The first question that Board members usually ask is – what is fiduciary duty?
The Merriam-Webster Dictionary defines fiduciary duty as follows:
“A duty obligating a fiduciary (as an agent or trustee) to act with loyalty and honesty and in a manner consistent with the best interests of the beneficiary of the fiduciary relationship (as a principal or trust beneficiary).”
There are various duties associated with fiduciary duty, and depending on the jurisdiction these duties may include:
Duty of Care;
Duty of Loyalty;
Duty of Confidentiality;
Duty to Act Within Scope of Authority;
Duty of Good Faith;
Duty of Prudence; and
Duty of Disclosure.
How does fiduciary duty apply to community associations?
In the context of a community association, a fiduciary duty entails the duty that a Board of Directors (and/or a member thereof) owes the Association (which is typically a non-profit corporation). The Board has a fiduciary duty to act in the best interests of the Association with every decision that it makes.
What standard of review do the courts utilize as it relates to fiduciary duty?
Courts in most jurisdictions utilize some form of the “business judgment rule” (BJR) as it relates to fiduciary duty issues. Under the BJR, board members must make decisions within the scope of their given authority, in good faith, using ordinary care and in the best interest of the Association.
Under the BJR, courts do not substitute their judgment for that of the board of directors and will not interfere with the internal management of the Association 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).
In order to establish a cause of action for breach of fiduciary duty against an association for actions taken by its board members under the BJR, the party complaining must allege facts which would establish that the actions of the board members 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).
In Pennsylvania, the Non-Profit Corporation Law of 1988, 15 Pa.C.S. § 5101 et seq. (NPCL), addresses the standard of care related to board members of non-profit corporations, which include Associations:
§ 5712. Standard of care and justifiable reliance.
(a) Directors. — A director of a nonprofit corporation shall stand in a fiduciary relation to the corporation and shall perform his duties as a director, including his duties as a member of any committee of the board upon which he may serve, in good faith, in a manner he reasonably believes to be in the best interests of the corporation and with such care, including reasonable inquiry, skill and diligence, as a person of ordinary prudence would use under similar circumstances. In performing his duties, a director shall be entitled to rely in good faith on information, opinions, reports or statements, including financial statements and other financial data, in each case prepared or presented by any of the following:
One or more officers or employees of the corporation whom the director reasonably believes to be reliable and competent in the matters presented.
Counsel, public accountants or other persons as to matters which the director reasonably believes to be within the professional or expert competence of such person.
A committee of the board upon which he does not serve, duly designated in accordance with law, as to matters within its designated authority, which committee the director reasonably believes to merit confidence.
(b) Effect of actual knowledge.–A director shall not be considered to be acting in good faith if he has knowledge concerning the matter in question that would cause his reliance to be unwarranted.
(c) Officers.–Except as otherwise provided in the bylaws, an officer shall perform his duties as an officer in good faith, in a manner he reasonably believes to be in the best interests of the corporation and with such care, including reasonable inquiry, skill and diligence, as a person of ordinary prudence would use under similar circumstances. A person who so performs his duties shall not be liable by reason of having been an officer of the corporation.
15 Pa.C.S. § 5712.
The NPCL also speaks to the personal liability of directors:
§ 5713. Personal liability of directors.
General rule.–If a bylaw adopted by the members of a nonprofit corporation so provides, a director shall not be personally liable, as such, for monetary damages for any action taken unless:
The director has breached or failed to perform the duties of his office under this subchapter; and
The breach or failure to perform constitutes self-dealing, willful misconduct or recklessness.
Common Interest Community Statutes — In Pennsylvania, pursuant to both the Uniform Condominium Act, 68 Pa. C.S. § 3101 et seq. and the Uniform Planned Community Act, 68 Pa.C.S. § 5101 et seq., board members stand in a fiduciary relation to the association and shall perform their duties, including duties as members of any committee of the board upon which they may serve, in good faith in a manner they reasonably believe to be in the best interests of the association. See 68 Pa.C.S. § 3303(a) and § 5303(a). Under the Pennsylvania Uniform Acts, Judicial review of board decisions is available even when a condominium or HOA was organized prior to the adoption of the Uniform Condominium Act, 68 Pa. C.S. § 3101 et seq. and/or the Uniform Planned Community Act, 68 Pa.C.S. § 5101 et seq.
