Washington Court Rules that Condo Association's Insurance Covers Tenant

A Washington appellate court recently decided that a condominium association’s insurance policy covered a unit owner’s tenant as a coinsured party because the lease did not specifically state otherwise. This is significant because associations’ insurers may not attempt to shift the cost of repairing damage caused by a tenant’s negligence or misconduct to that tenant if he or she is covered by the association’s insurance policy. Washington community associations should consider requiring leases to state that the tenant is not covered by the association’s insurance policy. This could help those associations avoid higher insurance premiums in the future.

Community association insurance can be a difficult subject to grasp, but boards must confront it in order to fulfill their legal duties. Identifying and understanding the portions of the governing documents and state law that govern insurance is the first and most important step. An attorney who focuses on representing Washington condominium and homeowners associations can make this complex area more accessible.

My Twitter Account Is Another Source of Useful Information for Condo Boards

It is wonderful to live in a time when information can be shared in so many ways. Given the many personal and professional demands on my time, it can be difficult to find the time to write blog posts that meet my high standards in terms of content and style. However, it is usually possible for me to spend a few minutes each morning reading the day's news in general and what other condominium attorneys around the country have written on their blogs in particular. The best stories and posts are included on my Twitter account.

Some attorneys focus their Twitter accounts exclusively on their practice area. I decided to give my account a broader scope that reflects my interests in a more comprehensive way. News and posts relating to condominium and homeowners associations play a major role, but I also include anything else that I think is interesting and deserving of wider attention. Entries about the real estate market, the economy, science, and technology are plentiful. The last five entries provide a good indication of the account's "flavor":

Money Beagle: The wild-card risk of buying a condominium unit. http://bit.ly/uwCZtu

Seattle Times: Rental-property managers find themselves in a sweet spot. bit.ly/uif3kT

Yahoo: Futuristic Taiwan Tower will borrow its design from a tree. yhoo.it/vwG5cQ

AP: Rabbi to become army chaplain, beard and all. yhoo.it/u9hBgY

Seattle Times: Bellevue's Kindering is oasis for special needs kids. bit.ly/u3cZaG

If you would like access to more news regarding community associations and related topics than is provided on this blog, then following my Twitter account may be just what you are looking for. And, as an added bonus, you'll learn a lot about the continuing exploration of our solar system.

Resident Hero Fights Condominium Fire Caused by Smoking on Deck

On September 22, off-duty firefighter Dan Hess grabbed his gear to battle a blaze on the roof of his north Seattle condominium building. Described as a hero by his neighbors, Hess helped to contain a fire ignited by lit cigarette embers that fell through a deck.

The Washington Condominium Act gives associations the authority to regulate the appearance and use of limited common areas like decks unless their governing documents provide otherwise. Condominium boards can thus usually approve rules regulating or restricting smoking on decks in order to reduce fire and nuisance risks. Consulting with the owners to gauge the level of support for proposed rules affecting smoking on decks is a good initial practice. Boards should also consider asking the association’s attorney to evaluate proposed anti-smoking rules before a vote is taken.

I Was Just Quoted in an Article About Homeowners Associations on MSN.com!

I was recently quoted in Scot Meyer's article Homeowners associations: Can you fight them and win? on MSN.com. I was pleased to see that he began by emphasizing the positive qualities of community associations that are regularly experienced (and sometimes taken for granted) by a vast multitude of people every day. I was also happy to see him stress at the outset that owners have internal political remedies at their disposal to address their legitimate grievances and effect change in their communities.

The Changing Landscape of Community Association Law

The October edition of the King County Bar Bulletin contains an article that I authored describing new laws affecting Washington condominium and homeowners associations. The full article can be found on my office’s website. Much of its content has previously appeared on this blog, but the new concluding paragraph expands on that content by emphasizing that most boards can derive great benefit from collaborative relationships with attorneys who focus on community association law.

Court Upholds Huge Penalty on State Agency for Failing to Disclose Records

The Washington Court of Appeals issued a published decision last week in the matter of Ken Bricker v. Washington State Department of Labor & Industries. In this case, Mr. Bricker sued a state agency after it failed to release public records to him. The trial court imposed a $90 per day penalty for the untimely disclosure of sixteen documents and a $15 per day penalty for the untimely disclosure of three additional documents based on the Washington Public Records Act. The total penalty was $29,445. It was upheld on appeal.

