November 27, 2009

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.

November 20, 2009

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The Washington Court of Appeals filed an unpublished opinion last week in a case involving a community association.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.

November 10, 2009

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.

November 6, 2009

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.