August 17, 2016
Court Determines that an HOA is Not Legally Valid
HOAs and Condominiums derive from the covenants and state statutes’ powerful tools to use against homeowners. However, if the association does not meet the legal definition of a HOA or condo, then it cannot use the statuary toolbox. Instead of issuing fines, it must file a lawsuit each time it wants to obtain a lien against an owner’s property. The Virginia Condominium Act and Property Owners Association Act contain many protections for owners. However, they also provide associations with powerful debt-collection tools if they fit within the statutory definition. If a court determines that an HOA is not legally valid, this is a big win for owners being bullied by the board. Every once in a while, owners will take a stand and challenge whether their “HOA” exists. Recently, George Evans, Karen Evans, Gilbert Kesser & Yvonne Kesser brought such a case against their “HOA” in Culpeper, Virginia. On July 13, 2016 they won an important motion, setting the stage for big changes in Seven Springs Farm Subdivision (SSF). I am originally from Culpeper County, but I have never been to Seven Springs. We lived in a quiet residential development of modest wooded lots a few blocks from a lake. No one ever complained that their quality of life or property values suffered for lack of an HOA. When I left to go to college in 1995, there were few HOAs. Since then, development transformed Culpeper County from a farming community into a suburb of Northern Virginia. HOAs played a key role in that transformation.
This case arose over a dispute about assessments for road improvements. The covenants required the HOA to take a member vote before apportioning an assessment against the unit owners. On March 29, 2014, the Board made a $12,000 “blanket” assessment against homeowners without taking their votes. When the Kessers and Evans refused to pay, the HOA placed liens against their properties. Many owners of HOA properties believe that their Boards have the power to “tax & spend” for the “general welfare” of the community and that there is little way to challenge this. However, the Seven Springs Farm HOA case shows that everything a Board does must be authorized according to proper interpretation of the governing documents.
My friend, Mark Sharp, brought a suit on behalf of the Evans & Kesser families. They sought a judgment declaring that SSF is not a HOA for purposes of the Virginia Property Owners Association Act (“POAA”). Usually, the developers’ lawyers who set up HOAs take care that the Association qualifies as an HOA under the POAA. However, just because it calls itself an HOA and acts as though it has those powers doesn’t mean that it is an HOA. In Virginia, the declaration of covenants must provide, among other things, that the Board has the power to make assessments and also an affirmative duty to maintain common areas. This makes sense, because a contract is only meaningful if obligations go both ways. Contracts that fail to exchange something by both sides are invalid because of lack of “consideration.” In the HOA context, fundamental unfairness would arise if the board had the power to assess and lien but no obligation to spend the money on the common areas. Without this mutuality of obligation, an association is not entitled to the toolbox of remedies provided in the POAA.
In the Seven Springs case, the declaration gave the “HOA” the power to assess. The board had the power to do common area maintenance but were not specifically obligated to perform it. Under Virginia law, “valid covenants restricting the free use of land, altogether widely used, are not favored and must be strictly construed.” Accordingly, “substantial doubt or ambiguity is to be resolved against the restrictions, and in favor of the free use of property.”
Culpeper Circuit Court Judge Susan Whitlock’s opinion applied this strict construction principle to the question of whether the association qualifies as an “HOA” under the Property Owners Association Act. Anything in a declaration of covenants can be strictly construed. HOA lawyers typically make the governing documents many pages long in order to avoid having a judge find any “substantial doubt or ambiguity.” Judge Whitlock observed that an HOA is subject to such a challenge even if there was an ongoing pattern of owners paying dues and the Board spending the money on the common areas.
When the owners brought this challenge, SSF filed a demurrer, asking the judge to dismiss the case for legal deficiencies and not allow it to proceed to trial. Judge Whitlock overruled this demurrer, finding that “The Defendant’s Declaration fails to expressly require SSF to maintain the common areas, and therefore the Defendant is not a “Property Owners’ Association” under the POAA. Merely stating that those fees shall be used for maintenance of Lots and upkeep of roads fails to bridge the gap of ambiguity to be considered an affirmative duty to maintain.”
