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

The last few years have brought with them a substantial upturn in development of large tower condominiums and multi-use condominiums in the Pacific Northwest, predominantly Seattle and Portland. Such condominiums often include multi-million dollar units, high-end retail stores and anchor hotel or grocery store chains. Each of these divergent segments is coalesced into a single master condominium association.

However, what is best for a hotel may conflict with the interests of individual homeowners. Public access and marketing efforts for a retail store may offend or intrude upon homeowners and hotel guests. Issues of parking, easements, common areas, pools and pets that involve most standard condominiums take on special significance and impact within tower and multi-use condominiums. Even rudimentary homeowner-to-homeowner disputes, such as excessive noise, are elevated to newfound consequences when multi-million dollar unit owners confront one another.

Recently, several multi-use condominium associations have contacted me regarding some of the exact issues highlighted above. In these instances, the condominium owners associations, with no prior formal legal representation, faced multi-million dollar sub-association entities with large corporate legal departments. If you are a homeowner or board member of a tower or mixed-use condominium association, in order to level the playing field, you'll want to ensure you have highly specialized legal counsel and other association professionals on your team.

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The new Washington Condominium Reserve Accounts and Studies law went into effect on June 12, 2008 (See my earlier Blog posting below).  In the past month, I have received several emails and telephone queries from association board members and managers regarding the law.  Below are five of the most commonly asked questions, with my corresponding answers:

Q.  Does the law include homeowner associations, or just condominiums?

A.  Although it is highly recommended that all homeowner associations that maintain common areas commision a reserve study, the new law is limited to condominium associations (this includes cooperatives that are also condominiums).

Q.  Does the new law affect "old" Act condominiums, or just condominiums created after July 1, 1990?

A.  The Reserve Study law governs all residential condominiums in the state of Washington, whether created before or after July 1, 1990.

Q.  What good is the law if it doesn't require condominium associations to actually fund a reserve?

A.  Although the law does not require a specific funding of reserves, it does require establishment of a reserve account and that an initial reserve study and periodic updates be conducted.  The study itself will set forth a recommended dollar amount per year or month be placed into a reserve account.  Also, the statute explicitly states that, "An association is encouraged to establish a reserve account to fund major maintenance, repair, and replacement of common elements, including limited common elements that will require major maintenance, repair, or replacement within thirty years."  If the association fails to follow the recommendations of the reserve study and actually fund the reserves, the statute does NOT allow "monetary damages or any other liability be awarded against or imposed upon the association, the officers or board of directors of the association, or those persons who may have provided advice or assistance to the association or its officers or directors, for failing to establish a reserve account or having a current reserve study prepared or updated."  I believe a group of homeowners might be successful in a declaratory judgment action against an association that fails to adequately fund a reserve, but no monetary damages could be awarded (it is arguable that attorneys' fees could be awarded if the action were successful).

Q.  Does a condominium association have to commission a reserve study right away?

A.  We believe an association has up to 12 months from the effective date of the law (6/12/08) in order to complete an initial or updated reserve study.  Thus, an association should have ample time to adequately research the marketplace for a reserve study consultant who fits the association's specific needs.  We recommend associations rely upon the Washington and Oregon chapters of Community Association Institute's recommended vendor lists WCAI / OCAI to identify well qualified reserve study professionals.

Q.  Who is a "reserve study professional" and does an association have to use such a person to conduct a reserve study or update under the new law? 

A.  Interestingly, the law does not require that a "reserve study professional" actually conduct the study or update.  However, the report itself needs to include a statement on whether the study was conducted by a "reserve study professional."  There is no state licensing or regulation of the reserve study industry.  Anyone can hold themselves out to be a "reserve study consultant."  Since there is no formal state designation, I believe a common sense and reasonable interpretation of "reserve study professional" controls; essentially, someone with a construction or building inspection background who has been performing condominium reserve studies for a reasonable amount of time.  Incidentally, there is a national trade group for reserve study consultants that does require testing and a credentialing process (see the APRA website for more details and a listing of members).

Feel free to contact Barker Martin, P.S. if you have further questions on this burgeoning law.

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Condominium associations are encouraged to establish reserve fund accounts to pay for major repairs or replacement of common elements. The purpose of a reserve account is to fund components that are in need of repair or replacement within 30 years.

On March 8, 2008, the Washington legislature passed a new law regarding reserve studies for condominiums. The law falls short of what many industry professionals sought, including mandatory reserve funding and studies, but is a step in the right direction. The new law also is silent on maintenance plans, as required in neighboring Oregon and California.

The law, which becomes effective June 12, 2008:

• Requires a residential condominium association, unless doing so, would impose an unreasonable hardship, to (1) prepare an initial reserve study based upon a visual site inspection conducted by a reserve study professional; (2) update the study annually; and (3) arrange for a visual site inspection every three years by a reserve study professional.

