May 17, 2016
Can a HOA Represent Individual Landowners in Court without Their Permission?
Can a HOA Represent Individual Landowners in Court without Their Permission? What gives an HOA or Condo Association standing to sue to address threats coming from outside the community, or to appeal administrative decisions by the government that affect the neighborhood? On April 22, 2016, the Circuit Court of Loudoun County issued an opinion that explains how an HOA’s power to represent its owners in the outside world is actually quite narrow. This case is important to anyone interested in the overreach of HOA powers. In matters involving real estate, the HOA only owns the common areas and easements granted in the covenants recorded in the land records. For an HOA to represent the interests of an individual owner’s property in court, specific authorization is required.
The Grenata Homeowners Association and the Evergreen SportsPlex are neighbors. Grenata is a 61 lot community in Leesburg, Virginia. Like many sports complexes, Evergreen SportsPlex uses powerful lighting to make its ballfields usable at night. In many places, sports complex lights are intense enough that passengers taking off or landing can see games in play from airplanes from a high altitude at night. Many people in Grenata find the glare from the Evergreen SportsPlex a nuisance. Personally, I dislike having streetlight glare come into my bedroom or hotel room at night. Loudoun County has a light ordinance that does not require residents to do this where the light problem reaches a certain point. I can understand why those owners brought complaints before Loudoun County, alleging that Evergreen SportsPlex violated the local light ordinance. (Pop star Cory Hart’s 1984 hit song, “Sun Glasses at Night” is the musical inspiration for this blog post) The zoning administrator issued a notice of violation. Evergreen SportsPlex appealed and the Board of Zoning Appeals reversed the decision, finding that the Evergreen SportsPlex lighting was compliant. The HOA and some of the individual owners appealed this adverse decision to the Circuit Court. The April 22, 2016 opinion of Judge Douglas Fleming rules on the County’s efforts to get the appeal dismissed without further litigation.
Much of Judge Fleming’s opinion addresses technical questions about whether the HOA or individual owners were effectively notified of the Board of Zoning Appeal’s decision and thus waived any right to appeal. The case also presents questions about Grenata HOA’s standing to appeal the Board of Zoning Appeal’s adverse decision on behalf of itself and its individual owners. Has Grenata rightfully interjected itself in this case if it is the individual owners who are impacted by the intense glare? There may be owners in the HOA who are not damaged by the SportsPlex lighting and would not stand to benefit from this litigation. The Court addressed Grenata’s claims of standing both as a property owner and as an owner representative:
HOA as a Representative Agent of Individual Homeowners:
Grenata HOA claimed to be an authorized representative agent of individual homeowners affected by this Board of Zoning Appeals decision. There are provisions in the covenants that authorized the HOA to bring lawsuits that the board deemed necessary. The Board of Directors made a written resolution specifically authorizing the appeal to be filed. The opinion does not discuss any provisions in the covenants that would specifically authorize the HOA to litigate on behalf of individual owners’ interests.
If Grenata succeeds on appeal, the owners living closer to the SportsPlex would benefit more than the ones living further away. All owners would be paying for this out of their assessments.
There is no provision of the Property Owners Association Act that specifically authorizes HOAs to appeal adverse land use decisions on behalf of individual “constituent” owners.
The Court found that there was no record in the Board of Zoning Appeal case that individual affected homeowners ever expressly authorized the HOA to pursue this appellate litigation on their behalf. However, since Grenata alleged in their appeal that there was, the Court viewed this as a factual dispute that would have to be resolved later on in the case.
The Court is making a subtle point about the limits of HOA powers. Just because a HOA Board of Directors decides that they want to pursue an appeal of a land use decision on behalf of several of their constituent owners doesn’t mean that they have the authority to do so. Only those individual landowners have standing to pursue the litigation unless they expressly authorized their HOA to do this. The language in the covenants is critical to assessing these authorization issues. The covenants could prohibit such actions by the board, with or without owner’s authorization, or they could provide specific circumstances where the HOA could do something like this without individual owner authorization. The analysis applied by the court appears to be in a situation where the covenants are silent on the issue.
In these types of cases it is usually best for the affected owners to retain their own counsel (either separate or joint representation, as appropriate) and explore these matters without involving the HOA. If an individual owner signs an authorization for the HOA to proceed, and the HOA Board is motivated to proceed, then the owner runs the risk that the HOA Board will pursue things in a manner in the interests of certain officers, the majority of HOA directors or owners. This could result in an outcome that might not be in the best interest of the affected owner. Also, many owners may be suspicious if the Board pursues legal action that is paid for by all owners but disproportionately benefits certain owners, who may be connected with board members. The case opinion does not delve into these internal HOA governance issues, so I don’t know if they come into play here.
HOA as an Impacted Property Owner:
Grenata HOA owned a few parcels of land approximately 480 feet from the SportsPlex, including a water supply and undevelopable “out-lots.” Grenata argued it had standing because it owned these nearby properties. The Supreme Court of Virginia has a test as to whether a neighbor has standing to challenge a land use decision:
- The neighbor must own or occupy property within close proximity to the property at issue (here the SportsPlex), thus establishing a direct, immediate, pecuniary and substantial interest in the decision.
- And they must demonstrate a particularized harm to some personal or property right, or a burden different from that suffered by the general public.
The County unsuccessfully argued that these common areas did not adjoin the SportsPlex and thus were not in close proximity. The court found that 480 feet was close enough to allow the appeal process to proceed. On argument the County pointed out that these common areas were undevelopable and thus of little or no market value. The Court determined that such value was not relevant to this determination. The court determined that the HOA had standing to pursue the appeal on the grounds because it sufficiently alleged that it was a proximate owner alleging a particularized harm not suffered by the general public.
A cheeky argument that lawyers for Evergreen Sportsplex or the County could make, but isn’t discussed in the opinion is that the SportsPlex lights actually confer a benefit on the HOA in its administration of the common areas. HOA’s have an obligation to their residents and guests to keep common areas well-lit if necessary to promote safety. If there is an area where storm runoff accumulates, or parking lots or perhaps some roads, it may benefit the community to have electric bills for lighting paid by Evergreen.
The Grenata case is far from over. The Circuit Court may ultimately dismiss the appeals of the HOA, individual owners or both. In Virginia, the factual determinations of the Board of Zoning Appeals are presumed to be correct by the Court unless a party successfully rebuts the presumption. The burden rests on the HOA and owners to show that the Board of Zoning Appeals made an incorrect determination.
Case Citation: Grenata Homeowners Association, et al. v. Bd. of Superv. of Loudoun Co. & EVG Land, LLC (Loudoun Co. Cir. Ct. April 22, 2016)(behind subscription paywall)
Photo Credit: Flood lights via photopin (license)
April 4, 2016
HOAs Prepare for a Zombie Foreclosure Apocalypse
In the contemporary dystopia, property ownership provides ordinary people with space in which to live, work and play in peace, safety, and freedom. Americans also see real estate as an investment. My high school friend Tom was one of my first classmates to purchase a home. Years ago, he explained that the great thing about a home is that it is an investment and you also get to live in it. Unfortunately, there are many predators in the marketplace seeking to capitalize on consumers’ commitment to home ownership. Some loan servicers, debt collectors, and contractors see owners as opportunities. Their trade groups lobby state capitals. Owners have to stick up for themselves in Court and with their elected representatives to protect themselves from becoming someone else’s cash drawer. Sometimes unscrupulous people get what they want by conceptually framing a crisis to shape the perceptions of decision-makers. Fear is one of the easiest emotions to manipulate. Owners should be skeptical of how the housing industry describes the Zombie Foreclosure Apocalypse.
In a recession, financial struggles can render owners unable to make payment obligations to mortgage lenders and HOA’s. In many cases, these personal crises are temporary. Job loss or illness of the owner or a family member can cause a temporary but acute financial crunch. The problems may be fixable by a new job or resuming work after addressing a family member’s needs. Unfortunately, lenders and HOA’s tend to treat all defaults in payment obligations the same. In the past few years, HOA’s have waited for assessment income when banks delayed foreclosing on homeowners. In these so-called “zombie foreclosures,” banks delay completing foreclosures for years because there is little economic incentive to adding the distressed property to their own real estate inventory. If they buy the property, they become responsible for it as the new owner. Usually the owners stop paying their HOA dues around the time they can’t pay their mortgage. The HOA industry sees themselves suffering financial losses at the hands of loan servicers who fail to timely foreclose and put a new owner in the property with the willingness or ability to pay the HOA assessments.
