July 28, 2017
Freedom of speech is a hot topic in community associations. Some of these First Amendment disputes concern the freedom of a property owner to display flags, signs or symbols on their property in the face of board opposition. Conflict between association leadership and members over free speech also spreads into cyberspace. One such case recently made its way up to Florida’s Fifth District Court of Appeals. On July 21, 2017, the appellate judges reversed part of the trial court’s ruling in favor of the association. Howard Adam Fox had a bad relationship with certain directors, managers and other residents of The Hamptons at MetroWest Condominium Association. Several lessons here for anyone who communicates about associations on the internet.
The July 21, 2017 appeals opinion does not describe the social media communications and blog posts that gave rise to the dispute. I imagine that they consisted of personal attacks that may have been alleged to contain slanderous material. The details are left out of the opinion, probably with a sensitivity towards the persons discussed by Mr. Fox online. In general, I do not like the spreading of false, slanderous statements in personal online attacks. To the extent that Fox had legitimate grievances about goings on at the Hamptons at MetroWest, the character of his criticisms seems to have eclipsed any merit. There are usually better ways of solving problems than angrily venting them in online forums.
The board filed a complaint seeking a court order prohibiting Mr. Fox from, “engaging in a continuous course of conduct designed and carried out for purposes of harassing, intimidating, and threatening other residents, the Association, and its representatives.” The association alleged Mr. Fox violated the governing documents of the condominium by his blog posts and social media activity. The court granted an ex parte injunction prohibiting the alleged wrongful conduct. This means that the judge initially considering the case did not wait for Mr. Fox to make a response to the lawsuit. Later, Mr. Fox and the board reached a written settlement wherein Fox agreed to cease certain activities. The final order in the court case incorporated the terms of the settlement. Making terms of the settlement a part of the final order means that the association does not have to start its lawsuit all over again to enforce the deal. They just need to bring a motion for contempt if Fox violates the order. Howard Fox represented himself and did not have an attorney in the trial court and appellate litigation.
Soon thereafter, the association filed a motion for contempt, alleging that Fox violated the settlement and final order. In the contempt proceeding, the trial court went further than simply enforcing the terms of the settlement. The judge forbade Fox from posting or circulating anything online about any residents, directors, managers, employees, contractors or anyone else at the Hamptons. The judge required him to take down all current posts. If someone asked him on social media about his community, and he wanted to respond, he would have to call them on the telephone.
Fox appealed this contempt order on the grounds that it violated his First Amendment rights under the U.S. Constitution. The Fifth District Court of Appeals agreed. The trial court’s ruling was what is called a “prior restraint.” The contempt order did not punish him for past wrongful actions. It looked permanently into his future. Prior restraints against speech are presumptively unconstitutional. Temporary restraining orders and injunctions are “classic examples” of prior restraints.
The appellate court focused on the public nature of the type of speech the lower court order forbade. This makes sense. While an association is private, it is a community nonetheless. There is no real conceptual difference between online communications and other types of speech. Matters of political, religious or public concern do not lose their protected status because the content is insulting, outrageous or emotionally distressing. In a condominium, many matters of community concern could easily be characterized as political, religious or public. Federal, state or local rulemaking may impact the common business within the association. While community associations are “private clubs,” the things that members communicate about are mostly public in the same sense as town or city ward communities. To paraphrase this opinion, “hate speech” is protected by the constitution, unless certain very limited exceptions apply, such as obscenity, defamation, fraud, incitement to violence, true threats, etc.
This Florida appellate court found that the trial court violated Fox’s First Amendment rights when it ordered the “prior restraint” against him making any posting of any kind online related to his community. On appeal, the court preserved the rulings finding contempt for violation of the settlement agreement. So, Fox must still comply with the terms of the settlement. The case will go back down for further proceedings unless there is additional appellate litigation. Nerd-out further on the constitutional law issues in this case by reading the useful Volokh Conspiracy blog post on the Washington Post’s website.
The appeals court did not find that any covenants, bylaws, settlements, or other association agreements violated the First Amendment. This opinion does not mean that people cannot waive their rights in entering a private contractual relationship with each other.
Usually, only “state actors” can be found to violate the Constitution. An association is not a “state actor” because it is not really governmental. Here, the “state actor” in the constitutional violation was the trial-level court and not the association. What difference does it make? Ultimately, the courts, review the validity of board actions, determine property rights and enforce covenants. The association board requested relief that apparently lacked support in the covenants or the settlement agreement. To protect their rights, owners must understand when their board is doing something or asking for relief outside of its contractual authority.
There is one final point that the court opinion and the Volokh Conspiracy blog do not discuss which I want my readers to appreciate. Owners of properties in HOAs do not simply have a right to communicate with each other and the board. They have an obligation. The covenants, bylaws and state statutes provide for the board to be elected by the members. Members can amend governing documents by obtaining a requisite of community support. The non-director membership is supposed to be an essential part of the governance of the association. If the members and directors do not have an effective means to communicate with each other, then the community cannot function properly. Community associations can have thousands of members and residents. The may cover the acreage like that of a town or small city. The internet, in both password protected and public sites provides a convenient way for information and messages to be shared. Limits on an owner’s ability to communicate with her board or other parties to the “contract” prejudices her rights under the governing documents. I do not like covenants or bylaws that limit an owner’s ability to obtain information or communicate concerns within the governance of the association. Donie Vanitzian recently published a column in the LA Times entitled, “Freedom of Speech Doesn’t End Once You Enter a Homeowner Association.” She discusses proposed California legislation to enshrine owners’ rights to assemble and communicate with each other about community concerns. Ms. Vanitzian makes an important point that because speech may be deemed “political” should not justify management suppression. Having rights to participate in the meetings of one’s HOA without the right to talk about what is going on is like owning land deprived of any right of way or easement to the highway. While the new Florida opinion does not discuss this point, it is consistent with the basic values of the First Amendment.
For Further Reading:
July 20, 2017
Supreme Court Justice Anthony Kennedy recently wrote in an opinion that, “Property rights are necessary to preserve freedom, for property ownership empowers persons to shape and to plan their own destiny in a world where governments are always eager to do so for them.” Murr v. Wisconsin, 198 L.Ed.2d 497, 509 (U.S. Jun. 23, 2017). This principle goes beyond the eminent domain issues in Murr v. Wisconsin. Many HOAs and condominiums boards or property managers are eager to make decisions for (or ignore their duties to) owners. In the old days, legal enforcement of restrictive covenants was troublesome and uncertain. In recent decades, state legislatures made new rules favoring restrictive covenants. Sometimes owners seek to do something with their property that violates an unambiguous, recorded covenant. I don’t see that scenario as the main problem. What I dislike more is community associations breaching their specific obligations to owners, as enshrined in governing documents or state law. Is the ability to enforce the covenants or law mutual? Are legal remedies of owners and HOAs equitable?