• Reserve studies must include detailed information on projected expenditures and current reserve account information and must be conducted by a reserve study professional.

• Encourages, but does not require, a residential condominium association to establish a reserve account, supplemental to the association’s annual operating budget, to fund major maintenance, repair, and replacement of common elements.

• Requires a condominium Public Offering Statement or Resale Certificate to include a copy of the current reserve study; or (2) a disclosure to the potential buyer stating that the association does not have a reserve study.

The statute does not define "unreasonable hardship."  The law also allows an association to withdraw funds from the reserve account for unforeseen expenses, as long as notice is given to unit owners, and a repayment schedule is set up.

There are other provisions in the statute not covered here. For a complete description of the law, see SB 6215. 

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[The following update includes newly released figures for 2007 and supplements my original entry posted 3/29/08]

I get that lawyer bashing has become a national pasttime and that plaintiff lawyers are as far down on our society’s popularity chart as politicians.   But what I do not understand is how insurance companies--the quintessential example of corporate largess--have rocketed up the chart.

Madison Avenue has done an amazingly effective job transforming large cap insurance companies into friendly, pro-consumer institutions in the eyes of many.

To emphasize my point, think of the three most popular insurance companies?

I bet Geico was one of the first names that came to mind. What image pops up? How about a docile animated gecko that speaks in a British accent? Or what about PEMCO Insurance, you know, the “We’re a lot like you, Greenlake power walker or blue tarp camper guy.” What about arguably the industry leader for this transformation change, the AFLAC duck?

But strip away the cute computer generated geckos and ducks, and the numbers reveal the truth about the insurance industry.

Fact: For the past three years and continuing into 2008, the insurance industry in America has achieved record-breaking profits. This fact is nearly astounding considering Hurricane Katrina occurred in 2005.

The numbers:

• 2005: $43.0 Billion profit (Source: Insurance information institute [insurance industry trade group])  
• 2006: $63.7 Billion profit (Source: Insurance Information Institute)
• 2007: $61.9 Billion profit (Source: Insurance Informaiton Institute) 
• 2008 projected: "Analysts expect the industry’s profitability to continue in 2008. . .The ratio of losses and expenses to premiums for 2008 is projected to be 97.3, a deterioration from an estimated 93.8 in 2007. The 93.8 estimate for 2007, if accurate, would represent one of the top 12 best underwriting performances over the 88-year period beginning in 1920." (Source: Insurance Information Institute)

In light of these record-breaking profits, the insurance companies are paying out less and less in claims against builders and developers.  Wthin the past twelve months alone, several of our homeowner association construction defect clients with multi-million dollar claims are facing zero contribution from insurance, as the insurers have included stringent exclusions to policies, including no payment for losses involving “condominium” or “multi-family residential” construction.

Several of the developers and contractors allegedly did not realize they were without insurance on their construction projects.  The developers and contractors obtained CGL policies and paid CGL premiums, but when it came time for the insurance companies to indemnify the insureds for the losses, sued the policy holders in declaratory judgment actions to avoid payment.

As a result , homeowners are left holding the bag on multi-million dollar repairs with no source of recovery because builders have created single-asset LLCs and distributed all income after the project was sold, and less and less insurance is available.  This shift has occurred in the context of insurance companies obtainng record profits.

One possible answer to the current disparity in loss and recovery in Washington is through the Condominium Qualified Warranty program created by the Washington legislature in 2004. RCW 64.35, et seq. 

Under the program, there is a two-year materials and labor warranty, a five-year building envelope warranty and a ten-year structural defects warranty. The program allows an award of reasonable attorneys' fees to the substantially prevailing party, yet in no event may such fees exceed the reasonable hourly value of the attorney's work. This provision should appease the lawyer-bashing critics.  Surprisingly, no insurers have funded the warranty program.  One can only speculate the lack of participation by insurers has everything to do with cutting into their bottom lines. 

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Within the past two weeks, I have been asked by three separate persons whether the Washington state legislature passed new laws this year related to homeowner and condominium association disclosure requirements tied to home sales.  The short answer is, "No."  Although there were several engrossed bills in the state house and senate involving homeowner associations that included added disclosure requirements, none of these bills went to a full vote by the legislature.

The current law in Washington is as follows:

• Association meeting minutes are not required to be included in a condominium resale certificate (The 18 separate statements or disclosures required to be included in a condominium Resale Certificate may be found at RCW 64.34.425.)
• Homeowner associations, other than condominiums, have no disclosure requirements related to sales of homes; however, individual sellers still need to complete a Seller Disclosure Statement, otherwise known as NWMLS Form 17.  

Although there is a movement to incorporate a resale certificate-type of disclosure requirement upon all homeowner associations in Washington, no such laws have been enacted to date.

 

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I get that lawyer bashing has become a national pasttime and that plaintiff lawyers are as far down on our society’s popularity chart as politicians.   But what I do not understand is how insurance companies--the quintessential example of corporate largess--have rocketed up the chart.  Madison Avenue has done an amazingly effective job transforming large cap insurance companies into friendly, pro-consumer institutions in the eyes of many.

