Author: rembaumlaw

A community association’s board of directors is often comprised of lay people who volunteer their precious free time for the needs of their association. At times, a board of directors or single director may make a poor decision, like entering into a dis-favorable contract based upon a mistake. While the contract may be otherwise valid, where a mistake is one that can be proven to be based upon unilateral mistake, the association might be able to void the contract. That said, doing so is an expensive, uphill battle.

Avoidance of a contract based upon unilateral mistake was recently discussed in the case of Thomas DePrince v. Starboard Cruise Services, Inc. decided by Florida’s Third District Court of Appeal on January 17, 2018. In this case, during a cruise, Thomas DePrince visited an onboard jewelry shop owned and operated by Starboard Cruise Services, Inc. (“Starboard”). DePrince expressed interest in purchasing a 15 to 20 carat loose diamond of particular color and clarity. Because the onboard shop did not have a diamond of this size, the shop’s manager contacted an onshore supplier for availability and pricing. The onshore supplier responded by e-mail providing that two diamonds meeting DePrince’s specifications were available, one 20.64 carat diamond for $235,000 and one 20.73 carat diamond for $245,000.

DePrince was advised by his expert gemologist sister that the diamonds should cost millions, not thousands, of dollars. She advised DePrince not to buy either diamond. Nevertheless, DePrince purchased the 20.64 carat diamond, paying Starboard’s quoted $235,000 price. Starboard later learned that the price it quoted to DePrince was the per-carat price for the diamond rather than the total price, which should have been $4,850,400. Starboard informed DePrince of the error and, on its own, reversed the charges on DePrince’s credit card to refund all monies paid. As a result, DePrince then sued Starboard, alleging claims for breach of contract, specific performance, and conversion.

The trial court found in Starboard’s favor based on its own defense of unilateral mistake using the “four-prong test” required to establish unilateral mistake. Under this test, an otherwise valid contract will be rescinded where the party seeking to avoid the contract has shown that:

1. the mistake was induced by the party seeking to benefit from the mistake;
2. there is no negligence or lack of due care on the part of the party seeking to avoid the contract;
3. denial of release from the contract would be inequitable; and
4. the position of the person benefiting from the mistake has not changed to the point where rescinding the contract would be unjust.

Here, the party seeking to avoid the contract is Starboard, and the party benefitting from the mistake is DePrince. With reference to prong 1 and prong 2, respectively, the trial court instructed the jury that the inducement could be satisfied by an omission on the part of DePrince and that there may be “some degree of negligence on the part of Starboard” so long as “there was no inexcusable lack of due care under the circumstances on its part.” Based upon these instructions, the jury found that Starboard should be released from the contract. DePrince was not pleased.

DePrince appealed the trial court’s decision to Florida’s Third District Court of Appeal. On appeal, the Court discussed DePrince’s duty to disclose to Starboard that it was making a mistake as to the price of the diamond. In a general commercial transaction, there is no duty to disclose facts that the other party could discover on its own with some due diligence. However, once a party begins to disclose certain facts, the whole truth must be disclosed. Therefore, “inducement” requires some type of action and cannot stand on an “omission.” Interestingly, because DePrince had no duty to disclose what he knew about the price of the diamond and did not trigger such duty by discussing any known facts about the price, the Court found that DePrince did not induce Starboard into making the mistake.

As to the application of prong 2, regarding negligence or lack of due care, it is clear from the four-prong test that there can be no negligence or lack of due care on the part of Starboard in order to satisfy this prong. However, the jury instruction allowed for some negligence on the part of Starboard in contravention of the established four-prong test.

As the satisfaction of prong 1 and prong 2 is a factual matter, the appellate Court determined that these findings are a matter best determined by the trial court and remanded the case for further proceedings with adjusted jury instructions (in plain English, the term “remand” means “sent”).

So, in the event your association makes a mistake and by entering into a dis-favorable contract, it is possible for an association to void that contract based upon unilateral mistake where the facts satisfy the four-prong test discussed above. However, doing so would require costly and time-consuming litigation with no guarantee of success whatsoever. Therefore, it is a far better practice for the board of directors to ask questions of their contractors and vendors to become well informed as to what they are getting into and have all association contracts reviewed by the association’s legal counsel to avoid the mistake in the first place.

According to the American Heart Association, sudden cardiac arrest (“SCA”) is a leading cause of death in the United States. It is estimated that more than 350,000 lives are taken each year due to the abrupt loss of heart function. However, with technological advances, the number of deaths due to SCA have been lowered through the use of an automated external defibrillator (“AED”). An AED is a portable medical instrument that delivers an electrical impulse to the heart to disrupt and correct an otherwise fatal irregular heartbeat (arrhythmia) and allows a normal rhythm to resume. Although AEDs have been credited with saving countless lives by making it possible for non-medical individuals to respond to a medical emergency, the question must be asked: “Is the liability worth the risk?”

