One of the bills passed by the Arizona Legislature during its recently completed session was House Bill 2299 ('HB2299') which amends the Condominium Act and the Planned Communities Act. HB2299 was signed by Governor Symington on April 20, 1996, and will become effective on July 20, 1996.

HB2299 makes several important changes to the Condominium Act and the Planned Communities Act. Every condominium association and planned community association needs to become familiar with the provisions of I-IB2299 and take the necessary action, including changing some existing procedures and developing new ones, so that the association is fully prepared to comply with the requirements of HB2299 as soon as it becomes effective.

HB2299 amends § 33-1804 of the Planned Communities Act to require a meeting of the members to be held at least once each year, to specify who may call a special meeting of the members and to provide for the manner in which notice of the meeting is to be given to the members. The amendments to § 33-1804 with respect to the manner in which notice of meetings of members is to be given to the members control in the event that there are no notice provisions in the articles of incorporation and bylaws of the association that specify the manner in which notice is to be given to the members. Since most articles of incorporation or bylaws of community associations contain provisions specifying the manner in which notice of meetings of members is to be given, the changes should not affect most planned community associations.

Although meetings of the board of directors of a condominium or planned community association have been required to be open to the members since 1994, there has been no legal requirement that the association provide notice of meetings of the board of directors to the members of the association. HB2299 amends both the Condominium Act and the Planned Communities Act to state that unless otherwise provided in the articles or bylaws of the association, notice of all meetings of the board of directors that are held after the termination of declarant control of the association must be given to the unit owners by newsletter, conspicuous posting or any other reasonable means as determined by the board of directors. Notice is not required if emergency circumstances require action by the board before notice can be given. Any notice of a board meeting must state the time and place of the meeting. If notice is to be given by other than newsletter or conspicuous posting, we recommend that the board of directors adopt a resolution setting forth the reasonable means by which notice of the board meetings is to be given to unit owners.

HB2299 permits an association to include in its articles of incorporation or bylaws the way notice of board meetings will be given to the members. By including such provisions in the articles or bylaws, the association can avoid any dispute about whether the association had complied with the somewhat vague and uncertain requirements for the giving of notice contained in HB2299. While bylaws are generally easier to amend than articles of incorporation, amendments to bylaws in many associations require a vote of the members. Therefore, it may not be possible for an association to amend its articles of incorporation or bylaws prior to July 20, 1996. An association may nevertheless want to consider proceeding with an amendment as soon as possible, so that the notice provisions of the articles or bylaws for giving notice of meetings of the board of directors to the members will control over the otherwise applicable requirements of HB2299.

HB2299 provides that an affidavit of notice by an officer of the association is prima facie evidence that notice was given as prescribed by law. Thus, regardless of the manner in which the association decides to provide notice of board meetings to the unit owners, an officer of the association should execute an affidavit of notice with respect to each meeting of the board (other than emergency meetings for which notice to the unit owners is not required), stating the manner by which notice of the meeting was given. This affidavit should be attached to the minutes of the meeting.

HB2299 makes significant changes to the provisions of the Condominium Act and Planned Communities Act requiring certain documents and information to be furnished to the purchaser of a unit. These requirements pertain only to the resale of units. They do not apply to the initial sale by a developer. Currently, the Condominium Act and Planned Communities Act require the seller to provide certain documents and information to the purchaser and provide that the purchaser may waive the purchaser's right to receive the documents and information. HB2299 amends the Condominium Act and the Planned Communities Act to provide that the seller must furnish the documents and information if the project has fewer than 50 units but that the association must provide the documents and information if the project has 50 units or more. The purchaser may not waive this requirement.

