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BORROWING TO BUY A CONDOMINIUM UNIT? Freddie Mac’s & Fannie Mae’s New Lending Requirements

BORROWING TO BUY A CONDOMINIUM UNIT? Freddie Mac’s & Fannie Mae’s New Lending Requirements

  • Posted: Mar 06, 2022
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BORROWING TO BUY A CONDOMINIUM UNIT?

Freddie Mac’s & Fannie Mae’s New Lending Requirements

by KBR Legal / RembaumsAssociationRoundup

Buying a bundle of home loans to later sell on the secondary market can be risky business. A lot can go wrong in the process. For example, the economy could tank, causing massive defaults; or even worse, as occurred recently in the case of Champlain Towers South, the building could collapse—where not only did many residents die, but also insurance proceeds are unlikely to be sufficient to satisfy all of the outstanding mortgage debt. This reality has a ripple effect on the mortgage-backed security, ultimately causing financial harm to the investors buying the bundled mortgages.

    The Federal Home Loan Mortgage Corporation, commonly referred to as “Freddie Mac,” and the Federal National Mortgage Association, commonly referred to as “Fannie Mae,” both compete on the secondary mortgage market, which is the market for the sale of securities or bonds collateralized by the value of mortgage loans. In short, they both package mortgages into mortgage-backed securities for sale to investors on the secondary mortgage market. Both Fannie Mae and Freddie Mac have requirements which must be met before they will buy a mortgage from a local lender, which they appropriately refer to as the “seller.” The Fannie Mae and Freddie Mac requirements placed on the seller (meaning, the local lender) trickle down to and then must be met by the association. The association’s compliance with these requirements is then analyzed by the local lender and likely further analyzed by Fannie Mae or Freddie Mac as a part of its bundled loan purchase.

    The mortgages they purchase help ensure that home buyers and investors who purchase property have a steady and stable supply of mortgage money. They broaden the likelihood of funds being made available for housing by attracting new secondary mortgage market investors through offering packaged mortgage-backed securities and guaranteeing the timely payment of principal and interest on the underlying mortgages. This makes secondary mortgage markets more liquid and can help lower interest rates paid by the actual mortgage borrowers (i.e., the property purchasers). It is reported that at times, together they finance up to 90 percent of all residential mortgages. Without Freddie Mac and Fannie Mae buying mortgages from lenders, the lenders would not be in a position to continue to offer loans. They need the funds from the Freddie Mac or Fannie Mae purchase to have available funds to make new loans. The bottom line is that if you expect purchasers in your condominium to be able to obtain a loan, then ultimately your association will have to abide by their requirements, including their demand for information about your condominium building’s condition and the condominium association’s finances, which are set out in their similar questionnaires.

    Congress created Fannie Mae in 1938 to provide accessible funding and more affordable housing. Freddie Mac, alternatively, started in 1970 as a public enterprise to further expand the secondary mortgage market. While there are many similarities between Fannie Mae and Freddie Mac, there are some key distinctions. The significant difference between Freddie Mac and Fannie Mae is where they acquire their mortgages. Fannie Mae purchases mortgages from larger, commercial banks, while Freddie Mac buys them from much smaller banks. While Fannie Mae and Freddie Mac programs have some differences in lending requirements, these requirements also appear more similar than different in so far as they assure the lender they will buy the loan.

    As a result of the Champlain Towers South collapse, Fannie Mae and Freddie Mac have imposed new temporary, additional requirements for mortgages obtained for condominiums and cooperative residential units. These new additional requirements will make it harder for existing condominium unit owners to refinance and for new buyers of condominium units to obtain mortgages.

    On October 13, 2021, Fannie Mae issued Lender Letter LL-2021-14 entitled “Temporary Requirements for Condo and Co-op Projects,” resulting with a new questionnaire effective January 1, 2022. In so doing, Fannie Mae suspended flexibility that allowed a lender to obtain a reserve study in lieu of meeting the 10 percent budget reserve requirement. Simply put, this means that if an association does not reserve at least 10 percent of its total annual budget for reserves, then any lender working with Fannie Mae will not be in a position to issue a loan to anyone purchasing a unit in that association’s condominium because doing so would make that loan ineligible for purchase by Fannie Mae, which ultimately hurts the local lender because it will have less funds to loan.

    Moreover, Fannie Mae will no longer issue project eligibility waivers for significant deferred maintenance or for projects subject to large special assessments. In other words, if the condominium association is not contributing at least 10 percent of its annual budget into the reserves, then Fannie Mae will not buy the loan from the local lender, meaning that the local lender will most likely not issue the loan to the buyer. In addition, and as part of its 10 percent reserve requirement, Fannie Mae no longer allows a borrower to rely on a reserve contribution provided in a reserve study in lieu of meeting the requirement that 10 percent of the annual assessments be contributed to reserves. Therefore, Freddie Mac-backed loans will become even more important to purchasers of condominium units and the developers who build them.

    Then, on December 15, 2021, Freddie Mac issued Bulletin 2021–38 entitled “Temporary Condominium and Cooperative Project Requirements and Topic 5600 Reorganization,” effective February 28, 2022 (the “Bulletin”). While Freddie Mac has strict requirements, too, it is not strictly requiring that 10 percent of the association’s budget be allocated to the association’s reserves.  The Bulletin begins with the following statement of fact:

In the aftermath of the collapse of the Champlain Towers South in Surfside, Florida, the risks of residential buildings with aging infrastructure and in need of Critical Repairs have been brought to the forefront of discussion throughout the nation.

    Regarding reserves, local lenders may continue to rely on a working capital fund for new condominium projects or a reserve study for both established and new condominium projects when the project’s budget provides less than 10 percent replacement reserves. In other words, as so succinctly explained by a regular reader of Rembaum’s Association Roundup, Barry Subkow, Esq.,

Unlike Fannie Mae, if the contribution to reserves is less than 10% of the total annual assessments (e.g., 8%) and is based on the reserve contribution amount that is provided in a reserve study, Freddie Mac will allow the loan.

    These newest Freddie Mac temporary requirements apply to all mortgages secured by units in projects with five or more attached units and are in addition to, and do not supersede, any of the other existing current applicable requirements. As such, there are terms which every board member and manager should become familiar with as they are needed to complete the required questionnaires. For example, a loan given by a local lender to a buyer for a project in need of “critical repairs” (as defined below) is not eligible for sale to Freddie Mac. As a result, the local lender will not be inclined to make the loan if a governmental program entity, such as Freddie Mac, is not willing to buy the loan.

    Because Freddie Mac secured mortgages are likely to become even more important in today’s economy, there are four terms with which every board member and manager should be familiar:

  • Critical repairs
  • Material deficiencies
  • Significant deferred maintenance
  • Routine repairs and maintenance

    The term “critical repairs” refers to repairs and replacements that significantly impact the safety, soundness, structural integrity, or habitability of the project’s building(s) and/or that impact unit values, financial viability, or marketability of the project. These repairs and replacements include the following:

  • All life safety hazards
  • Violations of federal, state, or local law, ordinance, or code relating to zoning, subdivision and use, building, housing accessibility, health matters, or fire safety
  • Material deficiencies (see below for definition)
  • Significant deferred maintenance (see below for definition)

    The term “material deficiencies” is defined as unresolved problems that cannot reasonably be addressed by normal operation or routine maintenance and which include the following:

  • Deficiencies which, if left uncorrected, have the potential to result in or contribute to critical element or system failure within one year
  • Deficiencies that will likely result in a significant escalation of remedial cost related to any material building components that are approaching, have reached, or have exceeded their typical expected useful life or whose remaining useful life should not be relied upon in view of actual or effective age, abuse, excessive wear and tear, poor maintenance, and/or exposure to the elements
  • Any mold, water intrusions, or leaks that are potentially damaging to the project’s building(s)

    The term “significant deferred maintenance” is defined as the postponement of normal maintenance, which cannot reasonably be resolved by normal operations or routine maintenance, and which may result in any of the following:

  • Advanced physical deterioration
  • Lack of full operation or efficiency
  • Increased operating costs
  • Decline in property value

    The term “routine repairs and maintenance” is defined as repairs and maintenance that are expected to be completed by the project in the normal course of business and are nominal in cost. These repairs are not considered to be critical and include the following types of work:

  • Often preventive in nature
  • Accomplished within the project’s normal operating budget
  • Typically completed by onsite staff
  • Focused on keeping the project fully functioning and serviceable
  • Minor deficiencies with a cost of $3,000 or less per repair item that do not warrant immediate attention but that require repairs or replacements that should be undertaken within the next 12 months
  • Scheduled repairs and maintenance that are fully funded, may have a cost greater than $3,000, and will be undertaken within the next 12 months

    Any documentation used by the local lender to determine the eligibility of projects in need of critical repairs must be retained and provided to Freddie Mac upon request. Violations of state or local law, ordinance, or code, as referenced in the critical repairs definition, include failure by the association to schedule an inspection required by the applicable jurisdiction and any directive from a regulatory authority or inspection agency to make critical repairs. Projects in need of critical repairs remain ineligible until the required repairs and/or inspection report have been completed and documented. Sellers of the proposed loan (i.e., the local lender) must review an engineer’s report, or substantially similar document, to determine that the repairs resolved the building’s safety, soundness, structural integrity, or habitability concerns. Acceptable sources of documentation to determine if a project is in need of critical repairs may include but are not limited to the following:

  • Board meeting minutes
  • Engineer’s reports
  • Reserve studies
  • List of necessary repairs
  • Other substantially similar documentation

    The Freddie Mac restrictions on the purchase of loans from lenders does not apply to the following:

  • Routine repairs and maintenance, (as defined above) or
  • Damage or deferred maintenance to one or a few units in the project, provided that there is no impact to the overall safety, soundness, structural integrity, or habitability of the improvements

    When determining if a repair is a routine repair or maintenance, Freddie Mac reminds the local lender that its condominium project budget requirements include determining that appropriate assessments are established to manage the project and that there are appropriate allocations for line items pertinent to the type and status of the condominium project. Sellers (meaning, the local lender) should evaluate the line items on the budget, especially those for repairs and maintenance, and the amounts associated with those line items as part of the seller’s project review process.

