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The phantom of the condominium.

Critical to whether a developer must pay assessment for declared but unbuilt units id determining precisely when the existence of a condominium commences.

There are times when the simplest of concepts can be the most difficult to explain or comprehend. Perhaps that is why, in deciding whether a condominium developer was obligated to pay its share of assessments for declared but unbuilt units, Florida's Fourth District Court of Appeal utterly misconstrued the condominium act.(1)

Background

On November 16, 1987, RIS Investment Group, Inc., f/k/a Resort at Indian Springs, Inc. (the "developer"), filed a declaration of condominium for Briarwood at Indian Springs Condominium. The declaration submitted to condominium ownership the entirety of the tract of land, upon which was to be built 40 townhouses of four units each, for a total of 160 condominium units. Although the developer retained the right to build out the condominium in phases,(2) it elected instead to declare the entire parcel to condominium in its initial declaration of condominium, notwithstanding the fact that only a few of the contemplated buildings had been constructed at that time.

The recorded declaration of condominium provided that "the Developer shall be treated the same as any other unit owner for the purpose of payment of its share of the common expenses and assessments relating to those units owned by the Developer from the recording of the declaration as long as said units are owned by the Developer."(3) However, in electing not to pay its share of assessments on declared but unbuilt units, the developer relied instead upon a contradictory note in Briarwood's proposed operating budget indicating that "[the] Developer shall, beginning when a certificate of occupancy is issued for a unit, be responsible for paying the same monthly assessments for that unit as every other unit owner until that unit has been sold" (emphasis added).

As a result of the developer's failure to pay its share of assessments for the declared but unbuilt units, the Florida Department of Business and Professional Regulation, Division of Florida Land Sales, Condominiums and Mobile Homes (the "department") issued a notice to the developer to show cause why the department should not enter a cease and desist order and/or impose civil penalties and/or an order requiring the developer to take certain affirmative action as a result of its violation of the condominium act.(4) Following a hearing, the department issued its final orders, determining that the developer was liable for the assessments from the date the declaration was recorded, November 16, 1987, through the date of the sale of the units.

The developer appealed the department's findings to Florida's Fourth District Court of Appeal. Relying on its prior opinion in Welleby Condominium Association One, Inc., v. The William Lyon Co., 52 So. 2d 35 (Fla. 4th DCA 1987),(5) and on its interpretation of the RIS declaration's intended definition of "unit,"(6) the Fourth District Court of Appeal held that the developer was not obligated to pay its share of the common expenses until the units were built.

Critical to the question of whether a developer is obligated to pay assessments for declared but unbuilt units is a determination of precisely when the existence of a condominium commences. The RIS court, relying heavily on its Welleby analysis, interpreted the condominium act(7) as granting the scrivener of the declaration "the option of describing a condominium unit (that object of any condominium assessment) in any number of different ways. . . ." The court reasoned that, since the scrivener of the Briarwood documents had intended a "unit" to encompass only a "condominium parcel" or an "individual private dwelling," the developer need not pay assessments against raw, unimproved lands (upon which no private dwellings were built).(8)

In rendering this conclusion, the RIS court was presumably oblivious to the fact that, in the aftermath of Welleby, the condominium act had been amended to provide that "upon the recording of the declaration, or an amendment adding a phase to the condominium under subsection 718.403(6), all units described in the declaration or phase amendment as being located in or on the land being submitted to condominium ownership shall come into existence, regardless of the state of completion of planned improvements in which the units may be located. . . ."(9)

In amending the statute to clarify legislative intent, the Florida Legislature understood that which the RIS court misconstrued: That, unlike the prenatal development of a human infant, there is no "gestation period" between the submission of property to condominium ownership and the "birth" of the unit. Rather, a subject property is instantaneously transformed into the two components of a condominium, the "units" and the "common elements," upon the filing of the declaration of condominium. That fact was correctly noted by Florida's Second District Court of Appeal in Hyde Park Condominium Association v. Estero Island Real Estate, 486 So. 2d 1 (Fla. 2d DCA 1986), a case involving the identical inquiry as RIS.(10)

The RIS court also misinterpreted the very nature of the property for which the department requires a developer to pay assessments. Contrary to the court's misconception, it is "air rights"--and not "raw land"--that is created by the filing of the declaration. Because the act of recording the declaration converts the subject property into units and common elements, the condominium units--whether built or unbuilt--exist in the air space reserved for them immediately upon recording.

A notable repercussion of the RIS decision is its practical impact upon unit owners of built and C. of O.'d(11) condominium units. Every condominium unit purchaser receives a prospectus that describes the respective unit and specifies that unit's designated ownership share of the common elements and common expenses. The right of each unit owner to rely upon this ownership and sharing formula has been deemed so critical that the condominium act unequivocally prohibits any modifications thereto without the unanimous consent of all record unit owners.(12) Yet, the precise effect of RIS was to modify each of the built unit's respective shares of the common expense without the approval or consent of the record owners, in direct contradiction of the condominium act.

