Wednesday, November 18, 2015

No Class Certification in Case Alleging Condominium Association and Management Company Charged Excessive Fees

The North Carolina Court of Appeals recently decided a case involving several homeowners’ claims that their condominium association, through its management company, was charging excessively high fees and late charges that were not permitted by the condominium’s governing documents.  We want to point out that these were simply allegations - the only part of this case that matters from a legal perspective is that the homeowners asked for class-action status, which was denied. 
For discussion purposes, there is not much distinction between the laws that govern condominiums and homeowners associations. All condominiums and HOAs are governed by declarations that specify the particular restrictions for the condominium or subdivision.  The rule of law is that the declaration (in conjunction with the bylaws, the association’s policies and rules and regulations), specifies the fines and late fees that can be assessed against homeowners for delinquent assessments, and the laws step in to fill legal gaps in the declaration or to place limits on the association’s discretion to levy fines and late fees.

In this case, the plaintiff homeowners alleged that the condominium association permitted its management company to assess fees that exceeded the statutory limits.It should be mentioned that this is an older condominium association, meaning that an amalgam of laws control the fees and charges.  The plaintiffs also asked the court to allow the case to proceed as a class-action lawsuit against the management company and the association.  The class-action status was rightfully rejected by the lower court in our opinion.  The plaintiffs appealed the court’s denial of class-action status, and this decision upheld the denial.  This was not a final decision on the merits of the case, so the case goes on, albeit without class-action status.

From a purely legal perspective, this case did not say a lot that was new.  However, we believe that this case is important to remind associations and their management companies to periodically take stock of the fees and fines that are assessed against homeowners to determine that all charges are compliant with the governing documents and within the bounds set by the law.  The fees and fines should be set forth either in the association’s governing documents or by a properly approved resolution or policy.  The maximum amount of late fees that can be assessed, for any particular month, is $20.00 or 10% of the amount overdue, and this amount can be charged only once per month.  The laws do allow the association to assess attorneys’ fees in many circumstances, although the association must provide the homeowner with proper notice beforehand.  These are only a few examples of charges that should be considered, so be sure to check with your management company or attorney to confirm that your HOA's charges are authorized by law.

Please give me a call or drop me an email if our HOA law team can assist your HOA or management company with the compliance process, or if we can be of assistance in any other way. We appreciate your reading our HOA law blog and encourage you to share it with others who may be interested. Thank you!

Monday, February 16, 2015

Supreme Court Loosens Up Construction Warranty Claims

The North Carolina Supreme Court does not often render decisions that directly affect HOAs, but on December 19, 2014, the Court issued an opinion in Christie v. Hartley Construction that may impact your HOA, and will certainly impact many consumers and construction contractors.

In 2004, the Christies, the plaintiffs in the case, were building their dream home and the builder suggested they purchase a stucco-like material called “SuperFlex” for the exterior. If properly maintained, the SuperFlex was promised to last decades, even in heavy sun, rain, salty air, and freezing conditions. The SuperFlex manufacturer even provided a lengthy written 20-year warranty for its product.

In spite of the promised durability of SuperFlex, a mere seven years later the SuperFlex began to flex, and then to crack and blister, causing moisture to penetrate the home. But no worries, the very specific 20-year warranty would protect the Christies, right? They sued in 2011 to enforce the warranty.

Not so, said the trial court. You see, North Carolina has a longstanding “statute of repose” for improvements to real estate (which includes most types of construction work on real estate). A statute of repose is like an outside statute of limitations. Whereas when a statute of limitations begins to run can depend on when the problem is discovered, a statute of repose says that a lawsuit cannot in any circumstances be filed later than a particular time period. In this case, the statute of repose for construction defects is and always has been six years.  (The ambitious or bored among you can can read it here - look at subsection (a)(5)(a).) This six-year statute of repose is intended to prevent builders and contractors from facing the possibility of an open-ended period of potential lawsuits.

No matter what, the trial court said, the statute of repose prevents a homeowner from suing to recover damages for improvements installed more than six years ago.  The 20-year warranty was worthless after six years.  On appeal, the North Carolina Court of Appeals agreed.  According to the court, this was obviously an improvement to real property and the statute of repose is clearly six years, so the homeowners had to abide by the statute of repose and the warranty was unenforceable, even though the written warranty was very clearly for 20 years. This had been the rule for many years and was not a difficult call for the court.

But the N.C. Supreme Court thankfully reversed the lower courts.  The Supreme Court held that a very important general rule of law is that parties can freely contract, and if the SuperFlex manufacturer wanted to provide a warranty beyond the statute of repose’s 6-year period, then it was free to do so. 

