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. 1 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.” 4 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.