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)
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:
October 1, 2014
We Built this City: Homeowner Associations and Traffic Stops
The classic image of a homeowners association is a neighborhood with stately homes or attractive townhouses. Owners occupy their own properties. Neighbors socialize with one another, perhaps around a park, golf course, tennis court or swimming pool. The common areas make the development an attractive place to live. Common values of commitment and neighborly respect inform stewardship of common areas and management of the association’s business. Desire to achieve this ideal motivates many land development and home buying decisions. According to Virginia Lawyers Weekly, there are 5,645 registered community associations in Virginia, and several thousand more unregistered ones. That’s a lot of roads and other common areas that are neither individually owned nor maintained by local governments. If someone recklessly drives their car on those association-owned roads, who has the authority to pull them over?
On August 13, 2014, Mark R. Herring, Attorney General of Virginia released an official advisory opinion addressing the question of homeowner associations and traffic stops. State Senator Bryce Reeves asked Mr. Herring whether a HOA may enforce violations of state or local traffic laws on its private streets and whether and how a HOA may adopt and enforce its own rules regulating traffic (Sen. Reeves’ district includes Fredericksburg, Orange County, and some surrounding areas). The Attorney General’s opinion is about the intersection between HOA law and traffic law. Mr. Herring outlines two options for associations: (1) ask the city or county in which their community is located to police the streets, or (2) they may use private security qualified as Special Conservators of the Peace.
Why is this issue coming up in 2014? The economic collapse beginning in 2008 affected homeowners associations in several ways:
- Many homeowners stopped paying their association dues along with their mortgage. This hit HOA’s in the wallet.
- Foreclosures negatively affected the property values, slowing down sales of neighboring properties.
- Renting became a way of life for many people struggling to save for 20% on a down payment for a home. For Associations, this means that many residents are tenants, who take a different perspective from owner-occupants regarding common areas and their neighbors.
What better words to describe such a dystopia than lyrics from one of the worst pop songs of the 1980’s:
Say you don’t know me or recognize my face
Say you don’t care who goes to that kind of place
Knee deep in the hoopla, sinking in your fight
Too many runaways eating up the night.
– Starship, “We Built this City” (1985)
Developers sought to create oases where children could safely play and parents could develop long relationships with neighbors. Now in some HOA’s, security patrols are chasing residents, tenants and guests for traffic violations.
The Attorney General Opinion describes an unnamed association (within Sen. Reeves’ district) that directed its safety patrol to stop moving vehicles and issue citations for traffic infractions such as speeding, reckless driving and failure to obey highway signs. The safety patrol even uses vehicles with flashing lights to pull over drivers over. Through the safety patrol, the association holds property owners responsible for their infractions and those of their guests. This association has its own “court” in the form of a Violations Review Panel where homeowners may appear to contest citations.
Do associations have the authority to enforce traffic rules in this way? How much do HOA’s resemble local governments? In commenting on this opinion, community associations lawyer Lucia Anna “Pia” Trigiani of Alexandria told Virginia Lawyers Weekly that, “community associations exist in some respects to relieve demands for local government services such as traffic enforcement and road maintenance.” No doubt these developments ease cities and counties burdens to provide key infrastructure in many residential neighborhoods. Attorney General Herring’s opinion appears to disagree with Ms. Trigiani in a critical aspect. He observes that the Virginia Property Owners Association Act does not grant associations the authority to enforce violations of state or local traffic laws that occur on community property. Private persons may only enforce traffic laws if they have been appointed as a Special Conservator of the Peace (“SCOP”). To qualify as an SCOP, one must undergo substantial training. Otherwise, attempts to pull over or stop drivers could be deemed an “unlawful detention” by misrepresentation of authority to conduct police-like activities. Associations may ask the city or county in which their community is located to police the streets, or they may use private security qualified as SCOP’s. Virginia Lawyers Weekly‘s Peter Veith notes that extensive use of SCOPs may produce its own controversies, since the extent of an SCOP’s authority may be misunderstood by the security guard or the drivers on association roads. If someone produces a SCOP credential, what does that mean to an individual driver?
Attorney General Herring makes an important point about the statutory authority of HOA’s to enforce their rules and regulations over their common areas. “Rules and regulations may be enforced by any method normally available to the owner of private property in Virginia.” Real estate legal remedies are not tailored to enforcing traffic laws. Private property owners do not have the authority to conduct arrests or stops of vehicles for violation of traffic rules. That authority is reserved to law enforcement and SCOP’s. This limitation may also apply to other quasi-governmental activities undertaken by HOA’s.
In the Lake of the Woods Association in Orange County, the reaction to this Attorney General Opinion was swift. The Free Lance-Star reports that this large community went to the County Board of Supervisors which adopted an ordinance designating the LOWA roads as highways for law enforcement purposes. This will allow LOWA SCOPs to issue traffic citations and broaden the authority of local law enforcement in the community. I expect that similar decisions will be made in HOA’s around the state that have extensive systems of community roads.
If you or your Association seek to navigate safely through the regulatory landscape now coming into focus regarding the enforcement of traffic laws in community associations, contact qualified attorneys having experience in both real estate and traffic law matters to review your association’s legal instruments. Communities with extensive networks of roads should take precautions to get ahead of avoidable situations where HOA roads become hazardous or private security unlawfully detains drivers.
photo credit: Phil’s 1stPix via photopin cc (apparently one of the toy cars is a W. Va. police vehicle)
