Northwest Condo & HOA Law Blog : Washington & Oregon Construction Defect Lawyer & Attorney : Barker Martin Law Firm : Homeowner Associations, Condos : Seattle, Portland

As association counsel, one of the most common inquiries from boards and managers of community associations is who is responsible for paying for repairs to various items. The item can be anything -- from a water heater that leaks, causing damage to multiple units in a high rise – to a minor crack in a concrete stairway leading up to one unit. The tendency is to want to find clear language in the governing documents relating to maintenance and repair. But the answer is generally far more complex, requiring analysis of various portions of the declaration. While community declarations differ from association to association, the basic method of finding out who is responsible is essentially the same. 

In very general terms, determining who is responsible is a three step process:

1) Where is the item found or how is it defined;

2) Who is obligated to maintain; and

3) Who pays?

If an insurance claim is involved, there is an over-arching rule because the association’s policy is almost always primary, requiring that the association’s insurance cover damage prior to requiring a unit owner to either pay or consider coverage under its own insurance. But in general, this is the process. 

Where is the Item?

The first step involves determining whether the broken item is part of or within the unit; a common element; and/or a limited common element. This will be determined in the declaration. Some declarations further break down these categories with further distinctions such as “residential limited common element.” But determining whether the item is within a unit or part of the common elements is only the first step. Often, maintenance and payment obligations may differ based on other language in the declaration.

Who is Obligated to Maintain?

After you’ve determined whether the item is part of the unit or a common or limited common element, declarations should say who has the obligation of maintaining or repairing such items as a group. For example, most declarations provide that the unit owner has the obligation of maintaining items within the boundaries of the unit. Therefore, a hot water heater within a unit would be the owner’s obligation. It gets trickier for limited common elements, because many declarations split the maintenance duties, sometimes requiring the owner to do “regular maintenance” such as cleaning while the Association does substantial maintenance such as repainting and replacing items. Unfortunately, this language is not always easily found in declarations and there are generally multiple exceptions or provisos to the general rule requiring more careful legal analysis. But the obligation to maintain is not always the same as the ultimate responsibility for payment. Thus, the third step. 

Who Pays?

While it is logical that the requirement to maintain implies a requirement to pay, that is not always the case. For example, many declarations and the Condo Act provide that even though the association must perform the maintenance, the cost of maintenance or repairs to limited common elements are to be assessed to the owners directly, so that only those owners benefitting from the limited common element pay for its maintenance. Many declarations also allow the association to assess owners for repairs caused by the owner’s wrongdoing or negligence. 

Because it requires interpretation of various portions of the declaration, an association can run into inconsistencies in definitions in any one of these steps, but keeping the three steps in mind should help associations and owners make more sense of their maintenance and payment obligations. 

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When faced with a difficult or controversial issue, many community association boards of directors become paralyzed, overwhelmed, reactionary; and in some instances, all of the above. Such inaction often leads to delay, adverse financial consequences and heightened distrust and animosity within the community.

To avoid such inefficient and problematic results, a board should take the following steps when confronted with a problem, dispute or complex issue:

Step 1: Be proactive. Establish a game plan from start to finish incorporating the steps below with a corresponding timetable. Ensure each stakeholder (board members, affected homeowner, third party vendor, etc.) buys into the process and timeline.

Step 2: Gather information. Establish a set period of time in which to gather facts and other information relating to the issue. If relying upon third parties for information, exercise some level of verification or validation to ensure accuracy and relevance.

Step 3: Filter the information. Discern subjective from objective information and identify possible biases. Subjective or biased information is not “wrong” or invalid, but it should be weighed appropriately.

Step 4: Rely on internal and external resources. Though board members have wide ranges of life experiences and backgrounds, some issues require help from professionals, such as contractors, attorneys, managers or other consultants. If available, the Association may have persons or documents that provide historical data on the issue.

Step 5: Look to and follow governing documents. The answers to most issues a community association board faces can be found within its governing documents. Questions of authority, responsibility and funding are often provided specifically within the set of documents. If not specific answers, general concepts and guidelines should be set forth.

Step 6: Be transparent. Unless the dispute involves litigation or other privileged matter, the board should deliberate and act openly and transparently. If recusal of a board member is appropriate, then that should occur seamlessly. Two-way flow of communication (to and from the board) should occur uniformly and consistently.

