ARTICLE 3. 

Management of the Condominium. 

§ 47C-3-101. Organization of unit owners’ association.

A unit owners’ association shall be organized no later than the date the first unit in the condominium is conveyed. The membership of the association at all times shall consist exclusively of all the unit owners, or following termination of the condominium, of all persons entitled to distributions of proceeds under G.S. 47C-2-118. The association shall be organized as a profit or non-profit corporation or as an unincorporated association. (1985 (reg. Sess., 1986), e. 877, s. 1.)  

OFFICIAL COMMENT

1. 1. 1. The first purchaser of a unit is entitled to have in place the legal structure of the unit owners’ association. The existence of the structure clarifies the relationship between the developer and other unit owners and makes it easy for the developer to involve unit owners in the governance of the condominium even during a period of declarant control reserved pursuant to Section 3-103(d). 
2. 2. The bracketed language preserves the flexibility existing under the vast majority of present condominium statutes to organize the association as a profit or non-profit corporation or as an unincorporated association. Although at least one state (Georgia) requires thee organization of the association in corporate form, it is not desirable to mandate this result in a uniform act. If a state wishes to mandate incorporation, it should delete the bracketed language.

NORTH CAROLINA COMMENT

This section is not significantly different from the Uniform Act.

59

§ 47C-3-102CH. 47C. CONDOMINIUM ACT § 47C-3-102

Editor’s Note – Session Laws 1985
(Reg. Sess., 1986), c. 877, s. 3 makes this
Chapter effective October 1, 1986.

§ 47C-3-102. Powers of unit owners’ association.

• (a) Subject to the provisions of the declaration, the association, even if unincorporated, may: 

1. (1) Adopt and amend bylaws and rules and regulations;
2. (2) Adopt and amend budgets for revenues, expenditures, and reserves and collect assessments for common expenses from unit owners; 
3. (3) Hire and terminate managing agents and other employees, agents, and independent contractors; 
4. (4) Institute, defend, or intervene in its own name in litigation or administrative proceedings on matters affecting the condominium;
5. (5) Make contracts and incur liabilities;
6. (6) Regulate the use, maintenance, repair, replacement, and modification of common elements; 
7. (7) Cause additional improvements to be made as a part of the common elements;
8. (8) Acquire, hold, encumber, and convey in its own name any right, title, or interest to real or personal property, provided that common elements may be conveyed or subjected to a security interest only pursuant to G.S. 47C-3-112;
9. (9) Grant easements, leases, licenses, and concessions through or over the common elements;
10. (10) Impose and receive any payments, fees, or charges for the use, rental, or operation of the common elements other than limited common elements described in subsections 47C-2-102(2) and (4) and for services provided to unit owners;
11. (11) Impose charges for late payment of assessments and, after notice and an opportunity to be heard, levy reasonable fines not to exceed one hundred fifty dollars ($150.00) (G.S. 47C-3-107A) for violations of the declaration, bylaws, and rules and regulations of the association;
12. (12) Impose reasonable charges for the preparation and recordation of amendments to the declaration, resale certificates required by G.S 47C-4-109, or statements of unpaid assessments;
13. (13) Provide for the indemnification of and maintain liability insurance for its officers, executive board, directors, employees and agents;
14. (14) Assign its right to future income, including the right to receive common expense assessments, but only to the extent the declaration expressly so provides;
15. (15) Exercise all other powers that may be exercised in this State by legal entities of the same types as the association; and
16. (16) Exercise any other powers necessary and proper for the governance and operation of the association.

• (b) Notwithstanding subsection (a), the declaration may not impose limitations on the power of the association to deal with the declarant that are more restrictive than the limitations imposed on the power of the association to deal with other persons. (1985 (Reg. Sess., 1986), c. 877, s. 1.)

OFFICIAL COMMENT

1. 1. 1. This section permits the declaration, subject to the limitations of subsection (b), to include limitations on the exercise of any of the enumerated powers. The bracketed language making a specific reference to unincorporated associations is not intended to exclude other forms of association; the unincorporated association would have such powers, subject to the declaration, regardless of the legal status of an unincorporated association in the state. If a state wishes to permit the association to be unincorporated and the law of the state is unclear whether an unincorporated association would have such powers in the absence of the language, the bracketed language should be retained, and the brackets removed.
2. 2. Required provisions of the bylaws of the association, references in paragraph (1), are set forth in Section 3-106.
3. 3. Many state condominium statures give the association the power to sue and be sued in its own name. in the absence of the statutory grant of standing such as that set forth in paragraph (4), some because it has no ownership interest in the condominium, has no standing to ring, defend, or to intervene in litigation or administrative proceedings in its own name.
4. 4. Paragraph (8) refers to the power granted by Section 3-112 to sell or encumber common elements without a termination of the condominium upon a vote of the requisite number of unit owners. Paragraph (9) permits the association to grant easements, leases, licenses, and concessions with respect to the common elements without a vote of the unit owners.
5. 5. The powers granted the association in paragraph (11) to impose charges for late payment of assessments and to levy reasonable fines for violations of the association’s rules reflect the need to provide the association with sufficient powers to exercise its “governmental” functions as the ruling body of the condominium community. These powers are intended to be an addition to any rights which the association may have under other law.
6. 6. Under paragraph (14), the declaration may provide for the assignment of income of the association, including common expenses assessment income, as security for, or payment of, debts of the association. The power may be limited in any manner specified in the declaration—for example, the power might be limited to specified purposes such as repair of existing structures, or to income from particular sources such as income from tenants, or to a specified percentage of common expense assessments. The power, in many instances, should help materially in securing credit for the association at favorable interest rates. The inability of associations to borrow because of a lack of assets, in spite of its income stream, has been a significant problem.

7. If the association is incorporated, it may, pursuant to paragraph (16), exercise all other powers of a corporation. Similarly, if the association is unincorporated, the association may, by virtue of paragraph (16), exercise all other powers of an unincorporated association. Inconsistent provisions of state corporation or unincorporated association law are subject to the provisions of this Act, as provided in Section 1-108

NORTH CAROLINA COMMENT

This section is not significantly different from the Uniform Act, however, subdivision (4) was amended to delete the requirement that the association act on behalf of “2 or more unit owners” because of a belief that the association should be able to act in its own name. Subdivision (11) was amended to insert a limitation of $150 on the amount of late charges or fines for violations if the declaration, bylaws, or regulations of the association. Subdivision (15) was deleted as unnecessary. 

§ 47C-3-103. Executive board members and officers. 

• (a) Except as provided in the declaration, the bylaws, or subsection (b) or other provisions of this chapter, the executive board may act in all instances on behalf of the association. In the performance of their duties, the officers and members of the executive board shall be deemed to stand in a fiduciary relationship to the association and the unit owners and shall discharge their duties in good faith, and with that diligence and care which ordinarily prudent men would exercise under similar circumstances in like positions. 
• (b) The executive board may not act on behalf of the association to amend the declaration (G.S. 47C-2-117), to terminate the condominium (G.S. 47C-2-118), or to elect members of the executive board or determine the qualifications, powers and duties, or terms of office of executive board members (G.S. 47C-3-103(f)), but the executive board may fill vacancies in its membership for the unexpired portion of any term. Notwithstanding any provision of the declaration or bylaws to the contrary, the unit owners, by at least sixty-seven percent (67%) vote of all persons present and entitled to vote at any meeting of the unit owner at which a quorum is present, may remove any member of the executive board with or without cause, other than members appointed by the declarant. 
• (c) Without 30 days after adoption of any proposed budget for the condominium, the executive board shall provide a summary of the budget to all the unit owners, and shall set a date for a meeting of the unit owners to consider ratification of the budget not less than 14 nor more than 30 days after mailing of the summary. There shall be no requirement that a quorum be present at the meeting. The budget is ratified unless at that meeting a majority of all the unit owners or any larger vote specified in the declaration rejects the budget. In the event the proposed budget is rejected, the periodic budget last ratified shall be continued until such time ass the unit owners ratify a subsequent budget proposed by the executive board. 
• (d) Subject to subsection (e), the declaration may provide for a period of declarant control of the association, during which period a declarant, or persons designated by him, may appoint and remove the officers and members of the executive board. Regardless of the period provided in the declaration, a period of declarant control terminated no later than the earlier of: (i) 120 days after conveyance of seventy-five percent (75%) of the units (including units which may be created pursuant to special declarant rights) to unit owners other than a declarant; (ii) two years after all declarants have ceased to offer units for sale in the ordinary course of business; or (iii) two years after any development right to add new units was last exercised. A declarant may voluntarily surrender the right to appoint and remove officers and members of the executive board before termination of that period, but in that event he may require, for the duration of the period of declarant, be approved by the declarant before they become effective. 
• (e) Not later 60 days after conveyance of twenty-five percent (25%) of the units (including units which may be created pursuant to special rights) to unit owners other than a declarant, at least one member and not less than twenty-five percent (25%) of the members of the executive board shall be elected by unit owners other than the declarant. Not later than 60 days after conveyance of fifty-percent (50%) of the units (including units which may be created pursuant to special declarant rights) to unit owners other than a declarant, not less than thirty-three percent (33%) of the members of the executive board shall be elected by unit owners other than the declarant. 
• (f) Not later than the termination of any period of declarant control, the unit owners shall elect an executive board of at least three members, at least a majority of whom must be unit owners. The executive board shall elect the officers. The executive board members and officers shall take office upon election. (1985 (Reg. Sess., 1986), c. 877, s. 1.)

