AN INTRODUCTION TO SHORT SALES AND FORECLOSURES FOR COMMUNITY ASSOCIATIONS

AN INTRODUCTION TO SHORT SALES AND FORECLOSURES FOR COMMUNITY ASSOCIATIONS

More than ever before, community associations are coping with financial shortfalls. Two issues which associations frequently encounter are short sales and foreclosures.  This Blog post will discuss the implications of short sales and foreclosures as each relates to the community association.

Short Sales

A short sale occurs when a home is sold for less than the amount of the outstanding mortgage on the home, with the explicit agreement of the bank.  In other words, the purchase price of the home is “short” of the remaining balance due on the existing mortgage.  

Short sales are being used by owners in an effort to avoid foreclosure and possibly preserve the owners’ credit rating.  While the home that is being sold via a short sale is not bank owned, the bank must approve (and ultimately determine) the sale price of the home as they are agreeing to reduce the amount owed on the mortgage.  Banks generally prefer short sales over foreclosures because a short sale is accomplished in a much shorter period of time than a foreclosure and because the cost of a short sale is far less than that of a foreclosure.  

Because community associations can possess a statutory lien on a particular property for past due assessments (which are usually present if the unit gets to the point of short sale), the association will be asked to approve the short sale.  As a general matter, when a short sale is proposed and the association is contacted about the outstanding account balance, the association is offered only a percentage of the total amount it is owed so that the short sale can be accomplished (sometimes, the association is offered the full amount owed, but this generally occurs only when the total amount owed is proportionately very small when compared to the short sale price, and even then, such an occurrence is a statistical rarity).  At this stage, the association must decide if it will accept less than the entire amount owed on the account or if it will “hold out” for the entire balance (it is noted that the amount the association ultimately accepts can and should be negotiated as the first offer provided is usually a “low ball” offer).  

In making this determination, the association should consider the fact that after the short sale, a new owner will be present in the unit and will begin to pay assessments; therefore, the financial “bleeding” the association is facing will ultimately come to an end. Should the association refuse to accept a compromised offer on the amount owed, the likely result is that the short sale will not be consummated and the unit will end up in foreclosure. In a [Pennsylvania] foreclosure situation, the association is statutorily entitled to receive unpaid assessments, fees and costs that come due during the six (6) months immediately preceding the date of judicial sale of a unit.  All other amounts owed to the association are divested in the foreclosure. Thus, community associations may actually end up in a more favorable financial position if a unit is sold in a short sale rather than in foreclosure.   Of course, because each situation is factually unique, outcomes will vary.  Associations should therefore seek the advice of a qualified property manager and/or counsel when they are faced with a short sale in the community.

Foreclosures

In general terms, a mortgage loan provides that the mortgagee (lender, usually a bank) possesses a security interest (lien) in a home purchased by the mortgagor (borrower).   The foreclosure process begins when the mortgagor defaults on the loan, and the mortgagee begins legal proceedings to repossess the property.

As it pertains to community associations, and as previously indicated, in a [Pennsylvania] foreclosure situation, the association is statutorily entitled to receive unpaid assessments, fees and costs that come due during the six (6) months immediately preceding the date of judicial sale of a unit.  All other amounts owed to the association are divested in the foreclosure.  Once an Association learns that the property has been listed for Sheriff’s Sale, the Association should contact the Sheriff’s office to advise of the (1) existence; (2) nature; and (3) amount of the Association’s statutory lien.  This being said, the association should always seek out the advice of counsel in order to determine a legally permissible course of action as Fair Debt Collection Practices Act (FDCPA) issues may arise in this setting.  

Associations should also be aware that if the foreclosure process is completed and the foreclosing bank takes title (or if the bank takes a deed in lieu of foreclosure), the association should verify if a Sheriff’s deed has been issued to the bank and, if so, contact the bank and request payment of the prior assessments and other charges the association is entitled to receive.  The association should also ensure that the bank, as [new] titleholder of record, will be promptly paying assessments going forward, as required by the community’s controlling documents.  As a general matter, associations should stay on top of their collections efforts and apply them uniformly to all owners, including banks.

Associations should also be aware that federal law and federal programs have provided borrowers with additional options to be utilized in response to foreclosure proceedings and/or in an attempt to avoid foreclosure altogether. As a result of all of this, the foreclosure process is taking longer than ever before to get from start to finish, and Associations are waiting longer than ever before to see some sort of finality with respect same.

For example, the Home Affordable Modification Program (HAMP) provides borrowers with the possibility of lowering their monthly mortgage payments to make their homes more affordable. The population of homeowners that may be eligible for HAMP was expanded to include: 

•     Homeowners who are applying for a modification on a home that is not their primary residence, but the property is currently rented or the homeowner intends to rent it.

•     Homeowners who previously did not qualify for HAMP because their debt-to-income ratio was 31% or lower.

•     Homeowners who previously received a HAMP trial period plan, but defaulted in their trial payments.

•     Homeowners who previously received a HAMP permanent modification, but defaulted in their payments, therefore losing good standing.

Moreover, other federal agencies, such as the Consumer Financial Protection Bureau (CFPB) and the Department of Treasury’s Office of the Comptroller of the Currency (OCC), are involved in the residential mortgage market from a regulatory perspective and can get involved on behalf of a homeowner whose home is in foreclosure.  Accordingly, associations should be educated in and made aware of the various programs that exist and how each may impact the financial position of the association.

Finally, “other” issues occur during the foreclosure process that associations must handle in the best interest of the association.   For example, when a unit is in the foreclosure process and the owner abandons the unit (and the foreclosing bank has not yet taken title), the association must examine its controlling documents and/or other legal requirements to determine what duty the association has to ensure that the unit is kept in good repair.  It is noted that a foreclosing bank will often take similar action when a unit is abandoned by its borrower in an effort to protect its investment; however, the bank’s concern about preserving its collateral is different than the association’s potential responsibility in this regard because the association must examine its duty to keep the unit in good repair as it relates to the potential impact of the abandoned unit on all of the association’s owners/members and their units, not just the abandoned unit itself.

