December 4, 2022
Proxies are the currency of power in HOA and condominium governance. Homeowners first discover such forms enclosed with meeting notices. Proxies allow the member to cast an instructed vote on an issue or chose among candidates. Proxies can also be used to delegate one’s vote to another person participating in the meeting. Sometimes proxies are used merely to establish a quorum. Virginia statutory law imposes rules for proxies. Most HOA or condominium instruments include additional rules. Owners whose associations are incorporated can also enter into a “voting agreement” with other mutually interested members to achieve common objectives. Incumbent leaders like to use proxies as means of maintaining continuity. The board enjoys an advantage in soliciting proxies because the management company works for them. Members who may not agree with the board majority can use proxies in elections or other business. Allied homeowners can explore achieving their objectives through elections and governance as an alternative to litigation. How do activists use proxies to change their community associations for the better? The validity of proxies can make or break an important vote. The board majority and opposition groups may compete for proxies amongst the same pool of undecided members. Understanding proxies is essential to “community organizing” in community associations. Proxies may be used in conjunction with efforts to override board action through a meeting of the members.
A proxy is not to be confused with a mail in ballot, although they may function in a similar way. A proxy is an instrument that designates a particular person, be it another member, a director or some other person the “representative” of the homeowner for purposes of an item of business or meeting. A “general” proxy allows the holder to do all the member could do at the meeting. General proxies are not always wise. The interests of the owner and the delegate are not necessarily aligned. With an instructed proxy, the designee is told how to vote. A proxy is not the same thing as an opinion survey. The latter solicits feedback and does not bind the decisionmakers. A proxyholder is an agent of the homeowner granting the proxy. Like any agent, the proxyholder is a fiduciary, for purposes of the scope of the agency granted.
The Property Owners Association Act, Nonstock Corporation Act, and Condominium Act allow for use of proxies in community association matters, unless the instruments for that community provide otherwise. Adult children who take care of their elderly parents may be familiar with the Uniform Power of Attorney Act. Unless the community’s instruments provide otherwise, homeowners are not required to sign a formal power of attorney instrument to designate a proxy. A proxy (or other delegation to exercise voting rights) ordinarily does not need to comply with the UPOAA. That said, POAs are one way of delegating voting rights.
Use of proxies is more regimented in condos than in HOAs. The Virginia Condominium Act states that,
The votes appertaining to any unit may be cast pursuant to a proxy duly executed by or on behalf of the unit owner, or, in cases where the unit owner is more than one person, by or on behalf of all such unit owners. No such proxy shall be revocable except by actual notice to the person presiding over the meeting, by the unit owner or by any of such persons, that it be revoked. Except to the extent otherwise provided in the condominium instruments, any proxy is void if it is not dated, or if it purports to be revocable without the required notice. Any proxy shall be void if not signed by or on behalf of the unit owner. If the unit owner is more than one person, any such unit owner may object to the proxy at or prior to the meeting, whereupon the proxy shall be deemed revoked. Any proxy shall terminate after the first meeting held on or after the date of that proxy or any recess or adjournment of that meeting. The proxy shall include a brief explanation of the effect of leaving the proxy uninstructed. Va. Code § 55.1-1953(D).
The issue of revocability is important. Unit owners sometimes submit proxies and later change their minds before a meeting. In some associations, all owners are encouraged to submit a proxy of some kind, even if they plan on attending the meeting. This practice helps to ensure that business gets done.
Attempts to “pool” voting authority in a private entity to certain members acting as representatives of a “voting block” can be confusing. In an October 14, 2022 letter opinion, Fairfax Judge David Oblon considered whether members of an LLC who granted their voting rights to another member through an agreement, which is silent as to revocability, can unilaterally revoke their assignments. Voting agreements are also called “voting trusts” or “pooling agreements.” With stock corporations, a proxy is irrevocable only if coupled with an interest, made part of a voting agreement, or given as security. Judge Oblon discussed the legal principle that a “naked agency” is freely revocable, but if the agency is “coupled with an interest,” it is irrevocable. This distinguishes situations where the agent acts for the principal from those where someone gets the power to act as the principal. Judge Oblon distinguished between the shareholder agreement with a proxy. A proxy votes for someone. A voting agreement vested the assignee with the assignors’ voting interests.
The authority to vote in an organization is a feature of the membership interest. Whether a membership interest is freely assignable depends upon what kind of entity it is and the terms of its governing instruments (such as covenants or bylaws). LLC statutes allow voting interests to be severed from economic rights in the company. The nonstock corporation act allows two or more members to make an enforceable, written (or electronic) agreement regarding the manner in which they will vote. By contrast, membership interest in an unincorporated association is ordinarily not transferrable without the consent of the association itself (or as provided in its governing instruments). In a community association, be it incorporated or not, membership in the association is appurtenant to title to the home.
HOA or condominium association meetings in Virginia are governed by open meeting statutes that generally require all business of the association be conducted in properly noticed meetings that members can attend, record and speak at. When communities handle elections by mail in ballot or proxies, the actual election meeting may be sparsely attended, but it is still a meeting. If a vote is contested the homeowners ought to ask to review the votes and proxies cast to determine if there are any irregularity.
The use or exclusion of proxies plays a powerful role in the conduct of community association member meetings. It can be difficult to navigate a proxy contest without the assistance of someone familiar with the unique legal and practical features of HOA voting. Activists use proxies to change their community associations as a feature of an overall strategy of engagement and teamwork. In incorporated community associations, the ability to make a voting agreement allows groups of homeowners to pool their voting power in ways that is different from a proxy. The voting agreement is an underutilized means of achieving solidarity among similarly interested homeowners that is less cumbersome that soliciting proxies every time a vote is scheduled to be taken. A voting agreement is something that can be made as an electronic document.
Selected Legal Authority:
Roscigno v. Deville, 28 Va. Cir. 96 (Fairfax Co. 1992)
7 Corpus Juris Secundum, Associations § 40
Wrightington, Law of Unincorporated Assn’s and Business Trusts, § 55
November 23, 2022
On June 24, 2021, high-rise condominium Champlain Towers South in the Surfside suburb of Miami, Florida partially collapsed, killing 98 people and injuring eleven others. One factor identified by investigators was the failure of a section of reinforced concrete damaged by water infiltration. This was truly a horrific tragedy.
Following Surfside, condominium communities and state governments across the country gave added consideration to avoiding similar disasters elsewhere. Many condominiums did not wait for government to act first. The problem of aging, deteriorating buildings and inadequate reserves is nothing new. However, Surfside was a sea-change moment in the community association world. There are certainly lessons to learn from what happened on June 24, 2021. The question is what ought to be done. Most proposals would require unit owners to pay significantly higher assessments.
Virginia initiated a process to carefully identify what, if any, legislative reforms are warranted. In April 2022, the general assembly enacted legislation sponsored by Senator Scott Surovell. Senator Surovell’ s district encompasses portions of Virginia’s Washington, D.C. suburbs. Mr. Surovell is also a well-regarded trial attorney. Senate Bill 740 required the Department of Professional and Occupational Recreation to establish the Virginia Structural Integrity and Reserves Work Group to study:
- How common interest communities are initially developed to self-finance.
- Governing documents.
- Reserve study requirements and disclosure of the same to purchasers.
- Budget requirements.
- Board authority to budget reserves, spend money, make assessments and borrow.
- Liability of associations and boards.
- Building inspections by localities.
- Insurance coverage and inspections.
- Education of directors and members of communities.
- Judicial remedies, including those involving assessments or funding.
- Self-management and professional management.
The Virginia Structural Integrity and Reserves Work Group is supposed to report to the legislature by April 1, 2023. This work group was formed earlier this year. It is chaired by Lucia Anna “Pia” Trigiani, an Alexandria HOA attorney. The Work Group includes people who are knowledgeable about HOA matters. Many are involved in selling services to common interest communities. I am not a member of the Work Group, not affiliated with it and do not speak for it in any way. Information about the Virginia Structural Integrity and Reserves Work Group is publicly available through the DPOR’s website and “Townhall” email notifications. The activities of the Work Group are relatively low-profile, despite the fact that, according to trade industry data, over 2,000,000 Virginians live in approximately 9,000 community associations. The large packet of documentation accessible through DPOR does not give the reader a sense of what the Work Group ‘s views and recommendations might be.
