A frequent question we are asked is who bears the expense of a reasonable accommodation? Under a JOINT STATEMENT OF THE DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT AND THE DEPARTMENT OF JUSTICE,addressingREASONABLE ACCOMMODATIONS UNDER THE FAIR HOUSING ACT, issuedMay 14, 2004, the following question was posed: What happens if providing a requested accommodation involves some costs on the part of the housing provider?HUD’s and DOJ’s response is:

Courts have ruled that the Act may require a housing provider to grant a reasonable accommodation that involves costs, so long as the reasonable accommodation does not pose an undue financial and administrative burden and the requested accommodation does not constitute a fundamental alteration of the provider's operations. The financial resources of the provider, the cost of the reasonable accommodation, the benefits to the requester of the requested accommodation, and the availability of other, less expensive alternative accommodations that would effectively meet the applicant or resident's disability-related needs must be considered in determining whether a requested accommodation poses an undue financial and administrative burden.

As noted above, with respect to handicapped persons, discrimination also includes a refusal to permit, at the expense of the handicapped person, reasonable modifications of existing premises occupied or to be occupied by such person if such modification may be necessary to afford such person full enjoyment of the premises. Once the modification is allowed, the next question that we receive is whether an association can require the modification to be removed by the resident when the resident moves. Section100.203(a) of the Code of Federal Regulations provides:

Reasonable modifications of existing premises. (a) It shall be unlawful for any person to refuse to permit, at the expense of a handicapped person, reasonable modifications of existing premises, occupied or to be occupied by a handicapped person, if the proposed modifications may be necessary to afford the handicapped person full enjoyment of the premises of a dwelling. In the case of a rental, the landlord may, where it is reasonable to do so, condition permission for a modification on the renter agreeing to restore the interior of the premises to the condition that existed before the modification, reasonable wear and tear excepted. The landlord may not increase for handicapped persons any customarily required security deposit. However, where it is necessary in order to ensure with reasonable certainty that funds will be available to pay for the restorations at the end of the tenancy, the landlord may negotiate as part of such a restoration agreement a provision requiring that the tenant pay into an interest bearing escrow account, over a reasonable period, a reasonable amount of money not to exceed the cost of the restorations. The interest in any such account shall accrue to the benefit of the tenant.

We believe that the express language of this section, “In the case of a rental,” means that the right to condition approval of the modification on restoring the interior of the premises only applies to rental situations, not to homeowners associations, and clearly applies only to the interior. If HUD had intended it to apply to homeowners associations, it could have easily left out the qualifier “In the case of a rental, the landlord may.” We have the same opinion regarding the additional highlighted language that discusses obtaining a deposit from the tenant, i.e., that it applies only in the case of a rental.

Under a JOINT STATEMENT OF THE DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT AND THE DEPARTMENT OF JUSTICEaddressing REASONABLE MODIFICATIONS UNDER THE FAIR HOUSING ACT issued May 5, 2008, the following question was posed: If a person with a disability has made a reasonable modification to the exterior of the dwelling, or a common area, must she restore it to its original condition when she moves out? HUD’s and DOJ’s response is:

No. The Fair Housing Act expressly provides that housing providers may only require restoration of modifications made to interiors of the dwelling at the end of the tenancy. Reasonable modifications such as ramps to the front door of the dwelling or modifications made to laundry rooms or building entrances are not required to be restored.

Once the modification is allowed, the next question is whether the Association is required to maintain it.In the JOINT STATEMENT OF THE DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT AND THE DEPARTMENT OF JUSTICE addressing REASONABLE MODIFICATIONS UNDER THE FAIR HOUSING ACT issued May 5, 2008 the following question was posed: Who is responsible for expenses associated with a reasonable modification, e.g., for upkeep or maintenance? HUD’s and DOJ’s response is:

The tenant is responsible for upkeep and maintenance of a modification that is used exclusively by her. If a modification is made to a common area that is normally maintained by the housing provider, then the housing provider is responsible for the upkeep and maintenance of the modification.  If a modification is made to a common area that is not normally maintained by the housing provider, then the housing provider has no responsibility under the Fair Housing Act to maintain the modification. 

