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For Association Boards — What is Due Diligence?
By Alyssa Gautieri
Boards of community associations are tasked with the onerous responsibility of running their communities, and ensuring all facets of doing so are given their necessary attention. But how can boards make sure they’re attending to everything they’re supposed to, and doing it properly? Boards are legally bound to exercise due diligence in their roles leading their associations, but what exactly is due diligence, and how can board members make sure they’re complying?
We spoke with Alexander DiSanti, an attorney and shareholder at Forbes Bender Paolino & DiSanti, PC, in Media, Pennsylvania, about how associations can ensure they are exercising their due diligence.
“Due diligence, a process of reasonable investigation and reasonable carefulness, is one of an association’s many fiduciary duties. It involves investigating a person or business before entering into contractual relations, hiring new employees, or bringing in professional advisors,” said DiSanti.
“When dealing with new hires or advisors, associations must investigate each individual’s experience, credentials, and references. Ask for proof — it is important to find substantiation for what each person says. Don’t take their word for it. Don’t take everything you hear at face value. Use due diligence to investigate and confirm,” he said.
Another tip to avoid being accused of due diligence—keep records. “In the case that an issue evolves later and an association is accused of failing to do its due diligence, it can take out its notes and papers to prove that it had,” said DiSanti.
“Due diligence should be used in almost every situation. It applies across the board, to almost everything that an association does. Of course, as the importance of the manner increases, the due diligence increases and the level of investigation or vetting increases proportionately,” he said.
According to DiSanti, while due diligence is not a bright line test or a black and white issue, here are some questions associations should ask themselves to ensure they are practicing due diligence: Do we have a good financial plan? Is cash flow projected to be adequate? Are our expenses appropriate? Do we have appropriate checks and balances to prevent errors, fraud, and abuse? Are we meeting guidelines of the community association laws? Are we sticking to the association governing documents?
“To ensure it is practicing due diligence, associations should keep digging further until they are reasonably satisfied that they found every answer they were looking for. If there is a question on their mind, board members have the absolute obligation to investigate it. They must ask questions until they’ve run the gamut, and there is nothing left to be asked. Having done this, they have arguably acted with due diligence,” said DiSanti.
What happens in the case that an association is sued for failing to exercise its due diligence? It is not uncommon for an owner to accuse a board of making the wrong decision and costing them a substantial amount of money.
“In the case of a lawsuit, due diligence is looked at on a case-by-case basis because there is no absolute guiding principle to determine its definition. If there is a really obvious gap in an investigation, the association may have failed to exercise due diligence. Associations should have director and officer (D&O) insurance, which will cover them in the case that they are accused of failing to exercise due diligence,” said DiSanti.
At the end of the day, board members must stay objective and remember that they have a responsibility to be honest and trustworthy. “Board members are acting on behalf of an association; therefore, they must exercise responsible care in regard to all decision-making. Board members must place the association above themselves at all times,” said DiSanti.
Alexander D. DiSanti, Esq., has been recognized by American Registry as one of America’s Most Honored Professionals for 2016, for continuous professional recognition, an accomplishment realized by the Top 1% of American Professionals. He continues to concentrate on representing homeowner and condominium associations, assisting in all of their legal matters, and personal injury claims, in addition to other legal matters, from his main office in Media, Delaware County, PA.
By Sherri Hall
As the famous quote says, one thing we can be certain about in life is paying taxes. However, when it comes to the property tax arena, it is possible to reduce the effect this certainty can have on our wallets. Enter the property tax assessment appeals process. This process allows homeowners to appeal the tax assessment that has been placed on their property and potentially lower the amount they have to pay.
In the world of community associations, property tax appeals can be filed by just one unit owner or by multiple owners at the same time. Associations can aid homeowners by making them aware of their potential savings and providing information. Associations can also recommend or suggest that owners take advantage of the appeals process.
In Pennsylvania and New Jersey, associations cannot file a property tax assessment appeal on behalf of the unit owners. “Every tax appeal is only permitted by the owner of the property. The appeal must be in the name of the owner,” noted Attorney Donald Weiss of Donald J. Weiss Esquire, PC in Chadds Ford, Pennsylvania.
Homeowners can file individual appeals or file as part of a class of owners, said Attorney Alexander DiSanti of Forbes Bender Paolino & DiSanti, PC in Media, Pennsylvania.
Weiss explained that in order to file as a class, the class must be made up of at least two homeowners who own similar properties. For example, a group of one-bedroom unit owners might apply as one class, while a group of two-bedroom owners might apply as another class. However, Weiss noted that it is very difficult for classes to be approved.
With that being said, DiSanti pointed out that it is easier for owners of condominium units to prove their properties are similar than owners of single family homes within a community because condominium units are usually more uniform than houses.
Whether or not property owners are each filing individual applications or appealing as part of a class, according to Weiss, it makes the most sense for as many owners as possible to file at the same time. “Doing so typically saves money on appraisal fees as well as attorney representation fees,” he said.
