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AVOIDING LITIGATION IN YOUR COMMUNITY ASSOCIATION

by Edward Hoffman, Jr., Esq., CCAL | Board Governance, collections, Education, Homeowners Association, Insurance, Litigation, Rules & Covenants, Transition

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:

1. Failure to provide a “reasonable accommodation” for a disability – examples include requests for animals (service and emotional support/companion animals) and parking issues;
2. Failure to provide a “reasonable modification” for a disability;
3.  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.