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.

Coronavirus/COVID-19 Updates for Businesses and Community Associations

Coronavirus/COVID-19 Updates for Businesses and Community Associations

The coronavirus situation is changing rapidly and each change has the potential to affect your business dramatically. Gatherings of 50 people or more are now prohibited statewide as of March 23, and the Mecklenburg County health director on March 24 instituted a stay-at-home order (although many business are deemed essential by the order and therefore are exempt.) How is your business affected? Because the COVID-19 situation is rapidly evolving, businesses must stay informed. Your course of action may be governed by focusing on employee morale or health, a desire to slow the epidemic, a need to address customer demands, public perception, and other imperatives. Your response will also vary depending upon your type of industry such as service or manufacturing.  In this article, Moretz Law Group addresses several areas of law and stakeholder groups that are most heavily impacted by the pandemic response.

New Employee Leave Laws – The Families First Coronavirus Response Act ("FFCRA") has become law and takes effect April 2. What do you need to know as an employer?

·         Applies to all private employers with 500 or less employees. Note that this is much broader than the FMLA, which excludes employers of 50 or less employees.

·         Adds “Emergency Paid Sick Leave” (a new mandate) and “Emergency Family and Medical Leave” (an enhancement to currently-required FMLA leave.)

·         Emergency Family and Medical Leave: Expands the FMLA to require paid leave for employees who are unable to work (including working from home) because they have or may have COVID-19 or are seeking a medical diagnosis, or who must stay home to care for such a person, or who must stay home to care for children whose school has been cancelled due to coronavirus concerns.

o   Employee must have been employed for at least 30 days.

o   Only applies when the employee cannot work from home or at the office.

o   The first 10 days are unpaid, but the employee can use paid time off if the employer offers it; maximum period, as with the FMLA, is 12 weeks.

o   After the initial 10 days, the employee must receive pay at a rate at least 2/3 their regular pay, not to exceed $200 per day or $10,000 total.

o   The employer will be reimbursed by the federal government by a quarterly credit to the employer’s payroll tax liability, including the employer’s share of any health insurance premiums if any.

·         Emergency Paid Sick Leave: Requires paid sick leave for employees who are unable to work (including working from home) because they have or may have COVID-19 or are seeking a medical diagnosis, or who must stay home to care for such a person, or who must stay home to care for children whose school has been cancelled due to coronavirus concerns

o   All employees are covered even if just hired.

o   Only applies when the employee cannot work from home or at the office.

o   Two weeks of paid time off in which the employee must receive pay at a rate at least 2/3 their regular pay, not to exceed $200 per day or $10,000 total.

o   Employee cannot be required to use other PTO first.

o   Does not apply where the employee is laid off, furloughed, or the business closes – in those cases, the new stronger unemployment insurance should apply.

o   The employer will be reimbursed by the federal government by a quarterly credit to the employer’s payroll tax liability for the full amount paid to the employee, including the employer’s share of any health insurance premiums if any.

Public Health Law and Stay-At-Home Orders - On March 10, Governor Roy Cooper declared the a state of emergency in North Carolina due to the COVID-19.  NC G.S Chapter. 166A-19.3(6) defines an emergency as “[a]n occurrence or imminent threat of widespread or severe damage, injury or loss of life or property resulting from any … public health, … incident.”  This declaration increased funding to address COVID-19 (e.g. monitoring, investigating, testing, disinfecting) and kicked in some of the consumer protections laws (for example, against price gouging).  The laws clearly outline who has the authority to take specific actions to protect the public by cancelling events, closing schools and other facilities, and restricting the movement of individuals.  Public health law allows county health directors to take very wide-ranging steps to protect public health. The steps taken so far, including today’s lockdown in Mecklenburg County through April 16, appear initially severe, but there are often helpful exceptions. For example, many businesses are excluded from that order as “essential” – please review the FAQ information carefully, especially the list of essential services on page 3, and determine if your business is excluded.

