Potential Problems in Condominium Terminations
In 2007, when the real estate market was still frothy, a legislative request was made to the Condominium and Planned Development Committee of the Real Property, Probate and Trust Law Section of The Florida Bar to try to make F.S. §718.117 on condominium termination more workable. The committee was specifically asked to address casualty damage and economic obsolescence. The termination problem was created in large part by declarations of condominium requiring 100 percent unit-owner approval for termination, a threshold that was a practical impossibility for most condominium communities.
In response to this request, the committee provided technical assistance in drafting a proposed revision to the condominium act’s termination provisions with the goal of protecting owners and lenders and providing a dispute resolution mechanism. The proposed revisions expanded F.S. §718.117 from 1,159 words to 4,360, covering a variety of issues that might necessitate a termination; it set forth a detailed and balanced process for termination.
Although the proposal was prospective, applying only to condominiums created after the date of anticipated enactment, one impetus for the legislative request was to allow for termination of an aging stock of condominiums approaching the end of their useful lives. Termination would afford owners in these condominiums the ability to realize the value of the buildings’ underlying land. The Florida Senate sponsor of the bill incorporating much of the condominium committee’s proposed text, Steven Geller, whose constituency includes older beachfront condominiums in Hallandale Beach, expanded the scope of the bill to include existing condominiums, affording owners the benefits of the statute. This expanded bill became law.1
The revised statute has provided substantial assistance in effecting terminations of a number of condominium conversions that, in retrospect, probably should never have become condominiums and would not have in the absence of the conversion frenzy in the early 2000s. As an unintended consequence, many failed conversion projects provided fodder for evaluating the practicality of terminations by revealing problems that can create substantial headaches for an attorney handling a termination.
The steps to termination are clearly described in the statute.
1. The Association adopts a plan of termination (“Plan”). The Plan can require an automatic termination upon its recording or can be conditional upon the occurrence of some future event. A conditional plan does not effect a termination until the occurrence of a specified event.
2. The Plan is recorded in the public records of the county in which the property is located.
3. Notice of the recording of the Plan is sent to all owners and lienholders.
4. The owners and those mortgage lienholders who would not receive the full value of their liens have 90 days following recording to challenge the Plan by expedited proceedings.2
5. Title to the condominium property vests in a termination trustee specified in the Plan and all liens are discharged from the property but attach to proceeds generated by the sale of the property by the termination trustee.
6. Following 90 days after Plan recording, the termination trustee sells the property and distributes the proceeds in accordance with the Plan.
Attorneys following this relatively straightforward roadmap, however, have encountered a number of unanticipated road hazards.
Satisfaction of Existing Mortgages
Although it was inconceivable in 2007 that a unit could be worth less than the mortgage encumbering it, this has widely proved to be the case. However, there is a lack of clarity in the statute on whether a mortgagee has to receive the full amount of its mortgage or only the value of the underwater unit. Lenders have generally accepted less than their principal amount since they are receiving the full current value of their collateral.
Obtaining a response from lenders for payment pursuant to a plan has been a problem. Many lenders never respond when contacted. It is not uncommon for the terminating trustee or its counsel to sit with funds to pay off lenders without being able to disburse them because the lenders will not advise on acceptance of funds.
There are many practical issues when working with lenders. The termination trustee may not be aware of the appropriate lender contact to obtain information on the unpaid amount, and may not have access to a lender’s account number to identify the loan. Experience to date is that mortgage holders do not readily respond to any request for information or even acceptance of their allocated proceeds. Since termination is not a traditional sale or refinance of a particular unit, lenders may perceive that they are under no statutory duty to provide estoppel letters, in spite of the termination trustees’ statutory title and obligations to make payments to lenders.
Another problem relates to satisfying the mortgage liens of record. Florida law requires a lender to provide a satisfaction when a lien is paid in full.3 Lenders do not readily recognize this requirement when the payment comes through a termination. Furthermore, if the plan provides for payment to lenders based on the value of the property, now typically substantially less than the amount of their loan, such payment does not require the delivery of a satisfaction; yet a satisfaction might be required by certain title companies to clear title.