The Work Group works in conjunction with DPOR, O.D.U.’s Dragas Center for Economic Analysis and Policy, G.M.U.’s Center for Regional Analysis, and Virginia Tech’s Center for Housing Research, and the Community Association Institute. CAI is a trade association of HOA managers, attorneys, directors, and vendors that lobbies congress and state legislators across the country to strengthen board powers.
Mr. Surovell observed that the risk that something like the Surfside tragedy might happen in Virginia is unknown, because of lack of public data. Surovell observed that associations are failing to raise dues to maintain reserves, there is a lack of transparency, localities are not involved in inspections, professional management is lacking, and there is “zero accountability for boards that fail to honor their fiduciary responsibilities to other property owners.” Senator Surovell calls for, (a) “enhanced insurance products,” (b) requiring directors to follow recommendations of reserve studies and inspections to enjoy legal immunity, (c) transparency regarding underfunded reserves, and (d) increased regulation of community managers.
I follow what the Virginia Structural Integrity and Reserves Work Group is doing because I advise individual HOA lot owners and condominium unit owners. Any reforms this Work Group may recommend will likely have an impact on owners. Anyone who owns a home in a HOA or condominium in Virginia ought to consider what the Work Group may recommend. In early December, an academic institute partnering with the Work Group will send out written surveys to all state-registered condominium and HOA boards across Virginia to solicit input from the public. I hope that any readers who has an opportunity to submit such a survey will take it seriously. I am not certain what weight or interpretation the Work Group will ascribe to any results. In February and March, 2023, the Work Group will determine what their focus and legislative recommendations will be. By the time a bill is introduced in the 2024 general assembly, it will be unlikely that the Virginia Structural Integrity and Reserves Work Group will go back to and rehash its work based on citizen input to the legislators. It’s possible that some members of the Work Group already have an idea of what reforms they will recommend.
On November 16, 2022, I attended their meeting in Arlington, Virginia as an observing member of the public. What is reported here ought not to be taken verbatim as the opinions of DPOR, the Work Group, any of its members, or myself. I’m trying to summarize the issues so that my readers can have a basic understanding of what is being deliberated.
The Work Group discussed use of reserve studies. Virginia condominiums are supposed to conduct reserve studies every five years. Reserve studies identify the remaining useful life of the components of the condominium and calculate an estimate to renovate or repair the component towards the end. Ideally, reserve studies are conducted by professionals. The board is supposed to use the reserve study in its budget process, so that a component of the annual assessment includes an appropriate amount to fund the reserves needed for major projects. Boards tend to succumb to pressure to keep assessments from increasing dramatically. In so doing, they ignore reserve studies or other recommendations that would require major increases. This approach underfunds reserves. Later when expensive deferred maintenance projects are overdue, there is insufficient funds. In such situations, the board is left to evaluate a variety of unpleasant alternatives, such as a major additional assessment (which many may be unable to afford), borrowing money, selling off a portion of the common areas, losing insurance, or termination of the condominium. To complicate matters, there are differently constructed communities and buildings that fall under the heading of “common interest communities.” This ranges from huge subdivisions of single-family homes to small condominiums with only two units, to little HOAs with only a short driveway to take care of, to high rise multifamily buildings. One challenge recognized by members of the Work Group is that given this wide variety, it’s difficult to adopt a one-size-fits-all legal reform. Any changes to require boards to take reserve studies seriously is going to lead to dramatic increase in assessments.
There was a presentation about Common Interest Community Insurance. This topic can be very technical, and I am not going to try to outline all of the issues here. There were discussions about whether insurance companies ought to use inspections to help associations identify maintenance issues that could result in future claims, and whether premium adjustments ought to be associated with such inspections. The Work Group discussed how many HOA directors are unaware of what insurance may be required or practically necessary. Some favor legislative changes to require boards to diligently conduct risk management assessments in the process of insurance renewals. Some governing instruments have detailed insurance requirements, which were put into the documents to address concerns by lenders, and not consumer demand. It would not surprise me if the Work Group were to recommend that the statutes require or strongly encourage purchase of more insurance. Robust insurance coverage is important, but like anything else, this will lead to higher assessments.
The Work Group discussed legislative action to make it easier for boards to use loans to finance capital renovation projects. The POAA and Condominium Act do not specifically authorize boards to borrow money. The statutes contemplate that project financing would come from assessment income. I would anticipate that the borrowing issue would be seriously considered by this Work Group as something that could be facilitated by statutory amendment.
The Virginia Structural Integrity and Reserves Work Group discussed condominium terminations. I previously wrote about condominium terminations, the last time that the General Assembly amended the laws. Condominiums consider termination for a variety of reasons. One reason is that the cost of renovating the condominium property is beyond what the unit owners want or are able to handle, and there is a developer who wants the land for redevelopment. Condominium unit owners are unaware of the possibility of future termination when they buy. Many condominium unit owners on fixed or limited incomes have few alternatives to own their own homes. Loss of a condominium unit with compensation of only a fraction of the investment cost can be a catastrophic loss for the owner. Unit owners are inadequately prepared for such a turn of events.
There was a discussion about provisions in the Condominium Act that pertain to additional assessments. If the board determines that the existing funds are inadequate to pay for necessary renovations, they can vote to impose an additional assessment on all of the unit owners, without waiting for the next annual budget. These additional assessments can be lump sum or installment payments. There was discussion about removing language from the condo statute that allows unit owners to call a special meeting to vote to reduce or rescind the additional assessment. Some people think that this recission option presents a moral hazard, whereby a majority of unit owners motivated by financial concerns can prevent essential renovations from being funded. According to this view, directors ought to be required to fulfill fiduciary duties to raise money through assessments and spend that money, and the unit owners at large should not interfere with the decisions being made about the who, what, when, where why and how much money of assessing and spending. Such a change will mean that the unit owners will have less say in such situations. A fundamental question is, “Who gets to participate in the decisions of what assessments are imposed and what projects are pursued? A board can dramatically raise assessments, even to the point of forcing out several owners, and identify a long list of projects, and nonetheless mismanage the whole thing, to the harm of the unit owners and the community’s future. A board can be ambitious while failing to be wise. If the balance of power shifts further away from the unit owners and onto a board increasingly constrained by statutory obligations, not only is it no longer much of a “mini-democracy,” its not going to be an environment where private property rights will be cherished. Condos become more like a speculative group of financial investments.
Even without any legislative reforms, community associations are already facing budget crises driven by inflation and aging buildings. I recently posted an article to this blog about the risks and challenges of using condominium units as retirement homes. The reforms being discussed may save some developments from a tragedy, and that is a good thing. However, whatever the Virginia Structural Integrity and Reserves Work Group proposes, it will most likely put strong upward pressure on community association budgets, make it more difficult for homeowners to assert certain kinds of challenges, facilitate aggressive collection mechanisms such as liens and foreclosures, and probably drive many communities into termination. These changes will push many people on reduced or limited incomes, particularly retired people and struggling families out of the communities due to financial hardship, replacing them with other owners, many of whom will be investors who will rent out the units, driving down owner occupancy and owner engagement with the board and committees.
Does this mean that all hope is lost, and that homeowners should give up on realizing their dreams of making a home in a community association their long-term future? No. Selling and moving, when a viable option, is often less uncertain than staying and having to spend large sums on assessments (or legal fees). But not always. Many adults’ despairs when they feel that they have little control over decisions made by people around them that impact them directly. Most people want a sense of control when it comes to their own home, in both the investment and daily living aspects.
If these communities function as social contracts of self-government, at the end of the day they will have to solve their own problems. Certainly, the state or local governments may be able to help. The physical characteristics of construction, governing instruments and people in each common interest community are unique, such that none of the 9,000 statewide are the same. I think that the Virginia Structural Integrity and Reserves Work Group understands that the same therapeutic regimen cannot be imposed on all of them. What is needed is a system of methods through which the leaders of approximately 9,000 can formulate customized plans to safeguard their properties in a way that considers both public safety, health and the economic shock effect of a large additional assessment. This is a policymaking process that everyone ought to participate in, on both a state and community level.
Disclaimer: The author of this blog post is NOT a member, affiliate or spokesman of the Structural Integrity and Reserves Work Group.