Step 7: Feedback. Before making a final decision, the board should have some mechanism in place to receive feedback or input from homeowners. This is not to say that the homeowners get to vote (though in some circumstances state law or the association’s governing documents may require a homeowner vote), and not every decision requires an appeal process, but if practical, a board should allow some level of input from the association members.

Step 8: Document. Whether by formal resolution, meeting minutes or some other written record, a board should document in writing its decision or action. If the decision constitutes a variance or permit from governing documents or other established practice, the board should qualify with as much specificity as possible the grounds for the variance.

If after following the foregoing steps a board is still stuck, then assistance from a mediator or business facilitator may be required. As an absolute last step, the association could petition the court to appoint a receiver. I almost forgot the most important step that applies uniformly to every decision and action a board takes: Step 1(a): Exercise common sense!
 

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These days more and more people are relying on FHA-insured loans to purchase homes. “FHA insured loans” are simply loans provided by FHA-approved lenders and backed by Federal Housing Administration mortgage insurance. They used to comprise less than 10% of residential mortgages and were popular because they allowed buyers with unestablished credit or lower credit scores to qualify for loans with smaller down payments. However, in the post-financial meltdown, stricter lending regulatory environment, FHA-insured mortgages constitute over 50% of today’s residential loans.

One negative feature is that FHA-insured loans require premiums for two types of mortgage insurance: an upfront mortgage insurance premium and an annual mortgage insurance premium (charged monthly).

In order for a prospective buyer to use an FHA insured loan, the property must meet FHA’s requirements. For condominiums, the entire condo project must have FHA certification. If your project is not FHA-certified, you may be limiting the pool of prospective purchasers. Losing sales in this economy could leave you with angry sellers, including sellers who think that not having FHA certification is a breach of the board of directors’ fiduciary duty, which could lead to a lawsuit. Regardless of whether such a lawsuit would have merit, your Associations would likely prefer to avoid that risk.

The first step is determining whether your project is eligible for FHA certification. Here are a few of the key eligibility requirements:

• Project must be primarily residential (excludes hotels, timeshares, live-work projects with more than 25% of the units devoted to “work”)
• Any one investor/entity cannot own more than 10% of the total number of units
• More than 50% of the units must be owner-occupied
• Fewer than 15% of the units can be delinquent in the payment of assessments
• Budget must provide for funding of replacement reserves in an account representing at least 10% of the budget

While the Association generally has little control over the first two requirements, an association can work to come into compliance by adopting rental restrictions, updating budgets and reducing delinquencies through collection actions. 

If your Association meets these and the other eligibility requirements listed in the FHA’s Condominium Project Approval and Processing Guide the next step is compiling all of your Association’s governing documents and other documents relating to the Association’s finances, insurance, and reserve studies. You will also be required to disclose any special assessments or litigation and to provide a project certification stating that:

• The information and statements provided are true and correct;
• The Association meets all FHA condominium approval requirements; and
• You have no knowledge of circumstances that might have an adverse effect on the projects (i.e. construction defects, operations issues, litigation, etc.)

All of this information, including the certification, needs to be submitted to FHA for approval. If the certification is rejected, FHA will identify the reasons therefore and an Association may re-apply.  FHA certification is valid for two years; Associations have an ongoing obligation to notify FHA/HUD of any significant changes in circumstances that occur while the Association is certified.

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Email is an incredibly useful tool for board members given everyone’s busy schedule and the number of issues that arise between board meetings. But, like many tools, email can be a dangerous thing if used improperly. Just remember, it is not unusual for owners to request certain association records, including any emails to or from board members about association business. They will  argue that any such email is an association record; and they are therefor entitled to review and copy any such communication. Unit owners can always demand tosee non-privileged association records. For Oregon association see ORS 100.480 and 94.670.For Washington associations see RCW 64.32.170, RCW 64.34.372 (1), RCW 64.38.045.

