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Before you know it, 2014 will be here. Many associations end their fiscal year on December 31st. With that in mind, this is a great time to review the financial reporting requirements.

Within 90 days after the end of the fiscal year, or annually on such date provided in the bylaws, the association must have prepared a financial report on the financial activities of the preceding fiscal year. Within 21 days after the financial report is completed, but no later than 120 days after the end of the fiscal year, the board must provide each member with a copy of the financial report or, at a minimum, provide written notice that a copy of the financial report is available upon request, at no charge to the members.

The financial report must consist of a complete set of financial statements prepared in accordance with generally accepted accounting principles. The level of financial reporting that must be prepared by the board is based on the total annual revenue (including reserves) of the association, as follows:

1. An association with total annual revenues of $150,000 or more, but less than $300,000, shall prepare compiled financial statements.

2. An association with total annual revenues of at least $300,000, but less than $500,000, shall prepare reviewed financial statements.

3. An association with total revenues of $500,000 or more shall prepare audited financial statements.

4. An association with total annual revenues of less than $150,000 shall prepare a report of cash receipts and expenditures.

Interestingly, if the board desires to raise the level of financial reporting, it may be increased without membership approval by board action alone, unless the governing documents provide otherwise. In addition, if the board is not inclined to approve a heightened level of reporting, but the members want to do so, then upon twenty (20%) percent of the parcel owners petitioning the board to increase the level of financial reporting from that required by Statute for that fiscal year, the board must notice and hold a membership meeting within thirty (30) days of receipt of the petition. To raise the level of financial reporting, a majority of members present at such meeting must cast their vote in favor of doing so.

However, lowering the reporting threshold is a different matter entirely because only the members can make that decision. To accomplish this, a majority of members present at a properly noticed membership meeting must cast their vote in favor of lowering the level of financial reporting. The meeting must take place prior to the end of the fiscal year in question.

On a completely different note, and interesting nonetheless, just two weeks prior to turnover, the developer, in Courvoisier Courts, LLC v. Courvoisier Courts Condominium Assoc. Inc., a 2012 case decided by Florida’s Third District Court of Appeal (the “3rd DCA”), assigned the remaining limited common element parking spaces and storage spaces to one of its remaining units still for sale and thus still under the control of the developer. In brief, “common elements” are owned by all of the unit owners together in indivisible shares. Typically all unit owners have the right to use the common elements. On the other hand, “limited common elements” are a subset of the common elements where only particular unit owner(s) have the right of use associated with the limited common element at issue. For example, while the condominium parking lot is typically a common element (meaning all owners have the right to traverse it), the parking spaces may be limited common elements (meaning only the assigned unit owner has the right to use their assigned parking space).

In Courvoisier Courts, the association argued that the developer was required to turn over all of the remaining limited common elements as a part of the turnover requirement and that the developer’s right to the remaining parking and storage spaces terminated upon turnover. The trial court agreed with the association and ordered the developer to convey all limited common elements to the association. The developer appealed, and the 3rd DCA reversed the trial court’s decision.

In so doing, the 3rd DCA looked to the declaration of condominium and noted that “[a]ny parking spaces and storage spaces that have not been assigned by the time Developer has sold all Units owned by it will become common elements and become the property of the Association.” Since the developer assigned the remaining limited common element parking spaces and storage units prior to turnover, the court ruled in favor of the developer affirming controlling case law that provides a court may not violate the clear meaning of a contract in order to create an ambiguity.

 

and Other Interesting and Important News

What do short sales, Florida’s Marketable Record Title Act, construction agreement indemnities, the term, “defalcation”, prevailing party attorney fees, and the implied covenant of good faith and fair dealing have in common? Well, not too much, except that they are discussed in today’s Rembaum’s Association Roundup.

Did you know, generally speaking, that forgiveness of a real estate loan is considered a taxable event by the I.R.S.? For example, say a homeowner owes $400,000 to their lender for their home that, due to market conditions, is only worth $300,000. If the lender allows the homeowner to short-sell the property for the lesser amount of $300,000, then the homeowner has received a taxable benefit of $100,000, meaning the homeowner would be expected to pay income tax on the forgiven $100,000 portion of the debt. Until now there has been legislation in place that acts to prevent the I.R.S. from taxing the homeowner for that portion of their loan that was forgiven by the lender. However, the legislation will expire on December 31st. With that in mind, if you are short selling your home, you might consider doing so prior to the new year or hope that Congress extends this benefit.

