SB1387 - 561R

Be it enacted by the Legislature of the State of Arizona:

Section 1. Section 33-1202, Arizona Revised Statutes, is amended to read:

START_STATUTE33-1202. Definitions

In the condominium documents, unless specifically provided otherwise or the context otherwise requires, and in this chapter:

1. "Affiliate of a declarant" means any person who controls, is controlled by or is under common control with a declarant.

2. "Allocated interests" means the undivided interests in the common elements, the common expense liability and votes in the association allocated to each unit.

3. "Articles of incorporation" means the instrument by which an incorporated association or unit owners' association is formed and organized under this state's corporate statutes.

4. "Association" or "unit owners' association" means the unit owners' association organized under section 33-1241.

5. "Board of directors" means the body, regardless of its name, designated in the declaration and given general management powers to act on behalf of the association.

6. "Bylaws" means the bylaws required by section 33-1246.

7. "Common elements" means all portions of a condominium other than the units.

8. "Common expense liability" means the liability for common expenses allocated to each unit pursuant to section 33-1217.

9. "Common expenses" means expenditures made by or financial liabilities of the association, together with any allocations to reserves.

10. "Condominium":

(a) Means real estate, portions of which are designated for separate ownership and the remainder of which is designated for common ownership solely by the owners of the separate portions. Real estate is

(b) Does not include a condominium unless the undivided interests in the common elements are vested in the unit owners.

11. "Condominium documents" means the declaration, bylaws, articles of incorporation, if any, and rules, if any.

12. "Declarant" means any person or group of persons who reserves, is granted or succeeds to any special declarant right.

13. "Declaration" means any instruments, however denominated, that create a condominium and any amendments to those instruments.

14. "Development rights" means any right or combination of rights reserved by or granted to a declarant in the declaration to do any of the following:

(a) Add real estate to a condominium.

(b) Create easements, units, common elements or limited common elements within a condominium.

(d) Withdraw real estate from a condominium.

(e) Make the condominium part of a larger condominium or planned community.

(f) Amend the declaration during any period of declarant control, pursuant to section 33-1243, subsection E H, to comply with applicable law or to correct any error or inconsistency in the declaration, if the amendment does not adversely affect the rights of any unit owner.

(g) Amend the declaration during any period of declarant control, pursuant to section 33-1243, subsection E H, to comply with the rules or guidelines, in effect from time to time, of any governmental or quasi-governmental entity or federal corporation guaranteeing or insuring mortgage loans or governing transactions involving mortgage instruments.

15. "Identifying number" means a symbol or address that identifies one unit in a condominium.

16. "Leasehold condominium" means a condominium in which all or a portion of the real estate is subject to a lease the expiration or termination of which will terminate the condominium or reduce its size.

17. "Limited common element" means a portion of the common elements specifically designated as a limited common element in the declaration and allocated by the declaration or by operation of section 33-1212, paragraph 2 or 4 for the exclusive use of one or more but fewer than all of the units.

18. "Person" means:

(a) A natural person, corporation, business trust, estate, trust, partnership, association, joint venture, government, governmental subdivision or agency, or other legal or commercial entity.

(b) In the case of a subdivision trust, as defined in section 6-801, person means the beneficiary of the trust who holds the right to subdivide, develop or sell the real estate rather than the trust or trustee.

19. "Real estate":

(a) Means any legal, equitable, leasehold or other estate or interest in, over or under land, including structures, fixtures and other improvements and interests which by custom, usage or law pass with a conveyance of land though not described in the contract of sale or instrument of conveyance. Real estate

(b) Includes parcels with or without upper or lower boundaries and spaces that may be filled with air or water.

20. "Rules" means the provisions, if any, adopted pursuant to the declaration or bylaws governing maintenance and use of the units and common elements.

21. "Special declarant rights" means any right or combination of rights reserved by or granted to a declarant in the declaration to do any of the following:

(a) Construct improvements provided for in the declaration.

(b) Exercise any development right.

(d) Use easements through the common elements for the purpose of making improvements within the condominium or within real estate which that may be added to the condominium.

(e) Appoint or remove any officer of the association or any board member during any period of declarant control.

22. "Unit" means a portion of the condominium designated for separate ownership or occupancy.

23. "Unit owner":

(a) Means a declarant or other person who owns a unit or, unless otherwise provided in the lease, a lessee of a unit in a leasehold condominium whose lease expires simultaneously with any lease the expiration or termination of which will remove the unit from the condominium. But

(b) Does not include a person having an interest in a unit solely as security for an obligation.

