The Colorado Common Interest Ownership Act

by Lynn S. Jordan David W. Kirch Jerry C. M. Orten Gary H. Tobey James L. Winokur

Reproduced by permission. ©1992 Colorado Bar Association,

21 The Colorado Lawyer 645 (April 1992). All rights reserved.

The Colorado Common Interest Ownership Act (“CCIOA” or “Act”),(fn1) which will go into effect on July 1, 1992, is a comprehensive statute covering the creation and operation of common interest communities (“CICs”). Its goal is the effective and efficient operation of homeowner associations in those many areas in which associations are involved, such as assessment collection, insurance, rules and regulations, and the maintenance of common elements. The Act gives more specific delineation to the organizational structure of homeowner associations and better standardizes association operations. The Act also does much to address responsible and flexible development of condominiums, townhomes and planned unit developments (“PUDs”).

CCIOA was based on the work product of the National Conference of Commissioners on Uniform State Laws and was modeled after the Uniform Common Interest Ownership Act (“Uniform Act”), which is a successor statute to the Uniform Condominium Act, Uniform Planned Community Act and Model Real Estate Cooperative Act. The official comments to the Uniform Act will help in interpreting the Colorado Act, although it was not adopted as part of the Colorado law. At least twenty-one states have enacted some version of the Uniform Act; thus, judicial decisions in these states can provide an additional source of guidance and interpretation of the Colorado statute.

The first three Articles of the Uniform Act were the basis for the Colorado Act. Article Four of the Uniform Act, which contained a number of consumer protection provisions, and Article Five of the Uniform Act, which established a regulatory agency, were not included in the new Colorado legislation.

Before CCIOA, the only guidance in Colorado in this complex area of legal relationships had been a smattering of court decisions and the Colorado Condominium Ownership Act,(fn2) which does little beyond making it possible to create an ownership interest in air space.(fn3) Prior Colorado statutory and case law did not resolve some of the most basic questions affecting this form of home ownership. For example, until recently a question existed concerning whether or not a recorded declaration could make a homeowner personally liable for association assessments.(fn4)

This article first discusses how the Act operates, the new terminology used under the Act, provisions unique to Colorado and the Act’s application to new and existing CICs. Also, the article deals with the creation of new CICs, termination and merger, and association operations as effected by the new law. Finally, association collection powers under CCIOA and the election for pre-existing associations are analyzed.

HOW THE ACT OPERATES

The type of CIC, date of the CIC’s creation (115 & 117),(fn5) number of units (116 & 119) and amount of annual assessments (116) determine which sections of CCIOA are applicable to the CIC. All small planned communities with less than ten units and new planned communities with annual assessments set in their declaration at less than $300 are specifically exempted from most of the Act’s operation (116). Also, cooperatives and planned communities, all of whose units are restricted to nonresidential use, are not covered by the Act (116 & 121), although the declaration of such a planned community can bring it under the Act (121). All new condominiums are subject to the Act, regardless of the number of units, the amount of assessments or the commercial use of the units.

An effort has been made to have the Act operate in as many instances as constitutionally permissible. Concerns with the improper interference with existing property and contract rights results in some complexity in CCIOA’s applicability. For example, the operation of the Act as to pre-existing associations is limited to events and circumstances occurring on or after its effective date of July 1, 1992 (117).

CCIOA TERMINOLOGY

In the transition from current to new law, some new terms have been introduced and others have been redefined.

The Act defines “common interest communities” as real estate, the ownership of which requires a person, by virtue of a declaration recorded with respect to the property, to pay assessments and other items [103(8)]. Generally, condominiums, townhomes, PUDs and cooperatives are subject to the law.

Traditionally, Colorado law defined a condominium in terms of both ownership of common elements and the existence of horizontal boundaries to property, permitting ownership of air space.(fn6) Under CCIOA, the term “condominium” is defined strictly in terms of the method of ownership of the common elements of the CIC, regardless of the existence of horizontal boundaries or separate ownership of air space. This is consistent with the approach in most other states.

If ownership of the common elements is held in undivided interests among the unit owners, a condominium exists [103 (9)]. If the common elements are titled in the name of an association of unit owners, a “planned community” exists under the Act [103(22)]. In the vast majority of cases, a condominium under current Colorado law also is a condominium under the new Act. Townhomes and PUDs generally are “planned communities” under the Act. However, by virtue of the new law’s reliance on the division of ownership of the common elements among the unit owners, even single family residences could form a “condominium” for purposes of CCIOA.

“Unit” is defined as a physical portion of the CIC designated for separate ownership or occupancy [103(30)]. CCIOA gives greater precision to what is physically included in and excluded from a “unit” (202). As a result, the allocation of maintenance and insurance responsibilities between the association and individual owners is more clearly delineated.

“Cooperatives” are defined in the Act as those CICs in which all real property, including the individual units, are owned by the association [103(10)]. Although this form of ownership has not been in common usage in Colorado, there are a few cooperatives in existence, and it is an area of continuing interest to developers. To avoid the use of cooperatives to circumvent the law, they were included in the Uniform Act and in the Colorado Act.

The definition of “declaration” under the Colorado law is expanded to include plats and maps, so that provisions of those documents will have the same force and effect as if included in what has been traditionally called the declaration [103(13)].

The above terms are used generally throughout the Act. Other specific definitions, in addition to the above, are integral to the Act’s operations, and practitioners should carefully review them.

