Thursday, April 23, 2009

Facing Financial Crisis

The subtitle of this section is "Foreclosures and Community Associations"

Surprised? Ha!

An insurance professional and three lawyers are discussing the pitfalls and risks associated with foreclosures; both those done correctly, and those which have problems.

The moderator, Jamie Schraff, is recommending communications with association members. Barry Postman, Esq., who disclaims pursuing collections as part of his regular practice, is suggesting communications with owners and a case-by-case analysis on whether or not to pursue individual collections. Leonard Siegel suggests inquiring as to the debtor's solvency prior to the commencement of a foreclosure.

Florida now mandates, via statute, a "meet and confer" conference with the debtor prior to commencement of the proceedings.

An attorney in the audience has thrown a curve to the panel by suggesting that an effort to contact the unit owner may constitute a violation of the Fair Debt Collection Practices Act. The panelists are acknowledging that to be a "fair point"; Mr. Postman is attempting (unsuccessfully in my humble opinion), to draw a distinction between "gathering infromation" and commencing collection proceedings.

Ms. Schraff has reminded all of the participants that CAI's listing of Rights and Responsibilities calls for foreclosure to be used only as a last resort...

All of the panelists are encouraging the obtaining of directors and officers coverage.

Now the panel is discussing the transfer of collection rights to debt collectors; the panel is rightly warning Associations to carefully scrutinize these relationships to make certain that the Board is not improperly delegating its responsibilities. And, they are all advising, make certain that the parties making these offers are not looking primarily to their own interests.

Bare Coverage in New Orleans

The first session that I'm attending today is entitled "Bare Walls, Bare Coverage? -- The Great Coverage Debate. The subject matter is insurance, not Bourbon Street.

The most interesting new knowledge to me is that Fannie Mae is essentially requiring HO-6 coverage in connection with mortgages. Additionally, FNMA regulations which have long required reserves for deductibles, are beginning to be enforced; that is impracticable for many associations which are carrying larger deductibles as a means of having adequate insurance.

Another main focus of the session is the fallout from a recent Maryland case, Anderson vs. Gables on Tuckerman, which led to insurance legislation. In that case, in an opinion which reached a similarly absurd result as the Flores v. Earnshaw case, the Maryland Court of Appeals ruled, as explained by Robin Manougian, CIRMS:

“the Maryland Condominium Act does not require the council of unit owners to repair or replace property of an owner in an individual condominium unit after a casualty loss.” The basis of the Court ruling [was] its conclusion that the Condominium Act requires the unit owner to make all repairs to the unit regardless of the cause of the damage."

Ms. Manougian further explained:

The vast majority of the Condominiums that our Agency insures (and by and large associations insured throughout Maryland) want to maintain traditional Single Entity coverage – master policy property insurance that covers the units, minus improvements and betterments made or acquired by the unit owners. This continues to be the best way to insure condominium associations because of:
-- The interdependency of the units to the common elements
-- The difficulty of adjusting losses between two or more adjusters – one for the association to the extent common elements are damaged, and one or more for the unit owners depending on the number of units affected at time of loss.
-- The insurable interest that the Association effectively has in the units. If the units are not properly insured, uninsured or underinsured losses affecting the units can impact value, adversely affecting the entire property.
-- Certificates of Insurance: The lenders have not reacted en mass as of this writing. Some have contacted us to verify that either Single Entity of Bare Walls coverage is in place. We suspect these calls will increase with time, and this means that they will look for affirmation of master policy unit coverage, or will begin requiring two certificates: One from the Condominium Association, and one from the unit owner.
-- Overall Costs. Single Entity coverage allows the unit owners to buy unit coverage in bulk. The overall replacement value, even if bare walls coverage is rendered, will not change much if at all, which means the premium for the Master Policy will not change, while the premiums for HO-6 based on increased dwelling coverage will increase.
-- The Maryland Condominium Act does not require that owners carry HO-6.* (see Fannie Mae requirement effective March 01, 2009)
-- Even if HO-6 coverage is carried, the possibility exists that unit owners will fail to have or maintain unit/dwelling coverage at full replacement value at time of

The insurance industry and Maryland's CAI Legislative Action Committee sponsored and managed to get legislation passed that will fix the result, by allowing associations, through their master policy, to insure the units and the betterments therein.

Live Blogging the CAI Conference -- Day 1

I'm at the Community Association Institute's National Conference, and will be live-blogging some of the conference proceedings the next couple of days.

Wednesday, April 22, 2009

Happy Earth Day!

I'm in New Orleans this week for a Foundation for Community Association Research strategic planning meeting and the Community Association Institute's National Conference; one of the conference highlights (at least in my opinion) is the release of the Foundation's Best Practices Report on Green Communities. It's the culmination of a project that I and others have been working on for many months; it will be available, soon, for free pdf downloads. I'll give you a link, as soon as it's available.