Why HOAs Wanted the Power to Fine:
Take an example. Imagine a property owner decides that it would be easier to simply dump their garbage in the backyard next to a HOA common area than take it to the landfill. Let’s assume that does not violate a local ordinance. Or substitute any other example where a property owner damages the property rights of others and the problem cannot be solved by a single award of damages. Before legislatures adopted certain statutes, the association would have to bring a lawsuit against the owner, asking the court to grant an injunction against the improper garbage dumping. This requires a demand letter and a lawsuit asking for the injunction. The association would have to serve the owner with the lawsuit. The owner would have an opportunity to respond to the lawsuit and the motion for the injunction. An injunction is a special court remedy that requires special circumstances not available in many cases. The party seeking it must show that they cannot be made whole only by an award of damages. The plaintiff must show that the injunction is necessary and would be effective to solve the problem. The legal standard for an injunction is higher than that for money damages, but it is not unachievably high. Courts grant injunctions all the time. However, the injunction requires the suit to be filed and responded to and the motion must be set for a hearing. Sometimes judges require the plaintiff to file a bond. Injunction cases are quite fact specific. The party filing the lawsuit must decide whether to wait for trial to ask for the injunction (which could be up to one year later) or to seek a “preliminary” or “temporary” injunction immediately. If the judge grants the injunction against the “private landfill,” the defendant may try to appeal to the state supreme court during these pretrial proceedings. These procedures exist because property right protections run both ways. Those seeking to enjoin the improper dumping have a right, if not a duty, to promote health and sanitation. Conversely, the owner would have a due process right to avoid having judges decide where she puts her trash on her own property. If the court grants the injunction, the judge does not personally supervise the cleanup of the dumping himself. If an order is disobeyed, the prevailing party may ask for per diem monetary sanctions pending compliance. That money judgment can attach as a lien or be used for garnishments. These common law rules have the effect of deterring the wrongful behavior. This also deters such lawsuits or motions absent exigent circumstances. Owners best interests are served by both neighbors properly maintaining their own property and not sweating the small stuff.
Giving Due Process of Court Proceedings vs. Sitting as both Prosecutor and Judge:
If association boards had to seek injunctions every time they thought an owner violated a community rule, then the HOAs would be much less likely to enforce the rules. The ease and certainty of enforcement greatly defines the value of the right. Boards and committees do not have the inherent right to sit as judges in their own cases and award themselves money if they determine that an owner violated something. That is a “judicial” power. Some interested people lobbied state capitals for HOAs to have power to issue fines for the violation of their own rules. To really give this some teeth, they also got state legislatures to give them the power to record liens and even foreclose on properties to enforce these fines.
Statutory Freeways Bypass the Country Roads of the Common Law:
Let’s pause for a second and pay attention to what these fine, lien & foreclosure statutes accomplish. The board can skip over this process of litigating up to a year or more over the alleged breach of the covenants or rules. Instead, the board can hold its own hearings and skip ahead to assessing per diem charges for the improper garbage dumping or whatever other alleged infraction. Instead of bearing the burden to plead, prove and persevere, they can fast track to the equivalent of the sanctions portion of an injunction case. Instead of enjoying her common law judicial protections, the owner must plead, file and prove her own lawsuit challenging the board’s use of these statutory remedies. Do you see how this shifts the burden? Of course, the HOA’s rule must meet the criteria of being valid and enforceable. In Virginia, the right to fine must be in the covenants. The statute must be strictly complied with. But the burden falls on the owner to show that the fast track has not been complied with.
Statehouse lobbying and clever legal writing of new covenants has helped the boards and their retinue. Let’s take a moment to see what remedies the owner has. Imagine reversed roles. The board decided that they could save a lot of money if they dumped garbage from the pool house onto the common area next to an owner’s property. The board ignores the owners’ request to clean and maintain that part of the common area. Let’s assume that the governing documents require the board to maintain the common area and do not indemnify them against this kind of wrongful action. The owner can sue for money damages. If the case allows, the owner may pursue an injunction against the board to clean up the land and stop dumping trash. The owner must follow the detail-oriented procedures for seeking an injunction. The owner does not have a fast-track remedy to obtain a lien against any property or bank accounts held by the board.
Fine Statutes Should be Legislatively Repealed:
In my opinion, community association boards and owners should both be subject to the same requirements to enforce restrictive covenants. If state legislatures repealed their fine and foreclosure statutes, the boards would not be left without a remedy. They would not go bankrupt. Chaos would not emerge. They would simply have to get in line at the courthouse and play by the same rules as other property owners seeking to protect their rights under the covenants or common law.
“But Community Association Lawsuits are a Disaster:”
Many of my readers are skeptical of leaving the protection of property rights to the courts. They don’t like people who sue or get sued. They argue that whether you are defending or suing, the process is laborious and expensive. The outcome is not certain. I don’t agree that property owners should surrender their rights to associations or industry-influenced state officials. What if there was a controversy-deciding branch of government that the constitution separates from special-interest influence and the political winds of change? Wouldn’t that be worth supporting? I know that there are legal procedures that drive up the time and expense of the process without adding significant due process value. That does not mean that the courts should be divested of the power to conduct independent review and award remedies not available anywhere else.
Judicial Remedies Are Better Options Than Many Owners Think:
Fortunately, owners have many rights that their boards and managers are not informing them about. Many common law protections have not been overruled. In Virginia, restrictive covenants are disfavored. Any enforcement must have a firm footing in the governing documents, statutes and case law. The statutes adopted by the legislature limiting the common law protections are strictly (narrowly) interpreted by the courts. It is not necessary, and may be counterproductive to run to some elected or appointed bureaucratic official. Under our constitutional structure, the courts have the power to enforce property rights. Many owners cannot wait for the possibility that a future legislative session might repeal the fine statutes. If they are experiencing immediate problems (like improper dumping of garbage or whatever) they need help now. In rare cases law enforcement may be able to help. In most cases working with a qualified attorney to petition the local court for relief is the answer.
April 28, 2017
One problem that owners in HOAs and condominiums face is access to justice. Boards enjoy various out-of-court remedies, such as fines, liens and foreclosures. To obtain remedies for the board’s breach of the governing documents, owners must bring a lawsuit. This requires legal counsel familiar with how governing documents, statutes and judicial precedent fit together. When cases go to trial, owners face uncertainty in the amount of attorney’s fees that may be awarded to the prevailing party. What determines whether a condo owner prevails on her request for attorneys fees? Many judges seem reluctant to award a full amount of attorney’s fees. Is seeking the assistance of a state agency a viable alternative to the courts?
