Court Requires Washington Condominium Associations to Submit Construction Defect Claims to Binding Arbitration

The Washington Supreme Court ruled last week that Washington condominium associations are bound by arbitration clauses contained in purchase and sale agreements between developers and original unit owners even though the Washington Condominium Act guarantees them a day in court. Since such arbitration clauses are almost always present in those agreements, this decision means that most Washington condominium associations no longer have the ability to successfully sue developers for construction defects. They must instead submit those claims to binding arbitration.

Arbitration is a less favorable forum than litigation for condominium associations asserting construction defect claims for at least three reasons. First, the expansive right of associations to obtain information and documents from developers during litigation is significantly curtailed in the arbitration process. Second, arbitrators are not explicitly required to decide matters in accordance with the law (much of which is designed to protect consumers). Third, there is anecdotal evidence that juries of ordinary citizens are more inclined to identify with condominium associations than professional arbitrators selected by developers.

Washington condominium associations still have the right to hold developers accountable if the initial construction of their buildings did not meet applicable standards. However, it is unfortunately difficult to avoid the conclusion that it just got harder for associations to win those claims and obtain enough money to perform necessary repairs.

Enforcing Restrictions on Holiday Decorations

The holiday season can be tough on community association boards. Owners sometimes place decorations on or near their homes that violate the governing documents, pose safety hazards, and/or annoy other owners. Informal attempts to reign in their exuberance typically result in accusations that the boards are acting like Scrooges and blunt refusals to tone down or remove the displays. Boards are then forced to decide whether the decorations merit fines or other punitive measures.

There is nothing wrong with enforcing restrictions on owners’ holiday displays if those restrictions have a reasonable basis (maintaining a uniform appearance, reducing the risk of property damage, etc.) and all owners are held to the same standard. However, boards may also wish to consider amending their association’s governing documents to reflect the prevailing practice in the community or a more permissive policy in general. This usually involves allowing owners to display holiday decorations within a specified time period as long as they do not pose a danger or unduly bother other owners. Boards retain the power to act in extreme situations while otherwise permitting the owners to celebrate the season as they see fit.

As a wise man said long ago, there is a time and place for everything. Strict enforcement of broad rules is appropriate in many situations. A more flexible approach may be preferable in other situations. Boards that make these types of distinctions are laying the groundwork for happier communities.

New Tenant Protection Law Helps Associations Collect Delinquent Assessments

The Protecting Tenants at Foreclosure Act went into effect in May of 2009. This federal law requires a foreclosing party to provide 90 days notice before attempting to evict a tenant. It also allows a tenant under a lease executed before the foreclosure started to remain for the rest of the lease term unless the property is conveyed to a person that intends to occupy it as a primary residence (which is usually not the case in lender foreclosures). These tenant protections also enhance community associations’ ability to collect unpaid assessments.

All Washington condominium associations and most Washington homeowners associations have the power to foreclose their delinquent assessment liens. An association is entitled to the appointment of a receiver over the property during a foreclosure action if the property is not occupied by the owner. A receiver seeks to collect rent to pay off receivership costs and unpaid assessments. The new federal law allows receivers to install long-term tenants into properties (or execute long-term agreements with existing tenants) even though lender foreclosures during the lease terms are probable. Collecting rent for a number of months could resolve many delinquencies.

The increasingly frequent elimination of delinquent assessment liens by lender foreclosures has been a major source of frustration for condominium and homeowners associations this year. Receivership is now a more potent collection tool that can be used to address this problem in some circumstances. A board should give this option serious consideration if the owner of a vacant or leased property owes the association a significant sum. Temporarily stepping into the role of landlord may be the only realistic way to collect the unpaid assessments.

Conflicting Covenants Result in Victory for Owner in Roof Litigation

The covenants that govern condominium and homeowners associations sometimes contain provisions that are inconsistent, and those imperfections can spark disagreements about board decisions and costly litigation. The Washington Court of Appeals issued an unpublished opinion last month that discussed the problem of conflicting covenants in a homeowners association. The owners prevail over the association in that case, and the reason why might surprise you.

In 2003, James and Janice Geary purchased a lot in the Flying H Ranch subdivision in Buckley, Washington. In late 2005, their house’s composition roof began to leak. The Gearys learned that their house could not support the tile roofing material permitted by the covenants. Another composition roof appeared to them to be the best available option. The Gearys’ proposal to the architectural control committee was rejected because the covenants do not allow composition roofs. The Gearys installed a composition roof anyway. The Flying H Ranch Homeowners’ Association filed a lawsuit against them nine months later.

Flying H Ranch’s covenants state that construction does not require committee approval and complies with the covenants if the association has not started a lawsuit by the time of its completion. However, the covenants also provide for an automatic $10 per day fine on lots that violate the covenants. The trial court concluded that these two provisions contradict each other and make the meaning of the covenants unclear. Since the developer (the source of the uncertainty) was actively involved in this dispute, the trial court strictly interpreted the covenants in the Gearys’ favor. The appellate court agreed with this result, but it also pointed out that covenants are more liberally interpreted in favor of restrictions once developers are no longer involved.

The Geary case demonstrates how inconsistencies in covenants can disrupt enforcement efforts. Identifying conflicting provisions and amending the covenants to fix those problems can prevent many headaches down the road. This case also shows how important it is for boards to be familiar with the portions of the covenants that are time sensitive.

Thanksgiving Thoughts for Community Association Boards

A Zogby survey conducted several years ago indicated that over 70% of participating owners in condominium and homeowners associations viewed community living in a positive light. Nearly 80% of those owners thought that the covenants and rules in their associations enhanced property values. In short, most owners appear to be thankful for their associations and the boards that manage them.

The same survey also indicated that about 10% of participating owners were unhappy with community living. Board members can be forgiven if they are not thankful for those owners’ criticism and complaints. However, listening to those owners in a receptive manner and addressing their concerns when appropriate is a crucial part of every board’s work.

Recent Washington Case Illustrates Rule Enforcement Pitfalls

The Washington Court of Appeals filed an unpublished opinion last week in a case involving a community association. This opinion provides valuable guidance regarding enforcement of governing documents and the limits of rule-making authority.

Gloria Holcomb purchased an undeveloped lot in Kitsap County that was subject to restrictive covenants. The covenants established an architectural control committee and prohibited building on the lots without written approval from the committee. However, the covenants also stated that the committee’s written approval was not required if the committee did not approve or disapprove a project within 30 days after construction plans had been submitted to it.

