Archive for April, 2010

Terrible Bill in Florida Shields Architects/Engineers from Legitimate Malpractice Claims–Great Risks for Condos, Co-Ops and HOAs

Friday, April 30th, 2010

[Updated with some new explanations, sorry for the delay!]

So while I try to keep my blog purring along on a national scope, the Florida Legislature today did something so questionable, with so many negative consequences for Shared Ownership Communities (SOCs) that I felt I had to brief my readers. If you live in Florida, PLEASE contact Governor Crist and ask him to veto this bill. You can reach the governor at Governor Crist has proven that he listens to his constituents–it’s time for us to speak up once again.

Senate Bill 1964 protects design professionals (architects, engineers and others, the majority of whom are perfectly nice and respectable people) from lawsuits due to their negligent design. That’s right–even when these engineers do their jobs badly, and even if a building is unsafe as a result, you will not be able to sue them to recover your economic damages.

First, some background. For many, many years, Florida law has recognized that professionals have a duty to perform their services according to a reasonable standard of care, and if they don’t, they are liable for damages caused by their carelessness. This includes purely economic losses, such as the cost to remediate the mistake or the reduction of property value. The reason this is important is because of a principle called the “economic loss rule,” which is legal mumbo jumbo that states that you can’t recover purely economic damages under tort (negligence) law unless you have property damage or a personal injury. Florida follows this rule for some types of lawsuits, but courts have been very clear in ruling that this can’t possibly apply in lawsuits against professionals like architects and engineers, because there are almost NEVER personal injury or property damages from their mistakes, and therefore they would essentially be unsueable except under contract law (where the remedies are far more limited, and are not always available to 3rd parties who are harmed by the error).

So the Florida legislature decided to overrule decades of precedent by passing a law that says the economic loss rule does apply to cases against design professionals. Therefore, under the new law, they can almost never be sued for negligence. Here’s the text of the law:

(1) A claimant contracting for the professional services of a design professional does not have a cause of action in tort against the design professional for the recovery of economic damages resulting from a construction defect.

The language is a little weird from a legal standpoint (only one of a number of problems with this bill), but it’s intent is clearly to wipe out well established legal precedent and to shield design professionals from liability. So who is covered by this limitation on liability? Architects, engineers, surveyors, interior designers and even landscape architects. If any one of them is negligent (if they act in a manner that is not reasonably professional), you cannot sue them in tort to recover your damages, unless they actually hurt someone (there’s an exception for personal injury) or their negligence damages someone else’s property.

Now, I have nothing at all against these types of design professionals–my mother is an interior designer, and I have good relationships with the engineers that I work with through my condominium. I simply feel that all people should be responsible for the reasonable consequences of the mistakes they make as a result of not doing their jobs within the bounds of reasonable care.

Think for a moment how incredible such a law is, and how much it proves just how important special interests are in government. Let’s say you hire someone to design a balcony overlooking your orchid garden. The engineer draws up the plans, and a contractor builds the deck. But a week later, the deck collapses, not only crushing your orchids but costing you double the original construction cost to repair. Turns out the engineer wasn’t quite paying attention and designed the deck with too few supports for the weight.

Now under current law, you would be able to bring the engineer to court and sue him for negligence, so that you can recover your economic damages–the cost of fixing the problem, perhaps the cost of the damaged orchids. Florida law recognizes that this is a legitimate lawsuit, and why not–how else would you hold professionals accountable for their carelessness?

But now, under this new law, the engineer would be totally protected from a negligence lawsuit. For some reason, he now gets protection that isn’t afforded to anyone else. Can you imagine if the legislature passed a law that said that lawyers could not be sued for damages cause by legal malpractice? People would flip. Who would tolerate such a law? Nobody gets that kind of protection–not accountants, or doctors or graphic designers. The only possible reason the legislature would pass this bill is because construction design professionals have enough pull with politicians to grant themselves a totally unprecedented legal shield.

Now here’s the $6,000,000 question. Why should SOC owners care? Every single condo, co-op and hoa, at some point in its lifespan, will need to make repairs or additions that require a design professional. Roofs, balconies, clubhouses and roads all deteriorate, and their repair and/or replacement usually requires that the association hires an engineer or architect. For many years, Florida’s courts had established that design professionals are, under tort law, responsible for economic damages caused by their negligence, just like EVERY OTHER TYPE OF PROFESSIONAL. But now, thanks to Florida’s consistently tone deaf legislature, that consumer protection has gone out the window. If your condo rebuilds it’s roof, and the engineer you hire designs it improperly, when that roof collapses and destroys half of your property your only recourse will be to go after insurance proceeds. When you hire an architect to design a storm drain, when that drain proves ineffective and your property sinks from flooding, you will have no recourse anymore. That’s why this bill is so dangerous for condos, co-ops and hoas. Design professionals are a constant element of the reality of repairing, securing and upgrading large properties, and if this bill is signed into law they will now be exempt from being responsible for damage they cause due to their own negligence.

