“Impact of New Case Law on Illinois Condominium Deconversions” – KSN attorney Kelly Elmore reviews the changes the new case law has on the process of conducting a Section 15 sale. Kelly also discusses how these changes will impact community association board members. (15 mins.)
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Episode Transcription
Nikki: You are listening to the KSN podcast and today we’re talking about the impact of new case law on Illinois condominium deconversions. Welcome to the KSN podcast where you’ll hear from KSN attorneys as they share their experience and insight on legal issues surrounding community associations, collections, property tax appeals, and landlord tenant law. I’m Nikki and today we’re joined by KSN attorney Kelly Elmore. Kelly practices condominium, townhome and homeowner association law, and has an extensive background as a litigator. Hi Kelly. Welcome to the podcast.
Kelly: Hi Nikki. It’s great to be here.
Nikki: Our topic today is the new case law on Illinois condominium deconversions and before we get into exactly what this new case law has to say, Kelly, can you please explain exactly what a condominium deconversion is?
Kelly: Sure. A condominium deconversion sale is the type of sale that we refer to, which is really a section 15 sale. So many people might not be aware that there is a provision in the Illinois condominium property act specifically section 15, that addresses the sale of all units in a condominium association. So while we refer to them as deconversion sales, and I think most people know them as deconversion sales, they’re really section 15 sales. Compared to the cost of constructing an entirely new property from the ground up, some real estate investors and developers have found it easier and financially more advantageous to purchase an existing condominium unit building and in some cases convert the units into apartments. These transactions are typically pretty complex. They involve multiple parties and dozens to hundreds of unit owners, depending on the size of the building. Additionally, there are seemingly countless issues that must be addressed during the process, including deferred maintenance, finances, occupancy, and some other legal considerations
Nikki: And Kelly, as it is with any type of sale of property and you had mentioned it, there are legal considerations that everyone must take into account and follow. So in Illinois, what is the top legal consideration that people must follow in these section 15 or condominium deconversion sales?
Kelly: Well, first it’s crucial to note that in Illinois, there is a provision within section 15 of the Illinois condominium property act that I mentioned that specifies that in order to purchase all of the units in an association, a sale requires approval by owners having at least 75% of the ownership of the common elements. Now, it is important to note that percentage can change based on the size of the building, but for most associations in Illinois, that percentage is 75%. The section 15 of the act generally states that if that requisite 75% affirmative vote of the ownership is obtained, the approval of the sale is binding to all owners, even those who don’t vote in favor of the sale and the last important thing to note, especially about the vote is that in the city of Chicago, the percentage is 85% for approval of the sale.
Nikki: Kelly and I are going to take a quick break, but when we get back, we’ll continue discussing the new case law regarding Illinois condominium deconversions.
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Nikki: And we’re back. I’m here with attorney Kelly Elmore and we’re discussing the new case law regarding Illinois condominium deconversions. So Kelly, we left off talking about the percentages needed for this section 15 sale to pass within a community association but before unit owners can vote on whether they want this sale to pass, there has to be an offer or a deal presented to the community association. So where do these sales come from and what responsibilities do board members have?
Kelly: Well, that’s a great question, Nikki and this is really where the new case law has come into play. Since the condominium deconversion or section 15 sale trend ramped up in 2015, Illinois legislation has attempted to clarify a lot of these provisions of section 15 of the act and address some of the unique factors involved in these transactions. These proposals have included board responsibilities in these sales, the fiduciary duty of a board, investigating the bulk sale, membership approval, and what’s required for that and the ownership voting thresholds. Well, in January of 2022, the Illinois appellate court issued a ruling in the case Glazer versus the private residences at Ontario place condominium association, clarifying that the Illinois condominium property act does not require the association’s board to obtain approval of the owners before taking an action to investigate or negotiate a bulk sale. So what this meant was that it was very clear that board members are not required to go and take a vote of the ownership before discussing a sale or negotiating terms or even listing a property for sale. There was a lot of confusion about that, I think over the years certainly our opinion was always that the act was clear, that the only requirement for an owner vote was the sale itself and this ruling unfortunately confirms that.
Nikki: And so Kelly, then what type of authority does a board have regarding these transactions?
Kelly: Well, what this ruling further clarifies is that there are votes that are reserved for owners within a condominium association, including amendments to the declaration and expenditures. Many people are familiar with votes on special assessments and things like that. With this recent ruling, the Illinois appellate court has made it clear that the Association’s board can obtain information and consult with real estate professionals prior to the sale of all units before they’re required to actually obtain votes. Ultimately, the owners of the association are going to make the final decision regarding a deconversion sale if at least 75% or other required percentage, depending on where you’re located, agree to the sale.
