June 26, 2009

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.

June 19, 2009

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.

June 12, 2009

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.

June 7, 2009

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.