HB2861 - 562R

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

Section 1. Section 33-1228, Arizona Revised Statutes, is amended to read:

START_STATUTE33-1228. Termination of condominium

A. Except as provided in subsection B of this section, a condominium may be terminated only by agreement of unit owners of units to which at least eighty percent of the votes in the association are allocated, or any larger percentage the declaration specifies, except:

1. In the case of a taking of all the units by eminent domain.

2. If the declaration specifies a smaller percentage, but only if all of the units in the condominium are restricted exclusively to nonresidential uses.

B. A condominium created on or after September 24, 2022 may be terminated only by agreement of unit owners of units to which ninety-five percent of the votes in the association are allocated, or any larger percentage the declaration specifies, except as provided in subsection A, paragraph 1 or 2 of this section.

C. At least thirty days before recording a termination agreement, the board of directors of the association shall convene a regular or special meeting of the board of directors at which a person or entity that purports to have the agreement of at least the percentage of the votes in the association specified in subsection A or B of this section, as applicable, or any larger percentage if required, shall produce and make available to the unit owners copies of a signed notarized statement that the owner of a unit has executed a termination agreement. The person or entity shall produce copies of a statement for each unit owner who has agreed to the termination, or may produce the signed termination agreement that includes a sufficient number of unit owners. Any meeting called pursuant to this subsection shall be noticed as otherwise provided by law, except that the board may not take action by written consent or any other method that does not provide for an actual meeting that is open to all the unit owners. Any termination agreement that is recorded without full compliance with this subsection is invalid.

D. An agreement to terminate shall be evidenced by the execution or ratifications of a termination agreement, in the same manner as a deed, by the requisite number of unit owners. The termination agreement shall specify a date after which the agreement will be void unless it is recorded before that date. A termination agreement and all ratifications of a termination agreement shall be recorded in each county in which a portion of the condominium is situated and is effective only on recordation.

E. A termination agreement may provide that all the common elements and units of the condominium shall be sold following termination. If, pursuant to the agreement, any real estate in the condominium is to be sold following termination, the termination agreement shall set forth the minimum terms of the sale.

F. The association, on behalf of the unit owners, may contract for the sale of real estate in the condominium, but the contract is not binding on the unit owners until approved pursuant to subsections A, B, C and D of this section. If any real estate in the condominium is to be sold following termination, title to that real estate on termination vests in the association as trustee for the holders of all interest in the units. Thereafter, the association has all powers necessary and appropriate to effect the sale. Until the sale has been concluded and the proceeds of the sale distributed, the association continues in existence with all powers it had before termination. Proceeds of the sale shall be distributed to unit owners and lienholders as their interests may appear, in proportion to the respective interests of unit owners as provided in subsection I of this section. Unless otherwise specified in the termination agreement, as long as the association holds title to the real estate, each unit owner and the unit owner's successors in interest have an exclusive right to occupancy of the portion of the real estate that formerly constituted the unit owner's unit. During the period of that occupancy, each unit owner and the successors in interest remain liable for all assessments and other obligations imposed on unit owners by this chapter or the declaration.

G. If the real estate constituting the condominium is not to be sold following termination, title to all the real estate in the condominium vests in the unit owners on termination as tenants in common in proportion to their respective interests as provided in subsection I of this section, and liens on the units shift accordingly. While the tenancy in common exists, each unit owner and the unit owner's successors in interest have an exclusive right to occupancy of the portion of the real estate that formerly constituted the unit owner's unit.

H. Following termination of the condominium, the proceeds of any sale of real estate, together with the assets of the association, are held by the association as trustee for unit owners and holders of liens on the units as their interests may appear. Following termination, creditors of the association holding liens on the units that were recorded before termination may enforce those liens in the same manner as any lienholder.