PROVISIONS UNIQUE TO COLORADO

CCIOA reflects a number of significant changes and refinements from the Uniform Act. Some were modeled after changes made in other states which adopted the Uniform Act, particularly Washington and Connecticut.

The insurance provisions of CCIOA were based on an entire rewrite of that section of the Uniform Act, using current insurance terminology (313). Of particular significance in this area is the requirement of fidelity bonds for those handling association funds. Also, greater flexibility is given associations in the area of casualty insurance claims adjustment.

The Colorado Act leaves the areas of covenant enforcement and architectural control largely up to the association documents [205(1)]. This is an intentional departure from the Uniform Act because these matters are believed to be properly handled on an individual basis.

The provisions allowing existing associations to elect treatment under the Act are unique to Colorado (118). They are modeled after statutory procedures in Colorado providing for election by pre-existing corporations to be covered under the 1967 Nonprofit Corporation Act.(fn7) In addition, CCIOA permits pre-existing associations to amend their governing documents to elect treatment under CCIOA (120). These provisions allow for more flexibility than currently exists for addressing inadequate or poorly drafted declarations.

Other Colorado departures from the Uniform Act are aimed at CICs with inadequate or poorly drafted documents, filling in gaps in such documentation. For example, the provision on recovery of attorney fees, which is essential to effective assessment collection efforts, has been expanded (123). Attorney fees are granted to the party prevailing on each claim in litigation. This mutuality of remedy, not contained in the Uniform Act, should avoid possible constitutional problems, such as those which were found to exist with the previous forcible entry and detainer statute in Colorado (which granted attorney fees only to the landlord).(fn8) Collection costs prior to the initiation of a lawsuit are specifically made recoverable.

Limited protection from the waiver of assessment lien priority given CICs is the most controversial provision in CCIOA. The Uniform Act creates a nonwaivable statutory lien for assessments, granting six months of assessment priority over a first deed of trust (316). The Colorado statute further caps the amount of the lien priority [316(2)(b)(I)] and refines the calculation of the lien to make it clear which six months of assessments are covered [316(1) & (2)(b)]. Further, title companies, lenders and purchasers are given greater certainty and protection by strengthening the requirement that, on request, associations provide binding statements of amounts due [316(8)].

With respect to property taxation, the Uniform Act was modified to preserve existing Colorado law (105). The provisions on eminent domain were modified to simplify the process of condemnation of common elements in Colorado [107(3)]. In addition to these highlights, other changes were made so the Act would be consistent with Colorado law.

APPLICATION AS TO NEW AND EXISTING CICs

On July 1, 1992, CCIOA will be effective and apply to both new and existing CICs. Application to new CICs is simpler than application to existing CICs and thus is discussed first.

Application to New CICs

For most new CICs “created” on or after the effective date, the entire Act applies (115). For a few new CICs, only limited portions of the Act apply (116 & 121). For other new CICs, none of the Act applies (115, 116 & 121).

The Act’s application to new communities can best be understood by the exclusions or types of new communities that are only subject to limited sections of the Act or that are not subject to the Act. CCIOA §§ 115 and 116 apply the Act to all new CICs, except for certain new small cooperatives, new commercial cooperatives and certain new small and limited expense planned communities. CCIOA § 121 does not apply to new commercial planned communities or certain new mixed use planned communities.

Existing Statutes

Parts of the current Colorado Condominium Ownership Act are superseded by the Act (115). The organizational sections of the Condominium Act do not apply to condominium CICs created after the effective date (CRS §§ 38-33-101 to 109). Those sections which remain applicable are: “Time-sharing—definitions,” “Special provisions applicable to time share ownership,” “Notification to residential tenants” and “License to sell condominiums and time shares” (CRS §§ 38-33-110 to 113).

The Act specifies that, to the extent it conflicts with other laws of the state of Colorado (i.e., the Colorado Nonprofit Corporation Act), the provisions of CCIOA control, whether the conflicting law now exists or is subsequently enacted (319).

Types of New CICs

New Condominiums. The entire Act applies to all new condominium projects “created” on or after the effective date of July 1, 1992 (115). New condominiums cannot be excluded from the Act’s application by size of the project, by the amount of the average annual assessment, by restriction of permitted uses (i.e., by restriction to uses of only a commercial nature) or by a combination of residential and commercial uses in a mixed use condominium project. The Act’s application to new condominiums, therefore, is simple—the Act applies, regardless of the type, size and nature of the uses in new condominium projects.

New planned communities. The Act applies to all new planned communities, including new planned communities limited to residential uses, but does not apply to certain new small and limited expense planned communities, new commercial use planned communities and certain new mixed use planned communities (115, 116 & 121).

New small and limited expense planned residential communities are not subject to the entire Act if they meet either of the following criteria: (1) the project contains no more than ten units and is not subject to “development rights” or (2) the average annual assessment for residential units (exclusive of any optional user fees and insurance) does not exceed $300 (116). These small and limited expense residential planned communities are only subject to three sections of the Act: § 105 on “Separate titles and taxation”; § 106 on “Applicability of local ordinances, regulations and building codes”; and (3) § 107 on “Eminent domain.” However, these communities also may be bound by the entire Act if their declarations so specify (116).

The Act does not apply to new commercial planned communities if uses are restricted to commercial uses (121). However, the Act does apply to a new mixed use planned community if the real estate comprising the residential units would be a “planned community” without the commercial use units or if the declaration expressly subjects the project to the Act’s terms (121).

