Minority Owner Protection Provisions in Commercial or Mixed-Use Condominium Projects

To preserve the marketability of a commercial or mixed-use condominium unit sold to a third-party, it may be necessary to include specialized minority owner protection provisions in the condominium declaration for the project. A description of common minority owner protection provisions to consider in condominium declarations are set forth below:

Major Decision Provisions

A Major Decision provision essentially provides that any decision made by the condominium association or another owner that has a material adverse effect on another owner must be approved by such owner. A Major Decision with a material adverse effect could include (i) an amendment to the condominium declaration that would compromise business operations of an owner that does not have sufficient voting power to block the amendment under the general amendment provisions of the condominium declaration; or (ii) a structural change to the building that would jeopardize portions of an owner’s unit.

Increase Consent Thresholds

Under Tennessee law, certain decisions, e.g., termination of the regime, the decision whether to restore in the event of a casualty, etc., requires that 80% votes held by the unit owners 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 detrimental impact on the minority owner’s unit.  To protect the minority owner’s unit, the 80% consent thresholds can be increased to 100% so that a unanimous vote of all commercial or mixed-use owners are required in order to effectuate a termination or decision not to restore after a casualty.

Board Seats

Under Tennessee law, the condominium declaration may provide for a period of declarant control of the association, during which period the declarant may appoint and remove the officers and members of the board of directors of the association (“Declarant Control Period”).  After the expiration of the Declarant Control Period, the board members of the association are elected by unit owners based on the votes allocated to the different units in the regime. To protect the minority owner’s unit, the condominium declaration can allow each unit owner to appoint a certain number of directors to the board (the larger unit(s) would still receive more board seats), ensuring that each unit owner is represented on the association board. Additionally, the condominium declaration can avoid setting up a Declarant Control Period altogether in a commercial condominium to allow all commercial unit owners to be represented on the association board from inception. 

 

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