By Stephan C. Nikoloff, Esquire
Many associations are still feeling the financial crunch of the foreclosure crisis. Foreclosures, while stabilizing, are still a major concern for community associations. When assessments are’t being paid, the whole community feels the pinch. Collection of assessments is a sensitive issue in communities, with paying members often feeling animosity towards those that aren’t. Boards are continuing to feel pressure from their memberships to collect dues or remove owners that aren’t paying their assessments. However, members also want the Board to spend Association finds in a judicious manner, which puts the Board in the position to have to uphold its fiduciary responsibility to collect assessments while doing so in a manner that best serves the Association’s financial interests. Here are some suggestions for how to address these concerns.
One of a Board’s primary duties is to collect assessments. The first method of collection is the traditional method. If owners are not paying, the Board should take the appropriate steps to collect, lien, and ultimately foreclose on properties that are not paying. However, Boards are hesitant to foreclose and take ownership of property because in today’s market, the home is likely worth less than the first mortgage, or “underwater,” and is not sellable. This should not be the only factor in determining whether an association should foreclose, however. Rather, we encourage the Board to review both the condition of the property, the status of unpaid taxes and the status of any lender foreclosure actions on the property. These three elements are critical to a Board’s decision because one of the board’s primary objectives when deciding to foreclose on a home should be to rent the home out until the lender completes its foreclosure. While foreclosure may be used to send a message to other non-paying owners, the Board’s ultimate responsibility is to ensure the financial viability of the Association. This is best accomplished by being able to rent the foreclosed home for as long as possible, thereby collecting as much revenue as possible which can then be applied to the Association’s overall delinquencies. It is therefore important to act quickly when someone is delinquent, because the faster the association forecloses, the more likely the unit will still be in viable condition to rent the property and recover funds.
Another option to attempt to recover past due amounts is to collect rent from an existing tenant residing in the delinquent home. The law provides a methodology for the association to demand that a tenant that is residing in a delinquent property pay the rent directly to the association rather than the landlord in order for the association to pay off the past due balance. The law further provides that the Association may evict a tenant for their failure to abide by the Association’s rent demand. We have found the rent demand letters to be a useful tool in the Association’s collection arsenal.
A recent addition to the law states that, if a unit has been vacant for a period of time, the association may petition the Court to allow the association to rent the unit immediately, rather than having to wait to take title through a foreclosure action. This is a new and intricate process, so if you have vacant units that are in rentable condition, please contact your attorney to be advised how the process works.
Finally, with associations having difficulty collecting assessments, many are finding that they must impose a special assessment at the end of the year to cover a budgetary or financial shortfall. However, the law, especially with regard to condominiums is very specific when it comes to levying a special assessment. For example, the notice sent to condominium owners for a special assessment meeting must contain both the nature and the estimated amount of the special assessment. Sending out proper notices and maintaining proper meeting minutes and payment records is critical when levying a special assessment. A thorough review of the notice and materials should be performed by counsel to confirm sufficiency and substance of notice. Failure to properly notice or follow procedure in levying a special assessment will affect the assessment’s validity and collectability. If you are a homeowners association, please check your association’s documents carefully, as the requirements for imposing a special assessment may be markedly different than for a condominium.
Please consult with association’s counsel for effective tools and methods of collecting assessments and properly managing association-owned properties. Also, association counsel can be a valuable resource in considering how to monitor and proceed with lender foreclosure considerations.
In these confusing and frustrating economic times, there is only one promise when it comes to collections: if you continue to do nothing, you will continue to lose money.
What is a Short Sale?
By Daniel J. Greenberg, Esquire
The mortgage foreclosure crisis has made us all familiar with a new term in real estate transactions, the “short sale.”
A short sale is the sale of a property for less than the outstanding mortgage balance(s). In a normal real estate market, when a property is sold, the seller receives funds at the closing after the expenses of the sale, such as Realtor commissions, and the lenders are paid in full. This occurs when there is equity in the home.
In today’s real estate market, as a result of the run up in real estate prices in the mid part of the last decade, many closings occur where there is not enough cash at the closing to fully settle all mortgages. As there is a “shortage” of cash, or the seller is short of funds necessary to fully pay off all liens and encumbrances, the transaction is called a “short sale.” In such cases, the lenders must agree to take a reduced amount to satisfy outstanding loans and release the mortgages.