New cooperatives. The Act applies to all new cooperatives, except new commercial use cooperatives and certain new small residential cooperatives that contain no more than ten units and are not subject to “development rights.” These particular new small residential cooperatives are subject to only two sections of the Act: § 106 on “Applicability of local ordinances, regulations and building codes” and § 107 on “Eminent domain.” New commercial use cooperatives are not subject to the Act (116), but both new commercial use cooperatives and new small residential cooperatives may be subject to the Act if their declarations so specify (116).

Application to Existing CICs

On July 1, 1992, most existing CICs will be subject to portions of the Act (117). The Act’s application to existing CICs is conceptually similar to its application to new CICs, with similar distinctions based on the type, size and nature of permitted uses (but not amount of annual assessments). The application of the particular sections and provisions of the Act to existing CICs depends on the type of CIC involved.

Specifically Applicable Sections and Provisions

Several sections of the Act apply to existing CICs. Certain sections set forth how the other Act sections and provisions operate or are to be construed. They are as follows:

Short title (101).

Legislative declaration (102).

Definitions (to the extent necessary in construing any applicable sections and provisions) (103).

Variation by agreement (104).

Supplemental general principles of law applicable (108).

Construction against implicit repeal (109).

Uniformity of application and construction (110).

Severability (111).

Remedies to be liberally construed (114).

Other applicable statutes (319).

Other sections set forth substantive provisions that apply to existing CICs. They are as follows:

Applicability to pre-existing CICs (117).

Procedure to elect treatment under CCIOA (118).

Exception for small preexisting cooperatives and planned communities (119).

Amendments to pre-existing governing instruments (120).

Applicability to nonresidential planned communities (121).

Applicability to out-of-state CICs (122).

Enforcement (123).

The Act’s sections and provisions specifically listed in § 117 as applicable to existing CICs are as follows:

Lien for assessments (316).

Certain powers of unit owner associations [302 (1)(a)-(f), (j)-(m) and (o)-(q)].

Construction and validity of declaration and bylaws (203).

Description of units (204).

Tort and contract liability (311).

Association as trustee (318).

Separate titles and taxation (105).

Applicability of local ordinances, regulations and building codes (106).

Eminent domain (107).

The sections and provisions listed in § 117 apply to events and circumstances occurring on or after July 1, 1992, but only apply to the extent they do not invalidate provisions of any declaration, bylaws, plats or maps in existence on June 30, 1992.

Types of Existing CICs

Existing condominiums. Those portions of CCIOA that are applicable, apply to all existing condominiums, regardless of the number of units in the project and the type or nature of the condominiums (117). The sections and provisions listed in § 117 and the other applicable parts of the Act (as set forth above) apply to all existing condominiums, including residential, commercial and mixed use condominiums.

Existing planned communities. Except for certain existing small planned communities, planned communities where uses are restricted to commercial uses and certain mixed use planned communities (117, 119 & 121), the same parts of CCIOA that are applicable to existing condominiums apply to existing planned communities. To these certain planned communities, the sections and provisions listed in § 117 and other applicable parts of the Act (as set forth above) apply.

Existing small and planned residential communities are not subject to applicable provisions of the Act if they contain no more than ten units and are not subject to “development rights” (119). These small planned communities are only subject to three sections of the Act: § 105 on “Separate titles and taxation”; § 106 on “Applicability of local ordinances, regulations and building codes”; and § 107 on “Eminent domain.” Existing small planned residential communities may become bound by additional provisions of the Act if the declaration is amended in conformity with applicable law (as allowed under § 120) or the election permitted under § 118 is made.

Existing planned communities which are restricted to nonresidential use (commercial use) are not subject to any of the provisions of the Act (121). However, in these communities, the declaration can be amended expressly to provide that the Act applies (121).

Finally, existing mixed use planned communities are not subject to applicable parts of the Act unless one of the following two criteria is met: (1) the real estate that comprises the residential units that may be used for residential uses would be a “planned community” in the absence of the commercial use units or (2) the declaration is amended expressly to provide that the Act applies (121).

Existing cooperatives. Except for certain existing small cooperatives (117 & 119), the same parts of CCIOA that apply to existing condominums and planned communities apply to existing cooperatives. Interestingly, existing commercial use cooperatives are not excluded from the Act’s application, while new commercial use cooperatives are excluded (117, 119 & 116).

Existing small cooperatives are not subject to the applicable provisions of § 117 and the rest of the Act if they contain no more than ten units and are not subject to “development rights.” These small cooperatives are subject to only three sections of the Act: § 105 on “Separate titles and taxation”; § 106 on “Applicability of local ordinances, regulations and building codes”; and § 107 on “Eminent domain.” Small cooperatives may become bound by additional provisions of the Act if the declaration is amended in conformity with applicable law (as allowed under § 120) or the election permitted under § 118 is made.

CREATION OF A NEW CIC

A CIC may be created pursuant to CCIOA by recording a declaration in every county in which any portion of the CIC is located [201(a)]. Under CCIOA, a declaration includes not only the recorded document entitled “declaration,” setting forth covenants, conditions and restrictions, but also all recorded maps, plats and plans or any combination thereof. Further, an important change to common practice is the requirement that the document be included in the grantor’s index in the name of the CIC and in the name of each person executing the declaration (201).

A cooperative CIC is created by conveying the real estate subject to that declaration to an association. CCIOA causes a major change in usual practice with cooperatives by requiring that the declarant convey the real estate subject to the declaration to the association and may not retain title until proprietary leases for all or most units have been executed.

