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)
April 17, 2015
Homeowners often acquire the impression that the HOA Board of Directors and property managers act in unison. However, there are often dissenting directors in homeowners associations. Homeowners seek changes to improve their community. Enough of her neighbors agree to get her elected at the annual meeting. Once they attend their first Board meeting as a director, they discover that the property manager is handling the day-to-day affairs of the association. The volunteer board only meets every so often. The majority of directors may find the property manager’s services and information acceptable. If the new director disagrees with a proposal, she is outvoted by the majority and perhaps informally by the property manager, association attorneys, etc. In the Hebrew Scriptures, the Lord spoke to the prophet Elijah not in an earthquake, hurricane, wind or fire, but in a “still small voice.” 1 Kings 19: 11-13. Dissenting directors in homeowners associations may feel sometimes like a still small voice in the wilderness. Even when it may not be immediately fruitful, small voices may nonetheless be influential voices. The rights to speech, due process and private property are related.
Homeowners frequently hear that they must support increase assessments and fines because the policies “protect property values.” However, the value of a home reflects, in part, the extent to which its use may be maximized by its residents. In my opinion, restrictive covenants can decrease the value of property. Where the covenants are reasonable and the association is well run, the benefits of membership may meet or exceed the “cost” of any restrictions and assessment liability. While potential buyers may notice the appearance of neighboring property, they make their decision primarily on the home on the market. For example, if a neighbor has peeling paint on her deck, that practically affects the value of that property and not its neighbors.
Some might object on the grounds that this reasoning is selfish and that really, “we are all in this together.” However, the individual property rights of one neighbor are precious to all neighbors. An assault to the rights of one threatens the rights of others similarly situated.
In a similar way, when dissenting voices on a Board of Directors represent a genuine concern about the governance of the association, they have great deliberative value even if they don’t carry a majority vote. In the association, the property manager and other advisors serve at the discretion of the board as represented by the majority. Association attorneys can be expected to be competent and professional, but they advocate for the legal entity. A dissenting director cannot reasonably expect the association’s advisors to provide her with independent counsel. So, what rights and responsibilities to dissenting directors have in a Condominium or HOA? Here are a few key considerations:
- Legal vs. Practical Power: While the majority (and by extension the professionals they retain) may enjoy the practical power of control, by law all directors have the same legal duties to the Association. Lawyers, lawmakers and judges usually describe this legal duty as “fiduciary.” Virginia Beach association lawyer Michael Inman explains the fiduciary duty of directors in a July 30, 2007 post on his Virginia Condominium & Homeowner’s Association Blog. He argues that a Board has a fiduciary duty to conduct debt collection against delinquent owners. However, the duty to conduct debt collection is not absolute. The board must not exceed its authority or neglect its other obligations. A director who does not enjoy practical control of the operations must understand her fiduciary duties in order to protect her voice. A director may also enjoy indemnification in the event of a civil lawsuit arising out of board action.
- Identify Potential Conflicts of Interest: A conflict of interest arises when a board member is called to vote on a matter where his personal interests and the interests of the association lead in opposite directions. For example, the director may be a principal for a company the association is considering doing business with, such as a property management company, construction contractor, pavement company, or other vendor. A director must be aware of how a vote on a potential resolution by her or other directors may give rise to a legal claim to undo the disputed transaction. However, the existence of a conflict of interest may nonetheless be acceptable under the circumstances. For example, the Virginia Nonstock Corporation Act provides “safe harbors” where the conflict of interest is disclosed to the board or the owners eligible to vote and they pass the resolution anyway or the transaction is deemed “fair” to the association at trial. The burden is on the director with the conflict of interest to properly disclose it.
- Owners’ Rights vs. Directors’ Rights: A director wears different hats. She is a director, an owner and probably also a resident or a landlord in the community. This presents unique circumstances not usually found in business or nonprofit boards. The director may leave board meetings and then go home in that same community. In a condominium, the director may rely upon the association’s employees for concierge services, HVAC maintenance, etc.
- Document Review Rights: Directors and owners have rights to review association financial statements and other documents as spelled out under Virginia law. Traditionally, a business would store these documents in paper files at its official address. As more and more information moves “on the cloud,” how a director or owner practically exercises her rights to review will evolve. Hopefully cloud computing will translate into convenient, transparent exercise of owners or directors rights to review financials and other documents to which they are entitled.
- Governance Issues: Virginia law and the bylaws impose obligations on the board of directors on how it may go about adopting legally effective resolutions. The board may be required to give notice of a meeting, achieve a quorum and record minutes and written resolutions. However, leadership may desire the flexibility of adopting resolutions without the necessity of an actual meeting. Formal governance requirements allow dissenting directors an opportunity to have their voices heard.
- Human Relationships: Even when leadership and managers disagree about major decisions and policies of the association, it’s important not to lose sight of the values of professionalism, respect and diplomacy. I recently participated in a continuing education seminar where a foreclosure attorney explained how important respect was in his practice. Although his job requires him to foreclose on commercial real estate supporting its owner’s livelihood, he reminds himself that these borrowers are also someone else’s family. Being a resilient advocate of the property rights of oneself and one’s neighbors requires civility. Ultimately, the best directors look at situations from the perspective of leadership.
In most situations, dissenting directors in homeowners associations will not need to retain independent legal counsel. However, if you are a director or committee member experiencing a legal dispute adverse to the association, contact a qualified attorney to protect your rights.