As you can see, the Fair Housing Act can be quite technical in its application, and can be very fact specific. If you have questions about how the Fair Housing Act affects your community, or any other matter concerning your community, please give us a call.

Facebook and Twitter can allow users to customize who can see information posted. While most association governing documents are matters of public record, if an association wishes to post other information, like meeting minutes or budgets, it may wish to limit access to association members. Any association that intends to make full use of the communications aspects of social media should take care to ensure that the site or page is regularly reviewed to grant access to members.

While many associations can take action by written ballot and are not required to hold a physical meeting, the temptation may exist for members to take formal action based on online discussions. This must be avoided because the association’s governing laws do not contemplate such action, and the likelihood that non-participating members have not received notice of the action is too great.

Even if an association has 100% participation by its members on a social networking site, it may not be prepared to handle the headaches that can come with web-based communication. Regular moderation can help an association ensure that comments are relevant to the community and are not inappropriate. However, overzealous moderation can lead to owner complaints of censorship.

In addition, anyone who has participated in a discussion group recognizes that the anonymity of the Internet can lead to the absence of civility. An association that provides a forum allowing anonymous posting may open floodgates for abuse. 

Associations may look to social media as a way to communicate to members, but should be cautious when allowing members to create a dialog on the association’s pages, and should never take formal action based solely on online discussions.

Earlier in this legislative session, we wrote about proposed new legislation, Colorado H.B. 1278, that was going to create an HOA Ombudsman as a State of Colorado employee. The earlier version of the bill required the Ombudsman to be an advocate for the rights of unit owners in their communities and offer to mediate disputes, but would not purport to give legal advice to any party; act as a clearing house for information concerning the rights and duties of unit owners, declarants, and unit owners’ associations under CCIOA; report suspected violations of the new law or rules of the Division of Real Estate; and report other suspected violations of law to the appropriate authorities.          

The proposed law went through many iterations, but was finally passed on third reading by both the Senate and House last week, and was sent to the Governor’s desk for signing. Assuming that the bill is not vetoed, it will become effective on January 1, 2011. On its journey, the bill was winnowed down to remove the advocacy provisions, and instead of creating an Ombudsman to advocate for everybody, now creates within the Division of Real Estate an HOA Information and Resource Center, the head of which will be the HOA Information Officer.

The bill requires the HOA Information Officer to be familiar with the Colorado Common Interest Ownership Act (“CCIOA”). It provides that, in searching for a candidate to be the HOA Information Officer, the Division of Real Estate must place a high premium on candidates who are balanced, independent, unbiased, and without any current ties to an HOA board or board member or to any person or entity that provides HOA management services. After being appointed, the Information Officer must refrain from engaging in any conduct or relationship that would create a conflict of interest or the appearance of a conflict of interest.

So what is the Information Officer’s role? The bill provides that this person will act as a clearing house for information concerning the basic rights and duties of unit owners, declarants and associations under CCIOA. He or she will track inquiries and complaints and report annually to the Director of the Division of Real Estate regarding the number and types of inquiries and complaints received.

Part of the bill addresses how this new position is funded. The bill actually amends CCIOA to add a new section 401 that requires every unit owners association to register annually with the Director of the Division of Real Estate. Annual registration must be accompanied by an annual fee which will not exceed $50. However, the following associations are exempt from payment of the fee: (1) an association having annual revenues of $5,000 or less, or (2) an association that is not authorized to make assessments and does not have any revenue. If the association fails to register, it is ineligible to impose or enforce a lien for assessments under Section 316 of CCIOA or to pursue any action or employ any enforcement mechanism otherwise available to it under Section 123 of CCIOA until it is validly registered. However, a previously filed lien will not be extinguished by a lapse in the registration – it just will not be enforceable during any lapse in the registration. The lien will be enforceable, and applicable time limits will be extended once the association is again validly registered.

While many professionals in the industry have questions about the benefits of the bill, there appears to be at least one gaping omission. It is commendable that the bill requires the Information Officer to be familiar with CCIOA. However, as we all know, there is a whole group of common interest communities that pre-date CCIOA, and are only subject to certain provisions of CCIOA, including condominium associations that are subject to the Colorado Condominium Ownership Act, planned communities that are governed by their own governing documents, and timeshare communities. Familiarity with only CCIOA could very easily lead to misinformation being provided by the Information Officer.

