New Law Brings Changes to Kentucky's Condominium Laws

On April 11, 2012, Governor Steve Beshear signed into law House Bill 433, and in doing so took Kentucky's condominium laws a step closer towards clarity and towards uniformity with the laws of many other states. HB 433 amends certain provisions of the Kentucky Condominium Act. Like the act itself, HB 433 has implications for anyone developing, owning, leasing, or lending against condominiums in Kentucky, even if the condominium was in existence prior to the law’s enactment.

The Kentucky Condominium Act (KRS 381.9101 – 381.9207) became effective on January 1, 2011. For condominium regimes created after that date, the law replaces Kentucky’s Horizontal Property Law (KRS 381.805 – 381.910) as the statutory framework for the creation, sale, use and administration of condominium regimes in this state. The Kentucky Condominium Act did not repeal the Horizontal Property Law, which continues to apply to regimes created prior to January 1, 2011.

The law does, however, make several of its important provisions apply to condominiums that existed prior to January 1, 2011. The Kentucky Condominium Act was modeled after the Uniform Condominium Act promulgated by the National Conference of Commissioner's on State Law, but it differed from the uniform law in various ways. Among other things, HB 433 helps clear up some confusion that resulted from Kentucky’s departures from the uniform law. HB 433 also includes some new provisions not found in the uniform law.

The following are among the provisions of HB 433 with the potential for the most significant practical impact on condominium owners and associations:

• Applicability of Resale Certificate Requirement. The Kentucky Condominium Act creates an obligation on the part of a seller of a condominium unit to provide its buyer with a certificate containing information on various matters related to the regime, including the monthly common expense fees, a statement of anticipated capital expenditures, a description of the insurance maintained by the association, and other information set forth in KRS 381.9203. As initially adopted, the certificate requirement did not apply to sales of units in condominium regimes created before January 1, 2011. HB 433 changes that. Subject to certain exceptions set forth in KRS 381.9201, a seller of a condominium unit must now deliver a certificate to its buyer regardless of when the related condominium regime was created. This change impacts not only condominium unit owners, but also associations, who are charged with the obligation of preparing the requisite certificate within ten days of a unit owner’s request. The law is silent on what penalties an association might face if it fails to provide the certificate in a timely manner, but the consequences to a seller for failing to deliver the certificate are severe: a purchase contract is voidable by the purchaser until five days after purchaser receives the certificate.
• Right to Pledge Association Income. A condominium association may find itself in a position where it must borrow funds in order to perform its obligations under the condominium documents. In such event, an association who is unable to provide a lender with a collateral assignment of its right to receive assessments will find it difficult, if not impossible, to obtain such financing. As initially enacted, KRS 381.9167(1)(n) (which applies to regimes created before and after the January 1, 2011) allowed an association to pledge its right to receive assessments, but only to the extent expressly provided in the condominium declaration. The declarations for many older condominium projects do not expressly give the association the right to assign assessments, as under the Horizontal Property Law the associations had that power even if it was not mentioned in the declaration. HB 433 comes to the rescue of those regimes by removing the requirement that the association’s ability to pledge its right to receive future income be expressly stated in the declaration.
• “Condominium” Definition. One of the most limiting aspects of Kentucky’s Horizontal Property Law was that the law defined a condominium unit as being an enclosed space. Consequently, boat docks, parking spaces and other open areas could not be units in a condominium regime under a strict interpretation of that law. The Uniform Condominium Act’s definition of unit is much broader and would allow a condominium unit to be created out of any space whose boundaries are capable of being defined. However, in adopting the Kentucky Condominium Act, the legislature gave the term “condominium” a definition that is different from the uniform law in that it referred to units as being in a structure. In doing so, Kentucky’s law seemed to stop short of accomplishing the goal of creating flexibility in the creation of condominium projects. HB 433 revises the definition of a “condominium” so that it is consistent with the uniform law.
• Requirements for Budget Approval. As initially adopted, KRS 381.9169 required that the executive board of the condominium association hold a meeting of the unit owners in order to ratify any proposed budget prepared by the board. This meeting would be required even if no such requirement existed under the association’s governing documents. HB 433 changes this section so that the meeting is only required in the event that the proposed budget contains an increase of greater than fifteen percent from the previous year’s budget.
• Financial Record Requirements. HB 433 revises KRS 381.9197 to set forth specific requirements regarding an association’s maintenance of financial records. The section applies to all associations, regardless of whether they were created before or after January 1, 2011. The level of detail required for the financial records for any association depends on the amount of the association’s annual revenues.

Time will tell whether further corrective legislation will be required, but the provisions described above as well as the other amendments contained in HB 433 should help resolve many of the uncertainties that have lingered since the adoption of the Kentucky Condominium Act.