Because of all of the complicated financial and legal issues involved with short sales and foreclosures, and because each situation may be factually different than the those which have preceded it, associations dealing with these situations should seek the advice of both a qualified property manager and counsel to determine the best course of action for each specific situation.

Edward Hoffman, Jr., Esq.

* The content for this Blog post is based upon the prior written work of the author as originally published in the July/August 2012 issue of the CAI PA-DelVal’s Chapter’s Community Assets magazine.

WHAT IS A NUISANCE AND WHAT DOES IT MEAN TO YOUR ASSOCIATION? WHAT BOARDS AND MANAGERS NEED TO KNOW.

WHAT IS A NUISANCE AND WHAT DOES IT MEAN TO YOUR ASSOCIATION? WHAT BOARDS AND MANAGERS NEED TO KNOW.

When a board member or community manager hears the phrase “nuisance”, many thoughts come to mind regarding what this means, and how it may impact their association, but, more often than not, most do not know what a nuisance really is and what the association may need to do to deal with a nuisance.    The purpose of this post is to properly educate community leaders on nuisance principles and to discuss real-word application to community associations.  

What is a Nuisance?

nuisance– noun  nui·sance \ˈnü-sən(t)s, ˈnyü-\

Merriam-Webster defines a “nuisance” as “a person, thing, or situation that is annoying or that causes trouble or problems.”  (http://www.merriamwebster.com/dictionary/nuisance).  Utilizing this definition, basically any person, thing or situation seems as if it could qualify as a nuisance.   However, the legal standard for determining if a nuisance exists is not subjective in nature, it is objective and is based on a “reasonable” or “normal” person standard.  Thus, if a “reasonable” or “normal” person in the same community (area) would view the activity as offensive, then it could be significant enough to be considered a nuisance.  

Public vs. Private Nuisance

A nuisance can be a public nuisance or a private nuisance.  A public nuisance generally involves a substantial portion of the population and threatens public health safety or welfare (a current example would be the situation of lead in the water in Flint, Michigan).  Public nuisances can lead to criminal charges being filed.

In Pennsylvania, and in many other jurisdictions, a private nuisance is defined as a “nontrespassory invasion of another’s interest in the private use and enjoyment of land.” Golen v. The Union Corporation, 718 A.2d 298 (Pa. Super. 1998); citing Restatement (Second) of Torts, § 821D.  The invasion must cause significant harm, which is harm of importance involving more than slight inconvenience.  Harford Penn‑Cann Service, Inc. v. Zymbolsky, 549 A.2d 208 (Pa. Super. 1988). In other words, to succeed on a claim for a private nuisance, there must be a real and appreciable interference with the Plaintiff’s use or enjoyment of his land.  Id.at 209.  Thus, a private nuisance involves an appreciable interference with a person’s reasonable use and enjoyment of his (or her) property but does not include an actual, physical trespass.   

In an association setting, “neighbor vs. neighbor” disputes frequently involve issues sounding in private nuisance.  The resident or owner bringing a private nuisance claim may bring it up with the association and/or may attempt to seek relief from the court.

Frequent examples of private nuisance include noise, odor, light and dust (smoke is a more recent phenomena).  It is noted that obstruction of a “view” does generally not give rise to a cognizable claim for nuisance in many jurisdictions.  To wit, the Pennsylvania Supreme Court has held that a property owner cannot assert an actionable tort claim to preserve a view from his property.  Cohen v. Perrino, 355 Pa. 455, 457, 50 A.2d 348, 349 (1947).  In Cohen, one neighbor erected a brick wall entirely on his land some one and half inches from the other neighbor’s house, which fully obstructed that neighbor’s view from the first floor of his property. The plaintiff in the action contended that the structure was a nuisance that blocked his view and diminished the value of his property.  The plaintiff sought removal of the structure.  The court held that a property owner is entitled to build a wall entirely upon his own ground, or to build a party wall, that obstructs and closes the windows of an adjoining property owner.  Cohenat 457, 349.  A property owner enjoys the privilege of building, upon his own land, a structure which obstructs the light, air and view of an adjoining landowner. Maioriello v. Arlotta, 73 A.2d 374, 375 (Pa. 1950) and absent the grant of an express easement, adjoining landowners can erect structures that interfere with the other’s view and no cause of action can arise.  Larsen v. Zoning Bd. of Adjustment, 543 Pa 415, 429, 672 A.2d 286, 293 (1996).

Nuisance in Governing Documents 

Association governing documents typically contain some language in the restrictive covenants (Declaration) as it relates to nuisance, although it is generally not very specific.   An example would be “[n]o noxious or offensive activities or noise shall be carried or allowed, in or upon the Common Elements or in any Unit nor shall anything be done therein either willfully or negligently which may be or become an annoyance or nuisance to the other residents in the community.” While provisions like this are vague, and are still subject to the legal standard(s) required to establish a nuisance, these provisions do provide the association with some guidance as it relates to the association’s responsibilities and requirements as it relates to a proposed nuisance in the community.   

Enforcement of Nuisance Issues in Associations

Obviously, if a nuisance involves the Common Elements, an association has the authority to, and should, act to abate the nuisance.  In doing so, the association should first look to its covenants in order to abate the nuisance.  The association should follow the procedures set forth for enforcement as provided in the governing documents and shall provide the allegedly offending owner with reasonable due process and an opportunity to be heard in an attempt to abate the nuisance administratively prior to going to court for injunctive relief.   As with all enforcement actions, the association should investigate the claim(s) and act within its enumerated powers in addressing the issue.