OFFICIAL COMMENT

1. 1. 1. Subsection (a) makes members of the executive board appointed by the declarant liable as fiduciaries of the unit owners with respect to their actions or omissions as members of the board. This provision imposes a very high standard of duty because the board is vested with great power over the property interests of unit owners, and because there is a great potential for conflicts of interest between the unit owners and the declarant. 

Officers and board members elected by the unit owners are required only to exercise ordinary and reasonable care. This lower standard of care should increase the willingness of unit owners to serve ass officers and members of the board.

1. 2. The provisions of paragraph © permit the unit owners to disapprove any proposed budget, but a rejection of the budget does not result in cessation of assessment until a budget is approved. Rather, assessments continue on the basis of the last approved periodic budget until the new budget is in effect.
2. 3. Subsection (d) and (e) recognize the practical necessity for the declarant to control the association during the developmental phases of a condominium project. However, any executive board member appointed by the declarant pursuant to subsection (d) is liable as a fiduciary to any unit owner for his acts or omissions in such capacity.
3. 4. Subsection (d) permits a declarant to surrender his right to appoint and remove officers and executive board members prior to the termination of the period of declarant control in exchange for a veto right over certain actions of the association or its executive board. This provision is designed to encourage transfer of control by declarants to unit owners as early as possible, without impinging upon the declarant’s rights (for the duration of the period of declarant control) to maintain ultimate control of those matters which he may deem particularly important to him. It might be noted that the declarant at all times (even after the expiration of the period of declarant control) is entitled to cast the votes allocated to his units in the same manner ass any other unit owner. 
4. 5. Subsection (e), in combination with subsection (d), provides for a gradual transfer of control of the association to the unit owners from the declarant. Such a gradual transfer is preferable to one-time turnover of control since it assures that the unit owners will be involved, to some extent, in the affairs of the association from a relatively early date and that some unit owners will be involved, to some extent, in the affairs of the association from a relatively early date experience in dealing with association matters. 

NORTH CAROLINA COMMENT

The second sentence of subsection (a) was amended to state expressly that the executive board acts ass a fiduciary to the association and not the declarant, and by adding the standard of care set out in Chapter 55 of the General Statues for directors of business corporations.

Changes in subsection (c) were for clarification purposed. The change in subsection (d) from a period of 60 days to 120 days for the termination of declarant control was seen as a more practical period.

In subsection (b) the provision in the Uniform Act (subsection (g)) requiring a two-thirds vote was changed to a requirement of 67 percent to simplify computation. 

§ 47C-3-104. Transfer of special declarant rights.

• (a) No special declarant right (G.S. 47C-1-103(23)) created or reserved under this chapter may be transferred except by an instrument evidencing the transfer recorded in every county in which any portion of the condominium is located. The instrument is not effective unless executed by the transferee. 
• (b) Upon transfer of any special declarant right, the liability of a transferor declarant is as follows: 

1. (1) A transferor is not relieved of any obligation or liability arising before the transfer, including, but not limited to, liability or obligations relating to warranties. Lack of privity does not deprive any unit owner of standing to bring an action to enforce any obligation of the transferor. 
2. (2) If the successor to any special declarant right is an affiliate of a declarant (G.S. 47C-1-103(1)), the transferor is jointly and severally liable with the successor for any obligation or liability of the successor which relates to the condominium.
3. (3) If a transferor retains any special declarant right, but transfers other special declarant rights to a successor who is not an affiliate of the declarant, the transferor is liable for any obligations or liabilities imposed on a declarant by this chapter or by the declaration relating to the retained special declarant rights and arising after the transfer. 
4. (4) A transferor has no liability for any act or omission or any breach of contractual or warranty obligation arising from the exercise of a special declarant right by a successor declarant who is not an affiliate of the transferor.

• (c) Unless otherwise provided in a mortgage instrument or deed of trust, in case of foreclosure of a mortgage, tax sale, judicial sale, sale by a trustee under a deed of trust, or sale under Bankruptcy Code or receivership proceedings, of any units owned by a declarant, or real estate in a condominium subject to development rights , a person acquiring title to all the real estate being foreclosed or sold, but inly upon his request, succeeds to all special declarant rights related to that real estate held that declarant, or only to any rights reserved in the declaration and held by that declarant to maintain models, sales offices and signs. The judgement or instrument conveying title shall provide for transfer of only the special declarant rights requested.
• (d) Upon foreclosure, tax sale, judicial sale, sale by a trustee under a deed of trust, or sale under Bankruptcy Code or receivership proceedings, of all units and other real estate in a condominium owned by a declarant the declarant ceases to have any special declarant rights.
• (e) The liabilities and obligations of persons who succeed to special declarant rights are as follows:

1. (1) A successor to any special declarant right who is an affiliate of a declarant is subject to all obligations and liabilities imposed in the transferor related to the condominium. 
2. (2) A successor to any special declarant right other than a successor described in paragraphs (4) who is not an affiliate of a declarant, is subject to all obligations and liabilities:
   • a. On a declarant which relate to his exercise or nonexercised of a special declarant rights; or
   • b. On his transferor, other than:
     • • (i) Misrepresentations by any prior declarant;
       • (ii) Warranty obligations on improvements made by any previous declarant, or made before the condominium was created;
       • (iii) Breach of any fiduciary obligation by any previous declarant or his appointees to the executive board; or
       • (iv) Any liability or obligation imposed on the transferor as a result of the transferor’s acts or omissions after the transfer.
       • (3) A successor to only a right reserved in the declaration to maintain models, sales offices, and signs (G.S 47C-2-115), if he is not an affiliate of a declarant, may not exercise any other special declarant right, and is not subject to any liability or obligation as a declarant, except the obligation to provide a public offering statement, and any liability arising as a result thereof.
       • (4) A successor to all special declarant rights held by his transferor who is not an affiliate of that declarant and who succeeded to those rights pursuant to a deed in lieu of foreclosure or a judgement or instrument conveying title to units under subsection (c), may declare his intention in a recorded instrument to hold those rights solely for transfer to another person. Thereafter, until transferring all special declarant rights to any person acquiring title to any unit owned by the successor, or until recording an instrument permitting exercise of all those rights other than the right held by his transferor to control the executive board in accordance with the provisions of G.S. 47C-3-103(d) for the duration of any period of declarant control, and any attempted exercise of those rights is void. So long as a successor declarant may not exercise special declarant rights under this subsection, he is not subject to any liability or obligation as a declarant other than liability for his acts and omissions under G.S. 47C-3-103(d). (1985 (Reg. Sess., 1986), c. 877, s. 1.)

