Tag Archives: Tennessee Condominium Act

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.

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.

When is an Association neither a Condominium nor a Homeowners Association?

We have taken a bit of a hiatus from posting as real world work has kept us busy. We will endeavor to keep the blog better updated.

When is an association neither a condominium nor homeowners association? When it is cooperative association! You do not see many coops in west Tennessee, but there are a few. Coops are much more common in the northeast. A cooperative association is a third way for a group to own real property in common to ensure for its maintenance. Since it is not a condominium, it is not governed by the Tennessee Horizontal Property Act or the Tennessee Condominium Act.

If you were to stand outside a coop and look at it, it would physically look much like a condominium or apartment. You have a multi-tenant building that is divided into various units that are occupied separately by different people. In a condominium, each Unit is defined by the Master Deed and each Unit is separately owned by the Unit Owner. Not so in the coop. In a coop, the underlying real property, the building, and the individual Units are all owned by the association. The association then leases individual units out to members of the association. The individual members do not own their unit. Instead, they are issued stock in the association. It should be remembered that the association is a corporation. Instead of being a non-profit corporation (like is the case for condominium and homeowners association), the association is formed as a for-profit corporation. This means that the association may issue stock. The members of the association in the coop, then are stockholders. Instead of owning a unit, a member of a coop owns stock in the association. The association leases the member a unit. The coop is governed by a master lease which sets out the various rights and responsibilities of the association and the member regarding maintenance, insurance, assessments, etc. The association, because it is a corporation, is governed by its charter and bylaws. Finally, the coop may have certain rules and regulations regarding the use of the units.

Consequently, in a coop the relevant documents are the master lease, the charter, and the bylaws (and any rules and regulations. A member of the association owns stock and not the unit. From an owner’s perspective, owning stock rather than a unit becomes interesting when it comes to financing a purchase. One does not get a mortgage on stock. Financing is available, but it works differently with regards to coops.

Because of the structure of the coop, the association has more bookkeeping responsibilities. First, it must manage the maintenance of the structure like a condominium. Second, unlike a condominium, it must address the leasing of units to its members. Lastly, from a governance standpoint, the association must keep records regarding the ownership of its stock.

There is nothing inherently wrong with coops. As noted above, they are much more common in the northeast. They are not preferred in west Tennessee, but there are a few here.