    Regarding any current special assessment, even if paid in full for the subject unit, such special assessment must be reviewed to determine eligibility. This includes any special assessment that the board approved and, if required, owners approved, but the board has not initiated collection yet (e.g., a planned special assessment). The local lender must determine the following:

  • The reason for the special assessment
  • The total amount assessed
  • For current special assessments, that the total amount is an appropriate allocation or, for planned special assessments, there is adequate cash flow to fund the reason for the special assessment, and
  • For current special assessments, that the amount budgeted to be collected year-to-date has been collected

    To determine that the amount budgeted to be collected year-to-date (YTD) has been collected, the following criteria apply:

  • The seller must review an income statement or a substantially similar document which has YTD budgeted and actual amounts for the special assessment,
  • The document should be dated within 90 days of the project review date, and
  • Any shortfall between the budgeted and actual YTD amounts for the special assessment must not be more than five percent.

    Any documentation used to determine the eligibility of the special assessment, such as the income statement referenced above, must be retained by the local lender and provided to Freddie Mac upon request. In addition, special assessments with more than 10 monthly payments remaining must be included in the calculation of the monthly housing expense-to-income ratio and must be documented.

If a seller (the local lender) relies on a reserve study, then the seller must ensure the reserve study meets certain requirements, which include, but are not limited to the following:

  • A reserve study’s financial analysis must validate that the project has appropriately allocated the recommended reserve funds to provide the condominium project with sufficient financial protection comparable to Freddie Mac’s standard budget requirements for replacement reserves. (Note—This requirement must be discussed and is required as a part of any professional’s reserve report.)
  • The reserve study’s annual reserve funding plan, which details total costs identified for replacement components, must meet or exceed the study’s recommendation and conclusion.
  • The most current reserve study (or update) must be dated within 36 months of the seller’s determination that a condominium project is eligible.
  • The reserve study must be prepared by an independent expert skilled in performing such studies (such as a reserve study professional, a construction engineer, a certified public accountant who specializes in reserve studies, or any professional with demonstrated experience and knowledge in completing reserve studies).

    Freddie Mac advises its sellers (the local lender) to evaluate the reserve study’s financial analysis. Sellers should compare, for the current fiscal year, the estimated beginning of the year (BOY) reserve fund balance in the reserve study to the actual BOY reserve fund balance. The reserve study’s recommended reserve allocation for the current fiscal year correlates to the project starting the year with that estimated reserve fund balance. If the project started the year with significantly less than what was estimated, then the project has likely failed to appropriately allocate the recommended reserve funds to provide the condominium project with sufficient financial protection.

    If your association is not Freddie Mac eligible under these terms, then a local lender can submit a project waiver request (PWR), which, however, has many other strict requirements that are not further discussed herein.

The Freddie Mac Bulletin can be found at:

https://guide.freddiemac.com/app/guide/bulletin/2021-38

The Fannie Mae Bulletin can be found at:

https://singlefamily.fanniemae.com/media/29411/display

    Each association will need to coordinate completion of the Freddie Mac and Fannie Mae questionnaires with its board members, manager, and, importantly, the association’s attorney. Practically speaking, the questionnaires will need to be updated as the scenario at your association changes. Just because an association is not eligible this year does not mean circumstances will not change leading to a later acceptance. As to the costs associated with the completion of the questionnaires (and while arguments may exist for the buyer who caused the need for the completion of the questionnaire to pay for it), since the questionnaire benefits the entire association by providing for a viable market for all new purchasers to acquire loans to purchase a unit, the expense should be deemed a common expense shared by all members of the association.

    Be sure to reach out to your association’s attorney to answer any questions you may have regarding Fannie Mae and Freddie Mac questionnaires and their local lender requirements because, remember, if Fannie Mae or Freddie Mac will not buy the loan from the local lender, the lender is not likely to make the loan.

Reprinted with permission from KBR Legal members of SFPMA.

 

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Will The Association’s Denial Of An Architectural Request Withstand Challenge? Many Won’t—Find Out Why

Will The Association’s Denial Of An Architectural Request Withstand Challenge? Many Won’t—Find Out Why

  • Posted: Mar 03, 2022
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For many homeowners associations, a top priority is ensuring that the homes in the community are maintained in conformity with the “community-wide standard.” But, what is this subjective standard? How is compliance measured? What is the process to be judged when a request to the association’s architectural review committee (ARC) is made? The ARC is instrumental in ensuring that the community-wide standard is met. However, your association may run into a problem if the ARC denies a request from a homeowner if the association has not adopted specific, objective criteria and guidelines on which the ARC can rely.

Sometimes applications to the ARC are denied because the proposed modifications were not “in harmony” with the other homes in the community or did not conform with the “community-wide standard.” However, such a limitation is vague, and a denial based on whether a particular modification is “harmonious” is subjective. Thus, the members are entitled to specific guidelines regarding what is allowed and what is not allowed, and in fact, this is required by law.

The association’s ARC can only be as effective as the objective guidelines and standards drafted into the declaration and board-adopted rules. If your ARC is relying on aesthetics or other subjective criteria that are simply “personal preferences” rather than written, adopted, and published objective standards and guidelines, any disapproval is vulnerable to a successful challenge. In fact, in the seminal case regarding approval of architectural modifications, Young v. Tortoise Island Homeowner’s Ass’n, Inc., 511 So.2d 381 (Fla. 5th DCA 1987), the court held that where the governing documents were silent as to the modification at issue, a denial could not be based on the architectural control board’s opinion regarding “aesthetics, harmony and balance—admittedly very personal and vague concepts.”

In Young, the owners submitted an application to build a flat roof on their home. The homes immediately surrounding the home were all peaked roofs. Nothing in the governing documents prohibited an owner from building a flat roof, and the requested roof complied with all of the specific requirements set out in the governing documents. However, the architectural control board denied the owners’ request because there was a “very strong feeling” that the flat roof would not be “architecturally compatible with the other homes.” In the end, the Youngs built the flat roof despite the association’s disapproval, arguing that the architectural control board had no authority to impose a prohibition against flat roofs. The court agreed with the Youngs, holding that

“In the absence of an existing pattern or scheme of type of architecture which puts a prospective purchaser on notice that only one kind of style is allowed, either in the recorded restrictions or de facto from the unified building scheme built on the subdivision, such a board does not have the power or discretion to impose only one style over another based purely on ‘aesthetic concepts.’”

The flat roof violated no recorded restrictions, no objective rule adopted by the association, and no de facto common existing building style in the community. Therefore, the court held that it was beyond the power of the architectural review board to prohibit the flat roof.

The concept in Young was further codified in 2007 in §720.3035(1), Florida Statutes, which provides that an association or the ARC has the authority to review and approve plans and specifications only to the extent that the authority is specifically stated or reasonably inferred as to location, size, type, or appearance in the declaration or other published guidelines and standards. More specifically §720.3035(1), Florida Statutes, provides that the authority of an association or any architectural, construction improvement, or other such similar committee of an association to review and approve plans and specifications for the location, size, type, or appearance of any structure or other improvement on a parcel, or to enforce standards for the external appearance of any structure or improvement located on a parcel, shall be permitted only to the extent that the authority is specifically stated or reasonably inferred as to such location, size, type, or appearance in the declaration of covenants or other published guidelines and standards authorized by the declaration of covenants.

In other words, the ARC can only approve or deny requested modifications based on objective standards with specificity as to location, size, type, or appearance that are set out in the declaration or other published guidelines and standards. Without specific, objective standards to rely upon, the ARC is at risk of making arbitrary decisions regarding approval. Basing ARC denials on concepts like “aesthetics, harmony, and balance” will land the association in hot water if an owner challenges such denial. It is far safer to base approval or denial on objective standards as set out in the declaration or as adopted by the board.

