Chapter 55

Creation of Community Associations

Condominiums in Georgia

Types of Property that can be created as a Condominium:

Any type of property can be created as a condominium regime.  A condominium defines the legal relationship to owners have to the land and each other.  It does not define the architectural style of the property.  A condominium can be:

• A high-rise building, a townhome or a single family home subdivision
• A boat dock with slips
• A parking deck
• A shopping center
• An office park . . . the list is infinite

How Does a Condominium Work? 

There are two different forms of ownership interests in a condominium: Unit ownership and common element ownership.

• A unit is a defined portion of space owned separately from all the other condominium owners.  For example:  a two-bedroom residence in a high-rise; one townhome among the others; one single family residence in the subdivision; one boat slip among the rest; one parking space in the deck; one store in the shopping center; one office space in the office building . . .

• The common elements are everything except the units.  If an area is not part of a unit, then it is automatically part of the common elements.  For example: the exterior building surfaces or the elevator shafts of the high-rise; the front yards of the townhomes; the clubhouse in the subdivision; the docks leading to the boat slips; the ramps in the parking deck; the dumpster and parking areas in the shopping centers; the stairwells and lobbies of the office buildings. . .

The limited common elements are sub-sections or areas of the common elements that are reserved for the specific use and enjoyment of one or more (but less than all) of the unit owners.  These spaces are not part of a unit (so automatically they are considered common elements).  However, everyone is not permitted to use them – just the owners and guests of the units to which the limited common elements are assigned.  For instance, balconies, storage spaces, and assigned parking spaces may be limited common elements (Unassigned parking spaces that are available for everyone to use are simple common elements, not limited common elements).

An owner in a condominium owns his/her unit separately from all other condominium owners.  The same owner also owns a portion of the common elements concurrently (as tenants in common) with all the other unit owners.  Depending on the legal documents for the condominium, the common elements might be owned in equal percentages by the owners of each unit or in unequal percentages based on the size or type of the units.

A condominium corporation (the association) usually does not own anything.  The corporation manages and operates the common elements – but the corporation does not own the common elements.  The common elements are owned by all the unit owners as tenants in common.

How do you Know what is Part of the Unit? 

The legal documents of a condominium identify the unit boundaries.  For example, the covenants may state that:  The boundaries of the units extend from the lowermost (unexposed) surface of the flooring material to the uppermost (unexposed) surface of the ceiling material.

This means that the unit includes the flooring material, the ceiling material and all the airspace in between.  It also means that all the airspace (and anything in that airspace) above the ceiling of one unit and below the flooring of another unit is part of the common elements.

By contrast, the covenants could state that:  The boundaries of the units not on the bottom or top floors extend from the centerline of the airspace below the flooring to the centerline of the airspace above the ceiling.

This means that all the airspace between the ceilings and floors of the building are part of the units – the bottom half of the airspace being part of the unit below and the top half of the airspace being part of the unit above. It is easy to determine the common elements of a condominium.  The common elements are everything on the property except what is a unit.  Figure out what the unit boundaries are, and the rest is common element.

What Laws Regulate Condominium Projects in Georgia? 

There are two condominium statutes in Georgia, but the older of the two, known as the Georgia Apartment Ownership Act (“AOA”), has been replaced by the Georgia Condominium Act, O.C.G.A. 44-3-70, et seq. (“GCA”).

• The AOA regulates condominiums that were created before July 1, 1975.  The AOA does not exist in the printed laws of the State of Georgia anymore.  However, it is still applicable to some communities.  As of July 1, 1975 new condominiums had to be created according to the Georgia Condominium Act (“GCA”) and associations subject to the AOA had the option (but not the obligation) to revise their legal documents and subject the community to the provisions of the GCA.  By now, almost all of the communities subject to the AOA have submitted to the GCA.  A few have not made the necessary document revisions and remain subject to the AOA.

• The GCA regulates all condominiums that were created after July 1, 1975 and any AOA that submitted to the GCA.  According to the GCA, in order to create a condominium the declarant must create and file three documents in the land records of every county where the property is located. (Remember, the land records are housed in the Superior Court of each county.)  If the property straddles more than one county, then these documents must be recorded in each relevant county.  The declarant also must incorporate an entity to operate the condominium.

All other general statutes and common laws in Georgia apply to condominiums also, in addition to these specific statutes. 

What Three Documents must be recorded in the Land Records to Create a GCA Condominium?

1. Declaration 

The Declaration of Condominium contains the:

• Private encumbrances — lien rights, easements, covenants (use restrictions, architectural control provisions and enforcement rights)
• Legal boundaries of the units (in words)
• List of the limited common elements and the unit assignments for each
• Percentage of common element ownership for each unit

2. Floor Plans 

Shows the interior of the condominium project – specifically the legal boundaries of the units (in drawings)

3. Plats 

Shows the exterior of the condominium project

QUESTION: What must be done to create a corporation? 

