The Michigan Condominium Act, MCL 559.101, et seq., contains specific procedures for the termination of a condominium. If a developer has not sold any condominium units, MCL 559.150 permits the developer to unilaterally terminate a condominium project. If the developer has sold units, MCL 559.151 sets forth the voting process for terminating a condominium project. This article will discuss the requirements of MCL 559.150 and MCL 559.151 and discuss potential issues that arise in terminating a condominium project. As will be set forth below, in many cases, it is not beneficial to terminate a condominium as the continued maintenance of commonly owned property becomes problematic.
Can the developer unilaterally terminate a condominium before selling units?
MCL 559.150 provides as follows:
If there is no co-owner other than the developer, the developer, with the consent of any interested mortgagee, may unilaterally terminate the condominium project or amend the master deed. A termination or amendment under this section shall become effective upon the recordation thereof if executed by the developer.
As indicated above, if the developer has not sold any units in the condominium, it may unilaterally terminate the condominium as long it obtains the consent of any mortgagee. Similar to any other amendment to a master deed, the termination is not effective until it is recorded. See also MCL 559.191(1) (“An amendment to the master deed or other recorded condominium document shall not be effective until the amendment is recorded.”). After executing the termination document, attaching the mortgagee’s consent, and recording it, a recorded copy of the termination document should be provided to the local supervisor or assessing office. See MCL 559.173(3) (“When recorded, a copy of the master deed and a copy of any subsequently amended master deed or amendment shall be filed with the local supervisor or assessing officer.”)
Can a condominium be terminated after units are sold?
MCL 559.151 provides the procedure for terminating a condominium after a developer has sold units, and provides as follows:
(1) If there is a co-owner other than the developer, then the condominium project shall be terminated only by the agreement of the developer and unaffiliated co-owners of condominium units to which 4/5 of the votes in the association of co-owners appertain, or a larger majority as the condominium documents may specify.
(2) If none of the condominium units in the condominium project are restricted exclusively to residential use, then the condominium documents may specify voting majorities less than the minimums specified by subsection (1).
(3) Agreement of the required majority of co-owners to termination of the condominium shall be evidenced by their execution of the termination agreement or of ratifications thereof, and the termination shall become effective only when the agreement is so evidenced of record.
(4) Upon recordation of an instrument terminating a condominium project the property constituting the condominium project shall be owned by the co-owners as tenants in common in proportion to their respective undivided interests in the common elements immediately before recordation. As long as the tenancy in common lasts, each co-owner or the heirs, successors, or assigns thereof shall have an exclusive right of occupancy of that portion of the property which formerly constituted the condominium unit.
(5) Upon recordation of an instrument terminating a condominium project, any rights the co-owners may have to the assets of the association of co-owners shall be in proportion to their respective undivided interests in the common elements immediately before recordation, except that common profits shall be distributed in accordance with the condominium documents and this act.
As set forth above, even if the developer has sold all of the units in the condominium, a residential condominium may only be terminated if the developer and at least 4/5 of the co-owners that are not affiliated with the developer agree to terminate the condominium. Such a procedure is problematic, as the development entity may no longer be in existence many years after the condominium is completed, leaving the co-owners with the prospect of attempting to sue a defunct development entity to gain the needed consent to terminate the condominium. Accordingly, it is this author’s opinion that this process needs a legislative fix, and that developer consent to terminate a condominium should be eliminated after the developer no longer owns any units in the condominium. While a condominium that is used exclusively for non-residential use may lower the 4/5 co-owner voting requirement, it is often still difficult to terminate a condominium due to the requirement of developer consent. While MCL 559.151 does not require mortgagee consent to terminate a condominium, such consent is required under MCL 559.190a(9)(a), which permits mortgagees to vote on amendments to the condominium documents that terminate condominiums.
Assuming the requisite consent can be obtained under MCL 559.151 and MCL 559.190a, and the appropriately executed documents are recorded in the register of deeds, the next step is determining ownership of the former common elements. Pursuant to MCL 559.137(1), each co-owner has an undivided interest in the common elements proportionate to its percentage of value while the condominium is in existence. After the condominium is terminated, all of the former co-owners will own the former common elements as tenants in common.
However, there are several drawbacks to this type of arrangement. First, common elements are not taxable pursuant to MCL 559.231. Accordingly, once the condominium is dissolved, and the common elements cease to exist, the real property that was formerly common elements becomes taxable and it will need to be assigned a new tax identification number. Second, after the condominium is dissolved, and the condominium association is dissolved, there is no longer a good mechanism for a single entity to collect assessments, maintain the common elements, and then take enforcement action against owners that do not pay. Accordingly, in the absence of an agreement between all owners, it is difficult to continue to maintain any commonly owned property and physically maintain the property, pay taxes, or pay insurance.
One option is to simply divide up the remaining common property, and deed that property to individual owners. As a practical matter, this is difficult, as it would likely require a survey to create a legal description to divide up the common property into separate parcels. This approach would also require unanimous consent of all owners that had an ownership interest in any of the common property, as they would need to sign off on any deed to an individual owner. A second option would be that the owners enter into a new set of restrictive covenants. However, any owner that did not consent would not be bound by the new restrictive covenants. Similarly, a homeowners association could be formed to administer the common areas, but owners would only be required to join the new homeowners association if they consented or it was required by the new set of restrictive covenants. If all owners did not consent to be bound by a new set of restrictive covenants, or join a new association that administers common areas, it would be more difficult to administer the common areas. Similarly, if the owners did not join received a benefit from the maintenance of the commonly owned property, the new association would likely only be able to pursue a claim for unjust enrichment, as opposed to being able to place a lien, or collect attorney’s fees and costs, if a property owner did not pay their fair share.
Often times a co-owner or groups of co-owners will seek to terminate a condominium if the condominium association has been inactive for a long period of time, they have difficulty obtaining board members, they are dissatisfied with the current board of directors or they no longer want to be subject to restrictive covenants. While Michigan Condominium Act, MCL 559.101, et seq., provides a procedure for terminating a condominium, it is usually not advisable to terminate the condominium as items such as roads, sewer, drainage, green space, signage or other shared amenities will still need to be maintained, and the absence of a mandatory condominium association makes this difficult. Accordingly, in most circumstances, co-owners are better off trying to properly operate the condominium association instead of terminating it.
Kevin Hirzel is the Managing Member of Hirzel Law, PLC. He concentrates his practice on commercial litigation, community association law, condominium law, Fair Housing Act compliance, homeowners association, and real estate law. Mr. Hirzel is a fellow in the College of Community Association Lawyers, a prestigious designation given to less than 175 attorneys in the country. He has been a Michigan Super Lawyer’s Rising Star in Real Estate Law from 2013-2019, an award given to only 2.5% of the attorneys in Michigan each year. Mr. Hirzel has been named a Leading Lawyer in Condominium & HOA law by Leading Lawyers Magazine in 2018 and 2019, an award given to less than 5% of the attorneys in Michigan each year. He represents community associations, condominium associations, cooperatives, homeowners associations, property owners, and property managers throughout Michigan. He may be reached at (248) 480-8758 or firstname.lastname@example.org.