(c) In the case of a contract for conveyance, as defined in section 33-741, of real property, unit owner means the purchaser of the unit. END_STATUTE

Sec. 2. Section 33-1215, Arizona Revised Statutes, is amended to read:

START_STATUTE33-1215. Contents of declaration

A. The declaration shall contain:

1. The name of the condominium, which shall include the word "condominium" or be followed by the words "a condominium", and the name of the association.

2. The name of every county in which any portion of the condominium is located.

3. A legal description of the real estate included in the condominium.

4. A description of the boundaries of each unit created by the declaration, including each unit's identifying number.

5. A description of any limited common elements, other than those specified in section 33-1212, paragraphs 2 and 4, but the declaration shall contain a description of any porches, balconies, patios and entryways, if any, as provided in section 33-1219, subsection B, paragraph 11.

6. A description of any development rights and other special declarant rights, together with a legal description of the real estate to which each of those rights applies, any time limit within which each of those rights must be exercised and any other conditions or limitations under which the rights described in this paragraph may be exercised or will lapse.

7. An allocation to each unit of the allocated interests in the manner described in section 33-1217.

8. Any restrictions on use, occupancy and alienation of the units.

9. All matters required by sections 33-1216, 33-1217, 33-1218, 33-1219 and 33-1226 and section 33-1243, subsection E H.

10. A statement that the assessment obligation of the unit owner under section 33-1255 is secured by a lien on the owner's unit in favor of the association pursuant to section 33-1256.

11. If the condominium is a conversion from multifamily rental to condominiums, a statement containing all of the following:

(a) A statement that the property is a conversion from multifamily rental to condominiums.

(b) The date original construction was completed.

(c) The name and address of the original owner, builder, developer and general contractor as shown on the applicable city, town or county building permit.

(d) The name and address of each subsequent owner as determined by a search of the county recorder's records in the county in which the property is located.

(e) The subdivider's agreement to provide the following information on request:

(i) The name and address of any builder, developer, general contractor, subcontractor, architect and engineer who designed or made improvements to the property immediately before the first condominium was sold.

(ii) A specific description of all improvements made.

B. If a city, town or county is unable to produce a building permit as required in subsection A, paragraph 11, subdivision (c) of this section, the subdivider shall submit a letter from the applicable city, town or county stating that the information required by subsection A, paragraph 11, subdivision (c) of this section is not available.

C. The declaration may contain any other matters the declarant deems appropriate. END_STATUTE

Sec. 3. Section 33-1243, Arizona Revised Statutes, is amended to read:

START_STATUTE33-1243. Board of directors and officers; conflict; powers; limitations; duties; indemnification; removal; annual audit; applicability

A. Except as provided in the declaration, the bylaws, subsection B of this section or other provisions of this chapter, the board of directors may act in all instances on behalf of the association.

B. The board of directors shall not act on behalf of the association to amend the declaration, terminate the condominium, elect members of the board of directors or determine the qualifications, powers and duties or terms of office of board of directors members. Except as provided in subsection H K of this section, the board of directors may fill vacancies in its membership for the unexpired portion of any term.

C. If any contract, decision or other action for compensation taken by or on behalf of the board of directors would benefit any member of the board of directors or any person who is a parent, grandparent, spouse, child or sibling of a member of the board of directors or a parent or spouse of any of those persons, that member of the board of directors shall declare a conflict of interest for that issue. The member shall declare the conflict in an open meeting of the board before the board discusses or takes action on that issue and that member may not then vote on that issue. the declaration of the conflict of interest shall be recorded in the minutes of the meeting. Any contract entered into in violation of this subsection is void and unenforceable.

D. IN ADDITION TO the DUTIES IMPOSED BY THIS CHAPTER AND THE CONDOMINIUM DOCUMENTS, THE ASSOCIATION THRoUgh ITS BOARD OF DIRECTORS HAS THE FOLLOWING DUTIES TO THE UNIT OWNERS OF THE CONDOMINIUM AS A WHOLE:

1. TO ACT WITH THE CARE AN ORDINARILY PRUDENT PERSON IN A LIKE POSITION WOULD EXERCISE UNDER SIMILAR CIRCUMSTANCES IN MANAGING AND MAINTAINING THE COMMON PROPERTY AND IN PROTECTING AND MANAGING THE FINANCIAL ASSETS AND AFFAIRS OF THE ASSOCIATION.

