Tag Archives: laws

Amending an Association’s Governing Documents is the Practice of Law…at least in Florida

On May 14, 2015, the Supreme Court of the State of Florida rendered an advisory opinion on the activities of community association managers (which can be found here). The opinion addressed whether certain activities were, in the opinion of the Court, found to be the unlicensed practice of law. The Court held that certain practices being done by community association managers in Florida were the unlicensed practice of law. In particular, the highlight of the Court’s opinion was that: the drafting of documents (and certificates of amendment that are recorded in the official records) to the declaration of covenants, bylaws, and articles of incorporation/charter when such documents are to be voted upon by the members of the association constitute the unauthorized practice of law. In other words, the preparation of CCRs, bylaws, charters, and any amendment thereto by a non-lawyer is the unauthorized practice of law.

Admittedly, Tennessee is not Florida. That being said, in practicing in this field, we often see documents prepared by non-lawyers, be they community association managers or well-intentioned board members. The issue is that these documents, nearly universally, create more problems than they solve. Sometimes they do not address the issue they were intended to address. Sometimes they are improperly executed. Sometimes everything is wrong with them. In one noted example, we found an association with no lien rights that filed over one hundred (100) liens on property. While we were able to resolve the situation, the issue was created because well-intentioned board members sought to save money by doing the documents themselves. Unfortunately, fixing the problems caused by non-lawyers usually costs more.

When you consider amending your documents, be advised that your association should have legal representation. The documents being amended will impact your development for years to come. Whether you are aware of it or not, small changes in your governing documents may have significant impacts in how your Association operates.

The advisory opinion of the Supreme Court of the State of Florida is a reminder that we are dealing with legal documents. Just like you would not have a lawyer conduct your heart surgery, you should not have a non-lawyer drafting your association’s governing documents.

Can an Association Prohibit or Restrict Smoking?

Can an association prohibit or otherwise restrict smoking in the common areas or common elements? This is not a question one would typically hear for homeowners associations. Simply put, single family homes in planned developments typically have open air common spaces where smoking is not an issue. But, in condominiums or townhome developments, smoking can be an issue. Many condominium developments are constructed with shared air ducts and walls. Smoke can freely pass through such ducts or walls, or under doors in condominium common areas. Given the well-documented health effects of second-hand smoke and the governmental regulation of smoking in other public spaces, can a condominium development prohibit or otherwise restrict smoking in its common areas or common elements?

Of course, Tennessee has not addressed this issue. But other states have. A California jury found a condominium association negligent for failing to resolve a second-hand smoke dispute between neighbors. The verdict awarded the Unit Owners over $15,000.00 in damages. California courts have held in Birke v. Oakwood Worldwide, that the owners of an apartment complex owed residents a duty to keep the premises “reasonably safe” and that the failure to adopt a no-smoking policy for outdoor common areas could constitute a breach of that duty. In Colorado, a District Court upheld an amendment to a declaration that banned smoking in a condominium development entirely. These cases show that an association may (and in some cases must) prohibit or regulate smoking in the common areas and common elements of a condominium development.

Based upon these cases, the law is headed towards creating some liability for associations that fail to recognize that second-hand smoke has health effects and that such effects can be mitigated by prohibiting or restricting smoking in the development. As noted above, courts are already holding associations liable for not regulating smoke within common areas and are upholding smoking restrictions.

We have already worked with an association in Memphis to pass a no-smoking restriction. Such a restriction does not prohibit all smoking. Rather, it addresses smoking in the common areas and common elements and incidents where smoke seeps or permeates out of a Unit into another Unit or the common areas or common elements.

If you association would like to discuss such an amendment, please let us know.

An Association’s Right to Non-Judicially Foreclose…

Often our first contact with an association begins with a discussion about a member who is seriously delinquent in the payment of their assessments. The Board wants to know what they can and should do. The answer we give often comes as a surprise.

Have you thought of a non-judicial foreclosure?

Many Boards do not realize that most master deeds and CCRs include a provision that allows for the non-judicial foreclosure of delinquent assessments. Of course, this provision is akin to the “nuclear option”. In effect what we are doing is selling this delinquent member’s home on the courthouse steps because they are delinquent in paying their homeowner’s association assessments. Of course, doing nothing means that the Board may have to explain to the members that do pay their assessments why this one owner gets to free-ride on everyone else’s good will. There are few good options here.

So, what does it mean for an association to foreclose? The association must comply with the statutory requirements regarding foreclosure sales. It must also comply with the requirements in its governing documents regarding such sales. Generally, this requires providing notice to all parties having an interest in the property, publishing at least three notices in a newspaper of general circulation in the county over at least a twenty day period, and calling the sale. The sale provisions need to waive certain property rights, such as the right of redemption, equitable right of redemption, homestead, and dower. Finally, the foreclosure provisions will explain how proceeds are to be distributed if there is active bidding (and in our experience, there is not).

