Commonhold law

Problems and potential solutions

Katharine N. Rosenberry
The Joseph Rowntree Foundation has supported this project as part of its programme of
research and innovative development projects, which it hopes will be of value to policy
makers and practitioners. The facts presented and views expressed in this report are,
however, those of the author and not necessarily those of the Foundation.

Katharine Rosenberry is a professor of law at California Western School of Law in San

Diego, California.

© Joseph Rowntree Foundation 2000

All rights reserved.

Published for the Joseph Rowntree Foundation by YPS

ISBN 1 902633 96 2

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Contents

Page

1 Introduction 1
United States 1
Australia 1

2 Overview 5
Background 5
Functions of commonhold associations 9
Some other issues 12

3 Issues in more detail 14

Preliminary provisions 14
Definitions 17
Creation, alteration and termination of commonhold communities 20
Operation (governance and business functions) 32
Miscellaneous provisions 46
Continuing the dialogue 49

Notes 50
1 Introduction

The goals of this report are to identify many of Real Estate.4 The Department will not approve
the issues that arise in commonhold law in the the sale of a unit unless the governing
United States and Australia, and to continue the documents comply with the ‘reasonable
dialogue about commonhold law. To the extent arrangements’ provisions of the Department’s
that English and Welsh practices are different regulations. These regulations control most
from those in the US and Australia, the aspects of the operation of commonhold
solutions to problems that are identified may communities.5 Therefore, in California, like
need to be different. It is difficult to solve a many states, the creation and operation of
problem, however, if one does not know a commonhold communities are controlled by
problem exists. statutes and regulations.
The laws that will be referenced in the paper
include the following.
Australia
1 Queensland Body Corporate and
United States
Community Management Act 1997 is
1 The Uniform Common Interest referred to in this report as Queensland
Ownership Act will be referred to as Statute. Queensland Body Corporate and
UCIOA in this report.1 UCIOA or similar Community Management Act Regulation
acts like the Uniform Condominium Act 1997 is referred to as Queensland
and the Uniform Planned Community Regulations. The Regulations contain
Act have been adopted in approximately various models for the governing
15 states in the US. Other states have documents of commonhold communities.
adopted provisions similar to provisions These include a Standard Module, a Small
in these acts. Schemes Module, an Accommodation
Module and a Commercial Module. (The
2 The Davis-Stirling Common Interest
references in this paper are to the
Development Act.2 This Act is referred to
Standard Module.)
in this paper as the California Civil Code.
Numerous other statutes also affect the 2 New South Wales Strata Schemes
creation and operation of commonhold (Freehold Development) Act 1973 is
law in California, primarily the referred to as NSW Strata Schemes; Strata
Corporations Code provisions applying Schemes (Freehold Development)
to non-profit mutual benefit Regulation 1973, Strata Schemes
corporations.3 (Leasehold Development) Act 1986, Strata
Schemes (Leasehold Development)
In California, the Department of Real Estate
Regulation 1986, Strata Schemes
Regulations also indirectly control the creation
Management Act 1996 is referred to as
and operation of commonhold communities. In
NSW Strata Schemes Management Act;
order to sell units, a developer must first seek
Strata Schemes Management Regulation
approval from the California Department of

1
Commonhold law

1997, Community Land Development Act C Commonhold community law should

1989 is referred to in this report as NSW impact the fewest laws possible
Community Land Development Act; D Most of the commonhold community law
Community Land Development should be in regulations rather than
Regulation 1990, Community Land statutes
Management Act 1989 is referred to as E Commonhold community law should
Community Land Management Act; and address basic issues that arise in the
Community Land Management creation of commonhold communities
Regulation 1995 is referred to in this F Commonhold community law should
paper as NSW Community Land address basic issues regarding the
Management Regulation. operation of commonhold communities

Strata titles are communities in which the II Functions of commonhold associations

common area is owned as tenants-in-common. A Governmental functions
Community land development schemes are 1 Hierarchy
similar to planned communities in the US, and 2 Rights and obligations
the form of title is most similar to commonhold. 3 Organisation operation
The NSW Strata Schemes Acts, NSW Strata a Voting
Titles Management Act and their accompanying b Covenant and rule enforcement
regulations contain operational procedures B Business functions
relevant to commonhold communities. 1 Asset and risk management
References will be made to both sets of statutes 2 Financial management
and regulations.6 a Financial reporting
All of the issues discussed will not be of b General funds and reserve funds
interest to all readers. The outline is presented c Levying and collecting service
so that the reader can more easily find the issues charges
that are relevant to his or her particular d Borrowing money
interests.7 e Contracting with third parties
Chapter 2 Overview C Creating a sense of community
I Background
III Some other issues
A Four types of commonhold communities
A Amending the documents after alteration
1 Condominium
or termination of the commonhold
2 Housing co-operative (company titles
community
scheme)
B Protection of purchasers
3 Planned community
C Administration of commonhold
4 Master planned community
communities
B Property interests in a commonhold
Chapter 3 Issues in more detail
community
IV eliminary
Pr provisions

2
 Introduction

A Title of act: commonhold communities 8 Commonhold communities on

law leasehold property
B Legislative intent 9 Description of units
C Construction of statute 10 Unit boundaries (default definition)
1 Severability 11 Implied easements
2 Liberal construction 12 Construction and validity of
D Interaction with other laws Commonhold Community Statement
1 Taxation and Bylaws
2 Local land development regulations 13 Amendment of Commonhold
and building codes Community Statement by owners
3 Compulsory government purchase 14 Amendment of Commonhold
4 Supplemental general principles of Community Statement by court order
law applicable B Alteration of boundaries and units
E Variation of law by agreement 1 Alteration of boundaries by developer
2 Relocation of unit boundaries between
V Definitions
units by owners
A Commonhold community
3 Subdivision of units by owners
B Master commonhold community
4 Alteration of unit by unit owner
C Unit
C Termination
D Common area
D Merger of commonhold communities
E Exclusive use common area
F Commonhold community association VII Operation (governance and business
G Development rights functions)
H Many other definitions A Organisation of commonhold association
B Powers of commonhold association
VI Cr
eation, alteration and termination of
C Powers of master association
commonhold communities
D Powers and liabilities of board of
A Creation
directors
1 Commonhold community
E Powers of original owner and transfer of
2 Master commonhold community
original owner’s rights
3 Master commonhold association
F Bylaws
4 Commonhold Community Statement
G Officers of board of directors
5 Signatures on the Commonhold
H Covenants and equitable servitudes
Community Statement
I Meetings
6 Allocation of allocated interests
J Voting
(percentage interest in association,
K Tort and contract liability
services charges and voting rights)
L Maintenance obligations
7 Exclusive use common area
M Finances
designated in Commonhold
1 Obligation to levy service charges
Community Statement

3
Commonhold law

2 Levying service charges VIII Miscellaneous ovisions

pr
3 Liens for service charges A Lender disclosures
4 Other liens B Exempting communities from the law
5 Additional financial controls C Other provisions included in the acts of at
N Record keeping least one other jurisdiction
O Disclosures on sales (relation to record 1 Regulation of managing agents
keeping) 2 Dispute resolution processes
P Insurance 3 Governmental administration of
commonhold communities

4
2 Overview

I Background corporation is a personal property interest.1

Thus, it is difficult to obtain financing. Also, if
A Four types of commonhold communities
one owner fails to pay their portion of the
There are four types of commonhold
mortgage, the other owners will either have to
communities. England, which includes Wales in
cover the defaulting owner’s debt or lose their
this report, is considering only two of them.
interest in the building. A way of getting around
In both Australia and the US, commonhold
this problem is to enact a statute that permits an
communities can be residential, commercial or
owner to relieve his or her unit of any liability
industrial. The residential commonhold
for the debt by paying his or her pro-rata share.
properties require more consumer protection
Housing co-operatives, or company titles
and, thus, the boards of directors in these
schemes, also exist in NSW. The association that
communities usually have more limited power.
owns the building is a traditional company and
Regardless of whether a commonhold
the ‘owners’ are shareholders. This means that
community is residential or commercial, there
traditional company law governs them. One
are four basic commonhold arrangements:
solicitor who is an expert in the field stated,
condominiums, co-operatives, planned
‘That means they operate as a free for all’. He
communities and master planned communities.
stated that solicitors no longer create this form
1 Condominium of ownership. It predominately exists in housing
Condominium or strata scheme – the unit that was built before the condominium and
owner owns a freehold interest in a unit coupled planned community law was enacted.2
with a tenant-in-common interest in the
3 Planned community
common area, and perhaps an interest in an
The unit owner owns a freehold interest in a
exclusive use common area.
separate area, sometimes called a unit or lot,
2 Housing co-operative (company titles coupled with an interest in the association. The
scheme) association owns the common area. The unit
Housing co-operative (in New South Wales, owner also may own an interest in a portion of
company titles scheme) – the corporation owns the common area that is called exclusive use
the entire structure, and each owner has the common area. An exclusive use common area is
exclusive right to possess a portion of the a portion of the common area reserved for the
building coupled with an interest in the use of one or more, but not all, of the owners.
corporation. The form of ownership is similar to These areas are usually patios, balconies and
a block of flats where all of the tenants have parking spaces.
purchased their flats.
4 Master planned community
In the US, there are not many housing co-
This is a combination of one or more of the
operatives outside of New York and Chicago,
above. This form of ownership is particularly
and these are older communities. It is rare for a
valuable in a mixed-use building where it is
developer to create housing co-operatives today
desirable to have one association for the
because in some jurisdictions the interest in the
commercial property and one for the residential

5
Commonhold law

property. (This discussion is more fully 2 There is also an interest in the association
developed later.) Each association has its own that owns the common area. Whether
common area and rules, and each is also subject those interests are equal or based on some
to the rules of the master association that also other formulation is discussed later in the
generally owns common property. In this case, paper.
both the commercial and residential owners
3 There may also be an interest called an
have voting rights in the master association.
‘exclusive use common area’. These are
As mentioned, England is considering what
portions of the common area that are for
are called, in the US, planned communities and
the use of a particular unit or units. They
master planned communities. It is not
are usually patios attached to units or
considering the type of community in which the
parking spaces assigned to particular
common area is owned as tenants-in-common.
units. In some communities, it is better to
When I asked experts in the US and Australia
have these as exclusive use common area
the advantages of having the common area
because then the association has greater
owned as tenants-in-common, they could think
control over them. It would also, of
of none. Condominiums are created
course, be possible to make them part of
predominately for historical reasons, to gain
the unit.
advantages in zoning, and because the lenders
are familiar with them. There is nothing California lawyers called these interests
inherently better in this form of ownership. ‘easements’ until they discovered that
In the US, if the condominium form of easements only give the right to non-exclusive
ownership is adopted, it is necessary to enact a use. Because the owners do not legally have an
statute to guarantee that the co-owners are easement and are not legally in ‘possession’ of
liable only for their pro-rata share of any these areas, it was necessary to create a new
liability incurred as a result of their owning the property interest – exclusive use common area.
common area as tenants-in-common. Otherwise, The distinction between possession, non-
one owner can be liable for the entire judgement exclusive use and exclusive use is the type of
against the association under the tort theory of distinction law professors care about more than
joint and several liability. practitioners. Practitioners, correctly, just want
the system to work. I raise this issue, however,
B Property interests in a commonhold because we took our law of easements from
community England. Therefore, the same issue may exist in
There are at least two, and sometimes three, England. It is important that the statutes and
property interests in a commonhold community. regulations clearly identify the property interest
because, among other things, it is important to
1 There is an interest in freehold. This is
know who has the responsibility for
sometimes called a ‘unit’. In a planned
maintaining each area.
community with detached houses, it is
Once the commonhold community is
sometimes called a ‘lot’.
created, both Australia and the US provide a

6
 Overview

variety of ways in which property interests can introduced into the market place. It is important
be changed. Except in extreme situations, to be able to respond to these problems quickly.
changes cannot be made over the objection of Because regulations can be changed more
the owner. Circumstances under which property quickly than legislation, only those things that
interests can be changed are discussed later. must be included in statutes should be. The rest
should be set forth in the regulations.
C Commonhold community law should
impact the fewest laws possible E Commonhold community law should
Creation of commonhold community law will address basic issues that arise in the creation
necessitate impacting other existing law. It is of commonhold communities
best to impact the fewest number of laws Developers need flexibility in creating
possible. For example, it is unnecessary to create commonhold communities in order to respond
a separate body of law for commonhold to changing market conditions. The need for
community insolvencies. First, not a single flexibility must be balanced with the owners’
expert with whom I have spoken in either the right to have the community remain as
US or Australia has ever heard of a single case represented at the time of purchase.
of insolvency. Even if an association could be For example, after creation, the developer
declared insolvent, the existing insolvency law may wish to annex or de-annex property from
may be sufficient to handle the situation. It is the commonhold community. Under the
unnecessary and unwise to create new law Uniform Common Interest Community Act
when it is not necessary to do so. (UCIOA) in the US, the developer can do this
Where commonhold community laws must unilaterally if there is full disclosure in the
interrelate with other laws, it will be important initial documents and the right is exercised
to have experts in the relevant fields carefully within a specified time.3 Another approach is to
review the draft bill. For example, tax lawyers permit annexation and de-annexation only if a
will need to give advice on the manner in which specified percentage of the owners agree.
one’s property interest in a commonhold It is important to know when the project is
community is determined for tax purposes. actually created. Some jurisdictions say the
Those who are responsible for local land commonhold community is created at the
development decisions will need to consider the moment the documents creating the
provisions dealing with the creation of commonhold community are registered.4 Other
commonhold communities. Company lawyers jurisdictions require the registration of the
will have to determine the extent to which law documents, but provide that the commonhold
needs to be modified to address the unique community is not created until at least one unit
needs of commonhold communities. is sold.5
Depending on how long it takes to get
D Most of the commonhold community law approval from the local government for a
should be in regulations rather than statutes development, the latter may be the better
Problems will arise as commonhold law is approach. If a developer discovers after getting

7
Commonhold law

the approvals that there isn’t a market for a 1 For-profit traditional companies are in
commonhold community, he can then change business to make a profit; commonhold
the project to leased flats. If the commonhold associations are not. Thus, some laws that
community is already created, the developer were created to govern for-profit
may not be able to change the legal structure of companies may not apply to
the commonhold community. commonhold associations.