While the Washington Public Records Act does not apply to Washington condominium and homeowners associations, those entities are similarly required by other state laws (and frequently their own governing documents) to make their records reasonably accessible to owners. If those associations fail to promptly disclose records, then they are subject to court-imposed financial penalties. The Bricker decision demonstrates why boards should take owners’ requests to review association records seriously.

New Medical Marijuana Laws Force Seattle Condominiums to Choose Sides

In 1998, Washington state voters approved a law permitting the use of medical marijuana by patients with certain terminal and debilitating medical conditions. On July 22, 2011, that law was amended to expand state-sanctioned patient protections, permit the formation of collective gardens managed by up to ten qualifying medical marijuana patients, and authorize cities to regulate medical marijuana.

Seattle City Ordinance 123611 went into effect on August 21, 2011. It seeks to regulate the possession, production, and distribution of medical marijuana in light of the fact that there are currently a number of medical marijuana dispensaries operating in Seattle. However, that ordinance also notes that local licensing of medical marijuana does not change the fact that possession, production, and distribution of marijuana (medical or otherwise) violate federal law. Washington Governor Christine Gregoire recently warned that medical marijuana patients and their providers remain subject to federal prosecution and should carefully evaluate the risks associated with their conduct.

Medical marijuana gardens and dispensaries are illegal. Seattle condominium associations confronted with requests to operate marijuana-related enterprises can just say no. Associations that are inclined to grant such requests should first seek the advice of an attorney in order to understand the possible ramifications of that course of action.

Court Rules that Washington Apartment Complex Is Not Liable for Dog Attack

The Washington Court of Appeals held last month in an unpublished opinion that a woman injured at an apartment complex by a tenant’s dog could not recover from the owner or manager of the apartment complex. The Court based its decision on the well-settled rule in Washington that only the owner, keeper, or harborer of an animal is liable for injuries that it inflicts on others. Liability flows exclusively from ownership or direct control of an animal.

The injured woman argued that the owner and manager of the apartment complex should be held liable because they breached their affirmative duty to maintain the common area in which the incident occurred in a reasonably safe condition. The Court rejected that argument in a telling footnote, pointing out that it ruled in that manner in a similar case fifteen years ago and was overruled in unequivocal fashion by the Washington Supreme Court.

Washington condominium and homeowners associations are sometimes sued in connection with injuries that occur in common areas. Sometimes the owner will have a case, but in other instances (such as those involving dog-inflicted injuries) the owner will have no legal right to recover damages from the association. An attorney who is experienced in community association law can help your board know which lawsuits are all bark and no bite.

New FHA Condominium Guidelines Allow for Higher Delinquency Rates

The Federal Housing Administration (FHA) Condominium Project Guidelines were recently revised in various respects. One significant change takes account of the financial difficulties that condominium associations and their owners have been facing over the past several years. The previous guidelines stated that associations would not be approved if more than 15% of units were more than 30 days delinquent. Under the new guidelines, condominium associations that exceed that 15% threshold can still qualify for FHA approval if they:

1) Have no more 20% of units that are more than 30 days delinquent;

2) Provide a report showing the past 6 months of assessments charged and collected;

3) Provide a report showing current reserve fund balances and operating accounts that exceed the amount of outstanding delinquencies;

4) Provide a showing that the association has budgeted for delinquencies;

5) Provide a reserve study less than 24 months old demonstrating that the association can meet replacement needs; and

6) Provide evidence of collection efforts, including legal actions and payment plans.

If your association is interested in obtaining FHA approval, it should contact an experienced professional that works in that area to determine whether it meets the many criteria that are involved in that process.

Seattle Condominium Flood Demonstrates Importance of Insurance

An overflowing bathtub caused by a sleepy owner recently plunged the Seattle condominium known as Mosler Lofts into a nightmare. Property damage was extensive, and many of the units had to be vacated for repairs. An unfortunate incident like this should remind condominium associations and their owners that purchasing adequate insurance coverage is advisable even when it is not legally required. It should also cause condominium boards to evaluate their governing documents to determine who pays their association’s insurance deductible in these types of situations. Ben Kakimoto’s discussion of condominium insurance on the Seattle Condo Blog earlier this month is well worth reading. For an overview of Washington condominium associations’ legal duty to purchase insurance, please review my previous post on that subject.

