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Buyers hit with surprise restrictions

DEAR BENNY: My husband and I own a condo in a seven-unit condo association. We have owned the unit since 2005.

Recently, one of the unit owners asked us if we were interested in buying his unit. We made an offer, and he accepted it.

After the sale and purchase agreement was signed, the seller of that unit sent an email to everyone in our association that he was happy to announce that we are buying another unit in the building.

Six days later, we received a notice for a special meeting in a great rush. Three units out of seven voted against rental restrictions, but since the two townhouses owned by mother and daughter are each worth 30.5 percent nominal interest, we lost the battle.

The trustees changed the bylaws two days later, stating that no unit shall be rented for more than two years out of five and the owner needs to live in his or her unit for three years out of five. We tried to get out of our deal, but the seller told us he would retain our 10 percent deposit. We closed on the condo and are stuck with the new bylaw.

Do you think we have a case?

—Sarah

 

DEAR SARAH: There is a universal rule in community association law that states that owners are bound by the association documents as they currently exist and as they are legally amended from time to time.

This rule applies equally to condominiums, cooperative housing and homeowners associations.

Note that I emphasize the word “legally.” If the bylaw in your association was legally enacted by the membership, then I must tell you that you are bound by that amendment.

I have not reviewed your association’s legal documents, so I can provide only general advice. However, just from the facts you gave me, I have some questions.

1. Typically, it takes a supermajority to amend legal documents such as bylaws. And that requirement usually is 66 2/3 or even 75 percent. From what you wrote, the amendment received only 61 percent. Accordingly, you must confirm the vote and make sure it was enacted by the requisite supermajority spelled out in your legal documents.

2. Typically, most legal documents require advance notice before a bylaw can be amended. Again, I don’t know what notice is required in your documents, but clearly you did not get sufficient notice.

3. There are some court cases that suggest that in order to impose rental restrictions on condo owners, the declaration — and not just the bylaws — must be amended. The declaration has a higher priority in the hierarchy of condominium law.

4. Finally, you might have an argument that the board of directors (in your case, the trustees), by rushing to enact the amendment, were involved in tortious interference with your sales contract. This is a stretch, and your attorney should give you specific legal advice.

Bottom line: Talk with an attorney who understands and practices community association law. There may have been defects in the way that the amendment was enacted.

 

DEAR BENNY: In a recent column a reader had obtained an investment property by way of a Starker exchange and after renting for several years moved into the house and now claims the property as his personal residence. Part of the answer you gave to the reader was not factually accurate:

“You have now abandoned the investment. The bad news is that you cannot take advantage of the up-to-$250,000 exclusion of gain (or if you are married and file taxes jointly up to $500,000) for any property that you exchanged.

“So while you may be able to claim the exclusion on your principal home (assuming you owned and used it for two out of the five years before sale), you will have to pay capital gains on the portion of the property that was exchanged.”

The Internal Revenue Service will not automatically challenge an investor who converts investment property acquired in an exchange to a primary residence to take advantage of the up-to-$500,000 exclusion of gain.

In order to qualify for safe harbor treatment, the investor must maintain the property as an investment for a minimum of 24 months. Once that period has passed, a taxpayer is free to convert the property to a primary residence.

If the investor satisfies the five-year use-and-occupancy requirement, he qualifies for the exclusion.

If the investment property was acquired prior to Jan. 1, 2009, the investor would qualify for 100 percent of the exclusion, according to the Housing Assistance Tax Act of 2008. —Neil

 

DEAR NEIL: Many thanks. I appreciate when readers call attention to errors that may occur once in a while.

 

KASS is a practicing attorney in Washington, D.C., and Maryland. Questions for this column can be submitted to benny@inman.com.

 

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