Creative drafting by an association’s attorney is critical in order to capture those ARC applications where a member may request a modification that is not squarely addressed by the governing documents. In plain English, a “catchall” amendment to the declaration can be artfully drafted that stands for the proposition that, if such a request is made, then the existing state of the community is the applicable standard by which the application is to be judged. For example, if the Tortoise Island Homeowner’s Association had had such a provision in its declaration, then given that there were no flat roofs in the community, the existing state of the community may have provided a lawful basis for the ARC to deny the request, thus possibly leading to a whole different result in the case.

On a related note, there are strict procedural requirements that your association must follow, most especially if the ARC intends to deny an ARC request. It is likely many ARCs do not conduct their activities in conformity with Florida law such that a denial could withstand judicial scrutiny. Pursuant to §720.303(2), Florida Statutes, a meeting of the ARC is required to be open and noticed in the same manner as a board meeting. In other words, notice of the ARC meeting must be posted in a conspicuous place in the community at least 48 hours in advance of the meeting, and the meeting must be open for the members to attend. In addition, pursuant to §720.303(2)(c)3., members of the ARC are not permitted to vote by proxy or secret ballot. Bare bone minutes should be taken as well to create a record of ARC committee decisions, most especially denials.

We hear from many associations that the ARC does not meet openly or notice their meetings. This leaves any decision made by the ARC vulnerable to challenge. If the ARC denies an application but fails to do so at a properly noticed meeting, the owner can challenge the denial claiming that it is not valid as the ARC did not follow proper procedures. Many declarations contain language which provides that if an ARC application is not approved or denied within a certain period of time, the application is deemed approved. In that case, if the ARC’s denial of an application is not valid because the ARC failed to comply with the procedural requirements for the meeting, an application which violates the declaration or the ARC standards may be deemed approved by operation of the declaration! By complying with the provisions of Chapter 720, Florida Statues, your association can avoid that disaster.

Practice tip: Remember that notice of any board meeting at which the board will consider a rule which restricts what an owner can do on their parcel must be mailed, delivered, or electronically transmitted to the members and posted conspicuously on the property not less than 14 days before the meeting.

If your association has not adopted objective ARC standards and guidelines including the “catchall” provision discussed above, now is the time to start! We recommend that you contact your association’s counsel prior to drafting such rules to ensure that the association is in compliance with the requirements of the governing documents and Chapter 720, Florida Statutes.

by Jeffrey Rembaum, Esq. of Kaye, Bender, Rembaum attorneys at law, legal practice consists of representation of condominium, homeowner, commercial and mobile home park associations, as well as exclusive country club communities and the developers who build them. Mr. Rembaum is a Certified Specialist in Condominium and Planned Development Law. He is the creator of ‘Rembaum’s Association Roundup’, an e-magazine devoted to the education of community association board members, managers, developers and anyone involved with Florida’s community associations.  His column appears monthly in the Florida Community Association Journal. Every year since 2012, Mr. Rembaum has been selected to the Florida Super Lawyers list and was also named Legal Elite by Florida Trends Magazine. He can be reached at 561-241-4462.

 

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Think Rules and Regulations Do Not Need To Be Recorded? Think Again!! by KBRLegal.com

Think Rules and Regulations Do Not Need To Be Recorded? Think Again!! by KBRLegal.com

  • Posted: Mar 02, 2022
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Think Rules and Regulations Do Not Need To Be Recorded? Think Again!! – by KbrLegal.com

Many Floridians live within a community operated by an association of some kind, be it a community of single-family homes under the jurisdiction of a homeowner’s or property owner’s association, or a condominium building maintained by a condominium association. These owners should be well-aware that many aspects of life within these communities are subject to restrictions outlined in a set of governing documents, which include a declaration, articles of incorporation, bylaws, and rules and regulations. While the declaration, articles of incorporation, and bylaws are typically recorded among the public records of the county in which the community is located, the rules and regulations are typically not recorded.

 

Because rules and regulations are usually amendable by the approval of the board of directors only (as opposed to the additional approval of the membership), allowing rules and regulations to be unrecorded provides the board of directors with the flexibility to amend the rules and regulations as the need arises without the added expense and time required to record these rule amendments among the county’s official records. However, this option has changed for homeowner’s associations as a result of recent legislative changes which took effect on July 1, 2018.

 

How has this changed? Pursuant to new provisions set out in Section 720.306(1)(e) of F.S., “n amendment to a governing document is effective when recorded in the public records of the county in which the community is located.” While this has certainly always been the case for a declaration, articles of incorporation, and bylaws, this is new as to rules and regulations of a homeowner’s association because they were added to the definition of the term “governing documents” as set out in Section 720.301(8), F.S. when the Statute was amended in 2015, effective on July 1st of that year.

Due to the fact that many homeowner’s associations have not recorded their rules and regulations in the public records of the county, consideration should be given to record the all of the rules and regulations, particularly if there are plans to amend them. Failing to record the rules and regulations prior to (or at the same time as) recording an amendment will possibly create what is termed a “wild” amendment, which is not connected in the public records to the document it is trying to amend. Additionally, if an amendment to the rules and regulations must be recorded in order to be effective, it is logical to conclude that the initial rules and regulations must also be recorded in order to be effective. Under Section 720.303 F.S., all governing documents are required to be recorded in the public records. Therefore, a homeowner’s association should record its rules and regulations in the public records in order to avoid this possible claim against the legal effectiveness of the rules when it becomes necessary for the association to enforce its rules against an owner.

As with any other amendment to a homeowner’s association’s governing documents, within thirty (30) days after recording an amendment to the governing documents, the homeowner’s association must provide either a copy of the recorded amendment to the members or, if a copy of the amendment was provided to the members before they approved it (for those communities with owner approval requirements for rules) and the amendment was not changed before the vote, a notice providing that the amendment was adopted, identifying the official book and page number or instrument number of the recorded amendment, and that a copy of the amendment is available at no charge to the member upon written request to the association.

 

While the consequences of this new legislation may have been unintended, it is the law until amended otherwise or an appellate court makes a contrary ruling. Although this will likely result in some minor additional costs to homeowner’s associations, this is a good opportunity for a board of directors to examine their existing rules and regulations and update them prior to recording them among the public records.

 

 

Board members of an association subject to Chapter 720, Florida Statutes, should discuss the implications created by this recent legislative change with their association’s lawyer. It is recommended that you have experienced association counsel review any existing rules and regulations prior to recording them to ensure that they are enforceable and do not unnecessarily expose the association to liability (e.g., Fair Housing violations). As to any proposed rules not yet adopted the same holds true. Experienced association counsel should review them to both ensure enforceability and to steer clear of unintended negative consequences.

 

Jeffrey Rembaum, Esq. of Kaye, Bender, Rembaum attorneys at law, legal practice consists of representation of condominium, homeowner, commercial and mobile home park associations, as well as exclusive country club communities and the developers who build them. He is a regular columnist for The Condo News, a biweekly publication and was inducted into the 2012, 2013 & 2014 Florida Super Lawyers. He can be reached at 561-241-4462.

Re Published with Permission: JR / KBR Legal

 

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WILL THE ASSOCIATION’S DENIAL OF AN ARCHITECTURAL REQUEST WITHSTAND CHALLENGE? Many Won’t – Find Out Why

WILL THE ASSOCIATION’S DENIAL OF AN ARCHITECTURAL REQUEST WITHSTAND CHALLENGE? Many Won’t – Find Out Why

  • Posted: Feb 15, 2022
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WILL THE ASSOCIATION’S DENIAL OF AN ARCHITECTURAL REQUEST WITHSTAND CHALLENGE?

Many Won’t – Find Out Why

For many homeowners associations, a top priority is ensuring that the homes in the community are maintained in conformity with the “community-wide standard.” But, what is this subjective standard? How is compliance measured? What is the process to be judged when a request to the association’s architectural review committee (ARC) is made? The ARC is instrumental in ensuring that the community-wide standard is met. However, your association may run into a problem if the ARC denies a request from a homeowner if the association has not adopted specific, objective criteria and guidelines on which the ARC can rely.

    Sometimes applications to the ARC are denied because the proposed modifications were not “in harmony” with the other homes in the community or did not conform with the “community-wide standard.” However, such a limitation is vague, and a denial based on whether a particular modification is “harmonious” is subjective. Thus, the members are entitled to specific guidelines regarding what is allowed and what is not allowed, and in fact, this is required by law.

    The association’s ARC can only be as effective as the objective guidelines and standards drafted into the declaration and board-adopted rules. If your ARC is relying on aesthetics or other subjective criteria that are simply “personal preferences” rather than written, adopted, and published objective standards and guidelines, any disapproval is vulnerable to a successful challenge. In fact, in the seminal case regarding approval of architectural modifications, Young v. Tortoise Island Homeowner’s Ass’n, Inc., 511 So.2d 381 (Fla. 5th DCA 1987), the court held that where the governing documents were silent as to the modification at issue, a denial could not be based on the architectural control board’s opinion regarding “aesthetics, harmony and balance—admittedly very personal and vague concepts.”