While the board, its managers and lawyers may interpret ambiguous governing documents to empower them to do what they want, in the end it is the counts that oversee HOAs, which a judge may very well reject. Judge Whitlock permitted the owners challenge to the road improvement assessment to proceed in Court.
This Seven Springs Farm HOA reminds us of several things: First, an owner must understand what the governing documents mean under state law to know what their rights and responsibilities are. In a dispute, this will require attorney assistance. The president, manager or HOA lawyer approaches the issue from a different perspective and cannot be expected to disclose to the owner all of her rights. The governing documents may or may not be consistent with what someone might think to be a common-sense approach to solving a problem.
Second, the Supreme Court of Virginia views a HOA as a contractual relationship. Ambiguous or uncertain provisions of these “contracts” can be strictly construed in the owners’ favor. A Virginia HOA board is not a “mini-government” empowered to exercise general legal authority within the boundaries of the development.
Third, Judge Whitlock’s decision is a pleasant reminder that not only do HOAs sometimes lose in Court, sometimes they are found to be less than a card-carrying member of the HOA club. Owners considering litigating against their community association should take this opinion as a reminder that a good case is winnable.
Fourth, just because a judge rules that an association is not an HOA under Virginia law doesn’t mean that the declaration of covenants is completely invalid. Such a ruling just means that its board cannot benefit from all of the intensive lobbying that the industry has done to empower HOAs and condominiums. A non-HOA association may still be able to exercise dominion over common areas and take owners to court to resolve disputes.
Property owners considering court action involving their boards of directors should begin the process with careful consideration of the recorded governing documents with the assistance of a qualified attorney. In many cases, they have more rights than what others explained to them.
Case Citation: Evans v. Seven Springs Farm HOA, No. CL15001273 (Culpeper Co. Va. Cir. Ct. Jul. 13, 2016)(Whitlock, J.)
Photo Credit: Culpeper County Courthouse via photopin (license)
March 12, 2015
Don’t Go it Alone on a Notice of Violation
By law, the homeowners govern mandatory property associations, whether for single-family homes or condominiums. They are roughly equivalent to the shareholders in a corporation. The property manager and employees answer to the board of directors, who in turn answers to the owners. Unfortunately, many homeowners have experiences where this structure seems turned upside down. The property managers, accountants and lawyers hired by the association explain to the board and the owners what to do.
Such a “role-reversal” occurs in circumstances where an association improperly accuses an owner of violating the rules and regulations. Homeowners are told that rules enforcement is necessary to “protect property values.” However, to a homeowner, loss of community privileges, limitation of the use of the property or payment of a fine decreases the practical value of their property. Associations sometimes take direct, unauthorized action without any due process. Usually, they begin the rule enforcement by sending a written notice of violation to the owner. This is the “opening salvo” in a process where an unassisted owner is likely at a disadvantage even when the facts and rules are favorable. Why? Associations pursue rule violations regularly. They usually hire experienced, capable community association lawyers. Property managers prepare to testify about the facts. The board members are often more familiar with the process than the other owners. It is important that owners don’t go it alone on a notice of violation.
Virginia law requires the association to follow established rules enforcement procedures:
- Complaint Made & Reviewed: Before any proceeding begins, another owner, a board member, manager or employee of the association must bring an allegation of a rule violation before the association leadership.
- Legal Grounds for Adverse Action: The General Assembly has not granted associations carte blanche authority to run their communities. Property associations do not have the broad powers of counties or cities. They only have the legal authority granted by law and properly adopted in the declarations, covenants and bylaws. Rules, regulations and resolutions must comply with these higher legal authorities. In substantial disputes, an owner is best served by consulting with an attorney who is familiar with community associations but doesn’t cater to them. Confirming the absence of legal authority requires knowing where to look, what to look for and what to do next. Each association has different documents that may affect an individual owner’s proceeding.
- Written Notice of Violation: Virginia law requires the board to send the owner a written notice of the alleged violation prior to taking any adverse action. The notice must give the owner a reasonable opportunity to correct the violation. Homeowners may need to consult with licensed contractor about the necessity or cost of any repairs that cannot be addressed on a DIY basis.
