Community managers are invited to join us on June 29 at 1:00 to learn about House Bill 1137, what it says, what it doesn’t say, and what you need to know to take care of your communities. Register in advance for this class; it’s sure to ruin your day, but we promise to make it as painless as possible!

The Governor signed House Bill 1040 into law last week, enshrining into law the obligation for community associations to provide notice to community members should it need to restrict access to common elements for more than seventy-two hours. While this is an appropriate, fair, and laudable goal, many other provisions of House Bill 1040 create liabilities and ambiguities for common interest communities.

The bill mandates that associations “preserve and protect unit owners’ ability to use and enjoy common elements.” In other words, a Board’s business decision to close common elements is now subject to an affirmative duty to preserve and protect, not withstanding extenuating circumstances that make use and enjoyment of the common elements detrimental to the rest of the community. Just today I worked with a client with a common element hot tub that is obsolete, only used by a few short term renters, and that will cost tens of thousands of dollars to maintain (and six figures to replace) when the community has many other more pressing financial obligations. Does the association breach its fiduciary duty if it spends money to pay its other bills rather than having the hot tub open and tested even when no one uses it?

The association will probably have to raise its assessments to pay the bills, rather than make a decision to close the tub for an undetermined time and risk litigation from a short term landlord. Would be a shame if it couldn’t collect on those assessments.

The bill also prohibits associations from “unreasonably” restricting or prohibiting access to, or enjoyment of, any common element.

You know that boiler rooms, roofs, and management office spaces are typically common elements in condominiums, right? Some condominiums even rent out common element management units to third parties. Are Boards really now prohibited from excluding owners from drunken rooftop picnics on flat roofs? Sure, that exclusion is probably reasonable, but why should Boards even have to justify this level of control? And if you were on Mars in 2020, you might not be aware of the conflicts between homeowners and Boards regarding common element pool and clubhouse closures related to COVID-19. Many homeowners considered closures to be completely unreasonable, and just as many considered them to be necessary and reasonable. This bill undermines a Board’s decision to close common elements in the face of a new and unknown virus and the risks associated with death and, even worse – no insurance. I hope we won’t have another pandemic any time soon.

I firmly believe that owners are entitled to reasonable information from their Boards about common element closures. Unfortunately, House Bill 1040 goes beyond that intention to create ambiguities and liabilities for Boards that exercise reasonable business judgment in light of their duties to the community as a whole.

And one last consideration; while the bill does not amend the CCIOA section that outline the CCIOA provisions that apply to communities formed before July 1, 1992, its language indicates it probably does apply to those pre-CCIOA communities. Plan accordingly.

If you pay attention to this blog or are involved in Colorado community association activities, you’ve certainly seen recent news stories detailing the impacts of HOA foreclosures on residents. While most of the foreclosures in the stories arose when owners failed to pay fines after violating rules or covenants, other foreclosures occurred because the owners failed to pay their regular maintenance and operating assessments.

Note: This blog was drafted based on the proposed strike-below for HB 1137. The strike-below was amended in committee this afternoon to address our concerns with culturally competent language and bidding 80% of the fair market value of a property. We appreciate the amendments and look forward to reviewing the pre-amended version as the bill continues the legislative process.

House Bill 1137 was introduced in February and hit the House Transportation and Local Government Committee on March 9. At the hearing, legislators heard testimony from individuals impacted by fines and enforcement in their communities, as well as Board members and professionals who have legal duties to enforce the promises homeowners make to one another and their communities. The bill was laid over while the interested parties discussed potential amendments and compromises.

The CAI Colorado Legislative Action Committee proposed a strike-below bill that would allow associations to take more matters to small claims court (where attorneys cannot appear unless the Defendant brings an attorney), eliminate daily fines, increase existing due process protections for homeowners, and most crucially, prohibit foreclosures based solely on fines and attorney fees associated with those fines. After all, it is clear from the media and testimony that no one should lose their home because of an oil stain on the driveway.

Unfortunately, HB 1137’s sponsor has introduced a strike-below amendment that will effectively eliminate all HOA foreclosures, decrease the availability of federally-backed financing in communities, force community associations to risk more discrimination claims, and increase legal expenses for communities as well as insurance costs.

Let’s discuss the bill in detail.

Small Claims
Small Claims courts in Colorado are courts with specific and limited jurisdiction. Corporations generally have to appear before courts using attorneys, but in Small Claims, no attorneys are permitted unless the Defendant files a notice of attorney representation. A nonprofit corporation can be represented by a nonattorney officer or an employee. House Bill 1137, as amended, increases Small Claims jurisdiction to allow parties to enforce rights and responsibilities arising under the community governing documents. Communities have already had the authority to enforce restrictive covenants in Small Claims.

In practice, this amendment will have extremely limited impacts on association activities and attorney fees. If the Association is a plaintiff, most will still have legal counsel file suit in County Court or District Court. Nonattorney Board members rarely have the time or inclination to file a lawsuit in the corporation’s name in Small Claims even where jurisdiction already exists. If the Association is a defendant, it will almost certainly file a Notice of Representation of its attorney before the return date, as is the common practice with Small Claims suits today. Legislation for the sake of legislation that does not actually resolve a problem is a waste of effort.