OFFICIAL COMMENT

1. 1. 1. 1. 1. 1. This section deals with the issue of the extent to which obligations and liabilities imposed upon a declarant by thig Act are transferred to a third party by a transfer of a declarant’s interest in a condominium. There are two part8 to be [the] problem. First, what obligations and liabilities unit owners (both existing unit owner and pe ng who become unit owners in the future) should a declarant retain, notwithstanding his transfer of interests. Second, what obligations and liabilities may fairly be imposed upon the declarant's successor interest. No present condominium state adequately addresses these issues. 
         2. 2. This section strikes a balance between the obvious need to protect the interests of unit owners and the equally important need to protect innocent successor to a declarant's rights, especially persons such mortgagees whose only interest in the condominium project is to protect their debt security. The general scheme of the section is to impose upon a declarant continuing obligations and liabilities for promises, acts, or omission undertaken during the period that he was in control of the condominium while relieving a declarant who transfers all or part of his special declarant rights in a project of such responsibilities with respect to the promises, acts, or omissions of a successor over whom he has no control. Similarly, the section imposes obligations and liabilities arising after the transfer upon a non-affiliated successor to a declarant's interests, but absolves such a transferee of responsibility for the promises, acts, or omissions of a transferor declarant over which he had no control. Finally, the section makes special provision for the interests of certain successor declarants (e.g., a mortgagee who succeeds to the rights of declarant pursuant to a "deed in lieu foreclosure" and who holds the project solely for transfer to another person) by relieving such persons of virtually all of the obligations and liabilities imposed upon declarants by this Act.
         3. 3. Subsection (a) provides that a successor in interest to a declarant may acquire the special rights of the declarant only by recording an instrument which reflects a transfer of those rights. This recordation requirement is important to determine the duration of the period of declarant control pursuant to Section 3-103(d) and (e), as well as to place owners on notice of all persons entitled to exercise the special rights of a declarant under this Act. The transfer by a declarant of all of his interest in a condominium project to a successor, without a concomitant transfer of the special rights of a declarant pursuant to subsection, results in the automatic termination of such special declarant rights and of any period of declarant control.
         4. 4. Under subsection (b), a transferor declarant remains liable to unit owners (both existing unit owners and persons who subsequently become unit owners) for all obligations and liabilities, including warranty obligations on all improvements made by him, arising prior to transfer. If a declarant transfers any special declarant right to an affiliate (as defined in Section the 1-103) the transfer remains subject to all liabilities specified in paragraph (1) of subsection (b) and, in addition, is jointly and severally liable with his successor in interest for all obligations and liabilities of the successor. 
         5. 5. The obligations and liabilities imposed upon transferee declarants under the Act are set forth in subsection (e). In general, a transferee declarant (other than an affiliate of the original declarant and other than a successor whose interest in the project is solely for the protection of debt security) becomes subject to all obligations and liabilities imposed upon a declarant by the Act or by the declaration with respect to any promises, acts, or omissions undertaken subsequent to the transfer which relate to the rights he holds. Such a transferee is liable for the promises, acts, or omissions of the original declarant undertaken prior to the transfer, except as set forth in paragraph (e)(2)(ii). For example, a successor declarant would not be liable for the warranty obligations of the original declarant with respect to improvements to the project made by the original declarant. Similarly, a successor would not be liable, under normal circumstances, for any misrepresentation or breach of fiduciary duty by the original declarant prior to transfer. The successor is liable, however, to complete improvements labeled ^“MUST BE BUILT” on the original plans.
         6. 6. To preclude declarants from evading their obligations and liabilities under this Act by transferring their interests to affiliated companies, paragraph (1) of subsection (e) makes clear that any successor declarant who is an of the original declarant is subject all obligations and liabilities imposed upon the original declarant by the Act or by the declaration. Similarly, as previously noted, paragraph (2) of subsection (b) provides that an original declarant who his rights to an affiliate remains jointly and severally liable with his successor for all obligations and liabilities imposed upon declarant by the Act or by the declaration.
         7. 7. The section handles the problem of certain successor declarants (i.e., persons whose sole interest in the condominium project is the protection of debt security) in three ways. First, subsection (c) provides that, in the cage of a foreclosure of a mortgage, a sale by a trustee under a deed of trust, or a sale by a trustee in bankruptcy of any units owned by a declarant, any person acquiring title to all of the units being foreclosed or sold may request the transfer of special declarant rights. In that event, and only upon such request, such rights will be transferred in the instrument conveying title to the units and such transferee will thereafter become a successor declarant subject to the other provisions of this section. In the vent of a foreclosure, sale by a trustee in bankruptcy of all units owned by a declarant, if the transferee if such units does not request the transfer of special declarant rights, then, under subsection (d), such special declarant rights cease to exist and any period of declarant control terminates. 

Second, any person who succeeds to special declarant rights as a result of the transfers just described or by deed in lieu of foreclosure, may, pursuant to paragraph (4) of subsection (e), declare his intention (in recorded instrument) to hold those rights solely for transfer to another person. Therefore, such a successor may transfer all special declarant rights to a third party acquiring title to any units owned by the successor but may not, prior to such transfer, exercise any special declarant rights other than the right to control executive board of the association in accordance with the provisions of Section 3-103(c). a successor declarant who exercises such a right is relieved of any liability under the Act except liability for any acts or omissions related to his control of the executive board of the association. This provision is designed to deal with the typical problem of a foreclosing mortgage lender who opts to bid in and obtain the project at the foreclosure sale solely for the purpose of subsequent resale. It permits such a foreclosing lender to undertake such a transaction without incurring the full burden of declarant obligations and liabilities. At the same time, the provision recognizes the need for continuing operation of the association and, to that end, permits a foreclosing lender to assume control of the association for the purpose of ensuring a smooth transition. 

Third, paragraph (3) of the subsection (e) provides that a successor who has only the right to maintain model units, sales offices, and signs does not thereby become subject to any obligations or liabilities as a declarant except for the obligation to provide a public offering statement and any liability resulting therefrom. This provision also is designed to protect mortgage lenders and contemplates the situation where a lender takes over a condominium project and desires to sell out existing units without making any additional improvements to the project. This provision facilitates such a transaction by relieving the mortgage lender, in that instance, from the full burden of obligations and liabilities ordinarily imposed upon a declarant under the Act.  

Under Section 2-110, a declarant may reserve the right to create additional units in portions of the condominium which were originally designated u common elements. The declarant becomes the owner of any unite created, but, prior to creation of unite, the title to those portions of the condominium is in the unit owners. The right to create the unite is an interest in land in which a security interest might be granted. If the mortgagee of that interest forecloses, the purchaser at the foreclosure sale has the choices concerning development rights and resulting liability which are described in the preceding paragraph. That is, under subsections (c) and (d), the purchaser may limit his liability by agreeing to hold the developments only for the purpose of transfer as provided by paragraph (e)(4) or may buy the rights under paragraph (c).

NORTH CAROLINA COMMENT

This section is not significantly different from the Uniform Act, however, in subsection (b)(1) the qualifying phrase “imposed upon him by this act” was deleted.

Subsection (d)(2) of the Uniform Act was deleted as an unnecessary restrictive provision which would serve only to reduce the value of a condominium to a prospective purchaser at a foreclosure sale.

Subsection (f) of the Uniform Act was omitted. 

§ 47C-3-105. Termination of contracts and leases of declarant.

If entered into by or on behalf of the association before the executive board elected by the unit owners pursuant to G.S.47C-3-103(f) takes office, (1) any management contract, employment contract or lease of recreational or parking areas or facilities, (2) any other contract or lease between the association and a declarant or an affiliate of a declarant, or (3) any contract or lease that is not bona fide or was unconscionable to the unit owners at the time entered into under the circumstances then prevailing may be terminated without penalty by the association at any time after the executive board elected by the unit owners pursuant to G.S. 47C-3-103(f) takes office upon not less than 90 days' notice to the other party. Notice of the substance of the provisions of this section shall be set out in each contract entered into by or on behalf of the association before the executive board elected by the unit owners pursuant to G.S. 47C-3-103(f) takes office. Failure of the contract to contain such a provision shall not effect the rights of the association under this section. This section does not apply to any lease the termination of which would terminate the condominium or reduce its size, unless the real estate subject to that lease was included in the condominium for the purpose of avoiding the right of the association to terminate a lease under this section. (1985 (Reg. Sess., 1986), c. 877, s. 1.)

OFFICIAL COMMENT

1. 1. 1. 1. 1. 1. This section deals with a common problem in the development of condominium projects: the temptation on the part of the developer, while in control of the association, to enter into, on behalf of the association, long-term contracts and leases with himself or with an affiliated entity. 

The Act deals with this problem is [in] two ways. First, Section 3-103(a) imposes upon all executive board members appointed by the declarant liability as fiduciaries of the unit owners for all of their acts or omissions as members of the board. Second, Section 3-105 provides for the termination of certain contracts and leases made during a period of declarant control.

1. 1. 1. 1. 2. In addition to contracts or leases made by a declarant with himself or with an affiliated entity, there are also certain contracts and leases so critical to the operation of the condominium and to the unit owners’ full enjoyment of their rights of ownership that they too should be voidable by the unit owners upon expiration of any period of declarant control. At the same time, a statutorily sanctioned right of cancellation should not be applicable to all contracts or leases which a declarant may enter into in the course of developing a condominium project. For example, a commercial tenant would not be willing to invest substantial amounts in equipment and other improvements for the operation of his business if the lease could unilaterally be cancelled by the association. Accordingly, this section provides that (subject to the exception set forth in the last sentence thereof), upon the expiration of any period of declarant control, the association may terminate without penalty, any “critical” contract (i.e., any management contract, employment contract, or lease of recreational or parking areas or facilities) entered into during a period of declarant control, any contract or lease to which the declarant or an affiliate of the declarant is a party, or any contract or lease previously entered into by the declarant which is not a bona fide or which was unconscionable to the unit owners at the time entered into under the circumstances then prevailing. 
         2. 3. The last sentence of the section addresses the usual leasehold condominium situation where the underlying real estate is subject to a long-term ground lease which is then submitted to the Act. Because terminate the condominium, this sentence prevents cancellation. However, in order to avoid the possibility that recreation and other leases otherwise cancellable under subsection (a) will be restructured to come within the exception, a subjective test of “intent” is imposed. Under the test, if a declarant’s principal purpose in subjecting the leased real estate to the condominium was to prevent termination of the lease, the lease may nevertheless be terminated. 

NORTH CAROLINA COMMENT

This section is not significantly different from the Uniform Act, however, because however, because of a concern for persons who in good faith enter into a contract with the executive board and expend capital towards fulfilling that a sentence was added to provide that any contract or lease described by the section must contain a provision that it may be terminated by the executive board elected by the unit owners upon not leu than 90 days notice.

§ 47C-3-106. Bylaws.

