Demystifying First Party Insurance Claims - Part 1: Washington

First party insurance claims have become more prevalent over the past few years as multi-family buildings (condominiums and apartments) age. Tens of thousands of these types of buildings were constructed in the Pacific Northwest over the past 40-50 years.

As the exterior cladding systems on these buildings nears the end of their useful lives, and the associations and owners commence repairs, substantial rot and damage often is discovered hiding beneath roofs, siding and walls. Some of this damage may be covered by property insurance.

Due to the complexity and multiple factors involved in tendering and evaluating such claims, the team at Barker Martin is offering free webinars on the topic.

Our first webinar, providing general information and Washington-specific case law, was given by Jim Guse and me this morning. It was recorded and can be viewed on our homepage: www.barkermartin.com.

We are offering a second 45-minute webinar specific to Oregon next Thursday (May 22nd) at 10:30 a.m. Registration for the free webinar can be done through our homepage: www.barkermartin.com.

For both our Washington and Oregon webinars, we:

• Explain what a first party claim is and how it is distinguished from other types of insurance claims;

• Discuss the various types of first party claims;

• Run through a history of “collapse” claims;

• Provide a brief summary of state-specific case and statutory law;

• Provide hints and best practices for tendering claims; and

• Discuss practical considerations for tendering and pursuing first party claims.

Along with the webinars, the Barker Martin team will be writing a few blog posts and emails in the coming weeks (..stay tuned...).

In addition to input from me and my partners, the webinars and related materials were formulated by Jim Guse, whose practice focuses on the representation of individual and corporate policyholders in insurance coverage disputes, including insurance coverage for construction disputes. Jim recently joined the firm and we are very pleased to have him assisting our clients on first party and all other insurance matters.

And as always, if you have specific questions related to insurance coverage for your association, please feel free to contact me at www.barkermartin.com.

"The Right Way to Correct Wrongs" - A Preview

The Washington State Chapter of CAI is hosting “Law Day” this Saturday – and we hope you can make it!

In the morning session, my Partner Dan Zimberoff is co-presenting with Jim Talaga (Association Reserves) on the topic, “Navigating the Minefield of Association Disclosures.” In a parallel time-slot, Partner Jeremy Stilwell will present “Basic Training for New Board Members” and a legislative update. In the plenary session prior to lunch, Jeremy will be updating everyone in attendance on current and planned legislative action as well.

Following lunch, Barker Martin general counsel David Goldstein, and I will be speaking on “Enforcement Actions: the Right Way to Correct Wrongs.” The following is a brief preview – I hope you can join us at the Lynnwood Convention Center from 8:00 a.m. to 3:30 p.m. for the full presentation.

The “Right Way” to correct wrongs isn’t about one particular enforcement procedure. Instead, the “Right Way” refers to best practices that are grounded in specific authority, reasonable in nature, and satisfy the basic tenets of due process. If an Association’s rules and its procedures meet these three basic criteria, then they should withstand scrutiny by the courts (if it should ever have to get that far). More importantly, however, following these basic principles lends a basic credibility to the enforcement process, which can fend off lawsuits – and which is generally in the best interests of the Association.

David and I will be discussing this basic concept in more detail, as well as the nuts and bolts of enforcement actions, which includes everything from establishing good rules and enforcement policies to how to coordinate complaints, draft effective notice letters, and how to avoid getting pulled into neighbor disputes.

On another note, next Saturday, the Oregon Chapter of CAI will be hosting ‘Community Association (CA) Day.’ Our email next week will discuss one of the topics our attorneys will be presenting at that event...so, stay tuned!

I hope to see you at both events!
 

Why Mediation Works

Community association disputes—whether they involve owner-to-owner, owner-to-board, or association-to-third party—are no different than any other commercial dispute in that the overwhelming majority of them are resolved short of trial, and in many instances, without litigation altogether. But how do combative or contentious parties come together to reach a reasonable resolution? Many times the answer lies in alternative dispute resolution, or ADR, methods, and more specifically, through mediation.

Mediation differs from arbitration or litigation in that unlike a judge, jury or arbitrator, a mediator does not decide who wins or loses. Instead, the mediator, who may be an attorney or retired judge, but also a layperson with training, assists the parties to negotiate and reach an agreed settlement. If both parties do not agree to the proposed settlement, then they simply walk away without resolution.

Mediation has a structure, timetable and dynamics that ordinary negotiation lacks. The process is private and confidential. Statements made during mediation cannot be used in subsequent litigation, which encourages transparent, good faith negotiation.

Mediation is most successful when both parties are willing to compromise. The process will not work if one or both parties are unwilling to move off their position.  Though participation is typically voluntary, many community association governing documents require that the parties proceed with mediation before filing suit, except for ordinary assessment collections actions. Both the Oregon Planned Community Act and Oregon Condominium Act contain similar requirements (Washington’s association statutes do not have such provisions).

If your association is in a dispute and seeks an efficient resolution, you certainly should consider mediation. Many county courts offer free or reduced-rate mediation services. For the more complex matters, professional mediation services with experienced attorneys and retired judges are available in the major metropolitan areas in Oregon and Washington. If you require assistance on a matter or would like help finding the right mediator for your dispute, give the team at Barker Marin a call—we’d love to help.

And as always, if you have specific questions, please feel free to contact me at www.barkermartin.com.
 

Removing an Officer or Director

Serving on a community association board can be a thankless job.  In addition to often being undervalued and underappreciated, on occasion, a board member is asked to resign.  But what if he or she is unwilling?  What is the process for removing an officer or director from serving for a community association?

The law in Oregon and Washington differs:

  • In Oregon, under both the Planned Community Act and Oregon Condominium Act, “unless otherwise provided in the declaration or bylaws,” a director can only be removed by vote of the association members. Before the vote to remove a director, owners must give the director whose removal has been proposed an opportunity to be heard at the meeting. Removal of a director by owners is effective only if the matter of removal was an item on the agenda and was stated in the notice of the meeting. Removal is accomplished by a majority of the owners who are present and entitled to vote. See ORS 94.640(6) (PCA); ORS 100.417(8) (OCA).
     
  • In Washington, under the Washington Condominium Act, “notwithstanding any provision of the declaration or bylaws to the contrary,” the unit owners, by a two-thirds vote of the voting power in the association present and entitled to vote at any meeting of the unit owners at which a quorum is present, may remove any member of the board of directors with or without cause.  See RCW 64.34.308(8).  Under the Homeowner Associations Act, only a “majority vote of the voting power in the association present,” is needed to remove a director with or without cause.  See RCW 64.38.025(5).

In most instances, a volunteer serves a dual role: board member and officer.  Under many association governing documents, an officer may be removed by a majority vote of the board of directors.  Therefore, an individual might be removed from their officer position by vote of the board, but retains their director position unless removed by a vote of the ownership.  Practically speaking, it could be problematic to have the volunteer removed as an officer, yet remain as a director.

The removal of a director or officer can also be acrimonious.  Boards should be careful about how they disseminate information that might be negative, even accusatory.  This is particularly true when it is the board that wishes to remove an officer or director. The board must consider the need to share relevant information with the owners with the desire to avoid mudslinging, potential legal actions and protecting confidential or sensitive information.  In such instances, it is usually best to consult with legal counsel.

Removal of an officer or director is rarely a seamless process.  But when done objectively and in strict compliance with the law, transition can occur with limited contention and emotion.

Protecting Owners' Confidential Information

Community association directors and their managers are required to maintain records identifying the people living in their associations. Typically they also keep contact information for the owners, including both listed and unlisted telephone numbers and email addresses that are not otherwise available to the public. This leads to the question: Under what circumstances should this contact information be shared with other owners?

In both Washington and Oregon, there are statutory obligations for maintaining association records and producing them for inspection, so the first step of the analysis is whether confidential contact information is part of the association’s “official records”.

Oregon

In Oregon, ORS 65.771 lists the records that a nonprofit corporation is required to keep as permanent records, and it does not reference contact information. Subsection (3) states that:

A corporation or its agent shall maintain a record of its members in a form that permits preparation of a list of the name and address of all members, in alphabetical order by class showing the number of votes each member is entitled to vote.

The Planned Community Act in Oregon also does not characterize owner contact information as part of the association records. See ORS 94.670. The statute specifically allows an association to withhold files of individual owners which may be where contact information is kept (section 9G). The Condominium Act contains a similar provision at ORS 100.480. Based on these statutes, individual owner contact information is not within the definition of an association record, and owners may not inspect that information.

Washington

In Washington, the Nonprofit Corporations Act requires that the corporation keep “a list of members, including names, addresses, and classes of membership, if any. . .” and that information must be open at any reasonable time to inspection by a member. RCW 24.03.135. It does not mention owner contact information.

The Homeowners Association Act at RCW 64.38.045(2) states that:

All records of the association, including the names and addresses of owners and other occupants of the lots, shall be available for examination by all owners, holders of mortgages on the lots, and their respective authorized agents on reasonable advance notice during normal working hours at the offices of the association or its managing agent. The association shall not release the unlisted telephone number of any owner. The association may impose and collect a reasonable charge for copies and any reasonable costs incurred by the association in providing access to records.

Since unlisted telephone numbers are expressly mentioned, it could be argued that listed telephone numbers are within the scope of information to be kept as an association record and disclosed to requesting owners. However, I believe a safer interpretation is to follow the letter of the statute and only characterize “the names and addresses of other owners and occupants of the lots” as association records to be made available for inspection.

The Washington Condominium Act does not contain any explicit list of the types of records that qualify as association records other than financial records. RCW 64.34.372. Since there is no statute, the requirements of the Nonprofit Corporations Act will be controlling, and names and addresses are the only required association records.

Based on these statutes, owner contact information is not within the scope of documents to be considered as association records that must be provided for owners to inspect and an association should not disclose that information without express authority from each owner.

A second question may arise: What if you want to provide owner contact information? For example, what if an owner requests all of the owners’ email addresses to let them know about an upcoming barbecue or other social gathering that would benefit the community. It may be tempting to share information for such a positive event. However, since there is no statutory authority for sharing that information, a director or manager would be taking a risk in choosing to share that information, exposing themselves to claims for violation of privacy or breach of duty. Instead of sharing the confidential contact information, I suggest that those types of notices be provided through the existing management company. As an alternative, you can let each owner decide if they want to share their contact information with their neighbors. An association can provide this option to all owners by simply including an “opt in” button on the community website that would allow their email address and/or telephone number to be visible to other owners. The website should also include a disclaimer that if an owner opts in, the association has no responsibility for monitoring any owner’s use or misuse of the contact information.

Most people are very cautious about protecting their personal information, and have the expectation that their associations will not provide their information without their knowledge or consent. Associations and their managers should respect that expectation of privacy as it relates to confidential contact information. If any questions on this topic arise, please feel free to contact me at angiebagby@barkermartin for further discussion.
 

Paralysis by Analysis: Breaking Board Inaction

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

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

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

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

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

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

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

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

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

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

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

Looming Crisis? When Caulk, Paint and Patches No Longer Work

Condominiums first appeared in the late 1960s when owner-occupied cooperatives and common interest communities took hold across the country. Throughout the 1970s, condominiums emerged as an important form of home ownership. HUD estimates that over 4.8 million condominiums were constructed in the 1970s and 80s.