On March 25, 2016, Dawn Bauman posted an article on the Community Associations Institute’s (“CAI”) blog titled, “Clean Up Foreclosures in Your Community.” Ms. Bauman argues that because the banks delay foreclosure, other owners must pick up the tab of the struggling neighbor to support an HOA’s budget. This blog post calls upon neighbors to file citizen complaints with the Consumer Financial Protection Bureau (“CFPB”) when banks delay foreclosing on neighboring homes. The blog post contains links and instructions for submitting complaints. I understand Ms. Bauman’s point that Boards might have to make budget changes if there is a spike in “zombie” foreclosures. These budget decisions might include increasing dues for other owners, slashing budgets or even raiding reserves to pay for major repairs. However, I’m not convinced that a campaign to expedite foreclosures would really advance the interests of other owners. As films and books such as “The Big Short” illustrate, the foreclosure crisis is a complex phenomenon. When a borrower falls into default, wouldn’t the community’s interests be better advanced by helping them get back on track with their existing lender and HOA? There is no guarantee that the CFPB would have the resources, authority and/or will to take regulatory action upon receipt of a complaint submitted through web forms on the internet. This CAI blog post seems to perpetuate the stereotype of debt collection as the common denominator of a HOA community. Yes, communities require accountability, but that should go both ways.
What is happening here? Imagine that a prospective buyer met with a realtor or property manager to discuss a home in an HOA. What if the real estate professional candidly told the prospective buyer that in this community, if you default on your mortgage, your neighbors and HOA will contact regulatory authorities to make sure the bank expedites your eviction. The prospective buyers are expected to also do the same against to their neighbors. The home shoppers innocently ask, “Why is this?” The manager candidly explains that the local government has outsourced its functions to the HOA. That HOA has a big budget. The locality and the HOA have an interest in keeping property assessments high. If the homebuyers are rational, they will walk out of that meeting and never come back to that development. Home owners want neighbors who support each other, or at least leave each other alone. No one wants to live in a community where neighbors are expected to tattle. If that’s necessary, then there is something wrong with the community association model. To sustain themselves, the community associations should seek to advance the interests of their members and not the other way around. The task of creating communities traditionally belonged to local governments, developers and the owners themselves. However, real estate is also a national policy concern because of the roles of Fannie Mae, Freddie Mac, the CFPB and a host of other federal agencies. At a March 29, 2016 town hall meeting, Republican presidential candidate Donald Trump identified “housing, providing great neighborhoods” was one of the top three responsibilities of the federal government. Such statements are easily dismissed as political pandering. However, Mr. Trump, however controversial, seems to have a knack at getting into the minds of many voters.
When an owner falls into a persisting default, usually the lender, HOA, and local government want to start over with a new owner. In fact, the HOA industry and local governments want to work together to eliminate these “zombie foreclosures.” Fairfax County holds an annual “Community and Neighborhood Leaders Conference” to provide face-time between HOA board members and county agencies with authority to enforce laws and ordinances. This alliance puts the elderly and disabled at a particular disadvantage when it comes to complying with local ordinances about how property should be maintained. Owners may find their lenders, HOA’s, and local governments taking action against their property interests.
If owners find themselves in default of their loan and assessment payment obligations, what can they do to protect their financial interests and property rights? Fortunately, there are some strategies that work.
- Avoid Falling into Default in the First Place. If the owner isn’t in default, then the lender or HOA doesn’t have a basis to institute foreclosure or debt collection proceedings. For many owners, the financial crunch of making the payments is less costly than digging themselves out of a persistent default.
- Know Your Rights. Many owners rely upon what bank representatives or HOA board members say in order to determine their rights. However, in court a judge can be expected to apply what the mortgage or HOA documents say to resolve any dispute. Owners should organize and understand the applicable legal documents and not rely on hearsay.
- Have a Plan. The bank representative or property manager is not going to take the lead on how to resolve the payment default. Debt collectors are looking to get paid as much as possible and/or to push the owner out. The owner must determine whether they want to keep or relinquish the property. The circumstances of each case are unique and which strategies to employ is outside of the scope of this post.
- Present Well. If a property appears to be abandoned, then the local government, HOA, and lender will treat it as such and move aggressively. If an owner keeps the property up, they are less likely to be bullied. Likewise, in negotiating with a lender’s or HOA’s representatives, an owner should consider how their actions and works are likely to be interpreted. If the owner has unrealistic expectations or appears to show signs of weakness, then the industry professionals are less likely to take them seriously.
- Have a Team. Board members, property managers, and collection attorneys are working together to maximize the accounts receivable of the HOA and minimize their own hassle. The lenders have account representatives and lawyers to service the loan. Owners should have a team of their own. Allies in a community can look out for each other and guard against bullies. Many state legislators want to take up the cause of property ownership. Lenders and HOA’s have experts and attorneys of their own on call to advance their interests. Out of experience they are able to think two or three steps ahead of consumers. If a lender or HOA behaves in a mysterious manner, it may be that they contemplate future legal action. Many times owners need legal assistance of their own.
An owner who struggles with financial difficulties is not a “zombie.” What is really “undead” is the complex web of loan documents, HOA rules, and public policies putting an owner’s property rights and financial condition at unnecessary risk. Financial challenges do not have to result in intractable crises. When told about the pending Zombie Foreclosure Apocalypse, owners need to understand what is really “undead.” The industry should educate and advocate for owners in these situations in order to keep the HOA model from turning into an unsustainable dead end. Until then, owners must work together and with qualified professionals to protect their rights.
UPDATE: Check out my April 23, 2016 “On the Commons” podcast with HOA attorney Jeremy Moss and Host Shu Bartholomew. We discuss the Zombie Foreclosure phenomenon and what it means for HOAs and owners.
photo credit: 1977 Lincoln Continental via photopin (license)
October 26, 2015
Are Dinosaurs a Nuisance or Merely Provocative?
My 4-year-old nephew loves dinosaurs. His favorite is the Triceratops. Before my sister gave birth to her second son, their family discussed names for the new baby. My nephew wanted to name his little brother “Brachiosaurus.” Needless to say, his parents outvoted him on that! He would love to live in the New Territory Residential Community Association in Fort Bend, Texas.In New Territory, Nancy Hentschel pastured two large dinosaur sculptures in her front yard. The Tyrannosaurus Rex and Velociraptor caught the attention of her neighbors and news organizations. The response was overwhelmingly positive. Hentschel reported that, “I’ve never had so many people knock on my door, say hello, tell me they love the dinosaurs, and as if they can take pictures.” The “dino duo” received hundreds of likes on social media. Her HOA sent a disapproving notice stating that she violated the rules by erecting an unauthorized “addition” to her home. Are dinosaurs a nuisance? Hentschel admitted that she knew that the HOA would object to the statues when she bought them. “This is a form of art but it is also a form of protest.” In a September 12, 2015 interview with Shu Bartholomew on the radio show, “On the Commons,” Hentschel described an earlier dispute she had with her Board of Directors. The HOA’s leadership cited her for having a 
crack on the surface of her own driveway. The board members went so far as to come to her property and get down on their hands and knees to measure the crack for purposes of issuing the violation. Hentschel protests the use of HOA authority to create fear in her community. In her interview, she remarked about how it’s not conformity and uniformity that create property values or a sense of community.
My wife and I have cracks in our own driveway. They were there when we purchased the property. They didn’t factor much in our decision to buy the house. I’m sure that other prospective purchasers didn’t care much about the driveway cracks either. Sometimes I think that I’m the only person who ever notices them. Although we live on a busy street, I’ve never had a neighbor or visitor complain about them. When I applied crack filler a year ago, the compound cracked when it dried. Once a concrete or asphalt surface has cracks, winter ice can freeze in it, causing the surface to progressively deteriorate. As someone who drives into the District of Columbia regularly, I am stridently anti-pothole in my political outlook. Somehow, I suspect that the motivation of Ms. Hentchel’s board was not a paternalistic effort to save her family from future potholes in her driveway.
Hentschel is not the first homeowner to violate a HOA rule in intentional protest or knowing indifference to HOA rules. Sometimes homeowners deliberately paint their house in an unsanctioned color. Others erect American flags or religious symbols in attempts to exercise freedom of speech. Hentschel’s dinosaur display is different. Her “civil disobedience” is not manifested in mundane details like trash can storage or serious concerns about expression of core personal commitments. Instead, she her display is humorous and fun.
When I first heard about the Texas Dinosaur controversy, it reminded me of Dinosaur Land here in Virginia. The Shenandoah Valley is a tourism hot-spot. Dinosaur Land is a roadside attraction near Winchester, Virginia. For around $5 a person, tourists can tour a private park with dozens of large dinosaur statues. It’s been in business for decades (statues are easier to care for than live creatures). You can imagine the kid appeal. After a day of following one’s parents around civil war battlefields and nature sites, the novelty of dinosaurs is irresistible. People are willing to pay to take their children to see this, at least once. In Texas, Ms. Hentschel has created a small-scale Dinosaur Land in her front yard. She isn’t charging anyone any fees. In fact, as of September 12th she had a waiting list of neighbors who want to borrow the dinosaurs to graze on their own lawns. She only asks them to make a $50.00 donation to a charity of their choice. In my opinion, by keeping the dinosaur statues as livestock, Nancy Hentschel made her community more desirable, at least for now. This makes her dispute with her HOA interesting from a property rights perspective. What she’s doing looks like a lot of fun, although she must be prepared to pay the price if her HOA decides that they don’t care about public perceptions and decides to go full force in litigation. That’s something one has to be ready for when breaking the rules to prove a point. Don’t try this at home, kids.
