CLOSING CONDOMINIUMS
Texas Land Title Institute December 5-6, 2019
By Richard Worsham Vice-President/Texas Regional Counsel Westcor Land Title Insurance Company
Bio
Richard Worsham is a 7th generation Texan who can track his family roots in Texas back to 1812. He is a 1981 graduate of the University of Texas at Arlington (BA), and a
1985 graduate of the University of Houston Law Center (JD).
Mr. Worsham spent 10-years as a commercial litigator, 10-years as a title insurance fee attorney, and is into his 14th year as a title insurance underwriting counsel. As a fee attorney and underwriter, he has worked with most of the underwriters in Texas.
For the past 4-years, Mr. Worsham has worked for Westcor Land Title as Vice-
President and Texas Region Underwriting Counsel, underwriting in the states of Texas,
Oklahoma, Arkansas, Louisiana and New Mexico, working exclusively with independent title agents.
Richard Worsham has extensive experience teaching realtors, escrow officers and attorneys. He has previously spoken here at the Texas Land Title Institute, taught webinars for the TLTA, taught at South Texas College of Law’s Annual Real Estate Conference, for the Houston Bar Association, and at the State Bar of Texas' Advanced Real Estate Seminar.
He has also taught seminars in the offices of many of the major law firms here in Texas.
Richard is married to Yvette Worsham, and has 3 children, ages 21, 17, and 5.
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Closing Condominiums
By Richard Worsham Vice-President/Texas Regional Counsel Westcor Land Title Insurance Company
Introduction
While this paper is about closing condominiums, a/k/a “condos,” there’s not that great a difference in closing a condo over closing any other residence. Condominium dues or annual assessments have to be prorated, an extra endorsement is available for the lender (the T-28), you have to make sure you describe the property properly in Schedule A, and generally you don’t need a survey. For the closer, that is pretty much the limit of the major differences.
That doesn’t mean special issues don’t come up related to condominiums, and that a basic understanding of condominium law isn’t desirable, and sometimes even necessary, to resolve these problems. So this paper ends up being something of a paper on condominium law and common problems likely to arise in a condominium closing.
What is a condominium?
Texas Property Code Section 81.002(3) defines a Condominium as, "a form of real property ownership that combines separate ownership of individual apartments or units with common ownership of other elements.”
Texas Property Code Section 82.003(8) defines a Condominium as, “a form of real property with portions of the real property designated for separate ownership or occupancy, and the remainder of the real property designated for common ownership or occupancy solely by the owners of those portions. Real property is a condominium only if one or more of the common elements are directly owned in undivided interests by the unit owners. Real property is not a condominium if all of the common elements are owned by a legal entity separate from the unit owners, such as a corporation, even if the separate legal entity is owned by the unit owners.”
While there is a clear overlap in the definitions, why are there two definitions in the Texas statutes? The answer is that Texas has two separate laws governing condominiums.
For condominium regimes formed prior before January 1, 1994, Texas Property Code Chapter 81, known as the “Condominium Act,” governs. For condominium regimes formed after January 1, 1994, Texas Property Code Chapter 82, known as the “Uniform Condominium Act
2 governs. To complicate things just a bit more, Texas Property Code Section 82.002 provides that a condominium regime created prior to January 1, 1994, can elect to be governed by the Uniform Condominium Act under Chapter 82, by voting under its existing bylaws, and some have.
Fortunately, the differences between condominium projects created pre-1994 and condominium projects created after 1994 do not generally affect closing condominiums, but the differenced do occasionally come up.
The Texas Supreme Court has defined a condominium in a simpler way for attorneys, “In essence, condominium ownership is the merger of two estates in land into one: the fee simple ownership of an apartment or unit in a condominium project and a tenancy in common with other co-owners in the common elements.” Dutcher vs. Owens, 647 SW2d 948 (Tex. 1983).
Recent Changes
There were minor changes to the Texas Uniform Condominium Act in the last legislature, which may have raised some curiosity. HB 2569 amended Texas Property Code Section 82.059(b)(7) to require a condominium regime created after September 1, 2019, must include , “the location of horizontal unit boundaries, if any, with reference to established data, unless described in the declaration or [of any horizontal unit boundaries not] shown or projected on recorded plans, and the unit's identifying number;” This has generally been common practice, but it codifies it as a requirement going forward. There were no other substantial changes to the law.
You may also notice that the online version of the Texas Basic Manual for Title Insurance highlights that changes were recently made to both Procedural P-9(b)(15) and Rate Rule R-11.l, dealing with condominiums. According to TDI Order 2018-5503, making the changes, the changes were only to, “…remove the stipulation that a company may issue a Condominium Endorsement on or after the effective date of Rate Rule R-11.m (now Rule R-11.l) because that rule is already effective.” There have been no recent substantive changes to the rules.
The T-28 Endorsement
Procedural Rule P-9.b.(15), provides for issuance of the T-28 Endorsement. It says, “Condominium Endorsement - A Company may issue the Condominium Endorsement (Form T- 28) to a contemporaneously issued Loan Policy, if its underwriting requirements are met and if it is paid the premium, if any, described in Rate Rule 11.l. The Company may delete any insuring provision if it does not consider that risk acceptable. The Company may not issue the Condominium Endorsement (Form T-28) if the land covered by the policy is not residential real property. Any insured matter that may be covered by a Condominium Endorsement (Form T-28)
3 may be insured only by the use of the Condominium Endorsement (Form T-28). This endorsement may not be issued in conjunction with the Planned Unit Development Endorsement (Form T-17).”