The building depicted in the photo associated with this blog post does not have any structural problems known to the author of this blog. The photo was chosen at random.
November 14, 2022
Fair housing laws provide homeowners with protection from discrimination that can easily arise if a HOA board feels that the most recent election gives them a broad mandate to make changes to protect “property values” in the community without due regard for the personal impact of their policies. Anti-discrimination scrutiny of community association activity can lead to confusion – the laws are technical and don’t always comport to ordinary intuitions. Often, HOAs will argue that fair housing law doesn’t apply because the owner “agreed” to the governing instruments when they purchased their unit, that the method employed by the HOA to enforce restrictions somehow is not regulated by ant-discrimination laws, or that the board doesn’t have the discretion to grant the accommodation requested. Filling an important gap in public policy, fair housing laws help condominium unit owners who need disability accommodations.
In 1997, the U.S. District Court for New Jersey considered whether a board must relax the parking rules in the condominium instruments to allow a disability accommodation where it seemed that the recorded rules were black and white. Albert Gittleman owned a home in the Woodhaven Condominium. Mr. Gittleman requested that the board assign him a parking space near his home, to accommodate his disability. The board refused, pointing to a provision in the master deed (declaration) stating that all parking spaces were non-exclusive. The board presented an amendment to the unit owners to allow for assigned exclusive parking. The initiative failed to carry because less that 2/3 of the owners supported it. The board argued that under the N.J. condominium act, they could not doll out a portion of the common elements to the exclusive use of a particular unit owner without a valid amendment. Condominium unit owners, as a group, own the common elements as tenants-in-common (joint owners). The association board has the authority to control, manage and repair the common elements, in a similar fashion to a landlord. State condominium statutes prevent the board from conveying portions of the general common elements for exclusive use by unit owners except as the declaration may allow assignment of limited common elements. Woodhaven argued that it was not discriminating because their hands were tied.
Mr. Gittleman filed a Federal Fair Housing Act Amendment lawsuit. He argued that the denial of the assigned handicap parking spot violated antidiscrimination laws. The FHAA makes it unlawful to, “discriminate against any person in the terms, conditions, or privileges of sale or rental of a dwelling, or the provision of services or facilities in connection with such a dwelling, because of a handicap of that person.” Discrimination may be shown through disparate treatment, disparate impact, or refusal to make a reasonable accommodation. The discrimination at issue in the Gittleman case was, “a refusal to make reasonable accommodations in rules, policies, practices, or services, when such accommodations may be necessary to afford such person equal opportunity to use and enjoy a dwelling.” Side note: Under the federal laws, “disability” is the only protected class that is entitled to a “reasonable accommodation.” The N.J. federal court sided with Mr. Gittleman. Woodhaven’s parking covenants were enforced by a parking policy. The Woodhaven board could not revise the master deed without a 2/3 vote, they could decline to enforce a policy in a discriminatory manner. The FHAA may be enforced against all sorts of private agreements, including master deeds, declarations, covenants, bylaws, land use regulations, special uses permits, terms, conditions, and the like. Enforcement of the FHAA is not limited to recorded covenants. The District of New Jersey observed that by statute, the association was tasked with managing the common elements and to adopt and enforce rules and regulations governing the use of the common elements. “The Association cannot seek to avoid liability under the FHAA by using the terms of the Master Deed as a shield. Rather, . . .. the FHAA was clearly intended to reach and invalidate those aspects of private agreements, such at the Master Deed, that have discriminatory effects.” Where the association has the authority to adopt rules and regulations, they are required to make those rules comply with fair housing protections.
There are quite a few takeaways from the Gittleman case:
- Each fair housing case is fact specific. The language of the community’s instruments matters. The FHAA does not provide blanket, standard exceptions to HOA covenants, rules, or enforcement actions.
- In a fair housing case, the court may be willing to look past the “plain meaning” of the state statutes and community instruments and forbid discriminatory enforcement, even if the language of the instruments does not target protected classes of persons.
- FHAA protections do not only apply to restrictions in deeds or recorded declarations of covenants. They apply to a wide variety of rules or private agreements. A community cannot evade fair housing laws through use of handbooks or enforcement policies. This makes sense, because state laws generally say that the governing instruments of a community association are viewed as a kind of private “contract.”
- Community association boards and their representatives will fight hard (i.e., allow their insurance defense lawyers to fight hard) when the official resolutions of the board are scrutinized, or community leaders are accused of prejudice, discrimination, or bigotry. Homeowners seeking to protect their rights, be they a member of a protected class or not, must be prepared for extensive litigation to achieve a favorable result.
- Disability discrimination cases illustrate incidents at the intersection of health and land use. People say that good policies balance personal liberty and choice against the community’s interest in preservation of cohesiveness and property values. This formulation is flawed. Association rules that interfere with the health of the residents, including disability issues and mental health, hold the community back from thriving. Housing is more than a coordinated grouping of speculative investments that people try their best to put a nest in.
- Antidiscrimination protections also exist on a state level, such as Virginia’s Fair Housing Law. To the extent possible, courts are required to give full effect to both the Virginia Fair Housing Law and the Virginia community association statutes. There is nothing in the VFHL that excludes HOAs and condominiums from its provisions.
- According to case law in Virginia and some other states, where a recorded declaration gives a board or committee authority to make additional rules and decide the merits of architectural approval applications, the association must conduct such regulatory activity according to a standard of “reasonableness.” Public policies reflected in the enactments of the general assembly inform notions of what is “reasonable” in a private land use context, particularly if those statutes speak to discriminatory recorded covenants.
October 20, 2022
Contemporary home buyers think less in terms of a “forever home” and more in terms of a “now home.” Americans buy “starter homes” when they first achieve a certain salary level. They graduate to larger homes when their wealth and families grow. Later, many people seek different properties with retirement in mind. More people are now retiring in an unmarried state, with less purchasing power and space needs. Many retirement-age Americans are not actually retiring, they just evolve their careers to suit life changes. Developers respond to the changing desires of buyers with an expanding array of options. Most of these housing products include a governing association. Are condominium units good for retirement-age buyers? First, one must consider what these older buyers want. They tend to have similar interests, which define their expectations and preferences post-closing as they engage in the voting and meetings of the unit owner’s association. Let’s take a look at reasons why buyers look at condos:
- Ease of ingress and egress as the owners’ mobility declines. Many condominiums are wheelchair accessible and allow unit owners to go about their daily life with a minimum of walking up and down stairs.
- Proximity to healthcare. Many people avoid remote areas with few doctors, hospitals and clinics. Many retirees want to live close to businesses that provide in-home support as an alternative to assisted or independent living.
- In urbanized areas, such as the Washington, D.C. suburbs, condominiums are typically the most affordable home option. But not all condominiums are really, “affordable housing.” Some luxury condominiums include lavish features and amenities not found in conventional single-family communities.
- Ease of maintenance. A 2,000-3,000 square foot house on a 1/3 to ½ acre lot has substantial maintenance and repair costs. A condominium unit has smaller square footage. The community is in charge of the roof, parking and exterior grounds. Many retirees do not want or are not able to handle the cleaning and repair of a larger home. Adult children don’t want the parent to struggle with cleaning and repair obligations.
- Social opportunities. Condominiums are communitarian enterprises. This is not strictly business. The building may have facilities such as a swimming pool or other recreation where unit owners can get to know each other. If a retiree is moving to a new area to be closer to family, a built-in social outlet may be attractive.
- Confidence that other people will take the lead to make sure things are taken care of. There is a board, a management company, concierge, and so on. The selling point for condominiums, especially in the 55+ options, is often the “care-free living.” Many people are attracted to the idea that the community takes care of the operation, cleaning and repair of everything except the owner’s unit.
- Rules that promote safety, quiet and attractiveness. Many 55+ people have lifestyle preferences that are different from young adults. They don’t want to hear loud noise at off hours. They don’t want a lot of renters or short-term lodgers moving in and out. This shapes their expectations when it comes to the rules enforced within the community.