To emphasize my point, think of the three most popular insurance companies? I bet Geico was one of the first names that came to mind. What image pops up? How about a docile animated gecko that speaks in a British accent? Or what about PEMCO Insurance, you know, the “We’re a lot like you, Greenlake power walker or blue tarp camper guy.” What about arguably the industry leader for this transformation change, the AFLAC duck?  But strip away the cute computer generated geckos and ducks, and the numbers reveal the truth about the insurance industry.

Fact: For the past three years and continuing into 2008, the insurance industry in America has achieved record-breaking profits. This fact is nearly astounding considering Hurricane Katrina occurred in 2005.

The numbers:

• 2005: $44.8 Billion profit (Source: LA Times)  
• 2006: $63.7 Billion profit (Source: Insurance Information Institute)
• 2007: Dollar figure not released. "Many insurers delivered strong earnings during the year powered in large part by healthy underwriting profits that could approach $25 billion in 2007, which would be the second largest underwriting profit on record after the $31.7 billion earned in 2006. 2007’s survey results indicate that the continuing respite in catastrophe losses in 2007 combined with strong performances in virtually all major lines of property/casualty (P/C) insurance will propel the industry to one of its best underwriting performances in the past 80 years" (Source: Insurance Information Institute)
• 2008 projected: "Analysts expect the industry’s profitability to continue in 2008. . .The ratio of losses and expenses to premiums for 2008 is projected to be 97.3, a deterioration from an estimated 93.8 in 2007. The 93.8 estimate for 2007, if accurate, would represent one of the top 12 best underwriting performances over the 88-year period beginning in 1920." (Source: Insurance Information Institute)

In light of these record-breaking profits, the insurance companies are paying out less and less in claims against builders and developers.  Wthin the past twelve months alone, several of our homeowner association construction defect clients with multi-million dollar claims are facing zero contribution from insurance, as the insurers have included stringent exclusions to policies, including no payment for losses involving “condominium” or “multi-family residential” construction. Several of the developers and contractors allegedly did not realize they were without insurance on their construction projects.  The developers and contractors obtained CGL policies and paid CGL premiums, but when it came time for the insurance companies to indemnify the insureds for the losses, sued the policy holders in declaratory judgment actions to avoid payment.  As a result , homeowners are left holding the bag on multi-million dollar repairs with no source of recovery because builders have created single-asset LLCs and distributed all income after the project was sold, and less and less insurance is available.  This shift has occurred in the context of insurance companies obtainng record profits.

One possible answer to the current disparity in loss and recovery in Washington is through the Condominium Qualified Warranty program created by the Washington legislature in 2004. RCW 64.35, et seq. Under the program, there is a two-year materials and labor warranty, a five-year building envelope warranty and a ten-year structural defects warranty. The program allows an award of reasonable attorneys' fees to the substantially prevailing party, yet in no event may such fees exceed the reasonable hourly value of the attorney's work. This provision should appease the lawyer-bashing critics.  Surprisingly, no insurers have funded the warranty program.  One can only speculate the lack of participation by insurers has everything to do with cutting into their bottom lines.  

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Friday, March 7 was the last day to consider opposite house bills in the legislature, so any bills that have been voted on by both houses will not pass this year.  Of the numerous condo and HOA-related legislation introduced this year, only two bills passed both houses and now await signature by the governor.  The governor has five days, excluding Sundays, to take action on bills passed by the Legislature unless adjournment occurs within those five days, in which case the governor has 20 days to sign or veto (excluding Sundays.)

HB 2014, relating to protection of tenants of conversion condos, passed both houses and awaits signature.  HB 2014 was revived from last session, but amended with a substitute bill in the Senate on January 18.  The bill passed both the senate and the house in this form. 

 

The second bill to pass this year is SB 6215 relating to reserve accounts for condominium associations.  After passing the senate, SB 6215 was amended by the House Committee on Judiciary to include a few clarifying terms and to require disclosure of the lack of reserve study if none has been undertaken.

 

The bill creating a cause of action for negligent construction, SSB 6385, amended in the Senate committee to exclude condominiums, passed the senate in that form and was passed out of the House Judiciary Committee on February 28.  On February 29, it was passed to Rules for a second reading, but never made it to the House floor. 

ESB 6745, which was the bill recommended by the HOA task force, was substantially amended on the floor of the senate, including amendments to make its application retroactive, to add numerous clarifying definitions, to remove the “open meetings” provision for board meetings, and to reduce the quorum requirement for association meetings.  Another amendment disallowed the use of liens against a person’s homes for failure to pay fines as opposed to assessments.  The engrossed bill passed the Senate unanimously.  It was then referred to the House Judiciary Committee on February 20, but inexplicably never made it out of committee.