The important parts of that rule are as follows:
• The T-28 may only be issued for the Loan Policy.
o There is no endorsement for the Owner’s Title Policy
• The endorsement is for “residential property” only.
o Note that the terms “residential property” is defined in the Texas Basic Manual Procedural Rule P-1.u as, “Any real property which has improvements thereon designed principally for the occupancy of from one to four families (including individual units of condominiums and cooperatives) and either (a) situated in a platted subdivision of record, or (b) consisting of five acres or less.” (There’s a further portion of the definition dealing with rural land that is not applicable here.)
o We see many commercial condominiums, but there is no specific endorsement for them.
• The T-28 endorsement specifically may not be issued in conjunction with a T- 17 endorsement.
o There is a great deal of duplication in coverage between the T-28 endorsements and the T-17 endorsements, so the T-17 would be redundant.
• Company may delete any portion of the T-28 endorsement it does not find insurable.
o Forms promulgated by the Texas Department of Insurance cannot be altered without a rule allowing it, so this is an important consideration.
The T-28 Endorsement is FREE. Rate Rule R-11.l, provides, “Condominium Endorsement as provided in Procedural Rule P-9b(15)--When the Condominium Endorsement (Form T-28) is issued with a Loan Policy in accordance with Rule P-9b(15), the premium for each Condominium Endorsement (Form T-28) shall be $0.00.”
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What does the T-28 cover?
What closers often don’t think about is what sort of title insurance coverage the endorsements give? Yet it’s actually the best way to think about what requirements you need to meet in order to close the transaction.
- Paragraph 1
T-28, paragraph 1, insures against, “The failure of the unit identified in Schedule A and its common elements to be part of a condominium within the meaning of the condominium statutes of the jurisdiction in which the unit and its common elements are located.”
Theoretically, to assure the title underwriter is in compliance with this insurance provision, you would have to have an encyclopedic knowledge of both Chapters 81 and 82 of the Texas Property Code and read every page of the Condominium Declaration, and all amendments, word by word.
Rather than review every section of these two statutes, the condominium declaration, and amendments, make sure –
• There is a condominium declaration filed of record declaring the property is a condominium, naming it, setting forth the units subject to the condominium regime, and identifying the obligations between individual condominium owners, other owners and the condominium association.
• Assure there is a plat or plans filed of record identifying the individual units and common areas. Theoretically this document is optional for pre-1994 condominiums, but if you don’t have a plat or plans detailing the separate units and common areas, you should not insure without approval of your underwriting counsel.
Most condominium closings do not involve a survey, so the condominium plat or plans are the survey for all purposes here, and you need to be able to look at them an identify the unit you are insuring.
• You except to the terms and conditions of the Condominium Declaration and all amendments thereto. Don’t get caught up arguing about what is and is not applicable, just except to them.
• If you have any questions about interpreting the Condominium Declaration, ask your underwriting counsel.
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- Paragraph 2
T-28, paragraph 2, insures against, “The failure of the documents required by the condominium statutes to comply with the requirements of the statutes to the extent that such failure affects the title to the unit and its common elements.”
Note that we’re only concerned with a defect which, “affects the title to the unit and its common elements.”
By meeting the requirements for insurance under paragraph 1 of the T-28 endorsement, you’ve largely met the requirements to insure under paragraph 2. To an extent, we piggy back on the capabilities of the attorneys creating the condominium regime. To an even larger extent, the older the condominium project, the less likely there is going to be a problem that hasn’t already been addressed.
However, a great deal more suspicion should be paid to new condominium regimes, particularly if they are small condo regime of 2-4 units. One of the things every closer will learn, if they haven’t already, is that there is a great variation in sophistication among real estate developers and investors, and a tendency to reduce or avoid attorney’s fees with either do-it- yourself paperwork or copies of other paperwork which may or may not wholly apply to the current situation.
One of the things you should look for, and protect against, is confusion between the address of the condominium and the plat of the condominium. In at least two separate Texas condominium projects, the units were assigned numbers and then either unit “A” or “B”, but when the post office assigned addresses, they used the same unit numbers, but designated each “A” unit as “B” and each “B” unit as “A.” The marketing people then sold the units according to the address assignment, so that by legal description all of the platted “A” unit owners were actually living in Unit “B,” and all of the “B” unit owners actually lived in Unit “A.” Because Texas does not insure property by address, and the insured did actually own the property they were insured as owning, this is technically not a policy claim. However, the fact it is not a policy claim does not absolve the title company of all moral responsibility for resolving the problem. The facts this has happened twice, in different parts of the state, and only caught years later in both circumstance, indicates the closer should carefully make sure the platted unit is the one being sold and occupied by the customer.
- Paragraphs 3 & 4
T-28, paragraph 3, insures against, “Present violations of any restrictive covenants which restrict the use of the unit and its common elements and which are contained in the condominium documents, except violations relating to environmental protection unless a notice of a violation
6 thereof has been recorded or filed in the public records and is not excepted in Schedule B. The restrictive covenants do not contain any provisions which will cause a forfeiture or reversion of title.”
T-28, paragraph 4, insures against, “The priority of any lien for charges and assessments at Date of Policy provided for in the condominium statutes and condominium documents over the lien of any insured mortgage identified in Schedule A.”
You will notice that paragraphs 3 and 4 of the T-28 overlap in coverage, and so preventative measures to address paragraph 3 also apply to paragraph 4.
What you need here is a resale certificate.
