Special Assessments: What HOA and Condominium Board Members, Owners and Buyers Need to Know

Repairs to the Champlain Towers over time funded by special assessments might have helped avoid the disaster.

Special assessments are a topic that comes up only occasionally with most single-family residential homeowners associations, but can come up more frequently with townhome associations or condominium associations, and even more often for condominiums located at the coast.  That's because buildings on the coast suffer weather-related effects that can require major, costly repairs to the exteriors of the buildings.  The recent Champlain South Towers condominium collapse disaster in Surfside, Florida has brought scrutiny to the issue of how homeowners and condominium assocations can undertake costly maintenance.

The North Carolina Bar Association and North Carolina Association of Realtors have also recently adopted revisions to the sections addressing special assessments in their jointly-approved residential Offer to Purchase and Contract, effective July 1, 2021. These revisions have generated questions.

This post looks at the issue of special assessments from three perspectives – that of HOA or condominium board members, that of HOA or condominium owners, and that of someone considering buying a home in an HOA or condominium.

Board of Directors Considerations Regarding Special Assessments

If you are a officer or director serving on the board of a homeowners association, what do you need to know about special assessments?  First, special assessments are not really addressed in the North Carolina Planned Community Act or the North Carolina Condominium Act.  Since they are solely a creature of your association's governing documents, you need to carefully read those documents to see what they say about what special assessments can be used for and the process required for them to be approved. 

As always, read your main declaration first, but also don't forget to read any and all amendments which may have been made to it, as well as your bylaws.  Some associations have restrictions on how special assessments may be used - for example, only for capital improvements, rather than for operating expenses - and almost all have specific requirements for how special assessments must be implemented.  Typically, a membership vote is required, and oftentimes the required vote is a higher percentage than is otherwise required.  Pay special attention to whether the approval percentage required is a percentage of the entire membership of the association, or just of those voting at a meeting or by ballot at which a quorum has been established. 

While it is common to see special assessments only allowed for capital expenses, and with super-majority voting requirements of the membership required for approval, these are generally a bad idea in our opinion.  An association has to be able to pay its bills, and in the case of a condominium with serious structural or water intrusion issues, the process should not be so difficult as to prevent the association from moving forward with needed repairs.  If you need further proof of that statement, see the Champlain South Towers condominium collapse.  If your HOA has significant restrictions on how special assessments must be passed or how the funds can be used, consider speaking with an experienced HOA attorney about amending them, especially if your HOA consists of stacked (i.e., multi-floor) condominium units.

Once a special assessment is approved by the membership, it must then be formally adopted by the board of directors of the association.  (Note: These two steps could happen in reverse order depending on the association’s documents, but the bottom line is that special assessments typically must be approved by both the board and the membership.) At the time a special assessment is adopted by the board, the board should be very specific in adopting procedures as to how the assessment may be paid by the owners, since typically a special assessment is a larger amount and often boards will allow homeowners to pay them over time. 

The proper procedure is to add the full amount of the special assessment to the homeowner's account at the time it has been approved by both the board and the membership and has become effective.  The board may allow owners to make payments over time, but this should only be extended to creditworthy owners who are current on all their obligations to the association. The board should also consider including details making the special assessment payable in full should the home change hands.  In addition to allowing the association to receive the funds that it needs, doing so also provides certainty to sellers and buyers when there is a sale.

Homeowner Consideration Regarding Special Assessments

If you are an owner in an association which is considered a special assessment, look into the matter carefully and make sure that the board has done its due diligence in determining that the special assessment is really needed, and also in obtaining multiple bids if a major construction or renovation project is involved.  (We recommend always getting the association's attorney involved if there is major construction involved. Renovation construction projects, especially on condominium buildings, can be very complicated, and such contracts need to be drafted very carefully to address all sorts of contingencies which are outside of the scope of this article, but which can make a huge difference in whether the project is successful or not.)

 Don't be one of those people who votes no on anything that might raise your dues.  The board members are homeowners as well, and they don't want to pay a special assessment any more than you do.  A special assessment will probably only be proposed if it's really necessary.  At the end of the day, it is the board's job to keep the property values up and maintain the common elements, and if a special assessment is needed to do so, this benefits all owners in the community, even if the immediate financial commitment is difficult at the moment.  Again, see the Champlain South Towers condominium collapse disaster if you have doubts regarding the duty of all owners to chip in to make sure needed repairs get done.  Or, consider what happens to the value of your investment in your home if it becomes known to the public that your association if unable to generate the funds necessary to properly to maintain its buildings.

