December 23, 2020
The Negativity Effect in Real Estate Decision-making
Kids, we are counting down the final days to Christmas 2020. Many of my readers are familiar with the 1957 Dr. Seuss book, “The Grinch Who Stole Christmas.” In honor of the Grinch and the Whos, I would like to share a few insights from a 2019 book I recently finished reading, “The Power of Bad: How the Negativity Effect Rules Us and How We Can Rule It” by John Tierney and Roy F. Baumeister. “The Power of Bad” is not a book about property matters per se. That said, I think that the principles of the negativity effect animate much of what is going on in real estate. The authors define the negativity effect as, “the universal tendency for negative events and emotions to affect us more strongly than positive ones.” There are many examples of this. If you visit a restaurant, and the experience is overall positive, but there is one discrete problem, then the customer walks away remembering the negative thing. When people read hotel reviews or other online ratings, they look to the bad reviews and tend to give more weight to descriptive negative reviews even if there are other positive ones for a business. On a larger scale, Anti-Terrorism is a good example. After one tragic, evil event the government makes all sorts of decisions, some warranted, but many unnecessary and harmful. In fact, the threat of terrorism is less of a risk than being struck by lightning. Empirical studies show that it often takes 3-4 good experiences to cancel out the effect of one bad experience on someone’s perceptions of a person, organization, or place. The negativity effect makes people susceptible to manipulation, particularly by media organizations chasing viewership through eye-catching news of the latest problems, a politician or candidate developing a voter base through fear, or merchants selling some product. Of course, there are bad things that people need to know to protect themselves against. The psychological power of bad experiences and associations distorts decision-making by warping perceptions through exaggerating a potential risk or threat.
The book does not go into the topic of real estate, but I can see how policymakers and property owners are particularly susceptible to negativity. Owners are afraid that their homes will become less useful, attractive, or valuable because of something that happens. Threats to one’s home affect people in deeply personal ways. Many fear an external threat to their enjoyment of their home, be it criminals taking over the neighborhood, increased traffic from new development, or a home-based business popping up next door. It is commonplace for people to buy homes subject to restrictive covenants that give power to HOA directors to impose fines for architectural “violations.” In effect, many paying extra each month to have someone tell them what to do with their own property. Why does this happen? The negativity effect convinces many (but not all) landowners that the threat of other people ruining the neighborhood by breaking the architectural restrictions outweighs the risk that the HOA may overstep its authority. However, the architectural violations that HOAs often find with owners’ properties rarely pose any substantial threat to the value or use of neighboring real estate.
The Power of Bad book provides an example of how workplace disciplinary systems can illustrate effects of the negativity bias. This example reminded me of the systems of fines used in many HOA communities. The food company, Frito-Lay discovered that workers in a Texas factory were writing obscene messages on potato chips before bagging them. During investigation, corporate discovered that the factory used a new “progressive discipline” system to deal with tardiness and safety violations. After a first “violation,” the worker’s file was noted and she was given a verbal warning. If there was another violation, the worker would be brought into an office to acknowledge receipt of a written violation notice. At that moment, the worker would feel like they were being forced to admit something without being given a chance to defend themselves. The employee was given another black mark in the file whether they sign the violation notice or not. If there was a third violation, the employee would be given an automatic three-day suspension without pay. The worker would return to the plant even angrier. The subsequent violation notice resulted in termination. Tierney and Baumeister saw this toxic disciplinary system as illustrating the “The floggings will continue until morale improves” management approach. Frito-Lay discovered that the managers hated the disciplinary system as well, because it eroded professional relationships and made them unpopular. Instead of making the disciplinary process more equitable by ratcheting-up punishments evenly, it caused the factory to become more arbitrary. The managers avoided handing out violations until they just could not stand a worker anymore, after which they tried to railroad that problem employee through the stages of the disciplinary system so they would be terminated. Frito-Lay ended up scrapping this progressive disciplinary system in favor of a different design. This “progressive” disciplinary system reminds me of the dysfunctional covenant enforcement and dues collection systems many homeowners or condominium associations use to implement board policies. When owners receive rule violation notices, they frequently observe that the rule is not being enforced in the community, and their property does not really break the rules, but others are. Sometimes the notice states that a hearing was held