Hentschel’s dinosaurs are a fun twist on the “spite fence” phenomenon. Periodically neighbors end up in litigation because one or both of them set up a fence or other structure for the purpose of harassing, intimidating or displeasing their neighbor. In 2007, one of these went up to the Supreme Court of Virginia. Thomas and Teresa Cline lived in Augusta, a rural county in Virginia. The Clines had a history of disagreements with their neighbor Roy Berg. Berg decided to construct an 11 foot tall tripod with motion sensors and floodlights pointing at the Clines’ windows. To make things even creepier, Berg installed surveillance cameras to watch the Clines on his television. After Berg refused to take down the floodlights and cameras, the Clines constructed a 32 foot high fence made of 20 utility poles. They attached plastic sheeting to the poles to block the intrusive lights and cameras. Berg sued the Clines, alleging that the fence was a nuisance to the community. The Clines asserted an “unclean hands” defense. They argued that the surveillance and floodlight apparatus disqualified Berg from asserting the nuisance claim. The county court found in favor of Berg and ordered the Clines to remove the fence because it was an eyesore. The Supreme Court of Virginia reversed, finding that the judge should have applied the doctrine of “unclean hands” to dismiss Berg’s suit. Cline v. Berg illustrates the difficulties inherent in these intractable neighbor disputes. In efforts to get it right, Courts can struggle with the question of who to punish and how. If Berg’s case is dismissed, then both of the spite structures would remain. No problems are solved. If the Court orders the Clines to remove the fence, then they are punished for their “eye for an eye, tooth for tooth” reaction. However, the lights and cameras would remain a problem.
Contrast the structures in Cline v. Berg with Ms. Hentschel’s dinosaur display. Kids love walking past dinosaurs and taking selfies in front of them. They distinguish Hentschel’s property. In the Cline case, the tripod and fence served no beneficial purpose outside of the neighbor conflict. In one case, there is fun and an increased sense of community, and in the other a scorched earth war. They are two ways to blowing off steam, with different effects on the community.
Property owners finding themselves in a dispute with a neighbor or community association, where rational discourse isn’t working may struggle with what to do next. Do I continue to suffer the indignity without complaint? Lash out by erecting a fence or other structure that serves no positive value? Bring a lawsuit? In a continuing education course I once attended, an experienced attorney explained that when these kinds of disputes arise, he asks the client if they have considered erecting a reasonable fence along the boundary of the property, as shown by the surveyor. Fences and walls define relationship boundaries in a physical way. When someone erects a fence, if their neighbor doesn’t like it, the burden is on them to bring suit requesting that the fence come down. Ms. Hentschel’s dinosaurs illustrate yet another alternative. I don’t know whether the dinosaurs violate her HOA covenants or not. If she broke the rules, at least she did it with something of popular value. In Virginia and other states, courts construe HOA covenants according to contract law. Where little damages are provable, potential court remedies may be limited. The outcome of particular cases will vary according to the facts and circumstances. If your neighbor or community association are interfering with your rights to use your own property, don’t give them the pleasure of responding to the provocation with an attack, escalating the conflict in a risky way. Contact qualified legal counsel to explore alternatives to protecting your rights. In many cases, review of a land records search and updated boundary survey may reveal overlooked possibilities for a favorable solution.
For More Information:
Cline v. Berg, 273 Va. 142 (2007)
September 12, 2015 Podcast, On the Commons
Barot, “HOA, Homeowner at Odds over Dinosaur Display,” Fort Bend Star, Sept. 17, 2015
Photo Credit (Dinosaur Land Photo):
October 19, 2015
How Can Purchasers Protect Themselves at Foreclosure Sales?
What reasonable steps can investors take to build a better foreclosure property portfolio? People who have access to more information tend to make better decisions in the long haul. In the 1990’s Sci-fi TV show, The X Files, David Duchovny portrayed a rogue FBI agent determined to uncover a government conspiracy to cover-up the existence of UFO’s. In the opening sequences announcing the name of the show and the cast there was a message, “The Truth is Out there.” While few people claim to be able to relate to experiences with UFO’s (not me), shows like The X Files are popular because everyone experiences feelings of curiosity, distrust and fear from time to time. In the world of real estate foreclosure, investors owe it to themselves to get to as much of the “truth” as may be “out there” before making a commitment to purchase a property shrouded in mystery. There are ways purchasers protect themselves at foreclosure sales.
On March 4, 2015, I published a blog post comparing buying real estate through brokers vs. foreclosure sales. That article explained how foreclosures come at lower prices because of greater risks. These concerns rightfully discourage many shoppers from looking for a personal residence at a foreclosure sale. For those investors for whom bidding at foreclosure sales makes sense, how can they manage the risks and increase the likelihood that the purchase will be a rewarding? Even before making a bid, the purchaser makes a time investment by reading the classified advertisements, researching sales data, driving by the property, lining up the purchase money and going to go to the auction. Why should a purchaser spend any more time on one opportunity than it deserves? The following are strategies that foreclosure investors can easily take to increase their success:
- Research the Property. In some commercial foreclosures, the trustee evicts the occupants first and holds an open house for potential buyers. When this is not available, a potential purchaser can at least drive by the property. What are the neighboring land uses? The bidders can obtain comparable sales data online first to see what is happening in the neighborhood. City or county tax assessment data is publically available online.
- Research Pending Lawsuits. The purchaser is already at the courthouse to bid on the property. Why not check to see if there are any active lawsuits involving the property? Hopefully, the trustee would know this and react appropriately, but a bidder can only know for sure by checking.
- Obtain a Title Examination. Ordinarily, a purchaser would not worry about title problems until someone alerted them. This is normally the concern of the settlement company in origination of the title policy. Many investors assume that the trustee conducting the foreclosure will not sign the deed unless they are prepared to stand behind it. Experienced investors purchase title insurance as a precaution. While these steps are reasonable, there is nothing that prevents an investor from spending a couple hundred dollars on a title report or taking time to research land records themselves. Any deviation in the foreclosure process from the terms of the deed of trust may be grounds for a suit filed by the borrower. I discussed this in a May 14, 2014 blog post about a lender’s failure to conduct a pre-foreclosure face-to-face meeting with the borrower. In Squire v. VDHA, the deed of trust incorporated HUD regulations requiring an effort to conduct such a meeting. The Supreme Court of Virginia observed that,
A trustee’s power to foreclose is conferred by the deed of trust. That power does not accrue until its conditions precedent have been fulfilled. The fact that a borrower is in arrears does not allow the trustee to circumvent the conditions precedent.
Foreclosure trustees may be under various pressures to ignore provisions in the loan documents. Without a copy of the deed of trust, the bidder won’t know whether things are off course until after making a substantial deposit.
- Investigate the Community Association. Many properties are subject to covenants, rules and regulations of the neighborhood property owner’s association. A new purchaser will be bound by the governance of the board of directors and their property manager. Covenants and bylaws are found in the land records. Some associations post their rules and regulations on the internet. Whatever the new purchaser wants to do with the property may be limited by how the HOA rules are enforced. Associations can range from boards that reasonably collect and spend dues to cover essential maintenance of common areas to aggressive debt collectors using fines for rule violations to generate revenue. Under Virginia law, a purchaser becomes a party to the HOA covenants (contract) at the consummation of the sale. While not strictly a foreclosure related issue, dealing with the HOA is a part of the true cost of ownership. Many investors incorrectly believe their HOA responsibilities are limited to paying the monthly dues.
- Review the Memorandum of Sale. If the purchaser makes the highest bid, the trustee will give her a Memorandum of Sale. This written agreement functions similar to the Regional Sales Contracts that real estate agents complete for their clients. Foreclosure sales typically occur in front of the courthouse. Buyers may not feel motivated to carefully read these Memoranda. Everyone is standing up, the weather may be unpleasant and people are waiting to leave. These distractions do not diminish the commitment represented by signing the document and making the deposit. The terms of the Memorandum of Sale will define the rights of the parties in anticipation of the real estate closing. This includes if and when the Trustee or the purchaser can get out of the contract. A purchaser can compare the Notice of Sale, Trustee Appointment and the Deed of Trust to the Memorandum of Sale before signing anything. The Deed of Trust reflects the trustee’s authority to conduct the sale. A Trustee may even be willing to share a copy of their form before the sale occurs.
