March 15, 2017
Should Homeowners Bring Complaints Against Contractors Before Courts or Regulators?
Property owners frequently have complaints about construction contractors. Some of these complaints involve thousands of dollars in damage or serious infringement upon the use or value of property. These property owners (and their attorneys) want to know who to turn to. Should homeowners bring complaints against contractors before courts or regulators? This question raises issues about how the government ought to enforce its laws and resolve disputes. There is a perspective that regulatory boards ought to be a welcome forum for owners threatened or damaged by alleged contractor misconduct. In this blog post I will explain why I believe that, for all its imperfections, the judicial system is the best venue for vindication of legal rights in consumer disputes.
In 2015, the Court of Appeals of Virginia decided an illustrative case arising out of a complaint of a home purchaser about the seller’s contractor. Around 2002, Mark Holmes purchased an Alexandria, Virginia home, including an addition constructed by Culver Design Build, Inc. Mr. Holmes was unhappy about defective construction of the addition. He went to the city government, whom the General Assembly tasked with enforcing the building code in his locality. The City Code Administration found extensive water damage caused by construction defects and issued a Notice of Violation to Culver. Holmes was not satisfied with Culver regarding corrective work, so he filed a complaint with the Virginia State Board of Contractors. Holmes asked the Board to suspend Culver’s license until it corrected the violation. Culver Design Build, Inc. argued that Holmes did not have legal standing to seek judicial review of the Board’s ruling because this was a license disciplinary proceeding. The Holmes case also includes issues about how deferential the courts should be to a licensing agency’s administrative rulings. This case is unusual in that Mark Holmes represented himself in his appeal to the Court of Appeals of Virginia. Mr. Holmes acknowledged that unlike the seller, he lacked the privity of contract with the contractor which potentially could be used to go to court in breach of contract. The Court of Appeals agreed with Culver and the Board for Contractors.
When homeowners conclude that a state-licensed contractor or tradesperson committed a wrongful act depriving them of their home or damaging its value, it is easy to see why the aggrieved party would want a governmental agency to help them. Most people deal with governmental agencies much more than courthouses or law offices. Lawsuits require significant commitments to pursue or defend. Public resources go to supporting various agencies that have apparent subject-matter authority. This may appear to be a taxpayer-financed legal authority to go after the professional. However, this strategy often does little more than aggravate the licensed professional, the agency officials and the consumer. The Holmes v. Culver case illustrates one key weakness with homeowners pursuing consumer complaints through the professional licensure and disciplinary board process.
When consumers are harmed by unprofessional conduct, usually what they want is to have the defect corrected, an award of money or the transaction voided. These kinds of remedies are conventionally handled in the court system. The professional regulatory boards focus on licensure. They consider whether a business is properly licensed, should the license be suspended or revoked, should fines be assessed, and so on. Prominent members of the industry typically dominate these boards. For example, licensed contractors sit on the Board for Contractors. Initiating a professional licensure proceeding is a clumsy means of advancing the specific interests of the consumer having a transactional relationship with the business. It is the judiciary that can grant money damages or other remedies arising out of the formation and any breach of the contract. Regulators focus on whether disciplinary action is warranted regarding the registration or licensure of the business. In the Culver Design Build, Inc. case, the Board for Contractors and the Court of Appeals for Virginia agreed that Mark Holmes did not have standing to contest a regulatory decision in favor of the contractor. The board had authority to punish Culver for failing to abate a regulatory violation. However, the board had no authority to order the contractor to take any specific action at the job site. The board did not deny Homes any right or impose upon him any duty in its decision, because its authority revolves around Culver’s licensure. It is the State Building Code Technical Review Board that has the authority to review appeals of local building code enforcement decisions, not the Board of Contractors. One of the appeals judges suggested that if Holmes’ contentions were taken to a logical conclusion, the new buyer of the house could have greater leverage over a contractor than the previous owner, whose remedies may be limited by the contract. In his oral argument, Mark Holmes admitted that trying to resolve his complaints through the Board of Contractors complaint process was, “cumbersome and very long lasting.”
Even if the consumer unhappy with an adverse decision made by a regulatory agency in response to a complaint has standing, her appeal to the courts may encounter other obstacles. The licensure dispute is unlikely to starts afresh on appeal. The courts tend to be receptive to the agency’s interpretation of the legislature’s statutes. In Virginia, courts accord deference to an agency’s reasonable interpretation of its own regulations (as adopted by the board pursuant to the statutes). A consumer’s ability to raise new factual issues may be strictly limited in her attempts to get the courts to overturn the board’s decision. Judicial deference to agency rulemaking is not without controversy. Judge Neil Gorsuch, whom President Trump nominated for the U.S. Supreme Court is a high-profile critic of judicial deference to agencies. In his August 23, 2016 concurrence to a federal appeals decision Gutierrez-Brizuela v. Lynch, Judge Gorsuch explained that concentration of both legislative and judicial power in regulatory agencies creates constitutional problems. The constitution protects the public from authoritarianism by separating the government by the type of power, not the subject-matter. Under the constitution, the legislature prescribes new laws of general applicability. Taken to its logical conclusion, doctrine that courts should defer to agencies’ quasi-judicial determinations of what the statutes mean unconstitutionally undercuts the independence of the judiciary. The constitutional problems identified by Judge Gorsuch are illustrated in the arena of housing industry occupational regulation.
Where does this leave an owner when property rights are infringed by regulated professionals? Should everyone should go back to renting? Certainly not! This is what the independent judiciary is there for. Usually owners have privity of contract with the contractor and do not need to go to an agency. They can sue for remedies for breach of contract or deceptive practices. Consumer advocates with an interest in legislation should focus on increasing access to the court system and not promoting an administrative process that may not be a good fit for the homeowner. If you find yourself needing to bring or defend a construction claim, contact my office or a qualified attorney in your jurisdiction.
Case Citations:
Homes v. Culver Design Build, Inc., No. 2091-13-4 (Va. Ct. App. Jan. 27, 2015) (Alston, J.)
HOMES V. CULVER DESIGN BUILD, INC. APPELLATE ORAL ARGUMENT
Gutierrez-Brizuela v. Lynch, No. 14-9585 (U.S. Ct. App. 10th Cir. Aug. 23, 2016) (Gorsuch, J.)
Photo Credit:
ehpien Old Town Alexandria via photopin (license)
February 28, 2017
Little Love Lost in Sedimental Affair
A lawsuit for damage to property must be timely filed to prevail in court. In Virginia, the statute of limitations for property damage is five years from accrual of the claim. When an owner suffers damage caused by a neighboring owner, when does this five year time-period start running towards its expiration date? Does the clock start ticking at the time the trespass or nuisance began or some other moment? On February 16, 2017, the Supreme Court of Virginia issued a new decision finding that when the effect of the offending structure is continuous, the claim accrues when damage began. The distinction between “temporary” and “continuous” is potentially confusing and the stakes are high in real property damage cases. Understanding how Virginia courts apply these rules is essential whenever owners and their attorneys discover what is happening.
Forest Lakes Community Ass’n v. United Land Corp. of America involved property that I have driven by numerous times. I grew up in Orange and Culpeper Counties in Virginia. My family would drive down Route 29 to shop or attend sporting events in Charlottesville. The Charlottesville area prides itself as the home of President Thomas Jefferson and the University of Virginia. Along Route 29 is Hollymead, an artificial lake built from a sediment basin. A sediment basin removes silt or other particles from muddied waterways. Two HOAs, Forest Lake Community Association, Inc. and Hollymead Citizens Association, Inc. jointly own Lake Hollymead.
The defendants included United Land Corp. and other owners and builders of the Hollymead Town Center (“HTC”) upstream from the Plaintiff HOAs’ lake. In 2003-2004, defendant developers constructed three new settlement basins along Powell Creek, the tributary to Lake Hollymead. Owners in the HOAs complained about excessive influx of sediment from the HTC construction into Lake Hollymead. If I bought a home with lake views, I wouldn’t like looking at muddied waters either. The HOAs complained that the defendants caused excessive sedimentation by improperly removing vegetation within the Powell Creek watershed.
If this was a serious problem, how did it get through the county’s permitting process? According to the case opinion, the development complied with state and local regulations regarding retainage of sediment within the three new basins. The county rejected suggestions from downstream owners that upgraded sediment filtration systems be required of HTC. The case doesn’t discuss whether the county’s standards did, or should set a benchmark for the reasonableness of the defendants’ control of sediment. Owners may have a right to sue even when the city or county refuses to intervene in a property damage dispute.
Discussions continued within these HOAs for years. In 2011 they finally filed suit, alleging nuisance and trespass. The HOAs asked for the court to award them money damages and an injunction requiring the defendants to stop the excessive drain of sediment. The HOAs enjoyed standing because they jointly owned Lake Hollymead as a common area. Incursion of sediment into Lake Hollymead began during HTC’s construction. The HOAs argued that intermittent storms caused subsequent separate and distinct sediment incursions, each triggering new causes of action that restarted the five year statute of limitation. This was contradicted by the HOAs’ expert who acknowledged that at least a little sediment incurred continuously. The HOAs also argued that the defendants’ sediment currently sits in Lake Hollymead and will continue to trespass until someone digs it out.
When a case comes to a lawyer for the first time, her initial assessment considers statutes of limitation. Legal claims have a corresponding statute of limitation setting a deadline by which the claim must be brought. Even if the claim is one day late it can be dismissed as time-barred. The HTC defendants sought to have the HOAs’ claims dismissed because they waited over five years after the sediment problem began in the 2003-2004 timeframe. After a day of testimony, Judge Paul M. Peatross found that the statute of limitations barred the claims because they accrued in 2003 and sediment incurred continuously thereafter.
The HOAs sought review by the Supreme Court of Virginia. Their appeal focused on Judge Peatross’ ruling that the claim was barred by the five-year statute of limitation because the continuous damage accrued at construction.
Justice D. Arthur Kelsey explained in the opinion that under Virginia law, a claim for an injury to property accrues when the first measurable damage occurs. Subsequent, compounding or aggravating damage attributable to the original problem does not restart a new limitations period. The court acknowledged that plaintiffs might need to seek a claim for an award for past, present and future damages. This accrual principle applies where the permanent structure causing the injury could be expected to continue indefinitely. I find this confusing, because drainage systems and sediment basins have lifespans. After a number of years, they fail or require repairs. Anything that comes into contact with water is under tremendous pressure. Perhaps what the court means is that the structure causing the injury is “permanent” if it would continue to cause the damage if maintained to continue to function as it did originally. This concept of “permanent structure” implies that its owner will maintain the nuisancing or trespassing feature as it presently exists.
Alternatively, in the facts of a case, a later cause of action might accrue that looks and acts like the earlier one but is a “stand alone” claim that starts a new five year limitations period. This can happen where the structure causes separate, temporary property damage. For example, some dams can be opened or closed. This exception can apply even when the physical structure causing the damage is a permanent fixture.
Justice Kelsey acknowledged the challenges applying these principles to particular cases:
Though easy to restate, these concepts defy any attempts at formulatic applications. Because the underlying issue – determining the boundaries of a cause of action – depends to heaving on the factual context of each case, our jurisprudence has tailored these principles to analogous fact patterns and rights of action.
To resolve these issues, the Supreme Court relied upon the factual finding of the Circuit Court that the three HTC sediment basins discharged into Lake Hollymead on a continuous basis and that the five year statute was not revived by a later, discrete discharge episode.
