Underwriting Manual: Condominiums

State Supplements

View state supplements to the national underwriting manual.

Underwriting Manual Subtopic

In General

V 4

A condominium may be defined as a system of separate ownership of individual units in multi-unit projects.

Condominium ownership consists of individual ownership, in fee simple, of a unit or apartment in a residential, commercial, industrial or multipurpose structure coupled with the ownership of an individual interest, as tenant in common, with the rest of the owners, in the common facilities and areas of the building(s) and grounds which are used by all residents or occupants of the condominium.

The following are some of the names being applied to this form of ownership:

  • Horizontal Real Property Law/Act/Regimes/Regimes Act
  • Apartment Ownership Act
  • Unit Ownership Act
  • Unit Property Act
  • Unit Ownership Estate Act
  • Condominium Ownership Act
  • Condominium Act
  • Condominium Property Act
  • Condominum Regime
  • Uniform Condominium Act

Underwriting Manual Subtopic

Main Characteristics Of Condominium

V 3

The main characteristics of a condominium ownership are:

  • Individual ownership in fee simple of a unit or apartment.
  • Ownership of an undivided interest in certain designated common elements which serve all the units in the condominium.
  • Right to mortgage each individual unit.
  • Separate taxation of each individual unit.
  • Necessity of an agreement among unit owners regulating the administration, management, maintenance, and conversion of the property.

Underwriting Manual Subtopic

Terminology (Condominiums)

V 4

It is difficult to define condominium terms because condominium terminology is basically a matter of state law. Generally, statutes go in to considerable detail in the area of condominium definitions or concepts.

Underwriting Manual Subtopic

Creation Of Condominiums

V 3

State law specifically regulates the creation of condominiums so that statutory requirements relative to the creation of condominiums must be strictly complied with. Therefore deviations are not usually allowed.

Basic Procedures

In general, the creation of any statutory condominium regime requires four basic procedures:

Commitment, submission, or dedication of specific property to statutory condominium ownership.

A system of describing:

The entire parcel of land.

Each of the separate units or apartments therein.

The common elements and the limited common elements thereof.

A system of management and assessment for the maintenance, operation, and conservation of the property.

The adoption of instruments for conveying and encumbering the interests of the respective owners.

Necessary Instruments

The Declaration of Condominium is also referred to as Plan, Master Plan, Public Deed, or Master Deed.

Plats, Plans, Maps, Floor Plans.

Bylaws or Code of Regulations.

Declaration of Restrictions. In certain jurisdictions, some of these instruments are made part of or appended to the Declaration.

In many jurisdictions, the instruments referred to above and any amendment or modification thereof must be filed for record in the office of the real estate records of the county where the property is located.

Underwriting Manual Subtopic

Deeds To Individual Units - Legal Descriptions (Condominiums)

V 3

The instrument required for the purpose of acquiring title to a unit or apartment is the unit or apartment deed. This document represents the transfer of title of the unit to the purchaser. Since each deed to an individual unit refers to real property, it must comply with the requirements of the conveyancing statutes in each jurisdiction. In addition, the contents of any deed to an individual unit must comply, as to its contents, with the requirements and provisions imposed by the condominium statute itself.

The legal description of the unit does not have to be a detailed metes and bounds description unless required by statute. Subject to statutory requirements, if any, the description may identify the unit or department as it is described in the recorded declaration or any other document which adequately describes the premises, such as the plat or map.

Underwriting Manual Subtopic

Percentages Of Common Elements Appurtenant To The Units

V 3

Title to an individual unit in a condominium regime includes, in addition to the right to exclusive ownership and use of the particular unit, an undivided interest in the common areas and facilities in a percentage computed, under most condominium statutes, by taking into consideration the value of the unit in relation to the value of the whole property.

The main characteristics of the percentages in the common areas are:

  • To be appurtenant to each respective unit.

  • To have a permanent character which cannot be altered except by the express consent of all the unit owners in a recorded amendment to the declaration or master deed consistent with state law. Mortgagees, lienholders, and in some cases developers, must also join in such amendment, when so required by state law.

  • Not to be subject to separation from the units to which they are appurtenant.

Underwriting Manual Subtopic

Common-Law Condominiums

V 3

Common-law condominiums are the result of projects defectively created from a statutory point of view or projects created prior to the enactment of statutory authority in a given jurisdiction. Scholars and writers are in considerable disagreement as to their legality, and courts are plagued with resolving many of their insurmountable problems. No title insurance coverage should be offered in connection with a common-law condominium.

Underwriting Manual Subtopic

Leasehold Condominiums

V 3
In General

Under the laws of some states, a condominium can also be created on land in which the developer has only a long-term ground lease.