without the owners knowing that their case was even before the board. Often, the board does not even have the authority to adopt the rule quoted in the violation letter. When owners receive fines for things that do not actually violate any legal obligation they have to the HOA, they lose motivation to maintain their property to keep up the neighborhood. Vindictive and incompetently managed rule violation systems can actually diminish the natural impulses that people often have to work in their yards to keep pace with their neighbors. Some people may become more worried about violation notices than actually yardwork. Sometimes bogus violation notices, fines, and late fees are focused on owners who are particularly unpopular with the board members or managers. Once associations record liens or institute foreclosures, the owner can feel “trapped” in a situation where they have few options other than paying a large monetary demand that includes items the collector is not entitled to, lying low and hoping that a suit or lien does not come, or retaining an attorney to solve the problem. These bad experiences can actually get away with these improper things, leaving them with few outlets other than posting attacks against the board or managers on social media (the contemporary version of scribbling on potato chips). Compounding things, there are people on the internet highlighting all of the “bad” about HOAs, to enhance the public’s attention to these issues, in the hopes that HOAs will become abolished and punish the malefactors (certain directors, managers, attorneys, etc.). This can detract from more useful discussions about how owners can, through education or working with an attorney, develop strategies for solving their own problems with HOAs. Sometimes news articles or social media posts, taken in the aggregate, actually re-enforce the false belief that it is futile to resist HOA bad behavior. But this is not true. It is common for landowners to successfully avoid, prevent, solve, or escape legal difficulties involving their neighbors or community associations. This happens all the time, but the news reports and social media buzz focuses on the hopeless cases because they draw more attention. If an owner has a problem with a homeowner’s association, they should not stop their research at doomsayer articles about other communities where a problem spiraled into a disaster. Those articles may be true, but they are not going to identify solutions that someone can use in their own situation. If an owner already purchased the house in a community association, they cannot wait for their HOA to be abolished in the future, because that is not going to happen. Often, the best thing is for the owner, a board member, neighbor, attorney, or other advisor to try to help the owner to resolve the problem before it becomes a larger financial burden, cause additional property damage, further limit the use of property, or mushroom into a larger interpersonal conflict. In what I have seen, landowners who cultivate positive vibes within themselves and their relationships are the ones that have the resiliency necessary to overcome the injustices they suffer. The Whos of Whoville were thankful and undeterred in the face of the Grinch’s scheming. My favorite chapters in “The Power of Bad” are the ones that talk about how positivity can overcome negativity and the negativity bias can be mitigated. In real life, one cannot count on the Grinch to have a change of heart when you need him to. In real estate matters, quite often overcoming the negativity bias involves refocusing away from vindication and shame to identifying tools (facts, resources, people, laws, etc.) that can be harnessed to solve the problem, which sometimes requires going before a judge, but often can be done in the context of settlement. Sometimes re-framing bad HOA covenants, rules or statutes as the byproduct of the negativity effect can convince decision-makers to interpret them narrowly and decline to enforce them in a particular instance. In HOA matters, often the answer to the problem can be found in a recorded declaration or other instrument that applies to the facts but has been ignored because people commonly think of the HOA as the organization you get rather than what is or is not expressed in the rules.
Note that the photo used for the blog post is just a stock image and does not depict anything referenced in my article.
December 18, 2020
Presenting to HOA Boards and Committees in Remote Hearings
Following enactment of 2020 General Assembly legislation, most HOAs and condominiums in Virginia carry on business through “remote” videoconferencing technology such as Zoom, WebEx and Microsoft Teams. Because of the Coronavirus, Americans of all ages are now more familiar with this technology. In the HOA context, boards and committees use remote hearings to decide matters that significantly impact the lives and property of many people. This presents challenges owners do not ordinarily face when using zoom for other reasons, such as religious services, educational programs, or social gatherings. Zoom allows owners to participate in HOA meetings and hearings that is in some ways more convenient than before. Travel time is unnecessary. The owner may be able to avoid arranging for childcare. On the flipside, the owner will not be able to present their arguments or requests by simply showing up at a meeting location in person with a folder of materials. In this blog post, I would like to identify certain issues that an owner must consider when a HOA schedules an architectural application or notice of violation for decision at a remote hearing.