2 Traditional companies do not levy service

F Commonhold community law should
charges on their members, and the
address basic issues regarding the operation
members cannot lose their homes if the
of commonhold communities
service charges are not paid. Therefore,
Many of the operational issues may also apply
more consumer protection is needed in
to a block where tenants have exercised their
residential commonhold communities
right to enfranchise a block of flats. The major
than in traditional companies.
difference is that in a commonhold community
all owners have a vote, whereas in a block some 3 Volunteers generally do not run
people may not have exercised their right to traditional companies.
enfranchise and, therefore, generally do not
4 Voting in traditional companies may not
have a vote. Thus, when considering the
be based on a variety of measurements
following, one should consider the extent to
such as square footage or market value of
which the issues are and are not relevant in both
real property as may be the case in
settings.
commonhold communities.
The association of a commonhold
community, acting through its board of 5 Traditional companies can be declared
directors, has three overlapping functions. In insolvent whereas an asset of a
some respects, the board of directors acts like a commonhold association is the ability to
governmental entity in that it enforces rules levy service charges to pay debts, and,
(similar to laws), maintains facilities used in therefore, they cannot be declared
common (similar to public facilities) and insolvent.
imposes service charges (similar to taxes).
6 The ownership interest in a traditional
In other respects, it is like a business that has
company is a personal property interest.
to be concerned with asset management,
In a commonhold association, it is an
financial management and risk management. It
interest in real property that may be
is important to note that, while the association is
subject to a mortgage.
generally a corporation, in both the US and
Australia, it is treated differently from other 7 Traditional companies do not have the
companies because it is different. Residential same control over the daily lives of their
commonhold associations are especially members as do residential commonhold
different from traditional companies. Below are communities.
some of the differences.

8
 Overview

As a result of these differences, it is very likely officers. In California, the directors are protected
traditional company law will have to be modified only if the association maintains a specified
to accommodate the unique characteristics and amount of insurance.7 It is often difficult to get
needs of commonhold associations. people to serve on boards. They are even more
The third role of the association is to create a reluctant to do so if they can be sued
sense of community. If there is a sense of individually for breach of fiduciary duty. Thus,
community, the owners are more likely to abide it is necessary to limit their liability.
by the rules of the commonhold community. There is also often a statute that limits the
liability of an individual owner to his or her
pro-rata share. In other words, if an owner owns
II Functions of commonhold associations
a hundredth interest in a 100-unit block of flats,
A Governmental functions that owner is only liable for one-hundredth of
1 Hierarchy any judgement against the association.8
Owners Original owner (developer)
3 Organisational operation
Commonhold association
a Voting
Board of directors
It is possible to assign one vote to each unit. It is
Committee members
also possible to assign voting rights and service
2 Rights and obligations charge obligations based on floor area or fair
Even though associations can act through their market value. For example, if one flat is four
boards of directors, the law in both the US and times bigger than the other flats in a building,
Australia restricts the actions of the board. the owner with the large flat may have a greater
There are certain designated rights that only the number of votes and be responsible for a larger
owners can exercise. For example, in California, share of the service charges. In the US, even if a
the board cannot raise service charges beyond a jurisdiction states a preference for one type of
certain percentage without a vote of the voting structure, it generally permits the
owners.6 Also, some statutes prohibit the board governing documents of a commonhold
from selling association property without a vote community to determine the appropriate voting
of the owners. structure for that community. It is important to
The board of directors is in the role of a provide a default provision in the law in the
fiduciary. The laws from different jurisdictions event the governing documents of a community
handle the issue slightly differently. The fail to establish a voting scheme.
developer is often held to a higher standard – that California permits developer ‘weighted
of a trustee – while he or she is in control of the voting’. For example, for a limited period of
board because of the inherent conflict of interest. time while the developer is trying to market the
The volunteer board members have the fiduciary development, the developer may have three
duty that directors of companies generally have. votes per unit owned rather than one.9 Other
Some jurisdictions provide limited immunity jurisdictions expressly prohibit this practice.10
for the individual volunteer directors and Proxy voting can pose a problem if one
owner or a group of owners is permitted to

9
Commonhold law

continue to control the association. The association to maintain property, general

limitations on proxy voting are discussed later liability, and director and officer liability
in the paper. insurance. There are also usually indemnity
provisions in the Commonhold Community
b Covenant and rule enforcement
Statement for directors and officers.
Commonhold communities cannot function
Associations may need to maintain additional
unless affirmative covenants can be enforced
forms of insurance depending on the
against subsequent purchasers. There must be
characteristics of the particular association.
effective, fair and inexpensive methods for
enforcing the covenants. 2 Financial management
There are both internal and external dispute a Financial reporting
resolution mechanisms in commonhold The requirements are likely to vary among the
associations. The internal dispute resolution jurisdictions and also to vary depending on
mechanisms include the manner in which the whether the commonhold community is
association notifies owners of violations, fines residential, commercial, or industrial. Some
them and places liens on their freehold interest. require the board of directors not only to keep
It should be noted that not all jurisdictions financial records, but also to review them on a
permit the association to fine owners. periodic basis and reconcile bank statements.14
External dispute resolution mechanisms
b General funds and reserve funds
include mediation, informal arbitration, formal
Several jurisdictions, including Queensland and
arbitration and litigation. In Australia, the
New South Wales, require the creation of both a
government runs a dispute resolution system.11
general operating fund and reserve fund.15 The
In the US, there is widespread use of private
jurisdictions differ in their approaches to
mediation and informal arbitration procedures
requiring the association to adequately fund
that often do not involve lawyers.
reserves. Even if there isn’t a statute or
regulation that requires funding reserves,
B Business functions
however, the common law fiduciary duty does
1 Asset and risk management
require it.
The jurisdictions differ in the extent to which
In addition, California requires periodic
they control the association’s ability to deal with
reserve studies.16 These studies require the
the repair and maintenance of major
association to compare the community’s
components, and with capital improvements.
estimated long-term expenditures with its
For example, California prohibits the association
reserves.
from making capital improvements costing
more than a specified amount without a vote of c Levying and collecting service charges
the owners.12 Associations can file a lien after service charges
Many jurisdictions require the association to are delinquent for a specified period of time,
maintain a variety of insurance policies.13 and the property can be sold through a power of
Insurance is one of the main protections for the sale. Upon sale, the owner receives any
owners. Some jurisdictions require the proceeds remaining after the debts are paid. The

10
 Overview

debt can include the past due service charges, documents, it usually can. The market place
the lawyer’s fees and costs incurred in determines whether or not a particular
attempting to collect the service charge. association will receive money. The security
California permits both a court sale and a either can be common area, where appropriate
private sale by an association-appointed trustee and permitted, or the association’s income
provided the sale is in accordance with the stream, which would be similar to a commercial
statute.17 Others permit only a court sale. loan.
In the US and Australia, the owners If the loan is in default and the common area
determine the service charges. These are based is the security for the loan, the common area can
on a yearly budget that must be approved by be sold at a court sale. This may occur where an
the owners in some jurisdictions and by the association owns a separate parcel of property
board in others. Courts are not involved. that it has mortgaged.
Because the owners set their own charges, they If the loan is secured by the association’s
are not in a position to argue that the service income stream, the bank steps into the shoes of
charges are unreasonable. If the owners do not the association and can collect the service
like the service charges, they can recall the charges to repay the loan. The bank can have a
board or elect a new board of directors. The unit sold at a court sale if an owner does not
system would not work if owners could pay his or her pro-rata share of the debt.
generally challenge the reasonableness of a I have spoken with several lenders in the US
service charge. If one owner does not pay a and not one of them has heard of an association
service charge, the others will have to cover the failing to pay its debt in a timely manner.
debt of the defaulting owner in order to Because the associations have reserves and the
maintain the property. Further, the legal costs of ability to raise service charges, they use these
a challenge have to be paid by someone. The funds to guarantee the debt is paid on time.
documents may require the losing party to pay.
e Contracting with third parties
However, there are often costs that are not
Some jurisdictions impose limitations on the
recoverable which means that the unit owners
board’s ability to enter into specific contracts,
who are paying their debts on time end up
particularly in residential communities. For
paying some expenses incurred in collecting the
example, while the developer is in control of the
debts of those who are not paying their service
association, the law often imposes restrictions
charges on time.
on the types of contracts into which the
An owner can allege that the board has
association can enter or gives the association the
violated a particular, legally required procedure
ability to cancel certain contracts.
or has breached its fiduciary duty in setting
service charges. Service charges, however, are
C Creating a sense of community
rarely challenged under either theory.
In order for a residential commonhold scheme
d Borrowing money to serve the best interests of the owners, it is
In the US, if the association is not prohibited necessary for the association to create a sense of
from borrowing money in the governing community. This does not mean all the owners

11
Commonhold law

are required to participate in the governance of anticipate all the changes that will occur over
the community. In the US, it is common for both the life of the community.
husbands and wives to work. If a family has If covenants have a termination provision,
two working parents, the last thing they want to problems can arise. In Los Angeles, there was a
do when they get home from work is attend an 3,000-unit condominium with covenants that
association meeting or association party. On the were about to terminate. This would have
other hand, they also do not want to live in a resulted in having 3,000 tenants-in-common
community where neighbour is pitted against with no procedures for determining what to do
neighbour or where property values are falling. with the streets and other facilities that they
A sense of community is generally created held as tenants-in-common. A statute was
through education and social events rather than passed giving the owners the ability to petition
through the law. However, in some cases, the the court to extend the terms of the covenants.18
law interferes with creating a sense of Some jurisdictions permit a simple majority
community. For example, in the US, if covenants to amend particular provisions, such as pet
are not enforced consistently then it is possible restrictions. However, they require a super-
for the association to lose its right to enforce the majority to amend provisions that would alter
covenants under the common law doctrine of the property interests, such as termination of the
waiver. Some boards of directors are over- commonhold community.19 Lenders may also
zealous and believe this law requires them to require a super-majority to amend provisions
send a notice of every small violation to an that directly impact their security interest.20
owner. To the extent England has the same law A problem arises when it takes more than a
(and, again, the US law came from England), it simple majority to amend the documents. It is
is worth considering. Also, if the law requires often difficult to get a super-majority to vote.
notices to be in a very legal and formalistic California responded to this problem by
format, it will interfere with the creation of a permitting the court to amend documents if
sense of community. certain procedures are met.21 Australia has some
I once heard a lawyer advise board members interesting voting procedures that are discussed
to treat the owners the way they would want later in the paper.
their mothers to be treated. This is good advice
and should be kept in mind when drafting law. B Protection of purchasers
California requires every purchaser in a
commonhold community to receive a copy of
III Some other issues
the governing documents.22 In addition, initial
A Amending the documents after alteration purchasers receive a brochure from the State
or termination of the commonhold community Department of Real Estate that explains the
Statutes, regulations and the governing owners’ rights and obligations.
documents usually provide for amendment of The purchaser also can evaluate the
the governing documents. This is essential. It is community’s reserve study that identifies the
impossible for even the brightest developer to community’s major components, their estimated

12
 Overview

life expectancy and the level of reserves The Department closely reviews the
available to replace or repair them. Finally, the governing documents to make sure they
law requires the purchaser to be told about the conform to the Department’s regulations. The
insurance policies maintained by the association Department also reviews the developer’s
and whether the association is in litigation.23 proposed initial budget to determine if the
The State requires numerous other estimated service charges are sufficient to
disclosure requirements that are not part of the maintain the property. Developers have an
commonhold legislation. These are part of the incentive to initially set the service charges at a
real estate sales law.24 low level (this is called ‘low balling’) in order to
sell all the homes. The owners discover only
C Administration of commonhold later that the service charges were set
communities unreasonably low, and that they have to
The extent of government involvement in the dramatically raise their service charges. This
creation of commonhold communities differs generally cannot happen in California because
among the jurisdictions. Some jurisdictions have California reviews the developer’s initial
almost no regulation other than local planning budget. Most jurisdictions, however, do not
law. In California, however, a developer cannot review the initial governing documents in this
create a residential commonhold development degree of detail.
without gaining approval from the California
Department of Real Estate.25

13
3 Issues in more detail

The following assumptions are made in IV Preliminary provisions

discussing the issues.
A itle T of act: commonhold communities law
1 Commonhold communities can be The title of Queensland’s law, NSW’s law, the
commercial or residential. US UCIOA and California law all have the
concept of common ownership or community in
2 They can consist of attached or detached
their titles.1 The terms ‘common’ and
units.
‘community’ are included because it is
3 Commonhold communities can be important that the concept of shared interest
created by new construction or by and shared responsibility be obvious from the
converting existing structures to this form title.
of ownership.
B Legislative intent
4 Commonhold communities are
Not all of the various statutes provide
communities in which the association
legislative intent. In the US, legislative intent
owns the common area, and the owners
assists the court in interpreting statutes.
own a freehold interest in a part of the
Legislative intent is sometimes included when
community, an interest in the association
there is a concern that a statute will be
and possibly an exclusive use common
challenged in court.
area (parking space, etc.).
Some goals listed in statutes in Queensland
5 It may be possible to modify some of the law include the following:
operational aspects of commonhold
a to balance the rights of individuals with
communities so they can apply in the
the responsibility for self-management as
leasehold setting.
an inherent aspect of community titles
Although, in Queensland, the Body schemes
Corporate and Community Management Act
b to promote economic development by
applies only to condominiums (where the
establishing sufficiently flexible
owners own the common area as tenants-in-
administrative and management
common), the Queensland law is included in the
arrangements for community titles
discussion because, in many respects, it is
schemes
relevant. New South Wales has separate statutes
for condominiums and planned communities in c to provide a legislative framework
which the association owns the common area. accommodating future trends in
UCIOA and California statutes apply the same community titling
law to condominiums, housing co-operatives
d to ensure that bodies corporate for
and planned communities.
community titles schemes (associations)
have control of the common property and
body corporate assets they are

