Sales of condominium properties pursuant to Section 15 of the Condo Act

The current real estate market and landscape has led to a great deal of activity regarding Section 15 sales. Developers and other investors are looking to acquire condominium buildings for use as rental buildings, initiating multiple condominium “de-conversions” throughout the Chicago area.

Chuhak & Tecson has been regularly advising Boards and purchasers in connection with these kinds of sales, from the solicitation of potential offers through closing of multiple sales. Principal David Bloomberg recently has spoken to groups of real estate professionals and attorneys regarding the representation of Associations and purchasers.

Section 15 of the Act provides, in relevant part, as follows:

a) Unless a greater percentage is provided for in the declaration or bylaws... not less than 75% [of the unit owners] where the property contains 4 or more units may, by affirmative vote at a meeting of unit owners called for such purpose, elect to sell the property. Such action shall be binding upon all unit owners, and it shall be the duty of every unit owner to execute and deliver such instruments and to perform all acts as in manner and form may be necessary to effect such sale, provide, however, that any unit owner who did not vote in favor of such action and who has filed written objection thereto with the manager of the board within 20 days after the date of the meeting at which such sale was approved shall be entitled to receive from the proceeds of such sale an amount equivalent to the value of his interest, as determined by a fair appraisal, less the amount of any unpaid assessments or charges due and owing from such unit owner.

b) If there is a disagreement as to the value of the interest of a unit owner who did not vote in favor of the sale of the property, that unit owner shall have a right to designate an expert in appraisal or property valuation to represent him, in which case, the prospective purchaser of the property shall designate an expert in appraisal or property valuation to represent him, in which case, the prospective purchaser of the property shall designate an expert in appraisal or property value to represent him, and both of these experts shall mutually designate a third expert in appraisal or property valuation. The 3 experts shall constitute a panel to determine by vote of at least 2 of the members of the panel, the value of that unit owner’s interest in the property.

In addition, Associations should have provisions in their Governing Documents that address the procedures to effectuate a Unit Owner vote and that provision should be examined closely before moving forward.

Procedure to move forward with a sale of the building

To effectuate a sale, a bona fide offer should be made to the Association through its Board, preferably in the form of a letter of intent outlining the terms for such sale, with timing, price and other essential terms as part of the offer.

Once the bona fide offer is received, the Board should call a special meeting of the Unit Owners. It should be specifically noted that the operative meeting is a special meeting of the MEMBERS as opposed to a BOARD meeting, and should be administered as such. As much information as possible should be provided to the Unit Ownership well in advance of any special meeting sufficient for all information regarding the proposed sale to be reviewed.

If a sufficient amount of Unit Owners approve the proposed sale, the Association should be provided by resolution with responsibility for carrying out the contract with the proposed purchaser, and the Unit Owners will have the responsibility for transferring title to the Association (as an escrow/intermediary) or otherwise, depending on how it is decided for the actual sale to be administered. Once the requisite Unit Owner vote is achieved, the Act makes clear that Unit Owners must comply with the vote and the Association must take action to effectuate the will of the Unit Owners until the sale is consummated.

For each Unit Owner that does not approve of the sale, Section 15(a) of the Act gives such Unit Owner 20 days after the date of the special meeting to file a written objection. Such written objection provides such dissenting Unit Owner with the opportunity to receive an appraisal for his or her Unit in accordance with the procedure set forth therein.

After the approval by the Unit Owners, the Association must provide written notice to all first mortgagees regarding the sale. It is recommended that a list of lenders be gathered prior to the special meeting.

Other considerations

• The Association should develop as much consensus regarding the sale as possible, as dissenting Unit Owners not on board with the process can potentially delay things and cost the Association a great deal of time and resources to effectuate the sale. To this end, consistent and effective communication among the Unit Owners should be established as early as possible.
• At all stages of the sale process, the Board MUST be aware of their fiduciary duty to the Unit Ownership. The Board must consider all of its actions in effectuating a sale and ensure that such actions are procedurally proper and consistent with applicable law and the Association’s Governing Documents.
• The Association and the purchaser should think about how the purchase price for the condominium building should be allocated among the Units. For example, there might be Unit Owners who have improved their Units to the point that they are worth more than their percentage interest in the Common Elements. Those issues should be dealt with before the Unit Owners vote on the proposed sale.
• To the extent that the sale of a Unit is insufficient to satisfy an existing mortgage lien, it is possible that a lending bank would be recalcitrant in releasing its lien and could possibly seek the deficiency from the Unit Owner. Issues relating to mortgages should be identified as early in the process as possible.