At some point, even well built buildings require major rehabilitation. The number of years an association can function before performing a major rehab is based on a multitude of factors, including the quality of construction, type of cladding and windows, exposure to the elements and of course: maintenance. Many communities choose to defer maintenance or common element repairs and replacement by kicking the can down the street for the next board or group of homeowners to confront. Though a precise timetable for replacing roofs, windows, HVAC, exterior cladding or other major systems may vary widely, the one certainty is that delay will result in increased costs. This fact is particularly true in the Pacific Northwest, where long rainy winters punish buildings year after year.

Now is the perfect time for an association to address its long-standing repair and replacement issues for the following reasons:

• Bank loans are viable. Interest rates remain at historic levels--the cost of borrowing money has never been this low--but will not remain at this rate indefinitely. Plus, due to the competitiveness in the lending industry, banks are loosening underwriting requirements.
 

• Construction costs remain low. Due to the overall economic malaise in our country, the cost of materials and labor remains highly competitive, but like bank interest rates, construction costs will not remain low forever. As the economy continues to improve, labor and material rates will certainly rise.
 

• Insurance coverage is at peril. Condominium insurers are rejecting new coverage and failing to renew policies on older condominiums that have failed to upgrade plumbing, electrical and other major systems. Older associations who have failed to perform this work are finding themselves without insurance and at significant risk.
 

• Delay results in higher costs. Delaying required repair and maintenance will result in a disproportionate rise in repair costs. Water damage to buildings is not linear. Rot, deterioration and other damage accelerate over time and mirror a hockey stick and not a straight line. At some point, the damage reaches the extent where mold and structural integrity cannot be ignored.

If you manage or govern an associations older than 20 years that has not actively addressed the condition of the complex, don’t become part of the looming crisis. Act now to take advantage of the favorable conditions to get this work done.

Here are some recommendations for dealing with underfunded capital improvements or major repairs:

1. Assemble a team of professionals, including an attorney, lender, architect or engineer and manager, to work closely with the board of directors in formulating and executing a comprehensive plan, from initial identification of the scope of the repairs through funding and completion of the work.
 

2. Rely on the advice of these professionals, who have guided hundreds of Oregon and Washington associations through proven and successful game plans and track records.
 

3. Do not succumb to “paralysis by analysis.” Details are important, but fear of the process should not override reasonable and necessary action.
 

4. Do not get bullied by adversarial homeowners. No one “wants” to pay a special assessment, but when presented with objective facts and data, reasonable owners should realize the need to take action. This is where your professional team can be especially effective in communicating and supporting the plan.
 

5. Be transparent and communicate often. Don’t wait for the special assessment meeting to communicate with the association about the need for repair/replacement of common elements.
 

6. Involve homeowners in the process. Committees or tasks forces can be especially helpful, but make sure the roles are clearly defined. Committee work should generally be in an advisory capacity with clear demarcation of roles and responsibilities.

A large number of older condominiums can no longer get by with caulk, paint and patchwork fixes. They face pressing and important decisions on how to proceed. The first step in making those decisions is becoming better informed. To assist that first step we have teamed with a lender and insurer to provide a 60-minute webinar to help inform homeowners and managers on how best to confront this predicament. For more information on the webinar and to sign up click here.
 

Call to Action: Legislative Alert

Owners, managers and vendors to community associations have a stake in state laws that impact associations. The Washington State Legislature is in session and several bills affecting community associations have been introduced. New legislation can have a tremendous financial impact on the community association industry and your association in particular. Even if you live in or work exclusively with Oregon associations, you may want to keep reading as regional trends are common.


Here is a list of Washington State Bills that could impact community associations:


HB 1370 – Electronic notice of meetings
Summary: The bill would allow Washington HOA’s to provide electronic notice of association meetings. This a great idea, but we question whether electronic notice should be something owners “opt-in” to accept rather than “opt-out” as the bill is currently drafted. Oregon currently employs the “opt out” method and this doesn’t seem to pose a burden to associations in the state.
 

SB 5134 – Reserve Studies
Summary: The bill would exempt condominium associations with fewer than 50 units from the reserve study requirements. This seems like a bad idea. The reserve study statutes encourage associations to estimate the anticipated major maintenance, repair and replacement costs that are not included in the association’s annual budget. Reserve studies are basic good governance whether an association has 10, 30, 50 or 500 units.
 

PSSB 5075 – Homeowners’ association assessment increases
Summary: This bill would limit an Association’s authority to increase assessments. We do not support this bill because Associations need the ability to assess the actual costs of maintaining the property and setting aside reserves for future major maintenance, repair and replacement.
 

SB 5031 – Real Property Damage Actions
Summary: The statute of limitations for an action regarding waste or trespass upon real property or for injuring personal property is three years. Based on a 1977 Washington Supreme Court case, if property is damaged as a result of construction occurring on an adjacent property, the statute of limitations does not begin to run until the construction project is substantially complete. This bill would make the statute of limitations run from the date the damage is discovered or reasonably should have been discovered.


HB 1029 – Private Road Maintenance

Summary: This bill is intended to make easement holders responsible for a share of maintenance and repair costs related to their use of easements. This could be important to Associations with easements for roads, sidewalks or other rights to cross over another’s land. The bill is being worked on to try and addresses several concerns. 

SB 5083 – Political yard signs
Summary: Under current law, the governing documents of a homeowners' association may not prohibit the outdoor display of political yard signs by an owner or resident before primary or general elections. This law would extend the prohibition to any public elections.

SB 5113 – Enforcement of speed limits on roads within condo associations
Summary: This bill would allow law enforcement to enforce speeding violations on private roads in condominium associations so long as certain requirements are met.


As legislative bills are drafted, re-drafted and amended, the ultimate step may be for community members to become involved in the legislative process through contacting their representative and provide feedback on how certain legislation would impact their community.

If you don’t know who your state representatives are, use this link and find out today:


Washington


Oregon
 

Association and Homeowner Insurance: Who Pays?

When there is a fire, flood or other sudden loss suffered by a community association, insurance is supposed to help solve the problem. Unfortunately, for many associations the focus quickly shifts from dealing with the damage to a dispute between the association and one or more unit owners over whose insurance company should pay for the claim. Disputes like that only delay the repairs and make a bad situation worse. All associations should know what their insurance obligations are and whether the association’s policy provides primary coverage.


What Insurance Is Required?


Each association should refer to state law and the association’s governing documents to determine what insurance it must obtain and then consult with its insurance agent for recommendations on optional coverages. For condominiums in Washington created after July 1, 1990, the association’s obligation to obtain insurance is clearly set out at RCW 64.34.352. We encourage all condominium board members and managers to read that statute, which requires condominium associations to maintain, to the extent reasonably available, property insurance and liability insurance.


For old-act condominiums in Washington, RCW 64.32.220 states that the association shall obtain insurance “if required to by the declaration, bylaws, by a majority of apartment owners, or at the request of a mortgagee having a mortgage of record covering an apartment”, but it is less specific than its condominium act counterpart in that it does not specify the types of coverage required.


The statute for homeowners associations (RCW 64.38) is silent on what insurance those associations must obtain. Your association should look to its governing documents and its insurance broker for guidance on what insurance to obtain.


Whose Insurance is Primary?


The question of whose insurance is primary is the most common dispute between associations and owners because usually neither party wants to submit the claim to their insurance due to concerns of premiums going up. Too often this dispute drags on because the parties do not clearly understand their respective obligations. Knowing which policy is primary and quickly tendering the claim to the proper insurer speeds along the repair process, minimizes disruption, and can avoid a heated dispute in the midst of an already stressful event.


For Washington condominiums created after July 1, 1990, this dispute should never arise. If both the association and the unit owners have insurance that might cover the claim, the Washington Condominium Act specifies that association’s policy provides primary coverage. RCW 64.34.352(3)(d). That means that a claim for property damage to common elements or arising out of common elements must be submitted or tendered to the association’s policy first.


For non-condominium owners’ associations, the answer to whose policy is primary will likely be dictated by your governing documents. Owners associations should always consult with their insurance agent when obtaining insurance to better understand which policy is primary and to ensure that the insurance coverage being obtained satisfies the requirements of the governing documents.


Coverage is Not the Same as Fault


Too often, associations fail to or delay in tendering claims to their insurance policies because they believe the unit owner is at fault or should be responsible for the repairs or deductibles based on whether the damage is units, common or limited common elements. But coverage for damage under an insurance policy is not the same as liability for the damage. Liability can and should be determined separately from insurance coverage.


Understanding whose policy is primary may seem insignificant now, but armed with that information, board members and managers can help bring a sense of leadership and calm to a situation that is almost always chaotic and stressful.

Voting in the Digital Age, Part 3

 

This is the last planned email in our series on electronic communications with owners.  The first two covered electronic notice of meetings to association owners in Washington and Oregon.  We received some excellent feedback in response to those emails.  For example, we know that some Washington Associations use electronic notice for their association meetings if the owner consents to receiving notices in that form.  There are very valid arguments in support of this position, but there’s always the argument that a clear and unambiguous statute should be followed. 

Any discussion regarding electronic voting in Washington associations is fairly short. When it comes to matters that are to be voted on by the association members, as opposed to the board of directors, the statute requires a meeting with proper notice that includes the items or business on the agenda to be voted on by the members.  RCW 64.34.332 (Condominium Act) and RCW 64.38.035 (HOA Act).  There are provisions that allow for voting by proxy and the Condominium Act allows for amendment of the declaration by vote or agreement of the requisite percentage of allocated interest, but there is no provision that would allow an electronic vote.  Granted, there is no provision prohibiting such an electronic vote, but when there is a clear and unambiguous statute stating what procedures are allowed, following the statute is always a good way to avoid problems.

In contrast, Oregon association law provides several alternate methods of voting including: absentee ballots, proxies, written ballots in lieu of a meeting, and electronic ballots. ORS 100.425, 100.427 and 100.428 (Condominium Act);  ORS 94.647; 94.660 and 94.661 (Planned Communities).  The Oregon statutes include specific requirements to ensure compliance with quorum and notice requirements, voting deadlines and secret ballot requirements.  It is not as simple as sending out a mass email to all of the owners and tallying responses.  Before taking a vote by mail in Oregon, Associations need to review their governing documents and make sure they can comply with the requirements of ORS Chapter 100 for Condominiums and ORS Chapter 94 for Planned Communities. 

It is important to note that neither Washington nor Oregon allow Boards of Directors to vote via electronic ballot.  The Washington HOA Act and Oregon Condominium and Planned Communities Acts include specific open meeting requirements that would prohibit a director vote via email (RCW 64.38.035(2); ORS 94.640(8); ORS 100.420).   While the Washington Condominium Act does not explicitly require open meetings, the Non-profit Corporations Act and Nonprofit Miscellaneous and Mutual Corporations Act require meetings with a quorum in order to transact business.  These acts specify that unless the governing documents state otherwise, directors may participate in a board meeting via any means of communication by which all participants can “hear” each other during the meeting.  RCW 24.06.150 and RCW 24.03.120.  This of course eliminates email as an option for conducting board business, although the Washington Nonprofit and Nonprofit Miscellaneous and Mutual Corporations Acts allows directors to take actions outside of meetings by unanimous consent.  RCW 24.03.465; RCW 24.06.510.

Will (and should) Washington someday join its neighbors to the south and provide Associations with procedures for electronic notice and voting? We’d love to hear your thoughts and feelings on this subject.