The purchase and availability of AEDs is controlled by state and federal laws and regulations. Pursuant to Florida law, AEDs are required to be installed in public schools, dental offices, and assisted living facilities. AEDs are optional in state parks and state owned or leased facilities. There is no requirement that community associations in Florida install AED devices on association property and/or association fitness facilities. Although not legally required, there is a growing trend of community associations considering installing AEDs on association property to better protect their residents. When considering whether or not to install an AED device, associations must ensure that all parties (i.e., association management, board of directors, residents, and any other authorized user) understand the potential liability associated with the use of an AED and the protections afforded to them under Florida law.
“The Cardiac Arrest Survival Act” (“Cardiac Act”) codified in section 768.1325 of the Florida Statutes was enacted by the Legislature in order to encourage consumer purchase, placement, and use of AEDs. The Cardiac Act only applies to situations in which an AED is used to resuscitate an individual. In situations not involving an AED, the “Good Samaritan Act” codified in section 768.13 of the Florida Statutes applies. The Good Samaritan Act provides that:

“Any person, including those licensed to practice medicine, who gratuitously and in good faith renders emergency care or treatment…at the scene of an emergency outside of a hospital, doctor’s office, or other place having proper medical equipment, without objection of the injured victim[s], shall not be held liable for any civil damages… where the person acts as an ordinary reasonably prudent person would have acted under the same or similar circumstances.”

The Cardiac Act shields the AED’s owner and its operator who used it in an effort to render aide from liability in the event of a perceived medical emergency. A perceived medical emergency occurs when a reasonable person believes that an individual is experiencing a life-threatening medical condition involving the heart that requires an immediate medical response. Pursuant to the Cardiac Act, the user of an AED is immune from liability for any resulting harm from the use or attempted use on the victim if:

1. There is a perceived medical emergency; and

2. No objection is made by the victim against the use of the device on their person.

The Cardiac Act further extends immunity to community associations organized under Chapters 617, 718, 719, 720, 721, and 723 of the Florida Statutes. However, the shield of immunity afforded to community associations can be pierced if the harm caused to the victim was due to the failure of the association to properly maintain and test the AED device. Additionally, immunity will not be granted to the association if the harm was due to the association’s failure to provide appropriate training to the employee or agent of the association when the employee or agent was the person who actually used the device on the victim. However, training by the association will not be required if any of the following is met:

1. The AED device is equipped with audible, visual, or written instructions on its use, including any such visual or written instructions posted on or adjacent to the device; OR

2. The employee or agent was not an employee or agent who would have been reasonably expected to use the device; OR

3. The period of time elapsing between the engagement of the person as an employee or agent and the occurrence of the harm, or between the acquisition of the device and the occurrence of the harm in any case in which the device was acquired after engagement of the employee or agent, was not a reasonably sufficient period in which to provide the training.

Even though training may not be required for one of the reasons set forth above, common sense dictates that any key personnel, such as the staff in charge of athletic activities and the manager, should be trained in the use of the AED device. In regard to where the AED should be installed, the Cardiac Act does not provide guidance. Again, common sense dictates it should be in a visible area. Also, an insurer cannot exclude damages resulting from the use of an AED from coverage under a general liability policy issued to the community association.
In relation to immunity extended to “the person,” the Cardiac Act further provides that the user will not be immune from liability if:

1. The harm was caused by user’s willful or criminal misconduct, gross negligence, reckless disregard or misconduct, or a conscious, flagrant indifference to the rights or safety of the victim who was harmed; OR

2. The person who used the AED on the victim is a licensed or certified health professional who used the AED device while acting within the scope of the license or certification of the professional and within the scope of the employment or agency of the professional; OR

3. The person is a hospital, clinic, or other entity whose primary purpose is providing health care directly to patients, and the harm was caused by an employee or agent of the entity who used the device while acting within the scope of the employment or agency of the employee or agent; OR

4. The person is an acquirer of the device who leased the device to a health care entity, or who otherwise provided the device to such entity for compensation without selling the device to the entity, and the harm was caused by an employee or agent of the entity who used the device while acting within the scope of the employment or agency of the employee or agent; OR

5. The person is the manufacturer of the device.

If an association decides to proceed with placement of an AED device on association property, then the board should adopt rules and regulations in the association’s governing documents which address the following: (1) the location of the AED device, (2) notification procedure should the AED be removed from its designated location to a secondary location on a temporary basis, (3) maintenance and testing of the AED, (4) authorized users, (5) training for the authorized users, (6) written instructions posted next to the device that provide a “how to” in case a trained user is not available, and (7) regular notice to the owners as to the AED device’s availability, location, and identification of trained staff and owners.

Any association that provides athletic activities for its members should seriously consider owning an AED device. Should you have any further questions about whether or not the liability is worth the risk, then contact your association’s attorney as to whether an AED is right for your association. Save a life by having an AED device available at your association!

