February 20, 2020
HOA Records and the Exclusion of Hearsay from Evidence
HOAs and condominiums, as legal entities, are creatures that derive their power from documents. Governing documents must be in writing. Rules, regulations, policies, and resolutions must be put into writing. To maintain and manage the common areas, the board must make contracts with vendors. Covenant enforcement requires data collection and issuance of notices to lot owners. The process of making and collecting assessments is also document driven. Owners in disputes with associations frequently complain that they cannot obtain access to essential records necessary to resolve the disputes or discover that the records do not exist. The creation, organization, and storage of paper and electronic records and documents are essential to the operation of a community association. HOAs derive power from the creation, organization, and control of this information. Owners often complain that they cannot get the records they want from their association or documents that would exculpate them cannot be found.
Once judges call disputes between owners and HOAs forward for trial, the conflict over HOA records shifts to the inclusion or exclusion of association exhibits as evidence. The rules of evidence allow for the exclusion of hearsay. Hearsay is an out of court statement offered to prove the matter asserted in the statement. The hearsay rule applies to oral statements, written materials or electronic records. The hearsay rule prevents a party from proving their case with alleged passed-on statements by persons who cannot be cross-examined at trial. The right to cross-examine one’s opponent is an element of “due process”. Not all statements are presented to “prove the matter asserted.” Some statements are introduced to show that a party was on notice of or aware of a contention or some other basis other than the truth of a statement or document. Even if a statement is hearsay, there are many well established exceptions to the hearsay exclusion. For example, an admission by one’s opponent is admissible hearsay, because the party can offer evidence to try to explain the admission. Another is the “business records” or “shop-books” exception. Businesses rely upon the accuracy of data collection, entry and storage to make informed decisions, operate and make money. Properly kept business records are considered trustworthy because they are not made for purposes of having a self-serving answer, which are needed at the moment. In community associations cases, the lawyers must understand the business records exception to navigate hearsay objections.
When associations try to use their business records, one problem they experience is that the documents were made and kept by a director, community manager, accountant or other custodian who does not testify. The directors of a condominium or HOA constantly change. When members elect new boards, frequently they change management companies because of complaints about the former managers. Even within a “tenured” management company, there is significant employee turnover. A community association may have voluminous records, but no one may have personal knowledge about the making and keeping of many of them.
The business record exception to hearsay frequently arises in community association litigation. In 2013, the Fourth District Court of Appeal of Florida considered an appeal of a final judgment of foreclosure brought by Sebastian Lakes Condominium Association against Connie Yang and Frank Romero. Sebastian Lakes sent Yang and Romero letters stating that they owed over $10,000.00 in unpaid assessments and recorded a lien in the land records. Later Sebastian Lakes filed complaints to foreclose on the liens. The owners contended that the new property management company failed to accurately apply credits to the account in the records because the wife’s father made an advance payment of approximately $18,000.00 in 2008.
Yang and Romero also alleged that the association pursued the foreclosure and other “scare tactics” to retaliate against them for participating in an investigation into $100,000.00 in missing condominium funds.
At trial, Sebastian Lakes called one of the management company’s employees as a witness to testify and introduce an account ledger for the husband. The defendant owner’s attorney objected to the introduction because the plaintiff’s attorney laid insufficient foundational testimony for admission of the ledger under Florida’s business record exception. The owner challenged the association’s evidence on the grounds that they could not establish accurate balances to the owners’ ledger accounts prior to the current management company’s takeover. The owner contended that the new management company failed to accurately reflect a large payment made before the takeover. The owner contended that he stored a copy of the $18,000.00 casher’s check in his unit. He could no longer get into his condo unit. Note that the ledger amounts were submitted for their truth because the true dollar amount owed was in controversy in the foreclosure action. The trial judge cut the presentation of the owners’ evidence off after about 20 minutes and entered judgments of foreclosure in favor of the condominium association.
Yang’s and Romero’s appeal focused on their objections to the introduction of the hearsay HOA records. Under Florida law, the party seeking to use the business records exception must lay a foundation of witness testimony that (1) the record was made at or the time of the event, (2) the record was made by or from information transmitted by a person with knowledge, (3) was kept in the ordinary course of a regularly conducted business activity, and (4) it was a regular practice of that business to make such a record. The rule in Virginia is similar but not identical. The rules and practices for the business record exception vary in each state. I am not a Florida lawyer – I am using this case as an example. On direct examination, the condominium’s lawyer asked the normal foundational questions and the employee of the new property management company gave the expected answers. The trial judge overruled the owners’ objection that there was an inadequate foundation for use of the business records exception to hearsay. However, on cross examination the employee admitted that records from before the takeover were maintained by the prior accountant and she had no knowledge of how that prior accountant kept or maintained the ledger records. The witness could not explain how they verified the starting balances. Based on this testimony, the appeals court found that the introduction of the account ledgers failed to include a proper foundation of witness testimony for the use of the business records exception. The court reversed the judgments of foreclosure in favor of the association. Note that the cross examination revealed the foundation problem after the court overruled the hearsay objection. The opinion does not state whether the defendants’ counsel voir dire’d the witness or moved to strike the hearsay after the cross examination. Practitioners need to know how to properly handle such a situation should it arise to avoid waiving grounds to object to the hearsay specifically or challenge the plaintiff’s evidence generally.