    In Young, the owners submitted an application to build a flat roof on their home. The homes immediately surrounding the home were all peaked roofs. Nothing in the governing documents prohibited an owner from building a flat roof, and the requested roof complied with all of the specific requirements set out in the governing documents. However, the architectural control board denied the owners’ request because there was a “very strong feeling” that the flat roof would not be “architecturally compatible with the other homes.” In the end, the Youngs built the flat roof despite the association’s disapproval, arguing that the architectural control board had no authority to impose a prohibition against flat roofs. The court agreed with the Youngs, holding that

            “In the absence of an existing pattern or scheme of type of architecture which puts a prospective purchaser on notice that only one kind of style is allowed, either in the recorded restrictions or de facto from the unified building scheme built on the subdivision, such a board does not have the power or discretion to impose only one style over another based purely on ‘aesthetic concepts.’”

    The flat roof violated no recorded restrictions, no objective rule adopted by the association, and no de facto common existing building style in the community. Therefore, the court held that it was beyond the power of the architectural review board to prohibit the flat roof.

    The concept in Young was further codified in 2007 in §720.3035(1), Florida Statutes, which provides that an association or the ARC has the authority to review and approve plans and specifications only to the extent that the authority is specifically stated or reasonably inferred as to location, size, type, or appearance in the declaration or other published guidelines and standards. More specifically §720.3035(1), Florida Statutes, provides that the authority of an association or any architectural, construction improvement, or other such similar committee of an association to review and approve plans and specifications for the location, size, type, or appearance of any structure or other improvement on a parcel, or to enforce standards for the external appearance of any structure or improvement located on a parcel, shall be permitted only to the extent that the authority is specifically stated or reasonably inferred as to such location, size, type, or appearance in the declaration of covenants or other published guidelines and standards authorized by the declaration of covenants.

    In other words, the ARC can only approve or deny requested modifications based on objective standards with specificity as to location, size, type, or appearance that are set out in the declaration or other published guidelines and standards. Without specific, objective standards to rely upon, the ARC is at risk of making arbitrary decisions regarding approval. Basing ARC denials on concepts like “aesthetics, harmony, and balance” will land the association in hot water if an owner challenges such denial. It is far safer to base approval or denial on objective standards as set out in the declaration or as adopted by the board.

    Creative drafting by an association’s attorney is critical in order to capture those ARC applications where a member may request a modification that is not squarely addressed by the governing documents. In plain English, a “catchall” amendment to the declaration can be artfully drafted that stands for the proposition that, if such a request is made, then the existing state of the community is the applicable standard by which the application is to be judged. For example, if the Tortoise Island Homeowner’s Association had had such a provision in its declaration, then given that there were no flat roofs in the community, the existing state of the community may have provided a lawful basis for the ARC to deny the request, thus possibly leading to a whole different result in the case.

    On a related note, there are strict procedural requirements that your association must follow, most especially if the ARC intends to deny an ARC request. It is likely many ARCs do not conduct their activities in conformity with Florida law such that a denial could withstand judicial scrutiny. Pursuant to §720.303(2), Florida Statutes, a meeting of the ARC is required to be open and noticed in the same manner as a board meeting. In other words, notice of the ARC meeting must be posted in a conspicuous place in the community at least 48 hours in advance of the meeting, and the meeting must be open for the members to attend. In addition, pursuant to §720.303(2)(c)3., members of the ARC are not permitted to vote by proxy or secret ballot. Bare bone minutes should be taken as well to create a record of ARC committee decisions, most especially denials.

    We hear from many associations that the ARC does not meet openly or notice their meetings. This leaves any decision made by the ARC vulnerable to challenge. If the ARC denies an application but fails to do so at a properly noticed meeting, the owner can challenge the denial claiming that it is not valid as the ARC did not follow proper procedures. Many declarations contain language which provides that if an ARC application is not approved or denied within a certain period of time, the application is deemed approved. In that case, if the ARC’s denial of an application is not valid because the ARC failed to comply with the procedural requirements for the meeting, an application which violates the declaration or the ARC standards may be deemed approved by operation of the declaration! By complying with the provisions of Chapter 720, Florida Statues, your association can avoid that disaster.

    Practice tip: Remember that notice of any board meeting at which the board will consider a rule which restricts what an owner can do on their parcel must be mailed, delivered, or electronically transmitted to the members and posted conspicuously on the property not less than 14 days before the meeting.

    If your association has not adopted objective ARC standards and guidelines including the “catchall” provision discussed above, now is the time to start! We recommend that you contact your association’s counsel prior to drafting such rules to ensure that the association is in compliance with the requirements of the governing documents and Chapter 720, Florida Statutes.

 

Jeffrey Rembaum’s, Esq.

legal practice consists of representation of condominium, homeowners, commercial and mobile home park associations, as well as exclusive country club communities and the developers who build them. Mr. Rembaum is a Board Certified Specialist in Condominium and Planned Development Law and is a Florida Supreme Court Certified Circuit Civil Mediator. He is the creator of “Rembaum’s Association Roundup,” an e-magazine devoted to the education of community association board members, managers, developers and anyone involved with Florida’s community associations. His column appears monthly in the Florida Community Association Journal. Every year since 2012, Mr. Rembaum has been selected to the Florida Super Lawyers list, and was also named Legal Elite by Florida Trends Magazine.

He can be reached at 561-241-4462.

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Why Condominium Associations Must Obtain Approval Before Work Begins and A Plea To The Florida Legislature For A Remedy by KBR Legal

Why Condominium Associations Must Obtain Approval Before Work Begins and A Plea To The Florida Legislature For A Remedy by KBR Legal

  • Posted: Jan 12, 2022
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Why Condominium Associations Must Obtain Approval Before Work Begins and A Plea To The Florida Legislature For A Remedy

 

When it comes to material alterations, some might say that homeowner associations have it easy compared to condominium associations. For a homeowners association, because Chapter 720, Florida Statutes is silent on the issue, unless otherwise provided in the governing documents, decisions regarding material alterations are made by the board. But, as to condominium associations, and as their board members should know, §718.113(2), Florida Statutes, requires advance membership approval for material alterations to the common elements and association real property. In this regard, there is no parity between the Condominium Act versus the Homeowners Association Act.

Before explaining further, a reminder of the Florida’s Fourth District Court of Appeal  definition of what constitutes a “material alteration” from the seminal case Sterling Village Condominium, Inc. v. Breitenbach,  251 so.2d 685, 4th DCA (1971) is in order. As explained in Sterling,  “as applied to buildings the term ‘material alteration or addition’ means to palpably or perceptively vary or change the form, shape, elements or specifications of a building from its original design or plan, or existing condition, in such a manner as to appreciably affect or influence its function, use, or appearance.”

Prior to July 1, 2018, §718.113(2)(a), Florida Statutes, provided that no material alteration or substantial addition can be made to the common elements or association real property without the approval in the manner provided for in the declaration, or if the declaration is silent, then by 75 percent of the total voting interests of the association. As adopted by the 2018 Florida legislature, (effective July, 1, 2018), §718.113(2), Florida Statutes was amended to provide that approval of the material alteration or substantial addition must be obtained before the work commences.

 

The current language of §718.113(2)(a), Florida Statutes, provides as follows:

Except as otherwise provided in this section, there shall be no material alteration or substantial additions to the common elements or to real property which is association property, except in a manner provided in the declaration as originally recorded or as amended under the procedures provided therein. If the declaration as originally recorded or as amended under the procedures provided therein does not specify the procedure for approval of material alterations or substantial additions, 75 percent of the total voting interests of the association must approve the alterations or additions before the material alterations or substantial additions are commenced. This paragraph is intended to clarify existing law and applies to associations existing on July 1, 2018.

Prior to the 2018 amendment, §718.113(2), Florida Statutes, did not expressly provide that the approval must be obtained before the material alteration or substantial addition was commenced. However, in a recent decision by the Third District Court of Appeal, the Court held that approval was required before the material alteration or substantial additions were commenced even before the language of §718.113(2), Florida Statutes, was amended to include the advance approval requirement!

In Bailey v. Shelborne Ocean Beach Hotel Condominium Association, Inc., Nos. 3D17-559, 3D17-01767 (Fla. 3d DCA July 15, 2020), unit owners brought a claim against their association alleging that the association violated §718.113(2), Florida Statutes, by failing to obtain the approval of the membership before commencing a large construction project which, they argued, constituted a material alteration to the common elements. Later, both parties agreed that all but two of the alleged “material alterations” actually constituted necessary maintenance that the association was authorized to commence without a vote of the membership.

The association alleged that the remaining two construction items were also necessary maintenance, which was an allegation the unit owners disputed. The trial court held that the remaining two alleged material alterations were valid notwithstanding whether they were necessary maintenance or material alterations because the association eventually obtained the approval of the membership (presumably after the fact). Therefore, the trial court reasoned it did not need to make a determination as to whether the two items were material alterations since the membership approved them, albeit in a tardy fashion.

