Condo Board Can Negotiate Building Sale Without Owner Approval

In a previous article, we dove into the upswing in condo deconversions in some parts of the country, with multi-unit buildings that were converted from apartments years ago reverting back to rental units. The Illinois Court of Appeals recently issued an important ruling addressing owners’ ability to challenge such moves (Glazer v. The Private Residences at Ontario Place Condominium Ass’n).

“The ruling is good for associations because it provides absolute clarity for boards that have been struggling with owners who say you need to take a vote before you can even go down this path,” says Kelly Elmore, a principal in the Chicago office of Kovitz Shifrin Nesbit. (Elmore’s firm was hired to handle the closing for this sale but wasn’t involved in the litigation.)

Owner Opposition Leads to Lawsuit

“In some associations, owners are very, very opposed to the sale,” Elmore told us when we talked to her for our earlier article. Some such owners may argue that the association’s board needs owner approval before it can even begin looking into the possibility of a sale.

That’s what happened in the Illinois case, where several owners sued their association and the board. They alleged the defendants were required to disclose information to them and obtain two-thirds approval from the owners before investigating and negotiating a proposed bulk sale of condo units.

By failing to do so, the owners claimed, the defendants violated two sections of the Illinois Condominium Property Act and breached their fiduciary duties. The trial court dismissed the claims before trial, and the owners appealed.

Appellate Court Sides with Board

As the Court of Appeals noted, the thrust of the owners’ argument was that any action taken by a board must be specifically authorized by the state condo law; otherwise, it’s beyond the board’s authority.

The court, however, found that the condo act itself makes clear that boards have broader powers than that. The act, it said, gives a board all powers necessary to administer the association property, except for those exclusively reserved for owners.

In other words, absent some reservation of right for owners and limitation on board powers, the condo law grants a board the authority to investigate or negotiate a bulk sale.

The owners pointed to two provisions of the Illinois condo law:

• Section 15, which reserves to owners the final decision on whether to sell the condo property through a bulk sale
• Section 18, which dictates that bylaws must require at least two-thirds owner approval of any purchase or sale of land or units on behalf of the association.

They contended that, taken together, the sections give owners the power to approve the initiation of any negotiations and therefore limit the board’s authority to negotiate a bulk sale without approval.

The court disagreed. It found the two provisions address two different, but related, issues — the bulk sale of the condo property as a whole and the sales of land or units that are much smaller than a bulk sale. And neither provision requires an affirmative vote of unit owners before the board launches the process of negotiating a bulk sale.

The court also rejected the owners’ argument that, as a matter of policy, boards shouldn’t be allowed to unilaterally decide to spend money on attorney fees and costs related to the solicitation of offers that “derogate” owners’ property rights.

The court said that the owners can address concerns about board expenditures through their power to elect the board. The condo law’s requirement that at least one-third of board terms expire annually ensures that owners retain ultimate control of the board.

Boards Can Initiate Deconversion Process

“As an attorney who has done so many of these sales, I think it’s a disservice to an association when owners go to vote without all of the terms in front of them,” Elmore says. “We just closed 427 units in another sale, and it wouldn’t make sense to go in front of that many owners and endeavor to take a vote with nothing more than just an idea of a sale.

“The ruling is consistent with what we’ve been advising clients for the past five years in the face of arguments that an association needs to get a vote before considering or investigating a sale.”

It’s worth noting that the court’s opinion wasn’t published when it was issued, meaning it can’t be cited as precedential. “But that can change,” Elmore says,” and I think the ruling gives a good indication of the court’s thoughts on these sales.”

Courts in other parts of the country may have similar thoughts, depending on the relevant statute. For example, Alessandra Stivelman, a partner/shareholder in Eisinger Law in Florida who focuses on real estate and association law, says the Florida Condominium Act and Not-for-Profit Corporations Acts are similar to the Illinois law.

“They grant condo association board members with broad authority and powers to effect ‘any or all of the purposes for which the corporation is organized,’” she says. “The governing documents for Florida associations generally also include a broad grant of authority to the board.

“I’m not aware of any specific requirement for a membership vote before a board could investigate or negotiate a bulk purchase.”

Stivelman believes Florida courts also would find no breach of fiduciary duty in these circumstances. “The very fact that the board is investigating the possibility of a deconversion shouldn’t be deemed a breach as the law contemplates that the board will seek the appropriate advice of a professional considered competent in the field and rely upon the advice provided.

“To restrict the board’s authority to investigate a possibly profitable or necessary option without membership approval could have a very negative impact on communities that simply can’t afford to continue to operate.”

She also cautions against imposing limits on how much a board can spend on legal fees for an action, such as deconversion, that would undermine owners’ rights.

“That could be very problematic because it could unintentionally limit the association’s ability to enforce certain covenants and would leave much to interpretation as to what is considered an action that would undermine the owner’s rights.”

Getting the Ball Rolling

So how should condo boards in Illinois proceed? “Before putting out a vote, boards need to do due diligence, investigate, and consult with the appropriate real estate professionals,” Elmore says. “Then they ultimately send out something for a vote that contains the terms of the sale.”

Of course, it’s not as if the owners are left with no say in a bulk sale. Final sales remain subject to owner approval, typically by at least a two-thirds vote, depending on the jurisdiction.