Does Your Condominium Association's Leasing Restriction Meet FHA's Guidelines?

Financing insured by the Federal Housing Administration (FHA) offers favorable terms and represents the bulk of loans currently available to prospective homeowners.  Many condominium associations are therefore seeking FHA approval.  However, that approval will not be forthcoming if their governing documents do not meet FHA’s standards. 

Among a number of other requirements, the FHA has specified guidelines for acceptable leasing restrictions in condominiums.  Three of those guidelines deserve special attention.  First, leasing restrictions must permit at least one unit to be leased.  Second, leasing restrictions may not require that a prospective tenant be approved by the condominium association or its agents.  Third, legal restrictions must not permit leasing for periods of less than thirty days. 

Condominium boards should consider giving themselves the gift of quality legal representation this holiday season.  This will allow them to more effectively promote peace and prosperity in their communities during the year to come.

New Board Training Manual Can Help Orient New Board Members

I recently collected twenty particularly useful posts from this blog to create a primer for new board members. This overview of important issues can be found here or by selecting "board training manual" from the "categories" menu on the right.  More posts will be added to the manual in the months ahead.  Next year, I intend to reorganize the material in the manual and make that resource available on my office's website.  I hope that this project helps many new board members understand how to properly fulfill their leadership roles in their communities.

Owners Should Be Thankful for Their Community Associations

The Washington Court of Appeals issued an unpublished opinion earlier this month concerning a challenge to the termination of a membership in a private social club.  The membership termination came as the result of a dispute over whether or not a member could bring an eleven-foot wide trailer onto the property.  The width of the trailer allegedly ran afoul of the club’s bylaws.  Finding no significant procedural irregularities, the appellate court upheld the club’s membership termination.

A concurrence to the court’s opinion noted that a slightly different standard would have been applied if this had been a case involving the restrictive covenants of a community association.  In that situation, the court would have interpreted those covenants "in such a way that protects the homeowners' collective interests and gives effect to the purposes intended by the drafters of those covenants to further the creation and maintenance of the planned community."  In other words, the interests of the community as a whole are entitled to great weight when there is a dispute about what the covenants governing Washington condominium and homeowners associations mean. 

At their best, community associations promote high property values and a pleasant living environment.  They make owners’ lives better by pursuing the common good.  On this Thanksgiving, owners should remember to be thankful for the benefits that they enjoy due to their membership in a community association.     

How Does the Washington Condominium Act Describe Unit Boundaries?

Condominium boards need to know where the boundaries between units and the rest of the property are located.  The section of the Washington Condominium Act entitled "Unit boundaries" provides a fairly straightforward description of those boundaries: 

"Except as provided by the declaration, the walls, floors, or ceilings are the boundaries of a unit, and all lath, furring, wallboard, plasterboard, plaster, paneling, tiles, wallpaper, paint, finished flooring, and any other materials constituting any part of the finished surfaces thereof are a part of the unit, and all other portions of the walls, floors, or ceilings are a part of the common elements." RCW 64.34.204(1) (emphasis mine)

This section goes on to indicate that porches, balconies, patios, exterior doors, and exterior windows are limited common elements allocated to the adjacent units (except as provided by the declaration).

Since condominium declarations are explicitly permitted to deviate from the Act with regard to boundaries, it is prudent for condominium boards to determine whether their declarations establish different boundaries than the ones described in the Act.  This can have major consequences when repairs and related assessments are necessary.  Attorneys can help boards quickly obtain a clear understanding of this crucial issue.     

Court Grapples with Distinction Between Repairs and Capital Improvements

The Washington Court of Appeals issued an unpublished opinion earlier this month concerning a condominium association's authority to fund a major construction project without a prior vote of its owners.  The project involved the installation of a $2 million "rain screen" building envelope system (an upgrade over the previous system) following the discovery of significant water intrusion. The court ruled that the project funding concerned "repair" of the building, which did not require owner approval, rather than a "capital improvement", which required owner approval over a certain amount.   

The court's analysis relating to the meaning of the term "repair" in the condominium's declaration is noteworthy.  The court first points out that the declaration contains a section investing the board with broad authority to acquire goods and services for the proper functioning of the condominium, including repair of units if necessary in the board's discretion to protect the common area or preserve the appearance and value of the condominium.  The court then concludes on the basis of that section that a "repair" includes anything necessary in the board's discretion to protect the common area or preserve the appearance and value of the condominium.

  

Establishing the meaning of terms used in condominium declarations sometimes requires legal interpretation.  Attorneys can help boards ensure that they are understanding their declarations correctly. A condominium board that wants to fund a construction project without obtaining owner approval should strongly consider asking an attorney whether the declaration permits this.

I Will Appear on Local Radio Show Brashenomics Thursday Afternoon!

I had the privilege of guesting on local radio show Brashenomics this morning.  I joined a panel of local professionals to discuss issues related to the Puget Sound real estate market.  The show airs on Thursday, October 25 at 4:00 on 1150 AM.   