ANSWER: Although the GCA regulates condominiums, different Georgia laws regulate corporations.  Since almost every community association in Georgia is a non-profit organization, we need to look to the Georgia Non-Profit Corporation Code (“Corporate Code”) to determine how to create a corporation.  The Corporate Code states that Articles of Incorporation need to be filed with the Georgia Secretary of State and bylaws need to be adopted to operate the corporation.  The Secretary of State does not record or file bylaws.

Articles of Incorporation are very basic.  They list the initial directors, the official address, the registered agent and the name of the incorporator.  For the most part, they are never referred to again.

The bylaws are used on a regular basis.  Typically the bylaws contain provisions about how the corporation should operate, including specifics about:

• Annual, special and board meetings;
• Notice, quorum, proxy and voting requirements for meetings
• Number, terms, election and authority of board members and officers

The biggest problem associations have with their bylaws is keeping track of them.  Since there is no legal requirement to record or file the bylaws, when the declarant-appointed board is replaced with an owner-elected group, sometimes the bylaws are lost.  To prevent this from happening, many developer attorneys now record the bylaws in the county land records as an exhibit to the declaration.  

GEORGIA LAW DOES NOT REQUIRE BYLAWS TO BE RECORDED ANYWHERE 

QUESTION: What else is the declarant required to do when creating a condominium? 

ANSWER: The declarant of a condominium is required to disclose certain information to the first purchaser of a new condominium unit.  (Re-sale sellers are not obligated to make the same disclosures to future buyers.)  Some of these disclosures are required to be in the Purchase and Sale Agreement between the declarant and the new buyers.  Some of them can be assembled into what is commonly referred to as the “Disclosure Package.”

QUESTION: What disclosures must be in the purchase and sale agreement? 

ANSWER: The contract must include two provisions from the GCA.  Both of them must be printed in bold or capital letters in a font that is no smaller than the largest type on the first page.

(I) The first provision is: 

Oral representations cannot be relied upon as correctly stating the representations of the seller.  For correct representations, reference should be made to this contract and the documents required by code section 44‑3‑111 of the “Georgia Condominium Act” to be furnished by a seller to a buyer

(II) The second required provision is:

This contract is voidable by buyer until at least seven days after all of the items required under code section 44‑3‑111 of the Georgia Condominium Act” to be delivered to buyer have been received by buyer. The items so required are:

1. A floor plan of the unit
2. The Declaration and Amendments thereto
3. The Association’s Articles of Incorporation and bylaws and Amendments thereto
4. Any ground lease
5. Any management contract having a term in excess of one year
6. The estimated or actual budget for the condominium
7. Any lease of recreational or other facilities that will be used only by the unit owners
8. Any lease of recreational or other facilities that will or may be used by the unit owners with others
9. A statement setting forth the extent of the seller’s commitments to build or submit additional units, additional recreational or other facilities, or additional property
10. If this contract applies to a condominium unit which is part of a conversion condominium,  a statement describing the condition of certain components and systems, a statement regarding the expected useful life of certain components and systems, and certain information regarding any notices of violations of county or municipal regulations.  A dated, written acknowledgment of receipt of all said items signed by the buyer shall be prima facie evidence of the date of delivery of said item
11. There are numerous other disclaims required to be in the sales contract if they apply to the project or the situation.  In all cases these disclosures must be printed in bold or CAPITAL LETTERS in a font that is no smaller than the largest type on the first page of the contract.

What is in the Disclosure Package and Why is it so Important? 

Items 1-10 above must be included in the Disclosure Package if they exist.  The Disclosure Package is important because (as mentioned in the preamble of the second required provision) the buyer can void the purchase and sale agreement for seven days after he/she receives the Disclosure Package.  If the Declarant does not include something in the Disclosure Package or one of the documents initially included is changed in a way that materially affects the buyer’s rights or the value of the unit, then the buyer has another seven days to void the contract from the date the new/corrected information is received by him/her.

What Kind of Challenges Exist when Creating a Condominium? 

1. Limited Common Element Assignments: 

Declarants sometimes do not list the limited common element assignments in the declaration.  This creates a problem because according to the GCA an owner affected by a limited common element assignment must consent to the assignment (if it was not already in the chain of title – recorded with the declaration — before the owner purchased the unit).  Technically, if the assignment list is not recorded in the original declaration every buyer must consent to every limited common element recorded after the buyers purchase their units.  If these consents are not obtained, then the limited common element assignment is subject to challenge.

2. Expandable Condominiums and Proper Submission of Future Phases: 

All of the condominium units created in a condominium project can be identified and recorded at one time with the initial recording of the declaration, floor plans and plats.  However, if the boundaries of some units are not finished or if the declarant only wants to submit some of the floors of the building, the declarant can create an expandable (or phased) condominium.