1. 1. 1. 1. (a) The bylaws of the association shall provide for:
         2. (1) The number of members of the executive board and the titles of the officers of the association;
         3. (2) Election by the executive board of the officers of the association;
         4. (3) The qualifications, powers and duties, terms of office, and manner of electing and removing executive board members and officers and filling vacancies;
         5. (4) Which if any, of its powers the executive board or officers may delegate to other persons or to a managing agent;
         6. (5) Which of its officers may prepare, execute, certify, and record amendments to the declaration on behalf of the association; and
         7. (6) The method of amending the bylaws.
         8. (b) Any other matters the association deems necessary or appropriate. (1985 (Reg. Sess., 1986), c. 877, s. 1.)

OFFICIAL COMMENT

1. 1. 1. 1. 1. 1. Because the Act does not require the recordation of bylaws, it is contemplated that unrecorded bylaws will set forth only matters relating to the internal operations of the association and various “housekeeping" matters with respect to the condominium. The Act requires specific matters to be set forth in the recorded declaration and not in bylaws, unless the bylaws are to be recorded as an exhibit to the declaration.
         2. 2. The requirement, set forth in subsection (a)(5), that the bylaws designate which pf the officers of the association has the responsibility to prepare, execute, certify, and record amendments to the declaration reflects the obligation imposed upon the association by several provisions of this Act to record such amendments in certain circumstances. These provisions include Section 1-107 (eminent Domain), Section 2-106 (expiration of certain leases), Section 2-112 (Relocation of Boundaries Between Adjoining Units), and Section 2-113 (subdivision or conversion of units). Section 2-117(e) provides that, if no officer is designated for this purpose, it shall be the duty of the president. 

NORTH CAROLINA COMMENT

This section is not significantly different from the Uniform Act but does contain minor stylistic changes. 

§ 47C-3-107. Upkeep; damages; assessments for damages, fines. 

1. 1. 1. 1. (a) Except sg provided in G.S. 47C-3-113(h), the association is responsible for causing the common elements to be maintained, repaired, and replaced when necessary and to assess the unit owners as necessary to recover the costs of such maintenance, repair, or replacement except that the cost of maintenance, repair or replacement of a limited common element shall be assessed as provided in G.S. 47C-3-115(b). Each unit owner is responsible for maintenance, repair and replacement of his unit. Each unit owner shall afford to the association and when necessary to another unit owner access through his unit reasonably necessary for any such maintenance, repair or placement activity.
         2. (b) If damage, for which a unit owner is legally responsible and which is not covered by insurance provided by the association pursuant to G.S. 47C-3-113 is inflicted on any common element, the association may direct such unit owner to repair such damage or the association may itself cause the repairs to be made and recover the costs thereof from the responsible unit owner.
         3. (c) If damage is inflicted on any unit by an agent of the association in the scope of his activities as such agent, the association is liable to repair such damage or to reimburse the unit owner for the cost of repairing such damages. The association shall also be liable for any losses to the unit owner.
         4. (d) The bylaws of the association may in cases when the claim under subsection (b) or (c) five hundred dollars ($500.00) or less provide for hearings before an adjudicatory panel to determine if a unit owner is responsible for damages to any common element or whether the association is responsible for damages to any unit. Such panel shall accord to party charged with causing damages notice of the charge, opportunity to be heard and to present evidence, and notice of the decision. This panel may assess a liability for each damage incident not in excess of five hundred dollars ($500.00) against each unit owner charged or against the association. Liabilities of unit owners assessed shall be assessments secured by lien under G.S. 47C-3-116. Liabilities of the association may be offset by the unit owner against sums owing the association and if so offset shall reduce the amount of any lien of the association against the unit at issue.
         5. (e) The declarant alone is liable for maintenance, repair and all other expenses in connection with real estate subject to development rights. (1985 (Reg. Sb88., 1986), c. 877, s. 1.)

OFFICIAL COMMENT

1. 1. 1. 1. 1. 1. The Act permits the declaration to separate maintenance responsibility from ownership. This is commonly done in practice. In the absence of any provision int eh declaration, maintainance responsibility follows ownership of the unit or rests with the association in the case of common elements. Under this Act, limited common elements (which might include, for example, patios, balconies, and parking spaces) are common elements. See Section 1-103(16). As a result, under subsection (a), unless the declaration requires that unit owners are responsible for the upkeep of such limited common elements, the association will be responsible for their maintenance. Under Section 3-115(c), the cost of maintenance, repair, and replacement for such limited common elements is assessed against all the units in the condominium, unless the declaration provides for such expenses to be paid only by the units benefited. See Comment 1 to Section 2-108.
         2. 2. Under Section 2-110, a declarant may reserve the right to create units in portions of the condominium originally designated as common elements. Prior to creation of the units, title to those portions of the condominium is in the unit owners. However, under Section 3-107(b), the developer is obligated to pay all of the expenses of (including real estate taxes properly apportionable to) that real estate. As to real estate taxes, see Section 1-105(c). 

NORTH CAROLINA COMMENT

Subsections (a), (b), (c) and (e) reflect revisions in language and structure (but not substance) of the Uniform Act. Subsection (d) is new and allows the association in cases when the claim for damages to a common element is $500 or less to hold hearings before an adjudicatory panel to determine whether a unit owner or the association is responsible for the damages. The subsection provides for minimal due process for the party charged with causing the damages. The subsection also provides that the liabilities of unit owners shall be assessments secured by lien under Section 47C-3-116 and the liabilities of the association may be offset by the unit owner against sums owing the association. 

§ 47C-3-107A. Charges for late payments, fines.

The bylaws of the association may provide for a hearing before an adjudicatory panel to determine if a unit owner should be fined not to exceed one hundred fifty dollars ($150.00) for a violation of the declaration, bylaws or rules and regulations of the association. Such panel shall accord to the party charged with the violation notice of the charge, opportunity to be heard and to present evidence, and notice of the decision. Such a fine shall be an assessment secured by lien under G.S. 47C-3-116. (1985 (Reg. Sess., 1986), c. 877, s. 1.)

NORTH CAROLINA COMMENT

This section was added to authorize an adjudicatory hearing, when permitted by the declaration, for fines, late payments, and violations of the condominium’s rules and regulations for up to $150.00 and is similar to the provisions of G.S. 47C-3-107(d) for a hearing on minor damages.

§ 47C-3-108. Meetings.

A meeting of the association shall be held at least once each year. Special meetings of the association may be called by the president, a majority of the executive board, or by unit owners having twenty percent (20%) or any lower percentage specified in the bylaws of the votes in the association. Not less than 10 nor more than 50 days in advance of any meeting, the secretary or other officer specified in the bylaws shall cause notice to be hand-delivered or sent prepaid by United States mail to the mailing address of each unit or to any other mailing address designated in writing by the unit owner. The notice of any meeting must state the time and place of the meeting and the items on the agenda, including the general nature of any proposed amendment to the declaration or bylaws, any budget changes, and any proposal to remove a director or officer. (1985 (Reg. Sess., 1986), c. 877, s. 1.)

NORTH CAROLINA COMMENT

This section is not significantly different from the Uniform Act. The notice provisions uses a period of 50 days to conform to Chapter 55A, the Nonprofit Corporation Act.

§ 47C-3-109. Quorums.

1. 1. 1. 1. (a) Unless the bylaws provide otherwise, a quorum is deemed present throughout any meeting of the association if persons entitled to cast twenty percent (20%) of the votes which may be cut for election of the executive board are present in person or by proxy at the beginning of the meeting. 
         2. (b) Unless the bylaws specify a larger percentage, a quorum is deemed present throughout any meeting of the executive board of persons entitled to cast fifty percent (50%) of the votes on that board are present at the beginning of the meeting. (1985 (Reg. sess., 1986), c. 877, 8. 1.)

OFFICIAL COMMENT

Mandatory quorum requirements lower than 50 percent for meetings of the association are often justified because of the common difficulty of inducing unit owners to attend meetings. The problem is particularly acute in the case of resort condominiums where many owners may reside elsewhere, often at considerable distances, for most of the year. 

NORTH CAROLINA COMMENT

This section is not significantly different from the Uniform Act and there was a deliberate choice for uniformity over the provisions of Chapter 55A, the Non-profit Corporation Act. 

§ 47C-3-110. Voting; proxies.