Ordinarily, on these motions to dismiss a lawsuit, the courts tend to give plaintiffs a benefit of the doubt. Often judges will look to see if the facts are contested so as to warrant a trial. Here, Judge Peatross took a day’s worth of testimony in a pretrial hearing. The HOAs may have appealed on the hope that the Circuit Court short-circuited the case too early and the Supreme Court would rule that they deserved another chance to have their case heard on its merits. This case may embolden more defendants to put on expert testimony in support of a plea of a statute of limitations in the hopes that their cases could be brought to a quick end.
The easiest way to avoid these kinds of statute of limitation problems is to file suit early enough so that either way the court looks at it, it would be deemed timely. Plaintiffs and their lawyers should file early to avoid the necessity of having to litigate such issues in day long evidentiary hearings and on appeal.
Case Citation:
February 6, 2017
The Surface Water Diversion Blame Game
According to the Bible, water is both the fountain of life and a destroyer by flood. Water naturally plots its own course, creating wetlands to store excess storm water. Human development, for better or worse, seeks to maximize the value of property and minimize land set aside for natural wetlands or artificial drainage purposes. The proximity of water can enhance or damage the value of real estate. For example, waterfront properties tend to fetch higher sale values. Sometimes neighbors will improperly channel water off their own land onto that of another in an effort to fend off unwanted surface water diversion. Lawyers and judges describe unwanted surface water as a “common enemy” because both neighbors seek to avoid it. The common law tradition developed a system of rules whereby judges can resolve disputes between neighbors over the reasonableness of surface water diversion.
Sometimes it is not a family or business that owns the uphill parcel that is diverting surface water. A property owner might find herself contending with a governmental or community association neighbor in a surface water diversion dispute. In a recent Southwest Virginia lawsuit, owner Consortium Systems, LLC sued two contractors, Lane Engineering, Inc. & W-L Construction & Paving, Inc. who constructed a sediment pond on a neighboring technology park owned by Scott County Economic Development Authority (“County EDA”). Rural counties like to build technology parks to attract out of town businesses to relocate there. Consortium alleged that the EDA’s contractors built the sediment pond without a proper outlet or outfall.
Owning property beside a public or private common area can be an advantage or a risk. Businesses want to locate themselves near parking, amenities and potential sources of customers or vendors. However, if a dispute arises between an owner and a governmental neighbor, the private party may find themselves facing additional legal obstacles. Sometimes governmental entities enjoy sovereign immunity, shortened lawsuit filing deadlines or additional notice procedures. Consortium tried to sue the contractors for negligence, trespass and negligent surface water diversion. The owner argued that the contractors should be liable to damage to neighboring properties because they faultily constructed the drainage facilities on the County EDA property. In his January 9, 2017 ruling on the contractors’ pretrial motions, Judge John C. Kilgore made findings illustrating an owner’s challenges to sue its neighbor’s contractors:
- Common Enemy Doctrine. Because surface water must go somewhere in developed areas, the common law tradition allows neighboring owners to “fight off” the “common enemy” onto neighboring parcels. Virginia, like many states, has an exception requiring surface water diversion to be done, “reasonably and in good faith and not wantonly, unnecessarily or carelessly.” Virginia courts find improper surface water diversion where the neighbor collects water into an artificial channel and redirects it onto someone else’s land.
- Sovereign Immunity. Virginia counties enjoy the sovereign immunity of the commonwealth. Municipal corporations are also entitled to sovereign immunity when exercising governmental functions. This immunity extends to contractors working for a governmental body. However, sovereign immunity does not protect the negligent performance of the government’s contractor. Judge Kilgore found the Economic Development Authority’s construction of the technology park to enjoy sovereign immunity without discussion in his opinion letter. Consortium’s negligence claims had been previously dismissed.
- Who is Responsible, the Neighbor or their Contractor? Judge Kilgore observed that the two defendants, Lane & W-K were working on behalf of the EDA. Generally speaking, the owner of a neighboring parcel is responsible for the acts of its representatives and contractors. The Court did not find authority for holding the neighbor’s contractor liable for the surface water diversion, in this situation.
The court previously dismissed Consortium’s claims for negligence as not being timely brought. In its January 2017 ruling, Judge Kilgore dismissed Consortium’s other claims, which were for trespass and diversion of surface water as barred by sovereign immunity.
The Consortium Systems, LLC v. Lane Engineering, Inc. case contains several surface water diversion takeaways in addition to the judge’s legal rulings. First, when flooding occurs, the suffering owner should investigate the causes and potential remedies for the drainage problem. Sometimes the answer is not obvious. In serious cases, this may require the assistance of an engineer or other expert. Second, all flooding problems should be addressed promptly before additional damage occurs. If a neighbor is to blame, they should be notified promptly. Third, the law may apply a standard of care that is different from what may appear as ground water diversion best-practices. The flooded owner or her attorney may need to consult HOA documents, covenants, deed restrictions, easements, county storm water management guidelines, state case law and other authorities to determine the parties’ relative rights and responsibilities.
Case Citation:
Consortium Systems, LLC v. Lane Engineering, Inc., 2017 Va. Cir. Lexis 2 (Lee Co., Jan. 9, 2017).
Photo Credit:
KevinsImages New 2016 drainage Juniper rd. via photopin (license)(does not depict any facts discussed in blog post)
January 24, 2017
What’s left of Virginia’s HOA Open Meeting Policy?
Promoters of community associations tout them as “mini-democracies,” reflecting the American tradition of public participation in governmental activity on a local level. One hallmark of “representative government” is that constituents may openly observe and review what their elected officials are doing with the money and property controlled for common benefit. Norman Rockwell enshrined this in his famous illustration of a working-class gentleman standing up to speak during a “town hall” meeting. If a citizen could not review proposed enactments and observe the deliberations of their rulemaking bodies, a fundamental element of democracy and the rule of law would disappear.
Lack of transparency and accountability between the management group and the owners is a widespread problem. With every news report about a condo building collapsing, managers embezzling thousands of dollars or the board awarding lucrative contracts to affiliated vendors, questions arise about how effective oversight could cure these ills. Today, the Washington Post ran an article about a Maryland HOA case where the judge found that the board improperly enforced a resolution requiring all owners to replace their mailboxes with a new $500.00 design. Fair elections, open meeting policies and freedom of information are the supposed safeguards for a resident’s peace of mind. Given Americans’ love affairs with democracy, truth, home ownership and their own pocketbooks, one would expect legislative efforts to strengthen HOA boards’ transparency to their members. Unfortunately, legislation passed by the 2016 Virginia General Assembly and a new bill introduced in the 2017 session trend in the opposite direction. This blog post examines the HOA open meeting principle, legislative and board governance trends limiting transparency, and whether the proposal currently before the General Assembly will promote openness.
According to the “open meeting” requirement, HOA boards and committees may not conduct deliberations and decisions outside of a publicized meeting. One exception to the “open meeting” requirement is the power of the board to meet in “executive session” to discuss certain sensitive matters such as the status of anticipated or pending litigation. The board must exit executive session and make an open resolution about any matter covered behind closed doors. When the election of board members and the open meeting policy work, board members are accountable to owners. When it works, the only way the owner can lose his voice is by avoiding the meetings. Quite often, these rules are simply ignored by directors and managers who either don’t know or care about them. The failure to observe these formalities leaves many attorneys who represent boards concerned that this might have adverse effects on the outcome of owners’ lawsuits challenging the decisions.
Many HOA bylaws and statutes appeared decades ago when people communicated by paper and the telephone and met in-person. In 2017, there are many ways that people can meet through communication technology. In person meetings by groups have mostly been replaced by “staying in touch by group e-mail.” HOA board members are not paid. Most would like to minimize in person meetings to save time. Attorneys and managers like to accommodate their boards’ requests while maintaining regulatory compliance. Owners who attend meetings who are not directors tend to not say much, ask time consuming questions or directly challenge the decisions and practices of the board and management. Management’s motive to limit the “open meeting” duty is obvious. The risks of this to the community are well known. The board is supposed to oversee the property management company and other employees, contractors and agents that take care of things on a day-to-day basis. Without effective board oversight, a HOA can easily devolve into one where the president and/or the property management company is running things without accountability.
On January 11, 2017, Delegates David Bolova & Joseph Lindsey introduced House Bill 1553 into the Virginia General Assembly that addresses this very issue. HB 1553 would amend a section of the Property Owners Association Act, Va. Code § 55-510.1 regarding meetings of the board of directors. HB 1553 proposes how 2016 legislation allowing for nonstock corporation board action by written consent without a public meeting would apply in the HOA context. The General Assembly amended Va. Code § 13.1-865 in 2016 to greater facilitate “action without meeting of board of directors” of a nonstock corporation. Almost all Virginia HOAs are nonstock corporations. Previously, a nonstock corporation board could only act without a meeting where the governing documents didn’t specifically require it and all of the directors signed a written consent to the resolution without the meeting. The 2016 amendments relaxed the onerous unanimous consent requirement. Now, if the articles of incorporation so allow, a board can act by written consent in lieu of a meeting if accepted by a majority of the directors (or by a quorum if larger). The directors may indicate their consent by paper or electronic means. A few sentences in the governing documents can greatly limit the duty to conduct business in open meetings.
The 2016 amendments contain an interesting privilege for directors who do not want the board to act outside of the public meeting. If any director doesn’t like the proposal, she can either abstain from it or submit a written objection within 10 days that forces the board to take up the matter in a future open meeting. This statute allows directors to initiate new proposals outside of the open meetings. If the proponent has enough director consents, the only way that a non-director owner could comment on it would be if one director submits a timely objection. One or more directors who disapprove of the majority’s policies would have to decide if they want to force an open meeting on the subject or simply allow the likely outcome to run its course without a meeting. Where the articles of incorporation allow, this legislative amendment creates a potent exception to the open meeting requirement.
A written consent without a meeting cannot be made casually by a majority hashing things out informally by email. The directors’ entitlement of 10 days’ notice is a practical impediment if the board meets once a month. While powerful, these new procedures are not a free-for-all to the board majority enjoying a favorable set of governing documents.
HB1553 proposes how these 2016 amendments to the Nonstock Corporation Act would apply within the context of the statutory requirements for board meetings. Va. Code § 55-510.1 requires that all board and committee meetings be open to all owners. The statute forbids directors from using “work sessions” or other informal gatherings to circumvent the open meeting requirements. Boards must take and keep written minutes of the director’s meetings. HB1553 would require any written consents without a meeting pursuant to the amendments to the nonstock corporation act to be added to the agenda packet for the next HOA board meeting. Members would be permitted to make comments on these consents, which by that time may already be valid and in force. The board has the authority to rescind any consent made without a meeting. Of course, it is a lot harder for an owner to argue against a resolution once it is already adopted and valid.
I have several questions about how this proposed 2017 legislation would work with the 2016 amendments and the realities of HOA governance:
- How Do Board Open Meeting Requirements Reconcile with Power to Act by Written Consents without a Meeting? The proposed amendment does not eliminate the open meeting requirement, it just clarifies a significant exception for certain written consents executed outside of meetings. Are directors permitted to deliberate and debate the proposed consents outside of meetings, despite the open meeting requirement? Or are they only allowed to accept, decline or object to the proposed consent, with no questions asked or information given? Is the “consent without a meeting” option a narrow exception to the “open meeting” requirement, prohibiting any back-and-forth other than the notice, text, acceptance or objection? Would this drive boards to make ill-informed or erratic decisions without regular meetings? Some dissident directors might feel compelled to exercise their “objection” privilege to force all such proposals into an “open meeting.” This could easily strain tenuous director relationships.
- Could Written Consents without a Meeting Deprive Owners of their Rights to Educate Themselves and Engage their Concerns? None of these statutes require any proposed written consents to be circulated to the owners before consideration by the directors. The legislation doesn’t require the proposal to go before the owners or an open meeting before circulation for approval. The proposal might greatly affect certain owners’ interests. An owner whose rights or interests are infringed by the written consent would later find herself fighting to undo resolutions that have already been adopted. There are many decisions that a board can make that are difficult to reverse once a contract is awarded. This legislative relaxation of requirements for consent without a meeting is ripe for abuse by boards and managers who don’t like people asking questions about what they are doing.
