Florida Condo & HOA Legal Blog : Florida Condo Lawyer & Attorney : Becker & Poliakoff Law Firm : Condominium & HOA Law Blog

A couple of CA bills of interest were heard by the House Civil Justice & Courts Policy Committee on Tuesday (February 4, 2010) morning. HB 329 by Rep. Robaina was debated and it was decided by the Committee to hold off on taking a vote due to some concerns with the provisions pertaining to the ability of associations to go after payment of assessments from renters when unit owner landlords aren’t paying.

HB 561, a omnibus CA bill which CALL is working on very closely with sponsors Bogdanoff and Hudson, was passed by the committee after adopting several amendments pertaining to the contentious sprinkler retrofit issue. It would move the date of compliance to 2019 from 2014 and say that if an association has voted to forego retrofitting that 10 percent of owners could petition to have a special meeting “re-vote” once every 3 years. CALL will continue to monitor this issue to make certain a workable solution is found which doesn’t jeopardize the bill.

There was also a discussion on the Florida Supreme Court’s administrative order re the mandatory mediation process for residential mortgage foreclosure cases. David Muller of CALL was asked by the Committee to testify and was able to provide helpful information on the foreclosure crisis many associations are facing and how this mediation process must not cause further delay and cost. This issue remains a top priority of CALL. We need you to let your Legislators know how your association is being impacted and ask for action.

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2010 looks like it will be another active year in the foreclosure reform area. According to Yeline Goin, Co-Executive Director of Becker & Poliakoff’s Community Association Leadership Lobby (CALL) “there are already several Bills in play which we expect to generate a lot of discussion in Tallahassee this year.”   Some of them include the following:
 

House Bill 115: This proposal states that during the pendency of a foreclosure action, if the unit is occupied by a tenant, the association may demand that the tenants pay rent directly to the association, with a right of eviction for non-compliance. This Bill would also permit the condominium association to suspend certain common element use rights for nonpayment, although utility services could not be suspended. Voting rights could also be suspended for delinquencies. Similar amendments are proposed in this Bill for Chapter 720, the Florida Homeowners Association Act.

Senate Bill 164: This proposal requires any mortgagee which has not completed its foreclosure within six months from filing its foreclosure lawsuit to pay the “statutory cap” (six months of past due assessments or one percent of the original mortgage debt, whichever is less) during the pendency of the lawsuit. This proposal would apply to condominiums only.

House Bill 329: This proposal would also allow the collection of rents directly from tenants, and permit suspension of certain common element use rights and voting rights. Significantly, this Bill also deletes the statutory cap and would require a foreclosing lender to pay all unpaid assessments if the foreclosure action is not completed within a year.

House Bill 337/Senate Bill 968: This Bill states that if an owner is delinquent in the payment of assessments, they can be restricted from running for office, holding office, serving on committees, leasing units, or using the common areas.

House Bill 419/Senate Bill 864: This Bill is similar to a couple of others already discussed regarding the right to demand payment of rents directly from tenants. This proposal also states that an association’s claim of lien can include the cost of collection efforts by management companies or licensed managers.

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In response to my last post (Records Retention: Risks of Failing to Comply with the Statute – Fines and the Division) I received a query from a subscriber as follows:

With regards to records retention, will you be able to address the paperless office and what records can be scanned and saved into a hard drive and what cannot. Also what is done with the documents that have been scanned?

In today’s age of technology and going green, I found the query to be so relevant to my Records Retention topic that I chose to respond via a formal post so all subscribers could benefit.

Both the condominium and homeowners statutes require Associations to maintain official records. They do not strictly require that this be done in paper format. Rather §718.111(12)(b) for condominiums provides:

The official records of the association shall be maintained within the state…. This paragraph may be complied with by having a copy of the official records of the association available for inspection or copying on the condominium property or association property, or the association may offer the option of making the records of the association available to a unit owner either electronically via the Internet or by allowing the records to be viewed in electronic format on a computer screen and printed upon request.

From the language above it is clear that a condominium can maintain its records electronically. Section 720.303(5) for homeowner associations on the other hand is not as clear:

The official records shall be maintained within the state and must be open to inspection and available for photocopying by members…. This subsection may be complied with by having a copy of the official records available for inspection or copying in the community.

It is important to note that while not clearly providing authority for maintaining electronic records, the statute does not explicitly prohibit it. As such, if done properly, going paperless in an HOA should not be a problem.

Any Association making the decision to electronically archive (“e-archive”) its official records must think through all aspects of the task before taking the first step toward going paperless. Below are some of the items to be considered:

The e-archive system permits inspections and copies by members within the time frames required by the statutes.

The documents are e-archived in a manner which does not permit manipulation of the final document.