14
 Issues in more detail

responsible for managing on behalf of every law that might be affected by this
owners of lots included in the schemes legislation and, therefore, impossible to know if
a court may subsequently find that a particular
e to provide bodies corporate with the
provision of the new law violates existing
flexibility they need in their operations
provisions of English law.
and dealings to accommodate changing
circumstances within community titles 2 Liberal construction
schemes It is customary to have a provision in the statute
that says that the commonhold community laws
f to provide an appropriate level of
should be liberally construed to encourage the
consumer protection for owners and
efficient creation and operation of commonhold
intending buyers of lots included in
communities.
community titles schemes

g to ensure accessibility to information D Interaction with other laws

about community titles scheme issues 1 Taxation
Commonhold communities create a unique
h to provide an efficient and effective
property taxation issue. The issue arises after
dispute resolution process.2
the original owner has conveyed a unit (flat,
There may be a desire to make this section, if house, or commercial space) in the commonhold
it is included, more consumer oriented. When scheme. Although the association owns the
discussing consumer protection, however, it is common area, the common area should not be
important to think about which consumers one taxed as a separate parcel of property because
is protecting. For example, if a roof needs to be the value of the property is already reflected in
repaired and one owner isn’t paying his or her an owner’s freehold interest.
service charges, the other owners will be An owner owns a freehold in a separate area
obligated to cover the defaulting owner’s debt if and a percentage interest in the common area. If
they want the roof repaired. So, one needs to the association’s property is taxed and the
consider whether one is protecting the owner owner’s interest, which includes a percentage
violating the commonhold community rules or interest in the common area, is also taxed, the
the owner who is following them. common area is taxed twice. This concept does
not apply where the original owner retains the
C Construction of statute common area in his or her sole ownership for
1 Severability future annexation or for other development
It is common in the US to have a provision in rights.
the statute that says, if the court determines that A second taxation issue arises if the service
a provision of the statute is invalid, that charges or reserve funds are taxed. Generally,
provision is severed from the statute and the commonhold associations do not run a business
rest of the statute is valid. It might be wise to and do not make a profit. Therefore, generally,
include this type of provision because the the government should not tax service charges
statute is untested. It is impossible to think of collected or the reserve fund.

15
Commonhold law

If the reserve fund makes a profit on community. The law should provide for an
investments, a policy decision needs to be made. automatic recalculation of the allocated interests
The government may wish to treat the of all units.
association similarly to an individual and tax ‘Allocated interests’ include an owner’s
the profit on investments. On the other hand, it percentage interest in the commonhold
may wish to encourage the creation of adequate community, voting rights and the obligation to
reserve funds so the blocks of flats do not fall pay assessments. For example, assume there are
into long-term disrepair. If this is the case, the two buildings with 50 units in each building
profits made on the reserve fund should not be and each owner has a hundredth interest in the
taxed. If the association is running a business, it association and one of 100 votes. If the
seems reasonable to treat the association’s government forces a purchase of one of the
business profits in the same manner as other buildings, there will only be 50 units left. Thus,
business profits. the interests need to be reallocated.

2 Local land development regulations and 4 Supplemental general principles of law

building codes applicable
Some planning statutes and building codes in It is common for statutes to provide that the
the US attempt to discriminate against buildings general principles of law and equity apply,
based solely on their form of ownership. For except to the extent they are inconsistent with
example, statutes may require different firewalls the Commonhold Communities Act. Such a
(different construction) depending on whether provision makes it clear that the existing
the building is an apartment building insolvency law, company law, etc. would apply
(containing short-term leased flats) or a to the creation and operation of commonhold
commonhold community. A provision should be communities except to the extent that they are
included in the law that prohibits inconsistent with the commonhold community
discrimination based solely on the form of law.
ownership.
E ariation
V of law by agreement
3 Compulsory government purchase
There are two ways of approaching this
In the US, when the government or
legislation. Statutes and regulations can provide
governmental agency acquires a freehold
default provisions that will control if the
interest through a compulsory government
governing documents are silent. Alternatively,
purchase, other freehold interests are not
statutes and regulations can control unless they
directly impacted. In a commonhold
specifically permit the governing documents to
community, they may be.
deviate from the law. Either approach is
For example, one building of a two-building
workable.
commonhold community may be purchased.
Whichever approach is used should permit
The law must address what happens when the
creativity in the creation of commonhold
government purchases one or more, but not all,
communities. Developers, particularly those
of the flats or houses in a commonhold

16
 Issues in more detail

creating commercial commonhold communities, common area and perhaps an exclusive use
should be permitted flexibility so they can common area. An exclusive use common area is
create a variety of communities to satisfy one that is part of the common area but
particular needs of the market place. designated for the exclusive use of one or more,
The definition of governing documents will but not all, of the owners. The exclusive use
need to be developed. The governing areas are generally patios, balconies, or parking
documents include the document that creates spaces.
the commonhold community. This document In commonhold communities, the owners
could be called the Commonhold Community are bound by covenants that create a common
Statement, which is similar to the Australian scheme. These are contained in a Commonhold
name. In the US, it is called the master deed, the Community Statement that also contains other
declaration, or the Covenants, Conditions, and provisions that are discussed later in the paper.
Restrictions (which is a name that does not While it is possible to have a commonhold
accurately describe the contents of the community that has only architectural
document). Additional governing documents restrictions and, therefore, no service charges,
include the documents that incorporate the generally, commonhold communities do have to
association, that contain the operational maintain common area so the owners have to
procedures of the association and sometimes a pay service charges.
document containing the rules created by the
association. B Master commonhold community
The deed to the freehold is not part of the A master commonhold community is one in
governing documents. It should, however, at which there are two or more commonhold
least refer to the Commonhold Community communities. A master commonhold
Statement. community probably needs to be created only
when there is common area that is shared by the
commonhold communities making up the
V Definitions
master community.
This section will be created at the end of the It is possible to create a master commonhold
process but some pivotal definitions can be association without creating a master
identified now. It is very important that any commonhold community. For example, assume
definitions ultimately presented be circulated the lower floor of a building is commercial and
for critical review. If the definitions are is owned by one person. The four floors above
confusing or wrong, litigation will ensue. the commercial floor are residential floors that
are one commonhold community. It is probably
A Commonhold community advisable to permit the commercial owner and
A commonhold community is one in which an the commonhold community to create a master
owner owns a freehold in a unit (which can be a commonhold association to deal with
flat, a lot, or a variety of other things), an maintenance and other issues that affect both
interest in the association that owns the interests in the building without requiring them

17
Commonhold law

to create a master commonhold community. C Unit

In this case, one would not create a master The owner’s freehold interest needs a name. The
commonhold community because there would goal is to be as expansive as possible in defining
not be two commonhold communities forming a the range of freehold interests that can exist in a
master commonhold community. Instead, it commonhold community. This form of
would be an association consisting of one ownership should be available for blocks of
commonhold community and a commercial flats, detached buildings, or any other form of
owner as members. real property. For example, in the US, parking
Having two voting classes can protect both spaces, boat slips and airspace containing
the commercial and residential interests. For mobile homes are held in this form of
example, the residential commonhold ownership. One developer even created a unit
community could be Class A and the for a cash machine in a commonhold
commercial Class B. The governing documents community. The unit was the size of the cash
could then require a majority of each class to machine.
approve a motion or they could provide some Developers should be given the flexibility to
other voting structure that would prevent one be creative. (Consumer protection issues are
entity from consistently controlling the outcome addressed elsewhere.) While the goal is to be
of the vote. If the voting structure were based on flexible, this definition has to be compatible
floor area either the residential or commercial with definitions of real property in existing
interests, depending on the respective floor area statutes.
space, would always control the outcome of a If it is clearer, the statute could use the term
vote. ‘separate interest’ instead of ‘unit’. This is the
A simpler way of addressing the same term used in California.3 It reinforces the fact
maintenance issues would be to specifically give that a commonhold community consists of areas
the commonhold association the authority to owned separately and areas where there is a
enter into cross covenants for maintenance and shared interest. Also, sometimes the word ‘unit’
cross easements where appropriate. The statute implies space within a building, and the
could state that these covenants run with the separate interest does not have to be within a
land. This approach would let the entities create building. Whichever term is clearer should be
their own arrangements for voting structure used.
depending on the characteristics of the The term ‘freehold’ should not be used to
particular building. This approach could be identify the separate interest. The association
confined to commonhold communities that are generally owns the common area in freehold,
contained within a mixed-use building if so and, thus, using this term to identify the
desired. This approach does not require the owner’s separate interest would be confusing.
creation of another association (the master An owner of a long-term lease of a building
commonhold community association) and, may wish to convert the entire building to a
therefore, may be more desirable. commonhold community, with the
commonhold community terminating at the end

18
 Issues in more detail

of the long-term lease. Commercial developers, considering the commonhold community law
in particular, may wish to develop property this will be new. On the other hand, the flexibility of
way. If having a commonhold community on assigning parking spaces may be desired.
leasehold property is viable, then the definition Even if exclusive use areas are designated in
should include leasehold property. the Commonhold Community Statement, the
If there are concerns about protecting owners can change the boundaries by amending
consumers in this situation, provisions can the Statement. Amendments will be discussed
easily be added to the law to require the later.
developer to give the consumers full disclosure
of the arrangement. Consumer protection is F Commonhold community association
discussed later in the paper. A commonhold community association is the
association that governs the commonhold
D Common area community. Some jurisdictions in the US require
Common area, the area the association owns, is the association to be incorporated; others do
usually a default definition. In other words, not. In the US, individual owners in an
statutes state that if property is not a unit it is unincorporated association can face greater
common area. liability than those in an incorporated
association. In the US there is no apparent
E Exclusive use common area reason why one would want the commonhold
Exclusive use common area is a portion of the community association to be unincorporated.
common area allocated in the Commonhold The issue of incorporation, however, should be
Community Statement for the exclusive use of discussed because perhaps there are advantages
one or more but fewer than all of the units. In of being an unincorporated association under
some jurisdictions, the association is permitted English law that do not exist in the US.
to allocate common area as exclusive use If associations are incorporated, there are
common areas even after the Commonhold two different approaches one can use. In
Community Statement is registered. For Australia, the traditional company law does not
example, if there are more units than parking control commonhold associations. The
spaces, either the Commonhold Community commonhold statutes include the company law
Statement can allocate the spaces to particular that applies only to commonhold companies. In
units or it can give the association the ability to the US, it is common for the company law
assign the parking spaces on some rational statutes to be modified to accommodate the
basis. unique problems that occur in commonhold
Again, a policy decision needs to be made. associations. The Australian approach is clearer
On the one hand, having the exclusive use areas and is less likely to produce unintended
designated to particular units in the consequences. The US approach, however, is
Commonhold Community Statement creates probably easier to draft. It is important though,
fewer arguments among the owners because if the latter approach is used, to amend the
there is certainty. Certainty may be desirable company law so that it accommodates the

19
Commonhold law

unique requirements of commonhold termination of commonhold communities

companies. comes from the Uniform Common Ownership
Because modifying traditional company law Act. UCIOA provides much more flexibility
may result in modifying statutes that were than does the law of either NSW or Queensland.
intended to apply only to traditional companies,
1 Commonhold community
it is essential that those familiar with company
A commonhold community is generally created
law review the existing company law in light of
by registering the document I have called the
the unique characteristics of commonhold
Commonhold Community Statement. This
companies. Some of the differences were
document is registered in every county where a
discussed previously and will be mentioned
portion of the commonhold community is
again later.
located because people purchasing property
need to be able to have easy access to the
G Development rights
Commonhold Community Statement.
Development rights are any combination of
All jurisdictions require registration of a
rights reserved by the developer in the
Commonhold Community Statement in order to
Commonhold Community Statement. These can
create a commonhold community. In California,
include the right to:
the developer also has to convey one unit before
1 add real estate to the community the community is created.4 The California law
was created because occasionally a developer
2 withdraw real estate from a commonhold
creates a commonhold community and then
community
finds after construction that they are not able to
3 create units, common areas, or exclusive market it. If they have not yet conveyed one
use common area within a commonhold unit they can easily change the building from a
community commonhold community to a rental project.

4 subdivide or convert units into common 2 Master commonhold community

area. A master commonhold community consists of
more than one commonhold community. One
H Many other definitions may wish to create a master commonhold
These are just a few of the basic definitions. community in the following situation. Assume
Many more will need to be added as the process there are four blocks of flats around a garden.
progresses. Each block of flats has its own unique
maintenance and covenant issues, but all blocks
want to share the common garden. Each block
VI Creation, alteration and termination of
could be a separate commonhold community
commonhold communities
with maintenance obligations, voting and other
A Creation rights pertaining just to that block. Only those in
The basic content of much of the material the affected block would get to vote on issues
dealing with creation, alteration and relating to that block.