I. The respective interests of unit owners referred to in subsections F, G and H of this section are as follows:

1. Except as provided in paragraph 2 of this subsection, the respective interests of unit owners are the fair market values of their units, limited common elements and common element interests immediately before the termination, and their pro rata share of any monies in the association's reserve fund and the operating account immediately before the termination. and Only For a unit that is owner-occupied, the unit owner shall receive an additional five ten percent of that total amount for relocation costs along WITH all closing costs of the sales transaction, including costs for title insurance if requested by the unit owner. For all unit owners, the fair market value of the unit shall be determined by an independent appraisal of the unit that is made using units with a similar SQUARE footage, a similar age, a similar number of bedrooms and bathrooms and other similar features, including common element amenities such as swimming pools, recreational courts and clubhouses. The appraisal shall be conducted by a person who is a state-licensed real estate appraiser, state-certified residential real estate appraiser or state-certified general real estate appraiser as prescribed by title 32, chapter 36 and shall include at least three comparable sales, with one comparable sale of a unit from within that condominium complex, if available, and two comparable sales from outside that CONDOMINIUM complex. The comparable sales that are used by the appraiser must be completed transactions. Any appraisal used for this purpose is at the unit owner's option, and the buyer shall pay for the appraisal. If the unit owner chooses not to use an appraisal, the fair market value shall be determined without it as PRESCRIBED by this paragraph. The fair market value shall not be reduced by any special assessments, capital improvement fees or other charges imposed by the association during the two-year period immediately preceding the termination. An independent appraiser selected by the association shall determine the total fair market values. The determination of the independent appraiser shall be distributed to the unit owners and becomes final unless disapproved within sixty days after distribution to the unit owner. Any unit owner may obtain a second independent appraisal at the unit owner's expense and, if the unit owner's independent appraisal amount differs from the association's independent appraisal amount by five percent or less, the higher appraisal is final. If the total amount of compensation owed as determined by the second appraiser is more than five percent higher than the amount determined by the association's appraiser, If the unit owner and the buyer do not agree on the fair market value of the unit and, if applicable, the relocation costs and other additional amounts due to the owner of an owner-occupied unit, the unit owner shall may submit the issues to arbitration by an arbitrator affiliated with a national arbitration association and under the rules of that association at the association's expense and the arbitration amount is the final sale amount. As part of the arbitration process, the appraisers shall fully disclose their appraisal methodologies and shall disclose any other transaction occurring between the buyer and the sellers. An additional five percent of the final sale amount shall be added for relocation costs.

2. If any unit or any limited common element is destroyed to the extent that an appraisal of the fair market value of the unit or element before destruction cannot be made, the interests of all unit owners are their respective common element interests immediately before the termination.

J. Except as provided in subsection K of this section, foreclosure or enforcement of a lien or encumbrance against the entire condominium does not of itself terminate the condominium, and foreclosure or enforcement of a lien or encumbrance against a portion of the condominium does not withdraw that portion from the condominium. Foreclosure or enforcement of a lien or encumbrance against withdrawable real estate does not of itself withdraw that real estate from the condominium, but the person taking title may require from the association, on request, an amendment excluding the real estate from the condominium.

K. If a lien or encumbrance against a portion of the real estate comprising the condominium has priority over the declaration, and the lien or encumbrance has not been partially released, the parties foreclosing the lien or encumbrance, on foreclosure, may record an instrument excluding the real estate subject to that lien or encumbrance from the condominium.

L. The provisions of subsections E, F, G, H, J and K of this section do not apply if the original declaration, an amendment to the original declaration recorded before the conveyance of any unit to an owner other than the declarant or an agreement by all of the unit owners contains provisions inconsistent with these subsections.

M. Beginning on August 3, 2018, Any provisions in the declaration that conflict with subsection I, paragraph 1 of this section are void as a matter of public policy. END_STATUTE

Sec. 2. Section 33-1260, Arizona Revised Statutes, is amended to read:

START_STATUTE33-1260. Resale of units; information required; fees; civil penalty; applicability; definition

A. For condominiums with fewer than fifty units, a unit owner shall mail or deliver to a purchaser or a purchaser's authorized agent within ten days after receipt of a written notice of a pending sale of the unit, and for condominiums with fifty or more units, the association shall mail or deliver to a purchaser or a purchaser's authorized agent within ten days after receipt of a written notice of a pending sale that contains the name and address of the purchaser all of the following in either paper or electronic format:

1. A copy of the bylaws and the rules of the association.

2. A copy of the declaration.

3. A dated statement containing:

(a) The telephone number and address of a principal contact for the association, which may be an association manager, an association management company, an officer of the association or any other person designated by the board of directors.