Ms. Holcomb planned to build her retirement home on the undeveloped lot. She submitted construction plans to the committee in May of 2006. In June and July of 2006, the committee requested more detailed plans in accordance with a stricter procedure recently enacted by the committee. Ms. Holcomb did not provide more detailed plans, and eventually abandoned the project. She then sued the community association, claiming that it violated the covenants by preventing her from proceeding with the project. The trial court ruled in favor of the association, and Ms. Holcomb appealed.

The appellate court’s opinion instructs the trial court to reconsider the case and determine whether the committee violated the covenants by unreasonably delaying approval of her construction project. If the committee is found to have acted improperly, Ms. Holcomb will be awarded damages that naturally flowed from the committee’s misconduct, which in this case could exceed $50,000. This serves as a reminder to boards and committees that failure to reasonably enforce the governing documents can result in liability.

During the trial court’s initial consideration of this case, it significantly concluded that the stricter procedure adopted by the committee was unenforceable because it conflicted with the covenants. The appellate court agreed that the committee exceeded its authority. This serves as a reminder to boards and committees that the rules they enact must be consistent with the association’s declaration or covenants.

New Requirements for FHA Condominium Loans Delayed and Revised

The U.S. Department of Housing and Urban Development has announced that most of the new guidelines for Federal Housing Administration (FHA) loans related to condominiums will not be implemented until December 7. The "spot loan" approval process is now scheduled to be eliminated on February 1, 2010. All currently approved condominium projects will be transferred to the new FHA approved list. Projects that were approved before October 1, 2008 will require re-certification by December 7, 2010. Projects that were approved between October 1, 2008 and December 7, 2009 will require re-certification within two years of their approval date.

The new standards governing FHA condominium loans that were first announced in June have also been revised. One significant change is that condominiums are not required to maintain a current reserve study. A "budget review" process has been inserted instead. This review must determine that the budget is adequate and meets the following standards: 1) Includes allocations to ensure sufficient funds are available to maintain amenities and unique features; 2) Provides for the funding of replacement reserves for capital expenditures and deferred maintenance in an account representing at least 10% of the budget; and 3) Provides adequate funding for insurance coverage and deductibles. If a condominium's budget does not meet these standards, a lender may request to review a reserve study that is less than a year old to assess the project's financial stability.

Another important revision to the new FHA standards concerns the kinds of insurance coverage that must be in place to obtain approval. Condominium associations are required to maintain property insurance in an amount equal to 100% of current replacement cost of the condominium and comprehensive general liability insurance covering common elements, commercial space, and public ways. Associations with 20 or more units must also maintain fidelity insurance with coverage in an amount no less than the sum of three months assessments on all units plus reserve funds. If the project is located on a 100-year flood plain, a certain type of flood insurance is required as well.

If the board of your condominium association is concerned about obtaining or maintaining FHA approval, then it should consider seeking guidance from an attorney or other real estate professional that is familiar with this complex area.

The Statue Standoff - Lessons for Curbing Community Conflict?

A few months ago, Glenn and Laura Wolf bought a house in a planned development in South Corvallis, Oregon. They placed five statues (ranging from 6 inches to 3 feet in height) in their front yard, including Christian figures, a Hindu deity, and an Indian chief. A neighbor complained. The association informed the Wolfs that the statues required board approval. The Wolfs responded that there is nothing in the governing documents that specifically addresses statues. Statuegate was born.

The Wolfs and the association each hired attorneys. An effort to recall three members of the association’s board is underway. The board recently offered to settle the dispute by allowing the current statues to stay as long as no more are added. The Wolfs rejected that offer, and they appear to be willing to litigate the issue. The Wolfs’ strong perception that the board is selectively enforcing the rules against them may make legal action inevitable.

Statuegate serves as a reminder that disputes over rules can escalate quickly if certain conditions are present, including ambiguous governing documents, debatable harm to the community, and owners who believe that they are being singled out for different treatment. Boards should always consider the likelihood of a legal challenge when deciding how to exercise broad authority and apply specific rules. Giving owners an adequate opportunity to be heard, discussing their concerns in a civil manner, and offering compromises when appropriate can keep small fires from turning into large ones.

Mediation Can Defuse Disputes with Owners

Owners in condominium and homeowners associations that view their boards as biased or oppressive often complain that there is no way to challenge the board other than expensive litigation. The intervention of a neutral party that is not a member of the association can cause unhappy owners and boards to see each other in a different light.

Mediation may be helpful if an owner is calling the board's impartiality or honesty into question. The mediator will listen to the board and the owner and try to help them understand the other side's point of view and the strengths and weaknesses of both positions. A mediator that raises the possibility that the board is merely trying to fulfill its obligations to the best of its ability can convince the owner to grudgingly conclude that the decision at issue is within the board's authority (even if the owner would have reached a different decision). 

My office offers mediation services as well as legal services.  If you are involved in a dispute with a condominium or homeowners association or an owner in such an association, then you should consider contacting my office to discuss mediation of that dispute.  

Using Board Meeting Minutes to Communicate with Owners

Condominium and homeowners association boards should strive to communicate effectively and often with owners. One of the main causes of discontent in such associations is boards that do not tell the owners what they are doing. Distribution of board meeting minutes is an excellent way to keep owners informed.

Board meeting minutes should reflect the meeting date, the persons that attended the meeting, the status of the previous meeting’s minutes, the general nature of each topic discussed at the meeting, and actions taken by the board. It is not necessary to record the comments or views of individual board members. Meeting minutes should be signed by the person that recorded them.

Many owners want to know about the decisions the board is making on their behalf, and sending them a regular stream of information about board activities reduces the potential for unfounded accusations and conflict. Making board meeting minutes widely available can also help boards better understand the wishes of their communities.

Fair Housing Act Requires Boards to Accommodate Disabled Residents

The Fair Housing Act requires condominium and homeowners associations to make reasonable accommodations for persons with disabilities to allow them to use and enjoy their homes. Any necessary modifications to the property should be performed at the disabled person’s expense. If an association refuses to make a reasonable accommodation, federal agencies can get involved to enforce the law and levy penalties.

In August, the U.S. Justice Department announced a $35,000 settlement with the Valley View Apartments in Longview, Washington. A handicapped tenant had asked to use two adjacent parking spaces until a handicapped-accessible space became available. The association refused to grant this request and began eviction proceedings. This proved to be a very expensive course of action when the tenant fought back with a complaint alleging discrimination against disabled persons in violation the Fair Housing Act.

