INTRODUCTION

2010 marks my 25th year writing TIC agreements, as well as my 25th year as a TIC owner. It’s hard to say whether I’ve learned more over the years from the feedback of my clients and their Realtors, or from my experience with the eight TICs in which I have personally participated, but I can say for certain that every day brings new insight and ideas on how to operate a TIC and improve TIC contracts. The gradual evolution of our TIC agreements continues each week, as we make small alterations to adapt to the latest round of unforeseen events and new questions. But every now and then, we re-work the basic TIC agreement templates from scratch, and make the kind of fundamental structural and organizational changes that cannot be handled incrementally. We have gone through this process over the past eight months, and are now proud to announce the “new-generation” TIC agreements. In this article, I will describe a few of the most significant changes and the issues we had in mind when making them.

RULES ARE RULES

It turns out that roughly 95% of TIC groups get along fine and never need to use their TIC agreement. The other 5%, the “problem groups”, rely heavily on their contract. A common characteristic of these problem groups is a member who is not particularly considerate and regularly stretches or bends the rules. The victims of this behavior frequently complain about the burden of enforcing the rules against the bad actor; they wonder why they should have to incur the cost of hiring an attorney and initiating an expensive dispute resolution process, while the inconsiderate and disrespectful owner sits back and waits for consequences, then starts the process all over again with some new offence. For better or worse, no legal contract enforces itself. An impartial judge or arbitrator must be available to resolve disputes and, where necessary, bring in the power of the state to compel compliant behavior. But we felt that several changes to TIC agreements could shift the burden of enforcement from the good guys to the bad guy.

The first of this group of changes was to significantly tighten the rules relating to the most common problem areas: parking, storage, and alterations of common and exterior areas. For example, regarding assigned parking and storage spaces, we now require exact and permanently mapped boundaries for each space, and that every part of an owner’s vehicle or stored items be entirely within the borders of the owner’s space. More important, we empowered the other owners to take immediate action, such as having an improperly parked car towed, or disposing of items improperly stored in shared areas such as yards and hallways, without initiating a mediation or arbitration process, provided the owners can document the violation with photos or other evidence. In effect, the burden of going to the trouble and spending the money to initiate a dispute resolution process has been shifted from the complying owner to the non-complying one.

Some of our clients have concerns about creating strict rules and enabling direct “self-help” enforcement. In the warm glow and excitement of the buying process, they feel that creating these rules and procedures can send the message that the parties themselves are strict and unreasonable, rather than willing to “just try to get along” and “work things out”. But in practice, it turns out that the best way to get along is to create strict rules and to enforce them consistently. The groups we see for dispute resolution tend to be the ones who either didn’t create a clear rule about the issue in dispute, or went through a period of not enforcing the rule and now need to change course. For example, we have had several instances where an owner with a small car allowed another owner with a larger car to use more than his allotted parking area. Later, when the first owner purchases a larger car, or wishes to sell, the second owner refuses to stop using the extra space, particularly when his larger car cannot fit within his allotted space and must be parked on the street. A similar example is where an owner who has long stored personal items in a common area refuses to move them to prepare the building to be shown for a sale.

BUDGETING, ASSESSMENTS AND EXPENDITURES

In general, TIC operating expenses fall into two groups: mandatory items, such as mortgage payments, property taxes, insurance premiums, necessary maintenance, and utilities; and non-mandatory items, which include everything else. Another common characteristic of problem TIC groups is that one owner resists approving a new or adjusted budget, and the resulting assessment or expenditure, even though all of the expenses are mandatory items. Sometimes an owner will take this tack simply to delay making a payment, but more often the motive is to force the group or another owner to make a concession or compromise on an unrelated issue. Since the TIC group really has no choice but to pay for mandatory items, and to adjust their budget and owner collections to match increases in these items, there is no reason to submit these issues to a group vote, and thereby create an opportunity for a difficult owner to start a dispute that requires the others to incur the time and expense of dispute resolution.

In recognition of this fact, we have made changes to the to new-generation TIC agreements designed to streamline the budget, assessment, and bill-pay process. For example, we have enabled the manager to adjust the budget himself, without calling a group meeting or vote, provided the adjustment is based on a mandatory item, and the manager can document the cost. An Owner who disagrees with the budget can challenge it, either by calling a meeting, or by initiating dispute resolution, but only after paying the resulting assessment. No one can refuse to pay based on his intention to challenge the budget or assessment. If the owner’s challenge is successful, he will get a refund. Similarly, when an owner is personally assessed for damage he has caused to another unit or the common area, or for costs resulting from a violation (such as towing or debris removal), he must pay the assessment first and then seek a refund by challenging its validity through the dispute resolution process.

INSURANCE AND RESPONSIBILITY FOR DAMAGE

Property damage in condominiums and TIC buildings has always raised complex issues, particularly when an occurrence in one apartment (such as a leaking pipe) causes damage to another, or when a common area failure (such as a leaking roof) causes damage inside one or more units. Recent developments in the insurance world, such as rising premiums and the tendency of insurers to hike rate based on the number of claims submitted, have only increased this complexity. Our new-generation TIC agreements provide significantly more detail and guidance regarding damage responsibility and insurance. For example, these agreements more clearly articulate when one owner is responsible for damage in another owner’s unit, and when the group is responsible for damage to apartment interiors, as well as how this responsibility is affected when an unusually high-value item, such as artwork or expensive electronics, is damaged. Similarly, these agreements define which items and building elements the group insures, and which items and elements individual owners insure, and limit each individual owner’s right to make claims against the group or another owner when the first owner incurs a loss because he didn’t carry enough insurance.

Another important insurance issue addressed in the new-generation TIC agreements is the decision-making process for making claims against the group policy. Often, owners are torn between the desire to collect insurance proceeds for a covered loss, and the reluctance to risk increasing premiums and triggering policy cancellation. The new-generation agreements specify when a claim will be submitted, and how loss will be allocated when no claim is made. It also describes how insurance deductibles are shared, an issue that can be particularly troublesome when damage spans multiple units and common area, and both individual and group policies provide coverage.