The basic difference between a fee simple and leasehold condominium is that a purchaser of a unit in the former acquires an undivided fee simple interest in land, whereas the purchaser of a unit in the latter case acquires an undivided interest in a leasehold on a fee which has been submitted to a horizontal property regime.

In a fee simple condominium, the property is submitted to a horizontal property regime by the owner, and deeds are issued to unit purchasers. Similarly, in a leasehold condominium, the basic approach (and that favored by most condominium mortgagees) is to have the owner-lessor submit the fee to the condominium property regime. However, since ownership of the land is being retained, the purchasers do not receive unit deeds, but rather are issued unit leases.

In a typical leasehold condominium, the expiration or termination of the lease will terminate the existence of the condominium.

This form of ownership is somewhat complex and intricate, and it is not uncommon for developers to follow different approaches or variations in the creation of leasehold condominiums.
Uniform Condominium Act Provisions For Leasehold- Condominiums

The Uniform Condominium Act contains the following provision with respect to leasehold condominiums:

Section 2-107 (Leasehold Condominium)

The expiration or termination of any lease may terminate the condominium or reduce its size (or a memorandum thereof) shall be recorded, and the declaration shall state:

  • The (recording data) for the lease (or a statement of where the complete lease may be inspected);

  • The date on which the lease is scheduled to expire;

  • A legally sufficient description of the real estate subject to the lease;

  • Any right of the unit owners to redeem the reversion and the manner whereby those rights may be exercised, or a statement that they do not have those rights;

  • Any right of the unit owners to remove any improvements within a reasonable time after the expiration or termination of the lease, or a statement that they do not have those rights; and,

  • Any rights of the unit owners to renew the lease and the conditions of any renewal, or a statement that they do not have those rights.

  • After the declaration for a leasehold condominium is recorded, neither the lessor nor their successor in interest may terminate the leasehold interest of a unit owner who makes timely payment of their share of the rent and who otherwise complies with all covenants which, if violated would entitle the lessor to terminate the lease. No unit owner's leasehold interest is affected by failure of any other person to pay rent or fulfill any other covenant.

  • Acquisition of the leasehold interest of any unit owner by the owner of the reversion or remainder does not merge the leasehold and fee simple interests unless the leasehold interest of all unit owners subject to that reversion or remainder are acquired.

  • If the expiration or termination of a lease decreases the number of units in a condominium, the common element interests, votes in the association, and common expense liability shall be reallocated in accordance with section 1-107 (a) of the Condominium Act as though such units had been taken by eminent domain. Reallocations shall be confirmed by an amendment to the declaration prepared, executed and recorded by the association.
Special Title Insurance Considerations When Insuring Leasehold Condominiums

  • Any policy to be issued must be a leasehold policy.

  • All the terms and conditions of the leases and subleases (if any) must be shown as exceptions in Schedule B of the policy.

  • The customary exceptions pertaining to the condominium must be shown in Schedule B of the policy.

  • An exception relative to all the terms and conditions of the condominium (leasehold) deed from the developer to the purchaser must be shown in Schedule B of the policy.

  • Since the Company does not know how tax assessors will assess the lessor's interest after the recording of the condominium declaration and the assessing of the individual units, it is necessary to make certain that there are no unpaid taxes assessed against the underlying fee or against the individual units as of the time of the title policy.

Underwriting Manual Subtopic

Expandable Condominiums

V 4
In General

Expandable condominiums are also referred to as add-ons, progressive, flexible, or phasing condominiums.

These condominiums are constructible in phases or stages: a floor at a time, a building at a time, or even a phase or subdivision at a time, but all within the physical area encompassed by the original project. Additionally, these subsequent phases or stages should be reflected in the original recorded condominium plan.

Expandable condominiums present some specific problems that require careful consideration:

  • Do the condominium statutes contain provisions relating to expandable condominiums?
  • Do the condominium statutes prohibit the creation of expandable condominiums?
  • If no provisions are contained in the condominium statutes, would an expandable condominium be allowed?
  • Do the condominium statutes state that the percentage interest in the common elements cannot be changed without the consent of all the unit owners?

Specific Approval Must Be Obtained From A Senior Underwriter For Insuring Any Expandable Condominiums.

After approval, and in the case of a statutory expandable condominium, strict compliance with the provisions of the local statute must be observed. In connection with a non-statutory expandable condominium:

The declaration of condominium should:

  • Describe the development parcel and the land which may (but need not) be added-on to the condominium by an amendment to the declaration.

  • Reserve to the declarant the right to add any or all of the development parcel to the condominium.

  • State a time limit within which the adding will be accomplished. Consult with the a Senior Underwriter if the time limit exceeds that of state law or 10 years, whichever is less.

