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

An unpublished opinion by the Washington Court of Appeals earlier this month dealt with a homeowners association’s attempt to enforce a restrictive covenant limiting tree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

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

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

How to Protect Your Association from Embezzlement

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

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

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

Recent Case Upholds Homeowners Association's Power to Assess Owners

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

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

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

Evaluating Condominiums from the Buyer’s Perspective

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

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

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

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

Resale Certificates

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

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

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

Reserve Studies

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

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

Records

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

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

Residents

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

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