Hintze Discusses Proposed Revisions to the Minnesota Common Interest Ownership Act (MCIOA)

The Minnesota Legislature is considering a number of amendments to MCIOA. After reviewing the proposed amendments to MCIOA, it appears that a majority of the revisions do not directly impact secured parties. However, we believe that the proposed revision to the consent rights of secured parties will have an impact upon lenders.

Under the current iteration of MCIOA, secured parties are given the right to consent or reject amendments dealing with certain aspects of the common interest community (e.g. condominiums, townhouses, cooperatives, known as "CIC"s) documents. Other approval rights in favor of secured parties may be granted in the CIC documents themselves. One of the problems that many CIC associations have faced is obtaining the necessary lender consent to even fairly innocuous amendments to the CIC documents. For example, in a 30 unit CIC, where all of the units are secured by mortgages, and the condominium declaration requires consent of 50% plus 1 of the secured parties to amend the CIC documents, the association is required to obtain consents from up to 16 different secured parties before implementing the proposed amendment.

In an attempt to address this issue in the 2010 Legislative Session, the following new provision is proposed to be added to MCIOA as Minn.Stat. 515B.2-118(a)(5):

If any provision of this chapter, the declaration, the bylaws or the articles of incorporation requires the consent of a secured party holding a security interest in a unit as a condition for the approval or effectiveness of an amendment to the declaration, the bylaws or the articles of incorporation, the consent is deemed to be granted if the secured party's written refusal to consent is not received by the association within 60 days after the secured party receives from the association notice and a copy of the amendment, by certified U.S. Mail, postage prepaid and return receipt requested. If the secured party has not otherwise provided to the association an address for notice, the association shall send the notice to the address, if any, set forth in the recorded instrument that evidences the security interest. This subsection shall not apply to an amendment that affects the priority of a secured party's security interest or the ability of a secure party to foreclose its security interest. In such cases, the number or percentage of secured parties whose consent is required by the instrument to be amended must consent to the amendment in writing.

The impact of this revision to the statute is that it will require many secured parties to devise a better way to administer and track their loans which are secured by CIC property. While a significant majority of the proposed amendments to the CIC documents that secured parties may be asked to consent to will be of little impact to a secured party, some certainly will. However, in order to make sure that you are able to determine which amendments will impact you and to have time to review them, we suggest the following steps:

1. Modify your loan approval checklist and/or closing checklist to: 
   
   
   1. require the loan officer or legal counsel to review the CIC documents to determine what the secured parties' approval rights are and, to the extent that you are lending to the CIC developer, to determine if you can (or want to) obtain additional approval rights;
   2. require the loan officer to provide the lender's notice address to the CIC association so that notice is sent to the appropriate office; and
   3. depending on your exposure in the CIC project and the current economic condition of the CIC project, consider having your loan officer or a delegate attend one or more association meetings – especially if an amendment is on the agenda.
   4. consider making amendments to certain provisions of the CIC documents without your written consent a default under the loan documents. In the past, we would not have suggested this because (i) it is likely to cause hardship to innocent borrowers; and (ii) in most cases, the lenders' interests were generally aligned so amendments against the secured parties' interests were not likely to pass. Under this revised statute, however, there is a reasonable likelihood that a number of secured parties will not respond to a vote on an amendment which is contrary to the secured parties' interests resulting in the passage of such an amendment by omission.
      
      
2. Modify your loan administration procedures to:
   
   
   1. promptly forward amendments to CIC documents to the loan officer for review and evaluation;
   2. require loan officers and/or legal counsel to review the proposed amendment within 10 business days (or at least a reasonable time) after receipt to provide time to analyze the request and obtain a higher level of review and approval, if necessary; and
   3. establish general rules as to the level of authority a loan officer has to approve amendments and what categories of amendments will need to be reviewed by legal counsel, managerial personnel or loan committee.
      
      

Proposed 515B2-118(a)(5) also provides that the association cannot amend any provision which affects the priority of the security interest or the ability to foreclose the same. This provision actually only restates the existing law, and does not add any additional protection for secured parties. However, it is worth reminding you that under Minn.Stat. 515B.3-116(b), liens for unpaid assessments are SUBORDINATE to liens and encumbrances recorded prior to the CIC declaration and purchase money first mortgages, but are PRIOR to second and third mortgages on CIC property.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.