The housing preferences of seniors, however reasonable they may be, often run up against the practical limitations of the condominium buildings, the other people who live there, and what the condominium instruments require or allow. To answer the question, “Are Condominium Units Good for Retirement-Age Buyers?” one ought to consider the challenges and obstacles of using a condominium unit as a retirement or empty-nester home:
- The cost to the community of maintaining the buildings and improvements on the property continually rises. There are many systems in a condominium building which will one day require expensive repair: elevators, parking lots, plumbing, HVAC vents, sewer pipes, insulation, roofs, windows, balconies, boilers, chillers, even structural components. Condominium leaders tend to defer major renovations and underfund reserves. Condominiums are supposed to base assessments on the operating budget and five-year reserve study. However, boards frequently ignore reserve studies for a variety of reasons. Many people are not able to handle a $10,000-$40,000 special assessment without major life changes. Most 55+ Americans who purchase condominium units for retirement do so to avoid large, unexpected repair bills. Home ownership is supposed to fit into one’s retirement plan. The retirement plan is not supposed to be dictated by the financial burdens imposed by the board. However, in the wake of the Surfside Florida condominium tragedy, the community association industry is lobbying state legislatures all around the country to give condominium boards more powerful tools to collect special assessments. If the condominium building has reoccurring problems there may be an expensive assessment to deal with it, or the deductibles for insurance will continue to rise.
- Condominiums with serious problems tend to experience intense conflict over managerial control. Most people do not want to spend their retirement years in conflict with their neighbors. In theory, the statutes and recorded instruments give the board the power to do what is necessary to manage the business of the association while insuring sufficient checks and balances on the exercise of such power. However, 30–40-year-old legal documents may not adequately foresee tomorrow’s challenges.
- In a worst-case scenario, the unit owner may face loss of their unit through foreclosure or termination of the entire condominium project. Legislative action tends to strengthen remedies such as foreclosure or termination in response to input of lobbyists and action committees for the HOA and developer industries.
- A large number of participating unit owners may not share the same views as the retirement-age buyers. The board of directors may be made up of unit owners with a variety of perspectives: retirees, young persons, real estate agents (or other vendors) looking to build a referral network, unit owners looking to have their own personalized concern addressed, or non-occupants who own a large number of units as investments. No matter how pure or conflicted their motives are, the directors are likely to look at themselves as non-profit volunteers who, unlike other unit owners, won the most recent election.
- Many condominium bylaws include indemnification provisions that protect the association against money damages claims for water infiltration. This is a burden shifting device that lowers the overall operating cost of the association, at the expense of the members. This is one way that condominium unit ownership can create a serious problem for a unit owner.
- Many people assume that there are laws and agencies that provide regulatory oversight preventing homeowners from unduly suffering from condominium governance problems. Government officials looking to be re-elected don’t send citizens written demands to pay $20,000.00. However, the idea behind community associations is that they are self-governing. Many states have boards or ombudsmen that play some role in the legal affairs of community associations. However, such officials often have close ties with the industry. Usually, their legal authority it limited.
- Most condominium disputes go into the courts if they cannot be solved within the association. The statutes and recorded instruments define the enforceable “contract” between the unit owners and the association itself. The obscurity of condominium law and equitable remedies makes it difficult for a general practitioner to navigate the courts for the unit owner client. Yet, condominium unit owners can successfully vindicate their rights vis-à-vis the board where the facts and circumstances allow.
Are condominium units good for retirement-age buyers? Based on my experience representing condominium unit owners, I have concerns about the realities of this form of housing investment. That said, there are many people who have good experiences buying condominium units, living in them or renting them out, and in a few years selling them above purchase price.
Most smart home buyers adequately research and review the potential investment. The process of reviewing the listing online, visiting the property, making an offer, and reviewing the disclosure packet, and considering a home inspection report can be inadequate for a buyer to rightfully feel a high level of certainty. The buyer does not have the experience to understand what they are reviewing (if they even bother to look). Even if they do possess the legal, accounting and engineering acumen, it may not disclose key information, such as the likelihood of a major future assessment or risk of system failure. If there are particular community features or rules which are a “must have,” the buyer ought to confirm that is set out in the recorded instruments, and not rely upon assurances provided during the sales process. Also, disclosure packets cannot predict what a future board might do. Newer condominiums are less likely to require major expenses necessary to replace entire building systems. But new buildings have defects too.
For a condominium unit to fit within a limited retirement budget, the purchaser needs to have a plan for how to deal with potential unpleasant surprises. If the buyer has the financial resources to set aside for a potential future special assessment and/or to litigate disputes, and they carefully review and consider the disclosures and find them unobjectionable, then perhaps they can ride out future obstacles.
Unless the buyer plans on sitting on the board of directors for the entire time they own the unit, they need a strategy for monitoring and engaging in what the board and committees are doing. Otherwise, it’s easy to become blindsided by a new development which had been discussed but not widely broadcast until after a decision is made. Many unit owners find it easiest to network with other unit owners (including some directors or committee members) who share their interests so that they don’t have to listen to or read every document or meeting. The retiree’s plan for purchasing and owning the condominium unit ought to include an exit strategy. Without adequate planning with respect to the condominium investment, the retiree risks having a board of directors overturn the personalized retirement plan.
July 20, 2022
I am frequently asked if the winner of a lawsuit between a community association and a homeowner will get an award of attorney’s fees at the end. For many property owners, the cost of litigating for months or years is burdensome, especially if it cannot be recovered. Virginia, like most states, follows the “American Rule” requiring each side bear their own fees, unless there is a statute, contract or other exception that allows fee shifting. The Virginia Condominium Act and Property Owners Association Act (HOAs) allow for prevailing party attorney fee awards in actions to enforce the statutes or instruments. Also, some recorded instruments (declarations, bylaws, amendments) provide a “contractual” basis for attorney fee awards. In most community association litigation, there is a statutory or contractual basis for an award of prevailing party attorney’s fees and costs. However, the statutes may not apply if the development does not meet the statutory definition of a condominium or property owners association. In such cases, the homeowner ought to consider whether another exception to the American Rule applies.
There are judicial opinions that address attorney fee awards in the HOA context. I discussed an important Supreme Court of Virginia case in my April 28, 2017 blog post, “Condo Owner Prevails on Her Request for Attorney Fees” That case, Lambert v. Sea Oats Owners Association, restates the seven factors that courts weigh in considering the reasonableness of a petition for attorney’s fees:
- The time and effort expended by the attorney.
- The nature of the services rendered.
- The complexity of the services.
- The value of the services to the client.
- The results obtained.
- Whether the fees incurred were consistent with those generally charged for similar services
- Whether the services were necessary and appropriate.
In Lambert v. Sea Oats, the trial judge decided to reduce the fee award on the grounds that the underlying amount of compensatory damages was much lower than the attorney’s fees. The trial judge decided that the attorney’s fee ought not to be out of proportion to the claim on the merits. This presented a problem to the unit owner, whose victory was hollowed by having her attorney’s fees award drastically reduced. This practice could encourage some to “stonewall” their opponent in a way that practically deprives them of their rights. In Lambert the Supreme Court disallowed cutting fees on such grounds.
In today’s post I would like to focus more on the procedural aspects of attorney’s fees petitions, because there are things are party is required to do if they want to avail themselves of the statutory or contractual provisions that entitle them to fees. Fulfilling these procedural requirements are important in part because many trial judges in Virginia are inclined not to award attorneys fees, even when the prevailing party is entitled to such an award by a contract or statute.
The procedural requirements for presenting a petition for attorney’s fees in Virginia vary from those used in the federal courts and some other states. In Virginia, the basis for the attorney’s fees claim must be specifically alleged the lawsuit. The parties are entitled to obtain copies of their opponent’s attorney fee invoices in discovery. Unless an order is entered otherwise, any party asserting an attorney fee claim must submit evidence in support of it at trial, otherwise the claim is waived. The rules allow for bifurcation of attorney’s fees. This allows the court to declare a victor and decide the attorneys fees at a subsequent hearing. However, bifurcation is supposed to be made by the parties mutual consent or by a pretrial order. In many cases, the party seeking fees will call an expert witness to testify regarding the reasonableness of the fee. In many lawsuits regarding property, by the time the case goes to trial, recovery for the cost of litigating becomes an important issue for the parties. Attorneys and their clients often prefer dealing with attorney fee petitions post-trial for a number of reasons. Trying to win on the merits requires a tremendous amount of attention to detail. If a party presents a large fee petition as a part of their trial presentation, the judge or jury may view their case as more about the attorneys fees and less about the merits. Also, its easier to calculate the attorneys fees award a couple weeks after trial because the trial is already concluded.