In an expandable condominium, the declarant submits some, but not all of the condominium units when the declaration is originally recorded.  This is done by listing only the submitted unit numbers, recording only certain floor plans, or doing both.  The declarant can sell only the units that have been submitted to the condominium.  When the declarant is ready to create more condominium units, a supplemental condominium declaration or an amendment to submit additional property is recorded in the land records.  This document should be recorded before any of the additional units are sold to buyers.  If the sale happens before the recording significant chain of title issues can arise for the buyer and the buyer’s lender.

As long as the additional property to be submitted to the condominium in future phases is identified in the originally recorded declaration, the GCA gives the declarant the unilateral right to add this additional property to the condominium for seven years.  Seven years after the declaration is originally recorded the declarant needs the consent of a certain percentage of submitted unit owners to include additional property in the condominium.

If the condominium is expandable, the declarant is required to disclose this fact to the first buyers of each unit.  Those contracts must include the following language in bold or capital letters in a font that is no smaller than the largest type on the first page: THIS CONTRACT APPLIES TO A CONDOMINIUM UNIT WHICH IS PART OF AN EXPANDABLE CONDOMINIUM. 

Project Approval for FHA-Insured Loans in Condominiums 

The Federal government passed the Housing and Economic Recovery Act of 2008. As part of the Act, the Federal Housing Administration (FHA) implemented a new approval process and requirements for FHA loans in condominium communities.  The new requirements are addressed in the US Department of Housing and Urban Development (HUD) Mortgagee Letters 2009-46B and 2009-46A.  Subdivisions and other non-condominium communities are not subject to these requirements, and FHA does not require project approval to insure loans in non-condominium communities.  These requirements apply only to condominiums.

Project approval is available for existing, conversion and new construction condominiums.  “Existing Condominiums” are defined as those whose buildings were constructed as condominiums, and all units, common elements and improvements have been completed for over one year.  “Conversion Condominiums” are defined as those constructed for some use other than condominiums, but converted to condominium use. In order for HUD to process a request for project approval, the Association must submit documentation evidencing the fact that the condominium meets all of the Project Eligibility Requirements set forth in HUD’s Mortgagee Letters 2009-46B and 2009-46A for Existing Condominiums.  The condominium must not be subject to the possibility of further expansion by the developer.  While there are a number of other significant requirements, the basic requirements for HUD approval of Existing and Conversion Condominiums are as follows:

• Insurance: The Condominium must be covered by hazard and liability insurance and, when applicable, flood insurance.  Existing Condominiums of 20 units or more must also carry a fidelity bond or fidelity insurance covering all officers, directors, employees or agents handling or responsible for Association funds, in an amount equal to three months’ assessments on all units plus the amount of reserve funds.

• Commercial Space: No more than 25 percent of the condominium’s total floor area can be used for commercial purposes, and the commercial portion, if any, must be of a nature that is homogenous with residential use and free of adverse conditions to the occupants of the units.

• Investor Ownership: No more than 10 percent of the units may be owned by one investor.  For condominium projects with ten or fewer units, no single entity may own more than one unit.  REO properties are excluded from this percentage.

• Delinquent Assessments: No more than 15 percent of the total units can be more than 30 days past due in the payment of assessments.

• Owner Occupancy Ratios: At least 50 percent of the units in the condominium must be owner-occupied or sold to owners who intend to occupy the units.  Vacant units are deemed to be “owner-occupied.”

• Budget: The annual budget must:  (a) include allocations/line items to ensure sufficient funds are available to maintain and preserve all amenities and features unique to the condominium; (b) provide for the funding of replacement reserves for capital expenditures and deferred maintenance in an account representing at least 10% of the budget; and (c) provide adequate funding for insurance coverage and deductibles.

• Reserve Study: If the budget does not meet the foregoing standards, then, in order to ensure that the budget includes sufficient funds to maintain and preserve the amenities, a capital reserve study, no more than 12 months old, is required.

To show that the condominium meets the above criteria, the Association must provide HUD with several supporting documents, including, a complete list of members of the Association, a list of the total number of leased units, delinquency reports, budgets, insurance policies, flood certifications, management agreements, outstanding/pending litigation reports and governing legal documents.

There are two specific issues creating barriers to obtaining project approval.  First, if there is outstanding, non-collection litigation it is unlikely the project will be approved.  Second, there is a federal statute stating that a mortgage shall not be eligible for FHA insurance if the mortgaged property is subject to legal restrictions on conveyance.  Since FHA guidelines require 50% owner occupancy, most associations created leasing restrictions so they could regulate leasing and the keep the owner-occupancy numbers higher than 50%.  Certain FHA offices reviewing applications from condominiums for FHA project approval refuse to grant project approval if the legal documents of the condominium include a leasing restriction – since those offices consider a leasing regulation a restriction on conveyance.  Until this is resolved, we are seeing project denials for most associations involved in non-collection litigation and condominiums that have leasing restrictions in their legal documents.