2. TO TREAT UNIT OWNERS FAIRLY AND TO ENSURE THAT THIS DUTY IS REQUIRED OF ANY AGENT ACTING ON ITS BEHALF.

3. TO ACT REASONABLY IN THE EXERCISE OF ITS DISCRETIONARY POWERS, INCLUDING RULEMAKING, ENFORCEMENT AND DESIGN-CONTROL POWERS.

E. THE DIRECTORS AND OFFICERS OF A CONDOMINIUM ASSOCIATION HAVE A DUTY TO THE ASSOCIATION TO ACT IN GOOD FAITH, TO ACT IN COMPLIANCE WITH AND WITHIN THE AUTHORITY OF THis chapter AND THE CONDOMINIUM DOCUMENTS, TO DEAL FAIRLY WITH THE ASSOCIATION AND ITS UNIT OWNERS AND TO USE ORDINARY CARE AND PRUDENCE IN PERFORMING THEIR FUNCTIONS.

F. THE ASSOCIATION and ITS DIRECTORS AND OFFICERS ARE INDEMNIFIED FROM ANY LIABILITY FOR ANY ACTION TAKEN OR ANY FAILURE TO TAKE ANY ACTION IF THE DUTIES WERE PERFORMED IN COMPLIANCE WITH SUBSECTIONs D AND E of this section. IN ANY PROCEEDING filed pursuant to THIS SECTION, A DIRECTOR HAS ALL OF THE DEFENSES AND PRESUMPTIONS ORDINARILY AVAILABLE TO A DIRECTOR. A DIRECTOR IS PRESUMED IN ALL CASES TO HAVE ACTED, FAILED TO ACT OR OTHERWISE DISCHARGED the director's DUTIES IN ACCORDANCE WITH SUBSECTIONs D AND E of this section. THE PARTY CHALLENGING THE ASSOCIATION'S OR DIRECTOR'S ACTION, FAILURE TO ACT OR OTHER DISCHARGE OF DUTIES has THE BURDEN TO ESTABLISH A BREACH OF DUTY BY CLEAR AND CONVINCING EVIDENCE OF FACTS REBUTTING THE PRESUMPTION. UNLESS THE BREACH OF DUTY IS BASED ON ANY ACTION OUTSIDE THE AUTHORITY OF THE BOARD OF DIRECTORS OR INDIVIDUAL DIRECTORs, THE CHALLENGER HAS AN ADDITIONAL BURDEN OF PROVING THAT THE ACTION BY THE ASSOCIATION OR DIRECTOR CAUSED OR THREATENS TO CAUSE HARM TO THE UNIT OWNER INDIVIDUALLY OR TO THE INTEREST OF THE CONDOMINIUM COMMUNITY.

D. G. Except as provided in the declaration, within thirty days after adoption of any proposed budget for the condominium, the board of directors shall provide a summary of the budget to all the unit owners. Unless the board of directors is expressly authorized in the declaration to adopt and amend budgets from time to time, any budget or amendment shall be ratified by the unit owners in accordance with the procedures set forth in this subsection. If ratification is required, the board of directors shall set a date for a meeting of the unit owners to consider ratification of the budget not fewer than fourteen nor or more than thirty days after mailing of the summary. Unless at that meeting a majority of all the unit owners or any larger vote specified in the declaration rejects the budget, the budget is ratified, whether or not a quorum is present. If the proposed budget is rejected, the periodic budget last ratified by the unit owners shall be continued until such time as the unit owners ratify a subsequent budget proposed by the board of directors.

E. H. The declaration may provide for a period of declarant control of the association, during which period a declarant or persons designated by the declarant may appoint and remove the officers and members of the board of directors. Regardless of the period provided in the declaration, a period of declarant control terminates no not later than the earlier of:

1. Ninety days after conveyance of seventy-five percent of the units that may be created to unit owners other than a declarant.

2. Four years after all declarants have ceased to offer units for sale in the ordinary course of business.

F. I. A declarant may voluntarily surrender the right to appoint and remove officers and members of the board of directors before termination of the period prescribed in subsection E H of this section, but in that event the declarant may require, for the duration of the period of declarant control, that specified actions of the association or board of directors, as described in a recorded instrument executed by the declarant, be approved by the declarant before they become effective.

G. J. Not later than the termination of any period of declarant control the unit owners shall elect a board of directors of at least three members, at least a majority of whom must be unit owners. The board of directors shall elect the officers. The board members and officers shall take office on election.