DiSanti explained that appraising a group of properties at the same time can be less expensive per person than the cost of just appraising one property. For example, if the appraiser comes out and appraises 20 houses in one day versus one house, he or she will most likely be willing to charge less per property, noted DiSanti. He said the appraiser would be using the same comparables (comps) to gather his or her data, and the reports being generated won’t be dramatically different.
From the property tax assessment appeals board’s standpoint though, more people filing at once doesn’t necessarily mean they will win. “Generally speaking, the chances of a successful appeal aren’t enhanced because more people are involved,” said DiSanti. “What you’re probably going to see though, are more uniform results if it’s done that way.”
What might lead community association members to believe they are overpaying for taxes in the first place? According to DiSanti, sometimes older properties don’t have current assessments, especially if a sale hasn’t occurred recently within the community. He explained that tax assessments are based on the fair market value of the property. A certain, pre-determined percentage (millage rate) is applied to the assessed value of the property and that’s how the tax amount is calculated. Homeowners can find out if their property has been over-assessed by hiring a certified appraiser to determine the fair market value. The appraisal process involves a combination of inspecting the property and looking at comps of similar properties, noted DiSanti.
Comps may be affected by uncommon factors, such as short sales or foreclosures. When a home is sold through the short sale or foreclosure process, it is typically sold for significantly less than its perceived value. Therefore, it may appear that the value of property in question is less than it should be. Because of this, DiSanti said, the tax appeals assessment board may not take comps from short sales and foreclosures into consideration when making a decision.
When determining property values, it’s important to note that common elements are typically not included in the assessment. In Pennsylvania, for example, common elements have a “zero” value, said Weiss. “Common elements cannot be sold, and therefore, they have no value,” he said.
Therefore, in Pennsylvania specifically, common elements aren’t taxed. This includes common areas. “Only individual properties are taxed,” noted DiSanti.
So, how does the appeals process work? In Pennsylvania, tax appeals should be filed each year between March 15th and August 1st, said DiSanti. The hearings related to those appeals will typically happen in September/October, and the decisions are usually delivered in November. Each appeal is filed with the local tax assessment office. A hearing is then scheduled with the board of tax assessment appeals. The property owner and/or attorney appears at the hearing with proof of the current value, which includes the appraiser’s report. The appraiser often testifies as well and answers any questions from the board. Then the board considers the information provided to make its decision, DiSanti explained.
According to Weiss, in New Jersey, the timing is a little bit different, as the deadline to file is April 1st of each year.
With regard to deadlines, DiSanti pointed out that there is one way to get around them and that is with new construction. “If you didn’t assume ownership of the property from the builder until the deadline has passed, you can request an interim review,” he said.
Both DiSanti and Weiss agree that property owners can, but should not file tax appeals without counsel. The advantage of an attorney is that he or she knows the process, is experienced in appearing at hearings and can prepare properly for them, said Weiss.
He noted that property owners should consider filing a tax assessment appeal every year. Homeowners can do a preliminary check to see if they might be over-assessed by using an online property tax calculator. This can give the property owners insight as to whether they have the basis to pursue an appeal. Weiss said that associations can choose to hire a professional to make a pre-determination on behalf of the homeowners so that they can advise them of potential savings. “If they can help all the residents, both the association and the community as a whole is better off,” he said.
What happens when an appeal is successful? According to DiSanti, in Pennsylvania, the savings is applied prospectively, not retrospectively. Therefore, the decision affects the taxes for the following year. “Your bill goes down because your fair market value is lower.”
Weiss noted that in New Jersey; however, savings from successful appeals that had been filed by the April 1st deadline are applied retrospectively back to January 1st of that year.
Besides saving money, filing a tax appeal can be beneficial to property owners in other ways. “In my opinion, if your taxes go down, your property value goes up because your house is more appealing to buyers,” said Weiss.
Does a property owner have a better chance at winning an appeal if his or her neighbor pays less in taxes? According to Weiss, “it’s irrelevant what your neighbor is paying in taxes. It’s all based on value.”
He explained that property values periodically change. For example, if a homeowner filed a tax appeal when the real estate market was down during 2007-2009, the property may have been assessed at a lower value than it would be today.
On the other hand, if the homeowner can demonstrate to the tax assessment appeals board that his or her property is similar to another property which has recently filed an appeal, there could potentially be some advantage, said DiSanti.
Either way, a person cannot just say “I know my property is worth less than its assessment, but I don’t know how much,” explained DiSanti. “You have to give a number. This property is worth $225,000,” for example.
Therefore, DiSanti said it is advisable for the property owner to obtain a formal appraisal, which will take recent sales and other recent tax assessment appeals into consideration in order to come up with that value. For example, if a property is assessed at $260,000, but the appraiser has deemed its worth to be $225,000, the appraiser’s report will show the tax assessment appeals board how this value was reached.
“It is my opinion that if you want to win at the board level you need an appraiser, although not legally required. I never go in without an appraisal and that’s why I win 90% and only 90% with an appraisal,” said Weiss.
