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

Every so often I am asked to help pick up the pieces after an association’s repair project went awry because the board utilized a cut-rate contractor. In the July-Aug 2007 edition of the Washington Community Associations Journal, I wrote an article entitled, “The Pitfalls of Hiring Your Brother-in-Law.” This posting summarizes the article, which can be found at: Barker Martin Articles. 

·        The Business Judgment Rule predicates that an association board should conduct a basic level of due diligence prior to entering into vendor contracts. A board should obtain a referral or reference from its management company (if professionally managed) or from other association boards, and not just pick the contractor from the Yellow Pages or a Google search, or worse, because the contractor is the brother-in-law of a board member.

·        Once a vendor is identified, ensure they are insured, licensed and bonded. But what do these terms mean, and what protections, if any, do these requisites provide?

·        “Insured” means that the entity or individual has appropriate insurance to cover the vendor’s negligent acts. Most insurance policies exclude intentional conduct. Also, insurance often does not cover general breaches of contract, unless the breach results in bodily injury or property damage resulting from an unforeseen, sudden event or occurrence. For example, insurance would not cover a painter who only applies one coat of paint instead of the contracted for two coats, or the landscaper who overzealously prunes the association’s favorite rhododendrons. Insurance should, however, cover the cost of repainting a car that was covered with overspray from painting the condominium exterior, or for bodily injuries suffered when a plumber neglects to set the parking brake and his truck rolls over a homeowner’s foot.

·        For major contracts, it is important for the association to insist on an adequate dollar amount of coverage and to be a named insured on the vendor’s policy. It is not enough to simply be identified as an “Additional Insured” on the vendor’s insurance certificate or declaration page. The Association should require the vendor to provide a copy of the “named insured” page of the vendor’s policy. 

·        “Licensed” simply means the vendor or service provider is registered to conduct business in the state. For more specialized vendors, such as general contractors and specialty contractors, it is imperative to know that the individual or company has followed the regulatory requirements to conduct its specific type of business. Although not a guarantee of quality or proficiency (because most state licensing requirements are simply a revenue generating process rather than a testing methodology), it is more of a red flag if the vendor is not licensed. Plus, many insurers require the policy holder be licensed in order for coverage to apply.

·        “Bonded” is another form of insurance, ordinarily for vendors who have access to client’s personal items or other similar losses. Bonded coverage is ordinarily limited to a nominal dollar amount, such as $5,000 or $10,000, and often covers intentional acts such as theft. This coverage would apply to a painter who has a bond and steals a homeowner’s $3,000 diamond watch. In such a case, the homeowner or association could file a claim directly against the painter’s bonding company. 

·        A “Performance Bond” is another type of bonding insurance. Unlike standard business or commercial general liability policies, performance bonds are designed to provide coverage to the aggrieved association or homeowner who suffers a pecuniary loss resulting from the contractor’s malfeasance, breach of contract or intentional act. As with standard bonds, the dollar value of performance bonds is quite low and may not cover the total value of damages suffered by the association.

·        To avoid employment tax and human resource issues and heightened litigation risks, it is important for the vendor to be an independent contractor, and not an employee of the association. The contract should be clear on its face that the relationship is between a client-vendor, and not between an employer-employee.

·        Lastly, association boards should be cognizant of conflict of interest issues. If a board is contemplating contracting with a family member or close personal friend of a board member, certain precautions should be taken, including recusal of the affected board member from voting to hire the individual or entity.

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In 2004, a legislative task force comprised of industry attorneys and experts created what is now RCW 64.55, which generally requires design documents and third party inspections focusing upon the building envelope prior to obtaining a permit for a multi-unit building. It also sets forth an alternative dispute resolution process for construction defect cases. 

Building Envelope Inspections for Conversions

One aspect of the new statute requires that developers who convert buildings (such as apartments) to condominiums hire a qualified, independent party to inspect the building envelope prior to selling units. The law applies to all conversions for which a Public Offering Statement (sales documentation required in the sale of a condominium) was delivered after August 1, 2005. Because of the delayed applicability of the statute, we are just now beginning to see condominium conversions where the developer was required to, but did not, conduct the building envelope inspection. 

