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

In a 6-3 decision issued on Christmas Eve, the Washington Supreme Court sided with condominium developers in upholding arbitration clauses incorporated into condominium purchase and sale agreements. 

In the consolidated case of Satomi Owners Association v. Satomi, LLC, this firm argued on behalf of two of its condominium association clients (Satomi Owners Association and Pier at Leschi Owners Association) that arbitration clauses contained within “Limited Warranty” packages were unenforceable. The Associations argued that the Washington Condominium Act’s provision for judicial enforcement or the arbitration provisions of RCW 64.55, which were drafted through a compromise of industry professionals and specifically designed for construction defect cases in Washington, trumped arbitration provisions contained within these so-called warranties.

The developers’ attorneys argued that the Federal Arbitration Act (“FAA”), which provides for enforcement of arbitration agreements in contracts, trumped the Washington Condo Act and the related arbitration provisions as a matter of constitutional preemption law. But the FAA only applies where there the transaction being sued over affects interstate commerce. The developers argued that the FAA applied because materials that make up the condominiums (such as lumber and siding) travelled in interstate commerce. At the court of appeals, we successfully argued that the fact that the materials used in constructing the condominiums travelled in interstate commerce was insufficient and irrelevant because the associations did not contract for the building of the physical condominium building, they merely purchased a finished condominium – a type of real estate that is intangible and specific to Washington law. 

Unfortunately, the 6-member majority held that because the arbitration clauses were referenced in the purchase and sale agreements, the fact that physical pieces of the condo travelled in interstate commerce was enough for the FAA to apply. The Court also cited the fact that some unit purchasers came from out of state or borrowed out-of-state funds.

The Court declined to decide the “gateway disputes” of whether Associations were bound when it is unclear whether all original purchasers signed an agreement including the arbitration clause. 

As a result, developers in Washington may be able to enforce terms of the arbitration clauses instead of following the carefully crafted arbitration provisions of RCW 64.55. 

This does not mean, however, that every part of the arbitration clause or the “limited warranties” in which they are found will be enforceable. While declining to decide whether the arbitration clause in the Blakeley Village case was unconscionable because of procedural irregularities, the majority confirmed that that issues of whether the contracts containing the arbitration clauses are unconscionable remain for the trial court to decide.

Another good summary of the case appears on the Supreme Court's blog.

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Yesterday, I was co-presenting at a Washington Community Association Institute (CAI) seminar on community building and annual meetings.  When discussing owner engagement in association matters, an attendee asked how a board should respond to "the crazies," and went on to describe a protracted dispute between several renegade homeowners and her board of directors.

As soon as the board member finished asking her question, several other attendees' hands shot up, wanting to share similar experiences within their homeowner communities.  The co-presenter and I ended up discussing the issue for several minutes before getting back to the main points of the presentation.

When I was driving home, I realized how often I have heard similar complaints from board members and association managers, with specific mention of "the crazies" within a community.  As I thought further, I came up with the following suggestions:

If you are a board member or manager, keep in mind:

• Not every complaint needs to be addressed.
• Not every issue must be resolved by the board or manager.
• Not every email needs an immediate reply.
• Not every phone call or in-person exchange at the mail kiosk or elevator requires an "official" response.

Just because a homeowner raises a community issue, it does not mean action has to be taken by the board or manager.  There are some issues that simply do not rise to the level of formal association action, no matter how strongly a homeowner protests, cajoles or threatens.

If a legitimate question or issue is raised by a homeowner during a chance meeting onsite or via email or phone call, a board member or association manager can respond by stating the issue will be discussed at the next board meeting.  When you get down to it, very few issues are truly emergencies requiring immediate action.  In reality, how much is ordinary business that can or should be conducted during formal association activity (i.e., board meeting)?  Think how refreshing it would be to let go of a significant percentage of email traffic by simply printing off the email, placing the issue raised on the agenda for the next board meeting, and discussing it then.  