Nevertheless, it is likely that we will soon have our very own Information Officer. What that means ultimately, only time will tell. Stay tuned.

The board of directors for an association has a fiduciary obligation to ensure that homeowners are complying with the covenants contained in the governing documents. Covenant enforcement does not always require an association to take legal action against its homeowners and there are several cost effective ways of ensuring compliance.

Oftentimes, a simple and courteous letter to the homeowner may suffice. If the letter is ignored, the association’s covenants may permit it to assess fines against homeowners for non-compliance. Before assessing a fine, the association must provide adequate notice to the homeowner and further provide to them an opportunity for a hearing before the board or fining committee to permit the offending homeowner to dispute the violation. If the board or committee is convinced that the violation exists, a fine may then be assessed. If a fine is assessed, it is typically beneficial for an association to continue to work with the homeowner to obtain compliance. It is recommended that the assessment of fines be used as a leveraging tool and not as a means of punishing the homeowners.

Occasionally, a fine and warning letters may not compel a homeowner to comply with the covenants. In this case, it is recommended that the association’s attorney send a demand letter to the homeowner. If the attorney demand letter does not result in the violation being cured a lawsuit, if authorized by the covenants, should be filed against the homeowner requiring them to remedy the violation. The association’s covenants may also permit it to enter a homeowner’s property, cure or remove the violation and assess the expenses incurred to the homeowner. As a part of this lawsuit, the association should request a judgment against the homeowner for all or part of the fines assessed and reasonable attorney fees and costs incurred.

One often overlooked method of enforcing the association’s covenants, particularly if the homeowner is a nuisance, is to institute a judicial foreclosure to remove the homeowner from the community. Of course, this option is only available if the homeowner has unpaid fines and assessment fees.

No matter which manner the association proceeds to enforce its covenants, it is recommended that they pursue so diligently and in a uniform manner to ensure that it is not precluded from enforcing its covenants in the future.

With all the new laws being passed directly involving HOA’s (see Mark Payne’s most recent posting) and those affecting HOAs indirectly, it is important to be aware of situations that may have impact how we attorneys offer advice.

Last year Congress passed Public Law 111-22, Title VII –Protecting Tenants at Foreclosure Act, effective May 20, 2009. The law was passed to protect bona fide tenants against immediate evictions by the successor in interest of “any foreclosure on a federally-related mortgage or loan or on any dwelling or residential real property after the date of the enactment [May 20, 2009]…” The law appears to focus on public trustee foreclosures on mortgages covered under federal law. But, because of the inclusion of “…or on any dwelling or residential property after the date of enactment…,” I would interpret the intent of “or” to include all foreclosures on dwellings and residential real property with or without it being a “federally-related mortgage,” - including HOA lien foreclosures as well.

If there is a non-owner tenant in the property, the law requires successors in interest to give bona fide tenants a notice to vacate at least 90 days before the effective date of the notice.  The law describes the rights of a bona fide tenant and what constitutes a bona fide lease or tenancy. But reading the statute in its entirety, I would recommend that the 90 day notice should always be given at the end of the redemption period to start the time to evict the bona fide tenant. (It is clear that the foreclosing party can not proceed sooner than that, such as the time of commencing the foreclosure action, since it would not have an ownership interest until the redemption period ends.)

Along those lines, this year Representatives Ryden and M. Carroll have introduced HB10-1278, which, if passed, will create an HOA ombudsman in the Colorado Division of Real Estate. The HOA ombudsman would be appointed by the Executive Director of the Colorado Department of Regulatory Agencies. The ombudsman would be required to have at least five years of experience working with issues arising under the Colorado Common Interest Ownership Act (“CCIOA”), or in the operation or management of associations as either an attorney, accountant, a member of an executive board or any combination thereof.

At this point it is impossible to tell where this bill will end up. But the message seems clear: associations, across the board, need to make sure that their governance is responsible and fair. This has been an ongoing theme since the introduction of S.B05-100 in 2005. If passed, this law will once again change the way associations do business.

We will keep you posted about the progress of this bill. Please check back here regularly for updates.

