Condominium Documents
§ 24.1:1Definition and Creation of Condominium and Owners’ Association
A condominium is a form of real property ownership in which portions of the real property are designated for separate ownership or occupancy (the “units”) and the remainder is designated for common ownership or occupancy solely by the owners of the units. Real property is a condominium only if one or more of the common elements (for use by all the unit owners) are directly owned in undivided interests by the unit owners. Real property is not a condominium if all of the common elements are owned by a legal entity separate from the unit owners, such as a corporation or property owners’ association, even if the separate legal entity is owned by the unit owners. .
Condominiums are established through filing, in the real property records of the county in which the property is located, a declaration imposing restrictive covenants on the property comprising the condominium regime. . The declaration must contain statutorily prescribed information. . The declaration defines the boundaries of the units and operates to subdivide the property into separate condominium units and common areas or elements. . It is not uncommon for condominium developers to presell condominium units before construction of the condominium building and thus before the boundaries of the units are defined by an as-built survey. In 2013, the Texas legislature amended the definition in to eliminate the word recorded with reference to the declaration but left section 82.051 (requiring recording to establish a condominium) unchanged.
The provisions of the declaration and bylaws are severable. See . These bylaws are for a condominium owners’ association that will take over management of the condominium regime from the declarant. The declaration also typically includes rules affecting the property and owners in the condominium regime.
A condominium owners’ association for a condominium formed after January 1, 1994, must be a Texas corporation. . These owners’ associations are typically nonprofit corporations, although section 82.101 allows them to be for-profit corporations. The Texas Business Organizations Code provides for the formation of both nonprofit and for-profit corporations. Form 24-3 in this chapter is a certificate of formation for a condominium owners’ association.
The Texas Uniform Condominium Act (TUCA), chapter 82 of the Texas Property Code, governs all condominiums with declarations recorded on or after January 1, 1994. TUCA also applies to condominiums formed before that date if the owners vote to have chapter 82 apply or if a declaration or amendment of declaration recorded before January 1, 1994, states that chapter 82 will apply. See . Portions of TUCA apply to all condominiums; however, certain rights cannot be limited for owners of condominiums created before 1994. See . Condominiums created before January 1, 1994, are otherwise governed by chapter 81 of the Property Code.
Property Code chapter 202, governing construction and enforcement of restrictive covenants, also applies to condominiums. Section 202.002(a) states that the chapter “applies to all restrictive covenants.” “Restrictive covenant” is defined to mean any covenant, condition, or restriction in a dedicatory instrument, and a “dedicatory instrument” means all governing instruments of planned developments, explicitly including condominiums. See . “Dedicatory instrument” as it relates to condominiums is defined in , which does not specifically require recording. Under chapter 202, however, a dedicatory instrument has no effect until it is recorded in the public records. . In many instances, the provisions of the statutes applicable to condominiums differ substantially from those that apply to noncondominium residential subdivisions. See .
In addition to provisions in chapter 82 of the Property Code, the Texas Business Organizations Code governs the formation and operation of the condominium owners’ association. See (for-profit corporations), (nonprofit corporations).
Condominium owners’ associations are subject to federal income taxation. They do not qualify as charitable organizations under Internal Revenue Code section 501(c)(3). Associations may qualify for special tax treatment under .
§ 24.1:3Foreclosure of Assessment Lien
An assessment levied by a condominium owners’ association is a personal obligation of the unit owner and is also secured by a continuing lien on the unit, on rents, and on insurance proceeds relating to the unit. See . For purposes of this section, “assessment” includes regular and special assessments, dues, fees, late fees, fines, collection costs, attorney’s fees, “and any other amount due to the association by the unit owner or levied against the unit by the association . . . . ” . The lien for assessments is created by the recording of the declaration, and no other recordation of a lien or notice of lien is required. . The association’s lien for assessments has priority over other liens, except for liens for real property taxes or other governmental assessments, liens recorded before the declaration was recorded, first vendor’s liens or first deed-of-trust liens recorded before the assessment becomes delinquent, and under certain circumstances, liens on improvements. See .
By acquiring a unit, an owner grants the association a power of sale. That power of sale is exercised pursuant to Texas Property Code section 51.002 unless the declaration provides otherwise. . The association may not foreclose a lien for assessments consisting only of fines. . The association may not foreclose during a person’s active military service or nine months thereafter without complying with . A notice of foreclosure sale must include the military service language in . The initial communication with the owner to collect delinquent assessments before exercising the right of foreclosure also should include language required under federal and state fair debt collection practices laws. A unit owner may not petition a court to set aside a sale solely because the price at foreclosure was insufficient to fully satisfy the owner’s debt. The association may purchase the unit at foreclosure.
The redemption rights of condominium owners are set out in . The Texas Residential Property Owners Protection Act, chapter 209 of the Property Code, does not apply to condominiums. . See Duarte v. Disanti, 292 S.W.3d 733, 736 (Tex. App.—Dallas 2009, no pet.) (it was “the legislature’s clear intent to have different redemption rights for residential subdivisions than for condominiums”).
At any time before a nonjudicial foreclosure sale, the unit owner may avoid foreclosure by paying “all amounts due the association.” . The association is not prohibited from taking a deed in lieu of foreclosure or from filing suit to recover a money judgment. .
If an owner defaults on obligations to the association, the association may notify other lienholders of its intent to foreclose and must notify any holder of a recorded lien or a duly perfected mechanic’s lien if the lienholder has given the association a written request of notification. . Foreclosure of a tax lien under chapter 32 of the Texas Tax Code does not discharge the association’s lien for amounts due the association after the date of foreclosure of the tax lien. .
§ 24.2General Instructions for Completing Forms
For general information about completing the forms in this chapter, see chapter 3 in this manual. In most forms, the information that the attorney must provide is listed at the beginning of the form. Of course, the attorney may add other specific provisions and references to exhibits and riders at the end of the form.
For general information about designation of parties, addresses, property descriptions, and execution and acknowledgment of documents, see chapter 3.
§ 24.3General Considerations for Declaration
The required contents for a condominium declaration are set out in .
The definition of “assessment” used in the declaration, form 24-1 in this chapter, is based on that used in .
The definition of “residential purposes” is derived from .