 

Association Meeting Notices in the Digital Age, Part 1 Washington Associations

There was joy throughout Washington when board members and managers first heard that the law for Washington non-profit corporations was changed to allow for the potential use of electronic notices for Association meetings.  The potential use of email notices led to dreams of reduced copy and postage costs and the slight chance of increased owner participation and easily achieved quorums.  Unfortunately, even though the non-profit acts allow for electronic notice in some circumstances, the Washington Condominium Act, RCW 64.34 (“Condo Act”) and the Homeowners’ Association Act, RCW 64.38 (“HOA Act”) do not.

The non-profit corporation acts in Washington allow the use electronic meeting notices in some circumstances.  Specifically, the Nonprofit Corporation Act allows for meeting notices to be sent via electronic transmission (RCW 24.03.080(1)) while the Nonprofit Miscellaneous and Mutual Corporations Act (RCW 24.06.105) allows it only if it specifically allowed for in the articles of incorporation or bylaws.  However, the language in the non-profit act that applies to your association is only the starting point.  You must also look at the language of the statute that specifically applies to your association to determine if that statute allows for electronic notice.  

If you are an association subject to the Condo Act or an owners association subject to the HOA Act, then you must comply with the language in those acts.  Both RCW 64.34 and RCW 64.38 state that for any association meeting:

[T]he secretary or other officers specified in the bylaws shall cause notice to be hand-delivered or sent prepaid by first-class United States mail to the mailing address of each owner or to any other mailing address designated in writing by the owner.

RCW 64.34.332 and RCW 64.38.035. 

The Condo Act and the HOA Act require association meeting notices to be hand delivered or sent first class mail.  They do not make any reference to or allow for electronic notice.  If you are a condominium that was created after July 1, 1990 you should comply with the language of RCW 64.34.332 and if you are an HOA you should comply with RCW 64.38.035 and either hand deliver or send your meeting notices by first class mail.  Your status as a non-profit or non-profit miscellaneous and mutual corporation does not trump the express Condo or HOA Act requirements.  Please note that notice requirements for board meetings often differ from an “association meeting;” thus, review and understanding of an association’s governing documents is paramount in determining proper board meeting notice requirements. 

Stay tuned for:

Part 2:  Association Meeting Notices in the Digital Age: Oregon

Part 3:  Voting in the Digital Age

Process and Procedure

Associations need to take note:  Process and Procedure Matter.  A Florida homeowner association was recently reminded of this fact when it was ordered to pay an owner $85,000 in damages. The owner is seeking an additional $220,000 in attorney fees.  The dispute stemmed from a $2,212 landscaping bill for replacement of the owner’s lawn.  See the related news article at:

http://www.tampabay.com/news/publicsafety/crime/new-tampa-homeowner-wins-judgement-against-homeowners-association/1253895.

In ruling against the Association, the Court made the following findings:

  • The Association replaced the owners' lawn when it was not the only yard affected by the drought.
  • Three Deed Restriction Committee members never inspected the property before the board authorized the work as required by governing documents.
  • The person who installed the sod was an officer and board member of the Association. Governing documents prohibit board members from receiving remuneration without a unanimously adopted resolution, which did not happen.
  • The fraudulent lien prohibited the Owners from selling their home, which they had purchased as investment property and rented out. At one point, when the home was valued at $215,000, they had an interested buyer. The property is now worth $100,000, according to the court order.

Keep in mind a couple of things that the Court did not find. 

  • The Court did not find that the Association acted unreasonably in determining the lawn should be replaced.  To the contrary, the Court found it was not the only yard affected by the drought.  
  • The Court did not find that the Association lacked authority to replace the lawn. To the contrary, it appears the Association did have authority replace the lawn and had specific procedures for making such a decision that included an inspection of the property by three committee members.
  • The Court did not find that the officer/board member could not perform the sod replacement.  The Court ruled that the Association’s governing documents require a unanimously adopted resolution and the process was not followed. 

Boards sometimes get into the mindset that so long as they have the authority to make something happen, the process and procedure of getting to that end is largely irrelevant.  The Florida association in this case almost certainly argued that any procedural failure does not change the fact that the lawn needed to be replaced and the Association had the authority to replace it. Based on the Judge’s findings, it seems like the Association had a decent “no harm – no foul” argument.  The importance of following your governing documents cannot be overstated. 

THE BOTTOM LINE: Associations lose lawsuits when they don’t follow the proper process and procedures. Obtaining sound legal advice to keep you OUT of court is far more cost effective than the alternative.

 

 

Update on National Class Action Plumbing Settlement

Many of you have been keeping up to date on the continuing issues with plumbing system defects
and so we wanted to notify you of a recent class action settlement that will affect many homeowners
and associations in Oregon and Washington that have PEX plumbing systems with yellow brass
fittings.

The settlement class includes anyone who owns a structure containing an RTI Plumb-PEX
Plumbing System containing ASTM F1807 brass insert fittings and stainless steel clamps sold by
RTI or Uponor and installed on or after May 15, 1999. Below are photos of some of the
components included in the settlement.

Claim eligibility depends on whether an owner has experienced a leak or whether an owner can
demonstrate reduced water flow. For multi-unit projects, a project that has experienced leaks in
30% or more of the units may be eligible for a replumb and replacement of the F1807 system. In
order to determine an association’s claim eligibility, the association will have to undertake some
investigation of its plumbing system.


Please contact us if you have questions about how this class action settlement affects your
associations or how to submit a claim. It can take several weeks or longer to complete the
investigation you need to develop the claim, and the time to file a claim is limited.

Demystifying Board Member Conflicts

“The greatest crimes do not arise from want of feeling for others, but from an over-sensibility for ourselves and an over-indulgence to our own desires.” - British Statesman Philosopher Edmund Burke.


People run for the board of directors of their association for many reasons. Some see the position as a way to get more involved with their community or to meet new people. Some join out of a sense of duty or to correct perceived problems with prior boards. Some see board membership as a networking opportunity or to get directorship or management experience. Regardless of why someone joins the board of directors, the bottom line is that once a person becomes a board member, he or she has very clear duties to the association as a whole. Keeping this duty in mind may help board members avoid conflicts of interest – or even the appearance of a conflict.
 

Both the HOA Act and the Condominium Act provide:
the board of directors shall act in all instances on behalf of the association and that board members have duties of care and loyalty to the association. RCW 64.38.025(1);

RCW 64.34.308(1). In Oregon, these same duties are contained in the Nonprofit Corporation Act at ORS 65.357, which is cited by both the Planned Community Act and the Condominium Act. These provisions not only define the governing authority of an association; they are an edict that the board of directors shall always act on behalf of the association, the corollary being that no board member should be acting on his or her own behalf. Acting in your own or anyone’s interest other than the association’s is the very definition of conflict of interest. Simply put, a board member must place the interests of the association above (not merely equal to) all interests, including their own.

Some board member conflicts are obvious. When a board member exploits his board membership to prevent enforcement action against him, most boards and managers have no trouble requiring the board member to recuse himself from any decisions relating to his own violations of the governing documents. But other conflicts can be more difficult to identify and therefore, harder to enforce. Even the issue of self-dealing (where a board member wants the association to hire her for some purpose) can be difficult to identify as a conflict because the board member often feels that the association benefits from the arrangement as well. In these circumstances, there is still a conflict. There is also the appearance of impropriety, which should be avoided because it causes erosion of the membership’s faith in the board.


Once a conflict is identified by either the association manager or one or more of the other board
members, it can be just as difficult for the remaining members of the board to decide what to do
about the conflict. That is why we recommend that boards adopt a board member Code of Ethics
that spells out potential conflicts and prohibits certain actions by board members with conflicts.
Adopting a Code of Ethics can easily be done under the board’s rulemaking authority. The best
time to adopt such a code is before a conflict arises because most people will agree with the set
of principles in the abstract, but may have difficulty adopting a set of rules that seems targeted at
their own behavior.


The provisions of the Codes can vary but the terms should be specific. The Code can flat out
prohibit any board member from accepting compensation from the association for any reason.
This would avoid not only actual conflicts but would also avoid perceived impropriety. On the
other side of the spectrum, the Code can require disclosure of even potential or minor conflicts to
avoid the appearance of impropriety. For example, the Code could require mere disclosure by a
board member who rents her unit when discussing changes to rental cap provisions, but require
disclosure and recusal of board members who are delinquent in paying assessments from voting
on issues relating to not only their own delinquency but all delinquencies. The Code should also
prohibit use of information to which the board has access, such as list of homeowners, for
purposes unrelated to association business so that board members cannot use such access to
solicit clients for his or her business.


Having a Code of Ethics in place not only allows the manager or other board members to point to
the violation of a concrete rule when a director starts acting in their own self-interest, it also
serves as an excellent reminder for existing board members and those seeking board positions as to the true purpose of the board – to act in all instances on behalf of the association.

Effective Communication

 “The single biggest problem in communication is the illusion that it has taken place.” - George Bernard Shaw

Whether in a personal or professional context, communication--or lack thereof--often causes strife and conflict. This axiom certainly applies to community association management and governance. How many times have you attended a board or association-wide meeting to find one or more homeowners incensed, claiming the board was acting secretly, deviously or deceitfully? In reality, it is likely in each of those instances that the board was acting openly and transparently, but its actions were not communicated effectively to the homeowners. Why?

Communication is a two-way interaction. There is a sender and receiver. Successful communication requires both elements to be working congruently and in harmony. Perfect outgoing communication may be ineffective if the receiver is not listening. Textbook receiving does not guarantee successful communication if the sender is deficient.

To reduce discord and contention within a community association, a board may wish to adopt one or more of the following communication protocols:

• Other than Executive Session, hold open board meetings with ample notice to each homeowner.

• Publish meeting minutes as soon as they are approved (ideally at the next board or association-wide meeting).

• When dealing with a controversial issues (e.g., special assessment, major construction project or capital improvement, adoption of rental restrictions, etc.), provide as much advance notice as possible, including informational meetings or taking time during board meetings to discuss the issue at the earliest possible time.

• Send separate written communication to the homeowners summarizing unique or special issues (in much greater detail than cryptic board meeting minutes) via email, newsletter or association website. Provide periodic written updates.

• If appropriate and reasonable, have the board appoint a committee comprised of homeowners to review and research the issue; however, keep in mind that committees ordinarily are advisory in nature, and do not possess authority or responsibility independent from the board of directors.

None of the above recommendations will improve communication if a homeowner is not listening. However, if ever confronted with accusations of acting behind closed doors or failing to communicate, a board that has implemented the foregoing protocols can respond that it has upheld its part of the communication process.

 

 

Don't Sweat the Small Stuff

You may have read the popular self-help book Don’t Sweat the Small Stuff… and It’s All Small Stuff: Simple Ways to Keep the Little Things from Taking Over Your Life by Richard Carlson, PhD. The book encourages readers to limit the amount of stress, anxiety and mental energy that they spend dealing with things that they have little or no control over as well as well as issues that have little or no actual consequence.


Now… think about your community associations. Are they spending too much time and mental energy focused on issues that they have little or no control over? Do they spend hours of time and expend incredible emotional energy on issues of little or no consequence? Are they spending too much time dealing with a couple of difficult owners rather than focusing on the community as a whole? Boards that are frustrated, beaten down, tired and contentious often spend a great deal of time and energy “sweating the small stuff.”


So… How do Associations break out of the cycle? One method is to employ the simple but effective problem solving approach taught in many Community Association Institute (CAI) courses:


Step 1: Define the issue or identify the scope of the problem.
As part of step one, you may realize that the issue is very limited in scope. You might also find that it’s not actually a problem at all. It may just be – “small stuff.”