Finally, a large percentage of community association Bylaws also speak to board members’ responsibilities and duties, and what standard is utilized to determine if a board member has acted appropriately. To wit, many Bylaws provide for indemnification for actions filed against the board and/or its members and specify when indemnity would apply given how a board member is to act on behalf the association (and at times, Bylaws will specify what actions would lead to no indemnification occurring, i.e., self-dealing, failure to act in the best interest of the association, etc.).
Insurance and claims.
Obtaining appropriate insurance to cover potential breach of fiduciary duty claims is critical for every association. Associations should work with insurance professionals that specialize in association matters in order to ensure that the association is receiving the best possible insurance product and coverage available.
As it relates to fiduciary duty claims, these claims can be brought under many legal theories (and for which it appears that the list of such potential legal theories is constantly growing), including:
Use of association property;
Buying/selling property;
Expenditure of association funds;
Hiring/firing;
Vendor and bidding issues;
Staff issues;
Election issues;
Member issues;
Collections disputes;
Operation of the association;
Self-dealing;
“Out of Control” board or board member(s) and Declaratory action(s) to remove;
Maintenance issues;
Design/Architectural issues;
Defamation;
Premises liability issues for an alleged failure to maintain;
Discrimination;
Failure to hold Annual Meeting;
Business decisions – insurance, reserve issues, FHA mortgage approvals; and
Enforcement of covenants/selective enforcement.
Fiduciary duty claims should be submitted to the association’s carrier for review under the association’s Officers (D&O) Liability Coverage. The D&O coverage part is generally drafted to include a myriad of potential claims, coverage for many of which may include a “wrongful act”. Board members must be considered an “insured” under the policy and required that the “insured” be acting in the scope of their capacity as a board member. There are also exclusions, defense cost issues and other issues pertinent to insurance that must be reviewed. The moral of the story is that D&O policies vary tremendously, so it is crucial that the association review their specific policy with its insurance professional in order to clearly understand their policy terms, conditions and exclusions.
Defense of fiduciary duty claims.
Typically, the threshold issue with the defense of breach of fiduciary duty claims is whether the BJR applies. The BJR is applied, in some form, whether through common law or statute, in the vast majority of jurisdictions. Standing to sue will be analyzed, as will the duties owed (i.e., is the duty owed to the association or is it also owed to individual members/owners?), conflicts/potential conflicts of interest, privilege and immunities and other issues like offers of judgment should be considered.
Claims, threats and suits should be submitted to the association’s D&O carrier so the carrier can make a coverage determination. It is important to notify the carrier as soon as possible so a defense can be provided, if applicable. Carriers will often open a file to “monitor” a fiduciary duty claim in the event the claim escalates and so defense to the claim may be provided to the association by the carrier.
Best practices.
How can associations attempt to avoid claims based upon an alleged breach of fiduciary duty? In a nutshell, board members should: (a) act within the scope of their given authority; (b) act in good faith; (c) use ordinary care; (d) act in the best interest of the association; (e) act reasonably with respect to enforcement of covenants and rules and regulations; and (f) act reasonably when making management and business decisions. Of course, each situation a board will face may be different, but at the day, acting reasonably will go a long way to overcome an allegation of a breach of fiduciary duty.
– Edward Hoffman, Jr., Esq., CCAL
* A version of this Blog post was drafted by Edward Hoffman, Jr., Esq., CCAL and originally included in his portion of the written materials for his presentation at CAI’s 2018 Community Association Law Seminar in Palm Springs, CA.
Time flies. Since about 2010, I have been counseling community associations on risks involving potential breaches of personal information and the fact that Pennsylvania has a specific statute related to such breaches, literally called the “Breach of Personal Information Notification Act” (“BPINA”). BPINA was recently amended and signed into law by Governor Wolf on November 3, 2022 (and effective in 180 days).
As a general BPINA primer, community associations qualify as “businesses” under BPINA and are covered “entities” which do business in the Commonwealth of Pennsylvania. BPINA defines “Personal information” as follows:
(1) An individual’s first name or first initial and last name in combination with and linked to any one or more of the following data elements when the data elements are not encrypted or redacted:
(i) Social Security number.
(ii) Driver’s license number or a State identification card number issued in lieu of a driver’s license.