Overall, the property tax assessment appeals process is not a difficult one, said DiSanti. Filing in a timely manner, acquiring a certified appraisal and representation by an experienced attorney are all important components of the process.
Alexander D. DiSanti, Esq., is an officer of Forbes Bender Paolino & DiSanti, P.C. Forbes Bender Paolino & DiSanti, P.C., is a full service law firm with offices located in Delaware County (Media) and Chester County (West Chester), Pennsylvania. Alex has been representing condominium and homeowner associations for over 25 years. He has the highest lawyer rating given by Martindale-Hubbell of AV Preeminent 5.0 out of 5. Alex has been recognized by Legal Leaders Presents Philadelphia’s Top Rated Lawyers and Pennsylvania’s Legal Leaders Presenting Top Rated Lawyers. At the request of the National Business Institute, he has served as a faculty member and instructor of Legal Aspects of Condominium Development and Homeowners’ Associations, a legal education seminar for lawyers. Alex can be reached at (610) 627-1700 or adisanti@fbpdlaw.com. Visit his website at www.fbpdlaw.com.
Legal Leaders Presents Philadelphia’s Top Rated Lawyers of 2015 has invited Alexander D. DiSanti, Esq., for inclusion in a special publication featuring the top rated lawyers in Philadelphia. ALM is partnering with Martindale-Hubbell to produce this special magazine and online edition. It will be featured in The Philadelphia Inquirer, The National Law Journal, The American Lawyer and The Legal Intelligencer. Alex has retained an AV Preeminent rating, the highest rating in legal ability and ethical standards, by Martindale-Hubbell, the leader in lawyer ratings. He focuses his practice on representing homeowner and condominium associations, which he has done for over 25 years, and personal injury litigation, which he has done for over 30 years. Alex can be reached by telephone at 610-627-1700 and by email at adisanti@fbpdlaw.com. The website of Forbes Bender Paolino & DiSanti, P.C., can be visited at www.fbpdlaw.com. Please feel free to contact Alex if you have any questions or comments.
In Frobish v. Cedar Lakes Village Condominium Association, No. 112, 732 (Kansas Ct. App., June 26, 2015), in an unpublished Opinion, the Kansas Court of Appeals decided that Kansas state law requires a condominium association to disclose the names and addresses of delinquent owners. Typically, an unpublished opinion is non-precedential and may not be cited as legal authority, the reader should understand. The opinion of the court serves only to resolve the matter before it. Nevertheless, the Court has rendered this ruling based upon the Kansas Uniform Common Interest Owners Bill of Rights Act, which became effective in 2011.
The ruling is based upon certain statutory language. The law requires associations to keep “detailed records of receipts and expenditures affecting the operation and administration of the association and other accounting records” for five years. In addition, an association must make those records available for inspection and copying by unit owners. “Individual unit files” and certain specific records may be withheld by an association, according to Kansas law.
Based upon this exception to disclosure, the Association’s Board of Directors adopted a rule that names and addresses of delinquent owners were “individual unit files” and could, therefore, be withheld from disclosure.
Frobish, a condominium owner, made multiple requests to the Association, asking for the names and addresses of association members who were delinquent in their dues payments. The Association refused. Frobish sued the Association, claiming that he was entitled to the delinquency records under Kansas law. The trial court granted summary judgment in favor of the Association. Frobish appealed from the trial court’s adverse resolution of the motion, which resolution represents a decision without a trial.
The Court of Appeals determined that Kansas law requires an association to keep detailed records of receipts and expenditures, including dues payments made by association members. These records, the Court concluded, would indicate the date, amount and who made a payment. The Court of Appeals held that the law’s mandatory recordkeeping requirements create an obligation to keep a record of who has paid dues, as well as those who have not.
The act allows an association to withhold private information and disclosures that would otherwise be contrary to the law. The Court of Appeals concluded that specific information may be withheld if it is consistent with privacy protections established by an association that were in effect at the time of the request. The Court determined that the Association could not demonstrate that privacy protection had been developed for delinquent owners.
The Court of Appeals heard argument that association members had an expectation of privacy with respect to whether association payments were made. The Court recognized that, if an owner is sued for nonpayment, the lawsuit is a matter of public record. The Court also noted that the law showed a preference for disclosure over secrecy. Finally, the Court determined that collection issues are fundamental to association operations. Unpaid dues payments negatively impact the operation of an association.
The Court of Appeals reversed the trial court’s ruling and remanded the case back to the trial court with instructions to permit Frobish to inspect and copy the records he was seeking, including the names and addresses of delinquent owners.
It is generally believed among attorneys who represent community association clients that this disclosure can create a landmine. Most attorneys, when faced with this issue, counsel an association client to be sure that the records are totally accurate. If they are not, the association, as well as the board members, may be sued for defamation by the person whose name was disclosed.
