December 31, 2009

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.

December 18, 2009

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.

December 11, 2009

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.

December 4, 2009

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.