Like a home owner’s association, a condo association lien or assessment is secured by the terms and conditions of the original Condominium Declaration, and therefore the owner takes subject to such lien rights. [Consequently, it doesn’t have to be one of the 8 allowed liens on homestead property set forth in the Texas Constitution Article 16, Section 50(a)] Any lien filed by the condo association will be superior to the insured lien, and it is therefore necessary that all condo association liens be excepted to on Schedule C of your commitment and cured in closing.
For any condominium subject to Chapter 82, you should request a resale certificate, referred to in the statute as a “condominium information statement.” This is similar to an HOA resale certificate but is governed by a different statute, and must contain all of the information in Texas Property Code Section 82.153. (Texas Property Code Section 207.002 exempts condominiums from the requirement to provide a resale certificate under that statute). This information includes:
(1) the name and principal address of the declarant and of the condominium;
(2) a general description of the condominium that includes the types of units and the maximum number of units;
(3) the minimum and maximum number of additional units, if any, that may be included in the condominium;
(4) a brief narrative description of any development rights reserved by a declarant and of any conditions relating to or limitations upon the exercise of development rights;
(5) copies of the declaration, articles of incorporation of the association, the bylaws, any rules of the association, and amendments to any of them, and copies of leases and contracts, other than loan documents, that are required by the declarant to be signed by purchasers at closing;
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(6) a projected or pro forma budget for the association that complies with Subsection (b) for the first fiscal year of the association following the date of the first conveyance to a purchaser, identification of the person who prepared the budget, and a statement of the budget's assumptions concerning occupancy and inflation factors;
(7) a general description of each lien, lease, or encumbrance on or affecting the title to the condominium after conveyance by the declarant;
(8) a copy of each written warranty provided by the declarant;
(9) a description of any unsatisfied judgments against the association and any pending suits to which the association is a party or which are material to the land title and construction of the condominium of which a declarant has actual knowledge;
(10) a general description of the insurance coverage provided for the benefit of unit owners;
(11) current or expected fees or charges to be paid by unit owners for the use of the common elements and other facilities related to the condominium.
For a condominium located wholly or partly in a municipality (not a county) with a population of more than 1.9 million (currently, Houston only), the condominium association must also provide a statement that a unit owner:
(A) as an alternative to personal service, may be served with process by the municipality or the municipality's agent for a judicial or administrative proceeding initiated by the municipality and directly related to the unit owner's property interest in the condominium by serving the unit owner at the unit owner's last known address, according to the records of the appraisal district in which the condominium is located, by any means permitted by Rule 21a, Texas Rules of Civil Procedure;
(B) shall notify the appraisal district in writing of a change in the unit owner's mailing address not later than the 90th day after the date the unit owner changes the address; and
(C) may not offer proof in the judicial or administrative proceeding, or in a subsequent related proceeding, that otherwise proper service by mail of the notice was not received not later than three days after the date the notice was deposited in a post office or official depository under the care and custody of the United States Postal Service.
Of course, the condominium information statement is not the only way to discover the existence of condominium assessment liens. A condominium regime can file a lien in the real property records, and they commonly do. Any such liens should be listed as an exception in Schedule C of your title commitment, and should be resolved pre-closing.
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In addition, as a precaution, you should always get an affidavit of debts and liens from the seller, which should specifically list all amounts owed to the condominium association.
If you have requested a condominium information statement or a resale certificate from the a pre-1994 condominium regime, and they have failed to either provide that document or file their lien of record, and you have an affidavit as to debts and liens from the seller that no dues, penalties or assessments are due, you have put the title underwriter in the best position possible in the event of a claim.
Occasionally you’ll find a conflict between what is of record and what is on the condominium association’s resale certificate. In that event, always call underwriting counsel to make the call on whether to address the lien in the commitment or not? If a Homeowner’s Association gives you a Resale Certificate reflecting no liens, Section 207.002 makes it clear that a Homeowner’s Association lien filed of record in superseded, as the Resale Certificate is binding on the Homeowner’s Association. There is nothing in the Texas Condominium laws which make Condominium Information Statements under Section 82.153 binding on the Condominium Association. Presumably the Condominium Association would be estopped from contradicting the Information Statement in a court as a statement against interest, but Westlaw does not reflect any case law interpreting Section 82.153. Consequently, it’s a much harder decision for underwriting counsel to decide to remove the lien based on the Condominium Information Statement, and they may not if it’s a substantial sum of money.
- Paragraph 5
Paragraph 5 of the T-28 insures against, “The failure of the unit and its common elements to be entitled by law to be assessed for real property taxes as a separate parcel.”
This is similar language to the ALTA 18-06 Endorsement, and is the only situation in Texas where we provide an endorsement stating the property is a separate tax parcel.
You should examine your tax certificate to make sure it reflects the unit is being taxed as a separate tax parcel, and the common areas are being taxed based on the unit’s prorated ownership of those common elements. If the Condominium Declaration has been filed within the past 5- years, you should make sure the prior tract the condominium was carved out of is not subject to rollback taxes or other unpaid assessments.
- Paragraph 6
Paragraph 6 of the T-28 insures against, “Any obligation to remove any improvements which exist at Date of Policy because of any present encroachments or because of any future unintentional encroachment of the common elements upon any unit or of any unit upon the common elements or another unit.”
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Just about every Condominium Declaration should have provisions which make encroachments of improvements between units permissive. However, don’t assume it, particularly if it’s a recently created Condominium Declaration. Read the Declaration.
Admittedly, this hasn’t led to a lot of claims, but if it’s a newly put together Condominium Declaration, particularly this 2-4 unit Condominium Declarations common in the Austin area, make sure they handled this correctly, or require a survey reflecting no such encroachments.