20
 Issues in more detail

The master commonhold community would permit the association to join a master
own the garden and other common area that is association when the documents are silent. As
not contained within an individual block of flats mentioned previously, it is important to require
or commonhold community. Each individual the agreement to be registered so that a
commonhold would be represented on the prospective purchaser and owner can get a copy
board of the master commonhold community. It of the agreement that identifies the rights and
would be necessary to register a Commonhold obligations of the owners.
Community Statement delineating all of the
4 Commonhold Community Statement
respective rights and obligations.
The Commonhold Community Statement
3 Master commonhold association creates the commonhold community and serves
England also should consider permitting the as a disclosure statement for potential
creation of a master association without the purchasers and owners. Therefore, it is
necessity for creating a master commonhold important that it contain sufficient information
community. Assume there is a commercial for a potential purchaser to decide if he or she
owner on the first floor of a building and a five- wishes to purchase a unit.
storey residential commonhold community Below is a combination of some of the
above. The residential commonhold community information required by various jurisdictions in
and commercial owner may wish to enter into the US and Australia. When deciding whether
an agreement that delineates the rights and this is too much information, it might be helpful
obligations of each. The parties could enter into to imagine what information you would like if
an agreement that creates the master association you were purchasing a flat or home in a
and delineates the respective parties’ rights and commonhold community. It may not be
obligations. The law could require the necessary for the Commonhold Community
agreement to be registered. Statement of a commercial commonhold
Another option would be to permit the community to contain as much information. The
parties to enter into a maintenance agreement following list is taken predominately from
without creating a master association. The Section 2-105 of UCIOA.
agreement would create covenants that run with
a A name identifying the commonhold
the land and address the allocation of voting
community.
rights and maintenance obligations. The law
could require the agreement to be registered in a b The words ‘commonhold community’.
manner that would make it accessible to
c The name of every county in which any
potential purchasers and owners.
part of the commonhold community
It is very possible that the Commonhold
exists.
Community Statement may not mention
whether the commonhold community may d A legally sufficient description of the
become part of a master association. If this is the commonhold community.
case, a decision needs to be made whether to

21
Commonhold law

e A statement of the maximum number of m The exclusive use common area and the
units that the original owner reserves the unit to which it is allocated.
right to create.
n Any rights of the original owner to use
f A description of the boundaries of each the property for sale purposes.
unit created by the declaration, including
q Any easement rights of the original
the units.
owner.
g A description of any exclusive use
r Covenants identifying the rights and
common area and any real estate that is or
obligations of the parties or a schedule
must become common area.
existing in the regulations which
h A description of any development right identifies the rights and obligations of the
reserved by the original owner, together parties which are intended to run with
with a legally sufficient description of the the land and whether those covenants
real estate to which each of those rights have a time in which they will expire.
applies, and a time limit within which
s A plan showing:
each of those rights must be exercised.
1 the name and a survey or general
i Any restrictions on alienation of the units, schematic map of the entire
including any restrictions on leasing, on commonhold community
the amount for which a unit may be sold, 2 the location and dimensions of all real
on the amount that may be received by a estate not subject to development
unit owner on sale or casualty loss to a rights, or subject only to the
unit or commonhold community, or on development right to withdraw, and
termination of the commonhold the location and dimensions of all
community. existing improvements within that real
estate
j The registration information for
3 a legally sufficient description of any
registered easements and licences
real estate subject to development
appurtenant to or included in the
rights, labelled to identify the rights
commonhold community or to which any
applicable to each parcel
portion of the commonhold community is
4 the extent of any encroachments by or
or may become subject by virtue of a
upon any portion of the commonhold
reservation in the Commonhold
community
Community Statement.
5 to the extent feasible, a legally
k Any lease the expiration or termination of sufficient description of all easements
which may terminate the commonhold serving or burdening any portion of
community or reduce its size. the commonhold community
6 the approximate location and
l The interest allocated to each unit.
dimensions of any vertical and

22
 Issues in more detail

horizontal unit boundaries and the of a project. The plan constitutes a boundary
unit’s identifying number survey of each unit. To the extent the plans
7 a legally sufficient description of any contain the above information, it should not be
real estate in which the unit owners duplicated in narrative form unless the plan
will only own an estate for years, cannot be easily understood.
labelled as ‘leasehold real estate’ Obviously, this information needs to be
8 the distance between non-contiguous reviewed by chartered surveyors and others to
parcels of real estate comprising the determine if the list is too exhaustive, if it does
commonhold community not include enough information, and if it is
9 the approximate location and consistent with English practice. In particular,
dimensions of any porches, decks, the surveyors should determine if these
balconies, garages, or patios allocated requirements are too onerous for the conversion
as exclusive use common areas and a of existing buildings to commonhold. Even in
narrative description of other existing buildings, however, it is essential for
exclusive use common areas. the owners to know the boundaries of their
freehold interest and the boundaries of the
t Unless the Commonhold Community
property that the association owns.
Statement provides otherwise, the
Although the above information is a lot of
horizontal boundaries of part of a unit
information, there may be an advantage in
located outside a building have the same
having the section be clear and err on the side of
elevation as the horizontal boundaries of
inclusion. On the other hand, a balance needs to
the inside part and need not be depicted.
be struck between inclusion and excessive
u To the extent that this section requires the verbiage.
same information to exist in the plan and The Commonhold Community Statement
other provisions of this section, the must identify the rights of the original owner to
information need not be duplicated. add or subtract units. There are ways of limiting
this right that should be discussed. For example,
v The Commonhold Community Statement
the statute or regulations could state that the
may also contain any other matters the
right terminates after a specified period of time
owners deem appropriate.
or after a certain number of units have been
As mentioned, this document serves a sold.
couple of purposes. In addition to establishing The problem of timing arises when a
the commonhold community and the developer decides to build a 100-unit
description of property interests, it serves as a community in ten phases. Assume, after he or
disclosure document. An owner should be able she sells ten units, the economy declines and
to read this document and understand his or her there is no market for additional units. The
ownership interest and the covenants. developer will choose to wait until there is a
The term ‘plan’ is not intended to mean the market for the units before continuing with the
actual building plans used for the construction other 90 units. How long should he or she be

23
Commonhold law

permitted to wait? At what point do the original appropriate amendment procedures, a

ten unit owners have a right to know whether designated officer of the commonhold
they will be part of a ten-unit community or association should be able to sign the
100-unit community? amendment to the Commonhold Community
In the US, the Commonhold Community Statement.
Statement generally contains covenants that This approach is particularly important in a
identify the rights and obligations of the large commonhold community. Locating all the
owners. In Queensland, the statement generally owners, especially absentee owners, and getting
includes provisions contained in one of the them all to sign on the same document has
schedules which are in the statute.5 The posed a significant problem in the US. Getting
schedules identify the rights and obligations of appropriate signatures posed such a problem in
the owners. The developer, however, can California that the legislature enacted a law that
deviate from these schedules to create covenants requires only the signature of the president or
better suited to a particular community. NSW the person designated in the Commonhold
has a different approach, but it also has Statement for signing amendments.7
schedules containing model covenants.6 In addition to the original owner or owners,
Even though in New South Wales the others with an interest in the property may be
covenants are in the regulations, they are required to sign. For example, the landlord
repeated in the Commonhold Community should probably be required to sign if the
Statement and documents. Therefore, the commonhold community is created on leased
documents prepared in connection with a sale land. Mortgagees and those with encumbrances
look similar in the US and NSW in that both are or other charges probably also should sign. The
extensive. difficulty in obtaining signatures should be
weighed against the advantage of having
5 Signatures on the Commonhold Community
everyone with an interest know what is being
Statement
created.
Someone has to sign the Commonhold
In addition to the Commonhold Community
Community Statement. If the commonhold
Statement, other documents control procedures
community is created by new construction or by
such as the bylaws of the association and rules
conversion of an existing building that is owned
created by the association. These are discussed
by one entity, a representative of that entity is
later.
the person who would sign the Commonhold
Community Statement. 6 Allocation of allocated interests (percentage
Even if all owners have to sign the original interest in association, services charges and
Commonhold Community Statement, it is voting)
probably not desirable to require all to sign The Commonhold Community Statement must
amendments unless land is added or subtracted allocate to each unit a fraction or percentage of
from the commonhold community. For example, the common expenses of the association and a
if the owners decide to amend the covenants in portion of the votes in the association. It needs
a Commonhold Community Statement through to state the formulas used to establish the

24
 Issues in more detail

allocations of interests and the interests used purposes of voting on expenditures affecting
when units are added or subtracted from the only their block, but not be permitted to vote by
commonhold community. class on rules for the use of facilities used only
The Commonhold Community Statement by the high-rise building.
may provide that different allocations of votes In some jurisdictions, the developers are
can be made to the units on particular matters. permitted to create a separate class for
For example, if a matter disproportionately themselves while they sell out their interests. In
affects some units, the Commonhold other jurisdictions, this is not permitted. Where
Community Statement may give those owners a it is not permitted, however, other methods are
greater percentage of votes on that matter. used to give the developer control during the
The law needs to specifically address the initial phases of the commonhold, which are
allocation of interests and require the formula to called development rights and are discussed
be included in the Commonhold Community elsewhere in this paper. Consumer protections
Statement. This prevents disputes and also exist.
eliminates lawsuits. Those who have lived with
7 Exclusive use common area designated in
this law have learned the hard way the
Commonhold Community Statement
importance of having these issues clear.
The Commonhold Community Statement must
Class voting may be particularly desirable in
specify that the association has the power to
a mixed-use commonhold community. There
assign exclusive use common areas (such as
may be certain kinds of issues upon which the
parking spaces) or it must designate a unit or
residential or commercial unit ownership
units to which each exclusive use common area
should have a special voice. To prevent abuse of
is allocated. If an exclusive use common area is
class voting by the original owner, the law
allocated in the Commonhold Community
should allow class voting only with respect to
Statement to a particular unit, it should not be
specified issues that directly affect the
altered without the owner’s consent and
designated class and only insofar as necessary
without registering an amendment to the
to protect valid interests of the designated class.
Commonhold Community Statement.
A situation in which class voting may be
Exclusive use common areas are technically
desirable is one in which there are 50 units but
‘owned’ by the association. The unit owner,
only 30 have parking spaces assigned to them.
however, may have the obligation to maintain
Perhaps those owning the parking spaces
the exclusive use common area. The
should be the only ones permitted to vote on
Commonhold Community Statement or law
issues relating to the parking spaces.
should provide that an owner may not convey
Also, assume there is a single commonhold
their exclusive use common area without
community consisting of both a block of flats
conveying the unit.
with common vertical boundaries (no unit
The statutes and regulations should make
above another unit) and high-rise buildings. The
clear whether the exclusive use common area,
owners in the block with vertical boundaries
such as parking spaces, can be assigned after the
might properly constitute a separate class for

25
Commonhold law

registration of the Commonhold Community b The date on which the lease is scheduled
Statement. The law could require all exclusive to expire.
use areas to be identified in the Commonhold
c A legally sufficient description of the real
Community Statement, or it could state that
estate subject to the lease.
subsequent allocation is permissible unless the
Statement provides otherwise. d Any right of the unit owners to acquire
the reversion and the manner in which
8 Commonhold communities on leasehold
those rights may be exercised, or a
property
statement that they do not have those
This section discusses a situation where the
rights.
entire commonhold property is located on land
that is leased. For example, a developer may e Any right of the unit owners to remove
own a 99-year lease on property. If the law any improvements within a reasonable
permits the creation of commonhold time after the expiration or termination of
communities on leased property it should the lease, or a statement that they do not
require additional protections for the owners. have those rights.
The law should require the lessor to sign the
f Any rights of the units owners to renew
Commonhold Community Statement creating
the lease and the conditions of any
the community. The signature ensures that the
renewal, or a statement that they do not
lessor has consented to the creation of a
have those rights.
commonhold community. If, because of the age
of some of the leases in England, it is not If the commonhold community is on leased
possible to find the original lessor, some property, then the law should also state that the
provision needs to be made to let the court or lessor may not terminate the leasehold interest
other appropriate body act on behalf of the of a unit owner who makes timely payment of
inaccessible landlord. his or her share of the rent or service charges,
It may or may not be necessary to require the whichever is appropriate. Unit owners should
lease to be registered. The owners, however, not share collective obligations to the lessor.
should have access to a copy of the lease. Thus, if the association defaults in the payment
If the law permits the commonhold of the rent owing to a lessor, the lessor should
community to be created on property held not be able to terminate the continued use of the
under a long-term lease, the law should require common areas by those unit owners who pay
the Commonhold Community Statement to their pro-rata share.
contain the following information. This The law should also provide that acquisition
information appears in 2-106(a) of UCIOA. of the leasehold interest of any unit owner by the
owner of the reversion or remainder does not
a The registration data for the lease or a
merge the interests unless all the interests of the
statement of where the complete lease
units are acquired. In other words, all owners
may be inspected.
should be sublessees with the same rights.

