Tuesday, March 31, 2015

Black, White & Gray

A wily Board member once said about governing documents:  "There is black & white, and there is gray, and gray is what I define it to mean."   When a community has poorly-drafted documents, a Board may find itself filling in the gaps where the documents are silent.  

One community had a problem with off-leash dogs.  The covenants were silent on the subject.  The Board used the generic nuisance provision in its violation notices, even though it was possible that a determined homeowner could successfully challenge it.

A Board may find itself getting creative within the boundaries of the governing documents, but realize that this ‘gray is what I say’ can also work against you.  This is especially true with service contracts, such as landscaping or pool maintenance.  One vendor hired to replace buried cast iron pipes left a path of plant destruction in the common area.  Although the contract included road repairs, it did not stipulate shrub replacement.    

It is not unusual for the wording in a contract to grow organically over time.  New situations lead the vendor to add wording which doesn't play well with the other sections.  Or an attorney ‘fixes’ items included by another attorney, which is ‘fixed’ in turn by yet another attorney.  

The longer the contract, the greater the chance that something important gets overlooked.   This is especially true when it comes to insurance.  These documents easily run 100+ pages, filled with a lot of ‘If-Then’ statements.  The contract definitions are not necessarily placed at the beginning of the document, and there may be other sections that completely redefine a definition.

For example:  How do you know whether a Board member’s spouse is being protected with the Association insurance policy?  With more and more claims being filed against spouses (as a way to get around the protection of a Board member), you want to be sure they are included in the General Liability, Directors & Officers, and Fidelity/Crime policies.

Even if your spouse is explicitly an ‘Insured’ in the definitions, 20 pages later there may be a listing of ways the spouse ends up excluded.  To avoid this snake’s nest, require the insurer to issue an Endorsement explicitly adding your spouse as additional insured and overriding exclusions listed elsewhere.

Community Association Managers also find themselves excluded from insurance coverage, even though the Association is required to provide protection.  Community managers act as agents for communities, but some insurance policies exclude agents from the definition of ‘employee’ when determining who should be covered. 

Another insurance document covers real estate managers, leading some to think this covers your manager.  However, in the State of Georgia, real estate managers are a distinct class from community association managers, making it a possible avenue to deny coverage.  Again, use endorsements to clear up any confusion.

The best way to manage the ‘gray’ in these situations is to insulate the Board with third party experts (i.e. an attorney).  If that gray item should suddenly become black & white, being able to shift the risk to the expert is an added layer of protection.   

Tuesday, March 24, 2015

New Development Dilemma

At a recent regional conference on homeowner association challenges, the hot topic was developer /declarant problems:  It was more shocking than surprising to see the number of communities lost in limbo.  Too often, the developer's focus is only on building homes, not communities.  A poorly crafted set of governing documents is provided by an attorney that does not specialize in HOAs.  Artificially suppressed assessments are imposed, leaving the community cash-poor.  A transition committee, if it is even provided by the developer, is provided very little guidance or time.  The Board of Directors is inaccessible.  There are no clear lines of communication and authority.

In this mess, homeowners don't know where to look for answers, much less what questions to ask.  Here are a few typical items you need to consider:

Who is in charge?  Each community is a corporation, and must be filed with the Secretary of State - go online to your State government website to quickly locate the officers listed for your community.  These records must be updated yearly.  If your community is shown as inactive, that's a problem.

Doesn't the management company make the decisions?  No.  Only the Board of Directors may do this, with the management company responsible for implementation.  Unfortunately the management company often finds itself walking a thin line.  Its duty is to the Association, but is receiving directives from a developer-installed Board.  Each manager must weigh how much good he hopes to accomplish on behalf of the homeowners within developer defined restraints.  If the developer hamstrings his ability to serve, the manager may decide to sever the agency relationship. 

When does the developer have to give up control?  This is determined both by State law and the governing documents.  It may be 10+ years.  Developer control is nearly absolute during the build-out of a community, so if you believe turnover is required, enlist the aid of a legal professional to review and confirm.  In some instances, homeowners come out-of-pocket for court action to resolve this.