 

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There are very few volunteer homeowner association boards that do not communicate via electronic mail. Although most board members know not to take any board action via email, the line between casual communication and official board action easily can be blurred. As general counsel for homeowner associations, I routinely advise boards that to the highest degree possible, they should reduce email communication. However, practically speaking, I understand board members are like just about every other member of American business culture who rely upon email as a valued communication tool and timesaving mechanism. The reason email between board members should be reduced or eliminated altogether is because association board action must be conducted in an official meeting and not conducted “off the cuff” outside the presence of association members.

• Notice: Homeowner association board meetings must be properly noticed and open to all association members (with limited exceptions for emergency and executive sessions) (RCW 24.03.120; ORS 65.214).  Oregon law allows for notice of meetings to be sent electronically, while Washington requires notice via U.S. Mail for condominium associations and as noted in the bylaws (including electronic notice, if prescribed) for PUD homeowner associations.
• Meetings via Consent (Oregon only): Unless the articles of incorporation or bylaws provide otherwise, action to be taken at an association board meeting may be taken without a meeting if the action is taken by all the members entitled to vote on the action. The action must be evidenced by one or more written consents describing the action taken, signed by all the members entitled to vote on the action, and delivered to the association for inclusion in the minutes or filing with the corporate records. Action taken under this Oregon Nonprofit Corporations Act section (ORS 65.211) is effective when the last member signs the consent, unless the consent specifies an earlier or later effective date.
• Alternative Meeting Methodology: Except as otherwise restricted by an Association’s articles of incorporation or bylaws, board members may participate in a meeting by conference telephone or similar communications equipment so that all persons participating in the meeting can hear each other at the same time. Participation by this method constitutes presence in person at a meeting.

It isn’t email, but if HOA board members have to conduct board action and they cannot convene together, I recommend that a conference call be conducted with provisions for association members to listen in.

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The sub-prime lending tsunami has rippled across the US economy, even reaching the Pacific Northwest condominium and homeowner association industry. Theoretically, an Association’s obligation to follow statutory and common law disclosure requirements should remain constant irrespective of whether the Dow Jones Industrial Average and housing market are soaring or slumping. However, practically speaking in a rising market when most everyone is making money, disclosures have been known to loosen; whereas, in a down market, disclosure statements are scoured over with heightened scrutiny. Whether the current stock market’s and housing market’s corrections have subsided or will continue indefinitely, mortgage underwriting requirements have tightened substantially for the foreseeable future. This change in the real estate marketplace requires association boards of directors to pay particularly close attention to: (a) disclosure requirements for condominium resale certificates (in Washington); (b) managing accounts receivable; (c) overseeing rental restrictions; and (d) following strict collections policies.

A.        Condominium Resale Certificates

In Washington, under RCW 64.34.425, a condominium unit seller must provide a purchaser with a Resale Certificate that includes eighteen separate written disclosures. Now that the lending industry has shifted its condominium review from a “limited” to a “full” review, association boards must ensure each required item is completed to the greatest extent possible.  Areas of particular concern in the current market environment involve pending litigation, pending or anticipated special assessments, a statement which shall be current to within 45 days of any common expenses or special assessments against any unit in the condominium that are past due over 30 days, a statement which shall be current to within 45 days of any obligation of the association which is past due over 30 days, a balance sheet and revenue/expense statement current to within 120 days, statement of any violations of the health or building codes, and history of any warranty claims made under a qualified warranty (if so provided). Although the number of condominium construction defect lawsuits has diminished over its peak earlier this decade, cases continue. In the limited time since the underwriting requirements stiffened and submission of this article, I have noted a significant rise in requests from lenders for clarification and supplemental information on resale certificates, especially disclosures related to construction defect lawsuits.

The statute is quite clear as to what must be disclosed in a condominium resale certificate. Although unit sales likely will be adversely affected to a degree not seen in recent memory due to construction defect lawsuits, significant special assessments or well underfunded reserves, condominium association boards should be aware of the heightened attention placed on these disclosures and should work closely with their professional manager and possibly legal counsel to provide accurate, thorough and comprehensive information.

B.         Accounts Receivable

If a Planned Unit Development (“PUD”) or condominium homeowner association seeks a loan to fund a capital improvement, major repair project or other large capital expense, banks and other lending institutions will be paying closer attention to the financial statement of the association.  A feature component of the statement is the number of units behind in assessments and aggregate amount of accounts receivable. Prior to the recent tightening of underwriting requirements, an association could get away with several owners whose accounts were past due without much adverse impact. Now, it appears an association may need to ensure it has a nominal balance in overdue accounts receivable, or at a minimum, ensure that foreclosure or collections proceedings have commenced on those accounts that are overdue.

Although an association should manage its finances and accounts receivable proactively and work to minimize overdue accounts regardless of lending requirements or trends in the marketplace, as stated previously, this area of an association’s finances could make the difference between qualifying for an association loan and being rejected.

