There are certain circumstances where the best interests of a condominium is to change from a condominium structure to a rental structure for the building or buildings. One common reason given is the market at that time favors rental units over condominiums, especially if financing is difficult to obtain for prospective purchasers. Other issues may also drive this decision, including where the condominium building is too expensive or too difficult to maintain for a condominium association. In these situations, the aggregate value of the condominium building may exceed the sum of its parts (the units), and a sale will maximize the return for the individual unit owners.
If the condominium deconversion option is decided upon, a purchaser is located, and the unit owners vote in favor of it, the condominium building(s) will no longer be subject to the Condominium Property Act and the condominium declarations and bylaws, and the “condo” units will become “apartment” units that will not be able to be sold individually. This process is commonly referred to as a condominium deconversion or a “bulk sale” of the individual condominium units. By most accounts, Illinois and Florida lead the nation in condominium deconversions, and as far as Illinois is concerned, one of the driving factors is that there are many condominium buildings that are older (including former apartment buildings that were converted to condominiums), and the cost to maintain these buildings can be extremely high. In recent years, large condominium deconversions in Illinois have taken place, including a $94 million deconversion of a 924-unit condominium comprising 154 buildings in Des Plaines[i] and a $107 million deconversion of a 391-unit condominium in Chicago’s Gold Coast.[ii]
In its simplest form, as said above, the deconversion of a condominium transforms a condominium building into an apartment building. In Illinois, Section 15 of the Condominium Property Act outlines the deconversion process, which will involve an actual sale of the condominium units and will officially remove the condominium from the Condominium Property Act. In addition to the provisions of the Condominium Property Act, the condominium declaration covering the condominium may have procedures for deconversion that are not specifically outlined in the Act, so the process may be different based on the language of that document. This article will explore the general procedure for de-converting a condominium in Illinois, as well as outlining how or when a unit owner may object to that process. If deconversion is explored, the language of the condominium declaration should be reviewed in depth and counsel retained to assist with the process.
Deconversion Voting Process Under the Condominium Property Act
Section 15 of the Condominium Property Act governs the deconversion process for a condominium. However, for years, condominium associations and unit owners have read Section 18(b)(13)(iii) of the Condominium Property Act as detailing an initial step that must be taken by a condominium association—a two-thirds’ majority of the unit owners in the condominium affirmatively voting to initially explore the possibility of a condominium deconversion. Because not every condominium association would seek a vote of the unit owners before exploring a deconversion, that issue was brought to the forefront in recent years in both a proposed bill before the Illinois Senate and a subsequent appellate decision. First, in 2020, Illinois State Senator Sara Feigenholtz introduced Senate Bill No. 3731 which sought to add into Section 18.4 of the Condominium Property Act a provision that stated that a condominium board could not even investigate an offer to purchase the condominium property, or list the property for sale, without an initial 75% vote of the unit owners. However, that bill did not pass. Then, in 2022, the First District Appellate Court in Glazer v. Priv. Residences at Ontario Place Condominium. Ass’n, 2022 IL App (1st) 210156, ¶ 39 held that a condominium board does not need to obtain unit owner approval “before taking action to investigate or negotiate a bulk sale.” Therefore, under the current state of Illinois law, unit owners are only required to vote after a potential purchaser of the units is located.
Assuming an offer is obtained to sell the condominium, the next step would be to seek the aforementioned approval of the sale from the unit owners. The minimum percentage needed to vote for a deconversion is unanimous consent if the condominium has less than two units, a two-thirds majority of the condominium if it has three units, and at least a three-fourths majority if the condominium has four or more units. Importantly, as said above, these percentages can be increased by the language of the condominium declaration, and therefore, it is critical that if a deconversion is being considered, that the language of the declaration be reviewed. Additionally, there is a chance that the local municipality has regulated the condominium deconversion process as well. For example, by ordinance (13-72-085), the City of Chicago requires an 85% affirmative vote in favor of a deconversion, and the impact of that ordinance is that if the condominium building has 6 or fewer units, unanimous consent will always be required.
Voting in favor of selling the condominium units to a potential purchaser will be done by the percentage of value assigned to the various units (or, in other words, the percentage owned by the unit owners in the common elements within the condominium). Therefore, if one unit owner owns 10% of the condominium building in the declaration, while the other units all are assigned a value of 5%, the unit owner with a 10% interest will have voting power equal to twice as much as any other unit owner. Section 18(p) of the Condominium Property Act does provide an exception to this rule, and that is, if parties that make up 30% or less of the units in the condominium by number own more 50% of the votes for the condominium, the percentage needed to vote on the deconversion must be done by the number of units and not the percentage owned within the condominium. An example of this is the situation where an eight-unit building has two penthouses that combine to make 51% of the condominium by percentage, but only 25% of the units. In that situation, all eight unit owners would have an equal vote related to the possible deconversion.