A related point is that most attorneys involved in this area of practice do not favor publishing a list of delinquent owners and conclude that the benefit is outweighed by the risk. It is certainly true that owners have a right to know about an association’s financial condition. However, a board needs to be careful about what is divulged. If a board is adamant about disclosure, most association attorneys advise only publishing the address of the delinquent owner, not the name of the owner, in an effort to avoid a defamation claim. Disclosure of this information would be easier to recommend if it was provided for in the governing documents of the association. Associations must be mindful that there may be issues relating to insurance coverage if a defamation claim is presented. Finally, one must recognize that state laws, whether statutory or decisional, differ on these subjects. Boards should consult the association attorney to ensure that any actions taken are legal and advisable.
Alexander D. DiSanti, Esq., is an officer of Forbes Bender Paolino & DiSanti, P.C. Forbes Bender Paolino & DiSanti, P.C., is a full service law firm with offices located in Delaware County (Media) and Chester County (West Chester), Pennsylvania. Alex has been representing condominium and homeowner associations for over 25 years. He has the highest lawyer rating given by Martindale-Hubbell of AV Preeminent. Alex was selected for inclusion in Legal Leaders Presents Philadelphia’s Top Rated Lawyers of 2014 and Pennsylvania’s Legal Leaders Presenting Top Rated Lawyers for year 2013. At the request of the National Business Institute, he has served as a faculty member and instructor of Legal Aspects of Condominium Development and Homeowners’ Associations, a legal education seminar for lawyers. Alex can be reached at (610) 627-1700 or adisanti@fbpdlaw.com. Visit his website at www.fbpdlaw.com.
By Katie Robinson
The transition from developer control to independent owner control for condominium and homeowners associations is not just a matter of electing new board members. The full transition process involves a review of financial, management, and maintenance issues to make sure that the newly empowered board members understand the true fiscal and physical condition of the association. With the aid of association professionals and the involvement of the developer and the independent owners, however, this process can move along more smoothly. What are the responsibilities of the independent owners during a transition and the steps that they can take to ensure a successful transition?
The majority of association sponsors retain voting control of the association board until the sale of a certain percentage of homes or the passage of a regulatory deadline. “At that point, the sponsor is required to transfer voting control of the association board to ‘independent’ owners – that is, owners who are not employees, business associates, or family members of the sponsor,” explained Kenneth Jacobs of Smith, Buss & Jacobs LLP, in Yonkers, NY.
When the end of declarant control is near, turnover obligations are created, said Alexander D. DiSanti, Esq., of Forbes Bender Paolino & DiSanti, P.C., in Media, PA. “Once the end of declarant control has happened, all responsibilities of the association are transferred from the declarant appointees to the executive board to the unit-elected board members once there has been a successful election meeting of the unit owners, leading to the election of unit owner members of the executive board.”
How does a transition actually take place? According to Jacobs, “If the association already has independent owners on the board, the sponsor might merely resign one seat and allow the other board members to select another owner to fill the vacancy until the next annual meeting.” If that is not the case, the board may schedule a meeting for the homeowners to elect new board members. The replacement of the sponsor on the board majority signifies the formal transition. DiSanti noted that volunteers will be needed for the impending election, and unit owners should attend the election meeting, with proxies obtained for absent owners in order to establish a quorum. Community involvement is key to a smooth transition.
Both DiSanti and Jacobs underscored, though, that the real transition is a complex process that can take months or even years to complete. A transition should be approached with the knowledge that it will take time to complete. “Unit owner preparation for the turnover of control should begin in advance of the sale of the final units. An attorney for the unit owners should be involved before the unit owners have control of the executive board, interacting with the declarant and making it known that the attorney represents the interests of the unit owners and will advocate in furtherance of their interests,” DiSanti said.
In Pennsylvania in particular, state community association laws dictate that the declarant must deliver all property of the association to the association at least sixty days before the end of declarant control, DiSanti said. Section 3320 of the Uniform Condominium Act details what items the declarant must deliver to the association within that time period, if that property is within the declarant’s possession. These items can include a certified copy of the recorded declaration and all amendments, the bylaws, and the rules and regulations, among other things. “Section 5320 of the Planned Community Act imposes the same requirements upon planned communities,” DiSanti added.
Jacobs explained that, prior to a transition, the sponsor frequently makes all decisions on behalf of the board. Sponsors may retain association operating records and liaise with management regarding any association issues without involving other board members. “Board members who have previously depended on the sponsor for information must now review and assess the quality of the data they have received, decide what additional facts they need, and make decisions for the future,” Jacobs said. For convenience, the areas of board concern can be separated into four categories: financial, physical condition, occupancy and alterations, and potential social and political implications.
Financial: Jacobs stated that the board should seek out detailed management reports to supplement the annual financial statements. These reports should include cash balances, ongoing revenues and expenses, arrears, payables, and year-to-date comparisons with the operating budget. “The board needs to determine whether common charges have been held at artificially low levels to facilitate sales or reduce sponsor obligations to pay deficiencies,” Jacobs said. “The board should also get a handle on current operating and service contracts such as laundry, parking, pool, and elevator agreements.”