In September, an administrative law judge ordered the Astralis Condominium Association in Carolina, Puerto Rico to provide accessible parking spaces to two disabled residents and pay $25,000. The judge determined that the association violated the Fair Housing Act by denying the residents’ request to use available handicapped-accessible parking spaces near their unit. The judge also concluded that the association harassed the residents by placing stickers on their car windows and filing a lawsuit to prevent them from using the handicapped parking spaces.

Responding to fair housing complaints can be expensive and stressful even when no misconduct has taken place. Boards should work with disabled residents when those individuals seek to modify the property to suit their needs, and boards should preserve written evidence of their efforts to do so. It may be possible for a board to identify alternative solutions that are less disruptive to the other owners than the original proposal.

FHA Update - Many Condominiums Will Lose Approved Status Next Month

The Department of Housing and Urban Development (HUD) recently postponed the effective date of its new requirements for Federal Housing Association (FHA) condominium loans until November 2. According to a number of real estate professionals, HUD has also clarified that only condominiums that were placed on the FHA approved list on or after October 1, 2008 will remain on that list on November 2. Condominiums that were placed on the FHA approved list before October 1, 2008 will lose their FHA approved status on November 2, and they must reapply under the new requirements to get it back.

Some (perhaps most) of the Washington condominiums currently on the FHA approved list will unfortunately not be able to meet the new standards. The requirement that no more than 15% of the unit owners can be more than 30 days delinquent will make a large number of condominiums ineligible. The requirement to have a current reserve study, update it annually, and fund at least 60% of the amount specified in the most recent reserve study will keep many condominiums from qualifying. The requirement that at least 50% of the units must be occupied by their owners will further limit the number of condominiums approved.

Once HUD’s new requirements take effect, all condominiums’ initial FHA approvals will expire after two years. Condominiums must then complete a re-certification process every two years to maintain their FHA approvals. This process often involves a large investment of time to collect information and produce documents. Boards will have to weigh the desirability of FHA loans against the cost of preserving access to them.

New Laws Regarding Solar Energy Panels, Adult Family Homes, and Reserve Studies

Three bills that directly affect Washington condominium or homeowners associations were signed into law during the last legislative session. The first two new laws limit homeowners associations’ ability to interfere if owners want to install solar energy panels on their property or use their property as an adult family home. The third new law allows small condominium associations to exempt themselves from the legal requirement to obtain a reserve study if they fulfill certain conditions.

Senate Bill 5136 states that homeowners associations’ governing documents may not prohibit the installation of solar energy panels on an owner’s property unless the panels do not comply with applicable safety and performance standards. This law does not apply to common areas. Homeowners associations’ governing documents may impose reasonable restrictions on the placement and appearance of solar energy panels. For example, governing documents can require solar energy panels to not be visible above roof lines and require portions of the equipment to be painted to coordinate with the roofing material.

House Bill 1935 states that homeowners associations’ governing documents may not limit the use and operation of “adult family homes” on the property. An adult family home is a residential home in which one or more individuals care for two to six adults who are not related by blood or marriage to the individuals providing the services. Homeowners associations are permitted to enforce reasonable nondiscriminatory regulations (such as general landscaping and sign standards) to adult family homes as long as those regulations apply to the rest of the residential property as well.

Senate Bill 5461 states that a condominium association with ten or fewer unit owners is not required to follow the reserve study requirements that went into effect last year if two-thirds of the owners agree to exempt the association from those requirements. The owners must agree to maintain that exemption by a two-thirds vote every three years. The condominium association must include the required disclosure that it does not have a reserve study in resale certificates if it opts for the exemption.

A Quick Guide to Budget Ratification

The board of the Issaquah Highlands Community Association recently had a landscaping problem on its hands. Undeveloped common areas that were too steep for people to reach safely or cheaply were becoming overgrown and unsightly. The board responded by renting herds of goats to munch on the unwanted vegetation for several weeks. The board’s creativity and frugality will probably be appreciated as the association considers its next budget. As community associations enter another budget season, they should make sure that they are following the correct procedures.

The Washington laws that govern condominium and homeowners associations require boards to provide owners with summaries of proposed budgets and schedule owners’ meetings between 14 and 60 days later to consider ratification of proposed budgets. Unless owners holding a majority of the voting power or any larger percentage specified in the declaration reject the proposed budget at the meeting, the proposed budget is ratified (whether or not a quorum is present at the meeting) and takes effect. If the proposed budget is vetoed or the required notice is not given, the last budget ratified by the owners continues until another budget is ratified. An association’s governing documents may impose additional requirements pertaining to budgets as well.

The budget ratification meeting is the board’s best opportunity to proactively address owners’ concerns about the size of their assessments and the association’s spending priorities. For example, if the budget increases reserve account contributions, the board should be prepared to explain how this added expense will contribute to the common good. Taking the time to reveal the reasons behind the numbers at the budget ratification meeting will put many owners at ease and can prevent larger disputes later.

What's That Noise? - Hard Surface Flooring and Condominium Living

A certain amount of noise must be tolerated in multi-family housing. However, sometimes the situation becomes intolerable. Installation of hard surface flooring in a condominium unit may increase its value, but it can also ruin a downstairs owner’s life. This is why many Washington condominiums have provisions in their declarations that forbid the installation of hard surface flooring in a unit without prior written approval of the board.

Provisions restricting hard surface flooring allow boards to act as gatekeepers. Boards may either ban that flooring entirely or allow it subject to conditions, such as compliance with codes relating to sound transmission. Some boards require owners to install specific sound deadening materials under new hard surface flooring. In some cases, soundproofing systems can substantially lessen the additional noise from new hard surface flooring.

If an owner has improperly installed hard surface flooring that is causing a problem, then the board may have to consider using fines and/or a lawsuit to compel the owner to restore the original flooring. A history of not requiring prior written approval for hard surface flooring can complicate matters, but one valid response is that the board is acting appropriately now. A deliberate failure to enforce a clear provision of the declaration when the circumstances call for it would leave the association and the board vulnerable to civil liability.

The Importance of Foreclosing Properly

New York Supreme Court Justice Arthur M. Schack has a motto taped on the wall near the entrance to his chambers – “Be sure brain in gear before engaging mouth.” This is good advice for us all. The New York Times recently featured a profile of this fiery jurist, who has denied 46 of the 102 foreclosure motions that have come before him over the last 2 years. His hard-nosed approach reflects the reality that more judges are scrutinizing foreclosure actions and holding them to a higher standard.

