December 30, 2010

Happy New Year to Washington Condos and HOAs!

2010 has admittedly been a difficult year for many Washington condominium and homeowners associations from a financial point of view. Associations have faced unprecedented struggles in collecting unpaid dues or assessments, funding new reserve accounts, and maintaining existing levels of services. It is impossible to know whether 2011 will be a better year for associations' finances, but there are encouraging signs that this will be the case. My office stands ready to assist your association if it is dealing with delinquency issues or needs guidance with regard to any other legal question. We look forward to helping our current and future clients solve their problems and improve their communities in the year to come.

December 21, 2010

New Law Limits Scope of Red Flags Rule

A new federal law has significantly limited the scope of the Red Flags Rule, a federal law that requires many businesses and organizations to implement a written identity theft prevention program. There has recently been a substantial amount of confusion about whether the Rule imposes new obligations on various persons and organizations (including community associations), and this new law clarifies who must comply with the Rule. The Red Flags Rule now applies to financial institutions and creditors that:

1) obtain and use consumer reports in connection with a credit transaction,

2) furnish information to consumer reporting agencies in connection with a credit transaction, or

3) advance funds to or on behalf of a person, based on an obligation of the person to repay the funds or repayable from specific property pledged by or on behalf of the person.

The third category is apparently intended to cover businesses like payday loan companies that sometimes lend without using consumer reports. Creditors who advance funds on behalf of a person for expenses incidental to a service provided by the creditor to that person are specifically exempted from the Red Flags Rule. Other types of creditors may be required to comply with the Rule if an agency determines that they offer or maintain accounts that pose a reasonably foreseeable risk of identity theft.

The Red Flags Rule does not appear to apply to condominium and homeowners associations under the new law. However, such associations may still choose to adjust their record-keeping procedures to comply with the Rule if they are concerned that it might be interpreted or amended to apply to them or if they want to obtain a heightened measure of protection against identity theft. More information about the Red Flags Rule is available here.

November 22, 2010

How to Protect Your Condominium’s Pipes From Freezing Temperatures

It’s cold out there, and it looks like it's going to get colder over the next few days. Condominium and homeowners associations in the Seattle area thankfully do not have to deal with extremely cold weather very often, but they should be aware of five simple steps that can help prevent the inconvenience of frozen pipes.

1. Disconnect hoses.

2. Insulate exterior pipes and faucets.

3. Insulate pipes and faucets in attics, basements, garages, and crawl spaces.

4. Drain irrigation and sprinkler systems.

5. Caulk around incoming pipes.

Boards should also encourage owners to leave their taps running slightly on particularly cold nights. If pipes freeze despite these measures, damage can be minimized by promptly shutting off the water until a licensed plumber arrives. Stay warm!

November 5, 2010

Should Your Association’s Attorney Be a Hired Gun or a Legal Navigator?

Community associations and the owners in them hire attorneys for many different reasons, but they often fall into one of two camps in terms of how they view attorneys’ primary purpose. Some view them as Hired Guns, while others view them as Legal Navigators.

The Hired Gun listens to the stated goal of the client and aggressively pursues that goal without questioning the goal, the likelihood of attaining the goal, or the method advocated by the client to attain the goal. This type of attorney resembles the classic “yes man” found in some corporate board rooms. Clients who want the Hired Gun want an attorney who will charge forward as they instruct with thoughts of nothing but success.

The Legal Navigator seeks to guide the client out of the wilderness it finds itself in by way of the most effective and efficient path. This type of attorney is quite willing to aggressively pursue the client’s goals using its preferred method when the situation calls for it, but he or she will also not hesitate to tell the client that it has made mistakes in the past that require compromise or that its favored plan of action is not the best one under the circumstances. In other words, the Legal Navigator will not shrink from telling clients things that they do not want to hear. In some cases, a well-timed “No” or “I advise a different approach” can result in lower legal expenses and better outcomes.

The “Charge!” approach of the Hired Gun is appealing to many. However, the clients of the Legal Navigator are much less likely to charge off cliffs.

October 19, 2010

Court Rules that Association’s 55-Plus Age Restriction Violates the Fair Housing Act

Since its beginning in 1953, the Ryderwood community in Cowlitz County, Washington was intended to be used and enjoyed primarily by persons who receive a pension or retirement annuity. Each home’s deed limited ownership based on that purpose. The Ryderwood homeowners’ association later amended its bylaws to require that anyone owning, purchasing, or occupying a home there must be at least 55 years old, except for a spouse of someone over 55 years old. However, several homeowners recently sued the association to allow them to market their homes to persons of all ages, and in August a federal judge ruled in their favor. This decision is now being appealed by the association as an intense struggle over the future character of this community continues to unfold.

The federal Fair Housing Act (“FHA”) prohibits condominium and homeowners associations from discriminating against families with children. The key issue in the Ryderwood case was whether the association qualified for the Housing for Older Persons Act (“HOPA”) exception to the FHA prohibition. The judge decided that it did not. In order to qualify for the HOPA exception, an association must meet the following requirements:

1. The community must be intended and operated for occupancy by persons 55 years and older;

2. 80% of occupied units must have at least one person who is 55+;

3. The community must consistently publish and adhere to policies and procedures that demonstrate the above intent; and

4. The community must comply with federal regulations for verification of the above requirements, such as submitting surveys, affidavits, written policies and advertising examples.

If an association wants to convert into a 55-plus community, it must first achieve the 80% requirement without discriminating against families with children. If you are on the board of a 55-plus community or want to convert your community into one, an experienced community association attorney can help you understand and comply with FHA requirements and the HOPA exception.

October 6, 2010

King County Health Department Provides Bed Bug Guidance

Bed bugs are unfortunately a significant nuisance in some parts of the Seattle area this year. Condominium and homeowners associations should know how to keep bed bug infestations from spreading and how to eradicate these pests. The King County Department of Public Health’s website contains detailed information regarding those topics. Board members and affected residents should consult this useful resource if they must battle bed bugs.