Negligence – While too complex to fully discuss here, we are being asked whether a business could be sued if an employee or customer were to contract a communicable disease at the employer’s workplace, or from a co-worker or customer. It depends on whether the business took reasonable actions to protect its employees and customers in light of the information available to it – in others words, whether the business was negligent. Tort law, or the law of negligence, applies in this situation. It holds that a person can be liable to another person to whom the first person owes a duty if the first person commits an act which is unreasonable (or fails to take a reasonably necessary action) which could reasonably be anticipated to cause damage to the second person, and the second person did not help cause the wrongful act or omission. For example, the Governor has prohibited all “mass gatherings” or 50 or more people; therefore it is legal (at least in most counties, as of this writing) to have mass gatherings of less than 50. But would this be reasonable in light of the CDC’s warnings against gatherings of more than 10 people? It depends on the situation, but reasonableness is the touchstone given all the facts and circumstances involved. Failure to abide by local orders or regulations, when they are aimed at public safety, has been held to constitute negligence in the past. We can help by drafting waivers or releases, for example, if you do need to hold a gathering or are concerned about liabilities to employees or customers in the current situation. Don’t hesitate to call or email us.

Contract Law and Force Majeure Clauses – Many contracts contain a force majeure clause, which translates from French as “superior force.”  It refers to uncontrollable events that are not the fault of any party and which interfere with a party’s ability to complete its end of the bargain or receive what it bargained for in the deal. Common examples are hurricanes, riots, labor stoppages and war.  At first blush, it would appear that a pandemic would constitute a force majeure, but the terms of the contract control. You must review the specific language of the contract in question. Language such as “circumstances outside our control” is very broad and will cover the current situation and allow the party benefited by the provision to avoid the contract.  More specific language such as the common “acts of God, war, insurrection, civil strife, riots or labor disturbances” may not be as helpful depending since the list arguably excludes pandemics. Common law force majeure, or the doctrine of impossibility, may also apply if it is impossible or illegal for the parties to carry out the purpose and intent of the contract. Send you contract to us for review if you have issues or concerns. If upon reviewing your contracts, you find provisions which do not suit your needs in the current climate, do not forget that you may amend the current contract or at least change it going forward.  We can quickly supply you with alternative language and have already done so for some of business clients.

Insurance – Business Interruption Insurance, a type of property insurance, applies when a business is damaged from an insured peril (e.g. fire or flood) and the collateral damages such as decrease in orders/sales, loss of customers, employees leaving result.  Business interruption insurance protects against financial loss and allows businesses to insure its income. The application of Business Interruption Insurance to the pandemic is not clear in all cases.  Often an exclusion is written into an insurance contract.  For example, the ISO policy exclusion form CP 01 40 07/06 is frequently included in commercial insurance policies. It states, “We will not pay for loss or damage caused by or resulting from any virus… that induces or is capable of inducing … illness or disease.”^[i]  Whether business interruption insurance applies, and what losses it may cover if it does apply, will vary from case to case.  For example, if a manufacturing plant closes down upon governmental order, coverage may be available as loss due to a competent authority’s denying access, rather than due to a virus capable of causing disease.  Statutes, executive orders, and the rulings of administrative agencies can affect the interpretation of contract language based on particular circumstances.  Please contact us if we can assist.  

Employment Law Issues

Employment law in the face of the COVID-19 is certainly wide-ranging and beyond the general scope of this update. We can provide specific advice for your particular issues, but typically concerns involve the Americans with Disabilities Act. Employers cannot take actions which might single out those with disabilities or which would require employees to disclose specific conditions which could potentially lead to discrimination, including being regarded as having a disability even if there is no actual disability. The questions we are hearing most often are:

• May employers monitor the health of employees at work?  Yes, but this must be done even-handedly and in the same manner for all employees. Employees may not be asked about pre-existing conditions or personal attributes which may make them more susceptible to the virus, but may be asked general questions applicable to all employees. See this guidance by the EEOC: https://www.eeoc.gov/facts/pandemic_flu.html

• How about monitoring asymptomatic employees? Yes, this can be done via questionnaire which is worded in a general manner. See the example on the EEOC website above.  

• Can an employee with a cough or other symptoms be sent home? Yes.

• If so, with or without pay? Whatever the employer’s specific policy is with regard to sick leave. North Carolina employers are not required to provide paid sick leave, but if your company does, any such leave should exhaust all PTO prior to becoming unpaid.

• How should an employer treat an employee who becomes infected or one who has been quarantined?  What measures should be taken in the workplace to avoid stigma?  Private, personal information of employees is required to be kept confidential pursuant to N.C. Gen. Stat. § 75-66 and other statutes.  All information and records which may identify a person who has or may have a disease required to be reported by the North Carolina Commission for Public Health must be strictly confidential. N.C. Gen. Stat. § 130A-143. Therefore, any information that an employee may have tested positive for COVID-19 or any other communicable disease should be kept confidential.