In Justice Schack’s courtroom, if a bank can not prove ownership in a foreclosure action, the case is over. This is a problem because many mortgage documents can no longer be found. It is often unclear which bank owns a mortgage. “If you are going to take away someone’s house, everything should be legal and correct,” he maintains. “I’m a strange guy — I don’t want to put a family on the street unless it’s legitimate.”

Condominium and homeowners associations should scrupulously follow the appropriate legal procedures when pursuing foreclosure actions. This will maximize their potential for success.

FHA Loans Will Soon Require Ongoing Approval of Entire Condominium

Loans insured by the Federal Housing Administration (FHA) are the best financing option for many prospective condominium buyers. FHA loans have the smallest down payment required in the industry (3.5%) and flexible qualifying standards. The availability of FHA loans makes it easier for condominium owners to sell their units and enhances property values. Unfortunately, ensuring continued access to FHA loans is about to get more complicated.

A condominium unit is currently eligible for FHA financing if the entire condominium is FHA approved or if a unit owner successfully completes a “spot approval” process. Since most condominiums in the Puget Sound area are not FHA approved, the spot approval process has been the only way that most condominium buyers can take advantage of these types of loans. However, the FHA spot approval process is being eliminated on October 1, 2009. Potential buyers of units at most condominiums will soon have no access to FHA loans unless boards take action to secure and maintain FHA approval for their condominiums.

The FHA approval process typically takes a few months to complete. Numerous documents must be produced, and the agency must evaluate eligibility requirements like percentages of delinquent and rental units (must be no more than 15% delinquent and at least 50% owner-occupied) and the age of the association’s reserve study (must be no more than 12 months old). Attorneys, property managers, and other real estate professionals can help condominium associations understand whether they can obtain FHA approval and how to apply if they are eligible.

Electronic Media and Association Business

Electronic media like email, Facebook, and Twitter are becoming the primary way for condominium and homeowners association board members to communicate with one another. Board members should be careful when using those types of media to discuss association business. Electronic messages may eventually be considered association records subject to review by the owners.

According to the Washington Condominium Act, association records must be made reasonably available to owners for examination and copying. This law applies to older condominiums as well. According to the Washington Homeowners’ Associations Act, all records of the association, including the names and addresses of owners and other occupants of the lots, must be made available to owners for examination at the office of the association or its manager. Homeowners associations are prohibited from releasing the unlisted telephone number of any owner in response to a request to review association records. Those associations may impose a reasonable charge for copies and costs incurred in providing access to association records.

Washington courts have not yet decided if electronic communications between community association board members about official business are records of the association, and the relevant state statutes are also silent regarding this issue. It is a good practice for board members to assume that electronic messages are potentially subject to review by the owners and strive to communicate about sensitive matters over the phone or in person. This will reduce the odds that a rash message from a board member will come back to haunt the association in future litigation.

Bankruptcy 101 - Chapter 7 vs. Chapter 13

I recently read a magazine article about the capital crime of fraudulent bankruptcy in England. This crime was committed when a debtor intentionally concealed assets from creditors during a bankruptcy. John Senior of York, the last person known to have been executed pursuant to this law, was convicted and executed for fraudulent bankruptcy in 1813. The law was amended to eliminate the death penalty for this crime in 1820. Washington condominium and homeowners associations have been dealing with more owner bankruptcies lately, and as a result it is helpful for board members to be familiar with the two major types of bankruptcy they may encounter.

Under Chapter 7 bankruptcy, a trustee takes possession of all of the debtor's non-exempt property, liquidates it for cash, and uses the proceeds to pay creditors according to the priorities of the bankruptcy code. There are frequently not sufficient assets to satisfy obligations to creditors. The trustee then usually abandons the property to the creditors. Associations may begin an action against delinquent units at that time if they have obtained relief from the stay or the bankruptcy has been dismissed. Associations will often receive no payments from owners or trustees during Chapter 7 bankruptcies.

Under Chapter 13 bankruptcy, debtors with regular incomes repay debts over a three to five year period according to a court-approved plan. This can result in associations eventually receiving payment for all delinquent assessments. After the court approves a plan and an owner begins submitting funds, an association should receive periodic payments to be applied towards pre-petition assessments. The association should also receive payments from the debtor for post-petition assessments.

Bankruptcies may result in negative consequences for associations, but they are not complete safe havens for delinquent owners. It is true that discharges relieve owners of the personal obligation to pay delinquent pre-petition assessments. Associations can not file personal lawsuits against owners seeking garnishment of wages or funds to pay discharged pre-petition assessments. However, associations can pursue foreclosure of their liens for the entire amount they are owed if they have obtained relief from the stay or the bankruptcy has been dismissed.

How to Garnish Delinquent Owners' Wages and Assets

Filing lawsuits directly against delinquent owners and attempting to garnish their wages and assets is a collection option that is usually available to community associations. If the debt is less than $5,000, small claims court is a quick and inexpensive way to seek a judgment. A board member typically presents the association’s case at trial. If the debt is substantially more than $5,000, then pursuing collection in superior court is a better choice. The association’s attorney presents the case in that forum.

Once a judgment has been obtained against a delinquent owner, the association must seek garnishment of the owner’s wages or bank account funds. If an owner’s employer is known, up to 25% percent of his or her wages can be diverted to the association until the judgment is paid. It is a good practice to request employment information from new owners. If a delinquent owner’s bank account is known, whatever funds are present can be diverted to the association. It is a good practice to keep copies of owners’ checks.

In some cases, a delinquent owner’s employer or bank account can not be identified. If an association lacks this information, it can try to serve an owner with written questions requesting information about his or her assets. If an owner fails to answer the association’s questions, he or she can be held in contempt of court. This sometimes motivates delinquent owners to cooperate.

The ultimate success of personal lawsuits depends to a large extent on the delinquent owner. If an owner is unemployed and has little money in the bank, a personal lawsuit is not likely to result in a full recovery in the short term. Some associations decide to cut their losses and end such lawsuits at that point. However, there is value in obtaining and recording a judgment against owners that currently have no assets. Judgments are valid for 10 years in Washington and can be renewed. Persistent associations can direct their attorneys to periodically reopen unpaid judgment matters to investigate whether circumstances have changed and proceed with garnishment if this is the case.

Association Records – The What, the When, and the Audit

A former Florida condominium association bookkeeper was arrested earlier this month on charges of stealing almost $500,000 from the association since 2005. The individual allegedly wrote checks to herself, transferred association funds into her personal account, and submitted fraudulent invoices. It was reported last week that an audit of a Virginia community association discovered nearly $700,000 missing from its accounts. The association’s treasurer disappeared at the end of June. Proper maintenance and evaluation of association records can help boards avoid problems of this magnitude.