Step 2: Who has the authority and obligation to address the problem?
Not every issue or problem is an Association’s concern. Associations do not exist to solve all owner problems. Before a board devotes time and energy to an issue they need to determine whether the issue is theirs to consider.


Step 3: Consider different approaches to solving the problem, evaluate available resources, formulate a plan, and implement it.
Associations often bog down in Step 3. In our experience, problems often stem from hesitancy in making decisions. If study items remain on the list month after month or year after year then a plan never gets adopted or implemented. At some point, a decision must be made.


Step 4: Communicate the plan to the owners.
After making a decision, boards need to always ask: Who needs to know this and how do we communicate the information to them?


Step 5: Monitor and evaluate the plan.


Take note: Boards should NOT bog themselves down with implementing every detail as a board. That would be “sweating the small stuff.” Instead, after adopting a plan, boards should monitor those charged with the responsibility of carrying it out. And if the plan needs to be changed or adjusted, don’t be afraid to make it happen.

The Value of a Great Team

There are ample opportunities to observe the value of teamwork—working with community associations presents one such opportunity. You likely have experienced the benefits of working with a team of dedicated board members, attorneys and vendors, and likely have struggled through tough situations when you did not have a strong team in place. In addition to the natural benefits of collaboration, using experts as part of your team can also provide legal protection for your association’s directors.


Both Oregon and Washington have laws governing the standard of care for directors of a corporation which apply equally to directors of incorporated community associations. Both states use a “business judgment rule” which requires that directors: 1) act in good faith; 2) use the care that an ordinarily prudent person in a like position would exercise under similar circumstances; and 3) act in a manner the director reasonably believes to be in the best interest of the corporation. RCW 24.03.127; ORS 65.357


Both state laws also permit directors to rely on the expertise of their team of professionals in exercising their business judgment. The statutes allow directors to rely on legal counsel, public accountants or others with expertise on the matters being considered. A director is not liable if the director relies on professionals in exercising their director duties. This is strong protection for directors, and all directors should be advised to assemble teams of qualified professionals to assist them in using sound business judgment for the benefit of their associations.


The value of a strong team exceeds merely achieving good results; it may also provide added legal protection, as is the case with community association boards in Oregon and Washington. Are you doing all you can to promote exceptional teamwork for your association clients?

Who Pays?

It is important to remember that not every Association responsibility is paid for as a common expense. Both Washington and Oregon statutes provide that common expenses may, in certain circumstances, be assessed against fewer than all owners. Governing documents may also require that expenses associated with the limited common elements must be assessed to the unit or units to which those limited common elements are assigned. Many owners do not realize this. They assume that any work performed by the Association is paid for as a common expense and thus shared by all of the owners.
 

The assessment of common or limited common expenses against fewer than all owners is one of those red button issues that should not be taken lightly. Sometimes the statutes and governing documents do not leave any discretion and fewer than all owners must be assessed. Complicating the issue, we often find governing documents that purport to grant greater authority and discretion than is supported by the statutes, especially in Washington. Just remember, if owners receive a completely unexpected assessment, the reaction will not be pleasant regardless of the assessments validity and never take lightly the question: Who pays?

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Balancing the Issues

In these trying economic times, homeowner associations are looking for many creative ways to keep their collective heads above water. One possible means we have heard from our clients is selling or leasing common areas or facilities.


For example, an HOA may wish to sell a portion of its open space to an adjoining community or property owner, open its pool or club house to the public (for a fee) or provide vehicle or boat storage.


In assessing the viability of these options, an association board may first wish to balance the financial benefits with possible adverse effects - any decision should not be based merely on monetary gain. For instance:

  1. Allowing public access to formerly private areas or facilities increases legal liability and likely insurance premiums.
  2. Mixing non-owners or association members with homeowners adds a new dynamic to the community (which can be positive as well as negative).
  3. Running a storage or other public access facility requires administrative support, bookkeeping, regulation and tax reporting.
  4. Who is going to perform these functions and at what cost?

In addition to the practical considerations, a board of directors must determine if it has the
authority to convey, lease or encumber common areas or property. Often times, an association’s
declaration or other governing documents include specific provisions addressing the topic. In the
absence of such language, in both Washington and Oregon, state statutes address generally these issues.


If you have an association that is considering selling or leasing a portion of their common areas
or facilities, do not hesitate to give us a call for a more detailed analysis. Also, please remain
alert and let us know if you are aware of other creative or resourceful ways in which community
associations are responding to the prolonged economic climate.

 

How to Protect Your Community Against Embezzlement

Unfortunately, community associations in the Pacific Northwest are not immune from becoming victims of embezzlement. Last week it was reported that several homeowner associations were victimized to the tune of over $1.5 million. Many of our clients are now left to wonder: “Could this happen to us?” and “What can we do to prevent this?” The good news is there are ways that associations can protect themselves and reduce the risk of embezzlement or theft. Here are some suggestions:

  1. Review your financial reports carefully and ask for copies of statements issued by your bank.
  2. Talk to your association manager about their company’s internal controls and ensure at least semi-annually that the procedures and controls are actually being used.
  3. Require two-person signing of checks or require that the person who signs checks be separate from the person who reconciles the bank statements. These procedures should be followed for both operating and reserve accounts.
  4. Ensure both your Association and management company have fidelity and anti-crime insurance coverage with policy limits sufficient to cover the association’s assets.
  5. Maintain strict control of who has access to electronic user names and passwords for the association’s financial accounts--change passwords regularly. Do not use the same password for more than one account.
  6. Ask questions if anything seems out of the ordinary.

As always, the best advice we can give is for association boards to be an active part of the team and to keep a watchful eye on their assets.

The Disappearing Declarant

More and more associations these days are experiencing the “disappearing declarant” phenomenon: The original developer suffers such financial difficulties that their unsold units are abandoned or foreclosed upon – or the declarant itself files bankruptcy or goes into receivership. Sometimes the construction stops mid-stream, leaving partially developed lots unfinished and buildings unoccupied. Clearly these associations are experiencing some down times at the very early stages of their existence. But associations should know that even under these circumstances, down is not out. Associations can take advantage of the shared goals of its members to preserve and increase their property values through the various situations discussed below.

     Association Paralyzation

A declarant who disappears prior to turnover of the association to the homeowners affects the Association’s very ability to govern. For example, if three of the five board members are to be appointed by the declarant and only two elected, it is unlike that the board can meet its 50% quorum requirement if declarant board members have not been appointed or do not attend board meetings. Without a quorum, the board cannot act on behalf of the association. Once those units are sold or taken over by the bank, however, the Association should be able to elect all board members.      

If the declarant has truly disappeared as opposed to just being inactive, the remedy in this situation is to initiate a lawsuit similar to those brought by shareholders of other corporations to ask a court to ask to have a receiver appointed to run the association. In that situation, the receiver has the power to govern the association in the best interest of the association and is not necessarily bound by all terms of the governing documents. 

     Units in Limbo

 

If the declarant’s units have been foreclosed by the bank, the bank is responsible for assessments just as any owner would be. However, the more common situation is where the bank has the right to foreclose (the declarant is in default of the loan obligation), but the bank does NOT foreclose, knowing that it then becomes responsible for paying assessments. In this case, where there are a substantial number of units in that situation and where the units are delinquent in paying assessments, the association may want to pursue foreclosure of the units.

 

Initiating foreclosure is not without its expense and pitfalls, however. While it is possible that the bank will step in and . . .

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Watch Out for Neighborhood Watch Programs

Last month in our post on community associations and squatters, one of the recommendations I listed was for an associate to initiate a neighborhood watch program. Coincidentally, a few days later, I read that the homeowners association where Trayvon Martin was tragically killed by a neighborhood watch captain is facing a likely lawsuit from the family of the 13 year-old gunned down on a street in the association.

The controversial and tragic death of the Florida teen is a stark reminder of the care a community association should take in implementing a neighborhood watch program. To eliminate tragedy, reduce legal liability and ensure a successful program, a community association may wish to take the following steps:

  1. Contact the local police department and ask their community support officer to meet with the association. In addition to providing general tips on establishing neighborhood watch programs, the police representative may give community-specific information and insights. While speaking, the officer may also provide anti-crime tips to assist individual homeowners.
  2. Establish written guidelines for the program. Work with the association's attorney in coming up with these procedures. Among other items, the guidelines should emphasize minimizing conflict and confrontation.
  3. Ensure program participants are not armed with weapons. A cell phone and camera ordinarily are the only equipment needed for protection.
  4. Criminal background checks should be conducted on all program participants. Local police departments or state agencies offer inexpensive background options.
  5. Contact the association's insurance company to verify insurance coverage for the program. Many community association insurers have risk management departments that offer helpful information on establishing neighborhood watch programs.
  6. The association's board of directors or professional manager should review the program at set intervals to ensure it is being conducted in compliance with the written guidelines.

A community association must understand the purpose of neighborhood watch programs. Volunteer homeowners are not intended to stop crime--that job is for the police. Watch programs are most successful in deterring crime by providing a watchful eye and vigilant documenting of suspicious behavior. If a crime is being observed, the watch members should dial 9-1-1 and avoid confrontation.

Residential communitites often have the best intentions in adopting neighborhood watch programs. An association should ensure effective safeguards are in place to eliminate unnecessary liability and potential tragedy.

Foreclosed Homes, Squatters and HOAs

A recent article in the Seattle Times, "Empty Foreclosed Houses Burden Cities, Neighborhoods", highlights a severe problem affecting community associations throughout the Pacific Northwest, and nation. In addition to losing out on receiving monthly and other assessments from homeowners going through the foreclosure process, homeowner associations are now facing squatters taking over many of these properties and turning them in flophouses.

Overwhelmed by a massive inventory of foreclosed homes, banks lack the resources to ensure the properties are maintained and secured properly. As a result, squatters have besieged many of these homes. The squatters often engage in drug activity, theft, vandalism and other highly disruptive criminal behavior which adversely affects neighbors and entire communities.

Community associations should take the following steps in an attempt to avoid or minimize such threats:

  • If a bank fails to foreclose on the property, the association should commence foreclosure proceedings. At a minimum, the action may jump-start the bank to take action. The goal is to get a new responsible homeowner in the home as soon as possible.
  • If foreclosure has occurred and the property is vacant, the association should implement a “community watch” type program. The volunteers could keep a watchful eye on the property and call police at the first sign of trouble. The sooner squatters can be interrupted, the more likely the community will be in keeping them out.
  • Meet with the local police and obtain a helpful contact person. It may not be effective to constantly call 9-1-1 for “routine” problems such as loud parties, trespassing, etc. However, if the association can forge a relationship with a community support officer, or other police representative, a collaborative, long-term solution can be created.

Though it may seem at times as though an association lacks the power or tools to rid squatters within its community, proactive, comprehensive steps often result in eviction and success. 

Annual Meetings: The Time To Shine [Part II]

The following is part two of a two-part article recently published in the January 2012 edition of WSCAI Washington Communities'Journal:

 

Recruit Prospective Board Members Early

Many community associations have difficulty filling officer and director positions. There are multiple reasons for this apathy; however, as with many volunteer positions, serving as a community association officer or director can be a highly rewarding experience.

 

Generally, voting for board positions occurs at the annual meeting. Boards who simply ask for nominations at the meeting do a disservice to themselves and their communities. Recruitment of board members is one of the common traits of successful common interest communities. A board member should begin thinking about his or her replacement almost from the time they first step onto the board. Identification of charismatic or effective leaders and managers within a community may take up to a year, or more. Persuading, convincing or even cajoling a neighbor to run as a board member may take even longer!

