a View from the Property Line

Three Steps to Minimizing Insurance Premium Hikes

2009-11-16T15:53:00.000-08:00

As a follow up to our last article, this entry details a few things that homeowner associations can do to manage their insurance policy premiums -- especially as annual policy premiums continue to spiral upward.

(1) Consider taking a higher deductible. One way to manage fluctuations in premium is to request a higher deductible from your insurance carrier. Generally, there is an inverse relationship between the premium paid versus the deductible paid on any given policy (since the association is basically taking on more liability via the deductible for any claim made against it under the policy). One caution though: before you start raising the deductible on your polic(ies), make sure to review any claims made against them in the past few years (a 5-year period should be sufficient) and compare the savings resulting from the lower premium versus the chance that if a new claim is made, the association will have more exposure based on the higher deductible. More often than not, the association will save money by raising the deductible if the association’s incident rate for claims can justify the move.

(2) Review your coverage limits. Many associations are “overinsured.” From a practical perspective, the more coverage the association has, the bigger the target for a plaintiff to attack. While it is equally undesirable to “underinsure” an association, review your association’s coverage(s) and make sure they are commensurate with replacement cost for all insurable property held by the association.

(3) Don’t be afraid to shop around. Loyalty to one company or agent is fine provided that the association is getting a good value for the money spent. But don’t be afraid to shop around and rate-check from time to time, especially if you haven’t had any claims against the policy lately – you just might find that the competition for your business from reputable agencies will lower the total cost of owning that insurance by just placing a few phone calls. Above all though, make sure that whatever carrier you choose to do business with possesses a high rating or grade, which indicates, among other things, the financial health or stability of any given insurance company.

*Thanks to Community Association Management Insider, June 2002 edition, from which excerpts of this article originated.

Bad Weather Can Wreak Havoc on Association Insurance Policy Deductibles

2009-10-29T20:33:00.000-07:00

As I sit here and stare out the window at the large droplets of rain pelting my office window, I am reminded of the critical role that insurance policies play in community association operations.

Of course, here in the Gulf Coast region of the United States weather is always a topic of discussion - regardless of the season - since we are never more than an hour or two away from a massive deluge from the skies above. Pity the weather forecasters.

Even though this year’s “hurricane season” is all but over and, thankfully, our region avoided any major storms, it’s always a good time to review your Association’s insurance policies before the next major storm season to make sure that you (1) have enough coverage, and that (2) the deductibles are commensurate with the coverage. This two-part article will cover these important issues in the context of what I call “weather-specific” deductibles.

Many associations’ insurance policies may include “weather-specific” deductibles, like for hurricanes, that trigger higher payments in order to claim damage suffered from a severe weather strike. There are currently over 17 states that allow for these specific deductibles to be applied in lieu of the standard deductible in case disaster strikes in the form of a hurricane, windstorm , hail storm, etc.

These weather-specific deductibles usually are calculated as a percentage of the total property value covered, and can range from two (2%) and five (5%) percent , but can go as high as ten (10%) percent in some cases based on state and jurisdiction. For example, a typical insurance policy with a “hurricane” deductible that has a $10,000 deductible to cover most other types of damage won’t cover the damage covered if a hurricane hits, because the “hurricane” deductible would apply instead. Let’s say the property value covered is a $10 million development, then the deductible to replace the hurricane damage could cost the association between $200,000 and $500,000! The objective here is to educate board members to review their association’s policy for these deductibles which could cost the association a multiple far greater than the original deductible contemplated when the policy was purchased.

Some types of weather-specific deductibles include:

1. Hurricane deductible.
2. Wind and Hail deductible.
3. Storm Surge, mud flow.
4. Mechanical breakdown, life cycle wear-and-tear replacement.
5. Plate Glass replacement.

Of course, you should always check with your Association’s insurance provider/carrier to determine if/when these coverages are applicable and/or available as the case may be.

Next week we will discuss how to manage your association’s insurance policy premiums in the wake of all this talk about bad weather and its effects on the association’s operations.

*Thanks to Community Association Management Insider from which excerpts of this article were provided, June 2005 edition.

Do's and Don'ts for Association Fining Systems

2009-10-12T14:38:00.000-07:00

I dusted off this article from June 2002, but the information is as timely as ever. Especially with the sagging economy, more homeowners now more than ever might be letting their maintenance accounts slip or the conditions of their properties slide (because we all know that upkeep costs money, something that's in short supply these days). When standard deed restriction enforcement fails to get the required response from the offending homeowner, then an Association can consider implementing a fining system to incentivize these homeowners to correct the violation or other misconduct.

Of course, whether or not an Association implements a fining system can be a touchy subject, but a fining system is sometimes needed for those times when homeowners’ conduct violates the use restrictions or restrictive covenants within a community and standard demand-letter correspondence fails to elicit a positive response to cure the misconduct or other violation.

If your Association is considering implementing a fining system to enforce the restrictive covenants within your neighborhood, then there are six (6) key points to consider:

1. Make the fining system as broad as possible. The Association needs to be able to assess fines for a broad range of violative conduct, including actions that violate the Declaration, the By-Laws, and any rules and regulations set forth by the Association by and through its Board of Directors. You can certainly maintain a list of specific activities that constitute fines under the policy, so as to give the membership notice of same, but make sure that this list is inclusive rather than exclusive of any other non-specified, violative conduct.

2. Make the fining system a FAIR system. Make sure that your fining system has built into its mechanisms “due process” – notice to the offending homeowner as well as an opportunity to “cure” the violative conduct before any fines accrue. Also include a procedure for allowing the homeowner to air his/her grievance or reasons for the offending conduct directly to the Board at the next regularly-scheduled Board of Directors meeting. If applicable, the homeowner can even bring its legal counsel if one is hired by the homeowner. Now due process and leniency has its limits: the notice and opportunity to cure should only be applicable for those “first-time” offenders who don’t necessarily know that their conduct has run afoul of the deed restrictions.

3. Each occurrence of a violation equals a SEPARATE violation. This “multiple” violation feature of the fining system helps to create a mounting fee accrual that can incentivize otherwise “laissez-faire” or slow-acting homeowners that would ordinarily ignore the initial fine amount, which can be nominal in most cases. By multiplying the fine amount commensurate with the length of time or frequency by which the violation exists, this can be the necessary “lever” to motivate the homeowner to correct the violation. One caveat: the Board needs to make sure that fine amounts don’t get out of hand; in other words, Courts are loathe to assess homeowners with outrageous fine amounts that operate more like a penalty than a fine. Make sure the fine is proportionate to the violation. For this reason, consider putting some kind of cap on the fine, if possible.

4. Avoid using the word “penalty” in your fining system. As a general rule, Courts don’t like enforcing penalties because most legal claims provide their own economic or equitable remedy without assessing a monetary penalty. Instead, make sure that fines correspond to the severity of the violation.

5. Don't Skimp on the Notice. Make sure the fining system gives notice that the Association has the power to collect ALL expenses incurred in enforcing the fining policy and collecting the fine. Sometimes these costs escalate rapidly, including attorney’s fees and court costs, so make sure that the membership is put on notice of the Association’s ability to collect these sums.

6. Apply payments to fines before assessments. Typically, and unless the homeowner indicates otherwise on the payment instrument, the order of application of payment by a homeowner is: attorney’s fees and costs, late fees and interest, then to fines, special assessments, and regular assessments. With this hierarchy of payment, the homeowner has a greater incentive to pay off the debt.

*special thanks to the Community Association Management Insider, June 2002, from which excerpts of this article were originated.

$100-Million Condo for One?

2009-08-03T04:40:00.000-07:00

Amidst the bevy of economic horror stories in the news assaulting our daily lives, comes a strange tale of the $100-million condominium project in Fort Myers, Florida where one solitary family lives in a 32-story, 220-unit highrise. The original link to the story can be found here, from a story by the Associated Press that originally appeared over the weekend in Yahoo News.

Evidently, this Fort Myers condominium (the Oasis Tower One) had been ravaged by a trinity of recessionary forces -- foreclosures, soaring unemployment and rising bankruptcies -- and saw all but one of its tenant contracts get cancelled or otherwise go unfulfilled. The Fort Myers area, like many counties across the country during this prolonged economic nosedive, is mired in a recession of historic proportions. The Associated Press monitors the "Economic Stress Index" of some 3100 counties nationwide, assigning each county a value in a range from 1 to 100 to indicate the relative level of economic hardship in any one region. A value of 11 or more on the index indicates that a particular county is in economic distress. The Fort Myers area rated a value in excess of 20 on the AP's index.

Fort Myers was supposed to be blossoming into Florida's next high-profile center for economic development until the brakes were put on the economy, that is. Now, the Oasis Tower One stands proud, but deserted, with scant few lights left on, utility services restricted, and most amenities either locked up or plans to build them long-abandoned. And what of that lone brave family that still lives there? They remain, with hopes for a better future, along with getting a neighbor or twenty.