One of the Department’s main messages is that it is usually necessary to hire a pest control company to get rid of bed bugs. It suggests a number of questions to help associations evaluate companies. Indoor pest control companies operating in King County are required to have proof of insurance and a current registration with the Department of Public Health. Boards can verify registrations here.

The Department also warns that over-the-counter pesticide foggers are not an effective way to kill bed bugs. In fact, those products can make the problem worse by causing the insects to scatter and move into walls and other places that are harder to reach. A combination of specially applied pesticides and non-chemical techniques is said to be the best way to eliminate this scourge.

September 27, 2010

How Should Your Association Respond to Banks' Foreclosure Delays?

National Public Radio reported earlier this month about the “shadow inventory” problem in the U.S. housing market. There are currently about six hundred thousand homes that banks have foreclosed but not yet put on the market. There are millions more homes in the early stages of foreclosure or more than ninety days past due on the mortgage. RealtyTrac estimates that approximately three million foreclosed homes will enter the market over the next three years. Banks appear to be responding to this situation by slowing down the pace of their foreclosure activity. Why?

Banks own a large number of mortgages on homes that have lost a significant amount of value. However, such transactions do not appear as losses on their books until the homes are re-sold for less than the values of the mortgages. Spreading out the re-sale of foreclosed homes over a longer period of time gives banks time to raise money to cover losses and could result in smaller losses if the market improves. Banks are also concerned about flooding the market with repossessed homes over a short period of time, which would cause home prices to decrease further and could produce another housing crisis. In addition, banks may be finding it difficult to keep up with a volume of foreclosures that has increased tenfold over the last several years.

If foreclosures are inevitable, Washington condominium and homeowners associations have a strong financial interest in them proceeding rapidly. When lender foreclosures are not completed in a timely manner, community associations are faced with an unpleasant choice – endure very long delinquencies or pursue their own foreclosures. Boards may need to adjust their existing collection practices in light of the present slow pace of lender foreclosures. More extensive use of associations’ collection powers has the potential to speed up transitions to new owners and even produce income from delinquent properties until foreclosures are completed.

For more information about community associations’ use of foreclosure, please review these past posts on that subject:

New Tenant Protection Law Helps Associations Collect Delinquent Assessments
The Rising Use of Foreclosure to Collect Delinquent Assessments

September 15, 2010

Free Fair Housing Training Available for Seattle Area Condominium Associations

Fair housing laws require Washington condominium and homeowners associations to discuss requests for disability accommodations with owners and to make reasonable accommodations once disabilities have been established. If an association fails to do so, a disabled owner can file charges of discrimination against the association and its board members. It is therefore important for boards to be familiar with their legal obligations in this area.

The King County Office of Civil Rights offers six free three-hour training sessions to educate condominium associations about fair housing laws each year. The next two dates that the county will present its fair housing basics workshop and advanced seminar are October 27 and December 8. These training sessions take place at the Jackson Federal Building, which is located at 915 Second Avenue in Seattle. Preregistration is required, and this can be accomplished by calling (206) 296-7592. The Office's webpage is a useful source of information about fair housing and related topics.

A major benefit of learning more about fair housing issues is a greater sense of caution given the risks involved. Community association boards should strongly consider consulting with an attorney before denying an owner's request for a disability accommodation.

August 25, 2010

Plant Containers Represent Unappreciated Fire Hazard

Earlier this year, a condominium in Calgary, Canada was destroyed by the combustible combination of a cigarette and potting soil. A person smoking outside the building apparently put a cigarette “out” in the dirt of a nearby planter. The planter contained two flammable ingredients: dry peat moss and fertilizer. The result was a massive fire and 250 people homeless.

Condominium boards should warn residents that potted plants and planters can pose a potential fire hazard. It is a good policy to either encourage or require residents to use ashtrays when they smoke on decks or porches and when they smoke in common areas. The association’s attorney and property manager can help identify the sources of association authority in this area and any limitations on that authority.

August 20, 2010

Owners Use Political Process to Challenge Stricter Covenant Enforcement Policy

Parking restrictions can lead to intense disputes between boards and owners. For example, home owners in a West Lafayette, Indiana subdivision are currently battling their board of directors over a covenant amendment banning street parking. The amendment was enacted in 2003, but it was not strictly enforced until November of 2009. Some owners complained that they were no longer able to host gatherings as a result of the new enforcement policy. The board responded to the outcry by starting a pilot program that allows owners to pay a refundable deposit for up to five street parking permits in advance of an event. The protesting owners were not satisfied with that solution, and they are now attempting to call a special meeting and replace the board members.

As a general rule, community association boards may begin enforcing existing covenants more strictly as long as all owners are notified of the change and are equally subject to the new policy. However, boards should also consider the reaction of the owners to abrupt changes in the standards governing their property. Giving owners an opportunity to state their concerns in advance and modifying the enforcement policy to address those concerns will reduce the odds of a major conflict.

The various political remedies described in every association’s governing documents (such as the ability to amend the governing documents, override board-adopted rules, and recall board members) often represent the best options for owners that want to challenge a strict enforcement policy. Mediation and some types of arbitration can also be effective ways to resolve such disputes. On the other hand, legal action is too slow, expensive, and uncertain for many owners to consider it a viable option, and litigation has the added drawback of greatly reducing the potential for dialogue and compromise.

August 11, 2010

New EPA Rule Regarding Lead Paint Will Affect Repair Work on Older Buildings

Lead-based paint, which has been shown to be the cause of serious health problems, was unfortunately common in buildings constructed before 1978. Under the Environmental Protection Agency’s Renovation, Repair, and Painting ("RRP") Rule, contractors and painters are currently required to follow specified lead safety work practices and to provide lead safety information to owners and tenants before they start renovation, repair, or painting work on pre-1978 residential housing and child-occupied facilities. On October 1, 2010, the Environmental Protection Agency ("EPA") will also begin enforcing a new portion of the RRP Rule that requires contractors and painters to obtain lead paint safety certification before working on pre-1978 buildings covered by the rule. To become certified, contractors and painters must attend a training course provided or approved by the EPA that provides instruction on how to work safely with lead-based paint.