26
 Issues in more detail

Although all owners are sublessees under course these should be enforceable against
long-term leases in this commonhold subsequent purchasers. Further, to the extent
arrangement, their rights are different from those that any unit encroaches on any other unit or
that exist in many present long-term leases. In the common area, the law should create an implied
case of commonhold sublessees, all have a vote easement for encroachment. These implied
and all are controlled by the same covenants. The easements are important because the actual
landlord has no control in the community. physical boundaries may differ somewhat from
the boundaries shown on the plans.
9 Description of units
The law should provide that a description of a 12 Construction and validity of Commonhold
unit which is set forth in a registered Community Statement and Bylaws
Commonhold Community Statement and which The law should provide that provisions of the
identifies the unit by number is a legally Commonhold Community Statement and
sufficient description of the unit and all the Bylaws are severable; that when the
rights and obligations appurtenant to the unit. Commonhold Community Statement and
The purpose is to prevent the description of a Bylaws are in conflict, the Commonhold
unit in a deed, lease, mortgage, or any other Community Statement controls; and that the
instrument from being subject to challenge for Rule against Perpetuities does not apply to
failure to meet any common law or other interests created by the Commonhold
requirements. Community Statement. These issues have been
the subject of litigation in the US. Courts have
10 Unit boundaries (default definition)
been asked to determine if the Rule against
It is important to know precisely what is and is
Perpetuities applies to the right of first refusal to
not included within the definition of a unit for
purchase a unit which some associations have.
purposes of maintenance. For example, if the
The law also could provide that title is not
association has the obligation to maintain the
rendered unmarketable by reason of
common area, and the unit owner has to
insubstantial failure of the Commonhold
maintain their separate area (freehold), it is
Community Statement to comply with the
important to know whether things like awnings,
Commonhold Communities Act.
heating ducts, electrical outlets, floors,
windows, etc. are part of the separate area or 13 Amendment of Commonhold Community
part of the common area. It is also important to Statement by owners
define the exclusive use common area. The law The right to amend the Commonhold
should provide a default provision that applies Community Statement raises several policy
when these issues are not adequately addressed issues.
in the Commonhold Community Statement.
a Different voting schemes
11 Implied easements The manner in which abstentions are counted
The law should imply easements for subjacent affects the likelihood that an amendment will
and lateral support where appropriate and of pass. If one requires a vote without dissent, then

27
Commonhold law

an abstention, in effect, is an affirmative vote. In Queensland has an interesting voting

other words, if someone doesn’t dissent, the system.8 It has three different voting
amendment passes. The burden is on those who requirements depending on the magnitude of
wish to dissent to act. On the other hand, if an the issue being addressed. If the owners’
amendment requires a 100 per cent affirmative property rights are being affected significantly,
vote of the owners, then an abstention counts as the Commonhold Community Statement or law
a negative vote, and the amendment does not may require a super-majority. These resolutions
pass. may require a vote without dissent. For
Another possibility is to require an example, amending the Commonhold
affirmative vote of a quorum. It is much easier Community Statement requires a resolution
to pass an amendment if all that is required is a without dissent to change the name of the
vote of a quorum, which is generally much scheme, adjust the allocated interests, or adopt
lower than 100 per cent of the owners. an architectural and landscape code.
In large projects or ones with absentee If property rights are being affected to a
owners, it is often very difficult to get people to lesser degree only, a special resolution may be
vote. In the US, it is sometimes impossible to required. A special resolution is passed if the
amend the Commonhold Community Statement following are satisfied:
if that Statement requires a super-majority, such
1 The votes counted for the motion are
as 75 per cent, to amend it. It is important to be
more than the votes counted against.
able to amend the Statement both because
conditions change over time and because the 2 The number of votes counted against is
original documents may have been poorly not more than 25 per cent of the votes in
drafted. One option is for the law to provide the community.
that an amendment is valid unless 25 per cent
3 The total of the allocated interests is not
vote against it.
more than 25 per cent of the total of all
Because it is difficult to get some owners to
allocated interests for all lots in the
vote, whenever a super-majority vote is
scheme.9
required of all the owners, rather than of a
quorum, it may be preferable to require a vote Even lesser changes require an ordinary
without dissent. Perhaps it should depend on resolution that passes if the votes counted in
the extent to which the outcome of the vote favour of the resolution are greater than the
affects the owners’ property interest. votes against the resolution.
Perhaps the percentage required to amend
b Who should sign the amendment?
the Commonhold Community Statement should
It is important not to require all the unit owners
be different depending on the issue. For
to sign the amendment. It is extremely difficult
example, should the percentage required to
to get all to sign one document, and one holdout
prohibit a particular use of a unit be greater
can prevent the amendment from being
than the percentage required to change a
effective.
provision that has less impact on the owners?

28
 Issues in more detail

c Giving mortgagees and other holders of security and the time they market it, it is important to
interests the right to vote on amendments permit the developer flexibility. On the other
In the US, mortgagees and other holders of hand, those who purchase units in the
security interests are sometimes given the right community have a right to some certainty.
to vote on amendments to the governing The right to add or subtract units or land to a
documents. A major problem arises when their community is sometimes called development
affirmative vote is required because the lenders rights. In the US, development rights are often
often don’t have a department or person to deal closely co-ordinated with financing for the
with this issue. The result is that they don’t community. A construction loan might provide
respond at all, which means that the document that, as soon as units or land are added in a
can’t be amended. Lawyers in the US have phased project, the mortgage becomes a
begun to change the governing documents to mortgage on the entire project.
provide that, if a lender doesn’t vote within a Assuming developers are given the right to
specified period of time, such as 30 days, the add or subtract real estate from the community,
lender loses its right to object. This process the law needs to provide a method for
could be set forth in the law. automatic reallocation of the interests of the
owners. For example, if a community contains
14 Amendment of Commonhold Community
ten flats and ten more are added, the original
Statement by court order
owners now have a one-twentieth interest
When the California legislature held hearings
rather than a one-tenth interest.
on commonhold communities, it discovered
The developer might also be given the right
that some communities had poorly drafted
to subdivide units. This may be particularly
documents and were unable to amend their
desirable in a commercial commonhold
Commonhold Community Statement. This
community. For example, the developer of a
posed a serious problem because these
five-storey office building commonhold
Statements set service charges at such a low rate
community may have people committed to
that the community could not generate enough
purchase the bottom three floors at the time of
money to repair the structures. Therefore, the
the filing of the Commonhold Community
legislature enacted a statute permitting the court
Statement but lack purchasers for the upper two
to amend the documents under exceptional
floors. In such a circumstance, the original
circumstances.10
owner could designate the upper two floors as a
I am not aware of any other jurisdiction
unit, reserving to themselves the right to
having a similar provision, but it is a good one.
subdivide or convert that unit into additional
It provides a safety valve.
units, common areas, or a combination of units
and common areas as needed to suit the
B Alteration of boundaries and units
requirements of the ultimate purchaser.
1 Alteration of boundaries by developer
If, at a later time, a purchaser wishes to
Because market conditions can change between
purchase half of one floor as a unit, the
the time the developer creates the community
developer could then exercise the development

29
Commonhold law

right to subdivide his or her two-floor unit into for maintaining it. Altering the rights in the
two or more units. He or she may also wish to common area, however, should be permitted
reserve a portion of the divided floor as a only if a super-majority of all of the owners
corridor that will constitute common area. In agree to the amendment.
that case, he or she would reallocate the The law could provide that the above is
allocated interests among the units. permitted only if the Commonhold Community
In order to protect purchasers, it is essential Statement specifically permits alteration of
that all development rights are fully disclosed in boundaries by fewer than all the owners or it
the Commonhold Community Statement and, may provide that alteration is permitted
when real estate is added or subtracted, the pursuant to statute or regulations unless the
developers or owners should be required to Commonhold Community Statement
amend the Commonhold Community specifically prohibits it. If alteration is
Statement. It is also important to set a limit on permitted, the process should not be so
the amount of time in which the developer, or cumbersome as to make it impossible to occur.
their successors, may exercise those rights. The
3 Subdivision of units by owners
owners have a right to certainty at some point.
It may also be desirable to permit subdivision of
2 Relocation of unit boundaries between units units by owners. Whether this is desirable will
by owners depend on the project. Any subdivision would
It is desirable to give unit owners the ability to have to be consistent with the overall scheme.
change boundaries and reallocate interests In most residential communities, it would
between their units. This right can be subject to not be desirable to permit subdivision because
the approval of the board of directors to make subdivision results in an increase in density and
sure the alteration will not cause any structural additional use of common facilities. Therefore, if
or aesthetic problems. subdivision is permitted, it may be desirable for
If alteration is permitted, the board should the law to provide that subdivision is permitted
register an amendment to the Commonhold only if the Commonhold Community Statement
Community Statement reflecting the alteration expressly permits it.
and the reallocation of the interests of the If units are subdivided, it will be necessary
affected owners. The amendment should be to register an amendment to the Commonhold
executed by the affected unit owners and Community Statement. The amendment should
contain words sufficient to convey any interests include new plans and satisfy all the
that are being conveyed. requirements for identifying the new units.
It also may be desirable to permit an owner If subdivision is permitted, thought must
to alter boundaries by incorporating common also be given to reallocating the interests.
area. For example, one owner may have a small Perhaps the percentage interest of a unit that is
portion of common area to which only he or she subdivided would be a fraction of the original
has practical access. The other owners may interests of that unit. For example, if there are
decide they would like to sell him or her this ten units and one owner subdivides unit 10, the
common area and make him or her responsible interests for units 10 and 11 would each be half

30
 Issues in more detail

of the previous interest of unit 10 (one- economically reasonable to rebuild them. The
twentieth). cost would have been prohibitive and there was
not adequate insurance. Because California does
4 Alteration of unit by unit owner
not have a law permitting 80 per cent to
It is important to give an owner the ability to
terminate the commonhold community, as do
make improvements or alterations in their unit
some jurisdictions, some of the commonhold
provided the alteration does not affect the
communities could not be terminated and sold
structural integrity of the building. For example,
to the highest bidder.11 Consequently, the
an owner should be able to drive a nail into the
owners had to walk away from their units and
wall, which could be common area, to hang a
default on their loans.
picture because that nail does not affect the
Assuming termination is permitted by fewer
structural integrity of the building. An owner
than 100 per cent of the owners, safeguards
who owns two units should be able to create a
need to exist. First, the percentage required to
doorway between the two units provided the
terminate should be a super-majority, for
structural integrity of the building is not
example 80 per cent. The agreement should be
affected and an owner should be able to remove
executed in the same manner as a conveyance
a partition between two units. Removing a
and be registered. The association also should
partition does not create one unit, however. To
be terminated.
merge two units into one would require the
Provisions should be made for permitting
owner to comply with the provisions relating to
the association to sell the property. The proceeds
altering unit boundaries.
should be distributed in the same proportion as
The alterations should not conflict with
the allocated interests.
specific provisions in Commonhold Community
If deemed desirable, the law could provide
Statements. They also should not affect the
different rules for termination of commonhold
appearance of the community without the
communities with attached units and those with
permission of the association.
detached homes. It may not be necessary to
force owners of detached homes to sell their
C ermination
T
homes without their consent. Perhaps the
It is important to have a provision that permits
Commonhold Community Statement could be
termination of the commonhold community
terminated and the association could sell the
with less than 100 per cent approval by the
common area, but the owners of viable free-
owners in order to address extraordinary
standing houses could keep their homes. In
circumstances. It is usually impossible to get 100
distributing the proceeds of the sale, the
per cent approval depending on the size of the
association would have to take into account the
project and one holdout should not be able to
value of the various interests.
affect the economic interests of the other
owners.
D Merger of commonhold communities
In Los Angeles, California, after the 1994
The law should make it possible for two or more
earthquake, some commonhold communities
commonhold communities to merge into a
were destroyed to the point where it was not

31
Commonhold law

single new community. This may be desirable specialise in the field. It is difficult to locate all
when two adjacent buildings, each of which is a the relevant statutes. On the other hand, the
commonhold community, have common area approach does not necessitate duplicating the
that would more logically be part of one company law that is relevant to both
community. commonhold associations and traditional
In the alternative, commonhold communities companies. If, however, the US approach is
could form a master commonhold community used, it is very important that the provisions of
with each community retaining responsibility for existing company law that apply to
some common area but sharing responsibility for commonhold communities be appropriate for
joint common area. Again, flexibility is desirable commonhold communities. The modified
because it is impossible to predict all the company law must take into account the
situations that will arise in the future in either the different characteristics of, and functions
residential or commercial setting. performed by, commonhold associations. These
Merger is treated as a termination of the were discussed earlier in the paper, but are
previous commonhold communities and the repeated here.
creation of a new commonhold community. It is
1 For-profit traditional companies are in
therefore necessary to register a termination
business to make a profit; commonhold
agreement and a new Commonhold
associations are not. Therefore, some
Community Statement for the new
aspects of company law that was created
commonhold community.
to deal with for-profit companies may not
be relevant. With rare exceptions, the not-
VII Operation (governance and business for-profit company law governs
functions) associations in the US.

This section, which deals with the operation of 2 Traditional companies do not levy service
commonhold communities, can be approached charges on their members and the
in a variety of ways. In Queensland and New members cannot lose their homes if the
South Wales, statutes expressly state that service charges are not paid. Therefore,
company law does not apply to commonhold more consumer protection is needed in
communities. Instead, provisions that would residential commonhold communities
normally be contained in company law are than in traditional companies.
contained in the commonhold statutes and
3 Volunteer home-owners generally do not
regulations. In the US, the law dealing with
run traditional companies.
commonhold community operations is
generally in commonhold statutes, separate 4 Voting in traditional companies may not
company law statutes and sometimes in a be based on a variety of measurements
variety of other statutes. such as square footage or market value of
On the one hand, the US approach is real property as may be the case in
confusing to owners and lawyers who don’t commonhold communities.

32
 Issues in more detail

5 Traditional companies can be declared A decision needs to be made whether to

insolvent whereas an asset of a require associations to be incorporated.
commonhold association is the ability to Incorporation is generally preferable because
levy service charges to pay debts and, liability is limited.
therefore, cannot be declared insolvent.
B Powers of commonhold association
6 The ownership interest in a traditional
There may be advantages to listing the powers
company is a personal property interest.
of the association just to make it clear that the
In a commonhold association it is an
commonhold has specified powers, unless the
interest in real property that may be
Commonhold Community Statement provides
subject to a mortgage.
otherwise. This approach probably will be
7 Traditional companies do not have the necessary if England decides to permit
same control over the daily lives of their commonhold associations to be unincorporated.
members as do residential commonhold An alternative is to say that the association has
communities. all the powers of a traditional company ‘except’
certain powers that don’t apply to commonhold
It is also important that provisions added to
associations, such as the power to issue shares
the company law that are applicable only to
in the company.
commonhold associations clearly state that they
Regardless of the approach used, the
apply only to commonhold associations.
developer, initially, and owners, ultimately,
should have the ability to restrict the powers of
A Organisation of commonhold association
the association in the Commonhold Community
All jurisdictions require an association to be
Statement. It may not be appropriate for some
created. The law should provide that the
associations to have the full range of powers.
association must be organised no later than the
For example, in some communities, it may be
date the first unit is conveyed. The existence of
desirable to prohibit the association from
the association (with its structure) clarifies the
conveying the common area except on
relationship between the developer and other
termination of the commonhold community.
unit owners. Creating an association at this
In order to protect owners, the law should
early stage also makes it easier for the developer
provide that developers may not insert
to involve unit owners in the governance of the
provisions in the Commonhold Community
commonhold community during the initial
Statement that give them an unfair advantage in
period when the original owner controls the
dealing with the owners or association.
association.
Below are some of the powers that should be
The law must also require the owners to be
considered. Some of these may not presently
members of the association. A voluntary
exist in English company law. For example, the
association will not work. Owners will not
association is given the power to levy service
choose to pay service charges if given the
charges and register Notices of Violation of
choice.