Short sales present a unique opportunity for Associations. If the Association completes its foreclosure and takes title to a unit, the Association may attempt to facilitate a short sale by engaging a Realtor to propose a contract for sale from a third-party buyer to the lender. The Realtor works on commission, so the Association does not pay any fees for the listing or the work the Realtor does in attempting to solicit a short sale. If the lender agrees to write down the mortgage, a sale will proceed and the Association, as a condition of the sale, can negotiate to receive a certain amount of money for past due assessments. Under the law, the Association is entitled to collect the entire amount included in its foreclosure Final Judgment; however, it is more common that the Association will compromise a portion of the amount due, as all parties essentially are taking a hit to get the sale done.
A short sale can occur without the Association having completed a foreclosure if the owner and lender agree to sell the home to a third-party for an amount less than the existing mortgage. In that event, the Association is also entitled to collect its entire past-due balance on the home, but, again, should be prepared to negotiate this amount in furtherance of completing the short sale and having a new, paying owner take title to the home. This is yet another reason that we recommend that all Associations record a Claim of Lien even if a lender is proceeding with a foreclosure. Once the Association has a Claim of Lien filed in the public record, all parties will be on notice that the Association must be included in the short sale process, and, as is the case with many lender foreclosure cases, if the case stalls or is dismissed, the Association will be in position to pursue its own foreclosure.
If you have any additional questions regarding short sales, please do not hesitate to call our office.
POWERS AND DUTIES OF THE BOARD OF DIRECTORS
By: Joseph R. Cianfrone, Esquire
An Association is responsible for the operation and management of a community’s affairs pursuant to various chapters of the Florida Statutes and the governing documents. The Association is governed by the Board of Directors, sometimes known as the Board of Governors or Board of Administration. The Board operates the Association.
The Florida Condominium Act, Chapter 718 of the Florida Statutes, specifies the duties of the Board as does Chapter 617, the Not-For-Profit Corporation Act. The Articles of Incorporation and the by-laws set forth additional provisions regarding Directors, such as the number of Directors, and specific grants or limitations of powers, such as expenditure limitations. Chapter 719 and Chapter 720 of the Florida Statutes respectively govern Co-Operatives and Homeowner Associations.
Recall is the ultimate limitation of the Board’s power. The Board or an individual Board member may lose the support of a majority of the membership and may be recalled at any time. Pursuant to the relevant statute and most Association documents, vacancies on the Board may be filled by the remaining Directors.
The Board members have a fiduciary duty to the membership. The general standards for discharge of a Director’s duties are outlined in Section 617.0830 of the Florida Not-For-Profit Corporation Act. All Directors should act in good faith with the care an ordinary, prudent person in a like position would exercise in similar circumstances. A Director must act in a manner he reasonably believes to be in the best interest of the Association. Courts have held that a Director has no real liability unless there is fraud, self-dealing or unjust enrichment.
A Director may rely on information, opinions, reports or statements, including financial statements, which are prepared or presented by officers or employees of the Association when the Director reasonably believes such person to be reliable and competent. The opinion of legal counsel, public accountants or other persons as to matters the Director reasonably believes to be within that person’s professional expertise may be relied on. The Directors are protected by law if they rely on the advice rendered by a professional or expert. Therefore, whenever the Board faces a question as to its operations or procedures, the Board should request an opinion in writing from a party skilled in the respective area. The same applies to operation and maintenance of the properties; the Board should consult and may rely on an expert to avoid personal liability when making decisions.
The most important power and function of the Board is to establish and collect the assessments. The collection of assessments is essential to the operation of the Association and should be conducted in a fair manner based on established policies.
Maintenance of proper financial records of the Association is part of the budget and assessment process. Most Boards have the significant authority to establish budgets and impose assessments as deemed necessary; however, the Condominium Act creates substantial requirements for financial reporting, standards for budgets and record keeping in this area. The service of a professional accounting firm familiar with condominium budgets and accounting is recommended.
The Board’s authority to acquire, convey, lease or mortgage Association real property is limited pursuant to statute unless specifically authorized in the Declaration. Traditionally, unit owners must approve such matters.
Most Association documents convey authority on the Board of Directors to adopt reasonable rules and regulations. The rule-making authority of the Board allows the Association to control use of the common elements and use of the units. Rules can also address inspection of records, reply to owner inquiries, club house and pool use and parking issues. All rules must be reasonable and must not contravene a right granted in the Declaration or reasonably implied from terms of the Declaration.
As condominiums are parcels of real estate created upon the recording of a Declaration of Condominium, the law is drafted to protect the status quo. The Board must operate and maintain the common elements. No material alteration or substantial additions may be made unless specifically allowed by the terms of the Declaration, or if the Declaration does not so provide, then only with approval of seventy-five percent (75%) of the total voting interests. The purpose of this provision is to ensure that a purchaser of a condominium can anticipate that his property will remain as originally purchased and not subject to annual revisions by each new Board. Of course, the opposite position is that a condominium may remain pastel pink forever unless a change is authorized by the members. Alterations in a Co-Operative are similarly limited by statute and the documents. A Homeowner Association is somewhat different as only the documents control the issue.
