REMBAUM'S ASSOCIATION ROUNDUP | The Community Association Legal News You Can Use

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Association Assessment Liens – The Importance of a “Relation-Back” Provision in your Community’s Declaration

Generally, liens, like any other recorded instrument, are deemed effective upon their date of recording. In other words, in Florida, lien priority is based on the notion of “first in time, first in right”. This means that the older liens have priority over more recently recorded liens. The older lien can “wipe out” junior, inferior liens – which are those liens which were recorded after the superior lienholder recorded its lien.

For example, should an unpaid electrical contractor record a lien against a lot within an association, then absent “relation–back” language set out in declaration (discussed below), the electrical contractor’s lien could have priority over the later recorded association assessment lien (which ultimately depends upon language within the documents). Hence, the need for inclusion of a very special provision in every declaration which will make the association’s lien superior to every other recorded lien, except to that of the first mortgagee. Of course, the only reason to give the first mortgagee’s lien superiority over that of the association’s lien is because, without such superiority, the lender would not loan its money to a purchaser of property within the association.

With the inclusion of special language in your community’s declaration, referred to as a “relation–back” provision, an assessment lien can relate all the way back to the date of the initial recording of the declaration. Such a provision, should it exist, is usually found within the section of the declaration pertaining to assessments and foreclosures.

The “relation–back” doctrine was crucial to the analysis of the very recent Fourth District Court of Appeal case, Jallali v. Knightsbridge Village Homeowners Association, Inc., decided January 4, 2017, which fully supplanted the prior appellate decision issued earlier in the same case and in which I am pleased to report that Kaye Bender Rembaum represented the Knightsbridge Village Homeowners Association, Inc. To understand the Jallali decision, we must first examine a prior appellate decision to provide the necessary context.

An earlier case decided in 2012, by the same District Court, U.S. Bank National Association v. Quadomain Condominium Association, Inc., stood for the principle that once a first mortgagee initiated its foreclosure proceeding against its borrower, an association was fully divested of its opportunity to foreclose an assessment lien, unless the association intervened in the lender’s foreclosure action within 30 days of the recording of a particular document in the public records, known as a lis pendens. The consequence of this decision was tantamount to a “death blow” to Florida’s community associations because it meant that, should the lender’s foreclosure litigation case stall for any reason, the association would be fully prohibited from filing an independent lawsuit to foreclose its own assessment lien, even if the assessment obligation did not exist until after the time to file a claim had expired – a very unfair result.

Well, with the issuance of the January 4, 2017 Jallali decision, the Quadomain decision was finally, fully and forever distinguished and quashed meaning that Florida’s community associations can once again bring their own assessment foreclosure cases at any time, even if there is a pending first mortgagee foreclosure lawsuit pending against the same owner. The lawyers at Kaye Bender Rembaum are very proud to have helped make this possible for the benefit of all community associations in the State.

In Jallali, in 2007, the first mortgagee filed its foreclosure action and then several years later, the Knightsbridge Village Homeowners Association filed its lien foreclosure lawsuit against the same owner. The association was first successful in its foreclosure and, later, the lender was successful in its foreclosure. Thereafter, the owner, relying in part, on the Quadomain decision, argued that the association’s foreclosure should be vacated. The District Court disagreed and also noted that it was because the association’s lien related back to the date that the Knightsbridge Village declaration was initially recorded, the association was not trying to foreclose an interest that did not exist when the lender initiated its foreclosure. It was because the association’s lien related back to the date that its declaration was initially recorded that was used as the justification to prove that the association was foreclosing its already existing lien interest in the property.

With all of the above in mind, should your association find itself in need of foreclosing its own assessment lien when a lender has already commenced its mortgage foreclosure action against the same owner, then absent the “relation–back” language set out in the association’s declaration, the association might likely not be in a position to be able to do so. Therefore, it is extremely important that every community association’s declaration contain a provision which makes it patently clear that all association assessment liens relate back to the date of the initial recording of the declaration.

To verify whether your association has this necessary and important language, the board should discuss this with its legal counsel. In addition, amongst the many other provisions which should be reviewed when amending and restating the declaration of covenants, a relation-back provision should be included, if not otherwise already present.

Reserve Funding Obligations – HOA Developers Beware: No Good Deed Goes Unpunished

Unlike condominium associations, homeowners’ associations (HOAs) do not have reserves mandated by statute. Instead, pursuant to Chapter 720 of the Florida Statutes, more commonly known to as the “Homeowners’ Association Act,” reserves in an HOA are either initially created by the community’s developer or by a vote of the majority of the entire membership. Once reserves are established, the reserves must be included in the HOA’s annual budget as fully funded, unless the reserves are later waived, reduced, or terminated by a majority of a quorum at a members’ meeting.

While reserves can be established by the HOA’s developer, the Homeowners’ Association Act also provides that during the time the developer controls the HOA, the developer can be excused from paying “operating expenses and assessments” which are attributable to the lots the developer owns so long as the developer obligates itself to pay any operating expenses incurred by the HOA which exceed the assessments received from non-developer owners. This developer assessment obligation is more commonly referred to as deficit funding. (In lieu of the deficit funding model, the HOA’s developer can also chose to provide a stated guarantee of assessments which is not the subject of today’s article.)