33
Commonhold law

Covenants. Therefore, the list should be 9 Impose and receive any payments, fees,
carefully compared to existing law. or charges for the use, rental, or operation
Section 3-102 of UCIOA lists most of the of the common areas, other than exclusive
following powers (some of which have been use common area.
slightly altered). Unless the Commonhold
10 Impose charges for late payment of
Community Statement provides otherwise, the
service charges and, after notice and an
association should have the power to do the
opportunity to be heard, levy reasonable
following.
fines for violations of the Commonhold
1 Adopt and amend the governing Community Statement, Bylaws, or rules
documents. of the association.

2 Adopt budgets, manage the finances of 11 Impose reasonable charges for the
the association and levy service charges preparation and registration of
for common expenses. amendments to the Commonhold
Community Statement, preparation of
3 Hire and fire employees and independent
documents in connection with the
contractors.
transfer of a unit, statements of unpaid
4 Institute, defend, or intervene in service charges, or other documents
alternative dispute resolution prepared pursuant to provisions of the
proceedings, litigation, or administrative law or the Commonhold Community
proceedings in its own name on behalf of Statement.
itself or two or more unit owners on
12 Provide for the indemnification of its
matters affecting the commonhold
officers and board of directors, and
community.
maintain directors’ and officers’ liability
5 Make contracts and incur liabilities. insurance.

6 Regulate the use, maintenance, repair, 13 Assign its right to future income,
replacement and modification of common including the right to receive service
areas, and make improvements to the charges.
common areas.
14 Register against a unit owner’s property a
7 Acquire, hold, encumber and convey in Notice of Violation of Covenant when an
its own name any right, title, or interest to owner violates a provision of the
real estate or personal property. Statement, provided the owner has been
given notice of the violation, an
8 Grant easements, leases, licences, and
opportunity to be heard and a reasonable
concessions through or over the common
opportunity to cure the violation if it is
area.
possible to cure it.

34
 Issues in more detail

15 Exercise any other powers conferred by documents and law applying to commonhold
the Commonhold Community Statement communities.
or Bylaws.
C Powers of master association
16 Exercise all other power that may be
The law can use one of two approaches in
exercised in England (and Wales) by legal
defining the powers of the master association. It
entities of the same type as the
can either provide that the master association
association.
has only the powers listed in the Master
In the US, tenants on short-term leases Commonhold Community Statement, or it can
sometimes cause problems because they do not provide that the master association has the same
have the same interest in the community that powers of the association unless the Master
the owners do. (Residential long-term leases are Commonhold Community Statement restricts
uncommon.) Without a specific statutory grant its powers. If it is decided that a commonhold
of authority, the association may have trouble community may form a master association with
enforcing the covenants against the short-term a person, such as a commercial owner, the law
lessee. Trying to enforce the covenants through needs to expressly state that it may.
an absentee owner is often difficult. Therefore, Because there may be confusion about the
the law should give the association the operation of the master association, one should
following power to deal with short-term lessees. consider whether the same rules regarding
If a tenant of a unit owner violates the notice, voting, quorums, etc., which are
governing documents in addition to exercising discussed later, should apply to the master
any of its powers against the unit owner, the association. Applying some rules will avoid
association may: confusion but may unnecessarily restrict the
usefulness of the master association. It may be
1 ‘After giving the tenant and the unit
desirable to permit owners flexibility in
owner notice and an opportunity to be
determining how the master association will
heard, levy reasonable fines against the
operate.
tenant for the violation, and

2 Enforce any other rights against the D Powers and liabilities of board of directors
tenant for the violation that the unit Except as provided in the legislation, the
owner as landlord could lawfully have Commonhold Community Statement, or the
exercised under the lease or which the Bylaws, the board of directors should have the
association could lawfully have exercised power to act on behalf of the association. The
directly against the unit owner, or both.’12 board members appointed by the developer or
original owner should be required to exercise
The law could also provide that the terms of
the degree of care and loyalty required of a
the governing documents are incorporated into
trustee, and the other directors should be
any lease. It should not, however, permit the
required to exercise ordinary care. The board
association to enforce provisions of the lease
members that the developer appoints should be
that are not directly related to the governing

35
Commonhold law

held to a higher standard because there is a control may not exist in a commercial
potential for conflicts of interest between the commonhold community.
developer and the other owners while the One should also consider what powers the
developer is in control of the association. board should not have. For example, the board
It is sometimes difficult to get owners to should not have the power to terminate the
volunteer to serve on the board. It is even more commonhold community.
difficult if they are subject to individual liability While the board is under the control of the
for their actions. Therefore, some jurisdictions developer, there should be restrictions on the
give volunteer board members limited type of contracts the developer is permitted to
immunity. If the board members act in good enter into on behalf of the association. In the US,
faith within the scope of their duties, and the some developers, while in control of the
association maintains the insurance required by association, enter into long-term contracts on
statute (discussed later), the board members behalf of the association that are beneficial to
may not be sued individually. This same the developer but detrimental to the association.
rationale may or may not apply in a commercial For example, in Florida, developers who were in
setting. control of the association executed long-term
The law should provide for a gradual recreational leases that were advantageous to
transfer of power from the developer to the the developers. The Florida legislature outlawed
owners. In the initial phases of a project, the this practice. When the owners acquire control
developer needs more control so that he or she of the association, they have the power to cancel
can maintain property values and sell the units. certain of these contracts.
However, volunteers also need to be on the On the other hand, a statutorily sanctioned
board in order to learn how to run a board. right of cancellation should not be applicable to
UCIOA Section 3-103 provides that, not later all contracts or leases which a developer may
than 60 days after the conveyance of 25 per cent enter into in the course of developing a project.
of the units, owners (other than the developer) If the association can cancel all contracts,
must elect not fewer than 25 per cent of the reputable companies may be reluctant to enter
members of the board. After 50 per cent of the into contracts with the association when it
units are sold, the owners can elect up to 49 per appears the developer is about to turn over
cent and, when 75 per cent of the units are sold, control. Thus, one should consider giving the
the developer loses control of the association. owners the power to terminate, within a
Some jurisdictions also place a time specified period of time after transfer of control,
limitation on the developer’s control. For any contract or lease previously entered into by
example, if 75 per cent of the units have not the developer. The owners also should have the
been sold within two years, the developer loses power to terminate immediately any contract
control of the association. The timing of transfer which was not entered into in good faith or
and percentage of units sold can vary. The which was unconscionable to the unit owners.
important point is to require a gradual transfer
of control. The need for a gradual transfer of

36
 Issues in more detail

E Powers of original owner and transfer of and his or her successor after transfer.
original owner’s rights While most statutes do not address these
As mentioned previously, developers need issues, UCIOA does. The general scheme of the
flexibility in creating projects in order to Act is to impose upon a developer continuing
respond to changing market conditions. UCIOA liability for actions and omissions undertaken
specifically gives developers the following during the period that he or she is in control of
rights to: the community and to relieve him or her of
liability for actions of their successor. Similarly,
1 complete improvements indicated on the
the Act absolves a non-affiliated transferee of
plans registered with the Commonhold
responsibility for the promises, acts, or
Community Statement
omissions of a developer over which the
2 maintain sales offices, signs, etc. on the successor had no control.14
premises for a specified period of time The Act requires all transfers to be registered
in order to be effective. This makes it possible
3 use easements through the common areas
for the owners to know about the transfer. It is
for the purpose of making improvements
also important to register the transfer in order to
within the common area or within real
determine the duration of the period of the
estate added to the community
developer’s control.
4 make the community subject to a master
association F Bylaws
Statutes and regulations often state what must
5 merge communities
be contained in the bylaws. This section should
6 appoint or remove any office of the be compared with existing company law and
association or master association or any those provisions that are permitted and required
board member during any period of the in The Articles and Memorandum.
developer’s control
1 ‘The number of members of the board of
7 add or subtract real estate.13 directors and the titles of the officers of
the association.
The main protection for potential purchasers
is giving the purchasers the ability to know 2 Election by the board of directors of a
what they are buying before they purchase. president, treasurer, secretary, and any
Therefore, all of the rights the developer other officers of the association that are
reserves should be clearly set forth in the specified in the bylaws.
Commonhold Community Statement.
3 The qualifications, powers, duties, terms
On occasion, developers transfer their
of office of board members, the manner of
interest. They sometimes do this before
electing and removing board members
construction and sometimes after. There has
and officers, and the method for filling
been confusion (and litigation) regarding the
vacancies on the board.
rights and obligations of the original developer

37
Commonhold law

4 Which, if any, of its powers the board of different from the association’s remedy. It would
directors or officers may delegate to other be the association that would file a lien for
persons or to a managing agent. failure to pay service charges. In the US, liens
for unpaid service charges are generally
5 Which of its officers may prepare,
enforced in the same manner as mortgages that
execute, certify, and record amendments
are in default. Therefore, it may be unnecessary
to the Commonhold Community
to duplicate existing lien law. Liens are
Statement on behalf of the association.
discussed in more detail later in the paper.
6 A method for amending the bylaws.’15 The law should require the association to
give the owner notice and an opportunity to be
G Of
ficers of board of directors heard before the association may impose a fine
The New South Wales statute provides that the for violation of a covenant other than a service
members of the board must, at the first meeting charge and before it files a Notice of Violation of
after they assume office, appoint a president, a Covenant.
secretary and treasurer. The provision permits
one person to be appointed to more than one I Meetings
office. The officers of the board are the officers Below are some issues that need to be addressed
of the association.16 regarding meetings. If existing law doesn’t
address them, it needs to be supplemented.
H Covenants and equitable servitudes It is important to identify when the first
The law must provide that both affirmative and meeting of the company must be held. The first
negative covenants in the Commonhold meeting should be held within the first six
Community Statement are enforceable as months after the association is created. The
equitable servitudes and run with the land. developer needs to think of the association as an
Commonhold will not work if affirmative independent entity. Thereafter, the law should
covenants do not run with the land. If the law require at least annual meetings. There also
provides that only those affirmative covenants should be provisions for special meetings which
appearing in the Commonhold Community the president, a majority of the board, or unit
Statement run with the land, other law owners having a specified percentage of the
regarding affirmative covenants will not be votes in the association may call.
changed. There should be provisions requiring the
The law also should provide that the board to give notice of meetings and there
association or unit owner may enforce the should be quorum provisions for association
covenants by any lawful means. Some means meetings. The quorum provisions should not be
include registering a lien for failure to pay onerous because it is often difficult for
service charges or fines, imposing a fine and associations to get members to attend meetings.
registering a Notice of Violation of a Covenant. Therefore, some statutes provide quorums as
Obviously, an owner’s remedy against low as 20 per cent. Others require a slightly
another owner for violating a covenant may be higher quorum at the first meeting and, if a

38
 Issues in more detail

quorum isn’t obtained, then a lower quorum at leasing, however long-term residential leases
a second meeting. are very uncommon in the US.
The association should be required to keep Another issue that needs to be addressed is
minutes of the meeting. The statute should proxy voting. It is not desirable to have an
specify the length of time they must be kept. owner, or a group of owners, be able to control
the association by obtaining 50 per cent of the
J Voting proxies.
The following issues should be addressed. First, In Queensland, the Standard Module limits
as mentioned previously, the allocation of votes the number of proxies one person can hold.17 If
must be identified in the Commonhold a community contains fewer than 20 lots, a
Community Statement. person may hold only one proxy. If it contains
Second, it is important to state what happens more than 20 lots, a person cannot hold proxies
when a unit is owned by more than one owner. from persons greater in number than 5 per cent
One possibility is to state that, if one of several of the flats. Another possibility is to legislate
owners of a unit is present at a meeting of the that the association may not exercise proxy
association, that owner is entitled to cast all of votes.
the votes allocated to that unit. Another If the association owns a unit, its right to
possibility is to say that one of several owners vote can also be restricted. For example, UCIOA
may cast all the votes allocated to that unit prohibits the association from voting even if it
unless any other owner of the interest objects. If owns a unit.18
there is an objection, then the unit does not have As mentioned previously, it is often difficult
a vote to cast. It would be too confusing to to get owners to vote. Therefore, it is important
permit a unit to split up its allocated interests to distinguish between requiring a percentage of
among the several owners. all the owners to vote in favour of a proposition
Some Commonhold Community Statements and requiring a percentage of a quorum of those
provide that short-term lessees can vote on attending a meeting.
specified matters. If this is the case, then the law It is also important to determine whether the
should provide that only the lessee and not the voting scheme counts an abstention as an
owner may vote on that specified issue. It is affirmative or negative vote. In other words,
important to avoid having both the owner of the does the vote require a vote without dissent
unit and the lessee think they are entitled to cast which results in abstentions in essence being
the vote. considered ‘yes’ votes, or a traditional vote
There has been some discussion about where those not voting are in essence
restricting the length of leases in residential considered ‘no’ votes? The higher the
commonhold communities. The length of the percentage required to pass a particular
lease may determine whether a developer proposition, the more voting without dissent
would want lessees to have a vote on specified should be considered.
matters. I am not aware of any commonhold
statements in the US that prohibit long-term

