Illinois Court Orders Developer to Pay Condo Assessments on Unfinished Units

Assessments (or dues) provide the lifeblood for condominium associations so that they can provide necessary services to the unit owners within the association, including the maintenance of common areas such as roads, sidewalks, parking areas, utilities, and elevators. In most condominium associations, the only source of revenue to pay for common elements are these assessments, so when certain unit owners are not paying, the condo association (and potentially the owner unit owners) will suffer.  This is especially true if the developer still owns a significant number of units and is taking the position that it is not required to pay assessments until the units in the condominium are completed.

Recently, the Second District Court of Appeals discussed a situation where a developer argued that, because unsold condominium units that it owned on a vacant lot are not “units” under the operative instruments and Illinois law, it should not have to pay assessments on those units.  The case is Holtgren v. 260 Jamie Lane Condominium Association, 2022 IL App (2d) 210440-U (May 9, 2022), and a more detailed analysis, including the court’s holding, is outlined below.  The Court held that the developer was required to pay the condominium association assessments.

 

Duty to Pay Assessments Under Illinois Law

In Illinois, condominium associations are governed by their declaration, bylaws, articles of incorporation and the Illinois Condominium Property Act (765 ILCS 605/1 et seq.), while common interest community associations (including most homeowners associations) are governed by their declaration, bylaws, articles of incorporation (or organization) and the Illinois Common Interest Community Association Act (765 ILCS 160/1, et seq.). More specifically, under the Illinois Condominium Property Act, it is the “duty” of each unit owner “to pay his proportionate share of the common expenses” (765 ILCS 605/9(a)), and under the Common Interest Community Association Act, a Common Interest Community is defined as “real estate other than a condominium or cooperative with respect to which any person by virtue of his or her ownership of a partial interest or a unit therein is obligated to pay for the maintenance, improvement, insurance premiums or real estate taxes of common areas described in a declaration which is administered by an association.”

As to the developer’s responsibility to pay assessments, Section 9(a) of the Condominium Property Act (765 ILCS 605/9(a)) provides:

“All common expenses incurred or accrued prior to the first conveyance of a unit shall be paid by the developer, and during this period no common expense assessment shall be payable to the association. It shall be the duty of each unit owner including the developer to pay his proportionate share of the common expenses commencing with the first conveyance. The proportionate share shall be in the same ratio as his percentage of ownership in the common elements set forth in the declaration.”

There is no corollary provision in the Common Interest Community Association Act, and so, therefore, developers may have an argument in a traditional homeowners association that it does not have to pay assessments until the units are complete (and maybe even sold) depending on the language of the governing documents for that particular HOA.

 

The Holtgren Decision

In the Holtgren case, Mr. Holtgren was the original developer of the condominium, and drafted the Declaration for the condominium at issue.  For purposes of the decision, the Court found four definitions from the Declaration pertinent: (1) “unit” which was defined as “a part of the property designated and intended for any type of independent use”; (2) a “unit owner” which was defined as “the person or persons whose estates or interests individually or collectively, aggregate fee simple absolute ownership of a Unit”; (3) “common elements” which was defined as  “all portions of the Property, except the units, including the Limited Common Elements [those designated in the declaration or plat of survey as being reserved for the use of a certain unit or units to the exclusion of other units]”; and (4) “common expenses” which was defined as “the proposed or actual expenses affecting the property, including reserves, if any, lawfully assessed by the Board.”

The condominium has 9 units, which are identified in the declaration and other condominium instruments as units A through I.  Each of the 9 condominium units were designated in the Declaration as having a percentage ownership in the condominium between 6.85% and 14.38%.  The Declaration’s provision regarding the payment of assessments is found in Article V, Section A, which stated that “Each Unit Owner shall pay his proportionate share of the Common Expenses *** in the same ratio as his percentage of ownership interest in the Common Elements.” The Court found it important that the Declaration specifies in Section I of Article XV that assessments must be paid even if there is no use by the unit owner of his Unit, and the Association had “no authority to forbear the payment of assessments by any Unit Owner” in Section H of Article XV of the Declaration.

