Incorporated v. Unincorporated Condominium Associations – Should the Association be Incorporated?

The facts and circumstances of each condominium project will determine whether it is prudent to incorporate a condominium’s association, but in most cases it is highly advisable to do so.  This is true if the developer is the condominium declarant controlling the association during the early stages of the condominium’s development and operation.  It is also true if the association is controlled by its unit owners after the period of declarant control ceases.

Whether you are involved as the Declarant (i.e. the developer) or merely as a unit owner, there is no inherent “corporate” protection for an unincorporated condominium association.  In certain circumstances, the association may qualify as a partnership underRhode Islandlaw – potentially exposing each of the unit owners to personal liability for the obligations of the association.  In most circumstances, the association will not be considered a partnership; however, this does not eliminate the risk of personal liability for individual unit owners.  Partnership status or not, there may still be personal liability for obligations of the association under common law agency theories and other applicable law unique to the facts of each association.  This personal liability may extend to all unit owners, some unit owners, and/or members of the association’s board of directors.

There are also practical operational issues to consider.  Some businesses, including lenders and insurers, are unwilling to do business with a loosely organized group such as an unincorporated condominium association.  This can make it difficult (or impossible) for the association and its executive board to satisfy its obligations (fiduciary or otherwise) to unit owners. 

Ultimately, the most prudent approach is to consult with counsel experienced with condominium and corporate law to ensure that the unit owners, association, and/or developer are properly protected.


Boundary Disputes, Title Insurance, and Surveys

Residential real estate buyers often erroneously believe that their title insurance policies fully protect them from all legal issues related to their property, including boundary disputes.  Owners’ title insurance policies are prudent investments and indeed afford a great deal of necessary protection.  For example, title insurance protects buyers from defective deeds and prior owners’ liens.  But, title insurance policies generally do not cover boundary encroachment issues.  Pursuant to most title insurance policies, coverage is “excepted” formatters that would be disclosed by an accurate survey and inspection of the premises (e.g., encroachments, overlaps, and boundary line disputes).
While the buyer may assert several legal claims and defenses against the seller and the hostile neighbor, the actual successful exercise of those rights is costly, slow, and stressful.  For example, if a neighbor makes an adverse possession claim, the buyer can retain counsel to defend the neighbor’s “squatters rights” claim and pursue damages from the seller concerning the tainted property that the buyer unwittingly purchased.  In either case, though, the buyer must pay $1000’s in legal fees and tolerate the risk of uncertainty and, potentially, losing property; the title insurance company typically will not bear these burdens.
As a result of the lack of title insurance coverage, and the substantial costs of protecting property rights through litigation, it is sometimes advisable for buyers to consider commissioning a survey before closing.  This is especially true if there are any red flags that suggest there may be boundary issues affecting the property.  Such signs include, but are not limited to:

–      the seller or listing agent indicating, expressly or impliedly, that there is a boundary issue (e.g., “there was a ‘little problem’ with the former neighbor complaining about the shed being built on his property, but the neighbor moved away and the new owner has not caused a ‘problem’ since”);

–      the neighbor approaches the buyer during the sales process and indicates there is a boundary issue (e.g., “we will need to talk if you buy this house because your driveway may be a little over the property line— but, I’m sure we can ‘work it out’”); and

–      visible boundary markers, such as bushes or fences, form irregular lines or are otherwise peculiarly located (e.g., a stockade fence apparently forms the sideline of the property, but the garage juts out ten feet beyond the fence line and seemingly on the neighbor’s land).

Ultimately, the only way for a buyer to be certain of the exact boundaries of the parcel — and to ensure no boundary encroachments exist — is to have a survey performed by a licensed professional.

If the buyer decides to obtain a survey as a condition of closing, the buyer should include that right in the purchase and sales agreement (with a clearly articulated right of termination in the event adverse conditions are discovered).  Surveys can be expensive (typically, more than $750.00), but relative to the purchase price (often the largest expenditure in a home buyer’s lifetime) and the expense of resolving a boundary dispute not covered by title insurance, survey costs are quite reasonable.

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