A condominium association’s board of directors has a seemingly endless list of responsibilities, but one of the most important – at least in terms of its impact on the membership – is the adoption of an annual budget. In simple terms, adopting a budget requires the board to balance two competing realities: (1) the association’s “legal” obligation to collect enough money to properly insure, maintain and administer the condominium, and (2) the board’s “practical” desire to minimize the financial burden that assessments place on the co-owners. This balancing act is made even more difficult by the fact that “association” costs have increased rapidly in recent years. To achieve an appropriate balance, boards of directors need to effectively control the association’s expenditures to offset these increasing costs. Stated differently, boards of directors of condominium associations must find ways to fulfill the association’s obligations without increasing assessments to the point where co-owners can’t or won’t be able to pay them. The board’s job would be much easier if it had an endless supply of money to work with; but realistically, this is never the case because there’s a limit to how much the co-owners can or should be expected to pay. Since the association’s income is essentially capped, the board’s ability to fulfill its obligations will depend on its ability to control the association’s expenditures.
A condominium association’s expenditures are determined by answering two simple questions: (1) which maintenance obligations are assigned to the association; and (2) how much does it cost to fulfill each of these obligations? In general, since condominium associations pay third parties to insure and maintain their projects, the board’s ability to control these costs is rather limited. If an association can’t afford to undertake a specific maintenance or repair project, the board must either (1) increase assessments and delay the repairs until it has the money to perform them or, alternatively, (2) reduce the scope of the repairs to only those that are urgently needed. Neither of these options will reduce or eliminate expenditures; it merely defers them to a later date.
There is, however, a third approach: instead of constantly searching for ways to reduce the costs associated with the association’s obligations, boards of directors should explore ways to reduce the obligations. This article explains how associations can save money by amending their condominium documents to reallocate insurance and maintenance responsibilities between the association and the co-owners in ways that are more efficient and less expensive.
The Michigan Condominium Act (the “Act”), MCL 559.101, et seq., does not require a condominium’s insurance and maintenance responsibilities to be assigned in any specific manner; instead, it leaves the assignment of these responsibilities to the condominium documents. In other words, the condominium documents can essentially allocate insurance and maintenance responsibilities between the association and the co-owners as they see fit – which means they can also be amended to reallocate these responsibilities.
For example, in an “attached” condominium, the condominium documents typically define the “common elements” as being comprised of the land upon which the condominium is situated (e.g., roads, parking areas, open space areas, and common amenities such as a pool or clubhouse), the building roofs, exterior walls, foundations and attic spaces, elements of building construction (e.g., support beams, framing, insulation, and shared utility pipes, wires and conduits), and the unfinished drywall and subfloors that form each unit’s perimeter boundaries. Conversely, a “unit” is typically described as consisting of everything located within the unit’s unfinished perimeter drywall and subfloors (e.g., wall coverings, floor coverings, framing and drywall used to create interior partition walls and closets, and appliances, fixtures, equipment and trim).
In many instances, the condominium association is responsible for insuring and maintaining the common elements, while the co-owners are responsible for insuring and maintaining their units and personal property. From there, the condominium documents often include various exceptions to this general rule. For example, these responsibilities are frequently modified by provisions in the condominium documents that:
Assign responsibility to the association for maintaining, repairing and replacing the common elements, together with the responsibility for any “incidental damage to a unit caused by the common elements or by the association’s maintenance, repair or replacement thereof.”
Require the association to insure the common elements, as well as “the interior walls and any fixtures, equipment and trim within each unit that were provided as standard features of the unit as originally constructed and sold by the project’s developer.” If the condominium documents assign insurance responsibilities in this fashion, they will typically assign the responsibility for maintaining, repairing and replacing the interior walls, fixtures, equipment and trim within each unit to the association “but only to the extent such maintenance, repair or replacement is covered under the association’s insurance policy.” Thus, in non-casualty situations, these responsibilities are assigned to each co-owner, while in casualty situations, they are assigned to the association.
Assign the “cost” of maintaining, repairing and replacing any “limited” common elements (such as porches, patios, balconies, and exterior windows and doors) to the co-owner of the unit to which these items are assigned. In these instances, the association is still responsible for performing any maintenance to or any repair or replacement of the limited common element, but the costs it incurs in doing so will be specially assessed to the specific unit to which the limited common element is assigned.