*the original Yahoo News/Associated Press article can be read in its entirety by following the link above or by clicking on the link here, http://news.yahoo.com/s/ap/20090801/ap_on_re_us/us_lonely_highrise

One Part "Sigh of Relief" Mixed with One Part "Caution Ahead"

2009-06-08T14:04:00.000-07:00

That's what you call the recipe for the Texas 2009 Legislative (regular) Session (although the folks who tracked, lobbied and arm-wrestled with State senators and reps over the record number of POA-legislation might invoke some more colorful metaphors to describe this session!).

Even though the vast majority of Property Owners Association-related legislation died on the floor of either chamber, or languished in sub-committees to be dusted off in another two years, this session was anything but ordinary. Of course, for those of us with vested interests in maintaining the sanctity of the Texas Property Code chapter 201, et. seq. relating to POA powers and governance, which should include all proponents of POAs, Boards of Directors, attorneys and the like, the conclusion of the legislative session was a welcomed sigh of relief.

However, the session did produce some new laws that POAs still need to be wary of, lest they let down their guards in the wake of the twin Property-Code-omnibus bills' failure to complete the legislative gauntlet. These comprehensive bills will be back, you can bet on that. One law in particular that I want to focus on is exactly one of those "housekeeping" type laws that could catch many unsuspecting POAs napping (and be costly in the form of lost assessment collections). Read on.

Senate Bill 1919 ("SB 1919"), relates to that most mundane of Association documents, the Management Certificate. SB 1919 modifies Section 209.004 of the Texas Property Code to add some "biteback" against those Associations that fail to file a proper Management Certificate in each county where a portion of the subdivision is located. The Management Certificate must list certain items of data, including the subdivision's name, the association's name, recording data for the subdivision and association dedicatory instruments, the name and mailing address of the association as well as its manager or other designated representative. See Tex. Prop. Code Ann. § 209.004(a) (2009).

Now under SB 1919, if a POA fails to file a Management Certificate, Section 209.004(d) states that "the purchaser, lender, or title insurance company or its agent in a transaction involving property in the property owners' association is not liable to the property owners' association for ... any amount due to the association on the date of a transfer to a bona fide purchaser, and any debt to or claim of the association that accrued before the date of a transfer to a bona fide purchaser" (emphasis added). Moreover, Section 209.004(e) states that the lien securing any amounts due on the date of transfer to a bona fide purchaser are enforceable only to the extent that amounts accrue AFTER the effective date of sale. OUCH.

Why such harsh legislation? It may have something to do with NOTICE and the logic makes sense. A Management Certificate is, after all, just another way of letting people know that a particular subdivision is deed-restricted, governed by a POA, and subject to terms and provisions contained within whatever dedicatory instruments are on file with the county of residence. In addition, these certificates provide a point of contact for those prospective and current homeowners who always whine that "they cannot contact their POAs" whenever issues of delinquent maintenance assessments and/or deed-restriction enforcement surface.

So is this new law, SB 1919, a procedural pitfall? You betcha. Ignore it at your own peril if you are a POA (or its Board of Directors, manager, agent or attorney). The ramification of non-compliance means that past-due indebtedness is effectively "wiped out" when a delinquent homeowner sells its property to a third-party buyer if that management certificate isn't on file with the county. But, when you look at the costs of compliance with SB 1919, e.g. creating and filing that darn management certificate, then the reasons for not doing so are NIL. Even if you have an attorney draft and file this (usually) 1-page document, you are only looking at a few hundred bucks versus thousands of dollars potentially lost in past-due assessments and collections costs. So the decision becomes a simple one when you look at the dollars-and-cents exposure to the POA.

*Special thanks goes out to Sharon Reuler, who maintained constant vigil over this year's legislative session and provided many timely updates and bill interpretations/amendments, as well as insight into the effects of these bills on POAs across the State. Ms. Reuler practices in Dallas, Texas and can be reached at www.txlandlaw.com. Kudos, Ms. Reuler!

Baked Alaskans

2009-04-21T10:52:00.000-07:00

Forgive the play on words in the title, but this article originates from an Alaska Supreme Court case and highlights the notion that Associations shouldn't necessarily interfere in "neighbor v. neighbor" disputes, nor do they have the duty to do so under the deed restrictions in most cases.

The Court in this case held that there is no actionable claim against the Association for "insufficient vigilance."

Actually, and for the very reasons outlined in this case study, the deed restrictions for a community oftentimes include an "anti-waiver" provision for Associations to invoke so that the Association isn't forced to litigate every single nuisance-like occurrence or event reported by disgruntled homeowners. Sometimes these incidents are between neighbors who may have a beef with one another -- and not the Association -- but will do anything to drag the Association into their personal vendettas as the "hired muscle" to bend the offending neighbor to their will or punish them.

Speaking from personal experience, Association involvement in arguments that can be more appropriately characterized as neighborly disputes only ends in needless (and escalating) legal fees for the Association (which affects ALL the members when it comes time to planning for annual budgets and possible assessment increases) and hurt feelings by one or more of the warring parties.

In the Alaska case, the homeowner had a series of complaints against the Association and her neighbors for various items of conduct including: failure to repair a leaky roof, failure to sand the unit's porch, failure to remove snow from the unit's porch and driveway, installing a fence to prohibit parking in the courtyard, verbal harassment and assault by neighbors, theft of the homeowner's plants, mail and mailbox tampering, vandalism of the homeowner's vehicle by the residents, and intentional infliction of emotional stress. Conversely, the Association also held legitimate claims against the homeowner for violative conduct against the deed restrictions including parking a vehicle in the Condominium's courtyard and walking a dog without a leash.

At trial, the Court ruled that the homeowner had no actionable claim against the Association for "insufficient vigilance" in enforcing the deed restrictions, but instead should have sued her fellow condominium owners to whom she attributed the offensive conduct against her. The Association was also successful on its claims against the homeowner for the violations of the deed restrictions. On appeal, the Alaska Supreme Court sided with the Association, ultimately, because the evidence tendered by the homeowner was deficient and the Trial Court had not abused its discretion when issuing its ruling(s) based on that evidence and the lack of an actionable claim against the Association.

*To read the full saga of the "Baked Alaskan (neighbors)", see Gilbert v. Simonka, Nos. S-11470, S-11841, 1282, Alas. Supreme Ct., July 25, 2007.

Covenants Survive the Developer's Demise

2009-03-09T09:32:00.000-07:00

I came across this Washington state appellate court case and felt that the message, while off-jurisdiction, was nonetheless still worthy of repeating here.

The dispute in this case centered around a denied ACC application for the subdivision of two residential lots. The deed restrictions prohibited the subdivision of lots "without the written consent of the developer," but the developer in this case had already filed articles of dissolution and ceased operation several years prior to the ACC denial. The aggrieved homeowner challenged the covenant in court because he reasoned that the "developer" was the only one who could enforce the covenant against him. The homeowner reasoned that, if the developer was out of the picture, then he was free to subdivide the lots as he saw fit. The homeowner ultimately lost on appeal. Why was this?

It seems that the developer had granted specific authority to the Association to enforce the covenants against the membership. The Association, as both successor in fact and by implication, "stepped into the shoes of the developer" and was able to assume certain powers and duties that may have been labeled "for developer" only explicitly in the covenants' provisions. Courts will liberally construe covenants to give effect to their intended purposes, and so the result reached in this case was not unreasonable. The Court also found that while the developer was still viable, the Association was the entity enforcing the covenants (which demonstrates implicit, if not express, agent authority to do so) and the homeowner even submitted his ACC application directly to the Association and not to the developer.

Finally, the Court reasoned that such covenants benefit the owners of property within the subdivision and so the goal for interpreting these covenants must be to protect those collective homeowners' property interests. Any ambiguity in covenant interpretation would be resolved in favor of the interpretation that avoids frustrating the reasonable expectations of those individuals affected by the covenant. In this case, requiring a checks-and-balances on the further subdivision of individual lots protected the character of the community. Likewise, the homeowners relied on this provision and others when they purchased their properties which act as safeguards to the collective property values in the subdivision.

*This particular case can be found at Jensen v. Lake Estates, No. 36094-2-II, Wash. App. Ct., May 13, 2008. Thank you CAI Law Reporter!

Deny it within 30 Days, Or Live With it Forever

2009-02-17T11:38:00.000-08:00

This article goes out to all of those homeowners who are civic-minded, vigilant, or crazy enough to serve on their HOA's Architectural Control Committee (ACC). If your Declaration of Covenants, Conditions and Restrictions (the "Declaration") sets forth a time limit for approving or denying homeowner improvement applications (usually a 30-day window), then by all means DON'T IGNORE IT and make sure that the ACC has taken some form of action (and reduced it to writing or some format calculated to reach the applicant) -- or else that charteuse-marbled electric-neon stereophonic bird bath may become a permanent fixture in your neighbor's yard.