New Washington Laws Affect Private Transfer Fees, Resale Certificate Charges, and Reserve Study Obligations

Effective April 13, 2011, a new section restricting private transfer fee obligations (“PTFOs”) was added to Title 64 of the Revised Code of Washington. A PTFO is a provision in a declaration or covenant that requires money to be paid to the association when a unit or lot is sold. The new law states that PTFOs recorded on or after April 13, 2011 are not binding or enforceable. It goes on to state that PTFOs recorded before April 13, 2011 are not presumed to be valid and that they will become unenforceable on December 31, 2011 unless the associations that benefit from them record documents containing certain notices before that date. Fortunately, transfer-related assessments payable to community associations in accordance with the state laws that govern them (such as resale certificate preparation fees and priority liens for delinquent assessments) are exempt from this new law and can still be collected in connection with transfers of ownership.

Effective July 22, 2011, the Washington Condominium Act will allow condominium associations to charge up to $275 to prepare resale certificates. The previous limit for this service was $150. To learn more about the obligation to provide resale certificates, please review my previous post on that subject.

Effective January 1, 2012, the Washington Condominium Act and Washington Homeowners’ Associations Act will contain a number of new provisions relating to reserve studies and accounts. Two of the changes affecting condominium associations deserve special mention. First, those associations are now only required to prepare and update reserve studies if this does not pose an unreasonable hardship and if the current total cost of major maintenance, repair, and replacement of reserve components is fifty percent or more of the gross budget of the association, excluding reserve account funds. Second, condominium associations are now required to make certain disclosures about reserve studies and accounts as part of the budget summaries they provide to owners.

This third law also imposes new requirements on Washington homeowners associations to prepare and update reserve studies and to make certain disclosures about reserve studies and accounts as part of the budget summaries they provide to owners. However, such associations are exempt from those requirements if: 1) the cost of the reserve study exceeds five percent of the association’s annual budget, 2) the current replacement value of the major reserve components is less than seventy-five percent of the gross budget of the association, excluding reserve account funds, or 3) there are ten or fewer homes in the association. To learn more about reserve-related obligations, please review my previous post on that subject.

Community association boards should keep in mind that the laws governing them will change from time to time. Establishing a relationship with a lawyer who focuses on representing Washington condominium and homeowners associations can help to ensure that your association fulfills its legal duties.

Innovative Soundproofing Techniques to Address Noisy Condo Units

Urbnlivn (a Seattle real estate blog) posted a fascinating article about the challenges associated with soundproofing condominiums earlier this week. While a certain amount of sound transmission between units should be expected in most condominiums, excessive noise can prevent residents from enjoying their homes and (in the absence of other solutions) lead to litigation. Products such as mineral wool, ceiling clips, and acoustical sealant may be able to adequately address serious noise issues at a reasonable cost. Since many condominium declarations restrict owners' ability to change flooring or perform other renovations, it is a good policy for owners to check with their condominium's board of directors before beginning any soundproofing project.

Washington Condos Forced to Reconsider Assessment Collection Strategies

The April edition of the King County Bar Bulletin includes the following article that I authored about the difficulties Washington condominiums are facing in the area of delinquent assessment collection. While I hope that the situation described in this article improves soon, many believe that 2011 will also be a challenging year for condos seeking to collect unpaid dues from owners. An experienced condominium attorney can help associations evaluate the best course of action in each matter, collect the maximum amount possible, and avoid options that involve too much expense and risk.

Like the municipalities to which they are sometimes compared, many Washington condominium associations are struggling to maintain appropriate levels of services in the face of declining revenues. More owners are failing to pay the monthly assessments that fund maintenance and repair of buildings and common areas. Collection actions involve more cost and risk than they did a few years ago. Owner bankruptcies and lender foreclosures have become more common. These realities have compelled condominium associations and the attorneys who represent them to find new solutions to the old problem of debt collection.

It is important to note at the outset that liens and personal liability for unpaid assessments are extinguished by operation of the Washington Condominium Act unless proceedings to enforce the liens or collect the debts are instituted within three years after the assessments became due. This places obvious pressure on Washington condominium associations to address delinquencies in a timely manner.

Personal lawsuits involve obtaining judgments against owners and garnishing their wages or assets to satisfy debts. This can result in payment in some instances, but recovery can be thwarted by several factors. Owners may be unemployed and lack significant assets. Associations may be unable to locate owners’ places of employment or assets. Owners may even file for bankruptcy and receive discharges of their personal debts.