Where do I obtain the governing documents?  These should have been provided at the time you purchased your home.  Although they are filed at the county courthouse, if you are not familiar with the system, rely on a title company or real estate attorney to help you track down all the documents.

What happens at turnover?  The developer must satisfy a series of items on a checklist issued by the County.  Any loan provided by the developer to the community is often forgiven in exchange for the homeowner controlled Association agreeing to not pursue the developer for any future items.  If your community happens to be a homeowners association (not a condominium), negotiate to have your community submitted to the Property Owners Association Act at the time of turnover.  This state statute provides protections for your community.

There are many respectable developers involved in creating homeowner associations.  If things get rocky, enlist the aid of outside counsel to help you clear up communications with the developer and resolve situations before they become a headache. 

Thursday, March 19, 2015

Painful Partings

One of the more stressful aspects of community association management is deciding to terminate a client contract.  Some reasons as to why this might occur include:

  • Loss of management staff or support that result in reduced service levels
  • Client demands services beyond the contract
  • Client is unable/unwilling to pay billings
  • Manager faces constant harassment or physical threats / lack of respect from homeowners and/or board members
  • Client consistently ignores professional advice (from attorney, insurance broker, CPA, manager, engineer)
  • Client exposes management company to liability (improper insurance coverage, Fair Housing decisions)
  • Client exposes community to liability (improper decisions, failing to respond in a timely fashion, selective rule enforcement)
  • Client's actions are degrading to the reputation of the management firm
The manager acts as a guide for community Boards of Directors, and navigating the above situations is no different.  Management always tries to work through challenges first, before resorting to a termination letter.  If circumstances permit, 30 days for a course correction is not unreasonable. 

It is disheartening to see a thriving client falter, but the management company can't hesitate if remedial steps fail.  It is easy to let things drag on, but this may only enable the aberrant behavior to continue.  

The way the termination is handled is just as important as the way service first began.  The failed expectations should be detailed in a formal letter to the Board, showing the same level of respect as expected in return.  A classy exit not only reflects well on you, but on the management industry as a whole.  Your goal should be to empower the next management company so that the Board addresses the critical conditions that lead to the termination.   You want the community to get back on track, regardless of which management firm is engaged.

Approached in the right manner, a proper termination leaves the door open for your engagement with the same client at a future date.  Homeowners moving to other communities may be the deciding factor for whether these, too, become clients.  Conduct yourself accordingly.

Tuesday, March 10, 2015

Penny Pinchin'

One compelling reason to do annual increases to the community’s budget:  The courts' intolerance of delayed maintenance work.  In the last few years, judges have made it clear that they do not accept excuses for refusing to increase assessments.  One community opted to discontinue landscaping service, rather than raising dues.  Commercial units in the association sued since this was directly noticeable by their clients.  The judge was not happy.  A special assessment was ordered.  In another community, the Board felt it was too expensive to repair the exterior of the building, and black mold took hold.  A court order and a million dollars later, not only was the building repaired at greater expense, but penalties were tacked on for the Association shirking its duties.

Now another critical reason prompts us to thoroughly maintain common areas:  Cancelled insurance policies. 

Insurance inspectors are tightening up on property reviews, and we have had several instances in the last few months where the carrier dropped a homeowners association, or threatened to do so - if action wasn't taken within 90 days to address basic items such as new roofs and pool resurfacing.  And it doesn't stop there - insurers are also dropping property, liability and directors & officers coverages.

Unless your community's bank account is flush with millions of dollars, the above should be terrifying.  Without insurance to personally protect you, no intelligent person willingly serves on a Board of Directors. Next, all mortgage lending dries up, since a master insurance policy is a basic requirement.  Things snowball from there.

An insurance inspector will not be fooled by substandard work resulting from ‘going cheap’.  Boards of Directors can no longer push for cutthroat contract rates and refuse to increase assessments over two or three years. 

The best course of action is educating your homeowners on the above.  Share with them the basic conclusions of your engineering study, analyzing the life expectancy and replacement cost for big ticket items.  Items such as road resurfacing, detention pond maintenance, clubhouse renovation, sewer line repairs and tree replacement can’t be neglected.

Bottom line - Uninsured is unacceptable.