Part One of this two-part series addressed when an association should amend its Michigan condominium documents. Part Two addresses the legal and practical considerations of how to amend your Michigan condominium documents.
How Does My Association Amend its Condominium Documents?
As an initial matter, a Board of Directors typically cannot amend the Articles of Incorporation, the Master Deed or the Bylaws solely by a vote of the Board of Directors. Two Michigan statutes primarily govern the amendment process. First, the Nonprofit Corporation Act, MCL 450.2101, et. seq., Act 162 of 1982, governs how a condominium association may amend its Articles of Incorporation. Second, the Condominium Act, MCL 559.101, et. seq., Act 59 of 1978, governs how a condominium association may amend the condominium’s Master Deed, Bylaws and the Condominium Subdivision Plan including the seven (7) instances when first mortgagee approval is required. Finally, the Rules and Regulations are typically amended by a majority vote of the Board of Directors unless the Master Deed or Bylaws contain a provision stating otherwise. For an association unfamiliar with the amendment process, there are both legal and practical considerations as the amendment process begins.
A. The Amendment Process: Legal Requirements
1. How to Amend the Articles of Incorporation
The Nonprofit Corporation Act, MCL 450.2101, et. seq., Act 162 of 1982, includes the procedure to amend an association’s Articles of Incorporation. Specifically, MCL 450.2611 addresses when the Board of Directors may make changes without member approval (very limited circumstances) and what changes require membership approval (most circumstances). For purposes of this article, the term “member” and “Co-owner” will be used interchangeably. Importantly, most Michigan associations are organized on a membership basis. According to MCL 450.2611(4), the process begins with a notification to the Co-owners prior to the meeting as follows:
A corporation or a member, shareholder, or director that proposes an amendment to the articles of incorporation shall give notice of a meeting to consider an amendment to the articles of incorporation to each member, shareholder, or director that is entitled to vote on the amendment, as applicable. The notice shall contain the proposed amendment or a summary of the changes that will occur if the amendment is adopted. The corporation or a member, shareholder, or director that proposes an amendment to the articles of incorporation shall provide the notice within the time and in the manner provided in this act for giving notice of meetings of shareholders, members, or directors, except that, in the case of a corporation that is organized on a directorship basis, the notice of the meeting shall be given to each director who is then in office at least 10 days before the meeting.
Once the notice is provided, there is a meeting held pursuant to MCL 450.2611(5), which states:
At a meeting to consider an amendment to the articles of incorporation, a vote of shareholders, members, or directors entitled to vote shall be taken on the proposed amendment. The proposed amendment is approved if a majority of the votes that are held by shareholders or members entitled to vote on the proposed amendment are cast in favor of the amendment or, in the case of a corporation that is organized on a directorship basis, if it receives the affirmative vote of a majority of the directors then in office. If any class of shares or members is entitled to vote on the proposed amendment as a class, a majority of the votes that are held by shareholders or members of that class must also be cast in favor of the amendment to approve it. The voting requirements of this section are subject to any greater requirements under this act for specific amendments, or as provided in the articles of incorporation or bylaws. In addition, unless a greater vote is required in the articles of incorporation, or in a bylaw adopted by the shareholders, members, or directors of a corporation that is organized on a directorship basis, the proposed amendment is approved if a majority of the votes cast by members or shareholders present in person, by proxy, or by electronic transmission at the meeting are cast in favor of the amendment and, if any class of shares or members is entitled to vote on the proposed amendment as a class, a majority of the votes held by shareholders or members of each of those classes that are present in person, by proxy, or by electronic transmission at the meeting are cast in favor of the amendment, or a majority of a quorum of the board of directors of a corporation that is organized on a directorship basis vote in favor of the amendment, if due notice of the time, place, and object of the meeting was given by mail, at the last known address, to each shareholder, member, or director entitled to vote at least 20 days before the date of the meeting or by publication in a publication distributed by the corporation to its shareholders or members at least 20 days before the date of the meeting.
Thus, unless the current condominium documents contain a higher percentage, for the vast majority of condominium associations in Michigan, so long as at least 20 days’ notice is provided, the amendments will simply require a majority of the members present at the meeting entitled to vote in order to modify the association’s Articles of Incorporation.
