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

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.

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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. 

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[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.

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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. 

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

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

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

 

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

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

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

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Last August I blogged that Fannie Mae was altering its lending practices in response to the sub-prime lending crisis. As the crisis deepened, the adverse impact upon the US economy and Fannie Mae only worsened. Since the government's restructuring of Fannie Mae last fall, we have been awaiting revised lending guidelines for condominium properties. Those guidelines were just released in late December under Announcement 08-34.  The guidelines include the following revisions:

• The 15% delinquency cap requires that no more than 15% of the total units may be more than 30 days delinquent;
• There must be fidelity insurance if there are more than 20 units in the project;
• Borrowers must obtain a “walls-in” coverage policy (commonly known as an HO-6 policy) unless the lender can document that the master policy of the Association provides the same interior unit coverage;
• Master insurance policies covering multiple unrelated condominiums are no longer acceptable (if they ever were); and
• The owner occupancy ratio of 51% includes REO owned units for sale as owner occupied units.

All of these changes take effect on March 1, 2009, except for the insurance provisions, which take effect immediately.

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

Track the status of SHB 2014 here. 

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

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

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

Building Envelope Inspections for Conversions

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

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

Remedy

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

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

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At Barker Martin, P.S., education is paramount—education of our clients and continuing education of our attorneys. For over a decade, Barker Martin attorneys have presented at dozens of industry seminars, such as Community Association Institute, Oregon & Washington Community Association Manager events and Washington and Oregon Continuing Legal Education seminars. In addition, in 2006 and 2007 alone, we teamed with other service professionals to provide over fifty free educational seminars to HOA and COA board members and association managers.

This education effort has resulted in Barker Martin providing industry and legal education to several thousand board members and association managers. In order to reach a wider audience throughout Oregon, Washington and Hawaii (states where we practice), we needed to expand our effort through the Internet.   We designed this blog site as a space where HOA and COA board members, association managers, attorneys and other individuals interested in homeowner association and condominium association law and topics could find fresh tips and commentary on this fluid, ever-changing industry and area of law.

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