It is well established that the Board may exercise a wide range of decision-making authority based upon the Business Judgment Rule. The Business Judgment Rule has afforded Boards the right to make certain changes in common elements. For example, arbitration decisions have held that worn Chatahoochie decking may be replaced with paver bricks and revisions to the common area landscaping plan may be made by the Board without a vote of the members.
The degree to which a Board maintains the common elements or common areas is within its business making discretion. All decisions of the Board regarding such maintenance are presumed correct, absent the showing of mismanagement, fraud or a breach of trust. The Business Judgment Rule even prohibits arbitrators from substituting their judgment as to the appropriate degree of maintenance.
The Board may employ and dismiss personnel necessary for the maintenance and operation of the common elements. Additionally, the Board has the authority to contract for management. When a manager is retained, the Board does not eliminate any of its own powers but merely gives the control of the day-to-day functions to the manager.
One useful power of the Board is to appoint committees. The Board may appoint committees for any function it deems necessary to carry out Association business. The Board may appoint a Fining Committee. The imposition of fines may allow the Association to control violations of its documents from within without resorting to litigation, arbitration or mediation.
Many Associations have Directors who are part-time residents. The part-time residency of Directors may create a problem in establishing a quorum during the summer months. Unless the Articles of Incorporation or bylaws provide otherwise, the Board of Directors may, by a majority of its full membership, designate from its members an Executive Committee. If given full authority, the Executive Committee may exercise all authority of the Board with the exception of: filling vacancies on the Board, revising the bylaws or approving or recommending to members actions required to be approved by the membership. The Executive Committee is used by many Associations.
As the Board is acting on behalf of the membership, it is essential that the Board keep appropriate records of all of its meetings. In addition to providing authority for actions to be taken, the meeting minutes also create a corporate history which future boards will rely on and utilize.
The power and authority of the Board of Directors is to make all reasonable decisions to govern the Community. The Board members should act as conservative businessmen burdened with the duty to maintain the status quo. Directors should rely on the written advice of professionals to limit their own personal liability.
By Stephan C. Nikoloff, Esq.
One of the most dismaying events during the collection process is the filing for bankruptcy by an owner. Bankruptcies are governed by Federal law, and are designed to give the "debtor" a new financial beginning or time to reorganize his or her financial affairs.
The provisions of the Bankruptcy Code are very detailed and specific. There are different forms of bankruptcies. Most Associations have been affected by the traditional consumer bankruptcies – Chapter 7 liquidation, or Chapter 13 reorganization at one time or another.
One of the most significant aspects of filing for bankruptcy is that as of the date of filing the Petition with the Court, all actions to collect debts or enforce judgments are automatically stayed by the bankruptcy filing. The bankruptcy stay prohibits the Association from proceeding with its foreclosure for past due assessments in State Court while the stay is in place. Violation of the stay can result in a finding of contempt of Court fines.
The Association may petition the Bankruptcy Court for a number of remedies. The most commonly used by an Association is to ask the Bankruptcy Court to "lift" the automatic stay in relation to the debtor's property, which is subject to the Association's assessments. This is especially useful if the owner has surrendered the property or there is no equity in the property, as the Court will normally grant relief without a hearing in those situations.
Chapter 7 of the Bankruptcy Code provides for a liquidation bankruptcy where the debts of the debtor are listed and personal liability is eliminated. Once a discharge is entered, the owner is not personally liable for any assessments that came due prior to the petition for bankruptcy being filed. HOWEVER, as the Association is a secured creditor by virtue of the Association's documents, the discharge does not operate to eliminate the Association’s secured interest in the property. Upon the conclusion of a Chapter 7 case, the Association may proceed with a foreclosure of the lien for nonpayment of past due assessments; however, the Association may not also receive a judgment against the debtor individually for the assessments. An exception is that the debtor is not insulated from personal liability for those assessments that accrue after the bankruptcy is over.
Many Associations find that members file a Chapter 13 bankruptcy, which allows the debtor to file a repayment plan for the past due debts. A Chapter 13 case may be open from three to five years. During the term of the case, the debtor is required to make payments to the bankruptcy trustee, who in turn, distributes funds to the various creditors, according to the terms of the plan. In a Chapter 13, it is essential that the Association verify the amounts due by filing a Proof of Claim, as the plan will repay the creditors based upon the amounts listed by the debtor or as filed in a Proof of Claim by a creditor.