As many people who live in communities operated by a community association know, one of the advantages, or disadvantages depending on who you ask, is that the association typically has the authority to regulate the improvements that are made by residents within the community. This authority will keep the purple house out of your neighborhood – good for those who would prefer to look out their window and not see a purple house, but bad for the person wanting the purple house. While most of the aesthetic qualities of a community can be regulated by the association through established architectural standards and guidelines that are set out in the community’s governing documents, the association is at times hamstrung by statutes or other regulations which govern certain improvements, such as solar panels, other energy saving devices and antennas.

Of topic in this article are satellite dish antennas which receive video programming signals from direct broadcast satellites, broadband radio service providers, and television broadcast stations. As directed by the United States Congress in Section 207 of the Telecommunications Act of 1996, the Federal Communications Commission adopted the Over-the-Air Reception Devices (“OTARD”) rule concerning governmental and nongovernmental restrictions on the viewers’ ability to receive these video programming signals to antennas, including direct-to-home satellite dishes that are less than one (1) meter in diameter, television antennas, and wireless cable antennas.

Under the OTARD rules, a resident has the right to install an antenna on property that the resident owns or over which the resident has exclusive use or control. In the case of a single-family home community, the right would extend over the lot as the lot is owned by the homeowner. In the case of condominiums and cooperatives, the OTARD rules apply to the unit and to the exclusive use areas, otherwise known as limited common elements, such as terraces, balconies, or patios.

As relevant to community associations, the OTARD rules prohibit restrictions that impair the installation, maintenance, or use of antennas used to receive video programming. Therefore, the OTARD rules prohibit most restrictions that (i) unreasonably delay or prevent installation, maintenance, or use; (ii) unreasonably increase the cost of installation, maintenance, or use; or (iii) preclude reception of an acceptable quality signal.

However, to the extent that an association’s regulations of satellite dish antennas may be accomplished without impairing reception of an acceptable quality signal, unreasonably preventing or delaying installation, maintenance, or use of a satellite dish, or unreasonably increasing the cost of installing, maintain, or using a satellite dish, the association would be able to create and enforce such regulations, especially where the need for the regulations are based upon express legitimate safety concerns and not merely for aesthetic reasons. For example, a regulation requiring that a satellite dish antenna be placed in a particular location on a house, such as the side or the rear of the house, might be permissible if this placement does not prevent reception of an acceptable quality signal or impose unreasonable expense or delay.

Additionally, as the OTARD rules are only applicable to property that a resident owns or over which the resident has exclusive use or control, these rules do not apply to common areas or common elements that are owned by a community association or jointly by condominium unit owners. Common areas and common elements typically include recreational facilities, the roof or exterior walls of a condominium or cooperative building, and right-of-ways. Therefore, an association may properly prohibit a resident from installing a satellite dish antenna on the association’s common areas or common elements which are not for the exclusive use of the resident. Even if a resident cannot receive an acceptable signal from the resident’s lot, unit, or area of exclusive use or control, the association is under no obligation to provide the resident with a location for the resident to install their antenna.

Further, the OTARD rules do not prohibit an association’s restrictions on satellite dish antennas which extend beyond the resident’s area of exclusive use or control when installed. For example, an association may impose restriction upon a satellite dish that extends beyond the balcony or patio of a unit to be over the common elements. Therefore, in order for the OTARD rules to protect the resident’s antenna, the antenna must be installed wholly within the exclusive use area.

Does your community association have restrictions regarding satellite dishes and other antennas? If so, you may want to have your association’s attorney review these restrictions to ensure that they meet the requirements of the OTARD rules.

At issue in today’s column is a subject we recently addressed regarding whether an association must record its assessment lien in the public records of the County in which the community is located in order for it to be effective and whether such lien relates back to the initial date of recording of the declaration. At least, as to a surplus that results from a tax foreclosure sale, the answer, in most circumstances, is that the association does not need to record its assessment lien in order to argue entitlement to the surplus, and the lien will relate back to the date of initial recording of the declaration, as was the outcome of a recent Fourth District Court of Appeal case, Calendar v. Stonebridge Gardens Section III Condominium Association, Inc., decided December 17, 2017.

In this case, Mrs. Calendar was the unit owner who lost her home as a result of a tax foreclosure. After the foreclosure sale, Mrs. Calendar asserted that she, and not the condominium association, was entitled to the surplus that resulted from the tax foreclosure sale. The appellate court disagreed and affirmed the trial court’s decision to award the surplus to the condominium association. In so doing, the appellate court cited section 718.116(5)(a), Florida Statutes (2016), which provides:

“The association has a lien on each condominium parcel to secure the payment of assessments. … [T]he lien is effective from and shall relate back to the recording of the original declaration of condominium, or, in the case of lien on a parcel located in a phase condominium, the last to occur of the recording of the original declaration or amendment thereto creating the parcel. However, as to first mortgages of record, the lien is effective from and after recording of a claim of lien in the public records of the county in which the condominium parcel is located…”

This type of lien is referred to as a “statutory lien,” and based on this statutory provision, the Appellate Court reasoned that the recording an assessment lien was not an absolute prerequisite to the enforcement of the lien for unpaid assessments, so long as the declaration of condominium was recorded, which it obviously was, and so long as a first mortgage was not at issue, which it was not.