Physical: According to Jacobs, the board must find out about the condition of association structures. Inquire into past maintenance issues to determine if they were given short-term or long-term solutions. Look into capital repairs, both for the past and the future, and determine their quality and cost.
Occupancy and alteration issues: Management records should be up to date regarding legal ownership and current occupancy of individual homes, Jacobs said. Records should also reflect any alterations made by individual homeowners that affect the building systems or that otherwise required consent from the board. Determine if those alterations were filed with municipal authorities and whether the developer-controlled board or management exerted proper oversight to the present date.
Social and political implications: Jacobs noted that the board should ask whether the association has established policies regarding day-to-day issues, such as leasing, alterations, pets, and smoking, among other things. Have those policies been enforced? If so, do changes need to be made to mitigate the impact on the stability of the association? Boards should also be knowledgeable of the manner in which the association keeps track of and handles owner complaints.
More importantly, Jacobs explained, the transition to independent owner control requires a shift from “renter mentality” to “owner mentality” on the part of both the board and the homeowners. The board has a duty to prepare the owners for the responsibilities of shared ownership. Communication is vital – the board must clearly detail its investments and goals to the owners. “Since all this effort costs money, especially in the first twelve to twenty-four months after transition, the board could face considerable resistance from previously uninvolved members unless it takes steps to help owners understand the process,” Jacobs said. It is crucial that the board communicate regularly with owners and remain aware of their attitudes towards the transition and the association as a whole.
Because each of those areas of inquiry comes with its own extensive set of questions, the board will need help throughout the transition to ensure that it gets the proper facts and good advice. Jacobs said that initial help should come from the association management, as they possess the association’s ongoing financial records. Management is typically familiar with physical condition issues and owner complaints, all issues on which the board requires information. “However, management must be assisted by independent counsel and accountants who can address the more complex legal and financial issues that any association will face and who can function as additional resources for boards based on their experience with similar associations,” Jacobs added.
Jacobs further recommended that associations retain an engineer during the transition to inspect the association’s common elements to determine if the developer completed whatever was promised in the offering plan and in its filings with governmental authorities. An architect or engineer can also assess the quality of construction and alert the board to the possibility of any future maintenance issues. “After getting this information, many boards negotiate with the developer to cure any violations or dangerous conditions that have been observed,” Jacobs said. He noted that association boards should have this inspection done as soon as possible. When an inspection is delayed, developers might tend to label issues as improper maintenance or natural deterioration.
However, Jacobs cautioned boards against getting sidetracked by disputes with the sponsor over building conditions. Boards need to address needed repairs even if the sponsor refuses to accept liability for the cost. “The association needs to keep its buildings in good condition whether or not the sponsor steps up.” Furthermore, the sponsor might even be able to assist the board with certain decisions, including those involving sourcing for services and construction.
Boards have a wide variety of responsibilities during a transition, and those responsibilities only increase with the transition. Take advantage of any help available and be sure to remain communicative with all involved parties. “Your professionals should help the board to keep its focus on the long-term stability of the association,” Jacobs said. With their assistance, tackling each responsibility head on and remaining aware of the breadth of the transition process can help smooth the process along.
Alexander D. DiSanti, Esq., is an officer of Forbes Bender Paolino & DiSanti, P.C. Forbes Bender Paolino & DiSanti, P.C., is a full service law firm with offices located in Delaware County (Media) and Chester County (West Chester), Pennsylvania. Alex has been representing condominium and homeowner associations for over 25 years. He has the highest lawyer rating given by Martindale-Hubbell of AV Preeminent. Alex was selected for inclusion in Legal Leaders Presents Philadelphia’s Top Rated Lawyers of 2014 and Pennsylvania’s Legal Leaders Presenting Top Rated Lawyers for year 2013. At the request of the National Business Institute, he has served as a faculty member and instructor of Legal Aspects of Condominium Development and Homeowners’ Associations, a legal education seminar for lawyers. Alex can be reached at (610) 627-1700 or adisanti@fbpdlaw.com. Visit his website at www.fbpdlaw.com.
By Leigh Cesanek
California’s Supreme Court decided unanimously that architects involved in designing condominiums may correctly be sued by a homeowners association for design defects. The case entitled Beacon Residential Community Association v. Skidmore, Owings & Merrill LLP was decided on July 3, 2014. The architects were sued for defects that included water infiltration, structural cracks, and “solar heat gain,” which made the condominium units uninhabitable and unsafe during certain periods because of high temperatures. These defects were alleged to represent safety hazards. The homeowners association sued a condominium developer and various other parties over construction design defects that allegedly made the homes unsafe and uninhabitable for significant portions of the year.
The architects in defense of these claims maintained that their contractual relationship was not directly with the eventual owners of the condominiums, and so they only owed a duty of care to the developer. The Supreme Court ruled that the architects did in fact owe a duty of care to the condominium owners. The Court stated that an architect who makes recommendations but not final decisions on construction owes a duty of care to future condominium owners with whom it has no contractual relationship. Alexander DiSanti, Esq., an attorney at Forbes Bender Paolino & DiSanti, P.C., in Media, PA, provided some additional insight into this case. “This case is significant because the California Supreme Court ruled that architects could be sued by a condominium association, even though the association was not a party to a contract with the architects. The architects argued, preliminarily, that without the condominium association demonstrating privity of contract, there could be no viable cause of action asserted against the architects. The case illustrates an erosion of the privity of contract requirement,” DiSanti said.