39
Commonhold law

K ort T and contract liability generally will be provided in the Commonhold

In order to protect the owners, it is important Community Statement, but a default provision
for the law to provide that any action in tort or should exist in case the statement does not.
contract arising out of acts or omissions of the
association must be brought against the M Finances
association and not against the individual unit In order to have the resources to maintain and
owners. By not allowing the unit owners to be govern the commonhold community, it is
named, each is responsible only for the portion essential for the association to have the ability to
of the judgement that represents their allocated levy service charges and collect them. There are
share. This eliminates joint and several liability, two types of service charges. Periodic or general
a situation where one unit owner can be liable service charges cover general expenses and fund
for the entire judgement. The law should also the reserve. Special service charges are assessed
provide that a unit owner is not precluded from to address a specific problem. For example, if an
bringing an action in tort or contract against the association has to face an unanticipated
association solely because he or she is a member emergency or wishes to make capital
or officer of the association. expenditure, the board may assess a special
In the early stages of a project, the developer service charge.
is in control of the association. Their actions California limits the board’s ability to raise
may produce either tort or contract liability for general service charges.19 The board can
the association. It is unfair to make the unit increase service charges by only 20 per cent over
owners pay these obligations when they had no the previous year’s budget with certain
control over them. Therefore, the law should exceptions. If they wish to raise the service
provide that a unit owner has a right to recover charges by more than 20 per cent they need the
from the developer any losses suffered by the approval of a majority of a quorum at a meeting
association or unit owner based on tort or called for this purpose.
breach of contract while the developer was in This provision is unusual and was the result
control of the association. of compromise. A problem existed because some
Commonhold Community Statements dictated
L Maintenance obligations the amount of service charges the association
Perhaps the law should specifically state that could levy. These service charges were not
the association has an obligation to maintain the sufficient to adequately maintain the premises.
common area in accordance with the provisions Therefore, the legislature said that these
of the Commonhold Community Statement and provisions were void and, regardless of the
the Commonhold Communities Act. provisions in the Commonhold Community
Maintaining the common area is implied in the Statement, the board could raise service charges
fiduciary duty the association owes to the by 20 per cent without a vote of the owners.
owners, but it might be valuable to make it Special service charges have a similar
clear. The extent to which the association has to requirement. The board may not levy special
maintain the exclusive use common area service charges in excess of a specified amount

40
 Issues in more detail

without a vote of the owners. The association communities, the owner, not the landlord,
should be required to prepare an annual budget determines service charges. Because it is the
that provides for both general operating owners who are determining the amount of
expenses and funding reserves, and service service charges, an owner should not have the
charges should be based on this budget. ability to challenge service charges on the
In California, associations that have a budget grounds of unreasonableness. In the US and
in excess of an amount specified in the statute Australia owners rarely charge themselves an
must have a reserve study done every three unreasonable amount because they are not
years.20 The reserve study gives the owners an trying to make a profit.
idea of the amount of money they should set In commonhold communities, if an owner
aside in a reserve fund to satisfy the long-term does not like the service charges the board is
maintenance, repair and capital replacement setting, the owner can mount a recall election or
obligations, such as repairing a roof. elect a new board. An owner can challenge
Whether the law requires reserves to be service charges only if the board exceeds the
funded and at what level is a policy question. In scope of its authority or breaches its fiduciary
newly constructed projects, it should be possible duty in setting the rate. This form of challenge
to require reserves to be funded to the full rarely occurs in the US.
amount. If there are older buildings in the
2 Levying service charges
commonhold community that have not been
In the initial stages of the project, the developer
adequately maintained, requiring full funding
will own the units. Perhaps the law should
of reserves may create an unreasonable
provide that the developer may pay all common
hardship for the owners.
expenses until the association levies the first
1 Obligation to levy service charges service charge. The developer may find it
Perhaps the law should expressly provide that advantageous, particularly in the early stages of
the association is obligated to levy service project development, to pay all of the expenses
charges sufficient to adequately maintain the of the common interest community themselves
common area and any other area it is obligated to avoid billing the costs of each unit separately
to maintain. Again, the common law fiduciary and crediting payment to each unit.
duty requires the association to maintain the When the original owner is in control of the
common area, and the only way it is likely to do development, it is important that the law
that is by levying service charges, but it might require them to create an adequate reserve for
be advisable to have a specific provision so future expenditures. Sometimes, developers set
stating. This may prevent boards from setting the service charges artificially low in order to
service charges too low to adequately maintain sell units. Once the unit owners gain control of
the premises. the association, they discover there is not
Under the existing English law, tenants can sufficient money for long-term maintenance,
challenge the reasonableness of service charges repair and replacement of the major building
under certain circumstances. In commonhold components.

41
Commonhold law

As mentioned, in California the California In some jurisdictions, in order to ensure

State Department of Real Estate reviews the prompt and efficient enforcement of the
developer’s initial budget for residential association’s lien for unpaid service charges,
commonhold communities to guarantee the liens for unpaid service charges have statutory
service charges are adequate to cover the priority over most other liens. Priority is given
anticipated expenses. If the Department because service charges are used to maintain
determines that the initial budget is not property values that benefit all holders of
adequate, then the developer may not sell any security interests in the community. Therefore,
units. This level of review is not common in the some jurisdictions in the US provide that the
US, but it is effective. association’s lien has priority for up to six
When the first service charge is levied, the months of delinquent assessments against even
law should provide that common expenses previously recorded liens.21
must be assessed against all the units in Lenders are given greater protection than
accordance with the allocations set forth in the under existing English leasehold law. If the
Commonhold Community Statement. Any past lender wishes, it can create an escrow for service
due service charge or instalment should bear charges when the loan is made to protect
interest at a reasonable rate set forth in the law. against having to pay six months unpaid service
The law should permit the Commonhold charges. More importantly, however, the lender
Community Statement to provide that a service does not need to be concerned about forfeiture
charge associated with maintenance of an and losing the security interest.
exclusive use common area or any common area Units may be part of both a commonhold
that clearly benefits one owner more than others community and master commonhold
can be levied against the owner receiving the community. In that case, the master association
benefit. might assess the units for the general
Provision should be made for reallocation of maintenance expenses of the master association
service charges when the number of units and the individual commonhold association
change, for example, after a government forced would levy service charges for the expenses of
purchase, expiration of certain leases, exercise of the individual association. In such a situation,
development rights and subdivision of units. the law could provide that the unpaid liens of
the two associations have equal priority
3 Liens for service charges
regardless of the relative time of creation of the
Service charges are usually assessed annually
two regimes and regardless of the time the
but due in instalments. A statute can state that a
assessments were made or became delinquent.
lien is imposed at the moment the annual
In some jurisdictions in the US, in the
service charge is levied (which is similar to the
absence of a contrary law, the association would
way property taxes are treated in the US). It can
have to ask the court to sell the property rather
also provide that the lien is imposed at the time
than sue the owner in the small claims court for
the Commonhold Community Statement is
the unpaid service charge. If this is the situation
registered.
in England, the law should permit the

42
 Issues in more detail

association to recover the funds or exercise the withdrawals from association accounts.
power of sale. It is important for the association The law could also require the association to
to be able to easily sue for failure to pay a small periodically review the association’s bank
service charge even if a lien has been registered. statements and records. Again, this will
This is because a power of sale is a drastic, albeit encourage the early discovery of theft or
necessary, remedy. mishandling of association funds by those with
It may not be necessary to create new lien whom the association has contracted such as
law to apply to association liens. It is necessary, accountants and property managers.
however, to review existing law to see if there Various levels of financial reviews also could
are any aspects that may need to be modified. be required. If the association collects service
charges over a specified amount per year, an
4 Other liens
audit could be required.
Assume someone is injured on the commonhold
property and sues the association. The law
N Record keeping
should make a judgement lien a direct lien
It is important for associations to keep records
against each individual unit, but allow the
so that they can disclose information to
individual unit owner to discharge the lien by
potential purchasers and creditors. In the US,
payment of their pro-rata share of the
associations prepare budgets, reports comparing
judgement. The ability to remove the lien by
budget to actual expenditures, balance sheets,
paying a pro-rata share will be valuable to a
income and expense statements, statements of
unit owner who is in the process of selling his or
delinquent accounts, statements of uncollected
her unit or securing a mortgage on it. Except in
sums owing to the association, statements of
those situations in which the association has
debts owing by the association, etc. The
given a mortgage secured by the common areas,
financial records required depend on the
one should not be able to assert a lien against
accounting method used. For example, if the
common areas.
accounting method does not show which
5 Additional financial controls on residential accounts are delinquent, then a separate report
commonhold associations showing these debts must be prepared.
It may be advisable to consider placing An association should be required to make
additional controls on residential commonhold the records reasonably accessible to any unit
communities. For example, the law in some owner. It may not be necessary to distribute the
jurisdictions requires that the association records to all the owners, but the association
accounts be kept in the association’s name should be required to provide relevant records
rather than in the managing agent’s general at the owner’s request.
accounts. The law can also require an officer of
the board to sign cheques in excess of a specified O Disclosures on sales (relation to record
amount or when funds are withdrawn from keeping)
reserves. This guarantees that the board knows In the US, sellers are generally required to
when the property manager is making substantial disclose specific matters to the potential buyer.

43
Commonhold law

States vary in their requirements, but below are f the most recent regularly prepared
some of the disclosures required. The balance sheet and income and expense
association should be obligated to keep any statement of the association
records necessary to assist the owner in g the current operating budget of the
complying with disclosure requirements. association
It may not be reasonable to require all of the h a statement of any unsatisfied
following disclosures. In deciding which to judgements against the association
include, it might help if you imagine that you and the status of any pending lawsuits
are purchasing a commonhold unit and think in which the association is a defendant
about what information you would like to i a statement describing insurance
receive. The following list is a combination of coverage
some of the disclosures required in various j a statement as to whether the board
jurisdictions. Most of it, however, appears in has given or received written notice
Section 4-109 of UCIOA. that any existing uses, occupancies,
alterations, or improvements in or to
1 A copy of the governing documents.
the unit or the exclusive use common
2 A certificate containing the following areas violate any provision of the
information: Commonhold Community Statement
a a statement disclosing the effect on the k a statement as to whether the board
proposed disposition of any right of has received written notice from a
first refusal or other restraint on the governmental agency of any violation
free alienability of the unit held by the of law affecting the community, such
association as a violation of a building code, that
b a statement setting forth the amount of has not been cured
any periodic service charge or special l a statement of the remaining term of
service charge currently due and any leasehold estate affecting the
payable community and the provisions
c a statement of any other fees payable governing any extension or renewal,
by the owner of the unit being sold and
d a statement of any capital m a statement describing any pending
expenditures approved by the sale of encumbrance of the common
association for the current and area.
succeeding fiscal years
The association should have an obligation to
e a statement of the amount of any
provide a certificate containing the information
reserves for capital expenditures and
necessary to enable the owner to comply with
of any portions of those reserves
the disclosures. The law should provide that a
designated by the association for any
unit owner is not liable for any information
specified projects
provided by the association and the owner is

44
 Issues in more detail

not liable for any service charge in excess of the reasonable price. If insurance is not available,
amount set forth in the certificate. however, it should be. This is the main vehicle
The association should have an obligation to for protecting owners against loss.
provide this information within a specified time, In Queensland, the insurance provisions in
such as ten days. It should be permitted to the Standard Module begin by defining certain
charge a reasonable fee for preparation of the terms. For example, a ‘building’ is defined to
material. include ‘improvements and fixtures, but not
including carpet, forming part of the building or
P Insurance a temporary wall, floor and ceiling coverings, or
Insurance is crucial for commonhold fixtures removable by a lessee or tenant at the
communities. It is required in both the US and end of a lease or tenancy.’ The word ‘damage’ is
Australia.22 UCIOA has very detailed insurance also defined.23
provisions discussing the type and amount of The important point is not exactly how
insurance required, the rights of owners and building or damage is defined, but that these
those with security interests in the event of terms are, in fact, defined. It is necessary to
destruction, subrogation, as well as many other know precisely what the association must
issues. Only a few are discussed. insure. The Uniform Act also addresses these
UCIOA requires the association to maintain problems.
property insurance on the common areas in an The Standard Module requires that the
amount that is 80 per cent of the actual cash association insure, to full replacement value, the
value of the insured property at the time of common property and the assets of the
purchase and at each renewal date. It also association. The policy must cover, to the
requires liability insurance covering all greatest practicable extent, damage and costs
occurrences commonly insured against for incidental to the reinstatement or replacement
death, bodily injury and property damage of insured buildings, including the cost of
arising out of use, ownership, or maintenance of taking away debris, and the fees of architects
the common area. Most associations also and other professional advisers. The association
maintain Director and Officer Liability must provide for the reinstatement of property
Insurance to compensate for injuries caused by to its condition when new.24 As mentioned, this
the board’s mismanagement. is often the practice in the US. If this insurance
The insurance requirement (80 per cent of cannot be provided, then the association can
the actual cash value) is a minimum apply to the Commissioner for permission to
requirement. Typically, the documents of many deviate from the requirement.
commonhold communities require insurance in The Standard Module also requires the
an amount equal to 100 per cent of the association to maintain public risk insurance to
replacement cost of the insured property. compensate for death, illness and bodily injury,
It may be wise to require insurance only to and damage to property in the amount of at
the extent reasonably feasible in case a least $10 million for a single event; and at least
particular type of policy is not available at a $10 million in a single period of insurance.25