- Notice of Hearing: To continue the process, the Association must send the owner advance notice of any hearing, identifying actions that the association may decide to take. The owner is entitled to receive it at least 14 days before the hearing.
- Participation in the Hearing: Violation hearings are conducted before the Board of Directors or some other quasi-judicial body specified in the Association’s governing documents. What can a homeowner expect at the hearing? Shu Bartholomew, host of weekly radio show “On the Commons,” explains the importance of not going it alone: “The last thing a homeowner wants is to be sitting – alone – on one side of the table when 5-7-9 board members, managers, recording secretaries, attorneys, and every other Tom, Dick and Harry in a semi-official capacity on the HOA is on the other side of the table, accusing the owner of being in violation of something, that the HOA may not even have the authority to enforce. It is intimidating and a very clear picture of the imbalance of power in HOAs.” The owner should be prepared for this possibility. But owners can have a “team” too. Owners may be represented by legal counsel at the hearing. The General Assembly saw a need to pass legislation making this a statutory right. In addition to an attorney, the owners should consider inviting witnesses and supporters.
- Rules Enforcement Decision: The association must send the owner the hearing result in writing within 7 days of the hearing. The result may consist of monetary charges or suspension of privileges, such as the clubhouse, pool, gym, etc.
- Effect of Decision: Virginia law allows for unpaid fines assessed pursuant to this process, if valid, to be treated like an unsatisfied assessment against the owner’s property. The association may put a lien on the real estate. The suspension of privileges may continue until the matter is resolved.
Virginia property owners are entitled to due process in these association proceedings. An owner is best served by taking action to avoid an adverse decision. However, the internal decision-making process is not the end of the story. Owner’s rights can be defended by bringing legal action in local courts. If your association is working with a team to assess a fine, suspend your privileges or take any other action against your property rights, don’t go it alone.
Virginia Code Section 55-513 (Adoption and Enforcement of Rules)[Property Owners Association Act]
Virginia Code Section 55-79.80:2 (Suspension of services for failure to pay assessments; corrective action; assessment of charges for violations; notice; hearing; adoption and enforcement of rules)[Condominium Act]
Senate Bill No. 1008 (Statement of Unit Owners Rights & Statement of Lot Owners’ Rights)[expected to go into effect July 1, 2015]
Diving. The Ascott Kuala Lumpur via photopin (license)(to illustrate a common area privilege. Does not depict a community association property in the U.S.)
February 20, 2015
The Basics of Civil Litigation Discovery
At some point after the filing of a lawsuit in Virginia Circuit Court, initial disputes over the sufficiency of the complaint are resolved. The parties are now on notice of their opponents’ claims and defenses. The process of getting to this point was the focus of my previous blog post. Contrary to what one sees on T.V. or movies, parties do not immediately proceed to going to trial. Instead, lawyers and their clients begin to prepare for trial in a period called “discovery.” Discovery involves finding out more facts about the case. This post provides an overview of the basics of civil litigation discovery, with a focus on its purposes and tools in real estate cases. Why is there such a lengthy process for this? Consider three purposes of discovery:
- Hoarding. Preventing one side or another from “hoarding” documents and information about the case to the unfair detriment of others. For example, in a case between different homeowners’ association factions over control of the board of directors, whoever happens to have access to the minutes, resolutions, notices, amendments, etc., kept by the association must provide them to the other.
- Surprises. Lawyers, as a lot, are attracted to springing surprises on their opponents at trial. However, it may be contrary to the principles of justice for one side to hand the other a large stack of documents they have never seen before during the trial and expect the witness questioning to be meaningful. Discovery can mitigate unfair surprise.
- Effectiveness of Trial. The public places greater confidence in trial results that are based on documents and facts rather than the decisions made in the absence of existing evidence.