If you have gone to any website or bought software for your personal use lately, you find that many links are to a PDF document and while you can read, print and search the document, you cannot readily alter its contents. This is the type of protection an Association wants for its documents. E-archiving the document in Word or Wordperfect format does not prevent the inadvertent “save” which saves over the original document such that the integrity of the Association’s official records would be compromised. Further, saving in Word or Wordperfect does not permit the capture of the signature(s) at the bottom of a letter, notice, memorandum, and so forth which are added to the final document after it is printed but before it is sent out. Since there are plenty of programs on the market that give you the protection of a PDF document, the Association should consider which is its best option (see next item).

Research and investment in the software (e.g., Adobe, back-up software) and hardware (e.g., scanners, computers, back-up drives) necessary to ensure the e-archive system is properly set up, updated/maintained, searchable, and readily accessible to ensure statutory compliance.

It is important to know that the equipment employed in the e-archive system could be subject to inspection/forensic examination as part of a lawsuit such that the items should purchased and maintained by the Association and/or its managers, and not individual Board members. See both upcoming posts (February and March 2010) for more on this topic.

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There May be no Coverage Available for Claims Against the Association for Allegations that Include Failing to Maintain & Repair the Property, Negligence, Breach of Contract and Breach of Fiduciary Duty.

Eastpointe Condominium I Association, Inc. v. Travelers Casualty and Surety Company of America, United States District Court - order entered October 14, 2010.

 This recently decided case highlights several legal maxims that should be more widely known, such as:

Tangible Property Exclusion  - the "Non-Profit Management and Organizational Liability Insurance Policy" was for the purpose of covering "any loss ... incurred by the [Association] as the result of any claim ... made against the [Association] ... for a Wrongful Act."  The term "Wrongful Act" was defined in the typical way, as any error, act, omission, misleading statement or breach of duty that caused, or is alleged to cause, damages.  However, the policy excluded coverage for claims "arising out of any damage, destruction, loss of use or deterioration of tangible property".  The definition made sure to mention that damages from construction defects, mold, toxic fungus or mildew were specifically excluded.  Thus, the insurance carrier was right when it determined there was no coverage for defense or indemnification under the policy in light of an owner's claim for damages to her unit, personal property and common elements of the condominium that forced her to use alternative accommodations.

 Duty To Defend v. Duty to Indemnify - You may have heard or been aware of this maxim. 

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Bankruptcy Court Finds "the Unit Owners are Not a Bottomless Well, From which Water May be Drawn Eternally With No Consequences" and Grants Maison Grande's Motion to Reject Unexpired Lease.

 As I mentioned in July in Bankruptcy An Option for Finally Distressed Condos & HOAs, the 99 year lease for certain recreational and parking facilities placed the most stress on Maison Grande Condominium Association's finances.   Owners of the 502 units in the oceanfront condominium enjoyed the use of the pool, the pool deck and the parking spots leased to the association, but simply could not keep up with the increasing rent, taxes, insurance and maintenance of these amenities.

Rent for the leased parcel in 1971 was $20,160 per month ($241,920 per year).  Now the association is required to pay $112,241 per month ($1,346,903 per year), regardless of whether all owners pay assessments on a timely basis.  The association reported that as much as 25% of its members were delinquent in payment of assessments and since many lacked equity in the units, they were also subject to mortgage foreclosure proceedings.

The bankruptcy court found that the decision to pursue bankruptcy and reject the lease was a "sound exercise of the Debtor's business judgment".   The decision contains a very comprehensive explanation of the business judgment rule, along with appropriate citations.

This is not the first time a Condominium Association pursued relief in the bankruptcy court.  In 1984 the court approved rejection of a 99-year lease, indicating that "the Court will not second guess the business judgment of [the] ... Board of Directors unless there is a showing that their judgment is clearly erroneous".  In re Condo. Ass'n of Plaza Towers South, Inc., 43 B.R. 18,22 (Bankr. S.D. Fla. 1984). 

The Order is apparently being appealed.  The parties in the case are expected to submit written argument and a hearing is scheduled for March 16th.

Is bankruptcy an option for your struggling association?  For more information please refer to the Questions & Answers previously posted on this site.

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IRS Audit of City Practices Important Lesson for Community Associations.  Improper Classification May Result in Penalties and Tax Liabilities. 

Many community associations classify maintenance personnel and others as "independent contractors" to avoid withholding federal income tax, dealing with workers' compensation insurance and the belief that such classification insulates the association from liability.

But calling someone an “independent contractor” does not mean they are not an employee. Many other factors must be analyzed. A recent preliminary report issued by the IRS in connection with an audit of the City of Deerfield Beach found that 42 workers were classified incorrectly.  The IRS considers facts in three broad categories, including 1.) behavioral control 2.) financial control and 3.) the type of relationship. Within these three categories, you must look at the following criteria to determine employee or independent contractor status:

• The existence and specific terms of a contract.
• When and where the work is performed.
• Who owns the tools and equipment that are used.
• What degree of instruction is given to perform tasks.
• Is the service provider subject to a performance evaluation system.
• Is training provided to the service provider.
• Are expenses reimbursed.
• Is the service provider permitted to provide services to others, as well.
• What is the method of calculating payments to the service provider.