-- Paragraph 7
Paragraph 7 of the T-28 insures against, “The failure of title by reason of a right of first refusal to purchase the unit and its common elements which was exercised or could have been exercised at Date of Policy.”
This is similar to the “private rights” coverage in the T-19, though limited to only the right of first refusal. Some Condominium Associations are intended to let the existing tenants choose their neighbors, and so may have provisions containing a right of first refusal to match any offer. This right either exists or does not exist, and if it exists, this paragraph must be deleted. This can be done by striking through the provision on the endorsement, or noting it as an exception on Schedule B of the final policy, “Right of First Refusal contained in that certain document filed in Volume ___, Page ___, Official Public Records of ______County, Texas. If the endorsements are attached to the policy, title insurance coverage under paragraph 6 of Endorsement T-28, paragraph 3.e of Endorsement T-19, and paragraph 3.d of Endorsement T- 19.1, are hereby deleted as to this exception.”
Note that since this is duplicative of T-19 and T-19.1 private rights coverage, deletions from these endorsements are required as well.
Surveys
Note that Procedural Rule P-2 of the Texas Basic Manual for Title Insurance contains a parenthetical exception for Condominiums to the general rule that a survey is required for survey deletion, which parenthetically states, “(the Company may waive the requirement of a survey in connection with the issuance of its Mortgagee Policy insuring the lien on a condominium unit)…” Procedural Rule P-50 does not require a survey to issue the T-19 Endorsement, and most underwriters will waive that requirement for a condominium provided a plat of the property is filed with the Condominium Declaration.
Nevertheless, there are times when a survey is desirable, though these circumstance rarely occur:
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• If you read the Condominium Declaration, and there is no provisions making encroachments of improvements permissive, then a survey may be needed in order to give T-19 coverage and Survey Deletion.
• When there is no Plat filed with the Condominium Declaration.
• When it’s a condominium conversion of an existing residential lot, and you want to make sure no improvements encroach on the neighboring properties.
Special Issues
- Residential Condominium Conversions
We’re seeing this most commonly in the Austin area, although it can happen anywhere in the State, but many small developers are taking large homes, converting them to duplexes, and then building a second structure on the premises which contains one or two residences. They then convert the entire house lot to a condominium regime by filing a condominium declaration, making the land surrounding the units’ largely common area. This is particularly popular on large corner lots, where a unit added in the “back yard” can still have street access.
Existing Covenants, Conditions and Restrictions (CCR’s) that restrict the property to single family housing are not supplanted by filing a Condominium Declaration. The single family requirement can be enforced in a court by a suit for damages or injunctive relief by either a home owners association or ANY resident of the same subdivision, or a neighboring subdivision if they can show they benefit from the restriction and their ownership historically arises from the same source.
That is not to say that your underwriter won’t take the risk on occasion. In order for the underwriter to take the risk, you must be able to show a general pattern of abandonment of this particular restriction in the subdivision. In a college community such as Austin where many residences have been converted to duplexes, this may not be difficult, but it is time consuming.
If you can show the restriction has been abandoned, that does not mean the CCR’s are deleted as an exception. The CCR’s remains as an exception, and the common practice is to separately except to provision the owner feels no longer applies, and provide P-39 express insurance over that provision. Different underwriters can have different approaches of course, but this is the most likely to be acceptable to underwriting counsel.
This problem with older CCR’s is not unique to Austin, as it is common to see developers want to redevelop areas subject to restrictions with nonconforming uses, and many older
11 restrictions simply do not have provisions that make them expire. Your underwriter typically does not want to litigate this issue, and you should submit all such situations to underwriting counsel for a final decision.
- Condominium Conversions
One of the common things that has been done in the past is to take an apartment complex and convert it into condominiums. This is common in good economic times when loan money for individual units is easy to obtain.
We don’t see as many as we once did, because lenders, Freddie Mac, Fannie Mae, FHA and VA were badly burned making these loans in the past, and the secondary mortgage market is not loaning on these projects as much as they once did. What we saw in the mortgage downturn is that the combination of high condo dues and property taxes made these units expensive to hold onto as REO, and difficult to sell in a depressed market at anything near the loan value. That doesn’t mean you won’t see them again.
- Condominium Terminations
Of course, there are many older condominiums and condominium conversions which have fallen into disrepair. In some cases, this makes it difficult to get new loans and full value out of the individual units. Also, many older condominium projects are now in very high end areas, and the real estate is much more valuable than the individual units. There is a great financial incentive to tear them down and redevelop them into higher density and higher end units.
In order to sell an entire condominium development in one transaction, you must get agreement of all of the owners. The first step is often to remove the condominium regime, so that the owner’s may collectively to decide to sell all of the property in a single transaction.
Under Texas Property Code Section 81.110, condominiums created prior to 1994 require unanimous consent to terminate unless a lesser percentage is set forth in the condo agreement, but not less than 67%. However, TPC Section 81.110 wasn’t enacted until 1989, and may not be retroactive in effect to condos created before this date, raising a question as to whether Section 81.110 is Constitutional if the condo regime did not originally have termination provisions within it?
Under Texas Property Code Section 82.068(a), condominiums created in 1994 and after under Chapter 82 require 100% approval to terminate unless a lesser percentage is set forth in the condo agreement, but not less than 80%.
The effect of termination is that each owner owns an undivided interest in the whole equal to their prior percentage ownership in the common elements.