  • State that no owner of a unit has any rights in the development parcel until an amendment making it part of the condominium is placed on record.

  • Grant a power of attorney coupled with an interest giving the declarant or named individual the power to change the percentage of ownership in the common elements.

  • Provide that each unit owner consents and agrees:

    • that the additional property, when added, shall be governed by the declaration;

    • to the automatic reallocation of the percentage of ownership in the common elements;

    • to the right of the declarant to revoke, and reallocate the percentage of ownership in the common elements;

    • that these provisions are within the scope of the condominium statute; and,

    • that the amendments shall not alter any lien for common expenses assessed prior to the recording of the amendment.

The deed from the developer to the initial purchaser must include provisions for the shifting of the common elements.

Underwriting Manual Subtopic

Time-Sharing Condominiums

V 4
In General

Time-sharing is a generic term used to describe interval ownership of an interest in real property and undoubtedly, condominium property may be made subject to time-shared ownership. When examining the title to a time-sharing condominium, it is necessary to:

  • Follow the underwriting instructions relative to condominiums.

  • Follow the underwriting instructions relative to timesharing ownership.

  • Determine whether there are any statutory dispositions that would prohibit, at any time, the existence of time-sharing ownership in a condominium property.

  • Determine whether there are any statutory dispositions regulating the time-sharing ownership in a condominium property.

  • Determine whether the condominium documents establish any form of prohibition, express or implied, in reference to time-sharing ownership in condominium units.

  • Determine whether the sale of time-sharing interests is subject to statutes regulating the sale of real estate securities.

  • Determine whether the tax assessor has made separate tax assessments for each time-share estate.

Refusal to insure or the need to raise special exceptions may result from the above determinations.

Do not insure on a time-share unless:

  • There is an express statutory provision for creation of a time-share.
  • ALTA endorsement 4 is used.
  • The time-share created is an interest in fee.

Underwriting Manual Subtopic

Condominium Conversions

V 4
In General

Though many existing buildings were not originally designed with condominium ownership in mind, it has become an appealing idea for owners to convert an existing building or group of buildings from rental status to condominium ownership.

Title insurance of condominium conversions, both insurance of the project as a whole and insurance of the units on their initial sales by the developer, presents substantial risks not present in other condominiums.

First of all, it is necessary to ascertain the legality of the conversion, and for this purpose the following must be fully examined:

  • The statutes regulating conversions.
  • The local ordinances regulating conversions.
  • Any applicable zoning laws or regulations.

In connection with the title insurance of units in any condominium conversion, specific exceptions should be raised for the:

  • Failure to comply with either statutory requirements or local ordinances in regard to conversions.
  • Rights of former tenants who are not purchasers but remain in possession.

Any pending litigation, brought by tenants or a tenant's organization, attacking the validity of the conversion must be carefully examined and shown as a title exception in Schedule B of the policy.

You should not insure over the outcome of such a suit without prior approval of the a Senior Underwriter.

Underwriting Manual Subtopic

Parking Easements In Condominiums

V 4
In General

Insuring a parking space or garage, as an appurtenant easement to a condominium unit, requires full compliance with the following:

  • You must issue a policy on the condominium unit to which the easement is appurtenant.

  • You must determine that the parking space or garage as been legally established as an appurtenant easement for the benefit of the condominium unit.

  • You must fulfill any other requisite or guideline in regard to the insurance of an easement.

The parking easement may be considered as appurtenant if:

  • The declaration or master deed provides for the grant of an exclusive easement for parking appurtenant to designated units over spaces delineated on a record survey plat or map and the deed to the unit also grants the parking space; and,

  • The declaration or master deed declares parking spaces delineated on a recorded survey, plat or map as limited common elements and the survey, plat, map, declaration, or master deed designates the unit to which such parking space use is limited. It also provides for the deed conveying the unit to designate such parking spaces. The statutes define limited common elements as a portion of the common elements reserved for the exclusion of other units.

Underwriting Manual Subtopic

Contract Purchases In Condominiums Under Construction

V 4
In General

A contract purchaser, under a contract to purchase a condominium unit in a building under construction, may have an equitable lien on the land equal to the purchaser's earnest money deposit. In some jurisdictions, the lien may have priority over the lien of any construction loan.

When insuring a condominium under construction, a proper exception must be raised in relation to the rights of purchasers, if any, of the condominium units. This exception should read as follows:

"Rights of purchasers under unrecorded contracts to purchase part of the land insured as condominium units and all parties claiming by, through, or under them."