H. K. Notwithstanding any provision of the declaration or bylaws to the contrary, all of the following apply to a meeting at which a member of the board of directors, other than a member appointed by the declarant, is proposed to be removed from the board of directors:

1. The unit owners who are eligible to vote at the time of the meeting may remove any member of the board of directors, other than a member appointed by the declarant, by a majority vote of those voting on the matter at a meeting of the unit owners.

2. The meeting of the unit owners shall be called pursuant to this section and action may be taken only if a quorum is present.

3. The unit owners may remove any member of the board of directors with or without cause, other than a member appointed by the declarant.

4. For purposes of calling for removal of a member of the board of directors, other than a member appointed by the declarant, the following apply:

(a) In an association with one thousand or fewer members, on receipt of a petition that calls for removal of a member of the board of directors and that is signed by the number of persons who are eligible to vote in the association at the time the person signs the petition equal to at least twenty-five percent of the votes in the association or by the number of persons who are eligible to vote in the association at the time the person signs the petition equal to at least one hundred votes in the association, whichever is less, the board shall call and provide written notice of a special meeting of the association as prescribed by section 33-1248, subsection B.

(b) Notwithstanding section 33-1248, subsection B, in an association with more than one thousand members, on receipt of a petition that calls for removal of a member of the board of directors and that is signed by the number of persons who are eligible to vote in the association at the time the person signs the petition equal to at least ten percent of the votes in the association or by the number of persons who are eligible to vote in the association at the time the person signs the petition equal to at least one thousand votes in the association, whichever is less, the board shall call and provide written notice of a special meeting of the association. The board shall provide written notice of a special meeting as prescribed by section 33-1248, subsection B.

(d) For purposes of a special meeting called pursuant to this subsection, a quorum is present if the number of owners who are eligible to vote in the association at the time the person attends the meeting equal to at least twenty percent of the votes of the association or the number of persons who are eligible to vote in the association at the time the person attends the meeting equal to at least one thousand votes, whichever is less, is present at the meeting in person or as otherwise permitted allowed by law.

(e) If a civil action is filed regarding the removal of a board member, the prevailing party in the civil action shall be awarded its reasonable attorney fees and costs.

(f) The board of directors shall retain all documents and other records relating to the proposed removal of the member of the board of directors and any election or other action taken for that director's replacement for at least one year after the date of the special meeting and shall permit allow members to inspect those documents and records pursuant to section 33-1258.

(g) A petition that calls for the removal of the same member of the board of directors shall not be submitted more than once during each term of office for that member.

5. On removal of at least one but fewer than a majority of the members of the board of directors at a special meeting of the membership called pursuant to this subsection, the vacancies shall be filled as provided in the condominium documents.

6. On removal of a majority of the members of the board of directors at a special meeting of the membership called pursuant to this subsection, or if the condominium documents do not provide a method for filling board vacancies, the association shall hold an election for the replacement of the removed directors at a separate meeting of the members of the association that is held not later than thirty days after the meeting at which the members of the board of directors were removed.

7. A member of the board of directors who is removed pursuant to this subsection is not eligible to serve on the board of directors again until after the expiration of the removed board member's term of office, unless the condominium documents specifically provide for a longer period of ineligibility.

I. L. For an association in which board members are elected from separately designated voting districts, a member of the board of directors, other than a member appointed by the declarant, may be removed only by a vote of the members from that voting district, and only the members from that voting district are eligible to vote on the matter or be counted for purposes of determining a quorum.

J. M. Unless any provision in the condominium documents requires an annual audit by a certified public accountant, the board of directors shall provide for an annual financial audit, review or compilation of the association. The audit, review or compilation shall be completed no later than one hundred eighty days after the end of the association's fiscal year and shall be made available on request to the unit owners within thirty days after its completion.

K. N. This section does not apply to timeshare plans or associations, or the period of declarant control under timeshare instruments, that are subject to chapter 20 of this title. END_STATUTE

Sec. 4. Section 33-1245, Arizona Revised Statutes, is amended to read:

START_STATUTE33-1245. Termination of contracts and leases of declarant; applicability

A. A contract for any of the following, if entered into before the board of directors elected by the unit owners pursuant to section 33-1243, subsection G J takes office, shall contain a provision in the contract that the contract may be terminated without penalty by the association at any time after the board of directors elected by the unit owners takes office:

1. Any management contract or employment contract.

2. Any other contract or lease between the association and a declarant or an affiliate of a declarant.

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.