Considering what we know about the establishment and funding of reserves and the developer assessment obligation for deficit funding, a question recently arose whether the HOA’s developer is excused from paying its share of reserves for the lots it owns during developer control of the HOA when the developer has opted for deficit funding? This question was recently asked and clarified by Florida’s Fifth District Court of Appeal in the case of Mackenzie v. Centex Homes, by Centex Real Estate Corporation, et al., decided December, 2016.

In this case, the developer, Centex Homes, built a community with multiple HOAs. Centex Homes prepared the governing documents for all of the HOAs. In so doing, Centex Homes opted to create reserves and to provide for deficit funding. By obligating itself to pay the deficit in operating expenses, Centex Homes was lawfully excused from paying “operating expenses and assessments” for the properties it owned during the time Centex Homes controlled the HOA. But, does that mean Centex Homes was not obligated to fund the reserves, too?

Although Centex Homes paid a nominal sum into the reserves during the first year of development, it discontinued paying into reserves for the remaining years of its control of the HOA. However, Centex Homes continued to collect reserves from all of the non-developer owners. Had Centex Homes paid reserves, its reserve payments would have equaled almost $1 million dollars. After Centex Homes relinquished control of the HOA to the non-developer owners, upset owners, the Mackenzies, brought a complaint against Centex Homes seeking a judgment from the court that Centex Homes failed to meet its reserve funding obligations and an order compelling Centex Homes to make the payment.

The Court, deciding in the Mackenzies’ favor, held that notwithstanding Centex Homes’ exemption from paying the “operating expenses and assessments” attributable to the properties owned by Centex Homes while it controlled the HOA in exchange for deficit funding, Centex Homes was still required to fund the reserves once they were established.

Due to the ambiguity created by the Homeowners’ Association Act in referring to the developer’s exemption from “operating expenses and assessments” under deficit funding and the requirement to fund reserves once they are established, the Court was required to interpret the reserves provisions and the deficit funding provisions of the Homeowners’ Association Act to give both meaning within the intent of the legislature that created them. If the Court were to agree with Centex Homes’ argument that it was excused from paying its share reserves because it was deficit funding, the obligation to fund reserves upon their establishment would be meaningless. Therefore, the Court reasoned that Centex Homes was not excused from its obligation to fund reserves attributable to the properties it owned during its control of the HOA as a benefit of deficit funding.

The moral of this story is that if a developer creates reserves in the HOA’s declaration, then, notwithstanding the deficit funding obligation and the financial relief it provides to the HOA’s developer, the reserves will still require funding. If the reserves are not properly funded, and there is no waiver or reduction accomplished by a vote of the members, then, according to the Mackenzie v. Centex Homes case, the developer is on the hook to fund the reserves.

This case could certainly lead to a chilling effect in that, in spite of a developer’s careful planning for its community and its desire to ensure success for the newly created HOA by ensuring reserves are created for future maintenance and repairs, after reading the Mackenzie v. Centex Homes case, why would any HOA developer create HOA reserves?

“All-Risk” Insurance Policies are not Always What they Appear to Be

Your board of directors has diligently met with the association’s insurance agent. After many meetings and protracted negotiations, the association purchases an “all-risk” insurance policy. Not too long after, the association’s clubhouse is damaged by hurricane force winds, water intrusion, and possibly some faulty construction, too. Will the damage be covered by the association’s insurer? This is what was recently addressed on December 1, 2016 by the Supreme Court of Florida in Sebo v. American Home Assurance Company, Inc.

Sebo purchased a home in Naples, Florida in April, 2005, when it was four years old. He insured it for over $8,000,000.00 with an “all-risk” insurance policy which was specifically created for his residence. Shortly after he bought the home, major water leaks caused by rainstorms occurred and were reported to the property manager. Soon it was apparent that the house suffered from major design and construction defects. In fact, after one rainstorm “paint along the windows just fell off the wall.” The residence could not be repaired and was eventually torn down. On two separate occasions, Sebo filed claims which were denied, except for coverage in the amount of $50,000.00 for mold damage.

After a jury trial, the jurors found in favor of Sebo, and the trial court entered a judgment against American Home Assurance Company, Inc. However, the appellate court disagreed with the trial court and reversed and remanded for a new trial. The appellate court’s disagreement with the trial court had to do with how the court should examine the causation of loss. Due to a difference in rulings from different appellate courts, the matter was decided by the Supreme Court of Florida.

The main issue examined is when there are multiple perils combined to create a loss and where at least one of the perils is excluded by the terms of the policy, must the insurer provide coverage under an “all-risk” policy? Should the court have applied the “Efficient Proximate Cause” theory, which provides that where there is a concurrence of different causes, the one that set the others in motion (the “efficient cause”) is the cause to which the loss is to be attributed, or should the court have applied the “Concurrent Cause Doctrine,” which provides that coverage may exist where an insured risk constitutes a concurrent cause of the loss even when the non-excluded cause is not the prime or efficient cause of the peril?