The Marketable Record Title Act, or MRTA for short, is set out in Chapter 712, Florida Statutes. MRTA operates to extinguish covenants recorded against real property not sooner than 30 years after the covenant was recorded against the property. While MRTA operates against homeowners’ association declarations, it does not operate against condominium association declarations. In Southfields of Palm Beach Polo and Country Club HOA v. McCullough, a 2013 case, the Fourth District Court of Appeals recently held that an HOA has a duty, which can be enforced by mandatory injunction, to take certain steps to prevent the horrible effects of MRTA from operating against a homeowners’ association. So, if your HOA’s declaration was recorded close to 30 years ago, then time is of the essence to ensure the effects of MRTA don’t begin to render your HOA declaration meaningless.

As to construction contracts, remember that if the contractor promises an unlimited indemnity in the event of damages, the contractor’s promise is absolutely meaningless unless the promise to indemnify contains a monetary cap. We are reminded by the First District Court of Appeals, in Griswald Ready Mix Concrete v. Reddick, a 2012 case, that Florida Statutes, section 725.06 requires the contractor’s indemnity to contain a monetary limitation in order to be enforceable.

In the “Jeopardy” category of words you have likely never heard of … for $500.00, Alex, comes the term “defalcation” (pronounced, dee-fal-kay-tion). It is a term used in Title 11 of United States Code, Section 523 and refers to the failure of a fiduciary to produce the funds entrusted to them. The Eleventh Circuit has held in the matter of In Re Bullock, that to be accused of “defalcation” the person holding the funds need not have engaged in fraud, embezzlement or even misappropriation, but does require more than mere negligence… such as being “objectively reckless” to give rise to a claim for defalcation.

As to a community association seeking prevailing party attorney fees for enforcing the terms of its declaration, in Alorda v. Sutton Place, the Second District Court of Appeals held that if the covenants provide for a legal remedy, and instead the association sued the non-conforming owner for injunctive relief for refusing to comply with the covenants, then even though the association prevailed, it is not entitled to prevailing party fees as to the injunctive relief it won.

Finally, in QBE Insurance Corp. v. Chalfonte Condominium Association, Inc., a 2012 case, the Florida Supreme Court reminds us that Florida contract law recognizes “an implied covenant of good faith and fair dealing” in every contract. “This implied covenant is intended to protect ‘the reasonable expectations of the contracting parties in light of their express agreement’.” Further, it must relate to the performance of a specific term of the contract.

If your association seeks to compel compliance with the maintenance provisions of its governing documents,
before filing a lawsuit the association first needs to ensure that there are clear and unambiguous standards and that the offending owner is not only informed of the violation, but also, informed of the specific steps that must be undertaken to bring the property into compliance.

In September 2013, the Fifth District Court of Appeals rendered its decision in Boyle v. Hernando Beach South Property Owners Association, Inc. (the “Association”) in regard to whether a homeowners’ association was entitled to an injunction against Boyle, a homeowner, for failing to properly maintain his lot. More specifically, it was alleged that his landscaping and trees needed to be trimmed and properly maintained and that the mold on the home needed to be cleaned or removed. The association had filed a lawsuit seeking an injunction to force the owner to comply with the covenants. The trial court agreed and issued an injunction.

The resulting specifically required defendant Boyle to “properly maintain[ ] and trim[ ] the landscaping and trees and clean[ ] or remov[e] the mold on the home.” The injunction further provided that “if Boyle fail[ed] to comply, the Association may enter and maintain the property and place a lien on the property that could be foreclosed if the costs incurred by the Association in bringing the property up to standard are not paid.”

The trial court case was resolved as a result of the “summary judgment” proceedings which are employed as a part of litigation, as we are reminded by the Fifth DCA, “to avoid the expense and delay of trials when all facts are admitted or when a party is unable to support by any competent evidence a contention of fact.” To prevail in such a motion, the moving party must prove that there are no genuine issues of material fact and that the moving party is entitled to judgment in their favor as a matter of law.

During the trial court’s motion for summary judgment hearing, the association presented “affidavits of five officers and directors of the Association stating that, based on their personal knowledge, Boyle ‘failed to properly maintain his lot… Specifically, the landscaping and trees need to be trimmed and properly maintained. Additionally, mold on the home needs to be cleaned/removed.’” The trial court agreed and granted the injunction compelling Boyle to properly maintain his landscaping and clean or remove the mold.