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Legal experience has been that the courts will side on the side of the poor old person who cannot replace his or her existing condo with equivalent housing if the condo regime is terminated and he or she loses her home, even if he or she is compensated for that loss. Substantial claims have been paid out by major title companies in this State for insuring these transactions.
Don’t insure terminations of condo agreements without either agreement of 100% of the homeowners or approval of your underwriting counsel, and the claims history on these transaction is such that you probably cannot get approval of underwriting counsel.
Condominium Foreclosures
- Lien Priorities
In ANY event, foreclosure of a condominium association lien for assessment does not cut off any of the following liens:
(1) a lien for real property taxes and other governmental assessments or charges against the unit, unless otherwise provided by Section 32.05, Tax Code [Author’s note – Section 32.05 of the Tax Code doesn’t provide for anything different];
(2) a lien or encumbrance recorded before the declaration is recorded;
(3) a first vendor's lien or first deed of trust lien recorded before the date on which the assessment sought to be enforced becomes delinquent under the declaration, bylaws, or rules; and
(4) unless the declaration provides otherwise, a lien for construction of improvements to the unit or an assignment of the right to insurance proceeds on the unit if the lien or assignment is recorded or duly perfected before the date on which the assessment sought to be enforced becomes delinquent under the declaration, bylaws, or rules.
[See, Texas Property Code Section 82.113(b)]
Federal tax liens are only cut off if the Internal Revenue service receives 25-day notice of the non-judicial foreclosure. The Internal Revenue Service is entitled to 60-days notice in any judicial foreclosure action.
Other liens may survive a condominium foreclosure. Texas Property Code Section 82.113(h) provides that any inferior lienholder can serve notice to the Condominium Association that they wish to receive notice of foreclosure. If this notice is served on the Condominium Association, the Association must give that lien holder 21-days notice of foreclosure. If the Condo
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Association fails to provide that 21-day notice, then that lien is NOT cut off by the foreclosure, and continues to exist as a lien on the property. [See, also, 51.002(b)]
This provision puts much more onerous affidavit requirements on insuring a condominium association foreclosure compared to other foreclosures. Unless you have affidavit evidence from the condominium association that they received no request for notice of foreclosure from any of the inferior lien holders, or if they did, such 21-day notice was provided, you should not delete exception to any inferior lien.
- Foreclosure Process
Unlike home owners associations, condo associations can still foreclose non-judicially. The procedure is similar to that for a deed of trust under Texas Property Code Section ____, but there are special notice requirements, and redemption rights.
For a non-judicial foreclosure under Texas Property Code Section 51.002, a written resolution by the Condominium Board appointing an officer, agent, trustee, or attorney of the association to exercise the power of sale on behalf of the association is required to evidence authority of a person to conduct a non-judicial foreclosure. [See Texas Property Code Section 82.113(d)] This is similar to the authority granted by a notice of appointment of substitute trustee in a normal foreclosure.
The Condominium Association or its duly appointed officer, agent, trustee or attorney must provide the owner, by certified mail, return receipt requested, a 20-day notice to cure the default at least 20-days prior to the mailing of the Notice of Foreclosure, as required by TPC Section 51.002(d). The 20-day notice does not include the entire calendar day on which Notice of foreclosure was sent. [See, Texas Property Code Section 51.002(d) for notice, and Texas Property Code Section 51.002(e) for certified mail requirement.] This is similar to the 20-day notice of intent to accelerate and opportunity to cure in a normal foreclosure.
After the 20-days has expired, the Condominium Association’ duly appointed officer, agent, trustee or attorney must provide each owner, by certified mail, return receipt requested, a 21-day Notice of Sale consistent with Texas Property Code Section 51.002. See, Texas Property Code Section 51.002(b)(3).
The Notice of Sale must state -
• The date of sale, which must be a 1st Tuesday of the month, regardless of whether that date is a state or federal holiday.
• The time of the sale, which shall be between 10:00 a.m. and 4 p.m.
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• The earliest time that such sale may begin.
• The name and address of the person sending the Notice of Sale.
• Contain the following language: "Assert and protect your rights as a member of the armed forces of the United States. If you are or your spouse is serving on active military duty, including active military duty as a member of the Texas National Guard or the National Guard of another state or as a member of a reserve component of the armed forces of the United States, please send written notice of the active duty military service to the sender of this notice immediately."
The Notice of Foreclosure must also be posted at least 21-days prior to the foreclosure sale date, "at the courthouse door of each county in which the property is located a written notice designating the county in which the property will be sold" per TPC Section 51.002(b)(1). It must also be filed in the Office of the County Clerk of each County in which the property is located a copy of the notice posted on the Courthouse door, per TPC Section 51.002(b)(2). If the County maintains a web site, the Notice of Sale provided to the County Clerk must posted on that web site, without charge for viewing. [TPC 51.002(f-1)]
The foreclosure must be conducted the foreclosure on the date noticed in the Notice of Foreclosure, and must occur in the area designated by the County Commissioner's Court for foreclosures to occur, within the County where the property is located. [See TPC 51.002(a) and TPC 51.002(h)]
Note that the owner has the right to stop the foreclosure process at any time prior to the foreclosure by tendering the entire amount due to the Condominium Association prior to the foreclosure. [See Texas Property Code Section 82.113(j)] Additional affidavit evidence from the Condominium Association should be obtained, stating that there was no offer to pay all amounts due was made by the owner prior to the foreclosure sale.