- Ask the Trustee Questions. Purchasers can have a hard time talking with people associated with a property. The current occupants probably aren’t talking much. When asked questions, the trustee may respond that they have duties to the lender and the borrower. The trustee may not volunteer as much information as a realtor would in a conventional transaction. However, to the extent the trustee and the purchaser are both signing the Memorandum of Sale, the purchaser has a reasonable expectation that the trustee answer questions about those terms.
Time constraints may not allow an investor to investigate all of these issues before every trustee’s sale. The property may go into litigation or have problems with its physical condition even if these steps do not reveal a problem. The same could be said about any investment. One of the other messages related in the opening sequences of The X Files was “Trust No One.” This reflect one extreme on the trust/distrust spectrum. People who live on this extreme are less likely to put themselves at litigation risk but often find themselves living in isolation or vulnerable to manipulation. In the world of real estate, many investors want to make quick, substantial returns while investing as little time as possible. Under these pressures, it is easy to operate to far on the opposite, overly trustful side of the spectrum. Potential buyers with the financial means to make this kind of investment have the discretion and the right to decide how much of these issues they want to deal with up front and which they can live with as a risk of doing business. Careful purchasers protect themselves at foreclosure sales. Expect the trustee to be an experienced foreclosure lawyer. Anyone investing in foreclosures should have qualified legal counsel of their own retained even before they make their first bid.
Case Authority:
Squire v. Virginia Housing Development Authority, 287 Va. 507 (2014)
Photo Credits:
Gillian Anderson & David Duchovny via photopin (license)
A_23 College Hill – H. P. Lovecraft’s Final Home – The Samuel B. Mumford House (1825) – 65 Prospect Street – Looking South-South-West (from the Meeting Street side) via photopin (license)
August 19, 2015
Donald Trump is in the Condominium Business but he does not trust Owner Associations
Donald Trump’s colorful background in the business of condominium development speaks volumes about two topics: (1) his track record as a real estate developer, and (2) the weaknesses of the community association model of real estate ownership. There are many commentators writing about the political nuances of Trump’s 2016 presidential campaign. Words of Conveyance is not a political blog. Instead, this post focuses upon a recent federal lawsuit involving the Trump Organization that illustrates a few risks in condominium ownership. Donald Trump is in the condominium business but he does not trust owner associations. As it turns out, Mr. Trump litigates in a similar way to his political campaigning.
Jacqueline Goldberg is a Certified Public Accountant who has invested over $10 million in real estate rental properties. A Trump-controlled developer made condominiums available in the Trump Tower in Chicago, Illinois. The Chicago Trump Tower’s 92 stories enclosed 486 residential units and 339 hotel condominium units. In 2006, Ms. Goldberg signed contracts to purchase two hotel condominium units as investments. Their prices were over $1.2 million and over $971,000, respectively.
The marketing materials used Mr. Trump’s personal brand to illustrate his personal involvement as an established, famous and successful developer. The Chicago Trump Tower advertised luxury amenities including a 60,000 square foot health club, concierge, laundry, garage, meeting rooms, ballrooms with 30 foot ceilings, storage areas, and an executive lounge as common areas of the condominium association. Since this was a hotel condominium, these common areas would be income generating assets and not merely perks available to owners or their tenants. The declaration is the essential document that defines these respective property rights of different owners in the association. This document defines which real estate elements are exclusively or commonly owned.
While the hotel condominium units in the Trump Tower were more expensive than most detached single family dwellings, Ms. Goldberg’s purchase contracts had some language that would make many real estate people nauseous. The agreements provided that the, “[s]eller reserves the right, its sole and absolute discretion, to modify the Condominium Documents.” The Condominium Documents include the declaration, bylaws and floor plans. The purchase contract only required Ms. Goldberg’s approval to change the Condominium Documents when specifically required by law. Her risk was that the contract language gave Trump the unilateral authority to change the material terms of the deal.
After signing the purchase agreements, Ms. Goldberg learned that the Trump Organization made subsequent changes to the Declaration, removing the health club, concierge, laundry, meeting rooms, ballrooms, storage areas and executive lounge from the association’s common areas. Perceiving a “bait- and-switch,” Ms. Goldberg refused to go to closing on the sale of the two units.
When the Trump Organization refused to return her $516,000 earnest money deposits, Ms. Goldberg filed a lawsuit. The principal theory of her case was that the developer defrauded her by including the later-removed elements in the original package while never intending to keep them as common elements of the hotel condominium association. In his defense, Mr. Trump insisted that the association could not be trusted with management of these elements of a mixed-use development:
Mr. Trump, a self-described “expert” on condominium developments, testified that based on his experience, he went into the Trump Tower project aware that “it can be very difficult” for a condominium board to manage function rooms, ballrooms, and food/beverage operations. Mr. Trump explained that, as a general matter, condominium associations “can change their mind,” “fire managers,” “do lots of different things to create tremendous turmoil,” and “really ruin the operation very easily.” He further explained that if a condominium association fired a manager, “[i]t could become a disaster.” This “has happened before, many times, where condo boards are involved and they can’t make a decision, they can’t hire a manager, and the whole thing goes to hell.” This may affect not only the stability and profitability of the building, but also the Trump Organization.
Mr. Trump argued that these elements were originally included as common elements only as an oversight. When he later figured this out, he transferred them over to one of his companies in order to prevent some association board of directors from ruining the Trump Tower for everyone. To anyone unfamiliar with Mr. Trump’s personal bravado, these comments would sound outrageous. How can a developer strong-arm luxury, income generating amenities away from a group of unit owners in the name of “protecting property values” against the incompetence of their neighbors? Yet, in Goldberg’s case, this argument worked. Trump won the 2013 jury trial in the U.S. District Court for the Northern District of Illinois. Goldberg then appealed to the Seventh Circuit Court of Appeals. Judge Richard Posner, a well-known federal appeals court judge, wrote a June 10, 2014 opinion affirming the trial court decision. He had some interesting observations about this case:
- “She signed with her eyes open.” Goldberg was an experienced real estate investor who should have understood the risks of signing the contracts with the “change clause.” The Court declined to paternalistically rewrite these contracts or condominium instruments made between these sophisticated investors. We know from the first Republican 2016 presidential debate that Mr. Trump’s businesses declared bankruptcy four times in order to discharge real estate loans. Given Mr. Trump’s business practices and what was spelled out in the contracts, the Trump Tower units were speculative investments.
- “He is not infallible.” What is to be made of Mr. Trump’s decision to change the condominium instruments after Ms. Goldberg signed the agreements? Judge Posner observed that, “Donald Trump is of course a highly experienced real estate developer, but he is not infallible – he has had many successes in the real estate business but also failures.” Given Judge Posner’s reputation for use of a wry sense of humor in carefully written judicial opinions, one cannot help but believe that the Court had Mr. Trump’s bombastic style in mind here. Trump’s current presidential ambitions enhance the irony.
- No Real Expectation of Profit. For Ms. Goldberg’s securities laws claims to prevail, there must have been an expectation of profits from the disputed common elements. Judge Posner observed that Ms. Goldberg’s share of the projected profits would have been so small that her share of the annual maintenance fees would have been adjusted by at most 3%. He was not persuaded that the amounts in controversy were more than speculation.
For most people, opportunities to invest in condominium units do not involve the complex issues found in a Trump Tower. However, even commonplace initial purchases of units from a residential condominium developer involve substantial risks. One cannot conduct home inspections for properties that have not yet been built. The developer (or some other investor) may enjoy an oppressive supermajority vote in the governance of the owners’ association. There may be ambiguity in the Condominium Documents. Since seasoned investors like Jackie Goldberg experienced heartburn, there’s all the more reason for others to have advisors help them navigate such an investment. In a post-trial interview with the Chicago Tribune, Goldberg said she felt good about “exposing” Trump and offered this advice for anyone going into business with him: “Read the contract.”
As a presidential candidate, Mr. Trump lacks political electoral experience. However, the Goldberg case shows that Mr. Trump does have a governance background within his real estate dominion. Industry people espouse that community associations are “mini-governments” that alleviate the burdens on cities and counties while permitting neighborhoods to enjoy autonomy on how things are run on democratic principles. If condominium associations are indeed analogous to political democracy, what does Ms. Goldberg’s case say about how a Trump White House would treat other organs of government?
Case Citations:
Goldberg v. 401 North Wabash Venture LLC, 755 F.3d 456 (7th Cir. 2014)
Goldberg v. 401 North Wabash Venture LLC, 904 F. Supp. 2d 820 (N.D. Ill. 2012)
Photo Credits:
July 3, 2015
Do Your Association’s Parking Rules Pass the Smell Test?
There are few property rights as unappreciated as the privilege to park. For nine years, I lived in a condominium where the association’s parking lot did not have enough physical spaces for all of the permitted vehicles. If you came home late, you might have to park on the street several blocks away, even if you had a parking decal. The property manager arranged to tow all vehicles without a permit or guest pass after a certain hour in the evening. You didn’t want to run the risk of having to hitch a ride down to the towing company and “bail” your car out. I relied upon that small sticker in the rear window of my car every night.