The definition of “common elements” is based on . In each condominium, there will likely be portions that should be designated as “limited common elements.” The consequence of such a designation is important, not only to limit use of those elements but also to determine responsibility for their maintenance, repair, or replacement, and the costs thereof. The drafter should carefully review Texas Property Code sections 82.052, 82.058, 82.107, and 82.112(d) when determining which aspects of a condominium should be designated as limited common elements as opposed to common elements.
The declaration defines the plat as including the plans. Property Code section 82.003(a) makes a distinction between plan and plat as follows:
(18) “Plan” means a dimensional drawing that is recordable in the real property records or the condominium plat records and that horizontally and vertically identifies or describes units and common elements that are contained in buildings.
(19) “Plat” means a survey recordable in the real property records or the condominium plat records and containing the information required by Section 82.059. As used in this chapter, “plat” does not have the same meaning as “plat” in Chapter 212 or 232, Local Government Code, or other statutes dealing with municipal or county regulation of property development.
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§ 24.3:2Restrictions on Use, Occupancy, or Alienation
Texas Property Code section 82.055(9) requires a declaration to set out any restrictions on use, occupancy, or alienation of the units. Section C. of the declaration, form 24-1 in this chapter, has examples of use and occupancy restrictions. Because changing the “use restrictions on a unit” in a declaration requires 100 percent of the votes in the association (), it will be difficult if not impossible to amend the use restrictions once the declarant loses control of the condominium regime. The use restrictions thus require careful consideration. Examples of restraints on alienation are provided in paragraph D.8. of form 24-1. The practitioner will need to consider what conditions or activities are to be prohibited. The nature and extent of the limitations will depend on the declarant’s purpose and expectations for the condominium. In addition, lenders may require that restrictions be incorporated to protect their interests and the security of mortgages.
Certain restrictions are prohibited or regulated, including restrictions concerning firearms (); rain barrels and xeriscaping (); solar energy devices (); roof shingles (; flags and flagpoles (); religious items (); standby electric generators (); and speed feedback signs (). The owner or developer must determine whether and to what extent rentals are permitted. Allowing rentals in residential condominiums can adversely affect the ability of owners to obtain mortgages. Some lenders will not finance a condominium loan unless a certain percentage of units in the condominium regime are owner-occupied.
If the declarant wants to restrict or regulate rentals, restricting the units to “residential” use will not suffice. Rental of a property for residential use does not transform the use of the property into a business or commercial use. Tarr v. Timberwood Park Owners Ass’n, 556 S.W.3d 274 (Tex. 2018). Any prohibition against rentals must explicitly be stated in the declaration. Tarr, 556 S.W.3d at 291. The declarant may want to consider not placing rental restrictions in the section of the declaration titled “use restrictions,” given the requirement for approval from “100 percent of the votes in the association” for a change in any “use restrictions.” . Careful consideration must also be given to the context in which the phrase “single family” appears in a declaration. The supreme court in Tarr determined that “single family” refers to a type of structure, not who can occupy the property. Tarr, 556 S.W.3d at 287. The declarant therefore may also want to define the term “single family” if used in the declaration.
Unless the declaration prohibits rental of units, condominium owners’ associations or managers may encounter enforcement problems when an owner rents the property to a third party. Insertion of provisions such as the following in the declaration or the association’s rules can minimize these enforcement problems:
•requiring that owners provide tenants with the declaration and rules;
•requiring owners to use rental agreements that impose on tenants the obligation to comply with the dedicatory instruments, with consequences for tenants’ violation of the declaration or rules;
•making owners responsible for any fines or other consequences if tenants violate the declaration or rules; and
•requiring owners to give the association or management information about rentals, including contact information for tenants and copies of the rental agreements (form 24-14 in this chapter can be used for this purpose).
Some declarations prohibit short-term rentals because of the unique problems they pose. “Short-term rental” means the rental of all or part of a residential property for less than thirty consecutive days. , . Short-term rentals are subject to sales and hotel taxes and, often, additional local ordinances. Promulgating association rules that require owners to comply with all applicable laws, with fines or other consequences in the event the owners do not comply, can provide an association with an enforcement tool in those situations.
§ 24.3:3Units and Common Elements
Texas Property Code sections 82.052 and 82.055(4) allow the declaration to define the boundaries of a unit other than as set forth in paragraphs D.3. and D.4. of the declaration, form 24-1 in this chapter.
The declaration is required to contain a description of limited common elements other than those described in Texas Property Code section 82.052(2) and (4). . Examples of limited common elements as set out in the statute include chutes, flues, ducts, wires, bearing walls, and other fixtures partially within and partially outside the designated boundaries of a unit and that serve only that unit. . Items such as windows, exterior doors, shutters, awnings, window boxes, doorsteps, porches, balconies, and patios designed to serve a single unit but located outside the unit’s boundaries are also limited common elements. . The declaration must also contain a description of property that may be allocated subsequently as limited common elements. .
§ 24.3:4Assignment of Association Income
Unless a dedicatory instrument requires a vote of the association members to borrow money or to assign the association’s right to future income or lien rights, gives the association’s board of directors the power to borrow money and assign as collateral for the loan the association’s right to future income and lien rights. If a vote of the members is required, (1) the board can provide for electronic voting, absentee ballot, proxy at a meeting, or written consent, and (2) at least 67 percent of all voting interests must vote in favor of the action, unless a dedicatory instrument provides for a lower threshold.
Form 24-12 in this chapter is a unanimous consent in lieu of a directors’ meeting to approve a loan under after any required members’ vote under section 82.102(g) has approved the loan. Chapter 6 in this manual contains forms and clauses for the promissory note. Form 24-13 is a security agreement and transfer of lien to secure the loan.
§ 24.3:5Assessments and Late Charges
Texas Property Code section 82.112 provides that an expense for maintenance, repair, or replacement of a limited common element must be assessed as if it were a general common element expense except as otherwise provided by the declaration or .
Late charges are governed by , , . The creation of liens and foreclosure for failure to pay assessments is addressed in . Form 24-15 in this chapter can be used for making an initial demand for payment of delinquent assessments before the association exercises its right to foreclose. That form includes the language required by the federal and state fair debt collection practices laws and the military service language required in the notice of foreclosure under . Redemption rights for condominium owners after foreclosure of an association’s lien for assessments are governed by .