Then homeowner Boyle filed an appeal arguing that there were material issues of fact in dispute, and therefore, the trial court’s summary judgment order was inappropriate and “that the supporting affidavits were insufficient.” Boyle also contended that his affirmative defenses were not properly negated by the Association and “the pertinent part of the [covenants were] vague and ambiguous.” [emphasis added]

On appeal, Boyle argued that the summary judgment evidence in the record did not indicate “how he was in violation of the [covenants].” In regard to the landscaping and trees, the Fifth DCA agreed. In so doing, the Fifth DCA held that the affidavits submitted by the Association merely mirrored the allegations of the complaint filed by the Association reasserting that Boyle’s landscaping and trees were not properly trimmed and maintained. But there were no allegations and there was no evidence presented to show how the landscaping and trees had not been properly maintained and trimmed.

The Court held that given the lack of evidence presented by the Association to establish that Boyle’s landscaping and trees were not maintained “in a neat, clean and orderly condition,” it is unclear how Boyle had violated the covenants and what steps he needed to take to ensure that his landscaping and trees are in compliance.

Interestingly, the Court found that the mold on the house was another matter that did not suffer from the same infirmities as the issue regarding the landscaping and trees because the mold on the house was established by the statements made in the affidavits, which, in the eyes of the Court, left no room for speculation or conjecture. The existence of mold on the subject home was a readily observable fact to the five board members who swore to their personal knowledge, which was not refuted by counter-affidavit or other proof.

In the end, the Fifth DCA reversed the part of the trial court order regarding the landscaping and trees and upheld the part of trial court order regarding the mold. The reported decision of this case evidences that Boyle had refuted the landscaping claim against him, and Boyle had not similarly refuted the mold claim. Had Boyle done so, then perhaps the Fifth DCA would have also overturned that part of trial court’s order, too.

In any event, there is nugget to be gleaned from this case. If an association is going to seek a court order to compel compliance with the governing documents, it first had better ensure there clear standards and that the offending homeowner is informed of the steps that must be taken to bring their property into compliance.

This week, Palm Beach Post writer, Jan Musgrave, reported on yet another community association security debacle that tragically led to a shooting and near fatality. Of course, everyone is familiar with George Zimmerman and the senseless death of Trayvon Martin. The tragedy at the center of this story, while only recently concluded, began in 2010.

On September 25, 2013, The Palm Beach Post (the “Post”) reported that the Northlake Villa Condominium was ordered to pay $1.5 million dollars to the victim of a shooting where the assailant, Jack Abrams, was the associations “deputized” security guard and who wasn’t even an owner, but was the live-in boyfriend of a board member. Because Abrams had been appointed by the association’s board to enforce the condominium’s rules and regulations, a Palm Beach County jury last week found that the association was liable for Abrams’s inexplicable fit of anger.

The Post reported that, in 2010, Abrams “lost it” when a woman left the condominium’s laundry room door open. Abrams vented his displeasure loudly. The woman’s boyfriend, wondering what the commotion was, ventured into the hallway where Abrams proceeded to shoot him three times leading to, as reported, 24 blood transfusions, 12 surgeries, and more to come. During the trial, the Post reported that the following facts were presented:

• When the board appointed Abrams, no background checks were done.
• Abrams received an “other than honorable discharge” in 2000 from the U.S. Marines Corps for drug use and other character flaws.
• A psychiatrist and psychologist who examined Abrams, as part of the criminal case, agreed he suffered from post-traumatic stress disorder and paranoia.
• When North Palm Beach police searched his apartment, they discovered an arsenal of weapons including five guns, seven combat knives, and 1,400 rounds of ammunition.
• Others testified about Abrams’s increasingly erratic behavior. It was reported that he accosted people in the parking lot if they didn’t park their cars between the lines.
• The day before he shot the victim, he told one resident: “I’m getting so sick and tired of this laundry room. I’m going to kill someone over it.”

… Sadly, that is exactly what he did. Abrams shot the owner’s boyfriend “due to a mixture of rage and intoxication”. While a security expert testified during trial that such “poor decision-making by neighborhood and condo associations is becoming increasingly common”, it was not poor decision making that led to the judgment against the condominium. Rather, it was that the board failed to act. By failing to act, the board conducted itself with reckless abandon.

The “standard” by which association board members should conduct themselves is referred to as “reasonable business judgment”. In plain English, this does not mean a board must always be right in their decision making. Rather, they must act reasonably under the circumstances. So, when a board defies the requirements of its own governing documents by deputizing a non-owner as a defacto committee chair of security, turns a blind eye to reports of its residents as to Abrams’s erratic behavior, and fails to conduct even a simple background check before appointing individuals to the neighborhood watch committee, it’s not likely anyone would believe the board acted reasonably. Rather, the board acted with a reckless and wonton abandon endangering the life of every owner, tenant, and guest.

