April 24, 2009

Rules Enforcement - Litigation or Exception?

In 2003, the River Watch Homeowners Association in Tarpon Springs, Florida imposed a $1,000 fine on an owner because her husband insisted on walking their black Labrador Cole through the community without a leash in defiance of an Association rule after repeated warnings. The Board President admitted that Cole was a pleasant dog that never caused any problems, but said that making an exception for him would mean that the board would have to permit all owners to walk their dogs without a leash. The owner and her husband refused to pay the fine, so the Association recorded a lien against her lot and began a foreclosure action. In 2007, a judge ordered the owner and her husband to pay the fine, interest, attorney fees, and costs, which meant that they owed the Association over $40,000 at that point. The owner and her husband say that they have already paid their own attorney over $100,000. They are now appealing the judge’s decision.

The “hard-line litigation approach” adopted by the River Watch HOA may be the only appropriate course of action in some instances. Most owners are not going to be willing or able to spent large amounts of time and money fighting over a rule and will grudgingly pay the fine and begin complying with the rule once they realize that it is in their financial best interest to do so. Many of those owners will back down after they speak with several lawyers because those individuals will likely warn the owners that litigation is expensive and risky. That being said, boards should likewise make sure that they are standing on firm legal ground before they file lawsuits that could in rare instances take years to resolve and cost tens of thousands of dollars.

The Washington laws that govern condominium and homeowners associations only permit them to impose and collect “reasonable” fines and attorney fees. This is of course an “eye of the beholder” standard to some extent, and it introduces an element of risk to any legal action to collect fines. Fines may be considered invalid by courts if associations do not follow the procedures required by law (distribute a fine schedule in advance and impose fines only after giving owners notice and an opportunity to be heard) and the governing documents. Courts may also refuse to order owners to pay fines if there is evidence that owners are being singled out for harsher treatment under the rules.

The “reassessment of the rule” approach should also be considered by boards at an early stage of disputes over rules. Boards should first evaluate whether the rule at issue is consistent with the prevailing standard of conduct in the community and still serves a useful purpose. If the rule at issue should be preserved in its current form, then boards should assess whether the particular circumstances justify making a specific exception to the rule. Community association boards have the discretion to make those types of decisions. Well-defined exceptions to rules that are documented in the meeting minutes will not render those rules unenforceable. If boards are concerned that making exceptions will cause other owners to stop following the rule at issue, they can explain the basis of the relevant exception at the next owners meeting and through written notifications such as meeting minutes and newsletters.

April 17, 2009

Dealing with Delinquent Owners

The recent drumbeat from the media regarding the economy is steady and depressing. Housing construction nationwide plunged to its second-lowest level on record last month. Foreclosure filings in King, Pierce, and Snohomish counties last month were up 25 percent from February and 111 percent from March 2008. The unemployment rate in Washington has risen over the last three months at the fastest rate on record and is currently 9.2%. As a result of the deteriorating economic climate, most condominium and homeowners associations either have a significant delinquency problem or soon will. How should they respond?

Many board members are understandably reluctant to refer one of their neighbors to a collection attorney. They justify inaction by focusing on the owner’s personal misfortunes. The feelings of compassion and community at the root of that reaction are commendable, but they should not be allowed to dominate the board’s decision-making process. Board members must also consider the impact of delinquencies on the other owners and the association as a whole.

The board of directors of a condominium or homeowners association has a legal obligation to exercise reasonable business judgment and act in the best interest of the entire community. The community needs money to maintain and repair the common areas and to ensure that essential services are provided. If an owner is not paying the ongoing assessments, the board should seriously consider taking prompt legal action to attempt to collect the debt. Failing to do so within the first several months of the delinquency substantially reduces the likelihood of recovering the full amount owing, increases the likelihood that the other owners will eventually be forced to pay more, and leaves the board vulnerable to being sued by one or more owners for breach of its duties.

The board should address delinquencies with a mixture of compassion and firmness. The board should attempt to work out a payment arrangement with a delinquent owner before referring the matter to an attorney, and in these difficult times it should consider approving payment plans that are longer than those that have been approved in the past. However, boards need to be prepared to take decisive action to deal with owners that either can not or will not work with them to address their delinquencies. Adopting a uniform collection policy and sticking to it is one way to ensure that the association does not suffer its own financial crisis.

April 10, 2009

Enforcing the Governing Documents

The United States Supreme Court, at the time led by Chief Justice John Marshall, ruled in 1832 that the forced migration of the Cherokees from South Carolina was unlawful. President Andrew Jackson is said to have responded as follows: "John Marshall has made his decision. Let him enforce it." The Cherokees were subsequently removed to Oklahoma.

If owners are not complying with the restrictions contained in a community association’s governing documents, the board of directors must decide how to respond. The association’s governing documents typically provide the board with several enforcement powers, which include imposing fines, suspending the right to use recreational facilities, and beginning a lawsuit. The preferred initial course of action is usually imposing a fine, but the board should make sure that it is acting in accordance with the Washington laws that govern this power.

There are three basic rules to remember regarding fines. First, a fine must be reasonable, which means that the fine amount should be related to the harm caused by the violation. Second, a fine must be based on a previously established schedule that has been adopted by the board and distributed to the owners. Third, a fine may only be imposed after the owner has been given notice that a fine is being considered and an opportunity to be heard by the board of directors or a designated representative regarding the alleged violation. Failing to meet these legal requirements will give the owner a basis to challenge the fine.

However, some violations may call for a different response. As noted in a recent KING 5 report, many condominium owners attempting to sell their units are being compelled by negative financial circumstances and the sour real estate market to rent their units on a month-to-month basis until they are sold. Such short-term rentals are often inconsistent with their associations’ governing documents. Boards confronted with this issue may wish to simply approve these types of rentals based on the “hardship exception” that is typically present in the governing documents. Boards likewise have the discretion to make exceptions with regard to other types of restrictions in the governing documents if extraordinary circumstances justify it.

April 3, 2009

Lenders Abandoning Some Foreclosures

Community associations need units to produce income. When the board of an association sees a delinquent owner's lender schedule a foreclosure sale, it typically hopes that this will result in either a payoff of all claims or a new owner that pays assessments (even if that new owner is the lender). Attorneys that represent associations often instruct them to put collection actions on hold pending the outcome of lenders' foreclosure sales. After all, why spend money that you may not be able to collect later? These realities make the relatively new phenomenon of lenders refusing to complete foreclosures a particularly frustrating one.

As noted by a recent article in the New York Times, lenders are in some cases declining to take possession of properties at the end of the foreclosure process, most often because the cost of doing so exceeds the rapidly diminishing values of the properties. In other cases, the complexities involved in sorting through financial records and bankruptcies make it difficult for the company that holds the loan to know what it owns.

Lenders typically lose 40 to 50 percent of their investment on every foreclosure. The purpose of their foreclosure actions is to take title of the properties, sell them, and recoup what they can. It is a sign of the times that lenders do not wish to take possession of some delinquent properties. This reality should cause community associations to consider whether they should simply proceed with their collection actions independently of lender-initiated foreclosures.