• HIPAA, while generally not applicable to employers since they are not health care providers, does apply where employers have private personal medical information in their records. Such information is required to be maintained in a separate, locked file only accessible to those with a genuine need for it. Thus, such information cannot be disclosed formally or informally.

Of utmost importance, implement policies consistently and evenly among all employees.  Communicate your message frequently and before you communicate check the facts from reliable sources and check them again.  Consider issuing your company policies/directives in this growing situation in writing and as amendments to your company employee handbook.

Realtors – The NC Real Estate Commission has allowed 90 extra days to complete all continued ed, and all continuing ed must now be completed online or via webcast, not in person. See https://www.ncrec.gov/  More information also available from the NC Association of Realtors - see https://www.ncrealtors.org/nc-realtors-coronavirus-information/

Real Estate Transactions – Recording of deeds and other real estate documents is continuing electronically and we have in fact recorded a transaction just this morning electronically, which proceeded as normal with no significant delay from the Register of Deeds office. No in-person business can be conducted at the Register of Deeds office – call and make an appointment if you need a marriage license or your notary commission renewed, for example.

Legal Proceedings and Courthouses – Courthouses are still open but running on skeleton staffs. We are able to file lawsuits, motions, pleadings and the like, but no hearings will be held until the stay on all but emergency court hearings is lifted by the N.C. Supreme Court and the N.C. Administrative Office of the Courts. This does not change or extend any statutes of limitations! In addition, any filings which were due between March 16 and April 17 have now been extended until close of business on April 17. The legal system is considered an “essential service” and is therefore not directly affected by Mecklenburg County’s stay-in-place order issued on March 24, 2020.  

Landlords, Homeowners Associations and Lenders – Your tenants, members and borrowers are still required to pay you and nothing is anticipated to change that at this time. Residential borrowers may receive special dispensation from the federal government but that is unlikely to apply to any private mortgage transactions. Lawsuits, liens and foreclosures may still be filed, but no hearings will be held until the stay on all but emergency court hearings is lifted by the N.C. Supreme Court and the N.C. Administrative Office of the Courts. We can assist you in getting things filed so that matters can be immediately heard once the stay is lifted.

Homeowners and Condominium Associations – Annual meetings are likely to have to be postponed since most associations require these to be held in person. Board meetings can, and should, be held telephonically in the current situation – all directors must be able to hear each other for the meeting to be valid. No such allowances exist by law in North Carolina for annual membership meetings to be held electronically. Boards should be meeting regularly by teleconference to adjust and react to current events. (Contact us if you need a review of your governing documents to see if there are ways to accomplish meetings electronically or other than in person.) Regarding common areas, be sure to read the section about Negligence elsewhere in this article. There is now plenty of information available from the CDC and others for best practices in keeping common areas clean and avoiding personal contact to quell the spread of disease – disregarding them could constitute negligence, making the association liable.

Taxes - An delay from April 15 to July 15 was announced by Treasury Secretary Steven Mnuchin for federal income tax filing for all taxpayers and businesses. North Carolina has also extended its state tax filing deadline to the same date. No specific written guidelines or rules had been published at the time we wrote this update, so be sure to consult your CPA for further details before relying completely on this informal announcement at this time.

Breweries, Distilleries and Other ABC Licensees – The NC Alcoholic Beverage Commission has issued very specific rules in response to the Governor’s COVID-19 Executive Orders. These new rules need to be followed strictly in order to ensure that you are not both in violation of the Executive Orders – a class 2 misdemeanor – as well as putting your ABC license in jeopardy. See the ABC Commission announcement: https://abc.nc.gov/PublicResources/LegalAnnouncement/261

Unemployment Benefits – This is an important change which provides a streamlined process to access benefits for those newly unemployed or with reduced hours or wages. Employees should be sure to specify that they are temporarily out of work or working reduced hours due to COVID-19 when filing a claim to make sure they are eligible for any extra benefits and to ensure that the employer’s unemployment insurance account is not charged for these benefits. Employers should be sure to indicate that the separation was due to COVID-19 when/if they receive a request for separation information from the NC Employment Security Commission. Details here: https://des.nc.gov/need-help/COVID-19-information

Parties, Events and Mass Gatherings - On March 23, 2020 Governor Cooper issued new Executive Order No. 120 adding further restrictions to businesses and prohibiting all mass gatherings of 50 or more people - down from 100 or more previously. Read the Executive Orders here for details.