If project approval is granted, FHA-backed loans are permitted on up to 30% of the units.  (FHA concentrations in a particular condominium can be as high as 50% if: the condominium has been complete for over 1 year; all units are sold; no entity owns more than 10% of the units; the budget shows at least 10% going to reserves; and the Board is owner-elected.)

Once a condominium has been approved, a lender seeking an FHA backed loan on a unit within the condominium must certify that it has reviewed and verified the condominium’s continued compliance with the initial requirements concerning investor-ownership, delinquencies, owner-occupancy rates and FHA loan concentration rate.  Once FHA project approval is received, it is good for two years.  After two years, the condominium must be re-approved.

HOMEOWNER ASSOCIATIONS IN GEORGIA 

What Types of Property can be created as a Homeowner Association? 

Any type of property can become part of a homeowner association (“HOA”) regime as long as the owner has title to the dirt under the improvements and the airspace above them.  The covenants do not have to require residential housing.  They could be association with an office park of townhomes or a   retail or commercial center.  However, an HOA cannot be created if the individually owned properties are stacked on top of each other.

How does a Homeowner Association Work? 

Typically each property owner holds title to a lot in the community.  If there are any amenities or common property, a private corporation (the association) usually holds title to those areas.  A homeowner association does not require mandatory membership.  Instead, the covenants may give the lot owners the option (on an annual basis) to decide whether to join the association.  This arrangement is called a voluntary association.  Even if the owner chooses not to become a member of the voluntary association, the owner is required to comply with all the recorded covenants against the owner’s property.

What Laws Regulate Homeowner Associations in Georgia? 

Although there is no specific group of laws that regulate homeowner covenants, if there is a corporate association, then the Georgia Non-Profit Corporation Code applies to that entity.  All other general statutes and common laws apply to homeowner associations just like they apply to all other individual Georgia residents.

What Documents must be Recorded in the Land Records to Create a Homeowner Association? 

To create a community subject to covenants, a developer is required to record the covenants and identify which property is subject to those covenants.  A developer also is required to file a plat in the county land records in order to subdivide property and obtain building permits.  These two documents are required to create a community subject to covenants.  Neither of these two documents is required to create a homeowner association.  

Remember that the association means the corporation (which may or may not be related to the covenants).  To create a homeowner association, there must be a corporation.  Just like a condominium, almost every homeowner association in Georgia is a non-profit organization.  Therefore, the Georgia Non-Profit Corporation Code would apply to a homeowner association.  The Corporate Code states that Articles of Incorporation need to be filed with the Georgia Secretary of State and bylaws need to be adopted to operate the corporation.  The Secretary of State does not record or file bylaws.

Remember also that just because a homeowner association (corporation) exists, does not mean that owners subject to the recorded covenants are required to be members of the corporation – the homeowner association may be mandatory or voluntary.  Mandatory means that the covenants are “married to” the corporation.  Anyone who owns property in the community that is subject to a certain set of covenants is required to be a member of the homeowner association (corporation).

Voluntary means that the covenants on the property say that anyone who owns property subject to those covenants has the option to become a member of the homeowner association (the corporation).  If an owner chooses to become a member in a particular year, that member must comply with all the corporation’s obligations of payment.  That member also can use all of the corporation’s property – the amenities in the community.  If a property owner subject to those covenants chooses not to become a member of the corporation/association in a particular year, that owner is not obligated to comply with the corporation’s payment obligations, and that owner will not be able to use the corporation’s property – the amenities.

Does the Declarant have any Disclosure Requirements? 

Other than the general requirements of Georgia law, there are no disclosures required from the declarant to the first new owner of a lot in a homeowner association.  The buyer is on “constructive notice” of any covenants recorded against the property.   Therefore, the declarant is not required to provide copies of the covenants to the buyer.

CHALLENGES WITH CREATION OF COMMON LAW HOMEOWNER ASSOCIATIONS 

Corporate Structure Contemplated but Not Created: 

One of the problems we see on a regular basis relates to the non-incorporated association.  The covenants indicate that an association is incorporated and the covenants give the corporation powers and authority to collect assessments, enforce covenants, etc.  However, according to the Secretary of State records the corporation does not exist in Georgia.  It’s interesting because communities can exist like this for years.  The owners elect board members every year.  The community has bank accounts and insurance policies.  No one ever notices that the association was never incorporated.  Thankfully, this is easy to fix.  Articles of Incorporation need to be filed with the Secretary of State and Bylaws needs to be created and adopted by the owners.

Intended Submitted Property is never properly Defined or Submitted: 

There are specific ways property can be submitted to covenants other than an express statement in the deed from grantor to grantee (which is rare).  Normally, the plat showing the lots to be submitted to the covenants includes a statement cross-referencing the recording information for the recorded covenants.  Otherwise, the reverse could be true.  The recorded covenants could include a statement cross-referencing the recording information for the plats depicting the relevant lots.