Not all association records may constitute hearsay, and there are other exceptions to the hearsay exclusion other than the business records exception. However, in a HOA case everyone needs to be aware of how the business records exception works in that court system. The effect of this rule can cut both ways. Sometimes the owner may be the one trying to authenticate the books and records of the association for litigation use.
Often, associations use hearsay business records to enforce covenants or collect assessments where they bypass the evidence rules and the courtroom entirely. In Virginia (and many other states), to the extent that statutes and the declaration allow, associations can send owners notices of architectural violations, hold hearings before a board or committee, and decide whether to fine the owner without going before a judge who would impose the rules of evidence. Also, state statutes allow for associations to record liens for unpaid assessments without first obtaining a court judgment. When HOAs and condominiums take such action, often they rely upon business records that would require a proper foundation to be admitted under the hearsay exception in a court of law. These HOA and condominium statutes that allow for bypass of civil litigation is that they relieve associations of the challenges associated with turnover among the directors, management companies and employees. Yang and Romero successfully defended the assessment foreclosure action because the court rules for evidentiary foundations and cross examination uncovered that the balance used in calculation of the unpaid assessment amount was unreliable. Understanding the business records exception is essential to navigation community association litigation.
Yang v. Sebastian Lakes Condo. Ass’n, Inc., 123 So.3d 617 (Fl. 4th App. Dist. Aug 28, 2013)
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February 10, 2020
What is the Difference Between an Easement and a License in Virginia?
Landowners in disputes with neighbors usually are aware of how easements may define property rights among adjoining properties. However, easements are not the only kind of right that allows someone to do or erect something on the land of another. In property law, the “license” is a well-established property doctrine. This kind of license is different from a permit for driving, fishing or professional activity. An easement is a right to use the land of another for a specific purpose. Easements can be implied, express, or established by adverse use. Easements can be conveyed or bequeathed to another person and are often recorded in the land records. Licenses, on the other hand, are more limited property rights that normally cannot be transferred and are usually easily terminated. Everyone has experience with licenses, whether they realize it or not. For example, if I order a book from an internet retailer for home delivery, the van stops in front of my house, and the driver walks the package up to my front door. The delivery person does not enjoy an easement, or any kind of written authority to walk on my land. Their action is not considered trespassing, because the right of entry is implied by custom and from the home delivery order. Licenses are important in the context of HOAs and Condominiums. Governing documents often delegate to Boards the authority to grant licenses to assigned parking spots or use of other portions of common areas. Virginia law treats licensing authority differently from easements or HOA rulemaking. Private operation of common areas distinguishes community associations from other land planning systems. All owners need to understand under what circumstances a Board may intentionally or inadvertently grant specific lot owners exclusive rights to use certain portions of the common areas. Licenses can be confusing because of their similarities with easements. What is the difference between an easement and a license in Virginia? Slight changes in wording in a recorded instrument may make a big difference in the rights of owners and HOAs. In this blog post, I will glean points from two published case decisions.
The Supreme Court of Virginia considered the licensure of assigned HOA parking spaces in a 2000 case opinion. Reginald W. Dye and other lot owners brought suit against Sully Station II Community Association, Inc. in Fairfax County, Virginia. In Sully Station, some townhouses came with their own garages, while others did not. Originally, common area parking spaces in Cluster Common Area Section 8 were available on a first come, first serve basis. On October 1, 1997, the Board assigned two reserved spaces to each townhome that did not come with a garage. The other spaces remained for overflow or visitor parking. Now, 78 of 94 parking spaces were reserved to 39 non-garage townhouses, and the remaining 16 were left as “first-come first-served”. This displeased lot owners who purchased garage townhouses, likely at a premium.