- Are Owners Entitled to Review Electronic Mail Between Directors Related to Written Consents without a Meeting? I’m concerned that that where these practices are adopted, the exception will practically swallow the open meeting requirement whole. If directors exchange emails or text messages with each other regarding a proposed written consent without a meeting, are owners entitled to review those messages as minutes, books and records of the association? As a practical matter, the HOA’s attorney may struggle to explain to the board what types of email communication are permitted and which ones aren’t under these laws.
- What is Left of HOAs as a “Mini-Democracy?” What is left of the “town hall” model in HOAs where the governing documents and state statutes allow board majorities to act outside of the “open meeting” ideal? This trend runs a strong risk of leaving owners with a level of transparency and accountability lower than what they enjoy with their city or county government. With regulatory agencies, the public has minimal “notice and comment” protections in administrative rulemaking. This new consent without an open meeting exception would offer even less protections to owners affected by adverse board decisions.
House Bill 1553 does not go far enough to keep all of the “tentpoles” up on the open meeting policy. I hope that the general assembly improves this bill so that the accountability of managers to boards and boards to members does not stray even further from the “Town Hall” civil ideal.
For Further Reading:
2017 House Bill 1553 to amend Va. Code 55-510.1, Meetings of the Board of Directors
2016 enacted Chapter 382, amending Va. Code 13.1-865, Action without Meeting of Board of Directors
January 13, 2017
Check Your Privilege, HOA
The attorney-client privilege is frequently misunderstood in the community associations context. When many owners request information, sometimes their board, board’s attorney or property manager asserts the attorney-client privilege. This may seem to obstruct their attempts to assess their property rights or how community funds are being spent. I recently had a conversation with a friend about an issue she raised at a HOA meeting. She asked the directors whether certain assessments were valid under the governing documents. The board consulted with their attorney, who answered them by e-mail. My friend suspected that the attorney advised the board that a judge would deem these assessments invalid. When asked, the board and their attorney refused to disclose the email, claiming attorney-client privilege (“ACP”). Since the board answers to the owners and the attorney works for the HOA, are the owners entitled to the attorney’s answering email? Does it make sense for any non-director owners to pursue copies of the attorney’s email?
In Virginia we have a court decision that addresses this issue that I will discuss. But first, let’s cover the basics. Anyone who deals with lawyers must understand how the ACP generally works. If an owner understands the ACP, she can more effectively pursue the information to which she is entitled and side-step unnecessary quarrels over confidentiality. This blog post will focus on the attorney-client privilege as applied by the courts in Virginia. The basic principles are similar in states across the country. Does this doctrine really allow boards to conceal important plans and communications in a shroud of secrecy? Not really, but it is often, baselessly asserted in many disputes, including HOA and condominium matters.
The purpose of the ACP is to encourage clients to communicate with attorneys freely, without fear of disclosure. This way attorneys can give useful legal advice based on the facts and circumstances known to the client. The Supreme Court of Virginia defines the ACP as follows:
Confidential communications between attorney and client made because of that relationship and concerning the subject matter of the attorney’s employment are privileged from disclosure, even for the purpose of administering justice . . . Nevertheless, the privilege is an exception to the general duty to disclose and is an obstacle to the investigation of the truth, and should be strictly construed.
The burden is on the party asserting the attorney-client privilege to show that it is valid and not waived. The privilege can easily be waived by disclosure of the communications to third parties. Waiver may be intentional or negligent, where the disclosing party failed to take reasonable measure to ensure and maintain the document’s confidentiality. Judges will consider waiver of privilege questions on a case by case basis. In general, the courts are reluctant to weaken the privilege by finding waiver in doubtful circumstances.
Contrary to popular belief, the privilege does not apply to every document or communication transmitted between an attorney and client. For example, if the client sends the lawyer corporate or business documents related to the facts of the case, those items would not be protected by the privilege by the mere act of transfer. It is quite possible that only the cover letter would be privileged. Generally, the privilege covers the seeking and delivery of legal advice.
Related to the attorney-client privilege is the “work-product doctrine.” The work product doctrine protects from disclosure the interview notes, office memoranda, internal correspondence, outlines, mental impressions and strategy ideas of the client’s lawyers prepared with an eye towards litigation.
When the client is an incorporated association and not an individual, questions arise as to which people function as the “client” as far as the privilege is concerned. Corporations can only act by means of their human representatives. This will often extend beyond the officers and directors of the corporation. Courts have found the privilege not waived when employees were privy to the communications. While the privilege is sacrosanct, it is narrow in scope and easily waived.
In Batt, et al. v. Manchester Oaks HOA, a group of owners challenged their board’s policy whereby parking spaces were assigned in a community where some townhouses had garages and others didn’t. Parking is a precious commodity. The plaintiff owners sought correspondence between the HOA’s leaders and their attorney. The owners asked the Circuit Court of Fairfax to order Manchester Oaks to produce the documents. They argued that the directors were fiduciaries of the owners and the suit asserted that the board acted inimically to the owner’s interests. In some other states, this is a judicially recognized exception to the ACP in some contexts. Judge Terrence Ney, who was highly respected within the local bar, declined to adopt the “Fiduciary-Beneficiary Exception” because that would “chill” communications between parties and their attorneys for fear the exchanges could be used against them in the future. I think he got this right. Properly understood, this does not infringe upon owners’ rights. Here’s why:
- Owners Need Boards to Act Competently. Owners need their boards to freely share their concerns with their attorney without fear that someone could later obtain the emails and use them against them. Community associations law is complex. For HOAs to work properly, boards need legal counsel to help them accomplish worthy goals while complying with the law and the governing documents. Owners need the HOA’s lawyer to tell the board what they can’t do, so that they can avoid doing bad things.
- The Director’s Fiduciary Duties Are Primarily Defined by the Governing Documents. If a fiduciary-beneficiary exception applies to a communication, that would be shown in the covenants, bylaws or perhaps a statute.
- The Board’s Lawyer is Not the Community’s Judge. When new owners visit HOA meetings and see directors defer to the association’s counsel on legal matters, this may lead to a misconception that the written opinions of the HOA’s lawyer are the “law of the land,” subject only to review by a judge. The opinions of the board’s attorney are simply her advice. Sometimes attorneys are wrong. Trial judges and appeals courts exist to make final determinations on contested legal disputes.
- “What Did the Board’s Attorney Advise” is Not the Best Question. This is really the most important point here. Requesting the HOA to disclose its attorney-client communications is not the best question to ask. Instead, the owner should ask the board to explain its authority to adopt or enforce a resolution. A HOA or condominium’s legal authority is public. It is written in a declaration, covenant, bylaw, statute, etc. The written legal authority and the official policy cannot be privileged. If the owner and board were to end up in litigation, sooner or later this would have to be spelled out in court. Chasing after what the attorney confidentially advised the board is not the direct path to solving the owner’s problem. If the board or its managers object on grounds of privilege when an owner asks them to point to the section in the governing documents that undergirds the policy, then the owner needs a lawyer of her own.
Ultimately the owners challenging the directors’ parking policy in the Manchester Oaks HOA case prevailed in Court, invalidating the board’s parking resolution. They didn’t need the attorney’s advice letter to achieve this. In other cases, owners don’t need to invade the board’s privilege, when it is properly invoked. However, it is very common for corporate parties to try to abuse the attorney client privilege in litigation. When someone invokes the attorney-client privilege in a HOA dispute, that is a good time to retain qualified legal counsel. If a party doesn’t back down when called out on an improper invocation of privilege, the dispute can be put before a judge. This “Check Your Privilege, HOA” blog post is the first in a series about how the attorney-client privilege is used and misused in the community association context. In future installments, I plan on discussing a couple hot topics. Does the Property Manager qualify as the client for purpose of the ACP or is it waived if the manager participates in the discussions with the attorney? Are the HOA’s lawyers’ billing statements protected from disclosure to the owners by the ACP or are they fair game?
For Further Reading:
Batt v. Manchester Oaks Homeowners Ass’n, 80 Va. Cir. 502 (Fairfax Co. 2010)(Ney, J.)(case reversed on appeal on other issues).
Walton v. Mid-Atlantic Spine Specialists, P.C., 280 Va. 113 (2010).
Michael S. Karpoff, “The Ethics of Honoring the Attorney-Client Privilege” (CAL CCAL Seminar Jan. 31, 2009)
Photo Credit:
December 12, 2016
Construction Defect Warranty Claims
Construction defect warranty claims are a frequent source of conflict between contractors and new home buyers. Builders feel pressure to get the purchasers through closing so they can pay their employees, subcontractors and suppliers. For the past few years there has been a severe shortage of experienced tradespeople and supervisors. This makes the contractor’s quality control efforts more challenging. Inexperienced buyers can get frustrated with delays. They may wonder what would happen if they try to back out of the deal. When consumer complaints about construction defects are not resolved amicably, the parties often find themselves pursuing or defending lawsuits or arbitration proceedings.
New home buyers feel pressure from the contractor and the circumstances of their lives to go to closing. Later, they may discover decreased responsiveness to their customer service inquiries to the builder. What should parties do to prevent construction defect litigation from becoming necessary? How are these cases won and lost? I took up these issues in an October 14, 2015 blog post entitled, “Common Misconceptions about Home Builder Warranties” On November 21, 2016, the Circuit Court of Norfolk, Virginia decided a case that provides some valuable insights for contractors and purchasers.
In April, 2007, Benjamin Bessant and Dorothy Horne contracted with Dey Street Properties, LLC for the construction of a new home in Norfolk, Virginia. The buyers got the standard new home warranty pursuant to Va. Code § 55-70.1. Dey Street impliedly warranted that the home was constructed in a workmanlike manner and free from structural defects for one year from settlement or possession. The implied new home warranty includes a strict requirement that the buyer give the seller written notice of the alleged defects. This notice must be properly submitted to the seller within the one-year warranty period.
During construction of the home, Mr. Bessant purchased $650 in floor tile out of his own pocket and delivered it to the jobsite for an upgrade. Unfortunately, someone stole this tile while Dey Street maintained control over the premises. Because Dey Street failed to complete the project by the agreed upon delivery date, Bessant and Horne had to stay in a hotel for three weeks. On August 15, 2007, the purchasers moved in.
Shortly after move-in, the purchasers discovered several construction defects. Bessant mailed Keith Freeman (principal of Dey Street) a notice letter on September 5, 2007. Not getting much of a response, on December 20, 2007, the purchaser’s attorney sent another letter, this one addressed to “Freeman Homes, Inc.” Enclosed with the attorney letter was the purchaser’s September 5, 2007 letter with the list of defects. Dey Street proceeded to do some warranty repairs.
Note the confusion regarding who the purchasers were dealing with. In the facts of the case, the purchasers signed a contract with Dey Street. However, many contractors provide consumers with different pieces of correspondence that have different business names. Judge David Lannetti found that the buyers only had privity of contract with Dey Street Properties, LLC. However, because Mr. Freeman also sent correspondence to Bessant on Freeman Homes, Inc. letterhead, the court found that notices actually received by Mr. Freeman put the Dey Street company on actual notice of the warranty claim.
These parties were not able to amicably resolve these construction defect damages issues. Bessant and Horne sued Dey Street. This family experienced some struggles preparing for trial. The homeowners had certain damages excluded from the jury because they failed to submit a timely expert witness designation. Also, the owners failed to disclose the details of certain defects in response to the builder’s pretrial discovery requests.