By contrast, in the federal courts a claim for attorneys fees is made by a post-trial motion filed in usually a couple weeks, unless a statute or scheduling order requires it to be presented at trial. As you can imagine, attorneys accustomed to the federal rules may miss the pretrial requirements imposed by the Virginia court rules, and later discover that they are procedurally barred from presenting their attorney’s fees claim.
Many attorneys mistakenly believe that if their client prevails, they can add all of their assorted litigation costs to the attorney fee and costs award. I’m talking about things like court reporter appearance or transcript fees, hotel fees, rental cars, expert witness fees, overnight delivery charges, and so on. Many of these things, such as court reporters and photocopies are as essential to the clients case. However, the only costs that are ordinarily recoverable under Virginia law are the court filing fees and the service of process fees. Depending upon the subject matter of the case and the contract documents, other costs may be made part of an award.
The attorneys fees statutes for HOAs and condominiums don’t just apply to claims by the homeowner against the association. The association can assert the same basis for attorneys fees, be it as a plaintiff or defendant. Also, the statute can apply to claims brought by a homeowner against another homeowner under the acts or the governing instruments.
When a homeowner files a lawsuit against the community association, other owners are often concerned about payment of attorney fees in defense of the suit. Ordinarily, when an association is sued, they place a claim with their insurance, who appoints them a lawyer to defend the case. The insurance defense attorneys are ordinarily seasoned trial attorneys who different kinds of civil defense work in addition to defending HOAs. Often, the board will assure residents that the insurance is taking care of the attorney’s bills. However, the association is likely to incur additional attorneys fees, because the board’s regular general counsel ordinarily participates in the communications between the board and the insurance defense attorney. The general counsel’s fees are not ordinarily reimbursed by the insurance.
Given how expensive it can become to litigate a HOA case to the end, the parties ought to give careful consideration to how a petition for fees will be supported or opposed. One must also consider that in the event that the case can be resolved through a negotiated agreement, the attorney fee claims have to settled or released in the context of the settlement of the case.
Fairfax Square LLC v. Hermes of Paris, Inc., 89 Va. Cir. 406 (Fairfax 2015)
July 12, 2022
In property cases, many parties seek an injunction. An injunction is a court ruling directing a defendant do something specific or to refrain from doing something. Violations of an injunction order may be enforced by contempt proceedings. Injunctions contrast with other remedies such as awards money damages. Injunctions are important in condominium and HOA cases. Sometimes boards sue to force an owner to obey a restrictive covenant. Someone may be obstructing an easement. The board may be acting in a fashion that is contrary to the statutes or declaration. While a party may believe that injunctive relief is the obvious answer, obscure doctrine may hinder the use of this “extraordinary” remedy. Today’s post covers considerations for bringing or opposing homeowner injunction claims against HOAs. On May 24, 2019, I posted an article, “Injunctions in HOA cases.” I am blogging about this again today because of how important this remedy is to homeowners seeking legal solutions in HOA matters.
Virginia law usually requires, (1) irreparable harm and, (2) an inadequate remedy at law to warrant an injunction. The harm doesn’t have to threaten life, limb or entire loss of the property to be deemed “irreparable” or to be absolutely permanent. But it must be some sort of substantial threat or actual, continuing infringement of a legal right. “Inadequate remedy at law” means that the problem cannot be sufficiently resolved by means of an award of possession, money damages, or some sort of appropriate legal process defined by law.
For enforcement of property rights, the Supreme Court of Virginia recognizes that an injunction is an appropriate remedy. The violation of a real property interest is deemed “irreparable”, and the owner ought to be protected in the enjoyment of his property. Yet, the other party may avoid the imposition of an injunction if it can demonstrate that it would create a hardship or injustice that is out of proportion to the relief sought. Although there are many published judicial opinions regarding injunctions, the distinctions may seem “fuzzy.” This is because the relevant facts, recorded instruments and statutes will vary. Injunctions involve judicial discretion.
There are other exceptions to the requirement of irreparable harm and inadequacy of a legal remedy. Neither must be proven when a statute or ordinance expressly empowers a court to grant injunctive relief. In that case, all that is required is proof that the statute or regulation has been violated. This is important in homeowner injunction claims against HOAs because the statutes allow such relief to enforce the VPOAA or Condominium Act.
A party seeking to enforce a real covenant is entitled to the equitable remedy requested upon showing the validity of the covenant and its breach. In such instances, the plaintiff is not required to prove damages or the inadequacy of a remedy at law. The relative equities of the parties do not need to be “balanced” by the judge. The courts will grant injunctions to enforce contracts for the sale of real estate. But the common law requires that restrictive covenants be clear in their express meaning to be enforced. Sometimes HOA or condominium boards act in an “ultra vires” fashion, exercising powers that the covenants don’t actually authorize them to use. Courts will enter injunctions against ultra vires activity.
Because homeowner injunction claims against HOAs focus on state statutes and recorded covenants, courts are likely to find injunctive relief appropriate. This is not to say that it is automatic. There are many defenses that may be asserted against an injunction suit. For example, the language of the statute or covenant may not entitle the plaintiff to a remedy. Relevant facts or other legal authority may provide much needed context for the court to ascertain whether an injunction is appropriate.
The defendant may be able to prove that the plaintiff is not entitled to an injunction because she slept on or relinquished her rights. There may be a statute of limitations barring the claim as too stale. The party may have affirmatively waived their claim or acted in such a way as to induce the defendant to treat it as abandoned. Such circumstances could give rise to a defense of waiver, estoppel, laches or condonation. Such defenses can be difficult to prove in the absence of a written or electronic communication by the plaintiff that constitutes an express waiver or consent.
Ordinarily, claims for injunctions are resolved at trial. But a claimant can ask for what is called a temporary or preliminary injunction pre-trial. A temporary injunction allows a court to preserve the status quo between the parties while litigation is ongoing. Many circuit court judges in Virginia expect litigants to prove the four elements of the federal courts’ test. To obtain a preliminary injunction Plaintiffs must establish they are likely to succeed on the merits, likely to suffer irreparable harm in the absence of preliminary relief, the balance of equities tips in their favor, and an injunction is in the public interest. Many judges require strict proof of these four elements if the motion is made pretrial, even if it is a property right or the statute allows for injunctive relief. The merits of preliminary injunction motion are dependent upon the unique facts and circumstances of the case.
Sometimes an injunction order may be enforced against tenants, purchasers or other successors to the party enjoined. For example, if a property owner is found to be causing a stormwater diversion nuisance, and the injunction requires them to make changes to the property by abating the nuisance, the defendant cannot avoid the effect of the order by leasing or conveying the property to another party who did not participate in the injunction lawsuit.
Boards of directors have a variety of remedies they can pursue that don’t necessarily require them to go to court, such as fines, privilege revocation or liens. Absent major legal reforms, homeowners remain reliant on other strategies, such as winning elections, negotiation, self-help or litigating to vindicate their rights. But these cases are winnable because the rights are set forth in recorded instruments, contracts or statutes that unless an exception or defense applies, can be enforced by injunction. Many lawyers are unfamiliar with the case law that facilitates homeowner injunction claims against HOAs. Showing that the landowner is entitled to and intending to pursue such relief may lead to faster and stronger results in resolving such disputes.
This post was updated on Sept. 29, 2022.
June 6, 2022
Rights and responsibilities regarding renovation of condominium limited common elements (LCE) are a frequent source of legal conflict among unit owners. LCEs can be of practically anything, frequent examples being balconies, patios, porches, or parking areas. The Virginia Condominium Act defines, “Limited common element” as, “a portion of the common elements reserved for the exclusive use of those entitled to the use of one or more, but less than all, of the units.” Contrast LCEs with general common elements, which are also common property, but not designated for exclusive use by anyone. Generally speaking, the unit owner’s association board controls the use, maintenance, and assessment of cost for repair to the common elements, including the LCE. LCEs can be something that the unit owner enjoys as living space, relies upon for the normal use of the unit, or required for access to and from home. When LCEs need to be repaired or replaced, disputes frequently arise regarding the method of renovation of condominium limited common elements and the assessment of costs. It makes sense to handle the cost of maintaining LCEs differently that “general” expenses. The other unit owners do not enjoy or benefit from the LCE. Cost of replacement or renovation of condominium limited common elements can, in some instances, be astronomical. For example, replacing all balconies at the same time can be expensive, but overall, if handled properly, more cost effective and produce more visually uniform results. Many people don’t like having a committee of self-interested non-experts decide when, in what design, and at what cost their balconies or patios will be replaced. Large, unforeseen special assessments for projects mostly benefitting others are a frequent source of conflict. Sometimes unit owners will mount campaigns to get rid the of the board if a special assessment project is objectionable.