C.        Rental Restrictions

Many condominium and PUD homeowner associations have imposed rental caps in order to keep the number of non-owner-occupied homes below the percentage required by federal underwriting requirements. This ratio ordinarily hovers between seventy and eighty percent and varies depending upon size of loan, size of down payment and specific lending program (VA, FHA FNMA, etc.). With tighter lending requirements, to help preserve property values, obtain financing and improve overall credit scores, an association may wish to impose rental restrictions in addition to rental caps, including lease approval requirements (e.g., ensuring leases are submitted in compliance with the association’s procedural steps, if a lease renewal, confirm positive track record of the tenant and confirm that the lease adopts all of the association’s CC&R requirements) and tenant screening procedures (including having the owner/leasor conduct a consumer credit report, verification of the applicant’s employment and rental history, and conduct a public records check). A board also may wish to adopt heightened enforcement procedures that provide the association with rights to act directly against tenants who violate the CC&Rs.

D.        Collection and Foreclosure Policies

Foreclosure rates in the Puget Sound region increased forty-two percent in 2007 from the previous year, with more than 1.8 million sub-prime mortgages scheduled to reset to higher interest rates across the country this year and next. With such a large number of foreclosures pending and forecast, many homeowner associations in the region likely will experience in the near term bank foreclosures within their communities. During the upward housing market, many associations were reluctant to commence foreclosure proceedings or money judgment actions against homeowners within their communities who became past due on assessments, at least until the balance grew to a large sum. With the current tightened market, it is recommended that an association adopt strict collection and foreclosure criteria and protocol, and follow those protocols consistently.  

A homeowner association board of directors should take proactive steps and particular action to protect itself and its members from the legal risks associated with a down market. The steps described above may provide the general overview for such protections and help keep an association’s “head above water” in these turbulent times.  

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SHB 2014, providing additional protections to tenants of condominium conversions, having passed the House on January 18, has been tentatively set for public hearing before the Senate Consumer Protection and Housing Committee on February 5, 2008 at 1:30. Having worked out some of the kinks last year, this bill seems fast-tracked for enactment this year. See our prior article re this bill here.

SB 6215, regarding reserve studies and accounts, was passed out of the Senate committee on January 18 and has been in Rules since January 25. See the original article regarding this bill here. 

SB 6745, the HOA Act Committee bill was set for public hearing in the Senate Committee on Consumer Protection and Housing on February 1, 2008. See the original article on this bill here. 

Two new bills propose to create task forces to study condominium issues this year. SB 6875, sponsored by Senator Rodney Tom, would create a task force to study condominium governance issues and would be staffed by condominium board members, homeowners and attorneys. In contrast, SB 6724 would be staffed with developer entities and no homeowner representatives. While this bill purports to create a task force to review condominium liability in the insurance context, it is expected that unless limited, the task force may attempt to make recommendations for amendment of the condo act to reduce builder liability. 

SSB 6385, creating a cause of action for negligent construction for single family homes, was amended in committee and passed the house on February 1, 2008. It has now been referred to the House Judiciary Committee for review.

Find info on these bills and others by checking out the legislative website bill finder. Also, a good overview of the legislative process can be found on the Washington State Legislature website here.

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The HOA Committee's recommendations to amend Washington's Homeowner Association Act have been compiled into Senate Bill 6745, which was introduced today.  The bill was referred to the Senate Committee on Consumer Protection and Housing and is currently scheduled for public hearing on Thursday, Jan. 24. 

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House Bill 2014, which would provide additional protections and disclosures to renters of apartments slated for conversion to condominiums, underwent its first major change this year. Today, the first substitute bill passed out of the House. The bill was first proposed last session, passed out of the House Committee on Housing, but session ended before it went any further. 

Currently, SHB 2014 provides that a condominium converter must give the current tenant 120 days’ notice of the conversion and must provide notice of any relocation assistance. In addition, any construction work commenced during that 120 days must not disturb the tenants’ “quiet enjoyment.” The bill defers to the local cities and counties whether to require the conversion declarant to fund relocation assistance.  

Track the status of SHB 2014 here. 

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As the Washington legislature begins its work this session, Senate Bill 6215, relating to reserve accounts and studies for condominium associations has been sponsored by Senators Rodney Tom, Jim Honeyford and Bob McCaslin. The bill would encourage condominium associations to have reserve studies conducted by reserve study professionals and establish reserve accounts to fund major maintenance, repair and replacement of common elements. However, the bill provides no penalties for an association’s failure to do so unless an association has failed to do so for three years and 20% of the homeowners demand that a reserve study be completed.   

The bill was set for hearing before the Senate Consumer Protection and Housing Committee on January 18, 2007. Check out the current iteration of the bill and its status here. 