Owners of rental housing and maintenance workers in multi-family housing (including condominiums) must follow the requirements of the RRP Rule. However, this rule does not apply to owners working on their own property (without tenants), and it also does not apply to “minor” maintenance or repair activities.

Associations and individual owners with pre-1978 homes or condominiums must be careful when hiring contractors and painters. They should ask what specific lead safety work practices will be used, and (after October 1st) ask to see the contractor’s or painter’s EPA certificate. For more information about lead paint safety, read the EPA’s information pamphlet (Renovate Right: Important Lead Hazard Information for Families, Child Care Providers, and Schools). For further information about the requirements of the RRP Rule, visit the EPA’s Renovation, Repair and Painting website or contact your association’s attorney.

August 3, 2010

Civil Rights and Nuisance Claims Result in Massive Judgments Against Homeowners Association

In June, a Boston jury awarded Scott J. Hyman and Donald and Julie Prescott judgments with a combined value of over $2.5 million against their homeowners association. The owners' successful legal claims were based on nuisance and infringement of civil rights. This case serves as a reminder of the robust legal remedies (including those contained in the Civil Rights Act and the Fair Housing Act) available to address misconduct by and in community associations.

Mr. Hyman, who is Jewish, was told by members of the homeowners association’s board of directors that his kind was not welcome in the community. He was denied the right to vote on association matters. Someone smeared excrement over his living room. Shortly after an association member mentioned that “someone is going to burn him out”, Mr. Hyman's primary residence (located elsewhere) was destroyed by fire. The Prescotts stood up for him and were similarly victimized. Mr. Hyman and the Prescotts had swastikas painted on their garages and were photographed hundreds of times. This pattern of harassment persisted for two years.

Condominium and homeowners association boards can subject their associations and their members to civil liability through both action and inaction. Boards should be careful to avoid taking actions that are inconsistent with applicable statutes, their association's governing documents, or a legal duty owed to another person. Boards should also give due consideration to owner complaints and known information and take action when they have a legal duty to do so. The association’s attorney can help the board evaluate how to respond to problems as they arise.

July 15, 2010

Illinois Court Favors Owner in Dispute Over Access to Association Records

Requests to review association records should be taken seriously. In the recent case of Palm v. 2800 Lake Shore Drive Condominium Association, a condominium unit owner in Illinois believed that the board president and the board as a whole were exceeding their authority. The owner asked the association to provide him with records relating to those allegations. The association refused, and the owner responded with a lawsuit. The trial and appellate courts ordered the association to produce the records immediately and to pay the substantial attorney fees incurred by the owner.

Washington law imposes a broad requirement on condominium and homeowners associations to make their records reasonably available to owners and their agents. Homeowners associations also must provide their records to mortgage holders and their agents and avoid releasing the unlisted telephone numbers of owners. If you think that an owner’s request for records goes too far, contact the association’s attorney before refusing to grant it.

June 30, 2010

To Lease or Not to Lease - Rental Restrictions in Washington Condominiums

The right to lease a condominium unit is a valuable one, but this right can be restricted if limits appear in the condominium’s original declaration or if enough owners approve an amendment to that document. Condominium boards, owners, and prospective purchasers of units should ask two crucial questions with regard to leasing. First, is there currently a rental restriction in the declaration or an amendment to the declaration? Second, what percentage of owners is necessary to amend the declaration to restrict leasing in the future? The answer to the second question depends on when the condominium was created.

If a condominium’s declaration was recorded on or before July 1, 1990, it can be amended to restrict leasing with the approval of sixty percent of the owners unless the declaration or an amendment to that document specifies a higher requirement. If a condominium’s declaration was recorded after July 1, 1990, ninety percent of the owners (including all units that are being rented) is required to amend it to restrict leasing unless the declaration or an amendment to that document specifies a higher requirement. This thirty point gap is the difference between “possible” and “unlikely” in most associations.

Most rental restriction amendments contain hardship exceptions that permit leasing over rental caps in certain circumstances, but it is a gamble for owners to rely on such provisions. Many condominium boards strictly interpret hardship exceptions and deny most requests that are submitted to them. Even if the present board views hardship requests favorably, the next board may not.

June 18, 2010

Court Upholds Seattle Condominium Association's Default Judgment Against Insurance Company

In 2005, the Lakewest Condominium Owners Association in Seattle discovered that several of its buildings required major repairs due to rain damage. The Association filed and pursued claims against numerous insurers to pay for the damage, which culminated in lawsuits against some of them. The Association was granted a default judgment in the amount of 7.5 million dollars against Tokio Marine & Fire Insurance Company, Ltd. in October of 2007. A default judgment is entered when a person is served with a lawsuit and does not respond within the time allowed by law. Tokio argued to the court more than one year after the judgment (the applicable deadline) that the judgment should be vacated. The court agreed with Tokio, but this ruling was reversed on appeal in an unpublished decision issued earlier this month. The association's default judgment is thus valid and enforceable against the insurance company.

Washington condominium and homeowners association boards should not be hesitant to file claims with their insurance companies when serious property damage occurs, and they should encourage owners to proactively contact their insurers as well. This is sometimes the only way to avoid major special assessments. It is sometimes necessary to sue insurance companies if they will not respond or if they deny claims that appear to be covered by the policy. Such litigation can obviously turn out very well indeed for the association if the insurer drops the ball and is found in default. The Lakewest case demonstrates that default judgments have value and will be upheld by the courts in some circumstances.

June 9, 2010

Little Boxes, Big Disputes: Religious Observance Sparks Condo Debate

The King County Bar Bulletin published an article this month that was written by my office. The article discusses three disputes between condominium boards and Jewish unit owners over the display of a small object called a mezuzah on the units' exterior doorposts. It concludes that boards should consider permitting such religious displays subject to reasonable size restrictions. The full article appears on my office's website.

June 2, 2010

Goat Dispute Highlights Best Practices for Covenant Enforcement

A North Carolina couple has won a legal battle with their homeowners association to keep two Nigerian dwarf goats named Fred and Barney in their yard. The association’s covenants state as follows: "No animals, livestock or poultry of any kind shall be raised, bred or kept on any lot except that horses, dogs, cats and other pets may be kept provided they are not kept, bred, or maintained for any commercial purposes." Several neighbors complained to the board about the smell and noise caused by the goats, so the board ordered the owners to remove them. Litigation ensued, and a judge eventually ruled that Fred and Barney should be permitted to stay because they are pets.