In this case, Sebo argued that his insurer was required to cover all losses under the “Concurrent Cause Doctrine.” In making its determination, the Court noted that both rainwater and hurricane winds combined with the defective construction which caused the damage to Sebo’s property. Ultimately, in reliance on and quoting an earlier case, the Court found that “[w]here weather perils combine with human negligence to cause a loss, it seems logical and reasonable to find the loss covered by an all-risk policy even if one of the causes is excluded from coverage.” Ultimately, the Court found that because the insurer did not explicitly avoid applying the “Concurrent Cause Doctrine,” the Court found that the plain language of the insurance policy did not preclude Sebo’s coverage under his “all-risk” policy.

The ever important “take away” from this case is that if your association has a policy that excludes the “Concurrent Cause Doctrine,” then in the event there are multiple perils that caused the casualty and one of the perils is excluded from coverage, then the association’s insurance company may, in fact, be able to deny coverage based on the singular exclusion, notwithstanding the coverage which may have been available for the other perils had the excluded peril not been part of the casualty causing event.

Retroactive Application of Statute Amendments: Does Your Declaration Have “Kaufman” Language?

Community association lawyers are often presented inquiries from their clients as to whether laws newly adopted by the Florida legislature apply to their governing documents, especially when the new law is contrary to their declaration’s existing provisions. A similar question was recently asked and answered by Florida’s Third District Court of Appeal in the case of The Tropicana Condominium Association, Inc. v. Tropical Condominium, LLC.

Before diving into the facts of the case, a brief explanation of the concepts mentioned by the Court is necessary. By way of summary, the “contracts clause” of the Florida Constitution establishes the general rule that the legislature is prohibited from enacting any law that impairs substantive rights of an existing contract. A declaration of covenants or declaration of condominium, as the case may be, is a contract, too. It is a contract between the members of the association and the association, itself. The declaration describes the contractual obligations of the members’ assessment and maintenance obligations and fully describes the association’s obligations to its members, too. Generally speaking, the laws in place at the time the declaration is recorded are essentially incorporated into the declaration as if they were initially drafted into it upon its creation. If a newly enacted or amended statute impairs a vested substantive right guaranteed by a declaration, the “contracts clause” operates to prevent it from being applied to the declaration. But, if the newly adopted law is of a procedural nature, then it more likely than not does apply.

Substantive laws are with regard to one’s rights and duties, and include, for example, in the condominium context, the configuration and size of a unit, the ownership share in the common expenses and common surplus, and the appurtenances to a unit. On the other hand, procedural laws are laws that dictate how such rights and duties are to be performed. A statute is procedural if it merely establishes how some right or obligation under the declaration is to be performed. For example, Chapter 720 of the Florida Statutes, more commonly referred to as the “Homeowners’ Association Act,” provides that, unless the bylaws of the association provide for a lesser percentage, the quorum requirement for a meeting of the members is 30%. Thus, if the HOA’s declaration requires 50% of the membership to establish a quorum, the quorum requirement is over-ruled by the statute and would be 30% (absent a court order holding otherwise).

While the “contracts clause” creates a general rule against new statutes impairing existing substantive rights as set out in a declaration, there are, of course, exceptions to the rule. In determining whether a statute may be applied to the declaration, the first determination must be whether the statute is procedural in nature or whether it creates, alters, or impairs substantive rights. Procedural statutes will apply to the declaration, whereas substantive statutes do not.

However, even if a statute is deemed substantive in nature, it may be still applied to a declaration if the statute in question contains language that clearly expresses the legislature’s intent that it is to apply retroactively or that the statute is remedial in nature and designed to clarify existing law. Of course, upon judicial challenge, the courts can hold that just because the legislature intended the new law to apply retroactively or be remedial that such application is unconstitutional or otherwise improper for one reason of another.

Another exception to the procedural/substantive argument is, what is often referred to as, “Kaufman” language. When “Kaufman” language is included in a declaration, the association never has to conduct the procedural/substantive analysis. An example of “Kaufman” language follows: “This Declaration is subject to Chapter 718, Florida Statutes, as it is amended from time to time.” The “Kaufman” language is the latter emphasized phrase. By inclusion of such language, all of the changes to the Florida Statutes, including changes to substantive rights, will apply to the declaration, without regard to whether the changes are beneficial or detrimental to the association.

With this general knowledge, we turn back to the facts of The Tropicana Condominium Association, Inc case. In this case, the declaration of condominium provided that the condominium could be terminated at any time by the written consent of all of the unit owners and all institutional mortgages holding mortgages on the units and that amendments to the termination process of the declaration of condominium required unanimous consent of the unit owners. The declaration of condominium was recorded in 1983 and it did not contain “Kaufman” language.

In 2007, the Florida legislature amended the termination provisions of Chapter 718 of the Florida Statutes, more commonly referred to as the “Condominium Act,” to provide that a condominium could be terminated upon the approval of 80% of the unit owners so long as not more than 10% of the unit owners oppose the termination.