Because structural and mechanical components of a condominium are usually part of the common elements, neither a declaration nor an amendment to a declaration adding units in a condominium may be recorded until all structural components and mechanical systems of at least one building covered by the recorded document are “substantially completed” [201(2)]. Developers may choose to create a CIC by completing only one building and reserving development rights for additional buildings. CCIOA does not require that all buildings be substantially completed to create a CIC.(fn9)

Although the Act encourages more uniformity and simplicity of description by use of identifying numbers of units, traditional legal descriptions are still valid (204). This is another departure under the Colorado law from the Uniform Act in recognition of traditional Colorado real estate practices.(fn10)

Under CCIOA, a declaration creating a CIC must contain the following:(fn11)

1. The declaration must contain the names of the CIC and the association and a statement that the CIC is either a condominium, cooperative or planned community.

2. The declaration must contain the name of the county or counties in which any part of the CIC is located.

3. The declaration must contain a legally sufficient description of the real estate included in the CIC.

4. A statement of the maximum number of units that the declarant reserves the right to create must be included.

5. In a condominium or planned community, there must be a description of the boundaries of each unit and, in a cooperative, there must be a description of each unit (including the unit’s identifying number, its size or number of rooms and its location within a building if it is within a building containing more than one unit).

6. There must be a description of any limited common elements and, in a planned community, any real estate that is or must become common elements.

7. There must be a description of any real estate, except real estate subject to development rights, that may be allocated subsequently as limited common elements, together with a statement that they may be so allocated.

8. There must be a description of any right or combination of rights reserved by a declarant in the declaration which will allow it to: (a) add real estate to a CIC; (b) create units, common elements or limited common elements within a CIC;

(c) subdivide units or convert units into common elements; or (d) withdraw real estate from a CIC. These are termed “development rights.”

9. There must be a description of any right reserved to the declarant to: (a) complete improvements indicated on plats and plans or the offering statement; (b) exercise any development right pursuant to § 210; (c) maintain sales offices, management offices, signs advertising the CIC and models; (d) use easements through the common elements for the purpose of making improvements within the CIC or within real estate which may be added to the CIC; (e) make the CIC subject to a master association; (f) merge or consolidate a CIC with another CIC of the same form of ownership; or (g) appoint or remove any officer of the association or any master association or any board member during any period of declarant control. The declaration also must include a legally sufficient description of the real estate to which each of these rights applies and a time limit within which each of these rights must be exercised. Under CCIOA, these rights are referred to as “special declarant rights.”

10. The declaration must include statements that fix the boundaries of those portions of the CIC subject to special declarant rights and regulate the order in which those portions may be subjected to such rights or must include a statement that no assurances are made in those matters.

11. If any development right can be “exercised as to less than all” of the real estate subject to that development right, a statement must be included as to whether or not that particular development right can be “exercised in all or in any other portion of the remainder of that real estate” [205(1)(i)(II)].

12. The declaration must contain any other conditions or limitations under which the development rights may be exercised or will lapse.

13. The declaration must include any restrictions on the rights of ownership of the units.

14. The declaration must contain the recording information for recorded easements and licenses appurtenant to the CIC.

15. The declaration must provide for an allocation to each unit of the portion of the votes in the association. In the case of a cooperative and a planned community, an allocation of a fraction or percentage of the common expenses of the association must be made; in a condominium, a fraction or percentage of undivided interests in the common elements and in the common expenses of the association must be made [207(a)]. The declaration also must state the formula used to establish allocations of interests and, if units may be added, the formulas to be used for reallocation [207(b) & (c)]. This provision allows a developer maximum flexibility—allocations may be made based on size, value or any other formula, as long as the formula is set forth in the declaration.

Finally, except for certain types of limited common elements,(fn12) the declaration must specify to which unit or units each limited common element is allocated.(fn13)

Because an important purpose of CCIOA is to fill gaps in the documents and prior law, an “insubstantial failure of the declaration to comply” with this laundry list will not invalidate a declaration [203(4)].

TERMINATION AND MERGER

Prior to CCIOA, CICs had no statutory authority, and rarely any documentary guidance, regarding termination. CCIOA’s prescribed procedures for termination of a CIC fill this problematic void.

Unless the declaration provides for a larger percentage, a CIC may be terminated by the affirmative vote of two-thirds of the votes in the association [218(1)]. Termination is effected by recording a termination agreement in the clerk and recorder’s office for the county in which the CIC in situated [218(2)].

Depending on the type of CIC involved, termination agreements differ in their treatment of the disposition of the common and limited common elements.(fn14) CCIOA also provides an orderly procedure for liquidating CIC assets and for discharge of all liens and encumbrances.(fn15)

Addressing a common problem, § 221 fills another void by setting forth a procedure by which two or more CICs may merge or consolidate. These actions must be by or among the same type of CICs (i.e., either condominiums or planned communities) and by agreement of two-thirds of the votes in each association.

ASSOCIATION OPERATIONS

Corporate Form for Associations

For those few associations not now incorporated, there will be strong incentive to incorporate to gain entitlement to the statutory lien for assessments (301 & 316). Further, CCIOA’s entire structure tends to assume the corporate form; several provisions follow the general approach of the Colorado Nonprofit Corporation Act.(fn16) A CCIOA executive board is essentially the same in purpose and function as a nonprofit corporation board of directors [103(16)]. CCIOA follows existing law(fn17) by providing that, if not appointed by the declarant, neither board members nor officers shall be liable for actions taken or omissions made in the performance of their duties, except for wanton and willful acts or omissions [303(2)(b)]. On the other hand, officers and board members appointed by the declarant are required to exercise their duties with the care required of fiduciaries of the unit owners [303(2)(a)].