As an aside, with the aforementioned in mind, if a declaration of condominium was recorded before April 1, 1992, then the statutory assessment lien does not apply because the relevant statute did not yet exist. In those situations, the declaration of condominium can be amended to include a provision similar to the statutory lien. Alternatively, subjecting the declaration of condominium to Chapter 718, Florida Statutes, “as amended from time to time,” a phrase otherwise known as “Kaufman” language, would incorporate the statutory lien provisions, as well as all other substantive changes to Chapter 718, Florida Statutes.

Homeowners’ associations have a similar statutory lien which also relates back to the date of initial recording of the declaration of covenants. However, the statutory lien does not apply to a homeowners’ association community’s declaration recorded prior to July 1, 2008. Prior to July 1, 2008, (absent any specific language in the association’s declaration indicating that the assessment lien relates back to the date the declaration was recorded), a prior recorded mortgage lien had priority, as was decided by the Florida Supreme Court in 1995 in the case of Holly Lake Association v. Federal National Mortgage Association. The relevant section 720.3085, Florida Statutes, was amended and became effective on July 1, 2008 which codified the current assessment lien relation back principle. Therefore, as to those HOA communities whose declarations were recorded previously, in order to have assessment lien rights which relate back to the date the declaration was initially recorded, the declaration of covenants must be amended to include a provision similar to the text of the statutory lien statute; or, in the alternative, the declaration of covenants may be made subject to Chapter 720, Florida Statutes, “as amended from time to time,” (a/k/a Kaufman language) thereby incorporating the relation back provision, as well as all other substantive changes to Chapter 720, Florida Statutes.

The Stonebridge case can also be used to assert priority of an unrecorded association assessment lien over many other types of liens, too, such a mechanics’ lien recorded against a unit/home by an unpaid contractor. Nevertheless, with the aforementioned mind, it is always better to be safe than sorry. Therefore, taking the time, and sometimes extra step, to record the association‘s assessment lien all but guarantees the priority of the association’s assessment lien.

An association member wants to review the association’s lawyer’s bills sent to the association over the past year. As a result, the member submits a written request to access those records. But, is the member actually entitled to see them? Pursuant to the relevant sections of Chapter 718, Chapter 719, and Chapter 720 of the Florida Statutes, regarding condominiums, cooperatives, and homeowners’ associations, respectively, all members (or their authorized representatives) have the right to access their community association’s official records for inspection and copying. However, this right is not absolute as there are several official records which are exempt from member access.

Among these exempted official records are records protected by the attorney-client privilege, as described in section 90.502, Florida Statutes, and any record protected by the work-product privilege. Generally, the attorney-client privilege protects communications between a lawyer and the lawyer’s client; whereas, the work-product privilege protects, for example, a record prepared by an association attorney or prepared at the attorney’s express direction which reflects a mental impression, conclusion, litigation strategy, or legal theory of the attorney or the association and which was prepared exclusively for civil or criminal litigation or for adversarial administrative proceedings or which was prepared in anticipation of litigation or proceedings until the conclusion of the litigation or proceedings.

While these exceptions to official records access are expressly provided in the relevant sections of the Florida Statutes, questions arise as to whether or not a community association’s legal invoices are protected by the attorney-client privilege and/or the work-product privilege. Moreover, can the association redact its legal invoices to keep privileged information provided in the legal invoices from access by the member? You bet the association can!

This issue was decided in the arbitration case of Jandebeur v. Marine Terrace Association, Inc. (Arbo. Case No. 2014-03-5716) in which the association, in the end, was represented by Kaye Bender Rembaum, Attorneys at Law. (This case involved a cooperative under Chapter 719, Florida Statutes, which is substantially the same as Chapter 718, Florida Statutes. Arbitration is not applicable to Chapter 720, Florida Statutes.) The law firm took the case over from the association’s prior counsel who, on behalf of his client-association, advised the board not to provide access to his law firm’s billing to the association, claiming the entire bill to be privileged.

In this case, the member made written requests to inspect the association’s official records, including legal invoices from the association’s prior law firm. Upon the advice of the association’s prior attorney, the association refused to provide the owner with access to the requested legal invoices claiming that they were inaccessible, in their entirety, because they contained attorney-client privileged communications and attorney work-product.

In deciding the matter in favor of the member, the arbitrator held that refusing access to the entire legal invoices was improper; however, the arbitrator made it patently clear that “[i]f attorney work product is contained in an invoice, e.g. a description of work performed reveals the attorney’s thoughts, etc., regarding the litigation, that information may be redacted.” Therefore, the arbitrator in this case clearly and expressly opined that portions of legal invoices may be redacted to remove information protected by the attorney-client privilege and/or the work-product privilege.