Tuesday, April 14, 2009

You Wanted a Toilet in Your Condominium?

The Utah Court of Appeals, in an opinion last week, came out with a rather absurd result in a dispute between a condominium developer and unit purchaser.

The case, Flores v. Earnshaw, involved Mr. Seadhna Flores' purchase of a yet-to-be-built condominium unit. Mr. Earnshaw and Mr. Flores both signed a Real Estate Purchase Contract (REPC) which called for a purchase price of "$144,950, less the $10,000 previously paid when Flores had exercised the earlier Option Agreement." About a month later, Earnshaw called "to express concern about the selling price..." Earnshaw sought to revise the contract to increase the price of the unit to $179,950; Flores rejected this offer, and ultimately sued, seeking specific performance of the contract.

Following a trial, the trial court decided that the contract was ambiguous as to whether the parties intended to convey a fully built-out unit, or just a shell of a unit. The court found that the form language in section 1.l was ambiguous, and considered evidence outside of the contract to ascertain the parties' intent. The court thus ordered the sale of a fully built out for $144,850. Earnshaw appealed.

The issue addressed by the Utah Court of Appeals involved whether or not the trial court was correct in allowing and considering the evidence outside of the contract. Ultimately, the court concluded that the court could only look to the contract to determine if it was ambiguous; it the contract itself did not appear ambiguous, the extrinsic evidence should be excluded. Looking only at section 1.1, the court found no ambiguity. Unfortunately for Mr. Flores, that section called for inclusion of "plumbing, heating and air conditioning fixtures, and equipment; ceiling fans; water heater; built-in appliances; light fixtures and bulbs; bathroom fixtures; curtains, draperies, and rods; window and door screens; storm doors and windows; window blinds; awnings; installed television antenna; satellite dishes and system; permanently affixed carpets; automatic garage door opener and accompanying transmitter(s); fencing; and trees and shrubs," only to the extent that they were presently owned and attached to the property. Because none of the items were "owned and attached" as of the date of the contract, the court found the language unambiguous, and held that the admission of the extrinsic evidence was improper. Thus the court remanded the case (sent it back to the trial court) "for further proceedings consistent with this opinion."

This is, obviously, an absurd result even if the case was decided correctly pursuant to evidentiary rules. There is no doubt, when the extrinsic evidence is considered, that Flores was expecting to buy, and Earnshaw originally intended to sell, a completed unit, with toilets and appliances. The court noted that the parties (and presumably the real estate agents, erred by using an REPC for completed construction. That fact, while true, is of little consolation to Mr. Flores.

The appellate court gave a few hints, and possible solutions, to Flores, in noting that the existence of an ambiguity can be found by reviewing the "contract taken as a whole." Furthermore, the court noted that the parties had not argued "mutual mistake, reformation, impossibility or any other theory to support their positions."

At this point, Mr. Flores and his counsel have the option to ask the Utah Supreme Court to review the Court of Appeals' decision, or they can try to get the trial court's reconsideration as to whether the contract, as a whole is ambiguous; Mr. Flores and his counsel could also seek to pursue some of the other theories suggested by the trial court. That may or may not be successful, depending upon the posture of the case.

This case should serve as a reminder of several things; the need for the assistance of competent advice in the purchase of property, the need to deal with an honest and reputable builder, and the need to carefully evaluate and pursue all legal options and theories when everything else fails. Although I had no familiarity with the case prior to last Thursday, (when the opinion was issued), I strongly suspect that the attorneys fees incurred by both both parties likely approached or exceeded the $35,000 difference in the original and proposed purchase price. And now, they get to go back to the trial court to fight some more.

Friday, April 03, 2009

Legislative Update Forthcoming

Regular readers will notice that my legislative tracking widget is no longer posted; with the adjournment of the legislature, it seems rather meaningless.

Of the bills being watched, only HB 243 survived; that bill dealt with "Rental Restrictions on Condominiums and Common Interest Communities". A couple of readers and clients have asked for my thoughts on that; unfortunately, I haven't had time to read and consider it. It is, however, on my "short list", and I'll update on it and other legislation of note in an upcoming blog.

Live Blogging The Managers' Munch -- Rentals

I'm attending the Utah Chapter of the Community Association Institute's monthly Manager's Munch today; the subject is Rentals in Community Associations. The first speaker, Paul Smith of the Utah Apartment Association is advocating the regulation, but not the prohibition of, rentals in associations.

Paul recommends using a local, attorney-reviewed lease contract; he also recommends that the board suggest the screening, by owners, of the potential tenants. If you do that, he says, make certain that the information regarding tenants is kept confidential. Next, require owners to identify their tenants.