The point of the inspection requirement is to make sure that people buying units in older buildings converted to condos have a realistic picture of the condition of the building envelope, which cannot generally be seen by buyers and problems which are rarely identified by home inspectors because the problems lie beneath the surface. 

Remedy

The statute provides that failure to do a building envelope inspection entitles the association to “actual damages” or an amount equal to three percent of the purchase price of each unit (10 percent if the failure to do so is found to be malicious). For example, a building with 50 units with an average purchase price of $300,000, would be entitled to at least $450,000. 

An Association may elect to pursue its “actual damages” which may be the cost to repair the building if there are substantial building envelope problems that would have been disclosed in a building envelope inspection. To our knowledge, no court has yet ruled on what the measure of actual damage would be since this area of the law is relatively new. 

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A homeowner wants to erect an 80-foot flag pole on his front yard to display the American and Washington State flags in support of our local troops in Iraq. While the board is sympathetic to the owner’s patriotism, the association has rules against additional exterior lighting, flags and lawn ornaments. 

Another owner wants to show his constant support for a city council candidate by posting a political sign year-round on the common area of the condo abutting the street where people will see it when they drive by. 

What does the board do? 

Most board members probably don’t realize how upholding state, federal and even constitutional law may play into their daily decisions. Yet when the United States flag and political signs are involved, the First Amendment protects a person’s right to free speech over an association’s CC&Rs.

The Freedom to Display the American Flag Act of 2005 (4 U.S.C. 1) provides that a condominium or other association is prohibited from adopting or enforcing CC&Rs that would prevent a member of the association from displaying a flag “on residential property within the association with respect to which such member has a separate ownership interest or a right to exclusive possession or use.” Thus, the Act generally grants homeowners in both condos and associations the right to display the American flag within the unit or within the limited common elements. 

According to the federal law, the display of the flag must be consistent with federal provisions for the proper display of the flag or any “rule or custom pertaining to the proper display or use of the flag.”

The state law, found only in the HOA Act (so condos are not covered) echoes the federal law, providing that “the governing documents may not prohibit the outdoor display of the flag of the United States by an owner or resident on the owner’s or resident’s property. . . .” RCW 64.38.033. The state law even protects homeowners from prohibitions against flag poles to a certain extent. 

But even First-Amendment speech is subject to reasonable “time, place and manner” restrictions. The federal Flag Display act is explicit, allowing “any reasonable restriction pertaining to the time, place, or manner of displaying the flag of the United States necessary to protect a substantial interest of the condominium association, or residential real estate management association.” The state law similarly allows for governing documents to include reasonable rules and regulations regarding the size, placement, manner of display of the flag and poles. 

Notably, both statutes apply only to the United States flag. Good ol' George on a field of green remains unprotected, as do flags of other states or nations. The state act applies retroactively, so that provisions in HOA CC&Rs created prior to 2005 unreasonably prohibiting the display of the flag are void.

Thus, the homeowner above probably cannot be prohibited from displaying the American flag in his front yard (if that area is designated for exclusive use by him). If he lives in an HOA as opposed to a condo, his right extends to some kind of flag pole but because of the exception allowing reasonable rules and regulations regarding the size of the flagpole, he may be required to shorten the pole or use a wall-mounted pole because those probably further a “substantial interest of the association” in preserving other owners’ views and aesthetics.

The other free-speech hot button for associations across the nation over the last few years has been the restriction of political yard signs. This debate was finally quelled in 2005 when the Washington legislature enacted RCW 64.38.034, which retroactively provides that the governing documents may not prohibit the outdoor display of political yard signs by an owner or resident on the owner’s or residents’ property before any primary or general election. 

Like the state flag display statute, an association is allowed to impose reasonable rules and regulations governing placement and manner of display. Unlike the flag statute, however, the sign statute restricts signage to the owner’s property. 

Since it applies only to HOAs and not condos, the owner above may be prohibited from posting the sign year-round. In fact, a reasonable restriction can be made to coincide with the statute’s mandate that the signs be allowed “before” a primary or general election. Unfortunately, how soon before the election is unspecified. The owner can also be prohibited from posting the sign on common areas of the association.

Associations are encouraged to draft rules and regulations specifically addressing these issues consistent with the federal and state laws, remembering that restrictions on political speech must further a substantial interest of the association and be reasonable. 

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