If you are an "association crazy" or potential "crazy," keep in mind:

• Board members live within the same community (or own units/homes there) and pay the same assessments as you.
• Board members are volunteer (unpaid) lay persons without formal education or training in association and corporate governance.
• Board members are subject to the same governing documents as every other homeowner.
• Contrary to claims by some, board members are not out to rule the world or get kick-backs from each contractor and the management company.
• Threats to sue the board and association are usually counter-productive and result in added legal expenses and assessments to the association, to which you are a member. 

The key to reducing disputes between the "crazies" (and also rationale) homeowners and boards and managers is to rely strictly upon governing documents, set reasonable expectations and pursue enforcement actions consistently and uniformly.  If at the end of the day the homeowner(s) are still acting irrational, try following the suggestions described in an earlier post entitled "Dealing With Problematic Homeowners." 

Good luck within your own communities and let me know if you have additional suggestions I can add to my toolbox.

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Homeowner association boards often struggle with enforcing certain rules, such as improper parking, failing to pick up after pets, littering and similar conduct.  It is not that the violations are unimportant or do not affect the character of the community; rather, the cost and effort  required to catch violators often exceeds the resources available to non-profit homeowner associations.

However, there is a relatively inexpensive, yet highly effective, tool available to associations to combat this behavior:  electronic surveillance.  As shown in this KOMONEWS.com video story, one apartment tenant using a camcorder and YouTube is deterring illegal activity near his apartment complex.

Some associations may not wish to post on the Internet video of illegal conduct within or adjacent to their neighborhood, for fear of stigmatizing their community and possibly adversely effecting sales.  However, an association can still record the activity and forward it to the police.  To deter Covenants, Conditions and Restrictions (CC&R) violations, an association can record a common area where pet owners routinely fail to pick up after their dogs, or visitor parking spaces where unit owners park, or other locations of common violations.

An association can obtain a wireless web camera for well under $100.  The camera can be installed inside a common area (such as a clubhouse, office or other enclosed area) or even within an owner's unit.  A day's worth of digitized video can be reviewed by a board member or committee member in fast-forward time in only a few minutes.  If conduct that violates a rule or covenant is found on the video, then the board has compelling evidence to pursue an enforcement action.

Electronic surveillance can be a highly effective and cost-efficient tool for homeowner associations to use in enforcing their CC&Rs.

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On November 6th, the Federal Housing Administration (FHA) finally issued major changes to its revised guidelines on mortgage insurance requirements for condominium associations.  The original guideline revisions were first proposed back in June (under Mortgagee Letter 2009-19).  The new guidelines go into effect on December 7, 2009; however, some of the requirements are phased in through January 31, 2010.

If you have been a reader of this Blog over the past couple of months, you are aware of the controversy and uncertainty involving HUD/FHA's proposed requirements for obtaining FHA mortgage insurance for condominiums.  The newest guideline revisions are in response to the strong reaction from condo owners and industry representatives who saw many of the FHA requirements as counter-productive and burdensome to condominium associations and owners.

The latest guidelines are described in two separate HUD/FHA documents:  (i) Mortgagee Letter 2009-46B (the revised guidelines for FHA approval of residential condominium projects); and (ii) Mortgagee Letter 2009-46A (temporary guidance for condominium approvals).

In short, Mortgagee Letter 2009-46B replaces Letter 2009-19.  The temporary guidance (Letter 46B) acts as a buffer to ease transition from the old to the new regs.

Under the Temporary Guidance:

• The "Spot Loan" approval process will continue through January 31, 2010; and
• The 30-percent cap on FHA loans per condo project will be expanded to 50 percent temporarily (Letter 46A does not state the termination date of this extension), with concentrations increased to 100 percent if certain additional conditions are met (as enumerated in the Letter).

I believe the most noteworthy changes to the New Guidelines are as follows:

• Condominium project approval is not required for condominiums that are comprised of single-family totally detached dwellings (no shared garages or any other attached buildings).
• Reserve funding:  From the previous requirement of at least 60% of the fully funded reserves to a new requirement consisting of at least 10% of the association's annual budget (see next bullet below).
• Budget review:  The review must determine that the budget is adequate and: (i) includes allocations/line items to ensure sufficient funds are available to maintain and preserve all amenities and features unique to the condominium project; (ii) provides for the funding of replacement reserves for capital expenditures and deferred maintenance in an account representing at least 10% of the budget; and (iii) provides adequate funding for insurance coverage and deductibles.
• The 1-year waiting period for conversion condominiums is eliminated.