Sometimes, the covenants and plats are recorded at the same time and the recording information for both is not available in advance.  When this happens, blank lines can be found on the plats and in the covenants where the recording information for the documents that were supposed to be cross-referenced is supposed to be listed.  If these blank lines are not completed and the documents are not re-recorded before the lots are sold, then it is possible that no property will be subject to the covenants at all.

Interestingly, some communities exist like this for years.  The owners all think they are bound by a set of covenants and they are obligated to pay their assessments.  However, their property was never properly submitted to these obligations.  Oftentimes this is not discovered until someone in the community owes past due assessments or violates a covenant and the association hires an attorney to address the issue.

Once brought to the board’s attention, there are two ways to address the situation.  First, the board of directors can inform the community and request written and recorded consent forms from the owners acknowledging the submission of their lots to the covenants.  Second, the association can seek a declaratory judgment that under the legal theory of implied covenants, all the lot owners are de facto submitted to the covenants without the necessity of a recorded consent form.

The implied covenant theory allows courts to exercise their equitable powers to imply a set of covenants against a tract of property despite the fact that the tract was never officially submitted to the covenants in the land records.  It must be apparent to the court, based on all of the facts involved, that the developer intended for the tract to be subject to such covenants.  Upon review of the case law and literature in this area, there appear to be certain identifiable factors which Georgia courts view favorably in finding implied covenants.

The following is a list of the most common factors which courts consider when finding implied covenants:

• A common grantor (developer) sells or states his intention to put an entire tract of land on the market
• A map or plat of the entire tract at the time of the sale of one of the parcels of land involved
• The actual development of the tract(s) in accordance with the claimed intentions
• A substantial uniformity in the restrictions imposed in the deeds executed by the common grantor
• Evidence showing that covenants were intended to be placed on an entire tract(s), not individual lots on an individual basis
• An apparent general scheme of development by the developer
• Evidence that owners purchased with notice of the general scheme of development, indicated in any of the following ways:
  • the uniform visual appearance of the community
  • oral representations made by the developer or sales staff
  • written sales materials
  • a recorded plat with reference to covenants
  • a sales contract referencing covenants
  • a Planned Unit Development rider attached to owners’ security deeds
  • a warranty deed with reference to covenants, and/or
    • a document signed at closing acknowledging receipt of covenants
    • records in the development office showing the general scheme

Future Phases Were Never Properly Submitted to the Covenants: 

This situation is exactly the same as what was described above, except that with this issue the initial phase of the subdivision was properly submitted to the covenants and some or all of the future (supplemental, additional, expansion) phases were not properly submitted to the covenants.  This could happen because the plats showing the additional lots did not include cross-reference information for the recorded covenants or because a supplemental declaration submitting the additional property to the previously recorded covenants was never recorded at all or the cross-reference to the additional property was not included if and when it was recorded in the land records.  Either way, the initial property was submitted to the covenants and some or all of the additional property was not.

The same options listed above for fixing that problem apply here too.  The owners can sign and record written forms consenting to submit their lots to the covenants or the association can argue to a judge that the theory of implied covenants should apply to these owners.  If neither happens, then it is possible that some lots will be submitted to the covenants and some will not be submitted.  The lots not submitted would have no right to use or enjoy the amenities UNLESS the amenities are depicted on the same plat as the lot.  Only those lots shown on the same plat as the amenities would have the right to use and enjoy them – but it would be subject to the payment of a fee.  Therefore, the lots shown on the plat with the amenities would have the right to voluntarily pay each year to use the facilities.  All other lot owners who did not submit to the covenants and whose lots are not shown on the same plat as the amenities would have no right to use the facilities at all.

PROPERTY OWNER ASSOCIATIONS IN GEORGIA 

What Types of Property can be created as a Property Owners Association? 

SAME AS AN HOA – Any type of property can become part of a property owner association (“POA”) regime as long as the owner has title to the dirt under the improvements and the airspace above them.  The covenants do not have to require residential housing.  They could be association with an office park of townhomes or a   retail or commercial center.  However, a POA cannot be created if the individually owned properties are stacked on top of each other.

QUESTION: How does a POA work? 

ANSWER: SAME AS AN HOA -Typically each property owner holds title to a lot in the community.  If there are any amenities or common property, a private corporation (the association) holds title to those areas.  SAME AS A CONDOMINIUM – A POA requires mandatory membership.  If you own property in a POA, you are automatically a member of the association and required to pay assessments.

QUESTION: What laws regulate POA’s in Georgia? 