Assign liability to the responsible co-owner for any “costs” incurred by the association to maintain, repair or replace a common element if the need to perform such maintenance, repair or replacement is the result of “negligent damage to or misuse of the common element by the co-owner or the co-owner’s family, guest or invitee.” Here again, in this instance, the association is still responsible for performing any such maintenance, repair or replacement, but the costs it incurs in doing so will be specially assessed to the co-owner responsible for the damage; provided, however, the association can establish “negligence” on the part of the co-owner (or the co-owner’s family members, guests or invitees).
Since the common elements are collectively owned by all co-owners, it is often assumed that the responsibility for insuring and maintaining them must be assigned to the condominium association; however, the Act contains no such requirement. In other words, there is nothing that prohibits allocating responsibilities for the common elements to the co-owners. Under Sections 69(1) and (2) of the Act, all expenses associated with maintaining “limited” common elements are assessed to the unit to which the limited common element appertains, “except to the extent that the condominium documents provide otherwise.” Subsection (3) of this same provision goes on to state:
The amount of all common expenses not specially assessed under subsections (1) and (2) shall be assessed against the condominium units in proportion to the percentages of value or other provisions as may be contained in the master deed for apportionment of expenses of administration. (Emphasis added)
In simple terms, under these provisions, the association is not required to assess the expenses it incurs for maintaining the common elements against all units in the condominium – these expenses can be assessed against specific units, as long as the method of allocation is adequately described in the condominium documents.
Similarly, the Act does not require the condominium documents to allocate the responsibility for insuring and maintaining the common elements to the association. Instead, under Section 54(4) of the Act, any “costs incurred” by the association relative to the common elements are “expenses of administration” and, as a result, they are subject to any restrictions and requirements in the Act that apply to “expenditures affecting the administration of the project.”
In short, the Act allows the condominium documents to allocate maintenance responsibilities for common elements to individual units. If the responsibility for a common element is assigned to a specific unit, the costs will be “incurred” by the co-owner of the unit – not the association – and, therefore, the costs are not “expenses of administration.” If the responsibility is assigned to the association, the maintenance costs will be deemed “expenses of administration;” however, even then, under Section 69(3) of the Act, expenses of administration can be allocated to specific units, as long as the method of allocation is adequately described in the condominium documents.
For the most part, the common elements affect more than one unit in the condominium, so it makes sense for the association to retain the responsibility for insuring and maintaining them. For example, in an “attached” condominium, multiple units share each building’s foundation, roof, exterior walls/siding, and other elements of construction that surround each unit or separate one unit from another. Thus, the units rely on these structural components for support, and they share common pipes, wires and ducts for their utilities.
As a practical matter, it isn’t feasible to make individual co-owners responsible for separately insuring and maintaining “parts” of these shared systems, not to mention the fact that it’s generally not a good idea for co-owners to be responsible for maintaining common support systems, utilities, or any other common element that directly impacts other units. There are, however, common elements that primarily service and affect only one unit; namely, perimeter wall and ceiling drywall, windows and entry doors. As a result, associations can reduce their expenditures by making co-owners responsible for insuring and maintaining items that primarily affect their own units, such as windows, entry doors and drywall, while retaining the responsibility for common elements that affect multiple units, such as foundations, roofs, attics, exterior walls, and items of construction surrounding the units (e.g., perimeter framing, ceiling joists and subfloors/floor joists). Reassigning responsibilities for common elements to the co-owners helps control assessment levels because insuring and maintaining these items will no longer be the association’s responsibility (and, thus, the costs for maintaining and repairing them will no longer be included in the association’s budget).
In the end, the co-owners of the condominium pay all insurance and maintenance costs – they separately pay the costs assigned to their individual units, and they collectively pay the costs assigned to the association via their payment of assessments. This begs the question: does reassigning these responsibilities from the association to the co-owners “artificially” reduce the rate of assessments? In other words, does amending the condominium documents actually lower costs, or are the co-owners simply trading payments to the association for payments to their own contractors? The answer is found by examining how property within a condominium is insured.
Reallocating the parties’ maintenance responsibilities goes hand-in-hand with “realigning” their insurance obligations. Simply stated, co-owners should insure property they are responsible for maintaining, while the association should insure property it is responsible for maintaining. In general, insuring property through individual unit policies saves money because it (1) lowers combined premium costs, (2) reduces deductibles, and (3) reduces the impact that claims have on insurance costs. Moreover, at least to some degree, most claims against an association’s insurance policy involve damage to or the repair of perimeter wall and ceiling drywall (and related items such as cabinets and fixtures ). As a result, insuring these items under the association’s policy can account for 20-30% of the association’s insurance premium.