I’m happy when I can report news to my readers when owners win and courts set precedents that will help them in the future. On April 13, 2017, condo owner Martha Lambert won a significant victory in the Supreme Court of Virginia against Sea Oats Condominium Association. Her board forced her to hire an attorney go to trial to obtain reimbursement for a $500.00 repair. The governing documents contractually obligated this Virginia Beach association to repair an exterior door jamb to her condo unit. The board failed to make the repair despite her persistent requests. They insisted that the damage was to a limited common element that was her responsibility. Initially, she sought petitioned the Virginia Common Interest Community Ombudsman’s Office to redress the board’s adverse decision. The Ombudsman issued a couple decisions letters indicating that she was unable to help Ms. Lambert. The owner made the repair herself and sued the association in the General District Court of Virginia Beach. When Sea Oats prevailed in G.D.C., Lambert appealed to the Circuit Court. There Sea Oats continued to defend the case, filing a motion and discovery requests. Lambert prevailed in the subsequent trial. The judge awarded a $500 judgment in her favor and against the condominium association. Ms. Lambert’s attorney submitted an affidavit indicating she incurred $8,232.00 in attorney’s fees. Under the Virginia Condominium Act, a prevailing party is entitled to reasonable attorney’s fees. The parties submitted briefs and argued a post-trial motion on the issue of attorney’s fees.
The lawyers for the condominium board opposed the attorney’s fees award. They argued that the owner’s request for attorney’s fees was 16 times the amount of the judgment. Without waiting to read Ms. Lambert’s response, the Judge James C. Lewis awarded her only $375.00 in attorney’s fees. Ms. Lambert’s attorney nonetheless filed a brief, and provided notice that she incurred an additional $2,650 in fees for the post-trial motions activity.
Was court litigation Ms. Lambert’s only means of redress against the condo board’s adverse decision regarding the broken door? Is there some state agency or official who can aid resolution of these disputes? Ms. Lambert tried to take this dispute to the Office of the Common Interest Community Ombudsman. Ombudsman Heather S. Gillespie issued a decision letter on April 17, 2013. Ms. Gillespie observed that her office lacked the legal authority to decide the dispute because the answer lay in the interpretation of the condominium instruments (bylaws, covenants, etc.) as to whose obligation it was to repair the limited common element. In a separate letter dated May 13, 2013, Ms. Gillespie declined to decide against Sea Oats on Ms. Lambert’s claim to inspect the association books and records pursuant to the Condominium Act. Ms. Gillespie observed that the Act was not clear and that sorting out statutory ambiguity was the province of the courts. As you can see from this case study, the Ombudsman’s Office lacks the authority to decide cases where parties present conflicting interpretation of legal documents. Of course, if the parties agreed as to what they meant, there would not be a dispute. Consumers and property owners are better off in court anyway because of the independence of the judiciary from lobbying and the political winds of change.
Ms. Lambert’s only effective means of redress was through the courts so that’s where she went. There are two ways of looking at Ms. Lambert’s case. There is a view that if someone files a civil lawsuit, they must have done something wrong to incur the damage that they suffered or they are otherwise petty or vindictive. In my years of practice both bringing and defending civil suits, I have come to see that there is often an unfair prejudice against plaintiffs.
The other perspective is that Sea Oats drove unnecessary litigation by failing to perform their maintenance obligations and then aggressively defending the suit to exhaust Ms. Lambert’s resources. If the defendant can simply outspend and exhaust their opponent, they don’t need to be in the right. If obstructionist tactics are rewarded in how attorney’s fee awards are determined, then the specific obligations of the HOA or condominium covenants can be made of no effect.
Judge Lewis explained why he only awarded $375 in attorney’s fees. He found that Ms. Lambert’s lawyer did a “magnificent job,” but “I thought $6,000 in attorney’s fees on a case involving a dispute of $500 was not fair to the Defendant [Sea Oats].” Ms. Lambert appealed her case to the Supreme Court of Virginia.
Was it proper for Judge Lewis to find that a prevailing party could be denied almost all the attorney’s fees she incurred because the amount was not “proportional” to the judgment? Lawyers know from experience that, especially in many state courts, judges are reluctant to award a prevailing party $6,000-$9,000 in attorney’s fees on a $500.00 judgment. The practical effect is that owners and their lawyers are reluctant to bring lawsuits where the amount of attorney’s fees is expected to exceed the value of what could be expected in the judgment. Sometimes these circumstances embolden boards to strategically breach the covenants.
On appeal, Ms. Lambert analogized the attorney’s fees provision in the Condominium Act to similar provisions in the Virginia Consumer Protection Act. The Supreme Court previously held that the purpose of the VCPA’s attorney’s fees provisions is to encourage private citizens to enforce the statute through civil litigation. Otherwise, the VCPA’s policies could be made of no effect if the consumer must bear the costs of vindicating the statutory rights. If you listen to the audio recording on the Court’s website, you can hear Lambert’s appellate attorney Kevin Martingayle doing an excellent job arguing the case to the justices.
On appeal, a judge’s determination of an award of attorney’s fees is evaluated on an “abuse of discretion” standard. However, the scope of the judge’s discretion is not absolute. The statutes and contract provisions create a boundary of exercise of discretion. The Supreme Court viewed the trial judge’s “proportionality” requirement as an incorrect legal conclusion misinforming his decision.
The Condominium Act states that the prevailing party in an action to enforce compliance with the condominium covenants and bylaws shall be entitled to recover reasonable attorney’s fees. There is an analogous section in the Property Owners Association Act that applies to most HOA’s in Virginia. These statutes are exceptions to the general rule that each party to a lawsuit must pay their own attorney’s fees. Unless you are in Alaska, courts won’t consider attorneys fee requests unless there is a statute or contract provision that allows for attorney’s fees. The Condominium Act makes an award of reasonable attorney’s fees mandatory when one side prevails, instead of merely an option for the judge.
What factors determine the reasonableness of an award of attorney’s fees? According to the Supreme Court of Virginia, those factors include:
- The time and effort expended by the attorney.
- The nature of the services rendered.
- The complexity of the services.
- The value of the services to the client.
- The results obtained.
- Whether the fees incurred were consistent with those generally charged for similar services
- Whether the services were necessary and appropriate.