Transition Strategy:

• FHA will move all currently approved condominium projects to the new approval list and FHA Connection database.
• Projects that received approval prior to October 1, 2008, will require recertification on or before December 7, 2009.
• Projects that received approval between October 1, 2008 and December 7, 2009, will be "grandfathered" and will have to follow the new guidelines' recertification process (recertification required every two years).

Summary:

Because the Administration is extending the "Spot Approval" process through January 31, 2009, we highly recommend any association that was contemplating obtaining FHA certification to act without delay before the comprehensive certification process is enacted.  Any Oregon or Washington condominium association that desires assistance in this endeavor can contact one of our attorneys by selecting the "Contact" tab at the top-right of this page.

Barker Martin will offer a Webinar on this topic in the near future (we will post on our website homepage the date/time of the upcoming seminar).

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In the past several weeks as I have been speaking on the new HUD/FHA guidelines, many persons have asked me whether HUD/FHA will require the "straight line," "cash flow" or some other methodology for determining percentage of reserve funding.  The short answer is, "we do not know."

What we do know is that in order to obtain FHA certification for a condominium project, reserve funding must be at 60% for established projects, and 100% for new projects.  Also, a reserve study must have been conducted within the past 12 months.  [To review our previous postings on the new proposed HUD/FHA guidelines, type in FHA in the search window]

In attempting to answer the question on funding methodology, I first spoke with the HUD regional office in Santa Ana, California.  The regional manager stated he did not know how the new guidelines would be interpreted regarding this issue.  I then spoke with Reserve Study consultant Jim Talaga from Association Reserves, Inc., who referred me to an article his partner recently wrote on the subject.

To read an informative article on the difference between "straight line" and "cash flow" reserve funding analysis written by Robert Nordland from Association Reserves, click here.

We'll find out in time whether HUD/FHA will mandate a particular type of reserve funding.  In the interim, as the experts at Association Reserves suggest, the use of a particular funding method does not dictate a particular result.  What's most important is funding results.  Thus “cash flow" or straight line?” is the wrong question to ask. It is much more informative to ask if the association is pursuing a conservative ““Fully Funded” objective, an aggressive “Baseline Funded” objective, or a “Threshold Funding” level somewhere in-between.  Whatever methodology is used, HUD/FHA will insist on either a 60% or 100% funded number to qualify for FHA certification.

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FHA/HUD's revised condominium certification regulations originally slated to take effect on October 1, 2009 and pushed back to November 2nd, are now scheduled to be implemented on December 7, 2009.  The onerous new regs, as described in HUD's Mortgagee Letter 2009-19 (published on June 12, 2009), were met with controversy due to the potentially chilling impact on the ability of a condominium project to obtain FHA certification.

As a result of public outrage, in mid-September, FHA/HUD announced postponement of implementation of the new regs.  On October 21st, FHA stated in an email:

Implementation of FHA’s new policy guidance for condominium project approval and condo unit financing will be delayed until December 7^th  2009.  The new guidance, to be issued within the next two weeks, will:  1) offer additional leniencies to address the difficult market conditions and 2) augment some portions of FHA Mortgagee Letter 2009-19, providing additional information and clarification.

 

Until the new guidance takes effect on December 7^th, 2009 lenders may continue to use the Spot Loan Approval guidance issued in Mortgagee Letter 1996-41.  Further, the site condo and manufactured housing condo project changes that have already been implemented are not affected by this delay.

Looks like FHA/HUD took notice of the public's comments (led in great part by lobbying from Community Association Institute (CAI), National Home Builders Association, National Association of Realtors and the Mortgage Bankers Association). 

We should know within a couple weeks how the final regs will play out.  Stay tuned for further information on this important topic. 

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In Garron v. Pier Point Condominiums Association, Division One of the Washington Court of Appeals affirmed the trial court’s summary judgment dismissal of a personal injury lawsuit by a housecleaner against the condominium association. While cleaning one of the condominium units, the plaintiff slipped and fell on a wet tiled walkway in the common area of the condo. The court agreed with the association that there was no evidence the association knew or should have known about the slippery and dangerous walkway.