ANSWER: There is one POA statute in Georgia – Georgia Property Owners Association Act, O.C.G.A. 44-3-220, et seq. (“POAA”).  The POAA does not apply automatically to community associations.  Instead, the developer of a community or the members of a community’s homeowners association must “opt-in” and choose to be governed by the POA.  The “opt-in” process generally takes place either:  (i) by the developer when the developer initially creates the declaration of covenants for the community, or (ii) by the members of the homeowners association through an amendment to the declaration.  Most developers of most communities do not submit their communities’ covenants to the POA, despite the benefits the POA would offer the community.  Therefore, most communities are left having to amend their legal documents to submit to the POA.

Just like a condominium, a POA requires mandatory membership in an association.  Thus, the community also is regulated by the Georgia Non-Profit Corporation Code.  All other general statutes and common laws in Georgia apply to POAs also.  This means if a voluntary association wants to convert to a POA, part of that process must include the creation of a mandatory membership fee structure.

Documents that must be recorded in the Land Records to Create a POA: 

Like an HOA – To create a community subject to covenants, a developer is required to record the covenants and identify which property is subject to those covenants.  A developer also is required to file a plat in the county land records in order to subdivide property and obtain building permits.  These two documents are required to create a community subject to covenants.  Neither of these two documents is required to create a property owner association.

Like a condominium, a POA is required by law to be incorporated.  Most community association corporations in Georgia are non-profit organizations.  Therefore, the Georgia Non-Profit Corporation Code would apply to POAs.  The Corporate Code states that Articles of Incorporation need to be filed with the Georgia Secretary of State and bylaws need to be adopted to operate the corporation.  The Secretary of State does not record or file bylaws.

QUESTION: Does the Declarant have any disclosure requirements under the POAA? 

ANSWER: Like an HOA, there are no disclosures required by law from the declarant to the first new owner of a lot in a POA.  The POAA originally was created as an “opt in” law for established associations so it did not include declarant/developer requirements like what is found in the GCA.  Other than the general requirements of Georgia law, the declarant has no specific disclosure obligations to a buyer and the buyer is on “constructive notice” of any covenants recorded against the property.

Challenges When Creating POAs: 

The three challenges mentioned above regarding the creation of HOAs also apply to the creation of POAs:

• corporate structure is contemplated in the covenants but not created
• initial property was never properly defined or submitted to the covenants
• future phases of the community were never properly submitted to the covenants

With POAs, there are other concerns as well.  First, if the developer is still involved in the community when the covenants are submitted to the POAA is the declarant required to pay assessments to the association?  Second, whether the community properly converted from an HOA to a POA.

CONVERTING FROM AN HOA TO A POA 

Automatic Statutory Liens: 

After submitting to the POA, the association will no longer be required to file liens at the county courthouse for unpaid assessments or other charges.  Instead, the POA creates an automatic statutory lien against a delinquent owner’s lot.  In other words, the association will no longer have to file individual liens against an owner’s lot in order to secure unpaid assessments; rather, the declaration of covenants itself serves as notice to the owner that there is a lien for any unpaid assessments or other charges.  As a result, closing attorneys, title examiners, purchasers or owners will generally contact the association for a statement of any amounts owed to the association prior to concluding a sale or refinance of a lot.  If the association is not paid out of the proceeds of the sale or refinance, the lien continues against the lot and will generally have priority over some, but not all, other liens.

Judicial Foreclosure: 

The POA allows an association to judicially foreclose on its liens for assessments or other charges.  This means that the association has the right to obtain an order from the court allowing the association to foreclose on its lien without first paying off all superior liens.  The superior liens, usually a first priority mortgage or lien for ad valorem taxes, will remain on the property and become the responsibility of the new owner.  Without the power of judicial foreclosure, most associations are unable to foreclose on their liens because the presence of a superior lien makes it financially impracticable.

Joint and Several liability to Pay Assessments: 

Another provision of the POA that strengthens an association’s assessment collection powers is joint and several liability.  Simply put, the POA provides that unless the declaration of covenants states otherwise, the buyer of a lot is jointly and severally liable with the seller for all unpaid assessments.  Therefore, if an association’s automatic statutory lien is not paid at closing; the association can proceed against the new owner who will be personally liable for all amounts owed prior to the closing.

Late Fees and Interest: 

Submission to the POA allows an association to charge a late fee of the greater of $10.00 or 10% of the amount due, and interest at a rate of 10% per annum on unpaid assessments and other charges. These provisions must be stated within the declaration of covenants, so, should be included in the amendment process in order to strengthen the community’s collection powers.

Attorneys’ Fees and Costs of Collection: 

The POA authorizes the recovery of the association’s costs of collection of any delinquent assessments and other charges, including reasonable attorneys’ fees actually incurred.  Without including this specific language in the association’s governing documents, some courts improperly reduce the attorneys’ fees awarded to the association, thereby leaving the association with a legal bill to pay.

Tenants: 

The POA clarifies that all owners and tenants must comply with all the provisions of the declaration of covenants and the association’s rules and regulations.  Therefore, any violation of the governing documents by a tenant will be treated, in many instances, as a violation by the owner.

