June 15-July 5, 2016 —
COLORADO REAL ESTATE JOURNAL
— Page 23
Law & Accounting
T
his is the 13th in a series
of 17 or so articles that
come from some years
of experience using the Colo-
rado Real Estate Commission-
approved contracts for purchase
and sale of real estate for com-
mercial real estate transactions.
Previous articles addressed the
buyer’s name, the seller, the
property, water rights, ordering
the title commitment, owner’s
extended coverage, making
title objections, off-record mat-
ters, special taxing districts and
ordering and reviewing the new
improvement location certifi-
cate or new survey. This article
addresses owners’ associations.
Section 7 of the contract, based
on its caption, deals with “own-
ers’ associations” but in fact
the section is applicable only to
property located within a “com-
mon interest community,” most
of which have some kind of an
owners’ association.
Trap:
A
common interest community that
is exempt from the Colorado Com-
mon Interest Ownership Act, often
referred to as “CCIOA,” may not
have an owners’ association, mak-
ing it difficult to comply with §7.
The term “common interest com-
munity” is not defined in the
contract, but presumably refers
to that term as used in C.R.S. 38
33.3 103(8), the definitions section
of CCIOA. The essence of the
definition of a common interest
community under CCIOA is real
estate with respect to which a
person owning a portion (i.e., a
“unit”) is required to pay for real
estate taxes, insurance premiums,
maintenance or improvement
of other real estate. Residential
real property in newer suburban
communities is commonly locat-
ed in a common interest com-
munity, as are all condominiums,
but it is not unusual to have other
commercial real property located
in one as well. There also is refer-
ence to a “declaration,” which
presumably refers to the term as
defined in C.R.S. 38 33.3 103(9),
which defines it as “any recorded
instrument, however denomi-
nated, that creates a common
interest community.” The term
“association” is defined in C.R.S.
38 33.3 103(3), with reference to
C.R.S. 38 33.3 301, and is the enti-
ty, most commonly a nonprofit
corporation, of which owners in
a community are automatically
members and which governs the
community.
Ownership
of real estate
in a common
interest com-
munity has
its hazards
as indicated
by the dis-
closures the
seller must
give to the
buyer in §7.1
of the contract
(in all caps
and bolded) if the property is
located in one (similar to the
disclosures required for special
taxing districts discussed in the
10th article in this series). The
disclosures mandated by C.R.S.
38 35.7 102(1) include that if the
property is located in a common
interest community, the owner is
required to be a member of the
association and will be subject to
its bylaws and rules and regula-
tions; the declaration and other
documents will impose financial
obligations on the owner; the
obligations are subject to a lien
that might allow the association
to sell the unit to pay the debt;
and the documents might also
prohibit the owner from making
changes to the property without
an architectural review. It advises
the buyer to investigate the finan-
cial obligations and read the dec-
laration, bylaws and rules and
regulations.
Under C.R.S. 38 35.7 102(2)(b)
the seller is obligated either to
provide, or authorize the asso-
ciation to provide, to the buyer,
upon request, all of the commu-
nity’s governing documents and
financial documents as listed in
the most recent Colorado Real
Estate Commission-approved
form of the contract. Failure to
comply exposes the seller to
“actual damages directly and
proximately caused by such
failure plus court costs” (C.R.S.
38 35.7 102(2)(b)). The seller can
assert as a defense, however, that
the buyer had actual or construc-
tive knowledge (which, by defi-
nition, would include knowledge
of all provisions of the recorded
association documents) of the
facts and information required
to be disclosed (C.R.S. 38 35.7
102(2)(a)).
The contract implements the
provisions of these statutes,
including the disclosures and list-
ing in detail what information the
buyer is required to receive (§7.4).
The “association documents” to
be provided include certain iden-
tified “governing documents”
(e.g., declarations, articles,
bylaws rules and regulations,
minutes, and, in what seems to
be a rather random inclusion,
“party-wall agreements”) and
“financial documents” (e.g., bal-
ance sheets, income and expense
statements, budget, reserve study
and unpaid assessments).
Trap:
As to minutes of the owners’ meet-
ings, only the minutes of the most
recent annual meeting are required,
while a buyer would be prudent to
get the minutes of any special meet-
ings as well, along with minutes
from several preceding years.
Spe-
cial meeting minutes might be
very important, especially recent
ones in which an emergency or
crisis might have been addressed
or revealed. Often, the histori-
cal minutes reveal problems the
association has had in the past,
as well as matters it has deferred
into the future and which the
buyer might find very relevant
to its due diligence.
Trap:
As to
directors’ minutes, only the minutes
from meetings during the past six
months are required to be given to the
buyer, which gives the buyer only a
very short history of the association.
The existence of a dysfunctional
board, for example, is not nec-
essarily discoverable by looking
only at the minutes of the past six
months, especially if the board is
so dysfunctional that it stopped
meeting more than six months
ago.
Trap:
Requiring only the “most
recent” financial documents does not
allow the buyer to see any historical
trending.
In a commercial transac-
tion, a buyer typically asks for
financial information from at
least the past three years.
Tip:
The buyer should ask for the right to
receive any additional information
concerning the association the buyer
reasonably requests, recognizing that
it won’t get any information the
association is not required to provide
to the seller.
Tip:
The buyer also
should ask for a representation and
warranty that the information pro-
vided is true, accurate and complete
(at least to the seller’s knowledge).
At
a minimum, such a requirement
should encourage the seller to
be diligent and not just provide
the possibly outdated informa-
Beat U. Steiner
Partner, Holland &
Hart LLP, Boulder
370 17th Street, Suite 4800 | Denver, Colorado 80202
303.825.0800 |
James L. Kurtz-Phelan - Real Estate Practice Chair
Real
Estate
Attorneys
with
Rea l
Experience
