Tag Archives: Tennessee Condominium Act

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.

Are Member Votes Private?

Is a member of an association entitled to review the individual votes of an association election, or do the members of an association in Tennessee have some expectation of privacy as to their votes? In Sigel v. The Monarch Condominium Association, Inc., No. W2011-01150-COA-R3-CV (June 29, 2012), the Tennessee Court of Appeals addressed this question.

Dr. Sigel is a member of The Monarch Condominium Association, Inc., a residential condominium association located in Memphis (the “Monarch”). In 2010 he ran for the Monarch’s board of directors. During the election, he started a Google Group for the Monarch and posted various information about the condominium development. He was unsuccessful in his attempt to be elected. Subsequently, he contacted the board and asked to audit the election results. The board initially ignored his requests. Dr. Sigel then retained an attorney who contacted the board. At that point, the Monarch’s board provided Dr. Sigel with a tally sheet that indicated the total number of votes each candidate received at the election. The Monarch’s board did not provide Dr. Sigel with the actual votes of each member of the Association. Since pursuant to the Monarch’s bylaws, each member’s respective vote was weighted based upon the size of their respective unit, the allocation of votes was of concern to Dr. Sigel. Ultimately, he filed suit claiming that provisions of the Tennessee Condominium Act and the Tennessee Non-Profit Corporation Act required the Monarch to release the individual ballots for an audit. The Monarch claimed that the members of the association had an expectation of privacy in the ballots. The trial court denied Dr. Sigel’s motion for summary judgment and ruled that the Monarch was under no statutory obligation to provide the original ballots. Dr. Sigel then appealed the decision.

The Court of Appeals noted that there has been scant judicial review of the Tennessee Condominium Act. The Court then focused on the reporting provisions of the Tennessee Non-Profit Corporation Act and the Tennessee Condominium Act. The Court noted that the reporting requirements of these two acts are different. However, since the Tennessee Condominium Act specifically governs condominium associations, the Court, quoting Dobbins v. Terrazzo Mach. & Supply Co., 479 S.W. 2d 806, 809 (Tenn. 1972) (stating that “where the mind of the legislature has been turned to the details of a subject and they have acted upon it, a statute treating the subject in a general matter should not be considered as intended to effect the more particular provision.”), held that the more specific reporting requirements of the Tennessee Condominium Act applied.

Next, the Court reviewed the reporting requirements of the Tennessee Condominium Act, Tenn. Code §§ 66-27-417, -502, and -503. Of these, Tenn. Code § 66-27-502, as has been previously discussed here, lists certain information the condominium association must provide to certain parties. The Court investigated the differences between the requirements of this section and the requirements of Tenn. Code § 66-27-417 which requires the association to provide “other information”. Dr. Sigel argued that this “other information” should be read expansively to include the individual ballots of the members of the Monarch. The association argued that the statutes should be read in concert and “other information” should be construed as to mean the information required by Tenn. Code § 66-27-502. After reviewing the legislative history, the Court held in favor of the Monarch, reasoning that an expansive interpretation of “other information” in Tenn. Code § 66-27-417 would entitle unit owners to personal information of other unit owners merely because it was in the possession of the association. Thus, the Court ultimately held that Dr. Sigel could not have access to the individual votes from the 2010 election at the Monarch.

From this case, it can be inferred that members in an association have some expectation of privacy as to their votes. Associations in Tennessee should consider this when they hold elections. Certainly records of the election should be kept, but the individual votes of each member should be kept private if they were cast in secret.

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).

Associations and Communications Technology

Following up on our last post on HB2060/SB2198, the House version of the bill has been taken off of notice for the legislative calendar, while the Senate version, as of February 19th, was assigned to a subcommittee.

Let’s switch from the legislative update to an interesting development near Nashville.  A lawsuit has been filed in the U.S. District Court of the Middle District of Tennessee, Nashville Division, involving a Tennessee homeowners association.  As noted before, it is rare to see associations in federal court.  Associations normally are not in federal court for jurisdictional reasons.  This case, styled:  DeCuyper v. Flinn, et al., Case No. 3:13-cv-00850, involves the alleged violation of the federal Electronic Communications Privacy Act, 18 U.S.C. § 2510, et seq. (the “Act”), amongst other matters.  Since the interpretation of a federal statute is at issue, federal jurisdiction is proper.

The heart of this case appears to involve a failed attempt to amend an association’s CCRs.  At the meeting of the Association at which the amendment was discussed and voted upon, matters appear to have gotten out of hand.  Without delving too much into the facts, what stands out of interest in this case is the allegation that the Board intercepted, blocked, obstructed, or otherwise disclosed emails of the Plaintiff.  Under the Act, such violations can be punishable by imprisonment, severe fines, civil liability for damages, punitive damages, and attorney’s fees.  Apparently, the Association provided its members access to a central email server system and allowed each member an email address.  These email addresses could be used by members to send and receive messages.  The allegations in the lawsuit are that the Board violated the Act.