Given the official records exemptions from member access as discussed above, the arbitrator’s decision in this case is in line with the statutory exemptions provided by the relevant sections of Chapter 718, Chapter 719, and Chapter 720 of the Florida Statutes. Therefore, do not be surprised if, upon a member’s written request to inspect the association’s law firm’s billing, invoices are presented only after significant redaction to protect both attorney-client and work-product privileges.

While arbitration cases decided by the Arbitration Section of Florida’s Department of Business and Professional Regulations, Division of Florida Condominiums, Timeshares, and Mobile Homes, do not create binding precedents on any other parties (meaning, the same issue could be decided differently in another case) and are not applicable to homeowners’ associations, they are often relied upon for guidance, as many community association attorneys do. Therefore, when presented with a written request for access to your association’s legal invoices, you may want to have your association’s attorney review the requested invoices to see if there is any privileged information which should be redacted to protect the privilege prior to the member’s inspection and copying of the official records.

Does an unrecorded assessment lien have any validity or value whatsoever? You bet it does! In a very recent Fourth District Court of Appeal case, Calendar v. Stonebridge Gardens Section III Condominium Association, Inc., decided December 13, 2017, the plaintiff homeowner, Mrs. Calendar, appealed a trial court order that dispersed surplus funds from a condominium unit tax sale in favor of the condominium association. The plaintiff homeowner argued that the trial court erred in dispersing the surplus to the condominium association when, in fact, the condominium association had not yet recorded its assessment lien or obtained a final judgment of foreclosure. In other words, she argued the association’s lien was not perfected because it was not recorded. Thankfully, the Fourth District Court of Appeal disagreed with her.

Germaine to the appellate court’s analysis was the “relation back” language set out in section 718.116, Florida Statutes. More specifically, this legislation provides in relevant part, that,

the association has lien that is effective from and shall relate back to the recording of the original declaration of condominium… However, as to first mortgages of record, the lien is effective from and after recording of a claim of lien in the public records of the county in which the condominium parcel is located.

Therefore, except as to a first mortgagee lender, the condominium association has a perfected lien that relates back to the date that the declaration of condominium was initially recorded. However, so as to encourage lenders to loan money in the form of a mortgage to a potential purchaser of a condominium unit, then, in that instance, the association’s lien is only perfected from the date the association’s lien is actually recorded in the public records. In that way, the first mortgagee will have priority over the association’s assessment lien.

In other words, and in plain English, the Fourth District Court of Appeal held that as to everyone but the first mortgagee, the condominium association, by virtue of the recordation of its declaration of condominium, has a lien which is effective from the date the declaration of condominium was initially recorded. This is extremely important in determining what is called “lien priority,” which is necessary to determine how to distribute surplus funds resulting from a tax foreclosure, amongst other things.

In deciding this case, the Fourth District Court of Appeal has made it patently clear that, except as to a first mortgagee, upon the recordation of a declaration of condominium, a condominium association has a perfected statutory lien that relates back to the date of the recording of the declaration of condominium and, therefore, a recorded claim of lien is not required to be in line for the surplus that relates to a tax sale of a condominium unit.

The really good news here is that in July 2007, the Florida legislature mirrored this statutory provision into Chapter 720, the Homeowners’ Association Act, and thus, it was made applicable to homeowners’ associations (HOA), too. Therefore, reasoning by analogy, except as to first mortgages, the HOA can also assert that its liens relate back to the recording of the HOA declaration, too. It is also possible that an HOA’s declaration recorded before July 2007 included a similar provision so it too could argue its HOA assessment liens related back to the date the HOA declaration was recorded, but this will need to be determined on a case by case basis.

This is a great result for associations!

It is the time of year when community associations across the state are electing members to serve on their board of directors. When considering whether or not you would like to put your name in the hat as a candidate for a director seat, you should consider the responsibilities you will have to take on that include the fiduciary duties owed to the members of your association.

Directors and officers owe their community’s members a duty of care and a duty of loyalty to act in the best interests of their association by acting with loyalty, honesty, and in good faith. Directors and officers owe a duty to exercise reasonable business judgment and to use ordinary care and prudence in the operation of the association. Directors and officers should perform their activities in good faith and in the best interest of the association, exercising the care an ordinary person would use under similar circumstances.

That said, directors and officers are not required to be perfect. Decisions of the board are typically protected by the “business judgment rule.” The “business judgment rule” acts to preserve and protect a board’s decision so long as the board acted in a “reasonable” manner. In general, absent actual wrongdoing in the form of fraud, self-dealing, or unjust enrichment, corporate directors and officers cannot be held personally liable for corporate acts. The protection afforded by the business judgment rule fades away when an act crosses the line from “negligence” to “gross negligence”.

For example, breaches of these fiduciary duties would occur when a director receives compensation in the form of a service or money for the privilege of doing business with the director’s association or when a director discloses to a third party privileged information intended for the board of directors only. In the event of a breach of such fiduciary duty, there is little recourse against a director or officer who has committed the breach, except to file a lawsuit, which is often a costly endeavor.