The methods of discovery are more formal than the fact gathering conducted outside of litigation. Informal investigation includes researching the documents and information within one’s control, talking to friendly witnesses, checking what is publicly available or that one’s bank can provide. Usually this doesn’t answer all questions. So what are the available forms of civil discovery? There are quite a few. The most useful in real estate and construction cases in Virginia circuit court are:
- Document Requests. The rules allow a party to request in writing an opponent’s documents. A party seeking production of documents must send a written request. The responding party then has 21 days in which to respond as to documents within their possession, custody or control. In large cases it usually takes significantly longer than 21 days to resolve a document request. Reviewing the relevant documents of one’s opponent is a central element of trial preparation. Contracts and other documents created before the dispute cannot, absent forgery, be changed to adapt to someone’s current story. When the judge or jury goes to make determinations of facts, the credibility of the parties and the key documents carry great weight. If a party fails to produce a document requested in discovery, they are not normally allowed to use it as an exhibit at trial. The documents of a third-party can be requested by serving them with a subpoena duces tecum.
- Interrogatories. Information sought may not necessarily be reflected in a document. In discovery, a party may submit written interrogatories to another party, seeking answers to specific questions. For example, a party may inquire into the factual support for their opponent’s claims or defenses. Parties usually ask for disclosure of all persons having knowledge about the facts of the case. Interrogatories are also a good tool for finding out about expert testimony that one’s opponent may present at trial. The answering party must respond within 21 days. The answers must be signed by a party under oath or affirmation.
- Requests for Admissions. Last August, I posted an article about the role of a party’s admissions in a federal trial in Maryland. In that case, a lawyer made an oral admission in a closing argument. His opponent did not make a motion to have the admission deemed binding before the jury went to deliberate. The jury made a decision contrary to the admission. The jury verdict ignoring the admission survived post-trial motions and appeal. Party admissions can be requested in discovery before they come out at trial. Parties are entitled to submit to the opponent formal, written requests for admission. The 21 day deadline applies here as well. Admitted responses are binding. These can be useful for resolving uncontested matters so that the trial can focus on what’s disputed.
- Depositions. How will a party or witness react to a line of questions at trial? Does a party or witness know something that can be useful to preparing one’s own case? In discovery, a party may take oral depositions of parties, experts or other witnesses. The deposition usually occurs at a law office. The parties, the lawyers and the witness meet in a conference room with a court reporter. The court reporter places the witness under oath, and then records all of the lawyers’ questions, objections and witness answers. Depositions of parties and experts are an important part of pretrial discovery in large cases.
- View of Real Estate. In many real estate or construction cases, the most significant piece of evidence is the building or land itself. If ordered, the jury travels to the property to view it as evidence. More commonly, the appearance of property is put into evidence by photographs or video. A party not in possession or control of the real estate is entitled to view it. This can be an effective way of expanding one’s knowledge about the case.
Not all of these tools will need to be employed in every case. In addition to these forms of discovery, there are common areas where parties dispute over whether the discovery has been properly sought or provided. These are usually the subject of objections and motions:
- Relevance. Discovery cannot be used to explore any and every topic. The requests must explore relevant, admissible evidence or information that is reasonably calculated to lead to admissible evidence. Although not unlimited, the scope of discovery is broad.
- Confidentiality. A party may have confidentiality concerns about turning over documents or information. These concerns can be addressed by a protective order regulating the use and disposition of confidential documents or other information.
- Privileges to Withhold. Frequently attorneys will interpose objections to discovery requests. One justification for withholding documents is the attorney-client privilege. Communications between an attorney and his client are not subject to discovery. Despite the apparent simplicity of this concept, disputes over assertion of the attorney-client privilege are a frequent source of discovery disputes. There are other privilege and objections that are applicable in certain situations.
- Spoliation. In the age of computers, e-mails, text messages, computer files and other electronic data are easily created and easily deleted. Once litigation is threatened or pending, parties and witnesses should take action to preserve evidence, including electronically stored information for potential use in the lawsuit.
- Motions to Compel. Lawyers must make reasonable efforts to resolve disputes over the legitimacy of objections, the sufficiency of responses and other discovery disputes without putting it before a judge. When disputes cannot be resolved, typically one party will bring a motion to compel discovery against the other.
- Sanctions. The failure to obey discovery orders can subject a party to a variety of sanctions, including awards of attorney’s fees, dismissal of claims or defenses, exclusion of witnesses and other punishments.
By better understanding the basics of civil litigation discovery, one can adopt strategies that make better use of time, energy and resources pre-trial. Implementing discovery strategies proper to the needs and circumstances of the case pave the way towards a favorable result.