- Redemption Right
If a third party purchases the property, the foreclosed owner has ninety (90) days to redeem the property after foreclosure, running from the filing date of the foreclosure deed. See Texas Property Code Section 82.113(g). In order to redeem, the owner must not only tender to the purchaser the amount paid, out of pocket expenses, and interest on those amounts, but must also pay the foreclosing Condominium Association all attorney’s fees and costs of foreclosure.
Abstracts of Judgment Against the Condominium Association
Occasionally it’s come up that a Condominium Association gets sued, a judgment is rendered against it, and the judgment is abstracted. What does it attach to?
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In 1983, the Texas Supreme Court addressed this issue, stating, “…the creation of the regime effects a reallocation of tort liability. The liability of a condominium co-owner is limited to his pro rata interest in the regime as a whole, where such liability arises from those areas held in tenancy-in-common.” Dutcher vs. Owens, 647 SW2d 948 (Tex. 1983).
A judgment against the whole of the condominium association is going to be allocated to the individual units in the same manner as set forth for other assessments for costs of the Association. In the event of a conflict between the Condominium Information Certificate stating there is no judgment when an abstract of judgment actually appears in the real property records record, you will always go by the real property records, except to the abstract of judgment on Schedule C, and require it be resolved prior to closing the unit.
Conclusion In conclusion, I’d like to thank my 5-year old son, Rhett, for the following personally typed contributions to this paper: zzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzz zzzzzzzzzzzugfrtcghjn;’ [;u8ijkmzzzzzzzzzzweasweaswsadfxrttryfzzzzzzzzzzzzzzzzzzzzzzzzz
16
Closing Condominiums
Richard D. Worsham, Vice-President/Texas Region Underwriting Counsel
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This Seminar is About Planet Texas, Only
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What’s Different in Closing a Condominium?
• Condominium dues or annual assessments have to be prorated. • An extra endorsement is available for the lender (the T-28). • Make sure you describe the property properly in Schedule A. • Generally you don’t need a survey.
2019 TEXAS LAND TITLE INSTITUTE 3 What is a Condominium?
Texas Property Code Section 81.002(3):
“Condominium" means a form of real property ownership that combines separate ownership of individual apartments or units with common ownership of other elements.”
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What is a Condominium?
Texas Property Code Section 82.003(8):
“Condominium" means a form of real property with portions of the real property designated for separate ownership or occupancy, and the remainder of the real property designated for common ownership or occupancy solely by the owners of those portions. Real property is a condominium only if one or more of the common elements are directly owned in undivided interests by the unit owners. Real property is not a condominium if all of the common elements are owned by a legal entity separate from the unit owners, such as a corporation, even if the separate legal entity is owned by the unit owners.”
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What is a Condominium?
• “In essence, condominium ownership is the merger of two estates in land into one: the fee simple ownership of an apartment or unit in a condominium project and a tenancy in common with other co-owners in the common elements.” Dutcher vs. Owens, 647 SW2d 948 (Tex. 1983).
2019 TEXAS LAND TITLE INSTITUTE 6 Texas Statutes
Texas Condominium Law is spread over 2 separate chapters of the Texas Property Code • Chapter 81 “Condominium Act” – Condominium Regime adopted before January 1, 1994 • Chapter 82 “Uniform Condominium Act” – Condominium Regime adopted after January 1, 1994 • However, Section 82.002 provides that a condominium regime created prior to January 1, 1994, can elect to be governed by the Uniform Condominium Act under Chapter 82.
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New Law - HB 2569
Section 82.059(b)(7) amended to require a condominium regime created after September 1, 2019, must include, “the location of horizontal unit boundaries, if any, with reference to established data, unless described in the declaration or [of any horizontal unit boundaries not] shown or projected on recorded plans, and the unit's identifying number;”
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T-28 Endorsement
Procedural Rule P-9.b.(15): “Condominium Endorsement - A Company may issue the Condominium Endorsement (Form T-28) to a contemporaneously issued Loan Policy, if its underwriting requirements are met and if it is paid the premium, if any, described in Rate Rule 11.l. The Company may delete any insuring provision if it does not consider that risk acceptable. The Company may not issue the Condominium Endorsement (Form T-28) if the land covered by the policy is not residential real property. Any insured matter that may be covered by a Condominium Endorsement (Form T-28) may be insured only by the use of the Condominium Endorsement (Form T-28)….”
2019 TEXAS LAND TITLE INSTITUTE 9 T-28 Endorsement
Procedural Rule P-9.b.(15): • Loan Policy only • Residential Property only. • Specifically may not be issued in conjunction with a T-17. • Company may delete any portion of the T-28 endorsement it does not find insurable.
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T-28 Endorsement
Rate Rule R-11.l: “Condominium Endorsement as provided in Procedural Rule P- 9b(15)--When the Condominium Endorsement (Form T-28) is issued with a Loan Policy in accordance with Rule P-9b(15), the premium for each Condominium Endorsement (Form T-28) shall be $0.00.”
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Rules Changes
If you look at the Texas Basic Manual for Title Insurance online it indicates changes were recently made. Changes to P-9.b.(15) and R-11.l contained in TDI Order 2018-5503 are to, “…remove the stipulation that a company may issue a Condominium Endorsement on or after the effective date of Rate Rule R-11.m (now Rule R-11.l) because that rule is already effective.”
2019 TEXAS LAND TITLE INSTITUTE 12 What Does the T-28 Cover?
Paragraph 1 - 1. “The failure of the unit identified in Schedule A and its common elements to be part of a condominium within the meaning of the condominium statutes of the jurisdiction in which the unit and its common elements are located.”
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What Does the T-28 Cover?