2. How to Amend the Master Deed, Bylaws and the Condominium Subdivision Plan
In Michigan, the association should notify its members of the proposed amendments at least ten (10) days prior to the meeting to vote on the proposed amendments to the Master Deed, Bylaws and/or Condominium Subdivision Plan. While certain limited amendments do not require a vote of the Co-owners, most condominium document amendments require an affirmative vote of 2/3 of the Co-owners entitled to vote as of the date of the sending the notice. See MCL 450.2412 and MCL 559.190(1) and (8). Specifically, the amendment process is contained in MCL 559.190(2), which states:
Except as provided in this section, the master deed, bylaws, and condominium subdivision plan may be amended, even if the amendment will materially alter or change the rights of the co-owners or mortgagees, with the consent of not less than 2/3 of the votes of the co-owners and mortgagees. A mortgagee shall have 1 vote for each mortgage held. The 2/3 majority required in this section may not be increased by the terms of the condominium documents, and a provision in any condominium documents that requires the consent of a greater proportion of co-owners or mortgagees for the purposes described in this subsection is void and is superseded by this subsection. Mortgagees are not required to appear at any meeting of co-owners except that their approval shall be solicited through written ballots. Any mortgagee ballots not returned within 90 days of mailing shall be counted as approval for the change.
Thus, any condominium documents that contain a provision that requires more than 2/3 Co-owner vote to amend the Master Deed, Bylaws or Condominium Subdivision Plan are void. However, there are certain exceptions to this rule. For example, MCL 559.190(4) states that in order to change or eliminate the percentages of value for each unit, other than for voting purposes, the association needs 100% Co-owner and mortgagee approval. Candidly, obtaining 100% agreement of the Co-owners and mortgagees is, for all practical purposes, an impossible task for most associations.
In addition to obtaining 2/3 of the Co-owners approval, there are seven specific circumstances when 2/3 of first mortgagee approval is also required. In a previous article titled Seven Instances when a Michigan Condominium Association Requires Mortgagee Approval to Amend its Condominium Documents, we addressed the seven circumstances that require first mortgagee approval as required by MCL 559.190a(9). While 2/3 of those Co-owners eligible to vote must affirmatively vote in favor of the proposed amendments, first mortgagee approval is typically a much simpler process. The association does not require 2/3 of the first mortgagees to affirmatively vote “yes” for the amendments. On a practical level, the association merely has to wait the 90 days (as most first mortgagees do not respond) to obtain first mortgagee approval. This is due to the fact that unless the first mortgagees vote “no” to the proposed amendments, the amendments are considered a “yes” vote after 90 days, even if the mortgagee does not respond.
Once the association obtains sufficient Co-owner approval and, if needed, first mortgagee approval, the amendments to the Master Deed, Bylaws or Subdivision Plan become effective only when recorded in the Register of Deeds. See MCL 559.191(a). In addition, a copy of the recorded amendments must be delivered to each Co-owner of the condominium pursuant to MCL 559.191(b).
3. How to Amend the Rules and Regulations
Unless otherwise specified in the Master Deed or Bylaws, the Board of Directors has the authority to amend the Rules and Regulations of the association by a majority vote of the Board of Directors.
B. The Amendment Process: Practical Considerations
Step 1: Normally, a Board of Directors for the association will decide that the condominium documents need to be updated either due to changes in the law or due to practical issues that have arisen which are not covered by the current condominium documents. Part One of this series addressed five normal circumstances when an association should update its condominium documents.
Step 2: Once the determination is made that the condominium documents should be updated, the next step for the Board of Directors is to locate and select a competent attorney with a background in condominium association law. Importantly, the Board of Directors should provide the attorney with the condominium’s Master Deed, Bylaws, Subdivision Plan and any Rules and Regulations including all amendments to the documents. In addition, the attorney can access the association’s Articles of Incorporation through the State of Michigan’s Department of Licensing and Regulatory Affairs website. If the Board of Directors knows of specific provisions it wants changed or included, it should immediately notify the attorney to save time and expense. Once the attorney has all of the relevant documents, the attorney will then draft the proposed amended Articles of Incorporation, Master Deed and Bylaws. This process may take some time depending on the age of the current documents or if the current documents contain unique provisions.
Step 3: Once the attorney completes the first draft of the Articles of Incorporation, Master Deed and Bylaws, the Board of Directors should meet and discuss the proposed amendments. Often times, the Board of Directors will have questions or minor changes to the proposed documents. While it is important for attorneys to remove ‘legalese’ in order to make the documents more accessible to the general public, there are certain provisions required under the Condominium Act, MCL 559.101, et. seq., Act 59 of 1978, or the Administrative Rules implementing the Condominium Act. Thus, your attorney may indicate that certain provisions must remain the same. In addition, a Board of Directors may wish to make certain changes, which require 100% Co-owner and mortgagee approval such as a change to the Percentages of Value. The attorney may advise the association that, in all practical terms, the provision likely cannot be amended.
Step 4: Once the Articles of Incorporation, Master Deed and Bylaws are complete, the Board of Directors should vote whether to approve the proposed amendments. If successful, there are primarily two ways that the amendment process normally progresses at this point.