Judicial foreclosures involve filing a lawsuit seeking the sale of the condominium unit to satisfy the owner’s debt to the association. Non-judicial foreclosures involve retaining a trustee to sell the property after providing proper notice. Washington condominium associations have the power to initiate judicial foreclosures, but they do not have the power to initiate non-judicial foreclosures without specific authorization in their governing documents.

Foreclosure actions result in payment in some cases, but there are again significant barriers to recovery. Steep declines in property values have reduced owners’ ability to pay through refinancing and, in isolated cases, have even eliminated their desire to continue owning their units. Association foreclosures also do not affect mortgages on units, which are either mostly or wholly superior to association liens in terms of priority. A limited priority lien over mortgages is contained in the Washington Condominium Act, but that lien only includes assessments based on a periodic budget during the six months immediately preceding a foreclosure sale. Condominium associations therefore do not usually receive payments from lenders exceeding that priority lien amount, and lenders can foreclose on units shortly after associations complete foreclosures. Worst of all, associations do not receive any money as a result of their foreclosure sales if there are no third-party buyers due to a lack of equity.

Terminating a unit’s utilities following the provision of proper notice is another collection option, but only if the condominium was created before July 1, 1990 and if the condominium’s declaration specifies that the association has that power. This is effective if the owner has the ability to pay or if the unit is leased by its owner, but it is not helpful if the owner lacks the ability to pay or if the unit is vacant.

Rent can also be intercepted if units are leased. Many condominium declarations give associations authority to demand that tenants submit rent directly to them when the owner is delinquent without taking additional legal action, and in some cases the association may be given the power to evict tenants that fail to submit rent payments as well. However, owners can respond by evicting tenants unless receiverships have been established.

Receiverships can be established over delinquent units during judicial foreclosure actions if the unit in question is not occupied by its owner. Receivers lease units in order to pay unpaid assessments. This collection method has become more common, in part due to the Protecting Tenants at Foreclosure Act. 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. The Act makes it possible for associations to lease distressed units for lengthy terms and increases the likelihood that receiverships will generate enough income to justify their expense.

In light of the challenges discussed above, some condominium associations are utilizing more creative methods to address delinquencies. Very long payment plans are being approved as an alternative to legal action. Rights to use common areas and amenities, vote on association matters, and serve on the board are being stripped from delinquent owners. Owners are being pursued in different forums like small claims court to minimize legal expenses. Perhaps most radically, a few associations are deciding to do little more than record liens and wait for lenders to foreclose. All of these approaches deserve consideration if traditional collection methods are not working.

In my experience, condominium board members do not relish the thought of suing neighbors to collect unpaid assessments. They proceed with collection actions because they are obligated to act on behalf of all owners and exercise reasonable care in managing association affairs. Delinquent owners should keep in mind that boards are usually willing to suspend collection actions if reasonable payment plans are proposed.

Report from the Wild World of Florida Condos and HOAs

Florida seems to be an inexhaustible source of news about condominium and homeowners associations. In honor of this April Fool's Day, I have included links to a few interesting stories to come out of the Sunshine State in recent days. Just for fun, see if you can guess at the start whether all, some, or none of these titles link to real stories.

Homeowners association wants to ban kids from playing outside.

Condo owners locked out of pool, clubhouse due to foreclosures.

Lemonade stand shut down by homeowners association.

Synagogue ousted from condo unit.

The Limited Liability of Conversion Condominium Declarants

The Washington Court of Appeals recently issued an unpublished decision involving a condominium that was converted from an apartment building in 2005. The Court’s opinion focused on whether implied warranties contained in the Washington Condominium Act were violated by the entity that created the condominium. The Act states that:

[1st] A declarant and any dealer impliedly warrants that a unit and the common elements in the condominium are suitable for the ordinary uses of real estate of its type and [2nd] that any improvements made or contracted for by such declarant or dealer will be:

(a) Free from defective materials;

(b) Constructed in accordance with sound engineering and construction standards;

(c) Constructed in a workmanlike manner; and

(d) Constructed in compliance with all laws then applicable to such improvements.