At the same time, most condominium documents require the co-owners to insure their units and contents – and if this requirement does not already exist, it can be easily added when the condominium documents are amended. Condominium units are typically insured by a “HO-6” insurance policy, and standard HO-6 policies provide coverage against damage to the general common element perimeter wall and ceiling drywall that services the insured unit. As a result, if the association is responsible for insuring these items, the co-owners are paying for coverage under both policies – once for coverage under the association’s policy, and once for coverage under their respective HO-6 policies – and it generally costs more to insure these items under the association’s policy. In short, both the association and the co-owners can reduce their insurance costs by simply removing coverage for perimeter wall and ceiling drywall from the association’s policy. Moreover, asserting claims against a unit’s HO-6 policy often has little or no effect on the policy’s premium, whereas asserting just one claim against the association’s commercial policy can cause the policy’s premiums to increase. In addition, the deductible amount that applies to claims under a HO-6 policy is generally less than $1,000.00, whereas the deductible under the association’s commercial policy are typically anywhere from $5,000.00 to $20,000.00. Since a policy’s deductible represents the amount the insured is “self-insuring” (i.e., the out-of-pocket repair costs the insured must incur before coverage under the policy kicks in), having a lower deductible reduces the overall out-of-pocket costs associated with the repair.
Unless the condominium documents were recently revised, they probably require the association to insure the fixtures, equipment, trim and interior walls within each unit. If so, the association will also typically be responsible for repairing these items “to the extent any damage is covered under the association’s policy.” In other words, when insurance responsibilities are assigned in this fashion, the association is responsible for repairing fixtures, equipment, trim and interior walls within each unit in casualty situations, while the co-owner of the unit is responsible for maintaining and repairing these items in all other (i.e., non-casualty) situations.
Limiting the association’s repair responsibilities for these items “to the extent” the damage is covered under the association’s policy is designed to insure that the association does not incur any out-of-pocket costs to repair items that are ordinarily the co-owner’s responsibility (i.e., the association repairs these “co-owner” items using the benefits paid under its policy relative to these items; and if the benefits aren’t enough to cover 100% of the repair costs, the co-owner is responsible for the difference). Thus, in theory, repairs to “co-owner” items should not increase the association’s out-of-pocket repair costs (i.e., they should not increase association’s budget), since its liability is limited to the amount of the benefits it receives under its insurance policy; however, in reality, these “shifting” responsibilities cause significant confusion and create out-of-pocket expenditures (i.e., increasing the association’s budget) because the association must pay for things like (1) an opinion from legal counsel clarifying each party’s respective responsibilities, and (2) the costs associated with coordinating the completion of the repairs and/or collecting reimbursement from the responsible co-owner. Since the fixtures, equipment, trim and interior walls within each unit are ordinarily the co-owner’s responsibility, there’s no compelling reason for “shifting” these responsibilities to the association simply because the damage was caused by a “casualty” event.
Along these same lines, the condominium documents will often bifurcate repair responsibilities when damage to a unit is “caused by the common elements or by the association’s maintenance, repair or replacement of the common elements;” specifically, while the co-owner is ordinarily responsible for repairing the unit (and all costs relating thereto), this responsibility “shifts” to the association when the damage is “caused by” the common elements. This “shift” occurs regardless of whether the damage is covered under the association’s policy, which means in all instances where damage to a unit is “caused by” the common elements, the association will incur out-of-pocket expenses that are ordinarily the co-owner’s responsibility. These provisions frequently lead to disputes over whether the damage was “caused by” a common element. For example, if lightning strikes the building and creates a hole in the common element roof, does the resulting water damage fit within the definition of damage that was “caused by” the common elements? In other words, was the damage “caused by” lightning, or was it “caused by” the roof?
Similar disputes can arise over whether the “unit” suffered damage. For instance, since condominium documents typically define the “unit” as “all that space contained within the finished unpainted surfaces of perimeter walls and ceilings and from the interior of the finished subfloor . . . and as shown on the condominium subdivision plan,” is damage to paint, carpet, fixtures, trim, etc., considered damage to the “unit” which are now the association’s responsibility (these co-owner items are not described in the master deed or shown on the condominium subdivision plan), or is this considered damage to the contents of the “unit” which remains the responsibility of the co-owner.