 What if You Are Considering Buying Into an HOA with Special Assessments?

Finally, if you are a potential buyer within a homeowners association, especially if it is a condominium association with multi-floor buildings, or located at the coast, inquire very specifically as to whether there are any special assessments, either under consideration or in place, and get it in writing.  Sometimes you will see the term “confirmed special assessment”.  That is a redundancy - this just means it's an actual special assessment that is due and payable.  If so, the amount due will need to be prorated at closing between you and the seller, and this can sometimes be confusing if the payments are due over time.  See the discussion above on this topic.  As a buyer, you will want to get as much in writing as possible from the board and the seller as to how much is due and a clear understanding of what, if any, your future obligations will be based on how much is paid between the two parties at closing.

We are attorneys licensed in the state of North Carolina only, and this post is obviously general in nature and does not constitute legal advice.  Please reach out to us if we can help your association with a special assessment approval process or an upcoming construction project.  While we hope our blog posts are instructive for all folks interested in community association matters, keep in mind we represent associations exclusively and do not represent homeowners in disputes with their associations.  Thank you for reading!

Recent Cases Cause Uncertainly Regarding Residential Restrictions and the N.C. Real Property Marketable Title Act

You may have heard about the recent pair of cases decided by the North Carolina Court of Appeals involving the North Carolina Real Property Marketable Title Act, which is codified at NCGS Chapter 47B.  The two decisions are C Investments 2, LLC v. Auger et al., and C.E. Williams III et al. v. Reardon et al. These decisions will have a significan adverse impact to North Carolina HOAs and condominiums if allowed to stand - but we don't believe that they will be allowed to stand.

The Marketable Title Act was passed almost 50 years ago and was designed to extinguish certain title flaws or encumbrances, if they had not appeared in any recorded documents within a given chain of title within the past 30 years.  The point was to clarify title and remove minor, old or forgotten matters of title if they had not reoccurred, been rerecorded, or been litigated within the past 30 years of when the title was being examined.  The Marketable Title Act has a number of exceptions for things which are not extinguished even though they may be more than 30 years old, including an exception for "covenants applicable to a general or uniform scheme of development which restrict the property to residential use only, provided said covenants are otherwise enforceable."  This exception had always been interpreted by real property and homeowners association lawyers to mean that restrictive covenants for residential subdivisions were excepted from the Marketable Title Act and therefore remain in place in perpetuity, as most covenants specifically provide, even if they are older than 30 years and even if they don't appear in a given chain of title within the past 30 years.

The Court of Appeals unfortunately ruled contrary to the longstanding common opinion and practice, interpreting the above-quoted provision to mean that residential restrictive covenants which have not appeared in a given chain of title within the past 30 years are completely extinguished, other than any provision specifically restricting the property to residential use only.  While the Court of Appeals took the position that this was a plain reading of the plain words of the statute, that reading if allowed to stand would upend every subdivision with restrictive covenants 30 years or more old and cause chaos in the chains of title of thousands of homes and residential subdivisions statewide.

For example, imagine an older subdivision with residential restrictive covenants of the typical sort, which were originally recorded more than 30 years ago.  Mr. and Ms. Jones reside on Lot 1 and have lived in their home for 31 years.  Mr. and Ms. Smith live on Lot 2 and just bought their home last year.  Based on these Court of Appeals rulings, the covenants are now extinguished on Mr. and Ms. Jones' property, other than the restriction that it can only be used for single family residential purposes.  So they can quit paying dues, maintain old junked cars on cinderblocks in their front yard, and allow their home to fall into complete disrepair.  On the other hand, what is the situation next door at the Smiths?  It depends on what the deed they received said, and what the deeds of all the other folks in the chain of title for their lot in the past 30 years said.  If the recorded restrictive covenants were mentioned in any of those deeds, then by the Court of Appeal's reasoning, they have been revived and the Smiths must comply with every provision of those restrictions.  If none of the deeds mentioned the restrictions, then they get to be scofflaws just like their neighbors the Joneses.  What if their deed said something vague like, "This deed is subject to all documents of record"?  Who knows?  The Court of Appeals doesn't tell us.  Thus, chaos.

It is a universal opinion among real property and homeowners association attorneys in the state that these decisions were wrong.  The General Assembly is currently reviewing legislation to make corrections to the Marketable Title Act that will put things back the way they have always been.  The chaos which will result if that does not happen it is a strong assurance that it will. 