45
Commonhold law

The Module goes on to address the same issues by litigation or an alternative dispute
raised in UCIOA regarding termination when proceeding, the lender should not have a right
the community is essentially destroyed and the to control the association’s actions, but should
manner in which insurance proceeds are be able to intervene as a party.27
distributed. As mentioned previously, where lender
Thus, although the detail is different approval is required for amendment of the
between the various statutes, the issues raised Commonhold Community Statement,
are very similar. New South Wales also has procedural problems arise. Often the lender
insurance requirements and, again, the issues hasn’t designated someone to give approval.
are similar.26 Therefore, while the law may provide that
lenders have the right to approve amendments
that affect their security interests, it is best also
VIII Miscellaneous provisions
to have the law provide that failure to reply
A Lender disclosures within a specified period, such as 30 days,
In a number of instances, for example, when constitutes approval.
there is a sale of the common area or
termination of the commonhold community, a B Exempting communities from the law
lender’s security may be dramatically affected UCIOA permits commercial developers to
by acts of the association. Therefore, it is exempt themselves from the Act, but, if they
common in the US for lenders to require exempt themselves, they do not receive the
protections in the governing documents. advantages under the Act, such as development
Lenders may require the Commonhold rights. If they choose to be bound, they are still
Community Statement to provide that all or a exempt from certain consumer protection
specified percentage of the lenders who hold provisions.
security interests, or who have extended credit The Uniform Act also exempts (with some
to the association, approve specified actions of exceptions) residential communities of no more
the association before those actions are effective. than 12 units.28 A smaller number may be
For example, they may require that desirable for England. For example, in
amendments affecting the security interest are Queensland, the average size of a community is
only effective if specified lenders approve the ten units. If the US standard were applied to
amendment. Queensland, the law would not apply to the
UCIOA provides three limitations on the average community.
rights of lenders. Lenders should not be able to In California, no residential projects are
control the general administrative affairs of the exempt. However, commercial communities are
association or litigation proceedings in which exempt from certain consumer protection
the association is involved. They also should not provisions.
control the receipt or distribution of insurance
proceeds prior to application of those proceeds
for rebuilding. If a lender’s interest is affected

46
 Issues in more detail

C Other provisions included in the acts of at commonhold association manager and passes a
least one other jurisdiction standardised test. The Community Associations
1 Regulation of managing agents Institute is one organisation that awards
There are a variety of models for regulating credentials because it has an independently
managing agents. Generally, the greater the evaluated standardised test and recognised
amount of regulation, the greater the expense to educational courses. In order to maintain the
the government. Because a portion of costs are credential, the commonhold managing agent
generally passed through to the owners, greater must satisfy continuing education requirements.
regulation is also often more expensive for the This system is less costly for the government
owners. On the other hand, more regulation and owners, and does not require creating
often gives owners greater certainty that their another bureaucracy.
managing agent is knowledgeable. A balance Credentialing can be market driven. For
needs to be struck between protection and costs. example, the government may decide not to
One model is licensing. The government can require a credential, but permit a managing
require all managers to be licensed. A licence is agent who has met the standard to advertise
obtained if the managing agent passes a test that that they have one.
evaluates the specific knowledge required to In the US, a significant portion of the small
manage a commonhold community. If all communities are self-managed. If the
managers must be regulated and all owners community is a bit larger it may have an on-site
must hire managers, then the costs to a small manager.29 The larger communities generally
block of flats will be unreasonably high. hire a professional manager with a credential.
Also, if a managing agent must have a Thus, the market place determines whether the
licence to practise, there must be a system for association will hire a manager with a
removal of that licence when the agent has credential. These people are usually more
engaged in misconduct. Taking away the right skilled but are also more expensive.
to practise one’s profession is a serious matter. In the US, while some of the skills for a
The process through which the managing residential managing agent and residential
agent’s behaviour is evaluated is likely to be commonhold association managing agents are
costly. similar, others are not. Both manage physical
Another possibility is credentialing. Under assets, supervise maintenance activities, and
this scheme, the state or some other entity prepare budgets and financial reports.
determines the standard that commonhold Traditional managing agents often market and
managing agents must meet. Then any lease property and collect rent which
organisation that can demonstrate to the commonhold association managing agents
government that its courses and tests meet the generally do not.
standard can give the credential. Commonhold association managing agents
For example, in the US, it is possible to are responsible for managing a company, not
obtain a credential if one takes a course covering merely the association property. In addition to
the unique information needed by a being responsible for the physical assets and

47
Commonhold law

supervising contractors, community association example, by failing to keep the exclusive use
managers also advise volunteer boards in area in a presentable condition, having
administrative, operational and financial excessively noisy children or pets, or parking in
matters. They enforce restrictive covenants and someone else’s parking space. These are the
decisions made by the boards. They organise human problems that also exist in traditional
community events and generally promote a neighbourhoods.
sense of community. Therefore, if education is Both Queensland and New South Wales
required as a condition of licensing or have a state-run dispute resolution process.30
credentialing, it should be related directly to the They receive high praise from the professionals
skills needed for managing a commonhold who are involved in commonhold community
association. associations.
The skills needed to manage management An alternative to a State-run programme is
companies (resident-owned buildings) should private dispute resolution systems. In the US,
be identified. They may already have been because going to court is expensive and takes a
identified by the Royal Institute of Chartered long time, private dispute resolution is
Surveyors and the Association of Residential flourishing. In California, for example, before an
Managing Agents. The skills needed may be owner or association can pursue a lawsuit, the
very similar to the skills needed by law requires the person or entity to offer the
commonhold association managers. If so, agents other party a form of alternative dispute
managing both types of properties need not be resolution.31 If the offer is rejected, the court
treated differently. looks upon the party rejecting the alternative
The US has found that no form of licensing dispute resolution process unfavourably in
or credentialing prevents theft or misdealing. arriving at its decision. The law does not,
Controls such as those mentioned in the however, mandate a particular form of dispute
discussion of ‘other financial controls’ above resolution.
help prevent misdealing. Depending on the magnitude of the
problem, dispute resolution takes a variety of
2 Dispute resolution processes
forms. If the stakes are high, the parties may
If commonhold community law is adopted, it
have a three-judge panel of arbitrators, follow
will not mark the end of disputes among
the rules of evidence and have lawyers present
neighbours. If the US and Australian
the case. If the parties want a less expensive and
experiences are any indication, it will greatly
less formal way to solve their problem, they
reduce them but not eliminate them.
may hire a mediator and split the costs. If they
The type of disputes that arise in a
can’t resolve their problem with a mediator,
commonhold community setting are slightly
they may hire an attorney to informally hear
different than in a long-term lease setting
their matter and make a decision. Other
because service charges are rarely the subject of
procedures are evolving in the market place.
dispute. Disputes centre on an individual
The important thing is not to assume one
owner’s refusal to follow the covenants, for
process is best for all disputes. The parties

48
 Issues in more detail

should be permitted flexibility to choose a to make sure they do not contain provisions that
process that is appropriate for the magnitude of are unreasonably detrimental to the future
the dispute. Therefore, while one may wish to owners and to make sure the budget is
require alternative dispute resolution, it is adequate. ‘Reasonable provisions’ are included
unwise to require the parties to participate in a in the Department’s Regulations so a developer
particular type of alternative dispute resolution. knows what must be included in the documents
in order to receive approval. The Department
3 Governmental administration of
also reviews the developer’s initial budget to
commonhold communities
make sure the service charges are adequate. This
There are different models of administration to
level of review is unusual in the US.
choose from. The model with the least review is
The higher the level of review, the more
one in which a government agency merely
expensive the process is. However, the higher
reviews the governing documents to make sure
the level of review, the greater the protection for
they comply with the statute. The agency does
consumers.
not comment on the viability of the
commonhold community. For example, the
agency does not attempt to evaluate whether Continuing the dialogue
the service charges are sufficient to adequately
As mentioned, the goal of this paper is to
maintain the building.
contribute to the dialogue regarding
A second level of review is done in
commonhold law. While these issues may be
California. Before a developer is permitted to
exhausting, they are not exhaustive. Other
sell a unit, they must receive approval from the
issues will arise as the dialogue about
California Department of Real Estate. The
commonhold law continues.
Department reviews the governing documents

49
Notes

Chapter 1 law) (Teys McMahon, 1998). This book is

easily understood by both lawyers and non-
1 National Conference of Commissioners on
lawyers, and is an excellent reference on
Uniform State Laws, 1994.
Queensland law. The author is a specialist in
2 This statute will not be referred to by title in the Queensland commonhold law. Gary
the footnotes. It appears at California Civil Bugden, Queensland Community Schemes Law
Code §§1350–1376. The Civil Code is and Practice (CCH Australia Ltd, 1999) and
published by West Publishing Company (St Gary Bugden, New South Wales Strata and
Paul, Minnesota) and Deering publishing Community Titles Law (CCH, 1999) are
company (Bancroft-Whitney Company, San predominately for lawyers and include case
Francisco, California). Both are updated law. The Uniform Common Interest Ownership
yearly. References to the Act will be by code Act (National Conference of Commissioners
section. on Uniform State Laws, 1994) has a
significant amount of explanatory material
3 California Corporations Code §§7110–8910
after each section and provides an excellent
(Deerings, 1994, Supp. 2000).
discussion of the policy reasons for particular
4 California Subdivided Lands Act, California provisions. Curtis Sproul and Katharine
Business and Professions Code §§11000– Rosenberry, Advising California Condominium
11200. and Homeowner Associations (Continuing
Education of the Bar, 2000) provides a
5 10 California Code of Regulations §§2792.15–
discussion of the statutes and case law.
2792.29.

6 The strata schemes acts will be referred to as

Chapter 2
NSW SSA and the regulations as NSW SSA
Regulations. The Strata Schemes 1 Fewer than 5 per cent of community
Management Act will be referred to as NSW associations (condominiums, planned
SSMA and the regulations will be NSW communities and co-operatives) are co-
SSMA Regulations. The Community Land operatives. Approximately 30 per cent are
Development Act will be referred to as NSW condominiums and approximately 65 per
CLD Regulations and the regulations as CLD cent are planned communities. Clifford
Regulations. The Community Land Treese, Community Associations Fact Book
Management Act will be referred to as NSW (Community Associations Institute, 1999,
CLMA and the regulations as NSW CLMA p. 19).
Regulations.
2 Francesco Andreone specialises in
7 If the reader is interested in a particular law, commonhold law and is a partner in the law
one of the following references will be of firm of Blessington, Judd in Sydney,
assistance. Ros Janes, The Body Corporate Australia.
Management Act for Everybody (Queensland

50
 Notes

3 UCIOA §§2-105(8), 2-110 and 2-122. 25 California Subdivided Lands Act, California
Business and Professions Code §§11000–
4 UCIOA §2-101.
11200.
5 California Civil Code §1352.

6 California Civil Code §1366(b). Chapter 3

7 California Civil Code §1365.7. 1 In the US, commonhold associations are
referred to as ‘community associations’ and,
8 California Civil Code §1365.9.
in Australia, they are referred to as
9 10 California Code of Regulations §2792.18. ‘community titles’. The California statute is
called the Common Interest Development
10 UCIOA §2-107(b).
Act, the Uniform Act is called the Uniform
11 NSW SSMA §§123–210, NSW CLMA §§62–87 Common Interest Ownership Act,
and Queensland Statute §§182–269. Queensland Statute is called Body Corporate
Community Management Act, the New
12 California Civil Code §366(b).
South Wales statute which regulates planned
13 NSW SSMA §§81–95, NSW CLMA §§39–44, communities is called the Community Land
and Queensland Statute §§147–150 and Development Act.
Queensland Regulations (Standard Module)
2 Queensland Statute §5.
§§126–137.
3 California Civil Code §1350(l).
14 California Civil Code §1365.5(a).
4 California Civil Code §1352.
15 UCIOA §3-113, NSW SSMA §69 and
Queensland Regulation (Standard Module) 5 Queensland Statute §§130–143 and Schedule
§100. 2.

16 California Civil Code §1365.5(e). 6 NSW SSMA, Schedule 1.

17 California Civil Code §1367(e). 7 California Civil Code Section 1355(a).

18 California Civil Code §1357. 8 Queensland Statute §§97–101(1).

19 UCIOA §2-118. 9 Queensland Statute §98(1).

20 California Civil Code §1356(e)(3). 10 California Civil Code §1356.

21 California Civil Code §1356. 11 UCIOA §2-118 is a termination provision and

the comments following the section provide a
22 California Civil Code §1368.
good explanation of the provision.
23 California Civil Code §1368.
12 UCIOA §3-102(d).
24 California Civil Code §§1102–1102.15.

51
Commonhold law

13 UCIOA §1-103(14) and Comment 15 and 24 Queensland Regulations (Standard Module)

UCIOA §2-115. §§127, 128 and 129.

14 UCIOA §3-104 and Comment 2. 25 Queensland Regulations (Standard Module)

§136.
15 UCIOA §3-106.
26 NSW SSMA §§81–95, NSW CLMA §§39–44.
16 NSW SSMA §18.
27 UCIOA §2-119.
17 Queensland Regulations (Standard Module)
§72(4). 28 UCIOA §§1-203 and 1-205.

18 UCIOA §3-110(d). 29 Twenty-seven per cent of the associations in

the US use volunteer management, 26 per
19 California Civil Code §1366(b).
cent use onsite staff, 42 per cent use a
20 California Civil Code §1365.5(e). management company and 5 per cent use a
combination of the above. Clifford Treese,
21 UCIOA §3-116.
Community Association Factbook (Community
22 UCIOA §3-113, Queensland Statute §§147– Associations Institute, 1999, p. 12).
150, Queensland Regulations (Standard
30 Queensland Statute §§182–269, NSW SSMA
Module) §§126–137, NSW SSMA §§81–95 and
§§123–224 and NSW CLMA §§62–87.
NSW CLMA §§39–44.
31 California Civil Code §1354.
23 Queensland Regulations (Standard Module)
§126.

52