“The Court’s decision relied heavily on these factors: first, the closeness of the connection between the architects’ conduct and the homeowners association’s damages and, second, the choice of hiring the architects being out of the hands of control of the condominium owners,” DiSanti said. “The Court emphasized that when an architect is the principal architect on a project, it owes a duty of care to future homeowners in connection with design services even if it was not given control over all decisions. That is to say that an architect may still be liable to a homeowner even when the developer retains control over all final decisions, including those relating to recommendations made by the architect.
This case highlights the possibility of extended liability exposure that architects may come to realize as a result of the Court’s focus on protecting homeowners. The principal architects were paid a fee of $5 million and were involved in the project to the extent that they performed weekly inspections, ensured compliance with design plans by the contractor, and changed design requirements whenever an issue arose. DiSanti explained that these factors were critical to the Court’s final decision. The architects were aware that the condominiums would be utilized in a residential manner, with these owners rightly assuming that their units were constructed properly and reasonably fit for habitation.
“The Court concluded that a liability rule that places the onus on homeowners to employ their own architects to fully investigate the structure and design of each home they might be interested in purchasing does not seem more efficient than a rule that makes all architects who design homes directly responsible to homeowners for construction deficiencies,” DiSanti said. He underscored that there was no privity of contract between the architects and the association. “There was precedent in the California court system for the proposition that, without a direct contractual relationship between an architect and a purchaser of a home, there was no duty of care owed by the architect to a homeowner,” DiSanti said. It is important to recognize that the developer in charge of the project ultimately made the decision whether to proceed in accordance with the recommendations of the architects.
A provision existed in the contract between the architects and the developer that stated that there would be no third party beneficiaries of the work done by the architects, in an effort to weaken the architects’ relationship to the homeowners association. “The Court focused on this provision as proof that the architects knew that others would be affected by the work that they performed,” DiSanti said.
He further noted that, among other factors, if architects could demonstrate that they did not act as the principal architects on a project, they may be relieved of responsibility for construction defects.
“It is to be expected that the architects will file a dispositive motion, such as a motion for summary judgment, before the matter proceeds to trial, in an effort to be removed from the case at a later time,” DiSanti said. He posited that any later motion filed by the architects would also be unsuccessful, unless there is a material change in the evidence. This intriguing case, while only binding precedent in the State of California, may have ripple effects in other jurisdictions. It is beyond speculation that this case will be cited by other parties in other states in an effort to expand the liability exposure of design professionals elsewhere.
Alexander D. DiSanti, Esq., is an officer of Forbes Bender Paolino & DiSanti, P.C. Forbes Bender Paolino & DiSanti, P.C., is a full service law firm with offices located in Delaware County (Media) and Chester County (West Chester), Pennsylvania. Alex has been representing condominium and homeowner associations for over 25 years. He has the highest lawyer rating given by Martindale-Hubbell of AV Preeminent. Alex was selected for inclusion in Legal Leaders Presents Philadelphia’s Top Rated Lawyers of 2014 and Pennsylvania’s Legal Leaders Presenting Top Rated Lawyers for year 2013. At the request of the National Business Institute, he has served as a faculty member and instructor of Legal Aspects of Condominium Development and Homeowners’ Associations, a legal education seminar for lawyers. Alex can be reached at (610) 627-1700 or adisanti@fbpdlaw.com. Visit his website at www.fbpdlaw.com.
By Katie Robinson
Buying a new home can be an exciting time for prospective homeowners, but the intricacies of the process can also make it incredibly stressful, especially for first time homebuyers. Finances often guide the process, with a difficult housing market only further complicating the matter. Well-informed potential residents, however, can go into their search for a new home knowing just which financial information is accessible.
Prospective buyers should do their research prior to looking for a unit in an HOA or condominium. They should know what financial information they can request from the property managers in order to determine if the association in question has a healthy financial history. Joel Meskin, Esq., CIRMS, is the Vice President of Community Association Insurance & Risk Management at McGowan Program Administrators in Fairview Park, OH. He noted that an association’s obligation to provide certain financial information and documents to potential buyers varies from state to state. “The potential buyer can ask any question or make any request they want. What they are entitled to ask, and the HOA is required to provide, is a state-by-state issue,” Meskin said.
