Tuesday, August 27, 2013

Conflicts - What Motivates Board Decisions

No matter how nice your community is now, it doesn't take much to change your little slice of heaven into a nightmare.  A new board of directors, a new property manager, a new association attorney, or the neighbors from hell can all wreak havoc on a community and create misery for everyone.  The misery comes in the form of higher assessments for legal fees, those intimidating covenant violation notices and possible fines, past due assessments which spiral out of control with legal fees, interest and late charges, or what I refer to as "neighbor wars," often fueled by one or the other claiming the association supports their position.

Avoiding conflict is best achieved by understanding the governing documents, understanding how an association functions and operates, understanding the various people managing and operating the association, and understanding common problems that may arise between owners or owners and the association.

The biggest complaint I hear are owners who feel victimized by their associations, the association's attorneys, or the property manager.  While it does happen and unfortunately frequently, knowing what motivates the actions and conduct of your association helps to keep you out of the crosshairs.  Once you have that target on your back there is little chance of ever living in peace.  Even if you are successful in litigation, chances are, unless you move, you won't enjoy living in the community and there will always be animosity. 

It takes all kinds of personalities to make up a community and you cannot not possibly get along with everyone or make everyone like you.  Add to the mix a board of directors of a private corporation with a contract you entered into waiving many of your property rights and you have a recipe for disaster if you are not prepared and informed.

While a have a theory the worst of board members are those who failed at their careers and decided to run your association so they can have their egos stroked, many board members start out with good intentions. Some have what it takes to do a good job without making enemies, but many are just average people with the same stresses in life as everyone else -- jobs, family, finances, mortgages, health concerns, etc.  Board members take on a voluntary job (at least they better not be paid or they are violating state law) and try to manage the community with limited funds.  The association, nine times out of ten, has a revenue stream that is generated by assessments only.  Many owners lose sight of that fact and assume it's a corporation with profits and a fat bank account.  Nothing is further from the truth.  Most associations are non-profit organizations with a limited budget based on the amount of assessments per household and an average of 25% to 40% of those households are not paying the assessments and are in a mortgage foreclosure.  Think of it like this -- what would you do if your paycheck was cut 40%?  Ouch!  On top of that you have everyone in the community complaining assessments are too high and at the same time complaining the pool needs repairs, the clubhouse needs a new roof, the entrance sign needs a face lift -- the list goes on and on. It's no wonder these volunteers reach their burn out level quickly.

Now consider the fact associations are either not regulated at all or have little regulation.  Currently the State of Florida does not regulate homeowners associations except for elections. Hopefully that changes in 2014. The State does regulate residential condominiums, but not commercial condominiums and hotel condominiums.  The regulation that does exist is limited and cannot include claims for personal damages or an assessment dispute.  Add to this lack of regulation a property manager who is required to take 18 hours of class work to get a license, if they have a license.  State law requires the property manager, or community association manager (CAM) and the manager's firm to each be licensed, but there are a number of unlicensed managers in the industry.  I am not trying to bash the CAMs -- there are a number of excellent CAMs out there who are hard working and have high ethical standards, but just like lawyers their profession gets a bum rap for the bad apples in the bunch.

Next added to the mix of things is the association attorney.  Associations want aggressive attorneys because the board members are afraid of being personal sued despite being protected by the Business Judgment Rule.  The Business Judgment Rule protects morons, idiots and those who just make plain honest mistakes. It also protects the association to an extent.  There are some overly aggressive association attorneys who count on owners not having the $100,000 or so it takes to fund a lawsuit.  Without state regulation of the association and a high price tag on justice, its the perfect storm.  Every day I get calls from people who ask me to take their case on a contingency because its a good case, it will generate publicity for me or its extremely unjust.  Its not easy for me to tell them a) I don't have the resources to fund their case and b) unless you have a physical injury that generates big money damages no law firm will take it on a contingency because it just not a good business decision to tie you your working capital with no return on investment, if any.

So how do you avoid the perfect storm?  Let's break it down into two categories:  1) past due assessments and 2) violations.

Most owners do not realize there is almost no defense to not paying your assessments.  Its your absolute duty to pay your assessments, even if you think the association failed to properly notice a meeting to vote on an increase or is misappropriating (stealing) funds.  The only defenses available are if you paid the assessments and can prove it, the association refused your payments, the association did not provide notice before filing a lien or foreclosing, the board met in secret to impose the  increase or the board did not notify the community of the increase.  Even with those defenses it is hard to win against the association.

If you get past due in assessments you will always be past due until you pay the total amount due!

