When a condominium association makes a significant change to its governing documents, most of the attention naturally goes to getting the required co-owner approval. But that is not always the whole picture. In some situations, first mortgagees[1] also have the right to vote on those changes. Knowing when mortgagee approval is required, who actually gets a vote, and how that process works is essential to making sure the amendment is valid and enforceable.
When Mortgagee Approval Is Actually Required
Contrary to common belief, first mortgagees do not vote on every amendment. Section 90a(9) of the Act strictly limits the circumstances under which their approval is required. Notwithstanding anything in the condominium documents to the contrary, first mortgagees are entitled to vote only if the amendment involves one of the following:
- Termination of the condominium.
- A change in the method or formula used to determine the percentage of value assigned to a unit subject to the mortgage.
- A reallocation of responsibility for maintenance, repair, replacement, or decoration from the association to the unit subject to the mortgage.
- Elimination of the association’s obligation to maintain insurance on the condominium or a unit, or a reallocation of insurance responsibility from the association to the unit owner.
- Modification or elimination of an easement benefiting the mortgaged unit.
- Partial or complete modification, imposition, or removal of leasing restrictions.
- Amendments requiring unanimous affected mortgagee consent as provided in Section 90(4) of the Act, such as certain changes to percentage of value (for non-voting purposes) or modifications to unit dimensions or appurtenant limited common elements without co-owner consent.
In most communities, the amendments that tend to trigger mortgagee voting are changes to leasing restrictions, moving insurance responsibility from the association to co-owners, or shifting maintenance and repair responsibility from the association to co-owners. If the proposed amendment does not fall into one of those specific statutory categories, mortgagee approval simply is not required.
Who Votes and When
Only first mortgagees of record as of the “control date” are entitled to vote. The control date is the date the co-owners approve the amendment; in other words, the co-owner voting deadline. The mortgagee voting process does not begin until after that control date. Second mortgagees and other junior lienholders are not entitled to vote.
Because mortgagee eligibility is determined as of the control date, associations should generally wait until the co-owner voting period has concluded, and the amendment has received the required co-owner approval, before soliciting mortgagee approval. Attempting to accelerate the process may require title searches to confirm eligible mortgagees, which increases both cost and administrative burden. Waiting ensures accuracy and efficiency.
The 90-Day “Deemed Approval” Rule
Once the mortgagee voting package is mailed, first mortgagees have 90 days to return their ballots. Critically, the Act provides that any mortgagee ballot not returned within that 90-day period is deemed approved. Silence constitutes a “yes” vote, which is a different standard than applies to co-owner voting.
In practice, most mortgage companies do not respond, and those that do typically approve the amendment. As a result, amendments rarely fail due to mortgagee voting, provided the statutory process is followed correctly.
Notice and Mailing Requirements
The Act sets forth detailed notice and mailing requirements that must be followed. The notice must be mailed to the address listed in the recorded mortgage or any recorded assignment.
The mortgagee voting package must include a copy of the amendment as approved by the co-owners, the date of approval (the control date), a return envelope addressed to the entity authorized by the Board to tabulate votes, and a ballot providing space for approval or rejection along with a signature line for the mortgagee or its authorized officer. The notice must also state the number of units subject to a first mortgage held by that mortgagee and the deadline for returning the ballot, which is 90 days from mailing.
Additionally, the notice must contain a statement substantially advising the mortgagee that it is entitled to vote, that it has one vote per unit subject to its mortgage, that the amendment will be approved if 66-2/3% of first mortgagees approve it, and that failure to timely return the ballot will constitute approval.
Associations must retain copies of the notice, proof of mailing, and returned mortgagee ballots for two years after the control date.
Practical Takeaways for Boards
Understanding when mortgagee approval is required, who is entitled to vote, and how the process works helps ensure the amendment is properly adopted and enforceable. When handled properly, the mortgagee voting process is largely procedural and typically does not stand in the way of an amendment being approved.
Footnote:
[1] The first mortgagee is the bank/lender with a recorded first (primary) mortgage on the unit and has priority over other liens.
This article was originally published by Community Associations Institute – Michigan Chapter. Reprinted with permission.
