Illinois Conversion Condominium Projects – Notice of Intent to Convert and Disclosure Requirements
The Illinois Condominium Property Act (the “Act”) (765 ILCS 605/1 et seq.) contains provisions allowing for the conversion of residential apartments or other income producing property from sole ownership to individually owned condominium units. However, in order for a sole owner to pursue this type of conversion condominium project, there are numerous requirements to be considered and met. This article will summarize a number of the essential requirements associated with such a project.
In addition to the requirements set forth in the Act, municipalities also have the ability to govern development of conversion condominiums. For example, the City of Chicago by ordinance has extensive additional requirements for conversion condominium projects in Chicago. Chicago Municipal Code Ch. 13-72. This article will focus upon the requirements of the Act.
Notice of Intent to Convert
§30 of the Act details various requirements unique to a conversion condominium, beginning with a provision that no real estate may be made subject to the Act without first providing notice of the intent to convert to all persons who are tenants of the building located on the real estate at the time the notice is provided. 765 ILCS 605/30(a)(1).
A declaration of condominium may not be recorded against the real estate until thirty days after the notice of intent is given, and no more than one year before the declaration is recorded. As part of the declaration of condominium, the developer of the conversion condominium project (i.e., the seller/owner) must execute a certificate that the notice of intent was given to all persons who were then tenants. Id.
The notice of intent to convert must be given to the current tenants before any agreement of sale of condominium units is made. Id.
The notice of intent to convert must include a schedule of unit sales prices for all units that will be subject to the declaration, and the notice must include an offer to sell to the current tenant of each unit at the listed price, except for units to be vacated for rehabilitation subsequent to the notice. 765 ILCS 605/30(b).
§30 of the Act also provides additional protection to tenants of a pending conversion condominium project. For example, tenants whose current tenancy expires within 120 days of the notice of intent to convert (other than a termination for cause) have the right to extend their tenancy on the same terms and conditions as the existing tenancy until the end of a 120-day period following receipt of notice of intent to convert, if the tenants give written notice of their intention to stay during that 120-day period to the developer within 30 days after having received the notice of intent to convert. 765 ILCS 605/30(c).
A tenant also has the right to be informed by the developer at the time the notice of intent is given whether the tenant’s lease will be renewed or terminated upon expiration. If a lease is to be renewed, a tenant must be informed of all charges, rental or otherwise, in connection with the new lease, and the time-frame of the new lease. 765 ILCS 605/30(d).
For 120 days following receipt of the notice of intent to convert, tenants have a first right to purchase their unit on substantially the same terms and conditions as set forth in any duly executed contract to sell the unit made by the developer during that time period. Also, all contracts entered into by the developer during the 120-day period following delivery of the notice of intent must conspicuously disclose the existence of the right of first refusal. The tenant may exercise the right of first refusal within 30 days of receiving notice from the developer that a contract to sell the unit has been executed, even if the 30 days extends beyond the 120-day period following delivery of the notice of intent, as long as the contract was executed inside of the 120-day period. The recording of the deed conveying the unit to the buyer which contains language indicating that the tenant of the unit either waived or failed to exercise the right of first refusal or had no right of first refusal with respect to the unit, eliminates any tenant claim to the unit arising under the right of first refusal. However, the tenant may still have a claim against the developer for damages arising out of the right of first refusal. 765 ILCS 605/30(e).
For 30 days after the delivery of the notice of an executed contract subject to a tenant’s right of first refusal, the developer is to grant the tenant access to any portion of the building to inspect its features or systems, and access to any reports, warranties, or other documents in the possession of the developer which reasonably pertain to the condition of the building. Refusal of the developer to grant such access (subject to reasonable limitations) is a business offense, subject to a fine of $500. 765 ILCS 605/30(f).
Tenants have the right to privacy against undue showing of their units to prospective purchasers. The developer may show such units only a reasonable number of times and at appropriate hours, and only during the last 90 days of any expiring tenancy. 765 ILCS 605/30(h).
If the owner fails to provide a tenant with the notice of intent to convert required by §30 of the Act, the tenant permanently vacates the premises as a direct result of the nonrenewal of his/her lease by the owner, and the tenant’s unit is converted to a condominium unit, then the owner is liable to the tenant for (1) the tenant’s actual moving expenses incurred when moving from the subject property, capped at $1,500; (2) three month’s rent at the subject property; and (3) reasonable attorney’s fees and court costs. 765 ILCS 605/30(a)(2).