However, when the nuisance does not involve the common elements but instead involves a “neighbor against neighbor” dispute, what is the association’s obligation to get involved, if any?   The answer is, it depends on the language in the governing documents and it depends on the nuisance that is being alleged.   While owners often believe that the association has omnipresent power to enforce every issue in the association, often times, the association cannot, and should not, get involved.    Private nuisance disputes may only be a “neighbor against neighbor” dispute and the association may actually have no legal standing to get involved.   Of course, the association may still choose to act as an intermediary between the owners, in order to facilitate harmony and perhaps a potential resolution.   

Examples of a Nuisance in an Association Setting

Smoking

Courts have held that smoke constitutes a nuisance under common law principles. See Thomsen v. Greve, 4 Neb. App. 742, 751, 550 N.W.2d 49, 55 (Neb. App. 1996) (“ . . . at least in our society, to have the use and enjoyment of one’s home interfered with by smoke, odor, and similar attacks upon one’s senses is a serious harm.”).  In at least one state, Utah, the legislature enacted a statutory provision (Utah Code 78-6-1101(3)) which defines and treats tobacco smoke migration from one unit to another as a nuisance. The statute permits for a [private] right of action for a violation.

Smoke has become an increasingly prevalent private nuisance issue in many communities, seemingly due to a decreasing number of smokers.  These complaints can be “neighbor against neighbor” and/or can involve the common elements and the association.  Should an association even get involved when it is neighbor against neighbor in a smoking dispute?  

Based on a case from Orange County California, the answer appears to be yes.   In Chauncey v. Bella Palermo Homeowners’ Association, et al., 3/28/2011, Cal. Super, Case. No. 30-2011-00461681-CU-OR-CJC, a jury found an association negligent for failing to resolve a secondhand smoke dispute between neighbors in a condominium. The plaintiffs alleged that the tenant-neighbors and their visitors smoked “incessantly” on the patio adjacent to the plaintiffs’ condo as well as the adjoining sidewalks in front of their home, with the “constant infiltration and presence of secondhand smoke” entering their condominium through windows and a sliding-glass door which was a nuisance to the family.  They alleged that despite their repeated complaints, the homeowners association, management company, tenants and the neighboring condominium’s owner/landlord did not stop the problem.  

The Plaintiffs asked the jury to award them $120,000 and after a five-week trial, jurors awarded the family $15,500 in damages ($6,000 for economic damages and $9,500 for emotional distress (the jury found the HOA to be sixty percent responsible for the emotional distress damages, while the management company, the owner and the tenants were held liable to lesser degrees).  The jury concluded that the association and the management company failed to ensure the non-smoking family’s right to the “quiet enjoyment” of their own unit.   (Source: “Condo owners win secondhand smoke case”, Orange County Register, Marilyn Kalfus, March 12, 2013.  http://www.ocregister.com/articles/smoke-499353-association-secondhand.html). 

Interestingly, the Bella Palermo Homeowners’ Association governing documents provide, in part, at Section 9.03: “Nuisance. No noxious or offensive trade or activity shall be permitted upon any part of the covered property, nor shall anything be done thereon which shall in any way interfere with the quiet enjoyment of each of the owners of his respective residence.”   Thus, while not specific as to the association’s responsibilities, a jury concluded that it was indeed the association’s responsibility to ensure the family’s “quiet enjoyment” of their unit.

Noise

Noise can be very subjective as it relates to whether or not it actually constitutes a nuisance, and it can literally come from every imaginable source, including… a baby.   In 2015, some Connecticut condominium owners with a one-year-old son received the following note from their neighbor:

“Please consider buying a parenting book or consult with a child care expert . . . “[y]our baby should not be crying that loudly and for that long. Try more calming techniques, music, turn on a vacuum, rocking chair, go for a walk … anything!”

The note goes on to provide, “[i]f you don’t make changes immediately, you risk being fined by [the homeowners’] association.”    The neighbor relied upon Section 4 of the Association’s Rules and Regulations that provides that excessively loud noise that interferes with the rights of neighbors is subject to possible fines.

However, does the Association have any authority to fine owners for a crying baby or to get involved?  It turns out the HOA did get involved – a previous noise complaint by the same neighbor actually prodded the HOA to send the parents a warning which warned that they would be fined if the child continued to cry.  (Source: http://www.realtor.com/news/trends/neighbor-files-noise-complaint-against-crying-baby)

My advice as an Association Attorney would have been for the Association to not send such a warning due to fair housing issues and other concerns.  The fact that an owner lodged a complaint does not mean that the Association needed to get involved and send the parents a note about a crying baby.  There are few other examples that would get an entire jury to dislike an Association such as this one.

Hot Topic: Medical Marijuana

While related to the smoking discussion above, due to the “smoke” emanating from the smoking of medical marijuana, this issue involves the legal use of marijuana for medical reasons, not simply recreational use.   Accordingly, a unit owner who is prescribed medical marijuana could request a “reasonable accommodation” under the federal Fair Housing Act, 42 U.S.C. §§3601 – 3631, if the marijuana is prescribed to treat a disability.   Also, some states have constitutional protections (Colorado) for marijuana use for debilitating conditions and others (Montana) statutorily permit its use for medical reasons.  Therefore, associations need to be aware that the use of medical marijuana may be protected and a “nuisance” complaint related to same will need to be properly evaluated and handled with the advice of counsel.

While it is not clear if it involved medical marijuana, an example from New York City from a condominium located at 400 Central Park West involved a Board of Directors who sued residents under a nuisance theory for chronic (pun intended) marijuana smoking where the smoke and odor infiltrated the other areas of the condominium building.  (Source: http://nypost.com/2016/03/31/stoner-tenant-is-smoking-out-central-park-west-condo-lawsuit/)

It is noted that Colorado also permits the use of “retail” marijuana that is not associated with medical necessity.  Retail marijuana is intended for private, personal use, and such use is only legal in certain locations not open or accessible to the public.  Accordingly, while the use of retail marijuana may be permitted in one’s “private” home, the protections associated with said use are not likely as strong as those associated with the use of medical marijuana in a private home and an association’s ability to deal with such an issue as a nuisance may not be as [legally] complicated.