It can be difficult to determine the fine line between acting with reckless abandon as compared against making, what may turn out to be, a really dumb decision. The Northlake Villa Condominium learned the hard way that there is such a line. Will George Zimmerman’s community association bear financial liability for the death of Trayvon Martin? Did his association’s board act with reckless abandon and fail to fulfill its duty by exercise of its reasonable business judgment?

Interestingly, the State of Georgia’s appellate courts have held that a condominium association, being a purely legislative created form of ownership (similar to Florida’s condominium regime) does not owe a duty to provide security in the common areas where it previously disclaimed such responsibility in its declaration of condominium. Likely, this would be true in Florida, too.

However, when a board fails to act when it should have, there are very real consequences. The Abrams case teaches us that where an association creates a neighborhood watch committee, the board should take “reasonable” (there is that word again) measures during the appointment process, such as running background checks and ensuring those appointed to office meet any requirements set out in the governing documents.

To the reader who asked whether an association member who owns a concealed weapon permit is allowed to bring their weapon into the “no weapons allowed” clubhouse, the answer is “yes, they are.” However, to the extent the member makes it known that he or she is carrying a concealed weapon, they are likely in violation of state laws, as the weapon is not concealed if its owner chooses to waive concealment by blabbing about it.

The association’s “declaration of covenants and restrictions” is a contract between the association and its members. Amongst other things, it provides for the rights and obligations of both parties. Until recently, lawyers often debated the statute of limitations applicable to a community association member’s legal challenge of their association’s member approved amendment(s). Generally speaking, section 95.11, Florida Statutes, provides that a legal action based on a contract dispute must be brought within five years from the time the aggrieved party knew, or should have known, of the matter that is the subject of the litigation.

In this context, lawyers often disagree as to when the five year period begins to accrue. For example, do the five years begin when the amendment is recorded, or some other time, such as when a member took title to their property? Of course, in the latter example, the association would never truly be free from a new owner’s challenge. Additionally, if a potentially aggrieved member is time barred from challenging an amendment, then by simply re-titling their property from themselves to perhaps a family trust, they could likely bring in an otherwise time barred claim. Drawing from municipal law cases, lawyers representing associations often argue that the five year statute of limitations should begin to run from the date an amendment is recorded.

Recently, an association member upset about an amendment requiring members to pay mandatory country club fees filed a lawsuit against her association. The trial court entered summary judgment in favor of the association because the amendment had been in effect for greater than five years. However, the 4^th District Court of Appeal reversed on August 24, 2013, when in Harris v. Aberdeen Property Owners Association, Inc., et al, Case. No. 4D12-1435 (Fla. 4^th DCA 2013), the Court held that:

“until Harris took title [to her HOA lot] in October of 2006 or, alternatively, until she was assessed membership fees, there was no “immunity, power, privilege or right of the complaining party” that was “dependent upon the facts or the law applicable to the facts…Because Harris filed suit within five years of taking title, it was an error for the trial court to enter summary judgment based on the statute of limitations.”

This case is not a good one for community associations because it means that any member of an association can challenge the declaration and its amendments for the first five years of that member’s ownership of their lot (or unit) without regard to age of the declaration or the amendments. In other words, and as absurd as it sounds, an association’s declaration and its amendments are never free from the legal challenges so long as the challenge is brought by a member(s) who has not owned their property for at least five years.

Associations, like governments, should have the absolute right to know when their declaration and its amendments are free from member challenge. ATTENTION ALL FLORIDA LEGISLATORS: A LEGISLATIVE FIX TO THIS DEBACLE IS NEEDED!

As of July 1, 2013, many new laws concerning community associations went into effect. If you serve on a homeowners’ association board, there is a new law on the books you might want to discuss at the dinner table. Well, that may not be the best place because, if you are not careful, it might be your last meal as a homeowners’ association board member. Florida Statute, section 720.3033, now provides, in part that,

“an officer, director, or manager may not solicit, offer to accept, or accept any good or service of value for which consideration has not been provided for his or her benefit or for the benefit of a member of his or her immediate family from any person providing or proposing to provide goods or services to the association…

However, an officer, director, or manager may accept food to be consumed at a business meeting with a value of less than $25 per individual or a service or good received in connection with trade fairs or education programs.”