The inspiration for this article arose from a Corpus Christi Appellate Court case that was decided last year. See Huntington Park Condo. Ass'n, Inc. v. Van Wayman, No. 13-05-00464-CV, Tex. App. Ct., Feb. 28, 2008. In that case, the soon-to-be homeowner had submitted an ACC application before he ever even purchased a unit in the Condominium complex seeking the addition of an enclosed patio area to his prospective unit. The ACC did not respond to the application and the homeowner purchased the unit, then subsequently built the patio enclosure some three (3) years later. The HOA then sued the homeowner for violation of the Declaration and sought injunctive relief including the removal of the patio enclosure. THE HOA LOST. TWICE.

How could this happen? After all, when the application was submitted for the patio enclosure, the individual wasn't even a homeowner yet. Why would the ACC even need to respond to such an application then? It's called ESTOPPEL. Estoppel simply means that a person or entity is precluded from taking a subsequent action contrary to a previous action (or inaction) from which another person relied upon.

In this example, the homeowner relied upon the ACC's failure to respond to the patio enclosure application and purchased the condo unit under the presumption that when the homeowner was ready to build, the HOA would not prevent it. The Court ruled that the patio enclosure was a "fundamental factor" in the homeowner's decision to purchase the condo unit, and so the ACC's failure to respond to the application was an implicit ratification of the homeowner's requested improvement. Therefore, the HOA was precluded, or ESTOPPED, from preventing the installation of the homeowner's patio enclosure. The ACC also had the duty to conduct due diligence on the application as part of its mandate under the Declaration and the Court ruled that the ACC had failed in that regard.

Bottom line: if you serve on the ACC, and you receive an application for an improvement by a homeowner (or a prospective one!) then RESPOND to it, or you might just be stuck with an unpleasant consequence (cue the neon bird bath reference above).

*Thanks again to the CAI Law Reporter for the original case cite and synopsis of the case.

Excess Proceeds and Subordinate Liens

2009-01-12T14:20:00.000-08:00

One of the Association's primary tools in collecting delinquent maintenance assessments from its homeowners is the enforcement or foreclosure of the lien against a homeowner's real property securing the indebtedness. However, when a superior lienholder such as a taxing entity, a purchase-money lender, or *gasp* the IRS, comes a calling, their lien enjoys "priority" over the Association's lien. What this means is that if any of these entities foreclose on their superior lien, this effectively extinguishes the Association's lien for the homeowner's indebtedness.

But, Texas law does allow, in some cases, for an Association to seek another avenue to recover its delinquent maintenance assessments in the face of a superior lien foreclosure: file a petition for excess proceeds.

For example, the Texas Tax Code chapter 34 allows for lienholders to petition for excess proceeds pursuant to a tax sale foreclosure of property. See Tex. Tax Code Ann. § 34.04(a),(c) (West 2008). The relevant provision(s) state:

(a) A person, including a taxing unit, may file a petition in the court that ordered the seizure or sale setting forth a claim to the excess proceeds. The petition must be filed before the second anniversary of the date of the sale of the property. The petition is not required to be filed as an original suit separate from the underlying suit for seizure of the property or foreclosure of a tax lien on the property but may be filed under the cause number of the underlying suit.

* * *

(c) At the hearing the court shall order that the proceeds be paid according to the following priorities to each party that establishes its claim to the proceeds:

(1) to the tax sale purchaser if the tax sale has been adjudged to be void and the purchaser has prevailed in an action against the taxing units under Section 34.07(d) by final judgment;

(2) to a taxing unit for any taxes, penalties, or interest that have been due or delinquent on the subject property subsequent to the date of the judgment or that were omitted from the judgment by accident or mistake;

(3) to any lienholder, consensual or otherwise, for the amount due under a lien, in accordance with the priorities established by applicable law;

(4) to a taxing unit for any unpaid taxes, penalties, interest, or other amounts adjudged due under the judgment that were not satisfied from the proceeds from the tax sale; and

(5) to each former owner of the property, as the interest of each may appear.

In the Association's case, it could file its petition for excess proceeds pursuant to Section 34.04(c)(3), assuming that there are any leftover proceeds after the foreclosing entity's lien has been satisfied by the tax sale (although this is not always the case due to market forces or other factors).

So all is not automatically lost for the Association to collect its delinquent maintenance assessments if a superior lienholder forecloses its lien. Just remember that filing a petition for excess proceeds may just be an oft-unheralded remedy that your Association can utilize to collect on those old homeowner debts.

*Thanks to the CAI Law Reporter for uncovering this gem of a case, Belt v. Point Venture Property Owners' Association, Inc., No. 03-07-00701-CV, Tex. App. - Austin 2008), upon which this article and excerpts were based.

General Guide to Restrictive Covenant Enforcement

2008-12-09T14:44:00.000-08:00

It's always good to periodically revisit old practices and check against established norms to confirm that your Association runs a sound deed restriction enforcement program.

Generally, and in most cases, it is the Board of Director's (the "Board's") fiduciary duty to enforce the deed restrictions on behalf of the Association membership. The Board must select when and what to enforce based on its best business judgment, while also taking care not to enforce the restrictive covenants in a discriminatory, arbitrary or capricious manner - the triumvirate of behaviors that will get an Association in hot water quicker than you can say "homeowner files civil suit against her HOA." It is impractical to expect that a Board can maintain absolute vigilance over the community and catch each and every potential deed restriction violation as it occurs in a community at any given time. Instead, the Board must exercise its own business judgment when considering whether to pursue an alleged violation.

The first thing the Board should always do is consult the deed restrictions for the community. Oftentimes, the deed restrictions will set forth express powers and authority that the Association can wield in its enforcement arsenal, like imposing fines or bringing equity suits for injunctive relief against violating homeowners.

Here is a list of the typical remedies available to an Association that seeks to enforce its deed restrictions:

1. Impose a fine - this power is typically derived from the DCCRs, by-laws, or even Texas statute. A homeowner must be given notice of the violation with an opportunity to cure same before any fines can be assessed for first time violators. Note: for "repeat offenders", the opportunity to cure is usually waived and the fine can be levied upon notice of same. The only problem with fines is that this won't motivate some people to correct the violation(s).

2. Small Claims Court - the Association can always file a suit in small claims court (the Association usually represents itself in these courts); however, the Association will only be able to secure a money judgment (which doesn't correct the violation(s)) and these courts are "courts of no record." Meaning, that if the homeowner wants to appeal the judgment, then the case is removed to County Court for a brand new proceeding, complete with all of the document review, pre-trial discovery and any other litigation procedures accompanying such efforts. As a result, small claims court can become just as expensive as its District and County counterparts with no concrete result and no violation remedy, especially if the homeowner appeals the small claims judgment.

3. County Court or District Court - like small claims court, but the Association is almost always represented by counsel; these are courts "of record" meaning that evidentiary rules and civil procedure must be observed to create and preserve the trial record in case of appeals by either party. Litigation in the District or County Courts can be expensive, but the Association can seek injunctive relief and an order by the Judge to cease the violative conduct and/or correct the deed restriction violations. Further, if the homeowner chooses to ignore the injunctive order, then the Judge has the power to level contempt sanctions against the homeowner, which includes more severe fines and, ultimately, incarceration for continued misconduct until the violation(s) are corrected.

4. Filing a Lien - if provided for in the deed restrictions for the Association, a lien can be filed in the real property records for the county wherein the property is located. This lien puts any potential purchasers of that property on notice that this violation exists and is an encumbrance of sorts on the land until resolved. While inexpensive, this remedy typically only nets a result at the time of property sale or refinancing (since the mortgage financiers generally will not fund the transaction until any encumbrances on the property are removed first).

5. Self-Help - if provided for in the deed restrictions, an Association can initiate self-help and enter the homeowner's property to correct the violation. The costs of effecting any removal or cleanup or other correction of the violation(s) is then charged back to the homeowner's account. This remedy can be tricky though, since expenses might be difficult to collect from a homeowner that is already non-responsive about the violation(s) while the homeowner may be able to claim trespass, damage to property or even personal injury arising from the Association's corrective measures. When utilizing self-help, the Association needs to take great care and document everything it does, including photographing or videotaping the actions it took.

6. Suspension of Member Privileges - if provided for in the deed restrictions, an Association, after notice and a hearing, may suspend certain member privileges if a homeowner refuses to correct the violation. This remedy, however, might prove useless if the homeowner does not utilize the privilege (like suspension of pool access privileges if the homeowner does not use the pool).

7. Mediation/Arbitration - based on whether or not the Association's deed restrictions require this or not; can be formal like a lawsuit (binding arbitration) or informal (non-binding mediation). Depending on the mediator/arbitrator, can be very cost-effective and less confrontational than a traditional trial, unless there is no middle ground from which to negotiate (e.g. the hot pink painted house cannot remain hot pink in color).