Judge Lannetti’s opinion only talks about certain items at issue post-trial: $1,500 for flooring defects, $200 for subfloor repairs, $2,000 for the drainage and concrete problems on the porch and $200 for a porch column. The owners also wanted reimbursement for the stolen tile and the hotel stays. I suspect that there were additional defects claimed in the lawsuit but because pretrial disclosure deadlines weren’t met, the owners were prejudiced to assert them at trial. For purchasers, properly documenting the defects and the estimates to repair is not always easy. In most cases this requires finding another contractor to assess and estimate it.
After a two-day trial, the jury returned a verdict of $15,000.00 in favor of the owners. After the jury returned its verdict, the contractor moved to invalidate or set it aside the jury verdict. First, Dey Street argued that the owners waived their implied warranty claim because the first notice letter was never received and the second one was sent to Freeman Homes, Inc. and not Dey Street Properties, LLC. Virginia law requires the purchaser to send the written notice letter to the seller by hand delivery with retention of a receipt or by certified mail. The court found the certified letter to Freeman Homes, Inc. to be sufficient. The court observed that the owner of Dey Street used Freeman Homes, Inc.’s name and address in correspondence to the buyer. At trial Mr. Freeman admitted on the witness stand that he actually received the second notice letter and its enclosures. The owners are lucky that Mr. Freeman did not simply deny receiving anything. Because they have the burden of proof, the owners should take care to follow all formalities required in the contract or statute so that they don’t have to rely upon their opponent’s moment of candor in court.
Dey Street also argued that the evidence was insufficient to support a verdict of $15,000.00. Judge Lannetti found this argument more persuasive. Since the implied new home warranty statute doesn’t say anything about negligent security for the tile or consequential damages like hotel room bills, those items were thrown out. The court could not figure out how the jury could possibly have added the remaining evidence of defect damages could total $15,000.00. The judge recognized in his opinion that he was not permitted to substitute his own independent assessment of damages for the jury award, and could only look to what the maximum verdict that the evidence would support. Judge Lannetti reduced the $15,000 verdict and entered a judgment against Dey Street for $3,900. A tough result for owners when their jury was convinced that they were owed much more. If larger dollar amounts were at stake I would not be surprised if the owners petitioned to appeal the case.
Lessons from Bessant v. Dey Street include the following:
- Who Are the Parties? Purchasers should be clear about what party they are in contract with so that they can correspond with and sue the proper entity. Contractors must take care to ensure that everything is done in the name of the contractor identified in the written agreement to avoid personal liability.
- Formalities of Notice. When lots of money are at stake, parties shouldn’t rely upon their opponents to follow through on oral demands or representations. Notice requirements in statutes should be carefully followed. Assume that at trial the judge will expect proof of notice and one’s opponent will deny receipt of the written notice.
- Use Professionals. Engage with a construction litigator and independent expert witnesses early so that legal formalities can be observed and deadlines met to maximize results.
- Be Prepared to Deal with Delays & Headaches. Purchasing a home that hasn’t been built yet can be an exciting, and even cost-saving means of acquiring one’s dream home. It also carries with it significant risks of delays, defects and added expenses which may be difficult to get reimbursed for.
When legal disputes appear on the horizon, contractors and purchasers should seek the assistance of qualified counsel to preserve and protect their rights.
Legal Authorities:
Va. Code § 55-70.1 (Implied warranties on new homes)
Bessant v. Dey Street Properties, LLC (Norfolk Cir. Ct. Nov. 21 2016)(link available to VLW subscribers only)
Photo Credit:
Jason OX4 B-R Corridor at Sunset via photopin (license)(disclaimer: does not depict anything discussed in blog article)
November 15, 2016
Attorneys Fees Awards Against HOAs
In this blog and in my law practice, I focus on practical solutions to clear & present legal dangers to property rights of owners of properties in HOAs, condominiums or cooperatives. Many raise questions about getting attorneys fees awards against HOAs. This is an interesting topic in community associations law, where the outcomes of many disputes have a direct or precedential impact on other owners in the community. In my last blog post, I discussed a couple of 1990’s Virginia court opinions where owners’ counsel used an old English common law doctrine to solve modern HOA litigation problems. The doctrine of “virtual representation” allows individual owners to bring to complaints of general concern without naming every owner in the community as a plaintiff or defendant. Where the actual, named parties to the lawsuit fairly represent the interests of other members who are too numerous to add to the court case, the judge can nonetheless render a decision that binds all impacted parties. For example, a “representative” owner may bring a court case challenging an election or the validity of board resolution and the final order binds all members impacted by the election or board action. The doctrine of “virtual representation” solves a couple obstacles to owners gaining effective access to the legal system.
Today’s post discusses the problem of “free-riders” who may reap a benefit from other owners virtually representing them and footing the bills. In litigation, HOA boards draw upon the benefit of insurance policies, loans or assessment income to finance their legal expenses. The board may protract the dispute in a desire for a precedential effect or to simply wear down the owner. There is a case presently before the Supreme Court of Virginia where an owner accuses her association of the latter. Martha Lambert had a claim for $500.00 for reimbursement for certain repairs she made herself that were the responsibility of Sea Oats Condominium Association, Inc. The board’s lawyers defended the claim with time consuming motions and discovery normally used in cases where the amount in controversy is much larger than $500.00. Ms. Lambert “won” in the Circuit Court of Virginia Beach on what the judge described as a “close call.” The judge told the owner’s lawyer he did a “magnificent job” and reasonably pursued the case. However, the court only awarded $375 in attorney’s fees out of the full $9,568.50 amount Ms. Lambert incurred in the case. The only reason Ms. Lambert didn’t get the full amount was because the trial judge wanted to make an attorney’s fees award smaller than the $500 principal judgment. The Supreme Court accepted the appeal to determine whether the statute allowing for “reasonable” attorney’s fees required the Circuit Court to reduce the award to an amount in a nexus to the principal judgment awarded. Lambert accuses Sea Oats of engaging in “stubborn & obstructionist tactics.” Kevin Martingayle, Counsel for Ms. Lambert describes the trial judge as punishing the homeowner for vindicating her rights and discouraging others from doing the same when necessary. At stake is whether one party can get away with not performing their covenanted obligations because a lawsuit would add insult to injury. Lawyers practicing in the community associations arena around the state will watch to see what the Supreme Court does with this case.
The outcome of Lambert vs. Sea Oats only appears to directly impact the association and Ms. Lambert. In other HOA lawsuits, the rights of other owners are directly impacted by the outcome. What if, hypothetically speaking, a condo association caused injury to an entire floor of condominium units. One owner decides to sue. A plaintiff may find herself shouldering the burdens of similarly situated owners (“free riders”) not joining the suit or otherwise helping to pay for the legal expenses incurred by the plaintiff. Under many HOA governing documents and state statutes, the prevailing party at trial is entitled to an award of reasonable attorney’s fees against their opponent. What about the portion of a prevailing owner’s legal expenses which is attributable to representing the interests of similarly situated fellow members who are not official parties to the lawsuit? Would this provide a separate basis for an award of attorney’s fees reflecting the realities of “virtual representation?”
Since the 19th century, Virginia’s common law tradition of judicial precedents protects representative plaintiffs from the burden of the “free rider” problem. In “virtual representation” cases, the prevailing party may recover in their attorney fee award for legal expenses incurred in achieving the common benefit:
It is a general practice to require, when one creditor, suing for himself and others, who may come in and contribute to the expenses of suit, institutes proceedings for their common benefit, that those who derive a benefit shall bear their proportion of the expense and not throw the whole burden on one. This is equitable and just. But it only applies to those creditors who derive a benefit from the services of counsel in a cause in which they are not specially represented by counsel. If a creditor has his own counsel in a cause, he cannot be required to contribute to the compensation of another. Stovall v. Hardy, 1 Va. Dec. 342 (1879), quoted in, DuPont v. Shackelford, 235 Va. 588 (1988).
Virginia courts apply this “common fund” doctrine in awarding attorney fee awards in creditor suits, securities lawsuits, civil rights cases, trust & estate litigation and other representative litigation. In 1999, the Circuit Court of Winchester applied it in the context of a dispute among members of a defunct nonstock corporation over the proceeds of liquidated assets. Most community associations in Virginia are incorporated under the Virginia Nonstock Corporation Act.
The Supreme Court of Virginia recognized that the common fund doctrine serves to eliminate “free rides” that would unfairly burden litigants in cases that directly impact a class of represented parties not retaining counsel in the lawsuit:
The essence of the common fund doctrine is that it would be unfair to permit one party to retain counsel, to file suit, to secure a benefit that all will share, yet to leave the full cost of the effort upon the one party who initiated the suit while others who will share the proceeds make no contribution. If others are to sit idly by and reap the benefits of one litigant’s labors, the idle parties should share in the cost of those labors. In short, the common fund doctrine is aimed at preventing “free rides.” See J. P. Dawson, Lawyers and Involuntary Clients: Attorneys’ Fees From Funds, 87 Harv. L. Rev. 1597, 1647 (1974), quoted in, DuPont v. Shackelford, 235 Va. 588 (1988).
The common fund doctrine extends beyond cases where there is an actual “fund” of money to included cases where there may be some sort of injunctive, declaratory or equitable remedy that does not have a specific dollar amount associated with it.
I am not aware of any published judicial opinions where a judge has considered the “common fund” doctrine in representative plaintiff litigation specifically involving HOAs or condominiums. However, the Property Owners Association Act and the Virginia Condominium Act provide for “prevailing party” attorney’s fees. Is there any reason why the common fund doctrine should not be applied to avoid free riding of representative plaintiff litigation against community associations? I see no obstacle to use of this doctrine for such in a proper case.
Update July 20, 2022:
I have a new 2022 blog post about Attorney fee awards in HOA and condominium law cases. “Awards of Attorney’s Fees in Community Association Litigation.” This blog post addresses the issue of attorneys fees in these cases more generally, with greater focus on the procedural aspects of such claims.
In 2017 I posted an article more particularly about the Lambert v. Sea Oats Condo. Ass’n, Inc. case, “Condo Owner Prevails on Her Request for Attorney’s Fees.”
Case Citations:
Du Pont v. Shackelford, 235 Va. 588 (1988).
Turner v. Yeatras, 49 Va. Cir. 395 (Winchester 1999).
Photo Credit:
Jason OX4 Il Radicchio at the Border via photopin (license)(for illustrative purposes – does not depict anything from any case discussed)
November 3, 2016
Lawsuits Against HOAs Potentially Benefit Other Owners
In many HOA disputes, only one (or a small handful of) owners desire to challenge board actions that negatively impact a larger class of owners in the community. If the court finds that the board action was invalid, then the court decision would materially impact everyone, not just the plaintiff owners and the HOA. Today’s post is about how plaintiffs lawsuits against HOAs potentially benefit other owners. Usually, a plaintiff must name everyone materially impacted by a potential outcome as parties to the lawsuit. Must a homeowner join all owners as plaintiffs or defendants in a lawsuit against a HOA seeking judicial review of a board decision? What flexibility does the law allow for one or more owners to bring a representative claim against the association to benefit themselves and other similarly situated owners? How should attorney fees be handled in cases with “free riders”? The answers to these questions show tools for owners to enjoy greater access to justice in community association disputes.
Mass claims by owners may be brought against community associations in several ways. A group of interested owners can split the cost for one law firm to sue on their behalf. Alternatively, owners may bring separate suits and have the claims consolidated in court. Filing a class action may be a feasible option in many states. Is there any other way that claims can be brought to benefit both the named plaintiffs and other similarly situated owners? Can this somehow make lawsuits against HOAs more affordable?