The questions most Board’s ask is – what about the mortgage? Excellent question. The promissory note secured by the deed of trust/mortgage was executed by the delinquent member, not the association. Thus, the association is not obligated to make payments on such promissory note even if the association acquires title to the property. Now, if the mortgage/deed of trust is superior to the lien of the association (likely the case), then the bank’s lien evidenced by such mortgage/deed of trust would be superior to any ownership interest conveyed by the association’s foreclosure of its lien for delinquent assessments. This means that the bank can foreclose the mortgage/deed of trust and wipe out the ownership interest conveyed by the association’s foreclosure. But, is this really a problem? The issue was the delinquent owner, not the bank. Presumably by the time the bank is involved the delinquent owner is gone. Further, once the bank forecloses, the income stream related to the assessments from the property will restart. Economically, the association may be out the costs of the foreclosure, but it has turned a non-performing property into a performing property over the long-term. Which would you rather have, a property with an owner who is consistently delinquent, or spending some funds to restart an income stream?

Obviously, this post merely scratches the surface of this issue. Given the differences in each development’s documents, how the process works can be different. Further, the costs of a non-judicial foreclosure can be significant. That being, it is a process that works for associations and should be considered and discussed by their Boards in certain cases.

A Word on Condominium Insurance…Trust Us, It’s Important.

We are often asked what the most overlooked issue for a condominium association is. Insurance. The insurance provisions in a condominium’s master deed and how they interact with the maintenance and repair provisions are exceedingly important. For example, if a main water riser in a high-rise condominium bursts causing water damage in both common elements and units, how does the insurance provision for the association treat such a casualty?

In condominiums, the association maintains a master insurance policy. The unit owners also maintain their own insurance policy (typically a HO-6 insurance policy). The issue lies where the coverages for these policies potentially interact. Typically, a master insurance policy will insure the general common elements, limited common elements, and the original construction of the units (or another formulation is that the policy will insure to the bear walls of the units). Any improvements and betterments made in the unit are to be insured by the unit owner. What is an improvement and betterment? Let’s say that in the condominium development involving the hypothetical burst riser above, the units originally came with carpet floors, painted walls, and laminate countertops. A unit owner buys a unit, but wants a better finish on the unit. The unit owner, being an aficionado of HGTV opts to install, after obtaining any necessary approval from the association, terrazzo floors, quartz countertops, and subway tile back splashes. Each of these changes is an improvement and betterment as they change the initial construction of the unit. In a properly written insurance provision, the unit owner should insure these improvements and betterments because it is not equitable to require other unit owners to bear the financial loss if such improvements and betterments are damaged by a casualty. Put another way, why should I pay for my neighbor’s damaged floor?

The issue is that lawyers are not insurance agents, and vice versa. Often we find that the insurance provisions in Master Deed, particularly more recent Master Deeds, is incorrect. Consequently, the association is put in the position of insuring such improvements and betterments. In the hypothetical above, if the burst pipe is not caused by the negligence or intentional acts of the association, then the association is generally not responsible for the repair of such improvements and betterments. But, if the insurance provisions of the master deed includes such improvements and betterments in the coverage of the master policy, then it becomes a claim on the master policy.

So? You might ask.

Where is snowballs, is that often these provisions then provide that the cost of an insurance deductible is a common expense. Since condominium insurance is not cheap, many policies have high deductibles. So, in the above hypothetical, the association could have multiple claims to repair a unit owner’s improvements and betterments where the costs of the insurance deductible(s) become a common expense. The unit owners that were not impacted by the casualty will soon wonder why their assessments are being impacted by insurance costs to repair another owner’s improvements and betterments.

Consequently, it is vitally important for condominium associations to review their insurance provisions. These provisions need to be reviewed by both a lawyer and an insurance professional.

2015 Legislative Update II — SB 1079

In addition to the proposed Tennessee Homeowners Association Act (HB 610/SB 405), the Tennessee legislature is currently considering SB 1079. It was also introduced on February 11, 2015.

This legislation imposes certain reporting guidelines on homeowners associations. Since the proposed legislation defines as “Unit” as including an unimproved lot, it presumably does not apply to condominiums (which have similar reporting guidelines under the Tennessee Condominium Act of 2008). The issue and concern in this proposed legislation is that proposed § 66-27-602(a) prohibits the association from charging the unit owner a fee for providing the information requested pursuant to the proposed legislation. This provision directly conflicts with existing state law under Tenn. Code § 48-66-103(c) that permits a non-profit corporation (which most homeowners associations are) to charge a reasonable fee for providing such information. Further, the proposed legislation levies fines on the homeowners association if the information is not timely provided.

