Tag Archives: laws

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.

Our Thoughts on the Proposed Neighborhood Protection Act

Last year, the Tennessee attorney general rendered an opinion on HB1982 (see Opinion No. 14-81), http://www.tn.gov/attorneygeneral/op/2014/op14-81.pdf.  Luckily, HB1982 died in last year’s legislative session. However, a new version will likely be resubmitted this year by State Representative Antonio Parkinson (see, http://wreg.com/2015/01/15/bill-could-force-ex-cons-out-of-tennessee-neighborhoods/).

The act would permit a homeowners association, neighborhood association, neighborhood watch, or any organized group of citizens that reside within a residential area to seek an injunction or restraining order prohibiting an offender from entering the boundaries of the residential area if: (i) the offender has been convicted of three (3) or more separate offenses of theft, burglary, rape, or criminal homicide (all as statutorily defined) and (ii) three (3) or more of the offenses were committed within the boundaries of the residential area.

Hmmmm…

So, if this statute were passed, a homeowners association could do nothing about the member who committed murder (and presumably served any sentence) in Memphis, Jackson, Nashville, Knoxville, Chattanooga, and Johnson City because that is not a “residential area”. Similarly, the homeowners association could do nothing about the member who commits multiple acts of vandalism, assault, and battery in the “residential area” as they are not enumerated offenses (this seems to fly in the face of broken windows theory). Nor could the homeowners association do anything with the member who has murdered once within the confines of the “residential area”, but gone on a murderous rampage on the other side of town. One could go on all day with similar hypotheticals.

Further, am I to expect the members of the homeowners association to pay the costs and attorney’s fees of enforcing this injunction and restraining order (assuming of course there is an unlikely circumstance where someone in the “residential area” has committed three of the enumerated offences within the geographical bounds of the “residential area”)?  Really?

What is the point of this statute? Will it ever be used? This Neighborhood Protection Act should suffer another legislative death.

Nuisance Provisions and the Enforcement of Covenants

Many CCRs and Master Deeds contain nuisance provisions. These seemingly innocuous provisions usually provide that: no unlawful noxious or offensive activities shall be carried on in any Lot or Unit, nor shall anything be done therein or thereon which shall constitute a nuisance or, in the judgment of the Board of Directors, unreasonably disturb others. Similar provisions also require Lot and Unit Owners to maintain their property in good condition and in good order and repair. Often in advising associations, I refer Boards to the nuisance provisions, noting that if an issue is so concerning then perhaps it is a nuisance and should be enforced as such. Many Boards wonder whether this provision has any teeth. A case I often discuss out of Nashville shows that it does.

The Tennessee Court of Appeals addressed the enforcement of a nuisance provision in 4215 Harding Road Homeowners Association v. Harris, 354 S.W. 3d 296 (Tenn. Ct. App. 2011). Harris dealt with a hoarder. The Court does an excellent job of relating the facts of the case. Briefly, however, Harris owned a Unit in the development since 1979. She apparently was a hoarder. In the summer of 2008, occupants of the condominium development began to complain about smells in the condominium. The management for the development, in an effort to deal with the issue, began a deep-cleaning of the common areas that did not address the issue. On August 26, 2008, Harris complained about a leak in her Unit. The management, in responding to the leak, immediately noticed “a very offensive and overpowering odor inside the Unit…compared to the smell of rotting meat.” In addition, management observed extremely unsanitary living conditions in the Unit. Over the next several months, the Association attempted to address this issue, including bringing in specialized contractors to assist Harris in cleaning the Unit. By the end of October 2008, the Unit was apparently clean. Unfortunately, matters did not end there. By late February 2009, the Association’s management company again received complaints about smells coming through the condominium’s HVAC stack. Another service call to Harris’ Unit revealed that the Unit had again fallen into disrepair and become unsanitary. On March 24, 2009, the Association held a forum on the matter and contracted with another company to inspect Harris’ Unit. Harris refused the inspection. On April 8, 2009, the Board sent a notice to Harris that she was in violation of the Master Deed and Bylaws. On August 31, 2009, the Association filed suit to enforce the Master Deed and Bylaws. In addition to enforcing the covenants, the Association sought the judicial sale of Harris’ Unit.

Ultimately, the Association was successful. Harris’ Unit was judicially sold. The proceeds of the sale were applied to the Association’s attorney’s fees.

The Court did not see this as a typical nuisance action. Rather, the Court noted that the enforcement of the Master Deed was a contract matter with nuisance elements. Simply put, Harris was violating a nuisance provision in the Master Deed. Thus, the behavior amounted to a breach of contract. The Master Deed provided the Association a remedy for such a breach of contract. In this instance, the Association was authorized to enter the Unit and remove the nuisance. In addition, the Association was authorized to sell the Unit to compensate itself for its legal costs. Thus, the nuisance triggered the other contractual provisions of the Master Deed.

Interestingly, this was not the end (nor the beginning of litigation between this Association and Harris). Harris was subsequently prohibited from purchasing another Unit in the development, see 4215 Harding Road Homeowners Association v. Harris, 2012 WL 6561040 (December 14, 2012). A previous case will be separately discussed.

What does this mean for Associations? Put simply, declarations and master deeds have real teeth. Admittedly, this was an extreme case. That being said, the Court did not hesitate to enforce the covenants contained in Master Deed. The covenants are there to protect the Association and the other Owners. The Board should be aware of them and should ensure that they are reasonably enforced.

The Difference Between Non-Profit and Tax Exempt

In representing condominium and homeowners associations, I often have to correct misinformation about the nature of such entities.  Recently, I have seen many members and Boards mention that their associations are 501(c)(3)’s.  They are not.

This is a common misconception regarding the nature of condominium and homeowners associations.  In Tennessee mandatory condominium and homeowners associations are created as non-profit corporations under the provisions of the Tennessee Nonprofit Corporation Act, Tenn. Code § 48-51-101, et seq. (the “Act”).  As non-profit corporations, the associations are merely corporations that do not have a profit motive.   The associations are more properly defined, under the Act, as mutual benefit non-profit corporations.  They are mutual benefit in that the purpose of the association is to provide benefits for all the members of the corporation.  For example, the maintenance of the common areas and common elements mutually benefit all members.  In regular corporations, the purpose of the entity is some business purpose ultimately geared towards making a profit.  Thus, the distinction solely has to do with whether the entity is intended to make a profit.

When an entity states that it is a “501(c)(3)” entity, it is referring to 26 U.S.C. § 501(c)(3), which is a provision of the Internal Revenue Code.  This section of the Internal Revenue Code addresses certain tax-exempt entities.  Donations to these tax-exempt entities are tax deductible.  For example,  when you make a donation to the American Red Cross or the Salvation Army, that donation is deductible on your taxes because, while those entities are non-profit they have also qualified under the provisions of 26 U.S.C. § 501(c)(3).  Applying for federal tax-exempt status can be an arduous process.

To my knowledge, no condominium or homeowners association in the State of Tennessee has successfully applied for such a classification.  Thus, while associations are non-profit, they are not tax exempt.  This means that the payment of assessments is not tax deductible.  I can understand the confusion, but it is important to note that associations are not federally tax exempt entities under 26 U.S.C. § 501(c)(3).