May 31, 2017
The proponents and critics of HOAs and Condominiums both tend to over-simplify the law and governing documents in a way that ignores many rights of owners (and boards). Some are explaining community associations law the wrong way. This area of the law is confusing, even to law school graduates and real estate professionals. Among the governing documents are declarations, bylaws, rules & regulations, architectural guidelines, articles of incorporation and amendments. Virginia law includes the Condominium Act, Property Owners Association Act, Nonstock Corporation Act, for the state Common Interest Community Board. This is not to mention federal laws such as the Fair Housing Act. On top of this you have the state and federal constitutions and published court opinions. If a legal dispute emerges between a board and an owner, the parties will struggle to determine which, if any of these statutes and documents apply to the situation. If more than one speaks to the problem, how do you reconcile ambiguities or discrepancies. Given the rat’s nest of law and governing documents, it is a challenge for anyone to quickly sort out these things without the assistance of legal counsel.
So how do you begin to explain community associations law? Most people are visual learners. They sort out complex matters faster with cartoons, charts and other graphics. Some lawyers practicing community associations law have tried to do this for association laws and governing documents. For example, an attorney in Washington State created this graphic. I’ve seen similar graphics for other states prepared by others. Charts like this don’t explain the hierarchy of authorities in a way that reduces confusion. I don’t want my readers to think that I’m picking on the author of this chart. Perhaps this is useful for Washington State. I will explain why this approach is unhelpful with respect to Virginia law.
The General Assembly enacts legislation and private parties join covenants and other contracts. The legislature declares what statutes say. The same can be said for private parties and contracts. Under our constitutional system, the judiciary’s mandate is to declare what legislation and contracts mean in the controversies brought in litigation. Sometimes this is easy because the “plain meaning” of a statute or contract is apparent on the face of the document. Often adversaries bring with them conflicting interpretations of documents or laws when they come into the courtroom. The contract or statute may not be clear on what remedies are available for breach of a statute or contract.
Often, the courts enforce claims, defenses and remedies that aren’t memorialized in any constitution, statute, regulation, contract, etc. Someone can read all community association legislative enactments and the association’s governing documents and not identify fundamental legal rights or duties that the owner (or board) may hold. This is because Virginia, like almost all other states, has “common law” legal doctrine enshrined in older case decisions that applies, except where abolished or superseded by statute:
The common law of England, insofar as it is not repugnant to the principles of the Bill of Rights and Constitution of this Commonwealth, shall continue in full force within the same, and be the rule of decision, except as altered by the General Assembly. Va. Code § 1-200.
American judges further interpreted the common law in case decisions applying it from 1776 to the present day. The common law includes a highly-developed set of doctrines regarding property rights, covenants, defenses and court remedies. The Supreme Court recently published an opinion in Tvardek v. Powhatan Village HOA discussing how the common law disfavors restrictive covenants. Here is a link to my previous post discussing the Tvardek case. That case is still important even though the General Assembly enacted legislation in 2017 in response. Enactments of the General Assembly that strengthen the enforcement of covenants are narrowly interpreted by Virginia courts because they limit owners’ common law property rights. This means that the statutes are not interpreted to give HOAs broad powers. The authority must be sufficiently articulated. This is why the proponents of community associations are so active in state capitals.
What are these common law rights, defenses and remedies and why do they matter? There are too many to summarize in this blog post. I will provide one example. A declaration of covenants is a type of real estate contract. The Property Owners Association Act makes it easier for covenants to be legally enforced against owners (and associations) that allegedly breach them. But common law defenses to breach of contract are still available to oppose the legal action. For example, if a board is found to have clearly or consistently failed to enforce the architectural guidelines, then an owner may be able to assert common law defenses such as waiver, estoppel, abandonment of the restriction or acquiescence in the alleged violation. Common law defenses like waiver and estoppel don’t need to be in the governing documents or statutes to be asserted by the owner. Where applicable, the owner just needs to understand the definition of the common law defenses and whether they have been abrogated by statute or the covenants themselves. This is just one example of common law defenses. The Washington state community associations law graphic fails to show common law rights, defenses and remedies that are valuable to boards and owners alike.
The common law is a secret treasure trove to property owners defending themselves against board or neighbor overreach. Property owners have legal rights that aren’t described in the statutes or governing documents. These rights don’t require wing-and-prayer appeals to various state officials or convoluted constitutional arguments. They are already there in legal treatises available in law libraries. In the fast-pace of litigation where parties don’t have months or years to sort out the diverse array of legal authorities and governing documents, owners need qualified legal counsel to help them identify and protect their rights.
August 17, 2016
HOAs and Condominiums derive from the covenants and state statutes’ powerful tools to use against homeowners. However, if the association does not meet the legal definition of a HOA or condo, then it cannot use the statuary toolbox. Instead of issuing fines, it must file a lawsuit each time it wants to obtain a lien against an owner’s property. The Virginia Condominium Act and Property Owners Association Act contain many protections for owners. However, they also provide associations with powerful debt-collection tools if they fit within the statutory definition. If a court determines that an HOA is not legally valid, this is a big win for owners being bullied by the board. Every once in a while, owners will take a stand and challenge whether their “HOA” exists. Recently, George Evans, Karen Evans, Gilbert Kesser & Yvonne Kesser brought such a case against their “HOA” in Culpeper, Virginia. On July 13, 2016 they won an important motion, setting the stage for big changes in Seven Springs Farm Subdivision (SSF). I am originally from Culpeper County, but I have never been to Seven Springs. We lived in a quiet residential development of modest wooded lots a few blocks from a lake. No one ever complained that their quality of life or property values suffered for lack of an HOA. When I left to go to college in 1995, there were few HOAs. Since then, development transformed Culpeper County from a farming community into a suburb of Northern Virginia. HOAs played a key role in that transformation.