When the garage townhouse owners challenged the new parking system, they contended that the assignments constituted “licenses” not authorized by the Declaration. The HOA contended that the new system was merely regulation of the common area, allowed by common area rulemaking authorization provisions in the Declaration. The Declaration granted every Owner an easement to the Common Area, subject to the right of the Association to license portions of the Common Area to members on a “uniform, non-preferential basis.” On appeal, the Association disputed the Circuit Court’s finding that the new parking policy violated the “non-preferential” requirements in the Declaration. The HOA argued that by authorizing rules and regulation, the HOA could assign parking as they see fit, and was not a license. The HOA pointed out that in some other states, assignment of reserved parking spaces by HOAs is considered to rulemaking, not licensing. Virginia is one of the states that holds that the declaration must do more than authorized rulemaking for the parking lot in order for the Board to have the authority to assign specific spaces.
In Sully Station, the Supreme Court of Virginia noted that a License to land is, “a right, given by some competent authority to do an act which without such authority would be illegal, a tort, or a trespass.” Additionally, a License is specific to a person and does not “run with the land” upon sale of the lot, unless deemed “irrevocable.” The Supreme Court observed that the new parking policy had to be viewed as licensing, and not rulemaking, because it created a special privilege entitling the non-garage townhouse owners to do something they could not without the “policy”, which was to exclude the other owners from their assigned parking spaces. This exercise of power by the Board was the essence of granting a License, because without it, the non-garage owners would have no right to exclude anyone. This licensing scheme violated the Declaration because it did not treat garage owners with non-garage owners uniformly on a non-preferential basis. The ruling in Sully Station is consistent with the Supreme Court of Virginia’s pattern of narrowly construing the authority granted to a HOA Board by the Declaration. Since the licensing provisions spoke directly to what the HOA was doing and forbade preferential treatment, the mention of rulemaking authority for the common areas elsewhere in the Declaration was not found to trump the licensing provisions.
Another HOA license case also came out of Fairfax. In Basham v. Maplefield HOA, the Association contended that the defendants improperly erected fences enclosing portions of the common areas. The lot owners argued that the fences ought to be permitted to remain on three alternative theories: (a) Express Easement, (b) Irrevocable License, or (c) Equitable Easement. The court found no “Express Easement.” The case turned on whether the previous decision by the HOA to allow the homeowners to extend their fences into adjoining portions of the common area resulted in an “irrevocable” license, and hence enforceable as a kind of easement.
While Licenses are ordinarily revocable by the Licensor, they can become permanent if it consists of erecting an improvement on the land and the Licensee incurs an expense in reliance upon the express License. The Circuit Court found that the lot owners’ claims for “irrevocable license” and equitable easement” could proceed, because the HOA allegedly acquiesced in the lot owners’ requests to extend the fences to their current location. Because they described facts in their pleadings that if proven would establish an Irrevocable License, the equitable easement claim was allowed to proceed as well, because Irrevocable Licenses can be vindicated as easements.
As Sully Station and Basham illustrate, the License to Land is a flexible doctrine, useful for interpreting governing documents or the implications of parties’ actions in ways to settle property rights. In every dispute, the parties ought to consider whether or not the disputed use or alleged encroachment could be deemed a “license” by the judiciary, and if so, how that could dictate the case’s outcome. Ordinarily, it take 15 years for a property owner to establish ownership of neighboring land by adverse possession or 20 years for a prescriptive easement. Owners with disputes about the exclusive use or enclosure of land by another ought to consult with qualified legal counsel to determine whether the doctrine of irrevocable license may provide another means to make the use permanent.
Sully Station II Community Ass’n, 259 Va. 282 (2000)(Carrico, C.J.)
Maplefield HOA v. Basham, 34 Va. Cir. 43 (Fairfax 1994)(Fortkort, J.)
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February 6, 2020
Proposed Virginia Legislation Would Empower Developers to Oppress Rights of Unit Owners in Sale of Terminated Condominium Developments
For many years, I have observed how state statutes enable condominium boards or developers to oppress the rights of unit owners in the termination and sale of condominium developments. I have work experience as an attorney representing unit owners or tenants in such cases. In 2019 I published a case study in a state bar journal relating to a case that is now the focus of efforts by the 2020 General Assembly to rewrite the Condominium Act through House Bill No. 1548. The 1993 amendments to the Virginia Condominium Act made it too easy for boards to sell all the units and common areas of the development to a real estate company for redevelopment purposes, without the consent of all unit owners, and giving unit owners a diminished, unfair share of the proceeds of the sale. My hope was that the Condominium Act would be amended to remove or reform those 1993 amendments. Unfortunately, 2020 House Bill 1548 would make it even easier for the interests of unit owners to be oppressed in condominium termination sales by removing common law protections. This blog post voices my opposition to this proposed bill. This blog post is not as polished of a writing project as I would prefer, because I’ve put it out quickly in the interest of quickly explaining my opposition to the bill.