Put simply, this is bad law, and it should be vetoed by the Governor. If you live outside of Florida, keep an eye on your own legislatures to make sure they don’t get any cute ideas, and if you live in Florida take the time to email Crist and let him know that we don’t take our legal protections for granted. SB 1964 is bad for SOCs, it’s bad for Florida, and it’s just a bad idea.

Should Condos Purchase Property? A Tough Decision for Boards to Make

Friday, April 16th, 2010

First, sorry for the slight delay since my last post, we had a naming for our new baby and I had family in town for most of last week. Affairs of state preceed the affairs of state, or some such thing… :D

I wanted to write today about an issue that many condo boards face at least once in the lifetime of most communities–whether or not the association should purchase property. We’ve already touched a bit in other blogs about the decision to foreclose on non-paying owners and own their property, but the decision I’m talking about today is a bit different–should condo associations ever purchase auxiliary property to expand the common elements for the benefit of the owners?

Now, based on my discussions with owners, I can assure you that there are a significant number of readers who already think they know the answer to this question, and each is as certain of their polar-opposite conclusion to the other. Some owners are currently thinking “of course the association can buy property, how else could we expand our parking, or build a tennis court or a clubhouse?” And then there are a significant number of owners who are saying “Are you crazy? Why would we want to take on the responsibility of owning more property, especially with times being so tough financially?” As is always the case, the truth to the situation probably lies somewhere in the middle.

With most condominiums (and I’m specifically leaving out HOAs on this one, because they operate differently and frequently the association does own its own property), the initial common elements are owned by all the owners, collectively, and they are managed by the association. But any property bought after the creation of the association would have to be purchased by the association (ie, the corporation or trust that counts every owner among its members), and it is actually owned by the association itself; not by the owners. So to try to explain this step by step:

Every owner in a condominium is a member of a mandatory membership association (the “association”), run by a board of directors elected by owners;
Every owner in a condominium jointly owns an undivided share of the common elements;
In addition, the association may, depending on its documents, purchase property for the benefit of owners. That property would be owned by the association, not directly owned by the owners.

I know, it’s extremely confusing, but it makes sense legally, which is really what matters. And yes, in a totally unrelated vein, I know that a lot of people would like legal issues to be instantly understandable to laypersons, but frankly that’s as unrealistic as asking doctors to stop using medical terminology and latin words. But that’s a different blog for a different day.

Suffice it to say that your association may be able to purchase property, and just like any corporate decision, there are a lot of times when such a decision will make sense. For example, what if your community has run out of parking? It may be that the developer simply didn’t plan well, or perhaps you simply have more guests than were anticipated. But parking is a basic need of our modern, transportation-oriented and car-obsessed society, and a lack of parking can severely depreciate property values. So if a neighboring lot is sitting empty, and if the price is at or below market value, it would often be in the best interest of the association to purchase the lot for its own use (of course, there are zoning considerations involved as well, but that’s why you should always get an attorney involved in property purchases).

Or, what if a maturing community, with an aging population, would like to spend more time socializing without going off-property? The owners of such a community might be well served by purchasing property to build a clubhouse. In the same vein, it might enhance the property values in a community to add recreational facilities, such as a pool, park, tennis court, skateboard park or whatever might be in vogue in their particular area. The point simply being that there are perfectly good reasons that a condominium might want to expand beyond it’s original borders and mandate. And often, the only way to do so is by having the association purchase the land.

But there are significant concerns that need to be addressed by any board that considers this issue. First, can the association purchase property? Usually, this basic issue will be addressed in the documents, and not every association has the power to make land purchases and own property.

Second, is the purchase a good business deal? Is the property really needed, and will it enhance the lives of owners and maintain or increase property values? Is the property selling for a fair price, or is the premium justified by the needs of the community? For example, it’s possible that a community’s parking needs are so acute that it would make sense to even overpay for a piece of land just to ease the burden. These are decisions that need to be discussed by the board and owners, at an open board meeting.