The Technology Itself. Before the hearing, the owner should become familiar with the software being used. One tech-friendly judge in Fairfax recommends that attorneys practice using WebEx with a friend or family member to make sure they can access a meeting through both the video and audio features. Many people find it easier to use a headset or their cell phone because such devices often have better speakers and microphones than laptops and tablets. WebEx, Zoom, Microsoft Teams and Google Meet are not the same.
The Notice of the Hearing. Procedural “Due process of law” consists of (1) the right to be heard by the judge or official, (2) decision by a neutral tribunal, and (3) adequate advance notice of that hearing and the subject matter at issue. HOAs and condominiums usually give affected owners notice of scheduled meetings and how to access the meeting. However, sometimes an affected owner is not given adequate notice for one reason or another. If an owner submits an application or complaint to the HOA, they ought to monitor their emails and the information available online to see if anything is happening. Sometimes an affected owner can identify themselves as such to the HOA and be notified of hearings before they occur.
Recording the Videoconference or Downloading a Recording. With limited exceptions, HOA boards and committees must conduct business, deliberate, and make decisions in “open” meetings, and that rule also applies when they use remote technology. In Virginia and some other states, owners have a right to record the meeting. Some associations record the meetings themselves and post the videos online after the meeting. However, the owner often cannot rely upon the HOA to make a recording and then make that available. There are several reasons why an owner would want to preserve such information. Sometimes neighbors or board members will say something in a meeting and then later deny that it was said or change their position. The record can lock them in. Also, if the HOA decides that the owner has legal grounds to challenge, whether on appeal within the HOA or in a court of law, the record of what happened in the HOA meeting is valuable to explain what happened and why.
How to Present One’s Position. In these hearings, its common for the “chair” to give owners a certain number of minutes to present their request, opposition or position to the board or committee. Usually, the directors or committee members read the written submissions beforehand, but not always. The owner may be required or well-advised to put things together in a written submission. In the case of architectural approvals, the declaration or guidelines will usually set forth specific information that must be included in the application in order for the committee to hear and approve it. Sometimes HOAs approve applications that are facially incomplete or will impose application requirements not found in the governing instruments. In architectural control matters, the burden is on the applicant to explain what they want and to show why this is proper. An owner supporting or opposing an application, complaint or violation notice ought to be aware of what the guidelines require or forbid. An owner or her attorney can put more information into a written submission than can ordinarily be stated in a limited amount of time. Its common for the written materials to be presented to the viewers. For this reason, visual aids such as photographs, drawings, surveys, and diagrams may present better than an email in 10-point type. Many attorneys organize their presentation into a PowerPoint or PDF slide presentation that they submit to the HOA for review beforehand. Remember that these meetings typically occur in the evening, when directors and committee members are already thinking about dinner, anxious to call it a day or feel fatigued. The owner ought not to overwhelm the HOA with voluminous, repetitive written or emailed submissions.
During the Meeting Itself. The members of the board and committee know each other and the HOA’s management staff. However, the owner or attorney may not be familiar with who is on the board or committee and who the chair or manager is. The board or committee members may not introduce themselves, leaving participants to guess who is a decisionmaker or not. An owner can find out who is on the board of committee before the meeting starts. One wants to know whether someone speaking is on the board or not. One ought to introduce oneself when talking and to again state your name if you speak again, so people know who they are. So, I would start by saying “John Cowherd, attorney for Homer Simpson, neighbor to the applicant Ned Flanders.” If I spoke again, I might say “John Cowherd” again but not repeat the details of my role again each time. Once one is allowed to speak, sometimes they are interrupted by another participant or are forcibly “muted” by a chair or staff person in mid-sentence. This is why I like written submissions. Sometimes boards will use “executive session” to confer with one another and their attorney without the other parties participating. Another bad practice is to tell participants that the portion of the hearing for their matter is concluded, and then after certain owners leave the electronic meeting, they will discuss it again later.