 

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In 2006, the Washington legislature established a committee to study the problems facing owners in non-condo HOAs and to come up with recommendations on revisions to the Homeowners’ Associations Act. The Homeowners Act Committee was charged with reviewing the Act, the Uniform Common Interest Ownership Act and considering specific problems faced by Washington HOAs such as disclosures to buyers in an HOA, alternative dispute resolution for HOA/owner disputes and methods for amending CC&Rs, among other issues. 

On January 9, 2008, the Committee issued its final report. Read the full report here. As of the date of this article, no bill has been introduced relating to the committee’s recommendations.

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On January 4, 2008, the Federal Communications Commission (FCC) issued notice that it would implement its proposed ban on the use of exclusive contracts for existing video services in community associations and other multi-family housing developments. The ban would prevent cable companies from enforcing exclusivity clauses in video service contracts commencing in March 2008.

Previously, the FCC had issued an order confirming an October announcement that the agency would ban the enforcement of exclusivity clauses in existing video service contracts. An exclusivity clause is a contract term giving a provider, usually a cable company, the exclusive right of access or the exclusive right to provide video service in a community. As written, the order may affect community associations across the country.

The order applies to cable operators, telephone common carriers, and open video system operators. Providers of Direct Broadcast Satellite services and "private cable operators," which are companies that provide video service without using local rights-of-way, are not covered

Several industry groups have challenged the FCC’s authority to implement such a ban and the challenge will most likely delay implementation of the ruling into summer.

If your association has a contract with a video or cable programming distributor, you may want to review its provisions to determine if there is an exclusivity clause, and if so, what the effect on the contract will be once the FCC order goes into effect, assuming industry groups are unsuccessful in blocking the ban.

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A case decided on the last day of December 2007 may affect how older condominiums vote on additions to condos.  Boards of older condominiums built prior to July 1, 1990 subject to the Horizontal Property Regimes Act often have difficulties knowing what percentage vote is required to do certain acts. In a recent decision, Lake v. Woodcreek Homeowners Association, Division I of the Washington Court of Appeals held that a homeowner adding a bonus room onto his unit actually converted common area to part of his unit under the theory that the air space around his unit was common area because common areas were defined as anything “not expressly described as part of the individual residence apartments or as limited common area.” Thus, the declaration required consent of all unit owners. This case could have a major impact on the ability of architectural control committees to approve exterior construction on condominiums subject to the Horizontal Property Regimes Act.

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There is a common misconception among builders and buyers of condominium conversions that builders who convert apartments into condos are only liable for “what they touch” or the parts of the condominium that they actually improve. This is not correct. In fact, there are a number of avenues for recovery when a conversion condominium experiences leaks or other problems relating to original construction defects even when the converter did not touch that part of the building. Among these is a claim against the converter under the implied warranty of suitability, which is just now getting some focus in the industry. 

In addition to the well-known warranties of quality for work actually done by a builder converting a building into condos, the Condo Act also provides that the creator of the condominium warrants that “a unit and the common elements in the condominium are suitable for the ordinary uses of real estate of its type.” This is called the implied warranty of suitability or fitness. Unlike the implied warranties of quality, this warranty applies to units and common elements, regardless of whether the developer did any work on those elements. 

It is unsettled what “suitable for ordinary uses” means because there is no further definition of the term in the statute, nor are there any published legal opinions relating to this matter in the context of conversion condominiums. It may be that this warranty equates with a warranty of habitability, meaning the building is so unsafe as to be virtually uninhabitable under certain circumstances. But it may mean just what it says – that the building is “unsuitable” for its ordinary uses rather than uninhabitable. We have and will continue to argue that a building that leaks is unsuitable for use as someone’s home. To our knowledge, this theory has not been tested in the courts, but we expect to see breach of this warranty pleaded in the near future, especially where, for example, a 75-year-old apartment has been converted for current use as condos with little to no renovation.

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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.

As with most board decisions, common sense is the most effective tool in the decision making process. Due diligence, prudence and following the foregoing steps should also keep association boards and managers from falling into the brother-in-law vendor trap.

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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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Homeowner associations often inquire as to their authority to tow vehicles within their communities. The following outline describes general Washington law regarding homeowners associations’ legal authority and required procedures for towing vehicles. Please note that this posting contains general information and is not legal advice for a specific towing event, which would be unique to the circumstances surrounding that event.

First, the board needs to determine if the streets within its community are public or private roads. This information should be contained within the Association’s Declaration and Plat. 

A.  Vehicles on Public Property

·        Only a law enforcement officer or public official having jurisdiction over the property upon which the vehicle is located has authority to order the impoundment of a vehicle located on public property. RCW 64.55.113. A vehicle constituting a traffic hazard can be removed immediately, while one that is not a hazard can be removed only after it has been properly tagged for twenty-four (24) hours. Additionally, a vehicle located in a publicly owned or controlled parking facility, which is properly posted with no parking signs, can be removed immediately. 