Third, how will the association pay for the property? The easiest manner, if allowed by the documents, would be for the association to simply assess owners for the cost of the property. Even a million-dollar piece of land may be affordable if split 300 ways ($3333 a unit, in that case, not a pittance, but also not insurmountable if paid over time and in installments). Plus, the association may be able to recoup the money and pay back owners if it intends to profit off of the land use, for example by selling the parking spaces created, or charging for use of the clubhouse. For that matter, many associations might have a war chest of funds stored for just such a purpose, and may not have to impact owners at all.

If an assessment is not practical, just like any individual or business, the association may finance the purchase (either through a line of credit against assessments or through a traditional mortgage). Again, an association’s documents will often spell out whether the association can take on debt, and if so how much and under what circumstances. Sometimes, an owner vote is required to approve debt, and other times owners must vote if the debt is over a certain percentage of the budget. Either way, using debt to purchase property is no less valid a business decision than your own decision to use a mortgage to purchase your unit–it’s just in a different environment.

Finally, is there a definite plan for how the property will be used? The property across the street may be a great deal, but the board should consider in advance whether it intends to hold and sell the property (using it for investment purposes), or whether there’s a pre-determined use.

No matter what, the purchase of property is a decision that should always involve consultation with the ownership. That doesn’t mean that the board must do whatever the loudest owners demand, or even what the majority demand (as, just like in our government, the opinion of the majority does not always benefit the community as a whole, and decisions must always be informed and well-purposed). But making such a big decision by way of illegal, closed board meetings, or even through the command of one or two dictatorial board members, is a recipe for disaster. Purchasing property is a big decision, whether it’s an individual or an organization, so make sure that your board does its research and considers all the variables. If you’re not on the board make sure that you attend the meeting where such an issue is discussed, and if the board makes a decision that’s contrary to law, don’t be afraid to band together with other owners and file a lawsuit! Often, it just takes a concerted and well-organized opposition to enforce your rights as an owner.

That said, if the board has the power to purchase property, has discussed the issue at an open board meeting and followed all laws and regulations involving the issue, just because you think it’s an invalid decision doesn’t make it illegal. You need to be a strong advocate, but also accept that sometimes decisions will simply not go your way. Living in a shared ownership community like a condominium involves give and take, and you can’t always be on the winning end of an argument. So no matter which side of the argument you’re on, be informed, speak up, insist that your board follow the law (or, if you’re on the board, insist that your fellow board members do), and then support your community with whichever decision it makes.

Good luck!

Keeping to Your Swim Lanes—Roles of the Board and Officers in Condos, Co-ops and HOAs

Tuesday, April 6th, 2010

Last week, we talked a bit about qualities to look for in a property manager. This week, I thought I would talk about serving your community as a board member or officer, and how that process can be as painless and efficient as possible. As you will see, a lot of it comes down to basic, good corporate management techniques, which should come as no surprise if you realize that Shared Ownership Communities (SOCs—condos, co-ops and HOAs) are essentially large, commonly owned corporations.

In New Neighborhoods we devote a significant amount of time to talking about the trials and tribulations of serving your community, especially on a board of directors. The main problem is that your average person hasn’t had to deal with elections or politics since high school, and the process of electing a community representative brings up a lot of odd personality traits—inflated self-worth, deal making, just general politicking. And so once the excitement is over, the people who have been elected tend to feel like they have been crowned, rather than simply elected. It’s basic human nature—it happens in all politics. But while strong leaders are important to any SOC, kings and queens are not.

I read a lot of condo/hoa blogs around the web, and the most frequent comments that I see posted are from readers who lament that their board members are sequestered dictators, making decisions without any community input and ignoring basic laws and rules that govern their behavior. Now, there’s no question that a percentage of those complaints come from people who are upset that an exception hasn’t been made for them on a particular rule—I’ve seen this happen first-hand numerous times in my own condominium. But it’s also certain that some boards in some communities have directors who have allowed the power of representation to go to their heads, and have begun to operate well outside the reasonable bounds of elected service.

First and foremost, serving as a director of an SOC is an elected, representative position. You are not anointed–you have been chosen among your neighbors because of your ideas or judgment, or maybe even just your smile (because, let’s be honest, that’s how politics works). But once you are a representative of your community, you owe it to the community to actually hear their comments and concerns, even the wackiest. As president, I never encountered a situation where I felt I needed to completely prevent a resident from speaking at a board meeting, unless he or she was being abusive or slanderous. Alternate ideas are never bad! If your thoughts make more logical sense than those shared by the resident, just explain why. Often, the owner may simply not be aware of the background of the issue, and may end up agreeing with you. But if you can’t support your position at a board meeting, maybe it’s not that strong a position. Simply blocking owners from speaking their mind just creates bitter and legitimately angry owners who then become the people who complain that their board members are know-nothing dictators. If your direction is strong and well-reasoned, you never have to fear it being challenged, and if it’s not, well, go back to the drawing board and listen to what someone else has to say about the issue.