The use of remote videoconference technology has real advantages to lot owners, because they can participate in HOA proceedings from the convenience of their own homes. If used properly, Zoom can increase owner participation and the overall effectiveness of governance. If the hearing is conducted online, the owner can have any qualified, licensed attorney represent them, regardless as to where the attorney lives in the country. If used properly, videoconferences can increase access to justice because its easier to find an attorney to dial in to a remote meeting than show up at a specific place on a weeknight. That said, many HOAs do not like dealing with attorneys. Remote technology can make it easier for the hearing to be recorded. Despite these advantages, technology provides additional practical tools for HOAs to evade open meeting requirements, “mute” objectors, and disregard governing instruments. What will happen to HOA meetings after the Coronavirus Epidemic is over? Some associations may revert to entirely “in-person” meetings and hearings. Others may continue with remove videoconferencing, or adopt a “hybrid” approach, where owners have the option of attending in person or accessing remotely. Overall, I expect videoconference technology to be more widely used for a variety of purposes after the epidemic than before. After everyone can get the vaccine and masks are set aside, we will be dealing with a variety of legal repercussions of the epidemic shutdowns for years to come.
Note that the photo associated with this blog post is a stock image that does not depict anything referenced in the article.
December 4, 2020
The Voluntary Payment Doctrine and HOA Liens
Homeowners disputes with HOAs and condominium associations frequently revolve around disputed demands for payments, large and small. Homeowners often wonder if they have to pay their monthly assessments if their HOA failed to fulfill an obligation. Generally speaking, if the assessments were legitimately determined by the HOA’s board of directors pursuant to its recorded instruments, then lot owners have to pay them. The assessments are made to fund the upkeep of commonly owned property. Ordinarily, the obligation to pay legitimately imposed assessments and the HOA’s obligations to its members are “independent covenants.” The lot owners usual remedy is to compel the HOA’s performance, not to withhold dues. However, under certain circumstances the owner must not voluntarily make a payment in order to preserve a legal challenge to the payment demand. This is because when an owner is in full knowledge of all of the facts, and makes the payment anyway, then it is as though he waived the legal challenge to the payment. Various courts recognize that application of the Voluntary Payment Doctrine can be harsh. Some consumer protection advocates call for its abolition. But as of 2020, it remains the law in Virginia. This rule has a number of important caveats and exceptions. The doctrine is particularly important in the context of the financial realities of community association life.
A 2020 court opinion from Missouri illustrates one way the Voluntary Payment Doctrine may be applied. Michael and Wendy Halliday owned a unit in the Malibu Shores Condominium, located on the Lake of the Ozarks. The Hallidays became delinquent on their assessments. In March 2016, the condominium obtained a $6,156.46 court judgment against them and lien against the condo unit. In May 2016, Randall Koeller and Jeff Haskenhoff purchased the unit at the sheriff’s sale. At that time, Jeff and Randall’s wife Angela were directors on the condominium board. Yes, dear reader, this is shady! It is not uncommon for people with family or business connections with an association board to purchase foreclosures, especially in a waterfront development where many are rentals or second homes. However, such connections may not insulate them from the risks and surprises that can come from investing in foreclosures. In June 2016, Randal and Jeff asked what the amount was of any lien. They were told that it increased to $8,154.00 because of additional months, finance charges, late fees, and attorneys’ fees. In fact, Jeff (who was a board member) assured Randall that this amount was correct. In July 2016, Randall and Jeff signed separate checks, each paying half of the updated demand. Later Randall and Jeff sold the unit to a third party at a profit.
But the story does not end there. Later, Randall and Jeff sued the condominium for allegedly misrepresenting the value and validity of the lien. The trial court found in favor of the association, finding insufficient evidence of misrepresentation, and ruling that by paying the sum, the two men could not later challenge its legality.
The Missouri Court of Appeals focused on the trial court’s application of the Voluntary Payment Doctrine. The Missouri rule is that a person who voluntarily pays money with full knowledge of all of the facts in the case, and in the absence of fraud and duress, cannot recover it back, even though the payment is made without sufficient consideration and under protest. The Missouri Court of Appeals explained the reason behind the rule.
a person who, induced thereto solely by a mistake of law, has conferred a benefit upon another to satisfy in whole or in part an honest claim of the other to the performance given, is not entitled to restitution. The underlying reason for those requirements is that it would be inequitable to give such a person the privilege of selecting his own time and convenience for litigation. . . .