When controversies regarding liability for renovations to LCEs arise, affected unit owners want to know what rights they have. Because every condominium property and recorded instrument is different, there are no stock answers to these questions.
Some explainers confusingly analogize LCEs to easements. The Virginia Condominium Act discusses both easements and LCEs and does not equate them. The LCE is a statutory creature that includes easements in favor of the assigned unit, conditioned on certain prerogatives regarding control, renovation and imposition of cost held by the board.
While the board exercises significant control over LCEs, it cannot take them away or reassign them willy-nilly. The designation and assignment of LCEs is difficult to change once established by a land recording. If the board could take a LCE away from one unit owner and give it to another, or create a brand new LCE out of a portion of the general common elements, much mischief could result. Assignment of a LCE generally requires an amendment to the declaration, unless it specifically provides for certain areas pre-identified as assignable LCEs to be allocated by the board in the future. For example, storage units or parking spaces may be treated as LCEs. This sounds obscure. However, sometimes boards will want to give a unit owner a privilege to use a common element in an exclusive way, in a manner not contemplated by the declaration or bylaws.
The Supreme Court of Virginia held that the UOA has exclusive standing to sue to vindicate rights in the common elements, including assigned LCEs. In a given case, one unit owner may not be able to sue another unit owner for misuse of a LCE, because, subject to the statutes and recorded instruments, a unit owner cannot usurp the boards statutory prerogatives.
The units to which a LCE is assigned will usually be required to pay the association a special assessment to cover the cost of the repair or replacement of the LCE. The Condominium Act provides “default” rule:
Except to the extent that the condominium instruments provide otherwise, any expenses associated with the maintenance, repair, restoration, replacement, or renovation of condominium limited common elements shall be specially assessed against the owner of the unit to which that LCE was assigned at the time such expenses were made or incurred.
Of course, if someone caused the damage by their intentional or negligent actions, the culpable party may be held responsible, or insurance may be available. When disputes over renovation of condominium limited common elements arise, it’s important for the affected unit owner to obtain legal advice, especially in instances where the Condo Act, original instruments, or any later amendments conflict with each other regarding the control and cost of an LCE. It may be necessary to research bylaw amendments, condominium plats, and builder’s drawings to be reviewed in light of the contracts and engineering designs for the new renovation project. The text of the condominium instruments may not contain the requisite detail for what is actually proposed to be renovated.
Condominium law distinguishes, “maintenance, repair, renovation, or replacement” from “additions & alterations.” Its easy to understand why a unit purchaser is deemed on-board for the repair or replacement of common elements that fall into disrepair, because they were there originally. Generally speaking, the board cannot alter the unit owner’s maintenance obligations by addition or alteration of a common element, unless the instruments make that a part of the “bargain.”
Sometimes, the declaration or bylaws may be amended by a simple majority or 2/3 of the unit owners. The board may ask their supporters to amend the way the LCEs are managed (in terms of usage) or costed (in terms of liability for renovation). Can a simple or super majority infringe upon the rights of a unit owner by altering their unique property rights, or socking them with costs that substantially benefit others? In other words, are there rights that a unit owner has that can’t be circumscribed by the other unit owners acting in concert? The Virginia Condominium Act requires 100%-unit owner approval to change the following:
- The boundaries of any unit,
- The undivided interest in the common elements,
- The liability for common expenses, or
- The number of votes in the unit owners’ association that appertains to any unit.
Another section (Va. Code § 55.1-1919) requires 100%-unit owner consent, or at least the consent of the affected unit owners, to re-arrange the unit boundaries or limited common elements. There is not much case law defining in what instances changes to the common expense liability will require 100% approval. Its possible that the courts would impose a “reasonableness” standard on review, as they do in certain other community association contexts. After someone buys a unit, the community may experience changes not anticipated by the buyer or contemplated in the bylaws. The scope of matters requiring 100% approval versus some lesser number has not been addressed much by Virginia courts. In other states, the courts require amendments of less than 100% to pass an additional requirement that the governing instruments must provide some sort of fair notice that the subject matter of the amendment is reasonably foreseeable.
Boards change personnel, the structures fall into disrepair (or even collapse) and the character of the property surrounding the condominium project changes. Sometimes condominiums attempt drastic measures to raise funds for repairs to avoid termination, such as selling off a swimming pool area, parking lot or docks to developers to raise funds. These risks raise the fundamental question of how a unit owner may protect herself from interference with the use or large unanticipated cost to LCEs. The statutes and recorded instruments may be clear or confusing, depending on the language. It would ne nice if the owner’s rights and responsibilities with respect to the LCE was intuitive or analogous to other kinds of shared property rights, but its not. LCEs are governed by technicalities reflected in obscure legal texts. People who buy condominium units for affordable, convenient housing want to believe that there are competent, responsible people making sure that things are managed and maintained properly, and that they can take assume that what they see and hear can be taken at face value. However, older condominiums bear all sorts of risks and professional assistance to the buyer is advised.
April 15, 2022
Nothing corrodes homeowners’ trust in their community association more than the apparent self-interest of a board majority. Every director or committee member has potential conflict of interest in the community’s business because they own property and pay assessments impacted by their own governance. Yet the HOAs business must get done. This doesn’t mean that leaders can disregard the governing instruments or state law in the decisions they make. Few directors ever recuse themselves from voting on things in which they have a personal stake. Courts often review HOA decisions through the lens of the Business Judgment Rule, an import from corporate law. Anyone who has ever questioned the wisdom or ethics of HOA actions has heard about the BJR. The BJR prevents the courts from “armchair quarterbacking” routine decisions of corporations in how to perform the duties mandated by their instruments. I recently blogged about important BJR exceptions in my post, “Are Courts Critical or Deferential towards HOA Decisions?” One important exception concerns director conflicts of interest in board decision-making. Today, I will discuss a March 31, 2022 decision of the Court of Special Appeals of Maryland that considers the scope of the interested director rule as a BJR exception. The court’s decision in Cherington Condominium v. Heather Kenney preserves the BJR generally while recognizing the versatility and usefulness of the interested director rule.
Its April, so its convenient to be talking about landscaping projects. Heather Kenney owned a garden apartment style condominium unit in Cherington Community Association. Cherington consists of 99 residential units, 87 of which are townhouses, and 12 are garden style units. All of the directors were townhouse owners. The board’s 2019 assessment increase required all unit owners, including the garden style units, to contribute financially to the maintenance of outdoor spaces around the townhouses. They increased townhouse unit assessments from $200 to $247 (23.5%) and garden style units from $240 to $352 (46.7%). Ms. Kenney alleged that the $42,700 budgeted for “grounds/landscaping” included maintenance of certain outdoor spaces around the townhouse units, including the fronts and accessible rear yards. The $42,700 sum was not itemized in the budget to show how much was allocated to the townhouses versus other concerns. The association pointed to sections of the bylaws that gave the board the discretion to maintain these particular areas. They said the community would be more attractive and uniform. The board thought that the garden units had previously been under-assessed.
Ms. Kennedy filed a complaint with the Montgomery County Commission on Common Ownership Communities. After the CCOC dismissed her complaint, Ms. Kenney filed suit in the Circuit Court to judicially review the agency’s decision. The Circuit Court ruled that the board’s landscaping assessment benefitting the townhouses was self-interested. This required Cherington to demonstrate that imposition of the costs of the townhouse landscaping onto the garden units was fair and reasonable. The association appealed, arguing that the BJR ought to have been applied instead of the interested director rule, because Kenney presented no evidence of fraud or bad faith. The appellate court agreed with the circuit court that the CCOC erred. Ms. Kenney’s challenge was sufficient to shift the burden to the board to demonstrate that the decision was fair and reasonable.