Judges are also permitted to consider other factors. In Lambert v. Sea Oats, the Supreme Court found that the amount of damages awarded was a permissible consideration under the “results obtained” factor. However, “merely applying a ratio between the damages actually awarded and damages originally sought will not satisfy the reasonableness inquiry.” This is common sense. In some cases, the non-prevailing party will engage in vigorous litigation tactics that will leave their opponent with the choice of taking necessary action to obtain a result in the case or abandon the claim. Conversely, plaintiffs can also be found to “over-litigate” cases, resulting in defendants incurring attorney fees that may be unnecessary in the case was properly brought. A formulaic ratio may be simply inadequate to do justice. The Supreme Court observed that a trial court may consider any disparity between the amount sought in the lawsuit versus the verdict. If a plaintiff sues for $500,000.00 but only receives $50,000.00 at trial, then this may factor in the attorney’s fee award. The Supreme Court found that Judge Lewis should have compared the $500 sought to the $500 awarded instead of the ratio of the fee request to the award:
[T]he “results obtained” factor does not permit courts to do what the circuit court did here—i.e., to use the amount of damages sought as a limit beyond which no attorney’s fees will be awarded. To do so tells parties that they may not recover the reasonable attorney’s fees they incur simply by sending an attorney through the courthouse door if they prosecute, or defend against, claims in which such fees exceed the amount in controversy. Circuit court litigation comes at a price, sometimes a heavy price. There is an initial pleading, or an answer to one, to research, write, and file. Discovery may be propounded and must be answered. There will be witnesses to prepare for trial. There may be pre-trial motions to research, write, and argue. And then there is the trial itself, if the case makes it that far. If either party invokes its right to a jury, trial could encompass everything from voir dire to jury instructions.
Each of these tasks requires an attorney’s time and, provided the time is reasonable in light of his or her experience and the nature of the case, he or she may expect compensation for that time at a reasonable rate. Undoubtedly, the number of tasks and the time required for them will vary depending on whether the ad damnum is $500 or $5 million, regardless of whether the attorney represents the plaintiff or the defendant. They will likewise vary based on the vigor with which the opposing party responds. But it is the court’s duty to assess the necessity of those tasks, the time spent on them, and the rate charged “under the facts and circumstances of the particular case.” Mullins, 241 Va. at 449, 403 S.E.2d at 335. This does not require the court to pore over pages and pages of billing records to evaluate the reasonableness of each line-item. But the court may neither shirk its duty to assess what amount of attorney’s fees is reasonable in the specific case before it, nor award an amount so low that it fails to reimburse the prevailing party for the costs necessary to effectively litigate the claim that—after all—it prevailed on.
Plaintiffs who come to court believe they have legitimate claims that are being illegitimately denied by the defendant. Defendants who come to court believe their defenses are legitimate. Neither’s position need be frivolous; they may simply disagree. But when each of them comes to court seeking a neutral adjudication of their disagreement, each is there because the opposing side forced him or her to be. When the case is covered by a fee-shifting provision and the court weighs the reasonable amount of attorney’s fees to award, it cannot dismiss out of hand the costs of litigation inflicted on the prevailing party by the losing party’s insistence on its losing argument, based solely on the dollar value of the claim. To do so deprives the parties of the benefit of their bargain if the fee-shifting provision is contractual and contravenes the intent of the General Assembly if the provision is statutory.
We stress that this holding does not mean that courts may not consider the value of the claim, along with other factors, to assess the complexity of the case (and therefore the legal services necessary to represent the client’s interests), or whether those services were necessary and appropriate in light of the claims prosecuted or defended against. It means only that courts may not do what this court did and say that “$6,000 in attorney’s fees on a case involving a dispute of $500” is unreasonable per se, without regard to the necessary costs of effectively litigating a claim.
The Supreme Court’s decision requires the case to go back to the Circuit Court of Virginia Beach to reconsider the award of attorney’s fees in light of the opinion.
Lambert v. Sea Oats is a big victory for owners in condominiums and HOAs. First, it sends a message that the particular circumstances of a case cannot be ignored and replaced by some percentage of the judgment. Second, this discourages HOA and condo boards from stonewalling owners’ rightful claims for what they are entitled under the governing documents. Third, it puts the obligation on the parties to make sound, rational litigation decisions. Fourth, it will help owners in cases that will never actually go to court. Why? Because the association lawyers will counsel their clients regarding this case and it will deter the kind of conduct that gave rise to cases like Ms. Lambert’s.
What I dislike about the trial judge’s approach in awarding only $375 is that it places parties like Ms. Lambert in an impossible position. Without reversals like this appellate decision, in the next case an owner would have to either (a) fix the common area herself and not seek reimbursement, thus making the covenants to no benefit to her, (b) limit the attorney’s activity to one or two hours of work, which could result in the owner losing the case for failure on a procedural technicality, or (c) effectively pay eight or nine thousand dollars to get the door fixed when the board is required to do it for $500.00.
Not all community association lawsuits are about money damages. Sometimes the plaintiff seeks an order that their opponent stop doing something, to take affirmative action required under a contract, or to declare the results of a board election invalid. In a footnote, the Supreme Court states that in those cases there may not be a dollar amount in controversy: “These cases tend to be binary, and the ‘result obtained’ is clear based on whether the relief sought was granted or denied.”
Does this new decision mean that homeowners will always get a disproportional award of attorney’s fees in small dollar cases where they prevail? No. But it does help to level the playing field of litigation. I hope that this case encourages more owners to pursue legal action when they suffer damage and infringement of rights in association matters. This case should also discourage owners and boards alike from bringing cases that should not be brought in the first place.
For Further Reading or Listening:
The photograph for this blog post doesn’t depict anything discussed in the article. It’s a row-house in Alexandria, Virginia.
November 3, 2016
In many HOA disputes, only one (or a small handful of) owners desire to challenge board actions that negatively impact a larger class of owners in the community. If the court finds that the board action was invalid, then the court decision would materially impact everyone, not just the plaintiff owners and the HOA. Today’s post is about how plaintiffs lawsuits against HOAs potentially benefit other owners. Usually, a plaintiff must name everyone materially impacted by a potential outcome as parties to the lawsuit. Must a homeowner join all owners as plaintiffs or defendants in a lawsuit against a HOA seeking judicial review of a board decision? What flexibility does the law allow for one or more owners to bring a representative claim against the association to benefit themselves and other similarly situated owners? How should attorney fees be handled in cases with “free riders”? The answers to these questions show tools for owners to enjoy greater access to justice in community association disputes.
Mass claims by owners may be brought against community associations in several ways. A group of interested owners can split the cost for one law firm to sue on their behalf. Alternatively, owners may bring separate suits and have the claims consolidated in court. Filing a class action may be a feasible option in many states. Is there any other way that claims can be brought to benefit both the named plaintiffs and other similarly situated owners? Can this somehow make lawsuits against HOAs more affordable?
There are good examples of such representative actions in Virginia. Ellen & Stephen LeBlanc owned a house in Reston, a huge development in Fairfax County, Virginia. Reston is a locally prominent example of where the community association model largely replaces the town or city local government. Most Restonians live under a Master Association and a smaller HOA or condo association. Such owners must pay dues and follow the covenants for both the master and sub association.