If a seller of improvements to real estate has such confidence in its product that it provides a lengthy written warranty, there is no reason for it later to be able to shield itself behind the statute of repose.  In unusually harsh language, the Court stated that allowing a seller to disavow its warranty would result in “a sham, useful only to beguile the unsuspecting”.  Accordingly, the 20-year warranty stands and a number of years of legal precedent were overruled, and rightly so in our view.

Although this decision may not impact too many HOAs or condominiums since most construction lives up to its promises, there could be situations where it comes into play.  We do sometimes see situations where an HOA purchases an improvement to its real estate, (e.g. to improve its clubhouse), only to find out down the road that the construction fails.  Imagine how miffed the board and the members are when they find out that the ironclad warranty they purchased along with the construction is as worthless as the shoddy construction.  Now these HOAs may have a remedy where before they had none. 

Please give me a call or drop me an email if our HOA law team can assist your HOA or management company with the compliance process, or if we can be of assistance in any other way. We appreciate your reading our HOA law blog and encourage you to share it with others who may be interested. Thank you!

Thursday, August 28, 2014

Changes... to Your HOA's Restrictive Covenants

The North Carolina Court of Appeals recently rendered an opinion reiterating that all amendments to the restrictive covenants (“CCRs”) governing a planned community must be reasonable.  As background, the existing law is that amendments to the CCRs must be reasonable in light of the developer’s original intent for the subdivision.  This rule arose in the context of an HOA in the western part of the state, Ledges of Hidden Hills, where the members adopted amendments to the CCRs that imposed obligations on all owners to pay annual assessments, whereas previously, only minimal payments were required of owners.  The North Carolina Supreme Court struck down the amendments, stating that amendments must be reasonable and consistent with the expectations of homeowners who purchased in reliance on the CCRs.  The case is available here.

By way of background, several years after the Ledges case, the NC Supreme Court took up the CCR amendment-reasonableness question again in Southeastern Jurisdictional Administrative Council versus Emerson (available here).  In Emerson, a religious-themed subdivision, created in the early 1900s, adopted an amendment to its CCRs to require service charges from homeowners to fund certain amenities.  This subdivision was not governed by the Planned Community Act and there was no homeowners’ association, making the case somewhat different than Ledges, although the underlying themes are applicable to modern HOAs.  Unlike the Ledges case, the Supreme Court determined that the amendment requiring service charges was reasonable and consistent with the intention of the parties when they purchased properties in the subdivision.  Specifically, a purchaser “could have reasonably anticipated” that service charges would be imposed to pay for the numerous amenities in the subdivision.  Notably, one of the justices gave a strong dissenting opinion, basically arguing that the court waffled in its decisions because Emerson was inconsistent with the earlier Ledges case.  Whether the Emerson case is just an outlier without much impact on the broader HOA community remains to be seen, because its outcome has not been routinely followed by courts. 

On July 1st, the appellate court decided Wallach v. Linville Owners Ass’n, Inc. (available here), relying in large part upon the reasonableness standard from the Ledges case.  In Wallach, the court was confronted with an amendment to the CCRs that greatly increased assessments levied against lots owned by builders.  As an enticement to builders, the original CCRs required builders only to pay 25% of annual assessments, and these assessments were deferred until the home was sold to a buyer.  The members decided to amend the CCRs to require builders to not only pay the full assessment amount (100%) going forward, they had to pay all deferred assessments within 30 days of the amendment.  Several builders and vacant lot owners filed a lawsuit to declare the amendment invalid.
The court held that the amendments were unreasonable and invalid because they were a complete reversal of the developer’s intent in the original CCRs.  When builders purchased lots, the reduced assessments were “essential to the original bargain” that enticed builders to purchase lots in the first place.  The members could not later amend the CCRs to the detriment of builders who purchased with the expectation of reduced assessments, which would violate the original intent of the developer when the CCRs were filed.

Although Wallach is consistent with the Ledges rule, its guidance to HOAs may be limited. After the Wallach lawsuit was filed, the legislature amended the Planned Community Act that governs most HOAs, stating that in many cases, amendments to CCRs are “presumed” valid. The import of this presumption is that anyone who seeks to invalidate an amendment to the CCRs faces a higher burden than faced by the builders in Wallach.  It also remains to be seen whether any of the parties appeals Wallach and whether other courts rely upon its interpretation of the Ledges case.      
In the long run, does our advice to clients change as a result of Wallach?  Not really.  We already caution clients that amendments to the CCRs should be reasonable.    