Budget

The association must prepare an annual budget [315(1)]. Within thirty days after the board’s adoption of any proposed budget, the board must mail by ordinary first class mail or otherwise deliver a summary of the budget to all unit owners. The board also must set a date for a meeting of unit owners to consider ratification of the budget not less than fourteen nor more than sixty days after the mailing or other delivery of the budget summary.

Whether or not there is a quorum of the owners at the meeting under CCIOA, the budget is ratified unless a majority of all unit owners reject the budget. Therefore, as a matter of operational regularity, the board must plan ahead for preparation and adoption of a proposed budget. To allow sufficient time for the required notice, it is suggested that this be done no later than two months prior to the annual meeting [303(4)].

Records and Assessment Status

Under CCIOA, the association must keep financial records which are sufficiently detailed and current for quick response to assessment status requests [316(8)]. Additionally, the financial and other records of the association must be made reasonably available for examination by any unit owner or an owner’s authorized agent. Although these general standards are maintained by many present associations on an ongoing basis, they are now mandated by statute (317).

The term “assessments” under the Act includes fees, charges, late charges, attorney fees, fines and interest, all of which are collectible as assessments [316(1)]. To receive a written status report of assessments, an owner or lender must make a written request delivered personally or by certified mail, return receipt requested, to the association’s registered agent. In response, the association must provide a written statement setting forth the amount of unpaid assessments currently levied against the owner’s unit. This statement must be furnished within fourteen business days after receipt and will be binding on the association, the executive board and each unit owner. It must be delivered personally or by certified mail, return receipt requested. If the association does not timely provide notice to the unit owner or mortgage holder, it loses its right to assert a priority lien [316(8)].

There are several highlights to note in § 316(8). The request for assessment status goes to the registered agent at the registered office under the Colorado Nonprofit Corporation Act.(fn18) As a practical matter, this means the association should promptly change its registered agent to an individual at the management company or an officer or other reliable person capable of responding for the association. This will ensure prompt, appropriate handling. Most property managers provide this service in a relatively prompt, reliable manner. Next, actual compliance is by written request and response, personally delivered or by certified mail, return receipt requested. An association might prefer less formal communication with title insurance companies, owners or mortgage holders, but the association risks loss of its limited lien priority if it fails to comply with the formal requirement.

Surplus Funds

CCIOA is straightforward in dealing with surplus funds. Unless provided otherwise in the declaration, surplus funds remaining after the payment or provision for common expenses and any prepayment or provision for reserves are to be credited to the unit owners in proportion to their common expense liability (314).

Insurance

CCIOA’s insurance provision sets forth general guidelines for all CICs. It follows the general approach by well-drafted association documents and provides for property insurance on the common elements, as well as general liability insurance [313(1)]. Property insurance is required to be in broad form in the amount of the full insurable replacement cost. General liability insurance is to be in the amount determined by the board and in no event less than that set forth in the CIC documents. Analogous provisions specifically address cooperatives. There is further provision for immediate notice to the unit owners in the event insurance cannot be obtained as set forth in CCIOA.

In an addition unique to the Colorado Act, the association is allowed to adopt nondiscriminatory policies relating to submittal of claims, responsibility for deductibles and other matters bearing on claims adjustment. The association is given express authority to assess deductibles paid by the association against negligent unit owners causing a loss to the property or unit owners benefiting from such repair. This ties into the provision allowing the association to charge expenses to owners based on the benefits received or the cause of the expense (315). The association also may prorate among the affected owners the obligation for any deductible where more than one unit is damaged [313(6)].

Fidelity Bond

Regardless of who handles the association funds, an association of thirty or more units must maintain fidelity insurance in an amount of no less than two months’ assessments, calculated from the current budget. The association may provide for a greater amount of fidelity bond. An independent contractor agent may be required to maintain the fidelity bond in the amount stated unless the association names the agent’s employee as an insured employee of the association [313(10-12)].

Notice of Assessment Lien

Recording of the declaration constitutes record notice and perfection of the assessment lien [316(4)]. It has long been the custom to accept recording of the declaration as establishing the lien priority. This potentially avoids the substantial expense of recording notice of default on the lien amount. Under CCIOA, lenders should routinely give associations notice of foreclosure procedures, regardless of the recording of the notice of default. However, where express language in a declaration calls for lien notices, conservative association counsel, at least initially, may opt to continue to record such notices.

Power to Sue on Behalf of Owners

In an important change in the power of associations, CCIOA gives the association the power to institute, defend or intervene in litigation or administrative proceedings in its own name on behalf of itself or two or more unit owners on matters affecting the CIC [302(1)(d)]. This statutory provision follows the national trend acknowledging the representative capacity of the association and ends substantial difficulty on the standing issue in Colorado.(fn19) This change should enable the association to represent more effectively its owners in such matters as construction defects and advocating the association position in land use actions. It also should avoid the necessity of assignment of claims, powers of attorney or class actions in many circumstances, thereby simplifying and making more practical the prompt action in the association’s and owners’ common interests.

ASSOCIATION COLLECTION POWERS

Stronger Association Collection Remedies

The most hotly contested provisions in CCIOA are those enhancing an association’s ability to collect delinquent unit assessments. Prior to enactment of CCIOA, collection of delinquent assessments had been an inefficient, often unsuccessful process. The low priority of the association’s lien and lack of equity relegated the association to receiving no proceeds from foreclosure by the senior first deed of trust and to having no incentive to foreclose or redeem.

