5/15/11: Amending Condo Documents Has Major Hurdles
By: Benny L. Kass
Q: I am the Vice President of a small community association (55 homes) in Loudoun County, VA. Our homeowners recently approved changes to our legal documents, but they have a clause that states: "Any other provision of this Declaration to the contrary notwithstanding, neither the Members, the Board of Directors, nor the Association shall, by act or omission, take any of the following actions without the prior written consent and approval of the institutional holders of all First Mortgages of record on the Lots .... (f) Modify or amend any material or substantive provision of this Declaration or the Bylaws of the Association."
This provision appears to be a show-stopper because; 1) the Board of Directors does not have a list of all lenders, 2) there are a couple foreclosed properties which we have no information on, and 3) there are a few residents that will not provide any personal information such as who their lender is.
Is there a public source where lender data can be obtained by the Board or if not, are there other ways of overcoming this problem? John.
A: John, although it will not be a consolation to you, this is not unique to your association. Almost every community association (condominiums and homeowner associations) have similar language in their legal documents.
First, even without lender approval, amending your legal documents requires a super-majority vote of the owners, based on their percentage ownership in the association. Why? Because when legislatures enacted the association laws, they did not want a small minority of owners to be able to dramatically change the way the association is governed and controlled.
The Virginia Condominium Act, for example, requires that a minium of two-thirds of the unit owners (by their percentage of ownership) must approve any amendments to the legal documents. The D.C. Condominium Act contains a similar requirement. And although the Maryland Code does not have any such requirement, from my experience, most - if not all - Maryland Association legal documents contain similar super-majority requirements, either two-thirds or even 75 percent.
The problem is compounded further because most association documents - in order to comply with Fannie Mae and Freddie Mac guidelines -- contain requirements such as exist in your legal documents. In fact, Virginia law specifically states that "No provision of this chapter shall be construed in derogation of any requirement of the condominium instruments that all or a specified number of the beneficiaries of mortgages or deeds of trust encumbering the condominium units approve specified actions contemplated by the unit owner's association."
You state that you are having difficulty obtaining the names of the current mortgage holders. First, your board should enact a rule requiring every homeowner to provide (on an annual basis) the name of their mortgage lender. This is not a difficult task, nor is it an invasion of privacy. All mortgages (deeds of trust) are public information since they are recorded among the land records in the jurisdiction where your property is located. And many jurisdictions have on-line access to the local recorder of deeds. For example, you should be able to find who holds the mortgage loans on all of your homeowners by searching "Loudoun County Real Estate Tax".
But, as you suggest, with foreclosures and short-sales, this information may not be current.
Association lawyers around the country have used what I call the "book of the month" option. Send the proposed amendment to as many lenders as you can find, advising them that if you do not hear from them within a set period of days, you will assume their consent. Fannie Mae, for example, allows such a procedure, which they call "implied approval". In the most current Fannie "Selling Guide", it states that the documents "must provide that amendments of a material adverse nature to mortgagees be agreed to by mortgagees that represent at least 51% of the votes of unit estates that are subject to mortgages."
However, Fannie recognizes that lenders may not always respond. Accordingly, if the documents were recorded prior to August 23, 2007, then implied approval can be assumed if the lenders do not respond within 30 days after they receive proper notice of the proposal. This means that the notice must be sent by certified or registered mail, with a return receipt requested.
If the project was recorded after August 23, then implied approval can be assumed after 60 days advance notice.
But it is to be noted that this relates to amendments "of a material adverse nature to" mortgage lenders. You - and your association attorney - should make a business judgment as to whether your proposed amendment falls into this category. For example, an amendment changing the date of the annual meeting is, in my opinion, not adverse to any lender, so the lenders do not even have to be notified. However, if you are changing the percentage interests in the association, that is material.
What risks does your association face if it just ignores the requirement of notifying and obtaining consent - implied or actual -from the lenders? That's a very good question, and to my knowledge has never been litigated in any court in the United States. From my experience - and talking with a number of association attorneys throughout the country - quite often the requirement is ignored, with no consequences. As a practical matter, the lender's lien was recorded on the land records before any amendments were enacted. If the lender wants to foreclose on a unit they are usually in first place position, subject only to any statute that gives the association a priority on assessments. In the District, when a lender forecloses, it has to pay the association up to six months of prior unpaid assessments; in Maryland, based on a law that just was signed by the Governor on May 10, banks who foreclose on association homes after October 1, 2011, must pay the association up to $1200 of any unpaid assessments. No such priority exists in Virginia.
I cannot recommend ignoring the law. If you believe your proposed amendment has material consequences against your lenders, do your best to track down all of the mortgage lenders and send them notice by certified mail, return receipt requested. Wait the 30 days, and then proceed to record the amendment on the land records where your association is located.