Friday, June 20, 2014

Spring Showers Bring Summer Weeds - How to Achieve Homeowner Compliance in Your HOA

Now that summer is here, many HOAs and their members are dusting off the grill, repairing the lawn mower and opening the pool to the summer crowds.  Spring and summer bring new life to HOAs but also bring new problems in making sure members keep lots up to the HOA’s standards. 
How does the HOA deal with that neighbor whose grass is always 6 inches too high or whose yard is always below the standards required by the HOA?  This is an all too common problem and one that creates many headaches among HOA boards of directors. 

First of all, be sure that your HOA has written standards or guidelines describing clearly what it expects as far as yard and home maintenance.  Doing so makes violations much easier to enforce and helps insulate the board from charges of favoritism or discrimination.

When a homeowner is in violation and has been given notice but still has failed to comply, then what?  The board can impose fines against the offending homeowner, but sometimes this can be too heavy-handed.  Some boards want a lighter approach.
An option to consider is suspending community privileges or services.  The statutes allow a board to suspend a member’s privileges or services (no pool access plus 90-degree heat equals a strong incentive for the homeowner to mow that grass). 

The law says that the CCRs that govern the community can set forth a procedure for suspending community privileges or services. The CCRs should be reviewed to determine what procedures must be followed and which community privileges or services can be suspended.  If the CCRs are silent about the procedure, the statutes say that the homeowner must be given written notice and an opportunity to appear at a hearing before privileges or services can be suspended.  The details can be found here
One question we sometimes receive is whether access to the community is a privilege that can be restricted, typically in a gated subdivision.  The answer is no.  The HOA cannot restrict any homeowner from accessing his or her lot.  If an HOA does suspend privileges or services, it must be careful not to deactivate a key card or fob that controls the gates to the community, if it is gated.

We are also asked if, in communities where the HOA provides the household water supply, water can be turned off to noncompliant homeowners.  The answer is yes, but we encourage providing substantial written notice and only doing so where are all other avenues have been exhausted.

Some HOAs are successful in encouraging members to keep up their lots by creating contests and the like.  An example is publishing a monthly “best yard” feature on the website or in a newsletter.  We recommend that any winner be compensated by a yard sign, bragging rights and pride, or at most a small gift card.  Generally, monetary prizes or reductions in dues should be avoided.  These types of contests can also lead to greater involvement in the HOA, which pays off in higher compliance levels and more volunteers for committee and board positions.

Of course, if these options prove unpersuasive, assessing fines and filing liens or other legal action may be the next steps.
Please use the comments below to share with us your success stories in getting your homeowners involved in their communities – and don’t forget the sunscreen this summer!

Please give me a call or drop me an email if our HOA law team can assist your HOA or management company with the compliance process, or if we can be of assistance in any other way. We appreciate your reading our HOA law blog and encourage you to share it with others who may be interested. Thank you!

Tuesday, February 4, 2014

Maximizing Votes at an HOA Meeting or Election

Many HOAs and condominium associations have annual meetings coming up this time of year, or special meetings to amend their covenants, conditions and restrictions ("CCRs") or bylaws. What is the best way to collect the votes your HOA needs to elect a board or get that important change to the CCRs or bylaws passed?

1. Have you fostered a sense of community in your HOA? Consider a barbecue, pot-luck luncheon or kids' movie night at or before your meeting. Not only does this remind people that there are good people in the neighborhood and that it is fun to get to know your neighbors, but it also reinforces that the HOA is not just there to demand payment of dues and that you put your trash can away. A social event says, "Our HOA is made up of hard-working, well-meaning people who are trying to support the neighborhood - don't you want to get involved as well?" And if I learned anything in law school, it's that the presence of food is guaranteed to double the turnout of any meeting.

2. Schedule the meeting well in advance and at a day, time and location that is convenient to homeowners. This may go without saying, but board members are often retired or self-employed, and therefore may have more flexible schedules than other homeowners. Give some thought to making the meeting convenient and accessible to those with less-flexible schedules. You may even wish to provide child care if your neighborhood is one with many small children.

3. We advocate sending out a meeting notice by mail which includes a proxy. While you should always hold an actual meeting for elections and whenever an amendment to the CCRs is proposed, you can gather a lot of votes ahead of time by using the proxy process. Many HOAs already use proxies, which are simply limited powers of attorney allowing a person attending a meeting to cast votes on behalf of others who are unable to attend. All proxies should be in writing, signed, include the printed name and address or lot number of the homeowner granting the proxy, and state a date by which the proxy expires. These should be collected by the Secretary at the meeting and carefully counted and tracked. (We recommend having at least three people, at least one of whom is not a board member, counting votes at any annual or special meeting.) By law, a proxy can be given to any person, even a non-member of the HOA. While it is wiser to limit only HOA members to serving as proxies, most HOA's CCRs and bylaws do not do so. 