The first five units were sold in 2001, and at the time of the decision, the developer still owned the remaining four “units” as well as “Lot 1,” which was identified as a “Future Building” and is a undeveloped, vacant lot.  At some point, assessments were levied on the four unfinished units owned by the developer, and after the developer failed to pay, the condo association recorded a lien on the units which, in turn, caused the units to not be able to be sold by the developer.

The developer filed the lawsuit in December 2019, and the case was couched as a declaratory judgment action seeking a declaration that no assessments were due on the unfinished units and the lien recorded by the condo association was a slander of title.  The primary argument raised by the condominium association in response to the lawsuit was that neither the declaration nor the Condominium Property Act exclude undeveloped or unfinished condominium units from the responsibility to pay assessments.

The trial court originally granted the condominium association’s motion to dismiss (on at least two separate occasions), and in doing so, found that, because the plat identified all nine units with precise boundaries and the “intended” and independent use of the vacant land were as “units,” the developer had a responsibility to pay assessments on the unfinished units.  Although the recitals to the Declaration stated “[e]ach unit consists of the space enclosed and bounded by the horizontal and vertical planes,” which would insinuate that a unit must have vertical planes (or be constructed) to be considered a unit, the Court found that fact to not be dispositive.  The inclusion of these units in the plat and the Declaration was enough for the Court to hold that assessments were due and owing irrespective of whether the condominium units were constructed.

In doing so, the Court also identified specifically that construction of the units was not included in the Declaration as a condition precedent to paying assessments.  There was no further discussion on the issue, but it appears that there is at least an opening for a developer to argue that it need not have to pay assessments until construction is complete if such a provision is in the declaration.

The Court of Appeals also rejected the developer’s “fairness” argument.  The developer tried to argue that it was unfair to be assessed for units that were not actually receiving any benefits of use of the common elements. The Court also pointed out that it would be “unfair” to the other unit owners if they were responsible for paying the share of assessments due on the developer’s condominium units.  In doing so, the Court stated:

There is simply nothing in either the Act or declaration that allows Holtgren to escape liability for assessments based upon his own nondevelopment of the units.

***

There is nothing in the Act or the declaration to suggest that the other unit owners could be saddled with the additional percentage of assessments in the event of nondevelopment of the remaining units. In fact, section 4(e) of the Act provides that the percentage of ownership interest in the common elements allocated to each unit in the declaration “shall remain constant unless otherwise provided in this Act or thereafter changed by agreement of all unit owners.” 765 ILCS 605/4(e) (West 2018); see Huskey v. Board of Managers of Condominiums of Edelweiss, Inc., 297 Ill. App. 3d 292, 295-96 (1998) (“Common interest ownership goes to the essence of an owner’s property interest in the condominium. The percentage of common interest ownership impacts the unit’s owner’s property taxes, the amount of annual and special assessments, as well as the resale price of the unit.”).

The Court also pointed out that the developer still owned over 50% of the units by percentage and could simply sit back and not developer the units and claim that it did not have to pay assessments under its theory asserted in the case.  For all these reasons, the trial court’s grant of judgment in favor of the association was sustained by the Court of Appeals.

 

Takeaways

The primary takeaway from the Holtgren case is that a developer must pay assessments on any units that it owns after the initial sale regardless of whether they are completed.  However, the Holtgren case does seem to at least open the door for a developer to argue that it need not pay assessments until the units are complete—if the language of the instruments themselves provide for this condition.  The Court did not analyze how a conflict between language in a declaration and Section 9(a) of the Condominium Property Act would be resolved.  Regardless, condominium associations should review the developer provisions in the instruments as soon as possible after turnover of the association and review the payment history (or lack thereof) for the developer.  Thereafter, if the developer refuses or fails to pay its proportionate share of assessments, look to try to collect those assessments in an expeditious manner.  An experienced condominium attorney can provide invaluable guidance to an association if a situation like that outlined in Holtgren occurs.

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.