The LeBlancs owned non-waterfront property near Reston’s Lake Thoreau. In 1994, the Master Association decided that henceforth, only waterfront owners would be permitted to moor their watercraft directly behind their properties. This would substantially inconvenience the LeBlancs’ boating activities. The LeBlancs’ lawyer Brian Hirsch filed a lawsuit in the Circuit Court of Fairfax County challenging the validity of the master HOA’s decision on both constitutional and state law grounds. The association retained Stephen L. Altman to lead their legal defense.
Roger Novak, Judy Novak, Rex Brown and Dalia Brown all owned waterfront properties on this lake. These families did not want the LeBlancs or other non-waterfront Reston owners mooring their boats behind their houses. I can’t blame them for wanting a tranquil aquatic backyard all to themselves. The Novaks and Browns hired lawyer Raymond Diaz to bring a motion to intervene. The Browns and Novaks became parties to the suit. These intervenors asked the judge to force the LeBlancs to name all the owners in Reston as parties or dismiss the case for lack of necessary parties.
In general, a lawsuit must be dismissed if the plaintiffs fail to name all parties that are necessary for the case to be properly litigated. A suit on a contract or land record usually must include all parties named in the contract or instrument. The Novaks and Browns wanted to block people like the LeBlancs from enjoying mooring privileges on the lake. They wanted the LeBlancs to name all the parties subject to the covenants recorded in the registry of deeds for the Reston Association. If the LeBlancs had to litigate against the hundreds of owners, then the case could quickly become uneconomical, even if most were friendly. The Court denied the intervening parties’ motion, upholding an exception from well-established legal precedents in non-HOA Supreme Court of Virginia opinions:
Necessary parties include all persons, natural or artificial, however numerous, materially interested either legally or beneficially in the subject matter or event of the suit and who must be made parties to it and without whose presence in court no proper decree can be rendered in the cause. This rule is inflexible, yielding only when the allegations of the bill disclose a state of case so extraordinary and exceptional in character that it is practically impossible to make all parties in interest parties to the bill, and, further that others are made parties who have the same interest as have those not brought in and are equally certain to bring forward the entire merits of the controversy as would the absent persons.
The Circuit Court found this exception to apply:
In the case at bar, it is impracticable to join the estimated 400 to 500 homeowners surrounding Reston’s five lakes in this action. Likewise, the interests of these persons are the same as those of the parties to this action, and said parties are certain to bring forward all of the merits of the case as would the absent persons.
Hundreds of other owners are materially impacted by the case’s outcome. But this exception allows the case to proceed without adding them as necessary. Other individual owners are not barred from suing or become party to the LeBlancs’ case. The other owners weren’t necessary for the practical consideration of the sheer number of the affected class. The court found the LeBlancs sufficient to represent the case against the exclusive moorings rule, and the Novaks, Browns and the HOA competent to defend the board’s action favorable to the waterfront owners. The LeBlanc’s case was permitted to proceed without adding hundreds of affected owners. This “virtual representation” procedure is significant because the court’s ruling on the validity of the board’s resolution would affect all owners, not just the parties.
At trial, the Court upheld the Board’s decision to regulate boating activity on Lake Thoreau as a valid exercise of powers granted in the covenants. The LeBlanc’s case was dismissed. The Supreme Court of Virginia declined to reverse the decision. However, the principle that one or more owners can virtually represent the interests of a large class of homeowners in a contest over the validity of HOA rulemaking has not been overturned.
In 1996, the Circuit Court for the City of Alexandria applied the same principles in a homeowner challenge to a condominium election of directors. The Colecroft Station Condo Unit Owners Association Board asked the court to dismiss the judicial review of the election because not all owners were listed as plaintiffs. The judge rebuffed demands that all owners be added as parties, citing the same exception as used in LeBlancs’ case.
This exception that all materially affected parties need not be named as a plaintiff or defendant in the lawsuit is important to homeowners’ rights for several reasons. It gives an individual or small group of owners the ability to proceed with a lawsuit even when their neighbors might be friendly but uninterested in litigating. It gives owners another option when their rights are threatened and are not effectively redressed by board of directors’ elections or initiatives to amend the governing documents. Certain types of claims may be brought where class actions are not permitted or unfeasible. One brave owner could get a court to overturn an invalid board decision infringing upon the rights of many. This “virtual representation” doctrine advances the cause of homeowner access to justice in HOA and condo cases.
One challenge in these “virtual representation” cases is the notion of “free-riders.” The HOA’s attorney’s fees are paid for by the board’s accounts receivable: assessments, fees, loans and/or fines. Representative plaintiffs leading the challenge might find themselves “carrying water” for similarly situated owners who would stand to potentially benefit from the outcome of the case but aren’t paying lawyers. Is it fair for the challenging owners to pay for the legal work undertaken to achieve a benefit to both the plaintiff and the larger class? Are they entitled to an award of attorney’s fees reflecting the benefit conferred on behalf of other interested parties not named as plaintiffs? I will address this question in a future blog post focusing on the doctrine of “common fund” or “common benefit” in attorney fee awards and how this might apply in community association cases.
LeBlanc v. Reston Homeowners’ Ass’n, 38 Va. Cir. 83 (Fairfax Co. 1995)
September 14, 2016
There is an interesting September 14, 2016 article in the Washington Post by Ilyce Glink and Samuel Tamkin entitled, “Why you should look carefully at an HOA’s plans for that community before buying a home there.” The article responds to Virginia home buyers who have great questions that aren’t answered in an HOA disclosure packet. The purchasers know that the roads the HOA owns need major repairs. It is overall a great article. The HOA disclosure packet doesn’t say how this will be paid for. They are concerned that their dues might increase from $1,000 to $3,500. This is a make or break question. Virginia law entitles the buyer to disclosure of HOA governing documents, corporate records and financial reports before going to closing on purchase of property. These disclosures are supposed to educate buyers about their rights and responsibilities to the HOA for as long as they own the property. In reality, buyers have many things on their minds during this exciting and stressful time. Their busy lives are consumed with urgent matters. They attend the home inspection and negotiation of any repairs. They come up with the down payment and approval from their mortgage lender. An excited family member may be dismissive of any questions or red flags about the property. The purchase will require the buyers to move and have their lives disrupted. Many home buyers feel worn down by demands of the process. They want to avoid cancelling and starting all over. All the buyers know about the HOA may be from seeing neighboring houses, maybe some common areas like a pool or playground. What’s in the HOA disclosure packet or condominium resale certificate give the association great influence over the financial affairs and home life of the buyers. Virginia law requires that HOA disclosure packet to include the following statements and documents:
