Tuesday, September 2, 2014

The Name Game

In many cultural narratives, power over a person rests in knowing his true name.  A classic example is the story of Rumpelstiltskin, whose scheme was stymied when his name is guessed.  This tradition carries on in our legal system, where we can be bound by contracts as long as our accurate name is used. The idea is so ingrained in our system that a whole industry has sprung up to address identity theft.  In contrast, being anonymous gives us freedom from consequences, sometimes with bad results.  The struggle between the two extremes makes for interesting times.

For homeowner associations, what appears on a property deed dictates ownership and determines success in collections.  A divorce results in one of the owners being removed from the property, but until the Association receives legal paperwork reflecting this change, both owners continue appearing on the records and are held responsible for community obligations.  If a spouse was never included on the deed, he/she may not be bound by some covenants (i.e. paying assessments) or mortgages.  And if an owner legally changes his/her name, court actions using the previous name can be invalidated.  In non-statutory HOA communities, paper liens can be voided with a simple misspelling of a person’s name.

Fraudulent uses of deeds do crop up.  For example, the homeowner may deed the property to a relative in an attempt to frustrate collections efforts.  If this change occurs after the HOA collections process has begun, the Association may only discover it after money and time have already been spent pursuing the 'wrong' person.  Even running title searches during collections may not immediately uncover the truth, due to delays in the county recording process.  Then once the Association serves this new owner a lawsuit, it's not unusual to see him immediately deed it back to the original owner, causing further delays.

Owners may opt to hold the property in the name of a business entity, such as a trust or limited liability corporation.  In some instances this is done to make collections more difficult (the corporation does not have funds to garnish), or to bypass certain regulations such as leasing restrictions (i.e. appointing a renter as an officer of the corporation).

Another concern is the type of deed used to convey property.  A special warranty deed transfers rights without guaranteeing against a disputed claim from a past owner.  A limited warranty deed may only transfer some of the property rights, or for only a set number of years.  Deeds may contain additional restrictions added by the seller, going beyond what exists in the community’s governing documents, such as requiring that the property automatically revert back to another owner under certain circumstances.  With the rise of short sales, there is the deed in lieu of foreclosure, which leaves liens against the property in place.  

These types of situations are more common when a bank loan isn't used to purchase the property.  However, even with the use of legal counsel and title companies, occasionally these issues slip past everyone (including banks), causing headaches for the Association. 

Correctly identifying ownership issues is just one challenge faced by Boards of Directors.  As a Director, you are not expected to be an expert in all things. Rather than bogging yourself in minutia, utilize third-party experts to navigate and resolve such issues.  Another example:  For those of us who work with financials in other industries, HOA accounting idiosyncrasies are mind boggling.  Best to leave the booking entry questions in the hands of an outside CPA, allowing you to focus on high level decision making!

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