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    Wisconsin's Revised Condominium Ownership Act

    In November, sweeping changes in Wisconsin's condominium laws take effect. Read how the changes will affect everyone involved in condominium transactions.

    Mark Hinkston

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    Wisconsin Lawyer
    Vol. 77, No. 9, September 2004

    Wisconsin's Revised Condominium Ownership Act

    In November, sweeping changes in Wisconsin's condominium laws take effect. The changes will affect everyone involved in condominium transactions by heightening condominium associations' fiscal responsibilities in planning and budgeting, simplifying the condominium sale disclosure process, enlarging the scope of condominium assessments and liens, regulating condominium tenants, and more.

    Sidebars:

    welcome mat

    by Mark R. Hinkston

    In April, Gov. Doyle signed into law 2003 Assembly Bill 254 (enacting 2003 Wis. Act 283) to overhaul Wisconsin's condominium statutes, commonly known as the Condominium Ownership Act.1 The legislation was the product of the Joint Legislative Council's Special Committee on Condominium Law Review, which was "directed to study ways to protect the investments of current and future condominium owners and ways to facilitate the appropriate development of the condominium form of property ownership."2 After more than two years of diligent review, the committee crafted legislation representing the most significant revision of Wisconsin's condominium law since the enactment of the state's first condominium statutes more than 40 years ago. The new law takes effect Nov. 1, 2004. This article reviews the changes the new law has wrought and discusses its impact on the various participants in condominium transactions.

    Background

    Wisconsin's first condominium statutory compilation, known as the Unit Ownership Act, was enacted in 1963. In 1977, the Wisconsin Legislature repealed the Unit Ownership Act and created the far more comprehensive statutory scheme known as the Condominium Ownership Act (hereinafter "the Act").3 The Act is codified as chapter 703 of the Wisconsin Statutes.

    Since the Act's creation, condominium ownership has increased dramatically. This growth led to the revamping of chapter 703. In 2000, the Joint Legislative Council formed its special committee to "review all aspects of condominium law, including: the development and establishment of condominiums; the governance of condominium associations, including the establishment of an annual budget and maintenance of reserve funds; the ownership and sale of condominiums; and rental of condominiums."4 The committee also was asked to address the concerns of local governments relative to condominiums.5

    In developing the new condominium legislation, the special committee members were motivated by a perception that, to many people, condominiums are a mystery. For example, some equate condominium ownership with apartment dwelling. The new law clarifies that a condominium is a form of property ownership, not land use.6 The committee also desired to make Wisconsin condominium laws understandable to consumers and condominium associations and to balance the property rights of condominium unit owners with the investment value of the condominium complex as a whole.7 The committee fulfilled its assignment by proffering extensive legislation that will have a significant impact on everyone involved with condominium transactions, including associations, unit owners, and developers.

    Condominium Associations: Enhanced Fiscal Responsibility

    A condominium's affairs are governed by an "association," which is all of the unit owners acting as a group to manage and maintain the condominium property. Through its bylaws and rules, the association's board of directors governs condominium administration. The board's powers include handling condominium revenues and expenditures as well as levying and collecting assessments for expenses.8 The new law expands association fiscal operation duties by requiring associations to establish "statutory reserve accounts" and annual budgets.

    Statutory Reserve Account: Saving for a Rainy Day. Unlike apartment renters, every condominium unit owner owns his or her unit and an undivided interest in the condominium's common elements, which is all property other than the individual units (for example, the land on which the condominium is located, building exteriors, parking lots, roads, landscaping, and recreational facilities).9 The association collects assessments from unit owners to pay for expenses to maintain the common elements.10 Because major repair costs will usually exceed an association's operating budget that is funded by assessments, associations need reserve funds to save for such contingencies.