November 11, 2014
Association Attempting to Foreclose on Home of a Veteran for Flying the Flag
Today, on Veterans Day, I would like to honor veterans who have served our country. Many of them return to civilian life and make additional, substantial contributions to their communities. A few go on to struggle to protect the property rights of themselves and others. In some cases, HOA’s may even attempt to foreclose on home of a veteran for flying the flag of the United States.
Larry Murphree’s Experience in Florida with Association Flower Pot Rules:
Larry Murphree is a U.S. military veteran who owns a residential unit in the Tides Condominium at Sweetwater in Florida. In 2011, he began to display a small 11″ x 17″ flag in a flower-pot outside his front door. His Association asserted fines against Mr. Murphree and the parties found themselves in litigation. The parties reached a settlement wherein Murphree agreed to display the flag in accordance with the condominium instruments. I first heard Mr. Murphree’s story on an October 18, 2014 interview by Shu Bartholomew on her radio show and podcast, “On the Commons.”
After the settlement, the Association adopted new guidelines which permitted display of one american flag, but only in a bracket near the street number plate. The new rules prohibited owners from displaying the flag during bad weather or at night. The military and other U.S. government facilities have more rigorous etiquette for display of the American flag than what is required of private citizens. The new rules the Tides Condominium may have been an attempt to shame Mr. Murphree for not following the military flag etiquette, which a private citizen is not ordinarily required to observe.
The Association also adopted new rules for potted plants. The Association only allowed one pot, which may only contain plants and a maximum of three self-watering devices. This Association found it is necessary to regulate what items may be placed in flower-pots on the doorstep of unit owners. Undoubtedly, there are cases where neighbors erect obstructions which infringe upon the rights of their neighbors. However, Mr. Murphree’s flag does not appear to be an albatross. At Mr. Murphree’s website, http://letmeflytheflag.com, you can see the small flag display from the street view.
Mr. Murphree decided to continue to display the American flag in the flower-pot. The Association began to assess fines a $100.00 per day. They now want to foreclose on his property for the unpaid fines. The parties are in litigation again. On March 32, 2014, the U.S. District Court for the Middle District of Florida published an opinion deciding, among other things, that the First Amendment protections do not apply against non-governmental entities like a homeowner’s association. The Court also ruled that the Freedom to Display the American Flag Act of 2005 does not provide for a right to sue a property association. It is my understanding that the litigation currently continues in Florida state court.
What About Virginia?:
In 2009, retired army veteran Colonel Van Thomas Barfoot’s association ordered him to remove a 21-foot flagpole that he used to fly the American flag. Mr. Barfoot earned the Medal of Honor and served in World War II, Korea and Vietnam. Barfoot won his dispute, but not without help from two senators and a former governor. Ted Strong discusses Mr. Barfoot’s story in a November 2, 2014 article in the Richmond Times-Dispatch.
In Virginia, both the Property Owners Association Act and the Condominium Act contain provisions relating to the federal Freedom to Display the American Flag Act of 2005. These state laws disallow associations from prohibiting owners, “from displaying upon property to which the unit owner has a separate ownership interest or a right to exclusive possession or us of the flag of the United States” where such display complies with federal law. However, the statutes do allow the association to:
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.
photo credit (photo does not display any of the properties discussed in this post): PatrickMcNally via photopin cc
November 4, 2014
The Future in Virginia of Foreclosure of Condominium Association Liens
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)
Photo Credit: (photo of Richmond, Va. condos, not property discussed in blog post): rvaphotodude via photopin cc
October 29, 2014
Can A Condominium Association Foreclosure Extinguish a Mortgage Lien?
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).
Photo credit: To my knowledge, the featured photo does not depict any of the property specifically discussed in this blog post. The credit is here: firstname.lastname@example.org via photopin cc
October 16, 2014
What Rights Do Lenders and Owners Have Against Property Association Foreclosure?
How are Virginia homeowners to evaluate competing threats from their mortgage bank and property association foreclosure? For many years, owners unable to pay their bills associated with their homes have focused on the threat of foreclosure from their mortgage lender.