While it is clear that directors and officers owe fiduciary duties to their association’s members, can a member allege a cause of action against one or more board members arguing that they breached their fiduciary duty owed to the association? The answer to this question is unequivocally, “no”. This was made clear as recently as August 30, 2017 in a recent Fourth District Court of Appeal decision in Collado v. Baroukh, et al., 42 Fla. L. Weekly D1917 (4th DCA Fla) citing Towerhouse Condo, Inc. v. Millan 475. So.2d 674 (Fla. 1985.

In regard to directors and officers immunity from civil liability, section 617.0834, Florida Statutes, provides in relevant part, that:

(1) An officer or director of a nonprofit organization …is not personally liable for monetary damages to any person for any statement, vote, decision, or failure to take an action, regarding organizational management or policy by an officer or director, unless:

(a) The officer or director breached or failed to perform his or her duties as an officer or director; and

(b) The officer’s or director’s breach of, or failure to perform, his or her duties constitutes:

1. A violation of the criminal law, …;

2. A transaction from which the officer or director derived an improper personal benefit, directly or indirectly; or

3. Recklessness or an act or omission that was committed in bad faith or with malicious purpose or in a manner exhibiting wanton and willful disregard of human rights, safety, or property.

(2) For the purposes of this section, the term:

(a) “Recklessness” means the acting, or omission to act, in conscious disregard of a risk:

1. Known, or so obvious that it should have been known, to the officer or director; and

2. Known to the officer or director, or so obvious that it should have been known, to be so great as to make it highly probable that harm would follow from such action or omission.

In the end, it is wise for board members and officers to act reasonably under the circumstances in order to provide for better insulation against any argument that a breach of fiduciary duty occurred.

For those not yet introduced to the phrase “statutory safe harbor,” in the context of community associations, it limits the past due assessment liability of a first mortgagee, along with its successor or assignee of the mortgage to who acquires a condominium unit or a HOA parcel as a result of foreclosure of its first mortgage or by deed in lieu of foreclosure, to the lesser of one percent (1%) of the original mortgage debt or the unpaid assessments that accrued during the 12 months before the first mortgagee, its successor or assignee, obtained title. A number of cases regarding the application of the statutory safe harbor have been decided with the past few years regarding the extent and reach of statutory safe harbor, most of which have benefited the lender or its successor or assignee of the mortgage.

In today’s Roundup, we look at the liability of a subsequent owner who acquired tittle from the lender who had previously successfully foreclosed, but failed to pay the statutory safe harbor prior to transferring the title. The question of whether an owner who acquired title subsequent to the first mortgagee is entitled to the statutory safe harbor on the delinquent assessments due when the first mortgagee failed to pay the statutory safe harbor prior to their transfer of title to a new owner was addressed in the October 25, 2017 opinion of Florida’s Fourth District Court of Appeal in the case of Villas of Windmill Point II Property Owners’ Association, Inc. v. Nationstar Mortgage, LLC.

In this case, CitiMortgage held the first mortgage on a parcel, then foreclosed on the mortgage and obtained title to the parcel as a result of the foreclosure. After obtaining title to the parcel, CitiMortgage deeded the parcel to Fannie Mae. A dispute arose as to whether or not Fannie Mae was entitled to the application of the statutory safe harbor upon the delinquent assessments due to the Association prior to obtaining title. The Association argued Fannie Mae owed all of the prior assessments due and Fannie Mae argued that it was entitled to the benefits of the statutory safe harbor. This dispute resulted in a lawsuit brought by Fannie Mae’s agent, Nationstar, against the Association, seeking application of the statutory safe harbor provisions, declaratory relief, and damages.

At trial, the trial court determined that Fannie Mae was entitled to the application of the statutory safe harbor in the amount of one percent (1%) of the original mortgage debt. On the Association’s appeal of the trial court’s decision, the Association argued that Fannie Mae was not entitled to the statutory safe harbor provisions of section 720.3085(2)(c), Florida Statutes, because Fannie Mae was not a first mortgagee, or its successor or assignee, that acquired title to the parcel by foreclosure or by deed in lieu of foreclosure. However, the Appellate Court did not agree with the Association’s argument.

The Appellate Court held that, although Fannie Mae was not a first mortgagee, or its successor or assignee, that acquired title to the parcel by foreclosure or by deed in lieu of foreclosure, Fannie Mae does indirectly benefit from the statutory safe harbor provisions because Fannie Mae is jointly and severally liable with CitiMortgage, the prior owner, for all unpaid assessments due up to the time of transfer of title, pursuant to section 720.3085(2)(b),Florida Statutes, and CitiMortgage did qualify for the application of the statutory safe harbor provisions. In other words, it would appear that the Association tried to argue that because the foreclosing lender failed to pay the statutory safe harbor prior to its sale to a new owner, the new owner should be jointly and severally liable for all of the past assessments due without regard to the statutory safe harbor provisions. In effect, both the trial court and Appellate Court held that the new owner did acquire the joint and several liability of the prior owner, and since the prior owner was the foreclosing lender and since it was entitled to the statutory safe harbor and even though the lender did not pay it to the Association prior to their transfer of title to the new owner, nevertheless, the new owner was only jointly and severally liability up to the amount of the predecessor owner. Since, in this instance, the predecessor owner was entitled to the benefits of the statutory safe harbor, then so too, was new owner.

