Tag Archives: Tennessee Condominium Act

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.

Assessments, Reserves, and Maintenance Obligations

The biggest concern we often hear about at association meetings is assessments.  Association members are right to be concerned about the cost of maintaining their association.  That being said, often there seems to a disconnect between the realities of the amount of the assessments and what the assessments are for.  Simply put, many associations appear to be either under-assessing or to not have a realistic idea what they should be assessing for.

An association, whether it be a homeowners association or a condominium association, is responsible for the maintenance, operation, repair, and replacement of the common areas (for a homeowners association) or the general common elements (for a condominium association).  These areas many include landscaped grounds, lakes, private roads, gates, sidewalks, elevators, balconies, buildings, signs, lights, street signs, walking trails, stairways, entrance foyers, parking lots, etc.  What an association may maintain, operate, repair, and replace can run the gamut and will be different in each development.  Thus, the documents governing the individual association are of paramount importance in determining what the association is to maintain, operate, repair, and replace.

Once the obligations of the association are known, it would be wise of the Board of Directors to contact an engineer who can provide the Board, on a periodic basis (perhaps every five years), with a report on the status, operational cost, maintenance cost, and replacement cost of such common areas and general common elements.  For example, a private road, no matter how constructed, has a lifetime.  It will need to be replaced.  If a homeowners association does not properly reserve funds for its replacement, the time will come when its members will be hit with a large special assessment.  The same can be said of a roof in a condominium development.  Rather than a Board depending on its judgment, it is better that the Association spend some money and depend on the judgment of a professional.  With such a report, the Board can then determine, with some degree of reliability what the Association’s operational expenses are.  Additionally, such a report should provide a Board with information as to what the remaining lifetime of its common areas or general common elements are.  Such a report should also estimate the replacement costs of the common areas or general common elements.  Once this information is known, then the association can intelligently plan its reserves.  We have found such engineering reports invaluable in providing unbiased information to members.

After operational expenses and reserve numbers are known, then the association can address other expenses, such as insurance, legal fees, etc.  Finally, you arrive at a workable budget.  This end number may be surprising.  It may turn out that the association is not assessing enough.

In the end a properly run association should have sufficient reserves to address the replacement of its common area and general common elements when such items reach the end of their useful lifetime.  While many documents provide for special assessments, such should be used in the case of emergencies and not as a replacement for thoughtful planning.

Tennessee Condominiums, Lender Foreclosures, and the Six Month Reachback

As has been previously mentioned, the Tennessee Condominium Act of 2008, Tenn. Code § 66-27-101, et seq. (the “Act”), applies in certain instances to all condominiums in Tennessee (even those created prior to January 1, 2009), but only with respect to events and circumstances that occur after January 1, 2009.  See Tenn. Code § 66-27-202(a).

One of the provisions that applies to all condominiums in Tennessee is found in Tenn. Code § 66-27-415(b)(2)(A).  The statutory framework provides in its entirety from Tenn. Code § 66-27-415(b) that:

(1)     A lien [being the association’s lien for delinquent assessments] under this section is prior to all other liens and encumbrances on a unit, except:

(A)    Liens and encumbrances recorded before the recordation of the declaration;

(B)     A first mortgage or deed of trust on the unit recorded before the date on which the assessment sought to be enforced became delinquent;

(C)     Liens for real estate taxes and other governmental assessments or charges against the unit.

(2)     (A) The lien is also prior to the mortgages and deeds of trust described in subdivision (b)(1)(B) to the extent of the common expense assessments based on the periodic budget adopted by the association pursuant to § 66-27-414(a) that would have become due in the absence of acceleration during the six (6) months immediately preceding institution of an action to enforce the lien.

What this statute is addressing is the priority of the lien of a condominium association versus the priority of the lien of other liens, such as real estate taxes and recorded deeds of trusts and mortgages.  Generally, what it provides is that the lien of the Association has priority over all other liens except those recorded before it, a first mortgage or deed of trust recorded prior to the date on which the assessment became delinquent, and real estate taxes.   These provisions are logical and reasonable.

What is interesting is the language in Tenn. Code § 66-27-415(b)(2)(A).  This provision gives condominium associations a super lien for six (6) months of regular assessments in certain specific situations.  Effectively, this provision provides that the lien of the condominium association for assessments primes first mortgages and deeds of trust for six (6) months of regular assessments.  But, this lien would not come into effect, pursuant to the terms of the master deed or declaration unless there was a default in the payment of assessments.  Further, it would not be an issue as to the holder of the mortgage or deed of trust unless such holder had foreclosed on the property.  Thus, this provision provides condominium associations (and note, it is condominium associations and not homeowners associations governing PUDs) a six (6) month reach back for assessments in the event of a foreclosure by a lender.  The six (6) month reach back is for regular assessments only.  Thus, if a lender forecloses on a condominium unit in Tennessee, the lender is responsible for all on-going assessments prorated from the date of foreclosure and six (6) months of regular assessments prior to the foreclosure.

Given that lender foreclosures have hurt Tennessee condominiums ability to collect delinquent assessments, the six (6) month reach back provided by this statute should not be overlooked.  We have used this statute to benefit of condominium associations we represent.