Paragraph 1 – Rather than review every section of these 2 statutes, make sure – • There is a condominium declaration filed of record declaring the property is a condominium, naming it, setting forth the units subject to the condominium regime, and identifying the obligations between individual condominium owners, other owners and the condominium association. • Assure there is a plat or plans filed of record identifying the individual units and common areas.
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What Does the T-28 Cover?
Paragraph 1 – …make sure – • Except to all amendments and additions to the condominium regime. Don’t get caught up arguing about what is and is not applicable. • If you have any questions about interpreting the condo declaration, ask underwriting counsel.
2019 TEXAS LAND TITLE INSTITUTE 15 A NOTE
Beware of Newness • If a condominium regime has been around a long time, it is much less likely to have defects which have not been resolved through internal disputes. • If it’s new, be much more careful to read over the agreement and the plat and make sure there are no apparent discrepancies.
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What Does the T-28 Cover?
Paragraph 2 – 2. “The failure of the documents required by the condominium statutes to comply with the requirements of the statutes to the extent that such failure affects the title to the unit and its common elements.”
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What Does the T-28 Cover?
Paragraph 2 –
◼ Note that we’re only concerned with a defect which, “affects the title to the unit and its common elements.”
◼ The only way to really know this is have an attorney who has carefully read and is expert on Chapter’s 81 and 82 of the Texas Property Code, but if you have a condominium regime and plat that appear correct, the underwriter will typically accept the risk.
2019 TEXAS LAND TITLE INSTITUTE 18 What Does the T-28 Cover?
Paragraph 3 “Present violations of any restrictive covenants which restrict the use of the unit and its common elements and which are contained in the condominium documents, except violations relating to environmental protection unless a notice of a violation thereof has been recorded or filed in the public records and is not excepted in Schedule B. The restrictive covenants do not contain any provisions which will cause a forfeiture or reversion of title.”
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What Does the T-28 Cover?
Paragraph 4 “The priority of any lien for charges and assessments at Date of Policy provided for in the condominium statutes and condominium documents over the lien of any insured mortgage identified in Schedule A.”
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What Does the T-28 Cover?
Paragraphs 3 & 4 • For any condominium subject to Chapter 82, you should request a resale certificate, referred to in the statute as a “condominium information statement.” • This is similar to an HOA resale certificate but is governed by a different statute, and must contain all of the information in Texas Property Code Section 82.153.
2019 TEXAS LAND TITLE INSTITUTE 21 What Does the T-28 Cover?
Paragraphs 3 & 4 • Note that the provisions for an HOA resale certificate do not apply to condominiums per TPC Section 207.002. • For an older condominium project, created prior to September 1, 1994, they have no obligation to provide you a resale certificate or condominium information statement, but you should request one anyway in order to create a paper trail that you attempted to get the information.
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What Does the T-28 Cover?
Paragraphs 3 & 4 Of course, the examiner should have identified any condominium liens filed of record and included them on your commitment. Read it.
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What Does the T-28 Cover?
Paragraph 5 “The failure of the unit and its common elements to be entitled by law to be assessed for real property taxes as a separate parcel.”
2019 TEXAS LAND TITLE INSTITUTE 24 What Does the T-28 Cover?
Paragraph 5 • Make sure your tax certificate reflects that this unit is separately taxed. • If the Condominium Declaration was filed within the last 5-years, make sure the prior tract is not subject to rollback taxes or other unpaid assessments.
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What Does the T-28 Cover?
Paragraph 6 “Any obligation to remove any improvements which exist at Date of Policy because of any present encroachments or because of any future unintentional encroachment of the common elements upon any unit or of any unit upon the common elements or another unit.”
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What Does the T-28 Cover? Paragraph 6 • Every Condominium Declaration which make for encroachments of improvements between units permissive, if any exist. If not, it MAY be necessary to evidence there are none. • This generally has not led to a lot of claims, so we don’t want to waste a lot of time on this issue.
2019 TEXAS LAND TITLE INSTITUTE 27 What Does the T-28 Cover?
Paragraph 7 “The failure of title by reason of a right of first refusal to purchase the unit and its common elements which was exercised or could have been exercised at Date of Policy.”
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What Does the T-28 Cover?
Paragraph 7 ▪ The condominium declaration should be read carefully to assure that there is no right of first refusal. ▪ This is duplicative of T-19 private rights coverage, which did not exist in the T-19 when the T-28 was created.
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Surveys
Survey Deletion - Procedural Rule P-2 contains a parenthetical exception to the general rule that a survey is required for survey deletion: “(the Company may waive the requirement of a survey in connection with the issuance of its Mortgagee Policy insuring the lien on a condominium unit)”
2019 TEXAS LAND TITLE INSTITUTE 30 Surveys
T-19 Coverage – Procedural Rule P-50 does not require a survey be provided in order to issue the coverage, and you will find that most title insurance underwriters will waive this requirement, provided there is a plat filed of record with the Condominium Declaration.
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Surveys
Nevertheless, there are times when a survey is desirable, though these circumstance rarely occur: • If you read the Condominium Declaration, and there is no provisions making encroachments of improvements permissive, then a survey may be needed in order to give T-19 coverage and Survey Deletion. • When there is no Plat filed with the Condominium Declaration. • When it’s a condominium conversion of an existing residential lot, and you want to make sure no improvements encroach on the neighboring properties.
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Schedule A Descriptions
▪ Make sure Schedule A on your commitment and policy accurate describes the property by reference to the condominium declaration, by unit number, and separately for the undivided common interests.