As the cliché goes, life is not black and white. Gray is a popular color in the world of law. Many covenants can be reasonably interpreted in more than one way. Boards should make an effort to play devil’s advocate and view covenants from owners’ perspectives before issuing demands or initiating litigation.

Another lesson that can be gleaned from this story is that it is sometimes better to focus on minimizing the negative effects of a disputed behavior rather than attempting to end that behavior. For example, it may be possible to address the goat odor issue by requiring more frequent bathing and waste removal. It may also be possible to address the goat noise issue by restricting them to certain portions of the property. Boards should always be on the lookout for creative approaches that lead to win-win solutions.

May 24, 2010

Embezzlement Prevention Strategies from Accountant Andrew Cohen

In light of recent reports regarding embezzlement in Washington condominium and homeowners associations, I recently decided to consult with a local professional who provides financial management and accounting services and discuss strategies to protect association funds. Andrew Cohen is a seasoned Seattle accountant and the co-owner of CoHo Accounting. Andrew and his company focus on providing personalized concierge-level accounting services, and he generously submitted the insights that follow regarding how to prevent embezzlement in community associations.

Embezzlement is similar to being pick-pocketed. You know it happens all the time, but to other people. UNTIL it happens to you! Like being pick-pocketed, embezzlement can be prevented or minimized with just a few basic safeguards.

The consequences of embezzlement can be significant for your association. It often starts when a volunteer gets into some sort of financial trouble or feels undervalued. The person might record their association dues as having been paid when they haven’t. The person might start paying a fake vendor a few hundred dollars a month and charge that expense to maintenance. Such fraudulent transactions are typically buried in the association’s most active expense line, both in terms of dollars and transactions. The person might even write themselves checks from the association’s account.

Boards should implement a system to prevent embezzlement:

1. Diligently review the association’s financial records.
2. Put internal controls in place to make theft more difficult.
3. Pay attention to the behavior of board members.

Diligence

• Review bank statements on a monthly basis.
• Evaluate who is receiving association funds – are any of them odd or unknown?
• Instruct accountant to examine books for discrepancies each quarter.

Internal Controls

• Set limits on the length of board service in the same position.
• Sign checks by hand. Do not use a signature stamp.
• Establish separate banking duties:
o The person who writes checks shouldn’t sign them or reconcile accounts.
o The person who deposits checks should not be able to cash them or open mail.

Here is one way to separate duties on an association board:

1. Secretary – Opens mail; records checks received; sends checks and check register to Treasurer; sends a copy of check register to President; sends bills to Treasurer; and sends bank statements to President.

2. Treasurer – Deposits checks; enters accounts payable and prepares checks for payment; coordinates with the board on insurance and liabilities; ensures that taxes are paid; brings prepared checks to President for signature; generates financial records like profit and loss statements and balance sheets.

3. President – Reviews and signs checks; reviews bank statements to ensure that:
o Deposits coincide with receipt record of HOA dues or assessments paid;
o The cash balance on the bank statement and the balance sheet agree; and
o There are no unusual expenditures. If clear explanations of such expenditures are not forthcoming, this is a red flag. It may simply be lax bookkeeping, but laxity is an opportunity for theft.

Behavior

Boards should stay alert for indications of an elevated risk of embezzlement. For example, does a person with access to association funds:

• Rarely take a vacation? If someone is always there, they can cover their tracks.
• Rarely delegate tasks, yet complain of being too busy? Control includes the power to conceal.
• Have personal financial problems? This increases the motivation to steal.
• Have a very close relationship with or control over a particular vendor? This can provide a way to obtain association funds secretly.
• Use drugs or alcohol to excess? This clouds judgment and lowers inhibitions.

If you are interested in learning more about how to protect your association from embezzlement, CoHo Accounting can help with innovative financial services designed to provide clients with peace of mind.

May 18, 2010

Dog Waste Problem May Cause Board to Implement Drastic Measures

The Scarlett Place Condominium in Baltimore is in the midst of a pooch poop predicament. According to a recent story in The Baltimore Sun, one board member believes that the amount of dog waste that is regularly left in the common areas has gotten out of hand, and he has proposed a novel way to identify the culprits – DNA testing. All dog owners would be assessed $50 per animal to cover testing costs and $10 per month to cover removal costs. A Tennessee-based company would create a database representing all pets at the Condominium and match offending samples to a particular dog. The dog’s owner would then pay a $500 fine.

Boards of Washington condominium and homeowners associations should be cautious when contemplating new regular assessments on a specific group of owners. Assessments must generally be charged on the basis of the percentages or values found in the association’s declaration or covenants. The Washington Condominium Act does permit all condominium associations in the state to charge common expenses benefiting fewer than all of the units exclusively to the units that are benefited, but only if such authority is explicitly provided for in their declarations. If an association’s declaration does not provide for the authority to charge certain common expenses to benefited owners, the declaration can be amended to give the association that power.

There are other possible ways to deal with dog waste that do not involve new assessments on dog owners or fines for noncompliance with removal rules. For example, dog owners could be persuaded to periodically assign one of their number to pick up the poop. The association could also include a line item in the annual budget to pay an owner to perform this task.

May 10, 2010

Contracts - Review Them, Revise Them, and (Sometimes) Reject Them

Many community associations periodically execute contracts with vendors to obtain essential services. If you are on the board of a condominium or homeowners association, you should resist the temptation to sign contracts without thoroughly reviewing them. Important legal rights are at stake.

The board needs to make sure that the contract accurately describes the agreement. It should be clear how the price will be calculated and what variables will affect it. The contract should specifically describe what goods or services the association is buying and all applicable performance standards.

The contract should also protect the association if something goes wrong during performance. Requiring the vendor to carry insurance that covers the association is one way to do this. Obtaining a release from liability for claims arising out of the work is another. Dispute resolution procedures should be established, and the causes that allow a party to terminate the contract should be described in detail.