In our representation of associations, we are seeing associations become more and more tech-savvy.  Associations have websites, social media accounts, and online forums.  Some associations, such as the one involved in the litigation discussed above, provide email addresses to their members.  The concern here is that there are federal and state laws regarding the treatment of such communication.  Associations certainly should embrace technology, but they should exercise care with regard to how such technology is used.

2014 Tennessee Legislative Update — HB2060/SB2198

We switch from a federal case on takings law to a bill that was filed in the Tennessee General Assembly on January 23, 2014:  http://wapp.capitol.tn.gov/apps/BillInfo/Default.aspx?BillNumber=SB2198.  HB 2060/SB 2198, as proposed, would prohibit homeowners associations and condominium associations from:

(1) Prohibiting any person from parking on any public street located within any county or municipality of this state unless expressly authorized by the legislative body of the county or municipality;
(2) Penalizing or fining any persons in an amount exceeding the required monthly amount of dues owed by persons owning separate lots or units within the respective homeowners’ association; and
(3) Attaching an assessment lien on any real property in this state unless the homeowners’ association or its designee demonstrates to a court by clear and convincing evidence that a person owning a separate lot or unit within the homeowners’ association is past due on required monthly payments owed to the homeowners’ association.

Unless expressly authorized by the legislative body of the county or municipality, this bill prohibits any governing document of a homeowners’ association from including a limitation or prohibition against the display of any political sign on privately owned property within the boundaries of the respective homeowners’ association.

The requirements of this bill would apply retroactively unless prohibited by Article XI, Section 2 of the Constitution of Tennessee, Article 1, Section 10 of the Constitution of the United States, or some other provision of either the state or federal constitution.

Functionally, we are not concerned about items (1) and (2).  An association has no control over a public street.  Thus, it cannot prohibit individuals from parking on public streets.  This has always been our opinion.  Charging late fees in amounts exceeding the assessments is likely usurious and therefore impermissible.

Item (3) is horribly thought out.

One of the primary tools for associations to collect delinquent assessments is the ability to file liens.  Properly written CCRs and master deeds contractually provide for a lien for delinquent assessments.  The Tennessee Condominium Act of 2008 provides in Tenn. Code § 66-27-415 that condominiums have a secured lien on units for delinquent assessments.  Hundreds of CCRs, master deeds, and declarations have been recorded including such liens.  Thousands of liens have been recorded by Associations throughout this state.  Yet, this bill, if passed, would nullify each of these liens, retroactively, unless each and every association can demonstrate to a court, by clear and convincing evidence, that the person owning the lot or unit is actually delinquent.  This provision is not going to reduce the recordation of liens in Tennessee.  It will only result in the increase in filed lawsuits as associations in Tennessee become required to collect delinquent assessments through the judicial system.  Once the Associations obtain their due judgment, then they will record judgment liens.

At this point the bill is in subcommittee.  Hopefully, it will die there.

Tennessee Associations and Real Estate Taxes

How common areas and general common elements are treated for real estate tax purposes is often a concern for Tennessee associations.   It should be noted that common areas are found in homeowners associations, and general common elements are found in condominium associations.  Common areas are typically conveyed to the association.  Consequently, the association owns the common areas.  Each lot owner in the development will likely have certain easement rights or rights to use the common areas as provided in the CCRs.  General common elements are different.  General common elements in a condominium development are owned in common by all of the unit owners in the condominium development.  As such, each unit owner has an undivided ownership interest in the general common elements.  This ownership interest cannot be severed from the unit owner’s title in the unit.  The association in a condominium development does not own the general common elements.  Rather, it is responsible for the maintenance of the general common elements.

Thus, the distinction is that common areas are owned by the Association and general common elements are owned in common by the unit owners.

Real estate taxes for common areas are usually de minimus.  Any such real estate taxes should be paid by the Association.

Real estate taxes for general common elements are theoretically taxed to the unit owners in a condominium development.  As noted above, each unit owner owns an undivided interest in the general common elements that cannot be legally separated from his or her unit.  In fact, both the Horizontal Property Act (see, Tenn. Code § 66-27-120) and the Condominium Act of 2008 (see, Tenn. Code § 66-27-205) provide that units must be separately taxed.  Thus, all taxes on general common elements are paid for by the unit owners.  Thus, a condominium development should not be assessed real taxes.  For a condominium development to assessed real estate taxes leads to a double taxation issue as those taxes are already included in the assessed valuation of the individual unit.  Simply put, a condominium association in Tennessee should not pay real estate taxes.