Here again, the association may be forced to incur the time and expense of having legal counsel determine each party’s responsibilities based on the specific facts applicable to each case, as well as the time and expense of litigation if the co-owner challenges counsel’s interpretation. Compounding this problem is the fact that there are so many factors that go into determining each party’s repair responsibilities, the answer is not always clear. Because of this uncertainty, “incidental damage” disputes are more likely to (1) require a legal interpretation, and (2) evolve into litigation – which means “incidental damage” claims are more likely to increase the association’s budget.
In short, amending the condominium documents to eliminate these “shifting” responsibilities not only eliminates the need to spend association funds to repair “co-owner” items, it eliminates the expenditures associated with disputes over whether and/or to what extent these responsibilities will shift from the co-owner to the association.
The goal of amending the condominium documents in the ways described above is to align the respective repair responsibilities of the association and the individual co-owners so that, to the extent possible, each party is always responsible for repairing its assigned property – regardless of the cause of the damage. There is no end to the number of different unique scenarios that can cause damage to property within a condominium. Aligning these responsibilities in this fashion eliminates the time, expense and inconvenience of having to determine each party’s obligations on a case-by-case basis, with one key exception: the responsibility for the cost of repairing damage to the common elements will “shift” to the co-owner in instances where the damage was “caused by” the co-owner.
Nearly all condominium documents contain language that imposes financial liability on co-owners who cause damage to the common elements or another unit. For example, older condominium documents typically require co-owners to reimburse the association’s out-of-pocket expenses for repairing “negligent damage to or misuse of the common elements.” In this instance, these costs will not “shift” unless the co-owner was “negligent” or they “misused” the common elements. As you might expect, the parties frequently dispute whether the co-owner’s conduct reaches the point at which common element repair costs become the co-owner’s responsibility.
As an initial matter, it should be noted that these types of “fault” provisions do not affect the association’s responsibility to perform the repairs – the only question is whether the at-fault co-owner is responsible for reimbursing the association’s out-of-pocket repair costs. Thus, even when the damage is “caused by” the co-owner (as such “fault” is defined in the condominium documents), the association will still perform its assigned repairs. After hiring and paying the contractor, the association will assess its out-of-pocket costs to the at-fault co-owner’s unit.
In many instances, it is difficult to establish negligence or misuse, which means all co-owners end up sharing the repair costs, even though the damage may have been “caused by” the actions of one co-owner. These problems can be resolved by amending the condominium documents to make co-owners “strictly liable” for any damage they cause. Specifically, the amendment would provide that co-owners are responsible for maintaining any fixtures, equipment and appliances within the unit, as well as the cost to repair any damage to the common elements caused by an item the co-owner is responsible for maintaining – regardless of whether the co-owner’s actions reached the level of “negligence” or “misuse.”
A common example is damage resulting from a leak in a water line that services an ice maker in the co-owner’s refrigerator. In most instances, co-owners do not routinely inspect or maintain these water lines, and a slow leak may go unnoticed for quite some time because it is hidden behind the refrigerator – that is, it goes unnoticed until the damage manifests itself in the unit below. Clearly, this water line is a co-owner responsibility, and just as clearly, the failure of the water line caused the damage; however, there mere fact that the leak occurred does not mean the co-owner was “negligent” or that they “misused” the common elements (and proving that the co-owner’s actions constitute “negligence” or “misuse” can be extremely difficult).
Holding co-owners strictly liable for repair costs when the damage is caused by a co-owner item creates a “bright line” test for establishing the parties’ respective responsibilities. Once again, it allows the association and the co-owners to avoid the time, expense and inconvenience of legal opinions and lawsuits, and it prevents these costs from being shared by all co-owners (since they are more properly assessed to the co-owner responsible for the water line).
The fact of the matter is, the co-owners pay all costs for insuring and maintaining all common elements within a condominium – the only question is: are the expenses being paid using funds that are collected from all co-owners via their payment of assessments, or are they being paid individually by each co-owner. It often makes sense to shift some of these common element responsibilities from the association to the individual co-owners; otherwise, all co-owners effectively become the “insurers” of each co-owner’s property and/or actions.
Reallocating responsibilities fairly rewards co-owners who properly insure and maintain their property and who don’t cause damage, while at the same reducing maintenance costs. It also creates greater stability and predictability in terms of adopting the association’s budgeting by eliminating unknown contingencies associated with potential liability for repairs that are ordinarily each co-owner’s responsibility. As a result, in most condominiums, realigning insurance and maintenance responsibilities in this fashion will reduce the overall cost of administering, insuring and maintaining the project.