Proper review and editing of proposed contracts can help associations get the best value for their money and avoid costly disputes with vendors. The board should attempt to envision how the contract will be performed under a variety of circumstances and the problems that could be encountered along the way. If the board has trouble identifying areas of concern, experienced attorneys and property managers can facilitate this process.

May 3, 2010

Washington Supreme Court Resolves Dispute Over Addition to Bellevue Condominium

The Washington Supreme Court issued an important decision last month regarding the Horizontal Property Regimes Act (the state law that governs condominiums created on or before July 1, 1990). This decision is significant for two reasons. First, the first few pages of the Court’s opinion provide an excellent overview of the Act. Second, the Court’s opinion clarifies that an owner in an older condominium can expand his apartment into the common area with board approval if the association’s declaration permits it.

An owner at the Woodcreek Condominium in Bellevue, Washington built a second story addition to his townhouse-style condominium apartment with the approval of the Woodcreek Condominium Association. This new addition blocked light to and views from another apartment, and the owner of that apartment sued the first owner and the association, arguing that the common areas either could not be divided or could not be combined with an apartment without a unanimous vote of the owners. The Court rejected those arguments and ruled in favor of the owner who built the addition and the condominium association.

The Court first held that the Act and the association’s declaration do not bar the division of a condominium’s common areas. It next held that the Act and the declaration do not require the unanimous consent of the owners to combine a portion of the common area with an apartment. The Court explained that the unanimous consent provision in the Act only applies to changes in the percentage ownership rates assigned to each apartment. It also noted that the association’s targeted increase in the assessments charged to the owner that completed the addition was invalid.

This case serves as a reminder to condominium boards and owners to determine whether Washington law and the governing documents allow them to pursue courses of action that affect others. Older condominiums face many challenges as they evolve, and owners' interests will sometimes clash. A thorough understanding of Washington law and the declaration is essential to resolving these conflicts without costly litigation.

April 25, 2010

Interview Examines Scope of Homeowners Association's Authority

I was recently interviewed for the third part of an article entitled "New Cases Scrutinize HOA Architectural Committee Decisions" on HOAleader.com. The Washington case discussed in this article illustrates the negative consequences that can occur when a condominium or homeowners association fails to comply with its declaration or CC&Rs. Here is a link to the article: Here is a link to the article: http://www.hoaleader.com/public/417.cfm

April 16, 2010

New Wave of Lender Foreclosures Threatens Community Associations

According to a recent industry report, the number of U.S. homes taken over by banks jumped 35 percent in the first quarter from a year ago. If the current pace of foreclosures continues, more than one million homes will be seized this year. Rick Sharga, a senior executive at RealtyTrac, Inc., indicated that banks are beginning to work their way through the backlog of distressed properties and predicted that the pace of lender foreclosures will accelerate in the months ahead.

If a Washington condominium or homeowners association receives a notice of default or a notice of trustee’s sale with regard to a delinquent unit, it should take prompt action to record a lien on the property and notify the trustee of its interest. Once these initial steps have been taken, the board should evaluate whether it should establish a receivership over the property or pursue a personal lawsuit against the owner in advance of the trustee’s sale.

If an owner's lender completes a foreclosure, the association’s lien for delinquent assessments will be mostly or completely erased. If a limited priority lien remains on the property after the foreclosure, the association can ask the new owner to pay it. The association can also obtain a personal judgment against the former owner for the full amount of the debt and pursue garnishment remedies.

Aggressive legal action to collect a debt can produce results even with a lender foreclosure on the horizon, but this is not always the appropriate response. In some circumstances, the best course of action may be to simply wait for a lender’s foreclosure to occur.

April 9, 2010

Know the Boundaries and Respect the Trees

The Washington Court of Appeals recently filed an unpublished opinion that involved Washington’s timber trespass statute. This law requires persons that cut down or injure trees on other people’s land without lawful authority to pay treble damages. In the appellate case, the claimed damages were $225,000, so the total amount of the award was $675,000. This case did not involve a community association, but it does raise an important issue for such associations.

Condominium and homeowners associations in Washington sometimes trim or cut down trees in common areas adjacent to other properties. In many situations, such as when an old or sick tree poses an unacceptable risk to people and property, this is the right course of action. However, associations should also be careful to avoid the liability associated with inadvertently removing or pruning trees on neighboring properties. If there is reason to doubt the exact location of a boundary line, the board should consider obtaining a professional survey before firing up the chainsaw.

April 2, 2010

Enhancing Your Association's Bylaws

A community association’s bylaws focus on procedure. The Washington Homeowners’ Associations Act and the Washington Condominium Act contain similar requirements regarding bylaws. Under both laws, bylaws must describe the number of board members and officers, their qualifications, their powers and duties, their terms of office, and the manner of their election and removal. Both laws also require bylaws to specify which, if any, of the Association’s powers the Board may delegate to a managing agent. The Washington Condominium Act (but not the Washington Homeowners’ Associations Act) also states that bylaws must include a statement of the applicable standard of care for officers and board members (ordinary and reasonable care for elected positions).

Some associations’ bylaws may impede good policies by imposing unduly burdensome procedural requirements. Associations may want to reduce quorum size, allow electronic notices, or allow voting by mail to facilitate action on issues that affect them. However, boards that are pursuing such changes should confirm that the proposed amendments to the bylaws are consistent with their associations’ declaration or covenants and state law. If they are not, then the amendments will be invalid.

March 26, 2010

How Broad Is Your Association's Entitlement to Attorney Fee Awards?

An unpublished opinion by the Washington Court of Appeals earlier this month dealt with a homeowners association’s attempt to enforce a restrictive covenant limiting tree height. The trial and appellate courts both ruled in favor of the association. However, the trial court refused to award the association its attorney fees, and the appellate court upheld that decision. The reasons why these courts reached those conclusions are too complicated to adequately address here, but one important lesson (associations might not recover their attorney fees even if they prevail in litigation) is much easier to explain.