On appeal to the Third District Court of Appeal, the unit owners challenged the trial court’s decision arguing that the statute required the association to obtain approval for material alterations before it commenced the work. Therefore, the plaintiff unit owners argued that the membership could not provide their consent and approval posthumously. As the construction project at issue took place between 2010 and 2016, the applicable version of §718.113(2) did not include the express requirement that approval be obtained before material alterations are commenced. However, the Court still held that the portions of a construction project that do not constitute necessary maintenance must be approved prior to commencement.

The court explained that “based on the structure of the statute, the 75 percent approval requirement is a condition necessary to overcome the statute’s clear prohibition, insofar as any of the construction work amounts to material alteration or substantial additions.” However, because the trial court did not rule on whether the two items at issue were material alterations or necessary maintenance, the Court was unable to determine whether a vote of the members was pre-required and remanded the case to the trial court for further proceeding to determine the nature of the two construction items.

Because the Court did not make a final determination whether the two construction items constituted necessary maintenance, the Court did not address the remedy for the association’s failure to obtain the advance approval of the membership. Additionally, the law fails to address the remedy when an association does not obtain membership approval before commencing a project.

In cases of material alterations already completed which required the advance approval of the membership, the present version of §718.113(2), Florida Statutes leaves no room whatsoever for the court to order an association to posthumously acquire the membership vote or put things back the way they were. Rather, the only remedy that appears available to the court would be to restore the common elements to its pre-existing state (or as close as can be accomplished under the circumstances), which explains why a legislative fix to §718.113(2), Florida Statutes, to provide for additional remedy would be helpful.

There is a very important lesson to be gleaned from the Bailey case. If your association is considering a material alteration of any kind, then the association would be wise to attain the required approval before commencing the project to avoid a successful legal challenge. If the association fails to obtain the required approvals before commencement of the project, in the event of a legal challenge, the association may well be required to undo whatever alterations were made to the common elements as Bailey suggests this was the case even before the relevant statute was amended. This can result in significant expense to the association, not to mention having to explain what happened to many irate unit owners.

 

Remember, prior to commencing any material alteration or substantial addition, be sure to consult your association’s attorney to ensure you comply with the requirements of the Florida law and your association’s governing documents.

1200 Park Central Boulevard South, Pompano Beach, FL. Tel: 954.928.0680
9121 North Military Trail, Suite 200, Palm Beach Gardens, FL. Tel: 561.241.4462
1211 N. Westshore Boulevard, Suite 409, Tampa, FL. Tel: 813.375.0731

 

 

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Selective Enforcement: A Grossly Misunderstood Concept by KBRLegal

Selective Enforcement: A Grossly Misunderstood Concept by KBRLegal

  • Posted: Jan 06, 2022
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Without exception, the affirmative defense of “selective enforcement” is one of the most misunderstood concepts in the entire body of community association law. How often have you heard something like this: “The board has not enforced the fence height limitation, so it cannot enforce any other architectural rules”? Simply put, nothing could be further from the truth.

When a community association seeks to enforce its covenants and/or its board adopted rules and regulations, an owner can, under the right circumstances, assert an affirmative defense such as the affirmative defense of selective enforcement. An affirmative defense is a “yes I did it, but so what” type of defense. In civil lawsuits, affirmative defenses include the statute of limitations, the statute of frauds, waiver, and more. However, it’s just not as simple as that. For example, a fence height limitation is a very different restriction than a required set back. Under most if not all circumstances, the failure to enforce a  fence height requirement is very different from the failure to enforce a setback requirement. Ordinarily, the affirmative defense of selective enforcement will only apply if the violation or circumstances are comparable, such that one could reasonably rely upon the non-enforcement of a particular covenant, restriction, or rule with respect to their own conduct or action.

In the seminal case of Chattel Shipping and Investment Inc. v. Brickell Place Condominium Association Inc., 481 So.2d 29 (FLA. 3rd DCA 1986), 45 owners had improperly enclosed their balconies. Thereafter, the association informed all of the owners that it would thereafter take “no action with respect to existing enclosed balconies, but prohibit future balcony constructions and enforce the enclosure prohibition.” As you might have already predicted, nevertheless, thereafter an owner of a unit, Chattel Shipping, enclosed their unit; and the association secured a mandatory injunction in the trial court requiring the removal of the balcony enclosure erected without permission. The owner appealed. In the end, the appellate court disagreed with the owner who argued that the association decision to enforce the “no enclosure” requirement only on a prospective basis was both selective enforcement and arbitrary. The court held that the adoption and implementation of a uniform policy under which, for obvious reasons of practicality and economy, a given building restriction will be enforced only prospectively cannot be deemed “selective and arbitrary.”

In Laguna Tropical, A Condominium Association Inc. v. Barnave, 208 So. 3d 1262, (Fla. 3d DCA 2017), the court again used the purpose of the restriction in its determination of whether the association engaged in selective enforcement. In Laguna Tropical, a rule prohibited floor covering other than carpeting unless expressly permitted by the association. Additionally, the rule provided that owners must place padding between the flooring and the concrete slab so that the flooring would be adequately soundproof. In this case, an owner installed laminate flooring on her second floor unit and the neighbor below complained that the noise disturbed his occupancy. As a result of the complaint, the association demanded that the owner remove the laminate flooring. However, the owner argued selective enforcement because the association only enforced the carpeting restriction against the eleven exclusively upstairs units in the condominium. The court noted that the remaining units in the condominium were either downstairs units only, or were configured to include both first-floor and second-floor residential space within the same unit.

Again, the court looked to the purpose of the prohibition on floor coverings other than carpet and found that the prohibition was plainly intended to avoid noise complaints. Therefore, no selective enforcement was proven because no complaints were shown to have arisen regarding any units except the eleven exclusively upstairs units.

What about cats and dogs? In another case, Prisco v. Forest Villas Condominium Apartments Inc., 847 So. 2d 1012 (Fla. 4th DCA 2003), the Fourth District Court of Appeals heard an appeal alleging selective enforcement regarding the association’s pet restrictions. The association had a pet restriction which stated that other than fish and birds, “no pets whatsoever” shall be allowed. In this case, the association had allowed an owner to keep a cat in her unit, but refused to allow another owner to keep a dog. The association argued that there was a distinction between the dog and the cat. However, on appeal, the court found that the restriction was clear and unambiguous that all pets other than fish and birds were prohibited. Therefore, the court reasoned that the facts which make dogs different from cats did not matter because the clear purpose of the restriction was to prohibit all types of pets except fish and birds. In other words, the court held that the plain and obvious purpose of a restriction should govern any interpretation of whether the association engaged in selective enforcement.

If an association has a “no pets” rule and allows cats, must it allow dogs, too? There is a long line of arbitration cases that have distinguished dogs from cats and other pets for purposes of selective enforcement. For example, in Beachplace Association Inc. v. Hurwitz, Case no. 02-5940, a Department of Business and Professional Regulation Division of Florida Condominium Arbitration case, the arbitrator found, in response to an owner’s selective enforcement defense raised in response to the association’s demand for removal of a dog, that even though cats were allowed, that comparison of dogs to cats was not a comparative, like kind situation. Further the arbitrator found that cats and dogs had significant distinctions such as barking versus meowing, and therefore the owner’s attempted use of the selective enforcement argument failed.

But, in Hallmark of Hollywood Condominium Association Inc. v. Andrews, Case 2003-09-2380, another Department of Business and Professional Regulation Division of Florida Condominium Arbitration case, the learned arbitrator James Earl decided that because the association has a full blown “no pets of any kind”  requirement and since cats were allowed, then dogs must be allowed, too. In other words, the defendant owner’s waiver defense worked. But, the arbitrator wisely noted in a footnote as follows: “The undersigned notes that there is a long line of arbitration cases that have distinguished dogs from cats and other pets for purposes of selective enforcement. However, the fourth district court of appeal has ruled that where the condominium documents contain particular language prohibiting all pets, any dissimilarity between dogs and cats is irrelevant and both must be considered. See Prisco.” The distinction between the two arbitration cases could be explained because of timing in that the 4th DCA’s decision in Prisco was not yet published when Hurwitz was decided.

From these important cases, it can be gleaned that

(i) even if an association has ignored a particular rule or covenant, that by giving written notice to the entire community that it will be enforced prospectively, the rule or covenant can be reinvigorated and becomes fully enforceable once again (though of course, prior non-conforming situations may have to be grandfathered depending on the situation),

(ii) if an association or an owner is seeking an estoppel affirmative defense, they must be sure all of the necessary elements are pled,

(iii) at times a court will look to the purpose of the rule itself where it makes sense to do so, and

(iv) dogs and cats are different, but they are both considered “pets.”

Remember to always discuss the complexities of re-enforcement of covenants and rules and regulations that were not enforced for some time with your association’s legal counsel in an effort to mitigate negative outcomes. The process (commonly referred to as “republication”) can restore the viability of a covenant or rule that may have been waived due to the lack of uniform and timely enforcement.