1. 1. 1. 1. (a) If only one of the multiple owners of a unit is present at a meeting of the association, he is entitled to cast all the votes allocated to that unit. If more than one of the multiple owners are present, the votes allocated that unit may be cast only in accordance with the agreement of a majority in interest of the multiple owners, unless the declaration or bylaws expressly provides otherwise. Majority agreement is conclusively presumed if any one of the multiple owners casts the votes allocated to that unit without protest being made promptly to the person presiding over the meeting by any of the other owners of the unit.
         2. (b) Votes allocated to a t may be cast pursuant to a proxy duly executed by a unit owner. If a unit is owned by more than one person, each owner of the it may vote or register protest to the casting of votes by the other owners of the unit through a duly executed proxy. A unit own may not revoke a proxy given pursuant to this section except by written notice of revocation delivered to the person presiding over a meeting of the association. A proxy is void if it is not dated. A proxy terminates one year after its date, unless it specifies a shorter term.
         3. (c) If the declaration requires that votes on specified matters affecting the condominium be cast by lessees rather than unit owners of leased units: (i) the provisions of subsection (a) and (b) apply to lessees as if they were unit owners; (ii) unit owners who have leased their units to other per ns may not cast votes on those specified matters; and (iii) lessee are entitled to notice of meetings, access to records, and other rights respecting those matters as if they were unit owners. Unit owners must also be given notice, in the manner provided in G.S. 470-3-108, of all meetings at which lessees may be entitled to vote.
         4. (d) No votes allocate to a unit owned by the association may be cast.
         5. (e) The declaration may provide that on specified issues only a defined subgroup of unit owners may vote provided:
   2. (1)

1. 1. The issue being voted on is of special interest solely to members of subgroup; and
   2. (2) All except de minimis costs that will be incurred based on the vote taken will be assessed solely against those unit owners entitled to vote.
   3. (f) For purposes of subdivision (e)(l) above an issue to be voted on is not of special interest solely to a subgroup if it substantially affects the overall appearance of the condominium or substantially affects living conditions of unit owners not included in the voting subgroup. (1985 (Reg. Sess., 1986), c. 877, s. 1.)

OFFICIAL COMMENT

Subsection (c) addresses an increasingly important matter in the governance of condominiums: the role of tenants occupying unite owned by investors or other persons. Most present statutes require voting by owners in e association. However, it may be desirable to give lessee, rather than lesson, of units the right to vote on issues involving day to-day operation both because lessees may have a greater interest than the lesson and because it is desirable to have lessees feel they are an integral part of condominium community.

NORTH CAROLINA COMMENT

Subsections (a) (c) and (d) are not significantly different from the Uniform Act. In subsection (b) the words "or purports to be revocable without notice" was deleted because such a proxy was deemed to be inconceivable.

Subsection (e) was added and authorizes provision to be made the declaration for subgroup voting when an issue is of special interest solely to members of a defined subgroup of unit owners.

Subsection (f), also added, does not allow subgroup voting when issue to be voted upon substantially affects the overall appearance of the condominium or the living conditions of unit owners not included in the voting subgroup.

§ 47C-3-111. Tort and contract liability. 

• • (a) Neither the association nor any unit owner except the declarant is liable for that declarant's torts in connection with any part of the condominium which that declarant has the responsibility to maintain.
  • (b) An action alleging a wrong done by the association must be brought against the association and not against a unit owner.
  • (c) If an action is brought against the association for a wrong which occurred during any period of declarant control, and if the association gives the declarant who then controlled the association reasonable notice of and an opportunity to defend against the action, such declarant is liable to the association:
  • (1) for all tort losses not covered by insurance carried by the association suffered by the association or that unit owner, and 
  • (2) for all losses which the association would not have incurred but for a breach of contract. Nothing in this subsection shall be construed impose strict or absolute liability upon the declarant for wrongs or actions which occurred during the period of declarant control.
  • (d)

• • In any case where the declarant is liable to the association under this section, the declarant is also liable for all litigation expenses, including reasonable attorneys' fees, incurred by the association. Any statute of limitation affecting the association's right of action under this section is tolled until the period of declarant control terminates. A unit owner is not precluded from bringing an action contemplated by this section because he is a unit owner or a member or officer of the association. Liens resulting from judgments against the association are governed by G.S. 47C-3-117 (Other Liens Affecting the Condominium). (1985 (Reg. Seu., 1986), c. 877, s. 1.)

OFFICIAL COMMENT

• • 1. 1. This section provides that any action in tort or contract arising out of acts or omissions of the association shall be brought against the association and not against the individual unit owners. This changes the law in states where plaintiffs are forced to name individual unit owners as the real parties in the interest to any action brought against the association. The subsection also provides that a unit owner is not precluded from bringing an action in tort or contract against the association solely because he is a unit owner or a member of officer of the association.
  • 2. In recognition of the practical control that can (and in most cases will) be exercised by a declarant over the affairs of the association during any period of declarant control permitted pursuant to Section 3-103, subsection (a) provides that the association or any unit owner shall have a right of action against the declarant for any losses (including both payment of damages and attorneys’ fees) suffered by the association or any unit owner as a result of an action based upon a tort or breach of contract arising during any period of declarant control. To assure that the decision to bring such an action can be made by an executive board free from the influence of the declarant, the subsection also provides that any statute of limitations affecting such a right of action by the association shall be tolled until the expiration of any period of declarant control.
  • 3. If a suit based on a claim which accrued during the period of developer control is brought against the association after control of the association has passed from the developer, reasonable notice to, and grant of an opportunity to the developer to defend, are conditions to developer liability. If, however, suit is brought against the association while the developer is still in control, obviously the developer cannot later resist a suit by the association for reimbursement on the grounds of failure to notify. 

NORTH CAROLINA COMMENT

This section is not significantly different from the Uniform Act, however, references in the Uniform Act to owners of individual units were deleted. These references were felt to be unnecessary, and to diffuse the thrust of the section.

§ 47C-3-112. Conveyance or encumbrance of common elements.

• • (a)

• • Portions of the common elements may be conveyed or subjected to a security interest by the association if persons entitled to cast at least eighty percent (80%) of the votes in the association, including eighty percent (80%) of the votes allocated to units not owned by a declarant, or any larger percentage the declaration specifies, agree to that action; provided, that all the owners of units to which any limited common element is allocated must agree in order to convey that common element or subject it to a security interest. The declaration may specify a smaller percentage only if all of the units restricted exclusively to nonresidential uses. Distribution of the proceeds of the sale of a limited common element shall be ag provided by agreement between the unit owners to which it is allocated and the association. Proceeds of the sale or financing of a common element (other than a limited common element) shall be an asset of the association.
  • (b) An agreement to convey common elements or subject them to a security interest must be evidenced by the execution of an agreement, or ratifications thereof, in the same manner as a deed, by the requisite number of unit owners. The agreement must specify a date after which the agreement will be void unless recorded before that date. The agreement and all ratifications thereof must be recorded in every county in which a portion of the condominium is situated, and is effective only upon recordation.
  • (c) The association, on behalf of the unit owners, may contract to convey common elements or subject them to a security interest, but the contract is not enforceable against the association until approved pursuant to subsections (a) and (b). Thereafter, the association has all powers necessary and appropriate to effect the conveyance or encumbrance, including the power to execute deeds or other instruments.
  • (d) Any purported conveyance, encumbrance, judicial sale or other voluntary transfer of common elements, unless made pursuant to this section, is void.
  • (e) A conveyance or encumbrance of common elements pursuant to this section shall not deprive any unit of its rights of access and support. (1985 (Reg. Sess., 1986), c. 877, s. 1.)

OFFICIAL COMMENT

• • 1. 1. Subsection (a) provides that, on unit owners holding 80% of the votes in the association, parts of the common elements may be sold or encumbered. (80% is the percentage agreement of required for termination of the condominium under Section 2-118.) This power may be exercised during the period of declarant control, but, in order to be effective, 80% of non-declarant unit owners must approve the action. 

The ability to sell a portion of the common elements without termination of the condominium gives the condominium regime desirable flexibility. For example, the unit owners, some years after the initial creation of the condominium, may decide to convey away a portion of the open space which has been reserved as a part of the common elements because they no longer find the area useful or because they wish to use sale proceeds to make other improvements. Similarly, the ability to encumber common elements gives the association power to raise money for improvements through the device of mortgaging the improvements themselves. Of course, recreational improvements will frequently not be sufficient security for a loan for their construction. Nevertheless, the ability to take a security interest in such improvements may lead lenders to be more favorably disposed toward making a loan in larger amounts and at lower interest rates. 

• • 2. Subsection (b) requires that the agreement for sale or encumbrance be evidenced by the execution of an agreement in the same manner as a deed by the requisite majority of the unit owners. The agreement then must be recorded in the land records. The recorded agreement signed by the unit owners is not the conveyance itself, but is rather a supporting document which shows that the association has full power to execute a deed or mortgage. Under subsection (c). it is contemplated that the association will execute the actual instrument of conveyance. Under subsection (e), a conveyance or encumbrance of common elements may not deprive a unit owner of rights of access and support.
  • 3. Under the condominium form of ownership, each unit owner owns a share of the common elements as an appurtenant interest to his unit and, when the unit owner mortgages his unit, he also mortgages his appurtenant interest. The unit owner himself cannot convey his unit separately from its interest in the common elements nor can he convey his common element interest separately from the unit. Therefore, if there is a mortgage or other lien against any unit, the problem arises as to whether the association under this section can convey a part of the common elements free from the mortgage interest of the unit mortgage. Subsection (f) answers that question no. Therefore, a sale of encumbrance of common elements under this section would be subject to the superior priority of any prior mortgagee on the unit unless the mortgagee releases his interest therein.