             The Colorado  Supreme Court held that the non-developer owner of a parking space did not receive an unrestricted title that would allow it to sell the space to a third party non-condominium owner B.B. & C. v. Edelweiss Condominium, 218 P.3rd 310 (Colo. 2009)

              The developer built a 21 unit complex that had thirty parking spaces. One parking space was conveyed to each condominium unit, leaving ten unassigned. The condominium Declarations allowed the developer to sell the unassigned spaces to condominium owners or to third party non-condominium owners. Under the Declarations no other person other than the developer was able to sell or lease a parking space to a non-owner.

            In 1971, Edward Lana, an owner of a unit, purchased parking space no. 21 from the developer. Lana sold his unit and two parking spaces in 1972, but maintained ownership of parking space 21. Two years later he sold space 21 to Justin and Isabella Lana (the “Lanas”) who were owners of a unit in the complex. 

            The Lanas then sold their unit with its two spaces, but maintained ownership of space 21 after the sale. A year later they sold the parking space to the Plaintiff, B.B. & C.,  via a warranty deed, which contained language that made the conveyance subject “to the terms, covenants, conditions, easements and restrictions, uses, limitations and obligations set forth in the Declarations.”   Because the Lanas were not the developer nor was the B.B. & C. an owner, the conveyance of space 21 violated the requirement that only the developer could sell or lease the parking space.

            B.B. & C. owned the space for over twenty years, paid all taxes, maintenance fees and insurance fees during this period and appeared to be able to take adverse possession of the property under color of title. Section 38-41-108. C.R.S.

            In 2003, the Condominium Association adopted an Amended Declaration which declared the Association members (“owners”) to be the owner of space 21 as a general common element, and excluded B B. & C. access to parking space 21. 

           
            B. B. & C. filed a quiet title action claiming unrestricted  fee simple ownership of the parking space by adverse possession under color of title pursuant to sections 38-41-108, and the right to sell the space regardless of the restriction in the Deed.

            The trial court ruled that the Amended Declarations changing ownership to the members of the Association and denying CPM access was unconscionable and voided the Amended Declarations. The Court of Appeals, in an unpublished opinion, reversed the trial court and held that the Amended Declarations was a valid amendment, but as a bone, gave  B. B. & C. its costs and attorney fees. 

            B. B. & C. appealed. The Supreme Court affirmed the court of appeals decision on different grounds. It went on to say that under section 38-41-108 C.R.S., if the party proves all the elements it is entitled to judgment of legal ownership, but only to the extent and according to the purport of the title.

            Section 38-41-108  Every  person in the actual possession of the lands, … under claim and color of title, made in good faith, who for seven successive years continues in such possession and also during said time  pays all taxes legally assessed on such lands … shall be held and adjudged to be the legal owner of said lands to the extent and according to the purport of his paper title.

            The Supreme Court said the trial court and the appellate court did not need to reach the issue of the Amended Declarations’ applicability to the case at issue.  It held that the original Declaration incorporated into B. B. &.C’s deed precludes B. B. & C from obtaining an unrestricted fee simple estate in the parking space.  

            The Supreme Court said, on remand to the trial court, that B. B. & C., regardless of the Amended Declarations could obtain a quiet title judgment recognizing its ownership of the parking space. But it would not be entitled to a judgment for an unrestricted fee simple estate; it could not obtain under color of a title any more rights than it was deeded. It would be the owner of the space, but it would only be allowed to sell or lease it to members of the Condominium Association as restricted by the deed. It was only entitled to ownership of the space to the extent and according to the purport of his paper title. subject to the terms, covenants, conditions, easements and restrictions, uses, limitations and obligations set forth in the Declarations.

•          At least 50% of the units of a project must be owner-occupied or sold to owners who intend to occupy the units.

•          No more than 10% of the units may be owned by one investor.

•          Projects must be covered by hazard and liability insurance and, when applicable, flood and fidelity insurance.

•          No more than 15% of the total units can be in arrears by more than 30 days in payment of their assessments.

•          No more than 25% of the property’s total floor area in a project can be used for commercial purposes. The commercial portion of the project must be of a nature that is homogeneous with residential use, which is free of adverse conditions to the occupants of the individual condominium units.