 

Kaye Bender Rembaum

We are dedicated to providing clients with an unparalleled level of personalized and professional service regardless of their size and takes into account their individual needs and financial concerns. Our areas of concentration include

1200 Park Central Boulevard South, Pompano Beach, FL. Tel: 954.928.0680
9121 North Military Trail, Suite 200, Palm Beach Gardens, FL. Tel: 561.241.4462
1211 N. Westshore Boulevard, Suite 409, Tampa, FL. Tel: 813.375.0731
  • Assessment collections
  • Construction defect claims
  • Contract drafting and negotiation
  • Cooperatives
  • Covenant enforcement
  • Fair Housing
  • Land Use and Zoning
  • Litigation and Arbitration
  • Master/ Sub Association Issues
  • Pre and Post Turnover Planning
  • Real Estate and Title Concerns
  • Review and amendment of covenants
Kaye Bender Rembaum is a full service commercial law firm devoted to the representation of more than 1000 community associations throughout Florida. Under the direction of attorneys Robert L. Kaye, Esq., Michael S. Bender, Esq., and Jeffrey A. Rembaum, Esq. Kaye Bender Rembaum is dedicated to providing clients with an unparalleled level of personalized and professional service regardless of their size and takes into account their individual needs and financial concerns.your interest in Kaye Bender Rembaum.

 

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DECONSTRUCTING THE CONSTRUCTION CONTRACT A Plain English Explanation by Kaye Bender Rembaum

DECONSTRUCTING THE CONSTRUCTION CONTRACT A Plain English Explanation by Kaye Bender Rembaum

  • Posted: Dec 19, 2021
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DECONSTRUCTING THE CONSTRUCTION CONTRACT A Plain English Explanation

by Kaye Bender Rembaum /  Rembaum’s Association Roundup

If your community association has engaged the services of a contractor, engineer, architect, or other construction or design professional to perform a maintenance, repair, replacement, or capital improvement project, you know the process can be overwhelming. No matter the mad rush to execute the contract as soon as possible, when beginning such projects, no matter how big or small, the board needs to ensure the contract adequately protects the association. Even the smallest of projects can have unexpected, disastrous consequences. A few of the more common provisions which every board member should understand follow.

The Indemnity Provision

In today’s extremely litigious world, it is important that your association does what it can to protect itself against unforeseen claims that can arise out of the contractor’s performance of the work. For example, assume a crane fell on the building being repaired, the contractor accidentally damaged the elevator shaft, or worse still, a life is lost. An indemnity provision provides that the contractor will indemnify, defend, and hold harmless the association from and against claims arising out of or resulting from the performance of the work by the contractor or any of its employees, subcontractors, suppliers, etc.

Indemnification provisions can be tricky to understand. The general contractor, engineer, and design professionals (aka the architect) may seek to avoid and/or cap their overall liability. Even a small contract can have significant consequences if the negligence of the contractor causes significant damage or injury.

Rarely does the inclusion of a single word have disastrous consequences; however, a recent trend we have seen in many contracts is the contractor requiring the indemnity obligation to be limited only to damage caused by the contractor’s “sole” negligence. As events which cause loss or damage rarely occur by the “sole” actions of an individual, this provision significantly diminishes the contractor’s responsibility to indemnify the association. The association should look out for any indemnity provision which provides that the contractor is only responsible to indemnify for its “sole” negligence. Without getting into too much complexity, Florida is a “contributory negligence” state. This means each party is responsible to satisfy a judgment against them in proportion to their responsibility for the blame. So, if the contractor is found to be 33 percent responsible for an accident, then it pays 33 percent of the final judgment award. But, if the contract indemnity provision required sole negligence, the contractor would pay nothing at all because the accident was not “solely” caused by the contractor. Youch!

Another trend we see is the contractor limiting its liability to damage caused by its “gross negligence,” which by definition excludes “simple negligence.” As a brief explanation, simple negligence is when a person fails to take reasonable precautions that any prudent person would take in similar circumstances and their actions cause harm (for example, a driver who runs a stop sign and causes an accident). Gross negligence is extreme indifference or reckless disregard for the safety of others (for example, driving 100 mph in a parking lot and injuring a pedestrian). As any claims arising out of the work are likely to result from the contractor’s simple negligence, this heightened standard is not favorable to the association.

If the contractor is insistent on limiting its liability, the association may consider limiting the contractor’s indemnification obligation to the maximum payable under the contractor’s insurance policy. This way, the contractor is not on the hook for unlimited liability, but the association has some decent protection as claims can be covered up to the maximum amount payable under the insurance policy. However, in the event of a catastrophic loss or casualty event, even the amount payable under the insurance policy may not be enough to protect the association.

In addition to these limitations, “design professionals” have the added benefit of statutory authority to further limit their liability in a contract (they must have better lobbyists). Section 558.0035, Florida Statutes, provides a procedure by which a design professional can exclude any “individual liability” for damages resulting from negligence occurring within the course and scope of a professional services contract. In other words, the design professional will not be personally liable to the association for any negligence in its design if the contract includes a provision that excludes such personally liability. Section 558.002(7), Florida Statutes, defines a “design professional” as a person who is licensed in the state of Florida as an architect, landscape architect, engineer, surveyor, geologist, or a registered interior designer. Therefore, if your association is contracting with any of the foregoing design professionals, you will likely need to negotiate this provision.

You should also be aware that disputes over the enforceability of the indemnification clause do not automatically include prevailing party attorneys’ fees unless the indemnification provision specifically provides that, in the event of a dispute concerning the applicability of the indemnification, the prevailing party must be indemnified for their attorneys’ fees, costs, and expenses incurred in enforcing their right to be indemnified.

Insurance Provisions

To ensure there are sufficient funds to satisfy an indemnity judgment in favor of the association, it is important that the association require the contractor to carry certain minimum insurance. Therefore, the contract should contain a clause which provides that the contractor will maintain such general liability insurance as will protect the contractor and the association from claims that may arise out of or result from the contractor’s operations under the contract documents in the amounts set out in the contract. Additionally, the association should ensure that the contractor obtains sufficient workers’ compensation coverage.

There are a couple of terms with which you should be familiar:

  • Certificate Holder: The certificate holder is merely entitled to the proof of insurance, nothing more. When the policy holders have their insurance agents issue a certificate of insurance to the entity that hired the contractor to do the work, that entity becomes a certificate holder. It is simply the contractor’s way of saying, “I have insurance.” Certificates show that the contract has the insurance policies in the limits shown on such certificate. It also provides that the certificate holder is entitled to know if the policy lapses.
  • Additional Insured: An additional insured is provided the same coverage and rights under the policy as the named insured. In other words, when you become an additional insured, you are entitled to the same insurance protections as the original policy holder. Therefore, in the event of loss, the association may file a claim on the contractor’s policy through its status as an additional insured.

Thus, the contract should not only require that the contractor carry insurance but also provide that the contractor is obligated to provide a certificate of insurance evidencing the insurance coverage and containing an endorsement listing the association as an “additional insured.”

In addition to the insurance requirements for the contractor, your association may consider purchasing builder’s risk insurance for the project. Builder’s risk insurance is designed to protect the owner of a construction site from loss and damage. This should be further discussed with the association’s insurance agent.

Paying the Contractor

During a major construction project, the association’s contractor will likely be working with several subcontractors to complete the work. The process for payments in such projects is set out in §713.13, Florida Statutes. (For a more detailed discussion on the construction payment process, you can read my prior article, “Construction Progress Payments: The Hidden Trap,” at rembaumsassociationroundup.com, originally published in the Florida Community Association Journal, February 2020 edition.)

By way of brief explanation, when the project commences, the association records a “Notice of Commencement” identifying the contractor and the legal description of where the work is being performed. The purpose of the Notice of Commencement is to inform all subcontractors and suppliers that if they intend to provide goods and/or services to the property, and if they want to have proper legal standing to record a lien against the property in the event they are not paid, the subcontractor and/or supplier must serve a “Notice to Owner” to the association. The Notice to Owner informs the association of all subcontractors working under the general contractor and all suppliers who provide suppliers and materials to the job site.

In exchange for payments to the general contractor, the general contractor provides the association with “partial payment affidavits” for each payment and a “final payment affidavit” upon conclusion of the work at hand. The subcontractors and suppliers provide the association “partial releases” for the payment received from the general contractor using the general contractor as the delivery conduit to deliver the partial release to the association. This method ensures that subcontractors and suppliers cannot later claim that they were not paid. However, in order to ensure this protection, it is important that the contract requires the contractor to provide the subcontractors’ and suppliers’ partial releases contemporaneously with the association’s progress payment. With the partial releases in hand, in the event the contractor does not pay the subcontractors and suppliers, the association is fully protected.

Some general contractors insist on providing the association with the partial releases from the subcontractors and suppliers one payment behind. This should be a red flag to your association because it means if the contractor fails to pay the subcontractors and suppliers after receiving payment from the association, the association will still have to pay the subcontractors and suppliers. In such event, the association will end up having to pay twice for all or part of the same work.

