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

Court Rules in Favor of Use Blanket Receiver to Collect Rental Income When Investment Owners Fail to Satisfy Financial Obligations to Association.

The Miami Herald and Sun-Sentinel both reported that the Third District Court of Appeal denied a challenge to an Order appointing a 'blanket' receiver to collect rental income from tenants when the unit's owner failed to pay assessments.  The owner challenging the Order owns several units, most or all of which are in delinquency status.  The appellate Court denied a request for a Writ of Prohibition, allowing the Association to continue enforcement of the blanket order requiring rent to be paid to the receiver to satisfy outstanding assessments and other sums due.

This 'mini-receiver' program has been very successful in South Florida.  The Order entered in the Verabella Falls Condominium Association case specifically requires the receiver to collect all rents and monies from tenants due to unit owners when the unit's owner is subject to a foreclosure action for the failure to pay past due assessments.  It also permits the receiver to engage a property manager to offer unoccupied units for lease or rent when the unit's owner is a defendant in foreclosure proceedings filed by the Association. 

Seminars will be held throughout the State to explain the success of these programs to community leaders.   Please check this site for more information regarding those seminars and other educational events.

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On very rare occasions will a building permit not be required. When in doubt, the Association should assume that a permit must be obtained.

Most construction work requires a permit. Section 104.1.1 of the Florida Building Code provides:   “Any owner, authorized agent or contractor who desires to construct, enlarge, alter, repair, move, demolish, or change the occupancy or occupant content of a building or structure, or any outside area to be used as part of the building’s designated occupancy (single or mixed) or to erect, install, enlarge, alter, repair, remove, convert, or replace any electrical, gas, mechanical or plumbing system, the installation of which is regulated by the technical codes, or to cause any such work to be done, shall first make application to the building official and obtain the required permit for the work.”

Building permits are issued by the local building official in the name of the person performing the work and only licensed contractors, or owners/builders may obtain a permit. 

It is not surprising that Associations are not familiar with local building codes. Most Associations believe that it is the contractor’s responsibility to make sure a building permit has been obtained, but that is not the case. The Association, as property owner is held responsible for obtaining the required building permit. 

Many times, a contractor may try to avoid the building permit requirement. However, if the building inspector finds the work in progress without the required permit, the Association will be cited (not the contractor) for having work done without a permit. This usually results in double fees for the permit and/or fines for having work done without a permit.

Why get a permit? Because it is the law. Working without a permit is illegal and can result in fines and cause problems for the Association down the road. A permit provides the Association the services of building department plans reviewers, inspectors and technical experts. In addition to providing advice, these experts approve each phase of the construction project, verifying that the work is performed pursuant to the applicable building code and the approved plans. A building permit and compliance with the applicable building codes protects the Association. It ensures that the completed work meets certain specific quality standards that will protect the Association and its membership.

If the Association does not obtain the necessary permit, the building authority will issue an advisory notice. Once a permit is obtained, the cost is usually double for an after the fact permit. Furthermore, there may be fees for a third party engineering analysis if areas of the work are concealed or do not meet code. If no action is taken, a Notice of Violation is issued which usually results in fines being levied against the Association. 

The State of Florida and its different local jurisdictions, require standards of construction for all properties in the state. The state relies on local governments to enforce these regulations. If the Association is not certain if a permit is required it should call the local building department before any work begins. 

Always ask to see the permit for the project. If no permit is obtained, the Association will be legally responsible.

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Several months ago, I posted an entry that discussed repair responsibilities after a casualty (see “What Happens when the Hot Water Heater Bursts?”). A similar (and equally important) topic involves incidental damages. That is, what happens when, during the course of performing its maintenance obligations, the association damages part of a unit that the unit owner is otherwise obligated to maintain?

Certainly, if the association is negligent in performing its maintenance and such negligence causes damage to the owner’s unit or personal property, the association is liable for the damage. But, what about situations where the association must cut into unit ceilings, floors or walls to repair common element pipes? The resulting damage to wood flooring, carpeting, tiling, paint or wallpaper is not the result of negligence in these instances. But is it fair for the unit owners to pay for the repairs when they had nothing to do with causing the damage?

Typically, a Declaration of Condominium (“Declaration”) will contain an “incidental damage” clause that provides the association must repair damages to a unit caused during the association’s repair of the common elements. However, not all Declarations have this language. In the absence of such language, unit owners are indeed responsible to repair damages to their unit and/or personal property caused by the association during the course of the association performing maintenance to the common elements. In fact, even with an “incidental damage” clause in the Declaration, absent negligence, the association is not responsible to repair or pay for damages it causes (during the performance of its maintenance responsibilities) to unit owner improvements or upgrades.

Presently, there are no appellate case decisions in Florida on this issue. However, there are several arbitration decisions on point. The Condominium Act requires that most condominium disputes go through the state’s mandatory non-binding arbitration program.  Arbitration decisions are not “law” and a court is free to accept or reject their holdings. Still, arbitration decisions are persuasive authority and many Florida courts do follow them.

