We are now more than three years into the condominium deconversion wave that took the Chicagoland real estate industry by surprise in 2015. While deconversions may appear to be commonplace, so are the challenges to these unique large sale transactions.
Some unit owners have mounted vocal and often caustic challenges in opposition to these sales. Others have taken to the courts to seek court intervention to stop the sales in their associations. However, the result of these challenges (and the court rulings that have resulted in these legal battles) is clarity regarding the role and authority of a Board of Directors in a condominium deconversion.
Defining a Section 15 Sale
A Section 15 or deconversion sale is a sales transaction in where the buyer purchases all the units in an association pursuant to Section 15 of the Illinois Condominium Property Act, 765 ILCS 605/15 (the Act). In order to purchase all of the units in the Association, a sale with a buyer requires approval by unit owners having at least 75% of the ownership of the common elements (Note: In some cases, the percentage vary based on the size of the building or the Association’s governing documents).
Section 15 of the Act generally states that if the requisite 75% affirmative vote of the ownership is obtained, the approval of the sale will be binding upon all unit owners, even those who did not vote in favor of the sale. In addition, if the sale is approved, it becomes it becomes “the duty of every unit owner to execute and deliver such instruments and to perform all acts as in manner and form may be necessary to effect such sale.” In other words, if at least 75% of the ownership votes in favor of accepting a contract for the sale of the units, all owners are required to sell their units.
Board’s Contractual Authority in a Section 15 Sale
Pursuant to the Act, the Board of Directors of a condominium association is granted the express authority to act in a representative capacity on behalf of the unit owners in relation to a Section 15 sale. Pursuant to the Act, the only decision that falls outside of the purview of the Board is the specific decision to sell the building. Otherwise, the Board has unencumbered authority to:
- discuss a potential sale,
- present offers to the ownership,
- and even to enter into a listing agreement with a real estate broker.
As is generally understood, the Board of Directors maintains the authority to enter into contracts on behalf of the Association. However, some Associations have recently experienced challenges to the Board’s authority to enter into a listing agreement and some owners have voiced opposition to a Board’s authority to discuss or consider a sale prior to taking a vote of the ownership.
Notably, the Act does not include a provision that states a Board may enter into contracts on behalf of the Association “except for contracts listing the association property for sale.” Accordingly, the conclusion that the Board does not have the authority to enter into contracts to list the property appears to be unsupported by the plain language of the Act.
Similarly, there can likely be no assertion that such a limiting provision is contained in an association’s bylaws. To the contrary, most of the standard association bylaws expressly state that nothing in the bylaws shall be construed to limit the powers and duties of the Board as set forth in the Act.
Subsequently, both the Act and the association bylaws seemingly provide the Board with the authority to vote to enter into contracts, including contracts to list property for sale. As such, without restriction, the Board may enter into contracts to list or market the property if the vote on the sale itself is reserved for the unit owners as provided in Section 15 of the Act.
To be certain, there are specific votes reserved for the unit owners within a condominium association. Throughout the Act, there are specific instances in which the Illinois Legislature granted unit owners with the power to vote on issues within a condominium association. For example, a vote on a substantive amendment to the Declaration of an Association and certain types of special assessments and expenditures require the vote of the ownership. The Legislature was clear as to those decisions in an association which should be submitted to the unit owners. However, the Legislature did not mandate that the Board take a vote of the ownership as to all actions taken prior to a vote on the sale of all units.
It’s worth noting that there is a minority opinion that the Board should conduct a vote of the ownership prior to listing the property or considering a deconversion sale. However, this opinion is not supported by the Act.
Some of these challenges have reached Illinois courtrooms and, on at least two occasions, unit owners in Illinois have challenged the Board’s authority to list the association property for sale without a vote of the unit owners. To date, these challenges have been rejected at the circuit court level.
Accordingly, the trend of the current judiciary supports the Board’s authority to represent the unit owners throughout the sale process until the vote on the sale itself is conducted with the unit owners.
Should the Board conduct a vote of the ownership prior to obtaining a contract?
The answer to this question requires an understanding of the Section 15 sales transaction.
Often, a buyer will agree to add additional incentives or to reimburse the owners for certain fees and costs during the contract negotiation stage. However, this stage happens only after a Board has made the decision to list the property or to investigate a potential sale. Accordingly, the unit owners cannot be expected to make an educated decision on a potential sale without knowing all the details and relevant terms of the sale before a contract is prepared.
As a result, the suggestion that a Board should force its unit owners to formally vote on a sale without having the benefit of knowing the maximum value that a buyer or buyers may offer is nonsensical.
Moreover, a Board’s request that owners vote on a sale without fully informing owners of the complete set of material terms could be viewed as a failure of the Board to provide the owners with crucial information affecting such an important decision.
There are a myriad of important issues that a Board must address when it comes to the sale of all units, including: written objections, unpaid assessments, informational meetings, and contract distribution. Nonetheless, until such time as a contract containing all material terms is presented, the Board should avoid conducting a vote on the sale of property.
If your association has been approached by an interested buyer, your association is in the middle of a potential sale or de-conversion, or you are a buyer interested in converting income property into condominiums, please contact Kovitz Shifrin Nesbit to discuss your legal needs.
Our dedicated condo deconversion team has the full suite of resources and services that you need to successfully move through the deconversion sales process.
Visit www.ksnlaw.com or call our law firm at 1-855-537-0500 to get started today.
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