(iii) Financial account number, credit or debit card number, in combination with any required security code, access code or password that would permit access to an individual’s financial account.
(iv) Medical information. (Added as amended on 11/3/22)
(v) Health insurance information. (Added as amended on 11/3/22)
(vi) A user name or e-mail address, in combination with a password or security question and answer that would permit access to an online account. (Added as amended on 11/3/22)
Most community associations do not keep social security numbers, medical information and/or health insurance information (and likely should not be if they are), but many have access to and keep records of driver’s licenses, financial accounts and credit/debit cards. Many also have portals which contain a user name or e-mail address, in combination with a password or security question and answer that would permit access to an online account (usually an association account of some kind). (Note: the last section re: email addresses and login information was added as amended on 11/3/22 so community associations should use due diligence to protect the information and comply with BPINA as amended, even if they were properly handling records of driver’s licenses, financial accounts and credit/debit cards prior to the recent BPINA amendments).
Hopefully any and all of this personal information is being properly handled and kept (maintained) offsite on properly encrypted systems run by third-party providers and/or contactors to attempt to offset and/or limit liability (I note that managing agents also keep this information as well, and there should be similar considerations/protections for maintaining such data).
BPINA has always required notification of the breach of the security of the system, but the November 3, 2022 BPINA amendments added additional notification requirements, including the following new Section 3(a.3):
(a.3) Electronic notification.–In the case of a breach of the security of the system involving personal information for a user name or e-mail address in combination with a password or security question and answer that would permit access to an online account, the entity, to the extent that it has sufficient contact information for the person, may comply with this section by providing the breach of the security of the system notification in electronic or other form that directs the person whose personal information has been materially compromised by the breach of the security of the system to promptly change the person’s password and security question or answer, as applicable or to take other steps appropriate to protect the online account with the entity and other online accounts for which the person whose personal information has been materially compromised by the breach of the security of the system uses the same user name or e-mail address and password or security question or answer.
Accordingly, community associations should be aware of not just the general (preexisting) notification requirements pertinent to a breach of personal information, but associations should also understand how to handle notification involving the breach of the security of the system involving personal information for a user name or e-mail address in combination with a password or security question and answer that would permit access to an online account in accord with BPINA as amended.
Finally, this post was not intended to serve as a discussion of how to properly handle a breach of personal information nor was it intended to be an exhaustive review of BPINA in general and/or as amended; rather, the intent was to notify our community association clients and industry colleagues of changes in the law, so proper due diligence can be undertaken. For some reason lawyers [still] love to use a dead language – Latin – to make their points. Our question is therefore: parati estis? … or, are you ready?
To get ready, we recommend that community associations review BPINA as amended, which can be found here, discuss with their counsel, managing agents, any service providers that handle personal information (especially association software providers), and confirm proper insurance coverage with association insurance professionals. As it relates to insurance, community associations should obtain adequate cyber-liability insurance to offset risk and cover a breach incident (it is noted that the cost of proper notification is tremendous, especially if the breach involves notification to over 1,000 persons at one time (because all consumer credit reporting agencies must also be notified)).
Look around, leaves are brown… There’s a patch of snow on the ground …
(A Hazy Shade of Winter, Simon and Garfunkel, lyrics by Paul Simon)
Every year, community associations face innumerable claims and lawsuits for accidents, injuries and damages for incidents involving snow and ice on association property. These claims and lawsuits are expensive and time-consuming and can potentially impact community associations’ insurance rates. A while back, I was interviewed* for CAI’s HOA Resources Blog regarding snow removal policies in HOAs. Below is the Q&A from that interview.
Q: Why should an association have a snow removal policy?
A: Every association with such a need should adopt a snow removal policy. Outdated snow removal policies can create just as large of a liability issue for the association as not having one. It’s important for the board to implement the policy and apply it uniformly and consistently.
Q: What are the top factors associations must consider when creating a snow removal policy?
A: First, associations should determine who is responsible for the snow removal, such as a service provider that will be performing contracted work. Boards and managers should check their insurance certificates and be certain that the association is named as an additional insured under each policy. The service provider’s proposal/specification sheet is not an actual contract.