8. Police and/or County/Municipal Intervention - Most counties, cities and local municipalities have ordinances for nuisance conduct, inoperable vehicles, disorderly conduct, disturbing the peace, etc. The Association should always consider contacting the local authorities when handling certain deed restriction violations as these agencies may be better equipped to deal with specific matters as the need arises. In the very least, the Association should maintain a good rapport with local law enforcement and government offices and cooperate with them when and if these entities are brought in to investigate the homeowner's misconduct as a violation of local civil and/or penal statute(s).

Associations Avoid Getting a "Bad RAP"

2008-11-12T10:08:00.000-08:00

Mention "RAP" to legal practitioners and they may audibly groan as they recall their days in law school when the sometimes confusing "Rule Against Perpetuities" was taught in their respective property law classes. The Rule Against Perpetuities, or RAP for short, states that "[a property] interest is not valid unless it must vest, if at all, within 21 years after the death of some life or lives in being at the time of the conveyance." Huh? Say what?

Basically, RAP safeguards against the future vesting of property if it requires a waiting period or other delay in transfer of title lasting longer than 21 years. Really, it is a policy favoring the free transfer of property NOW versus the hording of that property for distribution or conveyance LATER.

Fortunately for Associations, property interests created by restrictive covenants - interests that "run with the land" - while seemingly "perpetual" in nature (since these DCCRs typically automatically renew every 10-20 years by express provision), actually vest when title in the property vests. Thus, there is no "remote" vesting of title in these interests and they would not violate the RAP. So the good news for Associations is that annual maintenance assessments, and any other restrictive covenants contained within the Association's deed restrictions, do not upset the Rule Against Perpetuities and remain valid property interests.

This RAP issue reared its head in a somewhat novel legal challenge by a homeowner who had been sued by his Association for delinquent maintenance assessments. The homeowner alleged that the deed restrictions for his community were invalid because they automatically renewed every 10 years after the initial 20-year term, which seemingly would violate the RAP. The Court didn't bite. Instead, the Court ultimately found that the covenants to pay assessments, as well as the lien that attached to each homeowner's property, were covenants running with the land and, as such, vested when the homeowner took title to the property. Thus, the homeowner in this case lost his argument and the Association avoided getting a "bad RAP."

PART 2: No Duty* to Halt Perceived Nuisances OUTSIDE of the Subdivision

2008-10-21T13:56:00.000-07:00

*Ahem. Well, most of the time there's no duty for the Association to thwart nuisance conduct outside the bounds of the Subdivision. But as alluded to in last week's article, there are some scenarios where the Association may have the ability to enforce the deed restrictions and some scenarios where the Association is required to do so.

For instance, there was a Texas Appeals court case ruled on late last year whereby a coalition of homeowner-members of an association sued the association and a third-party developer to block the sale of a recreational park located adjacent to the subdivision in question. The association desired to sell the park, as it was record title holder to the property, to the third-party developer for use as a commercial enterprise. Furthermore, the park itself was not located within the boundaries of the subdivision proper. However, the deed restrictions on file for the subdivision included a specific reference to the recreational park and its prohibition against commercial use, even though the park was not included geographically in the subdivision. Likewise, the recorded map for the subdivision showed a designated "recreation area" which all parties agreed was the same park now in dispute.

The Court ruled that the deed restrictions, plat and subdivision map on file with the county all served to put prospective purchasers on notice that the park was to be used only for a recreational area and that commercial use was prohibited. The Court ruled further that the deed restrictions for the subdivision "demonstrated a plan of development" that imposed restrictions on property that was not included in the subdivision's boundaries. Thus, the homeowners prevailed and the sale of the park to the commercial developer was blocked. The Court's ruling implicitly found that the Association would have to safeguard the recreational use of the park even though the park existed outside the boundaries of the subdivision.

Now granted, this is a very narrow instance of extra-territorial jurisdiction applying to a community's deed restrictions; but, the ultimate lesson to be learned here is that sometimes additional scrutiny of an Association's dedicatory instruments is warranted when questions of deed restriction enforcement outside the borders of the subdivision arise. Do not just assume that because a nuisance or other issue exists outside the geographic bounds of the neighborhood, the Association can dismiss or otherwise ignore the deed restrictions that govern it.

No Duty* to Halt Perceived Nuisances OUTSIDE of the Subdivision

2008-10-14T11:02:00.000-07:00

*part 1 of a 2-part article that explores the duty that {generally} does not attach to property owner associations for nuisance conduct or incidents occurring outside the Subdivision's boundaries; part 2 will examine at least one scenario where the "no duty rule" does not apply to nuisances external to a subdivision's boundaries.

Generally, a property owners' association is charged with the governance and administration of the subdivision and its common areas for and on behalf of the residents and lot owners for that subdivision. Typically, the powers and duties prescribed to each association are enumerated in the deed restrictions and by-laws for that association, and if there are any "gaps" in these governing powers, then the association can look to provisions in the Texas Property Code and the Texas Non-Profit Corporation Act to supplement them.

Each association's "sphere of influence" is dictated by the subdivision boundaries platted and recorded in the real property records of the county where it resides. As such, this plat determines where the association can and cannot assert its powers to enforce the deed restrictions for which it is held accountable by its members to uphold. Simply stated, if a matter (nuisance or other challenged conduct) materializes within the platted subdivision that runs afoul of the deed restrictions governing that community -- whether it be in the common areas of the subdivision or on an individual lot -- then the association most likely has the ability to enforce the deed restrictions to resolve the matter.

Now, if that perceived nuisance or other challenged conduct occurs outside the platted boundaries of the subdivision, then the association is generally not required to act, and, in some cases, cannot act or suffer potential tort liability for its meddling in third-party transactions, business or otherwise, where it lacked the requisite authority to do so. For instance, if the association interferes with a proposed building or other corporate enterprise that its members object to as a perceived nuisance (and the association lacks the apparent authority to act as such), then the entities affected by the association's interference can sue the association for damages relating to the business loss resulting from that interference (delay in construction, increased costs, damage to business contracts relating to the building, etc. - in other words, any foreseeable consequences of the association's conduct would be fair game in a lawsuit).

In one Texas Court of Appeals case decided earlier this year, the Court ruled that the association did not breach its fiduciary duty to its members by allowing a cell phone tower to be built next to the subdivision. In this particular case, the association learned that the cell phone tower was slated to be installed within the boundaries of the subdivision. The association complained to the local municipality which prompted the cell phone company to relocate the tower outside of, but near, the subdivision. This concession also included lump-sum and monthly payments by the cell phone company to the association for the entire term of the tower lease as compensation for the tower's presence nearby (presumably to mitigate any perceived nuisance damage). Homeowners then sued the association for breach of fiduciary duty for (1) the association's acquiescence to the tower's final location and (2) application of the payments tendered under the settlement agreement between the association and the cell phone company.

The Court ruled in favor of the association citing that the homeowners could prove no damages from the tower's presence and, implicit in its ruling, that the association held no affirmative duty to thwart the cell phone tower's installation since it fell outside the boundaries of the subdivision. Now this ruling does not mean that the association does not have to act or cannot act for all situations and scenarios. In fact, we will look at one scenario in part-2 of this article where the association has the absolute right to enforce the deed restrictions outside the boundaries of the subdivision.

Associations have to be careful when faced with their residents' challenge of a perceived nuisance or other unwanted incident that is located outside the geographic boundaries of the subdivision. Blindly following the residents' charge to remove the alleged nuisance can lead to legal headaches for the association if the authority to halt or otherwise impede that conduct is absent.

(Stay tuned for Part 2 of this article in the coming weeks!)

$15 Million for a Pool Drain? You bet!

2008-08-25T13:52:00.000-07:00

On December 17, 2007, President Bush signed into law a little-known piece of legislation that could have far-reaching and potentially crushing liability effects on community associations that operate pools as part of the recreational amenities for their membership. Entitled the "Virginia Graeme Baker Pool and Spa Safety Act of 2007" (the "Act"), this bill requires that all owners/operators of "public" pools and spas comply with the federal standards for pool construction, including, most notably, the incorporation of anti-entrapment drains and drainage systems to protect against drowning, the second-leading cause of death in children under the age of 14. Owners/operators of public pools have until December 20,2008, in most cases, to comply with the Act or face stiff penalties for non-compliance, including fines of up to $15 MILLION per DAY per violation!!!

The Act promotes the safe use of pools, spas and hot tubs by imposing mandatory federal requirements for suction entrapment avoidance and by establishing a voluntary grant program for states with laws that meet certain minimum requirements as outlined in the Act. The Act is being administered by the U.S. Consumer Product Safety Commission (the "CPSC"). Specifically, the Act requires that each public pool or spa utilize, among other things:

Safety Drain Covers. Each swimming pool or spa drain cover manufactured, distributed, or entered into commerce in the United States shall conform to the American National Standard ASME A112.19.8-2007 Suction Fittings for Use in Swimming Pools, Wading Pools, Spas, and Hot Tubs published by the American Society of Mechanical Engineers (ASME). Compliance with this Standard will be enforced by the CPSC as a consumer product safety rule.