Among the powers granted to the association by the Texas Uniform Condominium Act (TUCA) is the power to impose charges for use of the common elements. See . Paragraph H.2. of the declaration, form 24-1 in this chapter, concerns fees for use of specified common elements and is optional. The purpose of this section is to expressly authorize such charges and to provide a procedure to the association.
The declaration may provide for different allocations of votes on particular specified matters or class voting on specified issues; however, units may not constitute a class merely because they are owned by a declarant. .
The formulas used to establish the allocations of interests must be stated in the declaration. See , . Attention should be given to section 82.057(c), which permits special provisions relating to voting rights.
If any unit is restricted exclusively to residential purposes, the approval of at least 80 percent of the members is required to terminate the condominium under section 82.068(a) of the Texas Property Code.
§ 24.3:7Amendment of Declaration
requires the declaration to contain the method of its amendment. By statute an amendment to a declaration may be made—
1.by written ballot that states the exact wording or substance of the amendment and that specifies the date by which a ballot must be received to be counted;
2.at a meeting of the members of the association after written notice of the meeting has been delivered to an owner of each unit stating that a purpose of the meeting is to consider an amendment to the declaration; or
3.by any method permitted by the declaration.
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The drafter may merely reference the two specific methods described in or may include additional methods. Some thought should be given to taking advantage of technological advances in order to accommodate different sizes and types of anticipated membership populations. For example, written ballots might be submitted electronically, rather than only by mail.
The right to create additional units is a development right. See . TUCA requires all condominium declarations to include a statement of the maximum number of units that the declarant reserves the right to create. See . If any development right is to be reserved by the declarant, the declaration (form 24-1 in this chapter) will require substantial modification.
§ 24.3:9Special Declarant Rights
requires not only a description of development rights and other special declarant rights but also clear identification of the particular real property to which such rights apply and time limits within which such rights must be exercised. Unless special declarant rights are expressly reserved in the declaration, they do not arise under TUCA. If development rights are reserved, the declaration (form 24-1 in this chapter) will require substantial modification. See , . Examples of special declarant rights include:
1.The right to complete or make improvements indicated on the plats and plans. See , .
2.The right to maintain sales and other offices and models and condominium advertising signs on the condominium. See , .
3.Rights of easement through the common elements for the discharge of declarant’s obligations. See , .
4.The right to appoint or remove officers or directors. See , .
§ 24.4General Considerations for Bylaws
Form 24-4 in this chapter is a proposed set of bylaws for a condominium owners’ association. The form can be modified consistent with applicable law, found primarily in the Texas Business Organizations Code and the Texas Property Code.
The Business Organizations Code provides that bylaws may contain provisions for the “regulation and management” of corporate affairs that are consistent with law and the corporation’s certificate of formation. (for-profit corporation), (nonprofit corporation).
Section 82.106 of the Property Code mandates that the bylaws contain specified provisions governing the “administration and operation of the condominium.” It also provides for “other matters the association considers desirable, necessary or appropriate” subject to the declaration. Section 81.202 of the Property Code (applying to condominiums formed before January 1, 1994) states that the “bylaws of a condominium regime govern the administration of the buildings that comprise the regime.” Thus, it is not unusual, particularly for associations formed before January 1, 1994, to see provisions in bylaws that go beyond corporate governance.
§ 24.5General Considerations for Rules
Form 24-11 in this chapter can be used in promulgating rules for the condominium owners’ association and the use of any common areas. The rules and penalties for violation (to be inserted in sections A. and B. of the form) will be unique to each condominium regime. The enforcement provisions (contained in section C. of the form) are based on the requirements in section 82.102(d) of the Texas Property Code.
§ 24.6:1Condominium Information Statement
Before offering to the public the sale of any interest in a condominium, a declarant (as well as certain other persons in the business of selling real property) must prepare and provide a condominium information statement to prospective purchasers. . The requirements for the condominium information statement are found in . These include—
1.the name and principal address of the declarant and of the condominium;
2.a general description of the condominium that includes the types and maximum number of units;
3.the minimum and maximum number of additional units that may be included in the condominium;
4.a brief description of any development rights reserved by a declarant and of any conditions relating to those rights;
5.copies of the declaration, articles of incorporation, bylaws, any rules of the association and their amendments, and copies of leases and contracts, other than loan documents, required by the declarant to be signed by purchasers at closing;
6.a projected or pro forma budget for the association for the first fiscal year of the association that conforms to Texas Property Code section 82.153(a)(6) and (b);
7.a general description of each lien, lease, or encumbrance affecting title to the condominium after conveyance by the declarant;
8.a copy of each written warranty provided by the declarant;
9.a description of any unsatisfied judgments against the association and any pending suits to which the association is a party or that are material to the land title and construction of the condominium of which a declarant has actual knowledge;
10.a general description of the insurance coverage provided for the benefit of unit owners; and
11.current or expected fees or charges to be paid by unit owners for the use of the common elements and other facilities related to the condominium.
Form 24-2 in this chapter is based on the above requirements. Special disclosures are required for condominiums located in whole or in part in a municipality with a population of more than 1.9 million. See .
§ 24.6:2Management Certificate
Texas Property Code section 82.116 requires a management certificate to be recorded in each county in which the condominium is located. If any changes in information occur, the association is required to file a new management certificate not later than thirty days after the date the association has notice of the change. See . In addition, all condominium owners’ associations must record a current management certificate on or before January 1, 2014, or rerecord the current management certificate if the previous recording was done before September 1, 2013. This requirement is to facilitate the county clerks’ indexing of management certificates, which, before September 1, 2013, did not have a clear, statutorily mandated system. . Thus, a condominium owners’ association should record or rerecord its current management certificates even if it missed the January 1, 2014, deadline. Form 24-5 in this chapter, the management certificate, may be used to comply with these requirements.
§ 24.6:3Resale Certificate and Acknowledgment of Receipt
A unit owner, other than a declarant, who intends to sell a unit must provide a purchaser with a current copy of the declaration, bylaws, any association rules, and a resale certificate. The resale certificate, required under chapter 82 of the Texas Property Code, must be prepared not earlier than three months before the date of delivery. The resale certificate must be issued by the association and contain the disclosures specified in . The resale certificate and other provisions in chapter 207 of the Property Code do not apply to condominiums. .
Form 24-6 in this chapter, the resale certificate, may be used to comply with the requirements of .