4. The North Carolina Non-Profit Corporations Act specifically allows voting by written ballot as well "unless prohibited or limited by the articles of incorporation or bylaws" (most don't). If no meeting is necessary, consider conducting the vote via written ballot instead. All members receive a ballot with clear instructions as to what they are voting on and a specific date by which all ballots must be returned. All ballots should require a signature or other means of verifying that the response is genuine and unique, and should include the printed name and address or lot number of the homeowner. All homeowners must receive a ballot and the opportunity to vote. Some HOAs even provide the ballot  on a postage-paid postcard or include a postage-paid return envelope to help make sure they get back to the HOA in time to be counted. You may also consider organizing block captains to go door-to-door to collect ballots and/or proxies for big votes.

Good luck with your upcoming membership meetings!

Please give me a call or drop me an email if our HOA law team can assist your HOA or management company with the meeting process, or if we can be of assistance in any other way. We appreciate your reading our HOA law blog and encourage you to share it with others who may be interested. Thank you!

Sunday, September 15, 2013

About the New Required Notice of Voluntary Prelitigation Mediation for HOA and Condominium Disputes

About the New Required Notice of Voluntary Prelitigation Mediation for HOA and Condominium Disputes

All HOAs and condominium associations in North Carolina now have the legal duty to inform all members at least yearly that they have the right to request voluntary mediation of any dispute with the association, except for disputes regarding payment of dues or assessments. Either party can decline to engage in mediation. This requirement took effect on July 1, 2013 pursuant to new statute 7A-38.3F, passed as Session Law 2013-127. You can read the text of the law here: SL 2013-127.

I have opined in a prior post on my blog that this new law was silly and unnecessary because it is completely voluntary, and I stick by that opinion. Anyone can agree to voluntary mediation or arbitration of any legal dispute already, so this law did not add anything new. My law practice certainly encourages these voluntary "alternative dispute resolution", or ADR, processes, and they can be very helpful in resolving legitimate disputes, especially business disputes. Remember, the law specifically states that either party can decline to participate in mediation for any reason, so the law has exactly zero teeth to it.

Anyway, your association now needs to notify its members of this new opportunity to request mediation of any legal dispute, other than a dispute involving the payment of dues. How should it do so? The law states that the notice must be posted on your HOA website, if you have one. If your HOA does not have a website - and it should, this is 2013 after all - the notice must be provided "at the same time and in the same manner as the names and addresses of all officers and board members of the association are published", which is already required by the Planned Community Act and the Condominium Act. (Your HOA is already doing this, right? It should be.) So this usually means within the annual meeting notice for HOAs which do not have a website. The main point is that the notice must be published in writing at least once per year.

So how should the notice be worded? Here is my recommended wording, which you are welcome to use verbatim: "Pursuant to N.C.G.S. Section 7A-38.3F, the association is required to notify its members yearly that members and the association may request voluntary mediation of any dispute with the association arising under the North Carolina [Planned Community Act][Condominium Act] (use whichever is appropriate for your association), or under the association's declaration, bylaws, or rules and regulations, other than a dispute relating solely to the failure to pay dues or assessments. Either party can decline to engage in mediation for any reason. The procedure for requesting mediation is set forth in the statute."

Please give me a call or drop me an email if our HOA law team can assist your HOA or management company in understanding or implementing this new requirement, or if we can be of assistance in any other way. We appreciate your reading our HOA law blog and encourage you to share it with others who may be interested. Thank you!

Sunday, July 21, 2013

2013 Changes to North Carolina HOA Laws

The General Assembly has made some important, and some not-so-important, changes to HOA law in its 2013 session. With the session now nearing its end, let’s review the changes that have been enacted into law. It does not appear that any other changes to HOA laws will be enacted this year.

Be aware that if you use the N.C. General Assembly's website to look up the North Carolina statutes, they always run one legislative session behind. So, the current statutes on the website do not reflect all the changes discussed here. It will most likely be next year before the statutes on the General Assembly website are updated. 

Changes to the Foreclosure Process

House Bill 331, which was enacted as Session Law 2013-202 on June 26, is the most important bill affecting HOAs this year. It makes a few significant changes to HOA foreclosure procedure by re-writing section 3-116 of both the Planned Community Act and the Condominium Act. The changes take effect on October 1. This bill was primarily drafted and supported by the community associations subcommittee of the Real Property Section of the North Carolina Bar Association, of which I am a member, so while I was not a great supporter of the bill because I had not encountered the issues it seeks to remedy, I did have some input into the drafting of the bill, and the changes it makes are in general positive.