 We encourage community leaders to discuss this issue with counsel in order to avoid complicated and potentially expensive future disputes.

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The Florida Condo & HOA Law Blog is just about to have its first birthday.  Over the past year we have covered important issues to community leaders and managers regarding association operations, insurance responsibilities, collections and foreclosures, legislative changes, new case law, mortgage and lending issues, contractor disputes, enforcement of covenants and much, much more. 

We are proud to say that our readers include board members, unit and/or home owners, prominent community leaders, governmental officials, industry professionals, local and national media representatives as well as licensed community association managers in Florida and elsewhere.

Please Note:  The host of this site is making some technological improvements, but that means you will need to re-subscribe to receive future updates.  You will receive an email inviting you to re-subscribe.  Subscribing is as easy as typing your email address on the link provided in the email.

Don't miss out - we have a lot more information to share with our readers.  In fact, we are expanding the scope of our coverage in 2010 to include even more information about real estate and construction issues that impact community associations.  Be on the lookout for additional authors, videos, newsfeeds and more.  Of course, we will provide a detailed analysis of legislative activities and will include posts direct from the capital as items are considered.   

Stay up-to-date by re-subscribing! 

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You may be wondering why such a simple topic is being addressed in a blog after all isn’t records retention 101 the first thing an Association Board and its managers learn? The truth is I have found that many times the Association simply does not follow the statute and this can cause problems. I have had Boards tell me that former Board members or the prior management company did not return all the documents; the e-mails communicating with the managers were not kept; the final version of a document sent to the members was not kept; or we have documents dating back to the beginning of time. In many instances, the Board simply shrugs off the issue. The truth is not properly maintaining the Association’s records could result in:

• Statutory Fine
• Division Investigation
• Spoliation/Presumption Against the Association in a Lawsuit/Arbitration
• Evidence Used Against the Association in a Lawsuit/Arbitration

In this post, I will address the first 2 items above; the next 2 will be addressed in my next post and the one after that will touch briefly on things the Association can do to ensure statutory compliance.

Statutory Fine
Whether a condominium or a homeowners association, both statutes which govern the retention and inspection of your records permit a fine to be levied against the Association for failure to timely produce records requested in an inspection. [§718.111(12)(c) and §720.303(5)] If the Association is not properly maintaining its records then each time a member asks to see the “missing” records the Association would be unable to produce them for inspection. In that instance, the Association has exposed itself a fine of $50 per day fine (up to the statutory cap) in damages to the member. There is also nothing which prohibits the same member from asking to see the records over and over again turning the Association’s non-compliance with the statute into a money making venture. This risk continues until the missing records fall outside the statutorily mandated retention period.

Division Investigation
A condominium member could file a complaint with the Division claiming the Association is not in compliance with the Condominium Act. An investigation by the Division is never welcome as there could be other issues the Division uncovers as part of its investigation which the Association was not even aware of. Assuming no other violations are found, the Association could still be subject to a fine imposed by the Division for the failure to properly maintain its records.
 

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Fannie Mae will Evaluate Whether Hundreds of Condominiums Throughout the State of Florida Qualify for Financing Despite Published Guidelines.

It has been harder and harder to obtain loans to purchase condominiums in the past two years.  Fannie Mae, Freddie Mac and FHA all published eligibility guidelines basically precluding borrowers from obtaining favorable loans to purchase condominiums if:

1. More than 15% of a condo project units are more than 30 days delinquent on HOA dues. This was an existing guideline that is now being applied to new condo projects.
2. Fidelity insurance, ensuring that homeowner association funds are protected, must be in place in adequate amounts. 
3. The  borrower didn't obtain a condo-owners insurance policy unless the master policy provides interior unit coverage; coverage may not be less than 20% of the assessed value. A condo-owners policy, known as an HO-6 policy, covers personal property, personal liability, and the physical unit from the studs and in. Many policies also include special assessment coverage or the option to include a special assessment coverage rider.
4. More than 10% of a project is owned by a single entity.
5. More than 20% of a project consists of non-residential space; or
6. The association didn't have at least 10% of its budgeted income designated for replacement reserves and adequate funds budgeted for the insurance deductible.

However, on January 7, 2010, Fannie Mae announced it has appointed a team of employees to determine whether hundreds of condominium projects in Florida are entitled to relief from these guidelines.

Want to learn more about this new development and what steps your community can take to improve mortgage options?  Then attend the CAI-SEFL Annual Day of Education and Exposition being held on January 30 at the Signature Grand in Davie, Florida where Fannie Mae's Senior Risk Manager, Joseph L. Minnich III, will deliver the keynote address.  For the past six months Mr. Minnich has been working with the Florida Project team to develop a program to provide stability and liquidity to Florida Condominium Projects.  He will explain the process and be available to answer questions.  Don't miss it.

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