This case arose over a dispute about assessments for road improvements. The covenants required the HOA to take a member vote before apportioning an assessment against the unit owners. On March 29, 2014, the Board made a $12,000 “blanket” assessment against homeowners without taking their votes. When the Kessers and Evans refused to pay, the HOA placed liens against their properties. Many owners of HOA properties believe that their Boards have the power to “tax & spend” for the “general welfare” of the community and that there is little way to challenge this. However, the Seven Springs Farm HOA case shows that everything a Board does must be authorized according to proper interpretation of the governing documents.
My friend, Mark Sharp, brought a suit on behalf of the Evans & Kesser families. They sought a judgment declaring that SSF is not a HOA for purposes of the Virginia Property Owners Association Act (“POAA”). Usually, the developers’ lawyers who set up HOAs take care that the Association qualifies as an HOA under the POAA. However, just because it calls itself an HOA and acts as though it has those powers doesn’t mean that it is an HOA. In Virginia, the declaration of covenants must provide, among other things, that the Board has the power to make assessments and also an affirmative duty to maintain common areas. This makes sense, because a contract is only meaningful if obligations go both ways. Contracts that fail to exchange something by both sides are invalid because of lack of “consideration.” In the HOA context, fundamental unfairness would arise if the board had the power to assess and lien but no obligation to spend the money on the common areas. Without this mutuality of obligation, an association is not entitled to the toolbox of remedies provided in the POAA.
In the Seven Springs case, the declaration gave the “HOA” the power to assess. The board had the power to do common area maintenance but were not specifically obligated to perform it. Under Virginia law, “valid covenants restricting the free use of land, altogether widely used, are not favored and must be strictly construed.” Accordingly, “substantial doubt or ambiguity is to be resolved against the restrictions, and in favor of the free use of property.”
Culpeper Circuit Court Judge Susan Whitlock’s opinion applied this strict construction principle to the question of whether the association qualifies as an “HOA” under the Property Owners Association Act. Anything in a declaration of covenants can be strictly construed. HOA lawyers typically make the governing documents many pages long in order to avoid having a judge find any “substantial doubt or ambiguity.” Judge Whitlock observed that an HOA is subject to such a challenge even if there was an ongoing pattern of owners paying dues and the Board spending the money on the common areas.
When the owners brought this challenge, SSF filed a demurrer, asking the judge to dismiss the case for legal deficiencies and not allow it to proceed to trial. Judge Whitlock overruled this demurrer, finding that “The Defendant’s Declaration fails to expressly require SSF to maintain the common areas, and therefore the Defendant is not a “Property Owners’ Association” under the POAA. Merely stating that those fees shall be used for maintenance of Lots and upkeep of roads fails to bridge the gap of ambiguity to be considered an affirmative duty to maintain.”
While the board, its managers and lawyers may interpret ambiguous governing documents to empower them to do what they want, in the end it is the counts that oversee HOAs, which a judge may very well reject. Judge Whitlock permitted the owners challenge to the road improvement assessment to proceed in Court.
This Seven Springs Farm HOA reminds us of several things: First, an owner must understand what the governing documents mean under state law to know what their rights and responsibilities are. In a dispute, this will require attorney assistance. The president, manager or HOA lawyer approaches the issue from a different perspective and cannot be expected to disclose to the owner all of her rights. The governing documents may or may not be consistent with what someone might think to be a common-sense approach to solving a problem.
Second, the Supreme Court of Virginia views a HOA as a contractual relationship. Ambiguous or uncertain provisions of these “contracts” can be strictly construed in the owners’ favor. A Virginia HOA board is not a “mini-government” empowered to exercise general legal authority within the boundaries of the development.
Third, Judge Whitlock’s decision is a pleasant reminder that not only do HOAs sometimes lose in Court, sometimes they are found to be less than a card-carrying member of the HOA club. Owners considering litigating against their community association should take this opinion as a reminder that a good case is winnable.
Fourth, just because a judge rules that an association is not an HOA under Virginia law doesn’t mean that the declaration of covenants is completely invalid. Such a ruling just means that its board cannot benefit from all of the intensive lobbying that the industry has done to empower HOAs and condominiums. A non-HOA association may still be able to exercise dominion over common areas and take owners to court to resolve disputes.
Property owners considering court action involving their boards of directors should begin the process with careful consideration of the recorded governing documents with the assistance of a qualified attorney. In many cases, they have more rights than what others explained to them.
April 17, 2015
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.
March 12, 2015
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.
Virginia Code Section 55-79.80:2 (Suspension of services for failure to pay assessments; corrective action; assessment of charges for violations; notice; hearing; adoption and enforcement of rules)[Condominium Act]
January 21, 2015
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.
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.
Photo credit (does not depict property discussed):