    Previously, associations in Wisconsin were permitted, but not required, to establish such funds.11 At least seven states, including Minnesota and Michigan, make reserve funds mandatory.12 Although the Wisconsin Legislature was not willing to go that far with the new law, it has reached a compromise by requiring condominium developers and associations to establish a statutory reserve account to hold reserve funds (defined as those reserved for repair or replacement of common elements, other than routine maintenance), but allowing developers and associations to opt out of the requirement.13

    Existing condominium associations must establish an account within 18 months of the new law's effective date (Nov. 1, 2004). An association may opt out of this requirement with the written consent of a majority of unit votes. Once an association establishes an account or elects not to, it must execute a "statutory reserve account statement," which is a statement indicating whether a statutory reserve account has been established for a condominium. If the association opts out, the statutory reserve account statement must explain how the association plans to fund future expenditures for the repair and replacement of common elements.14

    Annual Budget Requirement. Wisconsin condominium associations are given the power to adopt budgets.15 Although many condominium associations already find it prudent and necessary to adopt an annual budget, an annual budget will now be mandatory for all residential condominiums.16 The annual budget, which must be distributed to all unit owners, must set forth: 1) all anticipated common expenses and any amounts to be allocated to a statutory reserve account and to any other funds for future expenditures; 2) the amount and purpose of any other anticipated association expenditure; 3) the amount in any statutory reserve account and any other funds held for future expenditures; 4) any common surpluses; 5) the amount and source of any income, other than unit owner assessments; and 6) the aggregate amount of any assessments to be levied against unit owners and the purpose of the assessments.17

    Practical Considerations. The reserve account and annual budget requirements will go a long way toward promoting condominium association fiscal health. Although the statutory reserve account mandate is not strictly a requirement because associations may opt out, it is difficult to understand why an association would not want a reserve account. Nonetheless, because unit owners generally do not like unanticipated special assessments for major common element repairs, it may be difficult to convince the required majority of unit owners to opt out. Mortgage lenders and insurers also will likely be more comfortable with an association that maintains a reserve account.

    Associations may initially grapple with the dilemma of deciding how much of a unit owner's assessment should be devoted to the statutory reserve account. In determining the amount to be assessed for reserve funds, the new law provides that the association may consider the reserve funds currently held in a statutory reserve account, the estimated cost of repairing or replacing common elements (excluding routine maintenance), the estimated remaining useful life of common elements, whether "other means" will fund in part the account, and "[a]ny other factor that the association considers relevant."18 Although the new law does not mandate that an association hire experts or consultants to undertake a study to assess the useful life and anticipated cost of repair of common area components, such a study would seem essential to accurately quantify a reasonable reserve amount.

    There will be cases in which it turns out that a reserve fund was underfunded or, worse, that an association facing an unforeseen repair emergency previously opted out of the fund requirement. Yet under the new law no liability is imposed on association board members for decisions relating to establishing or terminating statutory reserve accounts or for any deficiencies caused by inadequate funding of the statutory reserve account.19

    The statutory reserve account statement must be recorded with the register of deeds, and prepared using the register of deeds' standard document format.20 As it has done for other real estate transactions, the Wisconsin Realtors Association has developed a standard account statement form.

    The statutory reserve account and annual budget requirements will likely be well-received by unit owners and lenders. Still, most well-run associations already have budgets in place. In fact, associations already are required under the Act to assist condominium unit sellers, as part of the seller's disclosure duties, to furnish to a buyer a "copy of the projected annual operating budget for the condominium, among other items."21

    Unit Owners: Sale Disclosure Requirements

    A condominium unit seller, whether the initial developer or a subsequent unit owner, must provide certain disclosure materials to a buyer at least 15 days before closing.22 These materials include the condominium declaration, which is the document initially filed by the condominium developer (referred to in the Act as a "declarant") to establish the condominium. The association bylaws, articles of incorporation, and rules and regulations also must be disclosed. The association is obligated to furnish the information necessary for the seller to meet the disclosure requirements.23 A condominium unit seller also must comply with the residential real property disclosure requirements set forth in chapter 709 of the Wisconsin Statutes.24

    Executive Summary. To a neophyte condominium unit buyer, the voluminous disclosure documents can be daunting. Although an index and table of contents organizes the materials, and notice language encourages the buyer to obtain legal advice if the buyer does not understand any of the materials, the special committee desired to ensure that the process of purchasing and owning a condominium unit became more transparent and understandable. The new law thus requires an executive summary and an addendum to the required real estate condition report.