If the seller fails to deliver to the purchaser copies of the declaration, bylaws, and association rules as required by before the purchaser executes the contract, or if the contract does not contain an underlined or bold-faced provision acknowledging the purchaser’s receipt of those documents and recommending that the purchaser read the documents before executing the contract, the purchaser has the right to cancel the contract before the sixth day after the date the seller delivers those documents to the purchaser. See . Form 24-8, the acknowledgment of receipt of condominium documents, may be used to document compliance with or may be modified to use as additional clauses in a sales contract.
An association is required to keep certain records, including information concerning each unit owner. The unit owner, within thirty days after acquiring an interest, must provide—
1.the unit owner’s mailing address, telephone number, and driver’s license number, if any;
2.the name and address of the holder of any lien against the unit and any loan number;
3.the name and telephone number of any person occupying the unit other than the unit owner; and
4.the name, address, and telephone number of any person managing the unit as agent of the unit owner.
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This information must be updated no later than thirty days after the date the owner has notice of any change in the required information. . Form 24-10 in this chapter, the record of unit, may be used to comply with those requirements.
A person who performs residential property management services for a single-family residential property must be licensed as a broker. . Among the many acts that can make one a “broker” for purposes of the Occupations Code, and thus requiring the person to be licensed, is “control[ling] the acceptance or deposit of rent from a resident of a single-family residential real property unit,” in expectation of receiving a commission or other valuable consideration. . Control means the authority to either (1) pay for services related to management of the property out of the rent collected, (2) determine where to deposit the rent, or (3) sign checks or withdraw money from a trust account. . states that in addition to other types of property, a condominium unit or townhome is a single-family residential real property unit for purposes of . An association that hires an unlicensed manager to assist in managing the association’s affairs can use form 24-16 in this chapter to prohibit activities for which a broker’s license is required.
§ 24.7Termination of Condominium and Sale of Resultant Property
§ 24.7:1Applicable Law and Checklists
Texas has two condominium statutes. The first-generation statute was enacted in 1963 as Texas Revised Civil Statutes article 1301a and was codified as (the Texas Condominium Act, or TCA), effective January 1, 1984, and applies to condominiums formed before January 1, 1994. On that date, the second-generation statute went into effect, codified as (the Texas Uniform Condominium Act, or TUCA), and governs condominiums with declarations recorded on or after January 1, 1994, as well as condominiums formed before that date if the condominium unit owners vote to have chapter 82 apply. See (applicability).
Commentary below addresses the following considerations to approach a termination of a condominium’s regime and the sale of the project’s property: why terminate and sell (section 24.7:2), potential obstacles to termination and sale (section 24.7:3), and how to terminate and sell (section 24.7:4).
Form 24-19 in this chapter (supplemental checklist with commentary) lists in a narrative format the matters to be addressed by a condominium owners’ association in the process of terminating a condominium project’s condominium regime and the sale of the project’s property, including, as section A, engaging consultants; B, gathering the necessary information; C, amendments to the declaration and bylaws; D, the sales contract; E, the preclosing process; F, the closing process; and G, postclosing matters.
See chapter 4 in this manual on sales contracts and guidance on selling property, including the checklist at form 4-1, the real estate sales contract at form 4-2, and other forms relating to the sale of real property. The forms in chapter 4 are referenced in the forms in this chapter, as are chapter 5, on deeds, bills of sale, and other transfers, and chapter 25, on leases.
§ 24.7:2Why Terminate and Sell
The following factors contribute to the current phenomena for condominium terminations and sale of former condominium property.
Improvements at End of Useful Life: Condominiums constructed before 1994 in the condominium boom of the 1970s and 1980s are entering their fourth or fifth decade and may have reached the end of their useful life, particularly in harsh coastal areas, resulting in major structural issues.
Lack of Liquidity: The good and bad news of condominium ownership is that it spreads a project’s maintenance and rehabilitation costs over multiple owners, but this can result in owners not prepared to undertake the costs of upkeep of deteriorating structures, resulting in significant deferred maintenance costs and inadequate reserves.
Rising Costs: The costs of keeping up with maintenance requirements are exacerbated by threatened recessions, rising inflation, and supply chain problems.
Lack of Time and Expertise: Condominium regimes are typically managed by volunteer boards of directors who lack the experience to undertake major capital improvements.
Occurrence of Casualty Loss without Adequate Rebuilding Capital: The occurrence of significant casualty losses (for example, from hurricanes or fires) and resultant underinsured or uninsured losses puts pressure on condominium projects to consider alternatives to rebuilding.
Prime Redevelopment Area: In many cases antiquated condominium projects are located in prime redevelopment areas, which may result in a developer offering a premium for the condominium project’s land and improvements with the goal of tearing down the improvements and replacing them with a new development, perhaps targeting a different market segment. In such cases, it is not unusual for the improvements to have little or no value to the developer’s redevelopment scheme and for the developer’s offered purchase price for the project to be significantly higher (a premium) than the aggregate of the purchase price of each of the condominium units.
Ability to Adopt Means to Terminate: In many cases, the second-generation statute permits condominium regimes governed by it to be terminated and the former condominium property sold to a developer without obtaining the approval of all of the condominium owners (i.e., over the objection of a statutory minority of the owners).
§ 24.7:3Potential Obstacles to Termination and Sale
Potential obstacles to condominium termination and sale of the property follow.
Some Owners Oppose Termination and Sale: It is unlikely that all of the unit owners will agree to terminate the condominium regime and sell the project’s property to a developer. In the condominium termination and sale sample used in this section, the supermajority of the owners required to approve amendments under the first-generation condominium documents were willing to and did approve amending the condominium documents to adopt technologically current means of considering and voting on amendments. The “in person” meeting and voting requirements were met with unit owners personally appearing or appearing by proxy. In the example, the owners in opposition personally attended the meeting and voted against the amendments. Also, a two-step process was followed: the first step was amending the condominium documents, and the second step, taken at a later meeting of the members, was for the requisite supermajority of the owners to approve a real estate sales contract for the sale of condominium property to a developer after termination of the condominium regime. The condominium termination and sale to the developer for the price offered by the developer was approved at a meeting of the unit owners after the lapse of the period granted to unit owners to disapprove of the statutorily required appraisal of the property.
Noncooperation by Unit Owners: Noncooperative unit owners can make the process more complicated, as with the following examples.
Refusal to admit to unit: They may refuse admittance to their unit to the developer’s inspectors during the sales contract’s inspection period.