In a lawsuit concerning a violation of the Washington Homeowners' Associations Act or the Washington Condominium Act, the court "may" award “reasonable” attorney fees to the prevailing party "in an appropriate case". The quoted portions of the last sentence give judges discretion to award less than all (and perhaps none) of the attorney fees that associations incur during lawsuits that they eventually win. While it may be true that judges often award prevailing parties all of their attorney fees pursuant to these laws, it is unwise for board members to view this as a guarantee.

Some condominium and homeowners associations have additional rights to collect attorney fees built into their governing documents. Such provisions typically state that the prevailing party in a lawsuit concerning the governing documents or collection of delinquent assessments is entitled to an award of its “reasonable” attorney fees. This is broader protection for victorious litigants, but it still leaves the door open for partial awards if judges decide that attorney fee requests are too large.

March 19, 2010

How to Protect Your Association from Embezzlement

The former treasurer of a condominium association located in the Capitol Hill neighborhood of Seattle was recently charged with felony theft after he allegedly stole more than $80,000 in common funds. The former treasurer apparently wrote dozens of checks to himself using the association’s account. He then fled to California. Local prosecutors are now attempting to bring him back to Washington to stand trial.

The last year has seen a marked increase in news stories and industry concern about theft committed by association board members. A recent national conference of community association lawyers included a very well-attended seminar called “Keep Fraud’s Ugly Head Out of Your Community Association”. The current Community Associations Network newsletter includes five different stories about embezzlement of association funds. This threat is real and should be taken seriously.

There are many ways to prevent fraud or minimize the impact of fraud if it ever arises. First, associations should obtain annual audits of their finances by an independent third party. Second, associations should require two board members to sign association checks. Third, associations should ask their banks to provide statements to a board member that is not involved in maintaining its financial records. Fourth, requests for reimbursement by board members should be scrutinized to ensure that they are legitimate. Finally, associations should consider obtaining fidelity bonds to insulate them from embezzlement that slips through the cracks.

March 12, 2010

Recent Case Upholds Homeowners Association's Power to Assess Owners

The Washington Court of Appeals filed an unpublished opinion last week in a case about the scope of a homeowners association’s power to assess owners. Several owners challenged the Driftwood Key Club’s authority to demand dues from them because the Club’s covenants were almost completely silent about that subject. The court decides that the Club’s articles of incorporation and bylaws complement its covenants and provide it with broad authority to impose assessments on owners. Washington courts are apparently willing to allow articles and bylaws to substantially elaborate on (but not contradict) very sparse language in an association’s covenants.

During the course of this opinion, the court significantly rejects the Club’s argument that it inherently has the power to assess listed in the “Association Powers” section of the Washington Homeowners’ Associations Act. It is important for boards of both condominium and homeowners associations to remember that the association powers listed in their governing documents are their primary source of authority. If a state law lists available powers that are not contained in an association's governing documents, then the association must seek to amend the governing documents if it wants to take advantage of those powers.

The Club’s attorney cited Wikipedia at one point in its brief to the appellate court. This did not go over well. The court responds that “the best citations to Wikipedia for legal practitioners are those citations that underscore its potential for inaccuracy and user abuse.” It then describes how The Colbert Report showed Stephen editing his show’s entry in Wikipedia to describe Oregon as (among other things) “Washington’s Mexico”.

March 5, 2010

Evaluating Condominiums from the Buyer’s Perspective

The March edition of the King County Bar Bulletin includes an article written by yours truly. The article focuses on helping prospective condominium buyers make more informed decisions. Board members may find the overview of resale certificates and reserve studies to be useful, and the article may also cause them to view their associations from a different angle. Without further ado, the text of the article appears below.

The origins of the condominium concept stretch back two thousand years to the Roman empire. Condominiums involve individual ownership of units (living spaces) and joint ownership of common areas (such as siding, roofs, and recreational areas). This form of ownership is currently popular with individuals on either end of the adult age spectrum because condominiums are generally less expensive than single-family homes, allow people to live in more desirable areas, and greatly reduce owners’ direct role in maintenance and repair work.

Persons interested in buying a condominium unit should conduct a thorough inquiry to make sure that they understand what kind of community they are joining and what their obligations will be once they are a member of that community. Condominium owners are responsible for common expenses and must comply with the restrictions contained in the association’s governing documents. It is therefore important for potential purchasers to evaluate a condominium association’s financial health and the types of rules that it expects owners to follow.

People considering condominiums should know how to spot warning signs that this is not the place to call home. Paying close attention to four key R’s - resale certificates, reserves, records, and residents - can help buyers make the best choices and savor condominium life.

Resale Certificates

A resale certificate must be given to a prospective purchaser of a condominium unit. The owner of the unit is legally obligated to provide such a document before the sale. An officer or agent of the condominium association is legally required to sign that document based upon actual knowledge.

Resale certificates contain a plethora of useful information. If delinquent assessments are owed by the current owner, this must be disclosed. If repair work is anticipated that will cost more than 5% of the annual budget, this must be disclosed. If any alteration or improvement of the unit or limited common area violates the declaration, this must be disclosed. A statement of the association’s reserves must be disclosed, along with financial statements, balance sheets, and operating budgets. It is important to review historical financial data as well as current reports. A reserve study must be provided or a mandatory disclosure about the lack of a reserve study must be given. Most importantly, a copy of the declaration, bylaws, and rules must be provided. These governing documents contain the rules by which a condominium buyer must live.

One broad entitlement to information in resale certificates that should not be overlooked is “any other information reasonably requested by mortgagees of prospective purchasers of units.” The Act states that information typically requested by entities like the federal national mortgage association and the department of housing and urban development is reasonable (and therefore discoverable in a resale certificate) if it is reasonably available to the association. Fannie Mae and HUD have recently begun requesting much more information about condominium associations, including owner occupancy rates and delinquency rates. Obtaining this type of information can help prospective purchasers make informed decisions.

Reserve Studies

Reserve studies have been legally required for most Washington condominium associations since June 12, 2008. If funded, reserve studies ensure that major common expenses will be collected in small increments over time. The alternative is paying for major repairs with loans and/or special assessments, and that approach tends to result in foreclosures and strife. Associations that have not obtained reserve studies pose an increased risk of financial disruption that should be taken into account when condominium shopping. Any potential buyer of a condominium unit should find out if the association in question has its financial life in order.