    Now, a condominium unit seller must provide to a buyer an executive summary setting forth in plain language certain essential information regarding the condominium (or the location within the condominium materials where the information may be found).25 The summary is to be prepared by the condominium association or declarant, whichever is in control when the summary is prepared,26 and must immediately follow the index at the beginning of the disclosure materials.27

    The summary must contain, among other things, information relating to a condominium's expansion plans; governance; special amenities (such as an athletic club or golf course); unit owners' maintenance and repair responsibilities; the identity of the person responsible for the maintenance, repair, and replacement of common elements and whether repairs or replacements will be funded from unit owner assessments, reserve funds, or both; whether unit owners may rent their units and any restrictions on rentals; rules and restrictions as to parking, pets, and alterations of a unit; whether the association maintains reserves for repairs and replacement of common elements beyond routine maintenance and, if so, whether a statutory reserve account is maintained; an indication that a unit purchaser's rights and responsibilities may be altered by an amendment of the declaration or bylaws; a description of the amendment process and requirements; and a description of other restrictions or features of the condominium.28

    Addendum to Real Estate Condition Report. The new law requires condominium unit sellers to provide an addendum to the real estate condition report mandated by chapter 709 that includes information relating to the condominium, its association, and assessments.29 The addendum is to include the condominium's name and creation date, the unit number offered for sale, and the identity of the seller or the seller's agent. The addendum also must include the association's name and address, whether it is self-managed, and the identity of the association representative who may be contacted regarding the sale. It also must contain the amount of current condominium assessments, fees, special assessments, or other unit owner charges, a statement whether current unit charges have been paid, and a copy of the executive summary.

    Practical Considerations. The Wisconsin Realtors Association has propounded standard forms for an executive summary and condition report addendum. Preparation of an executive summary may entail an initial extensive effort but should not place an inordinate burden on the association, because the summary information is objective and generally constant. The association is obligated to ensure that the executive summary stays consistent with any changes made in the disclosure materials that are described in the executive summary.

    Attorneys representing sellers should be aware of the new law's provisions regarding a purchaser's right to cancel if the required disclosure materials are not provided.30 Attorneys representing buyers must recognize that review of an executive summary should not relieve the buyer or his or her attorney of the duty to thoroughly examine the underlying condominium documents (declaration, bylaws, and rules and regulations).

    Unit Owners: Widening the "Assessments" Net and Tenant Accountability

    "Assessments" Expansion. A unit owner is liable for all assessments that come due while he or she owns a unit.31 Under prior law, "assessments" were generally considered to be assessments for common expenses.32 The new law broadens the definition of "assessments" to mean regular and special assessments for common expenses; charges, fines, or assessments for damage to a unit; and penalties for violations of the declaration, bylaws, or association rules.33 This new definition of "assessments" expands the reach of condominium liens since all assessments until paid constitute a lien on the units on which they are assessed if a statement of lien is filed.34

    Tenant Responsibility. Some unit owners (for example, those who winter in warmer climes) lease their units to tenants. The new law regulates agreements, whether oral or written, between unit owners and tenants who occupy residential units for more than a month or for recurring intervals of one month or more.35 It will apply to agreements entered into or renewed after Feb. 1, 2005. As a condition of the condominium rental agreement, the tenant agrees to comply with the Act, the association rules and bylaws, and the declaration. The unit owner is required to provide such documents to the tenant before occupancy. If a written lease is entered into, unit owners must provide a copy to the association within five days.

    Actions Against Tenants. Wis. Stat. section 703.24, which provided that a unit owner who fails to comply with the Act, the declaration, or bylaws may be sued for damages or injunctive relief, is repealed. The new section 703.24 imposes liability on both unit owners and their tenants.36 Under the new law, a unit owner who commits a violation is liable for any charges, fines, or assessments imposed by the association as a result of the violation and may be subject to a temporary or permanent injunction. Tenants also are liable for any fines or assessments for violating the bylaws or rules. The unit owner, if given notice, also may be liable for the fines or assessments imposed as a result of the tenant's violation if the tenant fails to pay within 30 days.

    Practical Considerations. Because the "assessments" definition now expressly includes charges, fines, or assessments for violating the declaration, bylaws, and association rules, any attorney representing a condominium association should review those items to make sure their contents comport with statutory requirements and that the various documents do not conflict and are synchronized.

