A board’s reluctance to contact an attorney could be a risk not worth taking.
A Fort Lauderdale condominium association paid $100,000.00 to settle a lawsuit after an attorney-board member who wasn’t licensed in Florida wrongly insisted how overdue assessments should be collected.
Board members of a California condominium association didn’t consult their attorney when a tenant claimed she and her children became sick from the improper handling of a water leak and subsequent mold. The directors wrongly interpreted their governing documents and claimed the association wasn’t responsible for the leak and cleanup. They were sued and had to repay a six-figure settlement to the insurance company.
These are vastly different scenarios that share one common problem: They could have been prevented if the associations had consulted their attorneys first. Though it’s not a new issue, associations nationwide appear to be struggling with when to call an attorney as they continue to grapple with budget shortfalls wrought by tough economic times.
Board members are trying to make critical decisions themselves or pressuring managers for legal advice to avoid attorney’s fees. Attorneys are concerned because when things go wrong, they have to clean up the mess. In the end, attorneys probably make the same -if not more- money, but it would be easier if they were called in the beginning.
Foregoing the expense of capital improvements is one thing. Associations can make do a little longer with ugly pavers around the pool, but trying to save a buck with legal advice could incur problems that’ll cost a lot more than a billable hour or two. It’s being penny wise and pound foolish.
The Gray Line
Threats of lawsuits and settlement costs can be a deterrent, but boards have to know when they overstep their bounds – and begin practicing law.
It may be perfectly acceptable, for example, for an association to file court documents without its attorney in some states, but not in others. The tough part is determining when the line has been crossed.
Mind your CC&R’s
Elaine Fowler, attorney with Turner Padget Graham & Laney in Charleson, SC, says governing documents and bylaws shouldn’t be amended by boards or managers alone.
Amendments, for example, have become a key issue because the original documents didn’t anticipate today’s economic climate. Caps on assessment increases may not give boards the ability to deal with essential expenses that can’t be funded due to high delinquency rates. Provisios such as permanent mandatory club memberships may no longer be affordable for financially strapped owners. And amendments may affect property values and home sales.
Anyone who takes on the task of changing or eliminating certain CC&R requirements without legal advice clearly doesn’t understand that other CCR provisions or bylaws may be affected by one change. And they can step on landmines of case law.
Some South Carolina court cases have held that even if an association’s CC&R’s permit amendments, no new provisions can be added. That’s not an easy distinction to make. And if CC&R’s aren’t interpreted and enforced consistently, the association may well lose the right to enforce them.
Some associations also run into trouble when board members are licensed professionals, like lawyers.
Kim, for example, has practiced law for 30 years. He’s also president of his condominium association, but he won’t act as legal counsel for the association. Why? It’s a matter of objectivity.
An association attorney’s client is the association, not the board. The attorney-board member might act in ways contrary to the best interests of the association.
The lawyer has to have the courage to tell the board that’s not right. And to not let his or her personal feelings affect legal judgment.
In Florida, attorneys have seen significant changes to construction defect settlements when board members decided to negotiate directly with developers or contractors. And those changes haven’t helped the association.
“Board members may be phenomenal negotiators in their professional lives, but when you negotiate in your personal lives, you have a different approach. A commercial developer or vendor is looking at it from a business perspective. A lawyer bridges that gap on behalf of the association.
And attorneys who provide legal advice to associations located in states where they are not licensed are guilty of practicing law without a license. In the case of the Fort Lauderdale association’s $100,000 settlement, the board member is an attorney licensed in New Jersey. The Fort Lauderdale Condominium is a second home.
Business Judgment Rule
A key principle for boards to follow is the business judgment rule, which refers to a process in which boards educate themselves before making a final decision. They are expected to gather all facts, seek expert opinions on technical or legal issues outside their knowledge, act in good faith on behalf of the entire association and arrive at a decision that a reasonable and prudent person would reach.
The Key issue: The person whose advice is being relied upon has to have expertise on that particular topic. That means legal advice must come from an attorney specializing in HOA law licensed in your state.
If this process is followed, courts will defer to the decision of the board unless there are allegations of fraud, oppression or conflict of interest.
“It can be a very, very powerful tool, but I think the quandary for board members is that (the business judgment rule) is not often explained to them,” says attorney Linda Cummings. “They don’t know about it.”
Learning the Difference
Associations should commit to spending whatever it takes to get the right legal advice from their attorneys. Part of that expense should be education.
Board members need to understand the difference between information and opinion or advice. They also need to know when they’re putting their managers – and the association – at risk by insisting managers render a legal opinion.
The association attorney can also develop a maintenance and repair guide that answers questions associations routinely field, such as, who’s responsible for what? That gets into interpretation of the docs and bylaws. Attorneys look at all the provisions that tie into the question, and there may be federal and state laws, or court decisions that impact the answer.
This document, if shared with owners, can prevent many of the questions boards and managers receive and cut down on the amount of back and forth between a board and its attorney. Each Association should have its own guide based on its CC&Rs.
By Terry Sheridan and Daniel Brannigan