Condominium associations often choose to finance major common element repair projects by obtaining bank loans. This type of loan is typically secured by the association’s pledge to the lender of all or substantially all of the association’s assets, including the association’s assessment receivables, operating account and reserves. Effective January 1, 2017, the procedure for approving this pledge of collateral has been streamlined for Illinois condominium associations.
It is fairly common for condominium instruments (particularly older sets of documents) to require that a condominium association obtain the consent of two-thirds or some other supermajority of the unit owners before pledging all or substantially all of the association’s assets as collateral. Previously, Subsection 18.4(m) of the Illinois Condominium Property Act provided that such unit owner approval requirements were enforceable. This unit owner consent requirement often proved burdensome to condominium boards seeking to undertake much-needed common element repair projects and to spread the repair costs over time, rather than having to fund the projects through large special assessments payable within a short time frame. Historically, many condominium boards were unaware that their condominium instruments contained this restriction and were caught by surprise when the restriction was discovered shortly before the scheduled loan closing date and the anticipated commencement of the repair contractor’s work.
Effective January 1, 2017, Subsection 18.4(m) has been amended to provide that all condominium associations have the right to pledge all or substantially all of the assets of the association by a majority vote of the entire board of managers, regardless of governing document restrictions requiring unit owner consent. This change will make loan transactions much more efficient for many condominium associations, obviating the need to obtain a supermajority vote of the unit owners, amend the condominium instruments or restructure the loan transaction due to governing document language restricting the authority to pledge assets.
Condominium associations should remain aware that governing documents may contain other restrictions relevant to a loan transaction which remain unaffected by the amendment to Subsection 18.4(m). Most notably, the governing documents might contain a contract duration limitation applicable to loan transactions having loan terms exceeding a specified number of years. Also, it is important to note that the change to Subsection 18.4(m) only affects condominium associations and does not apply to other types of community associations. It therefore remains advisable for all community associations to consult with legal counsel regarding the scope of corporate authority to enter into a loan transaction during a project’s planning stage, before entering into a binding transaction with a lender or repair contractor.
Scott A. Rosenlund