1. Name and registered agent of the association.
2. Approved expenditures that will require a special assessment.
3. Ordinary assessments or mandatory dues or charges.
4. Whether there are any other parties to which the lot owner may be liable for fees or charges.
5. Reserve study report or summary.
6. Current budget and financial balance sheet.
7. Any pending lawsuit or unpaid judgment that could have a material impact.
8. Insurance coverage provided and not provided by the association.
9. Whether any improvement to the property being sold is in violation of the governing documents.
10. Flag display restrictions.
11. Solar panel use restrictions.
1. Declaration & any amendments.
2. Articles of incorporation, bylaws & any amendments
3. Rules, regulations or architectural guidelines
4. Approved minutes of the board and owner meetings for previous six months
5. Notices of any pending architectural violations
6. Disclosure Packet Notice Form prepared by the Virginia Common Interest Community Board
7. Annual Report form filed with the state with officers and directors and other information
8. Federal Housing Administration lending approval statement
While many people aren’t familiar with these kinds of documents, they reflect the family’s future financial obligations to the HOA and restrictions on the use of the property. The 2008 subprime mortgage crisis was caused in part by mortgage lenders giving borrowers loan documents that they didn’t understand. The HOA covenants are also a source of confusion. Many buyers would never buy a home without using a home inspector, but they try to tackle the HOA disclosure packet themselves. Unfortunately, it is easier for an unaided consumer to eyeball things in the home that need repairs than make sense out of the HOA documents. The federal government requires mortgage lenders to provide borrowers with simplified statements of the loan terms to make them transparent. For HOAs, consumer protections are weaker. Virginia law gives the buyer only three days to cancel the purchase contract after receipt of the HOA disclosure packet. That might give a professional working in the real estate industry enough time to digest them. However, many ordinary consumers struggle to make this three-day review period a meaningful part of their decision-making. A buyer could negotiate with the seller for this three-day period to be lengthened in the language of the sales contract. Few ask for this because the disclosures in the sales contract do not suggest to the buyer that additional time might be necessary.
As more HOA horror stories appear in news articles and social media posts, consumers are more likely to read the HOA disclosure packet and ask questions like in today’s Washington Post article. Even if the buyer is familiar with community associations law, the governing documents may be vague, ambiguous or unclear about issues critical to the buyer’s use and enjoyment of the home. This is what the home buyers in the article discovered. Glink and Tamkin recommend that the buyers knock on the door of the HOA president and ask her point-blank about how the road repairs will be paid for. An officer who understands their leadership responsibilities well might provide a sufficient answer upon a direct request. However, in most situations this probably won’t achieve a satisfactory result. Educated officers and directors know that the HOA or condo board is only required to provide the information and documents referenced in the statutes. If the buyer is unsatisfied, they have to either exercise the contingency within the deadline or negotiate for an extension of the cancellation period and a follow-up request to the board. The HOA could employ dilatory tactics, inducing the buyer to inadvertently waive the right of cancellation while pursuing an answer to the question. The road expense issue is probably already a hot-button issue for this board with lots of HOA politics in play.
There is a disturbing issue about the facts described in this newspaper column that isn’t addressed by the article. The HOA is managed by its board and not by a property management company. The monthly dues for the property are $1,000. This means that the officers and directors are handling a huge budget themselves, making day-to-day property management decisions. Maybe the board consists of retired real estate professionals who do this as a hobby to benefit the community at no added benefit to themselves. Given the commitment required to manage such a large budget, this is probably not the case. This would be my number one question.
If the purchasers have questions about what the documents mean, they might ask their real estate agent. Realtors provide a lot of value to their clients because they negotiate sales transactions all the time. The agent may not be the best person to ask because she won’t receive a commission on the sale if the buyer gets cold feet and backs out. The disclosure packets contain legal documents that are designed to enforce restrictions in court should disputes arise. If an attorney or real estate agent might struggle to make sense out of the disclosure packet, a buyer who is not familiar with HOAs may only read a few pages before setting them aside and focusing their attention elsewhere. If consumers understood the HOA disclosure packet and made an intentional decision to go to closing or back out based on what they read, consumer trends and demands might force home builders to make HOAs more owner-friendly.
In theory, a buyer can retain independent attorneys and CPAs to review the HOA disclosure packet and answer questions. This would allow an educated decision whether to cancel within the short deadline. In reality, if the buyer doesn’t already have an attorney and/or CPA lined up at the beginning of the three-day period, it may already be too late. Let’s say the buyer spends a day trying to make sense of the HOA disclosure packet on his own. If the family cannot figure things out themselves, on the second day he might start calling around for an attorney. Unfortunately, almost all community association lawyers represent the associations themselves, big investors or developers. They do not normally represent homeowners. My firm is an exception – in my solo practice I never represent HOA boards. General practice attorneys often represent individual persons. However, to effectively advise the purchaser on short notice, the attorney must be familiar with the appellate court decisions concerning the HOA statutes and governing documents. Much of the law pertaining to community associations matters is found in court opinions, not just acts of the general assembly. Many general practice lawyers are very good but may not be familiar with these things. Assuming that the buyer does find an attorney who is a good fit, there still are time constraints. The buyer has to talk to the lawyer, hire him, and provide the documents. It may take the attorney more than an hour or two to review the documents to prepare to provide an overview and answer questions. All of this must be completed within 3 days (or whatever extended period agreed with the seller) so that the buyer can make a meaningful decision to exercise or waive the HOA contingency. Otherwise the buyer might lose their deposit and some other fees if they want to get out of the contract. The three-day period might work if the buyer hired the attorney beforehand. However, the terms and disclosures in the sales contract do not alert the buyer that such might be desired.
Don’t get me wrong. The HOA disclosure packet provides critical information and documents to consumers and does contain a right of cancellation. Doing away with it entirely would be a huge setback to property owners. Unfortunately, the deadlines and procedural features of the disclosure laws don’t do enough to protect consumers. My professional experience working with owners leads me to believe that many of them go to closing unaware of what they are getting into. This is not really their fault. Sometimes they don’t understand the extent of some restriction or obligation that the property is subject to. Also, owners have rights that they are often unaware of and could improve their situation if they knew about them.
One of the key statements in the packet is the Virginia Common Interest Community Board Disclosure Notice Form. This is a kind of “Miranda” warning to consumers about what it means to live in an HOA or condo. The current version is useful but could be improved. It doesn’t mention fines for rule violations. It states that the buyer is subject to all of the decisions of the Board. Yet an adverse decision of the board might be legally void or voidable if the owner acts promptly. The notice does not reference the statutes or common law principles that may dramatically affect the rights and obligations of owners. The packet notice does not point out to the buyer that they have a right to have their own attorney review the documents and answer their questions. If the buyer received a useful disclosure notice form at the time they signed the contract, then they might more carefully consider whether to hire an attorney, CPA or other professional to help them with the HOA disclosure packet. Also, if the statute allowed for a longer period of time for the contingency than three days, the buyer would not need to negotiate that in advance. These additional protections are necessary because the system that exists has a practical effect of limiting home buyers’ right to counsel.
