Report Title:

Residential Condominium Leasehold Conversion

Description:

Authorizes the conversion of residential condominium leasehold interests to fee under the State's power of eminent domain.

THE SENATE

S.B. NO.

3123

TWENTY-SECOND LEGISLATURE, 2004

 

STATE OF HAWAII

 


 

A BILL FOR AN ACT

 

relating to condominium property regime.

 

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF HAWAII:

SECTION 1. The Hawaii Revised Statutes is amended by adding a new chapter to be appropriately designated and to read as follows:

"Chapter

RESIDENTIAL CONDOMINIUM LEASEHOLD CONVERSION

PART I. GENERAL PROVISIONS

§   -1 Legislative findings and declaration of necessity; purpose. In 1967, the legislature enacted the Hawaii Land Reform Act, landmark legislation that recognized the serious adverse effects upon the State's economy and upon the security and welfare of its people caused by the practice of long-term leasing of residential lands. Homeowners, whose assets were substantially invested in their houses, were precluded from the full enjoyment thereof when landowners refused to sell the land situated under the houses, and were subject to long-term leases favoring the landowner. Fee simple residential land was in serious shortage and residential land values were artificially inflated. The high cost of housing was found to be a significant and serious contributing factor in the State's high cost of living, affecting the ability of thousands of residents to meet their basic needs of shelter, food, and health care.

The legislature addressed this situation by authorizing the State to exercise the power of eminent domain to condemn the fee simple title to residential land, pay just compensation to landowners, and make the fee titles available to residential leaseholders. The legislature found that the right to own land was not absolute when it operated against the general welfare for the benefit of a few, and that authorizing the changing of existing patterns of land ownership was necessary to serve the public purposes of land conservation, preservation, use, and management, and to protect the public safety, health, and welfare.

The legislature now finds that the same factors that supported granting the State the power to acquire residential lots under the power of eminent domain support a similar grant of authority with respect to residential condominiums. Condominium homeowners with leasehold interests who lack the opportunity to purchase the land under their units face insecurity regarding their future ability to retain or remain in their homes, and are unable to fully enjoy and reap the benefits of a lifetime investment. While leasehold condominium development may have been favored as a way to meet the State's housing shortage thirty or forty years ago, the social ramifications of displacing people from their homes at the end of the lease terms was not foreseen, and now lessees, many of them elderly and on fixed incomes, are faced with the prospect of having to pay substantially higher lease rents upon lease renegotiation, or lose their homes.

It is therefore declared to be necessary and it is the purpose of this chapter to establish the right of any person, who is a lessee under a long-term lease of land upon which is situated a residential condominium property regime project created under chapter 514A, to purchase the fee simple title to the land at a fair and reasonable price.

§   -2 Definitions. As used in this chapter, unless the context clearly requires otherwise:

"Association of apartment owners" has the same meaning as set forth in section 514A-3.

"Condominium" means a residential apartment, together with an appurtenant undivided interest in common elements, located on land subject to a declaration of condominium property regime as defined in chapter 514A, together with an appurtenant undivided interest in common elements, both used or occupied, or developed, devoted, intended, or permitted to be used or occupied as a principal place of residence for a single family.

"Condominium property regime" means a condominium property regime project established under chapter 514A.

"Corporation" means the housing and community development corporation of Hawaii established under chapter 201G.

"Development" means the area of land, irrespective of size, that is subject to a declaration of condominium property regime pursuant to chapter 514A, which condominium property regime contains or is intended to contain condominium apartment units occupied or to be occupied under apartment leases or condominium conveyance documents.

"Fair market value" means that amount of money that a purchaser willing, but not obliged, to buy land or an interest in land would pay to an owner willing, but not obliged, to sell the land or interest in land in an open market, taking into consideration all uses to which the land is adapted or might in reason be applied.

"Fee owner" means the person who owns the fee simple title to the land leased under an apartment lease, condominium conveyance document, or proprietary lease, including a life tenant with a remainder over, vested or contingent, and a holder of a defeasible estate, and the person's heirs, successors, legal representatives, and assigns.