Next, the threshold for snow removal must be determined. The industry standard in the Northeastern U.S. is generally 2 inches of accumulation. Special care should be attributed to ice and sleet events, meaning the association must address other hazardous conditions in the community.
Finally, consider what level of control the association is exerting over the service provider. The more control the board asserts while they work, the more potential liability should an incident occur. The association should contract for snow removal work according to the parameters set forth in a properly drafted and approved service contract.
Q: Should associations in areas that do not routinely get measurable snow have a policy?
A: Every association should have a policy for handling a snow event. There may not be a need for a snow removal contract in areas without measurable snowfall, but all associations should have a snow event action plan in place.
Boards and managers in an association without a snow removal policy should consider their options. While some areas without regular snowfall may not require one, having a snow event policy can prevent liability concerns later. Associations should review their snow removal policies periodically to determine their relevancy. One policy can be the difference between a winter wonderland and a slew of lawsuits.
– Edward Hoffman, Jr., Esq., CCAL
*The CAI HOA Resources Blog link to the interview can be found here: https://hoaresources.caionline.org/does-your-hoa-need-a-snow-removal-policy/
As a Community Association attorney, I’ve been on both sides of the fence as it relates to association litigation. Whether I am initiating litigation against others on behalf of the association or defending the association for claims brought by others, the following holds true: litigation is expensive, time-consuming and emotionally draining for those involved. The purpose of this Blog post is to educate community leaders on how to implement best practices in order to avoid litigation.
Association as a Plaintiff
Collections
Let’s face it: unit owner delinquencies are a problem for most associations. Sometimes avoiding litigation in collections is not possible due to chronically non-paying unit owners. But much of the time, litigation can be avoided if the association stays proactive in its efforts to collect overdue assessments.
To begin, every association should implement, and utilize, a practical collections policy that protects the interests of the association while, at the same time, seeks to resolve the arrears without the necessity of litigation. A multi-tiered policy is often the best way to try and collect the arrears while resorting to litigation as a last step. For example, after the account is deemed delinquent (as “delinquent” is defined in the collections policy), a warning/demand for payment letter is sent to the delinquent unit owner by the association, requesting payment within ten days. Should the owner not pay within the allotted time period, a final warning/demand letter is sent to the delinquent unit owner by the association, requesting payment within five days. Should the unit owner again fail to pay, the matter is to be turned over to the association attorney for collection. Depending on what the collections policy provides, the attorney can either send an attorney demand letter (in compliance with the Fair Debt Collection Practices Act) or immediately initiate suit against the delinquent unit owner in order to collect the delinquent account.
Utilizing this type of collections policy thus allows the association to have a “two (or perhaps three) strikes and you’re out” approach when it comes to collections in an attempt to avoid litigation until it becomes absolutely necessary.
Transition and Declarant Issues
The majority of lawsuits filed by an association against a declarant are filed after many months, or even years, of communication and negotiation between the parties. However, the earlier the parties can begin to communicate and attempt to resolve the disputed issues, the better.
For instance, associations often wait until the formal transition process begins to bring up any outstanding issues related to the common elements. While the declarant certainly needs to address valid issues at transition, there is no reason why the association has to wait until the actual transition to request that the declarant correct a deficiency with the common elements. Rather, the association should open the line of communication early in the process to put the declarant on notice of the issue. Sometimes, if it is logistically/economically feasible, a declarant may handle the issues as they occur in order to keep the relationship between the parties “positive” and to avoid having to handle everything all at once at transition (however, depending on the particular declarant, this may not be possible).
Also, with respect to the formal transition, rather than digging in, puffing out their chests and litigating every issue, the parties are encouraged to respectively discuss and negotiate their positions and enter into a “Transition Settlement Agreement” in order to finalize the remaining issues and send each party on its way.
The moral of the story is that while litigation between an association and a declarant is sometimes unavoidable, if the parties effectively communicate early on in the process, agreements may be reached and litigation may actually be avoided.
Contract Disputes
In the association world, most contractual disputes involve a contractor/vendor that the association believes didn’t live up to its end of the bargain. While breach by the other party is sometimes inevitable despite the terms of the contract, an association can seek to avoid litigation if it can craft/revise/amend the contract in such a manner that fosters the ability of the association and the contractor/vendor to resolve the issue and/or terminate the contract with an agreed-upon recourse (i.e., liquidated damages).