Based on my own personal experiences with real estate, the stories I have read about other people’s experiences and homeowners I have spoken to, I believe that on a practical level, the HOA disclosure packet is an ineffective system of consumer protection. This is shown by the surprise that owners experience when they are victim of an abusive debt collection practice, an arbitrary architectural review decision or any other infringement of their property rights by an association. Fundamentally, the HOA disclosure packet procedure doesn’t work because consumers don’t understand how its contents help them find answers to any questions they might have.
What does a buyer need to know that isn’t found in the HOA disclosure packet? The courts are the branch of government that oversee HOA boards. The Supreme Court of Virginia has repeatedly held that the declaration is a written contract or agreement between the owners and the HOA. If you go to the Virginia Code looking for guidance on something not explained in the packet you might not find the answer there because of the nature of the legal system. The declaration, along with other real estate contracts are interpreted by court precedents for many issues. For example, if a party breaches a contract, they are entitled to remedies which might include money damages, attorney’s fees or an order for the other side to do something. An owner has an interest in knowing whether the declaration even makes the association qualify as an HOA. The system of remedies for breach of covenants is very important in the HOA context because that’s where the owner finds means of enforcing his rights. A wide variety of rules that pertain to HOAs are found in court opinions that aren’t neatly summarized in the disclosure packet or even in legislation.
Because the governing documents are written in legalese interpreted by court opinions and legislative enactments, the disclosure packet is not effective as a summary of the rights the HOA has over the property. The Washington Post column illustrates this. A buyer does not have the time to take a law class on community associations or enforcement of real estate covenants in the three days in which the disclosure laws give them to review it.
I hope that the General Assembly amends the statutes to provide stronger protections for buyers. If buyers knew what they were getting themselves into beforehand, they would be better educated to be owners or even board members. In the meantime, home buyers should prepare to retain advisors to help them understand the documents. If necessary, the buyer and seller can agree to expand the three-day waiting period. Ultimately, families must work with their own team to stick up for themselves and protect their rights. Owners owe it to themselves to adequately understand all of the rights and burdens that may come with the sacrifices made to purchase the property to begin with. Buyers should retain a qualified attorney to help them understand the documents before they even receive the HOA disclosure packet or condominium resale certificate.
For Further Reading:
Va. Code Section 55-509.5 (Contents of association disclosure packet; delivery of packet)
Va. Code Section 55-79.97 (Va. Condominium Act – Resale by Purchaser)
August 19, 2015
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?
July 3, 2015
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.
May 14, 2015
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)
February 5, 2015
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.
November 11, 2014
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:
establish reasonable restrictions as to the size, place, duration, and manner or placement or display of the flag on such property provided such restrictions are necessary to protect a substantial interest of the association.
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.
November 4, 2014
Today’s blog post is the third installment in a series on the emerging trend of foreclosure of condominium association liens on private property owners. In a previous article, I discussed a new appellate court decision, Chase Plaza Condominium v. Wachovia Bank, recognizing the right of an association under the D.C. Code to sell a condo unit in foreclosure to satisfy unpaid assessments, thereby extinguishing the much larger bank mortgage. This installment examines how future, similar attempts may be viewed under the Virginia Condominium Act.
Presently, Lenders Have Priority over Association Liens in Virginia:
In 2003, the Supreme Court of Virginia heard a case involving similar facts as in the Chase Plaza case under the corresponding portion of the Virginia Condominium Act. Va. Code Sect. 55-79.84 provides that a properly recorded Condo assessment lien has priority over other encumbrances except for:
- Real Estate Tax Liens;
- Liens Recorded Before the Condominium Declaration;
- First Mortgages or First Deeds of Trusts Recorded Before the Assessment Lien.
That same code section provides for the distribution of the proceeds of the association foreclosure sale, differing materially from the aforesaid lien priorities:
- Reasonable Expenses of the Sale & Attorney’s Fees;
- Lien for Unit Owner’s Assessments;
- Any Remaining Inferior Claims of Record;
- The Unit Owners Themselves.
Since the statute provides for differing priorities for liens and distribution, I’m not surprised that this issue was litigated. At the Virginia Supreme Court, Colchester Towne Condominium Council argued that these provisions permitted foreclosure of a unit for its owner’s failure to pay assessments. This Association asserted that before the bank received anything, the proceeds would first be paid for expenses, taxes or the assessments.
Wachovia Bank argued that it had a priority over the Condominium Association for both the lien and payment. In a narrow 4-3 decision, the majority agreed with the bank. Justice Lawrence Koontz found that the General Assembly intended for the first mortgage to get paid before the association assessment liens. The Court observed that purchase money mortgages are the “primary fuel that drives the development engine in a condominium complex.” Justice Koontz remarked that a contrary result (the D.C. and Nevada cases come to mind as examples) would not adequately protect the lender’s interests.
Justice Elizabeth Lacy wrote for the three justice minority, which included now-incumbent Chief Justice Cynthia Kinser and Chief Justice-elect Donald Lemons. They favored permitting the association to conduct the foreclosure sale and give the unpaid assessments priority over the mortgage. However, they would permit the lender’s lien to survive the foreclosure process, burdening the property purchased at the auction. None of the justices on the Supreme Court at that time published an opinion that would give an Association powers like those found in the Chase Plaza case.
As of the date of this article, the conventional wisdom followed by many owners of distressed condominium properties in Virginia has a legal basis on this 4-3 decision from 11 years ago. I predict that in a matter of months or years, this same issue will resurface in the General Assembly or the Supreme Court. I don’t know to what extent the national sea change will have a ripple effect in Virginia. It is not possible to predict to what extent, if any, associations may acquire greater rights against banks and homeowners. However, local governments rely on associations to pay to maintain certain common areas and services. Cities and counties continue to seek ways to avoid budget shortfalls. New land development brings the prospect of additional tax dollars. These associations have a financial crisis of their own for the reasons I spoke of in my prior post. The financial crisis is greater today than 11 years ago, and so are the challenges to private property rights.
Where Does All This Leave Property Owners and Their Advisors?
For a homeowner, keeping one’s home and paying bills is a more immediate human concern than ending the larger rescission. What do these storm clouds mean to Virginia condominium owners? A few thoughts:
- Escrow Accounts. Courts and pundits suggest bank escrow of HOA dues may be the answer. Writer Megan McArdle points out, a “vast regulatory thicket surrounds mortgage lending.” Throwing association governance and budget issues into that thicket does not seem like an attractive option to owners, who don’t always find themselves aligned with their association’s decisions. Making banks party to disputes between Associations and owners would complicate matters further.