Liens and Attorney Fees
House Bill 1137 limits the lien for attorney fees to the amount a court determines is reasonable as provided by the Colorado Rules of Civil Procedure, but this forces associations to file lawsuits or treat all attorney fees as a cost of doing business. Most legal interactions resolve without necessity of litigation, but if communities are loathe to seek legal assistance knowing they will have to bear the expense caused by a rule-breaking owner, disputes that could be resolved with a demand letter are more likely to escalate to untenable situations. In addition, the revisions to CCIOA ignore other CCIOA provisions that allow for attorney fees without need of filing a lawsuit, building ambiguities into the already-confusing statutory scheme.

Notice and Due Process
CAI supports notice and the opportunity for hearings before communities impose fines. We want homeowners and Boards to discuss and understand expectations and to act reasonably with one another. Our proposed strike-below increases communications and these discussions. It does not seem fair for a letter to tell an owner “You are in violation of the covenants.” It should tell an owner, “You are in violation of the covenants, you need to repaint the trim on the north elevation of the property.”

Community associations are housing providers subject to Fair Housing prohibitions against discrimination. House Bill 1137 requires the community to send enforcement and delinquency notices “in a manner that is culturally competent and linguistically appropriate.” What does that mean? If it means the management company needs to find out an individual’s preferred language of communication before sending a notice, how is the management company supposed to do that? Even worse, if a Board or management company makes an assumption about an owner’s culture or language based on the owner’s name, it seems a ready-made national origin discrimination claim. As with much of House Bill 1137, we have language that might have good intentions, but has no recognition of the realities of community association management and practice.

Fines
Fines are the most effective means for an association to compel an owner’s compliance without involving an attorney. In an attempt to prevent fines from actually impacting owners who break the rules, the amended House Bill 1137 caps the total amount of fines for any violation at $500.00. This means that if a homeowner wants to paint their house pink, has that request denied, and does it anyway, the homeowner will be allowed to violate the rules for an extra $500.00 payment. The association’s only option to enforce the covenant will be to then take the owner to court. It’s better to levy a fine that actually makes breaking a rule unattractive. This restriction encourages rule-breaking by wealthy homeowners and litigation, and will harm communities in the exercise of their duty to enforce.

The restriction will also result in dangerous conditions in shared housing. Condominium units with aluminum wiring are practically uninsurable. If an association can only fine a unit owner $500.00, that unit owner can ignore the association’s requirement to correct aluminum wiring (which may cost several thousand dollars), force the association’s insurance premiums to double (or have no insurance at all), and put his neighbor’s lives at risk until the association files a lawsuit that may cost thousands of dollars and take years to resolve. Again, this bill encourages more litigation at the expense of the people who follow the rules.

Foreclosures
To reiterate, CLAC supports protecting owners from foreclosures that are based solely on fines. That’s not what House Bill 1137 does. In fact, it rewards owners who fail to pay assessments with massive windfalls. It reflects a misunderstanding of the foreclosure process. While the bill doesn’t change any foreclosure statutes (and changes to the foreclosure statutes would be beyond the scope of its title), it fundamentally alters how HOAs can foreclose regardless of whether the foreclosure is due to oil stains on a driveway or six years of consistent nonpayment.

When a property goes through foreclosure, whether by a lender or by an HOA, all junior lienholders are entitled to notice of the foreclosure by current law. Any junior lienholder that is not properly notified retains its lien on the property and has the right to redeem the foreclosure – that is, to pay off the parties who bid on or otherwise sought title to the property and take title themselves. If you hear stories about HOAs that foreclose on the “super lien” and take all the equity in a property, those stories are theoretically possible but are exceedingly rare. In addition, any lien foreclosure can take equity in a property. This isn’t unique to community associations and is dictated by lien priority.

The HOA lien comprises two parts: the six-month super priority lien, which is senior to the first mortgage, and then the rest of the lien, which is junior to the first mortgage. When the HOA forecloses its lien, it gives notice to that first mortgage, which will typically pay off the super priority lien to preserve the lien of the first mortgage. This means that, unless the first mortgage hasn’t been updating its records to protect its rights, the HOA lien foreclosure results in title to a property subject to the first mortgage.

Other liens, such as second mortgages, mechanics liens, and judgment liens, may then file for redemption on the property and take title by paying off the senior liens. The idea is that when a property is sold through foreclosure, equity will be made available to pay off the owner’s other creditors.

In the vast majority of HOA foreclosures, investors purchase existing liens on the property so that they may redeem and take title to the property. The HOA rarely ends up owning the property. These investors help ensure that HOAs are able to pay their bills and put a new owner in the property – one who will, hopefully, pay the assessments.

The amendments to House Bill 1137 require any unit foreclosed on to be sold at 80% of its fair market value, regardless of tax liens or mortgage liens. Let’s do the math.