There are good examples of such representative actions in Virginia. Ellen & Stephen LeBlanc owned a house in Reston, a huge development in Fairfax County, Virginia. Reston is a locally prominent example of where the community association model largely replaces the town or city local government. Most Restonians live under a Master Association and a smaller HOA or condo association. Such owners must pay dues and follow the covenants for both the master and sub association.
The LeBlancs owned non-waterfront property near Reston’s Lake Thoreau. In 1994, the Master Association decided that henceforth, only waterfront owners would be permitted to moor their watercraft directly behind their properties. This would substantially inconvenience the LeBlancs’ boating activities. The LeBlancs’ lawyer Brian Hirsch filed a lawsuit in the Circuit Court of Fairfax County challenging the validity of the master HOA’s decision on both constitutional and state law grounds. The association retained Stephen L. Altman to lead their legal defense.
Roger Novak, Judy Novak, Rex Brown and Dalia Brown all owned waterfront properties on this lake. These families did not want the LeBlancs or other non-waterfront Reston owners mooring their boats behind their houses. I can’t blame them for wanting a tranquil aquatic backyard all to themselves. The Novaks and Browns hired lawyer Raymond Diaz to bring a motion to intervene. The Browns and Novaks became parties to the suit. These intervenors asked the judge to force the LeBlancs to name all the owners in Reston as parties or dismiss the case for lack of necessary parties.
In general, a lawsuit must be dismissed if the plaintiffs fail to name all parties that are necessary for the case to be properly litigated. A suit on a contract or land record usually must include all parties named in the contract or instrument. The Novaks and Browns wanted to block people like the LeBlancs from enjoying mooring privileges on the lake. They wanted the LeBlancs to name all the parties subject to the covenants recorded in the registry of deeds for the Reston Association. If the LeBlancs had to litigate against the hundreds of owners, then the case could quickly become uneconomical, even if most were friendly. The Court denied the intervening parties’ motion, upholding an exception from well-established legal precedents in non-HOA Supreme Court of Virginia opinions:
Necessary parties include all persons, natural or artificial, however numerous, materially interested either legally or beneficially in the subject matter or event of the suit and who must be made parties to it and without whose presence in court no proper decree can be rendered in the cause. This rule is inflexible, yielding only when the allegations of the bill disclose a state of case so extraordinary and exceptional in character that it is practically impossible to make all parties in interest parties to the bill, and, further that others are made parties who have the same interest as have those not brought in and are equally certain to bring forward the entire merits of the controversy as would the absent persons.
The Circuit Court found this exception to apply:
In the case at bar, it is impracticable to join the estimated 400 to 500 homeowners surrounding Reston’s five lakes in this action. Likewise, the interests of these persons are the same as those of the parties to this action, and said parties are certain to bring forward all of the merits of the case as would the absent persons.
Hundreds of other owners are materially impacted by the case’s outcome. But this exception allows the case to proceed without adding them as necessary. Other individual owners are not barred from suing or become party to the LeBlancs’ case. The other owners weren’t necessary for the practical consideration of the sheer number of the affected class. The court found the LeBlancs sufficient to represent the case against the exclusive moorings rule, and the Novaks, Browns and the HOA competent to defend the board’s action favorable to the waterfront owners. The LeBlanc’s case was permitted to proceed without adding hundreds of affected owners. This “virtual representation” procedure is significant because the court’s ruling on the validity of the board’s resolution would affect all owners, not just the parties.
At trial, the Court upheld the Board’s decision to regulate boating activity on Lake Thoreau as a valid exercise of powers granted in the covenants. The LeBlanc’s case was dismissed. The Supreme Court of Virginia declined to reverse the decision. However, the principle that one or more owners can virtually represent the interests of a large class of homeowners in a contest over the validity of HOA rulemaking has not been overturned.
In 1996, the Circuit Court for the City of Alexandria applied the same principles in a homeowner challenge to a condominium election of directors. The Colecroft Station Condo Unit Owners Association Board asked the court to dismiss the judicial review of the election because not all owners were listed as plaintiffs. The judge rebuffed demands that all owners be added as parties, citing the same exception as used in LeBlancs’ case.
This exception that all materially affected parties need not be named as a plaintiff or defendant in the lawsuit is important to homeowners’ rights for several reasons. It gives an individual or small group of owners the ability to proceed with a lawsuit even when their neighbors might be friendly but uninterested in litigating. It gives owners another option when their rights are threatened and are not effectively redressed by board of directors’ elections or initiatives to amend the governing documents. Certain types of claims may be brought where class actions are not permitted or unfeasible. One brave owner could get a court to overturn an invalid board decision infringing upon the rights of many. This “virtual representation” doctrine advances the cause of homeowner access to justice in HOA and condo cases.
One challenge in these “virtual representation” cases is the notion of “free-riders.” The HOA’s attorney’s fees are paid for by the board’s accounts receivable: assessments, fees, loans and/or fines. Representative plaintiffs leading the challenge might find themselves “carrying water” for similarly situated owners who would stand to potentially benefit from the outcome of the case but aren’t paying lawyers. Is it fair for the challenging owners to pay for the legal work undertaken to achieve a benefit to both the plaintiff and the larger class? Are they entitled to an award of attorney’s fees reflecting the benefit conferred on behalf of other interested parties not named as plaintiffs? I will address this question in a future blog post focusing on the doctrine of “common fund” or “common benefit” in attorney fee awards and how this might apply in community association cases.
Case Citations:
LeBlanc v. Reston Homeowners’ Ass’n, 38 Va. Cir. 83 (Fairfax Co. 1995)
Cobble v. Colecroft Station Condo. Unit Owners’ Ass’n, 40 Va. Cir. 105 (Alexandria Cty. 1996)
Photo Credits:
pnyren35 20160131_Reston Trail Walk-187.jpg via photopin (license)
andrewfgriffith Flight Over the Town Center via photopin (license)
Bill Schreiner Dec15707 via photopin (license)
October 25, 2016
Virginia Consumer Protection Claims Against Contractors
There is a lot of litigation and arbitration in the construction contracting industry. Most of these cases are disputes over whether the contractor did the work and if so, whether it has been appropriately compensated under the terms of the agreement. Some construction disputes include allegations of deceptive practices. Virginia law approaches unprofessional practices in the construction contracting industry in two ways: First, construction contractors must obtain licenses to do business here. A builder is subject to professional sanction if the Board for Contractors finds that the conduct violated regulations. There is a fund managed by the board, from which unsatisfied claims may be paid if certain criteria are met. Second, owners, general contractors, subcontractors and other parties can bring lawsuits (or where agreed, arbitration claims). Can residential owners bring Virginia consumer protection claims against contractors? Parties unfamiliar with these rules often need help navigating the legal system to protect their rights.
VCPA & License Regulation:
In the 1970’s, the General Assembly adopted the Virginia Consumer Protection Act (“VCPA”). The main purpose of the VCPA is to make it easier for consumers (including homeowners) to bring legal claims against suppliers for deceptive practices. Before the VCPA, consumers had to prove fraud. Suing for fraud is attractive because a court may award attorney’s fees or punitive damages for fraud. However, fraud carries a higher standard of proof and many defenses that the consumer must overcome. In a proper case, the VCPA allows for tripled damages and attorney’s fees. The legislature has exempted certain types of real estate related business activity from the VCPA, including regulated lenders, many landlords and licensed real estate agents. What about contractors? Are contractors subject to professional regulation and exempt from the VCPA? Last month, the Circuit Court of Loudoun County considered this question in a lawsuit arising out of a residential custom contracting dispute.
Closing the Sales Process for the Custom Residential Construction Project:
On May 20, 2015, licensed contractor Interbuild, Inc. made a written agreement with Leslie & John Sayres for the construction of a large recreational facility on their property. The Sayres agreed to pay $399.624.00 for what would include a batting cage, swimming pool, exercise area and bathroom. According to the Sayres, they relied upon certain false representations by Interbuild in their decision to move forward with the contract. They allege that Interbuild told them the following:
- Interbuild had been established since 1981.
- The project did not require a building permit.
- The contractor already priced things out with subcontractors.
- Interbuild would supervise construction full-time.
- The project would be completed in 16 weeks.
- 4000 PSI concrete would be used.
- The building would be constructed upon an agreed upon area.
On October 20, 2016, attorney Chris Hill discusses this Sayres opinion in his Construction Law Musings blog. He observes that many of the alleged misrepresentations sound like things that would be specifications or terms of the contract. Hill raises concerns expressed by Interbuild’s lawyers that the Sayres complaint attempts to transform a breach of contract case into a fraud claim. I agree that this fraud in the inducement claim will be a challenge to pursue. However, I think that some of the fraud claims described in the Sayres counterclaim sound more like promissory fraud than anything else. Under Virginia law, promissory fraud occurs when one party makes a promise to the other that they have no intention of keeping, and the listener relies upon this empty promise to their detriment. In July, I blogged about this in the foreclosure context. If a false promise remains fraud even after reduced to a contract, then the Sayres fraud in the inducement claims make more sense.
Some of these alleged misrepresentations appear potentially more serious than others. While contract management experience is important, the Sayres contracted with Interbuild for a certain result. The experience was not an end unto itself. A missing permit could become a problem if the county later decided that the construction was not code-compliant and wanted substantial, costly corrections. The subcontractor pricing could become an issue if it could be proven that Interbuild was effectively unable to complete the job from the get-go. A contractor is required to provide adequate supervision regardless of what is represented. Rarely will you see a written agreement that absolves a contractor of this. In a proper case, courts will award damages for delay. However, the Sayres would have to prove that they relied upon the agreed delivery date. I suspect that this lawsuit is not about the Sayres inconvenience of continuing to exercise in a different place. The strength of the concrete raises serious structural questions, but would require proof by expert testimony. Building the project on the spot where the customer wants is indeed a fundamental issue. However, it might be shown that the location under the contract is unfeasible due to site conditions or that the difference is only slight. In general, the damages must flow from the misrepresentations. Courts are reticent to award a windfall to purchasers if the lies are of minimal consequence.
After paying most of the purchase price but before completion, the Sayres terminated the contract. Interbuild sued for work that was allegedly performed but not paid for. The Sayres filed counterclaims for fraud in the Inducement, VCPA and breach of contract.
Fraud in the Inducement:
Interbuild sought a court ruling on whether the Sayres could move forward with their fraud in the inducement and VCPA claims. The Contractor argued that the fraud claim should be thrown out. Interbuild maintained that the fraud claim was not proper because the customer only alleges that their expectations under the contract were disappointed. In its September 8, 2016 opinion letter, the Court dispensed with this argument, distinguishing between fraud inducing formation of the contract and fraud in the performance of the contract. The court found that the counterclaim clearly alleged that the misrepresentations were made to convince the Sayres to sign the contract. Because the alleged fraud occurred before the contract came into being, the claim is not alleging disappointed contractual expectations.
When legal disputes arise, owners and contractors frequently focus their attention on things that were most recently said or done. A contractor may be unhappy about an owner’s hands-on attitude about a project. Customers may take offense at the contractor’s customer service. However, the case might be about fraud in the inducement issues that come from the sales process. In the Sayres case, the judge allowed the fraud in the inducement claim to move forward.
The VCPA:
Interbuild adopted a different approach in its attempt to get the Sayres’ VCPA claim dismissed. The contractor argued that since it is subject to regulation as a licensee of the state contracting board, it is exempt from the consumer protection statute. While the VCPA does not specifically name contractors as exempt, it does exclude “any aspect of a consumer transaction which aspect is authorized under laws or regulations of this commonwealth. Va. Code § 59.1-199. Contractors are subject to state regulation by Va. Code § 54.1-1000, et seq. In his opinion, Judge Douglas L. Fleming, Jr. followed judicial precedents distinguishing between consumer transactions that are specifically sanctioned by law vs. those that are merely regulated. The absence of a prohibition of a particular practice does not constitute authorization of that practice. Since the professional regulations do not specifically cover the particular types of business practices at issue, this statutory exemption does not protect the contractor from suit. The court found that the alleged misrepresentations are the kind of practices that are actionable under the VCPA. This is consistent with other rulings made by Virginia courts in cases between consumers and construction contractors.