Step 5 (Option 1): For larger associations, trying to amend the Articles of Incorporation, Master Deed and Bylaws all at once may be a difficult process and could create pushback by certain vocal members adverse to immediate change. In such circumstances, we recommend a tiered approach. Initially, the association should only address the changes to its Articles of Incorporation. Once the Articles have been approved, the association should then focus on amending the Master Deed and Bylaws. While a slower process, this approach staggers the review, voting and implementation of the proposed amendments to ease Co-owners into the process and address any concerns along the way.
Under this process, the association will provide written notification to all members of the proposed changes to the Articles of Incorporation. Typically, the written package contains an introductory letter by the attorney including the reason for the proposed changes and/or a copy of the proposed amended Articles of Incorporation. Also included in the introductory letter is the meeting date and location to vote on the proposed amendments to the Articles of Incorporation. While not required, voting on amendments is often done at the annual meeting of the association.
The attorney then attends the meeting of the Co-owners and answers any questions the membership may have regarding the proposed changes to the Articles of Incorporation. In addition, the attorney may describe how the entire amendment process works, update the membership regarding changes in Michigan law, and indicate that the next step in the process is amending the Master Deed and/or Bylaws. Typically, if the membership has any amendments of their own, they should contact the Board of Directors for its review and consideration of the proposed amendments.
After the attorney answers any questions regarding the proposed Articles of Incorporation, the membership should vote on the amendments. If the members approve of the proposed amendments to the Articles of Incorporation, the association or its attorney will need to submit the newly adopted Articles of Incorporation to the State of Michigan. Once the Articles of Incorporation are approved and filed with the State of Michigan, the association should consider whether any changes need to be made to the proposed Master Deed or Bylaws. If no changes are required or if the changes are incorporated into the final drafts, the association then schedules another meeting to consider and vote on the proposed amendments to the Master Deed and Bylaws. Again, the written notice contains an introductory letter by the attorney including the reason for the proposed changes and/or a copy of the proposed amended Master Deed and Bylaws. Also included in the letter is the meeting date and location to vote on the proposed amendments to the Master Deed and Bylaws. On a practical level, it is extremely important for the Board of Directors to obtain proxies for the amendments to pass. All of this hard work will be for naught if the Board of Directors cannot obtain 2/3 Co-owner approval.
If the Master Deed and Bylaws pass, the attorney will need to determine whether one of the seven (7) provisions applies that also requires 2/3 first mortgagee approval. If so, this often entails sending out the notifications and waiting 90 days for approval to be obtained before the Master Deed and Bylaws may be recorded in the Register of Deeds. If first mortgagee approval is necessary and obtained, the association or its attorney should record the Master Deed and Bylaws in the Register of Deeds.
Step 5 (Option 2): Smaller associations may wish to complete the amendment process all at once. Under this process, the association will provide written notification to all Co-owners of the proposed changes to the Articles of Incorporation, Master Deed and Bylaws. Similar to the meeting described in Option 1 above, the attorney meets with the membership and discusses the proposed changes and answers any questions the membership may have. If the Articles of Incorporation, Master Deed and Bylaws all pass, the attorney will need to determine whether one of the seven (7) provisions applies for first mortgagee approval for the Master Deed or Bylaws. If so, the association or its attorney will need to provide notice to the first mortgagees and wait the 90 days for approval to be obtained before the Master Deed and Bylaws may be recorded in the Register of Deeds. However, given that the Articles of Incorporation passed, that may be filed with the State of Michigan immediately without waiting for 2/3 first mortgagee approval.
Step 6: Once the Master Deed and Bylaws have been amended, the final step in the amendment process is to create consistent Rules and Regulations to implement the newly changed Master Deed and Bylaws. Often, the association will want a collection policy, a bylaw enforcement policy, a code of conduct, a fine policy, a pet policy and rules related to campaigning for the association’s elections. In addition, if the association has tennis courts, a community pool, a clubhouse or any other amenities, the association may wish to create rules and regulations governing these aspects of the condominium.
While the amendment process may appear difficult on the surface, a competent attorney in condominium law will assist Michigan condominium associations in navigating the amendment process. Given the interplay of the Nonprofit Corporation Act and the Condominium Act, including intricacies and nuances related to same, it is imperative that the Board of Directors work cooperatively with the association’s attorney to address any issues that may arise.
The team at Hirzel Law, PLC is composed of award-winning real estate attorneys that can offer quality representation for Michigan clients. Regardless of if you are a commercial real estate developer or individual homeowner, our real estate attorneys can help. We fully understand how unique and complex the challenges that our clients may face, and our real estate attorneys are prepared to help in whatever way necessary. Contact Hirzel Law online or call 248-986-2921 (Farmington) or 231-486-5600 (Traverse City) or 616-319-9964 (Grand Rapids) to learn how our Michigan real estate lawyers can help protect your Michigan real estate investment today.