For example, in Salamone v. Golden Horn Condominium Association, Inc., Case No. 96-0370, the arbitrator did not require the association to replace owner improvements or modifications to the balconies, even though they were considered a part of the unit, and even where the association’s declaration contained an incidental damage clause, where the damages are occasioned by the association’s maintenance function. Similarly, in Harrison v. Land's End Condominium Association, Inc., Case No. 94-0298, a unit owner argued that the association was obligated to restore the balcony floor covering (i.e. tiling) after the same was destroyed during a condominium restoration project. In ruling that the association did not have to repair or replace the balcony tiling, the arbitrator concluded that the association would not have granted permission for improving the balcony floors if it was understood that all other unit owners would have to pay to replace the covering after proper work by the association.

The general tenor of these and other reported arbitration decisions appears to be that the unit owner is responsible to repair improvements or “upgrades” to the unit damaged by the association’s maintenance of the common elements. However, with respect to those items in a unit originally installed by the developer (e.g. original paint, wallpaper, carpeting and tiling), it appears that the Association would be responsible to repair them (as a common expense) if they are damaged during the process of association maintenance to the common elements.

Remember, this post deals strictly with normal maintenance and repair and has absolutely nothing to do with casualty repairs. Casualty repairs are governed by an entirely different set of rules in the Florida statutes.

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Community Association Boards of Directors Must Safeguard Association Funds.

Recent Arrests and Reported Losses Demonstrate Lack of Financial Oversight.

Community Associations simply cannot function without adequate cash flow.  Community leaders have a fiduciary obligation to monitor and protect the Association's funds.  Handling the finances of the Association can be a daunting task, especially if the volunteer leaders do not have any background in accounting or finance.  There are many state and federal laws governing budgeting, financial reporting, taxation and the like and a lack of sufficient oversight exposes the Association to loss from theft.

Community leaders cannot abrogate their responsibilities solely by hiring management or contracting with a bookkeeping service. Recently it appears there has been an increase in Associations that have been victimized by these professionals.  The Sun-Sentinel reported some Associations lost hundreds of thousands of dollars as a result of alleged theft by an employee of the management company.  One Association found out there were problems with its account when checks bounced.  The management company had the authority to write checks, balance the books and make deposits.  The directors of each of the Associations involved apparently did not review all the source documents to verify that payments were made and the balances on each of the accounts.

A similar situation occurred in Collier County, Florida.  Authorities arrested a bookkeeper working for a management company for 21 counts of grand theft.  The Naples Daily News reported that the bookkeeper made fraudulent bank transfers from the Associations' accounts into her personal accounts.

Communities comprised of older residents are especially susceptible to fraud schemes.  The Charlotte Square condominiums in Port Charlotte, Florida reported over $1 million in losses. 

Community leaders are encouraged to:

• Store blank and canceled checks in a secure location;
• Notify the bank/financial institution when officers change immediately and keep control of bank signature cards;
• Create precautions for Internet banking and bill paying;
• Review source documents (invoices, bank statements, deposit slips) with management reports and consider having the bank send duplicate statements;
• Avoid master vendor accounts and place low limits on credit and/or store charge cards; and
• Obtain adequate fidelity bonding and employee dishonesty coverage for all persons authorized to sign checks or drafts.

Always be alert to new or different spending patterns.  While the volunteer leaders are not expected to become experts, they must have a basic understanding of the Association's finances, its expenditures and obligations, as well as seek out the relevant information to make informed decisions.

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In my last post, I touched on an actual decision Humphrey v. Carriage Park CAI by the Division on this matter. I am now going to address a Legal Opinion regarding “Access to Association E-Mails” put forth by the Division on March 6, 2002. The Legal Opinion provides that if e-mails are used as a form of communication between the Board and manager to handle the operation of the Association then they are subject to inspection by owners in the condominium setting. Although this Legal Opinion does not address Associations under Chapter 720 specifically, the same reasoning should apply.

The key to this Legal Opinion is that the e-mails being addressed are not amongst the Board [as in Humphrey] but rather from members of the Board to its employee, the manager. There is no requirement that a Board interact with a manager solely during a Board meeting. If that were the case, the Association would never get anything done and this would be in contravention of the statute which vests the power to manage with the Board.
 

Reading this Legal Opinion in conjunction with Humphrey one might get confused as to why e-mails exchanged by directors on their personal computers or PDAs even if they address the operation of the Association are not “official records” while those to the manager are. The answer would appear to be in the reasoning put forth in Humphrey that e-mails amongst the Board are not written communication to the Association because there is no obligation on the recipient-director’s part to read the e-mails. There is however a duty on the part of a manager to read a communication from an agent (i.e., director) of his employer (i.e., the Association). It is a subtle difference but a difference nonetheless.

The Legal Opinion goes on to note that the Division has “no regulations expressly requiring archiving e-mails, but… if the e-mail correspondence relates to the operation of the Association property, it is required to be maintained by the Association, whether on paper or electronically….“ In other words once the Board communicates with its employees via e-mail regarding the operation of the Association those records are subject to the same inspection (and thus retention) requirements as all other “official records” of the Association.
 