In Summary   

Associations need to be cognizant of nuisance issues and must be able to handle them correctly … assuming that they need to get involved.   Before acting on a nuisance complaint, an association should elicit the cogent advice of counsel to ensure that any action by the association is both necessary and proper.   

Edward Hoffman, Jr., Esq.

* The content for this Blog post is based upon the prior written work of the author as originally published in the September/October 2016 issue of CAI’s Common Ground magazine and in the November/December 2016 issue of the CAI PA-DelVal’s Chapter’s Community Assets magazine.

AVOIDING INCONSISTENT ENFORCEMENT IN YOUR ASSOCIATION … COMMUNITY LEADERS TAKE HEED.

AVOIDING INCONSISTENT ENFORCEMENT IN YOUR ASSOCIATION … COMMUNITY LEADERS TAKE HEED.

Inconsistent, or selective, enforcement of covenants, restrictions and rules & regulations by a Community Association is, unfortunately, a frequent occurrence. Community leaders must understand that inconsistent enforcement by an Association for even a minor issue can lead to major liability for an Association.  This article will explore some of the issues surrounding inconsistent enforcement and will discuss ways to avoid potential liability for inconsistent enforcement.

Enforcement of Covenants, Restrictions and Rules & Regulations

In any type of common interest community, whether it is a planned community, cooperative or condominium, the Board (Board of Directors, Executive Board or Council) is charged with the responsibility to enforce the community’s covenants, restrictions and rules & regulations for the benefit of every member/owner in the community.   This responsibility is not voluntary; rather, the Board has a duty to (1) ensure that the covenants, restrictions and rules & regulations of the community are adhered to/followed by the members/owners; and (2) enforce the covenants, restrictions and rules & regulations against a member/owner who fails to adhere/follow them.   Examples of frequently encountered enforcement issues include but are not limited to pools, trash, outdoor elements (architectural control), parking, pets/animals, curtains, outdoor storage, maintenance and playgrounds.

How Does Inconsistent Enforcement Occur?

Inconsistent enforcement can occur in a number of different ways.  Frequent causes of inconsistent enforcement will be discussed below, though the list is certainly not exhaustive.

1.         Failing to enforce covenants, restrictions and rules & regulations.

When an Association fails to enforce its own covenants, restrictions and rules and regulations, this is, of course, inconsistent enforcement.   Associations must follow the provisions set forth in the governing documents uniformly and consistently, all the time.   When Boards fail to enforce an Association’s covenants, restrictions and rules and regulations properly, enforcement may become a feckless exercise.    In other words, when a Board does not enforce its governing documents uniformly, all of the time, this can weaken and/or kill an enforcement action and prevent an Association from being able to enforce its own governing documents.  This could wreak havoc for the governance of an Association. 

2.         Playing favorites.

A Board cannot choose to enforce its covenants, restrictions and rules and regulations against Mrs. Jones but not against Mr. Smith, even if Mrs. Jones is the community pariah and Mrs. Smith is the nicest, most charitable person in the community.   In order to comply with its fiduciary duty to the Association and its members, a Board mustenforce the covenants, restrictions and rules and regulations equally and must not play favorites. Picking and choosing some but not all members as it relates to enforcement action(s) is a sure-fire path to a lawsuit being filed against an Association.

3.         Stupid decisions.

Let’s not sugarcoat it.   Community leaders make stupid decisions.   Sometimes these stupid decisions lead to inconsistent enforcement of the community’s covenants, restrictions and rules & regulations.  The key is recognizing, and reversing course, on a stupid decision before it becomes a problem for the association.  

If the stupid decision was made in good faith (meaning, it may have been the wrong decision, but it wasn’t made for an improper purpose), then an Association will likely have a valid defense to a lawsuit alleging harm from inconsistent enforcement.  Stupid decisions can be avoided by adopting and implementing an enforcement policy which will be applied uniformly and equally to all owners.  

4.         Lack of due process.

In the author’s home state of Pennsylvania, both the Pennsylvania Uniform Condominium Act (§ 3302(a)(11)) and the Pennsylvania Uniform Planned Community Act (§ 5302(a)(11)) provide an Association with the power to levy reasonable fines for violations of the declaration, bylaws and rules and regulations of the association – after notice and an opportunity to be heardis provided to the owner.  Many other jurisdictions have similar requirements.   Fining an owner and/or engaging in a related enforcement action prior to and/or without providing an owner with notice and an opportunity to be heard may lead to a successful lack of due process defense by the allegedly offending/violating owner.   

It is further noted that many, if not the majority, of the governing documents reviewed by the author in his many years of Association representation have the due process provision reversed, meaning that the documents provide for the fine and/or violation notice to be sent first, and then allow an owner to appeal the fine or violation.   This runs contrary to the intent of the Uniform Acts and the very concept of due process itself.   Boards should carefully consider updating and amending governing documents to ensure that due process provisions are in accord with the law.

5.         Unofficial enforcement.

Over the years, the author has unfortunately dealt with instances where “unofficial” enforcement occurs.   Unofficial enforcement involves situations where a Board member, committee member or some other person with actual or apparent authority to act on behalf of the Association tells a member to do something as it relates to the covenants, restrictions and rules & regulations, but without the consent of the [entire] Board of Directors.   

For example, an Architectural Review Committee (ARC) member unilaterally decides to verbally advise a unit owner to remove his deck because the ARC member believes the deck to be in violation of the covenants.   This is unofficial enforcement because the ARC member may be viewed to have authority to tell the unit owner to remove his deck although the ARC member, in actuality, had no authority to do so.  Such behavior actually leads to the opposite situation, i.e., no possible enforcement of the unauthorized, unofficial enforcement action. Boards must therefore be cognizant of the propensity for this type of activity to occur and must properly educate and train all community leaders and volunteers to avoid unofficial enforcement from occurring.  