The Tropicana Condominium Association made multiple attempts to amend the termination provisions of the declaration of condominium to reduce the threshold needed for termination. However, the amendments failed to receive the unanimous approval of the unit owners. Nevertheless, it appears as though the 2007 amendment to the Condominium Act, requiring the 80% approval to terminate was followed, in direct contravention to the terms for termination as set out in the declaration. Thereafter, the unit owners filed the lawsuit against their association for failing to obtain the unanimous approval of the unit owners.

On appeal, the condominium association argued that, notwithstanding the failure of the association to obtain the required approval for the amendment to the declaration of condominium, the 2007 amendment to the Condominium Act still applied because it provided that “[t]his section applies to all condominiums in this state in existence on or after July 1, 2007.” The Court, however, did not agree. It found that the retroactive application of the 2007 amendment to the Condominium Act “would eviscerate the Tropical’s owners’ contractually bestowed veto rights.”

In discussing the declaration of condominium’s termination provisions, the Court found that the declaration of condominium’s termination provisions created in each unit owner a vested right to veto a termination attempt with the intent of protecting the unit owners. Therefore, applying the 2007 amendment to the Condominium Act would “work a severe, permanent, and immediate change” to the unit owners’ protections against unwanted termination attempts. In other words, even though the termination process is procedural in that it describes how to terminate the condominium, the percentage of unit owner votes required to bring about the termination was considered to be a vested substantive right.

If nothing else, The Tropicana Condominium Association, Inc., case further demonstrates the lack of clarity that exists when making a determination as to the applicability of newly adopted laws when compared against the existing provisions of an association’s declaration, absent the inclusion of “Kaufman” language.

Decorating for the Holiday Season: Religious Symbol or Secular Adornment?

Thanksgiving is almost here, and you can feel the holiday cheer is in the air. The recent overabundance of political signs is giving way to holiday decorations and glittering lights. Many communities are in the process of putting up white lights and oversized red bows. But, how many communities are setting up Christmas and Hanukkah displays, complete with nativity scenes and menorahs? Can they even do this considering the religious implications?

Luckily, we have some guidance from the United States Supreme Court to help associations differentiate between secular and religious symbols. In 1989, in County of Allegheny v. American Civil Liberties Union, the U.S. Supreme Court held that “the determination of whether decorations, including those used to commemorate holidays, are religious or not, turns on whether viewers would perceive the decorations to be an endorsement or disapproval of their individual religious choices.” The constitutionality of the object is judged according to the standard of a reasonable observer.

Although Christmas trees once carried religious connotations, the Court found that a Christmas tree, by itself, is not a religious symbol because “[t]oday they typify the secular celebration of Christmas.” The Court also noted that numerous Americans place Christmas trees in their homes without subscribing to Christian religious beliefs and that Christmas trees are widely viewed as the preeminent secular symbol of the Christmas holiday season.

In contrast, the Court stated that a menorah is a religious symbol that serves to commemorate the miracle of the oil as described in the Talmud. However, the Court continued that the menorah’s significance is not exclusively religious, similar to a Christmas tree, as it is the primary visual symbol for a holiday that is both secular and religious. When placed next to a Christmas tree, the Court found that the overall effect of the display to recognize Christmas and Hanukkah as part of the same winter holiday season, has attained secular status in our society. Therefore, we can conclude that a Christmas tree and menorah, side by side, are of a secular nature.

A reader once asked, “If our community displays a Christmas tree and menorah, doesn’t the Board have to allow a nativity scene and the Ten Commandments, too?” Interestingly, the answer is most likely, “no.” As to the Ten Commandments, in a 1980 case, Stone v. Graham, the U.S. Supreme Court held that that the Ten Commandments are undeniably religious in nature and that no “recitation of a supposed secular purpose can blind us to that fact.” The Court stated that the Ten Commandments do not confine themselves to secular matters (such as honoring ones parents or prohibiting murder), but instead embrace the duties of religious observers.

If a member of your community wants to include their religious symbol in the association’s holiday display, remember to consider the types of symbols already being displayed by the association as compared to the member’s request. Once your community displays a religious symbol, then there is a good chance your community will need to allow other requested religious symbols to avoid a claim of religious discrimination. Use the guidance from the U.S. Supreme Court’s cases to differentiate between a secular symbol and a religious symbol. The rules of kindergarten work best: treat everyone fairly and treat them as you would want to be treated.

Another important holiday decoration issue concerns whether the decoration constitutes a material alteration of the common elements or common area? Generally, unless a homeowners’ association’s declaration provides to the contrary, the homeowners’ association’s board of directors decides matters pertaining to material alterations. On the other hand, as to a condominium association, unless the terms of the declaration of condominium provide otherwise, seventy-five percent of the unit owners must vote to approve material alterations of the common elements.

The Problem of Choosing One Association over Another When Serving on Multiple Boards: The duties of loyalty and care

On October 21, 2016, after a three day trial in the U.S. Bankruptcy Court for the Southern District of Florida, one of the largest (if not the largest) residential developers in the Nation, D.R. Horton, Inc., and four employees of D.R. Horton who served as developer-appointed directors on multiple boards of directors received a devastating blow – a $16.3 million judgment against them for numerous violations that included, violations of the directors’ fiduciary duties, conspiracy to breach fiduciary duty and violations of Florida’s Deceptive and Unfair Trade Practices act being among them.