As punishment for eating a meal costing $25.00 or more, the new law takes an odd twist. The remaining board members now have the legislative authority to “kick” the accused board member off the board for enjoying a business meal costing $25.00 or more. (It’s ok, your eyes are not playing tricks. It is true.) Read it for yourselves…. section 720.303 also provides,

“If the board finds that an officer or director has violated this subsection, the board shall immediately remove the officer or director from office. The vacancy shall be filled according to law until the end of the director’s term of office.”

In an even odder twist of fate, the law does not provide any guidance whatsoever as to how the remaining board members are to decide the guilt or innocence of the accused violator. Should the standard be “beyond a reasonable doubt” (meaning without a doubt.. 100% guilty), “by a preponderance of the evidence” (meaning greater than 50% chance the accused is guilty or maybe the standard should be “clear and convincing evidence” (meaning that the burden of proof is somewhere in between the former two categories). Come to think about it, is the accused board member even entitled to any type of notice of the accusations, hearing, and trial? Is the accused board member entitled to defense?

An interesting question is whether the $25.00 limitation also applies to a “service or good received in connection with trade fairs or education programs”? A plain reading of the new legislation could be interpreted to mean that there is no limit on the value of the good or service received in connection with a trade show or fair. It’s not too likely that was the intent of the legislation, but…

On a related note, if the association enters into a contract or other transaction with any of its directors, or a company in which any of its directors are financially interested, the new legislation provides that the board must enter certain disclosures required by law into the written minutes of the meeting. In addition, the board must approve the contract by an affirmative vote of two-thirds of the directors present, compared to the typical majority otherwise required.

Then, at the next regular or special meeting of the members, the board must disclose the existence of the contract to the members. Upon motion of any member, the contract must be brought up for a vote and may be canceled by a majority vote of the members present. If the members cancel the contract, the association is only liable for the reasonable value of goods and services provided up to the time of cancellation, and is not liable for any termination fee, liquidated damages, or other penalty for such cancellation.

With all of this in mind, homeowners’ association board members would be wise to bring a box lunch and eat dinner at home.

Every now and then you might read about a homeowner who defaulted on his or her mortgage and ended up getting their house for FREE. This past Sunday is no exception. In the August 18, 2013 edition of the Palm Beach Post, Staff Writer Kimberly Miller’s headline article is titled “How to get your house for free: Rare but possible.” This well written, in-depth article begins with the following sentence:

“Florida’s five-year deadline to foreclose on a home is ticking on thousands of aging cases statewide, giving lucky borrowers a shot at a free house and catching banks with muddled files unaware.”

While the title to the article is catchy, Ms. Miller very quickly points out that “a very specific set of circumstances must be in play for a homeowner to walk away a jack pot winner.” Actually, you’re likely to have a better chance of being hit by lightning… over and over again. To be the recipient of such a windfall, you’ll need a very perfect storm. Let’s take a deeper look into the circumstances minimally needed to set such a stage.

At its core, the mortgage and note between the lender-bank and its borrower is a contract. Whenever there is a breach of contract, only a limited period of time exists for the non-defaulting party to file a lawsuit against the party that caused the breach. Section 95.11, Florida Statutes, provides that an action to foreclose a mortgage and an action based on a breach of contract obligation, or liability founded on a written instrument must be commenced within five years from the date the non-defaulting party knew, or should have known, of the activity that gave rise to the default. In the context of a borrower who defaults on their mortgage payments, the lender has five years to bring their lawsuit to foreclose their mortgage and note against the defaulting borrower. In the most simplistic terms possible, the “note” is defined as a contract that holds the borrower responsible for the monies borrowed, while the “mortgage” is defined as the contract that allows the lender to recover the collateral, in this case, the house, from the defaulting borrower (and most times from any other party who acquires the property prior to the conclusion of the lender’s foreclosure action).

The lender actually has five years from the date the last payment is due to foreclose their mortgage. How then does the occasional lender find themselves in the opposite position of being foreclosed out of foreclosing their own defaulting borrower? It’s actually quite simple.

The majority of all mortgages contain a provision that allows the lender to accelerate all the remaining payments in the event of a borrowers default. As a knee-jerk reaction to a borrower’s failure to make timely payments, prior to initiating the foreclosure lawsuit, the lender will often accelerate all remaining payments. For example, if a borrower entered into a 30 year loan on January 1, 2000, the lender would have until January 1, 2035 to finally file a lawsuit to foreclose their mortgage and note. However (and this is a big “however”), if the borrower stopped making his or her mortgage payments on January 1, 2010, and, as a result, the lender accelerated all of the remaining sums due, then the lender would only have five years (through January 1, 2015) in which to bring its foreclosure lawsuit. In that scenario, if the lender did not file its foreclosure lawsuit by January 1, 2015, then “all the glitters” might just turn into gold after all.