2018 TEXAS LAND TITLE INSTITUTE 33 Special Issues
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Conversion of Lots to Condo’s in Austin Area
• Common approach in Austin in older neighborhoods with large lots is to convert the main residence to a duplex and build a second structure containing 1 or 2 units on the back of the lot, and then file a condominium declaration creating 3-4 units with common areas. o Particularly popular on large corner lots.
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Conversion of Lots to Condo’s in Austin Area
• Existing Covenants, Conditions and Restrictions (CCR’s) restricting the lot to single family housing are not supplanted by creation of the condo regime, and the single family requirement can be enforced in court by – o An HOA (though few older Austin neighborhoods have one) o Any beneficiary of the restriction in the neighborhood with an interest in enforcing the CCR’s.
2019 TEXAS LAND TITLE INSTITUTE 36 Conversion of Lots to Condo’s in Austin Area
• The general standard by the underwriters will be they may cover this risk if you can show a general pattern of abandonment of the CCR’s by nonconforming use in the neighborhood.
o Given how many residences in most older neighborhoods around the college have been converted to duplexes, this may not be hard in some older neighborhoods if someone will put out the effort, but it is not effortless.
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CCR Violations
• This problem is not unique to Austin, as it is common to see developers want to redevelop areas subject to restrictions with nonconforming uses, and many older restrictions simply do not have provisions that expire. o Your underwriter typically does not want to litigate this issue, and you should submit all such situations to underwriting counsel for a final decision.
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Condominium Conversions
• One of the common things that has been done in the past is to take an apartment complex and convert it into condominiums. o This is quite common in good economic times when loan money is easy to obtain. o We don’t see as many as we once did, because lenders have been badly burned making these loans in the past, and the secondary mortgage market is not loaning on these projects as much as they once did. • What we saw in the mortgage downturn is that the combination of high condo dues and property taxes made these units expensive to hold onto as REO, and difficult to sell in a depressed market at anything near the loan value.
2019 TEXAS LAND TITLE INSTITUTE 39 Condominium Terminations
• Many older condominium projects are now in very high end areas, but are old and have come into disrepair. There is a very great financial incentive to tear them down and redevelop them into higher density and higher end units. • Preliminary to sale as a single piece of property, the condominium regime must be terminated.
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Condominium Terminations
• Pre-1994 Condominiums under Chapter 81 require unanimous consent to terminate unless a lesser percentage is set forth in the condo agreement, but not less than 67%. (TPC Section 81.110)
o The problem is that TPC Section 81.110 wasn’t enacted until 1989, and may not be retroactive in effect to condos created before this date, raising a question as to whether Section 81.110 is Constitutional if the condo regime did not originally have termination provisions within it?
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Condominium Terminations
• Post 1994 Condominiums under Chapter 82 require 100% approval to terminate unless a lesser percentage is set forth in the condo agreement, but not less than 80%. [TPC Section 82.068(a)] • The effect of termination is that each owner owns an undivided interest in the whole equal to their prior percentage ownership in the common elements.
2019 TEXAS LAND TITLE INSTITUTE 42 Condominium Terminations
• However, legal experience is that the courts will side with the poor, usually older, resident who cannot replace their existing condo with equivalent housing if the condo regime is terminated, even if compensated for the loss. • Substantial litigation costs have been paid out by major title companies in this State from insuring these transactions.
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Condominium Terminations
• Summary: Don’t insure terminations of condo agreements without either agreement of 100% of the homeowners or approval of your underwriting counsel, and the claims history on these transaction is such that you probably cannot get approval of underwriting counsel.
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Condominium Foreclosures
Priorities • Foreclosures by the condominium association do not cut off fist mortgage liens. • They also don’t cut off: o Property Taxes o City or county assessments o Any lien filed prior to the filing of the condominium declaration
2019 TEXAS LAND TITLE INSTITUTE 45 Condominium Foreclosures
Priorities • If a subordinate lien holder sent a written request to the Condominium Association that it wished to receive Notice of Foreclosure, it's lien is not cut off unless it received the 21- days in advance the Notice of Sale described in TPC 51.002(b)
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Condominium Foreclosures
• 20-days notice to cure default by certified mail • 21-days notice of foreclosure by certified mail • Name and address of person sending notice required in notice • Posted at Courthouse for 21-days • Date of Sale 1st Tuesday of the month. • Must contain Soldiers & Sailors Relief Act Notice • Must conduct foreclosure in county’s designated area • Notice of Sale posted on County’s web site, if available.
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Condominium Foreclosures
• Foreclosed Owner has a 90-day right of redemption. • Runs from the filing date of the deed.
2019 TEXAS LAND TITLE INSTITUTE 48 90-Day Right of Redemption
• If buyer is not the condo association, the redeemer must pay to the buyer -
o Amount bid at the sale
o Interest on the bid amount from the date of the foreclosure at 6%
o All assessments paid by the purchaser after the date of foreclosure.
o All reasonable costs incurred by the purchaser as the owner of the unit, including costs of maintenance and leasing.
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Condominium Foreclosures
90-day Right of Redemption • The redeeming owner must also pay to the association – • All assessments that are due as of the date of the redemption; and • Reasonable attorney's fees and costs incurred by the association in foreclosing the lien. • On redemption, the purchaser of the unit at the foreclosure sale shall execute a deed with no warranty to the redeeming owner.
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Feel free to call with questions:
Richard D. Worsham Vice-President / Texas Region Underwriting Counsel Telephone: 281-362-5860 1900 Saint James Place, Suite 201 Houston, TX 77056 Toll Free: 800.327.7969 [email protected]
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