The state laws that govern Washington condominium and homeowners associations do not specify what records should be maintained or how long they should be kept. It can be inferred that financial documents like bills and receipts should be kept at least the length of time necessary for them to be reviewed during the annual CPA audit (mandatory for Washington condominiums consisting of more than 50 units and mandatory subject to annual waiver for all other Washington condominiums and also Washington homeowners associations with annual assessments of $50,000 or more).

The state law governing Washington nonprofit corporations requires them to maintain, among other documents, financial statements and meeting minutes at their registered offices. Washington condominium and homeowners associations that are nonprofit corporations should comply with this law. The state law governing Washington profit corporations requires them to maintain meeting minutes on a permanent basis and states that they must keep, among other documents, shareholder meeting minutes, annual financial statements, and communications to shareholders at their registered offices for at least three years. Boards could decide to comply with those standards as an added safeguard. The governing documents of many associations contain specific record-keeping requirements that must be followed as well.

Diligent maintenance and evaluation of association records can help boards make more informed financial decisions, defend against owners’ claims of misconduct, and spot theft of association funds more quickly. Boards should ensure that their association records policies allow them to take advantage of those benefits.

Is Chinese Drywall Hazardous to Homeowners' Health?

American construction companies used large quantities of Chinese-made drywall over the last five years because it was abundant and cheap. Now many homeowners are complaining that Chinese drywall gives off fumes that corrode metals and sicken people. State and federal authorities are currently investigating whether Chinese drywall poses a direct health risk to people.

More than 500 million pounds of Chinese drywall was imported into the United States between 2004 and 2008. Most of it came into the country in 2006. Washington State has imported nearly 2.5 million pounds of Chinese drywall since January 1, 2006. Complaints about Chinese drywall appear to be concentrated in the Southeast at this time. Chinese drywall has been reported to be present in 21 states thus far, including Washington State.

There are several signs that your home may contain Chinese drywall. You may detect a sulphur, rotten egg, or acid type of smell. The electrical wires connected to outlets may be corroding too rapidly. Air conditioning coils or other HVAC components may be failing too frequently. Silver jewelry and flatware may be tarnishing too quickly. You may be able to locate a “Made in China” stamp on exposed drywall in places like your attic or basement.

If Washington condominium and homeowners associations and owners have been adversely affected by Chinese drywall, they may need to consider filing lawsuits against the manufacturer and distributor of the Chinese drywall and/or against the developer and contractors that constructed their buildings. Those entities may have assets to pay for any damages caused by Chinese drywall or may have purchased insurance policies that cover any damages caused by this product. Participation in class action lawsuits is another option, but those lawsuits usually take much longer to complete than individual lawsuits.

Amending Your Association's Declaration or Covenants

The original United States Constitution has been amended 27 times in the 222 years since its adoption. There have also been 6 other proposed amendments that passed Congress but were not ratified by enough states to become binding amendments. Most condominium and homeowners associations also find it necessary to amend their declarations or covenants from time to time to correct inconsistencies, shift responsibilities, and furnish themselves with additional tools to address recurring problems.

Condominiums created before July 1, 1990 are legally required to obtain the approval of at least 60% of the owners to amend their declarations. Condominiums created after July 1, 1990 are legally required to obtain the approval of at least 67% of the owners to amend their declarations. Those newer condominiums must also secure the approval of at least 90% of the owners (including the owners of all affected units) to enact certain types of amendments (including those that change unit boundaries, allocated interests, or uses of units). Some condominium declarations state that higher percentages of owner approval and the consent of a specified number of mortgagees are required for amendments. Washington law does not specify a minimum amount of owner consent that homeowners associations must obtain to amend their covenants, so it necessary to review those covenants to determine what is required to amend them.

Governing document amendments can take many forms. Some amendments require owners to maintain and repair specified portions of the property (such as windows) and repair damage to common property if certain circumstances are present. Others restrict the ability of owners to alter their property (such as by installing hard surface flooring) without the board’s consent. Amendments can provide associations with more options to collect delinquent assessments (including non-judicial foreclosure) and can enhance their lien rights in some cases. They can also place limits on how owners may use the property (for example, by imposing a cap on rentals). If an association’s governing documents contain contradictions (documents that make maintenance and repair of limited common elements the responsibility of owners in one place and the association in another are surprisingly common), amendments can fix those mistakes.

An association’s governing documents reflect its values and priorities. Seeking input from the association’s property manager, attorney, and owners at an early stage will make the amendment process as smooth and productive as possible. The end result will be a document that empowers the board to better serve the needs of the community in the future.

Understanding the Reserve Study Requirements in the Washington Condominium Act

My wife Elisabeth does her best to place a small portion of our income into a savings account each month. She is currently in good company. The New York Times reported last month that the national savings rate is at its highest rate in over 15 years. In a similar vein, the Washington Legislature took action last year to nudge Washington condominium associations towards a more saving-oriented mindset by requiring them to obtain and update reserve studies. Condominium board members should be aware of the obligations imposed by those new provisions of the Washington Condominium Act.

A reserve study attempts to project how much an association must save each year to pay for certain common expenses (including major projects such as replacing a roof) that will need to be paid in the future. Condominium associations must prepare and update reserve studies unless this imposes an unreasonable hardship. Associations must also establish reserve accounts. Initial reserve studies must be based upon a visual site inspection conducted by a reserve study professional. Existing reserve studies must be updated annually unless this imposes an unreasonable hardship, and they must be updated at least every three years based upon a visual site inspection conducted by a reserve study professional.

The Washington Condominium Act does not require condominium associations to place any funds in their reserve accounts. The Act permits associations to withdraw any funds that are deposited in such accounts to pay for unanticipated expenses subject to certain notice and repayment conditions. The Act states that owners holding at least 20% of the voting power can demand that an association obtain a reserve study prepared by a reserve study professional if more than 3 years has passed since one was obtained. An association can overcome such a demand if it demonstrates that obtaining a reserve study would impose an unreasonable hardship, and the Act provides that an unreasonable hardship definitely exists if the cost of preparing a reserve study exceeds 10% of an association’s annual budget.

Subject to the general guidelines described above, condominium board members have broad discretion to make decisions regarding reserve studies. The Act provides that condominium associations and their board members may not be held liable for monetary damages for failing to obtain or update reserve studies. The most significant legal consequence for failing to comply with this part of the Act is that an association must include a specific disclosure in resale certificates warning potential purchasers of units that the association’s lack of a current reserve study increases the risk that they may be forced to pay a large special assessment at some point.