While this case was with regard to the statutory safe harbor provisions applicable to homeowners’ associations under Chapter 720, Florida Statutes, it is likely that this decision will also be applicable to condominium associations under Chapter 718, Florida Statutes, due to the substantial similarity in the statutory safe harbor provisions of each of these chapters.

Ownership of a condominium unit, includes “appurtenances”, meaning rights which are attached to the unit and pass with the unit upon its sale. A plain English definition of the term means “connected to”. Typical examples of an appurtenance include common elements to which one or more unit owners have an exclusive use right such as the limited common element balcony attached to the unit and a limited common element parking space. More specifically, section 718.106 of Chapter 718 of the Florida Statutes, more commonly referred to as the “Condominium Act”, provides that appurtenances include:

1) an undivided share in the common elements and common surplus;
2) the exclusive right to use limited common elements as designated by the declaration;
3) an exclusive easement for the use of the airspace occupied by the unit;
4) membership in the condominium association with full voting rights; and
5) other appurtenances as may be provided in the declaration of condominium.

With limited exception, and unless otherwise set out in the declaration of condominium as originally recorded, appurtenances to a unit cannot be materially altered or modified without the approval of ALL of the unit owners, meaning one hundred percent (100%) approval, is required. This requirement is set out in section 718.110(4), Florida Statutes. Commonly, the use of this level of unit owner approval is evoked when a unit owner colonizes, or takes over, a portion of the common elements for that unit owner’s exclusive use. For example, where a unit owner installs a private patio in the common elements adjacent to his/her unit or where a unit owner finishes a common element attic space for use as a spare room.

However, the use of section 718.110(4), Florida Statutes, as a sword against an amendment to the declaration of condominium removing membership in an off-site fitness club designated as an “appurtenance to the Unit” in the declaration of condominium was recently denied on October 18, 2017 by Florida’s First District Court of Appeal in the case of Silver Beach Towers Property Owners Association, Inc., Silver Beach Towers East Condominium Association, Inc., and Silver Beach Towers West Condominium Association, Inc. v. Silver Beach Investments of Destin, L.C., and The Club at Silver Shells, Inc. It is the fifth factor, as set out in section 718.106, above, “other appurtenances as may be provided in the declaration of condominium” that is the subject of the appellate court’s review.

In this case, the declaration of condominium provided that each unit owner automatically became a non-equity member of The Club at Silver Shells, Inc. (the “Club”) which membership was deemed appurtenant to the unit. Unit owners were prohibited from terminating their membership until the unit was conveyed to another owner, but the Club was authorized to terminate an owner’s membership without notice to the owners. The Club’s property and facilities were located approximately a mile away from the condominiums and remained the property of “Silver Shells Corporation.” Although the Club property was “intended primarily for the benefit of the Owners and Occupants of Units,” the Club property could also be made available to the general public. However, the unit owners remained responsible to pay dues and fees set and charged by the Club at its sole discretion.

To rid themselves of the need to pay dues and fees to the Club, the declaration of condominium was amended to remove the provisions related to the Club membership and related expenses pursuant to the typical amendment provisions as set out in the declaration requiring the affirmative approval of a super majority of the owners. This amendment was later challenged by the Club and the community’s developer as being invalid for failure of the amendment to have been approved by ALL of the unit owners in accordance with section 718.110(4), Florida Statutes. In other words, in plain English, the Club and developer argued that, because membership in the off-site fitness club was declared as an appurtenance to ownership of a condominium unit, they argued amending this provision out of the declaration of condominium required 100% affirmative consent of ALL of the owners.

The trial court agreed with the Club’s and developer’s argument. But, on appeal the Appellate Court disagreed with the trial court and found that, notwithstanding the declaration of condominium provision which deemed that the membership in the Club was appurtenant to the unit, such membership was, in fact, not an “appurtenance to the unit” as the phrase is characterized in the law. In other words, the appellate court held that merely describing something as an appurtenance in a declaration of condominium does not really mean it is an actual appurtenance if the appurtenance does not comply with then provisions of s. 718.106, Florida Statutes, discussed above.

The Appellate Court reached this conclusion because the Club memberships in the off-site commercial fitness club:

1) were “non-equity” memberships,
2) were not exclusively available to unit owners,
3) were terminable solely by the Club without cause or recourse of the member,
4) the club did not constitute a part of the “common elements” or “condominium property” as defined by sections 718.108 and 718.103(13), Florida Statutes, and
5) the Court found that the Club was not owned, controlled, or even affected by any input from the unit owners or the associations.