 

Nominations of directors should be requested well in advance of the annual meeting. A brief bio or “platform statement” of each candidate may be included with the meeting notice and agenda. Voting for director positions must comply with the provisions of the association’s governing documents, most likely found in the bylaws. Most associations allow each candidate a few minutes to speak to the membership prior to the vote. Once the directors are voted in and assume their positions, often their first order of business is to agree upon officer positions. This action ordinarily occurs immediately following the annual meeting.

 

Overcoming Potential Pitfalls

Though reaching quorum is often stated by associations as a hurdle in achieving a successful annual meeting, following the steps described above in planning and running an effective combined business meeting and social event should result in higher attendance and an ability to reach quorum without difficulty.

 

Under the Washington Condominium Act (“WCA”), unless the bylaws specify a larger percentage, a quorum is present throughout any meeting of the association if the owners of units to which 25% of the votes of the association are allocated are present in person or by proxy at the beginning of the meeting.[1] Under the Washington Homeowner Association Act (“HOA Act”), unless “the governing documents” specify a different percentage, a quorum is present if the owners to which 34% of the votes of the association are allocated are present in person or by proxy at the beginning of the meeting.[2]

 

Proxies also allow associations to reach quorum even if many homeowners do not personally attend the meeting. Under the WCA, votes allocated to a unit may be cast pursuant to a proxy duly executed by a unit owner.[3] A unit owner may not revoke a proxy except by actual notice of revocation to the person presiding over a meeting of the association. A proxy is void if it is not dated or purports to be revocable without notice. Unless stated otherwise in the proxy, a proxy terminates eleven months after its date of issuance.[4] Though the HOA Act is silent regarding proxies, general corporations law essentially tracks the WCA on this issue.

 

Some associations have experienced legal challenges to business conducted at an annual meeting simply because they failed to follow procedural hurdles. Common interest communities in Washington must follow strict notice requirements to ensure a legally binding annual meeting. Under the HOA Act, not less than 14 nor more than 60 days in advance of any meeting, the secretary or other officers specified in the bylaws shall cause notice to be hand-delivered or sent prepaid by first-class United States mail to the mailing address of each owner or to any other mailing address designated in writing by the owner.[5] The notice of any meeting shall state the time and place of the meeting and the business to be placed on the agenda by the board of directors for a vote by the owners.[6] The rules are the same for condominiums in Washington under the WCA, except the minimum notice period is shortened from 14 to not less than 10 days.[7]

 

Success!

A community association who conducts comprehensive event planning, combines the business meeting with a social activity, includes community members and takes into account renters and families with children, can transform dread into success--turning the annual meeting event into an opportunity for the board and association to shine.

 

[1] RCW 64.34.336.

[2] RCW 64.38.040.

[3] RCW 64.34.340(2).

[4] Id.

[5] RCW 64.38.035(1).

[6] Id.

[7] RCW 64.34.332.

Annual Meetings: The Time to Shine [Part I]

The following is part one of a two-part article recently published in the January 2012 edition of WSCAI Washington Communities' Journal:

There are two words that often instill pangs of fear in the bellies of many condominium and homeowner association board members: annual meeting. Just mention of the event conjures doubts of reaching quorum, fears of homeowners running amok, and failings at filling open board positions. Yet, instead of dreading the annual meeting, through proper planning and a few “tricks of the trade,” every community association can coordinate and run a highly successful and effective annual meeting.

Plan the Event.

The first step in the process is proper planning. The annual meeting should not be perceived as merely a business meeting, but also as a social event and opportunity for every homeowner in the association to attend, socialize and get to know one another. Sandi MacCalla, CMCA and Director of Master Planned Communities for CDC Management Services in Seattle, stresses the importance of advanced and comprehensive planning. She recommends the meeting be well organized and even scripted. It is not uncommon to start the planning several months in advance. The meeting should be efficient, concise and informative. First and foremost, it is a business meeting. But just because the core of the meeting is all business, it should not limit an association from having fun. The association can incorporate a social event, such as a barbecue, potluck, chili cook-off or other friendly community competition to immediately precede or follow the meeting. Some associations have had success sponsoring community arts and crafts, wine tasting, sports (e.g., indoor volleyball) or other activities such as Bingo. The age, demographics and general make-up of the community will dictate the type of social event most likely to succeed in increasing homeowner participation and attendance.

 

Since most annual meetings occur in the first quarter of the calendar year, proper planning must take into account the inclement weather Washington State community associations are likely to encounter in January, February or March. Finding a proper indoor venue is vital.

Ms. MacCalla suggests that another component of successful event planning includes accommodation of families with children. Rather than expect parents to arrange childcare independently, an association can arrange community childcare. This effort can be accomplished at no additional cost through solicitation of older sibling sitters or other adult childcare providers who may live within the community. Local daycare centers also can provide sitters, exchanging free childcare services in exchange for promotion or advertising within the association.  Childcare can be co-located at the site of the meeting, either in an adjacent meeting room or nearby facility.

 

Integrate the Broader Community

Though an association annual meeting should be limited to governance and business of the association, the broader event can include the wider community beyond the walls of the development. Inviting a local political figure or business leader to speak either before or after the annual meeting may create a “buzz” for the event and increase homeowner attendance.

Associations may choose to invite local businesses to attend and offer promotional specials to the homeowners. Including businesses emphasizes inclusiveness and support not only to the association development or condominium, but also to the broader community to which the association is located. As with inviting a political or business leader, local businesses can create a “buzz” or incentive for homeowners to attend the annual meeting.

Lastly, a board should consider inviting renters to the event. Renters are important members of a common interest community. Except in rare circumstances, renters ordinarily do not vote as part of the business meeting; however, they uniformly can participate in the social aspect of the event and often add to the fun. 

 

Stay tuned for Part II of this article to be posted in a few days.  Happy New Year!

If you are a new board member of a community association in Oregon or Washington and have a legal question about annual meetings or any other board function, feel free to contact Barker Martin, P.S. by selecting the "Contact" tab at the top of this blog page.

Pacific Northwest Community Association Survey

Are you a Washington or Oregon condominium or homeowner association member who sometimes feels like you are on an island? Do you want to know how other associations are managing and governing their associations? Then participate in Barker Martin's Community Association Survey and we will provide you with a free report.

Time is of the essence, as the deadline for taking the 5 minute survey is March 15th!

Have you ever wondered what other communities are utilizing for their management practices and protocols? Whether your community is self-managed or run by a professional manager and/or management company, this survey will gather the opinions of Pacific Northwest homeowners and residents of condominium associations, homeowner associations and other common interest communities.

The online survey is anonymous and completely confidential. Rest assured that Barker Martin will not collect, record, or disseminate personal information about the survey participants or data from their computers. Responses to Barker Martin’s Management Survey will be held in the strictest confidence and only aggregate statistics and comments will be compiled and made available in a final summary report produced by Barker Martin.

To access the survey, click here.

2011 New Year's Resolutions for Community Associations

New Year’s resolutions don’t have to be limited to just individuals. In the spirit of ushering out the old and welcoming in the new year, I suggest community associations consider adopting New Year’s resolutions for 2011. The timing of these resolutions also coincides with the time that many shared ownership communities conduct their annual meetings and board elections, the first quarter of the calendar year. What better opportunity to adopt and implement a platform of New Year’s resolutions than when an association Board turns over or reconvenes for the year?

A Board may consider one or more of the following resolutions (in no particular order):

1. Adopt and follow strict collections policies. Due to the continued downturn in the economy, most every community association in the United States has experienced some level of foreclosures or owners who are past due on their assessment accounts. In less critical times, Boards may have relaxed their collections policies and allowed their “neighbors” time to catch up. But such leniency is no longer feasible in today’s economic climate. Instead, Boards must adopt and uniformly follow strict collections policies, or risk heightened delinquencies and claims of selective enforcement.

2. Review governing documents. Board members should be intimately familiar with their governing documents (i.e., Articles of Incorporation, Declaration, Bylaws and House Rules and Resolutions). Boards should resolve to review their documents at the start of each year, at a minimum, to ensure familiarity and compliance. Though sometimes containing "legalese," even non-attorney Board members should understand the provisions of each governing document. If not, a Board should have an attorney or other professional explain any confusing or technical portions of the documents.

3. Amend governing documents, if necessary. Along with reviewing and fully understanding their governing documents, a Board should resolve to amend any conflicting, vague or obsolete governing document. To avoid unnecessary conflict and cost, a Board should be forward-leaning and move to amend outdated documents before a conflict or a problem arises--it will be much cheaper in the long run.

4. Adopt communications policy. One of the most common problems experienced by community associations relates to inefficient or ineffective communication. A Board should resolve to adopt a communications policy governing intra-Board communication, as well as communication with association members, managers and third-party consultants or companies. If an association does not have a communications policy, even the most basic problem or issue can be blown out of proportion, resulting in increased conflict, cost and adverse consequences.

5. Reduce email. Electronic mail has certainly revolutionized American business. Unfortunately, the proliferation of email has also resulted in inundation of written communication which sometimes can be overwhelming and all consuming (e.g., iPhones, Droids and "Crackberries"). Email can also be far less effective than simply picking up the phone or speaking with someone directly. As part of a comprehensive communications policy, a Board may wish to define specific email protocols, including establishing limitations on subject criteria and response times. A Board should also establish association email accounts, such as GardenPointSec@yahoo.com or VillaCourtPres@gmail.com, etc., to eliminate the use of personal, company and government servers for association business.

6. Establish reasonable working protocols and expectations. Along with reducing reliance upon email, a Board may wish to set expectations as to when association business is to be conducted (preferably at Board meetings). Too often, Board members conduct business 24/7 via email or when confronted by an owner or other Board member in a parking lot or when getting their mail at the community mail kiosk. Everyone is busy juggling family, work, activities and Board service, but not every association related issue is urgent or must be dealt with by the Board. A Board that sets reasonable working protocols and expectations for itself as well as when dealing with homeowners and managers, is much more effective and productive.

7. Facilitate better communication and relations with management. All too often association Boards complain that their professional manager or management company is deficient in one or more areas. However, when asked if they have addressed the issue or issues directly with the manager, they often offer an excuse of one type or another. It may seem that the grass is greener at the adjacent community, or community manager, but it is surprising how much turnover there is among managers and management companies that could be avoided if communication was increased and expectations mutually agreed upon. Tying performance metrics to contract terms also is a must. Rather than dump its current manager in hopes of finding a better match, it may be more effective to work on the current business relationship to improve communication, relations and expectations.

8. Run efficient meetings. Almost every Board president or chair could strive to increase efficiency and productivity of Board and association meetings. An efficient meeting starts with proper notice and a well planned agenda. Thought should be given as to physical set up of the room, including location of the Board seats and table in relation to where the association members sit. Time limits should be set for each category of business and presentation, including any owner input, assuming the Board allows an owner forum as part of its meeting (versus hearing from owners before or after the official Board meeting is conducted). Lastly, meeting minutes should be concise and bulleted facts, with minimal narration. Minutes are not a substitution for attendance.

The start of 2011 is as good a time as any for a community association Board to consider adopting one or more of the preceding "New Year's resolutions."

Using Bad Debt Line Items in Association Budgets (Part II)

In Part I of this blog post, I reviewed generally how a condominium or homeowner association may utilize a "bad debt" line item in its annual budget. I defined "bad debt" and also described specific situations on how an association could practically utilize the budgeting tool. In this follow-on post, I'll highlight the differences between cash and accrual accounting in the "bad debt" context.