To strengthen the association’s financial viability, CCIOA clarifies association powers to collect assessments through enhanced remedies. Where unit owners default on properly levied assessments, CCIOA allows the association (subject to its declaration) to charge for late assessment payments, recover attorney fees and collection costs and impose fines for violation of governing documentation [302(1)(k)].

Unwaivable Priority of Statutory Lien for Assessments

Beyond recognizing a statutory lien on behalf of incorporated associations arising from the due date of any unpaid assessment [316(1)],(fn20) CCIOA also accords to incorporated associations a limited statutory priority over first deeds of trust and other encumbrances, which cannot be waived (104). This priority is limited to six months of assessments [316(2)(b)], plus attorney fees and costs incurred in enforcement of the lien.

To protect other creditors, CCIOA further limits this lien priority to no more than 150 percent of the average assessment rate for six months during the immediately preceding year [316(2)(b)]. Any excess over this six-month/150 percent ceiling remains a lien on the property. This excess holds a lien priority junior to the first deed of trust on the unit [316(2)(a)]. Thus, although the association’s lien is technically a single lien, its varying priority effectively separates the association’s rights in the subject unit into two liens, which are hereinafter referred to as the “prioritized lien” and the “less-prioritized lien.”

This limited six-month assessment priority is inapplicable against interests recorded before the declaration and liens for taxes or other public governmental charges [316(2)(a)(III)]. Mechanics lien priorities are unaffected [316(2)(c)]. As with tax liens, the limited statutory priority for the association’s assessment lien is not waivable; § 104 prohibits waiver of any rights conferred by CCIOA and, except as expressly provided in CCIOA, any variation of those rights by agreement. The CCIOA association assessment lien and priority is to be available to both new and pre-existing associations affecting priority of deeds of trust granted after CCIOA’s July 1, 1992, effective date (117 & 115).

The association’s prioritized lien, like its less-prioritized lien, may consist not merely of defaulted assessments, but also of fines, charges and interest. The reference to six months of assessments which would have been due [316(2)(b)(I)] merely sets a maximum amount of all these charges within the prioritized lien. Furthermore, this maximum does not apply to reasonable attorney fees and costs incurred in an action to enforce the lien, which are also included in the prioritized lien [316(2)(b)(II)].

Thus, for example, if a unit owner fell three months behind in assessments, the prioritized lien might include—in addition to the three months of arrearages—fines, charges and interest enforceable as assessments under CCIOA, up to the § 316(2)(b)(I) maximum, plus reasonable attorney fees and enforcement costs. However, for any assessments or other charges to be included within the prioritized lien, there must have been a properly adopted periodic budget promulgated by the association “at least annually,” from which the appropriate six months’ assessment ceiling can be computed.

Documentation

As noted above, CCIOA codifies interested parties’ ability to verify assessment status, obligating the association promptly to provide a written, recordable assessment status certificate binding on all concerned [316(8)]. Ready availability of such status certificates justifies CCIOA in requiring that only the declaration, and no further delinquency notice, needs to be recorded as notice of the lien for all assessment delinquencies [316(4)].

Foreclosure and Redemption Options

CCIOA provides that the association lien in condominium and planned communities may be foreclosed “in like manner as a mortgage on real estate” [316(11)(a)]—that is, judicially (CRS § 38-39-101). Acting on its prioritized lien, the association would initiate judicial foreclosure against a unit in default. Along with the unit owner, the holders of any other interests in the property would be joined in the foreclosure.(fn21) Holders of junior interests would stand to receive the excess, if any, of the foreclosure sale price over the amount of the prioritized lien in the order of their priorities. The association’s less-prioritized lien would be among those junior interests.

The process would vary considerably if, instead, the party seeking foreclosure were the holder of a first deed of trust on a CIC unit. Regardless of whether the first deed of trust holder’s loan is in payment default, default on the association assessment also is likely an event of default under the deed of trust, allowing its holder to initiate foreclosure. If a prioritized lien were outstanding against the unit, the deed of trust and its foreclosure would be subject to the prioritized lien which, as a senior interest, would not be extinguished by the deed of trust foreclosure.

If the association pursued foreclosure of its prioritized lien (perhaps to seek sure payment of its prioritized lien during the foreclosure, rather than likely payment at some time after foreclosure), its foreclosure would have to be by judicial foreclosure, in which the first deed of trust holder would be joined as a necessary party.(fn22) Pursuit of this foreclosure lawsuit should require suspension of the first deed of trust holder’s public trustee foreclosure,(fn23) in which case enforcement of the association’s lien will threaten substantial delays to the secured lender.

At first glance, the first deed of trust holder might consider paying off the unit owner’s debt secured by the prioritized lien,(fn24) rather than foreclose itself. Curing the default might seem particularly appropriate to the first deed of trust holder where an assessment default is not accompanied by a default on payments owing under the first deed of trust. Provisions in most deeds of trust allow the lender’s payment of its borrower’s delinquent assessments to be added to the secured debt.

Despite the theoretical advantages to curing the assessment default, a first deed of trust holder more often will elect to foreclose its lien, paying the assessment secured by the prioritized lien only after completion of the foreclosure process. Earlier payment of the delinquent assessments cannot permanently eliminate the prioritized lien threatening the deed of trust.