"Lease" means the conveyance of land or an interest in land by a fee simple owner as lessor, to a lessee or sublessee, or by any other person as sublessor to any person, in consideration of payment of rent or other recompense.

"Leased fee" and "leased fee interest" mean reversionary interests of the fee owner, lessor, and all legal and equitable owners of land that is leased, other than the lessee's or sublessee's interest.

"Legal and equitable owners" means the fee simple owner and all persons having legal or equitable ownership interests in the leased fee or in the lessor's leasehold estate, including mortgagees, developers, lienors, and sublessors, and their respective heirs, successors, legal representatives, and assigns.

"Lessee" means any person to whom land is leased or subleased, including the person's heirs, successors, legal representatives, and assigns and who is the owner-occupant of the residential condominium unit.

"Lessor" means any person who leases or subleases land to another, and the person's heirs, successors, legal representatives and assigns.

The terms "lessors," "lessees," "fee owner," and "legal and equitable owners" include individuals, both masculine and feminine, and also include corporations, firms, associations, trusts, estates, and the State or its political subdivisions. When more than one person are the lessors, lessees, fee simple owners, fee owners, or legal and equitable owners of a lot, the terms apply to each of them, jointly and severally.

"Owner-occupant" means any individual in whose name sole or joint legal title is held in a residential condominium unit that, simultaneous to the individual's ownership, serves as the individual's principal place of residence for a period of not less than one year immediately prior to application for conversion, as well as during the period pending legal proceedings to acquire the fee; provided that the individual retains complete possessory control of the premises of the residential unit during these periods. For the purposes of this definition, an individual shall not be deemed to have complete possessory control of the premises if the individual rents, leases, or assigns the premises for any period of time to any other person in whose name legal title is not held. Proof of residency and possessory control shall be as established by rules adopted by the corporation.

"Person" means any person who leases or subleases land from a lessor and, for purposes of this chapter, means the same as the term "lessee" as used in this chapter.

"Residential condominium apartment," for purposes of this chapter, does not mean:

(1) A unit used for commercial purposes;

(2) A unit used as a time share unit or transient vacation rental as defined under chapter 514E; or

(3) Any other nonresidential condominium.

§   -3 Applicability. Notwithstanding any other law authorizing the conversion of residential condominium leasehold interests, including ordinances enacted by the counties of the State, this chapter shall apply to all lands in the State of Hawaii on which are situated residential condominium property regime projects created under chapter 514A, owned or held privately or by the State or its political subdivisions, except Hawaiian home lands subject to Article XII of the Constitution of the State, lands owned or held by the federal government, and lands owned or held by nonprofit organizations. Subject to the foregoing, this chapter is not intended to supersede or preclude any other remedy at law available to condominium apartment owners, including those available under chapter 480.

§   -4 No estoppel or waiver. The rights granted to lessees by this chapter shall be effective, notwithstanding any provision in any lease, contract, covenant, bylaw, or articles of incorporation to the contrary. No lessee shall be estopped by any covenant, term, condition, or contract, however worded, from claiming the rights granted by this chapter, or otherwise be deemed to have waived those rights. Any provision in any lease, covenant, contract, bylaw, or article of incorporation contrary to the intent or purpose of this chapter shall be void.

§   -5 Trusts and estates. The rights granted to lessees by this chapter shall be effective, notwithstanding any condition or provision to the contrary in any instrument creating any life tenancy, defeasible fee, estate, or trust, regardless of whether the tenancy, fee, estate, or trust was in effect prior to the effective date of this chapter or is created hereafter; and the life tenant, holder, officer, or trustee of any tenancy, defeasible fee, estate, or trust may convey residential leases for terms exceeding twenty years and shall perform all acts required by this chapter. Every instrument of this type now in existence or hereafter executed shall be construed in conformity with the intent and purpose of this chapter. No trustee, officer, or agent of a lessor, or other legal or equitable owner, while acting pursuant to this chapter, shall be deemed to be acting in bad faith or to have committed a breach of trust.