As a result of the 2007 real estate market collapse, thousands of borrowers ended up defaulting in their loan payments. In response, lenders accelerated all remaining payments and initiated foreclosure lawsuits. Only afterwards did many lenders get caught with their proverbial pants down when they realized they did not have the necessary documents to foreclose their loans. Meanwhile, as the Steve Miller Band would sing in their noted song, “Fly Like an Eagle”… “time keeps on slippin’, slippin’, slippin’ into the future.” Before you know it, five years has passed since the time of the lender’s decision to accelerate its mortgage and then… OOPS!

HOA BOARD MEMBER CERTIFICATION. Effective July 1, 2013, within 90 days of taking office, all HOA board members are required to become “certified” by either taking an approved HOA Board Member Certification Course or by certifying in writing that the board member has read the association’s declaration of covenants, articles of incorporation, bylaws, and current written rules and policies; that he or she will work to uphold such documents and policies to the best of his or her ability; and that he or she will faithfully discharge his or her fiduciary responsibility to the association’s members.

To meet this new requirement, Attorney Jeffrey Rembaum, of Kaye Bender Rembaum, Attorneys At Law, will be presenting three (3) FREE HOA Board Member Certification Courses, generously sponsored by FirstService Residential (formerly, The Continental Group). These FREE courses will be held on August 13 and 27, from 12:30 PM to 2:30 PM and August 20, from 7:00 PM to 9:00 PM at the South County Civic Center located at 16700 Jog Road, Delray Beach. To reserve your seat(s), contact Janeal Aponte at 561-989-5064 or [email protected].

In addition, Kaye Bender Rembaum, Attorneys At Law, is offering the following FREE HOA Board Member Certification Courses from 6:30 PM to 8:30 PM on August 27, September 24, and October 29 in the Firm’s beautiful Pompano Beach office located at 1200 Park Central Boulevard, South. To reserve your seat(s), contact Odalis Milanes at 954-928-0680 or [email protected].

A MEMBER’S RIGHT TO SPEAK.  At members meetings, all HOA members have the right to speak for at least three (3) minutes on all items open for discussion or included in the agenda without regard to any provision to the contrary in the governing documents or rules adopted by the board or membership. Similarly, at board meetings, all HOA members also have the right to speak on all items open for discussion or included in the agenda, however, the law does not provide for the same minimum three (3) minutes. In both instances, the board can adopt reasonable rules regarding frequency, duration, and other manner of member statements. Every board should consider doing so. As compared to condominium associations, a condominium association member has the right to speak only with reference to all “designated agenda items” at both member meetings and board meetings. Similarly with HOAs, a condominium association may adopt written reasonable rules governing the frequency, duration and manner of member statements. In the condominium context, there are no statutory time limitations imposed on member statements.

ELECTION CHALLENGES & RECALLS. Any challenge to a condominium or homeowners’ association election process must be commenced within sixty (60) days after the election results are announced. Recall attempts cannot be conducted until at least sixty (60) days after the election and not within the sixty (60) day period prior to the subsequent election.

A NEW TAX LOOMS OVERHEAD (A/K/A THE BOSTON TEA PARTY, CONTINUED). You likely already know that the Division of Florida Condominiums, Timeshares and Mobile Homes (the “Division”) requires condominium associations to pay a fee (aka, a tax) of approximately $4.00 per unit, per year. The revenue is used to offset the Division’s operating costs and programs. But, did you also know that the Florida Legislature diverts the lion’s share of this collected revenue for other expenditures not all related to the Division’s needs by commingling the revenues into the State’s general coffers?

Apparently, the Legislature is considering reaching even deeper into your wallet. By November 22, 2013, every HOA is required to inform the Division of, amongst other things, the total number of parcels and total amount of revenues and expenses from the association’s annual budget. The collected information is to be presented to the Governor, the President of the Senate, and the Speaker of the House of Representatives by December 1, 2013, and each year thereafter. For what other reason could such information be required, if not to consider additional taxes?  Perhaps we should all meet by the intracoastal waterway, tea in hand…

NEW HOA OFFICER AND DIRECTOR CONFLICT OF INTEREST LAWS. If the association enters into a contract or other transaction with any of its directors or other entity in which an association director is also a director or officer or is financially interested (except in other community associations), the board member (1) must disclose the facts of the relationship, (2) such facts must be entered into the minutes, (3) an affirmative vote of two-thirds of the directors present is required to approve the contract (minus the vote of the interested/conflicted director), and (4) the contract or transaction must be fair and reasonable. In addition, at the next regular or special meeting of the members, the existence of the contract (or transaction) must be disclosed to the membership. Upon motion of any member, the contract or transaction shall be brought up for a vote and may be canceled by a majority vote of the members present. If the members cancel the contract, the association is only liable for the reasonable value of goods and services provided up to the time of cancellation and is not liable for any termination fee, liquidated damages, or other penalty.