Homeowners’ Varying Obligations to Lenders and Property Associations:
The conventional wisdom, in Virginia at least, is that homeowners should focus on keeping bills paid in the following priority: (1) local property taxes (have priority as liens, and are non-dischargable in bankruptcy), (2) mortgage lenders (monthly payments largest) (3) the monthly dues and special assessments of the homeowners association or condominium unit owners association. These notions are reinforced by mortgage lenders who escrow property taxes but not association assessments. Should owners continue to follow this in making decisions in the face of risk of payment default? Tax liens will certainly continue to enjoy a super-priority. However, a unit owner’s rights and responsibilities to their community association are of a different nature than bank mortgages. The rights of Associations to fix dues, special assessments and fines change. The General Assembly can amend the statutes. Courts make new legal interpretations. The owners can vote to change the Association Bylaws. Although the Association has significant influence over a unit owner’s rights, its lien is often overlooked to the detriment of many owners. What foreclosure, rights, if any, may an Association use to enforce its assessments? Florida and Nevada tend to be bellwethers of national trends in property associations because of their extraordinary number of condominiums and other associations. One recent case illustrates the chaos that may arise from these competing claims.
Las Vegas Foreclosure Contest Between HOA, Bank and U.S. Government:
On September 25, 2014, Judge Gloria Navarro of the U.S. District Court for Nevada issued an opinion providing clues to how Virginia homeowners may one day find themselves caught up in legal crossfires between banks and HOA’s. Emiliano & Martha Renteria owned a single-family home in Las Vegas that was a part of the Washington & Sandhill Homeowners Association (“HOA”). This is not a condominium but the issues are analogous. In September 2009, they defaulted on their Bank of America mortgage. Like Virginia, Nevada allows non-judicial foreclosure proceedings wherein title is transferred transactionally. The Court becomes involved if there is a dispute. In July 2012, the Bank-appointed Trustee foreclosed on the property. Five months later they rescinded that foreclosure. In May 2013, the Bank completed a foreclosure (in a do-over), claiming title to the property. On May 17, 2013 the Bank conveyed the home to the U.S. Department of Housing & Urban Development in a claim under the Single Family Mortgage Insurance Program.
To make matters more confusing, the HOA pursued its own foreclosure proceedings on the property at the same time to enforce its lien for the Renteria’s failure to pay their assessments. Most of the procedural aspects of Nevada condominium foreclosures are substantially different from Virginia. The HOA purchased the Renteria property at its own foreclosure sale in May 23, 2012, before the Bank’s first foreclosure sale. In July 2012, the HOA filed a release of its lien. A couple of months later, the HOA resumed its foreclosure, asserting an unpaid assessment lien of $4,983.00, this time against the Bank as owner. In October 2012, the HOA reacted to the Bank’s conveyance of the property to HUD, asserting a lien of $1,250.00 against the government. Note that this association foreclosed on a single-family home in an urban area to satisfy only $1,000-$5,000. When those demands went unpaid, the HOA abandoned this position. On October 9, 2013, the Association filed a federal lawsuit claiming ownership pursuant to the May 23, 2012 sale. In the lawsuit, the HOA disputed the Bank and HUD’s claims of title.
On September 18, 2014, the Supreme Court of Nevada ruled in a similar case that a HOA foreclosure extinguishes a mortgage lien such as that held by the Bank. Local readers may be interested that on August 28, 2014, the D.C. Court of Appeals reached a similar decision. In Nevada, Judge Navarro discussed how it is illogical for the HOA to simultaneously claim to be the rightful owner of a property and also assert an assessment claim against another party as owner. She found that under Nevada law, the Association was not permitted to waive its right to extinguish the Bank’s prior lien through foreclosure. The Court decided that the HOA’s subsequent release of the lien against the Renterias and new liens against the Bank and HUD were not valid because it had no right to change course. Had an individual investor purchased the property from the Bank’s foreclosure following the HOA’s release, he would have found himself caught up in this mess. The Court did not discuss whether these latter actions also created unwaivable rights. Judge Navarro ultimately decided that the HOA claim of title violated the U.S. Constitution. She dismissed of the Association’s lawsuit on the grounds that the HUD enjoyed an interest in the property under the Single Family Mortgage Insurance Program that could only be released under federal law. The Property Clause of the Constitution states that, only “Congress has the Power to dispose of and make all needful Rules and Regulations respecting the Territory or other Property belonging to the United States.” Since the Bank’s mortgage was HUD-insured, a HOA cannot violate the government’s rights as insurer. This case is currently on appeal.