The VCPA also provides that a consumer may sue a contractor for not having a license. Interbuild argued that because it had an active contracting license it was exempt from the VCPA. Since Interbuild is subject to license revocation for conduct that violates professional regulations, that should be the sole remedy under the state statutes. Judge Fleming rejected this argument, observing that the state’s licensure regulations do not, “inferentially cloak licensed contractors with VCPA immunity if they are shown to have committed deceptive practices.” In short, a professional license does not include with it a privilege to engage in fraudulent behavior.
News reports frequently raise public policy questions about professional regulation. Each year, more occupations become subject to licensure requirements. Usually this means that the leaders in that industry regulate its participants by means of a state board. Too often, self-regulating industries use these boards to protect prominent members against competition. Consumers look to the boards for relief from predatory practices, but are often frustrated by the results. Interbuild’s arguments seem to appeal to this notion that as a licensee, its customers should have to go through the board if they want a special remedy. Bear in mind that there is a public demand for housing prices to go down. Builders have a more organized lobby than consumers regarding professional regulation and limiting liability for extra damages in lawsuits. Given market demands, I wonder how close the General Assembly is to exempting contractors from the VCPA. The construction industry provides many jobs to Virginia. However, I think that the public’s interests would not be served if quality and service were sacrificed for job creation and affordability concerns. A defect-riddled house is the most unaffordable of investments to its owner and doesn’t help the “property values” of others.
All the September 8, 2016 opinion decided was that Interbuild’s counterclaims may move forward in litigation. Even under the lower standards and enhanced remedies of the VCPA, claims based on deception are difficult to prove and obtain an award of damages.
When disputes arise over custom construction contract projects, the parties cannot rely upon the board of contractors or the county’s permitting office to advocate or mediate for them. When payment issues, construction defects or other disputes arise, the services of an experienced construction litigator are necessary to protect one’s best interests.
For Further Reading:
Photo Credit:
Phil’s 1stPix Too Many Tonka Toys? via photopin (license)
October 13, 2016
High Court Upholds Public Policies Against Restrictive Covenants
The issue of restrictive covenants often comes up in news or social media stories where a HOA or condominium demands that an owner take down an addition, a shed, a statue or some other architectural feature on the grounds that it offends the rules. The board claims that the rule is found in (or derived from) a document recorded in the land records encumbering all of the properties in the community. The board’s assertion of the restriction may come as a surprise to the owner. In a recent blog post, Does an HOA Disclosure Packet Effectively Protect a Home Buyer?, I wrote about how the existing legal framework fails to adequately disclose to the purchaser what it means to live in a HOA. That post started some great conversations with attorneys, realtors and activists about how consumers could be better protected during the sale process. Today’s post focuses on what the legal requirements are for a contractual relationship to arise between the community association and a resale purchaser who did not sign off on the restrictive covenants originally.
Restrictive covenants that bind future owners are a legal device that predate HOAs and condominiums by hundreds of years. Community associations derive their power to collect $$$ from and enforce rules against their owners through restrictive covenants. However, many owners are not aware that enforcement of restrictive covenants are disfavored by Virginia courts on public policy grounds.
Restrictive covenants are contract terms which, if enforceable, follow the property or the person around even after the contract between the original parties is over. They aren’t limited to real estate. For example, a pest control company may ask an employee to sign an agreement not to compete against the employer even after leaving the company. Courts are skeptical of contracts that restrict the ability of a worker to make a living in the future. For public policy reasons, workers should be able to reasonably put their skills to use in the marketplace regardless of what a written agreement might say. The courts enforce only very narrowly tailored covenants-not-to-complete in the employment context. Judicial precedent and the uncertainties of litigation make many businesses reluctant to sue former employees now working as rivals.
Courts disfavor restrictive covenants on real estate for similar policy reasons. Covenants that bind future owners narrow the usefulness of the property. Labor and property should be freely marketable without short-sighted, unreasonable restrictions. Such a policy protects property values and market liquidity.
The Supreme Court of Virginia still shares this viewpoint. On February 12, 2016, the Court decided Tvardek v. Powhatan Village HOA. That case was about the validity of an amendment to the HOA declaration, including its restrictive covenants. In ruling in favor of the homeowners, the Court reaffirmed the strict construction of covenants that run with the land, even in contemporary HOAs. Justice D. Arthur Kelsey’s opinion explains:
“The common law of England was brought to Virginia by our ancestors” in large part “to settle the rights of property.” Briggs v. Commonwealth, 82 Va. 554, 557 (1886). At that time, English common law had developed a highly skeptical view of restrictions running with the land that limited the free use of property. “Historically, the strict-construction doctrine was part of the arsenal of restrictive doctrines courts developed to guard against the dangers imposed by servitudes.” Restatement (Third) of Property: Servitudes § 4.1 cmt. a (2000).
Virginia real estate law generally views restrictive covenants as a threat to liberty. University of Virginia law professor Raleigh Minor prophetically wrote in his 1908 treatise, “perpetual restrictions upon the use of land might be imposed at the caprice of individuals, and the land thus come to future generations hampered and trammeled.” If only Professor Minor could see how property rights have eroded in many communities today.
The viewpoint of many people in today’s real estate industry and local governments is the opposite of what courts have traditionally held. Buyers are told that covenants protect their investments from barbarian neighbors who might do something to make the surrounding properties look undesirable. But as Professor Minor pointed out 100 years ago, these rules give an opportunity for capricious enforcement. Is the message of our contemporary industry an insight misunderstood by previous generations, an appeal to the preferences of certain buyers who dislike non-HOA neighborhoods or merely a sales pitch?
English common law recognized very few restrictive covenants running with the land. Those receiving judicial approval appeared to be limited to easements appurtenant “created to protect the flow of air, light, and artificial streams of water.” United States v. Blackman, 270 Va. 68, 77, 613 S.E.2d 442, 446 (2005); see also Tardy v. Creasy, 81 Va. 553, 557 (1886). Over a century ago, we noted that “attempts have been made to establish other easements, which the [historic common] law does not recognize, and to annex them to land; but the law will not permit a land-owner to create easements of every novel character and attach them to the soil.” Tardy, 81 Va. at 557. Since then, in keeping with our common-law traditions, Virginia courts have consistently applied the principle of strict construction to restrictive covenants.
The court applied this principle in the Tvardek case where the association sought to enforce an amendment to the declaration against certain owners who didn’t vote for it. As the court reaffirmed in this 2016 decision, restrictive covenants are not always enforceable. The Tvardeks opposed being deprived of their right to rent out their property. The covenant has to fall within a recognized category. The principle of “strict construction” works against the restrictor and to the benefit and protection of the owner.
A restrictive covenant running with the land that is imposed on a landowner solely by virtue of an agreement entered into by other landowners who are outside the chain of privity would have been unheard of under English common law. See generally 7 William Holdsworth, A History of English Law 287 (1925) (“Whether or not the burden of other covenants would run with the land, and whether or not the assignee of the land could be sued by writ of covenant, seem to have been matters upon which there is little or no mediaeval authority.”). Privity has long been considered an essential feature of any enforceable restrictive covenant. Bally v. Wells (1769) 95 Eng. Rep. 913, 915; 3 Wils. 26, 29 (“There must always be a privity between the plaintiff and defendant to make the defendant liable to an action of covenant.”). Many of our cases have recognized this common law requirement. See, e.g., Beeren & Barry Invs., LLC v. AHC, Inc., 277 Va. 32, 37-38, 671 S.E.2d 147, 150 (2009); Waynesboro Village, L.L.C. v. BMC Props., 255 Va. 75, 81, 496 S.E.2d 64, 68 (1998); Sloan v. Johnson, 254 Va. 271, 276, 491 S.E.2d 725, 728 (1997). We thus approach the statutory issue in this case with this historic tradition as our jurisprudential guide.
Someone is “in privity” with another if they have legal standing to sue them because he (or his predecessor-in-interest) was party to the contract that creates the rights at issue. The court affirmed the common law privity requirement, rejecting any suggestion that it should be discarded as outdated. For this reason, the legal requirements that the association disclose certain documents and the seller honor a right of cancellation of the purchase contract have the effect of establishing privity between the HOA and the subsequent purchaser. Do these statutes fairly balance the respective rights of resale purchasers and community associations?
The Tvarkeks did not contest that they were not bound to the HOA covenants that existed when they bought their home. Instead, they sought to have an amendment to the covenants declared invalid because the statutory procedures were not properly followed. If you are curious about the technical reasons why the court found this particular amendment invalid, there are other bloggers, such as Jeremy Moss, following community associations law developments in Virginia have written about Tvardek from this angle. An HOA may have hundreds of members. The membership changes every year. Most owners have never personally made any transactions with the developer or the owners who voted to amend the declaration of covenants. How can privity exist if the declaration can be amended without a signature from every owner? That’s where the legislature comes into play:
The Virginia Property Owners’ Association Act, Code §§ 55-508 to 55-516.2, expanded the concept of privity considerably beyond common-law limits. In general terms, the Act permits the creation of a restrictive covenant running with the land and enforceable against subsequent owners of the parcels covered by the declaration, whether or not they consent, so long as the association follows the statutorily prescribed procedures governing the association’s declaration and amendments to it.
The enactment of the HOA statutes do not wipe out the rule of strict construction of covenants that run with the land. Instead, the General Assembly expands certain exceptions to the privity requirement for the enforceability of restrictive covenants. The basic rule of skepticism holds. The Property Owners Association Act must be understood within the context of the common law.
One might think that the modern age of statutes would have marginalized the role of English common law, but this is not so. “Abrogation of the common law requires that the General Assembly plainly manifest an intent to do so.” Linhart v. Lawson, 261 Va. 30, 35, 540 S.E.2d 875, 877 (2001). We do not casually presume this intent. “Statutes in derogation of the common law are to be strictly construed and not to be enlarged in their operation by construction beyond their express terms.” Giordano v. McBar Indus., 284 Va. 259, 267 n.8, 729 S.E.2d 130, 134 n.8 (2012) (citation omitted). A statute touching on matters of common law must “be read along with the provisions of the common law, and the latter will be read into the statute unless it clearly appears from express language or by necessary implication that the purpose of the statute was to change the common law.” Wicks v. City of Charlottesville, 215 Va. 274, 276, 208 S.E.2d 752, 755 (1974).
Case law is very important to make sense of any HOA. Otherwise the statutes just seem to be an enablement of legal powers for the boards that are not found in the governing documents.
The Virginia Property Owners’ Association Act authorizes the creation and enforcement of restrictive covenants against nonconsenting landowners in a manner unknown to the common law. The General Assembly, however, policed the imposition of these covenants with a host of strict procedural requirements — not the least of which is the plainly worded command that no recorded amendment shall be “effective” unless it is accompanied by a certification verifying that the requisite majority signed the amendment or a ratification of it. See Code § 55-515.1(F). In effect, the General Assembly created something entirely new to the law (the right to form private associations having power over land use) while adding precautions to honor the common law’s ancient antipathy toward restrictions on the free use of private property.