Property and Liability Insurance – Is Your Association Paying Too Much?

In times like these, every part of a community association’s budget should be scrutinized. Insurance is a tempting target when boards are looking to reduce spending, and some associations can obtain substantial savings while maintaining quality coverage. However, condominium and homeowners association boards should be aware of what state law and their governing documents say about insurance before they decide to make a major change in this area.

Condominiums created on or before July 1, 1990 and homeowners associations should focus on their governing documents when evaluating their current insurance. The Horizontal Property Regimes Act and the Homeowners’ Associations Act do not impose any insurance-related requirements other than those in the association’s governing documents. Condominiums created after July 1, 1990 are required to maintain the insurance that is required by the Washington Condominium Act, which includes property insurance on the condominium in the amount of at least 80% of the actual cash value of the insured property at the times that the policy is purchased and renewed and liability insurance for death, injury, and property damage relating to the use, ownership, or maintenance of the condominium’s common elements.

Once community association boards are aware of the minimum insurance requirements established by applicable statutes and their governing documents, they should examine their associations’ present insurance policies. Automatically renewing those policies without considering other available options could result in some associations missing a better deal. Mary Register, an insurance agent at Lovsted Worthington, recently pointed out to me that many condominium and homeowners associations can obtain as much or more insurance coverage for less money by switching to direct writers like Philadelphia Insurance or Fireman’s Fund. She also indicated that some associations would benefit from a re-assessment of the value of the insured property and the cost to rebuild it given the current market conditions. Even if an association decides to stay with its present insurer, Ms. Register noted that it can lower its insurance premiums over time by installing safety features like fire alarms and security systems.

It only takes one serious incident to realize the value of an association’s property or liability insurance policy. Boards should ensure that their associations have adequate insurance coverage, but they should also take advantage of the increased competition for their business to lower their associations’ premiums if possible. The owners will (or should) thank them later.

The Rising Use of Foreclosure to Collect Delinquent Assessments

Foreclosure is the most powerful weapon in a community association’s collection arsenal. If that process is completed, it will result in the property being sold to satisfy an owner’s debt to the association. The Wall Street Journal noted in an article last week that the rising number of substantial delinquencies is forcing many condominium associations to begin more foreclosure actions. The article points out that those associations are increasingly even finding it necessary to foreclose on units that lenders have seized from owners after they fail to pay their mortgage. An understanding of how foreclosure actions can be used to address delinquencies has unfortunately become essential for persons serving on most community association boards.

Foreclosure actions have the potential to bring owners’ lenders into the picture. Lenders may work with owners to refinance loans in a way that allows debts owed to a community association to be paid. They may permit delinquent owners to stop making mortgage payments for a short period of time in order to give those owners the opportunity to pay associations. Lenders may even decide to pay some or all of the past due assessments and add the amount paid to the owner’s loan. If payment from owners and lenders is not forthcoming, more drastic measures are required.

When units or houses are vacant, associations can ask courts during judicial foreclosure actions to appoint a receiver over the property at issue to lease it and collect rent. This can result in associations receiving full payoffs within a few months. When delinquent units or houses are still occupied, associations can seek to sell them at auction. If a property is purchased by a third party, then the owner’s debt to the association will be paid from the purchase price. If no one purchases the property, then the association becomes the owner of the property (subject to senior liens) and can seek to transfer it to a senior lien holder in exchange for payment, lease it, or sell it. At a minimum, completing a foreclosure sale will eventually replace an owner that does not pay assessments with an owner that does pay them.

All foreclosure actions involve significant financial risk (for example, attorney fees incurred are sometimes not recoverable) and cause neighbors to suffer great hardship. They should be pursued only after carefully considering all available alternatives. However, if an owner is seriously delinquent and lacks the ability to pay that debt and the ongoing assessments in the foreseeable future, a board can reasonably conclude that foreclosure is unavoidable.

Special Meeting Dispute Highlights Laws' Priority Over Governing Documents

Board decisions to increase assessments, reduce amenities, or enforce the governing documents can spark unpleasant and costly confrontations with groups of dissatisfied owners. The current situation in Iran demonstrates that uprisings can quickly take on a life of their own. The ongoing turmoil within the Sudden Valley Community Association provides an instructive example of community association strife that is much closer to home.

Sudden Valley is located about 70 miles north of Seattle. The Sudden Valley Community Association’s board of directors was served with a petition last month that sought the recall of 5 executive board members. The petition was signed by 55 owners, which satisfied the 50 signature requirement in the Association’s bylaws. The board rejected the petition on May 30 after consulting with the Association’s attorney. The attorney pointed out that the petition did not contain enough signatures to comply with the Washington Homeowners’ Associations Act, which states that special meetings of an association may be called by owners holding at least 10% of the votes in the association. The owners in favor of the recall are now gathering more signatures to meet that requirement.

Interestingly, the petition at issue would have been valid if the Association was a condominium association rather than a homeowners association. The Horizontal Property Regimes Act does not contain any restrictions regarding how special meetings may be called, and the Washington Condominium Act permits owners having 20% of the votes in the association “or any lower percentage specified in the declaration or bylaws” to call special meetings.

Laws enacted by the Washington State Legislature override provisions of community associations’ governing documents when there is a conflict between the two. Simply following the requirements of the association’s governing documents is thus not an advisable policy. It is important for boards to familiarize themselves with the laws relating to their associations and/or consult an attorney to ensure compliance with those laws. This often results in increased respect for board decisions and fewer disputes with owners over time. Even if conflict persists, the board will have placed the association on a firm legal footing that is likely to be upheld if challenged.

Condominium Safety – The Art of Preventing Injuries in Common Areas

Whitewater rafting can be an exhilarating experience. Who needs roller coasters when you can hurtle down a raging river at breakneck speed? However, the risk of striking sharp rocks that are obscured by water and foam is ever-present. Rafters must keep a watchful eye on the river ahead and steer clear of problem areas. Managing the common areas of a condominium requires a similar vigilance.

Condominium associations have a legal duty to maintain common areas in a safe condition. Failure to comply with applicable laws may be viewed by judges and juries as evidence of negligence. If the boards of condominium associations are or should be aware of dangerous conditions in common areas and fail to take prompt action to remedy those conditions, those associations and the members of their boards could end up on the losing end of negligence lawsuits and be liable for significant damages. It is therefore important for condominium boards to always be on the lookout for potential dangers in the common areas of their condominiums.