While this decision of the Court has no real precedential value (meaning that this decision is not mandatorily binding on other courts), because it is a federal bankruptcy trial court decision, it is certainly noteworthy and citable in that it provides guidance to attorneys and directors alike – that is, if the judgment is upheld during D.R. Horton’s appeal which will inevitably follow.

As to the facts of the case, in 2005, D.R. Horton began developing the master community of Majorca Isles Master Association, Inc. (the “Master Association”). The Master Association was created to administer a 681 condominium unit project in Miami Gardens for low to moderate income families. It was to be comprised of a total of nine other condominium sub-associations. As is quite typical with developer-controlled associations, D.R. Horton appointed its employees to serve on the various boards of directors. In fact, and quite notably, the four employees named as defendants in the bankruptcy case were appointed to serve on the Master Association’s board of directors and the condominium sub-associations’ boards of directors, too. As such, the directors owed a separate and individual duty of loyalty and care to each association they served.

By the time the housing crisis swept the Nation, only 355 units had been constructed and only five condominium sub-associations had been organized, after which construction halted. Due to the recession, unit owners stopped making their assessment payments. Along the way, and as provided for in the governing documents, the board opted for the condominium sub-associations to collect the assessments due to the Master Association directly from the unit owners within the condominiums. Although D.R. Horton was required to fund the $50,000 per month operating deficit of the Master Association, it stopped doing so. Further complicating the conditions, the individuals serving on both the condominium sub-associations and Master board decided to keep all the funds collected in the condominium sub-associations and did not pay the portions due to the Master Association. As a result, the Master Association was severely underfunded and became insolvent which led to its bankruptcy.

In determining where the assessment monies received by the condominium sub-associations (however little it was) should go, the developer-appointed directors were faced with a conflict as they were on the board of directors for not only the Master Association but also for the condominium sub-associations, too. The developer-appointed directors decided to favor the condominium sub-associations over the Master Association and, in so doing, diverted funds due to the Master Association to the condominium sub-associations. Additionally, in order to stop the bleeding of D.R. Horton, who was losing large sums of money fulfilling its deficit funding obligations, D.R. Horton prematurely turned the Master Association over to member control. This act would effectively terminate its deficit funding obligation. Prior to turnover, the developer-appointed directors opted to discontinue services and amenities which the owners were entitled to receive from the Master Association.

During the Court’s discussion of the evidence presented regarding the developer-appointed directors’ breach of fiduciary duties, the Court provided that the directors owed fiduciary duties to the Master Association, to the multiple condominium sub-associations and to their employer, D.R. Horton. The evidence showed that all of the directors were aware of their fiduciary obligations and testified as to having intentionally breached these duties in one way or another.

Among numerous violations as to what the Court described as outright fraud, the Court found that the developer-appointed directors breached their fiduciary duties of loyalty and care to the Master Association by favoring the condominium sub-associations and their employer. For their breach of fiduciary duties, the Court ordered just over $3.8 million in actual, consequential and special damages and $12.5 million in punitive damages intended to “deter future, unlawful, malicious conduct and otherwise fulfill the intent of punitive damages.”

In quoting Justice Cardozo, a revered Associate Justice of the U.S. Supreme Court in the 1930’s, the Court provided that:

Many forms of conduct permissible in a workaday world for those acting at arm’s length, are forbidden to those bound by fiduciary ties. A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior…

There are important lessons to be learned from this case. When serving on multiple boards of directors such as a master and sub-association which may have competing interests, if the interests of those entities become adverse to one another, then it may be best to, at a minimum, abstain from any decisions that favor one entity over the other if possible and/or appropriate. The conflicted director should also consider resigning from one of the entities to make room for a replacement director who will not be hamstrung in his or her decision making. Moreover, if three or more directors serve on the same multiple boards at odds with one another and make decisions together, then they leave the door wide open for allegations of “conspiracy to breach fiduciary duty,” too, which will serve to exacerbate the situation and resulting damages as occurred in the case against D.R. Horton.

Loan Servicers in the Post-Foreclosure World Are They Entitled to Safe Harbor Protection?

When purchasing your home, you likely shopped for the lender that would provide you with the most favorable terms for your mortgage loan. While you may have found the perfect lender, it is quite typical for your mortgage loan to be bought and sold on the secondary market. As a result, you receive a letter informing you of the transaction along with new instructions detailing where your monthly payments should be sent. But, the fun does not stop there. Your loan could then be bundled with thousands of others to be serviced by another loan servicing company. If so, you will receive yet another letter with new instructions.

In fact, it is not uncommon for a homeowner with a mortgage loan to not even know what company actually owns their mortgage due to confusion with their loan servicer, which is the company that manages the day-to-day operations of the mortgage loan on behalf of the mortgage loan owner. Although the loan servicer may be perceived as your lender, the loan servicing company is not the owner of your mortgage loan.

Given the number of companies which may have their hands on your mortgage loan, who is considered the first mortgagee under Florida’s statutory safe harbor laws? According to a recent decision of Florida’s Second District Court of Appeal, it could be all of them!