In other words, when all the facts are known to the payor, the time for objecting is when the demand is made, not after the payment is made. In this case, Angela (the widow of Randall) and Jeff both were fully aware of the facts because they were also board members of the same association. This circumstance deprived them of the ability to claim that they were unaware of the facts relevant to their decision to make the payment. For this reason, the court deemed this to be purely a mistake of law, not of fact. In other cases where the association may claim voluntary payment, the homeowner may not be imputed full knowledge. In fact, many associations keep their owners in the dark about many decisions, including those that may affect specific lot owners in unique ways. This illustrates why directors may have legal problems when they do transactions with the association even though the deal may not be forbidden by the covenants or statutes. A purchaser who was less in the know may have been able to challenge the amount of the lien.
The Malibu Shores case concerned unique facts where the payor was imputed full knowledge of the facts because of their unique position as board members, transforming it into a purely legal question. In other cases, the question turns on whether the payment was voluntary or involuntary. For example, in a recent Supreme Court of Virginia case, Rene Williams obtained a money judgment against Kerry Ann Sheehy and recorded it in the land records where Sheehy owned property. After initiating an appeal, Sheehy sold the property, and Williams obtained a payoff check out of the real estate closing. In Virginia, a defendant forfeits her appeal if she voluntarily pays off a judgment. The Supreme Court of Virginia contrasted the voluntariness of a payoff of a lien in a real state closing with payments made by the defendant during post-judgment execution proceedings such as garnishments, levies, or judicial sales. Such post-judgment collection proceedings would constitute coerced payments that do not fit into the definition of a voluntary payment. The Supreme Court of Virginia noted that there may be coercion in the foreclosure context. The Supreme Court remanded the case for the trial court to determine whether the transactional payoff was in fact voluntary.
In D.R. Horton, Inc. v. Board of Supervisors of Warrant County, the Supreme Court of Virginia observed that for purposes of the Voluntary Payment Doctrine, it doesn’t matter if the payor submits a written protest of the legality of the demand at the time payment is made for purposes of determining voluntariness. However, in D.R. Horton, the Court recognized three exceptions to the Voluntary Payment Doctrine: (1) in the event of “an immediate and urgent necessity,” (2) the payment is made to release his person or property from detention and (3) to prevent an immediate seizure of his person or property. As seen by these cases, what constitutes a necessity, detention or seizure is akin to duress or coercion, and not just an inconvenience. Also, the Voluntary Payment Doctrine does not apply where the plaintiff is not suing for return of erroneously sums paid.
The state legislatures granted HOAs and condominium associations substantial legal powers by allowing recordation of a lien without first initiating a civil claim and reducing it to a judgment at trial. In a sense, the legislation blesses, through legal recognition, attempts to coerce owners to pay certain sums to their associations, be they assessments, fines, late fees, attorneys fees, interest. It is common for associations to overstep what they are entitled to charge. Sometimes representatives of an association do not want the owner to climb out of default, for various reasons. For many owners, payment of the lien is seen as less troublesome and more certain than mounting a legal challenge or defense. However, owners do not have to surrender to extortionary or overbearing tactics. How is one to know whether payment would be necessary to prevent further bona fide collections action or if it would constitute a waiver of legitimate claims? Often it may not be clear to the landowner whether making the payment or refusing to pay is the right thing to do. The answer may require review of the governing instruments in light of state law. There is a “big picture” to the HOA-owner relationship that frames the issues raised by a specific demand for payment.
Referenced Legal Authority.
Koeller, et al. v. Malibu Shores Condo. Ass’n, 602 S.W.3d 283 (Mo. Ct. App. May 22, 2020)
Sheehy v. Williams, Nos. 190802 & 191089 (Va. Supreme Ct. Nov. 25, 2020)
D.R. Horton, Inc. v. Warren Co. Bd. of Supervisors, 285 Va. 467 (2013)
NOTE: The photo associated with this blog post does not illustrate anyone specifically referenced in the text of the article.