Public Pool Drain Covers. Each public pool and spa (as defined), both new and existing, shall be equipped with drain covers conforming to the ASME A112.19.8-2007 Standard described above.

Public Pool Drain Systems. Each public pool and spa (pump) with a single main drain, other than an unlockable drain, shall be equipped with one or more additional devices or systems designed to prevent suction entrapment, that meet the requirements of any applicable ASME/ANSI Standard or applicable consumer product safety rule. In addition to a compliant drain cover, such additional devices or systems include a safety vacuum release system (the "SVRS"), or suction limiting vent system, or gravity drainage system, or automatic pump shut-off system, or drain disablement, or other system determined by the CPSC to be equally effective in preventing suction entrapment (see ASME A112.19.17).

Systems that Exceed the Federal Statute. All pools and spas configured to comply with ANSI/APSP - 7 American National Standard for Suction Entrapment Avoidance in Swimming Pools, Wading Pools, Spas, Hot Tubs, and Catch Basins, will automatically comply with each of the mandatory requirements listed above by virtue of its more stringent construction standard.

Which Pools are affected?

Now what is a "public" pool as defined by the act, and can the community association hope to dodge this legislation? No. "Public" pools as defined under the Act specifically include pools that are open exclusively to members of residential real estate developments such as community associations. So community association pools fall squarely within the target facilities governed by the Act. As such, all public pools, including those operated by community associations, must be equipped with a drain cover that is sold in the United States and meets certain Federal standards. The Act also requires, among other things, that all public pools with one main drain include at least one of a number of entrapment prevention safety systems which meets Federal standards.

So now to the punchline of the the article's headline: how can a pool drain cost the community association $15 million bucks? Simple. The Act authorizes a penalty of up to FIFTEEN MILLION DOLLARS PER OCCURRENCE or violation of the Act on a DAILY basis. It doesn't take a mathematician to calculate the catastrophic liability that non-compliance with the Act would levy on an unprepared or unsuspecting community association. Especially with budgeting sessions coming up for the next fiscal year, community associations need to be wary NOW of this legislation and its effects on pool maintenance and operation. If you are a director serving on your community association board, then please communicate with your pool vendor sooner rather than later and make sure that your pool meets the requirements of the Act. The old adage goes, "an ounce of prevention is worth a pound of cure." In this case, a few dollars spent now to comply with the Virginia Graeme Baker Act could save millions in fines (and LIVES) as the ultimate crux of the Act is to ensure that no more drownings result from the phenomenon known as suction entrapment.

A podcast of this article can be heard by clicking here or here, where yours truly served as producer and host of the CAI's "Community Spotlight" Radio Program, which can be heard each and every Friday on CNN 650 AM (click on the link "Click Here to Listen Live" in the right hand column of the page).

Can a Fence Be held in Contempt?

2008-05-12T12:52:00.000-07:00

No, but the homeowner who built it can. Homeowners can be held in contempt of court for acting in bad faith and/or for failing to comply with a Court's order to remedy a deed restriction violation. Even if the violation is as ordinary as an improperly-erected fence.

Contempt is a sometimes misunderstood judicial remedy. There are two types of contempt, criminal and civil. Criminal contempt is assessed as a "punishment" for offending conduct. Criminal contempt penalties typically include some monetary fine in addition to, or in lieu of, incarceration for the offending party's misconduct. The length of time spent in confinement is fixed by the judge's determination. Civil contempt, however, is a different animal altogether. Sure, the judge can assess a fine and/or incarceration against the offending party, but this remedy is not a "punishment" per se; rather, the contempt order serves as a motivator to get the offending party to ACT (or to stop acting, as the case demands). The length of time spent in confinement for civil contempt is entirely in the hands of the offending party; that is, the offending party is said to "have the keys to his jailor." End the misconduct, end the incarceration. The choice is up to the offending party.

In the case of the "contemptuous" fence, the community association obtained a permanent injunction against a homeowner because the homeowner had constructed a fence in violation in of the community's deed restrictions. The trial court ordered the homeowner to comply with the deed restrictions and rebuild/repair/remove the offending structure. In a subsequent hearing held almost three years later, the trial court found the homeowner in contempt of the court's order because the homeowner had failed to comply with the deed restrictions, the fence was still non-compliant, the homeowner had the means and ability to comply, and the homeowner had deliberately and willfully refused to comply. The trial court ordered the homeowner incarcerated until he was "purged of his contempt" by complying with the permanent injunction. The homeowner appealed, citing that contempt could not be ordered on a simple money judgment. The appeal ultimately failed, because the trial court has wide discretion when enforcing its own orders, a key distinction to note in this matter. The contempt order is not issued as a "moral commentary" against the offending party, but rather, is a mechanical penalty applied to parties who ignore court orders, regardless of the underlying conduct that initiated the contempt proceeding. Absent a court's gross abuse of discretion, if there is any evidence to support that trial court's determination that a party willfully disobeyed the court's order, then the order will be affirmed on appeal.

Put Executive Sessions in their (Proper) Place

2008-05-05T11:50:00.000-07:00

Executive Sessions can be effective management tools when used judiciously by the Board of Directors; on the other hand, when misused or even abused, executive sessions can lead to trouble for the Board.

Executive Sessions can be used to foster conversation amongst the community association leadership without fear of any reprisal by the non-directors in attendance at a meeting. This confidential aspect to the executive session allows for directors to discuss more sensitive issues before presenting a unified stance to the membership and without infringing on any one individual's privacy rights or giving the appearance that the Board is not acting in unison with its directives.

Executive Sessions can also be improperly deployed, often resulting in the perception that the Board has no accountability to the membership, thereby fueling distrust, dissension, or other anti-Board sentiments by the membership or other non-director association personnel.

So how does the Board avoid these negative distinctions by using the executive session as a positive tool for community governance? Follow these simple guidelines and your Board should reap the benefits of executive sessions while avoiding the pitfalls that improperly-managed executive sessions can engender.

1. Don't overuse the executive session and be judicious. The executive session should be purpose-driven. Focus on the objective or agenda item to be dealt with and do not use this session to isolate or intimidate factional leadership and/or manipulate the results of a vote that the membership should be privy to.

2. Create an environment for sharing ideas. The Executive Session should be used to foster the free exchange of ideas and discussion on sometimes difficult topics. Don't hinder this process with heavy-handed tactics; instead, encourage board members to offer opinions, ideas, experiences and solutions to the issues being dealt with at the executive session.

3. Communicate to the membership. Don't mask the executive session in a shroud of secrecy. Instead, let members know why, when and for what purpose they are being excused from the executive portion of the meeting.

4. Don't hide the vote - take action in meetings, not executive session. Because the Board's actions are memorialized in the meeting's minutes, make sure that formal votes occur in the regular meeting, and not in the executive session.

*thanks to BoardSource, and its white paper, Executive Sessions: How to Use Them Regularly and Wisely, http://www.boardsource.org/Spotlight.asp?ID=14.337, copyright 2006 BoardSource.

If you're going to buy Foreclosure Properties, don't forget that there's a RIGHT OF REDEMPTION

2008-04-27T13:33:00.000-07:00

I'm writing this article because of a recent run-in with a prospector of real estate after this prospector purchased a property at a local county constable's sale. This property belonged to a homeowner who had fallen several years behind on the maintenance assessments to the community association, and simply could not come up with the necessary funds to rescue the home from the clutches of foreclosure.

Now I am not decrying the business of buying and selling foreclosure properties -- this is America after all, and the foreclosure mechanism is just another animal by which wealth is redistributed to those who can afford it from those who cannot. It really makes for a rather efficient transfer of property in most cases; however, Texas Property Code section 209.001, et seq., does recognize a homeowner's absolute right to redeem such a foreclosed property within 180 days after the foreclosure sale commenced if a property owner's association lien is the instrument being foreclosed upon. It's called the Texas Residential Property Owners Protection Act and it is very much alive and well.

In fact, Section 209.011 of the Texas Property Code states that "[t]o redeem property purchased at the foreclosure sale by a person other than the property owners association, the owner must pay to the purchaser of the property:

(a) any assessments levied against the property by the association after the date of the foreclosure sale and paid by the purchaser;
(b) the purchase price paid by the purchaser at the foreclosure sale;
(c) the amount of the deed recording fee;
(d) the amount paid by the purchaser as ad valorem taxes, penalties, and interest on the property after the date of foreclosure sale; and
(e) taxable costs incurred in a proceeding brought under Subsection (a)."

Tex. Prop. Code § 209.011(e)(2). Thus, if a homeowner has the funds necessary to comply with those sums listed in the above provision, and that homeowner tenders said amounts to the purchaser of the foreclosed property, then the purchaser must allow the homeowner to redeem the property. It's that simple.