An association’s parking rules effect the owners’ essential right to access one’s property. This means that whoever enforces community parking restrictions makes quality of life decisions for everyone. In many communities, the number of parking spaces permitted to a condominium unit defines the number of adults who can conveniently use it. If street parking is not readily available, guest passes define whether or not an owner can entertain anyone at their home. An association’s parking rules enforce someone’s vision for the character of the development. Residential associations typically refuse to issue parking permits for commercial vehicles. Commercial condominium associations may use parking restrictions to restrict undesired industrial uses.
The right to park at one’s property is easy to take for granted until threatened. If a HOA suspends privileges for a rule violation, the owner may be able to live without access to the pool, gym or party room. If the condominium documents allow revocation of parking permits for a violation, then this presents a greater threat to the resident. At a community association conference I attended this year, managers discussed whether it is feasible to enforce parking rules by using jersey walls to barricade owner’s garages!
Given the fundamental nature of the right of access, it is no surprise that landmark court decisions concerning community associations arise out of parking disputes. In 1982, the Supreme Court of Virginia decided Unit Owners Association of BuildAmerica-1 v. Gillman. BuildAmerica-1 was a commercial condominium consisting of a large industrial structure containing warehouse or garage condominium units. Undesignated parking spaces surrounded the building.
Harry & Saundra Gillman purchased space in BuildAmerica-1 for their trash collection business. After a few years, some of their neighbors complained about the odor of the Gillman’s trash trucks. The Association fined the Gillmans. They sought to force them to relocate by forbidding them from parking their trucks. A commercial condominium development can have the character of any number of office or industrial uses. Who wins when different owners have competing visions for a commercial condominium association? To the Supreme Court of Virginia, the answer lay with one of the fundamental, yet controversial, doctrines of community association law: The governing documents (covenants, declarations, bylaws) comprise a contract to which the owners are parties. A “covenant” is a legal agreement. Some homeowners’ rights advocates argue that boards, attorneys and managers abuse this doctrine by insisting that individual owners “agreed” to whatever policies and practices the association adopts. It is my opinion that the “contract” theory can actually help owners. How is this? A contract has the effect of limiting the scope of the rights and responsibilities of the parties. This can cut both ways, limiting the authority of the Association while also defining its affirmative duties to the owners. The “contract” is not each and every rule, regulation, decision, resolution or policy adopted or enforced by the Association and its agents. An owner can only be charged with such contractual obligations as are reflected in the declarations, covenants, bylaws, amendments that the owner is put on notice of in county land records and disclosed at the sale. Those documents are typically prepared by the developer’s lawyers. The governing documents are usually drafted to protect the developer and to be palatable to the initial investors at the sale. This means that often these documents don’t speak to the owner vs. association disputes that arise after the developer is out of the picture. Usually these disputes are about legislative amendments or Board-adopted regulations.
In Gillman, the Board adopted regulations forbidding owners from bringing more than three trucks onto the parking area weighing more than 10,000 pounds each. This rule was not a provision in the governing documents. So how are Virginia courts supposed to view the Board’s rules & regulations that are not in the covenants recorded in land records? In Gillman, the Supreme Court of Virginia set forth several very important standards:
- Rules Must be Reasonable. This is not a subjective test but one based on context.
- Rules Cannot Be Arbitrary or Capricious.
- Rules Must Not Violate a Fundamental Right. Does the rule violate the constitution or statutes?
- Rules Must Serve a Legitimate Purpose. The covenants should set out the fundamental character of the development (residential, industrial, office, mixed use, etc.) to provide some guidance as to the ostensible purpose of the Association’s existence. The issue of “legitimate purpose” has become more complicated now that many local governments mandate an association as part of the permitting process. If the Association has no other purpose than to fulfill a City or County ordinance, does this affect a Board rulemaking authority?
- Rules Must be Reasonably Applied. This includes uniform application to all owners fairly.
- The Board of Directors Must Not Abuse its Discretion.
The Supreme Court of Virginia affirmed the Circuit Court of Fairfax County’s decision to set aside the Association’s fine against the Gillmans. It reversed the Circuit Court’s decision to order the Gillmans to wash the trash trucks. Since the Gillmans prevailed, the Supreme Court set aside the award of attorney’s fees against them.
The Unit Owners Association of BuildAmerica-1 argued that they were a “self-governing community” and a “fully self-governing democracy” whose inherent powers are not limited. The Court rejected this and observed that while the powers of an association are broad, they are limited by statute. Gillman shows that association rules and regulations are not to be treated with the high level of deference owed to statutes or covenants. The only way to invalidate a regulation outside of the procedures in the Bylaws is by court review. If the rule or regulation your Association seeks to enforce violates your property rights contact a qualified attorney. Although the facts and circumstances of each case may result in different outcomes, judicial review may be a breath of fresh air to the prevailing “smell test” being applied within your Association.
Case Citation: Unit Owners Association of BuildAmerica-1 v. Gillman, 223 Va. 752 (1982).
photo credit: Eugene Oregon tow truck via photopin (license)
May 14, 2015
You May Be Targeted for Condominium Termination
When I was in grade school, one of the most discussed films was The Terminator (1984). Long before he became the “governator” of California, Arnold Schwarzenegger starred as a cyborg from 2029. A world-dominating cloud computing program sent the Terminator to assassinate the future mother of the leader destined to save humanity. Growing up in a family with four kids, my parents didn’t take us to the theater too often, especially ones like that. I initially learned about the Terminator through oral accounts from my classmates. In 2015, we are now about halfway to the date of the fictional dystopia that this monster came from. Luckily, we don’t have to deal with time-traveling robotic assassins yet. While this movie was science fiction, it was popular because it triggers fight-or-flight emotional responses from its audience.
In the world of condominiums, the threat of ownership termination creates fear, hardship and uncertainty. It is the job of owner’s counsel not to defeat robots but to provide counseling and advocacy to protect hard-earned property rights.
What is condominium termination? One of the unique features of condominium law is that under the law of many states, including Virginia, a super-majority of unit owners have the right to sell all of the units and common areas to an investor without the consent of the dissenting owners and directors. Condominium owners share walls, floors, ceilings, roofs, structural elements, and foundations with their neighbors, and these things can all fall apart. It makes sense to have a legal mechanism to address dire situations where the entire condominium can be liquidated so owners can cut their losses.
These legal procedures typically start with a super-majority, usually it is around 80%, adopting a formal plan of termination. Usually the Board of Directors of the association becomes the trustee of all of the property in termination. The Board hires appraisers to determine the fair market value of the individual units. The trustee enters into a contract with a purchaser for all of the real estate. The mortgage lenders, attorneys, settlement agents, appraisers, unit owners, etc. are all paid out of the proceeds of the sale to the investor. The termination provisions of the Condominium Act and the governing documents of the association provide framework for the process. On paper, the concept of condominium termination sounds like a reasonable accommodation for a super-majority consensus to address an extreme situation.
Unfortunately, now investors use the condominium termination statutes in ways that were probably not anticipated by the legislatures. Prior to the collapse of the real estate market in 2008, investors and developers converted many apartment buildings and hotels to condominiums. When the condominium market deteriorated, many associations found themselves with one investor owning a large number of units. The “bulk owner” controlled the association through its super-majority votes in owners meetings and on the board of directors. Certainly a less than ideal situation, especially for owner-occupants.
The bulk owners discovered the condominium termination statute. With their super majority votes, they had a legal theory upon which to sell all the units, including those of the minority owners to an investor, usually a business affiliate of the same bulk owner. Because the bulk owner controls the board of directors, they influence which appraisers calculate the respective values of the units. They also control the total purchase price where the bulk owner is, practically speaking, selling everything to itself.
The potential for self-dealing and abuse of property rights is obvious. The bulk owner naturally wants the unit appraisals and the overall purchase price to be low, to make the transaction more profitable. The governance of the association provides no real checks and balances or oversight because of the super-majority interest. Many associations use the flow of documents and financial information strategically. In adversarial situations, it is common to make only the legally-minimum amount of disclosures. In terminations, individual owners are left wondering what is happening, why and what rights they have, if any.
In The Terminator film, the bodyguard for the human target of the robot explains to her: “Listen, and understand. That terminator is out there. It can’t be bargained with. It can’t be reasoned with. It doesn’t feel pity, or remorse, or fear.” Unassisted by counsel, condo unit owners have a frustrating time trying to communicate with the other side in termination proceedings.
According to the Florida Department of Business and Professional Regulation, since 2007 there have been 279 condominium terminations in the Sunshine State alone. See May 4, 2015, Palm Beach Post, “Condo Owners Win Protections, but Do They Go Too Far?” Faced with public outcry over loss of their homes or retirement income at grossly inadequate compensation, the Florida legislature recently passed HB643 to reform the condominium termination statute. While I am not a Florida attorney, I have a few observations:
- The bill continues to allow termination of the condominium without a court proceeding. I would support legislation that would forbid non-judicial condominium terminations without direct court supervision, unless 100% of the owners sign off.
