Residential community associations are multi-family, attached or detached: Individually owned residences, or residences for which one acquires an exclusive right to occupy (in the form of a long term lease in the case of a cooperative), or a time-limited ownership (in the case of a time-share) with an undivided fractional interest in the whole of the associated “common elements.”
Common elements may include open areas, recreational amenities, and other facilities or features (such as detention basins or sewer treatment systems or hallways and elevators).
Condominiums, Cooperatives, HOA’s or POA’s are terms that suggest the parameters of ownership within a community association. Often, these terms and others like “townhouse, condo, flat, apartment, HOA, POA” are used to describe the style of a unit. However, care should be taken by realtors and community association representatives to use the appropriate term when describing the ownership type. Incorrectly describing a property can mislead a buyer’s expectations of ownership.
There are important distinctions between types of common interest ownership communities and the contents of their respective governing documents. The buyer is going to want and need to know what he or she is buying. A purchaser acquires either:
- Cooperative – shares of stock in a company that owns residential property and gives the holder of the shares the right to a long term lease of defined space within the building and an undivided fractional interest in the common elements. The deed for the real estate is held by the cooperative corporation and contains restrictions and covenants regarding use and transfer.
- Condominium – a deed to a specifically described unit within the Master Deed and an undivided fractional interest in the defined common elements which are all part of the same lot. Title to the common elements is not separated from title to the units. The Condominium Association has no ownership interest in any property. Title to the real estate is held directly by the unit owners. The Master Deed contains covenants and restrictions governing the entire property.
- Fee Simple – Homeowner’s or Property Owner’s Association with a deed to a defined space on a separate lot and an undivided fractional interest in the common elements. Typically, common elements are on separate lots, titles for which are vested in a HOA or POA. A “fee simple” community often has a recorded document called a “declaration” which contains covenants and restrictions governing all of the lots in the community.
Within the framework of the above types of ownership, there is room for variation and hybrids. For instance:
- Leasehold condominiums – the landowner maintains ownership of the property. Unit owners receive a long term right of ownership to the unit and an undivided fractional interest in the ground lease.
- Time-shares – may involve any form or combination of ownership set forth above but limited in duration.
- Multiple Community Associations – many larger developments have more than one community association within the development and may also have a separate “umbrella” association in the development. This structure helps separate responsibilities and risk.
- Umbrella Associations – often called the “Master” or “Community” or recreational (like “Golf”) association. Usually, an umbrella association’s function is to administer those elements that are common to all of the communities within the development, while the individual community associations administer the common elements associated with their respective properties.
The Governing Documents: Deed Restrictions and By-Laws
Before you purchase a community association property or represent a property as a realtor, there are many questions that should be asked and answered:
- Is there an age restriction on occupancy?
- Can residents have pets? How many? What kind?
- Can the purchaser’s commercial vehicle be parked on the property?
- Can one construct an addition to the unit?
- Can the deck be enclosed?
- Who is responsible for clearing ice and snow from the driveways and decks?
- Can owners decorate for Christmas?
- Can an awning be added to the residence?
- Who is responsible if the basement leaks?
These questions, and others like them, cannot be answered without reading the specific governing documents of a community. There are no standard answers. The specific governing documents of a community must be consulted in order to be informed or to give advice about the specifics of property uses and any actions which may or may not be permitted. These questions should not be answered without review of the governing documents since the answers vary. Knowing the type of ownership (i.e., cooperative, condominium or fee simple community) gives some clues about what one might expect to find in the governing documents, but there is so much variation in the specifics of each community’s restrictions and rules that one acts at his own peril when issuing advice without consulting the governing documents.
Common interest ownership community associations are usually created in accordance with a State statute like the New Jersey Condominium Act or the Pennsylvania Common Interest Ownership Act or Cooperative Recording Acts, although there are some types of community associations for which there is no statutory basis.
Residential associations come into being at the time of the recording of the title document (i.e., the master deed or declaration). The master deed or declaration of covenants sets forth the restrictions that run with and bind each and every lot or parcel of property created within the community.