A HOA director or officer charged by information or indictment with a felony theft or embezzlement offense involving the association’s funds or property is removed from office, and the board must fill the vacancy. However, if the charges are resolved without a finding of guilt or without acceptance of a plea of guilty or nolo contendere, the director or officer must be reinstated.  A HOA member who has such criminal charges pending may not be appointed or elected to a position as a director or officer.

A HOA is required to maintain insurance or a fidelity bond for all persons who control or disburse funds of the association. If annually approved by a majority of the voting interests present at a properly called meeting of the association, the association may waive the requirement of obtaining an insurance policy or fidelity bond for all persons who control or disburse funds of the association. Why would members vote to do that?

The board must immediately remove an officer or director from office if the board finds that such person solicited, offered to accept, or accepted any good or service of value for which consideration has not been provided for his or her benefit or for the benefit of a member of his or her immediate family from any person providing or proposing to provide goods or services to the association, excluding food to be consumed at a business meeting with a value of less than $25.00 per individual and services or goods received in connection with trade fairs and education programs. It is not clear from a plain reading of this new legislation whether the $25.00 cap is intended to also apply to services or goods received in connection with trade fairs and education programs.

About a year ago, Rembaum’s Association Roundup reported that the 5^th District Court of Appeals (“5^th DCA”), in Lakeview Reserve v. Maronda, recognized that the rights of homeowners’ association members included the implied warranty of habitability for off-site homeowners’ association improvements built by the developer such as roadways, drainage systems, retention ponds, underground pipes, etc. The sole issue in the case was whether the homeowners’ association could maintain its claim against the homeowners’ association’s developer for breach of the common law implied warranties of fitness and merchantability, also referred to as the “implied warranty of habitability.”

Lakeview Reserve alleged that its developer, Maronda Homes, defectively designed and constructed the subdivision’s infrastructure, roadways, retention ponds, underground pipes, and drainage systems, breaching the implied warranties of fitness and merchantability for the residential home development and causing damage to the entire residential subdivision. Lakeview Reserve asserted that the defects were latent, as they were not readily discoverable by home purchasers who lacked specialized knowledge and were undiscoverable by home buyers upon the exercise of reasonable diligence at the time of purchase. Lakeview Reserve also alleged that it sustained serious damages due to the defects because one of its obligations as the homeowners’ association was to correct and repair the subdivision’s structural defects which impacted the homes in the development. Initially, the trial court agreed with the developer. On appeal, the 5^th DCA reversed. This meant that the homeowners’ association could sue the developer for a breach of the implied warranty of habitability.  Then, the Florida Legislature gutted the 5th DCA’s decision by passing new legislation, section 553.835(4), Florida Statutes, effective July 1, 2012.

Section 553.835(4), Florida Statutes, provides that “there is no cause of action in law or equity to a purchaser of a home or to a homeowners’ association based upon the doctrine or theory of implied warranty of fitness and merchantability or habitability for damages to offsite improvements.” The statute defines the term “offsite improvements” as “the street, road, driveway, sidewalk, drainage, utilities, or any other improvement or structure that is not located on or under the lot on which a new home is constructed… and also includes the street, road, driveway, sidewalk, drainage, utilities, or any other improvement or structure that is located on or under the lot but that does not immediately and directly support the fitness and merchantability or habitability of the home itself.” The law also provides that it applies to all cases accruing before, pending on, or filed after that date.

The Florida Supreme Court recently examined the retroactivity aspect of the new law, and, on July 11, 2013, held, in Maronda v. Lakeview Reserve, case No. SC10-2292, that, “for the retroactive application of a law to be constitutionally permissible, the Legislature must express a clear intent that the law apply retroactively, and the law must be procedural or remedial in nature. Remedial statutes operate to further a remedy or confirm rights that already exist, and a procedural law provides the means and methods for the application and enforcement of existing duties and rights. In contrast, a substantive law prescribes legal duties and rights and, once those rights and duties are vested, due process prevents the Legislature from retroactively abolishing or curtailing them.”