- Owners get an option to lease “their” unit after termination. In certain circumstances, they may qualify for relocation expenses. For an owner suffering a financial hardship through loss of their home or rental property, for some this may seem to add insult to injury.
- Qualifying owners may receive their original purchase price as compensation. This may not help everyone, because buyers normally seek the lowest purchase price. Owners don’t buy condos high in anticipation of a termination. See April 27, 2015 South Florida Business Journal, “Florida Bill Could Make it Tougher for Developers to Terminate Condo Associations.”
- The reform provides special protections for mortgage lenders designed to avoid situations where the borrower would be left with a deficiency on the loan. This doesn’t help owners who maintained responsible loan to value ratios.
- The bill strictly limits the ability of homeowners to contest the validity of the termination and the adequacy of the compensation. For example, the owner must petition for arbitration within 90 days of the termination. This is dramatically shorter than most limitation periods for legal claims. The new statute also limits the issues upon which the owner may contest the termination to the apportionment of the proceeds, the satisfaction of liens and the voting.
This statute revision provides additional detail about the respective rights of bulk and individual owners in condominium terminations. Unfortunately for the individual investors, it continues leaving the procedures (largely) self-regulated by the bulk investors and their advisors. The termination provisions in each state are different. Other state condominium acts may not address bulk ownership like Florida. Virginia’s hasn’t been revised since the 1990’s.
In order to terminate a marriage, corporation or other legal entity in a situation where the parties are deadlocked, usually the party seeking termination must file a lawsuit. If there is more than one owner on a deed to real estate, absent an agreement to the contrary, a suit must be filed before the parcel can be sold or sub-divided. Condominium terminations remain one of the few circumstances where super-majority owners have a procedure to self-deal in the property rights of minority stakeholders with little oversight.
If you own an interest in a condominium unit and received a notice indicating that another owner has proposed termination to the association, contact a qualified attorney immediately to obtain assistance to protect your rights. The application of state law and governing documents to the facts and circumstances are unique in each case.
I’ll be back (to this blog)!
photo credit: Richmond Skyline from 21st and East Franklin at Dusk via photopin (license)
April 17, 2015
Valuable Voices of Dissenting Directors in Homeowners Associations
Homeowners often acquire the impression that the HOA Board of Directors and property managers act in unison. However, there are often dissenting directors in homeowners associations. Homeowners seek changes to improve their community. Enough of her neighbors agree to get her elected at the annual meeting. Once they attend their first Board meeting as a director, they discover that the property manager is handling the day-to-day affairs of the association. The volunteer board only meets every so often. The majority of directors may find the property manager’s services and information acceptable. If the new director disagrees with a proposal, she is outvoted by the majority and perhaps informally by the property manager, association attorneys, etc. In the Hebrew Scriptures, the Lord spoke to the prophet Elijah not in an earthquake, hurricane, wind or fire, but in a “still small voice.” 1 Kings 19: 11-13. Dissenting directors in homeowners associations may feel sometimes like a still small voice in the wilderness. Even when it may not be immediately fruitful, small voices may nonetheless be influential voices. The rights to speech, due process and private property are related.
Homeowners frequently hear that they must support increase assessments and fines because the policies “protect property values.” However, the value of a home reflects, in part, the extent to which its use may be maximized by its residents. In my opinion, restrictive covenants can decrease the value of property. Where the covenants are reasonable and the association is well run, the benefits of membership may meet or exceed the “cost” of any restrictions and assessment liability. While potential buyers may notice the appearance of neighboring property, they make their decision primarily on the home on the market. For example, if a neighbor has peeling paint on her deck, that practically affects the value of that property and not its neighbors.
Some might object on the grounds that this reasoning is selfish and that really, “we are all in this together.” However, the individual property rights of one neighbor are precious to all neighbors. An assault to the rights of one threatens the rights of others similarly situated.
In a similar way, when dissenting voices on a Board of Directors represent a genuine concern about the governance of the association, they have great deliberative value even if they don’t carry a majority vote. In the association, the property manager and other advisors serve at the discretion of the board as represented by the majority. Association attorneys can be expected to be competent and professional, but they advocate for the legal entity. A dissenting director cannot reasonably expect the association’s advisors to provide her with independent counsel. So, what rights and responsibilities to dissenting directors have in a Condominium or HOA? Here are a few key considerations:
- Legal vs. Practical Power: While the majority (and by extension the professionals they retain) may enjoy the practical power of control, by law all directors have the same legal duties to the Association. Lawyers, lawmakers and judges usually describe this legal duty as “fiduciary.” Virginia Beach association lawyer Michael Inman explains the fiduciary duty of directors in a July 30, 2007 post on his Virginia Condominium & Homeowner’s Association Blog. He argues that a Board has a fiduciary duty to conduct debt collection against delinquent owners. However, the duty to conduct debt collection is not absolute. The board must not exceed its authority or neglect its other obligations. A director who does not enjoy practical control of the operations must understand her fiduciary duties in order to protect her voice. A director may also enjoy indemnification in the event of a civil lawsuit arising out of board action.
- Identify Potential Conflicts of Interest: A conflict of interest arises when a board member is called to vote on a matter where his personal interests and the interests of the association lead in opposite directions. For example, the director may be a principal for a company the association is considering doing business with, such as a property management company, construction contractor, pavement company, or other vendor. A director must be aware of how a vote on a potential resolution by her or other directors may give rise to a legal claim to undo the disputed transaction. However, the existence of a conflict of interest may nonetheless be acceptable under the circumstances. For example, the Virginia Nonstock Corporation Act provides “safe harbors” where the conflict of interest is disclosed to the board or the owners eligible to vote and they pass the resolution anyway or the transaction is deemed “fair” to the association at trial. The burden is on the director with the conflict of interest to properly disclose it.
- Owners’ Rights vs. Directors’ Rights: A director wears different hats. She is a director, an owner and probably also a resident or a landlord in the community. This presents unique circumstances not usually found in business or nonprofit boards. The director may leave board meetings and then go home in that same community. In a condominium, the director may rely upon the association’s employees for concierge services, HVAC maintenance, etc.
- Document Review Rights: Directors and owners have rights to review association financial statements and other documents as spelled out under Virginia law. Traditionally, a business would store these documents in paper files at its official address. As more and more information moves “on the cloud,” how a director or owner practically exercises her rights to review will evolve. Hopefully cloud computing will translate into convenient, transparent exercise of owners or directors rights to review financials and other documents to which they are entitled.
- Governance Issues: Virginia law and the bylaws impose obligations on the board of directors on how it may go about adopting legally effective resolutions. The board may be required to give notice of a meeting, achieve a quorum and record minutes and written resolutions. However, leadership may desire the flexibility of adopting resolutions without the necessity of an actual meeting. Formal governance requirements allow dissenting directors an opportunity to have their voices heard.
- Human Relationships: Even when leadership and managers disagree about major decisions and policies of the association, it’s important not to lose sight of the values of professionalism, respect and diplomacy. I recently participated in a continuing education seminar where a foreclosure attorney explained how important respect was in his practice. Although his job requires him to foreclose on commercial real estate supporting its owner’s livelihood, he reminds himself that these borrowers are also someone else’s family. Being a resilient advocate of the property rights of oneself and one’s neighbors requires civility. Ultimately, the best directors look at situations from the perspective of leadership.
In most situations, dissenting directors in homeowners associations will not need to retain independent legal counsel. However, if you are a director or committee member experiencing a legal dispute adverse to the association, contact a qualified attorney to protect your rights.
legal citation: Va. Code Section 13.1-871, Virginia Nonstock Corporation Act, Director Conflict of Interests.
photo credit: East Norriton Townhouses via photopin (license)(photo depicts homes in Pennsylvania and not matters discussed in this blog post)
March 12, 2015
Don’t Go it Alone on a Notice of Violation
By law, the homeowners govern mandatory property associations, whether for single-family homes or condominiums. They are roughly equivalent to the shareholders in a corporation. The property manager and employees answer to the board of directors, who in turn answers to the owners. Unfortunately, many homeowners have experiences where this structure seems turned upside down. The property managers, accountants and lawyers hired by the association explain to the board and the owners what to do.
Such a “role-reversal” occurs in circumstances where an association improperly accuses an owner of violating the rules and regulations. Homeowners are told that rules enforcement is necessary to “protect property values.” However, to a homeowner, loss of community privileges, limitation of the use of the property or payment of a fine decreases the practical value of their property. Associations sometimes take direct, unauthorized action without any due process. Usually, they begin the rule enforcement by sending a written notice of violation to the owner. This is the “opening salvo” in a process where an unassisted owner is likely at a disadvantage even when the facts and rules are favorable. Why? Associations pursue rule violations regularly. They usually hire experienced, capable community association lawyers. Property managers prepare to testify about the facts. The board members are often more familiar with the process than the other owners. It is important that owners don’t go it alone on a notice of violation.