Please note that bankruptcies only affect those amounts that came due prior to the bankruptcy being filed. As such, it is the owner’s responsibility to ensure that post-filing assessments are paid to the Association on time.
Bankruptcies can be frustrating to the Association and its members. If you have an owner in bankruptcy and are not sure what to do, we can help. Please feel free to contact us to discuss how we may be able to assist you with your bankruptcy issues.
Association Enforcement ProceduresBy Daniel J. Greenberg, Esquire
Enforcement of the governing documents is a continuous job in a condominium, cooperative or homeowner association. In order to effectively enforce restrictions and rules, the first step is for the Association to diligently document violations. Enforcement should always be undertaken with the premise that ultimately the matter might proceed to arbitration, mediation or litigation. If the Association does not have substantial proof of the violation, the enforcement procedure is jeopardized.
Enforcement typically begins when the Board of Directors or property manager is made aware of a violation. With the exception of very obvious violations, some communities rely on committees or the property manager to canvas the community and inspect properties for compliance, while other communities respond only to written complaints.
Once the Association knows, or should have known, of a violation, the timetable on the Association’s right to enforce commences. When the Association is made aware of non-compliance, the Association should initially confirm the violation, if there is any question. Date-stamped photographs should be taken as evidence of the violation. To utilize photographs at a trial or arbitration, proper authentication of the photo must be made by a person under oath who is familiar with what is depicted in the photo.
The Association representative should take as many photographs as is necessary to fully document the violation. The photographs should be focused enough to allow a person who is unfamiliar with the case to recognize the nature and extent of the violation, but should also provide enough context to allow it to be identified as the owner’s property. Portions of the house, landscaping or other scenery should be included in the photograph, and the person who took the photograph should be noted. In the event a trial is necessary, the person who took the photographs will be called as a witness, at which time he or she will testify that the photographs are of the Defendant’s property and depict the violation in question.
In cases of continual violations, such as the parking of a prohibited vehicle, multiple photographs should be taken with the date noted on the photo, if possible. This will allow the Association to demonstrate that the violation was more than an isolated incident. The photographs, along with testimony by the taker, regarding when the photos were taken, will permit the Association to demonstrate to the Court that the violation continued from week to week or day to day depending on how often the photographs were taken. This is especially important in the fining process as well, as the Association must be able to prove a continuing violation if a multi-day fine is imposed.
After the Association has sent at least one violation notice, the Association’s attorney should be requested to send a formal demand to cure the violation. The violation letters will indicate the rule violation, a detailed description of the violation, advise the owner what action must be taken to cure the violation, and the timeframe in which they must complete the remediation. In a condominium, the violation notice must include a pre-arbitration notice, a prerequisite to filing an arbitration petition, which is how condominium associations must proceed pursuant to statute. Likewise, homeowners associations are required by statute to offer the owner an opportunity to participate in mediation by sending a pre-suit mediation offer detailing the violation before the filing of a lawsuit to compel compliance with the deed restrictions. In both condominiums and homeowners associations, the mediation process is used with great success to reach an amicable resolution to the issue without resorting to litigation.
Every community should establish a consistent policy whereby the procedures are clearly established for documenting violations and proceeding with enforcement of same. This will ensure that violations are dealt with promptly and in a manner that avoids owner defenses such as selective enforcement and waiver. Diligent handling of enforcement issues serves to protect community aesthetics, property values and the Association’s ability to enforce its deed restrictions. Please feel free to contact our office to discuss your Association’s enforcement policy and we will be happy to assist you with keeping your community at its best.
WHEN ARE CLOSED BOARD MEETINGS ALLOWABLE?
By Tiffany A. Grant, Esquire
Many Boards desire to have closed or executive session meetings to discuss business, absent non-board members being present. The Florida Statutes require that meetings of the Board (i.e. meeting where a quorum of the directors are present) be open to the members with limited exception.
Chapter 718, pertaining to Condominiums, has an exception pertaining to the open Board meeting requirement, which states in part:
Notwithstanding any other law, the requirement that board meetings and committee meetings be open to the unit owners does not apply to:
a. Meetings between the board or a committee and the association's attorney, with respect to proposed or pending litigation, if the meeting is held for the purpose of seeking or rendering legal advice; or
b. Board meetings held for the purpose of discussing personnel matters.