The Court concluded that the construction defects covered by the motion at issue related to the original construction of the apartment building in 1962, not the improvement work “made or contracted for by” the conversion declarant more than four decades later. As a result, the second type of implied warranty provided in the Act was not applicable to those defects and did not support a claim for damages. The Court did indicate that the first type of implied warranty relating to the suitability of the property might still support finding the conversion declarant liable at trial.

Condominiums that have been converted from apartment buildings carry increased risk that construction defects will be discovered that are not covered by statutory warranties. It is important to understand that conversion condominium declarants have limited liability for construction defects and that the cost to repair any defects related to the original construction of the building will most likely have to be paid by the owners.

The Link Between Homeowners Associations and Property Values

The Everett Herald included a well-written article about homeowners associations on Sunday. Columnist Steve Tytler provided a concise overview of the nature and purpose of such associations while tackling the question of whether a dormant association should be revived. He pointed out that covenants running with land are primarily intended to maintain attractive neighborhoods and enhance home values. He went on to note that homeowners associations, which typically have the power to collect dues from owners, fine misbehaving owners, and place liens on owners' homes, are in most cases the only realistic way to maintain common areas and address covenant violations.

Mr. Tytler concluded his article by contending that homeowners associations may not be necessary in some circumstances. In my experience, those situations are exceedingly rare. Most groups of owners seem to need the structure of an association to consistently achieve common goals. Without that structure, common areas tend to be neglected, covenants tend to be ignored, and property values tend to decline.

How to Collect Unpaid Assessments or Dues from Banks After Foreclosures

Bank foreclosures are unfortunately expected to peak in 2011. RealtyTrac Inc. estimates that more than 1 million homes will be repossessed this year. The Mortgage Bankers Association just reported that 4.6% of homes were in the foreclosure process last quarter, which is an all-time high for that survey. Condominium and homeowners association boards need to be prepared to deal with bank foreclosures in their communities.

It is a good practice for associations to take pro-active steps to inform banks of their interest in the properties at issue. If owners fail to pay assessments or dues, liens should be recorded on their units or lots. This makes it more likely that foreclosing banks will contact the association. If notices of trustee's sales are received, letters should be mailed to the named trustees regarding the applicable assessment obligations.

If a bank has completed a foreclosure against a property within your association, the board should promptly contact the bank to request payment of any amount due to the association at that time and the regular assessments after the foreclosure date. However, the bank may well ignore such a request. Many community associations have discovered in recent months that many banks' preferred practice is to foreclose and then refuse to pay any pre-foreclosure delinquency or post-foreclosure assessments until the property is re-sold. If your association encounters such a situation, it is entitled to treat the bank the same as any other owner and initiate a collection action against it.

Banks often respond quickly to demand letters from attorneys after foreclosures. One important reason for this is that banks (sensibly) do not want to pay their attorneys and associations' attorneys to argue about money that they are clearly obligated to pay. Associations' legal right to obtain awards of attorney fees related to debt collection against banks provides a powerful incentive for banks to pay associations sooner rather than later.

If banks persist in refusing to pay delinquent assessments or dues after receiving attorney demand letters, associations can pursue their own foreclosure lawsuits and even establish receiverships over properties to collect rent. Those types of aggressive actions are sufficient to convince most banks to pay associations what they are owed.

Interview Spotlights New System to Certify FHA-Approved Condominiums

I am pleased to note that I was recently quoted in an Inman News article written by Steve Bergsman entitled New FHA Condo Financing Rules Squeeze Sellers. This article offers an engaging examination of new re-certification procedures that condominium associations must follow to preserve access to Federal Housing Administration loans. It also highlights the importance of FHA loans in the current real estate market. You can check your condominium's FHA status by searching the U.S. Department of Housing and Urban Development's condominium database.

When Should Condo and HOA Boards Seek Legal Advice?

A Spokane homeowners association was recently fined $13,500 by the state for illegally burning a boat dock last June. The burning violated Washington state law because it polluted the air with toxic chemicals. It is presently unclear whether the association will appeal the fine.

Boards of condominium and homeowners associations should consult with their association's attorney before making major decisions like removing structures from their properties. An experienced community association lawyer may have identified the law prohibiting the dock burning, recommended a different method of proceeding, and saved the association a substantial amount of money. Boards considering other important matters like contracts with third parties, proposed amendments to the governing documents, and enforcement actions against owners should also give their association's attorney the opportunity to steer them clear of trouble and advise them regarding the best course of action.