Fines and Suspension: 

The POA grants the association a statutory power to assess fines against violators of the association’s governing documents and to suspend the common area use rights of those violators; provided, that, the association’s ability to fine and suspend are expressly stated in the declaration of covenants.  This statutory ability to assess fines significantly strengthens the association’s powers to enforce its legal documents.

Perpetual Duration: 

Prior to 1993, Georgia law generally provided that restrictions on the use of land expire after 20 years.  In 1994, the law was amended to permit use restrictions to automatically renew.  Yet, Georgia courts have subsequently held that use restrictions in communities recorded prior to 1994 do not receive the benefit of the 1994 law.  The POAA, however, provides that the 20-year limitation on use restrictions does not apply to any use restrictions submitted to the POAA.  As a result, a community that adopts the POAA can avoid complicated and expensive community votes to renew or extend its use restrictions because they will last in perpetuity.

Charter Club on the River Home Owners Association v. Walker

A recent decision by the Georgia Court of Appeals, Charter Club on the River Home Owners Association v. Walker, 301 Ga. App. 898 (2009), makes it more important now than ever for HOAs to adopt the POAA.  The case turned on the construction of Section 44-5-60 of the Georgia Code which provides, in part, that “no change in the covenants which imposes a greater restriction on the use or development of the land will be enforced unless agreed to in writing by the owner of the affected property at the time such change is made.”

In the Walker case, the Charter Club community adopted an amendment to its declaration of covenants restricting the leasing of homes within the community.  Prior to the amendment, leasing was permitted.  The community followed the correct procedure for passing the amendment, as outlined in its governing documents.

Constance Walker, an owner within the Charter Club community, argued that the leasing restriction adopted by the association was subject to Section 44-5-60, thereby rendering the leasing restriction invalid as it applied to her lot because she did not agree to, and did not vote in favor of, the restriction.  Ms. Walker continued to lease her lot in violation of the amendment.  After Charter Club assessed fines against her, Ms. Walker filed suit.

The trial court ruled that Section 44-5-60 made the amendment inapplicable to Ms. Walker because it imposed a greater restriction on Ms. Walker’s use of her land, and she did not consent to the amendment.   The Georgia Court of Appeals agreed with the trial court, and clarified that the statute does not condemn all amendments to restrictive covenants, but that it does apply to all amendments that “further restrict the use” of a homeowner’s property.

A benefit to those communities submitted to the POA prior to the Walker decision is that this case does not apply to them.  The POA specifically provides that Section 44-5-60 does not apply.  However, for those associations that have not yet adopted the POA, the effect of this case, at a minimum, is that amendments already adopted by the associations may not be binding on an owner who did not agree in writing to those amendments, if the amendments impose a greater restriction on the use or development of the owner’s property.   In addition, any future use restriction adopted by non-POA associations must be approved by 100% of the owners to be binding on all owners.

How does an HOA convert to a POA? 

The process starts with a review of the current covenants and bylaws of the HOA.  If any section of the existing covenants and/or bylaws does not comply with the provisions of the POAA, an amendment must be drafted to revise it and make it consistent with the language of the POAA.  If the community’s governing documents require a homeowner vote for adoption of the POAA, the POAA permits that amendment to be made by the percentage approval specified in the covenants.  The POAA is not considered a use restriction.  Therefore, the association is not forced to obtain 100% homeowner approval to adopt the POAA.

The amendment process to obtain the necessary consent of the association members to submit the community to the POAA can often be done by going door to door, depending upon the specific amendment provisions within a community’s governing documents.  While owners rarely oppose submitting to the POAA, associations often face the problem of overcoming owner apathy.  Working with the association’s attorneys to develop a well thought-out strategy to adopt the POAA can, therefore, be the key to obtaining the necessary approval of the owners needed to amend the community’s legal documents.

Adopting the POA will not fix the problem of amendments that were adopted prior to submission to the POA, but adopting the POA will give a community legal power to make future amendments and to ratify previous amendments pursuant to the governing documents.

COOPERATIVES 

QUESTION: What types of property can be created as a cooperative? 

ANSWER: Just like a condominium – any type of property can be created as a cooperative.

How a Cooperative Works: 

Members of cooperatives do not own any real property in the cooperative.  Instead, the cooperative association (corporation) owns all of the real property, including the buildings and all the units in the buildings.  Typically, there is a blanket mortgage on the entire property and the corporation is the debtor on the mortgage (not the individuals in the cooperative).

