Material Alterations, Special Assessments, and Borrowing
As to the title of this article, anyone familiar with Senate Bill 4-D and the newly required milestone inspection reports and structural integrity reserve studies primarily applicable to condominium and cooperative buildings three stories and higher knows that material alterations, special assessments, and the authority to borrow funds are not mentioned in the legislation. So why write this article about those subjects? Because the milestone reports and structural integrity reserve studies will no doubt also lead to both expected and unexpected required repairs and replacements. In effectuating such repairs and replacements, an association’s board of directors needs i) the ability to approve material alterations under certain circumstances that sometimes arise in connection with such work, ii) the ability to levy special assessments to pay for the work, and iii) the authority to borrow money that is often needed to pay for such repairs and replacements so that the special assessment payments can be amortized over time, thereby lessening the financial strain on the owners.
In the event the needed repairs and replacements require material alterations to the condominium common elements or cooperative property, an important question that arises is, is the approval of the members required? The relied-upon definition of what constitutes a “material alteration” comes from Sterling Village Condominium Inc. v. Breitenbach, 251 So. 2d 685 (Fla. 4th DCA 1971). It means to “palpably or perceptively vary or change the form, shape, elements, or specifications of the common elements in such a manner as to appreciably affect or influence its function, use, or appearance.”
Let’s first examine the relevant legislation concerning material alterations. As to condominium associations, §718.113, Fla. Stat., provides, in relevant part, that
Maintenance of the common elements is the responsibility of the association… Except as otherwise provided in this section, there shall be no material alteration or substantial additions to the common elements or to real property, which is association property, except in a manner provided in the declaration as originally recorded or as amended under the procedures provided therein. If the declaration as originally recorded or as amended under the procedures provided therein does not specify the procedure for approval of material alterations or substantial additions, 75 percent of the total voting interests of the association must approve the alterations or additions before the material alterations or substantial additions are commenced….
As to cooperative associations, §719.1055, Fla. Stat., provides in relevant part that
unless a lower number is provided in the cooperative documents or unless such action is expressly prohibited by the articles of incorporation or bylaws of the cooperative, … material alterations or substantial additions to such property by the association shall not be deemed to constitute a material alteration or modification of the appurtenances to the unit if such action is approved by two-thirds of the total voting interests of the cooperative. [emphasis added]
With all of this in mind, what if the required repairs stemming from the milestone report or structural integrity reserve study include necessary (meaning not voluntary) material alterations? If the governing documents do not vest such decision making to the board of directors, which is relatively rare, is the vote of the membership required? The short answer is that it depends on the facts and circumstances at hand. It is patently clear that merely because the replacement product is less expensive than replacing the item with the same product, that does not justify obviating the membership vote when required. See George v. Beach Club Villas Condominium Assoc., 833 So. 2d 816 (Fla. 3rd DCA 2002). For example, replacing a cedar shake roof with asphalt shingles due to cost considerations is not a sufficient reason to not obtain membership approval when otherwise required.
However, under the right circumstances the board can rely on the “necessary maintenance exception,” which evolved from a series of cases further discussed below. Before explaining further, the board should always consult with the association’s legal counsel to ensure a concurrence of opinion before proceeding with the work based on this “necessary maintenance exception” legal theory. There is a balance in the analysis which must be undertaken in that the association is responsible for the maintenance of the common elements as compared against when such maintenance may require a vote of the membership due to a material alteration. Based on the “necessary maintenance exception,” when it is clear that the material alteration is needed to complete the required maintenance, the board likely has the authority to proceed with the work without membership approval. Therefore, in our view, it would be beneficial for the legislature to codify this extremely important “necessary maintenance exception” into the Florida Statutes.
Regarding material alterations, in Tiffany Plaza Condominium Association, Inc. v. Spencer, 416 So. 2d 823 (Fla. 2nd DCA 1982), without the required vote of the owners, the board of directors opted to construct a rock revetment wall in the sand between the condominium’s seawall and the mean high-tide line. The area in question was part of the association’s common elements. Owners who were unhappy with the decision of the board (including the assessment to fund this project) sued the association. The association defended itself on the basis that the rock revetment was not an alteration or improvement of a common element but rather was part of the required maintenance, repair, and replacement of a common element that the association had responsibility for under several provisions of the declaration, its bylaws, and statutes. While the trial court agreed with the plaintiff owners, the Second District Court of Appeal reversed the trial court decisions and held that
If, in the good business judgment of the association, such alteration or improvement is necessary or beneficial in the maintenance, repair, or replacement of the common elements, all unit owners should equally bear the costs as provided in the declaration, bylaws, and statutes.
Further, the court held that
from the cited provisions of the declaration, it is clear to us that the association could properly assess all unit owners for the replacement or repair of the beachfront common element if it was damaged by erosion or otherwise. Likewise, it seems to us that if, in the good business judgment of the association, alteration or improvement of the beachfront by addition of a rock revetment would protect the beach from damage and the necessity of subsequent repair or replacement then that cost should also be borne equally by all unit owners.