The Florida Supreme Court found that section 553.835, Florida Statutes, is substantive and is not remedial in nature because it does not simply clarify an existing right, but rather, prescribes legal duties and rights. Therefore, the new law could not be constitutionally applied retroactively to Lakeview Reserve or to any causes of action that accrued before the law’s effective date.  As to homeowners’ associations created after the effective date of section 553.835, Florida Statutes, unless the legislature amends or abolishes the law, there is likely little chance of successfully bringing a claim for breach of the implied warranty of habitability.

In rendering its decision, the Florida Supreme Court clearly expressed its unhappiness with the Legislature’s “side-stepping” the 5^th DCA’s earlier decision, as evidenced by the Court’s comment when it declared, “the Legislature does not sit as a supervising appellate court over our district courts of appeal.”

Until not too long ago, if an investor or foreclosing lender acquired seven or more condominium units, there was limited legal authority from the Florida Division of Condominiums to hold that person or company in the shoes of the original developer for all of the construction defect liability and failed financial obligations. Then, along came the 2007 financial crash. Failed condominium projects were everywhere and sophisticated investors knew not to buy seven or more units for fear of tremendous liability for acts in which the investor did not at all participate. Enter, Part VII of the Condominium Act, Chapter 718, Florida Statutes … to the rescue.

In 2010, to solve this crisis, Part VII of the Condominium Act, was passed into law. It is appropriately titled, the “Distressed Condominium Relief Act”.  In short, the “Relief Act” allows a mechanism for investors to acquire failed condominium projects and then sell the units at arms length without acquiring the liability of the failed developer for any construction defects and/or assessment funding obligations of the failed developer. However, the acquirer of these bulk units is only labile for their own construction activities. There are even safe guards built into the Relief Act to protect against using it improperly as a shield against liability by prohibiting the bulk transferee from being related to the failed developer.

Before the Relief Act was enacted, and forgetting the “robo-signing” debacle that led to the lender foreclosure delays of an extreme magnitude, lenders were very reluctant to foreclose their failed condominium projects due to their inherent financial liability for construction defects and prior developer funding obligations. But, with the Relief Act springing into law, commerce resumed as failed condominium projects were taken over by sophisticated investors, and lenders saw fit to safely foreclose. Importantly, investors and lenders felt safe to acquire more than seven units from the failed condominium project.

AND THEN…

On February 27, 2013, in The Porto Venezia Condominium Association, Inc., v. WB Fort Lauderdale, the United States District Court for the Southern District of Florida held that a lender who loaned millions of dollars to a developer for construction of  a condominium project and who accepted a deed in lieu of foreclosure for the now built, but unsold condominium units, could be liable to purchasers for what are commonly referred to as the Chapter 718.203, Florida Statutes, “statutory implied warranties of habitability” that form the basis of the cause of action against developers for construction defects arising from the original construction of the condominium.  In short, the Southern District Court held that “WB” as the successor to the initial lender, “ING Direct, FSB”, was still a “developer” and, as such, could be liable for the activities of the original developer during the forthcoming trial brought by The Porto Venezia Condominium Association.

Interestingly, the trial court had held that WB was not liable as a lender-developer and had held that, “having engaged in no construction itself, it could not be liable for construction defects.” The trial court had also found that, “WB could not be liable under the Florida Building Code because it had not engaged in any construction.” As for negligence, the trial court found that, “because all construction had been completed, WB did not breach any duty, even duties that could arise if a lender took an active part in developing a construction project.” However, in overturning the trial court, the Southern District Court held that, “because the Florida Legislature crafted a broad definition of “developer” that captures both builder-developers and lender-developers, the Court should not have cut away statutory obligations that ride along with entities meeting that definition.” Even the Southern District Court admitted that “it is peculiar to make a lender a guarantor of the construction of others, because Florida law elsewhere is clear that such liability is inappropriate.”

So what does all this mean? It could mean that the Relief Act was not considered as a part of the Southern District Court’s analysis because it did not exist at the time the loan was made and still did not exist when WB took title as a result of its acceptance of a deed in lieu of foreclosure. It could also mean that, because the Southern District Court did not address the lack of applicability of the Relief Act in its written opinion, the WB case could again frighten lenders from lending on new projects and foreclosing failed condominium projects due to the lack of clarity in regard to the lender’s financial liability upon foreclosure of the condominium project. Perhaps the Florida Legislature will see fit to clarify the applicability of the Relief Act to encourage future lending practices.