A closely related issue is the amount of money that is in an association’s reserve account. Washington law does not require condominium associations to place any money in reserve accounts. As a result, some associations have a reserve study but have not set aside enough funds to fully or even mostly fund the expenses described in that study. This raises the risk of a future special assessment on the owners to make up the difference.

Records

Association records reflect important events in the life of a condominium. Minutes of the meetings of the board and the owners provide a particularly revealing window into the affairs of an association. It is prudent to obtain and review (at some length) the association’s governing documents and meeting minutes before pulling the trigger on a transaction. This can help identify sources of future conflict.

The governing documents of a condominium are usually long and difficult to understand, but taking the time to evaluate their contents can prevent major headaches down the road. A few associations ban smoking in units and/or the common areas. Some associations ban pets or place severe restrictions on their behavior. Some associations restrict the ability of owners to lease their units or run businesses out of them. Most associations limit what can be placed on windows, doors, and porches to preserve a uniform exterior appearance. Almost all associations have the general authority to punish behavior that an owner’s neighbors reasonably find annoying, and this can lead to heated disputes over noise and odors. The severity of fines for violations of the governing documents varies greatly. If people want to live in a condominium, they must be willing to subject themselves to the restrictions contained in the governing documents and the board’s reasonable elaborations on those restrictions.

Residents

Perhaps the most overlooked method to learn about a condominium is to speak with residents. Conversations with several board members and several other owners can provide a glimpse of the challenges facing the association and the general philosophy of those in power. This is often a valuable way to discover what life is like in that community.

Assessing condominiums’ strengths and weaknesses is difficult and time-consuming work, and many people seek out professionals that can guide them through this process. In light of the misery that can ensue if the wrong choice is made, this is time and money well spent.

February 26, 2010

Maintenance and Repair of Condominium Buildings - Who Pays?

Condominiums are divided into units, limited common elements, and common elements. The Washington Condominium Act, which governs condominiums created since July 1, 1990, establishes default rules regarding boundaries and upkeep. These rules have been incorporated into many past and present condominium declarations.

The Washington Condominium Act states that (subject to the declaration) the walls, floors, and ceilings are the boundaries of a unit. Items such as wallboard, plaster, tiles, paint, and other materials constituting part of the finished surfaces are part of the unit. Items such as flues, ducts, conduits, and other fixtures that lie partially within a unit are considered limited common elements to the extent that they serve only that unit. Items such as porches, balconies, exterior windows, and exterior doors that are designed to serve a single unit are limited common elements as well. The rest of the condominium is composed of common elements, which often include siding, roofs, and recreational areas.

The Act later describes who is normally responsible for each portion of a condominium. It states that (subject to the declaration and two other exceptions) the association must pay for maintenance, repair, and replacement of the common elements and the limited common elements and the owners must pay for the maintenance, repair, and replacement of their units. The Act allows associations to shift expenses related to limited common elements to the owners if the declarations permit this. The Act also allows associations under its jurisdiction to shift common expenses caused by an owner’s misconduct to that owner.

The default rules discussed above can be altered by condominium declarations, so those documents must be carefully reviewed in each instance to determine liability for repair costs. If the board is uncertain about the proper outcome, it should ask the association’s attorney to issue a legal opinion on the matter.

February 19, 2010

When Homeowners Associations Attack

"HOA Sues Former Board for $70 Million" is a headline that gets your attention. An Illinois homeowners association recently filed such a lawsuit against its former developer-controlled board (among others), claiming that past board members misused common funds and mismanaged the association's financial affairs. One portion of the lawsuit alleges that board members engaged in self-dealing by using their own or related companies to perform work for the association rather than competitively bidding the work. Another portion of the complaint contends that the association has insufficient reserve funds because dues were kept too low. It remains to be seen how this lawsuit will end.

Board members must always remember that they are obligated to exercise reasonable care in making decisions and must never use their positions to obtain personal benefits. Conducting a thorough investigation, complying with the governing documents and applicable state law, and seeking professional advice when appropriate are three ways that board members can ensure that their decisions are beyond reproach. The guiding principle is always the good of the community.

February 12, 2010

Resale Certificates - Provide a Proper Preview

According to the Washington Condominium Act, a prospective purchaser of a condominium unit must receive a resale certificate from the owner of that unit before the sale closes. The condominium association is required to provide the owner with a signed resale certificate within 10 days of each request, and it is allowed to charge a fee of up to $150 for this service. An officer or agent of the association must sign that document based upon actual knowledge.

Resale certificates provide a prospective buyer with a snapshot of the association in general and the unit in particular. If delinquent assessments are owed by the current owner, this must be disclosed. If significant repair work that will cost more than 5% of the annual budget is anticipated, this must be disclosed. If any alteration or improvement of the unit or limited common area violates the declaration, this must be disclosed. A statement of the association’s reserves must be disclosed, along with financial statements, balance sheets, and operating budgets. A reserve study must be provided or a mandatory disclosure about the lack of a reserve study must be given. A copy of the declaration, bylaws, and rules must be provided as well.

One broad entitlement to information in resale certificates is “any other information reasonably requested by mortgagees of prospective purchasers of units.” The Act states that information typically requested by entities like the federal national mortgage association and the department of housing and urban development is discoverable in a resale certificate if it is reasonably available to the association. Fannie Mae and HUD have recently begun requesting more information about condominiums, including owner occupancy rates and delinquency rates, so this information may need to be provided.

Associations should take their legal obligations to prospective purchasers seriously and err on the side of disclosure when completing resale certificates. A useful rule of thumb is: "If I was considering buying this unit, would I want to know about this?" Boards do not want to get involved in lawsuits seeking damages caused by inadequate resale certificates.

February 5, 2010

Census Calls for Cautious Cooperation

Congress is spending $2.5 million this year to advertise the U.S. Census during the Super Bowl. This could result in substantial net savings if the ads (which may reach 45% of all U.S. adults) cause more people to mail back their census forms. Each percentage point increase in the mail response rate prevents an additional $85 million from being spent to find and count those people.