In Ralph v. Envoy Point Condominium Association, Inc., 455 So. 2d 454 (Fla. 2d DCA, 1984), condominium owners objected to an assessment passed by the board of directors for the purpose of constructing a vertical seawall extension. The court held that, in view of the competent evidence from which it could be determined that the vertical extension of the seawall was necessary to protect the common elements, the board of directors of the condominium association was authorized to construct the extension without the necessity of the vote of the condominium unit owners, which was required by the condominium documents for alterations or improvements.
Regarding special assessments, in yet another case, Cottrell v. Thornton, 449 So. 2d 1291 (Fla. 2d DCA, 1984), condominium owners brought suit against the president of a board of directors of a condominium association after the board assessed the members to pay for the cost of fixing problems with a canal system, roadway, and swimming pool. The court examined the authority of the board to make decisions when a vote of the members would otherwise be required. It is clear from reading this case that the court received evidence regarding the condition of the canals which were filling due to erosion, excess weed growth, and pollution from excess runoff; that lots were gradually crumbling away into the canals; that the swimming pool was built on soil which was not de-mucked prior to construction and then floated up; and there were cracks on the floor and side walls of the pool and its deck. In fact, the pool was closed to any type of pedestrian traffic due to the unsafe conditions. The roadways had large and severe potholes. There was testimony during the proceedings that the canal needed to be drained, scraped, de-mucked, and lined with sea bags to make the seawalls secure and that the roads needed to be resurfaced.
After the board put its plan into action and levied the assessment, the plaintiffs who sued claimed the repairs constituted material alterations of the common elements. The president of the board argued that only necessary repairs and replacements were authorized by the board. The issue presented on appeal was whether the proposed changes constituted substantial additions/alterations or were necessary repairs. Here, the appellate court relied on the findings of the trial court which found that
because necessary repairs were planned, not material alterations, the trial court found the board of directors was authorized to make assessments against the unit owners without holding a vote.
The trial court also held that the restoration was “necessary to prevent further damage to the common elements,” and, as such, the board had the authority to proceed without a vote of the owners. This ruling is in line with the “necessary maintenance” principle previously provided in the above-referenced cases.
It is extremely important when examining whether a vote of the membership is required to perform material alterations that each project be separated into its core constituent components so as to avoid an argument that a particular part of the project was in fact a material alteration requiring a vote of the membership. If part of a concrete restoration project included material alterations which were unavoidable under the circumstances, but a part of the project also included voluntary aesthetic changes, those aesthetic changes would likely require approval of the membership (subject, of course, to the provisions in the governing documents or relevant legislation) even though the other part of the project did not.
In Bailey v. Shelbourne Ocean Beach Hotel Condominium Association, Inc., et al., 307 So. 3d 74 (Fla. 3rd DCA 2020), the board of directors levied special assessments to the tune of 30 million dollars for two rounds of construction projects. The first round of construction included elevator modernization; exterior painting; repairs to the porte cochere, pool and lobby; installation of a sewage lift station; and installation of impact-resistant balcony doors. The second round of construction included window repairs, installation of safety railing, replacement of unit doors, pool paver repairs, hardening of the beach entrance, and reinforcement of the substructure beneath the townhomes. Several condominium unit owners argued, among other things, that the association violated Chapter 718 F.S. by its failure to secure unit owner approval for the construction projects that amounted to a material alteration of the common elements and that a prior vote of the membership regarding a material alteration is required. The court held that regarding two particular parts of the project, the board of directors violated the Statute when it assessed unit owners for the cost of material alterations based on 75 percent of unit owners ratifying the construction projects after completion because §718.113(2)(a), Fla. Stat., requires approval before beginning construction. The court further held that although the majority of items completed during construction constituted necessary maintenance, and thus were properly assessed by the board, there was a genuine issue of material fact as to whether pool pavers and reinforcement of substructure underneath the townhomes were necessary maintenance items.
As to a board’s authority to borrow money to fund necessary repairs or replacements, there is no Florida case law or other legal authority that directly stands for the proposition that a board of directors can borrow such funds when the governing documents would otherwise require a vote of the membership to do so. Therefore, this, too should be addressed in a future legislative bill.
A board should never consider relying on the theories of the aforementioned cases without first consulting with its legal counsel regarding the applicability of those cases to the facts at hand and to better understand the risks involved.
With all of this in mind, it would be extremely helpful for additional legislation to be adopted by the Florida legislature that clearly
- permits the association through board action alone to authorize material alterations as part of any necessary repair or replacement project when similar like-kind items are no longer available or not recommended due to safety etc.; and
- permits the association through board action alone to special assess the membership as part of any necessary repair or replacement project; and
- permits the association through board action alone to borrow money in connection with any necessary repair or replacement project.