UPDATE: My Brashenomics segment can be viewed here. 

HUD Announces Changes to FHA's Condominium Approval Policies

The U.S. Department of Housing and Urban Development (HUD) recently announced changes to the Federal Housing Administration's (FHA's) condominium approval policies. Among other adjustments, HUD altered its policies governing the maximum levels of delinquency and leasing in FHA-approved condominiums.

Under the new FHA standards, no more than 15% of the total units in a condominium can be more than 60 days past due on assessment payments. This percentage includes units that are occupied, bank-owned, or vacant. HUD warned that it will not grant exceptions to this rule. 

The new FHA standards retain the requirement for completed condominiums that are over a year old to be at least 50% owner-occupied. For condominium projects that are proposed, under construction, or less than a year old, however, HUD now requires a minimum owner-occupancy percentage equal to 30% of the condominium’s declared units.

HUD's letter describing the complete set of changes to the FHA condominium approval policies can be found here.

Seattle's Energy Tracking Program Deadline is Approaching!

The City of Seattle's new Energy Benchmarking and Reporting Ordinance requires community associations with properties of five units or more to begin tracking their energy use by October 1, 2012. Tracking will be done using the EPA's portfolio manager tool, which is free and available online here.  Once community associations have established their portfolio manager profile, energy tracking and annual reporting to the City of Seattle will be done automatically.   

More information about the City of Seattle's Energy Benchmarking and Reporting Ordinance can be found at its website or by calling the City of Seattle's Energy Benchmarking Helpline at (206) 727-8484.

Why Washington Condominium and Homeowners Associations Need Attorneys

Washington condominium and homeowners associations encounter a number of legal issues each year.  Many of those issues arise when owners fail to comply with the association’s governing documents. Other legal issues relate to the association’s compliance with local, state, and federal laws, many of which impose affirmative duties on community associations. For example, Washington state law requires condominium associations to periodically approve budgets, hold meetings, obtain reserve studies, purchase insurance, and maintain records.  Associations that are not represented by attorneys are not likely to consistently fulfill those legal obligations.  It is therefore highly advisable for community associations to regularly seek guidance from attorneys who are familiar with this area of the law.

Associations should not expect their property managers to draft legal documents for them or to provide them with legal advice.  As a Florida court once pointed out, property managers who draft documents which establish an association’s rights or who advise associations about what the law requires in specific situations can be sanctioned for practicing law without a license. Improperly drafted, approved, or executed documents and incorrect statements of legal requirements can also create expensive headaches for associations.  Associations should instead instruct their attorneys to draft or review documents which affect their rights and seek advice from their attorneys regarding how to conduct the association’s affairs in accordance with current legal requirements.       

Association boards should not be under the false impression that working with attorneys necessarily costs a lot of money.  The attorneys who practice in the area of community association law have different methods, opinions, and personalities.  Some of them, including myself, place a high value on providing concise advice and minimizing legal fees to the extent possible.  If your association works with the right attorney, then the benefits reaped as a result of that relationship will far outweigh the costs associated with it.                  

How to Pursue Delinquent Owners in Small Claims Court

Owners in condominium and homeowners associations unfortunately do not always pay their assessments.  When that occurs, associations have many collection options available to them.  Most of those options involve hiring an attorney, but Seattle-area community associations can also pursue delinquent owners on their own by filing small claims in King County District Court.

If your association wants to file a small claim against a delinquent owner, then the first step in that process is to submit a notice of small claim form to the court.  The fee for filing a small claim is currently $35.  The court will add a case number and trial date to the notice of small claim and send two copies of that document back to the association.  Trials are typically scheduled between 40 and 90 days after the claim is filed.

The second step in the small claim process is to serve the completed notice of small claim on the delinquent owner.  Process service must take place at least 10 days before the scheduled trial date, and this can be accomplished by the sheriff's office, a professional process service company, or by certified mail with return receipt requested (as long as the owner signs the return receipt). 

The third step in the small claim process is to appear in court on the trial date.  If a mandatory mediation does not result in a settlement, then the trial will proceed.  A member of the association's board of directors must present its case at the trial.  Consulting an attorney in advance can help to ensure that the association's position is presented properly. 

While the small claim process can be a useful collection tool, associations should also be aware that it has significant drawbacks.  First, small claim judgments cannot exceed $5,000.  Second, associations’ ability to collect judgments will be limited by the amount of owners’ personal assets and wages that can be located and garnished.  Third, judgments will not prevent owners from continuing to reside in or lease their homes without paying assessments.  Fourth, board members must take time out of their busy schedules to travel to court and appear on the association’s behalf.  Despite those drawbacks, pursuing a small claim can be the best course of action in certain circumstances, particularly when the debt and the association’s legal budget are small.  Discussing the available collection options with an attorney can help associations decide if the small claim process is the right way to seek collection of unpaid assessments.          

The King County District Court’s website is an excellent resource if your association wants to learn more about pursuing small claims.