The POAA is not some sort of freeway that allows boards to completely bypass the old traffic lights of the common law. As attorney John F. Faber, Jr. observes in his July 2016 Hampton Roads Realtor magazine article about Tvardek, “‘close enough’ does not count when interpreting statutes that allow broad application of restrictive covenants prohibiting the free use by owners of their properties.” In Tvardek, the court articulates three important, related legal protections for owners:
- A restrictive covenant has to be expressly stated in a public land recording (or fairly implied by very narrow exceptions).
- Restrictive covenants must fall within narrow exceptions to the general rule prohibiting them in order to be enforceable.
- If the board relies upon the POAA to enforce the covenant but can’t show that it meets the strict requirements of the statute, it is out of luck.
Does this mean that an owner should disregard notices from the HOA or condo that there is a rules violation or monthly assessments due? Certainly not. Owners should presume that courts will enforce clear and validly adopted restrictive covenants. But what the board, property manager or other representatives of the association is tell the owner may not accurately reflect what the owner’s legal obligations actually are. The owner may not even have a complete set of the governing documents in her possession. In any dispute with an HOA or condominium, owners should see a qualified attorney to help them protect their rights.
For Further Reading:
Tvardek v. Powhatan Village Homeowners Ass’n, 291 Va. 269, 784 S.E.2d 280 (2016)
Photo Credit:
Geoff Livingston The Georgetowner via photopin (license)
September 29, 2016
What is a Community Development Authority?
Every community is supposed to have a downtown as a destination for people to live, shop and play. The town center ideally keeps retail dollars and tax income from leaving the community. When these developments pop up, you hear discussions about whether “gentrification” helps or harms blue-collar people who live or work there. How does a developer decide where to place a new town center? In many places in Virginia, the local government offers to help finance the project with a special assessment district called a Community Development Authority (“CDA”). A CDA is where millions of dollars are financed through issuance of bonds paid off over many years by owners of real estate in the CDA district. The locality collects the assessments for the Community Development Authority. I take a personal interest in these CDAs because there is one in Fairfax County near me called the Mosaic District. Like many CDAs, Mosaic mixes residential homes and retail development.
“The Residences at the Lofts at SodoSopa”
A few days ago the Supreme Court of Virginia issued a new case opinion that provides an example of CDAs’ particular vulnerability to changes in the economy. Before I describe the case, I must first share something from pop culture with insight into recent trends in town center developments. A year ago, the television show South Park aired an episode called “The City Part of Town.” This episode lampooned these kinds of developments. I don’t often watch South Park because of some toilet bowl type humor they employ in other episodes. As a denizen of Northern Virginia, I love this particular episode. In this show, the “socially conscious” leaders of South Park wanted something that would, “Instantly validate us as a town that cares about stuff.” They created a new town center designed to lure Whole Foods Market to South Park. They named the district SodoSopa, shorthand for “South of Downtown South Park”. The episode focuses on a boy named Kenny whose family struggles financially but manage to keep their heads above water. SodoSopa develops around their “historic” home. Hipsters at trendy SodoSopa bars cause nighttime disturbances. The episode also features Mr. Kim and his asian restaurant, City Wok. The residents of South Park lose interest in City Wok when swank new restaurants open in SodoSopa. Mr. Kim takes desperate measures to try to keep City Wok from going out of business. City Wok hires a “child labor force.” Mr. Kim broadcasts commercials for his own restaurant district in an effort to compete with SodoSopa. In classic South Park fashion, the moronic adults engage in foolish behavior in vain attempts to achieve vainglorious objectives. According to Wikipedia.com, Whole Foods Market does open a store in fictional South Park, but not in SodoSopa. South Park’s gentrified district becomes abandoned because it failed to land the desired anchor tenant.
[embedyt] http://www.youtube.com/watch?v=miXMWJyOdgw[/embedyt]
CDAs & “Overlapping Debt”
Unfortunately, the cartoon’s satire is not too far from reality. On September 22, 2016, the Supreme Court of Virginia published a new opinion in Cygnus Newport-Phase 1B, LLC v. City of Portsmouth. The case confronted the issue of “overlapping debt” in CDAs. Both bank loans and the CDA bonds finance these developments. If the local government records the CDA ordinance in land records after the bank files their deed of trust, which takes priority in foreclosure? Does the Community Development Authority have “super-priority” over “ordinary” liens? This case is of interest to anyone who conducts real estate settlements, foreclosures or wants to understand what it means to own real estate in a CDA.
New Port CDA
In 2004, Portsmouth Venture One, LLC (“PVO”) acquired a 176-acre developable tract of land in Portsmouth, Virginia. PVO used a Bank of America (“BOA”) mortgage to finance the purchase. In 2005, PVO successfully petitioned the city to set up New Port Community Development Authority. New Port CDA entered into a “Special Assessment Agreement” with PVO for finance of almost $17 million in infrastructure, including roads, utilities and lighting. PVO agreed that the City of Portsmouth could collect the special assessments to pay off the bonds financing the infrastructure improvements. The agreement provided that the special assessments, “does not exceed the peculiar benefit to the Assessed Property … resulting from the improvements,” and that PVO’s successors would be bound by the agreement. In 2006, the CDA’s resolution authorizing the bonds, the city’s ordinance establishing special assessments on the CDA properties and a declaration of notice of special assessment were recorded in the land records. The declaration provided that its provisions would “run with the land” and bind future owners of the subject property. The CDA handed approximately 75% of the bonds proceeds over to PVO to make the infrastructure improvements. PVO then began selling individual lots.
This is a particularly powerful type of financing. CDAs allow a developer to obtain millions of dollars up-front to pay for public infrastructure required in large projects. The Community Development Authority, as a local government entity, issues the bonds. The millions are supposed to be paid back by special assessments owed by the present (and successor) owners of the properties in the CDA. In addition to federal income tax, county property tax, state and local sales taxes, mortgage payments and community association dues, owners in a CDA must pay the special assessments collected by the city or county. Some of New Port CDA’s bonds would not be retired for 30 years.
Mortgage Foreclosure Crisis
2006 was a particularly unfortunate time to undertake an ambitious real estate project. A few years after the mortgage crisis began, PVO defaulted on its debt obligations, eventually losing its investment. In 2011, BOA sold its real estate loans to a company called Cygnus VA, LLC (“Cygnus”). Cygnus instructed the foreclosure trustee to conduct a sale. Cygnus itself purchased the property at the foreclosure sale, thus becoming the succcessor. Cygnus conveyed the property to other holding companies, but for the sake of brevity I will refer to all of them collectively as “Cygnus.”
Once Cygnus acquired these vast tracts, New Port CDA demanded the outstanding special assessments. Cygnus refused, insisting that the foreclosure stripped off the latter-recorded CDA lien that PVO allowed to encumber the property. Not wanting to pay the money or lose the property in a subsequent foreclosure, Cygnus filed a lawsuit. Cygnus argued that the foreclosure sale extinguished the special assessment lien. BOA was never party to the agreements with the CDA and city. Cygnus alleged that, physically speaking, there was very little to show for the millions provided to PVO by the CDA. The property purchased at the foreclosure was largely unimproved by infrastructure. How could New Port CDA claim a lien when there was little or no improvements to the foreclosed property that the new owner would be benefitting from? The circuit court found that this didn’t matter. Circuit Court Judge William S. Moore dismissed the lawsuit on the CDA’s motion. The Supreme Court of Virginia granted Cygnus’ petition for appeal.
Race-Notice Land Recordation & Super-Priority Liens
This New Port CDA case was a closely decided case by a 4 justice majority over 3 dissenters. Virginia appellate law blogger Steve Emmert describes this opinion as a “bar fight” among the members of the Supreme Court. I like his bar fight analogy because it makes me think of South Park’s fictional restaurant districts. The court majority decided that the bank foreclosure did not extinguish what was found to be a “super-priority” CDA lien. Virginia is a “race-notice” jurisdiction as far as real estate law is concerned. This means that between two parties who both recorded liens against real estate, the first one to record has priority. Cygnus appealed the case confidently – its title derived from BOA’s earlier-recorded deed of trust. However, the majority found that a special assessment lien is paramount over other encumbrances including a prior-recorded lien. They explained that a tax lien is superior in dignity because it is made by local governments for purposes of public improvements. The court found that it is not proper for a prior mortgage to defeat the process by which municipalities make property tax liens.
In response to this argument, the dissent points to the sections of the Virginia Code that specifically authorize the attachment of these CDA special assessment liens to real estate. The statutes mirror the “race-notice” rules that apply generally to land recordings. How can these special assessment liens enjoy “super-priority” status if the statute specifically provides otherwise? The Court ruled that because the city filed the ordinance before the foreclosure trustee’s sale, when Cygnus purchased the property, it was on notice of the special assessment liens.
The Shelter Doctrine:
Cygnus’ litigation strategy relied upon what is called the “shelter doctrine,” which has nothing to do with the habitability of any physical construction. Cygnus took title through BOA as a party without notice of any special assessment liens at the time the deed of trust was recorded. Under the “shelter doctrine,” if the mortgage lender’s interest in the real estate had priority over a later-recorded lien, then any party which takes title through the bank foreclosure enjoys the same lien priority. Under the shelter doctrine, the successor in interest of one who purchases the real property in good faith stands in the same position as the good faith purchaser even when the successor had notice of the lien through title examination. The shelter doctrine underlies the nonjudicial foreclosure system in Virginia. The purchaser at the trustee’s sale takes title from the trustee whose authority comes from the deed of trust made to benefit the lender.
The majority remarked that, “To permit such belated challenges would not only be contrary to the [Virginia] Code, it would completely unravel the entire legislative system of local improvements funded by special assessments.” The dissent argued that the majority rewrites the super-priority feature into the special assessment legislation which says otherwise.
“The Villas at Kenny’s House”
Remarkably, a CDA only requires the approval of the locality and 51% of the landowners’ interests in order to set it up. The 51% might be calculated by relative acreage or tax assessment appraised values. If non-consenting landowners oppose formation of the CDA, they have a very short deadline in which to petition the court to block it. In the South Park episode, Kenny’s family owned a small home included within the encompassing SodoSopa district. Of all the townspeople, only Kenny’s family attended a hearing where South Park heard public input on the creation of SodoSopa. If an owner has a larger developable tract as a neighbor, potential imposition of a CDA by the 51% and the county upon other landowners is a legitimate concern. The local government, not the owners, appoint the members of the CDA’s board.
What Might All of this Mean to Buyers and Owners?
I expect lenders to re-write their commercial loan underwriting and documentation processes in the wake of the Cygnus case. I can’t imagine Bank of America now agreeing to finance a project like this without forcing the developer to agree to obtain lender consent before petitioning for a Community Development Authority, or otherwise protecting their interests in writing. Why would a bank knowingly permit overlapping debt to obtain priority over their mortgage? Look for underwriting standards and loan documentation to tighten. Industry and governmental leaders want town center developments to continue and will want the players to get along.
The term “Community Development Authority” seems like a euphemism, like calling serfs “agricultural interns.” Someone who runs across the term might think that it is in charge of parks, libraries or children’s sport programs. CDAs are more accurately called a Higher Tax Area.
What does this new Cygnus case mean to owners of condos or townhouses in CDAs? An owner in one of these districts must pay the special assessments in order to avoid a sale to satisfy the liens. Like everything else in real estate, the owner must understand what the ordinances, abstracts, agreements and memoranda of liens mean. Owners should not assume that every CDA has the same governing provisions as one elsewhere. Likewise, anyone shopping for real estate should check whether it is located in a CDA and what those assessment obligations might be.
Independent Professionals Can Help with Understanding CDA Documents
Between HOAs, CDAs, mortgages and taxes, property owners have many potentially overlapping obligations and rules. HOAs & CDAs provide developers and local governments with means of shifting burdens to build and maintain common areas and infrastructure off of the county budget. While these strategies may work fine for creating these communities, they don’t always work well for owners, as shown by the South Park episode and the Supreme Court of Virginia opinion.