Under the statute, once paid, the prioritized lien could be “refueled” by additional unpaid present or future assessment delinquencies. The prioritized lien includes, by definition, all unpaid assessments up to the maximum set by § 316 (2)(b)(I). If the lender paid off only the assessments secured by the prioritized lien, any remaining or future assessment delinquencies, up to the § 316(2)(b)(I) maximum, would be elevated immediately in priority and included in a refueled prioritized lien. Any effort by the lender to avoid the refueling of the prioritized lien should violate CCIOA’s prohibition against waiver or variation of CCIOA-created rights (104).

Instead, the first deed of trust holder generally will not pay assessment delinquencies until the lender obtains title to the unit in foreclosure. At that time, payment of the prioritized lien, which, unlike the less-prioritized lien, survives this foreclosure as a senior interest, will be necessary to clear title for any resale of the unit.

Rationale for the Lien Priority Provisions

CCIOA’s lien provisions finally begin to redress the law’s implicit discrimination against CICs. Unlike with other properties, a defaulting CIC owner’s share of community costs to maintain common elements currently falls on those least responsible for the default—homeowners who regularly pay their assessments, remain in good standing and constitute the community association.

For non-community association developments, a lender typically maintains, insures and otherwise preserves the value of a property once the owner/borrower defaults. CCIOA’s assessment lien priority casts similar preservation burdens on CIC unit lenders, except that, unlike non-community association homes, the community association lender’s burden is limited. It would preserve inequity if, instead, a defaulting owner’s neighbors would bear costs like casualty insurance, security, physical maintenance (of common elements such as exteriors of homes, landscaping, private streets), rather than the lender whose security is protected by these payments, and who will likely own the property after foreclosure.

Lender responsibility to maintain the value of its own security during foreclosure resembles lender responsibility for clearing the title of real estate tax liens. In an era of privatized public services, with private associations rather than public governments collecting trash, maintaining roads and parks and the like, assessment charges deserve to be treated more like property taxes, which receive total priority over virtually all other liens on a property.

Experience Elsewhere

Attorneys in other states, such as Connecticut, with statutes like CCIOA’s lien priority provisions have confirmed that these provisions have not discouraged secondary purchase or sale of CIC mortgages, and that their lenders have not generally escrowed advance assessments.

Title Concerns

CCIOA creates no new title insurance vulnerability. Before issuing any title policy, an insurer can obtain a binding status notice of delinquent assessments against any home. These inquiries already are standard procedure for title insurers. Liens arising after the date of issuance, including all assessments liens based on subsequent defaults, are excluded by the standard title insurance policy. Title insurance coverage for the CCIOA prioritized lien could be provided only at the title company’s option.(fn25)

ELECTION FOR PRE-EXISTING ASSOCIATIONS

CCIOA is distinct from the Uniform Act in permitting associations created before July 1, 1992, to elect to be treated as if they came into existence on or after July 1, 1992.(fn26) The Colorado statute is unique in providing for this election to be made by corporate act, rather than by an amendment to the declaration. On making this election, all provisions of CCIOA are to be applicable to CICs.

The procedure for making this election is simple. An association’s board of directors must adopt a resolution recommending that the association accept CCIOA and directing that the question be submitted to a vote at a meeting of the owners. Alternatively, one-twentieth (or if there are in excess of 1,000 members, one-fortieth) of the owners also may call for a vote on electing CCIOA treatment. Voter eligibility is determined by the articles of incorporation, declaration and bylaws. Voting on this issue may be done at either an annual or special meeting and a quorum will be as provided in the governing documents for such a meeting.

The board of directors must give written notice to each eligible voter within the time and in the manner provided in the governing documents. In all cases, this notice shall: (1) set forth that a purpose of the meeting is to consider electing to be treated as a CIC organized after June 30, 1992, and thereby accepting the provisions of CCIOA; and (2) include a copy of CCIOA. An election to accept treatment under CCIOA requires an affirmative vote of two-thirds of the votes that the persons present at such meeting (in person and by proxy) are entitled to cast.

Where an association is formed, but does not have members, or where an association exists without governing documents providing for voting rights, a majority vote of the directors present at a meeting of the board of directors is sufficient to elect treatment under CCIOA.

A Statement of Election to accept the provisions of CCIOA must be executed and acknowledged by the president or vice-president and by the secretary or an assistant secretary of the association. The Statement must set forth the following:

1) that the association has elected to accept the provisions of CCIOA;

2) the date of the meeting, that a quorum was present, and that such acceptance was authorized by at least two-thirds of the votes that those present in person or by proxy were entitled to cast;

3) that the association has complied with the requirements of its articles of incorporation, declaration, bylaws and other governing documents so far as applicable in effecting this election;

4) the names and addresses of the association’s officers and directors; and

5) if there were no persons entitled to vote, but a CIC has been created, that the declarant desires the CIC be subject to CCIOA. The original Statement of Election must be recorded in the office of the clerk and recorder for the county in which the CIC is located.

Once an election is made and the original Statement of Election recorded, the CIC is subject to all provisions of CCIOA. Then the CIC has the same powers and privileges and is subject to the same duties, restrictions, penalties and liabilities as if it had been created after June 30, 1992. However, as is true of those provisions made applicable to existing associations under § 117, CCIOA applies in its entirety to associations making the election only with respect to events or circumstances occurring on or after July 1, 1992, and does not invalidate provisions of any declaration, bylaws, plats or maps in existence prior to the Act’s effective date.

