When a developer turns control of an Illinois condominium association over to an owner-elected board, what happens if the reserve account is nowhere near enough to cover looming repairs to the roofs, parking lots, and other common elements? Can the board pursue the developer years later for failing to set aside adequate reserves?
In the case of Bd. of Managers of Weathersfield Condo. Ass’n v. Schaumburg Ltd. P’ship, 307 Ill. App. 3d 614 (1999), a condominium association filed a multiple-count complaint against the developer and other named defendants (“Developer”) for failing to adequately fund and maintain reserves prior to turning over control of the condominium association to a board of managers elected by the owners, and failing to disclose the status of the reserve account.
After the condominium association filed its fourth amended complaint (“Complaint”), the Developer proceeded to file a motion to dismiss the Complaint, arguing, in part, that (a) it did not have a duty to establish a “certain desirable level of reserves,” (b) any duty it had under the Illinois Condominium Property Act “commenced only with the initial sale of condominium units to persons other than the developer,” and (c) the condominium’s declaration “required only an initial funding of reserves from amounts paid by initial purchasers of units from the developer at closing.”
The trial court granted the Developer’s motion to dismiss counts I, II, III, and VI of the Complaint. However, the trial court’s ruling was ultimately reversed by the appellate court, and the case was remanded to the trial court for further proceedings. The Bd. of Managers of Weathersfield Condo. Ass’n v. Schaumburg Ltd. P’ship case serves as an important reminder that developers have a fiduciary duty to fund and maintain adequate reserves.
Background of the Illinois Condominium Reserve Dispute
On December 29, 1980, the Weathersfield Condominium Association (“Condominium Association”) was established by the recording of a “Declaration of Condominium Ownership and Bylaws, Easements, Restrictions and Covenants” (“Declaration” and/or “Bylaws”) for the purpose of providing residential condominium units. After the Declaration was recorded, the property, which consisted of 136 apartment units, continued to operate as an apartment complex until 1992, when the Developer began marketing and selling individual units to home buyers. On November 6, 1993, a turnover meeting was held, and the Developer turned over control of the Condominium Association to the board of managers elected by the owners.
After turnover, the Condominium Association commenced litigation against the Developer, alleging that at the time of turnover, it had only $26,541.17 in capital reserves. The Condominium Association further alleged that at the time of turnover, the roofing system required “major replacement at a cost exceeding $400,000 and that inadequate maintenance was performed on the roofs and parking lots, which required repairs at a cost of $100,000.” The Condominium Association also alleged that the Developer “owed” the Condominium Association “a fiduciary duty to budget, collect and set aside reasonable reserves for capital expenditures and deferred maintenance for the repair and replacement of common elements, including the roofing system and parking areas,” and that the Developer “ failed to establish reasonable reserves for the replacement of capital improvements.”
The Developer responded to the Complaint by filing a motion to dismiss, arguing that the Condominium Association did not properly plead a cause of action against the Developer. The trial court granted the motion, and the Condominium Association filed a timely appeal of the trial court’s ruling.
The Appellate Court Rules in Favor of the Condominium Association
On appeal, the Condominium Association argued that the trial court erred in dismissing its Complaint. The issue for the appellate court to consider was whether the allegations contained in the Condominium Association’s Complaint, when viewed in the light most favorable to the Condominium Association, sufficiently set forth a cause of action against the Developer upon which relief may be granted. As part of its analysis, the appellate court stated as follows:
The affairs of a condominium association are controlled statutorily by the Condominium Property Act (765 ILCS 605/1 et seq.). The Act comprehensively regulates the creation and operation of Illinois condominium associations…Section 9(a) of the Act outlines the duties of the developer and unit owner regarding the payment of common expenses as follows: “It shall be the duty of each unit owner to pay his proportionate share of the common expenses. It shall be the duty of the developer to pay a proportionate share of the common expenses for each unit which has not been sold by such developer. The proportionate share shall be in the same ratio as the percentage of ownership in the common elements set forth in the Declaration.” 765 ILCS 605/9(a).
The appellate court also cited Section 2 of the Condominium Association’s Bylaws, which states, in pertinent part, as follows:
The board shall establish and maintain a reasonable reserve for contingencies and replacements
Moreover, the appellate court cited Section 9(c)(2) of the Illinois Condominium Property Act, which requires, in pertinent part:
All budgets adopted by a board of managers on or after July 1, 1990 shall provide for reasonable reserves for capital expenditures and deferred maintenance for repair or replacement of the common elements
Here, the appellate court found that from 1980 through November 6, 1993, the Developer “knew” that the “capital improvements of the Association, including the roofs and parking areas, were reaching the end of their useful life and by 1993 needed to be replaced.” The appellate court further found that the Developer “failed to maintain adequate reserves for repair of the common areas” and the Developer “should have known” that the Condominium Association’s “obligations could not be met without an adequate contribution of reserve funds.” The appellate court opined that the Developer’s duty to fund reserves began in 1980, the year the Condominium Association’s Declaration was recorded; and the “what constitutes reasonable reserves in the instant case should be determined by the trier of fact.”
The appellate court went on to state that “the facts here establish that $26,000 is an unreasonably small amount in relation to the needs of the Association.” The appellate court continued by stating that the Developer “had a fiduciary and statutory duty to maintain adequate reserves and to disclose the status of the reserve account.” Therefore, the Appellate Court reversed the trial court’s ruling dismissing the Condominium Association’s Complaint and sent the case back to the trial court for further proceedings consistent with the appellate court’s findings.
Why This Case Matters for Illinois Condominium Associations
Having adequate reserve funds is crucial to cover future maintenance, repair, and/or replacement of the common elements (such as roofs, elevators, parking areas, HVAC and plumbing systems, etc.). In addition, having adequate reserves may alleviate the need to impose special assessments and helps to maintain and enhance property values. Condominium associations should ensure that the developer has adequately funded reserves prior to turnover. The reserve amount should be reasonable, taking into account factors such as the property’s size, number of units, amenities, and current condition.
At Hirzel Law, PLC, we regularly assist condominium associations in disputes with developers over the adequacy of reserve funding. If your condominium association would like assistance in determining whether the developer-funded reserves are reasonable or whether additional action is needed, please contact our office.