So, in other words, the Court said, without saying it, there was not a sufficient nexus between the requirement of club membership and condominium unit ownership because the Club memberships were not “appurtenances to the units,” as the phrase is legally defined, the approval of all of the unit owners to an amendment modifying such “appurtenances” in accordance with in section 718.110(4), Florida Statutes, did not apply. Therefore, the unit owner vote to amend the declaration of condominium by its normal amendatory provision to rid themselves of the requirement of the Club membership and dues was proper.

In the end, merely declaring something an “appurtenance” in a declaration of condominium does not necessarily make it so. If your board of directors has questions about your condominium’s appurtenances that are appurtenant to unit ownership then you will need to consult with your association’s attorney.

In today’s overly litigious world, more and more, when a community association is sued for everything from slip and falls, maintenance and repair obligations, to failure to provide official records, so too is the management company. Thus, there is no need to wonder why community association management companies require their community association clients to indemnify them for their company’s and managers’ acts of ordinary negligence. In other words, if the manager is sued by a member, guest, or even a third-party vendor, then the purpose of including the contractual duty for the association to indemnify the management company and its managers is designed to ensure that all the fees and costs of the litigation, as well as any resulting monetary damage judgment entered against the manager and/or their management company, would be paid for, in full, by the association. As you will read below, for one management company, it did not quite work out that way.

The indemnification provision set out in a management contract can be a contentious part of a management agreement negotiation, most especially between the association’s lawyer and the lawyer representing the management company. Upon legal review, some management contracts already have fair indemnification provisions as a part of their contract and need no further negotiation. Other management contract indemnification provisions require re-drafting and negotiation of their boilerplate indemnification provision. If the management company is not willing to do so, then that is something that must be seriously considered by the board. Either way, the board should fully understand the implications of the indemnity provision set out in their management contract. While contract terms requiring a community association to indemnify their management company are likely as old as some of the very first management contracts, in 2014, the Florida Statutes were amended for the first time to address management company indemnification. The 2014 creation of section 468.4334, Florida Statutes, provides that,

“a contract between a community association and a community association manager or management company may provide that the association will indemnify and hold harmless the manager and management company for ordinary negligence by the manager or management company that is the result of an instruction or at the direction of the association.”

Notwithstanding, section 468.4334, Florida Statutes, also prohibits indemnification of a manager or management company for anything which,

“violates a criminal law; derives an improper personal benefit, either directly or indirectly; is grossly negligent; or is reckless, is in bad faith, is with malicious purpose, or is in a manner exhibiting wanton and willful disregard of human rights, safety, or property.”

In plain English, when read as a whole, section 469.4334, Florida Statutes, provides that the management company contract might require association indemnification of the management company for its ordinary negligence, but prohibits any term in the contract that would require the association indemnify the management company for its intentional bad acts and seriously reckless behavior.

Because your community association management contract will most likely have an indemnification provision to one degree or another, the question arises as to when and to what degree the obligation of the association to indemnify the management company takes effect. This was a topic of discussion in a recent Third District Court of Appeal case, MVW Management, LLC v. Regalia Beach Developers, LLC, Case No. 3D16-2198.

In this case, Regalia, the developer of a condominium project, sued MVW Management, the condominium’s manager, for mismanagement of the condominium under Regalia’s management contract with MVW Management. As Regalia is a party to the management contract with MVW Management, this action is deemed a first-party action, as compared against a third-party action in which, for example, a guest or vendor sues the management company. The management contract between Regalia and MVW Management provided for indemnity of MVW Management. MVW Management made a claim under the indemnity provision of its contract for advancement of its litigation expenses.

The indemnity provisions in the management contract provided that “[e]xpenses including attorneys’ fees, court costs, judgments, fines, amounts paid in settlement and other payments incurred by [MVW Management]… shall be paid by [Regalia] in advance of the final disposition of such action, suit or proceeding.” Notwithstanding this provision, the Appellate Court agreed with the trial court’s decision and determined that MVW Management was not entitled to advancement of its litigation expenses because the provision does not apply to a first-party litigation, such as the present case.

The Appellate Court explained that the right to be indemnified and the right to advancement of litigation expenses are different:

• “indemnification” is the right to be paid at the end of the lawsuit so long as certain conditions are met.

• “advancement of litigation expenses” is like a loan in which one party pays for the litigation expenses of the party holding the right as they are incurred with the understanding that the amounts must be paid back in the event the case is lost.

Although this distinction exists, both terms were intertwined in the case at hand. The Appellate Court explained that indemnification provisions in Florida only apply to third-party claims unless the language of the indemnification “clearly and unambiguously shows an intent to extend indemnity to first-party claims.” Because the management agreement in this case did not “clearly and unambiguously shows an intent to extend indemnity to first-party claims,” MVW Management was not entitled to advancement of its litigation expenses under the indemnification provisions of its management agreement with Regalia.