In the very recent Second District Court of Appeals case of Brittany’s Place Condominium Association, Inc. v. U.S. Bank, issued October 5, 2016, U.S. Bank filed a foreclosure action against a homeowner who was delinquent in payment of his mortgage loan. The condominium association was named as a defendant in the foreclosure action, and the foreclosure action was ultimately decided in U.S. Bank’s favor. As a result, U.S. Bank obtained title to the unit at the foreclosure sale and sought limitation of its liability for past due association assessments.

However, U.S. Bank was not the owner of the foreclosed mortgage loan. Rather, U.S. Bank alleged that it was the “holder of the note and mortgage and the servicer for the owner of the note and mortgage, acting on behalf of and with the authority of the owner.” The association and U.S. Bank disagreed as to the amount owed for past due assessments, and the association sued to foreclose its assessment lien on the unit.

In defending against the association’s foreclosure action, U.S. Bank won its motion for summary judgment where it argued that it was entitled to the statutory safe harbor. Simply stated, the statutory safe harbor limits the past due assessment liability of a first mortgagee, or its successor and assignee, to the lesser of twelve months’ unpaid past due assessments or one percent of the original mortgage debt. Noticeably absent from the safe harbor legislation is a provision extending its application beyond the first mortgagee, its successors and assigns to that of the loan servicer. Nevertheless, on appeal, the association argued that the statutory safe harbor did not apply because U.S. Bank was not the owner of the foreclosed mortgage loan.

During the appeal, the Court analyzed the language of the statutory safe harbor provisions, which do not provide a definition for “first mortgagee.” Looking to other Florida Statutes and other Florida cases for guidance, the Court determined that “a first mortgagee is the holder of the mortgage lien with priority over all other mortgages.” Additionally, applying the clarification from the statutory provisions, the “successor or assignee” is “only a subsequent holder of the first mortgage.” Then, the Court looked to a dictionary definition for the term “holder,” which is otherwise defined as a person who “holds” as an owner or “a person in possession of and legally entitled to receive payment of a bill.”

Based upon its analysis of the term “first mortgagee,” the Court concluded that actual “ownership” is not essential to a first mortgagee’s successor or assignee’s entitlement to limited liability under the statutory safe harbor, and its conclusion “is bolstered by the fact that the legislature did not use the word “owner” to restrict limited liability to only owners of the first mortgage (or note).” Therefore, the safe harbor protections were extended to the benefit of the loan servicing company, too.

The Court’s decision provides additional clarity as to who may be considered a first mortgagee, or its successor or assignee, under the statutory safe harbor provisions. Certainly this decision heightens the necessity for community associations to carefully analyze the application of the statutory safe harbor provisions.

ATTENTION FIRST MORTGAGEE LENDERS Be Careful What You Wish For

Of late, more and more first mortgagee lenders argue that they do not have to pay past due assessments which became due prior to their acquisition of title that occurred as a result of their foreclosure. Such argument results from recent appellate cases where it was found that the statutory assessment obligation which provides for joint and several liabiltiy for past due assessments, as set out in sections 720.2085 and 718.116, Florida Statutes, yields to the specific terms of the association’s declaration which often provides that the lenders do not need to pay the prior assessments and which fully eliminate the statutory safe-harbor, too.

By now, many board members and managers are familiar with at least two of these seminal cases: Coral Lakes v. Busie Bank, a 2010 Second District Court of Appeals case, and Ecoventure v. St. Johns, a 2011 Fifth District Court of Appeals case. But, are these cases and the principles for which they stand being too broadly construed by foreclosing lenders? In short, and to the delight of Florida’s community associations, “you bet”.

In a recent decision by the Florida Second District Court of Appeal (the “Court”) in the case of Ballantrae Homeowners Association, Inc. v. Federal National Mortgage Association, the Court, in reversing a trial court decision, held that the first mortgagee who obtained title to the two subject properties through foreclosure was NOT entitled to the limitation or elimination of liability for assessments that accrued prior to obtaining title where the declaration of covenants did not provide for such limited or eliminated liability and where the lender failed to name the association in the foreclosure action.

In this case, the lender foreclosed on two properties in the association’s community but failed to name the association in the foreclosure action. It is well established law that the lien of a junior lienholder (here, the association) is unaffected by a foreclosure judgment where the junior lienholder was not named in the foreclosure action. While the association’s assessment lien remained intact, the lender argued that it was still entitled to an elimination of past due assessments due to the subordination of the association’s assessment lien. However, although the declaration of covenants in this case provided that the association’s assessment lien was subordinate to the lender’s first mortgage, it did not contain language specifically limiting or eliminating the lender’s liability for unpaid assessments accruing prior to obtaining title.

Finally, the Court provided that, EVEN IF the lender had proven its entitlement to a limitation or elimination of past due assessments, the association’s assessment lien would still be effective. This is because, without foreclosure of the association’s assessment lien, the lien would remain effective and, if improperly extinguished, the association would be without the opportunity to bid on the properties, make claim to any surplus, or assert any available defenses. So, by Fannie Mae arguing that the terms of the declaration controlled rather than simply accepting the requirements of the statutory safe harbor, we once again learn that pigs get fed, and hogs get slaughtered.