The documents and information which must be furnished to the purchaser is set forth in § 33-1260 (for the Condominium Act) and § 33-1806 (for the Planned Communities Act). The information to be provided is the same whether the unit is in a condominium or a planned community. The association is required to provide the purchaser with copies of the bylaws and roles of the association and a copy of the declaration if the declaration is not otherwise received by the purchaser in connection with the sale. The association probably should never assume that a copy of the declaration will be provided to the purchaser from any other source and, therefore, the association should provide the purchaser with a copy of the declaration. The association should also furnish the purchaser with copies not only of the rules adopted by the board of directors pertaining to the use of the common areas or the use of the units but also any architectural control rules or design guidelines.

In addition to furnishing the purchaser with the declaration, the bylaws and the rules, the association must furnish the purchaser a dated statement containing certain information (the 'Resale Disclosure Statement'). Among other things, the Resale Disclosure Statement must contain a statement as to whether the association has any knowledge of any alterations or improvements that violates any provision of the declaration. HB2299 does not specify what steps the association must take in order to determine whether there are any alterations or improvements with respect to the unit that violate any provision of the declaration. Certainly, the association should review its records to determine whether the records contain any indication that there is any alteration or improvement that violates any provision of the declaration. In addition, the association should probably make a visual inspection of the property to determine whether there are any apparent alterations or improvements that violate the declaration. Each association will need to decide the extent of the inspection it will make of the unit. In some cases, it may simply be an inspection from the street in front of the unit. In other cases, the inspection may involve inspection of the unit from adjoining units to the extent that is feasible. The Resale Disclosure Statement should describe the extent of the inspection conducted by the association. In order for the association to be able to clearly demonstrate that a violation did or did not exist on the date the Resale Disclosure Statement was signed by the association, the association should consider taking date-stamped photographs of the unit.

There are several reasons the association should make as thorough an inspection as possible to determine whether there are any alterations or improvements that violate the declaration. The first reason is that the association will probably not be able to take any enforcement action with respect to any alteration or improvement that violates the declaration and existed on the property on the date the Resale Disclosure Statement is issued by the association, unless the alteration or improvement is described in the statement. As indicated previously, HB2299 does not indicate what action the association must take to determine whether any alterations or improvements exist which violate the declaration.

To the extent that the association performs a lesser investigation or inspection than a court ultimately determines to be required of the association in connection with the issuance of the Resale Disclosure Statement, the association could lose its right to take any enforcement action with respect to the violation, if the violation would have been disclosed by the type of investigation and inspection a court determines to be required under HB2299.

The second reason for the association to perform as thorough an investigation and inspection of the property as possible is that the association probably never has any greater leverage to have violations corrected than when the unit is being sold. The purchaser will probably not want to accept the property until a violation is corrected, since the purchaser will not want to have to defend any enforcement action taken by the association after the sale or to assume the risk that the association prevails and the purchaser is required to correct any violation.

The Resale Disclosure Statement must also contain a statement as to whether the association has any knowledge of any violations of health or building codes with respect to the unit. Since neither the association nor its managing agent will probably have the knowledge or expertise to make an independent evaluation of whether there are any violations of health or building codes with respect to the unit, the statement by the association will normally be based solely upon whether the association has received notice that there are any violations of health or building codes with respect to the unit. The Resale Disclosure Statement should specifically state that the statement by the association is based solely upon a review of the association's records.

The Resale Disclosure Statement must also contain a statement of the case names and case numbers for pending litigation with respect to the unit filed by the association against the unit owner or filed by the unit owner against the association. The association only needs to reveal any litigation with respect to the unit being sold. The association is not required to reveal any other pending litigation by or against the association. We recommend disclosing the court in which the litigation is pending, in addition to the case name and the case number required by the statute. The statement does not need to describe or summarize the nature of the litigation, and we advise against providing such information.

The documents and the Resale Disclosure Statement must be furnished to the purchaser within seven (7) days after receipt of notice of the pending sale. If the last day for furnishing the documents and the Resale Disclosure Statement falls on a Sunday or other legal holiday, then the association has until the next day which is not a Sunday or other legal holiday in which to furnish the documents and the Resale Disclosure Statement.