Prevailing Attorney’s Fees

Another important consideration is the prevailing party attorneys’ fees provision of the contract. An attorneys’ fee provision generally provides that in the event of litigation to enforce the terms of the contract, the prevailing party is entitled to recover their attorneys’ fees. However, this provision must be carefully worded to ensure that your association will be able to recover its attorneys’ fees.

Termination

Most contracts provide that the association may terminate the contract for cause. The termination for cause provision should include examples of conduct by the contractor which would entitle the association to terminate the contract for cause. In addition to termination for cause, we recommend the inclusion of a “without cause” termination provision. This provision gives the association an out in the event the contractor is not working out, but the contractor’s conduct does not rise to the level which would allow dismissal for cause.

Generally, if an association terminated an agreement without good cause, and unless otherwise spelled out in the contract, the contractor would likely be entitled to approximately 15 to 22 percent of the contract price for its anticipated lost profit and overhead.

Payment and Performance Bonds

Another way the association can protect itself is by requiring the contractor to obtain “payment and performance bonds,” which are most often purchased together as a set. While doing so typically adds three to five percent to the total contract price, it is well worth it. In addition, if the contractor is not able to provide such a bond because the bonding companies will not bond the contractor, it is very telling because not every contractor is bondable.

A “performance bond” is a surety bond issued by a bonding company or bank to guarantee the satisfactory completion of the work by the contractor. It acts to protect the association in the event the contractor fails to complete its contractual obligations.

A “payment bond” guarantees the contractor will pay all laborers, material suppliers, and subcontractors engaged by the contractor for the work. In the event the association pays the contractor, but the contractor fails to pay the laborers, material suppliers, and/or subcontractors, the surety will step in to pay same.

Force Majeure

Many contracts contain force majeure language which provides that the parties will not be responsible to the other if they are unable to fulfil the terms of the contract due to events beyond the control of the parties. Most often, a force majeure event adds delay to the targeted project completion date and avoids claims for breach of contract due to the delay. Such events may be acts of God, flood, fire, hurricanes, war, invasion, terrorist acts, government order or law, actions, embargoes, or blockades, etc. Of late, for reasons that need no explanation, pandemics are added to this list, too.

The above discussion is not meant to be all inclusive. There are so many other important provisions to consider, but space is limited. To ensure your association is protected, the association should always rely on its legal counsel to review the association’s contracts and make the necessary revisions to assist in the  protection of the association.

The Kaye Bender Rembaum Team Remains Available To You and Your Community Association

Happy Holidays from all of us at Kaye Bender Rembaum

 

Kaye Bender Rembaum

We are dedicated to providing clients with an unparalleled level of personalized and professional service regardless of their size and takes into account their individual needs and financial concerns. Our areas of concentration include

1200 Park Central Boulevard South, Pompano Beach, FL. Tel: 954.928.0680
9121 North Military Trail, Suite 200, Palm Beach Gardens, FL. Tel: 561.241.4462
1211 N. Westshore Boulevard, Suite 409, Tampa, FL. Tel: 813.375.0731

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It’s the Manager’s Fault…Or Is It? by rembaumlaw

It’s the Manager’s Fault…Or Is It? by rembaumlaw

  • Posted: Dec 13, 2021
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It’s the Manager’s Fault…Or Is It?

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Few professions have more demands placed upon them than that of the Florida licensed community association manager (CAM). Depending on whom you ask, the CAM is the organizer, rules enforcer, keeper of secrets (meaning confidential and statutorily protected information not limited to the medical record of owners and attorney-client privileged information), best friend, the “bad guy” (a frequent misconstruction), and the first person in the line of fire when things go wrong; in other words, the one who takes all the blame and gets little credit when things go right.

When things at the association go wrong, what comment is most likely heard? “It’s the manager’s fault!” But, is it? Unless the manager failed to carry out a lawful directive from the board, breached a management contract provision, or violated a Florida statute, then in all likelihood, the manager has no culpability. CAMs are licensed by the State of Florida pursuant to Part VIII of Chapter 468 of the Florida Statutes, and there are statutory standards by which CAMs must conduct themselves.

Pursuant to §468.4334, Florida Statutes, “ community association manager or a community association management firm is deemed to act as agent on behalf of a community association as principal within the scope of authority authorized by a written contract or under this chapter. A community association manager and a community association management firm shall discharge duties performed on behalf of the association as authorized by this chapter loyally, skillfully, and diligently; dealing honestly and fairly; in good faith; with care and full disclosure to the community association; accounting for all funds; and not charging unreasonable or excessive fees.”

As set forth herein, statutory standards provide guidance to CAMs as to how they should conduct themselves. They must discharge their duties with skill and care and in good faith. They must act with loyalty to their association employer and deal with the association both honestly and fairly. They must provide full disclosure, which can be interpreted as both keeping the board informed of current events and providing disclosures of any conflict of interests. They must be able to account for all funds, too, which means both assessment income and expenditures; in other words, they must mind the budget.

Best practices for CAMs include becoming extremely familiar with the governing documents of the association (including the declaration, articles of incorporation, bylaws, and rules and regulations) and the financials of the association, walking the physical property, engaging with their team and residents, as well as providing weekly status updates to the board regarding all ongoing association business. If you are a CAM and do these things, then you have an opportunity to shine and stand head and shoulders above your peers and competition. This weekly status report is an excellent communication tool yet seems to be a rarity. CAMs should also make themselves available to owners. However, when an owner becomes offensive or insulting, the CAM should politely and firmly request that the owner communicate respectfully and in a professional manner. A CAM should always be financially transparent and should be extremely familiar with the management contract to fully understand her obligations and authority; for example, the limitation to spend association funds. Finally, the CAM should strive to keep a written record of her activities.

The two most obvious and biggest ways to get in trouble include committing acts of gross misconduct or gross negligence in connection with the profession or contracting on behalf of an association with any entity in which the CAM has a financial interest that is not disclosed. Disciplinary actions against a CAM fall under the purview of the Florida Department of Business and Professional Regulation (DBPR). Section 455.227, Florida Statutes, governs grounds for discipline, penalties, and enforcement.

For example, the following activities constitute grounds for which disciplinary actions may be taken by the DBPR (this list is not all inclusive):

(i) making misleading, deceptive, or fraudulent representations in or related to the practice of the CAM’s profession; (ii) intentionally violating any rule adopted by the DBPR; (iii) being convicted or found guilty of, or entering a plea of guilty or nolo contendere (“I do not wish to contend”) to, a crime in any jurisdiction which relates to the practice of, or the ability to practice, a CAM’s profession; (iv) having been found liable in a civil proceeding for knowingly filing a false report or complaint with the DBPR against another CAM; (v) attempting to obtain, obtaining, or renewing a license to practice a profession by bribery, by fraudulent misrepresentation, or through an error of the DBPR; (vi) failing to report to the DBPR any person who the CAM knows is in violation of the laws regulating CAMs or the rules of the DBPR; (vii) aiding, assisting, procuring, employing, or advising any unlicensed person or entity to practice a profession contrary to law; (viii) failing to perform any statutory or legal obligation; (ix) making or filing a report which the licensee knows to be false; (x) making deceptive, untrue, or fraudulent representations in or related to the practice of a profession or employing a trick or scheme in or related to the practice of a profession; and  (xi) performing professional responsibilities the licensee knows, or has reason to know, the licensee is not competent to perform.

The Florida Administrative Code, in Rule 61E14-2.001, also provides standards for professional conduct which are deemed automatically incorporated as duties of all CAMs into any written or oral agreement for community association management services. A CAM must adhere to the following standards:

  1. comply with the requirements of the governing documents by which a community association is created or operated
  2. only deposit or disburse funds received by the CAM or management firm on behalf of the association for the specific purpose or purposes designated by the board, community association management contract, or the governing documents of the association
  3. perform all community association management services required by the CAM’s contract to professional standards and to the standards established by §468.4334(1), Florida Statutes
  4. in the event of a potential conflict of interest, provide full disclosure to the association and obtain authorization or approval; and
  5. respond to, or refer to the appropriate responsible party, a notice of violation or any similar notice from an agency seeking to impose a regulatory penalty upon the association within the timeframe specified in the notice.

In addition, during the performance of community association management services pursuant to a contract with a community association, a CAM cannot withhold possession of the association’s official records or original books, records, accounts, funds, or other property of the association when requested in writing by the association to deliver the foregoing to the association upon reasonable notice. However, the CAM may retain those records necessary to complete an ending financial statement or report for up to 20 days after termination of the management contract. Additionally, a CAM cannot (i) deny or delay access to association official records to an owner, or his or her authorized representative, who is entitled to inspect and copy the association’s official records within the timeframe and under the applicable statutes governing the association; (ii) create false records or alter the official records of an association or of the CAM except in such cases where an alteration is permitted by law (e.g., the correction of minutes per direction given at a meeting at which the minutes are submitted for approval); or (iii) fail to maintain the records for a CAM, management firm, or the official records of the association as required by the applicable statutes governing the association.