6.         Drafting Rules and Regulations that are contradictory, or contrary, to the covenants and restrictions.

Rules and Regulations cannot go “beyond” the scope of the covenants and restrictions – meaning, a Board can’t adopt a rule or regulation that is more restrictive than the recorded covenants and restrictions.   Moreover, even if they comply with these governing documents, Rules and Regulations must be “reasonable”, meaning, a court would need to view the Rule or Regulation as reasonably related to the purpose for which it was adopted.   

Potential Liability for Inconsistent Enforcement

Inconsistent enforcement may result in a lawsuit being filed against the Association and/or its Board. An Association Board must therefore act properly, uniformly and consistently when enforcing the community’s covenants, restrictions and rules and regulations.  But what standard is applied to determine if a Board acted properly, uniformly and consistently when enforcing a community’s covenants, restrictions and rules and regulations?  

In Pennsylvania, and similarly in many other jurisdictions,the Business Judgment Ruleprovides that Board Members must make decisions (1) within the scope of their given authority; (2)ingood faith;(3) using ordinary care; and(4) in the best interest of the Association (i.e., not in the best interest of the Board Members).  Therefore, under the Business Judgment Rule, in order to establish a cause of action for breach of fiduciary duty against an Association for an inconsistent enforcement action taken by its Board, the party complaining must allege facts which would establish that the actions of the Board were unauthorized, or that the actions had been taken fraudulently, in bad faith, or constituted self-dealing. Lyman v. Boonin, 635 A.2d 1029 (Pa. 1993). 

Courts will typically not substitute their judgment for that of the directors of a corporation and will not interfere with the internal management of the corporation unless the acts complained of constitute fraud, bad faith or gross mismanagement, or are unlawful.  Kelso Woods v. Swanson, 692 A.2d 1132 (Pa. Cmwlth. 1997), Mulrine v. Pocono Highland Community Association, 616 A.2d 188 (Pa. Cmwlth. 1992).  Moreover, in the Pennsylvania case of McMahon v. Pleasant Valley West Association, 952 A.2d 731 (Pa. Cmwlth. 2008), the Commonwealth Court of Pennsylvania found that a homeowners association has a duty to “act reasonably in the exercise of its discretionary powers, including rulemaking, enforcement and design-control powers” and to “use ordinary care and prudence in managing the property… subject to its control.”  Id. at 735. 

Given the body of law that is evolving nationally as it relates to the standard to be applied to determine if a Board acted properly, uniformly and consistently as it relates to enforcing a community’s covenants, restrictions and rules and regulations, the author predicts the future trend will be for courts to combine the attributes of “reasonableness” and the Business Judgment Rule, meaning, a Board must act reasonably with respect to its “discretionary” powers, including the enforcement of covenants, restrictions and rules and regulations.  

If a Board therefore acts reasonably in enforcing its covenants, restrictions and rules and regulations, it will greatly lessen the likelihood of inconsistent enforcement from occurring and potential liability for such action.

Finally, the author notes that every Association should obtain adequate Director and Officer (D&O) Liability Insurance to best protect and defend the Association and its Board (and committee) members from covered claims which may include inconsistent enforcement.

Inconsistent Enforcement is Avoidable

Community leaders rejoice!  The good news is that inconsistent enforcement is entirely avoidable. Boards must proactively seek to reasonably enforce the community’s covenants, restrictions and rules & regulations uniformly and consistently.   How can a Board do this?   Best practices.   

Best practices the Board should incorporate include:

  • Following the procedures set forth in the governing documents; 
  • Ensuring due process is provided to owners;
  • Acting uniformly as to all owners; 
  • Adopting/repealing/amending Rules as necessary to clarify;
  • Acting within the scope of the Board’s given authority;
  • Acting in good faith;
  • Using ordinary care; 
  • Acting in the best interest of the Association; 
  • Acting reasonably with respect to enforcement of rules and regulations; and
  • Contacting counsel beforeacting if there is a question.

Finally, the Board can pass a Resolution and, with the assistance of counsel, can adopt an enforcement policy that would be applied uniformly and consistently regardless of the owner or the issue that is involved (of course, such a policy can incorporate some flexibility for a Board to “reasonably” make exceptions to the policy for warranted circumstances).  The enforcement policy must be followed so there is no dispute as to what must be done as it relates to enforcement.  Owners must be provided with a copy of the policy.

In Summary           

Association leaders need to be cognizant of the issue of inconsistent enforcement and must proactively and properly enforce the community’s covenants, restrictions and rules and regulations.   Doing it correctly now will serve to avoid problems later and will greatly reduce, and perhaps eliminate, the potential for liability.  Finally, if there are any questions, concerns or doubts about any type of enforcement issue, the Association should elicit the cogent advice of counsel before undertaking any type of enforcement action.

Edward Hoffman, Jr., Esq.

An abbreviated version of this article was originally published in the September/October 2017 issue of CAI’s Common Ground magazine.

BUYING A HOME IN A COMMUNITY ASSOCIATION OR CONDOMINIUM ASSOCIATION

BUYING A HOME IN A COMMUNITY ASSOCIATION OR CONDOMINIUM ASSOCIATION

As attorneys that practice Community Association Law and represent Community Associations and Condominium Associations all over Pennsylvania, we are frequently asked, “what would you look for if you were buying a home in a Community Association or Condominium Association?” The following is a brief overview of what buyers should be looking for when considering a home in an association.

Declaration of Covenants, Conditions & Restrictions (CC&Rs)

Prior to signing on the dotted line, examine the Declaration/CC&Rs for the community to make sure that you, as a potential community resident, can actually live with the limitations imposed on all owners in the community. For example, many association communities prohibit sheds, even for a single home on an acre of land. If you simply must have a shed, then buying a home in an association community that prohibits sheds is obviously not the best choice for you. By carefully reviewing the governing documents for the community and asking questions prior to the purchase, a buyer will be able to determine whether living in a particular community is actually the right choice for them.