Virginia law requires the association to follow established rules enforcement procedures:
- Complaint Made & Reviewed: Before any proceeding begins, another owner, a board member, manager or employee of the association must bring an allegation of a rule violation before the association leadership.
- Legal Grounds for Adverse Action: The General Assembly has not granted associations carte blanche authority to run their communities. Property associations do not have the broad powers of counties or cities. They only have the legal authority granted by law and properly adopted in the declarations, covenants and bylaws. Rules, regulations and resolutions must comply with these higher legal authorities. In substantial disputes, an owner is best served by consulting with an attorney who is familiar with community associations but doesn’t cater to them. Confirming the absence of legal authority requires knowing where to look, what to look for and what to do next. Each association has different documents that may affect an individual owner’s proceeding.
- Written Notice of Violation: Virginia law requires the board to send the owner a written notice of the alleged violation prior to taking any adverse action. The notice must give the owner a reasonable opportunity to correct the violation. Homeowners may need to consult with licensed contractor about the necessity or cost of any repairs that cannot be addressed on a DIY basis.
- Notice of Hearing: To continue the process, the Association must send the owner advance notice of any hearing, identifying actions that the association may decide to take. The owner is entitled to receive it at least 14 days before the hearing.
- Participation in the Hearing: Violation hearings are conducted before the Board of Directors or some other quasi-judicial body specified in the Association’s governing documents. What can a homeowner expect at the hearing? Shu Bartholomew, host of weekly radio show “On the Commons,” explains the importance of not going it alone: “The last thing a homeowner wants is to be sitting – alone – on one side of the table when 5-7-9 board members, managers, recording secretaries, attorneys, and every other Tom, Dick and Harry in a semi-official capacity on the HOA is on the other side of the table, accusing the owner of being in violation of something, that the HOA may not even have the authority to enforce. It is intimidating and a very clear picture of the imbalance of power in HOAs.” The owner should be prepared for this possibility. But owners can have a “team” too. Owners may be represented by legal counsel at the hearing. The General Assembly saw a need to pass legislation making this a statutory right. In addition to an attorney, the owners should consider inviting witnesses and supporters.
- Rules Enforcement Decision: The association must send the owner the hearing result in writing within 7 days of the hearing. The result may consist of monetary charges or suspension of privileges, such as the clubhouse, pool, gym, etc.
- Effect of Decision: Virginia law allows for unpaid fines assessed pursuant to this process, if valid, to be treated like an unsatisfied assessment against the owner’s property. The association may put a lien on the real estate. The suspension of privileges may continue until the matter is resolved.
Virginia property owners are entitled to due process in these association proceedings. An owner is best served by taking action to avoid an adverse decision. However, the internal decision-making process is not the end of the story. Owner’s rights can be defended by bringing legal action in local courts. If your association is working with a team to assess a fine, suspend your privileges or take any other action against your property rights, don’t go it alone.
Authorities:
Virginia Code Section 55-513 (Adoption and Enforcement of Rules)[Property Owners Association Act]
Photo Credit:
Diving. The Ascott Kuala Lumpur via photopin (license)(to illustrate a common area privilege. Does not depict a community association property in the U.S.)
February 5, 2015
Association Rule Enforcement and Homeowner Rights
A property association’s board of directors has the controversial power to issue and enforce fines against its members for rule violations. When an owner receives a threatening notice from the association, it is not always clear what options are available other than to simply obey the demand. This blog post summarizes the process of association rule enforcement and homeowner rights to protect their interests.
When an investor creates a new condominium, townhouse or detached single family home development, he usually makes them subject to covenants to be enforced by an association. The investor files covenants in the county land records, placing all future purchasers on notice that owners of homes in the development are subject to the covenants, bylaws, rules and regulations of the association. Virginia courts interpret the legal relationship between the association and the owner like a contract. There is a hierarchy of authorities defining the respective rights of the associations and owners:
- State Law. An Association must follow the Condominium Act or the Property Owners Association Act. The covenants, rules and regulations may not contradict state law except where those statutes may allow variance from their provisions.
- Association Instruments Recorded in Land Records. This means declarations, covenants, bylaws, amendments, etc. These documents control the governance of the association and its powers to adopt rules and fine owners.
- Resolutions, Rules and Regulations. State law and the covenants and bylaws set out the association’s powers to adopt rules. The rules and regulations are subject to both state law and also the recorded covenants and bylaws. The power to adopt and enforce rules is held by the board of directors, who answer (at least on paper) to the owners in exercise of their own voting rights. Sometimes it can be difficult for an owner to determine which documents are formally adopted rules and which are “policy documents” published by some individual with the intent that the owners follow them but that don’t carry the authority of a formal rule. This is why the minutes and resolutions of the board are important.
The laws, land records and resolutions are all separate, sometimes contradictory documents that speak to an association’s board of director’s authority to fine owners. The board’s notices of an alleged rule violation can be confusing. When threatened with a fine, what strategies are effective for a homeowner to protect her rights? The facts and circumstances of each case are different, but three strategies may be applied in a variety of situations:
- Keep Property Records. A homeowner should maintain files (either in a paper filing system or on a computer) of documents from the purchase of the home and all association documents such as covenants, rules, regulations, resolutions or correspondence from the property manager or board members. In the event of a dispute, these files may be necessary to support the homeowner’s position. Also keep records of all estimates, contracts, purchase orders, invoices, payments for all repairs and maintenance to the property. In general, homeowners who keep good files tend to have fewer legal disputes and resolve them more easily and favorably than those who don’t.
- Build Rapport with Neighbors. Whenever possible, have as good relations with one’s neighbors as possible given the personalities involved. Amicable relationships create mutually beneficial alliances (This does not necessarily require being BFF’s). However, association representatives may try to convince a homeowner that they are letting their neighbors down by not obeying a violation notice. However, a friendly relationship with others subject to the same covenants and rules can serve as a reminder that one’s neighbors usually are not crazy about the rules enforcement either.
- Promptly and Politely Assert Rights. Upon receipt of a notice of rule violation, many homeowners are often tempted to ignore it. If it is not reasonable or easy to understand, is it really a threat? Unfortunately, notices are usually followed by a notice for a hearing where a fine may be determined. The owner is entitled to be present at this hearing and be represented by an attorney, if desired. After that, the association may attempt record a lien in land records, file a lawsuit at the courthouse, or both. A homeowner’s rights are easier to defend earlier in the process than after something adverse happens. board directors or property managers may tell an owner that they must comply with the notice of rule violation in order to “protect the property values” in the Association. However, home buyers rarely ever compare the rules and regulations with the appearances of the homes when they are conducting their home buying process. An association covenant that a home is encumbered with does not improve its value. In fact, it represents a future liability in the form of monthly assessments.
If you are a homeowner and you are unsure whether your association is properly conducting its rule enforcement proceeding against you, promptly contact a qualified attorney to protect your rights.
January 21, 2015
Sweet Home Chicago: Are Association Property Managers Debt Collectors?
A few days ago, Virginia state senator Chap Peterson introduced new Homeowner Bill of Rights legislation in the 2015 General Assembly. The proposal sets out certain rights of property owners in HOA and condominium communities. For example, SB1008 recites a owner’s right to due process in the association’s rule violation decision-making. I anticipate political debate on whether SB1008 simply restates existing legal protections or contributes to them. Regardless, the introduction of this bill illustrates that rule violations are a hot item in association matters. Who collects on association rule violations? Boards in most associations are comprised of unpaid volunteers. Most of an association’s day-to-day work is done by property managers hired by the board.
Federal Debt Collection Laws.
Generally, the Fair Debt Collection Practices Act (“FDCPA”) protects consumers from abusive debt-collection practices. This Act does more than provide defenses in collection lawsuits or authorize a federal agency to take regulatory action. If debt collection businesses, including law firms, violate the FDCPA, they may be liable in an independent lawsuit. Under the FDCPA, it is easier for debtors to sue collectors for false or misleading statements in correspondence. The Act also requires certain notices in correspondence, such as notifying the consumer of their right to seek verification of the debt. In my previous blog post, I provided some examples of this in the foreclosure context. Where the facts and circumstances allow, class action lawsuits may be brought for FDCPA violations. Broad application of the FDCPA against association property managers would force them to change many of their practices. For example, the Act examines whether a notice would be materially confusing to the least sophisticated consumer. Are association property managers debt collectors for purposes of the FDCPA?
Welnowska v. Westward Management, Inc.
