Board members must understand the right of first refusal in condos. While many boards rarely exercise this right in practice, it is still important to know how it works, when it triggers, and what the board’s role is. In doing so, condo boards can avoid making common mistakes and exposing the association to liability.
What is the Right of First Refusal in Condos?
In the context of the Illinois Condominium Property Act, the right of first refusal refers to a provision that allows the condominium association or existing unit owners the right to purchase a unit before the owner sells it to an external third party. Details of this right are outlined in Section 30(e) of the Illinois Condominium Property Act, but each association’s governing documents may have their own rules and regulations related to the right of first refusal (ROFR).
How the Right of First Refusal in Illinois Typically Works
The purpose of the right of first refusal is to allow the condominium association or existing unit owners to maintain some control over who resides in the community. One reason an HOA may enact it is to ensure that the units are sold within a certain price range so as to preserve property values.
Here’s how the right of refusal in condo associations typically works:
- Intent to Sell. When a condo unit owner decides to sell their unit, they must first notify the condominium association or the existing unit owners, depending on the specific provisions outlined in the association’s bylaws or the Illinois Condominium Property Act.
- Offer to Condo Association or Unit Owners. The unit owner presents an offer to sell the unit to the condominium association or existing unit owners. This offer is often made on the same terms and conditions as those offered by a prospective external buyer.
- Decision by Condo Association or Unit Owners. The condominium association or existing unit owners then have a specified period to decide whether they want to purchase the unit at the offered price. If they choose not to, the unit owner can proceed with selling the unit to an external buyer.
It’s important to note that the specific procedures and timelines for exercising the right of first refusal can vary and should be clearly defined in the condo association’s bylaws. If homeowners have questions or concerns about the condo right of first refusal, they should contact their board.
When is the Right of First Refusal Triggered?
The right is triggered after a seller accepts a purchase agreement but before the sale closes. The usual process works like this:
- A unit owner signs a purchase contract with a buyer.
- The contract and buyer information are submitted to the condominium association.
- Condo board members review the contract under the ROFR provision in the governing documents.
- The board has a limited period, often 10 to 30 days, to decide whether to exercise the right.
If the board declines the right, the sale proceeds as normal. On the other hand, if the board chooses to exercise the right, the association or its designee must purchase the unit. The purchase must follow the exact terms of the buyer’s contract.
The Role of the Condo Board in ROFR
The condo board’s role in the ROFR process is typically administrative and procedural. The board does not negotiate the sale price or terms. Instead, it simply reviews the executed contract and decides whether the association wants to exercise its right.
In most cases, the board’s responsibilities include:
- Reviewing the purchase agreement submitted by the seller
- Confirming whether the governing documents grant a Right of First Refusal
- Determining whether the association wishes to exercise the right
- Issuing a waiver if the board declines to purchase the unit
Many associations almost always issue an ROFR waiver. This way, the sale can move forward without any disruption. Boards usually only exercise this right in specific situations, such as preventing a distressed sale or buying the unit for association purposes.
Actions the Board Can and Can’t Take
There are a number of actions the board can take when a contract exists and the ROFR process begins. These include:
- Reviewing the purchase agreement and buyer information
- Deciding whether the association will exercise its right
- Issuing a written waiver of the right
- Purchasing the unit under the exact terms of the buyer’s contract (if the board exercises the right)
That said, board actions have limitations, too. Once a unit is already under contract, the board can’t manipulate the sale. The board also can’t interfere with the transaction. Prohibited actions include:
- Changing the terms of the purchase contract
- Demanding a higher purchase price
- Rejecting a buyer simply because they dislike them
- Delaying issuing a waiver beyond the allowed timeframe
- Using the right to discriminate or violate fair housing laws
There are really only two options the board has: to waive the right or to match the contract exactly as it is written.
Common Mistakes Associations Make With ROFR
Condo boards consist of volunteer owners, so they don’t always understand ROFR provisions. This can lead to unintentional misuse, which can lead to liability all the same. To prevent problems, boards should know what mistakes to avoid.
1. Using ROFR as a Buyer Screening Tool
Some boards attempt to use ROFR to reject certain buyers. This is risky because the ROFR doesn’t allow boards to approve or deny buyers. Doing so can lead to discrimination claims or allegations of fair housing violations. If the board wishes to exercise the right of refusal in condos, it must actually buy the unit.
2. Failing to Follow the Timeline
A condo’s CC&Rs usually impose strict deadlines for when boards must exercise the right. If the board misses the deadline, it automatically waives the ROFR.
3. Trying to Renegotiate the Contract
Associations must follow the contract terms to the letter. Boards can’t use their position to alter the terms. If they don’t want to accept the deal or buy the unit, then the only other option is to waive the right.
4. Not Having Funds to Complete the Purchase
If the board exercises the right of first refusal in condos, the association must be able to close on the unit. This means having sufficient funds to actually purchase it. Some boards exercise the right even without financial capacity in an effort to delay the sale, but this can lead to liability.
A Helping Hand
The right of first refusal in condos can bring confusion and frustration, especially to inexperienced boards. Understanding how it works is the first step, but many COAs seek help from professionals. A management company can guide the board through the decision-making process and ensure legal compliance.
To learn more about condo association management in the greater Chicago area, please contact us at First Community Management.