Bottom line: We do not believe that this is a situation which should be of concern for North Carolina HOAs or condominiums at this time. We believe the General Assembly will remedy the matter. Of course we will be monitoring the situation and will provide further updates as they occur.

Contact us if we can provide any further information, and thank you for following the NC HOA Law Blog.

When it Rains, it May Pour on Your Homeowners Association

Do you have one of these lovely structures in your yard?

 

It seems like it rained most all of this past winter.  It rained for 4 days straight as this post was being written, and regardless of your beliefs regarding climate change, it is a fact that we in the Carolinas have had more than our fair share of rain over the last few years.

Rain, and the flow of it across the ground that we call storm water management, is probably the most common issue we face regularly as homeowners association attorneys.  I've certainly been fielding a lot of calls lately about it. 

The general rule regarding storm water is that a property owner is not liable to neighboring property owners for storm water flowing across his or her property onto their property, unless the property owner has changed the natural flow of storm water across his or her property in a way that adversely affects the neighbor by directing more water onto the neighbor's property than would otherwise naturally occur.  

Thus, in general, each homeowner in a homeowners association is responsible for storm water flow across his or her property and cannot blame his or her uphill neighbor for storm water naturally flowing downhill onto his lot, unless he can show that the neighbor made changes to his lot which are directing an unnatural amount of water onto him/her.  It is important to keep this common law concept in mind if you are having grading work done on your property or putting in an in-ground swimming pool, for example.  You must do so in a way in which manages the storm water on your own property and does not direct additional storm water onto your neighbors.

We often hear from our homeowners association clients when property owners in the neighborhood demand that the association step in to correct adverse drainage across the owner's lot.  Take a look at this awful situation:

Unfortunately in almost all cases, the homeowner's wish to make poor drainage the association’s responsibility is headed down the drain.  Unless the restrictive covenants provide otherwise, storm water pipes, drains, swales, ditches, and the like on a homeowner's lot are that homeowner's responsibility to maintain, and an individual homeowner rarely has recourse against any other parties for excessive storm water coursing across the surface of his or her lot, or for the maintenance and repair of storm water pipes installed within their lot. That bell tolls for him or her and no one else.

In general, homeowmers own their lots down to the center of the earth and up into the sky as far as the eye can see, and everything in between.  This includes any storm water pipes installed on or under the property, even though the storm water pipe was probably installed by the developer or the home builder, not the homeowner, and even though the storm water pipe may drain water from other lots, common areas, or roads of the neighborhood and not just from the homeowner's own lot.  

From the prospective of the homeowner's association, this is the correct result.  The primary purposes of a homeowner's association are to maintain property values and maintain the common elements.  It is not a police force, nor is it a public works department.  The association did not design, approve, or construct the lots or the roads, nor does it usually have the right to go upon lots to correct topography or drainage, nor does it typically have the financial resources to do so.  The homeowner must generally look to his or her own resources or confer with their neighbors to address storm water problems.  

Occasionally, storm water apparatus may be maintained by the local municipality, and if so that municipality should always be the first recourse to assist with storm water issues.  Most cities and counties have storm water engineers on staff due to the increasing requirements of the federal government under the Clean Water Act and most are more than willing to come out and meet on site to examine issues.  Occasionally, there may also be issues with storm water catch basins or drains constructed within city streets or state-maintained roads, so the city transportation department or North Carolina Department of Transportation, if a state road, are often good resources.  Remember that in North Carolina, counties do not maintain roads, so do not call your local county government with street or road related issues in most cases.

 The only instances where a homeowner's association might have liability for storm water issues are where the association owns adjacent common area.  If the association itself has made topographic changes to common area it owns and which is causing adverse drainage onto a neighbor's lots, then it of course may be liable.  And in some case, the restrictive covenants for the neighborhood specifically provide that the association is to maintain the storm water management structures throughout the neighborhood.  (This would occur more often in a commercial property owners association, or sometimes in a condominium or townhome situation – almost never in a single-family detached subdivision.) 

 If the subdivision has private roads which are maintained by the association, the same situation as described above with city or state roads might apply, so the association needs to make sure any catch basins or storm drains within its privately-maintained roads are properly maintained so that they are draining the roads as originally designed.  But again, the association did not design, approve, or construct the roads, so it generally cannot be held liable for inadequate design, but only for failing to reasonably and properly maintain those specific storm water management devices which are within its private roads, or any catch basins or similar devices it owns or maintains.  Storm water pipes, ditches, drains, and swales on individual lots generally do not fall within this area of responsibility.

Don't hesitate to contact us if we can assist your association, whether during rain or shine or sleet or dark of night!