Since the enactment of the Minnesota Common Interest Ownership Act (MCIOA) in 1994, a significant number of associations not subject to MCIOA have made the decision to “opt in” to MCIOA – and thus to be governed by MCIOA. What factors should be considered when making the decision to opt in? Once the decision to opt in is made, how does an association bring the project to completion?
Why Opt In?
For those associations not already governed by MCIOA, the discussion about whether to opt in is usually spurred by some issue or problem arising from the current language of the association’s governing documents (Declaration, Bylaws, Articles of Incorporation), or the realization that the documents in place just aren’t “working” anymore. Frustration over inconsistencies, vagueness or just plain inability to understand existing documents can be the impetus for opening the dialogue, but isn’t the only factor to consider.
A significant factor to consider is whether “reality” is consistent with the “technicality” of the existing governing documents. If for example, the Declaration provides that certain maintenance responsibilities are to be performed by the homeowner, but the association’s practice is to perform some of those obligations itself, the association may wish to adjust—and perhaps expand and clarify—maintenance obligations.
In addition, associations need to consider just how many changes to a given document have already been made (in prior amendments) and how many changes the association might be considering making now. If, for example, various provisions of the Declaration have already been amended piecemeal over time, it may be appropriate to do a “wholesale re-write” of the governing documents and, in so doing, bring the governing documents into compliance with MCIOA.
In a more general sense, by opting in to MCIOA, an association is then also entitled to take advantage of such provisions of MCIOA as the “super lien” (requiring foreclosing lenders who take ownership of a property to pay assessments accruing in the six months prior to the end of the owner’s redemption period in the foreclosure). The mere statutory structure offered by MCIOA is also appealing, since lenders understand its provisions, including its mandates regarding replacement reserves, which typically lead to financially healthier associations, which can make homes in MCIOA-governed associations more appealing collateral for lenders’ loans.
Finally, an association must consider the cost of amending its governing documents. The association should consult with an experienced attorney to determine the requirements for amendment, and, based on those requirements, determine the estimated cost for the project.
How Can an Association Plan for the Opt In Project?
Since amending governing documents requires consent of owners at some level (based on the requirements of the existing governing documents), it is important that the Board of Directors of an association have confidence that owners are likely to approve the proposed documents. The association will spend significant time and resources on the project, so it is important that the Board ensure there is sufficient support for the project before “putting pen to paper.” Many associations conduct surveys, straw votes and “town hall meetings” to gauge support of owners before making the final decision to move forward with amending the association’s governing documents to opt in to MCIOA.
As part of planning for a project of this nature, the association must also ensure that the financial resources are available to complete the project, either by using funds already collected or by budgeting for the project. If an association does not have adequate financial resources to undertake the project and meet its ongoing maintenance obligations, owners may “blame” the amendment project for certain maintenance projects being delayed, which may affect owners’ willingness to participate in the amendment project—and their willingness to consent to the adoption of the proposed documents.
The Board of Directors of an association planning an opt in project should also ensure that it engages experienced legal counsel to work with on the project. While some attorneys are competent to handle various aspects of association representation, it is important to work with an attorney specifically experienced in drafting amended documents and, in particular, documents intended to allow an association to opt in to MCIOA. Not only is an association more likely to get a better product from an experienced attorney, but experienced attorneys can draw from their experience in addressing practical implications of some “wish list items” and establishing processes and procedures that have proven effective and efficient in completing an opt in project.
As part of planning process, associations should also consider what they know they want to change in their existing documents. Do they want to modify the allocation of maintenance responsibilities? Do they want to increase or decrease the number of directors, or establish staggered terms for directors? Do they want to adopt leasing restrictions or modify existing restrictions?[1] Associations should share these desired changes with drafting counsel.
How Does an Association Execute the Plan to Opt In?
Once an association has its “ducks in a row” and is ready to execute the plan, the Board should meet with its chosen legal counsel to discuss the project so that the Board understands how the attorney anticipates the project to progress and the attorney understands the “wish list items” and any special concerns or considerations to bear in mind during the project.
Once the attorney provides proposed drafts, the Board should carefully review those drafts to ensure that the documents accurately reflect the needs and desires of the association. The Board knows its community far better than the attorney.
Once the proposed documents are in a form acceptable to the Board, the Board should provide copies of the proposed documents to association members for review. Many associations schedule an informational meeting at which homeowners have an opportunity to ask questions about the documents. In some cases, the questions asked can telegraph issues of concern to homeowners and may in fact reflect the likelihood that owners will consent to the proposed documents. In such cases, the Board may opt to modify the documents to address those concerns before seeking appproval of owners.
After the documents have been finalized, the association seeks the approval of owners and, if necessary, lenders, in compliance with the requirements for amendment set forth in each document. (Bear in mind that each document has its own amendment requirement. Typically, the requirements for amending the Declaration are the most onerous.) Once all requisite approvals have been obtained, the amended Declaration must be recorded with the County Recorder/Registrar of Titles, as appropriate, and the Restated Articles of Incorporation must be filed with the Minnesota Secretary of State. These documents are not effective unless and until they are filed/recorded with the appropriate governmental office. The amended Bylaws are not required to be filed/recorded in any governmental office unless the existing Bylaws so require.
Once all the documents have been signed and recorded/filed as required, a copy of the new documents should be provided to all homeowners with instructions to destroy any previous documents. The new documents completely replace any prior governing documents.
Conclusion
An association’s decision to undertake a project to amend its governing documents and opt in to MCIOA is not a decision to be made lightly. There are several factors to consider, and, if the decision is made to move forward, a successful effort requires planning and preparation. Amending governing documents is a significant undertaking that takes time, resources and patience. Completing an amendment project is a significant achievement worth celebrating. To those associations that have successfully completed the process: Congratulations! To those who are in the midst of the process or are considering starting the process: Good luck!
[1] Adopting overly restrictive leasing restrictions can adversely affect a condominium community’s ability to qualify for FHA project financing approval. Condominium communities should consult with competent legal counsel as to what restrictions are permissible without jeopardizing FHA project approval. (Townhome communities are not approved on a project basis for FHA loan approvals.)