The RIS court's deference to Welleby's definition of a "condominium parcel" as an "apartment" similarly conflicts with the condominium act's statutory definition of a condominium parcel as "a unit, together with the undivided shares of the common elements which is appurtenant to the unit."(13) Such deference is unsettling, given that the condominium act represents the controlling Florida law regarding the creation and regulation of condominiums--and that, accordingly, a declaration of condominium may not contain provisions that are inconsistent with the act.

The Condominium Concept

In analyzing RIS and its ramifications, it is important to understand that a condominium is strictly a form of property ownership. Although there were contractually created condominiums in effect prior to the enactment of Florida's condominium enabling legislation, condominiums currently are statutorily regulated in all 50 states and most foreign jurisdictions.

Every condominium property throughout the world essentially embodies two components: units and common elements. The units consist of the portion of the property subject to private ownership, while the common elements encompass the property not included within the units. It is a unit coupled with its undivided share in the common elements that constitutes a "condominium parcel." Thus, the "cement" that links each condominium unit to the common elements is the unit's respective share of ownership of the common elements, stated as either a fraction or a percentage. Simply stated, if one "eliminated" the units from a condominium property, only the common elements would remain. Moreover, a purported "unit" lacking any designated share of the common elements would not qualify as a condominium "unit" at all, but instead would constitute a common element.(14)

It is impossible to ascertain visually whether a particular parcel of real estate is a condominium. In fact, the only way to verify whether a property is a condominium is to examine the public records to determine if it has been submitted to condominium ownership. It is similarly impossible to discern visually whether a building or group of buildings constitutes a single condominium or a series of separate and distinct condominiums. However, a fundamental element of the condominium concept is that the individual shares in the common elements, appurtenant to each unit and stated as percentages or fractions, must in the aggregate equal 100 percent. Therefore, it is necessary to determine what specific building or group of buildings constitute the condominium in order to allocate responsibility for the common expenses of the condominium. That inquiry is similarly resolved by examining the recorded declaration of condominium to observe what combination of units or structures total 100 percent.

Although condominium properties may take such diverse physical configurations as a single-family residential development, a 50-story highrise, a townhouse complex, a mobile home community, an unimproved vacant lot, a parking garage, or a boat dock, the essence of the condominium entity remains:

1) The submission of the real property, upon which the improvements are or will be built, to condominium ownership;

2) The designation of units;

3) The designation of common elements; and

4) The assignment of a percentage or fraction of ownership in the common elements to each unit, which in the aggregate totals 100 percent.

Once submitted to condominium, the real property is immediately subject to all requirements of the condominium act, including the payment of each unit's share of the common expenses. Subsection 718.116(9) both pronounces the general rule regarding payment of common elements and prescribes the limited instances in which a developer may avoid its obligation to share in the common expenses.

Subsection (9)(a) mandates that: [See also Rule 61B-22.006(3)(e), 6113-22.0062(2)(d), Fla. Admin. Code.]

No unit owner may be excused from the payment of his share of the common expense of a condominium unless all unit owners are likewise proportionately excused from payment, except as provided in subsection (1)(15) and in the following cases:

1. If the declaration so provides, a developer or other person who owns condominium units offered for sale may be excused from the payment of the share of the common expenses and assessments related to those units for a stated period of time subsequent to the recording of the declaration of condominium. The period must terminate no later than the first day of the fourth calendar month following the month in which the closing of the purchase and sale of the first condominium unit occurs. However, the developer must pay the portion of common expenses incurred during that period which exceed the amount assessed against other unit owners.

2. A developer or other person who owns condominium units or who has an obligation to pay condominium expenses may be excused from the payment of his share of the common expense which would have been assessed against those units during the period of time that he has guaranteed to each purchaser in the purchase contract, declaration, or prospectus, or by agreement between the developer and a majority of the unit owners other than the developer, that the assessment for common expenses of the condominium imposed upon the unit owners would not increase over a stated dollar amount and has obligated himself to pay any amount of common expenses incurred during that period and not produced by the assessments at the guaranteed level receivable from other unit owners. The guarantee may provide that after an initial stated period, the developer has an option or options to extend the guarantee for one or more additional stated periods.

[See also Rule 6113-22.004, Fla. Admin. Code.]