All of this caught my attention because it illustrates how HOA’s and Banks may use nonjudicial foreclosure procedures to duel over residual rights in distressed real estate. This case illustrates, if nothing else, why title examination and insurance are valuable investments to individual investors who may find themselves caught up in such a case. Well-advised home buyers must study the association bylaws and other disclosures carefully before waiving the contingency. If legal developments like this continue, associations will likely require a substantial legal reform. Otherwise, property values, especially condominiums will be in jeopardy, banks may restrict financing in fear of HOA lien priority, and investors may lose interest.
Will a Reordering of Rights of Banks and HOA’s Come to Virginia?
The competing rights of HOA’s and Banks is a critical aspect of the foreclosure crisis. On October 2, 2014, Nevada real estate attorney Bob Massi was interviewed on cable news about trends in HOA foreclosures. He predicted that lenders will start requiring borrowers to make their HOA payments into a bank escrow so that the lender’s foreclosure rights are not prejudiced by unpaid assessments.If this becomes a reality, mortgage servicers will become collection agents for associations. What remedies will owners have with respect to the escrow if they have disputes with the association over a fine? Will lenders change their underwriting guidelines to make loans more difficult for property subject to association covenants?
I expect that the issue of HOA lien priority will soon return to the Virginia Supreme Court and General Assembly. What responses to these trends can homeowners expect in Virginia? In a later installation in this new blog series about Association Foreclosure, I will discuss how a 2003 Supreme Court of Virginia decision presently limits a Condominium Association’s remedies for unpaid assessments. This Virginia opinion limits the rights of Virginia’s community association to disturb a lender’s rights under a purchase money mortgage. Given these new developments in Nevada and D.C., this 11-year-old opinion is important to every owner, association and lender with an interest in Virginia condominiums.
If you are a lender and have questions whether an association’s lien has priority over your own mortgage, contact qualified legal counsel. If you are an owner and have questions whether an attempt by your association to enforce a lien on your property runs afoul of the law or your condominium instruments, contact a real estate attorney to protect your rights.
Case citation: Washington & Sandhill Homeowners Association v. Bank of America, et al., No. 2:13-cv-01845-GMN-GWF (D.Nev. Sept. 25, 2014)(Navarro, J.).
Thanks to Shu Bartholomew, host of the weekly property rights radio show “On the Commons,” for letting me know about the Bob Massi interview.
Photo credit (photo does not depict the property discussed in this post): JoeInSouthernCA via photopin cc
October 1, 2014
We Built this City: Homeowner Associations and Traffic Stops
The classic image of a homeowners association is a neighborhood with stately homes or attractive townhouses. Owners occupy their own properties. Neighbors socialize with one another, perhaps around a park, golf course, tennis court or swimming pool. The common areas make the development an attractive place to live. Common values of commitment and neighborly respect inform stewardship of common areas and management of the association’s business. Desire to achieve this ideal motivates many land development and home buying decisions. According to Virginia Lawyers Weekly, there are 5,645 registered community associations in Virginia, and several thousand more unregistered ones. That’s a lot of roads and other common areas that are neither individually owned nor maintained by local governments. If someone recklessly drives their car on those association-owned roads, who has the authority to pull them over?
On August 13, 2014, Mark R. Herring, Attorney General of Virginia released an official advisory opinion addressing the question of homeowner associations and traffic stops. State Senator Bryce Reeves asked Mr. Herring whether a HOA may enforce violations of state or local traffic laws on its private streets and whether and how a HOA may adopt and enforce its own rules regulating traffic (Sen. Reeves’ district includes Fredericksburg, Orange County, and some surrounding areas). The Attorney General’s opinion is about the intersection between HOA law and traffic law. Mr. Herring outlines two options for associations: (1) ask the city or county in which their community is located to police the streets, or (2) they may use private security qualified as Special Conservators of the Peace.