Stephen R. Buschmann, an attorney at Thrasher Buschmann & Voelkel, P.C., in Indianapolis, IN, noted the differences among types of associations with regard to what financial information can be obtained from them by potential homeowners in his state. “The Declaration of an HOA is a recorded document. Therefore, a potential buyer can obtain a copy of the Declaration before closing on an offer. Note that in a condominium the by-laws are recorded as well, so the buyer can get copies of those also,” Buschmann said. Indiana further requires that real estate agents complete a Sellers’ Residential Real Estate Sales Disclosure (State Form 46234), which must be provided to the buyer before an offer on the property is accepted. Buschmann added that the form includes such questions as, “Is the property subject to covenants, conditions and/or restrictions of a homeowners association?” and “Are there any violations of zoning, building codes or restrictive covenants?” This particular form ensures that certain information is known to any buyers in Indiana before a purchase is made final.
In a Planned Unit Development, Buschmann said, “A buyer is generally co-liable with the seller for unpaid assessments that accrued before the closing of the sale.” The rules regarding condominiums differ slightly, with IC 32-25-5-2 providing that a buyer is as liable as the seller for any unpaid assessments on the unit that existed prior to the closing of the sale. “The statute provides that the buyer may make a written request to an association of the amount of outstanding assessments on the unit. The association has ten business days after receipt to respond. If it does not respond, then the buyer has no liability for pre-transfer assessments. If the association does respond, then the buyer is only responsible for the amount stated in the response,” Buschmann said. This statute helps to limit the potential liability of the buyer.
A similar requirement is in effect in Pennsylvania under the Pennsylvania Planned Community Act. This determines that associations must provide to potential buyers certain information prior to the sale of a unit. Alexander D. DiSanti, Esq., an attorney at Forbes Bender Paolino & DiSanti, P.C., in Media, PA, said that the requirement set down in Pennsylvania is meant to be consumer friendly and to inform the buyer of the nature of his or her purchase. “Before the execution of any contract of sale, a variety of financial, insurance and other information must be provided to the purchaser so that a rational decision may be made about whether to purchase a unit,” DiSanti said.
According to DiSanti, some of the significant requirements of the Act include the budget for the first year of operation after purchase of the first unit, a description of reserves, monthly projected common expense assessments, association expenses, and the disclosure of special fees payable at closing, among other things. DiSanti further noted that Pennsylvania law requires a property report, detailing the condition of structural components and major utility installations. All empower the homebuyer with a thorough picture of the association’s financial situation.
A more limited information set, in the form of a resale certificate, must be provided to the buyer when a unit is resold by a private unit owner other than the declarant in Pennsylvania. “The public offering statement of the declarant need not be provided to the buyer,” DiSanti said. “A homeowners association is obligated to provide the resale certificate, along with copies of the governing documents of the association, within 10 days of a request by a unit owner, who has the responsibility to provide this information.”
Obtaining additional information beyond that required by the state, however, is a more difficult task. DiSanti recommended directing requests to either the executive board of the association or the property manager. “Understandably, there may be reluctance to provide any information which is not required to be disclosed,” he said.
If an Indiana homeowner were to request financial records from his or her association, it would be required by law to provide contracts, invoices, bills, receipts, and bank records. “The association is not required to provide this to a potential buyer. However, a buyer could condition the closing on the seller obtaining copies of whatever information the buyer deems appropriate,” Buschmann said.
Beyond requesting financial documents from the association, buyers can do their own independent research to determine financial health. “I would be doing a great deal due diligence on my own and not rely on the association for their financial information. I would probably do a civil index check with the court to see if there are any foreclosures pending, which could give an idea of the financial stability of the association. If there are a lot of foreclosures, there is a possibility that the association is not getting the revenue it needs to operate. I would ask a ‘good’ real estate agent what the disclosure requirements are for an association,” Meskin said.
Meskin underscored the importance of buyers doing their homework prior to going into their search. While the amount of research that a potential buyer can do is rather extensive, knowing what an association is actually required to offer can help to ease the process of purchasing a new home.
Alexander D. DiSanti, Esq., is an officer of Forbes Bender Paolino & DiSanti, P.C. Forbes Bender Paolino & DiSanti, P.C., is a full service law firm with offices located in Delaware County (Media) and Chester County (West Chester), Pennsylvania. Alex has been representing condominium and homeowner associations for over 25 years. He has the highest lawyer rating given by Martindale-Hubbell of AV Preeminent. Alex was selected for inclusion in Legal Leaders Presents Philadelphia’s Top Rated Lawyers of 2014 and Pennsylvania’s Legal Leaders Presenting Top Rated Lawyers for year 2013. At the request of the National Business Institute, he has served as a faculty member and instructor of Legal Aspects of Condominium Development and Homeowners’ Associations, a legal education seminar for lawyers. Alex can be reached at (610) 627-1700 or adisanti@fbpdlaw.com. Visit his website at www.fbpdlaw.com.
By Katie Robinson
The community aspect of a homeowners association or condominium can unify residents and facilitate healthy communication. Along with that, though, comes the issue of liability as residents and groups organize social gatherings. Events held in common areas can raise issues for associations, especially when alcohol is a factor. Many events can take place without any problems, but associations should always be aware of the possibility of an individual bringing an action against them were something to go awry at an event.