Pursuant to subsection (9)(b):

If the purchase contract, declaration, prospectus, or agreement between the developer and a majority of unit owners other than the developer provides for the developer or another person to be excused from the payment of assessments pursuant to paragraph (a), no funds which are receivable from unit purchasers or owners and payable to the association or collected by the developer on behalf of the association, other than regular periodic assessments for common expenses as provided in the declaration and disclosed in the estimated operating budget pursuant to s. 718.503(2)(f) or s. 718.504(20(b), shall be used for payment of common expenses prior to the expiration of the period during which the developer or other person is so excused. This restriction applies to funds including, but not limited to, capital contributions or startup funds collected from unit purchasers at closing.

Conclusion

Florida's condominium act determines: a) that condominium units are created upon recording the declaration; b) that the developer's liability for payment of assessments begins on the date of recording the declaration; and c) that, unless the developer provides for a guarantee or exemption pursuant to the statute, liability for assessments begins on the date of recording of the declaration.

It is imperative to reiterate that subsection 718.116(9) sets forth the only procedures by which a developer can permissibly avoid or postpone its obligation to share in the common expenses. Since none of the stipulated conditions applied to the facts of RIS, there remains no statutory basis for the decision of the Fourth District Court of Appeal in that case. Therefore, unless RIS is revisited and redressed, Florida appears doomed to confront a new, judicially created, hybrid property form--one that is certain to produce a new era of confusion and contention in condominium developer-association relations.

(1) Fla. Stat. [sections] 718.101 et seq.

(2) Fla. Stat. [sections] 718.403, effective October 1, 1984, provides the option of developing multi-sectional condominiums in phases, thereby affording developers the flexibility to modify a project in response to market demands. Had the developer of Briarwood at Indian Springs Condominium taken advantage of its option under [sections] 718.403, it would have incurred no liability for assessments or unbuilt units.

(3) Paragraph 7.4 of the Declaration o Condominium for Briarwood at Indian Springs Condominium (emphasis added).

(4) Fla. Stat. [sections] 718.104(4)(f) requires the declaration of condominium for residential condominiums created after April 1, 1992, to stipulate whether the ownership share of the common elements assigned to each residential unit will be based upon the total square footage of each residential unit in uniform relationship to the total square footage of each other residential unit in the condominium, or upon an equal fractional basis.

(5) RIS Investment Group, Inc. v. Div. of Fla. Land Sales, No. 96-0511, 1997 Fla. App. LEXIS 2464, at *6 (Fla. 4th D.C.A. March 19, 1997) (citing [sections] 711.103(15)). (emphasis added)

(6) Id. at *6-*8.

(7) Fla. Stat. [sections] 711.103(15) (emphasis added) was in effect at the time the Welleby declaration was recorded, but was amended prior to RIS.

(8) RIS at *6-*8.

(9) Fla. Stat. [sections] 718.104(2).

(10) See also Estancia Condominium Assn Inc. v. Sunfield Homes, Inc., 619 So. 2d 1008 (Fla. 2d D.C.A. 1993).

(11) Certificate of Occupancy.

(12) Fla. Stat. [sections] 718.110(4) provides that an amendment that changes the proportion or percentage by which the owner of a parcel shares the common expenses and common surplus requires the unanimous approval of all unit record owners. (emphasis added)

(13) Fla. Stat. [sections] 718.103(11) (emphasis added).

(14) Daytona Dev. Corp. v. Berguist, 308 So. 2d 548 (Fla. 3d D.C.A. 1977).

(15) Fla. Stat. [sections] 718.116(1)(b) limits the liability of a first mortgagee or its successor or assignees who acquire title to a unit by foreclosure or by deed in lieu of foreclosure for any unpaid assessments that came due prior to the mortgagee's acquisition of title to the lesser of: either the unit's unpaid common expenses and regular periodic assessments which accrued or came due within the six months immediately preceding the acquisition of title, and for which payment in full has not been received by the association, or to one percent of the original mortgage debt. Subsection (1)(e), however, exempts such a title owner from liability for unpaid assessments which came due prior to such acquisition of title if the first mortgage was recorded prior to April 1, 1992, unless the declaration included language incorporating by reference future amendments to Chapter 718.

Gary A. Poliakoff is a founding principal of Becker & Poliakoff, P.A., Ft. Lauderdale. He received his B.S. in 1966 from the University of South Carolina and his J.D. in 1969 from the University of Miami School of Law. Mr. Poliakoff has served on the State of Florida Condominium Study Commission and State of Florida Advisory Council on Condominiums as well as the Bar's Legislative SubCommittee on Condominium and Cooperative Law.

This column is submitted on behalf of the Real Property, Probate and Trust Law Section, Julie A.S. Williamson, chair and David H. Simmons and Brian Sparks, editors.
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Title Annotation:Florida
Author:Poliakoff, Gary A.
Publication:Florida Bar Journal
Date:Feb 1, 1998
Words:2824
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