Protective Provisions for Minority Owners in Commercial or Mixed-Use Condominium Projects – Real Estate and Construction

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United States: Provisions relating to the protection of minority owners in commercial or mixed-use condominium projects

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In order to preserve the marketability of a commercial or mixed-use condominium unit sold to a third party, it may be necessary to include specialized provisions for the protection of minority owners in the declaration of co-ownership for the project. A description of the common provisions for the protection of minority owners to be taken into account in the declarations of co-ownership is presented below:

Provisions relating to major decisions

Essentially, there is a material decisions provision that any decision made by the condominium association or another owner that has a material adverse effect on another owner must be approved by that owner. A major decision with a material adverse effect could include (i) a modification of the declaration of co-ownership which would jeopardize the business operations of an owner who does not have sufficient voting rights to block the modification under the general provisions of modification of the declaration of co-ownership; or (ii) a structural modification of the building which would jeopardize parts of an owner’s dwelling.

Increase consent thresholds

Under Tennessee law, some decisions, such as plan termination, whether or not to restore in the event of an accident, etc., require 80% of the votes held by unit owners to consent to such action. A minority owner may not have sufficient voting power to prevent the majority from implementing these decisions, which could have a negative impact on the minority owner’s unit. To protect the unit from the minority owner, the 80% consent thresholds can be increased to 100% so that a unanimous vote of all commercial or mixed-use owners is required in order to effect a termination or decision not to not restore after a disaster.

Council seats

Under Tennessee law, the declaration of co-ownership may provide for a period of control by the declarant of the association, during which the declarer can appoint and remove the officers and members of the board of directors of the association ( “Reporting period of the declarant”). After the expiration of the Registrant’s Control Period, the directors of the association are elected by the unit owners on the basis of the votes attributed to the different units of the plan. To protect the unit from the minority owner, the declaration of co-ownership can allow each unit owner to appoint a certain number of directors to the board (larger units will always receive more seats on the board), ensuring that each owner unit is represented within the Council association. In addition, the declaration of co-ownership can avoid setting up a period of control of the declarer in a commercial co-ownership to allow all owners of business units to be represented on the board of directors of the association from the start.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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