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The nation’s financial crisis has turned the dream of home ownership into a nightmare for many owners where dissolution of the condominium could become the best resolution.  Other Associations inadvertently subject their condominiums to dissolution by failing to follow required procedures in the Declaration after damage to the property.

A condominium’s dissolution, or termination, converts all the units back to a single piece of property, no longer governed by the Condominium Act. The drafters of RCW 64.34.268 envisioned dissolution at the end of the building’s life or following a catastrophic event, like a major fire; however, terminations can occur under other circumstances.   Dissolution of a condominium can be voluntary or involuntary as described below.

Voluntary Termination: In Washington, 80% of the ownership can vote to dissolve their condominium.  The owners collectively sell the building and distribute the proceeds.  This could occur when the land value exceeds the unit values, or when major repairs are necessary, but it does not make economic sense to complete them.

Voluntary dissolution could be an option for condominiums suffering because of excessive delinquent assessments.  As more owners fail to pay, cash flow dries up, forcing a shrinking number of non-delinquent owners to cover more fixed costs like insurance and management fees. This can require special assessments and lead to more delinquencies.  The association can pursue collections, but there is often little chance of recovery.  Unit values spiral down due to delinquencies, foreclosures, poor cash flow, and distress sales.  At some point, Associations could find it beneficial to terminate the condominium, sell the building to a single owner who rents the units as apartments, distributing the proceeds to unit owners.  Under some circumstances, dissolution becomes the lesser of two evils, but we know of none in our state

Involuntary Termination:   This occurs automatically after some triggering event (like a fire) that causes significant damage to the condominium building.  For condominiums built before July 1, 1990, termination is automatic if the owners do not agree to repair, reconstruct, or rebuild within 90 days after the triggering damage event.  For condominiums built after July 1, 1990, the declaration typically addresses how decisions about damage are handled, and often include provisions that mandate termination if required procedures are not followed.  Termination may automatically follow a decision not to repair, which may be implied by a Board’s inaction after a damaging event, like failure to hold a meeting within a certain period of time.  Follow the Declaration’s provisions to avoid unintended dissolution.

Consequences:  The results are the same whether dissolution is voluntary or involuntary. Ownership converts to a “tenancy in common” and continues until the property is sold to a new owner.  Owners who previously owned units then share the entire property.  This is not an attractive option for owners who want to stay in their units.  Costs can rise, and their allocation is difficult. Each owner becomes responsible for all expenses. The market value of an owner’s share is likely to drop substantially.  Other consequences affect the owners’ association, which must wind up the affairs of the Association until it is sold by the owners.

When the owners sell the property after termination, all creditors’ liens on the (former) units must be satisfied before any distribution to owners.  This can produce absurd results where owners’ distributions have little relationship to their equity in the property, and may be based on fair market value rather than percentage of ownership. We can envision no “winners” in an involuntary dissolution, with banks getting the best protection.

Preventing Dissolution:  Dissolution is an unfortunate solution to an Association’s problems.  To prevent the involuntary dissolution, you must strictly adhere to Declaration requirements.  This is especially true after any damage which could trigger automatic termination.  You must understand how your declaration defines “damage”, and what steps must be taken if “damage” occurs.

To prevent termination related to Association debt, condominium assessments (regular and special) must be collected on time.   Associations must ensure that they have the money necessary to maintain the community, including contingencies for delinquent owners. Boards should consider ways for owners to remain “current” even in an economic downturn.

Associations considering voluntary dissolution need to make that decision when it still makes economic sense, understanding all of the consequences.  Associations burdened with debt may alternatively consider bankruptcy.  Bankruptcy might allow Associations to restructure debts until they can resolve delinquency issues, but requires some workable plan.

The dissolution of a condominium is an extreme measure with upsetting results, especially if it occurs involuntarily. If you are a Board member or Association manager facing serious financial problems or if you are uncertain about the procedures required by the Association’s governing documents, you should consult the Association’s attorney to assist in these matters.