These days most people view emails as confidential communications and while they are certainly less public than Facebook posts or Tweets, they are not always confidential. Unfortunately, that false sense of confidentiality prompts many people to write things that they would never want to see on the front page of a newspaper or community newsletter. To avoid the disclosure of embarrassing or even damaging board emails, there are two basic steps each board member can take to protect themselves: 

1. Create a separate email for association business. This is a good idea so that you can be certain you have not mixed personal and association emails. It also helps prevent a unit owner from requesting all of your personal email in order to make sure they see every email you sent that involved association business. Lastly, an association email account (e.g., VillaPointeTreasurer@gmail.com) allows for historical and institutional information to be passed down easily.
2. Do not mix personal and business information in the same email.   Assume that every board email will ultimately be made public and draft them accordingly. Emails by and between board members or the manager are not the place for venting. They are business communications and should always be professional.

Draft your board emails as a board member and keep in mind that all of the owners in your association may have the right to read what you are writing. A little vigilance goes a long way.

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In last week’s article, Dan discussed the use of the executive session during board meetings to conduct privileged conversations. As an extension of this topic, we are often asked to consult on how the attorney-client privilege impacts dissemination of the attorney’s opinions to the other members of the Association and requests for association records.

The primary rule is that the actual document containing communications between the lawyer or the law firm and the members of the board should not be copied, published or otherwise shared with the members of the Association. While such a document might technically be an Association record, the document must be withheld to protect the attorney-client privilege.

In Washington & Oregon, the attorney client privilege doctrine is found in RCW 5.60.060(2)(a) and ORS 40.225(1)(d) respectively. The statutes are dissimilar in language, but both provide that neither the attorney nor the client can be compelled to disclose communications made by the client to the attorney, or vice versa, when made in the scope of giving or receiving legal advice. The rule covers oral statements as well as written documents and correspondence passing between the client and the attorney.

When the Association is the lawyer’s client, the documents that are protected are those between the lawyer and the primary control group – the members of the board of directors. Association managers can be included as part of the client group if they are “necessary agents” of the Association. There is no published case in Washington or Oregon that makes this determination, so the determination of whether the community manager is a necessary agent must be made on a case by case basis within the context of the communication itself.

As Dan mentioned last week, the privilege requires that the board have discussions with counsel concerning legal advice in executive session. The actions taken after the session should be reported in the minutes, but the minutes should not say such things as “the association’s attorney advised us to do X” or “the attorney thinks we do not have a good chance of prevailing.” Including such statements in minutes could result in a dispute as to whether or not the Association has waived it attorney client privilege.

As always, the best course of action to take if an Association questions what should be reported in the minutes or receives a request for a document containing potential legal advice is to should consult its attorney before sharing or disclosing any such communications.
 

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The use of executive session is often a confusing and misunderstood function of a community association board’s powers. We commonly see both over and under use of this privilege by well intentioned, but misinformed, boards. The law differs between Washington and Oregon.

In Oregon, both the Condominium Act and Planned Community Act mirror one another and expressly address executive session in the following manner:

All meetings of the board of directors of the association shall be open to owners, except that at the discretion of the board, the board may close the meeting to owners other than board members and meet in executive session to:

(A) Consult with legal counsel.

(B) Consider the following:

(i) Personnel matters, including salary negotiations and employee discipline;

(ii) Negotiation of contracts with third parties; or

(iii) Collection of unpaid assessments.

ORS 100.420(1)( a) (Condo Act); ORS 94.640(8)(a) (Planned Community Act). Note that subsections (A) and (B) are distinct, meaning that executive session can occur when a board consults with legal counsel or considers the three enumerated issues (with or without legal counsel present).

In Washington, there is no requirement under the Washington Condominium Act or Horizontal Property Regimes Act for condominium boards to meet in open; though, we highly recommend they do so. Thus, there is no reference to executive session in either statute.

For Washington HOAs, under the Washington Homeowners Association Act:

Upon the affirmative vote in open meeting to assemble in closed session, the board of directors may convene in closed executive session to consider personnel matters; consult with legal counsel or consider communications with legal counsel; and discuss likely or pending litigation, matters involving possible violations of the governing documents of the association, and matters involving the possible liability of an owner to the association.  RCW 64.38.035(2). The statute goes on to describe procedures for conducting business under executive session that are discussed further below.

Now that we’ve covered what the law says, there are some practical suggestions for community association boards to follow when utilizing executive session (regardless of type of community or state where they reside).