§   -6 Violation; penalty. Any person who violates any provision of this chapter shall be fined not more than $1,000 or imprisoned not more than one year, or both. All fines collected shall be deposited in the fee simple residential condominium revolving fund created by section    -41.

§   -7 Administration of chapter. The housing and community development corporation of Hawaii shall administer this chapter.

§   -8 Corporation's powers and duties. In addition to any other duty prescribed by law and in this chapter, the housing and community development corporation of Hawaii shall:

(1) Within six months after the effective date of this chapter and in accordance with chapter 91, adopt rules necessary to effectuate the purposes of this chapter;

(2) Enforce this chapter and the rules adopted pursuant thereto;

(3) Establish reasonable fees to be assessed and collected from lessees for the services of any appraiser;

(4) Disseminate information and render assistance to lessees of residential condominiums in order that this chapter may be understood and effectively implemented;

(5) Conduct an investigation upon any written complaint or whenever it appears that this chapter has been or is being violated. In an investigation, the corporation may examine the books, accounts, records, and files of any person connected with the matter under investigation and conduct hearings. If the corporation finds from satisfactory evidence that any person has violated or is violating this chapter, the corporation may order the person to cease and desist from continuing the violation or engaging in doing any act or acts in furtherance thereof and, where necessary, the corporation may bring an action in the name of State in any court of competent jurisdiction for enforcement of its orders;

(6) Facilitate the acquisition of all necessary property interests by the State through eminent domain proceedings as provided in this chapter;

(7) Facilitate the making and execution of contracts, mortgages, and other instruments necessary or convenient to the exercise of the powers of the State under this chapter;

(8) From time to time, require from the lessors of leases of residential condominiums and from all fee owners and legal and equitable owners of such condominiums, such information as it may reasonably require in connection with the administration of this chapter; and

(9) Do all things necessary and convenient to carry out the powers expressly conferred upon the corporation by this chapter.

§   -9 Quitclaim deeds. Unless otherwise provided by law, the corporation shall issue quitclaim deeds whenever it conveys, transfers, sells or assigns any property developed, constructed, or sponsored under this chapter. In no instance shall the corporation be considered a guarantor or warrantor of the condition and quality of the property upon the issuance of any quitclaim deed.

PART II. CONDEMNATION OF CONDOMINIUM DEVELOPMENT LEASEHOLD

§   -21 Applicability. This part applies to developments that, at the time of acquisition of the development by the corporation, are:

(1) Developed into condominium property regimes or occupied by residential lessees under leases of condominium conveyance documents executed before the effective date of this chapter; or

(2) Developed or partially developed into condominium property regimes occupied or to be occupied by residential lessees under apartment leases or condominium conveyance documents executed on or after the effective date of this chapter; provided that ninety per cent of the leases to units in the condominium have been executed.

§   -22 Designation of development for acquisition. (a) Subject to subsection (b), the corporation may designate all or that portion of a development containing residential condominium land for acquisition, and facilitate the acquisition of the applicable leased fee interests in that land by the corporation through the exercise of the power of eminent domain or by purchase under the threat of eminent domain, after:

(1) At least ninety per cent percent of the owners of the condominium units agree in writing to the proposed acquisition;

(2) At least twenty-five of all the condominium owners within the development, or the owners of at least fifty per cent of the condominium units, whichever number is less, file an application with the corporation to purchase the leased fee interest pursuant to section    -24; and

(3) Due notice is given and a public hearing held, the time and place of which have been duly advertised in a newspaper of general circulation in the State of Hawaii, on at least three different days, the last publication being not less than five days before the date of hearing, the corporation finds that the acquisition of the leased fee interest in the development or a portion thereof, through exercise of the power of eminent domain or by purchase under threat of eminent domain and the disposition thereof as provided in this part, will effectuate the public purposes of this chapter.

For purposes of this subsection, "condominium owners" means the owner-occupants of the condominium development.

(b) The land designated and acquired by the corporation may consist of a portion of or the entirety of the land area submitted to the declaration of condominium property.

