MICHIGAN LEGISLATURE AMENDS SECTION 67 OF THE CONDOMINIUM ACT – “BIG DEVELOPER” WINS BIG, WHILE “AVERAGE JOE CO-OWNER” IS LEFT HOLDING THE BAG (AGAIN)

section 67By: Gregory J. Fioritto

On June 22, 2016, Governor Snyder signed Senate Bill No. 610 into law, amending Section 67 of the Michigan Condominium Act. The Michigan Legislature had a prime opportunity to effect real change in the law to benefit the many thousands of people who live in unfinished condominium projects as a result of The Great Recession. Sadly, the amendments to Section 67 amount to nothing more than another gift to developers in a statute that is already unfairly tilted in favor of “Big Developer” and against “Average Joe Co-owner.”

Section 67 of the Act primarily addresses the rights of associations and developers in regard to unfinished condominium projects. Specifically, the statute sets a time limit for developers to complete construction of any items not marked as “must be built” (“MBB”) on the condominium subdivision plans. In sum, the developer’s right to construct “need not be built” (“NNBB”) items “times out” if the developer does not complete construction of such items within the statutory time limits. Once these rights expire, there are two main consequences: (1) the developer loses the right to build the NNBB items, and (2) the developer loses the right to withdraw the land from the project on which those items were to be constructed and the land remains in the project as part of the common elements.

For years, Section 67 of Act has been utterly failing those co-owners who were unfortunate enough to buy into unfinished condominium projects prior to or in the midst of The Great Recession. These failures have included, for starters, the following:

1. It was unclear under the inartfully drafted text of Section 67 exactly when, or even if, the developer’s right to withdraw land from unfinished projects and the right to construct units on the land ceased. Association Boards of Directors were left to take their best guess at the nature and extent of their rights regarding the unfinished units and common elements. Associations were extremely reluctant to assert these rights via legal means under the poorly-worded statute in fear of a facing a costly retaliatory lawsuit from the developer (or successor developer) which the association had no reasonable assurance that it could win.

2. It failed to address the taxability of unbuilt units. If taxes or special assessments were owed against an unbuilt unit and the developer’s right to build the unit on the land “timed out,” did the association become responsible for those taxes/assessments once the unit became part of the common elements? If the answer to that question was even possibly “yes,” then the “timing out” of the developer’s right was meaningless in cases where there were any amount of substantial unpaid taxes owed against the unbuilt units. There was no point for a cash-strapped association to voluntarily assume the sometimes massive tax obligations that potentially would come along part-and-parcel with assuming ownership of large blocks of unbuilt units.

3. The artificial distinction between MBB and NNBB items made little practical sense if the point of the statute was to impose a deadline for the completion of condominium projects. Only the developer’s right to build NNBB items timed out under Section 67, whereas the developer had an infinite amount of time to complete those units or common elements which were marked MBB on the subdivision plans. A developer’s designation of unbuilt units/common elements as MBB turned out to be worthless if the developer failed when the economy tanked (as numerous developers did). An incomplete project is an incomplete project, whether its components were originally marked as MBB or NNBB. The ongoing financial stress and turmoil that unfinished projects cause co-owners is not made any easier to bear by the MBB designation of their unfinished parts.

4. Section 67 completely omitted any real protections for associations that are forced to deal with “successor developers” after the failure of the condominium’s original developer. Such protections could include, for example, imposing a hard-line rule making all successor developers responsible for the payment of assessments on all unbuilt units from the date of their acquisition of title to the units onward, creating time limits for the completion of both MBB and NNBB items, and imposing clearer (and tighter) obligations on successor developers to post adequate security to ensure completion of the project before any work is commenced. Protections like these are necessary because the residents in “re-started” communities have no assurance that their successor developers will perform any differently or be any more successful than the failed original developers. Given the very meager protections that the statute currently affords associations against the actions of successor developers, all too often the Boards of unfinished projects are forced to choose between two unattractive options: spend a lot of money for an attorney to fight for a fair deal with the successor developer, or simply roll over and let the successor developer have its way just so that the project can be completed.

So, one may rightly ask, how exactly does the amended version of Section 67 of the Act assist the multitude of beleaguered owners who live in unfinished condominium projects in Michigan?

Although the new language used in Sec. 67 (3) is somewhat less confusing than the previous version (e.g., the “timing out” of the 10-year development period now expressly runs from the recording of the condominium’s master deed), the statute does little to nothing to assist co-owners who live in unfinished projects.

In fact, the most significant change in the statute – the requirement in Section 67 (4) that the association must obtain 2/3 membership approval and give 60 days’ prior written notice to the developer before a reversion becomes legally effective – is actually a boon to developers, not to the owners who live in such projects. This change benefits developers in that it: (1) throws up another procedural roadblock that the association must overcome in order to terminate the developer’s right to withdraw unbuilt units from the project or to complete their construction; this roadblock applies regardless of how much time might have elapsed from the initial recording of the master deed; and (2) forces the association to give the developer a “heads up” via the 60 days’ notice before a reversion can occur, at which point the developer can either withdraw the land (again, regardless of how long it may have been since the initial recording of the master deed), or mark the unbuilt units/common elements as MBB items, thereby unfairly preserving the developer’s right to build the units/common elements in perpetuity.

As if for no other reason than to simply throw even more dirt into the eyes of Average Joe Co-owner, the amended statute has a retroactive effect, so even if a reversion of unbuilt units to common elements might have properly occurred under the old version of the statute, such a reversion is now legally undone unless and until the election, notice, and recording requirements of the new Section 67 (4) are met.

Needless to say, the amendments to Section 67 completely ignore the many significant problems mentioned above in regard to the continuing lack of any real protection for co-owners who live in unfinished condominium projects. If Average Joe Co-owner has any friends or allies in the Michigan Legislature, one has to wonder where they were when this legislation was proposed and enacted into law. Given that Michigan’s real estate landscape is still littered with numerous unfinished condominium projects, much deeper and more comprehensive legislative action was (and is) warranted than what the revised Section 67 achieves.

In short, Michigan co-owners deserve far better than the “relief” provided to them by the amendments to Section 67. Until the Legislature adopts true and fair reform that benefits both sides of the condominium equation and not just Big Developer, co-owners who live in unfinished condominium projects will unfairly continue to bear the lion’s share of the continuing costs imposed by failed developers for many years to come.

Gregory J. Fioritto is a partner with the firm. He has extensive experience in community association law and has been with the firm since 2003. His practice focuses on providing vigorous advocacy to protect and defend the legal rights of both associations and individual co-owners/homeowners. Greg’s particular expertise in community association law includes document amendments, collections, parliamentary procedure, corporate governance, developer disputes, insurance duties, and intellectual property matters.

You can reach Greg at our Plymouth office at 734-459-0062 or via email at gfioritto@zdfattorneys.com

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