1.         Boards should use executive session in a consistent and uniform manner, that is, avoid varying its use depending upon which owner they are dealing with. 

2.         Executive session should not be used as an avoidance tactic. Boards should not convene or threaten to convene in executive session every time a controversial or contentious issue arises. The issues upon which a board can legally enter executive session are stated expressly within the statute applicable to their association, and the statutes can be used as guidelines for all communities.  

3.         The Washington Homeowners Association Act provides strict procedures when utilizing executive session that are recommended for all boards—condo or HOA, Washington or Oregon:

a.                The board chair should entertain a motion to enter executive session that shall state specifically the purpose for the closed session.

b.               Reference to the motion and the stated purpose for the closed session shall be included in the minutes.

c.                The board of directors shall restrict the consideration of matters during the closed portions of meetings only to those purposes specifically exempted and stated in the motion.

d.               No motion, or other action adopted, passed, or agreed to in closed session may become effective unless the board of directors, following the closed session, reconvenes in open meeting and votes in the open meeting on such motion, or other action which is reasonably identified.

4.         If minutes are taken during executive session, they should be marked as “Privileged” and maintained in the same manner as other confidential documents, i.e., not available for disclosure to homeowners or third parties absent court order or extraordinary circumstances.

When used appropriately and discriminately, executive session can be an effective, and essential, tool for community association boards. Proper procedures are paramount in maintaining the integrity of a board’s decision making process. Do not hesitate to contact the team at Barker Martin if you have any questions relating to executive session, or any related topic.

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This past Saturday, I had the opportunity to co-teach a Community Association Volunteer Leader course for CAI. For those of you that haven’t taken the CAVL course, it’s a basic level course designed to provide fundamental knowledge and problem solving strategies for anyone that works with community associations. I spent the better part of Saturday with a group of eager-to-learn-owners working through the program to better understand the basic governance of community associations. Sharing information about community association operations and practicing the necessary problem solving techniques were educational for the teachers as well as the participants. Walking away from the seminar, I was reminded of how much our clients rely on their association managers, reserve specialists, accountants, attorneys, insurance brokers, bankers and a host of other professionals. We owe it to them to bring our “A” game every day.

Additionally, I was reminded how important it is that we embrace our role as teachers. In order for associations to become the vibrant communities that we all want, it is imperative that we, as an industry, take the time to educate our boards. It’s easy to forget when a new director joins the board that he or she may have never served in that capacity. Without proactive action on our part, board members may become unintentionally rooted in misunderstandings and misinformation.

Industry veterans often “know” (or at least think we know) what is best for the associations we serve. As busy professionals, it’s easy to fall into the trap of identifying an issue and skipping straight to the conclusion. It hurts all involved to make this mistake. The CAVL course recommends a problem solving strategy that requires boards to:

1. Identify the scope of the problem.
2. Determine who has the authority and obligation to act.
3. Consider approaches and resources; formulate and implement the plan.
4. Communicate the plan.
5. Monitor and evaluate the plan.

The lessons learned in a CAVL class apply equally to seasoned industry professionals as well as green board members. It’s important that all of us take the time to analyze issues before an association decides to take action. Of course not everything is a problem or a difficult issue. You obviously won’t go through a five step plan each month to determine whether or not the association should pay their landscaper. But, when creating policy or dealing with a difficult issue, it’s important that we work with our associations and their boards of directors in addressing those issues. Walking them through the CAVL problem solving process will engage the board and make sure that they are invested in the final decision. Without their involvement in the process, board members will inevitably become an unexciting collection of owners that make sure the bills are paid, the manager’s report is reviewed, and maybe the financial statements are read, but little more. Their work will be less beneficial for the association if board members lack the knowledge and ownership over their tasks. Let’s take the extra step to make sure our associations are the vibrant, involved communities that the owners deserve.
 

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Smoking in residential communities often becomes a contentious issue. As more health issues are linked to exposure to second-hand smoke, more homeowners are looking for ways to ensure they are not exposed to smoke. This can lead to disputes between neighbors and sometimes even results in demands that the Association take action to prevent smoke infiltration. It is important for Associations to understand their rights and responsibilities in these circumstances.

The Risk of Doing Nothing.