The bracketed introductory language to subsection (f) is intended to permit an enacting state to choose whether or not the declaration could vary the rule of subsection (f). if the bracketed language is included, the declaration might provide, for example, that any subsequent conveyance of specified portions of the common elements would be free of prior security interest. In that case, the security interest in the common elements held by unit mortgagees would be cut in the common elements could significantly affect mortgagees, states considering inclusion of the bracketed language probably should consult mortgagee groups. If limited to particular common elements real estate such as portions of recreational area land, and if protections are provided for lender interests, the ability to convey free of prior security interests could contribute significantly to the continues economic viability of a project. Therefore, lenders may be favorable to inclusion of the bracketed language. 

The declaration could protect lender interests in connection with a conveyance freed of the security interests in a number of ways. For example, the declaration might provide for payment of a specified percentage of the sales price to unit mortgagees or it might provide that a specified percentage of the mortgage debt be paid to them. Also, the declaration might provide that no sale or encumbrance of common elements would be effective without the approval of a specified percentage of lenders. There are, no doubt, other devices which could afford substantial protection to lenders.

NORTH CAROLINA COMMENT

This section is not significantly different from the Uniform Act, however, in subsection (a) a special provision is set out concerning the distribution of the proceeds of any sale of a limited common element; and subsections (d) and (f) of the Uniform Act were deleted as unnecessary.

§ 47C-3-113. Insurance.

• • (a) Commencing not later than the time of the first conveyance of unit to a person other than a declarant, the association shall maintain, to the extent available:
  • (1) Property insurance on the common elements and units insuring against all risks of direct physical lose commonly insured against including fire and extended coverage perils. The total amount of insurance after application of any deductibles shall be not less than eighty percent (80%) of the replacement cost of the insured property at the time the insurance is purchased and at each renewal date, exclusive of land, excavations, foundations and other items normally excluded from property policies; and
  • (2) Liability insurance in reasonable amounts, covering all occurrences commonly insured against death, bodily injury and property damage arising out of or in connection with the use, ownership, or maintenance of the common elements.
  • (b) The insurance maintained under subdivision (a)(1) need not include improvements and betterments installed by unit owners.
  • (c) If the insurance described in subsection (a) is not reasonably available, the association promptly shall cause notice of that fact to be hand-delivered or sent prepaid by United States mail to all unit owners. The declaration may require the association to carry any other insurance, and the association in any event may carry any other insurance it deems appropriate to protect the association or the unit owners. 
  • (d) Insurance policies carried pursuant to subsection (a) must provide that:
  • (1) Each unit owner is an insured person under the policy with respect to liability arising out his interest in the common elements or membership in the association;
  • (2) The insurer waives its right to subrogation under the policy against any unit owners or members of his household;
  • (3) No act or omission by any unit owner, unless acting within the scope of his authority on behalf of the association, will prelude recovery under the policy; and
  • (4) If, at the time of a loss under the policy, there is other insurance in the name of a unit owner covering the same risk covered by the policy, the association’s policy provides primary insurance. 
  • (e) Any loss covered by the property policy under subsections (a)(1) and (b) shall be adjusted with the association, but the insurance proceeds for that loss shall be payable to any insurance trustee designated for that purpose, or otherwise to the association, and not to any mortgagee or beneficiary under a deed of trust. The insurance trustee or the association shall hold any insurance proceeds in trust for unit owners and lienholders as their interests may appear. 

Subject to the provisions of subsection (h), the proceeds shall be disbursed first for the repair or restoration of the damaged property, and unit owners and lienholders are not entitled to receive payment of any portion of the proceeds unless there is a surplus of proceeds after the property of the property has been completely repaired or restored, or the condominium is terminated. 

• • (f) An insurance policy issued to the association does not prevent a unit owner from obtaining insurance for his own benefit. 
  • (g) An insurer that has issued an insurance policy under this section shall issue certificates or memoranda of insurance to the association and, upon written request, to any unit owner, mortgagee, or beneficiary under a deed of trust. The insurer issuing the policy may not cancel or refuse to renew it until 30 days after notice of the proposed cancellation or nonrenewal has been mailed to the association, each unit owner and each mortgagee or beneficiary under a deed of trust to whom certificates or memoranda of insurance have been issued at their respective last known addresses.
  • (h) Any portion of the condominium for which insurance is required under this section which is damaged or destroyed shall be repaired or replaced promptly by the association unless (1) the condominium is terminated, (2) repair or replacement would be illegal under any State or local health or safety statute or ordinance, or (3) the unit owners deicide not to rebuild by an eighty percent (80%) vote, including one hundred percent (100%) approval of oners of units not to be rebuilt or owners assigned to limited common elements not to be rebuilt. The cost of repair or replacement in excess of insurance proceeds and reserves is a common expense. If the entire condominium is not repaired or replaced, (1) the insurance proceeds attributable to the damaged common elements shall be used to restore the damaged area to a condition compatible with the remainder of the condominium, (2) the insurance proceeds attributable units and limited common elements which are not rebuilt shall be distributed to the owners of those units and the owners of the units to which those limited common elements were allocated or to lienholders, as their interest may appear, and (3) the remainder of the proceeds shall be distributed to all unit owners or lienholders, as their interest may appear, in proportion to their common element interest. If the unit owners vote not to rebuild any unit, that unit’s allocated interests are automatically reallocated upon the vote as if the unit had been condemened under G.S. 47C-1-107(a), and the association promptly shall prepare, execute and record an amendment to the declaration reflecting the reallocations.notwithstanding the provisions of the subsection, G.S. 47C-2-118 governs the distribution of insurance proceeds if the condominium is terminated.
  • (i) The provisions of this section may be varied or waived in the case of a condominium all of whose units are restricted to nonresidential use. (1985 (Reg. Sess., 1986), c. 877, s. 1.)

OFFICIAL COMMENT

• • 1. 1. Subsections (a) and (b) provide that the required insurance must be maintained only to the extent reasonably available. This permits the association to comply with the insurance requirements even if certain coverages are unavailable or unreasonably expensive. 
  • 2. Subsection (b) represents to a significant departure from the present law in virtually all states by requiring that the association obtain and maintain property insurances on both the common elements and the units within buildings with “stacked” units. See Comment 3. While it has been common practice in many parts of the country (either by custom or as mandated by statute) for associations to maintain property insurance on the common elements, it has generally not been the practice for the property insurance policy to cover individual units as well. However, given the great interdependence of the unit owners in the stacked unit condominium situation, mandating property insurance for the entire building is the preferable approach. Moreover, such an approach will greatly simplify claims procedures, particularly where both common elements and portions of a unit have been destroyed. If common elements and units are insured separately, the insurers could be involved in disputes as to the coverage provided by each policy.

The Act does not mandate association insurance on units in town house or other arrangements in which there are no stacked units. However, if the developer wishes, the declaration may require association insurance as to units having shared walls or as to all units in the development. Many developments will have some units with horizontal boundaries and other units with no horizontal boundaries.in that case, association insurance as to the units having horizontal boundaries is required, but it is not necessary as to other units.

• • 3. The distinction between what is a common element and what is a unit with respect to the insurance coverage required by this section is complex. The definitions of common elements and a unit in Section 1-103(4) and (25) are not sufficient for this purpose. To determine the distinction between the common elements and units, one must refer first to the declaration’s section on unit boundaries. That section will define the unit boundaries. If the declaration fails to do so, the provisions of Section 2-102 apply.

In summary, Section 2-102 provides that, if the declaration is silent, all non-loadbearing and non-structural portions of the walls, floors and ceilings are part of the unit, while all loadbearing and structural portions of the walls, floors, and ceilings are common elements. Further, with respect to any structure partially within and partially outside of the boundaries of a unit, any portion thereof serving only that unit is a limited common element (see definition in Section 1-103(16)), and any portion thereof serving more than one unit or any portion of the common elements is a part of the common elements. This treats and defines ownership of all portions of the electrical, plumbing, and mechanical systems serving the building not entirely within the boundaries of a unit. 

All spaces, interior partitions electrical, plumbing and mechanical systems, and all other items within the boundaries of the unit which are attached to the unit boundaries, whether or not deemed fixtures under state law, are part of the unit.

Put simply, if any item is installed, constructed, repaired or replaced by the declarant or his successor in connection with the original sale of a stacked unit, the item is insured by the association. Clearly, this does not include items of personal property easily movable within the unit or easily removable form the unit (whether or not deemed a fixture under state law), such as a vase, table or other furnishings. If installed by the unit owner, the item should be insured by the unit owner. Those items, installed by the unit owner and not covered by the association policy, are called “improvements and betterments”. 

