Selling Common Areas

Aspiration Heights Condominium is located on one of the most desirable blocks in the city. Part of the condominium is an undeveloped and largely unused field adjacent to the condominium building. The condominium has received several inquiries from prospective purchasers about selling the field for use in future development. On the other side of town, the Arid Flats Homeowners Association owns a storm water detention pond that collects water off of the public streets in the community. The board of directors is concerned about the association’s on-going obligation to maintain the pond and its exposure to liability arising from ownership of a pond that does not appear to provide a direct benefit to the members. An adjacent homeowner expressed interest in purchasing the pond area to include as part of his lot. In still another part of town, the Slender Lane Townhome Community was laid out with narrow swaths of common area located between the fenced backyards of homes located back-to-back on the same block. The board would like to convey the narrow strip to the adjoining homeowners and let each of them take over the maintenance. There are many reasons why a community association may want to sell its common areas to a third-party. When making a determination about whether to pursue the sale of its common area, there are several issues an association’s board of directors should consider.

Whether an association’s common area has value to someone other than the association is a fact-specific question. Common areas of homeowners and condominium associations are usually subject to a declaration of restrictive covenants or declaration of condominium for the community and are designated as common area or common elements on the recorded plats for the community. In some instances, owners within the community want to purchase the property and retain it as undeveloped open space, so the fact that it is subject to restrictive covenants might not be of paramount importance. A prospective purchaser from outside of the community who wants to purchase the common area for future development will probably require removal of the restrictive covenants from the property in connection with the sale. As discussed further below, in the context of a condominium, the association will need unanimous approval of all of the unit owners and their mortgagees to withdraw the property from the condominium and to facilitate a sale. For associations other than condominiums, unanimous approval of the owners will also be necessary to remove the property from the coverage of the covenants unless the community’s governing documents specifically contemplate removal of a portion of the community from the coverage of the covenants or generally allow amendments to the governing documents that have non-uniform effect.

If the common area has value to a prospective purchaser, as a first step, the board must determine whether the association has authority to sell its common areas. Homeowners and condominium associations in Georgia are usually established as nonprofit corporations pursuant to the Georgia Nonprofit Corporation Code (“Nonprofit Code”). The Nonprofit Code authorizes an association’s board of directors to sell, convey, exchange, and otherwise dispose of all or any part of the association’s property unless a community’s governing documents say otherwise. See Nonprofit Code Section 14-3-302(5) and Section 14-3-801(b). In non-condominium communities, the association usually holds title to the common areas. Most declarations of restrictive covenants for these communities contain a provision authorizing the board of directors to sell a portion of the common area under certain circumstances, most often upon receiving approval to do so from the membership. The board may sell the common area so long as the voting procedure outlined in the governing documents is properly followed and documented in the association’s records.

Selling the common area of a community established as condominium pursuant to the Georgia Condominium Act, O.C.G.A. § 44-3-70, et seq. (the “Condominium Act”) is more difficult to accomplish. In condominiums, the common areas, referred to as “common elements,” are generally owned by all of the unit owners as tenants-in-common. In order to sell off a portion of the common elements, the property must be “withdrawn” from condominium in accordance with a procedure set out in the Condominium Act. Withdrawal of property from the condominium requires the approval of unit owners holding at least four-fifths of the votes in the association and their mortgagees. Once the property is withdrawn from the condominium, however, it is still owned by all of the unit owners as tenants-in-common, and all of the unit owners and all of their mortgagees must consent to a sale of the property.

Once the board determines whether their association can sell its common area, the board should consider whether the Association should proceed with the sale. As noted above, many declarations of restrictive covenants authorize the board of directors to sell common area under certain circumstances, such as receiving approval to do so from the membership; however, whether the board pursues such a sale is usually discretionary. If proceeding with such a sale, Georgia case law generally requires that the board’s actions be procedurally fair and reasonable and that the board’s decision to proceed be made in good faith, and be reasonable and not arbitrary and capricious. In addition to following whatever procedural requirements are necessary under the community’s governing documents, the Board should examine why it is pursuing conveyance of a portion of the common area and should record it’s reasoning in well documented minutes.

Several issues can impact the determination of whether the association should sell its common area. The association should obtain assurances from the prospective purchaser that any use of or rights associated with the property that are necessary to the association will be preserved. For example, if there are improvements on the property that require on-going maintenance, such a storm water detention pond, the association will probably want the new owner to assume such maintenance obligation. Similarly, if the association benefits from use of the property in some way, for example, if other property owned by the association drains storm water over the property or if utility lines serving the community run under or through the property, the association should establish appropriate easements or other rights over the property to ensure continuation of such benefits. Further, the original zoning conditions for some communities may require a certain amount of open space or may specify a certain use for association common area. The association may want to get assurances from the new owner that they will not use or develop the property in such a way that will expose the association to liability due to a zoning violation.

The association should also be aware of any potential uses for the property that could affect the community in the future. For example, current zoning regulations would control the uses to which the property could be put; however, a new owner may be able to obtain a variance from the current zoning for a special use or may attempt to rezone the property altogether. Any future use may result in more traffic, noise or other disturbances in or around the community. Structures built on the property may be visible from the community and further affect the community. There may be other governmental requirements or encumbrances on the property which influence the use and activities allowed on the property. The association may be able to negotiate agreements with the prospective purchaser to establish reasonable guidelines on the use of the property and construction activities on the property. If the association wants such an agreement to be binding on future owners of the property, it should be in the appropriate form and recorded in the land records.

As noted above, there are many reasons why a community association may want to sell its common areas. In connection with the prospective sale of an association’s common areas, members of the board of directors should become aware of potential obstacles to selling the association’s property and the potential impact on the community of doing so. By understanding some of the issues up front, the board will be in a better position to fulfill its duties and protect the association’s best interests. Because of the complexity of these transactions, it would not be advisable to “try this at home” without contacting the association’s legal counsel!