Briefly, the Governor's orders cancel public schools (K-12) until May 15 and prohibits mass gatherings of 50 or more until further notice. The prohibition of mass gatherings has specific definitions and is worthy of clarification.  These orders have the rule of law - violation constitutes a Class 2 misdemeanor pursuant to N.C.G.S. 14-288.204. There are more details on our website here.

Stay tuned for more legal updates from us on this continually evolving issue.

Resources for Businesses to Stay Informed:

·         https://www.cdc.gov/coronavirus/2019-ncov/community/organizations/businesses-employers.html

·         https://www.osha.gov/Publications/OSHA3990.pdf

·         https://www.eeoc.gov/facts/pandemic_flu.html

·         https://www.ncdhhs.gov/divisions/public-health/coronavirus-disease-2019-covid-19-response-north-carolina/businesses-employers

·         https://abc.nc.gov/PublicResources/LegalAnnouncement/261

·         Read the Executive Orders here

·         https://des.nc.gov/need-help/COVID-19-information

·         https://www.mecknc.gov/news/Documents/COVID-19-Stay-at-Home-FAQ.pdf

·         https://www.mecknc.gov/news/Documents/COVID-19%20Frequently%20Asked%20Questions.pdf

·         https://www.cabarrushealth.org/555/Coronavirus-Information-Page

Moretz Law Group is prepared to help you with your business needs in this situation.  We are fortunate to have Marjorie Benbow as part of our firm due to her expertise in virology and public health.  Prior to receiving her J.D. and M.B.A degrees from Wake Forest, Marjorie received her Masters of Science in Public Health from UNC-Chapel Hill. She worked as a virologist at Burroughs Wellcome after finishing her coursework. She also worked for the state's health agency in the areas of epidemiology focusing on communicable diseases. Marjorie is also a registered patent attorney and assists our clients with trademarks and copyright matters as well as with brewery and distillery law. Marjorie can be reached here. Reach Zac Moretz here. Our coronavirus updates are here.

Update on New South Carolina HOA Legislation - Don't Miss the January 10 Deadline!

While this is generally a North Carolina HOA law blog, we represent many South Carolina HOAs as well, and as most of them are aware by now, the new South Carolina Homeowners Association Act was enacted on May 17th, 2018 and was the first major legislation in South Carolina to regulate homeowners associations. The major focus of this new law is to provide owners access to all of a community’s governing documents and rules, regulations, policies and procedures. Obviously, this applies to HOAs located in South Carolina only.

On or before January 10, 2019, all “governing documents” and rules and regulations must be recorded with the register of deeds’ office to remain enforceable. All governing documents other than bylaws must be recorded already under present law, so no change there.

All “rules and regulations”, which presently need not be recorded, must now also be recorded by January 10 to remain enforceable. This includes:

o   Bylaws;

o   Rules and regulations;

o   Architectural guidelines;

o   Any other policies and procedures, such as collection policies.

o   Basically, anything you want to be enforceable against a homeowner or a lot or unit in your HOA.

• In addition to the recording requirement, all “rules and regulations” must be made accessible to members upon request, or posted conspicuously on the common areas, or posted on the community’s website.
• Any amendments to any of the above made after January 10 must be recorded by January 10 of the year following their adoption. 
• The act also requires the South Carolina Department of Consumer Affairs to collect and publish online data regarding complaints by and against homeowners associations. It will provide copies of any complaint to the HOA and/or the owner. The Department will publicly report the complaints in a searchable database.
• The act provides that small claims court is now a proper forum for resolving disputes between homeowners and HOAs.  
• Finally, the act requires sellers of homes in HOAs to provide additional disclosures to prospective buyers.

If you're a South Carolina HOA, make sure you don't miss the January 10 deadline!

• Contact your attorney or management company and get your documents compiled and to your county Register of Deeds or Clerk of Court (depending on how your particular county handles these types of recordings).
• You should also post all of these same documents in PDF form on your website.

Call us if we can help! Good luck!

