Editor’s Note: The Edge is serializing an as yet unpublished book by Great Barrington attorney David M. Lazan. Here is the sixth of eight installments: Condominiums. Previous installments were Introduction and Chapter One: Real Estate Agents and Lawyers; The Purchase and Sales Agreement, Title,Title Insurance, Plot Plans and Surveys, Financing Real Estate, and The Closing. Future installments will cover Buying Land and Building a Home; The Massachusetts Homestead Act; Nominee Trusts; and Short Sales.
Chapter Six: Condominiums
There are significant differences in the condominium documents we use in western Massachusetts as compared to those used in many other states, including other parts of Massachusetts. Additionally, our condominium statutes and laws are considerably less involved than those used in places like Florida and New York.
Although our real estate brokers and lawyers use the same basic provisions in a Purchase and Sale Agreement when you contract to buy or sell a condominium unit, they add provisions designed to deal with certain matters unique to condominium ownership.
A. Condominium Ownership
A major difference between Massachusetts and many other states is the document we use to create a condominium. We call it a “Master Deed” as opposed to the more common “Declaration of Condominium”. The Master Deed defines what is a condominium unit (the part exclusively owned by an individual or individuals) and what is a common element (the portion of the property owned non-exclusively by all the unit owners of a condominium). It also defines ownership rights in common elements, who will manage and regulate the condominium, how the Master Deed may be amended, the purpose of the condominium and as many other topics as the condominiums’ developer may want to address. A Master Deed may provide for what in Massachusetts is called “phasing”. Phasing permits additional condominium units, common elements and sometimes land to be added to the condominium development.
In most states, condominiums have an association of homeowners that manage common areas and collects assessments. In the Berkshires, most condominiums are managed by trustees of a condominium trust. The trustees, elected by the unit owners once the developer turns the trust over to the new owners, are responsible for collecting assessments used to pay for maintenance, repairs, insurance, and any reserves for replacement of improvements within the common areas. The trustees are also responsible for enforcing the condominiums rules and regulations.
B. Reviewing Condominium Documents
Before buying or selling a condominium, the master deed, condominium trust and any other documents that may affect ownership, including rules and regulations, should be carefully reviewed by the parties’ lawyers. Also, the financial circumstances of the condominium trust should be reviewed to determine whether adequate reserves have been established, whether assessments are sufficient to meet the needs of the condominium project and what the outstanding liabilities of the trust are. Only in this manner can both parties understand any transfer requirements the condominium may have and exactly what rights or obligations a Buyer will have in becoming an owner. If a Buyer intends to bring pets upon the premises, it is essential that the Buyer’s lawyer review the most current version of the bylaws and rules and regulations of the condominium to insure that pets of the type owned by the Buyer are permitted and whether that bylaw, rule or regulation can be changed.
Also, if a condominium can be enlarged without additional facilities being added, a practice called “phasing,” a prospective Buyer should determine if the facilities are sufficient for the number of units that may be sharing them. Whether parking spaces and storage areas are provided with a unit is another question answered by a review of the condominium documents.
C. Working Capital Contributions and Assessments
Condominiums frequently make assessments to cover expenses such as the replacement of a roof, resurfacing of a driveway or other extraordinary costs and expenses. It is therefore essential that the Seller disclose and the Buyer determine whether there are outstanding assessments not yet paid by the Seller and which party will be responsible for their payment.
Often, trustees of a condominium trust collect extra monies from unit Buyers at the time the condominium is created, to create a pool of money for unpredicted expenses. This money is called “working capital”. The FHA requires a reserve account equal to ten percent of the Condominium budget. Additional working capital is often raised by charging unit owners a transfer fee at the time units are transferred. Also, additional funds can be accumulated by trustees through unanticipated cost reductions. The working capital or reserve account belongs to the trustees of the condominium and not to the unit owners. Whether the amount of the unit owner’s interest in the working capital or reserve account is added to the price being paid for the unit or whether it is included in the purchase price is a question that should be determined before the Purchase and Sale Agreement is signed.
D. Purchasing a Condominium Unit from a Developer
Buying a condominium unit from a developer carries certain risks, some of which can be partially avoided and others which a buyer must be willing to accept. These include the risk that the developer may not finish a contemplated unit or project, that projected maintenance fees and real estate taxes may be higher than anticipated or that you may be living in a construction site for months or even years.
If you decide to purchase a condominium from a developer, especially a condominium in a project which is in its early stages of development, it is imperative that your purchase and sale agreement provide that any deposit or monies paid to the developer prior to completion of the unit be held in escrow by a bank, real estate broker or attorney. Additionally, the agreement should require the developer to provide you with a copy of all documents that will govern the condominium before signing your purchase and sale agreement, so you may have your lawyer review those documents and advise you as to your rights and obligations if you proceed with your purchase. As part of your agreement to purchase, there also should be attached to your contract an architect’s plan of the unit you are acquiring with detailed specifications as well as plans for any amenities that are to be included.
Before your monies are released from escrow to a developer, your contract should also provide that you will receive good record, marketable and insurable title to your unit. If your developer promises less than this, you should make sure you fully understand what risks are involved.
As you can see, it is essential that you have your lawyer carefully review any contract and documents provided by a developer to insure that the end result is the result you desire and that the risks you take, are risks that you can afford to take.