•          Budget Review — Lenders must review the Association’s annual budget and determine that the budget is adequate, and includes allocations to ensure sufficient funds are available to maintain and preserve all amenities and features unique to the condominium project; provides for the funding of replacement reserves for capital expenditures and deferred maintenance in an account representing at least 10% of the budget; and provides adequate funding for insurance coverage and deductibles.

•          In cases where the budget documents do not meet these standards, the Lender may request a reserve study to assess the financial stability of the project. The reserve study cannot be more than 12 months old.

•          Projects of 3 units or less will have no more than one unit with mortgage insured by FHA.

•          Projects of 4 units or more will have no more than 30 percent of total units with mortgages insured by FHA.

In addition, project approval must be obtained every 2 years; in addition to other requirements, consideration will be given to: (1) pending special assessments; (2) pending legal action against the association or directors or officers; and (3) adequate insurance requirements being met.

Under the temporary regulations, the following restrictions apply:

•          Project concentration of FHA insured loans temporarily increased to 50% (from 30%), and under certain conditions can be increased to 100%.

•          Owner occupancy ratios are still 50% that must be owner-occupied or sold to owners who intend to occupy the units. However, vacant or tenant-occupied real estate owned, including properties that are bank owned may be excluded from the calculation of the required owner-occupancy percentage.

As noted previously, there are other requirements as well. However, these are the provisions that, in our experience, have the potential to most significantly affect an existing condominium community. Associations will need to make sure that they comply with these requirements, and that their governing documents address them, so as to maximize owners’ ability to sell their homes. Please call us if you need assistance in gaining compliance with the Fannie Mae guidelines or HUD regulations.

This bulletin only addresses the new Fannie Mae guidelines. Next month we’ll discuss the new HUD regulations.

Some of the more significant requirements for a condominium community to obtain Fannie Mae approval include:

• Insurance must cover 100% of the insurable replacement cost of the project improvements, including the individual units in a condo project.
• No more than 20% of the total square footage of the project can be used for nonresidential/commercial purposes.
• No more than 15% of the total units in a project may be 30 days or more past due on their association dues.
• At least 51% of the total units in the project must have been conveyed or be under a bona fide contract for purchase to owner-occupant principal residence or second home purchasers.
• Lenders must review the homeowners’ association projected budget to determine that: (1) it is adequate (i.e., it includes allocations for line items pertinent to the type of condo); (2) it provides for the funding of replacement reserves for capital expenditures and deferred maintenance at least 10% of the budget; (3) and it provides adequate funding for insurance deductible amounts.
• No single entity—the same individual, investor group, partnership, or corporation other than the developer during the initial marketing period—may own more than 10% of the total units in the project.

There are other requirements as well. However, these are the provisions that, in our experience, have the potential to most significantly affect an existing condominium community. Associations will need to make sure that they comply with these requirements, and that their governing documents address them, so as to maximize owners’ ability to sell their homes.

If you have questions about whether your association's governing documents satisfy Fannie Mae guidelines, please give us a call.

Colorado Rules of Civil Procedure, Rule 19, Joinder of Persons Needed for Just Adjudication, provides for the addition of parties who are necessary for a complete adjudication of all issues. This column does not answer the question of who is an indispensable party necessary for joinder in a lawsuit. The intent is to discuss the timing of when homeowners can be added as indispensable parties during pending litigation. The case cited below does talk about homeowners as indispensable parties, but it does not focus on the factors that make the owners indispensable to the litigation. In fact the law on whether homeowners are necessary parties in homeowner association litigation has the possibility of being radically revised as the Supreme Court has granted review of the case discussed below. 

As implied above, not every party to the litigation can successfully argue the need to join an indispensable party after the judgment in the trial court or even during the course of the trial. The purpose of allowing joinder of parties is to protect the interest of the absent party. Where a party is only moving for joinder to protect his/her own self –interest, and not the interest of the alleged indispensable party, the Court can deny the request as a waiver by the party raising the issue. 

The appeals court cited a case for the above proposition where the issue was raised after entry of the judgment and six years of litigation. It held that the rule, C.R.C.P. Rule 12(h) Waiver or Presentation of Certain Defenses, “…does not mean that a party with information to make a motion for joinder can sit back and raise the issue at any time when the only effect would be to protect himself,” at p. 454.