There are many ways in which an ounce of prevention can equal a pound of cure. Better lighting in common areas can reduce criminal activity and allow residents to spot tripping hazards in advance. Visual inspections of the premises by a board member can identify rotting wood in common area structures before a collapse occurs. Maintenance of sprinkler systems can limit the damage from a fire. Promptly clearing ice from entryways and sidewalks can reduce slip and fall incidents. The key is to spend time trying to anticipate hazards.

Condominium boards should make common area safety one of their top priorities. This involves taking owners’ safety-related concerns seriously, seeking professional guidance regarding the laws that their associations must follow, inspecting the common areas on a regular basis, and causing necessary maintenance, repair, and replacement of common areas to occur at the appropriate times. If boards perform their duties in this manner, they will help their associations avoid some of the rocks that lurk downstream.

Assessing the Condominium Market - A Conversation with Jim Reppond

I recently sat down with Seattle real estate agent Jim Reppond to discuss the financing and sale of condominiums in the current market. Here are some of the highlights from that conversation:

Financing requirements – Jim’s recent experience has been that major lenders such as Fannie Mae and FHA are requiring strict compliance with their condominium lending guidelines. He indicated that boards and property managers can facilitate sales and enhance the value of the property by making information pertaining to those lending guidelines (such as the percentages of owner-occupied units and delinquent units) readily available to potential purchasers of units and their agents.

Resale certificates – Jim is not seeing potential purchasers back away from deals due to disclosures in resale certificates that the association has not obtained a reserve study. He is advising his clients to carefully review meeting minutes to gain a better understanding of the type of association they might be joining. Jim noted that the failure to disclose major repair projects that are being considered by the board at the time resale certificates are issued can lead to litigation over the obligation to pay special assessments.

Canceling purchase contracts – Jim is not seeing individuals receive their earnest money back after canceling purchase contracts. He acknowledged that most purchase contracts in the recent past did not contain the types of contingency clauses that would allow for this to occur. Jim said that such contingency clauses are now being added to purchase contracts if requested due to depressed market conditions. He did describe how one purchaser was recently able to secure a lower price than the one stated in the contract by working with the developer to have the value of the unit re-appraised.

Jim’s blog The Seattle Specialist (www.theseattlespecialist.com) is an excellent resource for information about the Seattle real estate market and related issues. His “car” videos are definitely worth a look.

Bankruptcy Basics - Filing a Proof of Claim

The rate of bankruptcy filings in Washington has accelerated recently. As noted last month in the Seattle Times, more than 7,000 people statewide declared bankruptcy in the first quarter of 2009, up 50 percent from a year ago. If a condominium or homeowners association receives a notice that one of its owners has filed for bankruptcy, taking quick action can minimize the damage that bankruptcy may inflict on the association’s budget.

A “proof of claim” is a document that creditors file in bankruptcy cases to provide notice that the debtor owes them a specified amount of money. Notices of bankruptcy filings sometimes state that there is no need for a creditor to file a proof of claim at that time. However, some bankruptcy judges have informally indicated to attorneys that practice in this area that a creditor should always file a proof of claim after receiving a notice of bankruptcy because the bankruptcy may be converted to another type that requires a proof of claim. Associations should not rely on delinquent owners to name them as creditors. If an owner does not list an association as a creditor and an association does not file a proof of claim, that association could lose the right to collect delinquent assessments once the bankruptcy has been concluded.

A proof of claim usually must be filed no later than 90 days after the date set for the meeting of the creditors. When filing a proof of claim, an association should list all delinquent assessments, late fees, interest charges, and collection-related attorney fees owed by the owner on the date the bankruptcy petition was filed. Assessments that become due after the bankruptcy petition is filed must be paid during the bankruptcy. If those post-petition assessments are not paid, an association may seek relief from the bankruptcy court, which could include payment of those amounts from the bankruptcy estate (if there are available funds) or permission to commence a collection action against the owner. In light of restrictions imposed by bankruptcy law, community associations should not attempt to collect delinquent assessments from owners that have filed for bankruptcy unless a court has authorized them to do so.

Submitting a proof of claim will often not be sufficient to protect an association’s interests after an owner has filed for bankruptcy. The association or its attorney may need to take additional actions to ensure that the association receives the funds that it is entitled to under the bankruptcy code. The proof of claim is important because it allows those steps to be taken if necessary.

Smoking in Common Areas - Permit or Restrict?

As the old saying goes, where there’s smoke there’s fire. Community association boards are sometimes confronted by the fire of owners’ anger when they are bothered by other owners’ cigarette smoke. However, boards do not have the power to prevent owners from smoking in their units and in the common areas unless there are restrictions on smoking in their associations’ governing documents (the 2005 Seattle initiative restricting smoking does not apply to condominium and homeowners associations).

A recent lawsuit in California illustrates how far some owners are willing to go to be free of cigarette smoke. The Oakwood Apartments permit smoking in the outdoor common areas of the complex. Melinda Birke, a five-year old girl who has allergies and asthma, lives at Oakwood. Secondary smoke in the outdoor common areas made her symptoms worse and contributed to her falling ill with pneumonia on three occasions. Melinda’s father asked the board to ban smoking in those areas, but it refused to do so. Melinda then filed a lawsuit against Oakwood alleging that the failure to ban smoking in the outdoor common areas constituted a public nuisance. Oakwood filed a motion to dismiss Melinda’s lawsuit. The court ruled that Oakwood “plainly has a duty to maintain its premises in a reasonably safe condition” and that Melinda could prevail if she submits evidence at trial that supports the elements of her public nuisance claim.

It is difficult to predict how a Washington court would rule if it was presented with the facts in the Oakwood case. The nuisance statute in Washington states in part that a failure to perform a duty is a public nuisance if it “annoys, injures, or endangers the comfort, repose, health, or safety of others” and “affects equally the rights of an entire community or neighborhood, although the extent of the damage may be unequal”. Given this broad definition of public nuisance, the outcome of the case would likely depend on how the court characterized the association’s duty to regulate the use and maintenance of the common areas. The fact that many associations’ governing documents contain a section prohibiting “noxious or offensive activities” and “conduct which may be an annoyance or nuisance” could also form the basis for a separate legal claim.

The Oakwood case demonstrates that condominium and homeowners associations which allow smoking in their common areas could potentially be subject to liability. As a result, boards may wish to consider amending their governing documents to ban or restrict smoking in common areas. The applicable laws in Washington give condominium and homeowners associations the general power to regulate the use and maintenance of common areas. Rules banning or restricting smoking in common areas can therefore be adopted by boards without a vote of the owners unless there are contrary provisions in their associations’ declarations or covenants.