Annual Budget

Prior to signing the agreement of sale, ask for and review a copy of the association’s budget. Look at the association’s outstanding debts and liabilities, as well as the percentage of owners that not current on assessments. If the majority of owners are behind, this may signal financial issues for the association. This may also have a negative impact on a buyer’s ability to obtain a loan to purchase a home in a condominium association because Fannie Mae, Freddie Mac and the Federal Housing Administration, which purchase and/or insure a majority of mortgages, place a cap on assessment delinquencies for condominiums.

Reserve Funds

Make sure that adequate reserve funds are set aside for maintenance of common areas in order to fund a large-scale project, like a swimming pool repair or a road repaving project (for private roads). If the reserve funds are insufficient, owners may be issued a special assessment to pay for the project. Buyers should therefore ask for a breakdown of the reserve funds as well as expected, upcoming capital expenditures.

Rental/Investment Properties

If a buyer wishes to live in the unit and not use it as a rental/investment property, the buyer should examine the percentage of units that are owner-occupied versus how many are leased. A high number of rental properties in the community could mean that a low level of owner involvement is present in the community. A high level of rentals in a community can also have a negative impact on a buyer’s ability to obtain a mortgage to purchase a home in a condominium association because Fannie Mae, Freddie Mac and the Federal Housing Administration set a minimum owner occupancy rate for condominiums.

Conversely, if a buyer is looking to use the unit as a rental/investment property, the buyer should see if there are rental restrictions present in the community and/or if the maximum threshold for rental/investment units has been reached in a condominium community prior to signing the agreement of sale.

Insurance

Ask for a copy of the “Policy Declarations” for the association’s insurance policy/policies to ensure that coverage is adequate and current. Coverage should include but not be limited to general liability coverage, director & officer liability coverage, environmental impairment coverage, employee dishonesty coverage and/or sinkhole coverage for the common elements.

Edward Hoffman, Jr., Esq., CCAL

*This article originally appeared in issue No. 4 of Network Magazine, Spring 2016. https://mynetworkmag.com/2016/04/are-you-thinking-of-buying-a-home-in-a-community-association-or-condominium-association/

Tags: BudgetCC& RConditionsCovenantsDirectorGeneral LiabilityHomeowners AssociationInsuranceInvestmentOfficerPennsylvaniaRental PropertiesReserve FundsRestrictions

HOLIDAY DECORATING IN THE COMMUNITY ASSOCIATION … IS IT A DECORATION, RELIGIOUS SYMBOL OR A RELIGIOUS DISPLAY?

HOLIDAY DECORATING IN THE COMMUNITY ASSOCIATION … IS IT A DECORATION, RELIGIOUS SYMBOL OR A RELIGIOUS DISPLAY?

Here come the holidays, and here come the decorations.   But not every decoration is only a decoration … some decorations are just decorations but other things can be considered religious displays or religious symbols, which means that the things that owners put out can mean different things to different people. Also, some things are not merely decorative in nature; rather, they are either required by the religion or are part of a religious practice or tradition.   So how do we handle all of this in a community association?

Decorations

To begin, with respect to holiday decorations, there appears to be a legal distinction between a mere holiday decoration and a religious symbol.   According to the United States Supreme Court (when evaluating the constitutionality of Christmas and Hanukkah displays on public property in Pittsburgh under the Establishment Clause (Fourteenth Amendment)), a Christian nativity scene is a religious symbol and a Christmas tree is not.  A Jewish menorah is a religious symbol, but is not solely “religious” in nature.  To wit, when a menorah is put next to a Christmas tree, it is secular in nature.  Whether or not a holiday decoration is actually a religious symbol or religious display depends on whether an observer would believe the decoration is an endorsement or disapproval of an individual religious choice, to be deemed by a “reasonable observer” standard.  See County of Allegheny v. American Civil Liberties Union, 492 U.S. 573 (1989). 

A frequently-encountered issue in community associations involves when decorations may be put out and removed.   Again, care must be taken to ensure that the association is not prohibiting or otherwise stifling the display of a required religious symbol in enacting or enforcing any covenants, restrictions, policies or rules or regulations relating to holiday decorations.  Once this is determined to be appropriate, the association can pass reasonable rules and regulations, subject to and in accord with the community’s recorded restrictions and covenants, related to the type, placement, size and permitted time periods related to holiday decorations.  

Religious Symbols and Religious Displays

Disputes involving religious symbols and religious displays are increasing in frequency in community associations.  A frequently litigated issue involves the installation of mezuzahs.   A mezuzah is a small religious object that an observant Jewish person installs on the doorpost or doorframe outside of their residence in fulfillment of their religious obligations (note: this is not just a “seasonal” installation, it remains throughout the year).  To these folks, mezuzahs are not “decorative” in nature; one cannot reside inside of a residence where a mezuzah is not installed on the outer doorpost or doorframe. 

Currently, there are six states (Connecticut, Florida, Illinois, Rhode Island & Texas and California) that prohibit restrictions on the placement of mezuzahs or other required religious objects on outer doorposts or doors, as indicated below (important note: there are local municipalities and local governments around the country that also prohibit such restrictions, this should therefore be evaluated in your jurisdiction when undergoing an analysis of this issue).  

Connecticut Public Act No. 12-113, Section 6.  “No person may prohibit or hinder the owner, lessee or sublessee of a condominium unit from attaching to an entry door or entry door frame of such unit an object the display of which is motivated by observance of a religious practice or sincerely held religious belief.

