What Happens When a Failure to Maintain an Illinois Condo Leads to Distressed Condominium Property Status Under the Illinois Condominium Property Act?

What Happens When a Failure to Maintain an Illinois Condo Leads to Distressed Condominium Property Status Under the Illinois Condominium Property Act? 

Unfortunately, there are times in which issues within a condominium can lead to a determination that the condominium is “distressed.”  The Condominium Property Act contains provisions that outline what can happen in a situation like that, and provides for certain avenues to try to remedy some of the issues.  This article will outline what happens in that unfortunate situation where a condominium becomes distressed. 

What is a Distressed Condominium? 

The Condominium Property Act (the “Act”) defines the term as a “distressed condominium property.”  Under the definition in the Act (765 ILCS 605/14.5), a distressed condominium property that is operated in a manner or has conditions that may constitute a “danger, blight, or nuisance to the surrounding community or to the general public.”  Additionally, the condominium must have 2 or more of the following 6 conditions: 

1. 50% or more of the condominium units are not occupied by persons with a legal right to reside in the units;
2. the building has serious violations of any applicable local building code or zoning ordinance;
3. 60% or more of the condominium units are in foreclosure or are units against which a judgment of foreclosure was entered within the last 18 months;
4. there has been a recording of more condominium units on the parcel than physically exist;
5. any of the essential utilities to the parcel or to 40% or more of the condominium units is either terminated or threatened with termination; or
6. there is a delinquency on the property taxes for at least 60% of the condominium units.

What Happens if a Condominium is Potentially “Distressed”? 

If a condominium is distressed, the local municipality (usually the city or the village where the condominium is located) files a complaint in the circuit court.  That complaint must be filed in the county where the condominium is located and contain allegations to show why the condominium is distressed under the criteria outlined above. 

The lawsuit must name each owner in the condominium, and each owner must be served just like any other lawsuit that would be filed.  This is potentially a difficult process, especially if there are a large number of units, or a large number of units that are not occupied.  Third-parties who may have interest in the condominium, including mortgagees, judgment creditors, lien claimants and tax purchasers, must also be provided notice by personal service or by certified mail. 

After service is complete, there will be a hearing before a judge.  Under the Condominium Property Act, the court should set the hearing in an expedited manner and the hearing regarding whether the condominium is distressed is supposed to take precedence over other matters pending before that judge. 

If the judge determines that the condominium is distressed, the judge can order the appointment of a receiver.  Any court-appointed receiver will have the authority to perform various tasks, including, but not limited to, securing the property, entering into leases with tenants, collecting rent, procuring insurance, entering into contracts, paying taxes levied against the condominium, maintaining utilities and making repairs to the property.   The receiver can also perform a feasibility study on the condominium, which is important for the next few paragraphs of this article. 

If the court finds that the condominium is not viable as a condominium (usually as the result of a feasibility study), then an order can also be entered that declares that the building is no longer a condominium and that each unit owner owns the property in common with the other owners based on the percentage interest outlined in the previous condominium declaration.  It is a very difficult process to understand and implement because the previous liens and recorded interests stay on the property as well. 

If that step is taken (to declare the property no longer a condominium), more than likely, the judge will also allow the receiver to enter into a contract to transfer title to the entire property.  Once this happens and a sale is consummated, then, after payment of the receiver’s fees, the remainder of the funds will be placed in an escrow account segregated based on the percentage ownership of each unit owner.  As an example, if there are 20 units each owning 5% of the condominium and the property is sold for $1 million, then each unit owner’s segregated account will include $50,000 (after the payment of receiver fees).  The distribution from these segregated accounts will happen in the following order:  (1) taxes owned by the unit owner; (2) liens attributed to the unit owner; and (3) any excess, back to the unit owner. 

In Chicago, distressed condominiums are a part of the Troubled Building Initiative and have been since 2008.  Under the Troubled Building Initiative, the City of Chicago utilizes the building court to appoint receivers and tries to work with owners and lien claimants (where appropriate) to obtain a positive result for all parties involved.  Information about the Troubled Building Initiative can be found on the City of Chicago’s website at the following web address: https://www.chicago.gov/city/en/depts/doh/provdrs/developers/svcs/tbi.html. 

Conclusion 

The distressed condominium process is not a process that is utilized very often, and is, in many instances, truly a forced deconversion where the unit owners’ interest will, more than likely, be lessened by receiver costs and other fees.  However, there are situations where it is a necessary evil especially if the condominium association is not handled correctly or where unit owners cannot afford to keep the condominium active and alive.  If a condominium association is in distress, or close to it, hiring an attorney to investigate all the available options is a smart choice, and the experienced attorneys at Hirzel Law, can assist in trying to formulate a plan with the board at an early stage before a lawsuit is filed. 

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.