It is recommended that the association have its professional property manager review and assist in negotiating contracts on behalf of the association. Managers generally have many years of experience under their belts when it comes to contracts, and they are a tremendous resource for associations.
When it comes to larger (as far as cost), and more technically complicated, contracts, it is advisable to have the association attorney review the contract to ensure that the association is best protected. Many times, onerous and one-sided (and sometimes unenforceable) clauses are present in the contract and these provisions should be removed from the outset. Other times, there are issues pertaining to breach, notice and damages that the attorney must strengthen and/or bolster for the benefit of the association.
At the end of the day, an association can best seek to avoid litigation by being proactively involved in the drafting process prior to execution of the contract. Otherwise, it might be “too late” and litigation may become the only option available to the association.
Enforcement (injunctive relief)
Similar to collections matters, sometimes avoiding litigation in an enforcement matter is not possible due to perpetually non-compliant unit owners and/or due to the nature of the violation at issue. However, litigation can be avoided if the association stays proactive in its efforts to enforce its covenants.
To start, associations should enact reasonable rules and regulations in compliance with their governing documents and enforce same equally and uniformly against all unit owners. Care should be taken to ensure that the proper notice, hearing and appeal requirements are incorporated into the rules and regulations. Doing so not only ensures compliance with the law (i.e., procedural due process), it also provides a mechanism for the association to try and work with the unit owner(s) to voluntarily remedy the violation prior to engaging in litigation in order to force unit owner compliance.
Finally, associations should make every effort to communicate with the non-compliant unit owner(s) throughout the process in an attempt to resolve the violation. Only after every reasonable opportunity has been exhausted, should an association engage in litigation to seek injunctive relief to cure the violation (the author notes that when the alleged violation involves actual or potential damage to property and/or results/may result in physical harm or bodily injury to a person, the association should expedite seeking a remedy and obtain emergency injunctive relief if required).
Association as a Defendant
Personal Injury – Premises Liability
Associations must manage risk appropriately in order to avoid litigation in premises liability matters. Proactive risk management measures include, but are not limited to:
Asking the association general liability insurer to perform a risk management assessment in order to provide recommendations to the association on suggested risk minimization techniques;
Ensuring that various contractors fulfill their duties in a manner that minimizes risk (i.e., snow plow contractors, security guards, lifeguards, landscapers).
Making sure that the association is properly maintaining common elements to eliminate common risks (i.e., broken/uneven sidewalks, potholes, trees and tree limbs);
Having the property manager perform routine inspections of the property;
Enforcing rules and regulations as required in order to avoid risk caused by unit owner violations.
By being proactive about risk minimization, associations will reduce the number of claims that are brought, and in turn, the likelihood of litigation.
Director and Officer (D&O) Liability Actions – Breach of Fiduciary Duty
Litigation brought by unit owners for an alleged breach of fiduciary duty by the association board of directors is a growing phenomenon. In order to avoid these claims, the board should act in good faith, treat all unit owners equally and perform its duties reasonably and with sound business judgment.
While such allegations will invariably be brought by at least one unit owner in every association, the more documentation an association has to substantiate its actions, the better suited it will be when a claim is made. Accordingly, it is imperative that the association keeps minutes of all board decisions, correspondence to/from unit owners, copies of all contracts and accounting statements and audits, among other things.
Finally, the author notes that associations should obtain adequate director and officer liability insurance coverage in order to best protect the board and the association.
Enforcement Issues
Unit owners frequently bring claims against the association for “selective” or “unequal” enforcement, meaning that the association board is allegedly picking and choosing how it wishes to pursue enforcement of the association covenants and/or is selectively deciding which unit owners they will seek to enforce the covenants against (in other words, the association is allegedly using its enumerated powers to “punish” some owners, and let others “slide”).
Associations can avoid litigation for selective enforcement by always acting: (1) in good faith; (2) reasonably; and (3) with sound business judgment. By following the enforcement procedures set forth in the governing documents (including proper notice, hearing and appeal requirements) and enforcing the covenants equally and uniformly against all unit owners, the risk of such claims is reduced.
Finally, it is noted that claims brought for selective enforcement often concurrently involve fiduciary duty claims (discussed above) and/or fair housing/discrimination claims (discussed below).