• • 4. Although “all risk” coverage is not required as to conversion buildings, but merely fire and extended coverage, this is not intended to imply that such coverage is unnecessary. “All risk” coverage is not required because it may not be appropriate in the case of an unrenovated conversion where cost is a critical factor. 
  • 5. The minimum requirement as to the amount of insurance, which is 80% of the actual cash value, should not be viewed as a recommendation; rather, the 80% is a floor. Typically, many condominium documents require insurance in an amount equal to 100% of the replacement cost of the insured property. The Act permits greater flexibility, however, inasmuch as different types of construction and varieties of projects may not required such total coverage with its attendant higher premium cost.
  • 6. Subsection (a)(2) covers only the liability of the association, and unit owners as members, but does not cover the unit owner’s individual liability for his acts or omissions or liability for occurrences within his unit.
  • 7. Clause (i) of the third sentence of subsection (h) would operate as follows: 
  • (1) If the condominium consists of campsites, restoration after fire damage might consist of merely resodding the area damages; (2) if the condominium consists of separate garden-type buildings, restoration after firer damage might consist of demolishing the remaining structure and paving or landscaping the area; and (3) if the condominium consists of a single highrise building, restoration may not be required (if the building is substantially destroyed) inasmuch as “a condition compatible with the remainder of the condominium” would be damaged and unrestored. 
  • 8. The scheme of this section, as set forth in subsection (h), is that any damage or destruction to any portion of the condominium must be replaced (if repairs can be made consistent with applicable safety and health laws) absent a decision to terminate the condominium or a decision by 80% of the unit owners (including the owners of any damaged units) not to rebuild. Unless a decision is made not to rebuild, any available insurance proceeds must be used to effectuate such repairs. For this reason, subsection (e) provides that any loss covered by the association’s property insurance policy shall be adjusted with the association and that the proceeds for any loss shall be payable to the association or to any insurance trustee that may be designated for such purpose. Significantly, such insurance proceeds may not be paid to any mortgagee or other outside party. This provision is necessary to insure that insurance proceeds are available to effectuate any repairs or restoration to the condominium that may be required.
  • 9. In the case of commercial or industrial condominiums, nit owners may prefer to act as self-insurers or make other arrangements with respect to property insurance. Accordingly, subsection (i) provides that the insurance requirements of this section may be varied or waived in the case of a condominium all of the units of which are reserved exclusively for non-residential use. Such waiver or modification is not possible in the case of a mixed-use condominium, some of the units of which are used for residential purposes. 

NORTH CAROLINA COMMENT

This section is not significantly different from the Uniform Act, however, minor changes have been made for the sake of clarity and minor deletions have been made to eliminate unnecessary language. the term “actual cash value” was changed to “replacement cost”.

§ 47C-3-114. Surplus funds.

Unless otherwise provided in the declaration, any surplus funds of the association remaining after payment of or provisions for common expenses and any prepayment of reserves must be paid to the unit owners in proportion to their common expense liabilities or credited to them to reduce their future common expense assessments. (1985 (Reg. Sess., 1989), c. 877 s. 1.)

OFFICIAL COMMENT

Surplus funds of the association are generally used first, for the pre-payment of reserves, and remaining funds are thereafter credited to the account of unit owners or paid to them. In some cases, however, unit owners might prefer that surplus funds be ised for other purposes (e.g., the purchase of recreational equipment). Accordingly, this section permits the declaration to specify any other use of surplus funds.

NORTH CAROLINA COMMENT

This section is not significantly different from the Uniform Act.

§ 47C-3-115. Assessments for common expense.

• • (a) Until the association makes a common expense assessment, the declarant shall pay all the common expenses. After any assessment has been made by the association, assessments thereafter must be made at least annually by the association.
  • (b) Except for assessments under subsections (c), (d), and (e), all common expenses must be assessed against all the units in accordance with the allocations set forth in the declaration pursuant to G.S. 47C-2-107(a). Any past due common expense assessment or installment thereof bears interest at the rate established by the association not exceeding eighteen percent (18%) per year. 
  • (c) To the extent required by the declaration:
  • (1) Any common expense associated with the maintenance, repair, or replacement of a limited common element must be assessed against the units to which that limited common element is assigned, equally, or in any other proportion that the declaration provides;
  • (2) Any common expense or portion thereof benefiting fewer than all of the units must be assessed exclusively against the units benefited; and
  • (3) The costs of insurance must be assessed in proportion to risk and the costs of utilities must be assessed in proportion to usage.
  • (d) Assessments to pay a judgment against the association (G.S. 47C-3-117(a)) may be made only against the units in the condominium at the time the judgment was entered, in proportion to their common expense liabilities.
  • (e)

• • If any common: expense is caused by the misconduct of any unit owner, the association may assess that expense exclusively against his unit. 
  • (f) If common expense liabilities are reallocated, common expense assessments and any installment thereof not yet due shall be recalculated in accordance with the reallocated common expense liabilities. (1985 (Reg. sess., 1986), c. 877, s. 1.)

OFFICIAL COMMENT

• • 1. 1. This section contemplates that a declarant might find it advantageous, particularly in the early stages of condominium development, to pay all of the expenses of the condominium himself rather than assessing each unit individually. Such a situation might arise, for example, where a declarant owns most of the unite in the condominium and wishes to avoid building the costs of each unit separately and Crediting payment to each unit. It might also arise in the cage of a declarant who, although willing to assume all expenses of the condominium, is unwilling to make payments for replacement reserves or for other expenses which he expects will ultimately be part of the association's budget. Subsection (a) grants the declarant such flexibility while at the same time providing that once an assessment is made against any unit, all units, including those owned by the declarant, must be assessed for their full portion of the common expense liability.
  • 2. Under subsection (c), the declaration may provide for assessment on a basis other than the allocation made in Section 2-107 as to limited common elements, other expenses benefiting than all units, insurance costs, and utility costs.
  • 3. If additional units are added to a condominium after a judgment has been entered against the association, the new units are not assessed any part of the judgment debt. Since unit owners will know the assessment, and since such unpaid judgment assessments would affect the price paid by purchasers of units, it would be complicated and un necessary to fairness to reallocate judgment assessments when new units are added.
  • 4. Subsection (f) refers to those in stances in which various provisions of this Act require that common expense liabilities be reallocated among the units of a condominium by amendment to the declaration. These provisions include Section 1-107 (Eminent Domain), Section 2-106(d) (expiration of certain leases), Section 2-110 (Exercise of Development Rights) and Section 2-113(b) (subdivision or conversion of units).

NORTH CAROLINA COMMENT

This section is not significantly different from the Uniform Act. 

§ 47C-3-116. Lien for assessments. 

• • (a)

• • Any assessment levied against a unit remaining unpaid for a period of 30 days or longer shall constitute a lien on that unit when filed of record in the office of the clerk of superior court of the county in which the unit is located in the manner provided therefor by Article 8 of Chapter 44 of the General Statutes. The association's lien may be foreclosed in like manner as a mortgage on real estate under power of sale under Article 2A of Chapter 45 of the General Statutes. Unless the declaration otherwise provides, fees, charges, late charges, fines, and interest charged pursuant to G.S. 47C-3-102(10), (11), and (12), G.s. 47C-3-107(d), and 47C-3-107A, are enforceable as assessments under this section.
  • (b) The lien under this section is prior to all other liens and encumbrances on a unit except (i) liens and encumbrances (specifically including, but not limited to, a mortgage or deed of trust on the unit) recorded before the docketing of the lien in the office of the clerk of superior court, and (ii) liens for real estate taxes and other governmental assessments or charges against the unit. This subsection' does not affect the priority of mechanics' or materialmen's liens.
  • (c) A lien for unpaid assessments is extinguished unless proceedings to enforce the lien are instituted within three years after the docketing thereof in the office of the clerk of superior court.
  • (d) This section does not prohibit actions to recover sums for which subsection (a) creates a lien or prohibit an association taking a deed in lieu of foreclosure.
  • (e) A judgment, decree or order in any action brought under this section must include costs and reasonable attorney's fees for the  prevailing party.
  • (f) Where the holder of a first mortgage or first deed of trust of record, or other purchaser of a unit, obtains title to the unit as a result of foreclosure of a first mortgage or first deed of trust, such purchaser, and its heirs, successors and assigns, shall not be liable for the assessments against such unit which became due prior to acquisition of title to such unit by such purchaser. Such unpaid assessments shall be deemed to be common expenses collectible from all the unit owners including such purchaser, and its heirs, successors and assigns. (1985 (Reg. Sess., 1986), c. 877, s. 1.)