Subsection (a) of this section shall not prohibit the enforcement or adoption of a bylaw that, to the extent allowed by the first amendment to the United States Constitution and section 3 of article first of the Constitution of the state, prohibits the display or affixing of an item on an entry door or entry door frame to the owner’s, lessee’s or sublessee’s unit when such item: (1) Threatens the public health or safety; (2) hinders the opening and closing of an entry door; (3) violates any federal, state or local law; (4) contains graphics, language or any display that is obscene or otherwise patently offensive; (5) individually or in combination with each other item displayed or affixed on an entry door frame has a total size greater than twenty-five square inches; or (6) individually or in combination with each other item displayed or affixed on an entry door has a total size greater than four square feet.”

Florida Statutes, 718.113(6).  “An association may not refuse the request of a unit owner for a reasonable accommodation for the attachment on the mantel or frame of the door of the unit owner of a religious object not to exceed 3 inches wide, 6 inches high, and 1.5 inches deep.”

Illinois Law, 765 ILCS 605/18.4(h).  “. . . [N]o rule or regulation may impair any rights guaranteed by the First Amendment to the Constitution of the United States or Section 4 of Article I of the Illinois Constitution including, but not limited to, the free exercise of religion, nor may any rules or regulations conflict with the provisions of this Act or the condominium instruments. No rule or regulation shall prohibit any reasonable accommodation for religious practices, including the attachment of religiously mandated objects to the front-door area of a condominium unit.”

Rhode Island General Laws, Chapter  34-37-5.5.  “Except as otherwise provided by this section . . . an association of unit owners, as defined in § 34-36.1-1.03 (hereinafter “property owners”); may not enforce or adopt a restrictive covenant or otherwise prohibit a unit owner or tenant from displaying or affixing on the entry to the unit owner’s or tenant’s dwelling one or more religious items, the display of which is motivated by the unit owner’s or tenant’s sincere religious belief.”

Texas Property Code 202.018.  “Except as otherwise provided by this section, a property owners’ association may not enforce or adopt a restrictive covenant that prohibits a property owner or resident from displaying or affixing on the entry to the owner’s or resident’s dwelling one or more religious items the display of which is motivated by the owner’s or resident’s sincere religious belief.” 

California Civil Code 1940.45.  

(a) Except as otherwise provided by this section, a property owner shall not enforce or adopt a restrictive covenant or any other restriction that prohibits one or more religious items from being displayed or affixed on any entry door or entry door frame of a dwelling.

(b) To the extent permitted by Article 1, Section 4, of the California Constitution and the First Amendment to the United States Constitution, this section does not prohibit the enforcement or adoption of a restrictive covenant or other restriction prohibiting the display or affixing of a religious item on any entry door or entry door frame to a dwelling that:

(1) Threatens the public health or safety.

(2) Hinders the opening or closing of any entry door.

(3) Violates any federal, state, or local law.

(4) Contains graphics, language or any display that is obscene or otherwise illegal.

(5) Individually or in combination with any other religious item displayed or affixed on any entry door or door frame that has a total size greater than 36 by 12 square inches, provided it does not exceed the size of the door.

(c) As used in this section, the following terms have the following meanings:

(1) “Property owner” means all of the following:

(A) An association, as that term is defined in Section 4080.

(B) A board, as that term is defined in Section 4085.

(C) A member, as that term is defined in Section 4160.

(D) A landlord, as that term is defined in Section 1940.8.5.

(E) A sublessor.

(2) “Religious item” means an item displayed because of sincerely held religious beliefs. 

SEC. 2.

 Section 4706 is added to the Civil Code, to read:

4706.

(a) Except as restricted in Section 1940.5, no governing document shall limit or prohibit the display of one or more religious items on the entry door or entry door frame of the member’s separate interest.

(b) If an association is performing maintenance, repair, or replacement of an entry door or door frame that serves a member’s separate interest, the member may be required to remove a religious item during the time the work is being performed. After completion of the association’s work, the member may again display or affix the religious item. The association shall provide individual notice to the member regarding the temporary removal of the religious item.

In all other states, it would seem that the application of the Fair Housing Act would generally limit (or prohibit) restrictions on the installation of mezuzahs or other required religious objects, based either on prohibiting a required religious display but allowing secular items to be displayed or by not permitting a member of one religion to display an item while allowing a member of another religion to do so.  While community associations are currently not required to provide owners with “reasonable accommodations” for religious purposes under the Fair Housing Act, association leaders should nonetheless elicit the sage advice of counsel before making any decision related to the issue.

Of course, where there is evidence that a [seemingly] facially neutral restriction adopted by an association related to the removal of objects (name plates or signs) from the exterior of homes was really pretext for intentional discrimination based on religious prejudice (i.e., to prohibit mezuzahs), a violation of the Fair Housing Act would occur.  (See Bloch v. Frischolz, 533 F. 3d 562 (7thCir. 2008), aff’d in part, rev’d in part, 587 F. 3d 771 (7thCir. 2009)).

Another religious symbol or display issue that has been litigated involves the Sukkah, which is a [temporary] outdoor structure that may be used for meals and sleeping during the Jewish holiday of Sukkoth. A condominium association in New York prohibited the placement of a Sukkah on a limited common element balcony restricted to use by the owners under the community’s Bylaws.  Upon review, the court held that the Board exceeded its authority because nothing in the association’s Bylaws prohibited a Sukkah from being placed on a balcony (as opposed to being improperly placed and prohibited on a condominium common area, as was the court’s holding some eight years prior in a case litigated by the same parties). Greenberg v. Board of Managers of Parkridge Condominiums, 2000 W.L. 35921423 (N.Y. Sup. Ct., September 1, 2000, unpublished), aff’d., 294 A.D.2d 467 (2d Dept. 2002).  Therefore, something which may specifically prohibited by the governing documents for a non-discriminatory reason need not be allowed by the association, but disallowing something that is not specifically prohibited by the governing documents may be deemed to be improper by a court.   