·        To have a vehicle removed from a public right-of-way, a homeowners association’s options are limited to notifying a public official of the location of the vehicle it wants removed. The public official may then arrange for and authorize the vehicle’s removal after twenty-four (24) hours. The association may not authorize the removal of a vehicle from public property.

B.  Vehicles on Private Property

·        A vehicle located on private property may be removed through private impoundment by the owner of the property or the owner’s agent. Such a vehicle may be removed immediately if the property is properly posted with parking restrictions, or if the property qualifies as residential property. Residential property is defined as property with no more that four living units. A vehicle found on unposted, nonresidential private property can be removed only after it has been parked for twenty-four (24) hours. 

·        Signage prohibiting parking on nonresidential property must meet several requirements. A sign must be posted near each entrance and on the premises in a clearly conspicuous and visible location. The signs must state the times at which an unauthorized vehicle may be impounded and must also list the name, telephone number, and address of the towing company where the vehicle may be redeemed.

·        A person requesting a private impoundment must provide a signed authorization for the impound to a registered tow truck operator. A separate authorization must be signed for each impoundment; blanket authorizations allowing a towing company to remove all unauthorized vehicles are not allowed. The authorization must include the following statement: “A person authorizing this impound, if the impound is found in violation of Chapter 46.55 RCW, may be held liable for the costs incurred by the vehicle owner.” Additionally, a private property owner may not authorize the immobilization of a vehicle on its property though devices such as “car boots.”

·        As an alternative to having a vehicle removed as an unauthorized vehicle in a private impound, a person who owns, possesses, or controls private property may dispose of a vehicle abandoned on the property as an “abandoned junk vehicle.” The advantage of this process is that once a vehicle has been properly designated as an abandoned junk vehicle, the property owner is immune from liability regarding disposal of the vehicle and may receive proceeds from the sale of the vehicle. Additionally, the junk vehicle’s registered owner is liable to the property owner for costs incurred in disposing of the vehicle.

·        There are several requirements that must be met before a vehicle may be removed as an abandoned junk vehicle. A public official must inspect the vehicle and verify that the value of the vehicle is equivalent to the value of the vehicle’s parts. The official then provides the property owner with the name and address of the vehicle’s registered and legal owner. The property owner must mail a notice to the vehicle’s owner. Fifteen (15) days after sending notice, the property owner may dispose of the vehicle or sign an affidavit of sale to be used as a title document.

C.  Summary

This is not an exhaustive list of Washington law regarding towing vehicles and each association should review the local ordinances controlling for their jurisdiction. In general, state law requires that a homeowner association contact a public official, most likely local law enforcement, to have a vehicle removed from public property. An association may remove vehicles located on private property under its control immediately if the property is posted or if it qualifies as residential property. On unposted nonresidential property the vehicle may be towed after it has been parked for twenty-four (24) hours.

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In late 2006, I wrote an article that unintentionally created a minor maelstrom of backlash from several association management companies in Oregon and Washington. Although published in 2006 in the Community Associations Journal and Regenesis Report the topic is as relevant today as it was almost two years ago. Many management companies continue to serve two masters (homeowners and developer/declarants) without taking proactive steps to minimize the perceived, and sometimes actual, conflict of interest as demonstrated below.  

Property management companies retained by developer clients often have to walk a tight-rope as they balance the interests of their two clients: the developer and the homeowner association. In the perfect world, this dichotomy of client interests would not be at issue because the developer and homeowner association would share parallel interests. But practically speaking, inherent conflicts arise between developers and homeowners regularly, which place the property manager squarely in the middle of an undesirable situation. 

A.        Conflict in the Making

            A developer will hire a property manager to take the association through the transition from developer/ declarant control to homeowner control with an intention for the property manager to stay on as the association’s management company. At the time the management company is hired, it is clear the client is the developer. But soon thereafter, the manager has to begin working with the homeowner association members and must consider the interests of the homeowners.

            In large projects or master plan communities, a property management company may be retained many months prior to establishment of a homeowner’s association in order to manage the physical property and assist in creation of the association. As the development sells out and homeowners begin populating the association, additional duties are initiated, including management of operating and reserve financial accounts, coordination of association meetings, administration of vendor contracts, oversight of physical maintenance, et cetera. At the point of formal transition from developer or declarant control to homeowner control, the pendulum shifts and the property manager works almost exclusively for the association.

            But just as during initial retention by the developer, the property manager should begin to consider the interests of the ensuing homeowners, following transition, the manager may find it difficult to ignore the interests of the developer—the party that initially hired him or her. This dual master relationship creates a less than enviable challenge for the property manager. 