Existing Condominium Law. Condominiums are a form of common ownership where the owner owns a “unit” outright, and all of the unit owners own the common areas as tenants in common. The Condominium Association, acting by the Board of Directors, has the exclusive power to operate the common areas for the benefit of the unit owners. The respective rights of the unit owners and the association are defined by the declaration and bylaws recorded by the original developer on the entire project, with any amendments. The courts treat the declaration and bylaws as the “contract” between the unit owners and the association. Like any other real estate “contract” or “tenant-in-common” ownership, the common ownership arrangement can come to an end through termination. When condominiums were a new invention, judges and lawyers understood that because the common areas were owned by the unit owners as tenants in common, the statutes pertaining to partition of real property would apply to issues of termination and sale, along with whatever applicable provisions there are in the Condominium Act and the Declaration. Directors, lawyers, developers, lenders and unit owners involved in the termination of condominium declarations and the sale of the property discovered that the partition statutes did not make it easy for the board, prospective buyer, or a majority of the unit owners to cleanly sell the property and distribute the proceeds. This is because absent a guiding provision in the declaration, it is necessary to litigate the partition action in the court system if 100% agreement cannot be made among the tenants in common. The 1993 amendments to the Condominium Act made it easier for the requisite super-majority of unit owner interests to make a Termination Agreement allowing sale of the entire property and distribution of the proceeds to the unit owners. The reasoning being that a few holdouts should not be able to block the sale of a property that was no longer useable or could be sold for a good price. However, when condominium terminations are made, often the “majority” is not a consensus of individual unit owners, but a commercial interest that has purchased 51%-67% of the units and is in the position of controlling or influencing the seller while also being the buyer. When one party is the buyer and controls to some degree the seller, they can control the purchase price, and thus the proceeds that go to each unit owner according to their percent interest.
Virginia House Bill 1548 does nothing to remedy the problems that exist under the current system. In fact, it makes oppressive tactics faster and easier to conduct. The following identifies several problems with the proposed amendments to Va. Code 55.1-1936:
Erosion of Protections in Recording Acts. Ordinarily a purchaser of property takes the land subject to all defects and encumbrances known to her or reflected in the publicly recorded land records. One of the effects of the land recording system is that it encourages parties to record land instruments to protect their rights by putting potential purchasers or lenders on notice of an encumbrance. A Condominium Termination Agreement is an encumbrance because it evidences the terms by which the declaration is being terminated and how the entire property is going to be sold. This is exactly the kind of information that a prospective purchaser would want to know before buying a condominium unit or accepting the unit as security for a loan. Under present law, there is no reason why a termination agreement would bind a purchaser of a unit unless the agreement was recorded prior to the conveyance of the unit or the seller told them. The Proposed 2020 amendment would do away with this protection, by allowing the proponents of the termination and sale to get the requisite signatures on the Termination Agreement, place the instrument in a desk drawer for recordation at a convenient time, but any purchaser would nonetheless take title subject to that termination agreement. See HB 1548, section C. Allowing “pocket” terminations would create ripe opportunity for abuse by bulk-buyers of condo units who want to keep the remaining unit owners in the dark or see what happens in a rezoning activity. The proposed amendment attempts to provide a replacement safeguard by requiring a copy of the termination agreement to be included in the resale disclosure packet. However, the statutes in Virginia requiring resale disclosures are woefully inadequate. The terms of those statutes give buyers barely any time to evaluate the sufficiency of the disclosures. The remedy for a deficient disclosure packet is to void the sale, not void the omitted instrument from affecting the rights of the purchaser. Also, the persons preparing the packet would not necessarily know about the existence of the termination agreement unless the makers of the agreement told the board or the manager.
Termination Agreement Can Redefine Unit Owners Rights. According to the proposed amendments to section I, new subsection 1, “Expect as provided in subsection 3, the respective interests of the unit owners shall be as set forth in the termination agreement.” This substantially inflates the powers of the supermajority voting interest promoting the termination sale. Ordinarily, the interests of condominium unit owners are defined by the declaration, condominium survey plat, bylaws and other instruments that define what rights are included in the condominium unit. This proposed amendment could allow the majority making the termination agreement to redefine the interests of the unit owners without their consent. The Bill proposes to amend Section G from reading,
If the property that constitutes the condominium is not sold following termination, title to the common elements and . . . title to all the property in the condominium shall vest in the unit owners, upon termination, as tenants in common in proportion to the unit owners’ respective interests.