(b) The amount of the common expense assessment for the unit and any unpaid common expense assessment, special assessment or other assessment, fee or charge currently due and payable from the selling unit owner. If the request is made by a lienholder, escrow agent, unit owner or person designated by a unit owner pursuant to section 33-1256, failure to provide the information pursuant to this subdivision within the time provided for in this subsection shall extinguish any lien for any unpaid assessment then due against that unit.

(d) The total amount of money held by the association as reserves.

(e) If the statement is being furnished by the association, a statement as to whether the records of the association reflect any alterations or improvements to the unit that violate the declaration. The association is not obligated to provide information regarding alterations or improvements that occurred more than six years before the proposed sale. Nothing in This subdivision relieves does not relieve the seller of a unit from the obligation to disclose alterations or improvements to the unit that violate the declaration, nor precludes and does not preclude the association from taking action against the purchaser of a unit for violations that are apparent at the time of purchase and that are not reflected in the association's records.

(f) If the statement is being furnished by the unit owner, a statement as to whether the unit owner has any knowledge of any alterations or improvements to the unit that violate the declaration.

(g) A statement of case names and case numbers for pending litigation with respect to the unit filed by the association against the unit owner or filed by the unit owner against the association. The unit owner or the association shall not be required to disclose information concerning the pending litigation that would violate any applicable rule of attorney-client privilege under Arizona state law.

(h) A statement that provides "I hereby acknowledge that the declaration, bylaws and rules of the association constitute a contract between the association and me (the purchaser). By signing this statement, I acknowledge that I have read and understand the association's contract with me (the purchaser). I also understand that as a matter of Arizona law, if I fail to pay my association assessments, the association may foreclose on my property." The statement shall also include a signature line for the purchaser and shall be returned to the association within fourteen calendar days.

4. A copy of the current operating budget of the association.

5. A copy of the most recent annual financial report of the association. If the report is more than ten pages, the association may provide a summary of the report in lieu of the entire report.

6. A copy of the most recent reserve study of the association, if any.

7. A statement summarizing any pending lawsuits, except those relating to the collection of assessments owed by unit owners other than the selling unit owner, in which the association is a named party, including the amount of any money claimed.

8. A statement notifying the purchaser that under the laws of this state, the condominium may be terminated by a vote of eighty percent or more of the owners of the units in the condominium and if a sufficient number of units are acquired by a potential buyer for the entire property, the unit owners may be required to sell their units.

9. A statement that the CONDOMINIUM is governed by recorded covenants, conditions and restrictions that regulate the use of the property.

B. A purchaser or seller who is damaged by the failure of the unit owner or the association to disclose the information required by subsection A of this section may pursue all remedies at law or in equity against the unit owner or the association, whichever failed to comply with subsection A of this section, including the recovery of reasonable attorney fees.

C. The association may charge the unit owner a fee of not more than an aggregate of four hundred dollars $400 to compensate the association for the costs incurred in the preparation and delivery of a statement or other documents furnished by the association pursuant to this section for purposes of resale disclosure, lien estoppel and any other services related to the transfer or use of the property. In addition, the association may charge a rush fee of not more than one hundred dollars $100 if the rush services are required to be performed within seventy-two hours after the request for rush services, and may charge a statement or other documents update fee of not more than fifty dollars $50 if thirty days or more have passed since the date of the original disclosure statement or the date the documents were delivered. The association shall make available to any interested party the amount of any fee established from time to time by the association. If the aggregate fee for purposes of resale disclosure, lien estoppel and any other services related to the transfer or use of a property is less than four hundred dollars $400 on January 1, 2010, the fee may increase at a rate of not more than twenty percent per year based on the immediately preceding fiscal year's amount, not to exceed the four hundred dollar $400 aggregate fee. The association may charge the same fee without regard to whether the association is furnishing the statement or other documents in paper or electronic format.

D. The fees prescribed by this section shall be collected no not earlier than at the close of escrow and may only be charged once to a unit owner for that transaction between the parties specified in the notice required pursuant to subsection A of this section. An association shall not charge or collect a fee relating to services for resale disclosure, lien estoppel and any other services related to the transfer or use of a property except as specifically authorized in this section. An association that charges or collects a fee in violation of this section is subject to a civil penalty of not more than one thousand two hundred dollars $1,200.

