Is a condominium unit on the top floor worth more than one on the ground floor? If you’re buying, yes; if you’re terminating, no

Every year thousands of new condominium projects are created, either as new construction or by converting existing apartment buildings.  It’s not so often that condominiums are terminated, in fact, hardly ever.  If the owners of the Champlain Towers South units in Surfside, Florida terminate their condominium now that the building is no longer standing, eventually the association will have to divide among its members whatever money remains after the lawsuits are resolved and the real estate is sold to the next developer.

At that point the owners of the higher units will encounter a quirk in condominium law that, because so few condominiums have been terminated, has rarely if ever been tested.

The declaration that creates a condominium must state how the condominium owners’ association (the COA) will allocate dues and assessments among the owners.  If the units are all about the same size, the declaration might state that each unit will be assessed an equal share of dues and assessments.  If the units vary in size, the declaration will usually state that dues and assessments will be allocated in proportion to unit area.  The owner of a 1500 SF unit will pay twice what the owner of a 750 SF unit pays.  The declaration will state that the owners’ interest in the land and common elements follows the same proportions.  If the building has 100,000 SF of floor area in the units and you own a 1000 SF unit, you pay 1% of the dues and assessments and you own a 1% interest in the land and the common elements.

This system is unlike property tax collection, where you are assessed in proportion to unit value.  The more your unit is worth, the more tax you pay.  Units on higher floors with better views are worth more than units on lower floors with limited or no views.  In one 25-floor condominium tower near my office, all but two of the units are exactly the same size, but the ones near the top are worth 50% more than the ones near street level.

Assessing dues in proportion to unit area makes sense for operating expenses.  Larger units use more utility service and place more burden on the common elements.

The quirk that Champlain Towers South is about to demonstrate is that condominium declarations usually state that if the condominium is terminated, then the assets of the COA will be allocated among the owners in the same proportion as dues are assessed.  If you owned a 1000 SF unit in the 100,000 SF condominium, you will get 1% of the remaining cash when the condominium is terminated and the COA is liquidated – whether your unit had enjoyed a glorious view from the 20th floor or looked out over the Dumpsters from the second floor.

What does this mean for the unit owners in a terminated condominium?

Let’s build a model condominium project.  To keep things simple imagine that the condominium has ten floors, each with ten units.  The units are all the same size, so each of the 100 units pays 1% of the dues and assessments and is entitled to 1% of the proceeds if the condominium is terminated.  Also to keep things simple, let’s place our condominium where the high floors enjoy a great view, the middle floors have some view, and the lower floors have no view.  The 30 lowest units are worth $400,000 each, the 40 middle units are worth $500,000 each, and the 30 highest units are worth $600,000 each, for a total project value of $50 million and an average unit value of $500,000.

Disaster strikes and the building is destroyed.  Let’s assume that the building is fully insured, which is not always the case.  The owners terminate the condominium, collect the insurance proceeds on the structure, and sell the land.  The association receives exactly $50 million, distributes $500,000 to each owner, and shuts down.

The owners of the lower units are happy and the owners of the middle units are content.  The owners of the upper units are left short – and those among them who recently bought their units may be leaving their lenders short also.  A new owner who borrowed 90% of the purchase price will have to pass the $500,000 on to the lender and will still owe $40,000, secured by a dwelling that no longer exists.

The Champlain Towers South disaster may add one item to a lender’s checklist.  Not only will the lender want to know how much the unit will sell for if the lender has to foreclose, but also whether under the condominium declaration and the COA’s insurance policy the lender will be made whole if the building is destroyed.

Champlain Towers South and insurance: uncovered dangers may become uncovered losses

Three days after the tragic collapse of half of the 136-unit Champlain Towers South condominium in Surfside, Florida, the association’s insurer, James River Insurance Company, announced that it was paying the entire amount of its policy into court.

In matters of insurance, always read the fine print, even in news stories.  James River is paying not the amount of its coverage for building insurance, but its coverage for general liability – the coverage that we associate with visitors who slip on wet or damaged walkways.  That policy amount is reported to be $5 million, which equates to about $30,000 per condominium unit.  The association carried insurance of various sorts reported to total $48 million, which is about $300,000 per unit, and is about half the total market value of the 136 units before the collapse.

The legal dispute between Champlain South’s insurers (there are several) and the association is likely to focus on whether the policies cover the loss of the building.  That depends on the words in the policy.  Not every loss is a covered loss.

The Champlain Towers South case won’t be the first time Florida has seen this question.  In The Sandalwood Condominium Association at Wildwood, Inc. v. Allstate Insurance Company, 294 F.Supp. 2d 1315 (2003), the condominium’s policy covered “risk of direct physical loss involving collapse of a covered building or any part of a covered building caused only by one or more of the following,” including “hidden decay” and “hidden insect or vermin damage.”  In November 1998 the association discovered that termites had damaged several of the buildings.  As the association repaired the damage, it learned that the termite damage was extensive, and it filed a claim with Allstate in April 2000.  Seventeen months later Allstate denied the claim on two grounds: first, that the damage was not “collapse,” and second, that the damage was not “hidden.”   Allstate moved for summary judgment on both defenses.

The court denied both parts of Allstate’s motion.  Its explanation for rejecting Allstate’s argument that the damage was not “hidden” was not really a win for the association.  Why not?

Allstate alleged that, in the court’s words, the association “cannot claim the damage was hidden if they had prior knowledge of its existence,” and asked the court to rule that the Sandalwood association had to show that it did not know, and did not have a reason to know, that termites and decay had damaged the buildings.

The court rejected Allstate’s motion, but it adopted Allstate’s rule, saying that “in order to recover under the policy, Sandalwood must demonstrate that the damage to the structural integrity of the Complex was not visible and that Sandalwood neither knew nor should have known of the structural damage with sufficient time to allow for repairs before it reached the state of ‘collapse.'”  Because that was a question of fact and not a question of law, the court denied the motion.

Three years ago an engineering firm evaluated Champlain South. Buried in its report on page 7 is the following:  “The waterproofing below the Pool Deck & Entrance Drive as well as all of the planter waterproofing is beyond its useful life and therefore must all be completely removed and replaced.  The failed waterproofing is causing major structural damage to the concrete structural slab below these areas.  Failure to replace the waterproofing in the near future will cause the extent of the concrete deterioration to expand exponentially.”

If Champlain South’s policy reads like Sandalwood’s policy from Allstate did, be prepared for Champlain South’s insurer to argue that it doesn’t have to pay for the lost building because the association – its insured – knew about the severe damage in 2018 and had enough time to arrange for repairs, but didn’t.