§   -23 Purchase of leased fee interest. The condominium lessees who have authorized approval and who have qualified for purchase of the leased fee interest shall purchase from the corporation, within sixty days of acquisition of the interest thereby, the leased fee interest appertaining to their condominiums, together with an undivided leased fee interest equal to the percentage of common interest appurtenant to the lessees' condominium units, subject to the terms, covenants, and conditions of the contract executed with the corporation. If any lessee refuses to enter into such a contract, such lessee shall pay to the corporation all costs incurred by the corporation in the acquisition of the appurtenant condominium leased fee interest within the development, including but not limited to appraisal costs, costs of publication, and survey costs, and the corporation is authorized to take any action it deems necessary to collect the costs. In the case of a wilful breach of the purchase agreement, the corporation shall further be entitled to any available remedy, including the sale of its interest in the condominium.

§   -24 Qualification for purchase. (a) No sale of any condominium land within a development shall be made unless the lessees:

(1) Are at least eighteen years of age and are owner-occupants of their condominium units;

(2) Are bona fide residents of the State of Hawaii;

(3) Have legal title to, or pursuant to an agreement of sale, have an equitable interest in a condominium situated on the leased property applied for; provided, that for the purposes of this section, the vendor under such agreement of sale shall not be eligible to purchase that property. An "agreement of sale" means an executory contract for the sale and purchase of real property that binds one party to sell and the other party to buy property which is the subject matter of the transaction;

(4) Do not own property in fee simple lands suitable for residential purposes within the county nor have pending before the corporation an unrefused application to lease or purchase residential real property for dwelling unit purposes. A person is deemed to own lands, for the purpose of this paragraph, if the person, the person's spouse, or both the person and the person's spouse (unless separated and living apart under a decree of a court of competent jurisdiction) own lands, including any interest in a land trust;

(5) Submit a letter of credit, certificate of deposit, proof of funds, or approved application from any lending institution demonstrating that the lessees that are participating in the purchase of the fee interest will be able to pay the corporation promptly for the leased fee interests;

(6) Submit an application for the purchase of the leased fee interest in good faith, and in such form as is acceptable to the corporation; and

(7) Execute a contract for the purchase of the fee interest in such form as is acceptable to the corporation.

(b) In the event of a wilful breach of contract by the lessees, the corporation may sell or assign its interest without respect to the requirements of this section.

(c) The corporation may require additional testimony or evidence under oath in connection with any application. The determination by the corporation of any applicant's eligibility under this part shall be conclusive as to all persons thereafter dealing with the property; provided that the making of any false statement knowingly by applicants or other persons in connection with any application shall constitute perjury and be punishable as such.

(d) The corporation shall adopt rules under chapter 91 to effectuate the purposes of this section.

§   -25 Deposits by lessees. (a) The corporation may require the submission of a deposit by lessees seeking to purchase the leased fee interest in their condominiums pursuant to this chapter. The means of determining the amount of the deposit shall be established by rule.

(b) The deposit may be applied by the corporation to payment of appraisal, survey, attorney fees, and administrative costs, and any other costs the corporation has incurred as a result of the designation, with the remainder of the deposit to be applied toward the purchase of the owner's fee interest. The corporation shall incur no liability for the deposits under this section.

§   -26 Preliminary negotiation required. (a) Upon the filing with the corporation of an application by the lessees in accordance with section    -24, the corporation shall request the lessor and the lessees to negotiate the just compensation which the lessees will pay to the lessor to acquire the lessor's interest in the development. The lessees shall engage and pay for the services of two independent appraisers to determine the fair market value of the leased fee interest, based upon an average of the two appraisals. If no agreement is reached within sixty days after the request to negotiate, the parties shall simultaneously exchange written final offers together with any appraisals, other documents, and any other expert opinions on which their negotiating positions were based. Copies of the final offers and related documents shall be submitted to the corporation, which may use the information to determine, prior to commencing condemnation proceedings, the probability that the lessees will be able to meet the financial requirements of section    -24.