- Banks Shy From Financing Condos. The Wall Street Journal Reports that David Stevens, president of the Mortgage Bankers Association, expects mortgage rates to rise in Nevada. The Mortgage Bankers Association also reports that sometimes HOAs won’t accept payments from them or even tell them the amount due. I expect banks to strengthen due diligence of a condominium association’s governing documents, policies and financials before agreeing to lend on a property subject to its covenants.
- Home Buyer’s Focus on Contingency. In purchasing a condominium or another type of property in an association, a buyer has a window of time to review the association disclosures and either get out of the deal or move forward. If the banks start escrowing association fines, etc., this may become a greater focus in the home-buying process.
- Cash Only Trend Prevails in Condominium Sales. In many condominiums, unit sales are conducted in all cash. The cash only option certainly cuts out the problem of the purchase money-lender. This also cuts most owner-occupants out of the house hunt, and decreases the number of owner-occupants in the association, making the place less attractive to lenders. This does not seem to be a solution.
One option that I haven’t seem discussed elsewhere is this: What if, when unit owners default on their obligations, the property is put up for foreclosure, and the lender, association (or any other investor), could submit competing bids to a trustee? The HOA would get paid, and the lender could get the collateral property. I doubt this would work under the existing statutory framework, but perhaps it would work better than an escrow.
If you own a property that is subject to the covenants of a condominium or homeowners association, and the association has threatened to enforce its lien against your property, contact a qualified real estate attorney to protect your rights. In order to protect your rights, you may need to prepare for a sea change in the balance of powers in home ownership.
If you are considering an opportunity to purchase a property at an association assessment lien foreclosure sale, retain qualified counsel to advise you regarding related risks, and carefully consider purchase of title insurance.
Case opinions discussed: Colchester Towne Condominium Council v. Wachovia Bank, 266 Va. 46, 581 S.E.2d 201 (2003)
October 29, 2014
On October 16, 2014, I asked in a blog post, “What Rights Do Lenders and Owners Have Against Property Association Foreclosure?” In that installment, I discussed a Nevada foreclosure case that was not between the borrower and the lender. It reflected a litigation trend between the lender, homeowners association and the federal government. Today’s article continues exploration of this legal development emerging in some states. Some courts are finding that homeowners associations have the right to foreclosure on private property for failure to pay fines, dues and special assessments. Several recent court rulings found that HOA foreclosures can extinguish the lien of the bank who financed the purchase of the property. Owners, banks and federal housing agencies find this trend an alarming sea change in the home mortgage markets.
Evaluating Competing Foreclosure Rights:
Today’s blog post focuses on where all of these legal developments put lenders when an Association attempts to enforce a lien for nonpayment of fines, assessments and dues. In a mortgage, the borrower agrees to put the property up as collateral to finance the purchase. The loan documents received at closing outline the payment obligations and the rights of foreclosure. Association obligations, on the other hand, are determined by the governing body of the Association according to the Bylaws. In many states, statutes provide for Associations to record liens in land records for unpaid assessments. Some statutes also allow Associations to conduct foreclosure sales to satisfy unpaid assessments by following certain procedures. Where state law allows, the Association’s authority to foreclose isn’t based on the owner’s agreement to make the property collateral. The statutes and recorded covenants put the buyer on notice of these Association rights.
Journalist Megan McArdle discusses on BloombergView how in about 20 states, HOAs can put homes up for auction (without the permission of the lender) and sell them to satisfy little more than outstanding dues (perhaps a four figure amount) to an investor, and the bank’s mortgage lien (six or seven figures, likely) is extinguished from the real estate. Ms. McArdle remarks that this doesn’t make a huge amount of sense, and I tend to agree with her. Some adjustment must come to the regulatory landscape in order to preserve both property rights and market liquidity.
Personal Experience with Northern Virginia Condominium Ownership:
Before I got married, I owned and lived in a condominium in Northern Virginia for over nine years. I remember hearing discussions, whether at the annual meeting or in the elevators, that some owners in the building fell on hard times and had kept on paying their taxes and mortgages but had stopped paying their condo association dues. Those distressed homeowners felt confident that while the association might consider other collection activity, it would not be able to sell their unit in foreclosure, to the prejudice of both the mortgage lender and the owner. At that time, the right to occupy the unit had a unique value to them.
This made sense to me, because the mortgage lender usually has more “skin” in the game in terms of the dollars invested. Can this strategy continue to hold up in light of new national trends in HOA foreclosure? Changes have already reached the opposite shores of the Potomac in an August 28, 2014 District of Columbia Court of Appeals decision.
Bank and Association Battle in D.C. Courts Over Priority of Liens on Condo Unit:
Two months ago, the Court of Appeals published an opinion that will likely change the lending environment for D.C. condominiums. In July 2005, Brian York financed $280,000.00 to purchase a unit in the Chase Plaza Condominium in Washington, D.C.. Unfortunately, he became unable to continue making payments on his mortgage and Association dues after the mortgage crisis began in 2008. In April 2009, the Association recorded a lien of $9,415 in land records. The Association foreclosed, selling the entire home to an investor for only $10,000.00. The Association deducted its share and then forwarded the $478.00 balance to the lender. The bank and Association found themselves in Court over whether the Association had the right to wipe off the bank’s six figure mortgage lien in the five-figure sale to the investor.
The Court of Appeals found that under the D.C. condominium association foreclosure statute, the lender gets paid from the left-over proceeds, and to the extent the lien is not fully satisfied, it no longer attaches to the real estate. (It then becomes an unsecured debt against Mr. York, who went into bankruptcy).
J.P. Morgan, the successor in interest to the original lender, pointed out that such a conclusion, “will leave mortgage lenders unable to protect their interests, which in turn will cripple mortgage lending in the District of Columbia.” The Association and investor responded that the alternative leaves HOAs often unable to enforce their liens or find buyers in foreclosure sales. The Court suggested that lenders can protect their own liens by escrowing the HOA dues, like property taxes.
The decisions of Nevada, the District of Columbia and other jurisdictions do not control the Supreme Court of Virginia or the General Assembly. However, the same economic and human forces exert pressure on lending and home ownership in Virginia as they do in the District of Columbia. What is the current law in Virginia? How are owners and lenders to react to these changes here? The answer will come in the next installment in this series on Community Association Foreclosure.
If you are the beneficiary or servicer of a loan on distressed real estate subject to a lien of a community association, contact qualified legal counsel to protect your interest in the collateral.
Case opinion discussed: Chase Plaza Condominium Ass’n, Inc., et al. v. J.P. Morgan Chase Bank, 98 A.3d 166 (2014).