The bill would change this language to,
If the property that constitutes the condominium is not sold or otherwise disposed of following termination, title to all the property in the condominium shall vest in the unit owners, upon termination, as tenants in common in proportion to the respective share of the proceeds of sale paid to each unit owner.
So, this proposal would allow the supermajority voting block that approved the termination to, at their discretion, redefine the unit owners’ respective take or share in the context of a subsequent sale. This portion of the amendment may run afoul of the Constitution of Virginia, because the respective rights of the unit owners of existing condominiums are already defined by the Condominium Act and the common law of Virginia, and the legislature can’t pass laws that redistribute rights derived from preexisting contracts, declarations or deeds. With this amendment, the person or groups that make termination agreement would try to use this language to deprive other unit owners of rights by redefining the share of the proceeds. This is not a “mini-democracy.” It’s a tyranny of a super-majority of voting interests.
Further Dilution of the Appraisal rights of Unit Owners. According to the law currently in effect, the Board of Directors is supposed to hire independent appraisers who appraise each unit and use these appraisals to calculate each unit owner’s percentage interest in the net proceeds of the sale. Since the individual or group that has the requisite super-majority will undoubtedly place directors friendly to their cause on the Board, and because of the friendly relationship (or identity of persons) between the buyer and this voting bloc, the seller can greatly influence or control the process of appraising the units, or ignore the appraisal requirements to make the process faster and cheaper. The appraisal requirements in the current statute seem to be there to protect the interests of unit owners who spent considerable sums maintaining or improving their units, so that they would not be treated the same way as persons who neglected maintenance. The proposed bill makes it easy for the proponents of a termination to dispense of the appraisals by allowing the termination to require unit owners to demand appraisals within 30-days’ notice. If the appraisals come out 10% or more higher for the unit owner than the share the unit owner would receive according to the agreement, then the appraisals are used for valuation. If the appraisals come out 10% lower, then the dissenting unit owner’s share of the proceeds is reduced by the cost of the appraisals. This proposed system for challenging the appraisals does nothing to solve the problem of the buyer’s influence over the board that appoints the appraisers. This proposed change would bless the board to depress the share of the dissenting owner by 10%, even if the appraisals showed that the valuation method stated in the termination agreement undervalued a unit owners’ interest in the proceeds of the sale.
Leases and Mortgages. Section (I)(5) adds a new section, “Unless the termination agreement provides otherwise, each unit shall satisfy and cause the release of any mortgage, deed of trust, lease or other lien or encumbrances on his unit at the time required by the termination agreement.” Under the current Condominium Act, the leases and liens convey with the land if sold pursuant to a termination agreement, unless there is some limitation in the declaration that the tenant or lender takes subject to. The Condominium Act does not presently require unit owners to clear liens in the event of termination. Condominium units can be valuable as rental units, whether they are commercial or residential. Commercial leases can have terms that span many years and may involve rights of first refusal for purchase. In the commercial context, unit owners or their tenants frequently improve the interiors of the units at great expense to make them usable as a medical office or restaurant. The effect of this provision would be to devalue the use of condominium units as rental properties because the protections of the tenant and landlords’ leasing rights would be subject to this new provision. Many commercial tenants may refuse to willingly lease a unit where the landlord requires them to have the lease terminated by operation of a termination process outside of the landlord’s control. Also, its common for condominium unit owners to use their property as collateral for loans. Condominium terminations often occur when the economy is changing. In the event of a recession, many unit owners may be underwater on their loans. The effect of Section (I)(5) is to circumscribe condominium unit owners’ opportunities to leverage their investments through loans and leasing necessary to unlock value of the property. The condominium unit owner’s deed becomes less of an individual property right and more of a share in a communal resource.
There are other problems with the bill to which there is inadequate time to explore on short notice. Owners, lenders and tenants of condominium units in Virginia deserve better than to have ill-considered legislation impair their rights and make it easier for others to oppress their property rights through termination sales. For many Virginians, their condominium unit is their greatest investment and where they live or earn a living. Condominium ownership is promoted as a carefree means of living the American dream. The General Assembly has the opportunity to reduce the risk of nightmare for many of their constituents by voting against HB No. 1548.
February 7, 2020 Update: Today the House of Delegates approved HB No. 1548 by a 81-18 margin. To follow the bill status, go to www.lis.virginia.gov
For Further Reading:
Current Version of Va. Code § 55.1-1937 in effect
2020 House Substitute Bill No. 1548 Reported from General Laws Committee, February 4, 2020
My Fall 2020 Fee Simple Journal Article about Owners Rights in Condominium Termination
photo credit: Coastal Elite Construction in Halifax, Nova Scotia – September 2018 via photopin (license)(Doesn’t Depict Anything Mentioned in Post)