Refusal to cooperate in closing process: They may refuse to provide the title company with their lender’s contact information for obtaining lien payoff information for closing the sale.
Existing tenants with leases extending beyond sale closing: They may have rented their units to tenants with lease terms extending beyond the closing date of the sale to the developer.
New tenants with leases extending beyond sale closing: They may lease their property after the supermajority approves condominium termination and resale to the developer with a lease term ending beyond the sale closing date.
Suits challenging processes employed: Disgruntled unit owners file suit (or suits) challenging anything or everything, for example, the process employed to amend the condominium documents, the process employed to approve termination of the condominium and resale of the property to the developer, or the means of allocating the sales proceeds among the unit owners.
Changes in Status of Unit Owners: The following circumstances may occur after the unit owners approve termination of the condominium and sale to a developer.
Death and intestacy: A unit owner dies, and the estate is tied up in probate or in administration if the unit owner died intestate.
Liens greater than unit owner’s respective share of sale proceeds: A unit owner may have liens, for example, federal tax liens or judgment liens, filed against them encumbering their property with indebtedness that, in the aggregate with the unit owner’s purchase money financing, is greater than the share of sales allocable to the unit.
Owner bankruptcy: One or more unit owners file for bankruptcy.
Divorce: Some unit owners may be in divorce proceedings.
Sale of unit by owner: The owners of a unit may change between the time of approval of the sale and the sale, with or without knowledge of the property management company or the board of directors.
Other Complicating Circumstances: Other complicating circumstances include the following.
Large project: The condominium project is composed of a large number of units and unit owners.
Geographical dispersion of unit owners: The project is owned by unit owners that do not reside in the units but are in locations geographically remote to the project.
Unavailable owners: Unit owners are travelling, possibly outside of the United States, at the time votes are taken or at the time of the closing.
Nature of the Process: The process brings together parties that are not used to or knowledgeable about the process.
Volunteers: The board of directors of the association are volunteers and not available to devote the time required to address the details of a project like major amendments to the condominium documents.
Changing board: The board of directors might change membership during the process.
Different ownership objectives: Unit owners have different ownership objectives. For example, a unit owner may not have the same motivation to sell as other unit owners, a unit owner may provide use of the unit to their child and not want to sell while the child attends college, or a unit owner may rent the unit on a short-term basis and is satisfied with the rental return.
Lack of familiarity with termination and sale: Unit owners might be unfamiliar with the matters involved in a condominium termination and resale.
Complex concepts and extensive costs: Such a major project involves a lot of people, professions, and related expenses, for example, an association’s historical counsel; an association’s special counsel in the condominium termination and resale process; an out-of-state developer not familiar with purchasing a condominium project that will be terminated before closing; developer’s counsel, which may include out-of-state counsel that represents an out-of-state buyer and local Texas counsel; the title company and title underwriters; surveyors; inspectors; appraisers; property and liability insurers; unit owners’ counsel; lenders and lenders’ counsel, for both the unit owners’ lenders and the buyer’s lender; consultants to address with the city and other governmental bodies historic aspects of the project and authorizing demolition; and expenses from all of these entities together with the unit owners being located in multiple cities.
In these circumstances the association will not likely have cash on hand to pay all of the costs it will incur before the closing and will seek funds from the prospective buyer to cover the association’s costs to undertake and complete this process, likely with a credit being given to the buyer against the purchase price for some or all of the costs incurred by the association related to this process.
§ 24.7:4How to Terminate and Sell
Second-Generation vs. First-Generation Condominium Termination Provisions
The Texas Property Code permits a condominium regime to be terminated by its unit owners as follows. Emphasis has been added to highlight some differences between the second- and first-generation acts, and the table heading and subheadings have been added for reader convenience and are not set out in the code.
Second-Generation Act(Tex. Prop. Code § 82.068,Termination of Condominium) |
First-Generation Act(Tex. Prop. Code § 81.110,Termination of Condominium Regime) |
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Consent to Terminate |
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(a) Unless the declaration provides otherwise and except for a taking of all the units by condemnation, a condominium may be terminated only by the agreement of 100 percent of the votes in the association and each holder of a deed of trust or vendor’s lien on a unit. The declaration may not allow a termination by less than 80 percent of the votes in the association if any unit is restricted exclusively to residential uses. |
(a) By unanimous agreement, or if the declaration provides for termination by agreement of the owners, by agreement of the holders of at least 67 percent or a stated percentage in the declaration, whichever is greater, of the ownership interests in the condominium, the owners of a building in a condominium regime may terminate the regime and request the county clerk of the county in which the regime is located to merge the records of the estates that comprise the condominium regime, if any creditors in whose behalf encumbrances against the building are recorded agree to accept the undivided portions of the property owned by the debtors as security, provided no amendment may be made to a declaration to reduce the vote required for termination of the condominium regime. |
Termination Agreement |
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(b) An agreement of unit owners to terminate a condominium must be evidenced by the execution or ratification of a termination agreement by the requisite number of unit owners. If, pursuant to a termination agreement, the real property constituting the condominium is to be sold following termination, the termination agreement must set forth the terms of the sale. To be effective, a termination agreement and all ratifications of the agreement must be recorded in each county in which a portion of the condominium is located. |
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Termination and Sale |
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(c) The association, on behalf of the unit owners, may contract for the sale of real property in the condominium, but the contract is not binding on the unit owners until it is approved under Subsections (a) and (b). If the real property constituting the condominium is to be sold following termination, on termination title to that real property vests in the association as trustee for the holders of all interests in the units, and the association has all powers necessary and appropriate to effect the sale, including the power to convey the interests of nonconsenting owners. Until the sale has been concluded and the proceeds distributed, the association shall continue to exist and retains the powers it had before termination. Proceeds of the sale must be distributed to unit owners and lienholders as their interests may appear, in proportion to the respective interests of unit owners as provided by Subsection (f). Unless the termination agreement specifies differently, as long as the association holds title to the real property, each unit owner and the owner’s successors in interest have an exclusive right to occupy the portion of the real property that formerly constituted the owner’s unit. During that period of occupancy a unit owner and the owner’s successors in interest remain liable for all assessments and other obligations imposed on unit owners by this chapter or the declaration. |
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Termination without Sale |