I have attended some constable's foreclosure sales in the past and I cannot tell you how many uninformed, ill-advised, uninitiated prospectors I've seen purchase property after property without having the faintest clue that the property is subject to purchase money liens, government tax liens, etc. These buyers lack the understanding of priority lien concepts, assumption of mortgages, and other pitfalls that come along with foreclosure sale prospecting. Instead, these people buy the property in hopes of turning a quick buck, ignorant of the laws under which they purchase, then trample the rights of those people who would attempt to redeem when such a situation becomes tenable. Now back to the original prospector I was speaking about.

In this case, the homeowner obtained the necessary amounts to redeem under section 209.011 of the Texas Property Code, tried to redeem the property from the purchaser, but the purchaser refused the redemption offer. The purchaser demanded all sorts of outlandish sums for property management, attorney's fees, and "research costs" for prospecting the property. It was obvious that the prospector was conducting a "money grab" -- attempting to attach all manner of ethereal charges to the property -- so that the profit margins could be artificially boosted on the purchase if the homeowner ever tried to redeem. The homeowner, distraught and not knowing where to turn to, actually asked the community association for help.

The homeowner may have the last laugh here because the right to redeem goes hand in hand with the foreclosure sale and is not to be ignored if such a remedy is sought. Texas Property Code section 209.011(f) states that “[i]f a purchaser fails to comply with this section, the lot owner may file a cause of action against the purchaser and may recover reasonable attorney’s fees from the purchaser.” So now, the homeowner may seek recovery of all attorney's fees incurred in the fight to redeem the property. The law is clear in this case, the homeowner can redeem if it complies with the statutory provisions of the Texas Residential Property Owners Protection Act. All the homeowner needs to do is tender those amounts listed under Section 209.011. In turn , the purchaser of the property must tender a deed back to the homeowner or suffer civil penalty.

Ultimately, I hope that the purchaser at least learns a valuable lesson from all of this legal wrangling: the homeowner's right of redemption is absolute under the Texas Property Code when a property owner's association forecloses its lien. Don't be an uninformed prospector; instead know the law regarding foreclosure sales before you buy.

Timing Isn't Everything

2008-02-01T10:42:00.000-08:00

"Timing, degree and conviction are the three wise men in this life."
-- R.I. Fitzhenry

I don't usually write about condominium issues, but I thought that the following article may be beneficial to those readers who are living in condos now, or are contemplating doing so in the near future. This is a cautionary tale about: (1) being careful when making assumptions regarding the validity of an association's corporate charter as it relates to the association's ability to enforce a condominium "regime"; and (2) understanding the distinctions that can be made under the Uniform Condominium Act (the "UCA") between the condominium and the condominium's association -- they are TWO separate issues. If you ever decide to challenge the authority that an association possesses to enforce a condominium regime, when an association is formed may not matter depending on the circumstances surrounding the condominium's formation.

Let's set the table. I was perusing the appellate court cases relating to Community Associations last week (thank you CAI for your timely bulletins) and I came across a case out of Plano where a plaintiff sued a builder/developer challenging the validity of a condominium regime (the "Condominium") because the plaintiff was deeded property in the Condominium before the Condominium's association (the "Association") was incorporated by the developer/builder. The plaintiff tried to argue that because the property was conveyed prior to the Association's incorporation, then the association did not have the requisite authority to enforce the Condominium's declaration against the plaintiff or any other Condominium owners.

However, the developer/builder had previously filed the declaration for the Condominium (the "Declaration") in September 2003. The developer/builder then conveyed three lots to the plaintiff in November 2003, January 2004, and April 2004. The developer/builder incorporated the Association in August 2004. After incorporation, multiple disputes arose between the plaintiff and the Association. As a result, the plaintiff initiated a declaratory judgment action against the Association seeking determinations that the Association was not a legal entity and could therefore not enforce the Declaration against the plaintiff. The plaintiff did succeed at the trial court level and won its declaratory judgment against the Association based on the Association's lack of standing as a legal entity to enforce the Declaration.

Enter the Texas Court of Appeals.

The Texas Court of Appeals aptly pointed out that the UCA defines "condominium" as "a form of real property with portions of the real property designated for separate ownership or occupancy, and the remainder of the real property designated for common ownership or occupancy solely by the owners of those portions." The Court continued by stating that "a condominium is created 'only by recording a declaration' that contains a description of the property, the number of units, and the name of the owners association (emphasis added). The Court found that the Declaration had been filed prior to any conveyance of property, thus the Condominium was properly formed and the plaintiff (now appellee) was still subject to its provisions, regardless of which entity actually administered those provisions.

In addition, the Court cited relevant provisions of Texas Property Code which suggested that there were no mandatory consequences for conveyances of property prior to incorporation. To wit:

A unit owners' association must be organized as a profit or nonprofit corporation. The declarant may not convey a unit until the Secretary of State has issued a certificate of incorporation ...

Tex. Prop. Code § 82.101 (emphasis added). The Court interpreted the "may not convey" language as directory versus mandatory. The Court summarized that the UCA and its commentary establish that the "defining event" in the creation of a condominium is the filing of a declaration, and not the incorporation of the association which governs it. Thus, the plaintiff was ultimately not excused from obeying the Declaration governing its properties within the Condominium and the Court reversed the Trial Court's ruling.

Bottom line: Timing isn't everything. If you are going to challenge the validity of your condominium association's actions based on the legitimacy of that association's corporate charter, better do some research regarding the timing of your condominium's declaration filing. As the above-case demonstrates, the declaration filing date seems to be the operative controlling factor, not the date whereupon the association was incorporated. You just might save yourself some time, money and unnecessary grief.

The Tax Code Giveth and the Tax Code Taketh Away...

2007-12-28T10:15:00.000-08:00

One of our clients recently suffered the misfortune of having to pay delinquent property taxes on a reserve of land that was essentially gift-deeded to them by a former developer of the Subdivision many years back. This Association had no idea that the property given to them by the former developer still had unpaid assessments on it -- to the tune of SEVEN years' worth of taxes, penalties and interest -- until the taxing authority, in this case, the County, filed suit against the unsuspecting Association in district court. Our client paid all annual taxes due and owing each year that it owned the reserve since 2000, but never received notice of the delinquency for tax years 1998 through 2000 until our client was served with the tax suit. What makes this an even more galling story for our client, and for other potentially liable Associations out there, is this: under the Texas Tax Code (the "Tax Code") there is literally NO remedy for an Association seeking recovery of these delinquent taxes, penalties and interest if there was no mistake or omission made by the taxing authority which led to the delinquency and/or failure to pay by the Association EVEN IF THE FAILURE TO PAY WAS DUE TO A LACK OF NOTICE BY THE TAXING AUTHORITY or the former developer, in most cases.

Section 33.011 of the Tax Code states in part as follows:

§ 33.011. WAIVER OF PENALTIES AND INTEREST.
SUBCHAPTER A. GENERAL PROVISIONS
(a) The governing body of a taxing unit:
(1) shall waive penalties and may provide for the waiver of interest on a delinquent tax if an act or omission of an officer, employee, or agent of the taxing unit or the appraisal district in which the taxing unit participates caused or resulted in the taxpayer's failure to pay the tax before delinquency and if the tax is paid not later than the 21st day after the date the taxpayer knows or should know of the delinquency; (emphasis added).

Nowhere in the above provision does lack of notice by the taxing authority (or by the conveying party) factor into the legislators' calculus of when a taxpayer can seek recovery of delinquent tax payments. Notice is covered in other sections of the Tax Code, like Section 33.04:

§ 33.04. NOTICE OF DELINQUENCY.
SUBCHAPTER A. GENERAL PROVISIONS
At least once each year the collector for a taxing unit shall deliver a notice of delinquency to each person whose name appears on the current delinquent tax roll. However, the notice need not be delivered if:
(1) a bill for the tax was not mailed under Section 31.01(f); or
(2) the collector does not know and by exercising reasonable diligence cannot determine the delinquent taxpayer's name and address.

This statutory provision is significant because it used to provide a remedy for taxpayers who failed to receive notice from the taxing authority. Prior to the 2001 amendment to this tax code section, delinquent taxes, penalties and interest were waived if the taxing authority failed to provide certain notices under Section 33.04. In our client's case, this excised language would have saved the Association several thousand dollars in delinquent tax payments to the County. However, as the statute now reads, there is simply no recourse against the taxing authority if this notice is not provided, because Section 31.01 of the Tax Code provides an "out" for same:

§ 31.01. TAX BILLS.
SUBTITLE E. COLLECTIONS AND DELINQUENCY
(a) ...
(g) Except as provided by Subsection (f) of this section, failure to send or receive the tax bill required by this section does not affect the validity of the tax, penalty, or interest, the due date, the existence of a tax lien, or any procedure instituted to collect a tax (emphasis added).