Lawyers need to review carefully the advantages and disadvantages of the election, with the needs of each particular CIC in mind. In most cases, the provisions of CCIOA are more comprehensive than existing governing documents. While several CCIOA provisions are applicable to pre-existing CICs, by electing treatment under CCIOA, all of Part 2 and Part 3 are available. In particular, CCIOA should help to resolve issues relating to the following: unit boundaries; limited common elements; development rights; alteration of units; encroachment easements; borrowing powers; termination or mergers of CICs; addition of real estate; organization and powers of the association and its executive board, officers and declarants; conveyance or encumbrance of common elements; and insurance coverage and claims.

CONCLUSION

CCIOA is a lengthy, complex piece of legislation, addressing the needs of CICs and their associations, developers, lenders and individual owners.(fn27) As is true of any comprehensive legislation, until practitioners become more familiar with its provisions, there will be concerns and uncertainty surrounding its operation. CCIOA offers legal counsel many tools to improve their clients’ circumstances, to ascertain readily the rights and duties of affected parties and to define substantial legal relationships in which these opposing interests may converge.

NOTES

_____________________
Footnotes:

1. CRS § 38-33.3-101 et seq.

2. CRS § 38-33-101 et seq.

3. See generally, “A Symposium on Condominium Law and Practice in Colorado,” 11 The Colorado Lawyer (Nov. 1982).

4. Chateaux Condominiums v. Daniels, 754 P.2d 425 (Colo.App. 1988).

5. All section citations in the text are to CCIOA, codified at CRS § 38-33.3-101 et seq.

6. CRS § 38-33-103.

7. CRS §§ 7-21-111 to 114.

8. CRS § 13-40-123; More v. Johnson, 568 P.2d 437 (Colo. 1977).

9. See, CRS §§ 38-33.3-209 and 210.

10. Section 2-104 of the Uniform Act provides:

A description of a unit which sets forth the name of the common interest community, the recording data for the declaration, the county in which the common interest community is located, and the identifying number of the unit, is a legally sufficient description of that unit and all rights, obligations, and interests appurtenant to that unit which were created by the declaration or bylaws.

11. See generally, CRS § 38-33.3-205.

12. The types of limited common elements which may be excluded are those which would be considered “structural,” and are described in CRS § 38-33.3-202(1)(b) and (1)(d).

13. CRS § 38-33.3-208 (which also describes procedures for allocating and reallocating limited common elements).

14. See, CRS § 38-33.3-218(3),(4) and (5).

15. See generally, CRS § 38-33.3-218(6)-(12).

16. Title 7, Arts. 20-29.

17. See, CRS § 13-21-116(2)(b).

18. Title 7, Arts. 20-29.

19. Summerhouse Condominium Assn, Inc. v. Majestic S & L Assn, 615 P.2d 71 (Colo.App. 1980); Summerhouse Condominium Assn, Inc. v. Majestic S & L, 660 P.2d 16 (Colo.App. 1982); Villa Sierra Condominium Assn v. Field Corp., 787 P.2d 661 (Colo.App. 1990).

20. For a single assessment payable in small installments, a lien arises for the full amount of the assessment from the due date of the first installment.

21. C.R.C.P. Rule 105(a) (1985).

22. Id. Cf. CRS §§ 38-38-103 and 104; Sweetbaum, Judicial Foreclosures, Colorado Deed of Trust Foreclosures (Professional Educational Systems, Inc., 1990); Nelson and Whitman, Real Estate Finance Law at § 7.12, 2d ed. (West Publishing Co., 1985). It causes no analogous problem if the lienor foreclosing by public trustee foreclosure wishes to extinguish by the foreclosure a junior lien which would normally be required to foreclose judicially. The public trustee process may be used in these cases. See, CRS § 38-38-103.

23. See, C.R.C.P. Rule 105(a) (1985). Compare, Boulder Lumber Co. v. Alpine of Nederland, Inc., 626 P.2d 724 (Colo.App. 1981), in which the Colorado Court of Appeals affirmed injunction prohibiting the public trustee from proceeding with a deed of trust foreclosure where a mechanics lien holder was seeking judicially to foreclose against the same security, and where priority disputes among the lienors left the respective parties’ rights particularly unclear. Even where priorities are clear, however, the simultaneous pursuit of a judicial and a non-judicial foreclosure against the same land could produce confusing results, considering the overlap of parties with interests standing to be extinguished in both proceedings. Compare also, for an example of the type of confusion resulting from dual foreclosures, the classic decision in Murphy v. Farwell, 9 Wis. 102 (1859).

24. The right to cure is established in Colorado by CRS § 38-38-103. With senior deeds of trust, securing debts which have been accelerated for foreclosure, the junior lienor also will have the right of paying off the entire lien, not just the amount of a current default.

25. For more extensive treatment of the lien priority provisions of the Uniform Act, on which CCIOA is based, see, Winokur, “The Meaner Lienor Community Association: The Super Priority Lien and Related Reforms Under the Uniform Common Interest Ownership Act, 27 Wake Forest L.Rev. (May 1992).

26. CRS § 38-33.3-118.

27. As to a treatment of the Act regarding its impact on different parties, see, in this issue: Linquanti and Smith, “The Colorado Common Interest Ownership Act: Basic Concepts of Balance,” 21 The Colorado Lawyer (April 1992) at 721.

Lynn S. Jordan, Denver, is a shareholder with Lohf, Shaiman & Ross; David W. Kirch, Denver, is a sole practitioner; Jerry C. M. Orten, Denver, is a shareholder with Orten & Hindman, P.C.; Gary H. Tobey, Denver, is a shareholder with Tobey & Pelz, P.C.; and James L. Winokur is a Professor at the University of Denver College of Law. These authors have participated in the drafting of CCIOA.