B.         Actual Examples of Actual Conflicts

            At or shortly after transition, an association becomes aware of potential construction defects within its condominium. The developer is notified and offers to repair problems. This scenario presents an immediate conflict of interest between the homeowners and the developer. It is in the interest of even the most honest developer to minimize the repair, as once the project is sold and turned over to the homeowners, the project shifts from a profit center to a cash drain. Thus, there are very few developers who would conduct an exhaustive investigation to determine the extent of the problems, choosing instead to effectuate the most minimal repair possible. This interest clashes head-on with the interest of the homeowners, who should conduct an independent, comprehensive investigation to determine the exact nature and scope of the problems or defects. The property manager is placed directly in the cross-hairs between the two competing interests. If the manager sides with the developer and recommends that the association accept the developer’s offer to repair the problem, then it is possible that he or she is compromising the interests of the homeowners. Conversely, if the manager recommends that an independent investigation be conducted, then the manager will surely aggravate the developer.

            Another example of developer-homeowner conflict involves financial accounting. Frequently, at time of transition, there are operating or reserve account questions. Although Washington law requires an audit and Oregon law requires a financial audit be conducted, for a substantial percentage of associations residual financial questions remain, such as whether and how much the developer contributed to homeowner dues during the time they owned units, maintenance costs that might have been attributable to the developer involving expenses related to finishing the project, or other administrative reimbursable expenses. More often than not, these types of questions are not answered, and seldom raised, during an audit or financial review.

Another condominium association was less than a year from transition when it discovered possible construction defects. The association obtained legal representation and was attempting to work with the developer and his attorney to resolve the problems short of litigation. Unbeknownst to the association’s attorney, and done behind counsel’s back, the developer met with the property manager and told her that he had two new properties that were coming on line within the next year and he was looking for a management company. In the same breath, the developer asked if the manager could arrange a meeting with the current association’s board of directors so he could pitch a repair plan “without the need to get the attorneys involved.”  

C.        How to Avoid the Conflict Conundrum

There are certain conflicts of interest that are inherent in the business world. Some professions, such as physicians and business facilitators, handle these conflicts through implementation of strict guidelines and rules. Other professions, such as the legal, accounting and real estate brokerage industries, are heavily regulated by state statutes or administrative codes. There are no such laws or guidelines in the property management industry—yet. Therefore, property management companies might consider self-regulating themselves until such time as more formal rules or policies are enacted. The following guidelines are suggested for those property management companies who are hired by developers or declarants and then continue to serve as the homeowner association management company.

            The most obvious and cleanest way to avoid this conflict is simply to avoid acting as both the developer/declarant manger and ensuing association manager. A property management company could either specialize in pre-transition properties on behalf of a developer/declarant, or post-transition properties on behalf of an association, but not both. Once control of the association shifted to the homeowners, the developer’s management company’s services would be terminated. The obvious drawback to this option is revenue. There are not many management companies that voluntarily choose to work only for developers or only for already established associations.

            The next best alternative would be for the property management company to state up front when hired by the developer that the manager would work for the developer up through time of transition, but once the control of the association shifted to the homeowners, the manager would act solely on behalf of the interests of the homeowners. This arrangement should be clearly defined and articulated in the services agreement with the developer/declarant. A possible drawback to this option is that there may be developers or declarants who would not be amenable to this arrangement, and would not accept the fact that the property manager’s allegiance would shift to the homeowners (even though the developer/declarant would no longer be paying the property manager post-transition). It likely would only take one example of the property manager siding with a homeowner association against the developer post-transition for the developer to abstain from using that property management company for future projects.

            The last option (and apparently most common in today’s industry) would be for the property management company to try to balance the interests of both clients simultaneously throughout the period of management. Although discouraged, when a property management company proceeds in this manner, it is highly suggested that the manager inform both the declarant/developer and homeowner association in writing of such dual representation and potential conflict of interest. It would be further recommended that the manager obtain written consent from both parties.

            If acting for both the developer/declarant and association, the property manager should also make it a practice to rely on independent consultants, rather than try to resolve the dispute or potential conflict internally. This custom would minimize the likelihood of perceived or actual wrong doing or unintentional favoring of one client over the other. For example, if a legal question arises, the manager should recommend that the association seek independent legal advice, and not advice obtained by the property manager and passed on to the association. Or, if construction or defect issues are suspected, then the manager should refer the association to an independent inspector with expertise in the field. If financial questions arise, it would be wise to conduct a review or, under severe circumstances, an audit of the association’s financials by an independent, certified CPA.

D.        Conclusion

Property management companies are placed in difficult situations every time they are hired by developers or declarants and carry on as the association’s manager. A substantial number of management companies’ business plans include such a portfolio of properties. For those companies who do not desire to become entangled in the conflict of interest quagmire, than they should ideally refrain from dual representation. For those companies who pursue such clients, they should take proactive steps to minimize the potential for conflict and to ensure they provide sufficient notice and even receive written consent from their clients. All property managers should refer questions or issues to independent, qualified consultants who should be hired by, and report directly to, the association board of directors, rather than pass information through the manager.

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At Barker Martin, P.S., education is paramount—education of our clients and continuing education of our attorneys. For over a decade, Barker Martin attorneys have presented at dozens of industry seminars, such as Community Association Institute, Oregon & Was