A lender’s liability for past due assessments will fully depend on the specific language of the declaration which can both subtly and drastically differ. Therefore, careful examination of such terms is required.

When you examine the terms of your community’s declaration you should look to see (i) if there is text that provides that the association’s assessment lien is subordinate to a first mortgagee’s lien; (ii) if there is text that provides that the first mortgagee, upon foreclosure of its mortgage, is not responsible for past due assessments; and (iii) if there is text that provides for a subsequent owner’s assessment liability when title is acquired from the lender who recently foreclosed. In other words, from Ballantrae we learn that having just the subordination language (in (i) above) will not operate to fully extinguish the prior assessments due from the foreclosing first mortgagee.

Many, but not all, association declarations which have not been minimally amended to mirror the statutory safe harbor obligations to determine the first mortgagee’s liability for prior assessments upon foreclosure or deed in lieu of foreclosure, as set out in Chapter 718 and Chapter 720 of the Florida Statutes, governing condominium associations and homeowners’ associations, respectively (otherwise known as “safe harbor”), continue to provide the lender with a full elimination of liability for past due assessments. This language is generally included in declarations prepared by a community’s developer to entice lenders to approve purchaser loans.

As to the “safe harbor” statutory provisions, while the provisions for both condominium associations and homeowners’ associations are vastly similar, there is one great distinction. As to homeowners’ associations, the “safe harbor” provisions only apply if the first mortgagee initially joined the association as a defendant in the foreclosure action while there is no similar requirement for condominium associations.

What does your declaration say with regard to first mortgagee’s past due assessment liability? Does it provide the foreclosing first mortgagee lender with a full pass on assessments due prior to its acquisition of title, or does it only provide for subordination? Regardless, if you have not reviewed or amended your association’s declaration in regard to assessment liability provisions that result from foreclosure in the past 5 or so years, then the board should consult with the association’s attorney to both review these terms and propose an amendment to provide better terms in favor of the association.

Community Association Liability – Neighbor to Neighbor Discrimination

There is a dangerous trend being established by the U.S. Department of Housing and Urban Development (“HUD”) under the Federal Fair Housing Act (the “Act”) and the enforcement of the Act of which community associations must be aware.

On April 4, 2016, HUD’s General Counsel issued guidance regarding the application of the Act on the use of criminal arrests and convictions by community associations to screen potential purchasers and renters. Pursuant to this guidance, HUD provides a three element standard by which criminal history-based screening provisions are evaluated: (1) whether the criminal history policy or practice has a discriminatory effect; (2) whether the criminal history policy or practice is necessary to achieve a substantial, legitimate, non-discriminatory interest; and (3) whether there is a less discriminatory alternative.

This HUD guidance comes less than a year after a June 25, 2015 decision of the Supreme Court of the United States in which it held that claims of racial discrimination under the Act may be based upon disparate impact, the case having been based upon the discriminatory effects of the allocation of housing tax credits. As a result, it is possible that a discrimination claim based on the theory of disparate impact may be brought under the Act due to credit score requirements where the application of the requirement causes a disproportionate effect on individuals of a protected class.

Now, community associations have another concern. On September 13, 2016, HUD released final regulations regarding the Act, which will become effective on October 14, 2016. Under this new regulation, community associations may be liable under the Act for the discriminatory actions of residents who harass or create a hostile environment for other residents.

In its Rules and Regulations set out in Chapter 24, Part 100 of the Code of Federal Regulations which further interprets the Act, HUD stated that it believes that, “we are long past the time when racial harassment is a tolerable price for integrated housing; a housing provider is responsible for maintaining its properties free from all discrimination prohibited by the Act.”

As everyone should already be familiar, the Act provides, in relevant part, that it is unlawful “to interfere with persons in their enjoyment of a dwelling because of race, color, religion, sex, handicap, familial status or national origin of such persons or of visitors or associates of such persons.” With that in mind, HUD believes that there has been significant misunderstanding among the public and private housing providers (such as community associations) as to the circumstances under which they will be subject to liability under the Act for discriminatory housing practices undertaken by others. (In other words, is a community association liable for third-party behavior that is not the board’s business to begin with? According to HUD, you bet.) To answer this question, HUD amended its Rules and Regulations. HUD maintains that these amendments only clarify existing law. But, in fact, HUD has created unnecessary and unwarranted liability for community associations, their boards of directors, and quite possibly their managers and management companies, too.

Until now, neighbor-to-neighbor disputes have largely been a private matter. Ending this notion, HUD maintains that a person is directly liable for “failing to fulfill a duty to take prompt action to correct a discriminatory housing practice by a third-party, where the person knew or should have known of the discriminatory conduct. The duty to take prompt action to correct and end a discriminatory housing practice by a third-party derives from an obligation to the aggrieved person created by contract or lease (including bylaws or other rules of a homeowners’ association, condominium or cooperative), or by federal, state, or local law.” HUD further maintains that “the power to take prompt action to correct the discriminatory housing practice by a third – party depends upon the extent of control or other legal responsibility the person may have with respect to the conduct of such third – party.” HUD commented that, “the duty to take prompt action to correct a discriminatory housing practice by a third – party derives from an obligation to the aggrieved person created by contract or lease (including bylaws or other rules and a homeowners association, condominium or cooperative), or by federal, state or local law.” And further, HUD notes that even if the governing documents do not expressly create obligations to act, the power to act may derive from other legal responsibilities or by operation of law.