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At Least Five Community Associations in Florida have filed for Bankruptcy Protection and Relief.

Reorganization through Bankruptcy Allows Communities to Restructure Obligations and Reduce Debt.

On July 8, the Daily Business Review reported about the Maison Grande Bankruptcy filing.  Maison Grande condominium owners are obligated to pay the developer over $100,000 per month for a 99-year lease of the pool and some other improvements.

Bankruptcy Attorney Aleida Martinez Molina of Becker & Poliakoff indicated that the bankruptcy code contains unique provisions which, in essence, give associations the upper hand in dealing with creditors.   According to the Daily Business Review, Maison Grande owes the developer almost $700,000, but the lawsuit filed by the developer is on hold while the bankruptcy court has jurisdiction.

There a various benefits to reorganization through bankruptcy proceedings:

• If the Association is facing lawsuits from several creditors in different venues, the bankruptcy court may have the power to shift the jurisdiction to streamline addressing each claim.
• The Bankruptcy Code includes provisions allowing debtors to assume or reject executory or unexpired leases, providing opportunities to renegotiate onerous provisions.
• A Bankruptcy filing will delay, and in some cases prevent, a creditor from seizing or garnishing bank accounts and will also delay cancellation or shut-down of utility services.

Many community associations are obligated under contracts initially entered into by the developer.  The Legacy Park Community filed for bankruptcy protection when it could not pay a cable bill in excess of $100,000, especially since it reported over $250,000 in lost (unpaid) HOA assessment fees not paid by the owners that lost homes due to foreclosure.

Presidential Golf Maintenance Association also recently filed for relief under Chapter 11 allegedly due to the fact that in can no longer maintain approximately 97.8 contiguous acres because they do not have sufficient funds. They filed to “restructure and evaluate other strategic alternatives.”

Attorney Molina strongly encourages any Association desiring to take advantage of relief that may be available through bankruptcy proceedings to only file with a clear understanding of its plan for reorganization.   

Judge Mark dismissed a  bankruptcy filing on the behalf of View West Condo Association.  View West had controversy with roofer who supplied services to the condominium regarding payment, quantity and quality of work performed and warranty of work.  The Court found:

There does not appear to be any purpose for filing a Chapter 11 plan nor any reason for the Debtor to stay in Chapter 11 other than Debtor’s counsel’s suggestion that this Court would be a more expeditious forum for litigating claims against third parties. That reason is insufficient if the litigation solely involves state law issues.

As a result of current economic conditions, bankruptcy filings may become more prevalent for community associations.  Please contact us if your community would like to discuss whether bankruptcy is a viable option.

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HUD Implements New Approval Process for Condominium Projects to Qualify for FHA Insured Mortgages.

Website Allows Users to Search for FHA Approved Projects.

On June 12th the Department of Housing and Urban Development (HUD) published Mortgagee Letter 2009-19 announcing the new process for approval of condominium projects.  As previously reported on this Blog, Fannie Mae, a federally backed lender, announced several changes to its standards, including the imposition of PERS review.

Lenders are now permitted to determine FHA project eligibility, review project documentation and certify compliance with HUD regulations in furtherance of the directives contained in the Housing and Economic Recovery Act of 2008 (HERA).   In order for a condominium project to be eligible for FHA insured mortgages:

• Hazard and Liability Insurance must be in place.  Flood insurance is also required where applicable.
• Any right of first refusal in the declaration of condominium or other governing document cannot violate prohibitions against discriminatory conduct under the Fair Housing Act regulation in 24 CFR 100.  Many projects have been rejected as a result of the provisions granting the Association the rights to "screen" and "approve" purchasers.
• Commercial use cannot consist of more than 25% of the floor area and commercial uses must be homogeneous with residential use.
• A single investor cannot own more than 10% of the units.
• The owners of no more than 15% of the units may fall into arrears (defined as more than thirty days past due in maintenance fees or assessments).
• At least 50% of the units must be sold, although pre-sales apply.
• At least 50% of the units must be owner-occupied or sold to owners that intend to occupy the units as a primary or secondary residence.

HUD provides resources for home-buyers to determine whether projects are FHA approved.  You may search by location, name or status.  The website also reveals which projects have been rejected by FHA or whether approval is currently pending.  Click here to search whether your condominium is FHA approved.

FHA loans are advantageous for purchasers as generally there is less money required for the down payment,  lower closing costs and lower interest rates than sub prime loans.  FHA loans are a good option for borrowers that cannot qualify for conventional financing, as other alternatives generally include large pre-payment penalties.  FHA limits have increased as a result of the stimulus package as well.

Condominium project approvals expire two (2) years after the initial approval and re-certification to determine whether the project remains in compliance with HUD guidelines is required for continued approval.  

Community associations may want to consult with counsel to determine whether it is worthwhile to take action to qualify for FHA and/or Fannie Mae approval, especially if recent sales have slowed.

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