Paul suggests that tenants should also be kept abreast of the owners' deficiencies; he suggests that associations advise tenants of pending amenity disruptions. Leases should inform unit owners of the association's governing documents.

According to Paul, cities are actively encouraging participation in the Good Landlord programs, in which municipalities provide disproportionate fees for non-participating landlords, in order to encourage training and education.

Paul contends that most cities won't touch a definition of a family; that's the first matter upon which he and I differ significantly. I suggest that my associations look to and incorporate those definitions into their restrictions; Paul's co-presenter, Kirk Cullimore more or less retracted that assertion.

Now Kirk Cullimore is up, taking on the difficult task of attempting to explain conflicts and overlaps between municipality, state and federal laws. His advice, with which I agree, is that you find the most restrictive requirement, and comply with it.

Kirk recommends that associations should inspect units more than they traditionally have. He suggests that utility companies may be willing to provide information as to the recipients of bills. Kirk also suggests using the state DMV database; I'd recommend extreme caution in that area, because the subscription agreement on that information contains significant limitations on its proper and improper use.

Kirk is now talking of nuisance evictions; he contends (and I agree) that they are difficult in Utah. A "three day comply and vacate" notice is often ineffective by itself; even if it's not, they make a good trail, and can lead to the service of what Kirk calls a "Three Day Get the Hell Out" notice. (I like that term, but probably wouldn't put it on a pleading...)

Kirk suggests a required lease addendum for the community; I agree that this approach is superior to the imposition of a form lease.

Thursday, April 02, 2009

Rental Restrictions in Bylaws?

The Wisconsin Supreme Court, in an opinion released last Friday, issued an opinion which affirms the validity of rental restrictions included in a community association's bylaws, as opposed to the association's declaration. Several courts around the country have dealt with this issue in the past several years, with opinions coming down on both sides of the issue. And in this case, the Court was divided, with a dissenting justice arguing that the amendment to the bylaws were contrary to the declaration and the statutes, and that the restrictions needed to adopted, if at all, as an amendment to the declaration.

The case, Apple Valley Gardens Association, Inc. v. MacHutta, involved an association formed in July of 1979, by Steven MacHutta (yes, that MacHutta). The original declaration included a sentence providing that "Any lease...shall not relieve an owner from his obligation to pay common expenses or any other obligations..."

In 2002, the Association members amended the Association's bylaws to prohibit rental of units. Ms. MacHutta, the declarant's spouse was renting her unit, and challenged the amendment. Existing tenancies were "grandfathered", as the dispute did not ripen until 2004, when the board refused her petition to enter into a lease with a new tenant. Nonetheless, she rented the Unit and the Association sued.

The Court framed the first question as to whether lease restrictions must be included in the declaration; the court held that the rental restriction fell within the statutory provision providing that bylaws could include "any restriction on or requirement respecting the use and maintenance of the units...," which the Court held could include rental restrictions.

The Court next held that the provision respecting the joint liability of owners for assessments, by allowing leases, was contrary to the restriction against leases.

"Condominium ownership is a statutory creation that obligates individual owners to relinquish rights that they might otherwise enjoy in othr types of real property ownership", the Court stated. Amendments to the bylaws were foreseeable and enforceable, even if not as readily discoverable by virtue of recordation, and even if more easily achievable than declaration amendments. "The fact that lenders and purchasers rely on recorded declarations is irrelevant. If lenders and purchasers wish to know whether and under what conditions a condominium unit may be rented out, they may easily inquire as to both the declaration and the bylaws."

Next, the Court held that the declaration's reference to the conditions under which leases must be made did not mandate that they be allowed. The Court stated: "this provision neither grants a right to rent one's unit nor prohibits it..."

Lastly, the court dismissed a statutory-based challenge to the provision, holding that a marketability statute did not prohibit the bylaw.

The dissent disagreed, arguing first that restrictions such as rental restrictions must be in the declaration to be valid. Furthermore, the dissent argued, the amendment was contrary to, and hence prohibited by, the Declaration.

Apple Valley provides support for the Association that cannot, for whatever reason, provide rental restrictions in a declaration as opposed to bylaws. Nonetheless, this author, and the majority of practitioners in the area, encourage associations to make such significant changes in the declaration, rather than the bylaws.

Wednesday, April 01, 2009


Monday's New York Times had an article on the continued (and apparently increasing) tendency of lenders to walk from properties, rather than foreclose on them.

This article, however, reveals a new twist to the problem: the owners, who think their homes have been foreclosed, are being charged by municipalities for the clean up, and sometimes the demolition of, these residences. So it's not just community associations that are facing non-responsive lenders, but also the owners of those units. Previous posts on this blog have advocated vigilance in the monitoring of units in this day and age; this gives another reason. And just because a lender threatens foreclosure, don't assume it will be completed.