    As for tenants, they must recognize that they are subject to the same bylaws, rules, and regulations that are imposed upon unit owners and, therefore, must ensure that they know the guidelines. Unit owner lessors should ensure that they notify the condominium association of a tenancy. Failure to do so will not immunize them from their vicarious liability if their tenant fails to pay or commits a violation, a situation that could result in the imposition of a condominium lien.

    Although a tenant's failure to pay fines or assessments or to comply with the Act, rules, bylaws, or declaration triggers the provisions of the Landlord-Tenant Act (Wis. Stat. chapter 704),37 apparently only the unit owner may commence the eviction proceedings. Deleted from the final bill was a provision allowing a condominium declaration to authorize a tenant's eviction for violations if the unit owner refused to take action.38

    Developers: Duties During Control Period

    Mark R. HinkstonMark R. Hinkston, Creighton 1988 cum laude, practices business litigation with Knuteson, Powers & Wheeler S.C., Racine.

    The new law clarifies developers' responsibilities during the period of their control (which is generally the earlier of three years or 30 days after 75 percent of the common element interest has been conveyed to purchasers).39 During their control, developers will have to comply with the statutory reserve account and executive summary requirements.40

    Other changes that affect developers include: 1) a developer may not assess unit owners for common expenses attributable to unsold units;41 2) during the period of developer control, the developer is responsible for creating and maintaining association financial and operational records and must turn the records over to association directors when elected;42 3) a developer may convert a building to a condominium immediately after notice to any tenant of the conversion, but the tenant may not be required to vacate for 120 days following delivery of the notice;43 4) in a conversion scenario, a tenant is given a "first right to purchase" at a purchase price based on statutory criteria;44 and 5) Wis. Stat. section 703.2559 (commonly known as the "phantom unit" law) is repealed.45

    Practical Considerations. With respect to developers' statutory reserve account duty, as with the duties of associations and unit owners in that regard, the new law codifies fiscal prudence and will help prevent situations in which associations are left to scramble to pay for unanticipated repair expenses after the developer hands over the reins. Developers and their counsel should remember that because the new law expressly provides that developers are liable for the common expenses attributable to their units, they could incur late fees or have liens placed on their unsold units should they fail to timely pay the assessments.46

    Others Involved: Mortgagees and Government

    Mortgagees. The Act's revisions also affect mortgagees in that first mortgagees are bestowed with greater rights with respect to the initial declaration and declaration amendments. The declaration is in essence a condominium's birth certificate, containing information such as a description of the various property interests; the percentage interests appurtenant to each unit; the number of votes appurtenant to each unit; and the purposes for which the building and each unit are intended and restricted as to use.47 Under the new law, first mortgagees are required to sign the initial declaration establishing a condominium.48

    Under current law, to amend a declaration two-thirds of the unit owners (or a greater percentage if provided in the declaration) must give written consent and mortgagees are to provide approval.49 The new law provides that a declaration may be amended with the written consent of two-thirds (or a greater percentage if specified in the declaration) of the aggregate of all unit owner votes (as opposed to two-thirds of the unit owners).50 It also clarifies that the required mortgagee approval applies only to first mortgagees and must be written.51

    The new law also establishes an alternative procedure for amending the declaration.52 The association commences the alternative amendment process by recording an affidavit with the register of deeds that sets forth the text of the proposed amendment and other required information. Notice must be sent to each unit owner and mortgagee. The unit owners' notice must include a ballot to be signed by the unit owner and that shall contain a space for each mortgagee to indicate approval or objection to the amendment. In ascertaining to whom the notices shall be sent, the association may rely on the list of owners of record set forth in a title report obtained when the initial affidavit is filed.