The recorded master deed or declaration of covenants and restrictions controls use of the property. The by-laws of the corporation control the members’ actions as property owners are members of the association. Together, the recorded master deed or declaration of covenants coupled with the by-laws of the corporation (as well as the articles of incorporation) make up the “governing documents” of the community.
Community associations were created to be exclusive and to control the look and use of real estate in a community in order to maintain high value. Common interest ownership projects have become more popular as a method to manage the escalating quantity and costs of development. Increased density serves to lower the cost per unit and open spaces can be preserved. Moreover, members of an association can afford greater amenities and services collectively than would be possible individually. Thus, membership is usually coincident with ownership and members cannot opt out of the restrictions and obligations that pertain to their properties.
What to Know Before Buying
“Common elements” are all of the property within the development that is not part of someone’s unit. The term “common element” is usually further defined in the master deed or declaration to be either a “general” or “limited” common element. All members are entitled to equal access and use of general common elements whereas, with limited common elements, the exclusive use and control of a portion of the common elements is reserved to fewer than all of the members. The common elements (general and limited) are administered by the association which is comprised of all of the homeowners (or shareholders with a lease, in the case of a cooperative).
The association is usually a non-profit corporation except in the instance of a cooperative which is traditionally established as a business. In the case of a cooperative, the business entity is vested with legal title to the real estate. Members acquire shares and a long term lease for a unit as well as an undivided interest in the common elements. The members of a common interest ownership association elect a board of trustees or directors to manage the common elements and administer the corporation.
Neither the board of directors, nor the developer, has any right to amend, or grant exceptions to, the recorded deed and restrictions. Departures from the restrictions and obligations set forth in the governing documents are, generally, only possible after amendment of the governing documents by a majority or super-majority vote of the membership.
One of the pitfalls of this type of transaction is that sellers, purchasers and other interested parties may be deemed to have constructive notice of the restrictions and controls set forth in the recorded instrument… whether they have read them or not. The collective information may be deemed to be of legal significance and “material” to the transaction. In order to protect your real estate license and the legal contract of the sale, a realtor should know the contents of those documents before making representations about living in the community… or be careful not to make any representations.
The real estate salesperson should facilitate the purchaser’s obtaining of governing documents prior to establishment of a contract so that the recorded restrictions and corporate by-laws can be studied at a material time in the transaction.
Depending on ownership and repair responsibilities described in the governing documents of the community association, the association may be responsible for conditions affecting the selling unit (as identified in a home inspection report). Since the association is not a party to the unit sale transaction, neither the purchaser nor the seller can obligate the association to take any action in the contract of sale or by the date of closing. Most association attorneys would not recommend that the association make representations in the sale transaction.
All associations require members to pay common expense assessments, commonly referred to as maintenance fees. The fees vary in amount commensurate with the degree of responsibility assigned to it. For example, a fee simple community (whose only common element is a detention basin) may assess very little in maintenance fees. On the other hand, a condominium association charged with responsibilities for snow removal, lawn care, building exteriors, fencing, pools, clubhouses, and tennis courts must assess considerably more in order to properly fund upkeep, repairs, improvements, and management.
Generally, non-members of the association (i.e., potential purchasers and real estate salespersons) have no right to review the association’s books and records but a prudent purchaser should, nevertheless, make inquiries regarding the financial soundness of the association. Most statutes governing community associations require that the books and records of the association be subjected to an outside, independent audit each year. Although a non-member of the association may not be entitled to that information, the seller of the unit certainly is and can provide that information and any other pertinent or desirable financial information to the purchaser. The seller, as a member of the association, has every right to review the association’s books and records and can disseminate that information as necessary.
As a realtor or a buyer, you should have clear knowledge of the following:
- There is an association.
- There are restrictions and rules and regulations that must be followed.
- There are association fees to be paid.
- There may be assessments in addition to the regular fees.
- The developer or sales professional cannot grant exceptions to the restrictions.
- Purchasers should review the financials before purchasing.
- Purchasers should have the governing documents to read before purchasing.
- Realtors and community association representatives should always consult the specific governing documents of the development before answering questions regarding the restrictions in the community… or do not make any representations.
Questions Regarding Community Association Real Estate Contracts
If you have any questions regarding your community association real estate contracts in New Jersey, please call Radom & Wetter at 908-707-1500.
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