Nikki: So since the law was passed in January of 2022, KSN has helped in the closing of the condominium deconversion terrace of Elk Grove Village condominium associations, which had over 400 units. How did you and the team handle this new ruling? Did it have any impact on this closing or any other closing that you and the section 15 team here at KSN are working on? I mean, Kelly, I know I’m kind of going into a lot of questions, but have you had any issues with any old transactions with this new ruling or, what do you see to play out in the future here for any of the current deals that you’re working on?
Kelly: Well, fortunately for our team, the ruling hasn’t had a significant effect as the ruling mirrored what we were advising clients, even going back to 2015, which is the only requirement under section 15 is that you take a vote of the ownership on this sale of all units. In other words, the act doesn’t say that you need to take a vote to negotiate a contract. The act doesn’t say that you need to take a vote in deciding whether to list the property and things like that and there were many opponents of deconversion sales over the past several years who have attempted to throw up roadblocks, as associations were attempting to complete a section 15 sale. And many of these attorneys were arguing that the board somehow breached a duty to the ownership because a vote was required to be taken prior to even considering whether or not to move forward with a section 15 sale.
Kelly: Now, for those of us who have practiced in this area and who have handled dozens and dozens of these sales, we always pointed out that that approach and that theory is really illogical because at the outset of a section 15 sale process, owners and the board members have no idea what the final terms might be. So for example, many times associations are presented with an offer and that initial offer doesn’t look anything like what we’re able to negotiate on behalf of associations. So if the owners had taken a vote on that initial offer, because of this idea that a vote of the ownership is required before you can even consider a sale, well, it would’ve been very misleading to the owners. And to be honest, certainly would not have been in the best interest of the owners. Certainly, I think over the past several years, firms like ours have been able to negotiate incredible deals on behalf of owners. So, if there had been a requirement that owners have to take a vote before the board can even investigate or consider a sale I certainly don’t think that would’ve worked out well for many of the owners who have taken advantage of these types of sales.
Nikki: You know, Kelly, I totally agree. The top thing for board members is fiduciary duty to be able to act in the best interest of the other unit owners. So, it seems as if these condominium deconversions, they can be very complex transactions. So with your team and the many years of experience you guys have over 70 deconversions closed, how can you help our listeners with these transactions?
Kelly: Well, as I mentioned previously, these are incredibly complex deals and not just because of the size, but because of all of the individual parties involved. When you think about some of the buildings that we’ve closed; 400 units, 600 units, 700 units, that’s 600 or 700 individual sellers that have to review closing documents and review their numbers and many, many owners with individual issues affecting their units. So you really, really have to have a dedicated specialized team in place for an association to be able to successfully close on a sale and go through this process. There are a number of critical issues that condominium association board members address in the deconversion process. I’ve tried to, over the years, break it up into three different phases for board members so you can kind of more easily wrap your head around it. But the initial phase is obviously discussing the potential sale and the contract review, going through the negotiation with the buyer and then ultimately if a contract is agreed upon then moving into the phase of the voting process where we’re preparing the meeting notice, preparing the voting packet for the ownership and sustain a board with conducting a vote. And then there’s what I call phase three, which is dealing with winding down of association affairs when an association has successfully approved a sale.
Kelly: There’s many, many things that have to happen to wind down an association, which as you know, is a not for profit corporation in the state of Illinois. So it’s crucial that all of that is done correctly, otherwise there could be individual board member liability after a sale. So, what we did starting several years ago was develop a full service condo deconversion department. So our team individuals, it’s all they work on. So they don’t handle other types of transactions. It’s all section 15 sales, and they’re dedicated to navigating the entire section 15 sales process, including our legal guidance and administrative support. So I’m pleased to say that as of the end of January, 2022, we have closed over 70 condominium section 15 deconversion sales ranging from single digit associations to buildings with over 700 units.
Nikki: That was KSN attorney Kelly Elmore. Kelly practices condominium, townhome and homeowner association law, and has an extensive background is a litigator. KSN is an experienced legal resource, ready to provide you with quality advice and exceptional service. We look forward to demonstrating how we have earned the trust of thousands of clients over the past 35 years. If you’d like to reach Kelly or anyone of KSN’s experienced attorneys, please call 855-537-0500. You can also visit ksnlaw.com and complete the contact form to send us a message. Thanks for listening.
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