Washington Courts Support Homeowners Associations' Efforts to Enforce Covenants

In a recent unpublished decision, the Washington Court of Appeals considered a case involving a house and garage that did not comply with setback requirements contained in recorded covenants.  The owners did not obtain the association’s approval before building those structures as required by the covenants.  The trial court ruled that the owners had violated the covenants, ordered them to tear down the home and garage, and instructed them to obtain the association’s approval before building in the future.  The association eventually agreed to allow the house to remain in exchange for a scaled-back garage and payment of the association’s attorney fees. 

The more recently published decision of Green Bank Beach and Boat Club v. Bunney also involved a homeowners association's attempt to enforce its governing documents.  In that case, a house that did not comply with a height limitation contained in recorded covenants was built without the association’s approval.  The trial court ordered the owners to modify their house, and the Washington Court of Appeals upheld that ruling.  However, the association’s covenants did not contain any provisions entitling it to an award of its attorney fees.  As a result, the association had to pay its $75,000 legal bill itself.

Washington courts generally support community associations when they seek to compel owners to comply with governing documents.  When legal action is necessary and an attorney has advised that the facts and law are on the association’s side, boards have good reason to be confident in the outcome.  Entitlement to attorney fees, on the other hand, is a separate issue.  Boards should determine at the outset whether their associations’ governing documents give them the right to be awarded attorney fees if they prevail in litigation.  This will allow them to properly evaluate the risk associated with pursuing lawsuits to enforce covenants. 

Staying Connected Helps Community Associations Weather Financial Storms

The June edition of the King County Bar Bulletin contains the following article that I co-wrote with my paralegal Elizabeth Demong.  The article describes how the presence of various types of connections within community associations can help to prevent bitter disputes over new or increased assessments.  Association boards are encouraged to take an active role in the creation and strengthening of such connections. 

In an effort to fund England's military engagements with France during the Hundred Years War, a young King Richard II levied an unpopular poll tax upon his subjects in 1381.  A large and almost certainly unanticipated uprising fueled in part by unhappiness about that tax occurred later that year.  The King’s lack of connection to his subjects helped bring about a serious conflict between ruler and ruled.   

           

Whether they like it or not, owners within condominium and homeowners associations are subject to their community’s governing documents and the boards that enforce them.  However, the law also requires community association boards to exercise their authority in a reasonable manner, which includes the application of proper skill and diligence to each situation.  When boards lose touch with their owners and act in ways that are inconsistent with their owners’ circumstances and opinions, political upheaval or (perhaps worse) litigation are often the unfortunate result.         

Like King Richard II, community association boards are of course sometimes compelled to deal with pressing financial concerns that have the potential to strain their connections with the owners that they govern.  However, boards should learn from King Richard II’s example and ask themselves two questions before attempting to raise large amounts of new revenue from owners.  First, are they asking for too much?  Second, are they asking too soon?  Neither question can be answered in a satisfactory manner without a strong connection to the owners.

Properly evaluating whether a board is asking for “too much” in new assessments requires both the exercise of due diligence (obtaining reports and/or bids from reputable local sources) and a strong connection to the owners.  Boards should seek to discover what is important to their owners and what challenges their owners are facing through surveys or meetings.  The ensuing connection will inform the nature and scope of the proposal and make it more likely to be successful.  Seeking new funds when connections with owners are weak can lead to ugly “civil wars” that paralyze the community.

Properly evaluating whether a board is asking for new assessments “too soon” also requires both the exercise of due diligence (obtaining reports from reputable local sources) and a strong connection to the owners.  Boards should consider the local economic and real estate climate and the challenges their owners are facing before making decisions about the timing of new assessments.  The recent defeat of a Mercer Island school bond measure illustrates the need to carefully calibrate requests for new revenue to economic realities.

Like King Richard II’s subjects, owners in community associations often lack meaningful connections to the boards that govern them.  When the only contact between board and owner concerns assessment increases, the relationship between the two is not likely to be a warm one.  On the other hand, some community association boards make it a part of their mission to nurture their connection with the owners and promote connections between them.  Those boards are likely to experience fewer intense conflicts because owners will feel that they are part of the community and that the community’s board takes their input into account.  Connected owners will make financial sacrifices to benefit the community more readily.

The creation of connections within community associations should be tailored to the community.  Suburban communities with large numbers of families will create connectivity in a different manner than urban communities dominated by young single professionals.  Once an emphasis has been selected, boards can periodically survey the owners to find out more about them and what they want.  Monthly newsletters are a particularly effective way to keep owners informed and involved.   

While the creation of connections within communities may aid in the avoidance of conflict, boards must also be prepared to handle conflict when necessary.  Sometimes this will mean “going to war” in court, but in other situations the re-establishment of the connection between the parties is the best option.  King Richard II limited bloodshed and preserved his rule by meeting with the rebel leaders and at least considering some of their demands. Community association boards can often profit from following the same course of action, whether this takes the form of an informal meeting, a negotiation with attorneys present, or a formal mediation.