OFFICIAL COMMENT

• • 1. 1. Subsection (a) provides that the association's lien on a unit for unpaid assessments shall be enforceable in the game manner as mortgage liens. In addition, if the use of a power of sale pursuant to a mortgage is permit in a particular state, the bracketed language  (with an appropriate citation inserted) may be used to ensure that the association's lien for unpaid assessments may also be enforced through the power of gale device. The bracketed language requiring notice of foreclosure should be adopted only in states in which the power of sale statute does not require  notice to junior lienholders.
  • 2. To ensure prompt and efficient enforcement of association’s lien for unpaid assessments, such liens should enioy statutory priority over most other liens. Accordingly, subsection (a) provides that the association's lien takes priority over all other liens and encumbrances except those recorded prior to the recordation of the declaration, those imposed for real estate taxes or other governmental assessments or charges against the unit, and first mortgages recorded before the date the assessment became delinquent. However, as to prior first mortgages, the association’s lien does have priority for 6 months assessments based on the periodic budget. A significant departure from existing practice, the 6 months’ priority for the assessment lien strikes an equitable balance between the need to enforce collection of unpaid assessments and the obvious necessity for protecting the priority of the security interests of mortgage lenders. As a practical matter, mortgage lenders will most likely pay the 6 months’ assessments demanded by the association rather than having the association foreclose on the unit. If the mortgage lender wishes, an escrow for assessments can be required. Since this provision may conflict with the provisions of some statutes which forbid some lending institutions from making loans not secured by first priority liens, the law of each should be reviewed and amended when necessary.
  • 3. Subsection (e) makes clear that the association may have remedies short of foreclosure of its lien that can be used to collect unpaid assessments. The association, for example, might bring an action in debt or breach of contract against a recalcitrant unit owner rather than resorting to foreclosure.
  • 4. In view of the association’s powers to enforce its lien for unpaid assessments, subsection (f) provides unit owners with a method to determine the amount presently due and owing. A unit owner may obtain a statement of any unpaid assessment, including fines and other charges enforceable as assessments under subsection (a), currently levied against his unit. The statement is binding on the association, the executive board, and every unit owner in any subsequent action to collect such unpaid assessments.
  • 5. Units may be part of a condominium and of a larger real estate regime (see the Uniform Planned Community Act, promulgated by National Conference of Commissioners on Uniform State Laws in 1980, which would govern m0st associations with assessment powers). For example, a large real estate development any [may] consist of a larger planned community which contains detached single family dwellings and town houses which are not part of any condominium and a highrise building which is organized ag a condominium within the planned community. In that cage, the planned community association might assess the condominium units for the general maintenance expenses of the planned community and the condominium association would assess for the direct maintenance expenses of the building itself. In such a situation, subsection (c) provides that unpaid liens of the two associations have equal priority regardless of the relative time of creation of the two regimes and regardless of the time the assessments were made or become delinquent.

NORTH CAAOLINA COMMENT

This Section differs from the Uniform Act and follows previous North Carolina law by requiring that liens of the owners association must be recorded to be perfected and by persevering the priority of purchase money mortgages in order to comply with requirements established by federal mortgage agencies. The act provides for automatic attorney's fees to the prevailing party thereby enhancing the association’s ability to enforce the lien. 

§ 47C-3-117. Other liens affecting the condominium.

• • (a) A judgment for money against the association is not a lien on the common elements, but if docketed is a lien in favor of the judgment lienholder against all of the units in the condominium at the time the judgment was entered. No other property of a unit owner is subject to the claims of creditors of the association. 
  • (b) Notwithstanding the provisions of subsection (a), if the association has granted a security interest in the common elements to a creditor of the association pursuant to G.S. 47C-3-112, the holder of that security interest must exercise its right against the common elements before its judgment lien on any unit may be enforced.
  • (c) Whether perfected before or after the creation of the condominium, if a lien other than a deed of trust or mortgage, including a judgment lien or lien attributable to work performed or materials supplied before creation of creation condominium, becomes effective against two or more units, the unit owner of an affected unit may pay the lienholder the amount of the lien attributable to his unit, and the lienholder, upon receipt of payment, promptly shall deliver a release of the lien covering that unit. The amount of the payment must be proportionate to the r4aio which that unit owner's common expense liability bears to the common expense liabilities of all unit owners whose units are subject to the lien. After payment, the association may not assess or have a lien against that unit owner's unit for any portion of the common expenses incurred in connection with that lien.
  • (d) A judgment against the association shall be indexed in the name of the condominium and the association and, if so indexed, is notice of the lien against the units. (1985 (Reg. Sess., 1986), c. 877, s. 1.)

OFFICIAL COMMENT 

• • 1. 1. This section deals with the effect of the unit owners of judgements against the association. The issue is not free from difficulty. Presently, in most states, if the association is organized as a corporation, the unit owners are likely to receive the insulation from liability given shareholders of a corporation, so that the judgment lienholder can satisfy his judgment only against the property of the association. On the other hand, if the association is organized as an unincorporated rated association, under the law of most states each unit owner would have joint and several liability on the judgement. This Act strikes a balance between the two extremes, making the judgement lien a direct lien against each individual unit, but allowing the individual unit owner to discharge the lien by payment of his pro-rata share of the judgement. The judgement would also be a lien against any property owned by the association. 
  • 2. It should be noted that, while the judgment lien runs directly against unit owners, the actual liability of the unit owner from direct liability were applied. If incorporated association inly is liable for a judgement, it will, of course, have no assets to satisfy the judgement except whatever personal property and real estate not a part of the common elements it owns. If a checking account or other cash funds of the association are attached or garnished by the creditor, the association, in order to maintain its operations and fulfill its other obligations, will be obliged to make an additional assessment against unit owners to cover the judgement. The same result follows if the association is to prevent the sale of other assets at an executional sale. That additional assessment would be in precisely the amount for which this Act gives a direct lien against the individual owners. Further, if an association which is without sufficient assets to satisfy a judgement refuses to make assessments from which the creditor can have his claim satisfied, it is very likely that a court, in a supplemental proceeding on the judgement, would direct the association to make the necessary assessments against the unit owners. Unpaid assessment made by the association constitute liens against units just as do judgements. 

Therefore, whether the lien of the judgement creditor runs against the units directly, or whether the lien is inly against the association which finds it necessary to make additional assessments to satisfy the judgement, the unit owner who does not pay his proportionate share will end up with a lien against his unit. 

The differences, therefore, between the lien system established by Section 3-117 and the system which would be applicable if ordinary corporation rules were applied are these:

• • (1) The unit owner can discharge his unit from the lien and free it from the possibility of being subsequently assessed by the association for the judgment by making a payment directly to the lien holder. This ability may be valuable to a unit owner who is in the process of selling or securing a mortgage on his unit during the period between the time the judgment is entered and the time the association makes a formal assessment against individual unit owners for the amount of the judgement lien.
  • (2) The judgment creditor through his ability to threaten to foreclose the lien on an individual unit if the judgment is not paid is given some leverage over individual unit owners to encourage them to see that the association pays the judgment. Procuring an assessment through pressure on individual unit owners may be quicker and cheaper for the judgment creditor than using supplemental proceedings and having a judge order that the board of directors make the necessary assessment.

In the rare cage where, under corporation law an association could avoid payment of a judgment by dissolution of the association and vesting of title to the units in the unit owners as tenants-in-common or otherwise, the National Conference of Commissoners on Uniform State Laws believes that that result is inappropriate, and that the unit in the condominium itself should be viewed as equity property of the association capable of being reached by judgment creditors in satisfaction of the judgment. As a matter of social policy the condominium association is in quite a different position than the ordinary corporation. The corporation statutes provide shareholders immunity from liability for debts of the corporation to encourage investment in corporations whose entrepreneurial activities in the marketplace contribute to the general wealth and well-being of society. The condominium association, in managing the affairs of the homeowners, does not serve the game entrepreneurial function. It seems reasonable, as a matter of social policy, that an individual homeowner who would be fully liable for debts incurred in the renovation and maintenance of his home or for torte caused by his failure to adequately maintain the premises should not be able to entirely avoid that liability through the device of organizing with other homeowners into a condominium association. On the other hand, it is perhaps not fair to a unit owner in a condominium regime to have all of his assets at risk based on the contracts of the association over which he has little control and as to which he has only a fractional interest or benefit.

It should be noted that, except for situations in which the association has given a mortgage or deed of trust on common elements, the judgment creditor cannot assert a lien against common elements, but is rather left to a lien against the units. That is, the judgment creditor has no power to levy on the golf course or on the swimming pool or other open spaces and sell them independently of the units to satisfy the judgement.

NORTH CAROLINA COMMENT

This section is not significantly different from the Uniform Act. 

§ 47C-3-118. Association records.

The association shall keep financial records sufficiently detailed to enable the association to comply with this chapter. All financial and other records shall be made reasonably available for examination by any unit owner and his authorized agents. (1985 (Reg. Sess., 1986), c. 877, s. 1.)

NORTH CAROLINA COMMENT

This section is not significantly different from the Uniform Act.

§ 47C-3-119. Association as trustee.

With respect to a third person dealing with the association in the association’s capacity as a trustee under G.S. 47C-2-118 following termination or G.S. 47C-3-113 for insurance proceeds, the existence of trust powers and their proper exercise by the association may be assumed without inquiry. A third person is not bound to inquire whether the association has power to act as trustee or is properly exercising trust powers and a third person, without actual knowledge that the association is exceeding or improperly exercising its powers, is fully protected in dealing with the association as if it possessed and properly exercised the powers it purports to exercise. A third person is not bound to assure the proper application of trust assets paid or delivered to the association in its capacity as such trustee. (1985 (Reg. Sess., 1986), c. 877, s. 1.)

OFFICIAL COMMENT

Based on Section 7 of the Uniform when the association is acting as a Trustees’ Powers Act, this section is in trustee for the unit owners, either under tended to protect an innocent third party  Section 3-113 for insurance proceeds, or in its dealings with the association only Section 2-118 following termination.

NORTH CAROLINA COMMENT

This section is not significantly different from the Uniform Act.