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|Minnesota Community Living 2013-09-10 Considering Rental Restrictions|
Considering Rental Restrictions Part Two: Who, Where, When, and How?
By Matt Drewes, Thomsen & Nybeck, P.A. Attorneys
This is the second in a two-part series discussing rental restrictions. Part one can be found in the July/August issue of Minnesota Community Living magazine.
You may recall that in the first installment of this pair of articles I discussed one of the reasons that a community association may want to amend its declaration. The focus of that discussion was on rental restrictions and whether, and to what degree, an association might wish to consider implementing them (the what and the why). There are many other reasons an association might wish to amend its declaration, as well. No matter what the reason, you’ll need a guide through the process. This is a brief roadmap covering some of the most typical issues your association may face, including who’s involved, where each party’s involvement is needed, and when to get them involved.
First, however, there is an important caveat about the procedures discussed in this article. I have tried to cover many of the typical variations I’ve seen. There can always be outliers. It’s always best to get advice about who must approve your amendment, and how best to get that approval.
The Board of Directors
The board of directors steers the association in its day-to-day and month-to-month functions, but also provides policy initiatives. Although the board is not authorized to pass an amendment on its own, it has to take some initiative if an amendment will pass. It will have to approve the language that will comprise the amendment that is submitted for approval, and either directly or indirectly obtain that approval from the required parties.
Amending a community association’s declaration typically requires a substantial number of members (unit owners) to authorize the change. The minimum requirement in most associations, and according to the Minnesota Common Interest Ownership Act (MCIOA), is 67% of the voting interests. Some declarations contain a requirement that 75% or even 90% of the voting interests approve the change, and MCIOA will defer to that higher percentage.
Note that the applicable percentage will apply to all of the voting interests in the association, not just those who show up at a meeting. Despite this high percentage requirement, associations with proper guidance rarely seem to fail to get amendments passed except in the event they’re pursuing particularly controversial amendments. The procedures available to get there are addressed below.
Note, also, that 67% means at least 67%. If your association has six units, and the owners of each unit each have equal voting power, then the approval of the owners of four of those units is just two thirds, which is still less than the required percentage. In your case you’ll need to get the owner(s) of that fifth unit to approve the amendment.
The analysis changes if your owners’ voting interests are determined instead based on an unequal allocation (square footage of units, etc.). You need 67% of the voting interests, not owners of 67% of the units. So, if among six unit owners, four have 20% of the vote each, and two have 10% of the vote each, then the four 20% vote holders can pass an amendment with 80% of the vote.
Mortgagees (i.e., mortgage lenders)
Most amendments also require notice to, and/or consent of, mortgage lenders to at least some degree. The extent of mortgagee approval can vary substantially, however. Some declarations may require all first mortgagees to approve the amendment. That means all lenders who have a first-position mortgage on a unit within the association. If the association is governed by MCIOA, this isn’t necessarily cause to fret, as I’ll explain below. If your association is not already subject to MCIOA, however, the association has to perform some research and be prepared to be persistent to get through to the decision-makers at the applicable lenders.
Fortunately, in most cases, associations are authorized to pass an amendment with only the approval of "eligible mortgagees.” If this requirement applies to your association, the term "eligible mortgagee” should already be defined in your existing declaration. It usually means only those mortgagees who have previously registered with the association. As you might guess, mortgagees almost never do this. If your declaration refers to "eligible mortgagees,” that’s usually good news.
WHERE, WHEN AND HOW
I’ve lumped the last three questions together, because as we review where and when each of the above participants carries out its function in this process, we’re really answering the question of how as well.
The board begins the process by identifying the issue(s) that require the amendment, and either it or its appointed committee start to define the particular goals of the amendment. To use the earlier example, the amendment may be to restrict rentals, but there are questions about the particulars. These might include whether there will be exceptions, and the limits of those exceptions. Once the final concept(s) have been approved, the precise amendment should be reduced to writing. Members can’t vote on the amendment if they don’t know exactly what they’re approving.
Members: "consent” or "vote?”
When the proposed amendment is finalized, it should be submitted to the members for approval. Earlier, I mentioned that the approval process is more feasible than you might think even if you have to get 67% or more of the votes. After all, it’s hard enough to get holders of 67% of the votes to show up for a meeting, let alone to have that many voting in favor of something. Fortunately, most governing documents (and MCIOA) permit approval by having members sign a document stating they consent to the amendment. It’s similar to a petition, but it should be clear the members who sign have all seen the complete, final version of the amendment and that they are signing for the purpose of providing their consent.
If your declaration doesn’t permit amendment by "written consent,” and your association is not already subject to MCIOA, you will have to pursue the approval by member vote. In that case, consider the procedures that may be available to you to help you achieve the vote you need. If authorized by your articles of incorporation or bylaws, the board may approve proxies, which the board or its authorized committee may then collect in advance of the meeting for the purpose of voting in favor of the amendment. This way, members who favor the amendment but are too apathetic to attend a meeting can have their votes counted.
So long as the articles or bylaws approve it, votes may also be held by mailed (or electronic) ballot. Voting by ballot allows the members a period of time to review the materials (often between 15 and 45 days) and submit their vote remotely. During the voting period the board can visit with undecided members about the merits of the amendment, and obtaining a responsive ballot is easier than ensuring member turnout for an in-person meeting.
Mortgagees weigh in. Or not.
Usually, the required percentage of mortgagee approval is 51%. The ease of obtaining mortgagee approval depends greatly upon whether your documents call for the approval of first mortgagees or "eligible mortgagees,” as I described above. Since the law changed in 2010, MCIOA also makes a significant difference. MCIOA now provides associations with statutory authority to consider a lack of response to be a "yes” vote if a mortgagee does not respond within 60 days of receiving proper notice of the amendment via certified mail. You will still have to do your homework to attempt to identify all the applicable mortgagees, but your approval can no longer be stalled by mortgagees who hide behind loan servicers and fail to respond.
If you are required to obtain the approval of first mortgagees and your association is not governed by MCIOA, you will have to locate and coax a vote out of each mortgagee, which takes diligence and patience. There is an argument that may still preserve an amendment if you don’t do this, but it’s best if the argument is used as a fallback rather than a first option, and you may wish to seek an attorney’s opinion before deciding to rely on the argument.
CAN WE DO THIS?
There’s no shame in it if you have felt that the amendment process seems daunting. It is true that there are several aspects of the process that can present a challenge. But if you prepare yourself, and recognize it can be accomplished in a series of manageable steps, you should gain confidence that you can implement a change you may have been putting off. Hopefully, this primer on the process demonstrates that the amendment you may have been considering is achievable if you have the right plan.
Note: The information in this article is provided solely as general information and not as legal advice. Your receipt, and even your use of this information, does not establish an attorney-client relationship. Readers are urged to speak with a qualified attorney focusing on community association law when making decisions regarding a specific legal issue.
Published by Community Associations Institute — Minnesota Chapter, copyright 2013. All articles and paid advertising represent the opinions of authors and advertisers and not necessarily the opinion of either Minnesota Community Living or CAI–Minnesota Chapter. The information contained within should not be construed as a recommendation for any course of action regarding financial, legal, accounting, or other professional services by the CAI–Minnesota Chapter, or by Minnesota Community Living, or its authors. Articles, letters to the editor, and advertising may be sent to Chapter Staff Editor Joanne Penn at firstname.lastname@example.org, or at CAI–Minnesota Chapter, 1000 Westgate Dr., Suite 252, St. Paul, MN 55114.