How do you know if your association requires a licensed community association manager? Pursuant to §468.431, Florida Statutes, if the association has 10 or more units or has a budget of $100,000 or more and the person is conducting one or more of the following activities in exchange for payment, the person must be a licensed CAM:

  1. controlling or disbursing funds of a community association
  2. preparing budgets or other financial documents for a community association
  3. assisting in the noticing or conduct of community association meetings
  4. determining the number of days required for statutory notices
  5. determining amounts due to the association
  6. collecting amounts due to the association before the filing of a civil action
  7. calculating the votes required for a quorum or to approve a proposition or amendment
  8. completing forms related to the management of a community association that have been created by statute or by a state agency
  9. drafting meeting notices and agendas
  10. calculating and preparing certificates of assessment and estoppel certificates
  11. responding to requests for certificates of assessment and estoppel certificates
  12. negotiating monetary or performance terms of a contract subject to approval by an association
  13. drafting pre-arbitration demands
  14. coordinating or performing maintenance for real or personal property and other related routine services involved in the operation of a community association, or
  15. complying with the association’s governing documents and the requirements of law as necessary to perform such practices.

However, a person who performs clerical or ministerial functions under the direct supervision and control of a CAM or who is charged only with performing the maintenance of a community association and who does not assist in any of the management services described above is not required to be licensed.

So, whose fault is it when things go awry? A CAM’s role is far different than that of a rental complex manager who often has decision-making authority. The CAM does not have that same type of decision-making authority. The CAM must take direction from the board and perform pursuant to the obligations set out in the management agreement and Florida law. It is the board of directors of the community association that actually makes the decisions. So, while the uninformed might blame the CAM, you now know that the buck stops with the board of directors. If you have further questions regarding a CAM’s responsibility, then please discuss this with your association’s lawyer.

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Financial Screening of Purchasers: How Far Is Too Far? by KBRLegal

Financial Screening of Purchasers: How Far Is Too Far? by KBRLegal

  • Posted: Dec 03, 2021
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Financial Screening of Purchasers: How Far Is Too Far?

A few months back a case came before the county court in the 20th Judicial Circuit for Collier County, wherein a prospective buyer challenged the validity of a board-adopted rule which required that all prospective buyers provide two years of tax returns with their application for ownership approval. This requirement was in addition to the background check and credit check that were also required. While this is only a county court case and, therefore, has no precedential value other than to the parties themselves, there are principles addressed of which associations and managers should be aware; even though many learned attorneys would opine that the conclusions of the court are legally flawed under the facts of the case and, if appealed, would likely be overturned. Nevertheless, there are still nuggets of knowledge that can be gleaned from this case.

In this case, Mech v. Crescent Beach Condominium Association, Inc., Case No. 19-SC-3498, decided June 2020, the purchaser, who was the plaintiff, was seeking to buy a unit at Crescent Beach Condominium for $400,000, which was to be paid in cash. The purchaser purportedly had a clean background and a credit score of 800. Nonetheless, the board required that, like all other prospective purchasers at the condominium, this purchaser needed to produce his tax returns in order for the association to approve the transfer. The purchaser refused to provide his tax returns and cited his good credit score and clean background as evidence enough for approval. Eventually, an impasse was reached, and the purchaser canceled the contract. Then he brought the county court lawsuit challenging the requirement. (Generally speaking, typically under current Florida law, the purchaser would not have legal standing to even bring the claim against the association; but it does not appear that this legal infirmity was raised by the association, which allowed the case to proceed.)

The purchaser challenged the rule, arguing that the rule was not within the scope of the association’s authority to adopt, nor did it reflect reasoned decision-making. (It is noteworthy to point out that, after the initiation of the lawsuit, the association amended its declaration of condominium to provide that the association may require tax returns in an application for approval of a sale. However, this is not relevant to the conclusions of the Court in this case since it occurred after the litigation was filed.)

The association argued that the tax returns are necessary because they provide more information than a credit report and could help ensure that the potential purchaser is “a good credit risk.” The Court, however, did not agree, calling the argument “nonsensical.” The Court goes on to identify what this judge considers to be the best indicator of a person’s financial history, and as a result, it is the only information the association is allowed to seek. (We note that this conclusion is also without a stated legal basis.)

In the final judgment, some might argue that the Court goes way beyond what proper judicial consideration and conclusions typically contain and indicates that she could find “NO justification for the invasive requirement that a full, or even partial, return would be required when, in fact, the board already requires a full background check and credit check.” While no legal support for the conclusion was provided, the Court held that the request for tax returns was invasive and unnecessary and that the requirement was “shocking.”

The Court objected to the blanket requirement that applied to every applicant regardless of the results of their background and credit checks. Had the tax returns only been required when an applicant’s credit history showed a history of financial instability or delinquencies, the rule may have been upheld by the Court. How-ever, the Court held that “to take a position that ‘every person’ who applies to be a member at is patently unreasonable and shall be stricken.” Lastly, also without a legal basis or ability, the Court ordered the association to strike all reference in its condominium documents which require potential purchasers to produce tax returns unless the association can show good cause to request the information.

A brief discussion regarding the adoption of rules and regulations is necessary to highlight lessons that can be learned from this case. Generally, both condominium and homeowners association governing documents will typically provide that the board of the directors has the authority to adopt rules and regulations for the community. While some governing documents may contain restrictions requiring a membership vote to approve new rules, it is common for the governing documents to provide the board with the authority to adopt rules and regulations. (Careful review of the documentary authority for each community is recommended as some may limit the rule-making authority to common areas only and not to the residential property within the community.)  Although the board is generally authorized to adopt rules and regulations, those rules and regulations must not conflict with any provision expressly set out in the governing documents or reasonably inferred from them, and they must be reasonable. (This should be contrasted with covenants recorded in the County’s official records, which may be unreasonable and still be legally enforceable under long-standing Florida case law.)

In Beachwood Villas Condominium v. Poor, et. al., a 1984 Fourth District Court of Appeal (4th DCA) case  in which several owners challenged rules enacted by their association’s board of directors, the Court noted that there could be two sources of use restrictions: (i) those set out in the declaration of condominium and (ii) those adopted by the board. As to the use restrictions set out in the declaration, the court held that such restrictions are “clothed with a very strong presumption of validity,” as initially provided in Hidden Harbor Estates v. Basso (a 1981 4th DCA case).

In examining board-adopted rules, the court first must determine whether the board acted within its scope of authority—in other words, whether the board had the express authority in the documents to adopt the rule in the first place. If the answer is “yes,” the second question to determine is whether the rule conflicts with an express provision of the governing documents or one that is reasonably inferred. (If the documents are silent on an issue, the inference is that it is unrestricted. Adopting a rule to restrict a topic that the declaration is otherwise silent about would conflict with the inferred unrestricted use and therefore be unenforceable.)  If these first two issues are found to exist, the court will then determine if the rule is reasonable. The board’s exercise of its reasonable business judgment in adopting a rule is generally upheld so long as the rule is not “violative of any constitutional restrictions and does not exceed any specific limitations set out in the statutes or condominium documents.”

In examining your own board-adopted rules, ask the following:

  • Did the board have the power to adopt the rule?
  • Is the rule in accord with with the declaration, articles of incorporation, or bylaws?
  • Is the rule reasonable under the circumstances? (While ultimately only a court can make this final determination, the board should use its best judgment, with assistance of its counsel, to reach this decision.)

If the answer to these three questions is “yes,” then the rule should be found to be valid and enforceable by the court upon an owner challenge.

Ultimately, what can be gleaned from Mech v. Crescent Beach Condominium Association Inc. is that even if the association acts reasonably when adopting rules and even when amending the declaration, a lower court judge can reach almost any decision it wishes. Had the provision at issue only required tax returns when the background or credit checks revealed that the prospective purchaser had a history of financial irresponsibility, the provision may have withstood judicial challenge by this particular judge. Additionally, had the provision requiring tax returns been set out in the declaration before the initiation of the lawsuit, the outcome may have been different under existing, well-established case law.

Bottom line, whenever the board is considering new rules, it is recommended that the board consult with the association’s legal counsel before adopting them.

(Reprinted with permission from KBR Legal)

Jeffrey Rembaum’s, Esq. of Kaye, Bender, Rembaum attorneys at law, legal practice consists of representation of condominium, homeowner, commercial and mobile home park associations, as well as exclusive country club communities and the developers who build them. Mr. Rembaum is a Certified Specialist in Condominium and Planned Development Law. He is the creator of ‘Rembaum’s Association Roundup’, an e-magazine devoted to the education of community association board members, managers, developers and anyone involved with Florida’s community associations.  His column appears monthly in the Florida Community Association Journal. Every year since 2012, Mr. Rembaum has been selected to the Florida Super Lawyers list and was also named Legal Elite by Florida Trends Magazine. He can be reached at 561-241-4462.

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