Households are required by law to respond to the Census Bureau’s requests for information, and community associations could face penalties if they unreasonably impede Census work. However, associations and owners should be aware that unscrupulous persons in their area may attempt to falsely pose as Census workers. The Better Business Bureau offers the following useful tips to prevent Census-related fraud:

• If a U.S. Census worker knocks on your door, they will have a badge, a hand-held device, a Census Bureau canvas bag, and a confidentiality notice. Ask to see their identification and their badge before answering their questions.

• Census workers are currently only knocking on doors to verify address information. Do not give your Social Security number, credit card number, or bank account number to anyone, even if they claim they need it for the U.S. Census. While the Census Bureau might ask for basic financial information, such as a salary range, it will not ask for Social Security, bank account, or credit card numbers, nor will employees solicit donations.

• Eventually, Census workers may contact you by telephone, mail, or in person at home. However, they will not contact you by e-mail, so be on the look out for e-mail scams impersonating the Census. Never click on a link or open any attachments in an e-mail that are supposedly from the U.S. Census Bureau.

January 29, 2010

Use It or Lose It - The Three-Year Limitation on Collecting Delinquent Condominium Assessments

The Washington Condominium Act states in part as follows: "A lien for unpaid assessments and the personal liability for payment of assessments is extinguished unless proceedings to enforce the lien or collect the debt are instituted within three years after the amount of the assessments sought to be recovered becomes due." This basically means that a Washington condominium association does not have the right to collect assessments that are more than three years old unless a lawsuit seeking payment or foreclosure is already pending. This law applies to condominiums created before July 1, 1990 as well as newer condominiums.

The three-year limitation on collecting delinquent assessments obligates condominium boards to monitor the length of delinquencies and take legal action to collect them before it is too late. Beginning a personal lawsuit against the owner in small claims or superior court within the three year period will preserve the owner’s obligation to pay the full debt. Beginning a foreclosure lawsuit against the unit within the three year period will preserve the association’s full lien rights. Being proactive in this manner will help to maximize the association’s ability to collect the money it is owed.

January 22, 2010

Using Executive Sessions of Board Meetings to Address Sensitive Matters

Most of the important decisions regarding a condominium or homeowners association are made at board meetings. The attendance of owners at board meetings has many benefits, but owners may be excluded in certain situations. Such closed portions of board meetings are called executive sessions.

The Washington Homeowners’ Associations Act requires board meetings to be open for observation by owners and their agents. It goes on to state that boards may vote during meetings to hold executive sessions that only directors may attend. The motion to hold an executive session must specifically state the purpose of that session. The Act lists five areas that are appropriately handled in executive session:

1) Consideration of personnel matters.
2) Consultation with attorneys or consideration of legal advice.
3) Discussion of likely or pending litigation.
4) Discussion of possible violations of the governing documents.
5) Discussion of an owner’s possible liability to the association.

After an executive session has concluded, the board must vote in open session in order to take any action with regard to the matters discussed in executive session. Homeowners associations’ governing documents may impose additional procedures relating to board meetings and executive sessions.

Washington laws governing condominiums do not contain specific requirements pertaining to the attendance of owners at board meetings or executive sessions. However, many condominium associations’ governing documents contain provisions that cover those topics. If an association’s governing documents are silent, the board may wish to consider complying with the rules applicable to homeowners associations to give its actions an extra measure of protection.

January 15, 2010

The Nuts and Bolts of Association Meetings - Notices, Quorums, and Proxies

The Washington Condominium Act states that condominium associations must hold at least one meeting a year. The Act requires meeting notices to be hand-delivered or mailed to the owners at least 10 days before the meeting and no more than 60 days before the meeting. The notice must describe the issues that are before the owners for a vote, including the general nature of proposed amendments to the declaration or bylaws, changes in a previously approved budget that alter assessment obligations, and proposals to remove a director or officer.

Unless the governing documents specify a higher percentage, a quorum is present in a condominium covered by the Washington Condominium Act if owners of units to which 25% of the votes of the association are allocated are present in person or by proxy at the beginning of the meeting. This is the minimum acceptable quorum. A proxy is void if it is not dated or if it claims to be revocable without notice. Unless the proxy states otherwise, it terminates 11 months after it was executed.

The Washington Homeowners’ Associations Act largely includes the same meeting and notice requirements in the first paragraph above, but it requires a minimum of 14 days notice of association meetings to be given to owners. Unless the governing documents specify a different percentage, a quorum is present at a homeowners association meeting if owners to which 34% of the votes in the association are allocated are present in person or by proxy at the beginning of the meeting. This is the default quorum, and it can be adjusted in either direction by the governing documents. There is no provision in this law about proxies.

These two laws are not the only source of information about association meetings. The association’s declaration and bylaws must also be consulted. The quorum amounts established by governing documents are often higher than the percentages stated in the laws. It is fairly common for bylaws to elaborate on the content of valid meeting notices and proxies as well. Following the requirements relating to notices, quorums, and proxies will help to deflect any challenges to actions taken at association meetings.

January 8, 2010

The Sword, the Shield, and the Guide - Working with the Association's Attorney

A board should strive to get the most out of its relationship with the association’s attorney. There are three types of attorney roles that a board is likely to encounter – sword, shield, and guide. The third role is just as important as the first two, but it is often the least understood.

Boards retain attorneys to enforce the CC&Rs and collect delinquent assessments. The attorneys are swords used to produce compliance. Boards hire attorneys to defend the association from legal action by owners or others. The attorneys are shields used to deflect liability. Most board members are familiar with these two attorney roles.

Some boards retain attorneys to provide comments and recommendations about association affairs as they happen. The attorneys are guides used to ensure that the association is managed in accordance with the governing documents and applicable laws. They can amend declarations to produce more desirable results. They can inform boards of the risks and benefits involved when faced with difficult choices. The attorneys add their knowledge and experience to board deliberations and (hopefully) help boards make better decisions.

The guide role can produce many benefits for an association, but it does require the commitment to regularly inform the attorney of the significant business before the board. Once the proper procedures are in place, the attorney can often help resolve a matter with a brief email or phone call.