Defamation
A suit for defamation can arise in an association when a unit owner (or even a board member) alleges that the association defamed (whether through slander or libel, or both) the owner by communicating about the owner in a manner that has harmed the owner. In the author’s home state of Pennsylvania, and in many other states, when bringing an action for defamation, an owner must prove:
The defamatory character of the communication;
Its “publication” by the association;
Its application to the owner;
The understanding of the recipient of its defamatory meaning;
The understanding of the recipient of it as intended to be applied to the owner;
The special harm resulting to the owner from its publication; and
At times, that abuse of a conditionally privileged occasion had occurred.
While many suits for defamation brought by unit owners are baseless in the law, the association still must defend the suit, which is time-consuming and potentially expensive. Associations should therefore seek to act reasonably and avoid making potentially defamatory communications about the owner. Some frequent issues that have brought about defamation complaints are as follows:
Publishing the name of a unit owner whose account is in arrears to all owners either in a newsletter or by posting on a community bulletin board (whether electronic or physical);
Publishing the name of a unit owner whose account is in arrears on an association website, allowing the “world” to view it; and
Publicly discussing a unit owner’s alleged covenant violation at an open board meeting prior to issuing a final determination on the issue.
Finally, if the association has any doubts on how to handle an issue that may lead to a potential defamation claim, it is encouraged that the association contact its counsel for an opinion on the issue.
Contract Disputes
Contractors and vendors with whom an association contracts often bring claims against the association for breach of contract. More often than not, the association believes that the vendor or contractor has not “performed” pursuant to the contract terms (and/or has overcharged) and has therefore breached the contract. The association then withholds payment, which causes the vendor or contractor to sue the association for breach.
The key to avoiding these suits is for the association to act reasonably in how it approaches a contract dispute, including how it handles the above-referenced situation. Rather than simply withholding payment for an alleged breach by the vendor or contractor, which will likely cause the situation to escalate into litigation, the association should seek to communicate with the vendor or contractor in an effort to amicably resolve the dispute. Frequently, these disputes can be negotiated and resolved in a manner that’s beneficial to both parties when compared with the cost, energy and time involved to litigate a breach of contract dispute.
Fair Housing Claims
Title VIII of the Civil Rights Act of 1968 (“Fair Housing Act” or “FHA”), 42 U.S.C. §§3601 – 3631, and its 1974 amendment, made it illegal to threaten, coerce, intimidate or interfere with anyone exercising a fair housing right or assisting others who exercise that right, or to advertise or make any statement that indicates a limitation or preference based on a protected class, which includes race, color, national origin, religion or sex (gender).The Fair Housing Amendments Act of 1988 (FHAA) added two more protected classes to the FHA: (1) familial status; and (2) individuals with disabilities. The FHA applies to community associations because the FHA prohibits discrimination, by the association, related to any services and/or facilities the association provides related to the residential housing in the association. 42 U.S.C. §3604(b).
The US Department of Housing and Urban Development (“HUD”) has interpreted the FHA 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 race, color, sex, religion, national origin, familial status or disability. Disparate Impact involves discrimination by different impact, i.e., when a neutral policy or procedure has a disproportionately negative impact on a protected class.
Fair housing claims have been increasing steadily against community associations across the country. The most common fair housing complaints in associations are as follows:
Failure to provide a “reasonable accommodation” for a disability – examples include requests for animals (service and emotional support/companion animals) and parking issues;
Failure to provide a “reasonable modification” for a disability;
Familial status violations.
In order to avoid fair housing claims and litigation, associations should be educated on the law, act reasonably when making determinations and, when handling an accommodation/modification request, review same and issue a fair and reasonable determination in a timely manner.
Finally, the author notes that fair housing issues are discussed in greater detail in the author’s Common Ground magazine article entitled “All’s Fair”, in the July/August 2014 issue.
Alternatives to Litigation (ADR)
Finally, sometimes the only way an association can actually avoid litigation is to agree to submit the dispute to alternative dispute resolution (ADR). This can be binding or non-binding in nature, based on the agreement of the parties. Popular forms of ADR include Mediation (generally heard by a sole Mediator and is more of a “summary” proceeding where the parties and the attorneys submit information to the Mediator (ahead of time and/or at the Mediation) without the need for evidence/actual testimony to be introduced/taken at the Mediation) or Arbitration (frequently heard by a panel of Arbitrators and can include testimony and evidence at the proceeding).