Why is this issue coming up in 2014? The economic collapse beginning in 2008 affected homeowners associations in several ways:
- Many homeowners stopped paying their association dues along with their mortgage. This hit HOA’s in the wallet.
- Foreclosures negatively affected the property values, slowing down sales of neighboring properties.
- Renting became a way of life for many people struggling to save for 20% on a down payment for a home. For Associations, this means that many residents are tenants, who take a different perspective from owner-occupants regarding common areas and their neighbors.
What better words to describe such a dystopia than lyrics from one of the worst pop songs of the 1980’s:
Say you don’t know me or recognize my face
Say you don’t care who goes to that kind of place
Knee deep in the hoopla, sinking in your fight
Too many runaways eating up the night.
– Starship, “We Built this City” (1985)
Developers sought to create oases where children could safely play and parents could develop long relationships with neighbors. Now in some HOA’s, security patrols are chasing residents, tenants and guests for traffic violations.
The Attorney General Opinion describes an unnamed association (within Sen. Reeves’ district) that directed its safety patrol to stop moving vehicles and issue citations for traffic infractions such as speeding, reckless driving and failure to obey highway signs. The safety patrol even uses vehicles with flashing lights to pull over drivers over. Through the safety patrol, the association holds property owners responsible for their infractions and those of their guests. This association has its own “court” in the form of a Violations Review Panel where homeowners may appear to contest citations.
Do associations have the authority to enforce traffic rules in this way? How much do HOA’s resemble local governments? In commenting on this opinion, community associations lawyer Lucia Anna “Pia” Trigiani of Alexandria told Virginia Lawyers Weekly that, “community associations exist in some respects to relieve demands for local government services such as traffic enforcement and road maintenance.” No doubt these developments ease cities and counties burdens to provide key infrastructure in many residential neighborhoods. Attorney General Herring’s opinion appears to disagree with Ms. Trigiani in a critical aspect. He observes that the Virginia Property Owners Association Act does not grant associations the authority to enforce violations of state or local traffic laws that occur on community property. Private persons may only enforce traffic laws if they have been appointed as a Special Conservator of the Peace (“SCOP”). To qualify as an SCOP, one must undergo substantial training. Otherwise, attempts to pull over or stop drivers could be deemed an “unlawful detention” by misrepresentation of authority to conduct police-like activities. Associations may ask the city or county in which their community is located to police the streets, or they may use private security qualified as SCOP’s. Virginia Lawyers Weekly‘s Peter Veith notes that extensive use of SCOPs may produce its own controversies, since the extent of an SCOP’s authority may be misunderstood by the security guard or the drivers on association roads. If someone produces a SCOP credential, what does that mean to an individual driver?
Attorney General Herring makes an important point about the statutory authority of HOA’s to enforce their rules and regulations over their common areas. “Rules and regulations may be enforced by any method normally available to the owner of private property in Virginia.” Real estate legal remedies are not tailored to enforcing traffic laws. Private property owners do not have the authority to conduct arrests or stops of vehicles for violation of traffic rules. That authority is reserved to law enforcement and SCOP’s. This limitation may also apply to other quasi-governmental activities undertaken by HOA’s.
In the Lake of the Woods Association in Orange County, the reaction to this Attorney General Opinion was swift. The Free Lance-Star reports that this large community went to the County Board of Supervisors which adopted an ordinance designating the LOWA roads as highways for law enforcement purposes. This will allow LOWA SCOPs to issue traffic citations and broaden the authority of local law enforcement in the community. I expect that similar decisions will be made in HOA’s around the state that have extensive systems of community roads.
If you or your Association seek to navigate safely through the regulatory landscape now coming into focus regarding the enforcement of traffic laws in community associations, contact qualified attorneys having experience in both real estate and traffic law matters to review your association’s legal instruments. Communities with extensive networks of roads should take precautions to get ahead of avoidable situations where HOA roads become hazardous or private security unlawfully detains drivers.
photo credit: Phil’s 1stPix via photopin cc (apparently one of the toy cars is a W. Va. police vehicle)