Can Condominiums Charge Capital Contribution Fees?
By: Steven R. Braten, Shareholder
Paula S. Marra, Senior Associate
Our condominium association clients frequently ask whether they can charge “a new owner fee” or a “working contribution” or “capital contribution” to buyers of a unit. We respond “no”. After our condominium clients get over the initial shock we didn’t provide the usual lawyer answer, “it depends”, the next question usually is “why not”, or “but a neighboring association does – how come they can and we can’t.” This is where the lawyer responses start. For example, we usually say “well, it’s complicated”, or “is your neighbor an HOA?”
WHEN DID THE CONDOMINIUM ACT GET SO COMPLICATED?
Once upon a time, the Florida Condominium Act and the case law interpreting it could be read in less than a day. Those days, however, are long since gone. Fortunately, we have all kept up with the latest developments in the law (see our 2018 legal update!). But seriously, getting back to whether a condominium may charge a buyer a fee in connection with the transfer of a Unit, Section 718.112(2)(i) of Florida’s Condominium Act is one of the clear provisions in what is now pages and pages of statutes. This section states:
(2) REQUIRED PROVISIONS.—The bylaws shall provide for the following and, if they do not do so, shall be deemed to include the following:
(i) Transfer fees. —No charge shall be made by the association or any body thereof in connection with the sale, mortgage, lease, sublease, or other transfer of a unit unless the association is required to approve such transfer and a fee for such approval is provided for in the declaration, articles, or bylaws. Any such fee may be preset, but in no event may such fee exceed $100 per applicant other than husband/wife or parent/dependent child, which are considered one applicant. However, if the lease or sublease is a renewal of a lease or sublease with the same lessee or sublessee, no charge shall be made. The foregoing notwithstanding, an association may, if the authority to do so appears in the declaration or bylaws, require that a prospective lessee place a security deposit, in an amount not to exceed the equivalent of 1 month’s rent, into an escrow account maintained by the association. The security deposit shall protect against damages to the common elements or association property. Payment of interest, claims against the deposit, refunds and disputes under this paragraph shall be handled in the same fashion as provided in part II of chapter 83. (emphasis added).
As you can see, Section 718.112(2)(i) clearly and unambiguously prohibits a condominium association from charging a fee “in connection with the sale, mortgage, lease, sublease, or other transfer of a unit” with one exception. The only exception to the blanket “no charge” prohibition “in connection with” the sale of a condominium unit is a $100.00 “application fee”. There is no similar prohibition in Florida’s Homeowners’ Association Act – yet. That’s it you say!? But a background check costs $150.00! We know. We understand. But apparently the Legislature has not been informed that inflation is still alive and well and that maybe it’s time to increase that $100.00 fee to some more reasonable amount.
Even an increase to the allowable application fee, however, would not authorize charging “capital contributions”, such as one or two quarters of assessments, to offset operating expenses, or to fund reserves. When you get back to one of the core fundamentals of the condominium entity you will see why amending the declaration to require a “capital contribution” to buyers of a unit violates the Condominium Act. When a condominium is created, Section 718.104(4)(g) requires the declaration to state the percentage or factional share of liability for common expenses of the condominium for each unit. Common expenses are defined as all expenses incurred by the Association in the performance of its duties. Charging a “capital contribution” to a buyer of a unit operates to change the fractional or percentage share for common expenses stated in the declaration for that unit.
So, why can’t we pass an amendment anyway to provide an exception to this? Well, it’s complicated… Section 718.110(4) prohibits amendments to a declaration that change the proportion or percentage by which the unit owner shares the common expenses of the condominium unless the record owner of the unit and unless all the record owners of all other units in the same condominium approve the amendment. So, an amendment for this type of charge is not feasible because every time a “capital contribution” is charged you would arguably be changing the percentage or fractional share of liability for common expenses each time the fee is charged.
SO WHAT SHOULD WE DO?
So what should a condominium association do to help raise much needed cash without levying special assessments? For starters, we recommend to our association clients that they have a reserve study performed every three to five years. We also recommend that if your association is not fully funding reserves, then the association should establish a plan to move toward fully funded reserves, otherwise the old adage “you can only kick the can down the road so far” will surely come back to haunt your association. As many condominium buildings in South Florida approach or have surpassed their 40th birthday, condominium boards are struggling with retrofits, upgrades, and deferred maintenance projects and trying to figure out how to pay for those projects because reserves are underfunded. Also, by waiting as long as possible to deal with the inevitable, suddenly hasty decisions have to be made, such as hiring contractors and engineers without having the opportunity to fully vet them or send association counsel their proposals or contracts for review.
Wait a minute, I thought I asked a simple question – why can’t we charge a capital contribution simply because we are a condominium. Like we said in the beginning, it is simple, but then it gets complicated.