Reading the above provisions together renders the following outcome: if the Association finds itself saddled with a delinquent tax bill and wishes to challenge it, then the Association must first pay the delinquent taxes within 21 days of notice of the delinquent taxes (by suit or otherwise) even though they are disputed, and then seek a review by the taxing authority (Commissioner's Court or other administrative procedure) to assert an error or omission by that taxing entity. If after an administrative hearing is granted and the taxing authority can demonstrate that it sent notice to the delinquent taxpayer (notice is presumed proper under the Tax Code!) or that there was no apparent error or omission committed by same, then the taxing authority is absolved of any wrongdoing.

In the case of our unfortunate client, it lost its appeal at the administrative hearing (the County vouched that all requisite notices and tax bills were sent to the proper address, presumed and otherwise, and there was no error admitted to) and so there will be no refund of payment for those delinquent taxes, penalties and interest. Instead, our client must now seek redress from the former developer who conveyed the reserve to the Association -- a developer who may or may not have known that such liabilities were due and owing at the time of conveyance. In the end, the Association is only left with a legal avenue to pursue monetary recovery from a private party while the taxing authority is insulated from further investigation.

As Section 33.04 of the Tax Code illustrates, the Tax Code giveth (pre-2001) and the Tax Code taketh away. If your Association suspects that it may owe any amount of delinquent taxes, be proactive and inquire about same with your taxing authorit(ies) each year, even if you have received your annual tax statement. Taxing authorities are NOT REQUIRED to list delinquent tax amounts on your current tax bills, so do not let that omission comfort you. That phone call or letter to the County tax office or other taxing entity could end up saving your Association big money in the long run.

*A special "thanks" is extended to the 2001 Texas Legislature for eliminating what little protection taxpayers enjoyed under the Tax Code and for reducing certain notice provisions into mere "window dressing" to the chagrin of unsuspecting taxpayers statewide.

When in Doubt... PUT IT IN WRITING!

2007-12-26T10:17:00.000-08:00

Seasons' Greetings dear readers! A few moons have passed since my last blog entry -- partly due to a chronic malady known as the "human condition" -- it seems that as long as people are people, a lawyer's work is never done. Although life can get hectic at times, the holiday season always provides a measure of respite to reflect on the year that was and, also to catch up on my journal reading (so that I can impart any wisdom gleaned from such articles to my loyal readership). Be that as it may, the following cautionary tale comes to us from our friends to the southeast in Galveston, from a Texas Court of Appeals case, Indian Beach Property Owners' Association v. Linden, No. 01-05-01116-CV (March 22, 2007).

In this case, a homeowner (Linden) endeavored to erect a chain-link fence, that most gaudiest of deed restriction "of-fences," on the perimeter of his non-commercial, residential property. Like all good homeowners should, Linden submitted an ACC application for review and was summarily denied. However, one of the Board members intervened and orally told the Lindens that their denial was due in part to a setback provision that the Lindens thought was inapplicable to their property. The Board member also orally asserted to the Lindens that a letter explaining the inapplicability of the setback would be sufficient as a reapplication to the ACC for reconsideration. Thus, the Lindens followed suit and submitted a letter explaining the setback and didn't hear anything from the ACC during the subsequent 45-day reapplication period. The ACC didn't consider this letter a proper reapplication and therefore didn't issue a reply. Unfortunately, the Indian Beach POA's deed restrictions contained a "silent affirmation" provision (as do most Associations) that deems approval for any ACC application not acted upon by the ACC within the prescribed approval period (provided that the improvement sought conforms with the harmony and general aesthetic of the Subdivision). At trial, the Court found that the letter did constitute a legitimate reapplication based on principles of reliance and notice to the ACC attributable to the Board member's intervention in the application process. Hence, the Lindens got their fence and the Association lost twice in court (once at trial and once on appeal).

The real lesson here is not to be wary of board member intervention in the ACC process (which ultimately led to the Lindens' success) but to put ACC decisions in WRITING. I understand the purpose of these "silent affirmation" clauses is to promote efficiency by the ACC, so that those overworked and underpaid (read: UNPAID) ACC committee members can perform their duties without the hassle of so much paperwork if the improvement is to be approved. However, these provisions are double-edged swords: if the ACC fails to express its decision in writing, good or bad, then that decision is automatically ratified as approved for the homeowner and will most likely be upheld in a court of law, as it did in the Indian Beach case. Better to err on the side of caution and address all correspondence received by the ACC with some type of written response. The ACC can generate a form library of sorts that can deal with certain repeatable issues, like "Linden letters" that may or may not conform to the standards of a formal ACC application. These simple form responses, while marginally more expensive than doing nothing, could provide insulation from a bigger Association expense down the road: litigation over unwanted improvements in the Subdivision. Don't leave it in the hands of the courts, put it in writing next time.

Intrinsic Threat: Who's Minding the HOA "Store"? PART TWO

2007-09-05T14:57:00.000-07:00

This week's article concludes what I started last week -- talking about how associations can guard against "embezzlement schemes, financial scamming by trusted fiduciaries, and even outright theft by vendors and/or board members." Part Two of the "Intrinsic Threat" covers items 6 through 10 on the association's checklist of conduct to be wary of or actions to take to minimize the risk of directors'/vendors' unscrupulous actions.

6. Choose a bank that fits your security needs. Safeguards like requiring dual signatures on every check or prohibiting electronic funds transfer between accounts under different Fed ID numbers should be demanded of your banking services provider.

7. Be informed on association insurance coverage(s). Have the association's insurance agent(s) attend a monthly meeting of the board and review the association's coverage(s), plans, and other specifics. The board should keep copies of the polic(ies) readily available for review or consultation by any director.

8. Insure association funds as you would its property. Don't forget that you can also insure the association's funds by obtaining fidelity coverage that meets or exceeds the association's funds. Some D&O insurance coverage provides a measure of this protection, however, it may not be adequate. Check with your insurance agent to verify this. Make sure that property management companies dealing with the association also follow suit.

9. When in Rome, ... If the association utilizes an independent property management company, then require that these safeguards against theft and embezzlement be applied to the property manager's business practices as well. Two lines of protection is better than one, or none, in this regard.

10. An Auditor can be the association's best friend. Even if an annual audit of the association's books and records is cost-prohibitive, an audit should be performed every few years nevertheless. Bank balances should be independently reviewed annually for verification.

None of the above measures will guarantee that your association won't fall victim to the actions of a rogue director or some other sort of fiduciary bad actor. But by implementing these strategies, you can at least afford some protection against these threats and create an environment where checks and balances exist to improve the moral and operational efficiency of the association's leadership.

*Special Thanks to Darcy Mehling Good, Esq., "Whodunit?", Common Grounds, July/August 2007 from which excerpts of this article are attributed to.

Intrinsic Threat: Who's Minding the HOA "Store?"

2007-08-28T08:40:00.000-07:00

I recently came across an article in a national community association magazine that was germane to a current client matter that I'm dealing with -- regarding board members misbehaving in their roles as fiduciary to the association under which they serve. I felt that the message was an important one that all of the readership would appreciate and use as a reminder that, even though people may have the best intentions, they are still fallible, and so we must guard against that weakness when protecting the association's coffers.

There has been a rash of recent cases where homeowner associations have been victimized by embezzlement schemes, financial scamming by trusted fiduciaries, and even outright theft by vendors and/or board members. What can an association do to protect itself from these dangers? Remembering the 10-item checklist below may keep your association from becoming a target of these ne'er-do-wells.

1. Know the association's federal tax ID. Use the tax ID to periodically verify the existence of all listed bank/financial accounts held by the association. Make sure that this number is distributed to all members of the board so that no one member can exercise complete control over those accounts. Accountability by each board member to all other board members ensures a checks-and-balance approach to "minding the store" when nobody's looking.

In one particularly messy embezzlement case, the treasurer of the board was the only person to have knowledge of the bank accounts and amounts deposited to them, so the board could not independently verify what deposits and payments were or were not occurring until it was too late and the past-due notices were piling up from various vendors.

2. DON'T SIGN BLANK CHECKS. Common sense and practicality not only demand this, but also, a person is not acting as a fiduciary to the membership if it signs a check without knowing what its purpose is. Require dual signatures for all checks issued by the association and demand a monthly statement of accounts from your financial institutions and/or management company. Also consider using a lockbox so that homeowner payments are transferred directly to the association's bank accounts while reducing the risk of wrongful deposit of these payments elsewhere.

3. Safeguard the association's reserves. As an association builds up reserve funds in its accounts, ensure that these reserves are tied up in longer-term "non-liquid" instruments such as certificates of deposit. This measure will help deter any temptation by a wayward member or manager from converting these assets to cash for personal benefit. Reserves should be under the control of one or more board members (or have access if managed by a third-party) so that no one person can control the purse strings for these funds.

4. Sign up for duplicate monthly bank statements and/or online/email statements. Get more "eyes on the board" viewing these monthly statements and you reduce the chance that any one member tries to procure any monies for personal benefit. Again, nobody is accusing anybody else here, but what you are doing is eliminating the temptation and reducing risk.