The Pier Point Condominium is a small eight-unit condo in Oak Harbor. The plaintiff had cleaned a unit at the condo every week for several years, so she was familiar with the complex. She was aware that when it rained, the walkway tiles became wet and slippery. The unit owner who employed the plaintiff testified he believed the walkway was dangerous when it rained, but had failed to inform the association of his concern. The appellate court concluded, as had the trial court, that there was no evidence the association knew or should have known about the alleged danger created by wet tiles on the walkway.

The appellate court also denied the plaintiff’s attempt to amend her complaint to sue the individual condominium unit owners. The court relied upon a specific provision of the Washington Condominium Act that states “an action alleging a wrong done by the association must be brought against the association and not against any unit owner or any officer or director of the association.” See RCW 64.34.344.

This case turned on the specific testimony of the parties. The plaintiff herself testified that she was aware that the steps got wet when it rained. Although there was some testimony about puddling of water on the walkway tiles, the plaintiff testified there were no puddles the day she slipped and was injured.

Although the plaintiff was unsuccessful in this particular case, associations should be vigilant and act as soon as reasonably possible to eliminate dangerous conditions.

For more information on this case, or to answer any related questions involving association liability, select the “Contact” tab at the top of this blog page to reach one of our attorneys.      

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Under revised guidelines effective October 1, 2009, the FHA is implementing a new approval process for condominiums to be eligible for FHA / HUD financing. Under the new guidelines, the spot approval process will no longer be available, and approvals expire every two years.  Click here to see a copy of the HUD Notice.

 - Historically, to utilize HUD / FHA financing, a condominium could, under certain circumstances, receive “spot approval” for lending with HUD / FHA, or the association was required prepare and submit a comprehensive package of materials for consideration for “permanent” approval. 

 - Under the October 1, 2009 guidelines, FHA will allow lenders to determine project eligibility, review project documentation, and certify compliance with the National Housing Act requirements. We expect lenders will approach association boards and managers, asking for certain information, certifications, and even legal opinions regarding compliance with certain legal requirements.

 - If a condominium is not on the FHA-approved list, or has lost its approval because it underwent repairs or litigation, or for some other reason, the board of directors may wish to consider applying for approval (or re-approval).  

The attorneys and staff at Barker Martin, P.S. are ready to help your association adjust to these changes.  Just select the “Contact” tab at the top of this blog page to reach one of our attorneys.

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With the economic crisis continuing and foreclosure rates still increasing, I have heard a lot of talk recently regarding rental cap hardship exceptions.  Many condominium and homeowner association boards of directors whose associations have rental ceilings are feeling the pinch between following their CC&Rs and facing unprecedented levels of claims of hardship.

A typical rental ceiling Hardship Exception leaves much discretion to the board:

Hardship Exception. Where, on written application from a homeowner, the Board determines that a hardship exists whereby, due to circumstances beyond the control of the owner, that owner would suffer serious harm by virtue of the limitation on renting contained in this Section 4.6, and where the Board further determines that a variance from the policies contained therein would not detrimentally affect the other homeowners or secondary mortgage market financing, lender approval or VA or FHA approval, the Board may, in its discretion, grant an owner a waiver of the Rental Ceiling for a temporary period not to exceed twelve (12) months.

So what can/should a board do in these trying economic trying times when balancing an individual owner's financial difficulty with the interests of the remaining homeowners?  Although each association should be considered on a case-by-case basis, I would not be averse to recommending boards exercise a bit more leeway by exercising a fairly liberal approach to granting rental cap hardship exceptions.

Perhaps granting a six-month lease, in lieu of a full year, may be the most appropriate compromise for boards whose associations have reached their rental caps, yet have owners who are experiencing severe financial strain.

If a board decides to grant a hardship exception, it should ensure it documents the basis with specific grounds, to make sure it does not open itself to claims by other homeowners of selective enforcement.

For more details on rental restrictions, rental caps or hardship exceptions, do not hesitate to contact Barker Martin, P.S. by selecting the “Contact” tab at the top of this blog page. 

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