Chapter 719, pertaining to Co-Operatives, also has an exception pertaining to the open Board meeting requirement. The provision states in part:
Notwithstanding any other law to the contrary, the requirement that board meetings and committee meetings be open to the unit owners does not apply to board or committee meetings held for the purpose of discussing personnel matters or meetings between the board or a committee and the association’s attorney, with respect to proposed or pending litigation, when the meeting is held for the purpose of seeking or rendering legal advice.
Chapter 720, pertaining to Homeowner Associations, has a similar exception to the above, which states in part:
(a) A meeting of the board of directors of an association occurs whenever a quorum of the board gathers to conduct association business. Meetings of the board must be open to all members, except for meetings between the board and its attorney with respect to proposed or pending litigation where the contents of the discussion would otherwise be governed by the attorney-client privilege. . . . The provisions of this subsection shall also apply to the meetings of any committee or other similar body when a final decision will be made regarding the expenditure of association funds and to meetings of any body vested with the power to approve or disapprove architectural decisions with respect to a specific parcel of residential property owned by a member of the community.
(b) Members have the right to attend all meetings of the board. . . . Notwithstanding any other law, meetings between the board or a committee and the association's attorney to discuss proposed or pending litigation or meetings of the board held for the purpose of discussing personnel matters are not required to be open to the members other than directors.
The laws allow closed Board meetings with an Association attorney to give the Board the opportunity to openly discuss the details of a legal proceeding. The meeting allows the Board and the attorney to review the entire factual situation pertaining to a pending or proposed matter without worrying about disclosing the aspects of the case to the residents of the Community generally, or to the owner who is opposing the Association’s position, essentially providing them with ammunition against the Association and laying out their legal argument for them.
The Association is the attorney’s client. There are significant rights pertaining to attorney/client privilege matters. The concept is that in dealing with an attorney, the client needs to be able to openly inform and discuss with the attorney all relevant facts pertaining to a situation to enable the attorney to properly advise and represent the client.
There are many issues which would not be suitable for open discussion during litigation, as the opposing side would gain an unfair advantage. When an Association Board and the attorney are considering pursuing enforcement action, there may be various issues pertaining to lack of enforcement in the past. Discussions relevant to selective enforcement, waiver or related matters become important for the attorney and Board to consider without the opposing side being present. When a Board is considering settlement, discussion of financial offers would be inappropriate in an open meeting. It would not make sense for a Board to openly state that it is going to initially offer a certain sum to settle a case, but if necessary, that the Board will go to a higher figure in an effort to achieve settlement.
One can easily see why the law makes exception for closed meetings when dealing with the Association attorney on pending proceedings. The law also makes an exception to allow the Board to discuss personnel matters. It may be important to discuss issues with personnel behind closed doors. There are privacy concerns relative to the personnel and there is good reason to keep someone’s potential termination under wraps to avoid any potential for retaliation.
Question of Meeting Notice
Many questions are raised as to whether posting notice of a Board meeting with the attorney is required. The Florida Statutes state all meetings of the Board shall be posted. The purpose of posting is to allow the unit owners to be aware that the Board is having a meeting and in the case of Condominiums and Co-Operatives, to allow the owners to view the agenda to make a determination as to whether the owner desires to attend the Board meeting. In the case of Condominiums and Co-Operatives, the owners have the right to address items on the agenda. Even in Homeowner Association Board meetings, the members have a right to see the Board in action and view the decision making process.
A conservative view is that notice of the meeting should be posted. Condominium arbitration cases have held that posting notice of the Board meeting is required even when meeting with an attorney. Arbitration cases are not binding precedent on the Court and there are no recorded cases dealing with the requirement of posting notice of a Board meeting when dealing with the attorney. However, it is suggested the notice be posted. The notice may also indicate that the meeting is with the Association attorney pertaining to proposed or pending litigation or to discuss personnel matters and is therefore closed.
Issue of Minutes
Closed meetings of the Board may not result in meeting minutes in a traditional sense. Many times the attorney will summarize the matters discussed and/or decisions in a letter to the Board. In such case, the letter would be kept in a closed file, not subject to review, due to the attorney/client privilege during the pendency of the action. Alternatively, if Board notes or minutes are kept as a result of discussions at the meeting, such minutes would also be kept in the “legal file” and not subject to record inspection during the time the case is open. The Board may ratify a decision made with the attorney at a subsequent open meeting. The motion to ratify would be general in nature, i.e., “to ratify the decision made when meeting with the attorney.” Many Associations take the position that all records pertaining to a legal matter will be kept closed on a permanent basis due to the attorney/client privilege. This is very debatable. In certain instances where records are to be kept closed on a long-term basis, the Association should seek the opinion of the attorney regarding the matter. The Board could periodically reconsider the issue as to when to open certain records.