Assume a unit is worth $500,000 and has a $300,000 first mortgage, and is subject to $500/month assessments. The Association cannot foreclose until the property is at least $3,000 delinquent. Let’s assume that the Association files for foreclosure immediately when it is able and the process moves quickly. At the time of sale, the homeowner will likely be a year behind (if not more), and the Association will incur maybe $4,000 in costs and attorney fees.

The bank will pay the $3,000 super lien to protect its mortgage. The Association’s bid under current law will be $7,000. An investor might bid $7,001, others might bid it up further. Junior lienholders might redeem. Under the amended House Bill 1137 foreclosure process, the owner will be entitled to any overbid funds remaining after junior lienholders have redeemed. Keep in mind, because the first mortgage paid $3,000, whoever ends up holding title to the property will hold it subject to that first mortgage.

Under HB 1137, the Association’s bid will have to be at least $400,000. The first mortgage is not a junior lienholder (because it paid the super lien) and so it won’t have access to any of that money. Likewise, tax liens will survive the HOA foreclosure. If there are no other junior lienholders who file to redeem the foreclosure, the HOA will end up paying a non-paying owner $393,000 and owning a property with a $300,000 mortgage. The money paid will come from existing assessments or reserve accounts, and force HOA Boards to become property investors and flippers. This will have tax implications and create legal and other expenses for volunteer Boards that are far beyond the typical scope of an HOA – to enforce covenants and preserve the community.

Under this scheme, knowing the HOA will have to pay it off, the first mortgage might not pay off the super lien. It’ll get paid in full by the HOA as a junior lienholder. This means that institutional investors who have no interest in taking care of a property (as was common during the recession) will have no reason to get a new owner into the unit. The people who still live in the community will suffer.

And of course, you might recall that just over a decade ago, overstated appraisals were rampant. If the Association has to bid 80% of an owner’s appraised value, and that appraisal is not accurate, the owners who pay their assessments are going to be hit even harder by the folks who don’t. This law will encourage owners in communities that are facing financial and structural challenges to walk away. If an owner can either pay a $15,000 special assessment to make structural repairs to his condominium unit, or walk away and wait for a big check to come in the mail, the choice is simple. For the HOA, the choice is not so simple: it can continue shifting expenses to the paying owners and let the abandoned unit languish (uninsured, unoccupied, unheated), or it can pay off the owner who wasn’t willing to be a part of the community.

Community association liens are entitled to the same rights as liens for taxes, mortgages, and judgments. Moreover, an owner consents to that lien – and its potential foreclosure – when purchasing the property. House Bill 1137 eliminates the rights of communities to require owners to follow the rules and pay their bills, shifts those economic externalities onto other homeowners, and will bankrupt communities that are already struggling to pay their bills.

A final point that seems to be lost in the foreclosure discussion is that Colorado community associations undertake judicial foreclosures. This means that each and every time a homeowner loses a property to an HOA foreclosure, a judge has reviewed the documents and facts and made a decision that the foreclosure is proper. Due process is provided by the existing system, which House Bill 1137 collaterally attacks by making community association liens (whether for fines or maintenance assessments) less powerful than any other lien in the state.

Financing and Insurance
By effectively eliminating foreclosure as a remedy for delinquent assessments, House Bill 1137 will result in increased accounts receivable for communities throughout the state. Higher delinquency balances and percentages mean that FHA may be unwilling to certify a condominium for FHA-backed financing. Without FHA financing, many first-time homeowners will find themselves without a lender. This is an example of the unintended consequences of a bill that might be intended to help out first-time homeowners.

The bill will also make community associations liable for up to $25,000 in damages if a unit owner proves, by a preponderance of the evidence, that the association “has violated any foreclosure laws” with respect to that unit owner. The statute of limitations for this claim is an arbitrary five years, tied to no existing statutes of limitation. The question of whether an association “has violated any foreclosure laws” seems impossible to answer; did the association violate a foreclosure law if it didn’t give notice to a junior lienholder? Perhaps, but is that the owner’s right to enforce? Association insurers may find themselves overrun with claims relating to foreclosures for years, because many owners will dispute the validity of a foreclosure even if the Association did everything by the book. Losing a home feels unfair even when the law is followed. Insurers might pay a few claims a nuisance value to settle, and then they’ll start excluding foreclosure claims from coverage altogether, or drastically increase rates in light of the claims. Yet again, an unintended – or intended – consequence of a bill that purports to eliminate foreclosures based on fines is to effectively remove the remedy altogether.

What You Can Do
Sad anecdotes create poor policy decisions. CAI remains interested in a compromise bill that will protect owners from fine-based foreclosures and increase due process within reason. The legislature must consider the very real ramifications of the laws they pass and how they will impact the hundreds of thousands of homeowners who rely on their community associations to protect their homes. Contact your legislators today to ask them to fix problems, rather than spread them throughout your community. Ask them to protect you, and to vote against House Bill 1137.