    The association has 180 days to obtain the required approvals and consents. The current amendment procedure does not contain a time limit. Once amendments are approved, the association's senior executive must record with the register of deeds a document confirming satisfaction of the statutory requirements for notice and amendment.53

    Practical Considerations. The alternative declaration amendment method will necessitate diligent recordkeeping. For two years after the amended declaration is recorded, the association must maintain and make available to unit owners the title report the association relied on to ascertain owners; all ballots from unit owners; and all written approvals or objections from mortgagees.54

    Government: Eminent Domain. The new law also has implications for government entities. Currently, a government entity seeking to acquire a portion of a condominium's common elements via eminent domain (condemnation) is generally required to undertake the sometimes arduous task of obtaining the consent of all unit owners. To alleviate the complications involved with potentially negotiating with multiple unit owners, the new law affords the condemnor the opportunity to negotiate directly with a condominium association rather than each individual owner unless an owner objects to the association acting as his or her agent within 30 days after receiving notice from the condemnor.55 This procedure applies to acquiring a portion of the common elements created after May 1, 2005. As for the appeal of the necessity of a taking or a condemnation award, the new law repeals the association's right to appeal and vests the unit owners alone with that right.

    The new law also clarifies that: 1) zoning and other land use regulations may not discriminate against the condominium form of ownership; 2) state or local building codes may not be applied differently to a condominium unless the "different application is reasonably related to the nature of condominium ownership"; 3) subdivision ordinances may not apply to a condominium unless "the application is reasonably related to the nature of condominium ownership"; and 4) governmental jurisdictions may not enact any law, ordinance, or regulation that imposes a greater burden on a condominium "or provide a lower level of services to a condominium than would be imposed or provided if the condominium were under a different form of ownership."56

    Additionally, the new law allows a city, village, town, or county to bring a receivership action under Wis. Stat. chapter 823 if the governmental entity has grounds to abate a nuisance occurring on the common elements and the condominium association's failure to perform its duties to maintain and control the common elements is a reason the nuisance has not been abated.57

    Miscellaneous

    Many other aspects of the Act are revised, including: 1) the definition of "small condominium" has been changed, allowing condominiums with 12 or fewer units, whether residential or commercial, to use streamlined rules for establishment and operation;58 2) various provisions are added relating to the amendment of condominium plats;59 3) if a unit owner alters or improves his or her unit, the alterations or improvements may not constitute nuisances that affect the use and enjoyment of other units or the common elements;60 4) provisions are included relating to a unit owner's improvement of "limited common elements," which are those that are part of the common elements commonly owned by all owners but used exclusively by one or more of the unit owners (such as balconies and patios);61 5) simplified procedures are afforded to unit owners who wish to amend the declaration to change boundaries between units or merge units;62 and 6) a master association, which is a profit or nonprofit corporation or unincorporated association that acts as an association for one or more condominiums, may represent condominium or noncondominium property on behalf of one or more condominiums and property under a different form of ownership or for the benefit of the unit owners of one or more condominiums and the owners of other property.63

    Conclusion

    The trend in condominium growth is expected to continue.64 Members of the Special Committee on Condominium Law Review and the Wisconsin Legislature should be lauded for modernizing Wisconsin's Condominium Ownership Act in anticipation of the continuing boom in condominium ownership. The changes and additions to the Act will go a long way toward reaching the goals of enhanced association fiscal planning, increased awareness of the various aspects of condominium ownership, and preservation of the investment value of individual units and the condominium complex as a whole. Any attorney representing condominium developers, associations, unit owners, or others involved with condominium transactions would be well-advised to review the updated Act to understand the broad impact that it will have on condominium transactions.

    Endnotes

    1Wis. Stat. ch. 703.

    2Wis. Legis. Council Report to the Legislature, Special Committee on Condominium Law Review, RL 2003-10 (April 24, 2003), at 29 (Appendix 3).

    31977 Laws ch. 407 (codified at Wis. Stat. ch. 703).

    4See supra note 2.

    5Id.

    6Press Release (Jan. 30, 2002), Sen. Erpenbach and Rep. Sykora Recommend Condominium Law Revisions to Legislature.

    72003 Wis. Act 283, § 64 (amending Wis. Stat. § 703.37).

    8Wis. Stat. § 703.15.

    9Wis. Stat. §§ 703.04, .05.

    10Wis. Stat. § 703.16(2).

    11Wis. Stat. § 703.15(3).

    12Wis. Legis. Council Staff Memo to Members of the Special Committee on Condominium Law Review, Memo No. 4 (Nov. 6, 2000).

    132003 Wis. Act 283, § 33 (creating Wis. Stat. § 703.163).

    14Id.

    15Wis. Stat. § 703.15(3)(a)(1).