Underwriting Manual Subtopic

Right Of First Refusal In Condominium Property

V 4
In General

While generally not a specific provision of condominium law, a majority of condominium declarations provide for a right of first refusal in the condominium board of managers or association. As a result, and unless this right is not provided for by the condominium declaration, evidence must be furnished to the Company relating to the fact that the board or association has not exercised and does not intend to exercise its right of first refusal.

In this respect, any title commitment must contain the following exception:

"Upon a conveyance or devise of the land, a certificate executed and acknowledged by the Secretary of the Board of Managers or Associaton, stating that compliance has been made by the owner with the provisions of Article _____ of the Declaration recorded _____ as Document _____ or that said provisions have been duly waived by the Board or Association and the rights of the Board or Association under Article _____ have been terminated, must be furnished to the Company."

Underwriting Manual Subtopic

Mechanic's Liens Relative To Condominium Property

V 3
Construction Of The Condominium Is Completed

Generally, unless otherwise established by state law, subsequent to the recording of the declaration of condominium and while the property remains subject to the declaration of condominium, mechanic's liens may only arise or be created against:

  • The condominium property, as a whole.
  • A unit or parcel of condominium.
Construction Of The Condominium Is Pending

Because of the complexity of state laws in regard to the privity or effect of mechanic's liens filed while construction is still pending, it is essential to analyze carefully the law of each jurisdiction or contact a Senior Underwriter for further guidance.

Underwriting Manual Subtopic

Assessment Liens

V 4
In General

Most state statutes provide that reasonable assessments may be imposed in the declaration of restrictions or bylaws, obligating the condominium owners to contribute a proportionate share of the expenses of management and maintenance of the common area. Such assessments may properly become liens on the estate or interest of the condominium owner upon the recordation of a notice of the lien.

Accordingly, any title commitment must contain the following requirements:

"Furnish a statement executed and acknowledged by the Secretary of the Board of Managers or Association of ____________, stating that there are no unpaid assessment liens arising by reason of the affecting the unit nonpayment of any maintenance or management expenses affecting the unit or parcel."

Underwriting Manual Subtopic

ALTA Endorsement Form 4 - Condominiums

V 3
In General

The ALTA condominium endorsement 4 is designed to give additional protection to purchasers of individual condominium units and mortgagees of such units.
Issuance Requirement (Condominiums)

The ALTA condominium endorsement 4 is to be issued only after compliance with the following:

  • A careful review and examination has been made in connection with:

    The condominium statutes; and,

    The condominium documents.

  • A determination has been made that:

    The condominium documents comply with the condominium statutes of the jurisdiction in which the property is located; otherwise, do not issue the endorsement;

    There are no present violations of the use restrictions, if any, contained in the condominium documents;

    That the condominium use restrictions, if any, contain no provisions for a forfeiture or reversion of title;

    That there are no existing delinquencies in the payment of charges and assessments provided for in the condominium statutes and the condominium documents;

    That the condominium statutes and the condominium documents establish the priority of the insured mortgage over such charges and assessments incurred in the future;

    That state statutes provide for separate assessment of each unit and its common elements;

    That all real property taxes levied against the entire tract of land submitted to the condominium statutes have been paid in full;

    That real estate charges and assessments issued subsequent will be levied against the individual units with their respective interests in the common elements;

    That the condominium documents or condominium statutes contain provisions permitting the maintenance of the encroachments described in the endorsement; and,

    That the condominium documents contain no provisions granting any right of first refusal, and if they do, that it has been properly waived in writing with respect to the sale of the insured unit and its common elements to the party in title.

Note: It may become necessary to modify or adjust the endorsement form in order to eliminate any paragraph thereof containing a situation or statement which the Company may be unwilling to insure.

Underwriting Manual Subtopic

Contractions of Condominium Units or Undeveloped Lands

V 4

In general, the provisions of the condominium master deed identifies the process that the Developer must follow to be able to contract “need not be built” units, undeveloped lands or expansion areas from a condominium project. The developer may reserve the right to contract such units or lands from the project by Amendment to the Master Deed without unit owner consent.  Or, the provisions for amending the Master Deed may apply such as the requirement for notice, a duly called meeting, 2/3rds approval of the unit owner’s and the recording an Amendment to the Master Deed. Another consideration might be specific statutory language which places time limitations on the Developer to convert “need not be built” units or expansion areas to “must-be-built” units. In the event your statutes contemplate a specific period of time within which the Developer may develop unbuilt units or expansion areas, be aware that the language of the statute may revert to those areas to “general common elements” for failure to develop them timely.  If so, the units or land may be deemed to be under the ownership of the unit owners and within the control of the Association. Thus to be able to insure a sale of such lands, it may be necessary to secure unit owner/Association consent, possibly conveyances and certainly an Amendment to the Master Deed to be able to insure a sale by the Developer to a new buyer.