The cash method and the accrual method (sometimes called cash basis and accrual basis) are the two principal methods of keeping track of an association's income and expenses. The cash method is the more commonly used method of accounting for associations. Under the cash method, income is not counted until cash (or a check) is actually received, and expenses are not counted until they are actually paid. Under the accrual method, transactions are counted when the order is made, the item is delivered, or the services occur, regardless of when the money for them (receivables) is actually received or paid. In other words, income is counted when the sale occurs, and expenses are counted when you receive the goods or services.  

With respect to my Linked-In inquiry on utilizing a "bad debt" budget line item, Arizona CPA Howard Simon commented:

The initial question asked if the budget should include a line item for bad debts. As a CPA providing financial statement and tax services to HOAs, I encourage HOA boards to include a line item for uncollected or uncollectable assessments.

On the cash basis, the budget line for assessment income should be the fully billed assessments for the year (by month), offset by the line item for bad debts, which on a cash basis should be the expectation (estimate) of assessments that will NOT be received in the period (month or year). Also to be noted, because prepaid assessments are accounted for as assessments received, I encourage HOAs to account for prepaids as a separate line item in the cash basis financial statements, thereby emphasizing this important figure and providing a more accurate picture of assessments actually received versus budget.

On an accrual basis, using the allowance method (described previously) should provide an accurate picture of earned revenues each period. Because the budget is a management tool, it is important to be realistic (and perhaps conservative) about the funds available during the year.

Whether cash or accrual, the industry insiders who responded to the Linked-In inquiry universally agreed that in today's turbulent economic climate, a condominium or homeowner association should include a bad debt line item in their annual budget.

Using Bad Debt Line Items in Association Budgets

[The downside to being a full-time attorney and part-time blogger is the periods when case loads increase and trials commence. Now that we're back to the usual level of insanity at Barker Martin, P.S., we'll do our best to keep this blog updated more frequently. Thank you for your understanding and continued readership.]

In advance of the upcoming community association budget season, I posted on one of the Linked-In groups to which I subscribe a query on whether associations utilize a bad debt line item in their annual budgets. Numerous industry experts, from managers to CPAs, provided insightful and valuable responses, some of which I'd like to share here. 

The respondents universally agreed that in today's turbulent economic climate, a condominium or homeowner association should include a bad debt line item in their annual budget.  Mitch Drimmer pointed out that before an association can put in a number for bad debt, "bad debt" must be defined. "There is debt that is absolutely collectible and there is debt that is possibly collectible and then there is stone cold bad debt. How do you define and how do you calculate it?"

CPA Heather Clark responded to Mitch's question by stating the following:

There are two aspects of bad debt from an accounting perspective. There is the allowance for doubtful accounts and there is bad debt expense which is the charge that adjusts the allowance for doubtful accounts:

1. What is an allowance for doubtful accounts?
a. An allowance for doubtful accounts is an estimate of the amount in your receivables that will not be collected.
b. The receivable account is an asset account and the allowance for doubtful accounts is a contra asset account i.e. an account that reduces the balance of the receivable account. So if the receivable balance is $100,000 and the allowance is $25,000 the net receivables on the books is $75,000.

2. What is bad debt expense?
a. Bad debt expense is the expense charge for increasing the allowance account which reduces net income (revenues less expenses).
b. So using the example above, if at December 31, 2009 the allowance for doubtful accounts is $100,000 and it is determined that at July 31, 2010 the allowance needs to be $130,000, then assuming no other adjustment to the allowance in the year 2010, the bad debt expense to be booked in July would be $30,000 (increase to $130,000 from $100,000).

Heather continued:

Having an allowance for doubtful accounts does not mean all the accounts reserved for are uncollectible. Some may be fully collectible while others are partially collectible and others may not be collectible at all. Determining the amount needed in an allowance for doubtful account is an estimate which requires judgment. It is important determining the adequacy of the allowance for doubtful accounts that collection practices and legal action being taken be considered. If no legal action is taken accounts that are collectible may become uncollectible while legal action may result in accounts being wholly or partially collectible.

Continue Reading...

Down Economy Exacerbates Strife Within Community Associations

It is said that conflict increases in good times and in bad, when there is more to quibble over or when resources are scarce.  As the economy continues to sputter with unemployment and foreclosure rates remaining at record levels, this phenomenon appears to be playing out within common interest developments throughout the nation. Though not yet an epidemic, my unscientifically-supported analysis from personal experience and anecdotal empirical evidence reveals a recent spike in conflict between condo and HOA homeowners and boards of directors.

There are studies and theories that support the hypothesis that when people feel oppressed, downtrodden or powerless against the true cause of their despair, rather than face the adversity head-on, they attack each other. Without attempting to validate or challenge the soundness of my oversimplified description of this phenomenon, it appears to be playing out within condo and homeowner associations as neighbors lash out at one another.

This conflict plays out in many ways, including owners who flagrantly disregard covenants, conditions and restrictions (CC&Rs), association board members who fight amongst themselves and both owners and boards who take untenable or irrational stances against one another. Many of these seemingly minor clashes turn into major and protracted battles that often result in heightened emotions, personal animosity and large legal fees.

Associations are facing unprecedented foreclosures and owners with past-due accounts--many owners simply walking away from their homes. For new communities, there are stories of developers who went bankrupt mid-project and abandoned the project, leaving the few owners who bought straddled with the full cost of managing and operating an underfunded development. 

Suffice to say that this unrivaled level of economic despair has resulted in exceptional rates of conflict in shared interest communities across the country. Though I can't do anything to reduce the economic difficulty that associations are facing, the following tips may help avoid unnecessary conflict within a community of homeowners:

  1. Exercise common sense.
  2. Ensure that the association’s governing documents are clear, unambiguous and consistent with applicable laws.
  3. Uniformly interpret and apply all CC&Rs; avoid selective enforcement. If a variance or permit is provided by the board, document the grounds in committee or meeting minutes.
  4. Be willing to revise outdated or obsolete rules and policies that no longer work for the community.
  5. Enhance communication between the Board and homeowners.
  6. Run concise and efficient Board and membership meetings.
  7. Provide ample notice of meetings to homeowners and provide for some level of homeowner input.
  8. For issues that are expected to be contentious, plan ahead and formulate a game plan to tackle the issue – from identification all the way through resolution.
  9. Avoid Board Member conflict of interest. 
  10. Act rationally and reasonably.

Lastly, it is usually beneficial to think before acting. Is it the owner or board member who deserves the wrath, or is the root of the problem something larger?  Whatever the cause, face it head on reasonably and proportionately.  And don't forget to use and rely upon professionals well suited to provide assistance, including professional managers, mediators, facilitators and, if needed, legal counsel.

If your association needs assistance in resolving a conflict, feel free to contact Barker Martin, P.S. by selecting the "Contact" tab at the top of this blog page.  We promise, we won't just march into court.

How to Deal With a "Crazy" Board of Directors

One of the most popular blog posts we have published to date was our January 10th: "Dealing With 'the Crazies' Within a Homeowners Community."   Though we received ample comments supporting the article, we also received several emails from readers wondering why we didn't write a similar article about "crazy" or irrational homeowner association boards of directors.  Therefore, as requested...

In our experience, the number of irrational or unreasonable owners greatly outweighs the number of irrational boards.  That said, there are instances where boards or individual board members act outside their authority, act irrationally, or simply ignore legitimate complaints or calls for action by homeowners.

One reader asked what to do when his board and the association's manager failed to enforce the governing documents fairly and consistently?  What if a board or manager refuse an owner's request to review HOA documents?  Or denies an owner's request for a hearing?  In each of the foregoing circumstances, the owner should be able to point to particular provisions of the governing documents which require explicit action and compliance by the board.

If a homeowner believes their board is failing to respond appropriately or acting irrationally, they should:

  1. Articulate the issue(s) as succinctly as possible;
  2. Gather all relevant written documentation;
  3. Review the association's governing documents (Articles of Incorporation; Declaration, Bylaws, Rules & Regulations) and identify which provisions control over the issue(s); and 
  4. Identify all relevant persons who are witnesses, parties or have other persons with knowledge of the facts and circumstances giving rise to the issue. 

The owner should then draft a concise written letter or request to the board that embodies the four factors described above.  If the association is professionally managed, then a copy of the letter should be sent to the manager.

The association's governing documents should have a process already in place to resolve the dispute.  If so, the owner should identify the process and insist on board compliance.  If not, and if the board does not respond adequately to the owner's letter, then the owner can request a meeting with the board.  

If the board continues to dismiss or ignore the owner, and if the professional manager is ineffective in helping to resolve the dispute, then the owner should seek legal counsel.  Keep in mind that many association governing documents require mediation or similar dispute resolution process be conducted prior to a lawsuit being filed.

If an owner does not wish to seek legal assistance, and if they feel the board is failing to follow its governing documents and otherwise acting irresponsibly or irrationally, then the owner may wish to try to unseat the board through a special election and vote of the association.  An association's governing documents ordinarily outline the process for removing a board member or entire board.

Just as I wrote in my earlier post, the key to reducing and resolving disputes between the "crazies" (whether homeowners or boards) is to rely strictly upon an association's governing documents.  A modicum of common sense and reasonableness also go a long way to solving the problem.  If all else fails and the board cannot be removed via special election, then mediation or court interaction may be required.  If so, in claims arising from enforcement or other CC&R disputes, many governing documents allow the prevailing party to recover their reasonable attorney's fees and costs.

Pitfalls of Special Assessment Webinar

On Wedesday, April 21, 2010, myself and Rebekah Baze, Vice President with Columbia Bank, will be presenting a free webinar on "The Pitfalls of Special Assessments." 

Rebekah and I will discuss issues related to homeowner association special assessments from the legal and banking perspectives.  We will highlight the processes and pitfalls.  The webinar is designed for association members, board members, managers and any other community association industry member who has an interest in the topic.

I invite you to join us by registering here.

Lenders and Squatters Accessing Homes Prior to Foreclosure

There have been several recent reports in the media and Blogosphere of lenders and squatters gaining access to Northwest homes vacated through the foreclosure process: AG's Office Investigating Squatters; The Lafayette Report - Legal Alert; Bend Foreclosures on the Rise.

The justification provided by lenders may be that they received a report that the property was vacant and unsecured and that they were simply securing the property by changing the locks, winterizing and safeguarding the home from property damage, vandalism and theft.  Squatters are merely seizing upon the misfortune of others.

As stated by attorney Brian McLean from Leahy, P.S. in a LinkedIn discussion on the topic, "Common language in deeds of trust permit the lender (within reason) to enter and suspect property secured by a deed of trust. The lender may also change locks where the owner has failed to perform as covenanted (for example, keep payments up-to-date). Such an approach seems reasonable when the property 'appears' abandoned.

Regardless of who or why persons other than deed holders are entering, altering or residing in homes, the issue should be on the radar screen of homeowner associations.  Since the owner has vacated the premises and likely has no further contact with the home, the homeowner association board or manager may be the only person or entity with knowledge of the activity.  If a manager or board notices activity at a vacant home under foreclosure, they should make immediate inquiry.  The association's actions are not entirely altruistic, as they could result in better preservation of the property and a quicker conveyance--both resulting in higher income to the association via payment of monthly assessments. 