HB2299 does not require either the seller, the purchaser or any escrow agent acting as the agent of the seller or purchaser with respect to the sale to give notice to the association. HB2299 also does not require the notice to the association to be in writing or to contain the name and address of the purchaser. However, in most cases, the notice will probably be in writing and will come from the escrow agent handling the sale. Although an association can take the position that it does not have to respond to any notice except a written notice containing the name and address of the purchaser, we recommend that an association which receives oral notice of a pending sale or receives a written notice which does not contain the name and mailing address of the purchaser immediately take reasonable steps to confirm that a sale is pending and/or determine the name and address of the purchaser so that the documents and Resale Disclosure Statement can be furnished to the purchaser as required by HB2299.

HB2299 requires that copies of the declaration, bylaws and rules of the association and the Resale Disclosure Statement be furnished to the purchaser. HB2299, however, does not indicate the manner in which the documents and Resale Disclosure Statement are to be furnished. The association should furnish the documents and Resale Disclosure Statement by mail, by personal delivery or by an overnight courier service. Regardless of how the documents and Resale Disclosure Statement are furnished to the purchaser, the association should retain in the association's files proof of when the association received notice of the pending sale and when the documents and Resale Disclosure Statement were furnished to the purchaser. If the documents and Resale Disclosure Statement are sent by United States mail, the association should obtain from the United States Postal Service a certificate of mailing. If the documents and Resale Disclosure Statement are delivered personally to the purchaser or sent by overnight courier service, the delivery service should provide the association with a receipt signed by the purchaser or other evidence of the date on which the documents and Resale Disclosure Statement were delivered.

HB2299 expressly gives an association the right to charge the unit owner a reasonable fee to compensate the association for the costs incurred in the preparation of the Resale Disclosure Statement. The association is required to make available to any interested party the amount of any such fee established from time to time by the association. The board of directors of each association containing fifty or more units should adopt a resolution establishing the fee to be charged for the issuance of the Resale Disclosure Statement.

Section 33-1807 requires that, upon request, an association must furnish a statement in recordable form of any unpaid assessments. Because the notice of pending sale may constitute a request for a statement of unpaid assessments, an association should consider putting the Resale Disclosure Statement in recordable form, so that it satisfies § 33-1807.

It is extremely important for the association to strictly comply with the requirements of HB2299 with respect to the furnishing of documents and the Resale Disclosure Statement to the purchaser, since HB2299 provides that any person damaged by the failure of an association to disclose the required information may pursue any and all remedies at law or in equity against the association.

HB2299 amends § 33-1803 of the Planned Communities Act to impose a limitation on the amount by which an association can increase the regular assessment from one year to the next. Notwithstanding any provision in the declaration, bylaws or rules of the association to the contrary, an association may not impose a regular assessment that is more than twenty percent (20%) greater than the immediately preceding fiscal year's assessment without the approval of the majority of the members of the association. It is important to note that the required member approval is a majority of all of the members of the association and not just a majority of those voting.

HB2299 also amends § 33-1803 to state that an assessment payment by a member is deemed late if it is unpaid thirty (30) or more days after its due date, unless the community documents provide for a longer period. It is unclear what effect this provision has on provisions of community documents which provide for a shorter grace period than thirty (30) days. Since § 33-1803 could be interpreted as invalidating provisions of the community documents which provide for a shorter grace period than thirty (30) days, the safest course of action for an association is to not impose !ate charges or interest until a payment has been due for more than thirty (30) days.

Section 33-1803 also is amended by HB2299 to limit late charges for delinquent assessments to the greater of $15 or ten percent (10%) of the amount of the unpaid assessment. In addition, §33-1803 requires all monies paid by the member for an unpaid 'assessment to be applied first to the principal amount unpaid and then to the interest accrued. Since the priority of late charges is not established by §33-1803, monies paid by the member probably should be applied to late charges after first being applied to the unpaid assessment and then to accrued interest. If an association's current policy for the application of monies paid by members who are delinquent in the payment of assessments or other amounts due to the association differs from §33-1803, those policies will have to be changed to comply with the requirements of §33-1803. Section 33-1803 contains similar provisions with respect to late charges imposed for the nonpayment of a monetary penalty.