Objecting to Condominium Deconversions Under Illinois Law
When the provisions of the condominium declaration and the Condominium Property Act are followed, and the requisite number of votes are obtained, there is not much that a dissenting unit owner can do to stop a deconversion from happening. However, as of the 2018 amendments to the Condominium Property Act, there is also a process for an objecting condominium unit owner to maximize its recovery from any deconversion if it disagrees with the price obtained by the condominium association. If a unit owner wishes not to vote in favor of the deconversion, that unit owner must file a written objection to the board of managers for the condominium association within 20 days of the date of the meeting where the sale/deconversion was approved.[iii] That objecting unit owner would then be entitled to receive from the proceeds of any sale, the greater of the value of its interest (as determined by an appraisal) less the amount of unpaid assessments or amounts due, or the outstanding balance of any debt secured by the unit owner in acquiring or refinancing the condominium unit less the amount of unpaid assessments or amounts due. Additionally, the objecting unit owner is also entitled to receive, from the proceeds of the sale, reimbursement for “reasonable” relocation costs, which are determined by regulations promulgated under the Uniform Relocation Assistance and Real Property Acquisition Policies Act of 1970.
The Condominium Property Act also discusses what happens if there is a disagreement as to the value of a unit owner’s interest. In that situation, both the unit owner and the prospective purchaser designate appraisal experts, and the parties then work together to designate a third expert. These three experts then form a panel, and two of the three must vote an agree on a value of the particular interest.
Concerns For a Condominium Board in The Deconversion Process
If a condominium board decides to explore a deconversion, it is important for that board to remember that it owes fiduciary duties to the unit owners during the entire process. Those fiduciary duties were brought to the forefront in the 2020 case of Kai v. Bd. of Directors of Spring Hill Bldg. 1 Condominium. Ass’n, Inc., 2020 IL App (2d) 190642, ¶ 35, 171 N.E.3d 42, 54, appeal denied sub nom. Kai, 159 N.E.3d 974 (2020). In the Kai case, the board decided to move forward with a deconversion of a condominium made up of 6 buildings in Roselle. Certain members of the board had bought a large percentage of the units in the condominium and moved forward with a bulk sale to an entity that was primarily owned by those unit owners. As a matter of fact, one entity made up of three individuals owned all of the units in buildings 2 and 3, a majority of the units in building 1 and more than 75% of the units in buildings 4, 5, and 6. The board for four of the buildings in the condominium, and the master association, was made up of three individuals who were part of the entity that was to bulk purchase the condominium units. The plaintiffs, who were individual unit owners not part of this group, filed suit against the board members for breach of fiduciary duty and to rescind (or undo) the deconversion sale. After the minority unit owners were unsuccessful at the trial court level, the appellate court overturned the decision and held specifically that: (1) the board members owed a fiduciary duty to the unit owners regarding the deconversion process, which include common-law duties of fidelity, loyalty, and care and these duties could be impacted by the board members’ self-dealing; (2) rescission was not an available remedy because the plaintiffs had already moved and incurred expenses in relation to a new home; and (3) punitive damages may be available if the plaintiffs are ultimately successful.
As of the date of publication of this article, another case is pending in the Eastern District of California (Glazer v. The Private Residences at Ontario Place Condominium) claiming that the board of directors breached their fiduciary duties to the unit owners in relation to deconversion of a condominium in the Gold Coast. That case, filed by two unit owners who happen to live in California, seeks to stop the bulk sale of 467 condominium units for over $180 million—which would be the largest condominium deconversion in Chicago’s history. There, the primary claim is the lack of transparency between the board and the unit owners and the manner in which votes were tabulated to reach the aforementioned 85% threshold required to bulk sell a condominium in Chicago.
The main takeaway from the Kai and Glazer cases is that fiduciary duties should be considered at every stage of the deconversion process and information freely provided to the unit owners so that claims such as these against the individual board members are avoided.
Conclusion
The process for de-converting a condominium in Illinois can be daunting, but the process can also be rewarding and maximize the return for unit owners within a condominium. As recent Illinois cases state, if a condominium board decides to explore a deconversion, it is important for that board to remember that it owes fiduciary duties to the unit owners during the entire process. Additionally, if you are a unit owner that is unhappy about the process, or the amount to be received as part of the sale, there are steps that can, and should, be taken to preserve your rights and maximize any payment to come from the sale. The experienced attorneys at Hirzel Law can assist with the process and answer any questions that may arise during the process.
The attorneys of Hirzel Law, PLC focus their practice on condominium and homeowners association law in addition to real estate law. Our attorneys have extensive litigation and trial experience in state and federal courts involving commercial litigation issues and real estate matters. We stand by our clients, offering quality legal representation and promptly responding to our clients’ needs. Contact Hirzel Law online or call 312-552-7669 to learn how our Illinois attorneys can help.
[i] https://rejournals.com/illinois-largest-condominium-deconversion-by-units-trades-in-des-plaines/
[ii] https://therealdeal.com/chicago/2020/01/16/esg-kullen-lands-big-loan-on-priciest-chicago-condominium-deconversion-ever/
[iii] Legislation was introduced in 2021 to change the time period for an objecting unit owner from 20 to 30 days, but as of the date of publication of this article, that legislation has not passed.