SHB 2657 re LLC Dissolution Passes Both Houses

As a quick update to our Feb 19. article, SHB 2657, the bill proposed by Representative Jamie Pedersen, has passed both houses as amended in the Senate Judiciary Committee.  It was delivered to Governor Gregoire for signature today.  Updates can be found here

Communal Living Q&A on KUOW

Blog contributer, Dan Zimberoff with Barker Martin, P.S., appeared on the KUOW radio show, "The Conversation" with Ross Reynolds today.  Click here to check out the conversation and listener Q&A. 

DELRAP vs HRAP for FHA Condominium Certification

The last unanswered question I had regarding the new FHA guidelines involved the difference between the Direct Endorsed Lender Review Approval Process (DELRAP) and the HUD Review Approval Process (HRAP).  In reviewing and analyzing the provisions promulgated in HUD Mortgagee Letter 2009-46B, the guidelines explained in detail the DELRAP process, but did not describe the precise submission process for HRAP.  The attachments to the letter, including the “Lender Certification,” only referenced DELRAP, so, my colleagues and I were unsure exactly who could submit a HRAP package. Under the old “spot approval” process, essentially anyone acting on behalf of an association or owner could.

When we first raised the question with the regional supervisor in Southern California, he stated they were still interpreting the proposed guidelines and were waiting on further information from DC. But now that the guidelines are in effect, and having spoken directly with the regional manager, we have our answer.

Similar to the former guidelines, there is no specific limitation as to who can file a HRAP package. The HRAP submission no longer requires an attorney opinion letter, but must comply with the strict guidelines contained within Mortgagee Letter 2009-46B.

We still recommend an attorney or other person with expertise in the FHA condominium certification process handle HRAP packages. If you have any questions on the process or would like an attorney from Barker Martin, PS to spearhead a package for your Oregon or Washington condominium association, select the “Contact” tab at the top of this blog page.

Legislature Working on a Fix to the LLC Abatement Problem

This session, Representative Jamie Pedersen of the 43rd Legislative District has prime sponsored SHB 2657, which would fix the rather large loophole identified by the Washington Supreme Court in its May 2009 decision in Chadwick Farms Owners Association v. FHC, LLC, 166 Wn.2d 178, 207 P.3d 1251 (2009). 

In Chadwick Farms, the court held that any and all legal claims against LLCs abated -- essentially disappeared -- when an LLC's certification of formation was "cancelled."  The court explained that under the LLC statute as written, cancellation signalled the end of the LLC's existence and therefore, it could neither sue or be sued.  As a result, a company formed as an LLC could avoid liability -- even if a lawsuit had already been filed against it -- simply by filing a certificate of cancellation.  Since many condominium and HOA developers are formed as LLCs, homeowners in Washington stood to lose quite a bit if the loophole was not fixed.  But the court's holding is not limited to construction defect or homeowner lawsuits - any LLC could avoid liability simply by cancelling.

With the support of WSCAI and the LLC section of the Washington State Bar Association, Rep. Pedersen's bill does away with the concept of cancellation and makes the LLC statutes (found in RCW Chapter 25.15) more consistent with existing law for corporations.  The most recent striking amendment to the bill ensures that claims will survive against dissolved LLCs unless a sometimes-optional "certificate of dissolution" is filed and three years has run since the filing of the certificate.  WSCAI and the homeowners we represent thank Rep. Pedersen, the Bar Association Section and the Judiciary Committees in both the House and Senate for their efforts to pass this bill.

The bill was passed by the House and is scheduled for executive session in the Senate Committee on Judiciary on Feb. 19.  The bill is expected to pass out of committee and be forwarded to the Rules Committee for review.  Click here for an update on the bill's status. 

 

FHA Announces Important Underwriting Policy Changes

Because I have received so many inquiries and questions regarding my recent posts on the new HUD/FHA Condominium Guidelines, I thought I would keep our readers apprised on the latest developments over at FHA.

A number of important changes were announced yesterday by the FHA to reduce risk and improve its finances:

  • The upfront mortgage insurance premium (MIP) will be raised from 1.75 percent to 2.25 percent.
  • The minimum down payment will climb from 3.5% to 10% for applicants whose Fico score is below 580.
  • Allowable seller concessions will be reduced from 6% to 3%.
  • The FHA also plans to request legislative authority to increase the maximum annual mortgage insurance premium so it can reduce upfront costs for prospective home buyers.

The complete FHA announcement can be found here.

The proposed changes, which apply to all FHA loans, are expected to go into effect in either spring or summer 2010.

Additionally, the agency will continue to increase enforcement on FHA-approved lenders, and will publicly report lender performance rankings to improve transparency and accountability.

Lastly, based on anecdotal information provided by industry persons, I have reported that up to 40-50% of single-family residence loans will be FHA insured in the near future.  I read this week in several blogs (but have not been able to confirm through the FHA) that in 2009, 30% of mortgages and 20% of refinances were FHA backed.  So my initial estimates may not be too far off. 

 

Supreme Court of Washington to Condominium Owners: A Lump of Coal for Christmas

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.

 

Dealing With "the Crazies" Within a Homeowner Association

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.

Enforcing CC&Rs Through Electronic Surveillance

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.

Changes to Revised FHA Condo Guidelines Announced

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).

 

Reserve Funding

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.

FHA Condominium Certification Changes Pushed to December

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 7th  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 7th, 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. 

Washington Condominium Association Wins Slip-and-Fall Lawsuit

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.      

Major HUD / FHA Condo Lending Changes Effective October 1st

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.

Rental Caps and Hardship Exceptions

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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Update on FHA Approved Condominiums

[Associate David Silver conducted research and assisted me with this post--thanks, Dave!.]

In recent months, I have posted several articles discussing various aspects of condominium and HOA mortgage lending in the wake of the present housing and financial crisis. In early April, I blogged about Congress’ attempts to pass a mortgage modification bill, and, later that month, discussed the effect Fannie Mae’s rules regarding pre-sale of condominium units have had on local markets. Lately, we have received a number of questions on a related topic: condominium projects and FHA-approved status.     

Although only a hunch, we attribute this heightened interest in FHA-approved status to the fact that until mid- to late-2008, there were a wide variety of non-FHA, non-conforming mortgage alternatives available (e.g. Alt-A, Non-Income Verified, No-Doc, 100% purchase-money second loans, etc.) to condominium unit buyers. Plus, following the evaporation of those creative mortgage products, the housing market has been generally slow. Consequently, when there were a slew of other mortgage options, potential purchasers did not have to rely so heavily on mortgages underwritten and approved by FHA. Now, however, with most of the “portfolio,” or “non-conforming” mortgage programs discontinued (and transactions picking up, if ever so slightly), FHA underwritten financing has become increasingly attractive—and may be a purchaser’s only option.

 

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 should consider applying for approval (or re-approval, whatever the case may be). You can look to see whether a condominium is approved on the HUD Homes & Communities website located here.

 

Keep in mind that in some situations, limited “spot-approval” may be obtained by certain buyers for condominiums not otherwise approved.

 

Currently, HUD is backlogged a month or more in reviewing submitted applications. Thus, should your condominium need to be submitted for approval, keep in mind the process may take some time. Moreover, the work to compile and complete the application package itself can take weeks, and require the board, its manager, and legal counsel to gather data, documents, and expert opinions required for FHA approval. The package of materials that must be submitted can vary from condominium to condominium, and often requires an updated reserve study and certain legal opinions. 

 

For further information on FHA approval requirements, or other issues related to condominium associations, feel free to contact Barker Martin, P.S. by selecting the “Contact” tab at the top of this blog page.

Chadwick Farms lets Dissolved LLCs off the Hook at Possible Expense of the LLC's Members

On May 14, 2009, the Washington Supreme Court published its opinion in Chadwick Farms v. FHC, LLC, 2009 WL 1333004 (May 14, 2009). The issue in Chadwick Farms was the capacity of LLCs to sue or be sued after cancellation of the LLC pursuant to the Washington LLC Act (Chapter 25.15). Without much analysis, the court first held that administratively dissolved LLCs are actually cancelled by operation of law two years later if the LLC has not reinstated the LLC. 

Based on RCW 25.15.290, the court then held that claims against LLCs abate once the LLC is cancelled. In other words, once the LLC is cancelled, it ceases to exist and cannot prosecute or defend claims against it, even if the LLC is currently involved in a lawsuit in which it has been sued or has sued others. 

The court said that the new statute regarding a 3-years statute of limitations after dissolution, RCW 25.15.303, did not change the result because of its “inartful” use of the term dissolution rather than cancellation.

As if to balance the seemingly disastrous result, the court reminded everyone of the existing rule that where an LLC is cancelled, there may be personal liability for LLC members who allow their LLC to get cancelled if they failed to properly wind up and “make provision” for “known” liabilities.  Thus, at least where an LLC has a known liability (like a lawsuit against it), members of LLCs might want to ensure that the LLC is not cancelled in order to avoid personal liability.   

H.R. 1106 Dies in the Senate

Earlier this year, I wrote Blog postings on proposed federal legislation that could adversely impact the ability of homeowner associations to recover past-due assessments.  Specifically, H.R. 1106: "Helping Families Save Their Homes Act of 2009,"  would have given bankruptcy judges the ability to ‘cram down’ the principal balance and monthly payments, wiping out tens or even hundreds of thousands of dollars of money owed.  In addition to allowing courts to rewrite private mortgages, the proposed law also would have allowed the courts to bypass state assessment lien and priority lien statutes, thereby eliminating the already limited ability for a community association to collect past due assessments from these properties.

On April 30, 2009, the United States Senate voted 45 to 51 on a rewritten version of the House Bill, thus effectively killing the Bill.  I believe the proposed law was defeated in large part due to the high number of homeowners who contacted their Congressmen and women in voicing their concerns over the Bill.

As housing and foreclosure issues are likely to linger until a sustained economic recovery takes place, the attorneys at Barker Martin, P.S., will continue to monitor prospective legislation affecting homeowners and homeowner associations.

Due Diligence When Buying a Condo or HOA home

Kevin Lisota wrote an informative posting Friday (5/1) on the Smart Real Estate Blog Site regarding due diligence a prospective condominium purchaser should conduct prior to purchasing a unit.  Click here to view the article. 

Lisota lists the following steps:

  • Conduct a visual inspection;
  • Review meeting minutes;
  • Review the operating budget;
  • Review the current reserve study;
  • Review the association's rules and regulations;
  • Review the association's insurance policy.

I have provided similar suggestions in seminars and presentations.  First, though, I'd like to add a couple of comments to the foregoing list.  It is not enough to 'review" the operating budget.  I recommend scrutinizing each line item of the current budget, and comparing it with the previous two years' budgets to identify trends and accuracy.  With respect to reserve study, if you do not have any construction or building maintenance experience, pass the report to a friend or family member who may have knowledge and can provide valuable assessment.  Also, make sure to review the reserve account, in addition to the actual reserve study.  Regarding rules and regulations, I would also highly recommend reviewing the association's declaration and bylaws.  You do not have to be a lawyer to identify gaps and potential problems.  When reviewing insurance, make sure to look at policy limits, deductibles, Directors and Officers coverage and endorsements specific to multi-family residences, such as sewer back-up, code compliance and demolition coverage, to name just a few.  There is no substitute for review by a professional insurance agent or consultant.

I would also add the following to the due diligence list:

  • When conducting the visual inspection, stop and speak with a few homeowners and ask them the strengths and weaknesses of the community.  You may be surprised at what you uncover, both positively and adversely.
  • Call the association manager and ask them the same question.  They do not get paid for such calls, but may provide you with a quick summary of the community.
  • In these times of economic crisis, make sure to scrutinize not only the operating budget, but also the bad debt and collections/foreclosure rates. 