Members of the cooperative execute subscription agreements to purchase shares of stock or membership shares in the association (corporation) and in return the member receives and signs an occupancy agreement (like a lease).  The occupancy agreement allows the member to live in a unit.  It also requires the members to pay carrying fees (like rent and community association assessments combined) and to comply with the rules and regulations of the cooperative.  The carrying fees are pooled together to pay the mortgage, property taxes, maintenance and repair expenses and all other financial obligations of the cooperative.  Members may deduct some of their carrying fees from their federal income taxes based on the proportion of their carrying fees that was used to pay the corporation’s mortgage.  If members do not pay their carrying charges the cooperative may not be able to pay the mortgage.  If the mortgage does not get paid, the lender could foreclose on the entire building.  For this reason, boards of directors of cooperatives have the right to approve or reject potential buyers.  The boards can evaluate the financial history, credit history and criminal history of the potential buyers and decide whether a member may offer a potential buyer a subscription and occupancy agreement.  Additionally, through provisions in the occupancy agreement, the cooperative can terminate someone’s membership and evict the member if he/she is delinquent in the payment of carrying fees.

The approval or denial of a potential buyer and any eviction, if necessary, must be for a neutral reason.  The board of directors cannot discriminate against potential buyers on the basis of race, color, religion, national origin, handicap, or familial status.

QUESTION: What laws regulate cooperative in Georgia? 

ANSWER: Although there is no specific group of laws that regulate cooperatives in Georgia, all other general statutes and common laws apply, especially landlord-tenant and corporate law.

QUESTION: What legal documents are necessary to create a cooperative? 

ANSWER: Cooperative ownership is not the same as real property ownership.  The developer does not need to record covenants (or any other documents) in the county land records to create a cooperative.  Plats may be required by the county development department.  However, plats may need to be recorded to obtain building permits, not because the developer is building a cooperative.

Like condominiums, POAs and mandatory HOAs, cooperatives must be incorporated.  Therefore, the Georgia Non-Profit Corporation Code would apply to cooperatives.  The Corporate Code states that Articles of Incorporation need to be filed with the Georgia Secretary of State and bylaws need to be adopted to operate the corporation.  The Secretary of State does not record or file bylaws.

As mentioned above, other legal documents used to organize a cooperative are subscription agreements, occupancy agreements and rules and regulations.

EXPIRATION OF COVENANTS 

GCA: 

Condominium covenants are not subject to the expiration provisions in Georgia law.  Therefore, they are perpetual.  Unless the declaration of condominium states otherwise, owners of units to which four-fifth (4/5) of the votes in the association pertain and all mortgagees of such units are required to sign a termination agreement in order to voluntarily terminate a condominium.   The termination agreement must be recorded in the county land records.  If a condominium is terminated, each unit owner has the right to continue to occupy his/her unit and all the unit owners will own the common elements as tenants-in-common.

POA:

Property owner association covenants are not subject to the expiration provisions in Georgia law.  Therefore, they are perpetual.

HOA:

Regulated by Georgia Code Section 44-5-60:

• Subsection (b) — covenants restricting lands to certain uses, in counties or municipalities that have adopted zoning ordinances, shall bind such land for 20 years, at which time such covenants shall expire.

NOTE: Case law states that the obligation to pay assessments is not considered a covenant restricting land to a certain use.  Therefore, even though the use restrictions in covenants may expire at some point, the obligation to pay assessments will not.

• Covenants Recorded AFTER March 28, 1990

Subsection (d) added — covenants restricting lands to certain uses affecting planned subdivisions containing no fewer than 15 individual plots may be extended for additional 10-year periods if 2/3 of the owners agree to the extension

• Covenants Recorded AFTER July 1, 1991 

Subsection (d) revised — covenants restricting lands to certain uses affecting planned subdivisions containing no fewer than 15 individual plots may be extended for additional 20-year periods if 2/3 of the owners agree to the extension; provided that no change in the covenants which imposes a greater restriction on the use or development of the land will be enforced unless agreed to by the land owner.

• Covenants Recorded AFTER July 1, 1993

Subsection (d) revised — covenants restricting lands to certain uses affecting planned subdivisions containing no fewer than 15 individual plots shall automatically be renewed for a period of 20 years beyond the 20 year period provided for in subsection (b) unless terminated by 51% of the persons owning plots affected by such covenants.

Dissolving the Community Associations

Expired or terminated covenants do not affect the community association (corporation).  The Corporate Code explains what is necessary to dissolve a Georgia corporation.

• Board of directors recommends dissolution to the members
• Majority of members (unless bylaws require a high percentage) must approve the dissolution
• The board of directors adopts the plan of dissolution to distribute the assets and liabilities
• Notice of Intent to Dissolve is filed with the Secretary of State and published once per week for two consecutive weeks
• Board of directors liquidates assets and pays all corporate debts
• Articles of Dissolution are filed with the Secretary of State

Sometimes community associations are administratively dissolved for failure to pay annual registration fees to the Secretary of State.  This is easy to fix – simply complete the reinstatement form and pay the past due fees.  The corporation will be reinstated back to the date it was administratively dissolved, as if the dissolution never happened.