While a strong relationship with a residents' association can benefit the successful operation of any manufactured housing community (an "MHC"),  in certain states, understanding residents' and resident associations' statutory rights can be critical to a successful purchase of or exit from an MHC.   An increasing number of state legislatures are enacting resident-focused opportunities and requirements related to an owner's decision to sell an MHC.  These range from positive (e.g., tax incentives encouraging the sale of the MHC to its residents) to potentially punitive (e.g., rights of first refusal and rights of first offer [a "ROFR"] in favor of the residents or a residents' association).  Without proper planning and diligence, ROFRs, in particular, can unnecessarily put an MHC deal at risk.

MHC sellers should begin resident and residents' association diligence and compliance before the property is brought to market.  Does state law provide resident protections?  Do those protections flow through a residents' association, or directly to the residents?  Does an informal residents' association qualify for resident association protections?  While it may be possible to “clear" a ROFR or other requirement prior to marketing the property or signing a purchase agreement, sellers should carefully review any sunset period for non-exercise of a ROFR and for any re-offer requirements if the MHC does not achieve the seller's desired price.

Similarly, an MHC purchaser should not wait for a signed purchase agreement to begin resident and resident association diligence - the purchaser should start on day one of the contract negotiations.  Is the MHC subject to resident protection laws?  If so, has the seller initiated the required compliance process?  If the seller has not started, does the contract provide adequate time and purchaser remedies to ensure the seller achieves compliance? If there are properties in multiple states, does the purchase agreement provide a mechanism to attenuate risk between ROFR states and states without resident protections?  Once a purchase agreement is signed, a purchaser's diligence team should work closely with the seller and the title company to confirm that all applicable resident and resident association requirements are timely resolved.

Answering these questions early in the process is critical, especially for investors and other actors accustomed to working in non-ROFR states—like Texas.  When properly addressed, resident protection law compliance can not only be achieved, but also can serve as a framework for a purchase agreement's critical path timeline.