How to Handle HOA/Condo Board Member Resignations

By Chris Gelwicks, Esq.

From time to time we receive questions regarding the resignation of directors, term expiration and what to do in the event of a mass resignation by the existing board.  The North Carolina Planning Community Act, Condominium Act, and the Non-Profit Corporation Act address certain issues with regard to directors’ terms and how to fill vacancies.  Generally, the remaining board members appoint a replacement to serve out a resigning director’s term. But what happens when directors resign and do not appoint their successors, or when there are not enough remaining directors left to appoint replacements? 

Section 55A-08-05(d) of the North Carolina Non-Profit Corporations Act provides that when the term of a director expires, that director continues to serve until his or her successor is appointed or elected and takes office.  This seems to be in contrast with Section 55A-08-07 which indicates that a director’s resignation is effective upon communication of that resignation to the board (unless the resignation sets forth another effective date).  The key difference between the two statutes are the terms “expire” and “resign”.  Normally, in either case, the remaining directors would appoint someone to fill the empty seat unless the bylaws indicate differently. The board could also choose to hold an election for the empty seat(s).

Where we run into problems is where an entire board resigns at once and no successors are appointed.  Pursuant to Section 55A-08-30, directors on boards have a duty to act in good faith, with reasonable care, and in a manner that is in the best interest of the association.  Such fiduciary duties include that directors enforce the declaration of covenants, collect assessments, and ensure that the association is run and continues to be run effectively.  It is a reasonable conclusion that if an entire board resigns at once and appoints no successors to fill vacancies, then the association cannot be effectively run.  Those directors who resigned en masse potentially subject themselves to liability by not finding and appointing replacements; those directors, by basically abandoning their posts, could be construed to have violated their fiduciary duties.

The same could also apply if so many directors resign that the board can no longer reach a quorum to make a decision on appointing replacement directors.  Keep in mind that the bylaws of your homeowners association ultimately control and can provide a different procedure than these North Carolina state statutes.  If you are reading this and are on the board of your association, you may wish to review your bylaws to determine what they say in these situations and whether changes might be necessary to provide better procedures, such as stating that even board members who resign also continue to serve until their successors take office.

The bottom line is this: Resignations, vacancies and the like are not to be taken lightly.  Directors who resign should always find a successor if at all possible and submit those names to the remaining board members.  If an entire board intends to resign – which is an extremely bad idea to begin with and should be avoided at all costs – they should do so in a manner that allows successors to be appointed and the association to continue to function.  For example, the resignations may be staged over time to allow replacements to come aboard.  And remember that, at least in North Carolina, board members whose terms expire continue to serve, and continue to have fiduciary duties to the association and the members, until their replacements take office.

Failure to appoint successors in a way that results in a dysfunctional board can result in personal liability to the resigning directors for breach of fiduciary duty.  As always, don’t hesitate to contact us to discuss strategies, procedures and potential liabilities when dealing with board matters.

Click here for another of our blog posts regarding board of directors matters.

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Your Homeowners Association’s Governing Documents: Please Don’t Call Them Bylaws!

Our HOA Ninjas here at Moretz & Skufca have a little pet peeve when it comes to terminology: folks who refer to the governing documents for their community association as “the bylaws.”  So (to borrow from Shakespeare) what’s in a name?  Turns out that when it comes to homeowners association documents, names mean a lot.  There are articles, bylaws, declarations, CCRs, deed restrictions, board resolutions, policies and procedures, and rules and regulations, among other animals.  Help us stop the malapropism trend by understanding these different documents and how they relate to one another.  (Note that while we use North Carolina nomenclature here, these concepts apply to community associations in virtually every state.)

Articles of Incorporation

An HOA’s articles of incorporation, also known as its “charter”, legally create the corporation when filed with the Secretary of State’s office, and confer upon it all of its legal authority, as well as its non-profit status.  Think of the articles of incorporation as your community association’s Declaration of Independence – the document that creates a new entity out of thin air.  Since a corporation has no legal authority to act in any manner not authorized by its articles of incorporation, the articles are typically very broadly-worded and non-specific in order to avoid inadvertently limiting the corporation’s authority to do business.  Articles for homeowners associations must limit membership to lot owners only and include language specified by the IRS in order to qualify as a non-profit.  Your HOA will almost never deal with its articles once they are filed. 