E. This section applies to a managing agent for an association that is acting on behalf of the association.

F. The following are exempt from this section:

1. A sale in which a public report is issued pursuant to section 32-2183 or 32-2197.02.

2. A sale pursuant to section 32-2181.02.

3. A conveyance by recorded deed that bears an exemption listed in section 11-1134, subsection B, paragraph 3 or 7. On recordation of the deed and for no additional charge, the unit owner shall provide the association with the changes in ownership, including the unit owner's name, billing address and phone number. Failure to provide the information shall not prevent the unit owner from qualifying for the exemption pursuant to this section.

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

H. For the purposes of this section, unless the context otherwise requires, "unit owner":

1. Means the seller of the condominium unit title. and excludes

2. Does not include:

(a) Any real estate salesperson or real estate broker who is licensed under title 32, chapter 20 and who is acting as a salesperson or broker. ,

(b) Any escrow agent who is licensed under title 6, chapter 7 and who is acting as an escrow agent. and also excludes

(c) A trustee of a deed of trust who is selling the property in a trustee's sale pursuant to chapter 6.1 of this title. END_STATUTE

Sec. 3. Title 33, chapter 9, article 3, Arizona Revised Statutes, is amended by adding section 33-1262, to read:

START_STATUTE33-1262. Annual notice to unit owners; termination; ownership

The board of directors shall provide an annual notice to all unit owners that includes the following:

1. A statement that, under the laws of this state, the condominium may be terminated by a vote of eighty percent or more of the owners of the units in the condominium and if a sufficient number of units are acquired by a potential buyer for the entire property, the unit owners may be required to sell their units.

2. A statement that provides the total number of units in the CONDOMINIUM, the number of units owned by each unit owner and the name of each unit owner.END_STATUTE

Sec. 4. Legislative intent; condominium terminations; retroactivity

A. The legislature finds that in recent years, numerous condominium owners in this state have been forced to sell their residences at a significantly reduced price to investors that have acquired a substantial interest in the condominium units in that community and that are terminating the condominium over the objection of those same owners and, in most cases, converting the condominiums to rental property. These condominium owners have been financially harmed by the inequitable system used by the investors acquiring the condominium units at an extreme discount in a forced sale. Some of these investors have further harmed these condominium owners by levying special assessments or other similar charges against the unit owners once the investors have control of the association board of directors, thus requiring the special assessments and charges to be paid on termination, reducing the net sales proceeds for the unit owners even further. These inequities are compounded by recent real estate market forces that have made condominium termination and conversion a more favored investment option.

B. The statutory provisions that govern the acquisition and termination of a condominium, originally written in 1977, have been in place in this state since 1985 and have been unchanged for many years. Beginning in 2018, the legislature recognized the inequities in the old statutory scheme that leaves these condominium owners with unequal bargaining power and has attempted to provide more protections for condominium owners who are subject to a forced termination. A recent decision in this state's courts, Cao v. PFP Dorsey Investments, LLC, 253 Ariz. 552 (Az. App. 2022), has reduced or eliminated the effectiveness of the legislature's recent enactments, resulting in continuing harm to condominium owners' private property rights.

C. Based on the foregoing and after careful consideration of the case Cao v. PFP Dorsey Investments, LLC, 253 Ariz. 552 (Az. App. 2022), the legislature finds and declares that there is a vital public interest in maintaining these forms of private property ownership as affordable and essential housing and in ensuring through a lawful exercise of its police powers that condominium unit owners are properly compensated for their private property ownership rights and receive fair compensation for any condominium units that are forced to be sold under the termination process. The legislature further finds that even if this enactment does constitute a substantial impairment to one or more contractual rights, this enactment is a valid exercise of this state's police power in that it provides a safeguard to the vital public interest in protecting these property rights and is a reasonable and appropriate minor adjustment to the inherently unequal bargaining position of the parties and furthers this significant and legitimate public purpose. Therefore, the legislature intends for this act to be retroactively applied to all condominiums in this state, whether established before or after the effective date of this act.

Sec. 5. Retroactivity

Section 33-1228, subsection I, Arizona Revised Statutes, as amended by this act, applies retroactively to all condominiums in this state, whether established before or after the effective date of this act.