5. Reconcile accounts payable with invoices and credit card receipts. This one is self-explanatory. Be sure and review credit card statements and vendor invoices to ensure that outgoing association payments match them. Question any unfamiliar payments and/or vendors (we had one instance where a client found out that a board member was fabricating vendors to make payments to, but magically, these funds ended up in the hands of the board member!) and be vigilant for any "funny accounting." Math is math and incoming demands for payment should match outgoing monies for payment.

Well, that's all for now. Stay tuned for Part 2 of this article which concludes next week as we review items 6-10 of the anti-scammers checklist.

*Special Thanks to Darcy Mehling Good, Esq., "Whodunit?", Common Grounds, July/August 2007 from which excerpts of this article are attributed to.

Enforcing Restrictive Covenants Means Exercising Vigilance

2007-08-21T13:46:00.000-07:00

A recent case handed down by the Texas Court of Appeals confirms what most of you already know: properly enforcing the deed restrictions in your community requires constant vigilance. In that case, Girsh v. St. John, the defendant homeowners successfully won their appeal when the appellate court ruled that the statute of limitations had run out on the deed restriction violation.1 In other words, the complaining neighbor had waited too long to enforce the restrictions, and thus, lost her right to do so. The controversy stemmed from the defendant homeowners placing a mobile home on their property in violation of the subdivision's restrictive covenants. St. John, a fellow homeowner, sued to enforce the restrictive covenants based on her 1998-99 discovery of the mobile home on defendants' property. But since the mobile home had been in place on the property since 1984, nearly 15 YEARS before any legal action was taken in this matter, the ultimate question became one of diligence: was the violation generally discoverable by exercising reasonable diligence?

One would think that, generally, a neighbor would notice if a mobile home was resting on an adjacent property, right? Well, St. John argued that the foliage and overgrowth of bushes and greenery on the Girshes' land obscured the view of the mobile home and prevented discovery of same until the neighboring land was cleared sometime in 1998 or 1999 thereby exposing the mobile home to public view. And this theory seemed to strike a chord with the trial court, which ruled in St. John's favor. But the appeals court thought differently:

we find that, as an owner of property in Tall Timbers, Section Two, St. John "had some obligation to exercise reasonable diligence in protecting [her] interests" (quoting HECI Exploration Company v. Neel, 982 S.W.2d 881 (Tex. 1998)). The record evidence indicates the mobile home was present in the Girshes' back yard openly, and there is no evidence of the use of artificial devices or methods to camouflage or hide it. St. John's request for application of the discovery rule would require us to hold a full-size mobile home's presence on a residential lot in violation of a restrictive covenant, with said lot located in a highly populated subdivision, is a category of injury inherently undiscoverable even with the exercise of reasonable diligence, because of the presence of indigenous flora spontaneously growing nearby. A decision by us favorable to St. John would mean that she had established that the category of reasonably diligent property owners would not discover the existence of a full-size mobile home on a residential lot in the midst of a populated subdivision during the four-year limitations period.2

And so it went. The Girshes won the appeal and St. John, as well as all vigilant homeowners and community associations, was taught a valuable lesson. When you see a violation of the restrictive covenants in your subdivision, take action now rather than later. Sure, all cases won't deal with a 12' x 46' mobile home resting in a neighbor's backyard, but the point is to take notice of the condition of property, open your eyes to deed restriction violations, and solicit input and feedback from your membership (who most often know more about the alleged violations occurring at any given time than the association.)

The statute of limitations for enforcing a deed restriction violation is generally four years, which is generous, compared to other certain causes of action. Don't get caught in the "limitations trap" as detailed in the case above and be proactive in your association's deed restriction enforcement program. Deed restriction enforcement not only protects homeowner value, but it also promotes the community aesthetic while preserving an overall balance between individual homeowner expression and collective neighborhood beautification.

*Special thanks to the Community Associations Institute Law Reporter July 2007 edition for reporting this case in its monthly newsletter.

1 See Girsh v. St. John, 218 S.W.3d 921 (Tex. App. - Beaumont 2007).
2 Girsh, 218 S.W.3d at 935-36.

Another Legislative Year Bites the Dust...

2007-06-15T14:02:00.000-07:00

I wanted to take a few moments to reflect on the recently-departed entity that was the 80th Regular Session of the Texas Legislature. Every two years, Community Association managers, board members, legal counsel and lawmakers, friends and foes alike, gather 'round the "water cooler" (and the various committee podiums) to debate, craft legislation, and vote about issues of power, control, architectural guidelines, fine systems and homeowner foreclosures, to name a few.Thanks to the hard work and efforts of Community Association Institute Lobbyists and grass roots volunteers, there was no major legislation passed again this year that could be considered damaging to the operation of Community Associations in general.

However, one bill that passed muster (and that now awaits signature by the governor) actually echoed the sentiments from one of my earlier articles regarding developer-controlled associations: House Bill (HB) 2402, authored by Representative Vicki Truitt and Senator Kim Brimer, incorporated provisions from HB 3709 authored by Representative Bill Callegari which placed controls on developer governance of a community association after that developer has lost its controlling interest. The text of that bill is printed below and adds Section 209.013 to Chapter 209 of the Texas Property Code. Basically, this bill establishes: (1) once a developer has lost controlling voting rights in the association, then (2) the developer cannot modify the dedicatory instruments thereafter to retain authority or controlling interests, and (3) such documents can only be modified upon the election of new board of directors.

In my practice, I have crossed paths with developers who have tried to do this very thing and enact by-law resolutions and/or deed restriction amendments so that they could extend their power and authority over the association. The situation is inequitable at best, and so, this legislation could be a boost to beleaguered associations who are laboring under developer control long after the developer has "overstayed its welcome."

Chapter 209, Section 209.013(a) reads:

"Sec. 209.013. AUTHORITY OF ASSOCIATION TO AMEND DEDICATORY INSTRUMENT

(a) A dedicatory instrument created by a developer of a residential subdivision or by a property owners' association in which the developer has a majority of the voting rights or that the developer otherwise controls under the terms of the dedicatory instrument may not be amended during the period between the time the developer loses the majority of the voting rights or other form of control of the property owners' association and the time a new board of directors of the association assumes office following the loss of the majority of the voting rights or other form of control."

Governor Perry has until June 17th to sign the bill, veto it, or let the bill become law without his signature.

*Thanks to the folks at CAI and their efforts each and every year to safeguard the rights of community associations across the state and beyond.

Serving Two Masters: Developer-run Associations

2007-05-15T12:53:00.000-07:00

In every Subdivision's infancy, the Developer most often has to take control as the de facto leader of the Board of Directors for the Homeowners Association -- a reality that can create a conflict of interest for the Developer. Developer-appointed Directors are often caught in a dilemma: who do they serve? the Association for which they were appointed, or, the Developer from whom they derived the appointment (with all presumed loyalties attached thereto)? And what about "self dealing?" When are actions taken for the Association really for the betterment of the Association? The Developer-led Association treads a slippery slope when it comes to liability avoidance and justification of its actions.

Here are some areas that a Developer-led Association must be wary of lest it incur liability for not acting in behalf of the Association, and the membership homeowners, who pay dues in expectation that the Board of Directors is serving their community's interests.

1. Contracts and Leases. Directors have a clear duty to act in the best interests of the Association and to only enter into agreements that further those interests. Contracts must be examined for economic and business impact upon the Association, and not towards any perceived detriment to the Developer, even though one might arise from the contract performance. Developer-appointed Directors must exercise good business judgment, disclosure, and control when considering these obligations.

2. Assessments and Budgets. Self-dealing in this arena evokes a failure to adequately determine a budget for the Association and/or assess consistent maintenance charges for both owner-controlled and Developer-controlled lots within the Subdivision.

3. Acceptance of Common Elements. Most communities develop their common areas by close negotiating and project management with their Developers. This relationship usually terminates with a release by the Association upon completion of the common area development/construction objectives. This process contemplates construction and upkeep, not ownership. But in the case of Developer-led Associations, there is a commonality of interest and it may be hard to discern between the acceptable condition of common area elements when the construction and acceptance of same are all controlled or governed by the same entity, the Developer.

4. Maintaining Adequate Records. Commingling of funds and poorly-kept records are scourges in this area of concern. The wise Developer maintains accounts for the development enterprise separate and apart from the Association's funds while maintaining adequate books and records of payables and receivables.

5. Enforcing Developer's Obligations towards the Association. Oftentimes, a Developer may refrain from enforcing architectural controls and regulations against its own lots (or against all lots) in the Subdivision because of the perceived notion that enforcement will inhibit sales of future units. This perception opens the door to liability against the Association for breach of fiduciary duty alleged by the membership. Better that the Developer-led Association enforce the rules and regulations for a community so that development proceeds according to the plan set forth in the dedicatory instruments.

*special thanks to Wayne S. Hyatt, Condominium and Homeowner Association Practice: Community Association Law (3rd Ed., 2006) from which excerpts were taken to create this article.