Avoiding Legal Landmines: Advice for HOA/Condo Board Members & Managers

Jim Slaughter

Earlier this week, I presented at the CAI-NC 2021 Annual Conference on how associations, board members and managers can “Avoid Legal Land Mines.” I won’t repeat the presentation here, as the entire program can be found at the CAI-NC website. However, here are tips to help keep your association out of court.

Our firm does a huge HOA/condo practice in five different offices. As a result, we regularly see every kind of dispute between owners and associations. Not all will end up in court. After all, a violation over a garbage can being left out is likely not worth litigating. However, issues that owners care deeply about and are willing to spend significant money on are more likely to end up in litigation. As a result, it often pays to involve us as association attorneys in certain disputes much earlier and before all facts are set in place.

The sorts of issues that are more likely to end up in court fall into certain categories:

(1) THE HOA OR CONDO’S AUTHORITY

A community association is not an apartment complex. That is, you can’t simply tell owners what to do and, if they don’t, throw them out. Some issues (a drug house, someone with a gun, barking dogs) are difficult for an association to solve, and the authorities may need to be called.

At the end of the day, an HOA or condo is a real estate organization that has certain powers granted by statute and the governing documents (i.e., Declaration, Articles of Incorporation, and Bylaws). If the Association wants to do something, authority needs to be found in one of those documents. In terms of penalties, a community association generally have the authority to fine, lien, and possibly foreclose. A court order is possible, but can be quite expensive. Newer board members should understand they do not have power over everything. And generally, if you want to tell an owner what they must be done on a lot or unit OR if you want to charge an owner money, you’ll need supporting language in the Declaration.

(2) OWNERSHIP

Who owns what arises as an issue more than you would think. For instance, in a townhome, who is responsible for driveway repair or drainage issues on the lot? For such questions, you most always need an understanding of ownership in the association. What an owner owns varies between single family homes, townhomes and condos. Single family homes and townhomes are both a type of homeowner association and in both, the owner owns the entire lot—all the way into the ground and all the way up into the sky. However, in a townhome association, the Declaration typically provides that the association is responsible for maintenance of certain items, such as the roof and exterior surfaces. In a condominium, the owners own the inside of their units, and all unit owners own the common elements in percentage interests. Responsibility for an item tends to follow both the language of the governing documents AND ownership, so you need to have some idea of where property lines are in the community.

(3) DIRECTOR ACTIONS

Directors who go “rogue” and take some action without authority often lead to trouble for the association. That’s not a director’s job. Not even the President tends to have authority to act without guidance from the Board except in certain instances. Most often, the governing body of an association is the board making a decision at a meeting with a quorum present by majority vote. Such a meeting may be able to be held virtually. Or the board may be able to make a decision through written unanimous consent of all directors. Board members unilaterally taking it upon themselves to “police“ the community often ends badly. The board should make decisions, and the community manager should implement them. Sometimes, particularly if there are newer board members, we are asked to attend (virtually these days) and “read the riot act” as to board authority and what directors should or should not do.

(4) ARCHITECTURAL DECISIONS

ARC disputes are likely the most common issue to end up in court. There are several danger areas. If the Declaration establishes a deadline by which the association must respond to an ARC request, follow it to the letter! In addition, is the architectural committee properly constituted? Whatever the documents say about the make-up of the ARC, follow that too! Finally, does the ARC have limited or broad authority? That will be governed by the language of the governing documents and recent court decisions.

(5) FAIR HOUSING

Unless your association rules have recently been reviewed, they likely violate the Fair Housing Act. The Act prohibits discrimination as to a number of classifications, including race, religion, and families with children. Association rules and regulations adopted by the Board tend to just govern common areas, such as pools. We review policies and pool rules all the time, and most have FHA violations, such as (a) different swim times for adults and children, (b) requiring that children under 18 be accompanied by an adult, or (c) infants having to wear special swim diapers. Don’t single out owners for different treatment! Instead, involve an attorney in drafting or reviewing any board rules.

(6) INSURANCE

Make sure the association has the right coverage in the right amounts based on state statute and the governing documents. We have seen associations tremendous amounts when the wrong insurance was purchased. The statutes for stacked condominiums built on or after October 1, 1986 are particularly complicated. For insurance coverage questions, an attorney can advise on what insurance is required by the governing documents and by state statute. However, an experienced HOA/condo insurance agent should be consulted as to what policy to buy. Just as there are manager designations, CAI’s CIRMS (Community Insurance and Risk Management Specialist™) designation denotes an agent who focuses on community associations. While there are many excellent insurance agents in North Carolina, only a handful have the CIRMS designation and should likely be consulted in the event of a complicated HOA or condo insurance matter.

(7) CASUALTY

A casualty loss is damage caused by something that is sudden and accidental. Whatever you think the rules are regarding repair and maintenance in an association, those often go out the window when casualty is involved. For instance, the routine repair section of the Declaration may not apply when insurance kicks in. Or someone else may be responsible for doing such repairs. Or the association may have insurance on everything, but its only responsibility is to distribute insurance funds to the owners, who must then do repairs.

Insurance deductible disputes also often lead to litigation. An insurance deductible typically means there will not be enough money to cover the entire casualty loss, as the deductible will be deducted from any insurance proceeds. From an association’s perspective, if owners have to fix their own lots or units, there is no association issue. However, if the association is responsible for fixing casualty damage, the deductible means the association will be short money (possibly a lot). And some types of claims, such as sewage backup insurance, are often capped at small amounts. Who will be responsible for the additional monies needed? Based on the governing documents, the losses might be the association’s responsibility. On the other hand, some documents allow the association to bill back owners who are benefited for the difference. Other declarations allow the association to bill back whenever they spend money on behalf of a specific owner. If you don’t have the right Declaration language, an attorney can help with an amendment.

RESOURCES & CLOSING ADVICE

Resources

The NC Chapter of the Community Associations Institute has programs that advise on all of the preceding issues. In addition, our firm has some 400 blogs on homeowner and condominium association issues, all of which can be found and are searchable at http://lawfirmcarolinas.com/blog.

Closing Tips:

  • Understand the specific association involved. Based on different governing documents, no two associations are exactly the same.
  • Directors should read (or be told by the manager to read) the association’s documents, including the Declaration, Articles of Incorporation, and Bylaws.
  • Rely on the association’s professionals. For any of the disputes discussed above, it’s best to contact our office BEFORE things progress too far and all facts have been established.
  • Buy D&O insurance! Directors and officers liability insurance is what protects directors when they are sued. No one should serve on a Board without knowing if there is D&O coverage and in what amounts.

If you have questions about any community association (HOA or condo) issue, please contact a Law Firm Carolinas attorney at any of our five offices for assistance.