    162003 Wis. Act 283, § 32 (creating Wis. Stat. § 703.161).

    17Id.

    18Id. at § 33 (creating in part Wis. Stat. § 703.163(7)).

    19Wis. Stat. § 703.163(10).

    20Id.

    21Wis. Stat. § 703.33(1)(d).

    22Wis. Stat. § 703.33(1).

    23Wis. Stat. § 703.20(2).

    24Wis. Stat. § 709.01.

    252003 Wis. Act 283, § 49 (creating Wis. Stat. § 703.33(1)(h)).

    26Id. at § 50 (creating Wis. Stat. § 703.33(1m)).

    27Id. at § 51 (creating Wis. Stat. § 703.33(2)).

    28See supra note 25.

    292003 Wis. Act 283, § 69 (creating Wis. Stat. § 709.02(2)).

    30Id. at § 60 (creating Wis. Stat. § 703.33(4)(b)).

    31Wis. Stat. § 703.16(3) (renumbered under new Act as Wis. Stat. § 703.165(2)).

    32Wis. Stat. § 703.16.

    332003 Wis. Act 283, § 34 (creating Wis. Stat. § 703.165(1)).

    34Id. at § 34 (amending Wis. Stat. § 703.16(4)).

    35Id. at § 48 (creating Wis. Stat. § 703.315).

    36Id. at § 38 (repealing and recreating Wis. Stat. § 703.24).

    37Note to 2003 Wis. Act 283, § 48 (creating Wis. Stat. § 703.315).

    38Wis. Legis. Council Amendment Memo on Assembly Amendment 2 (March 11, 2004).

    39Wis. Stat. § 703.15(2)(c).

    402003 Wis. Act 283, § 33 (new Wis. Stat. § 703.163(3)); § 50 (creating Wis. Stat. § 703.33(1)(m)).

    41Id. at § 30 (creating Wis. Stat. § 703.16(2)(b)).

    42Id. at § 37 (creating Wis. Stat. § 703.20(3)).

    43Id. at § 7 (creating Wis. Stat. § 703.08(2) (intro.)).

    44Id. at § 6 (creating Wis. Stat. § 703.08(1)(a) - (c)).

    45Id. at § 40 (repealing Wis. Stat. § 703.255). Wis. Stat. section 703.255 provided that if a developer fails to complete all units described in the declaration within five years after declaration recording, and fails to obtain the agreement of at least 75 percent of the unit owners to permit completion of the units within five years of the agreement, the developer must amend the declaration to remove the description of the uncompleted units and adjust the percentage ownership and voting interests accordingly.

    46See Lisa M. Pardon, Advising Developers in Operating Community Associations, 77 Wis. Law. 12 (March 2004).

    47Wis. Stat. § 703.09.

    482003 Wis. Act 283, § 11 (renumbering and amending Wis. Stat. § 703.09(1)(k) as § 703.09(1c)).

    49Wis. Stat. § 703.09(2).

    502003 Wis. Act 283, § 14 (amending Wis. Stat. § 703.09(2)).

    51Id.

    52Id. at § 16 (creating Wis. Stat. § 703.093).

    53Id.

    54Id.

    55Id. at § 36 (creating Wis. Stat. § 703.195).

    56Id. at § 42 (creating Wis. Stat. § 703.27).

    57Id. at § 70 (creating Wis. Stat. § 823.015).

    58Id. at § 3 (amending Wis. Stat. § 703.02(14m)).

    59Id. at § 18 (amending Wis. Stat. § 703.11(2)(c)); § 19 (creating Wis. Stat. § 703.11(5)).

    60Id. at § 20 (amending Wis. Stat. § 703.13(5)(a)).

    61Id. at § 21 (creating Wis. Stat. § 703.13(5m)).

    62Id. at § 22 (amending Wis. Stat. § 703.13(6)(c) and (d)); § 23 (creating Wis. Stat. § 703.13(8)).

    63Id. at § 28 (creating Wis. Stat. § 703.155(7)).

    64Michele Derus, Condos, Co-ops Likely to Gain Ground, Milw. J. Sentinel, April 9, 2004; Thomas A. Fogarty, Condo Sales Outrun a Fast Market, USA Today, Feb. 17, 2004.




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