In Maryland, the BJR is a presumption that in making a business decision the directors of the corporation acted on an informed basis, in good faith and in the honest belief that the decision was in the best interest of the community. Any challenger must show abuse of that discretion that rebuts the presumption. There are exceptions to the BJR. The party challenging the corporate action can put on evidence of fraud or bad faith. Alternatively, they can demonstrate that the director or someone close to that person, has a personal interest in the outcome of the decision. This shifts the burden to the board to prove that it was just and proper without unfair advantage. IMHO, this formulation of the rule is more practical than the extremes of (a) expecting a challenger to prove things where the documentation is likely withheld by the interested party, or (b) deeming all decisions tinged by self-interest voidable without considering facts showing it to be adequately fair. The appeals court ruled that the BJR and the interested director rule are not mutually exclusive. The latter functions as a kind of brake on the former. Otherwise, directors no longer have fiduciary responsibilities.
The appeals court discussed a couple Maryland community association cases applying the BJR in the context of architectural approvals. In Virginia, the less deferential “reasonableness” standard (and not the BJR) generally applies in architectural control matters. But the BJR applies to Virginia HOA decisions in many other contexts.
Cherrington association sought to limit the scope of the interested director rule to contracts made by the corporation with a benefitted director or family member. The landscaping contractor was not a director or affiliate. The appeals court declined to take such a “pro-HOA” position, and found that the 2019 condominium assessment was something that could trigger the interested director rule, because it’s similar to a transaction between a corporation and its directors. Moreover, the assessment was spent on the landscaping contract of particular use to the townhouse owners. The appeals court sent the case back down to the COCC to take evidence pursuant to the shifted burden of proof. Ms. Kenney hasn’t quite won on the merits yet, but she now has a good chance to obtain a fair outcome.
Now to a few takeaways:
- Legal standards of review and evidentiary presumptions define how courts evaluate the evidence presented in contentious community association litigation. Without a rule shifting the burden on the association to show fairness, Ms. Kenney’s would fail because the association controlled the information needed to ascertain the facts.
- The interested director exception to BJR is alive and well in Maryland. Cases where a challenging unit owner can substantiate claims of fraud or bad faith are unusual, because dishonesty is ordinarily concealed. The appeals court’s holding makes clear that the disputed transaction doesn’t need to be something where the board is directly paying money over to a director or their family member. This formulation of the exception prevents the BJR from being used improperly to avoid fiduciary responsibilities.
- Challenging wrongful HOA decisions in court is doable, but not easy. Even though the appeals court rejected the idea that the BJR eclipses all other rules, Ms. Kenney still has to go back to the COCC and prevail on remand. This unresolved dispute began three years ago. HOAs frequently counter owner challenges with stonewalling tactics. Sometimes, the unit owner’s conduct is put on trial, and the board makes all sorts of unfounded accusations that the plaintiff is the real bad apple in the community. But the legal victory enjoyed by Ms. Kenney is another example that judges are willing to look at these cases from an independent viewpoint, that may not be reflected in the decisions of a state or county-level commission dominated by persons with ties to a particular industry.
When a property owner knows that something being done is factually unfair, violates a law or instrument, and prejudices their rights, they don’t have to accept the usual explanations that the good faith “business judgment” of “elected nonprofit volunteers” reflects the best interests of the community.
March 16, 2022
Many homeowners can tell that the boards and committees of their community association are making wrong decisions that prejudice their rights, but struggle to articulate the legal basis for why the decision is bad. Attorneys inexperienced with HOA law sometimes write demand letters to community leaders sprinkled with legal jargon such as “breach of fiduciary duty,” “arbitrary and capricious,” “lack of due diligence,” or “bad faith.” Sometimes, a problem has a clear answer, because a statute, contract or bylaw provides an unambiguous rule. However, statutes or governing instruments often give boards and committees some discretion in fulfilling their duties and exercising their rights. The board may have to decide whether to go with one management company over another. There may be differences of opinion as to whether roads must be resurfaced next year or in five years. The board may have to decide whether to buy play equipment aimed at toddlers or 5th graders. HOAs frequently find themselves revising or applying architectural guidelines as the community ages and owners submit new applications. The establishment of a board or committee presupposes that they will deliberate and decide among various choices. Collective deliberation is supposed to produce correct decisions, or at least follow a process which, if followed, members will accept even if they disagree.
If the legal text provides a clear, unequivocal answer, its easy for the attorney to advise the client whether the breaching party could be successfully sued. Where the rules allow the board to make a debatable decision, and members have varying views as to the wisdom of that decision, one must consider what standard the court is likely to apply. Should the court defer to the board’s judgment, as the elected representatives tasked with making such decisions? May the judge substitute her own judgment for that of the board? Judges know that its important to apply appropriate standards in similar situations, so as to promote fairness and consistency. If they could pick their own dockets, many judges would not prefer to deal with many community association lawsuits. HOA cases tend to be quite acrimonious, involve obscure legal doctrines, and require extensive reading of lengthy written instruments. At times, it may be unclear whether the judge is applying a conventional interpretation of an established rule or is merely trying to rationalize a decision he sees as appropriate given how it will resolve the dispute. Legal methods vary in the many judicial opinions deciding legal challenges to HOA or condominium decisions or resolving covenant enforcements disputes. There are reasons why different standards appear in different cases, from “strict scrutiny” to more deferential approaches. Different legal doctrines may apply to the same legal dispute, from specific provisions of the community’s governing instruments or contracts, amendments to the state statutes, or ancient yet flexible common law doctrines. It is essential for a homeowner to have a basic understand of judicial standards of scrutiny & deference in HOA matters. Otherwise, someone may mistakenly pick the wrong battle.
The first question is to determine whether the covenants and bylaws are clear or ambiguous. Where the terms of restrictive covenants (or really any kind of legal text) are clear and unambiguous, the duty of the court is to interpret them in accordance with their “plain meaning.” If the statute or covenant is ambiguous or vague, this will raise thorny questions. However, courts usually find the legal text to be unambiguous, and this makes it easier to identify the proper standard by which to evaluate the board’s action. In Virginia courts, there are three general standards of review applied by judges in community associations cases.
Doctrines of Plain Meaning, Strict Construction and Ultra Vires – When one looks to the governing instruments for an answer, and the instruments either provide a clear answer then principles of strict interpretation proscribe the HOA’s duty to act or refrain from acting in a certain way. The Association may not act in contravention of its governing documents. If it does so, such an act is void or voidable. Also, it the declaration enumerates a list of powers and certain things are conspicuously absent, then this may mean that the omission of such things from the text shows an intent to exclude such authority. Sometimes HOA boards to try to use architectural standards, administrative resolutions, committee charters, or handbooks to establish rules that are contrary to a statute or recorded instrument, or is not authorized by such instruments. The board can only exercise “business judgment” with respect to things that have been made its business by the operative language of the recorded instrument or statute.
Business Judgment Rule – According to the BJR, it’s not the place of the courts to second guess decisions that a corporate board is required to make in the performance of its duties. Exercise of the BJR will not be disturbed by the courts unless justified by those discrete facts that are properly pleaded and would justify judicial review, such as cases of fraud, bad faith, breach of trust, or gross mismanagement. Boards (and their advisers) are very attracted to the BJR because it is highly deferential to the HOA. HOA instruments often delegate broad authority to the boards with respect to the business of the development. Fraud, bad faith, breach of fiduciary duty, or gross mismanagement are easy to allege but difficult to prove. Application of the BJR requires the directors’ decision to be that of a business judgment and not a decision which construes and applies a statute, covenant or bylaw. The BJR is not a mega-doctrine swallowing up all the provisions imposed upon the board by the statutes or instruments. Its best not to pursue litigation against HOA boards on matters which clearly fall within the BJR. However, the instruments may be unclear, or they may clearly limit the board’s discretion. The BJR applies most naturally to decisions like which manager, landscaper or attorney to hire, when to replace the roof on the pool house, or what color to paint a shed. Its important to remember that the BJR is a doctrine imported into community associations from corporate law, where many decisions fall within either the “ultra vires” (void) or BJR categories. In corporate law, once a board power is treated as within its authority, it tends to become a part of the private affair of the management of the business. It is difficult to legally challenge decisions to which the BJR applies, absent an applicable covenant or bylaw, or the rare cases where fraud, dishonesty, criminality, etc. could be proven.