(b) This preliminary negotiation shall be in advance of and shall not constitute any part of any action in condemnation or eminent domain. Any offers, appraisals, other documents, or any other expert opinions giving a value of the lessor's interest in the condominium development that were prepared by a party for use in preliminary negotiations as provided for in this section, for setting qualification amounts pursuant to section    -24, or for negotiations to determine the just compensation after designation to acquire the lessor's interest in the development, and that were not prepared for use in the trial shall not be discoverable, usable, or admissible by an opposing or adverse party in any action, suit, or proceeding brought under this chapter.

PART III. EMINENT DOMAIN

§   -31 Applicability. This part applies to developments created by condominium property regimes under chapter 514A.

§   -32 Exercise of power of eminent domain. Within twelve months after the designation of the development or portion thereof for acquisition, the corporation shall facilitate the acquisition of the leased fee interest in the land beneath the development by the corporation through voluntary action of the parties, or the institution of eminent domain proceedings pursuant to chapter 101 to acquire the leased fee interest or portion thereof so designated. If the leased fee interest is not acquired or eminent domain proceedings are not instituted within the twelve-month period, the corporation shall reimburse the fee owner, the lessor, and the legal and equitable owners of the land so designated for actual out-of-pocket expenses incurred thereby as appraisal, survey, and attorney fees costs as a result of the designation.

§   -33 Eminent domain trial. The parties to the eminent domain action brought under this chapter shall be the corporation as plaintiff and the lessees, the lessors, and all other necessary parties as defendants. All parties shall be given an opportunity to present evidence of the fair market value of the leased fee interest being acquired.

§   -34 Compensation. The compensation to be paid for the leased fee interest shall be the current fair market value of the leased fee interest. The compensation shall be determined as of the date of the summons of the complaint in eminent domain.

§   -35 Exchanges. (a) The corporation may exchange public lands for private lands to be condemned or involuntarily sold pursuant to this chapter; provided that any such exchange shall be subject to legislative disapproval; provided further that lands exchanged need not be of like-kind or comparable use; and provided further that no lands classified as conservation shall be exchanged for private lands.

(b) The corporation may acquire private lands by negotiated sale for purposes of exchanging such land with private lands pursuant to subsection (a). The legislature declares that such acquisition is for the public purpose of encouraging home ownership on as widespread a basis as possible.

§   -36 Interest acquired. (a) Upon acquisition of a development or portion thereof as provided in this part, the property interest acquired by the corporation is all of the right, title, and interest of the fee owner, and of the lessor and fee owner and all legal and equitable owners, if any besides the lessor, in and to the development or portion thereof acquired, subject to all covenants, conditions, easements, reservations, and restrictions of record running with the land or contained in the agreement of sale, deed, or other conveyance held by the fee owner, lessor, and legal and equitable owners or permitted or suffered by lessees of existing residential condominium leases, that are not inconsistent with the intent of this part. The acquisition terminates all the right, title, and interest of the fee owner, lessor, and all legal and equitable owners, whether such interest is a remainder, vested or contingent, a reversion, or other beneficial interest in the property, present or prospective.

(b) If the apartment lease, condominium conveyance document, or proprietary lease is subject to any leasehold mortgage, lien, or encumbrance suffered or permitted by the lessee, including, but not limited to, rights arising through divorce, marriage, or assignment, the purchase of the leased fee by the lessee in no manner shall affect or impair such mortgage, lien, or encumbrance, or the security afforded thereby to the holder thereof, and the leasehold shall continue, notwithstanding the purchase of the leased fee by the lessee, for the purpose and to the extent necessary to avoid any impairment of the leasehold security, unless the holder of the leasehold mortgage, lien, or encumbrance in writing consents to the transfer thereof to the fee and merger as provided in this chapter. Upon written consent by the holder thereof, each leasehold mortgage, lien, or encumbrance to which the apartment lease, condominium conveyance document or proprietary lease is subject and to which the consent refers shall be transferred to and shall bind the fee acquired by the lessee, and thereafter shall continue in full force and effect as a mortgage, lien, or encumbrance of the fee acquired by the lessee, in the same order and priority among such mortgages, liens, and encumbrances so transferred to the fee as the same applied to and bound the lessee's immediate, previous leasehold interest.