B. The board of directors shall notify the appropriate contractual party of the termination at least thirty days before termination.

C. This section does not apply to any lease if the termination of the lease would terminate the condominium or reduce its size.

D. If a contract covered by this section fails to contain the provisions required by subsection A of this section, the contract is voidable at the option of the association.

E. This section does not apply to timeshare plans or associations that are subject to chapter 20 of this title. END_STATUTE

Sec. 5. Section 33-1811, Arizona Revised Statutes, is amended to read:

START_STATUTE33-1811. Board of directors; contracts; conflict; powers; limitations; duties; indemnification

A. Except as provided in the declaration, the bylaws, subsection B of this section or other provisions of this chapter, the board of directors may act in all instances on behalf of the association.

B. The board of directors shall not act on behalf of the association to amend the declaration, terminate the planned COMMUNITY, elect members of the board of directors or determine the qualifications, powers and duties or terms of office of board of directors members.

D. IN ADDITION TO the DUTIES IMPOSED BY THIS CHAPTER AND THE COmmunity DOCUMENTS, THE ASSOCIATION THRoUgh ITS BOARD OF DIRECTORS HAS THE FOLLOWING DUTIES TO THE members OF THE planned community AS A WHOLE:

2. TO TREAT members FAIRLY AND TO ENSURE THAT THIS DUTY IS REQUIRED OF ANY AGENT ACTING ON ITS BEHALF.

3. TO ACT REASONABLY IN THE EXERCISE OF ITS DISCRETIONARY POWERS, INCLUDING RULEMAKING, ENFORCEMENT AND DESIGN-CONTROL POWERS.

E. THE DIRECTORS AND OFFICERS OF A planned community ASSOCIATION HAVE A DUTY TO THE ASSOCIATION TO ACT IN GOOD FAITH, TO ACT IN COMPLIANCE WITH AND WITHIN THE AUTHORITY OF THis chapter AND THE community DOCUMENTS, TO DEAL FAIRLY WITH THE ASSOCIATION AND ITS members AND TO USE ORDINARY CARE AND PRUDENCE IN PERFORMING THEIR FUNCTIONS.

F. THE ASSOCIATION and ITS DIRECTORS AND OFFICERS ARE INDEMNIFIED FROM ANY LIABILITY FOR ANY ACTION TAKEN OR ANY FAILURE TO TAKE ANY ACTION IF THE DUTIES WERE PERFORMED IN COMPLIANCE WITH SUBSECTIONs D AND E of this section. IN ANY PROCEEDING filed pursuant to THIS SECTION, A DIRECTOR HAS ALL OF THE DEFENSES AND PRESUMPTIONS ORDINARILY AVAILABLE TO A DIRECTOR. A DIRECTOR IS PRESUMED IN ALL CASES TO HAVE ACTED, FAILED TO ACT OR OTHERWISE DISCHARGED the director's DUTIES IN ACCORDANCE WITH SUBSECTIONs D AND E of this section. THE PARTY CHALLENGING THE ASSOCIATION'S OR DIRECTOR'S ACTION, FAILURE TO ACT OR OTHER DISCHARGE OF DUTIES has THE BURDEN TO ESTABLISH A BREACH OF DUTY BY CLEAR AND CONVINCING EVIDENCE OF FACTS REBUTTING THE PRESUMPTION. UNLESS THE BREACH OF DUTY IS BASED ON ANY ACTION OUTSIDE THE AUTHORITY OF THE BOARD OF DIRECTORS OR INDIVIDUAL DIRECTORs, THE CHALLENGER HAS AN ADDITIONAL BURDEN OF PROVING THAT THE ACTION BY THE ASSOCIATION OR DIRECTOR CAUSED OR THREATENS TO CAUSE HARM TO THE member INDIVIDUALLY OR TO THE INTEREST OF THE PLANNED COMMUNITY. END_STATUTE

Sec. 6. Legislative intent; duty to members; clarifying changes

The legislature finds that Tierra Ranchos Homeowners Association v. Kitchukov, 216 Ariz. 195 (Ct. App. 2007) governs the nature and extent of the duty owed by the board of directors of a homeowners' association to its members. The legislature intends that the amendments made to sections 33-1243 and 33-1811, Arizona Revised Statutes, are clarifying changes and do not provide any substantive change in the law, and that the remaining provisions of the act are intended to further these clarifying changes.