So, the homeowners association would not be able to recoup its administrative costs (contrary to existing state law) and would be subject to fines if it does not timely submit the required information. How does this assist a homeowners association governed and administered by unpaid directors? Is the association, which has a limited budget, simply to eat these costs?

2015 Legislative Update — the Proposed Tennessee Homeowners Association Act (HB610/SB405)

This year, the Tennessee Legislature is considering the Tennessee Homeowners Association Act (HB 610/SB 405). It was introduced on February 11, 2015. As yet, we have not had an opportunity to digest the proposed Act in its entirety. That being said, it appears to be a solution looking for a problem. While there is no governing statutory framework exclusively for homeowners associations in Tennessee, the questions which must be asked by the legislature are whether this Act is necessary, and if so is it the proper Act to legislate homeowners associations in Tennessee (especially in light of what other states have done).

The Act purports (pursuant to proposed Tenn. Code § 66-27-605) to apply “to all common interest communities that may be used for residential purposes.” Both “common interest communities” and “residential communities” are separately defined using definitions that refer to other terms which are separately defined. For our purposes, though, the Act applies to all residential homeowners and condominium owners associations in Tennessee, unless otherwise provided in the Act. The Act then states in proposed Tenn. Code § 66-27-606 that certain sections of the Act apply to all “common interest communities”, regardless of the date of the occurrence, and all of the other provisions of the Act apply to all “common interest communities”, but only with respect to events and circumstances that occur after July 1, 2015. The Act then provides in proposed Tenn. Code § 66-27-607(d) that the Act does not apply to condominiums governed by the Tennessee Condominium Act of 2008. Of course, pursuant to Tenn. Code § 66-27-202(a), the Tennessee Condominium Act of 2008 governs all condominiums built in Tennessee after January 1, 2009, and selectively applies to all other condominiums in the state. So, whether this provision in the proposed Act means that condominiums, in general, are exempted from the Act or only those condominiums constructed after January 1, 2009, are exempted from the Act is unknown.

So, to start, just to determine how the proposed Act is to be applied is something of a challenge. It is to be applied to all “common interest communities”, unless governed by the Tennessee Condominium Act (which is selectively applied to condominiums), and even then portions of the proposed Act apply only to events that occur after July 1, 2015. At first blush, this must be clarified.

The proposed Act contains some positive elements (such as a six-month reach-back for common interest communities). That being said more review by industry professionals is necessary before the legislature approves this Act.

We will update you as we review the proposed Act.

Another Reason Not to Opt into the Tennessee Condominium Act…

As has been discussed before, the Tennessee Condominium Act is an odd statute. It both does and does not apply to all condominium developments in Tennessee. If a condominium development was created (i.e., its master deed or declaration properly recorded) after January 1, 2009, then such development is governed by the entirety of the Tennessee Condominium Act. However, most condominium developments in Tennessee were created prior to January 1, 2009. As such, the Tennessee Condominium Act only partially applies to them, and then only as to events that occur after January 1, 2009, see Tenn. Code § 66-27-202(a). That being said, the Tennessee Condominium Act provides that an existing condominium development may opt into the new statute, see Tenn. Code § 66-27-202(c). But, would a condominium development want to?

Our answer is “no”.

Here is an example of why.

The Tennessee Condominium Act provides at Tenn. Code § 66-27-211 that:

In addition to any other remedy provided by the declaration, any right or obligation declared by this part and parts 3-5 of this chapter is enforceable by judicial proceeding. If any person subject to this part and parts 3-5 of this chapter fails to comply with this part and parts 3-5 of this chapter or any provision of the declaration or bylaws, any person or class of persons adversely affected by the failure to comply has a claim for appropriate relief. The court, in an appropriate case involving willful failure to comply with this part and parts 3-5 of this chapter, or any provision of the declaration or bylaws, may award reasonable attorney’s fees.

Facially, this seems to be a good provision. It provides that the master deed/declaration, bylaws, and Tennessee Condominium Act may be judicially enforced and with attorney’s fees awarded. That is true. However, “person” is defined by the Tennessee Condominium Act, at Tenn. Code § 66-27-293(18), to include corporations. This means that this enforcement provision may be used against the association if it is not complying with the master deed/declaration, bylaws, and Tennessee Condominium Act. So, a condominium bound completely by the Tennessee Condominium Act has given a statutory attorney’s fees provision to its members. Given the increase in litigation between members and associations, this is not a good thing.

When condominiums contemplate whether to opt into the Tennessee Condominium Act, this is something they should consider.