§   -37 Interest in compensation paid by the corporation. The lessor, fee owner, and all legal and equitable owners shall share in the compensation paid by the corporation as their respective interest shall appear. Notwithstanding any provision to the contrary in any contract or lease, a developer or other person entitled to share in the lease rentals shall share in the compensation paid by the corporation to the extent of the person's interest as may be determined by agreement of those entitled to share in the compensation paid by the corporation and in the absence of such agreement pursuant to chapter 658.

§   -38 Compulsory or involuntary conversion. It is the intent of the legislature, within the meaning of section 1033 or section 1231 of the Internal Revenue Code or the applicable provisions of chapter 235, as well as all other statutes, rules, regulations, administrative orders, and legal interpretations within the federal and state governments relating to taxation, that any conveyance of title to property by a fee owner to the corporation under this section shall constitute a compulsory or involuntary conversion, as a result of the exercise of the power of condemnation or the threat of imminence thereof, and that the fee owner shall not, by reason in whole or in part of any provision of this chapter or by reason of the execution by the fee owner of leases to the property and other properties subsequent to the date of approval of this chapter, be deemed to hold the property primarily for sale to customers in the ordinary course of trade or business.

PART IV. REVOLVING FUND AND GENERAL OBLIGATION BONDS

§   -41 Fee simple residential condominium revolving fund. A fee simple residential revolving fund is created. The funds appropriated for the purposes of this chapter and all moneys received or collected by the corporation under this chapter shall be deposited in the revolving fund. Moneys collected to reimburse the corporation from the lessees for their pro rata share of the direct costs incurred by the corporation under this chapter shall be deposited into the revolving fund. The proceeds in the fund shall first be used to pay the principal and interest on bonds or other indebtedness issued by the corporation, or by the State, and then for necessary expenses, including indirect costs of the corporation in administering this chapter.

§   -42 General obligation bonds. The director of finance may, from time to time, issue general obligation bonds in such amounts as may be authorized by the legislature, for the purpose of acquisition by the housing and community development corporation of Hawaii of residential condominium fee interests within developments pursuant to part III or for the acquisition of suitable properties to exchange pursuant to section    -35 or for the acquisition by the department of land and natural resources under section 171-50.1 of suitable properties for exchange pursuant to section 171-50.2 to effectuate the purpose of this chapter. The principal and interest of general obligation bonds issued pursuant to this section shall be reimbursed to the general fund from the fee simple residential condominium revolving fund as provided in section    -41. Pending the receipt of funds from the issuance and sale of general obligation bonds, amounts required within the limits of legislative authorization may be advanced to the housing and community development corporation of Hawaii from the general fund of the State. Upon the receipt of the bond funds, the general fund shall be reimbursed the amount advanced."

SECTION 2. Section 171-50.1, Hawaii Revised Statutes, is amended to read as follows:

"[[]§171-50.1[]] Acquisition of lands for exchange under [chapter] chapters 516[.] and    . The board may acquire private lands by negotiated purchase to be exchanged to effect the conversion of leasehold lands and residential condominium leasehold interests to fee simple ownership under section 171-50.2. The legislature declares that such acquisition is for the public purpose of encouraging home ownership on as widespread a basis as possible."

SECTION 3. Section 171-50.2, Hawaii Revised Statutes, is amended to read as follows:

"§171-50.2 Exchanges for conversion of leasehold lands and residential condominium leasehold interests to fee simple ownership. The board may exchange public lands for private lands to be condemned or involuntarily sold pursuant to [chapter] chapters 516[.] and    . Such exchange shall be requested by the executive director of the housing and community development corporation of Hawaii, and shall be effected in conformity with section 171-50; provided that such exchange shall be subject to legislative disapproval; provided further that the private lands conveyed to the State shall be disposed of pursuant to chapter 516; and provided further that lands exchanged need not be of like-kind or comparable use; provided further that no lands classified as conservation shall be exchanged for private lands."

SECTION 4. Statutory material to be repealed is bracketed and stricken. New statutory material is underscored.

SECTION 5. This Act shall take effect upon its approval.

INTRODUCED BY:

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