Before delving into the issue of liability, associations are not even required to host events sponsored by them, as issues of financing the event come into play. Gregory Chandler of Eads Murray & Pugh, P.C, in Indianapolis, IN, noted that the estimated cost of any functions held should be itemized in the annual budget. Boards should open up a discussion regarding hosting events. “Boards should not simply assume that they have an unchecked right to use community money for social events, however popular they may be,” Chandler said.
While associations should be consistent with regard to whether or not they allow events, they have no obligation to allow them to begin with. Stacey Patterson, Esq., Counsel, of Herrick Feinstein LLP in New York City, said, “The association is a private community, and they have a right to establish reasonable and legal rules with respect to the use of their common areas. As far as what they can limit them to, the association has to tread lightly to make sure that they’re not infringing on anybody’s constitutional rights. They can’t exclude certain religions or races, or anything of that nature.”
As far as liability when an event actually goes forward, Joel Meskin, Esq., CIRMS, Vice President of Community Association Insurance & Risk Management at McGowan Program Administrators in Fairview Park, OH, said, “The key issue you need to keep in mind is not whether an ‘association is liable for damage,’ but if its insurance policy will provide a defense if someone brings an action against the association.” Meskin said that associations should take seriously the assumption of any additional liability. Associations deal with enough liability as it is without taking on the liabilities of a social gathering for an outside group on their property.
Meskin further noted the difference between an event held by an outside group and one held by the association itself. “If the association is going to allow an outside entity to use its facilities, it should make sure that all corresponding costs, including insurance, are incurred by the group. In addition, the group should make the association an ‘additional insured’ on the group’s policy for the purpose and to the extent of liability arising out of the use of the association’s facilities. A copy of the additional insured endorsement should be sent from the group’s insurance agent and not delivered by the group itself,” he said. When acquiring insurance, the association should determine what events are and are not covered by the proposed insurance. This can then guide them in the planning of any future events to avoid liability. “The association can even require the holder of the party to obtain their own insurance in the event of any issues,” Patterson said.
Associations greatly increase the risk of liability by serving liquor, and it should be noted that general liability policies do not cover liquor liability. By making a party BYOB, that liability is reduced though still present. Chandler said, “The potential cons, in my opinion, far outweigh the pros. At a minimum, associations should get the perspective of their insurance carriers before hosting any community events at which alcohol will be present.” Regarding the level of risk when serving alcohol, Alexander DiSanti, Esq., an attorney at Forbes Bender Paolino & DiSanti, P.C., in Media, PA, said, “In the event that someone is injured or property is damaged as a result of someone drinking alcoholic beverages at a party sponsored by the homeowners association, anyone involved in the party could be sued.” Patterson noted the further issue of the presence of minors at such events.
DiSanti stated that “apart from hiring a professional to serve alcoholic beverages, the only legal way for a homeowners association to serve alcohol would be in the capacity of a social host. A social host means by definition that no money is exchanged for the alcoholic beverages.” Attendees cannot purchase tickets or make any donations to help fund the event, either. With regard to a BYOB event, DiSanti said, “In my mind, this is the safest way to proceed if you want to serve alcohol at parties if hiring a professional is cost prohibitive.” Chandler further recommended that, at non-BYOB events, the associations should hire a licensed and bonded caterer or distributor. Taxi or designated driver services also help to ensure the safety of attendees, Patterson added.
Oftentimes, boards choose not to offer common areas to outside organizations, as this only increases risk and often presents boards with the conundrum of picking and choosing which groups should be allowed. Written policies should be presented to outside groups if the board does choose to allow them to hold events. Chandler said, “The renter should sign a written agreement and be given a copy of the rules in advance. I also recommend that boards have the renters sign an additional indemnity agreement holding the association harmless for damage or personal injury.” He further noted that many associations require refundable security deposits.
Associations are encouraged to use their discretion in such situations, always erring on the side of caution to reduce risk and liability. Although social gatherings seem like simple ways to bring the community together, they can often pose too much of a problem for associations to actually be worth it. Keep in mind that adding factors such as alcohol only increase risk. Associations can consider tamer educational or social events as an alternative, allowing them to facilitate an enjoyable, community atmosphere.
Alexander D. DiSanti, Esq., is an officer of Forbes Bender Paolino & DiSanti, P.C. Forbes Bender Paolino & DiSanti, P.C., is a full service law firm with offices located in Delaware County (Media) and Chester County (West Chester), Pennsylvania. Alex has been representing condominium and homeowner associations for over 25 years. He has the highest lawyer rating given by Martindale-Hubbell of AV Preeminent. Alex was selected for inclusion in Legal Leaders Presents Philadelphia’s Top Rated Lawyers of 2014 and Pennsylvania’s Legal Leaders Presenting Top Rated Lawyers for year 2013. At the request of the National Business Institute, he has served as a faculty member and instructor of Legal Aspects of Condominium Development and Homeowners’ Associations, a legal education seminar for lawyers. Alex can be reached at (610) 627-1700 or adisanti@fbpdlaw.com. Visit his website at www.fbpdlaw.com.