Compliance with the Federal Pool and Spa Safety Act

I took a trip to Houston this week. As I was heading to the airport to catch my return flight, I glanced at the car’s thermometer. Ninety four degrees. Summer is apparently in full swing down there, but we in the Pacific Northwest will probably have to wait a bit longer for regular hot weather. Condominium and homeowners associations that have a pool or spa should use that time to evaluate whether they are in compliance with a recently enacted federal law that pertains to such facilities.

The Virginia Graeme Baker Pool and Spa Safety Act was enacted by Congress and signed by the President in late 2007. The goal of this legislation was to improve pool and spa safety by reducing the risk that powerful suction could trap a person underwater. The Act applies to all “public pools and spas”, and that term is defined by the Act to include pools and spas that are open exclusively to residents of a residential real estate development or other multi-family residential area. Condominium and homeowners associations are included within this general definition and therefore must comply with the Act’s provisions.

The Act requires the installation of a certain type of cover over all public pool and spa drains. It also requires the installation of a second anti-entrapment system (such as a safety vacuum release system, a suction-limiting vent system, or a gravity drainage system) if a public pool or spa has a single main drain. Operators of public pools and spas with “unblockable drains” (defined by the Act to mean drains that a human body can not sufficiently block to create a suction entrapment hazard) do not have to install a second anti-entrapment system but must still install the drain covers specified in the Act.

Public pools and spas that operate year-round were required to comply with the Act by December 19, 2008. The U.S. Consumer Product Safety Commission (the agency charged with enforcing the Act) has taken the position that seasonal public pools and spas that are currently closed must be in compliance with the Act on the day that they reopen in 2009. Additional information regarding the Act’s requirements can be reviewed at http://www.cpsc.gov/businfo/vgb/poolspa.aspx.

The tragedy of a preventable drowning death and the resulting civil liability for such an event could have a devastating impact on a community. Condominium and homeowners association boards should ensure that their pools and spas are safe before allowing the summer fun to begin.

Collection of Delinquent Assessments - Understanding Your Options

Martial arts students are taught to hope that they will never need to use their skills to harm others. However, they are also instructed to use those skills quickly and decisively when the situation calls for it. So it is with the collection of delinquent assessments in condominium and homeowners associations. Boards should understand the nature of the collection powers contained in their associations’ governing documents and provided by Washington law, and should use those powers to address delinquencies before they get out of hand.

A foreclosure action against the property is a collection option that is almost always available to community associations. This method can take two forms – judicial and non-judicial. In judicial foreclosure, the association files a lawsuit against the owner and entities that hold liens on the property that seeks a court order that the property must be sold by the county sheriff to satisfy the owner’s debt to the association. Most community associations have the ability to pursue judicial foreclosure. In non-judicial foreclosure, the association directs a trustee to sell the property after providing notice to the owner and to entities that hold liens on the property. Community associations do not have the right to pursue non-judicial foreclosure unless their governing documents specify that they have this power.

A personal lawsuit against the owner is another collection option that is usually available to community associations. This method can be pursued in small claims court (which allows a board member to present the case) or in superior court. If a judgment is obtained against the owner, the association will then need to attempt to garnish the owner’s wages or assets to satisfy the debt.

Terminating the utilities that serve a property following the provision of proper notice is a third collection option that is sometimes available to community associations. However, this method is only available to a condominium association if the condominium was created before July 1, 1990 and if the condominium’s declaration specifies that the association has this power. Condominium associations can not terminate utilities to a unit due to a delinquency if the condominium was created after July 1, 1990. The Washington law governing homeowners associations does not mention termination of utilities in response to past due assessments, and those associations’ governing documents typically do not provide for the use of that power.

Intercepting rent from an owner’s tenant is a fourth collection option that is sometimes available to community associations. The Washington laws governing condominium associations states that they are entitled to the appointment of a receiver to collect rent during foreclosure actions. Many condominium declarations also give the association the authority to demand that tenants submit their rent payments directly to the association when owners are delinquent without taking additional legal action, and in some cases those declarations state that the association may take legal action to evict tenants that fail to submit rent payments as directed. The Washington law governing homeowners associations does not mention rent interception or the appointment of a receiver to collect rent, and those associations’ governing documents are usually silent with regard to those matters as well. Homeowners associations may be able to use the Washington law governing receiverships to collect rent from tenants during foreclosure actions.

Every community association board needs to understand what tools are at its disposal to extract funds from delinquent owners. If the board examines the association’s governing documents and is disappointed that one or more of the options discussed above is not present, then it should consider an attempt to amend those documents to provide for broader collection powers.

Compliance with Fannie Mae and FHA Condominium Lending Standards

Mortgage giant Fannie Mae and the Federal Housing Administration (FHA) are major sources of money for individuals seeking to purchase or refinance condominium units. If a condominium association does not meet their lending standards, owners will find it more difficult to sell and refinance their units, which may have an adverse impact on the value of all units. Condominium boards should therefore take several key lending standards into account as they manage their associations' affairs.

The number of condominium units that are occupied by their owners is one important standard. The FHA requires that at least 51% of the units be owner-occupied before it will approve a loan. Some mortgage insurers will reject applications if less than 70% of the units are owner-occupied. Boards should take these restrictions into account when evaluating the number of rentals in their associations and whether to amend their declarations to restrict the number of units that may be rented.

The number of condominium units that are delinquent in the payment of monthly assessments is a second important standard. Fannie Mae requires that no more than 15% of the units may be 30 days or more past due. Fannie Mae has recently clarified that it will work with lenders who request waivers when a particular project exceeds this 15% threshold, and that exceptions are typically granted if the project can sustain itself with 15% or more of the units delinquent. However, there is no guarantee that lenders will request such exceptions or that they will be granted, and high delinquency rates will at a minimum make obtaining a loan more complex. Boards should take this restriction into account when evaluating their collection policies and how to deal with delinquent owners.

The amount of funds set aside for maintenance of the condominium is a third important standard. Fannie Mae requires that at least 10% of the association's operating budget be reserved for "capital expenditures and deferred maintenance". Boards should take this restriction into account when evaluating their associations' budgets.

Bringing a condominium association into compliance with these lending standards will promote both the short-term financial health of the association and the long-term financial health of all unit owners. It may not be an easy goal to accomplish, but the potential benefits make it worth the effort.

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.