND YOUR NOTICE OF CANCELLATION BY CERTIFIED MAIL WITH A RETURN RECEIPT REQUESTED OR OBTAIN A SIGNED AND DATED RECEIPT IF DELIVERING IT IN PERSON.” “(3) A PURCHASER SHOULD NOT RELY ON STATEMENTS OTHER THAN THOSE INCLUDED IN THIS CONTRACT AND THE DISCLOSURE STATEMENT.”
29. The contract must also include the following: the name and address of the developer and timeshare unit. (2) the purchaser exercises the right of cancellation, all payments shall be returned within 21 days. (3) the name of the persons actively involved in the sales presentation. (4) the amount of the periodic assessments currently assessed. (5) a statement the timeshare common properties are not mortgaged, unless the mortgage contains a non disturbance clause. (6) in the event such timeshare is sold under a lease, right to use, or membership agreement where free and clear title to the timeshare unit is not passed to the buyer, then the contract must contain a warranty that the timeshare is free and clear, or if subject to a mortgage, the mortgage must contain a non disturbance clause in the event of foreclosure. (7) the date the purchaser signs the contract. (8) a statement the timeshare purchaser has a right to an annual timeshare fee and expense statement.
30. Timeshares A violation of the Timeshare Act is a Class A misdemeanor. If the purchaser is offered participation in an exchange program, the developer must give the purchaser an exchange disclosure statement. This statement must explain the legal relationship between the exchange companies and the developers, conditions under which the exchange program might terminate, and other specific information. Unfortunately, some abusive timeshare marketing practices have given timeshares a bad name. It should be remembered, however, that when there is an honest developer, timeshare interests can be a very attractive purchase.
31. Cooperative Housing Cooperative ownership is another method of apartment ownership. There are distinct differences in methods of control and type of unit ownership as used by cooperatives in comparison to condominiums. The Texas legislature made some specific homestead provisions applicable to cooperative housing.
32. Creation A cooperative can take one of three forms: (1) tenancy in common, (2) the trust form, or (3) the corporate form. Tenancy in common. The homeowner owns his share of the cooperative project in undivided proportionate shares, along with a lease, for a particular unit. Trust. Ownership in severalty by a trust, which executes a single blanket mortgage for the entire cooperative. There is a single mortgage and management function, operated solely through the trust. Corporation. The basis for this type of ownership arises out of the charter and bylaws of the corporation as created according to the laws of the State of Texas. The corporation executes the mortgage and maintains the actual control and ownership of the building.
33. Ownership and Control The certificate of occupancy (or lease) is regarded as personal property, not real estate. The charter and bylaws (or trust instrument) usually contain provisions whereby the corporation or trust has the right of first refusal. It is critical that there be a strictly enforced agreement between the co-owners, carefully setting forth all rights and obligations.
34. Advantages Cooperatives are substantially cheaper than other forms of ownership. In retirement, a senior citizen may buy a 1,200 to 1,500 square-foot unit. Future contributions would be only to pay utilities and maintenance. Thus more comfortable on a fixed retirement income. Cooperatives can be structured so that the owner of the property can buy the property back. If the corporate owner can resell the unit the profit is either shared amongst the owners, or used for capital improvements or maintenance.
35. Disadvantages What would happen if several owners could not make their proportional mortgage, insurance, tax, or maintenance payment for one month? The obvious answer is that the remaining unit owners must come up with the rest of the money in order to ensure that payments are made. Since ownership is evidenced by a certificate of occupancy, or “shares” of ownership, it may be affected by securities laws.
36. Tort Liability Under corporate or trust form the owners are insulated through the corporate veil or the trust form of ownership. Anyone who has a claim against the cooperative housing unit would have to sue the trust or corporation Homeowners would be insulated from liability and not personally liable. Tort
37. Fair Housing Most cooperative projects have a review board to approve new owners. They must be sure they are solvent, credit-worthy, and a good “fit” for the other owners. The review board must justify its reasons for not allowing people in the project so as not to infringe upon the rights of a protected class.
38. TREC Enforces the Texas Timeshare Act
39. www.caionline.org
40. Questions for Discussion 1. In general terms, explain how condominium ownership works in Texas. 2. What are the three types of ownership an owner holds in a condominium? 3. How is a condominium managed and maintained? 4. What is a timeshare? 5. Explain how a cooperative works and its single, biggest disadvantage.