Most Associations have provisions in their governing documents that give the Board authority to prevent any “nuisance” or interference with owners’ use and enjoyment of their property. Courts in Washington and Oregon have not definitively ruled on whether second-hand smoke qualifies as a nuisance or an offensive activity under this provision, but that would seem to be a likely result.

A California jury recently considered this issue and ruled against a Condominium Owners Association. In the California case, homeowners complained to their Association that their neighbors’ incessant smoking exacerbated their son’s asthma. The neighbors smoked on their own patio and on common area sidewalks, but the smoke traveled into the complaining owner’s unit. The jury awarded $15,500 in damages and determined that the majority of the damages were the Association’s responsibility. The Association did not have specific rules about second-hand smoke, but did have a rule prohibiting noxious or offensive activities.

Associations should seek to prevent the risk of legal liability by doing something to address second-hand smoke concerns, but what can they do?

What Associations Can Do.

The best course is to address this issue before it ever comes up by amending the Association’s CC&R’s or adopting rules to make it clear to all owners how the problem will be addressed. Using the Association’s authority to prohibit nuisances or offensive activities, the Board may seek to adopt rules prohibiting smoking in common areas which include fine schedules providing prompt recourse against violators.

The issue becomes much more complicated if the Association wishes to prohibit smoking within units. A prohibition against smoking inside units will almost always require a super-majority vote in favor of the prohibition and an amendment of the Association’s governing documents. This will be difficult, if not impossible, to achieve if the Association’s members include smokers. However, although owners may be allowed to smoke in their own homes, Associations can require that the owners take action to ensure that their second-hand smoke is contained within their own homes. For example, Associations can require installation of filters or screens to prevent second-hand smoke from infiltrating neighboring units.
Regardless of the approach your Association decides to take, it is certain that we will continue to encounter second-hand smoke complaints and demands that Associations take action on behalf of their residents. Associations should prepare themselves by considering this issue carefully before being faced with a lawsuit.
 

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In last week’s email, we discussed grounds and legal authority for community associations assessing fines. This week, we continue the discussion relating to association fees.

The source of an association’s authority to impose “fees” as opposed to fines may be varied and is the subject of some controversy. The only “fees” (other than attorney and resale certificate fees) explicitly referenced by any of the acts appear in the Washington HOA Act and the Oregon Condo Act. Those acts allow fees for use of the common areas or elements (RCW 64.38.020(10); ORS 100.405(4)(j)) and late fees on assessments (RCW 64.38.020(11); ORS 100.405(4)(k)). The Washington Condo Act and Oregon Planned Community Act reference these and further allow fees for “services provided to unit owners.” RCW 64.34.304(1)(j); ORS 94.630(1)(l). Thus, late fees, common area rental fees, and move-in and move out fees, fees for production of keys, etc. may be justified under the specific language of the Acts as fees for use of common areas or for services provided to owners. Because the Acts differ and declarations differ substantially, you should obtain legal advice with respect to any particular fee to determine whether it is justified under your particular association’s governing documents. If the fee is justified, most people will agree that it should still be contained in a “rule” adopted by the board and published to the owners to ensure proper notice.

Remember, these statutes are subject to the provisions of the declarations, so depending on the language in the declaration, additional fees may be authorized even if they do not relate to delinquencies, use of common areas and services to owners (e.g., move-in and move-out fees). Again, this can only be determined on a case-by-case basis. Similarly, declarations can require that common expenses that benefit fewer than all owners be paid by the owner benefited, which can provide another source of authority for a “fee.” Still other fees, such as a management company’s “delinquency monitoring fee” may be authorized as “costs of collection” of delinquent assessments or fines, authorized by some declarations.

It is important that Associations don’t adopt onerous fees that function as a penalty. Penalties play an important role in the effective governance of associations, but they are not fees. Fees should be charged to cover expenses associated with an activity rather than to discourage the activity. Before adopting a fee schedule, an association must be able to show that the charged fees are reasonably tied to related expenses and that the overall fee is reasonable.

The bottom line is whatever a fee is being imposed or collected from owners, the association should identify the source of authorization for the fee, the basis for the fees to be charged and include such fees (even those fees required by community management companies) in its published “fine and fee schedule.”
 

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