The changes are primarily designed to conform the HOA foreclosure process to the standard power-of-sale foreclosure process used for deeds of trust. Some clerks of court and title companies had raised concerns with the legality of the process HOAs had been using since it seemed to skip some steps required in typical non-HOA foreclosures.

The most important change is that a trustee must now be appointed to handle the foreclosure process, just as in typical non-HOA foreclosures. But don’t panic! The trustee can be the HOA attorney as long as the homeowner does not “contest” the foreclosure proceeding. If the homeowner does contest the proceeding, then an independent trustee (i.e., a separate attorney) must be appointed – but the homeowner is responsible for all the fees and expenses of the trustee.

While the $1200 cap on attorneys’ fees for an “uncontested’ foreclosure remains in place, the bill does clarify that this cap does not apply to any other legal proceedings to collect amounts due from a homeowner, or to processing payment plans and the like. We have run into this issue recently with the Mecklenburg Co. clerk of court.

In addition to some other rewordings and reorganizations of section 3-116, H.B. 331 makes one further change which is very much to the benefit of HOAs. It provides that a lender who takes title to a lot or unit by foreclosure is subject to assessments after the upset bid period passes, regardless of when the lender records the deed into itself or the foreclosure purchaser. While this does not address the issue of lenders who put off the foreclosure process, at least it does address those who foreclose but delay in recording their deed, which is certainly a step in the right direction.

Read the bill here.

Voluntary Pre-Litigation Mediation

On June 19, the General Assembly passed the dumbest of its 2013 HOA legislation, House Bill 278, enacted as Session Law 2013-127. It went into effect on July 1 and provides for a completely voluntary process by which HOAs and homeowners can agree to mediate legal disputes – which they could have done anyway without this pointless bill. The bill is codified in new statute 7A-38.3F. Chapter 7A is the chapter of our laws dealing with judicial matters – so be aware that while this is an HOA law, it is found in Chapter 7A and not in Chapter 47F (the Planned Community Act) or 47C (the Condominium Act).

The bill provides that HOAs and homeowners can agree to mediate a dispute, although neither is required to and either can decline to do so. If they do agree to do so, then the mediation is handled in the same way as any other mediation, which can result in a legally-binding settlement – again, if both parties agree.

Rep. Deborah Ross (D-Wake)The new law does not apply to disputes regarding payment of assessments, so I guess those now cannot be mediated even though they could have been before. Or maybe they still can be. Who knows? As is typical of the other anti-HOA legislation proposed by Rep. Deborah Ross of Wake County, who thankfully resigned from the General Assembly on June 1, such as her prior proposals to eliminate HOA foreclosures altogether, this bill is poorly-written and not well thought out in pretty much all respects. The mediation was originally proposed to be mandatory, so we can be thankful that we were at least able to make it voluntary during the legislative process.

The only really important thing to know about this bill is that the HOA is required to inform homeowners of its existence at least once per year. Typically this should appear on the HOA’s website, or on its annual meeting or budget ratification meeting notice if the HOA does not have a website. Since HOAs are required to publicize the names and addresses of the board members and officers annually in the same way anyway, this should not add much to HOAs’ administrative burdens.

Read the bill here.

Validity of Amendments and Access Through Common Areas

Senate Bill 228, enacted as Session Law 2013-34, was passed on April 24 and takes effect on October 1. It makes some fairly technical adjustments to sections 3-107 of the Planned Community Act and the Condominium Act, and to sections 1-102, 1-104, 2-103 and 2-117 of the Planned Community Act. The changes 1) confirm HOA authority as found in their articles of incorporation, bylaws and CCRs; 2) confirm that amendments to CCRs made in accordance with the articles of incorporation, bylaws and CCRs (which had been placed into some doubt by some recent appeals court decisions) are presumed valid; and 3) require lot and unit owners to provide access through their lot/unit to the HOA and other owners if needed for repairs or maintenance to common areas or other units. This bill was supported by our HOA subcommittee. It should not affect the day-to-day operations of HOAs but does help clarify some legal issues.

Read the bill here.

Please give me a call or drop me an email if our HOA law team can assist your HOA or management company in understanding or implementing these changes, or if we can be of assistance in any other way. We appreciate your reading our HOA law blog and encourage you to share it with others who may be interested. Thank you!