Section 33-1803 currently provides that the board of directors of a planned community association has the power to levy reasonable monetary penalties against the unit owner for violation of the declaration, bylaws or rules of the association after giving the owner notice and an opportunity to be heard with respect to the violation. HB2299 amends §33-1803 to require that the notice to the unit owner include information pertaining to the manner in which the penalty is to be enforced.

Since §33-1803 provides that penalties are enforceable in the same manner as assessments, the notice to the unit owner should include information pertaining to the manner in which assessments can be enforced under the association's governing documents. The board of directors of a planned community association will need to review the notice of violation which the association is currently using and, if the notice does not include information pertaining to the manner in which the penalty is to be enforced, the form of the notice will need to be revised prior to July 20, 1996.

HB2299 adds a new § 33-1807 to the Planned Communities Act. Section 33-1807 pertains to the priority and enforcement of the association's assessment lien. The provisions of {}33-1807 are similar to the provisions of the Condominium Act pertaining to the assessment lien of a condominium association. However, there are several important differences between {}33-1807 and the assessment lien provisions of the Condominium Act.

Under §33-1807, the assessment lien of a planned community association is subordinate to all liens and encumbrances recorded before the recording of the declaration and any consensual mortgage or deed of trust on the unit recorded before the date on which the assessment sought to be enforced became delinquent. Under the Condominium Act, the assessment lien of the condominium association is subordinate only to liens and encumbrances recorded before the recordation of the declaration and a first mortgage or deed of trust on the unit recorded before the date on which the assessment sought to be enforced became delinquent.

The second important difference between §33-1807 and the assessment lien provisions of the Condominium Act is that the Condominium Act provides that a lien for unpaid assessments is extinguished unless proceedings to enforce the lien are instituted within three years after the full amount of the assessment becomes due. Under §33-1807, the lien of a planned community association will be extinguished unless proceedings to enforce the lien are instituted within one year after the full amount of the assessment becomes due.

Each planned community association needs to review the status of its delinquent accounts to determine whether there are any assessments which are delinquent by more than one year. If so, the planned community association will have to decide whether to file a suit to enforce the lien prior to July 20, 1996, or permit the assessment lien to be extinguished at least with respect to assessments which have been delinquent for more than one year. If the association decides not to file an action to foreclose the lien, the association should consider filing suit to obtain a personal judgment against the owner and then record the judgment with the County Recorder in which the project is located, so that the judgment becomes a lien upon the unit. In this manner, the association will continue to maintain a lien for all delinquent assessments.

With respect to the handling of future delinquent accounts, the association should institute policies to ensure that a decision is made by the board of directors as to whether to file an action to foreclose the lien prior to the expiration of one year after the assessment becomes due. If a lien foreclosure action is not filed within one year after the assessment becomes due, then the lien will be extinguished. The only way for the association to maintain a lien if the association decides not to file an action to enforce the assessment lien would be for the association to obtain a personal judgment against the delinquent owner and record that judgment prior to the expiration of one year after the full amount of the assessment becomes due.

Section 33-1807 also contains a provision stating that upon written request, the association shall furnish to a lienholder, unit owner or other person designated by a unit owner a recordable statement setting forth the amount of any unpaid assessment against the unit. The statement must be furnished within seven (7) business days after receipt of the request and the statement is binding on the association, the board of directors and every, unit owner. Failure to provide the statement within seven (7) business days after receipt of the request extinguishes any lien for any unpaid assessment then due.

Dyekman, Meda & Curtis, P.L.C.

6750 East Camelback Road

Suite 104

Scottsdale, Arizona 85251

(602) 481-0202

(602) 481-0555 (Fax)

This update is only a summary of the new legislation, and is not intended as legal advice for a specific set of circumstances. For further information contact Don Dyekman or Dan Curtis at the above address or phone.