Lastly, I believe the foregoing steps are not limited to condominiums; rather, apply to Planned Unit Developments ("PUDs"), as well.

Buying a condo can be more complex than buying a single-family home.  For a successful purchase, make sure to perform your proper due diligence.

   

 

Fannie Mae Rules Push Out Condo Buyers

There was an article in last week's Stranger reporting that new Fannie Mae regulations established in March have blocked condominium developers from closing unit sales if the developer has sold fewer than 70 percent of the units in a building.  Many of the large condo towers currently being built in Seattle and Portland are below the 70-percent threshold; consequently, hundreds of buyers who've already put down deposits may have to live elsewhere even after the buildings are completed.  These circumstances are a direct result of the economic crisis and real estate market slow down.

As Dominic Holden writes in the Stranger article:

If developers can't presell 70 percent of a building's condos before opening—a steep expectation even in a strong market—market forces may push developers to convert their buildings into apartments or drastically reduce prices.

As prices on unsold condos drop, some buyers may choose to walk away from earnest money deposits rather than hang on to units that have lost much of their original value.  In an ever spiraling situation, as more buyers walk away--increasing the gap between actual sales and the 70 percent required under the new Fannie Mae regulations--developers may have to decrease unit prices even further.

Click here for a listing of several Fannie Mae regulations affecting condominium lending requirements.

For further information on Fannie Mae lending requirements, or other issues related to condominium associations, feel free to contact Barker Martin, P.S. by selecting the "Contact" tab at the top of this blog page.

 

 

Legislative Update

We've been writing about several Bills on this Blog lately because there is a lot of prospective legislation (both locally and nationally) affecting homeowner associations and individual homeowners.  The level of legislative activity in this area appears to have increased probably in part as fallout from the economic crisis. 

As an update, H.R. 1106 "Helping Families Save Their Homes Act of 2009" remains stalled in the U.S. Senate, with no scheduled date for a vote (click here to keep track of the Bill).  In Washington, ESSB 1393, "Addressing residential real property construction improvements through consumer education, warranty protections, contractor registration requirements, and worker certification standards," is similarly stalled in the state Senate.  An earlier version of the Bill passed in the House, but is undergoing major rewrites in the Senate.  One of the latest versions, Striker 1393-S2.E AMS WM S2889.2, can be found here.  I believe the Striker version is wholly impractical and inefficient.  For example, the Striker establishes  a 7-person "Home Construction Board" to resolve construction disputes.  The Board would be comprised of four construction professionals of varying experience, a governmental building inspector and two members "of the general public."  The board members would be appointed by the governor and meet at least four times per year.  Doesn't sound to me like an effective or efficient way to resolve hundreds, if not thousands, of construction disputes filed in our state each year.  To keep track of ESSB 1393, click here.

The Oregon legislature is also debating several Bills that affect homeowners and homeowner associations, including SB 811 and SB 963.  SB 811 modifies provisions relating to enforcement of liens for association assessments in planned communities and condominiums, including establishment of a "super lien priority" for associations.  SB 963 includes several technical changes regarding governance for planned communities and condominiums in Oregon.  For specific information on the Bills and to track their progress, click here.  

Several Barker Martin, P.S. attorneys remain highly active in the Washington and Oregon legislative process, including serving on legislative committees for homeowner association industry groups.  On occasion, we also are asked to review and help draft prospective legislation.  Keep checking this Blog to obtain the latest legislative developments affecting homeowners.
   

Mortgage Modification Bill Stalls in the Senate

In early March, we posted a couple of blogs relating to proposed federal legislation that would significantly impact a homeowner association's ability to collect past-due assessments from a homeowner undergoing foreclosure.  Within days of my post calling for homeowners to contact their Congresspersons, I was contacted by an aid to a Tennessee Congressman wondering what all the fuss was with the H.R. 1106 ("Helping Families Save their Home Act of 2009" ).  After several emails and a lengthy telephone conversation, I explained the adverse impact of the bill.  Today, having passed in the U.S. House of Representatives, the bill is stalled in the Senate.

The following is an update from the Community Association Institute's ("CAI") website:

President Obama’s mortgage modification bill, H.R. 1106 passed the House of Representatives on March 5, 2009 by a vote of 234 to 191 with 7 members of congress not voting. The legislation is currently before the U.S. Senate for consideration where passage is far from certain. H.R. 1106 and its Senate companion bill S. 61 will need 60 votes to pass the Senate in order to avoid the filibuster promised by the bill’s opponents. The bill has not yet been scheduled for a vote as sponsors continue to seek enough votes for passage. Right now, a vote is not expected before Easter.

Click here for the bill's status.

Part of the President’s plan to stabilize the housing markets, H.R. 1106 would allow federal courts to reform mortgages in cases where a homeowner’s property is worth less than their principle mortgage balance. It would give bankruptcy judges the ability to ‘cram down’ the principal balance and monthly payments, wiping out tens or even hundreds of thousands of dollars of money owed in an effort to keep more people in their homes and to stabilize the housing market. CAI’s concern continues to be to protect associations’ ability to collect for past due assessments and to make sure that this legislation does not inadvertently bypass state assessment lien or priority lien statutes.

CAI was able to start a constructive dialogue with key House and Senate leaders on the potential impact of mortgage modification on associations ability to collect past due assessments. Thanks to the many persons who contacted their legislators, we believe that positive progress is being made in crafting a bill that provides support to those who need it and doesn’t create the risk of harming additional homeowners or their associations. Specifically, H.R. 1106 was amended in an attempt to clarify what costs need to be included in the post bankruptcy payment. This formula now specifically includes association assessments. House and Senate leaders are listening to our concerns regarding protecting associations and by extension homeowners.

Barker Martin, P.S. will continue to monitor the status of the bill, and other federal and state legislation affecting homeowners and homeowner associations.

Washington Homeowner Rights Bill: Contact Your Legislator Now

Engrossed Second Substitute House Bill 1393 (ESSB 1393) is currently under consideration by the House Ways & Means Committee.  The Bill is drafted to address real property construction improvements through "consumer education, warranty protections, contractor registration requirements, and worker certification standards."

This Bill would create an "Office of Consumer Education for Home Construction" under the guidance of the Attorney General's Office.  This new office would become a resource for consumers and would also receive and monitor complaints against residential construction contractors.
Another consumer protection provision of the Bill includes the creation of a "Home Construction Board." This Board would act as a mediator between owners and residential contractors when disputes arise.  As drafted, a property owner seeking recourse would be required to comply with the procedures before commencing litigation.  The make-up of the board as proposed seems a bit weighted in favor of industry insiders, but the concept is very promising, particularly for small disputes that are ill-suited for more formal dispute resolution procedures.
The Bill would also modify the common law implied warranty habitability.
   
There is also an express warranty provision that would require certain minimum standards in all contracts for the sale or construction of new residential property including:
  • One-year warranty against defects in workmanship and materials;
  • Two-year warranty against defects in the wiring, piping and ductwork in the electrical, plumbing, heating, cooling, ventilating, and mechanical systems;
  • Four-year warranty against damage to basement slabs; and
  • 10-year warranty for structural defects.
The need for consumer protection in residential construction has been required for years.  Currently, a Washington consumer has more protection buying a toaster in this state than a home.
We recommend all Washington residents contact their legislators in support of this Bill.  Whether you are in the market for a new home today or sometime in the future, shouldn't that home meet at least some minimum performance standards?  Contact your legislators today (find your legislators here)--do not let the Building Industry Association of Washington (BIAW) kill this vital piece of litigation.

 

HR 1106 Passed by House

On March 5, 2009, HR 1106: "Helping Families Save Their Homes Act of 2009" was approved (234 to 191) by the U.S. House of Represetnatives and is now off to the Senate for debate and vote.  There is a companion bill in the Senate that is concurrently being debated.

If you have concerns related to the possible adverse impact of the bill upon condominium and homeowner associations, contact your Senator.  For further details, see my March 5th Blog post below.

 

Legislative Alert: Contact Your Congressperson Today!

This week, Congress is scheduled to vote on H.R. 1106: "Helping Families Save their Home Act of 2009."  I urge all owners who live in homeowner associations to call  or email their Congressperson and tell them to oppose this legislation as it is currently written.

Part of President Obama’s plan to stabilize the housing markets, H.R. 1106 would allow federal courts to reform mortgages in cases where a homeowner’s property is worth less than their principle mortgage balance. It would give bankruptcy judges the ability to ‘cram down’ the principal balance and monthly payments, wiping out tens or even hundreds of thousands of dollars of money owed. In addition to allowing courts to rewrite private mortgages, the legislation as written could also allow the courts to bypass state assessment lien and priority lien statutes, thereby eliminating the already limited ability for a community association to collect past due assessments from these properties.

Each year, residents of community associations assess themselves close to $80 billion dollars to pay for the maintenance, improvements and amenities in their communities. These assessments help preserve property values and provide infrastructure that would otherwise become the responsibility of state or local governments. When buying into a community association, home buyers agree to pay their share of the community operating costs.

If passed as written, H.R. 1106 could:

  • Impact an association’s ability to recover delinquent homeowners’ assessments and, potentially, affect future assessment obligations to the community.
  • Bypass state statutes that provide a priority lien or assessment lien for past due association assessments.
  • Cause additional strain on the housing market by forcing non-foreclosed homeowners to pay higher fees to cover mandatory operating expenses, pushing more homeowners into financial distress.
  • Cut funds available to maintain common areas of the community, resulting in a spiral of deteriorating infrastructure, lower property values and, ultimately, higher financial burdens on state and local governments.
  • Undermine, if not unravel, the benefits of common ownership communities by exempting some homeowners from the obligation to pay their fair share to support common elements of the community, potentially leading to the bankruptcy of the communities themselves.

The critical nature of requiring all owners to pay their fair share of association assessments is recognized in the current bankruptcy code under 11 U.S.C. 523(a) (16) and various state-imposed assessment lien regimes. To protect the vast majority of responsible homeowners, legislation addressing mortgage modification must explicitly protect an association’s right to recover funds owed to the community by a delinquent homeowner.

If passed as written, this legislation would have a direct detrimental impact on the responsible residents of community associations. Please take action today by contacting your Congressman or Congresswoman.

 

Easing Board Transition

This month the Washington Community Associations Journal includes an article I wrote entitled "Changing of the Guard--A Survival Guide for New Board Members."  Feel free to view the article here.

Enhance Association Communication with Web 2.0

Attorney and blogger Chris Jaglowitz from The Ontario Condo Law Blog makes some excellent points in his recent posting on the use of Social Networking sites to increase homeowner association communication.  Check out his post here.

I agree with Mr. Jaglowitz that  Social Networking concepts and sites will become increasingly popular among condominium and homeowner residents as a medium to:

  • Share news, documents and ideas;
  • Organize activities and events;
  • Enhance owner participation, communication and feedback;
  • Gauge the pulse and public opinion of the community;
  • Improve delivery of services; and
  • Strengthen the bonds of their communities.

Unlike websites that are updated weekly or monthly--at best--Social Networking sites offer up-to-the-second information; thus, increasing exponentially the level of interaction and information exchange between homeowners.  I believe the most popular sites are: Linkedin, Facebook and Twitter.

There is an explosion in the use of Social Networking concepts and sites for buisness and personal use.  It's only a matter of time before these tools are used by homeowner associations.  Be on the forefront of this technological wave by jumping in today and creating association-specific groups on one or more of these sites to enhance communication and community.      

 

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