A 2014 court case illustrates the current limitations in applying the FDCPA to association property managers. Anna Welnowska & Jerzy Sendorek owned a residential condominium unit in the Madison Manor 2 Condominium Association in Chicago, Illinois. In July 2012, Madison Manor hired Westward Management, Inc., as its “full service” property manager. Part of Westward’s duties was collection of assessments and fines. Westward mailed collections letters to Welnowska & Sendorek in the name of Madison Manor. The owners disputed the charges. Madison Manor filed a lawsuit seeking a judgment for the unpaid sums and eviction of the owners.
In August 2013, Welnowska’s & Sendorek’s attorneys filed a FDCPA lawsuit against Westward in federal court. The manager filed a motion to dismiss, arguing that it is not a “debt collector.” The FDCPA has an exception for collections activity that is “incidental to a bona fide fiduciary obligation.” 15 U.S.C. Sect. 1692a(6)(F). A fiduciary is someone, such as a trustee or corporate director, who owes a high standard of care in managing someone else’s money or property.
Westward argued that its debt collection activity was only one of many duties it had to the association. The owners argued that this exception did not apply because the debt collection was central to the fiduciary obligation, not incidental. In his July 24, 2014 decision, Judge Edmond Chang rejected the owners’ argument on the grounds that Westward had numerous non-financial, managerial obligations to the association.
Alternatively, the owners argued that the debt collection activity was entirely outside the scope of Westward’s Management Agreement with the association and thus was not “incidental to” the fiduciary obligation. This written agreement specifically excluded collection on delinquent assessments and charges except for FDCPA notices. Westward separately billed the association for the collections activity at issue in the case.
The Court found that if Westward indeed acted outside the scope of the Management Agreement, the incidental-to-a-fiduciary-obligation exception would not apply. This case illustrates why an association’s property manager does not enjoy “automatic” exception from the FDCPA. In each case where the manager asserts this defense, courts will review the Management Agreement and related facts and determine: (a) whether the FDCPA would apply absent the exception; (b) if the manager has a fiduciary obligation to the association; (c) the nature and scope of that fiduciary obligation; and (d) the relationship between the debt collection activity in the case and that fiduciary obligation. The Westward case demonstrates the challenges to homeowners in bringing a successful FDCPA claim against a property manager.
Fiduciary Duties.
Westward sought refuge from the FDCPA under the “fiduciary” exception. Most service providers try to avoid designation as a fiduciary. Fiduciaries owe strict duties to their beneficiaries. If the court deems that there is more than one beneficiary, the court may apply a duty to the fiduciary to act impartially between them. A fiduciary may be liable to a beneficiary for a claim for Breach of Fiduciary Duty. Over the years, the General Assembly has enacted legislation imposing special duties on other types of fiduciaries, such as trustees in foreclosures and estates.
Foreclosure Trustee as Debt Collectors.
Just because a debt collector is a fiduciary doesn’t mean that he is excepted from FDCPA compliance. For example, the FDCPA applies when lawyer debt collectors act as trustees in residential foreclosures where the communications include a demand for payment. Courts have found that a debt collection attorney’s activity as a foreclosure trustee isn’t incidental to the fiduciary obligation; it is central to it. The foreclosure trustee debt collector must refrain from continuing foreclosure proceedings or litigation activity until the debt verification requirements are met. In a foreclosure sale, the debt collection attorney obtains cash applied in satisfaction of the debt. A foreclosure trustee has fiduciary obligations that go beyond merely collecting the purchase price. A foreclosure trustee has a broad set of duties under the loan documents to prepare for the sale, conduct it, and disburse the proceeds properly. While association property managers and foreclosure trustees are different types of fiduciaries, in both examples the professional has a broad set of obligations impacting more than one party.
Whether debt collection activity conducted by an association’s manager is non-abusive or “incidental to a fiduciary obligation” requires independent analysis in each case. Boards, homeowners and property managers must familiarize themselves with debt collection laws and the management agreement to determine whether the manager must comply with the strict standards of the FDCPA. If an association’s property manager is engaging in improper collections activity against you, contact a qualified attorney to discuss your rights.
Cases:
Welnowska v. Westward Management, Inc., No. 13C06244 (N.D.Ill. July 24, 2014)
Townsend v. Fed. Nat’l. Mortg. Ass’n, 923 F. Supp. 2d 828 (W.D.Va. 2013)
Photo credit (does not depict property discussed):
November 11, 2014
Association Attempting to Foreclose on Home of a Veteran for Flying the Flag
Today, on Veterans Day, I would like to honor veterans who have served our country. Many of them return to civilian life and make additional, substantial contributions to their communities. A few go on to struggle to protect the property rights of themselves and others. In some cases, HOA’s may even attempt to foreclose on home of a veteran for flying the flag of the United States.
Larry Murphree’s Experience in Florida with Association Flower Pot Rules:
Larry Murphree is a U.S. military veteran who owns a residential unit in the Tides Condominium at Sweetwater in Florida. In 2011, he began to display a small 11″ x 17″ flag in a flower-pot outside his front door. His Association asserted fines against Mr. Murphree and the parties found themselves in litigation. The parties reached a settlement wherein Murphree agreed to display the flag in accordance with the condominium instruments. I first heard Mr. Murphree’s story on an October 18, 2014 interview by Shu Bartholomew on her radio show and podcast, “On the Commons.”
After the settlement, the Association adopted new guidelines which permitted display of one american flag, but only in a bracket near the street number plate. The new rules prohibited owners from displaying the flag during bad weather or at night. The military and other U.S. government facilities have more rigorous etiquette for display of the American flag than what is required of private citizens. The new rules the Tides Condominium may have been an attempt to shame Mr. Murphree for not following the military flag etiquette, which a private citizen is not ordinarily required to observe.
The Association also adopted new rules for potted plants. The Association only allowed one pot, which may only contain plants and a maximum of three self-watering devices. This Association found it is necessary to regulate what items may be placed in flower-pots on the doorstep of unit owners. Undoubtedly, there are cases where neighbors erect obstructions which infringe upon the rights of their neighbors. However, Mr. Murphree’s flag does not appear to be an albatross. At Mr. Murphree’s website, http://letmeflytheflag.com, you can see the small flag display from the street view.
Mr. Murphree decided to continue to display the American flag in the flower-pot. The Association began to assess fines a $100.00 per day. They now want to foreclose on his property for the unpaid fines. The parties are in litigation again. On March 32, 2014, the U.S. District Court for the Middle District of Florida published an opinion deciding, among other things, that the First Amendment protections do not apply against non-governmental entities like a homeowner’s association. The Court also ruled that the Freedom to Display the American Flag Act of 2005 does not provide for a right to sue a property association. It is my understanding that the litigation currently continues in Florida state court.
What About Virginia?:
In 2009, retired army veteran Colonel Van Thomas Barfoot’s association ordered him to remove a 21-foot flagpole that he used to fly the American flag. Mr. Barfoot earned the Medal of Honor and served in World War II, Korea and Vietnam. Barfoot won his dispute, but not without help from two senators and a former governor. Ted Strong discusses Mr. Barfoot’s story in a November 2, 2014 article in the Richmond Times-Dispatch.
In Virginia, both the Property Owners Association Act and the Condominium Act contain provisions relating to the federal Freedom to Display the American Flag Act of 2005. These state laws disallow associations from prohibiting owners, “from displaying upon property to which the unit owner has a separate ownership interest or a right to exclusive possession or us of the flag of the United States” where such display complies with federal law. However, the statutes do allow the association to:
In condominiums, balconies, patios and doorways are usually what’s called “limited common elements.” This would limit the usefulness of these legal protections to a homeowner desiring to display the flag in such areas.The statute does not define what “substantial interests” an association may have that would need to be protected from display of the American flag. The provisions state that the association bears the burden of proving the legitimacy of the restrictions. It is remarkable that the same government that authorize a HOA’s exercise of power would allow them to restrict or forbid a citizen’s right to display that government’s flag. The Richmond Times-Dispatch article does not discuss what federal or state statutes played a role in the outcome of Mr. Barfoot’s case.
Associations become more prevalent each year. Kirk Turner, Director of Planning of Chesterfield County told Mr. Strong that around 100% of new developments of at least 20 lots have mandatory associations: “From our standpoint, we actually encourage the creation of an HOA.” Henrico County Attorney Joseph Rapisarda explained: “To me, the HOA is like a mini-government.” If a HOA is indeed a “mini-government,” then a homeowner might expect constitutional protections normally provided against governmental intrusion. From the owner’s perspective, if the HOA has the authority of a mini-government but not the legal restrictions, that makes homes subject to association covenants less valuable. In her interview of Mr. Murphree, Ms. Bartholomew observed that to the owner, the value of property is what the owner does with the property, not what it would sell for. I can see how difficult it might be for a comparable sales analysis to account for the exercise of association powers.
If your association is taking action against you for display of the American flag or any other political or religious symbols, contact a qualified attorney.
photo credit (photo does not display any of the properties discussed in this post): PatrickMcNally via photopin cc