As it relates to religious symbols and religious displays and fair housing discrimination, it is important to note that the United States Department of Housing and Urban Development (“HUD”) has interpreted the Fair Housing Act to include two types of discrimination: disparate treatment and disparate impact (also known as “discriminatory effect”).  Disparate treatment involves discrimination due to different treatment, i.e., treating someone differently because of religion would be included.  These claims involve allegations of intentional bias. 

Disparate impact, on the other hand, involves discrimination by different impact, i.e., when a neutral policy or procedure has a disproportionately negative impact on a protected class.  Disparate impact claims shift the focus away from “intent” to one of result.  

In 2013, HUD issued a final rule entitled “Implementation of the Fair Housing Act’s Discriminatory Effects Standard” (Federal Register, Vol. 78, No. 32, Friday, February 15, 2013).  This final rule provides that if a practice has a “discriminatory effect,” HUD or a private plaintiff can establish liability under the Fair Housing Act even if a facially neutral practice has no discriminatory intent.  In 2015, the United States Supreme Court held that disparate impact claims are cognizable under the Fair Housing Act (see Texas Department of Housing and Community Affairs (TDHCA) v. Inclusive Communities Project, 135 S.Ct. 2507 (2015)).  This case is now the law of the land as it relates to making disparate impact claims under the Fair Housing Act.  What this means for associations is that although an association may not intend to discriminate against a class or group of people through a policy or practice, a violation of the Fair Housing Act may still be found if the policy or practice has a disproportionally negative impact on a protected class – and this would include religious symbols and religious displays.

It would appear that claims brought under a theory of disparate impact are a growing phenomenon and this theory will likely be utilized in future cases involving religious symbols and religious displays, as the display of religious symbols and religious displays, by default, generally only involves one protected class of people (i.e., members of one religion that requires or otherwise utilizes the religious symbol or religious display) and not other people. 

To wit, in Philadelphia, a case with disparate impact allegations was recently filed in federal court (Tripathi v. Murano Condominium Association, Case No. 2:18-cv-01840-JP (U.S. Dist. Ct., E.D. Pa., May 3, 2018)).  The case involved a Hindu condominium owner who wanted to hang a toran, a decorative object, in his doorway. Doing so contradicted the association’s rules, which at the same time specifically permit mezuzahs. The matter appears to have settled, as it was dismissed, and as such, the interpretation and application of claims brought under a disparate impact theory remain unclear.             

Finally, when faced with a “holiday decoration” situation in an association, care must be taken to properly evaluate the issue in order to determine if it is instead a religious symbol or religious display in order to plan the proper course of action.

– Edward Hoffman, Jr., Esq.

* Content for this Blog post is primarily based upon the published written work of the author, notably, “The Rights Approach: The First Amendment can create chaos for community associations if they don’t understand the law”, published in the November/December 2018 issue of Common Ground, a publication of the Community Associations Institute.

WHERE’S THE PARTY?

WHERE’S THE PARTY?

Year after year clients ask us about hosting social events in the Clubhouse and whether they should either purchase and serve alcohol for a fee or allow residents to consume alcohol on a BYOB basis.  The simple answer is that the Association is not in the business of serving alcohol for commercial purposes so the Association shouldn’t serve alcohol for a fee at the Clubhouse.   This would also include taking “donations” at the door from attendees to pay for the alcohol that was purchased by the Association.  

Allowing residents to consume alcohol on a BYOB basis may be appropriate in some circumstances, but may not in others – such as near a pool or other amenity where there is inherent risk present.  It is best to have a policy for alcohol consumption at the Clubhouse and distribute it to the unit owners – and, of course, the Association must actually enforce the policy.

Even if an Association is not actively serving alcohol for a fee, if it is purchasing alcohol to “hand out” to residents at a Clubhouse event for free, or allowing BYOB consumption, this could also lead to trouble for the Association should an incident occur.

In Pennsylvania, the “social host doctrine” provides that a “social host” can be held liable for resulting personal injuries or property damage if the social host served alcohol to a person he/she knew, or should have known, was intoxicated and/or that the person would be driving afterward. To date, Pennsylvania courts have only imposed liability on social hosts who have knowingly provided alcohol to persons under the age of 21, to the point of intoxication.  The rationale is that adults are responsible for the consequences of their own actions. Moreover, the Pennsylvania legislature has made a legislative judgment that persons under twenty-one years of age are incompetent to handle alcohol.   There is therefore risk in serving or allowing minors to drink at Clubhouse events even if the Association does not actually know if minors are drinking at the event.  

If the Association allows rental of the Clubhouse by unit owners, the Association could be named as a party if an incident occurs which involves intoxication of a minor since the event hosting the event occurred at the Clubhouse – this can occur even if the Association had no hand in serving the alcohol to a minor at a resident’s private event.   Therefore, if a unit owner wishes to rent the Clubhouse and host the event, the Association should ensure that Association’s policy for Clubhouse use and the rental agreement provide for various protections for the Association, to the extent permitted by law, including language that the unit owner will not serve minors alcohol and providing for indemnity for the Association by the unit owner.  While no policy or agreement will be a failsafe against liability, the Association should nonetheless seek to protect itself from liability.  In addition to a strong policy and agreement, this would also include ensuring that the Association’s insurance policy would cover/defend the Association and making sure that the unit owner renting the facility has homeowners insurance by way of obtaining a certificate of insurance as part of the rental process.

Finally, even if an intoxicated person that attended an event at the Clubhouse were over 21 years of age, the Association would likely be named as a party in any litigation if it hosted the event or rented the facility to a unit owner.   While liability may not ultimately be found against the Association given the current status of the law and precedent, the Association will still need to defend the action so proper insurance for the Association and homeowner and/or indemnity provisions in any rental agreement will serve to protect the Association’s interests.

It is wise to have an attorney review the Association’s insurance coverage and its policy for Clubhouse use and/or the rental agreement for the Clubhouse to ensure that the Association is protected to the best extent possible.   Hoffman Law LLC is ready to assist your Association with this and more.

– Edward Hoffman, Jr., Esq., CCAL

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