Bylaws

The bylaws establish a corporation’s internal governance, voting and administrative procedures.  These include details about membership and board meetings, board elections, descriptions of the officers, how they are appointed and their authorities, and other similar matters.  Think of your homeowners association's bylaws as its Constitution – the rules of how the people will elect their representatives and what those representatives can do.  Bylaws need not be filed with the Secretary of State or recorded with the local register of deeds.  (While many HOA declarations have the bylaws attached to them when they are recorded with the register of deeds, this is not legally required.)  You will typically refer to your homeowners association's bylaws only when there are questions regarding elections, special assessments or how other important matters may be voted upon by the membership and/or the board.  Generally, bylaws are fairly boilerplate and should not require a lot of thought or attention by your board or your members unless there are major issues facing your HOA.

This is where our pet peeve comes in.  We often hear folks refer to their declaration of restrictive covenants, or to all of their homeowners association’s governing documents, as “the bylaws” (cringe). Please don’t do this!  The bylaws are a specific document, different from the other documents governing your HOA.  If you need to refer to them all together, the proper term is “governing documents.”  Use the word “bylaws” only when referring to the bylaws themselves.

The most important document for your homeowners association is the declaration of covenants, conditions and restrictions, or, for condominiums, the declaration of condominium (sometimes called a "master deed" in South Carolina) – what we call the “declaration.”  These are also referred to variously as the “covenants”, the “restrictions”, or the “CCRs.”  These are recorded with the register of deeds where the association is located prior to any lots being sold, which causes the provisions of the declaration to “run with the land” and be binding upon all current and future owners of each lot.  The declaration states what can and cannot be done with a lot owner’s land and the homeowners association’s common areas, and provides details as to how the HOA is to be operated.  In this latter regard there can be substantial overlap between the declaration and the bylaws, and this may be part of the confusion we see in terminology.  In general, the declaration controls over the bylaws if they are in conflict.

Deed Restrictions

An aside about deed restrictions.  Some subdivisions have “deed restrictions” in addition to, or in lieu of, a declaration.  The term generally refers to a document which places limits on what can be done with a lot owner’s land, but which does not create a full homeowners association operational structure like a declaration does.  This type of restriction was used primarily in the old days before homeowners associations with detailed declarations became prevalent, but deed restrictions can also be used now to place additional or special restrictions on a subset of lots within a larger HOA, or for small subdivisions where no formal HOA is required.  We avoid using this term except in these limited situations.  Modern declarations include deed restrictions (specific restrictions on what can be done on the owners’ lots) in addition to lots of other details regarding the operation of the community association, so “declaration” is the proper term for modern, detailed declarations of restrictive covenants as opposed to simple limitations on lots.

Everything Else 

The final category of governing documents is board resolutions, policies and procedures, and rules and regulations.  While these different terms are often used based upon type or level of formality, they are all positions formally adopted by the board of directors setting forth how a particular matter or situation will be handled now and in the future.  We refer to them generally as the homeowners association’s “policies.”  Policies serve to spell out in detail matters that may be addressed more generally in the declaration or the bylaws. 

While the articles of incorporation, the declaration and the bylaws ultimately control the governance of your homeowners association (in that order), the board of directors has the legal authority to adopt policies which are in general accordance with the authority granted by those documents.  For example, an HOA’s declaration may restrict leasing to no more than 15% of the homes in the subdivision, but it may not go into specific detail regarding how the leasing restrictions are to be implemented.  The board has the legal authority to adopt a policy describing how a homeowner may apply to lease his or her home, defining who is considered to be a tenant versus a guest, how a waiting list will be maintained, and other similar details.  Conversely, the board could not adopt a policy restricting leasing if such a restriction were not set forth in the declaration.

Policies can usually be adopted by the board acting alone, and need not be recorded or filed anywhere – although the best practice is to make sure they are made known to the members, usually by mailing, newsletter or website.  The board should be sure that the board meeting minutes reflect the research and consideration underlying the adoption of a particular policy, including the board’s consultation with its management company and professional advisors if necessary, and should take care that the policy is well thought out and written down in clear and specific detail.

We hope this discussion has shed some light on the various common HOA documents and the proper terminology for each.  If we can provide further information to assist your HOA, don’t hesitate to contact us.

Please give us a call or drop us an email if our HOA law team can assist your HOA or management company with your governing documents, 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!

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!