Pursuant to §22 of the Act, before the initial sale or offering for sale of a condominium unit, the seller must provide copies of the following:
- the declaration;
- the bylaws of the condominium association;
- a projected budget for the unit to be sold, including an estimated monthly payment for the unit for maintenance or management of the condominium property and monthly charges for the use of recreational facilities; and
- a floor plan of the unit to be purchased and the street address of the unit, if any, and if the unit has no street address, the street address of the project. 765 ILCS 605/22 (a)-(d).
In addition, §22 of the Act provides that if the development is a conversion condominium project, copies of the following must be provided:
- the amount of any initial or special condominium fee due from a purchaser at the time of closing and the basis for this fee;
- information, if available, on the actual expenditures made on all repairs, maintenance, and upkeep of the building being converted for the last two years that the building was occupied (this information should be presented in tabular form per unit, together with the proposed budget charges for each unit);
- a description of any provisions made in the budget for reserves for capital expenditures and the basis thereof, and if no provision is made for reserves, a statement to that effect must be made;
- for developments of more than six units, an engineer’s report is required as to the present condition of all structural components and major utility installations in the condominium, together with dates of construction, installation, major repairs and expected useful life of such component, and the estimated cost of replacing such items; and
- any release, warranty, certificate of insurance, or surety required by §9.1 of the Act.
In this regard, §9.1 of the Act provides that before conveying a unit, a developer shall record and furnish a purchaser with releases of all liens affecting that unit and its common element interest which the purchaser does not otherwise expressly agree to take subject to or assume, and the developer shall provide a surety bond or substitute collateral for or insurance against liens for which a release is not provided. After conveyance of such unit, no mechanics lien shall be created against such unit or its common element interest by reason of any subsequent contract by the developer to improve or make additions to the property. 765 ILCS 605/9.1. Therefore, a developer will need to ensure it has discussed the condominium conversion process with the existing lienholders against the real property to be converted, and have arrangements in place that will allow conveyance of units free of existing liens.
All of this information which is available must be furnished to the prospective buyer prior to execution of the contract. Thereafter, no changes or amendments may be made in any of the items furnished to the prospective buyer which would materially affect the rights of the buyer or the value of the unit without obtaining the approval of 75 percent of buyers then owning an interest in the condominium.
When all the information is not available at the time the contract is formed, the buyer’s obligation to close is voidable up until five days after all of the required information is available, or the closing occurs, whichever is earlier.
Failure of the seller to make full disclosure under §22 of the Act entitles the prospective buyer to rescind the contract at any time before closing, and to receive a refund of all deposits made, plus statutory interest. 765 ILCS 605/22 (e).
Other Required Disclosures for Residential Units
When the sale is related to a residential unit, the seller will also be required by Illinois law to provide a Residential Real Property Disclosure Report, setting forth the knowledge of the seller regarding possible defects as to a number of different property items. See 765 ILCS 77/20.
In addition, federal law requires that the seller disclose known lead-based paint and/or lead based paint hazards that exist in residential real property (or state that the seller has no knowledge of the same), provide the buyer with all available property reports on lead-based hazards, provide a prescribed pamphlet on lead-based hazards, and offer the buyer the opportunity a 10-day opportunity to test for lead-based paint and associated hazards. 42 U.S.C. §4852d(a)(1)(B).
Finally, the Illinois Radon Awareness Act (420 ILCS 46/1, et seq.), requires sellers to provide buyers of residential real estate with the following disclosures: (1) the pamphlet entitled “Radon Testing Guidelines for Real Estate Transactions” as published by the Illinois Emergency Management Agency (IEMA), (or an equivalent pamphlet approved for use by IEMA), and (2) the Illinois Disclosure of Information on Radon Hazards, detailing the potential threats to human health related to radon exposure and requiring the seller to disclose knowledge of the same related to the property, all as set forth in §10 of the Illinois Radon Awareness Act. 420 ILCS 46/10.
Of particular relevance to the conversion of multi-story structures, §20(9) of the Illinois Radon Awareness Act does not apply to “[t]ransfers of any residential dwelling unit located on the third story or higher above ground level of any structure or building, including, but not limited to, condominium units and dwelling units in a residential cooperative.” 420 ILCS 46/20(9).
In addition to the numerous statutory requirements and practical considerations associated with any condominium development in the State of Illinois, undertaking a conversion condominium adds layers of complexity and requires significant advanced planning. The conversion process should be undertaken with care and diligence, and the developer will likely need to engage numerous professionals (e.g., architect, attorney, engineer, surveyor) in order to produce the required disclosure materials, and ensure compliance with the Act.