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(d) If the real property constituting the condominium is not to be sold following termination, on termination title to the real property vests in the unit owners as tenants in common in proportion to their respective interests, and liens on the units shift accordingly. While the tenancy in common exists, a unit owner and the owner’s successors in interest have an exclusive right to occupy the portion of the real property that formerly constituted the owner’s unit. |
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Distribution of Sale Proceeds |
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(e) Following termination of the condominium, and after payment of or provision for the claims of the association’s creditors, the assets of the association shall be distributed to unit owners in proportion to their respective interests. The proceeds of sale described by Subsection (c) and held by the association as trustee are not assets of the association. |
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Owner’s Interest |
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(f) The interest of a unit owner referred to in Subsections (c), (d), and (e) is, except as provided by Subsection (g), the fair market value of the owner’s unit, limited common elements, and common element interest immediately before the termination, as determined by one or more independent appraisers selected by the association. The decision of the independent appraisers shall be distributed to the unit owners and becomes final unless disapproved by unit owners of units to which 25 percent of the votes in the association are allocated not later than the 30th day after the date of distribution. The proportion of a unit owner’s interest to that of all unit owners is determined by dividing the fair market value of the unit owner’s unit and common element interest by the total fair market values of all the units and common elements. |
(b) If a condominium regime is terminated, each apartment owner owns an undivided interest in the common property that corresponds to the undivided interest previously owned by the apartment owner in the common elements. |
Rededication to Another Condominium Regime |
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(c) Property that has been removed from a condominium regime may be dedicated to another condominium regime at any time. |
Destroyed Unit or Element |
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(g) If a unit or a limited common element is destroyed to the extent that an appraisal of the fair market value before the destruction cannot be made, the interest of a unit owner is the owner’s common element interest immediately before the termination. |
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Foreclosure Is Not Termination |
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(h) Foreclosure or enforcement of a lien or encumbrance against the entire condominium does not of itself terminate the condominium, and foreclosure or enforcement of a lien or encumbrance against a portion of the condominium does not withdraw that portion from the condominium, unless the portion is withdrawable real property or unless the mortgage being foreclosed was recorded before the date the declaration was recorded and the mortgagee did not consent in writing to the declaration. |
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Rescinding Termination Agreement |
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(i) By agreement of the same percentage of unit owners that is required to terminate the condominium, the unit owners may rescind a termination agreement and reinstate the declaration in effect immediately before the election to terminate. To be effective, the rescission agreement must be in writing, executed by the unit owners who desire to rescind, and recorded in each county in which any portion of the condominium is located. |
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Rationale for Adopting Second-Generation Act: The second-generation act provides greater flexibility and addresses process details not addressed by the first-generation act. The second-generation act, (“Applicability”), permits a condominium regime created under the first-generation act to be—
governed exclusively under [chapter 82] if . . . the owners of units vote to amend the declaration, in accordance with the amendment process authorized by the declaration, to have [chapter 82] apply and that amendment is filed for record in the condominium records . . . .
Thus, upon the vote of the owners to amend a first-generation declaration in accordance with the provisions of their project’s declaration, the owners can elect to be governed exclusively by the chapter 82 provisions, including its condominium termination provisions. It is a common practice, and one approved by some title insurance underwriters, for unit owners of a first-generation project, whose condominium documentation permits amendment by less than a unanimous vote, to amend their condominium documents to be governed by chapter 82, and then to amend the condominium termination provisions of the declaration to provide for termination upon an 80 percent vote, effectively bypassing the language that was added to section 81.110 by amendment in 1989: “no amendment may be made to a declaration to reduce the vote required for termination of the condominium regime.” This approach is helpful if the first-generation project’s declaration provides that a termination can be approved only by a unanimous vote of the owners or by a percentage greater than the 80 percent threshold permitted by chapter 82.
Similarly, this approach to elect chapter 82 governance permits unit owners in a project that has elected chapter 82 governance to amend a first-generation declaration under the amendment authorization provisions of chapter 82, to delete from the declaration provisions requiring approval by unit lienholders of a termination of the condominium regime, effectively bypassing section 81.110(a)’s provisions requiring approval of all lienholders: “if any creditors in whose behalf encumbrances against the building are recorded agree to accept the undivided portions of the property owned by the debtors as security.” Chapter 82 does not have provisions requiring lienholder approval to terminate a condominium regime, or provisions requiring advance notice of amendments to the declaration to be given to lienholders. Some title insurers take the position that lender consent is not required, if the foregoing bypass process is followed, taking comfort in the fact that the lender’s loan is paid off at closing of the property’s sale to the developer. As a practical matter in today’s loan market, it is nigh impossible to contact and work through the process of obtaining consents of lenders, and much less the consents of all or a high number of lenders.
Amendments to Condominium Declaration and Bylaws: See form 24-19 in this chapter (supplemental checklist with commentary), section C (amendments to declaration and bylaws). Forms 24-20 through 24-25 amend the condominium documents to facilitate an association’s process to determine if its members will terminate their condominium regime and sell the property to a proposed developer (for convenience the condominium project is referred to in these practice notes as the “subject project” and its condominium documents as this “example”):
Notice of special meeting of members on amendments: Form 24-20 in this chapter is for providing notice to the members of a specially called meeting of members to consider the amendments and to provide a form (24-21) for members unable to attend the meeting in person to designate a proxy to attend and vote in their place.
Amendments to condominium declaration and bylaws: Form 24-22 sets out amendments to the subject project’s first-generation condominium documents. These amendments facilitate consideration by the condominium association members of a proposed termination of the subject project’s condominium regime and subsequent sale to a proposed developer.
1.Adoption of chapter 82. In the example, the first amendment in form 24-22 adopts chapter 82 to apply to the existing condominium regime. The amendment is to be approved by unit owners that have at least the vote percentage required under the declaration to amend the declaration. In this example, the declaration provided that it could be amended by a 75 percent vote of the unit owners, with the consent of first mortgagees that own first mortgages against units whose owners can vote at least 67 percent of the votes in the association. In the example the title insurer followed the previously noted practice of not seeking the consent of the lienholders. The third amendment adds to the declaration a right in the holders of 80 percent of the votes to terminate the condominium regime.
