ULC

Real Estate Cooperative Summary

Forms of multiple ownership of real property have become exceedingly important in the United States. Even though con­dominium ownership has captured the most attention, perhaps be­cause it is the newest form of multiple ownership in the U.S., there are other native forms which continue to be used, and are gaining in popularity. Included are planned communities (also called planned unit developments) and cooperatives. The ULC responded to condominiums and planned communities with the Uniform Condominium Act (UCA) and the Uniform Planned Community Act (UPCA). It has now created the Model Real Estate Coopera­tive Act (MRECA).

 

The differences between these forms of multiple ownership depend upon the exact division of ownership. A condominium vests ownership wholly in unit owners. Each unit owner has his own unit plus an undivided joint interest in the common ele­ments, or the common property in the condominium. In a planned community, each owner has his own unit, and the unit owners' association owns the common elements. In a cooperative, the association owns all the real property, and each member owns a share of the cooperative association and has a proprietary lease for his or her unit.

 

These differences must be taken into account, particularly for the purposes of such things as financing and insurance, but each form of multiple ownership, also, has broad areas of simi­larity. All of them have the same critical phases -creation, financing, management, and termination. All of them depend upon an owners' association for governance. Usually, the owners are assessed regularly for the maintenance of the development. Sim­ilar amenities can be, and are, offered to make life in these developments attractive. Conversely, most of the potential problems are identical-inordinate developer control, shoddy construction, disorganized management, and long-term mainten­ance.

 

A comprehensive act must deal with the four critical phases. It must also provide buyer protection and, in the case of con­version buildings, with the rights of existing tenants. An

additional important issue is resale o~ units. MRECA deals with all these issues, as do UCA and UPCA. These Acts, therefore, do resemble each other to-i great degree, and they should so that the law creates no artificial preferences between one form of multiple ownership over another. Let more fundamental economic factors and consumer interests dictate those choices.

 

The Model Real Estate Cooperative Act is a model act, not a uniform act. Historically, cooperatives have been limited to the Northeast and Midwest as a major form of multiple ownership of real property. Since it is not expected that this form will have the same appeal nationwide, it did not seem suitable to urge a uniform act upon the states. In contrast, condominiums and planned communities appear from coast to coast and border to border. Uniformity of the law is extremely important with respect to them.

 

The creation of a cooperative takes place upon the filing of a declaration under the MRECA, exactly as condominiums begin under UCA, and planned communities under UPCA. The declaration contains-matters pertaining to title, primarily, and include the name of the cooperative, its location, a description of the real estate, and a description of relevant development rights, easements, and other title matters. The declaration is the fundamental instrument for a cooperative.

 

Financing for cooperatives is, perhaps, the most critical incident of cooperative development. A cooperative member does not necessarily own real estate in the sense of fee ownership. Therefore, lenders may not be able to obtain the traditional security in real estate when they lend to cooperative members. On the other hand, the association can obtain blanket financing for the whole of a cooperative development, which purchasing members then agree to pay as part of the association's assess­ment. A cooperative member can obtain the tax advantages of a traditional mortgage in this fashion.

 

MRECA takes these differences in financing into account. If the declaration does not specify, for instance, a cooperative member's interests are personal property. But the declaration may specify that these interests are real estate. That way, the best and most advantageous financing mechanism can be created, initially.

           

All three Acts -MRECA, UCA, and UPCA -provide an assess­ment lien to the owners' association for-unpaid assessments. The assessments, it must be remembered, are the life blood of the community. Priorities in MRECA are different, since the association can encumber all the real property upon which a member's interests are based. For condominiums and planned communities, an assessment lien has priority over all subse­quently recorded liens, including first mortgages. The assess­ment lien has a priority over even prior recorded first mort­gages for a limited amount (past due six months before an action to enforce). However, for cooperatives, the association may encumber the real property, since it owns it. Therefore, it would not be fair to creditors to allow the association to have a priority for assessment liens over and above other liens against it. In fact, that would inhibit the association's capacity to borrow, and the assessment lien in MRECA takes no priority over liens against the association.

 

Management provisions between the three Acts are nearly identical. An owners' association must be created as soon as a first sale is made. The association must be supported by the declarant until sufficient owners or members are available to provide adequate assessments. Declarant control of the associ­ation shifts as the number of unit owners or members grows. At a point at which 75% of all units have been sold or two years after the declarant has ceased sales or ceased exercise of any special developer rights, control of the Board of Directors shifts entirely to unit owners or members. All three Acts pro­vide comprehensive powers for management of a development, in­cluding the power to police improper owner or member actions. The bylaws of the association are its governing rules. All three Acts have provision for allocation of liabilities and the responsibility for insurance coverage. Under MRECA, of course, the responsibility for insuring against casualty loss rests en­tirely with the association -since it owns the property. In­surance costs become part of common expenses for cooperative members.

           

Nobody expects termination of any multiple ownership development, but there should be provision in the statute for this contingency. All three of the multiple ownership Acts allow for termination upon the concurring vote of at least 80% of owners or members. There are provisions in each Act for car­rying out termination, including sale of property, taking care of creditors, and distributing proceeds to owners or members.

  

 Consumer protection in MRECA, UCA, and UPCA are also basic­ally the same. Two basic concepts rule -disclosure and warran­ties. MRECA, like UCA and UPCA, requires a public offering statement, a detailed listing of facts and figures pertinent to purchasing a unit. Special disclosure provisions apply for conversion buildings. Warranties in MRECA include both express and implied warranties of sale. Any affirmation of fact or promise by the seller to the buyer is the basis for express warranties. Implied warranties of fitness will apply, without overt affirmation by the seller. Implied warranties, however, may be disclaimed if done clearly and specifically.

MRECA, like UCA and UPCA, has an optional article which es­tablishes an administrative agency for cooperative development. All projects would be registered with, and approved by, the agency. It would have the power to investigate complaints, issue cease and desist orders, and sue for violations of the Act. This article is optional, because it is recognized that new administrative agencies or new duties given to old admin­istrative agencies may not be fiscally feasible in many jur­isdictions. MRECA provides for individual enforcement through the courts so that the need for an agency is minimized.

These three Acts have much in common, as do the respective forms of multiple ownership. With some distinctions between the three Acts, a clear family resemblance and similarity re­sults. MRECA is part of this family of Acts, and completes the capacity of the states to adopt law adequate for all multiple forms of ownership.