In a second cited case a tenant in a landlord –tenant lawsuit waited until the end of the trial and then requested that the landlord only be awarded half the damages because his wife, a co-owner of the property, was an indispensable party and was not a party to the lawsuit. The trial court rejected the tenant’s assertion because he had the opportunity to insist upon joinder of the party from the beginning and failed to do so. The tenant was only raising it for his protection and not the alleged “indispensable party” at p. 455. The court was not going to let the tenant game the process by sitting back and doing nothing in hopes if not defeating the landlord, minimizing his damages.

If a party becomes aware that there are others out there who are “indispensable” for full relief, he/she can raise the issue at any time during the proceeding – if the joinder is for the protection of the absent party(ies) and not for the sole purpose of serving the moving party’s self-interest. Alternatively, if the party becomes aware of a necessary party to be named to protect him or herself, he/she should move as quickly as possible in bring that party into the case or lose the right, and suffer the resulting harm of being sued multiple times for the same matter.

The Clubhouse case was decided August 7, 2008. The Colorado Supreme Court granted certiorari August 31, 2009. The issues the Supreme Court agreed to review have the possibility of making significant changes in the law regarding joinder of homeowners. As certiorari has only been recently granted a decision on the issues is probably a year down the road.

The issues the Supreme Court is looking to review are:

Whether the court of appeals incorrectly concluded that the defendant [the Association] did not waive its right to raise the need for indispensable parties by failing to raise the issue in a timely manner.

Whether the court of appeals decision is not in accord with the Colorado Common Interest Ownership Act; e.g. section 38-33.3-311, CRS.

Whether the court of appeals incorrectly concluded that the interests of the homeowners were not adequately represented.

Whether the court of appeals decision that lot owners are indispensable parties is contrary to public policy, unduly chilling the rights of litigants and rendering cases excessively cost prohibitive.

We are surprised by the number of times that we’ve heard these statements from board members when they are being challenged for actions they’ve taken, or decisions they’ve made. However, Colorado law does not make any explicit distinction between board members who are volunteers as compared to board members who receive compensation for serving on the board (such as for other types of non-profit corporations).

Each director shall discharge the director’s duties as a director, including the director’s duties as a member of a committee of the board, and each officer with discretionary authority shall discharge the officer’s duties under that authority:

            (a) In good faith;

            (b) With the care an ordinarily prudent person in a like position would exercise under similar circumstances; and

            (c) In a manner the director or officer reasonably believes to be in the best interests of the nonprofit corporation.

However, the Colorado Common Interest Ownership Act (“CCIOA”) provides that, for associations that are subject to its provisions, if not appointed by the declarant, no member of the board and no officer is liable for actions taken or omissions made in the performance of such member’s duties except for wanton and willful acts or omissions. This is a significantly lower standard than a fiduciary duty, and ought to give some measure of relief to board members of communities that were formed under, and are subject to the provisions of CCIOA. Unfortunately, there are no court decisions interpreting this provision, and some courts continue to speak in terms of fiduciary duties of board members even where the community is subject to CCIOA.

In interpreting the validity of certain actions of homeowners association boards, Colorado courts have also recognized what is commonly termed the “business judgment rule.” The business judgment rule was first enunciated with respect to a homeowners association in Colorado in the case of Rywalt v. Writer Corp., a 1974 Colorado Court of Appeals’ decision. In that case, the court said:

The good faith acts of directors of profit or non-profit corporations which are within the powers of the corporation and within the exercise of an honest business judgment are valid. Courts will not, at the instance of stockholders or otherwise, interfere with or regulate the conduct of the directors in the reasonable and honest exercise of their judgment and duties.

In addition to the protections afforded by the business judgment rule, the Nonprofit Act also provides additional protection to board members who rely on advice or information provided by others if certain criteria are met. It provides:

In discharging duties, a director or officer is entitled to rely on information, opinions, reports, or statements, including financial statements and other financial data, if prepared or presented by:

                                    *                                  *                                  *

            (b) Legal counsel, a public accountant, or another person as to matters the director or officer reasonably believes are within such person’s professional or expert competence;

                                    *                                  *                                  *

A director or officer is not acting in good faith if the director or officer has knowledge concerning the matter in question that makes reliance otherwise permitted.