2.Deletion of notice to and consent by mortgagees. In the example, the second set of amendments delete a sentence in the declaration addressing amendments to the declaration, including the portion requiring consent of first-lien mortgagees, and replace it with the amendment process set out in . The fourth set of amendments delete additional provisions in the declaration that require notice to first-lien mortgagees of amendments to the declaration. The second-generation act does not require that amendments be consented to by first-lien mortgagees or that notice of amendment be given to mortgagees. Before adoption of these amendments in this example, the title company confirmed that it would not require these amendments be consented to by mortgagees upon the unit owners’ adoption of the form 24-22 amendments. The title company took comfort in the fact that the liens of mortgagees will be paid off at closing and their liens released and that chapter 82 does not specify that consent of mortgagees is required.
3.Addition of requirement that leases terminate thirty days after condominium regime termination. The fifth amendment adds to the declaration a provision requiring new leases and amendments or modifications of existing leases to terminate thirty days after the declaration is terminated. The amendment also provides that after termination of the declaration, the landlord is not responsible for repairs. In the example, this amendment was required by the proposed buyer of the subject project to facilitate its dealings after closing with persons continuing to occupy the subject project. Note that form 24-26 in this chapter (the real estate sales contract for a condominium regime termination and sale of the property) sets up a process by which, before closing, one or more unit owners may enter into leases for a short term after closing with the buyer as the landlord and the former unit owners as tenants and by which unit owners may enter into subleases with their tenants as subtenants.
4.Miscellaneous amendments. The sixth set of amendments in the example address other miscellaneous matters in the condominium documents, that is, amendment by counterpart written instruments and concerning captions.
5.Amendments to bylaws. Form 24-22 also effectuates amendments to the bylaws to incorporate means used in second-generation projects to call and hold members’ meetings: the Amendment to Notice of Meetings, the Amendment to Means to Attend Meetings, the Amendment to Means to Give Notice, the Amendment to Waiver of Notice, the Amendment Permitting the Board to Act by Unanimous Written Consent with Exceptions, and the Amendment to the Manner of Attending a Meeting and Voting by Members.
Explanation of amendments: Form 24-23 in this chapter provides members with a brief explanation of the proposed amendments and is to accompany form 24-20 (the notice of the special meeting of the members).
Minutes of special meeting of members on amendments: Form 24-24 is the minutes of the special meeting of the members and memorializes the members’ adoption of the amendments to the condominium declaration and bylaws.
Certificate and voting roll: A completed form 24-25 is to be recorded in the public records. It includes a certificate to be signed and sworn to by an authorized officer of the association setting out information supporting the association’s having given proper notice of the special meeting of the members. Attached to the form is a voting roll detailing the vote at the meeting approving the amendments.
Condominium Termination
Condominium termination agreement: Form 24-27 in this chapter, the condominium termination agreement, is set up to be signed by the association through an authorized officer before submission to the unit owners for consideration of the board-negotiated real estate sales contract signed by the buyer and before completion of the Property Code section 82.068(f) appraisal. Once the appraisal is completed, the appraisal together with the condominium termination agreement and form for owner ratification are submitted to the unit owners for consideration and ratification. Attached to the condominium termination agreement are the following exhibits:
1.Unit owners’ respective interests in sales proceeds. Exhibit 1 is a table with a row for each unit setting out that unit’s number, the name or names of that unit’s owners, the respective interest for that unit as a percentage of the gross sales proceeds payable the unit owners, and that unit’s respective interest as a dollar amount. The record owner for each unit as of submission of the condominium termination agreement to the unit owners should be reconfirmed by an updated title search by the title company. The respective unit interest as a percentage and as a dollar amount is to be determined by comparing the appraised fair market value for each unit to the fair market value of all units. See the text in this section below with the heading “Appraisal.”
2.Texas Property Code section 82.068. Exhibit 2 is section 82.068 of TUCA and provides members with the statutory process for their terminating the condominium regime.
3.Ratification. Exhibit 3 is a pro forma form of ratification, or ballot. A separate execution copy of the ratification, completed for each unit and unit owner, is to accompany the condominium termination agreement sent to that unit’s owner(s).
4.Real estate sales contract. Exhibit 4 is a copy of the real estate sales contract negotiated by the board and signed by a duly authorized officer of the association and the buyer. See form 24-26 in this chapter. The sales contract is signed by the association acting through its board and its authorized officer and by the redevelopment buyer and escrowed with the title company pending approval of the unit owners of termination of the condominium regime and the appraisal.
Approval by unit owners: The condominium termination agreement is set up to be signed by the association through an authorized officer before submission of the developer’s offer to the unit owners for consideration and before completion of the Property Code section 82.068(f) appraisal. See the text in this section below with the heading “Appraisal.” Once the appraisal is completed and approved by the board, the following is sent to each unit owner: (1) the appraisal, (2) a copy of the signed condominium termination agreement with the exhibit 1 table completed, (3) a copy of the signed real estate sales contract attached as exhibit 4, and (4) a ratification prepared for the unit owner’s signature. A unit owners meeting is to be scheduled more than thirty days after delivery of these items to the unit owners. This approach permits a single submission to the unit owners. Unit owners may object to the appraisal within the thirty-day review period set out in Property Code section 82.068(f):
The decision of the independent appraisers shall be distributed to the unit owners and becomes final unless disapproved by unit owners of units to which 25 percent of the votes in the association are allocated not later than the 30th day after the date of distribution.
(emphasis added).
Notice of special meeting of members on termination agreement and sales contract: Form 24-28 in this chapter is used to provide unit owners with notice of the meeting of unit owners to consider termination of the condominium regime and sale of the subject project on the terms set out in the condominium termination agreement and its exhibits.
Proxy to vote on termination agreement and sales contract: Form 24-30 is a proxy for unit owners who cannot attend the special meeting in person. Each such unit owner may use the form to appoint a proxy to vote in the owner’s stead to ratify the condominium termination agreement, including the sale of the property on the terms set out in the real estate sales contract.
Certificate and voting roll: Form 24-31 is to track delivery of the notice of the special meeting of the members to each unit owner and the vote of each unit owner. The completed form is to be recorded in the public records. It includes a certificate to be signed and sworn to by an authorized officer of the association setting out information supporting the association’s having given proper notice of the special meeting of the members. Attached to the form is a voting roll detailing the vote ratifying the condominium termination agreement and the real estate sales contract.