CDAs are a relatively new and potentially confusing phenomenon. Owners or prospective buyers should seek a qualified attorney to help them understand the obligations that come with the benefit of living in one of these districts. Investors should protect themselves against the potential risks that come with unanticipated responsibilities and town center developments that might fail.
For Further Reading:
Cygnus Newport v. City of Portsmouth, Supreme Court of Virginia, Sept. 22, 2016
Photo Credit:
m01229 The new Target store, coming to Merrifield via photopin (license)
September 14, 2016
Does an HOA Disclosure Packet Effectively Protect a Home Buyer?
There is an interesting September 14, 2016 article in the Washington Post by Ilyce Glink and Samuel Tamkin entitled, “Why you should look carefully at an HOA’s plans for that community before buying a home there.” The article responds to Virginia home buyers who have great questions that aren’t answered in an HOA disclosure packet. The purchasers know that the roads the HOA owns need major repairs. It is overall a great article. The HOA disclosure packet doesn’t say how this will be paid for. They are concerned that their dues might increase from $1,000 to $3,500. This is a make or break question. Virginia law entitles the buyer to disclosure of HOA governing documents, corporate records and financial reports before going to closing on purchase of property. These disclosures are supposed to educate buyers about their rights and responsibilities to the HOA for as long as they own the property. In reality, buyers have many things on their minds during this exciting and stressful time. Their busy lives are consumed with urgent matters. They attend the home inspection and negotiation of any repairs. They come up with the down payment and approval from their mortgage lender. An excited family member may be dismissive of any questions or red flags about the property. The purchase will require the buyers to move and have their lives disrupted. Many home buyers feel worn down by demands of the process. They want to avoid cancelling and starting all over. All the buyers know about the HOA may be from seeing neighboring houses, maybe some common areas like a pool or playground. What’s in the HOA disclosure packet or condominium resale certificate give the association great influence over the financial affairs and home life of the buyers. Virginia law requires that HOA disclosure packet to include the following statements and documents:
Statements:
1. Name and registered agent of the association.
2. Approved expenditures that will require a special assessment.
3. Ordinary assessments or mandatory dues or charges.
4. Whether there are any other parties to which the lot owner may be liable for fees or charges.
5. Reserve study report or summary.
6. Current budget and financial balance sheet.
7. Any pending lawsuit or unpaid judgment that could have a material impact.
8. Insurance coverage provided and not provided by the association.
9. Whether any improvement to the property being sold is in violation of the governing documents.
10. Flag display restrictions.
11. Solar panel use restrictions.
Documents:
1. Declaration & any amendments.
2. Articles of incorporation, bylaws & any amendments
3. Rules, regulations or architectural guidelines
4. Approved minutes of the board and owner meetings for previous six months
5. Notices of any pending architectural violations
6. Disclosure Packet Notice Form prepared by the Virginia Common Interest Community Board
7. Annual Report form filed with the state with officers and directors and other information
8. Federal Housing Administration lending approval statement
While many people aren’t familiar with these kinds of documents, they reflect the family’s future financial obligations to the HOA and restrictions on the use of the property. The 2008 subprime mortgage crisis was caused in part by mortgage lenders giving borrowers loan documents that they didn’t understand. The HOA covenants are also a source of confusion. Many buyers would never buy a home without using a home inspector, but they try to tackle the HOA disclosure packet themselves. Unfortunately, it is easier for an unaided consumer to eyeball things in the home that need repairs than make sense out of the HOA documents. The federal government requires mortgage lenders to provide borrowers with simplified statements of the loan terms to make them transparent. For HOAs, consumer protections are weaker. Virginia law gives the buyer only three days to cancel the purchase contract after receipt of the HOA disclosure packet. That might give a professional working in the real estate industry enough time to digest them. However, many ordinary consumers struggle to make this three-day review period a meaningful part of their decision-making. A buyer could negotiate with the seller for this three-day period to be lengthened in the language of the sales contract. Few ask for this because the disclosures in the sales contract do not suggest to the buyer that additional time might be necessary.
As more HOA horror stories appear in news articles and social media posts, consumers are more likely to read the HOA disclosure packet and ask questions like in today’s Washington Post article. Even if the buyer is familiar with community associations law, the governing documents may be vague, ambiguous or unclear about issues critical to the buyer’s use and enjoyment of the home. This is what the home buyers in the article discovered. Glink and Tamkin recommend that the buyers knock on the door of the HOA president and ask her point-blank about how the road repairs will be paid for. An officer who understands their leadership responsibilities well might provide a sufficient answer upon a direct request. However, in most situations this probably won’t achieve a satisfactory result. Educated officers and directors know that the HOA or condo board is only required to provide the information and documents referenced in the statutes. If the buyer is unsatisfied, they have to either exercise the contingency within the deadline or negotiate for an extension of the cancellation period and a follow-up request to the board. The HOA could employ dilatory tactics, inducing the buyer to inadvertently waive the right of cancellation while pursuing an answer to the question. The road expense issue is probably already a hot-button issue for this board with lots of HOA politics in play.
There is a disturbing issue about the facts described in this newspaper column that isn’t addressed by the article. The HOA is managed by its board and not by a property management company. The monthly dues for the property are $1,000. This means that the officers and directors are handling a huge budget themselves, making day-to-day property management decisions. Maybe the board consists of retired real estate professionals who do this as a hobby to benefit the community at no added benefit to themselves. Given the commitment required to manage such a large budget, this is probably not the case. This would be my number one question.
If the purchasers have questions about what the documents mean, they might ask their real estate agent. Realtors provide a lot of value to their clients because they negotiate sales transactions all the time. The agent may not be the best person to ask because she won’t receive a commission on the sale if the buyer gets cold feet and backs out. The disclosure packets contain legal documents that are designed to enforce restrictions in court should disputes arise. If an attorney or real estate agent might struggle to make sense out of the disclosure packet, a buyer who is not familiar with HOAs may only read a few pages before setting them aside and focusing their attention elsewhere. If consumers understood the HOA disclosure packet and made an intentional decision to go to closing or back out based on what they read, consumer trends and demands might force home builders to make HOAs more owner-friendly.
In theory, a buyer can retain independent attorneys and CPAs to review the HOA disclosure packet and answer questions. This would allow an educated decision whether to cancel within the short deadline. In reality, if the buyer doesn’t already have an attorney and/or CPA lined up at the beginning of the three-day period, it may already be too late. Let’s say the buyer spends a day trying to make sense of the HOA disclosure packet on his own. If the family cannot figure things out themselves, on the second day he might start calling around for an attorney. Unfortunately, almost all community association lawyers represent the associations themselves, big investors or developers. They do not normally represent homeowners. My firm is an exception – in my solo practice I never represent HOA boards. General practice attorneys often represent individual persons. However, to effectively advise the purchaser on short notice, the attorney must be familiar with the appellate court decisions concerning the HOA statutes and governing documents. Much of the law pertaining to community associations matters is found in court opinions, not just acts of the general assembly. Many general practice lawyers are very good but may not be familiar with these things. Assuming that the buyer does find an attorney who is a good fit, there still are time constraints. The buyer has to talk to the lawyer, hire him, and provide the documents. It may take the attorney more than an hour or two to review the documents to prepare to provide an overview and answer questions. All of this must be completed within 3 days (or whatever extended period agreed with the seller) so that the buyer can make a meaningful decision to exercise or waive the HOA contingency. Otherwise the buyer might lose their deposit and some other fees if they want to get out of the contract. The three-day period might work if the buyer hired the attorney beforehand. However, the terms and disclosures in the sales contract do not alert the buyer that such might be desired.
Don’t get me wrong. The HOA disclosure packet provides critical information and documents to consumers and does contain a right of cancellation. Doing away with it entirely would be a huge setback to property owners. Unfortunately, the deadlines and procedural features of the disclosure laws don’t do enough to protect consumers. My professional experience working with owners leads me to believe that many of them go to closing unaware of what they are getting into. This is not really their fault. Sometimes they don’t understand the extent of some restriction or obligation that the property is subject to. Also, owners have rights that they are often unaware of and could improve their situation if they knew about them.
One of the key statements in the packet is the Virginia Common Interest Community Board Disclosure Notice Form. This is a kind of “Miranda” warning to consumers about what it means to live in an HOA or condo. The current version is useful but could be improved. It doesn’t mention fines for rule violations. It states that the buyer is subject to all of the decisions of the Board. Yet an adverse decision of the board might be legally void or voidable if the owner acts promptly. The notice does not reference the statutes or common law principles that may dramatically affect the rights and obligations of owners. The packet notice does not point out to the buyer that they have a right to have their own attorney review the documents and answer their questions. If the buyer received a useful disclosure notice form at the time they signed the contract, then they might more carefully consider whether to hire an attorney, CPA or other professional to help them with the HOA disclosure packet. Also, if the statute allowed for a longer period of time for the contingency than three days, the buyer would not need to negotiate that in advance. These additional protections are necessary because the system that exists has a practical effect of limiting home buyers’ right to counsel.
Based on my own personal experiences with real estate, the stories I have read about other people’s experiences and homeowners I have spoken to, I believe that on a practical level, the HOA disclosure packet is an ineffective system of consumer protection. This is shown by the surprise that owners experience when they are victim of an abusive debt collection practice, an arbitrary architectural review decision or any other infringement of their property rights by an association. Fundamentally, the HOA disclosure packet procedure doesn’t work because consumers don’t understand how its contents help them find answers to any questions they might have.
What does a buyer need to know that isn’t found in the HOA disclosure packet? The courts are the branch of government that oversee HOA boards. The Supreme Court of Virginia has repeatedly held that the declaration is a written contract or agreement between the owners and the HOA. If you go to the Virginia Code looking for guidance on something not explained in the packet you might not find the answer there because of the nature of the legal system. The declaration, along with other real estate contracts are interpreted by court precedents for many issues. For example, if a party breaches a contract, they are entitled to remedies which might include money damages, attorney’s fees or an order for the other side to do something. An owner has an interest in knowing whether the declaration even makes the association qualify as an HOA. The system of remedies for breach of covenants is very important in the HOA context because that’s where the owner finds means of enforcing his rights. A wide variety of rules that pertain to HOAs are found in court opinions that aren’t neatly summarized in the disclosure packet or even in legislation.
Because the governing documents are written in legalese interpreted by court opinions and legislative enactments, the disclosure packet is not effective as a summary of the rights the HOA has over the property. The Washington Post column illustrates this. A buyer does not have the time to take a law class on community associations or enforcement of real estate covenants in the three days in which the disclosure laws give them to review it.
I hope that the General Assembly amends the statutes to provide stronger protections for buyers. If buyers knew what they were getting themselves into beforehand, they would be better educated to be owners or even board members. In the meantime, home buyers should prepare to retain advisors to help them understand the documents. If necessary, the buyer and seller can agree to expand the three-day waiting period. Ultimately, families must work with their own team to stick up for themselves and protect their rights. Owners owe it to themselves to adequately understand all of the rights and burdens that may come with the sacrifices made to purchase the property to begin with. Buyers should retain a qualified attorney to help them understand the documents before they even receive the HOA disclosure packet or condominium resale certificate.
For Further Reading:
Common Interest Community Board – Virginia Property Owners’ Association Disclosure Packet Notice
Va. Code Section 55-509.5 (Contents of association disclosure packet; delivery of packet)
Va. Code Section 55-79.97 (Va. Condominium Act – Resale by Purchaser)
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160404-neighborhood-sidewalk-morning-clouds.jpg via photopin (license)(does not depict property referenced in blog post)