By Edward Hoffman, Jr., Esq., CCAL
An abbreviated version of this Blog post was published in Ed Hoffman’s article in the July/August 2015 issue of Common Ground magazine.
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.
As Bob Dylan noted in 1964, “The Times They Are A-Changin’.” While this anthem of societal change may seem unrelated to the 2011 residential real estate market, in actuality, Dylan’s poetic title track serves as a template for today’s buyers. Back in 1964, most buyers were limited to “traditional” home ownership. Today’s buyers have a myriad of options, including living in a common interest community (CIC).
In a nutshell, CICs are formal legal entities (usually non-profit corporations) created to provide a common basis for the maintenance and preservation of the homes and/or the property contained in the community. In Pennsylvania, CICs are generally set up as either homeowners’ associations (HOAs) or condominium associations. CICs are subject to the statutes that govern both non-profit corporations and common interest communities. Most homes that are located within a CIC are purchased subject to Covenants, Conditions & Restrictions (CC&Rs), which are restrictions placed upon each home to maintain uniformity within the community. This uniformity will hopefully lead to a preservation of property values for the homes located within the community. Homeowners pay dues or assessments so the CIC can pay expenses related to maintaining common property in the community, including roads, gated entrances and drainage basins and often to provide various services and/or amenities that are common to all of the homes in the community, such as trash removal, snow removal, security, landscaping, a fitness center, a swimming pool, a community center, or a playground.
Today’s buyers interested in purchasing a home in a CIC should consider a few important things, including:
Reserves
Make sure that the reserve funds set aside for maintenance of common areas are adequate to fund a large scale capital improvement project, like repaving a road or replacing a roof. Owners will be issued a special assessment to pay for the project in addition to the normal assessment if the reserve funds are not enough. If not enumerated in the resale certificate issued to the buyer prior to closing, the buyer should ask for a breakdown of the reserve funds as well as expected, upcoming capital expenditures.
Budget
Ask the CIC Association or the seller for a copy of the budget. Pay careful attention to the Association’s outstanding debts and liabilities, as well as the percentage of homeowners that are not paying their assessments. If the majority of homeowners are not paying, this spells financial trouble for the Association as well as its member-owners. This could also have a negative impact on a potential buyer’s ability to obtain a mortgage to purchase a home in a condominium association. Freddie Mac, Fannie Mae and the Federal Housing Administration, which purchase and/or insure a majority of mortgages, place a 15% cap on assessment delinquency rates in order to approve lending for homes in the community.
Insurance
Ask for a copy of the Association’s insurance policy to make sure that the community’s coverage is adequate. This is separate and distinct from an owner’s homeowners’ insurance policy. Ask your insurance agent to look at the Association’s policy. Coverage should include but not be limited to general liability coverage with no general aggregate, director & officer liability coverage, environmental impairment coverage, guaranteed replacement cost coverage and employee dishonesty coverage.
Number of Investment Properties
If a potential buyer is looking to live in the home as opposed to using the home as an investment vehicle or rental property, the buyer should look into the percentage of homes that are actually owner-occupied versus how many are leased to tenants. 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 rental properties in a community can also have a negative impact on a potential buyer’s ability to obtain a mortgage to purchase a home in a condominium association. Freddie Mac, Fannie Mae and the Federal Housing Administration currently require a 51% owner occupancy rate in order to approve lending for homes in the community.
Covenants, Conditions & Restrictions (CC&Rs)
Look at the CC&Rs for the community to make sure that you, as a potential community resident, can live with the limitations imposed on all owners in the community. For instance, many communities require that curtain backs–the side of the curtain that faces the window–be one color so that all of the community’s homes have a uniform appearance from the outside. If you must have fuchsia curtains for the world to see in every one of your windows, then perhaps buying a home in a common interest community is not the best choice for you.
Homeowners living in a CIC enjoy many attractive benefits and amenities, including security, access to recreational facilities and activities, and fewer worries about property maintenance. By carefully reviewing contracts and asking questions, homeowners will be able to determine whether living in a particular community is right for them.
By Edward Hoffman, Jr., Esq. Originally published in Lehigh Valley Marketplace, December 2011