I leave that as a stand alone statement so everyone can understand the importance of this.  By state law any payments are credited to all charges other than assessments first.  Assessments are credited last, so anything less than 100% of the amount demanded means you are past due and the association can lien and foreclose on your home.  There is no minimum amount.  Even though you may owe them $100 and your neighbor owes them $10,000, they can foreclose on you first.  Its all about which owner the association is most likely to recover from with the least amount of legal fees expended.  Or it could be they don't like you, but the court recognizes the association does not have the funds to go after everyone at once and will let them pick and choose who to go after without any consequences for their selections.  Before you jump to any conclusions, look at it unemotionally.  Is it smarter to go after the owner who owes $100, is current in the mortgage, has a job and generally pays any debts or go after the owner who owes $10,000, is in a mortgage foreclosure, has no job and is likely to file bankruptcy?  Even if the association forecloses, if there is a mortgage on the property it is only a matter of time before the bank forecloses on whoever buys the property at the foreclosure auction, which is often the association.  If there is already an active mortgage foreclosure the bank can file a motion and get the property from the association in six to eight weeks where it takes years to get it from the homeowner.

What's the deal with all that interest, late fees, administrative charges and attorneys' fees?  Well, as I said before, the only source of revenue an association has is assessments and there has to be consequences to not paying assessments or everyone would withhold them.  The association cannot waive the attorneys' fees or they are passing on costs you generated to your neighbors and your neighbors could bring a lawsuit against the association.  Assessments can definitely not be waived or the association could be sued for not enforcing the declarations.  Do associations abuse this and over charge these fees?  Yes, but I don't blame the associations themselves as much as I blame the property managers and the lawyers.  Like I said -- its the perfect storm -- an unregulated business where those who do business with the association are guaranteed to get paid.  All the association has to do to pay its bills is increase assessments.  Greed is a problem.  Owners and board members alike have to watch out for property managers working with attorneys to generate billable hours for both.

A word of caution -- don't try to plead financial hardship, death, disability, job loss or any other personal issues.  The courts cannot consider this when they rule on these cases. These claims are not a defense to not paying assessments.  If you want to keep the roof over your head pay the mortgage and the association.  I would rather skip a mortgage payment then the association payment. At least you can negotiate with the bank -- eventually.

Next on the list is covenant violations.  The best way to avoid them is to know the rules! Period!

You need approval of your association to change anything.  If you make that assumption you should stay out of trouble.  Its better to ask for permission and not need it then to not ask and try to get a lawyer's forgiveness.  You can count on the lawyer being involved.

Some of the newer rules, or rather laws of the state:

1. An association cannot prohibit or prevent an owner from installing Florida Friendly Landscaping.  Its a matter of public policy and important to conserving our natural resources.  You are still required to get your association's approval.  No one has figured out how to deal with the issue of what to do when the association denies your application and the law says you can do it anyway.  There are cases pending in court over this.  Some associations have been wise enough to realize their lawyers were probably looking at generating billable hours and its a losing proposition for them -- they dismissed their cases.  Other aren't so smart.

2. You have a right to a hearing with 14 days advance notice of the hearing before you can be fined.  While this part of the statute was passed as a matter of public policy the statute is written as if to imply associations have a right by statute to fine owners.  The previous rule, before this statute was passed, was an association could only fine you if the Declarations, Bylaws and Articles of Incorporation authorized fines.  My position is this is still true and there is no pubic policy reason for imposing fines by statute, but its a lot cheaper to pay the fine than to fight in court and possibly an appeal.  Many associations also believe if you don't show up to for the hearing the fining committee can impose the fine without having the hearing.  Wrong!!!  But again, is it feasible to spend lots of money to fight a fine?

3.  A buyer is liable for the past due assessments of any previous owner.  The statute only addresses assessments and not late fees, interest and attorneys' fees.  While it is industry practice to charge all these to any buyer, there are cases pending challenging this.  Stay tuned.  One pet peeve I do have is charging a new owner the attorneys fees for the association attorney's involvement in a mortgage foreclosure.  Associations are named as a defendant in a mortgage foreclosure because they have a competing lien and the bank cannot claim the 12-month cap on liability if the association is not named.  There is no rule of civil procedure that allows one defendant to assess their legal fees against another.  I would think the Florida Bar would have issues with this as well.  It has also been the industry practice to not write off any past due assessments and other charges after the bank pays their 12-month cap and hold this for the next buyer.  The Third District Court of Appeals ruled against that on August 14, 2013.  It sends a clear message.

4. No stealing by board members!  Finally!!!  If a board member is arrested for a crime involving the association the board member is automatically removed from office as a matter of law.  Did I hear a big "WOOHOO" out of Davenport, Florida?  I am eternally grateful to the Polk County State Attorneys' Office for a job well done.

5. Old law, but important:  before you can sue your association you must engage in pre-suit mediation for homeowner associations and arbitration for condominium associations.  There are exceptions as noted above for assessment disputes and, for arbitration, personal damages.

6. Another old law that's important:  if your board of directors is doing a lousy job you can initiate a recall and remove them.  This is much easier and less expensive than a lawsuit.

Remember pay your assessments and ask permission.  Do those two things and you can avoid a lot of heartache and legal fees.  While it goes against my anti-establishment nature, most association battles are not worth it emotionally and financially.

While I didn't touch on neighbor-on-neighbor disputes, which are virtually impossible to resolve, my only advice is to put yourself in their shoes and ask yourself would you be annoyed living next door to you?

Good luck and next time buy farmland.

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