Appraisal: provides the following:
The interest of a unit owner referred to in Subsections (c), (d), and (e) is, except as provided by Subsection (g), the fair market value of the owner’s unit, limited common elements, and common element interest immediately before the termination, as determined by one or more independent appraisers selected by the association. . . . The proportion of a unit owner’s interest to that of all unit owners is determined by dividing the fair market value of the unit owner’s unit and common element interest by the total fair market values of all the units and common elements.
Before undertaking the appraisal, the appraiser should confer with the title company and confirm the title company’s approval of the process to determine fair market value of each unit, the aggregate fair market value of all units, and the ratio of these determinations for each unit. Prior experience by the appraiser in the context of termination of condominium regimes is helpful if not imperative. The appraiser should be prescreened as being willing to and prepared to defend its appraisal should any units’ values or the valuation process be challenged in litigation by one or more disgruntled unit owners. As noted above, an owner that opposes sale of the condominium property might refuse access to its unit by the appraiser.
Rescission of condominium termination: TUCA sets out a mechanism for unit owners to rescind termination of the condominium and to reinstate the condominium regime:
By agreement of the same percentage of unit owners that is required to terminate the condominium, the unit owners may rescind a termination agreement and reinstate the declaration in effect immediately before the election to terminate. To be effective, the rescission agreement must be in writing, executed by the unit owners who desire to rescind, and recorded in each county in which any portion of the condominium is located.
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Real Estate Sales Contract for Resultant Property: Form 24-26 in this chapter is a sample form of a sales contract for the sale of a condominium project’s property, conditioned on approval of the unit owners of the termination of the condominium regime and the sale of the property. The sales contract is patterned after and is similar to form 4-2 in this manual. See form 24-19 (supplemental checklist with commentary) at section D. (“Sales Contract”). The following is a synopsis of the key terms of sale in form 24-26 that are particularly applicable to the sale by a condominium association of the condominium project’s property conditioned on termination of the condominium regime.
Association as seller of property: The sales contract is set up for the association to be the seller as trustee for the unit owners, conditioned on unit owner approval of the termination of the condominium regime and sale to the buyer on the terms set out in the condominium termination agreement. See the sales contract’s introductory paragraph and paragraph L.1.e., designating the seller as the association acting as trustee for the unit owners. Property Code section 82.068 has the following two provisions addressing the status of the association in the sale of the condominium property:
(c) The association, on behalf of the unit owners, may contract for the sale of real property in the condominium, but the contract is not binding on the unit owners until it is approved under Subsections (a) and (b). If the real property constituting the condominium is to be sold following termination, on termination title to that real property vests in the association as trustee for the holders of all interests in the units, and the association has all powers necessary and appropriate to effect the sale, including the power to convey the interests of nonconsenting owners. . . .
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(e) Following termination of the condominium, and after payment of or provision for the claims of the association’s creditors, the assets of the association shall be distributed to unit owners in proportion to their respective interests. The proceeds of sale described by Subsection (c) and held by the association as trustee are not assets of the association.
(emphasis added).
Preclosing conditions. Form 24-26 provides for the following preclosing conditions:
1.Appraisal disapproval period. See form 24-26’s paragraphs L.1.d.iv. (“TUCA Appraisal Disapproval Period”), L.2.a.ii. (“TUCA Appraisal Not Disapproved by Disapproval Number”), and L.2.b.iv. (“TUCA Appraisal”).
2.Ratification deadline period. See paragraph L.2.c. (“Contract Termination Option”).
3.Inspection period. See sections D. and L.5. (both “Inspection Period; Buyer’s Right to Terminate”). Also see form 24-19, section E. (“Preclosing Process”).
4.Title and survey period. See form 24-26, section C. (“Title and Survey”). See form 24-19, section E.2. (“Title Approval”) and paragraph E.3. (“Survey Approval”).
Leases: See form 24-19, section D.2.c. (“Leases”).
Representations and warranties: Form 24-26’s exhibit B (“Representations; Environmental Matters”) is to be similar to exhibit B to form 4-2 in this manual. See form 4-2, at section E. (“Representations; As Is, Where Is Provision; Environmental Matters”) and form 24-26, section L.4. (“Representations and Warranties”).
Preclosing payments by buyer: The sales contract provides for the title company to pay to the seller two payments out of the earnest money deposit as an option fee and as independent consideration for seller’s entry into the sales contract. Upon payment to seller, the payment is no longer part of the earnest money but is to be applied to the purchase price on closing. The two payments are as follows: (1) an initial payment to the seller within three business days of the parties’ escrow of the signed sales contract with the title company and the buyer’s deposit of the earnest money with the title company and (2) a subsequent payment to the seller within three business days following the ratification by the unit owners of a condominium termination agreement and the sales contract. See form 24-26, at sections B.4. (“Payments to Seller”) and L.2.d. (“Deposit Allocation”).
Closing sale to developer: See form 24-19, at section F. (“Closing Process”), and form 24-26, at section H. (“Closing”).
1.Closing documents. The following are forms in connection with the closing of the sale from the association to the developer as buyer.
a.Special warranty deed. To be attached to the sales contract as exhibit G is the special warranty deed, form 5-3 in this manual, to be completed, executed, and delivered to the title company for closing.
b.Bill of sale and assignment. To be attached to the sales contract as exhibit H is the bill of sale and assignment, form 5-16 in this manual, to be completed, executed, and delivered to the title company for closing.
c.Assignment of assumed contracts and association leases. To be attached to the sales contract as exhibit I is the assignment of assumed contracts and association leases to be completed, executed, and delivered to the title company for closing.
d.Postclosing lease—buyer to former unit owner. To be attached to the sales contract as exhibit J is a residential lease, form 25-5 in this manual, for each unit that will continue to be occupied by a former unit owner, between the buyer and the former unit owner, to be completed, executed, and delivered to the title company for closing.
e.Postclosing sublease—former unit owner to tenant. Also to be attached to the sales contract as exhibit J is a sublease, form 25-23 in this manual, for each unit that will continue to be occupied by a former unit owner’s tenant, between the former unit owner and the tenant, to be completed, executed, and delivered to the title company for closing.
2.Closing actions. See form 24-26, at section H. (“Closing”) and exhibit K (“Settlement Activities with Unit Owners”), for the closing activities of the seller, buyer, unit owners, and title company.
Postclosing: See form 24-19 in this chapter (supplemental checklist with commentary), at section G. (“Postclosing”), for actions to be taken by the association after closing.
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