A director or officer is not liable as such to the nonprofit corporation or its members for any action taken or omitted to be taken as a director or officer, as the case may be, if, in connection with such action or omission, the director or officer performed the duties of the position in compliance with this section.

Therefore, board members need to make sure that they are acting:

• In good faith;
• In the best interests of the association;
• In a reasonably prudent manner;
• In the exercise of honest business judgment; and
• In reliance on the opinions, advice and information of experts.

If these standards are met, then board members will continue to serve without pay and in their free time, but at least knowing that they have protected themselves to the extent they are able from liability to ungrateful homeowners.

The appellate court reversed the trial court’s decision and found in favor of the homeowners. The court stated that the association could not prevail since the declaration of covenants was required to be signed and executed in the same manner as a deed. The court further rejected the argument that the association’s signed and recorded property plat was sufficient, since it did not specifically incorporate the terms of the declaration or state that the property was subject to the covenants.

The court’s decision underlines the importance of verifying that the association’s covenants are properly signed and recorded in the public records.

A receivership is started by filing a lawsuit in County or District court. Unlike other lawsuits, the court will normally grant our request for a receivership and appoint a receiver without first scheduling and conducting a trial or court hearing.

A receiver is an independent third party, unrelated to the Association or the homeowner, appointed by a court to take over possession and control of the property. In legal parlance, the receiver is an officer of the court, and answers to the court. However, being an officer of the court does not mean that the receiver is part of the court system. Typically, a receiver is a person who has experience in managing and operating real property, oftentimes a real estate broker.

The receiver, once appointed, will make reasonable efforts to rent the property. It is possible that the property can only be made habitable following the completion of repairs. Oftentimes, it is not possible to determine whether repairs are necessary until after a receiver has been appointed and has accessed the inside of the property to determine its condition.

Once the property is made habitable, a receiver is normally able to locate a tenant quickly by setting rent slightly below the average market value in the area. If the property is already rented when the receiver takes possession, the receiver is typically able to collect rent from the existing tenant in the property that would otherwise have been paid to the owner.

Once rented, the monies collected are applied as follows: first to pay or reimburse the receiver for his fees; second to reimburse the receiver for any costs in getting the property in habitable condition; third to reimburse the association for attorneys fees and costs in having the receiver appointed; finally, to the association to pay delinquent assessments, late charges, interest and other fees.

The association is still responsible for payment of the receiver’s fees, attorneys fees and costs and other expenses incurred in the event that: (a) the receiver is unable to rent the property; (b) a homeowner occupies the property prior to the receiver finding a suitable tenant; or (c) the association does not want to pay for repairs to make a property habitable.

Factors to consider before having a receiver appointed include the following:

• whether the property is vacant or occupied by a non-homeowner
• the condition of the property
• the amount owed to the association
• whether one or more of the homeowners have filed for bankruptcy
• the cost of appointing the receiver, including the receiver’s fees, attorneys fees and costs;
• whether the court will require service of process on the owner before appointing the receiver, and how difficult it will be to obtain service of process;
• whether the receiver will need to incur any expenses to make the property habitable;
• the amount of rent that the receiver thinks the property can be leased for, usually on a short term basis; and
• whether the property is currently in foreclosure by the first mortgage holder - many times, if the property is in foreclosure, the amount of rent that a receiver can collect over the short period of time that the receiver can rent the property will not be enough to offset the cost of having the receiver appointed.

If your association would like to commence a receivership lawsuit or you have any additional questions related to the receivership process, please contact one of our attorneys.

Is the association or the owner responsible for insurance coverage? This question often arises in the context of condominium and townhome communities, and the answer depends on what the governing documents and controlling statutory provisions say. Often, the documents do not give clear guidance on which party bears the burden for insuring specific components, hence the call to the attorneys. The answers sometimes come as a surprise to uneducated owners and even association boards.

We recommend that associations evaluate insurance obligations with legal counsel and their insurance professionals to ensure proper coverage and to enable clear communication with owners about what coverage applies. Through the preparation of insurance and maintenance charts that summarize association and owner obligations, and the adoption of insurance guidelines that state insurance coverage responsibilities and provide step-by-step procedures for reporting and handling claims, associations can proactively educate owners and reduce confusion when losses occur.