Rule of Reasonableness – The rule of reasonableness applies in HOA architectural control matters. Virginia courts strictly construe restrictive covenants because they are in derogation of the free use of one’s property. So one normally looks to whether the “plain meaning” of the restriction is ascertainable and violated in a particular instance. However, most HOA and condominium declarations contain additional provisions that require most architectural changes to the lot to first obtain approval from a board or committee. How do you reconcile notions of “plain meaning” and strict scrutiny” when the restrictions contemplate the HOA withholding or granting approval on a case-by-case basis? The Supreme Court of Virginia has held that a restrictive covenant for a residential subdivision which requires consent to construction or approval of plans of construction, even though the provisions of the restrictions do not establish standards of approval, will be declared valid when such covenants apply to all the lots as a part of a uniform plan of development. But such covenants will be enforced only when there has been a reasonable employment of such restrictions. Architectural standards have been found to pass the rule of reasonableness where applied uniformly, consistently and in good faith for a considerable period of time. It makes sense for the board to be held to a higher standard in the formulation of architectural restrictions because, in general, restrictive covenants are disfavored and strictly construed. Most architectural restrictions require the owner to obtain approval from a board or committee prior to making changes to the appearance of the lot. The rule of reasonableness prevents HOAs from unreasonably withholding approval for unjustified reasons. Note that the standards that may apply under a reasonableness inquiry don’t have to be expressly set forth in the recorded instruments. Bear in mind that the “reasonableness” standard is informed by the meaning of statutes, covenants, standards, etc. An approach can be unreasonable even if the board, its advisers and friends in the community feel it is reasonable. The reasonableness standard prevents architectural controls from becoming some sort of free for all, whereby the committee and board members and their friends get what they want out of the process, and those who want to improve their properties in other ways have their applications unjustifiably denied.
Having different standards makes sense. The exercise of architectural controls in a community is a quasi-governmental function, and not analogous to managing a business. To apply the BJR in the making, applying and enforcing of architectural standards would create an exception that would swallow the general principle of strict scrutiny of restrictions on the free use of property.
In some states, the courts no longer apply the rule of reasonableness, and instead apply the BJR to all instances in which the board gets to make a decision. Also, even if judicial doctrine imposes a reasonableness requirement on architectural rulemaking and decisions, the governing instruments may be worded in ways that maximize the board’s latitude. Furthermore, whether the BJR or the rule of reasonableness applies, in either case the judge is permitted to consider various legal texts and evidence of the facts of the case to formulate an equitable remedy or apply a defense. In a dispute between a HOA and its members regarding a decision, eventually the question will be asked whether strict construction, business judgment or reasonableness standard applies. Usually, the board will attempt to invoke the BJR or argue that the decision they made was required by the documents. For many property owners seeking to protect their rights, identifying the proper legal standard is essential. To take a case to trial, the owner will likely have to make a substantial investment of their time and resources. An owner will want to show that the board’s action fell outside of what it was allowed to do by the express language of the statutes or governing instruments, or that to the extent that exercise of discretion was called for, there are compelling grounds that there was unreasonableness, arbitrariness, bad faith, or self-dealing. Even where a fair interpretation of the governing instruments does not allow any board discretion, there may be other defenses that the HOA asserts, such as waiver, estoppel, laches, condonation, unclean hands, etc. that attempt to redirect the scrutiny back on the plaintiff. However, those kinds of defenses require a factually specific presentation at trial. Absent a clear letter or email that establishes such a defense, those kinds of defenses can be difficult to prove.
March 1, 2022
Community association disputes can become quite contentious. People will call others names or question their integrity in a board meeting. Others send “reply all” blasts attacking the ethics of neighbors, board members or managers. It is not surprising that emotions boil over in such communications, because everyone participating has some amount of “skin” in the game, be they a director called upon to make a vote, an owner who is more negatively affected than other members, or someone who is concerned that they won’t be able to pay a special assessment. Often people think that there are one or two bullies in the community, but the members don’t often agree which neighbor is the real bully. When a leader or neighbor seems to be ruining someone’s life or property, some people question whether notions of civility, decorum, mutual respect are still relevant. This reflects a larger discussion in the U.S. about the coarsening of manners and abandonment of civil discourse. As an attorney who counsels and advocates for property owners in HOA and neighbor disputes, the question of civility arises frequently. The question is most difficult in instances where there is one homeowner, whose use and value of their property is rendered practically uninhabitable because a majority of the board (and community members) do not want to take action to make sufficient repairs or alterations to the common elements so as to abate the problem (because it costs a considerable amount of money). Such a dispute can arise even if the governing instruments clearly delegate the responsibility to maintain the common elements to the board. For an owner whose home is being ruined, it is humiliating to have to listen to community meetings where a significant number of their neighbors are willing to jump on board with practically any idea or theory that could relieve them of the obligation to pay a special assessment so that the community can uphold its obligations to one or two specific other homeowners. In such instances, rational explanations seem to be fruitless. Sometimes, the “mob” is attracted to suggestions that the suffering party is to be blamed for their own misfortune. Some aggrieved parties feel they are being thrown under the bus by the majority in their subdivision, simply to save money. The HOA is a kind of “contract” among the owners, but sometimes the majority intentionally defaults on its obligations to one or two members, because they suspect that the party being damaged does not have the resources or capability to fight back legally. In other instances, there is a bully who is not on the board, but nonetheless uses unfounded threats to try to control their neighbors. In such situations, the notion of “civil discourse” can seem irrelevant because opponents are behaving in a selfish and irrational fashion, raising the question does one still have to be civil if everyone else is not.
The ancients taught three ideas that are important here. One is the golden rule: do unto others as you would have others do unto you. The second is what the ancient Greeks called parrhesia, which is the practice of speaking boldly for the common good, even if the act of speaking out is done at great risk to the speaker. The contemporary expression “Speaking truth to power” comes close to the idea of “parrhesia.” The third idea is to always behave as though “angels” are watching, and can come to one’s aid or abandon you.
People who are angry tend to believe that they are thinking clearly, and that they have identified the flaws in their opponents approach and are calling them out on precisely the issue that is determinative. But in reality negative emotions such as anger, fear, jealousy, envy and so on tend to distort one’s perspective on the world. Parrhesia is not lashing out at one’s opponent because they deserve it, or trying to cancel someone for taking unpopular views.
So is a landowner supposed to remain civil even if everyone else in the community wants to trample on their rights, in a way contrary to the governing instruments or statutes, because the group thinks that this protects their interests? Or do difficult moments call for bold speech or actions? I would say both are true. If you want people to be civil, you have to be civil, even if you are the only one leading the way. If a bullying tactic does not completely flatten the opponent, the opponent will likely engage in recrimination, and the cycle will continue. I think that there is a fine line between parrhesia and being a jerk (readers of Greek philosophy will appreciate this point). Sometimes that line is not much of a line. But the difference between being bold and being a bully matters a great deal. For one reason, the HOA meetings, social media posts, or the reply all email discussions are not the end of the road. Someone can bring a lawsuit to challenge or enforce a decision, or right a wrong. When that happens, the audio recordings of the meetings, the emails, the online messages, etc. become evidence of what happened. When the dispute goes from the HOA gathering and into the courtroom, the question becomes whether someone has a legitimate cause of action that entitles the claimant to a remedy or if this person is just using the HOA forum or the courtroom to lash out at something they can’t really change. If for no other reasons, people ought to behave themselves because a judge, arbitrator or jury may one say read what they said or did, and decide the case based on that. Sometimes seemingly intractable conflict has to escalate to a certain point before it can be resolved.
Lastly, if an owner feels that they are being bullied by a board, neighbor, or if they are being accused of being the bully, and such disputes intensify, then its important to seek the assistance of an attorney. The attorney’s job is to listen to people who are being deprived of their voice or their rights, and to help them sort out what is happening and what next steps may be legitimate options, and then help them take themselves there.
January 1, 2022
Often strait roads are best, other times it takes windy paths to achieve a lofty goal. I am here to help my clients to navigate unfamiliar legal routes and obstacles in 2022. Wishing you much health and success in the coming year.
– John C. Cowherd