HUD believes that the community association generally has the power to respond to third-party harassment by imposing conditions authorized by the association’s covenants, conditions and restrictions or by other legal authority and that community associations regularly require residents to comply with the covenants, conditions and restrictions and community rules through such mechanisms as notices of violations, threat of fines, and fines. Finally, HUD maintains that “the community association is required to take whatever actions they can legally take to end the harassing conduct.”

 As to when the community association is on notice that it should act, HUD maintains that “a verbal or written account from an aggrieved tenant [occupant] may be enough to provide notice to a housing provider that a hostile environment may be occurring, but whether it would be sufficient to establish that the conduct is sufficiently severe or pervasive to create a hostile environment depends upon the totality of the circumstances.” As to when the community association “should have known” of the harassment of one resident by another, it occurs when the “housing provider had knowledge from which a reasonable person would conclude that the harassment was occurring. Such knowledge can come from, for example the harassed residence, another resident, or a friend of the harassed resident.”

With all of the above in mind, your community association should review its governing documents to determine whether the association is authorized to curtail conduct that contravenes existing law and review other type of “nuisance” provisions. No matter how innocuous such a provision might seem, the liability for the community association to act can be demonstrated from the requirements of such a provision. But remember, the power to act can also be derived from other legal responsibilities or by operation of law, too.

So, what can a community association do to protect itself from a claim of discrimination brought by a member asserting that the association knew or should have known that the resident was being discriminated against by another member and failed to take action to protect them? Minimally, the association can amend its governing documents to provide it is not responsible to police neighbor to neighbor conduct under any circumstances. But, nevertheless, if the association becomes aware of discriminatory conduct as caused by one neighbor to another, the association should consider taking remedial action by having its lawyer send a cease-and-desist letter to the offending owner, employing such penalties as may be permitted in the governing documents, and notify local law enforcement of the situation.

Is That New Rule Adopted by the Board Really Enforceable? Back to Basics

Long before the Condominium Act, more specifically, section 718.110(13) of the Florida Statutes, was amended to include that “an amendment prohibiting unit owners from renting their units or altering the duration of the rental term or specifying or limiting the number of times unit owners are entitled to rent their units during a specified period applies only to unit owners who consent to the amendment and unit owners who acquire title to their units after the effective date of that amendment” there was Beachwood Villas Condominium v. Poor, et. al., a 1984 Fourth District Court of Appeals (4th DCA) case where several owners challenged rules enacted by their association’s board of directors which regulated both unit rentals and occupancy of units by guests. The trial court invalidated the rules, while the 4th DCA reversed the trial court’s ruling and reinstated the board adopted rules.

The 4th DCA noted that there could be two sources of use restrictions, those set out in the declaration of condominium and those adopted by the board. As to the use restrictions set out in declaration, such restrictions are “clothed with a very strong presumption of validity,” as initially provided in Hidden Harbor Estates V. Basso, a 1981 4th DCA case. Since the rules that are set out in the declaration of condominium are recorded in the public records, all purchasers, prior to becoming owners, have notice of these rules. But this is not the case for board adopted rules.

In examining board adopted rules, the court first determines whether the board acted within its scope of authority, in other words, whether the board had the power to adopt the rule in the first place and, then if so, whether the rule reflects reasoned or arbitrary and capricious decision-making. The board’s exercise of its reasonable business judgment in adopting a rule is generally upheld so long as the rule is not “violative of any constitutional restrictions[] and does not exceed any specific limitations set out in the statutes or condominium documents.”

It is interesting to note that the 4th DCA discarded an argument that use restrictions adopted by the board must be clearly inferable from the declaration of condominium. In so doing, the 4th DCA decided that such a test would be too stringent. The resulting test to determine the validity of board adopted rules as applied by the 4th DCA is relatively simple: “provided that a board-enacted rule does not contravene either an express provision of the declaration or a right reasonably inferable therefrom, it will be found valid, within the scope of the board’s authority. This… test safeguards the rights of unit owners and preserves the unfettered concept of delegated board management.”

In examining board adopted rules ask yourself:

1) Did the board have the power to adopt the rule?

2) Does the rule conflict with the declaration?

3) Is the rule reasonable as measured by being rationally related to the objectives of the association?

If the answer to these three questions is “yes,” then the rule is valid and would quite likely be found enforceable upon owner challenge.

Remember that rules prohibiting unit owners from renting their units or altering the duration of the rental term or specifying or limiting the number of times unit owners are entitled to rent their units during a specified period applies only to unit owners who consent to the amendment of the declaration of condominium and unit owners who acquire title to their units after the effective date of that amendment, the Beachwood Villas Condominium test to determine the validity of board adopted rule is still good law.