New Issues Arise
Some title companies are unwilling to insure the acquisition of title from a termination trustee by reason of the fact that they cannot establish that all owners and lienholders were given proper notice of the termination or received payment. The termination statute permits both owners and mortgage lienholders to challenge a termination after the plan is recorded.4 H owever, it may be difficult for a termination trustee or the purchaser from a termination trustee to establish that the appropriate notice was given and received by the parties to be notified or that proper payments were made. The purchaser in such cases might be required to bring a quiet title action naming all owners and possibly all lenders. Even when it is possible to establish notice and payment, there have been instances in which a lender has commenced a foreclosure prior to the recording of the plan and acquired a certificate of title subsequent to the termination. In such cases, a quiet title action may also be required to eliminate the lender’s interest in its nonexistent unit.
A problem may also arise in unconditional terminations, which are effective upon recording the plan, when the anticipated sale of the condominium property fails. A plan may be recorded in anticipation of a sale. The result of recording is to discharge the interests of all owners and mortgagees in the property. If the proposed sale of the property fails for any reason, how does one regenerate the condominium? This issue is not covered by the statute and would appear at least to require 100 percent of the owners to consent to the reinstatement. For this reason, it may be prudent to utilize only a conditional plan that becomes effective 90 days after recording the plan, at which time the termination trustee can arrange for a simultaneous termination and sale or document of record that the conditions were not met.
The statute requires a determination of the value of the units and the value of the common elements separately. The statute further provides a number of methods of apportioning the sale proceeds among the units, one of which is the property appraiser valuation.5 The property appraiser does not value the unit separately from the common elements since each owner owns an undivided interest in the common elements.6 In attempting to comply with the valuation method in the statute, many appraisers find it a practical impossibility to separate the value of the common elements from the units, especially since there are no comparable independent values for a building lobby or a building structure. In the absence of “comps,” appraisers tend to attribute no value to the common elements.
Another issue is how to fund administration of the property if the termination trustee is not the condominium association, or if the termination trustee is the association, when administration takes longer than expected. This issue militates toward naming the association as trustee, not a third party. Whoever is trustee should have adequate funds available to pay the expenses that would accrue before the anticipated sale, including big ticket items such as insurance, and where necessary, security.
Finally, an issue has arisen when most of the units have been acquired by a bulk purchaser. Termination initiated by a bulk purchaser has been the most common form to date for utilizing the termination statute. The statute contemplates a sale of all property upon termination. In many cases, the bulk buyer is both the termination trustee and the purchaser, thus, acquiring the bulk owner’s units along with the unowned units. A transfer tax will be payable on the property, including the bulk units that are, in essence, not being transferred, since the bulk owner will only be reacquiring the unowned portion of the property prior to termination. There are provisions in the statute for partial terminations, but a transfer of less than all of the units in connection with a complete termination does not fit comfortably within the statutory language for either complete or partial termination.
As reports of the application of the termination statute are being received, the statute is being reevaluated with an eye to further amend it. In the interim, practitioners are urged, as always, when addressing a new statutory procedure, to beware of unintended consequences. As the goal of termination is usually the ultimate sale of the real property, practitioners should consider consulting a title underwriter and obtaining a title commitment to help ensure that the resulting title is insurable.
1 Laws of Fla. Ch. 2007-226.
2 Proceedings are pursuant to Fla. Stat. §51.011; see Fla. Stat. §718.117(16).
3 Fla. Stat. §701.03.
4 See Fla. Stat. §718.117(16).
5 See Fla. Stat. §718.117(12).
6 As a matter of fact, the condominium act requires the tax assessor to value the common elements as part of the assessment for the individual units. See Fla. Stat. §718.120.
Martin A. Schwartz is a partner in the Miami firm of Bilzin Sumberg Baena Price & Axelrod, LLP, and is admitted to practice in Florida and New York. He obtained both an LL.M. and LL.B. from New York University and is a member of the Condominium and Planned Unit Committee of the Real Property, Probate and Trust Law Section.
This column is submitted on behalf of the Real Property, Probate and Trust Law Section, Michael Allen Dribin, chair, and Kristen Lynch and David Brittain, editors.