Now backing up a bit, condo and HOA corporations are run just like any large corporation—there is a board of directors, who collectively make policy decisions at board meetings, and then officers like the president, vice president, treasurer, etc., who may also be board members, but not always. The officers are tasked with the “day-to-day” implementation of the board’s policies.

In the corporate world, directors and officers generally have years of management experience and training, and they know exactly how to do their jobs effectively and efficiently. But in the SOC world, board members and officers often have zero corporate experience, and many have never managed anything larger than their own personal budgets. But a good-sized SOC may be as big as many medium-sized corporations—budgets in the millions are common. Overall, this is where the biggest disconnect comes between being an effective director or officer. People with no corporate experience tend to believe that they are personally responsible for every action taken by the corporation, and they direct or preside accordingly.

Consider this—what would happen to a corporation like Apple if Steve Jobs personally and directly managed 21,000 employees? Obviously, that’s a little extreme, but even smaller corporations, with dozens of employees, can’t be managed by their directors or officers. Directors are visionaries—they are supposed to be making decisions about the direction of a corporation, approving large projects and guiding policy. The officers of that corporation then take the direction of the directors and translate it to the day-to-day managers, who are responsible for instructing employees underneath them. Sometimes, there are multiple levels of managers. Good managers delegate work to competent employees—they don’t insist on doing the work for themselves, and they don’t interfere with lower level managers’ ability to manage their employees.

Let’s then bring this into the condominium context. Say we have a condominium of 200 units with a $4,000,000 budget—a medium sized corporation. The condo has 20 or 30 employees, spread between office staff, valet, security, front desk and maintenance. There are various managers—the big chief Property Manager, an Office Manager, a Maintenance Supervisor, and even a Chief of Security.

Let’s forget about the board entirely for a moment. Let’s assume that the Property Manager is a dreaded “micro-manager”. He spends his days going from employee to employee instructing them on exactly what tasks they should be doing. He tells each individual housekeeper which room to clean. He tells the maintenance lowbie which garbage to change first. He even tells the office secretary to clean up his rolodex, instead of making the phone calls she had been assigned by the Office Manager.

This Property Manager is, straight and simple, a very bad corporate manager. For one thing, he has completely undercut all of his sub-managers, effectively removing them from their jobs and destroying any possible accountability for their work. In addition, he’s not doing HIS job properly either, as he certainly doesn’t have time to concentrate on the big-picture management items, like walking the property, coordinating with contractors, preparing projects for board approval, meeting with vendors, etc. He is doing the jobs of 10 or more people, but not doing any one of them particularly well.

Instead, imagine a Property Manager who comes in first thing in the morning and walks the property. She makes a list of items that need to be addressed, and then assigns that work to her various sub-managers in her daily meetings. She instructs the Maintenance Supervisor to attend to a broken door, she instructs the Office Manager to make sure the board packets are prepared by the next evening. Then, with those projects completely off her plate, she can turn to more important items, like negotiating a new contract with the pool maintenance company or discussing a rule violation with an owner. She has allowed her employees to do their jobs. If they don’t do them properly, she can evaluate and take action, but not without allowing them to NOT do their jobs properly first!

The exact same dynamic is true of board members and officers. Let’s say that the president of the same condo association insists on personally directing all employees. He switches maintenance employees from one job to another without any consideration of prioritization, he gives projects to the office staff without consulting with the property manager, he even directs security while on their rounds. This person is a prototypical “Condo Commando,” and he is doing the same disservice to the staff at the condominium that the micro-manager did just one level below.

Instead, the president of the association should be taking the policies and directives of the board and discussing them with the property manager, allowing the manager to make decisions about which employees engage in which tasks to get those projects accomplished. This way, if something isn’t done properly, the manager can be held accountable. Otherwise the president would simply be an unpaid and totally unaccountable property manager who has no training or experience. Would you hire such a person to manage your property?

And ultimately, that really is the important question when it comes to micro-managing officers—if you submitted your own resume to your community as a property manager, would you hire yourself? Are you qualified to do the job? Do you have any training whatsoever in managing a business, much less an SOC? 99.9% of the time that answer will be no, and that’s exactly why officers should never manage their properties—they should only guide and direct the manager to accomplish the priorities of the board.

Officers and directors frequently interfere with one-another, as well. The treasurer of an association is tasked with overseeing financials, the budget making process, and sometimes chairing a financial or budget committee. He or she generally is the point person who communicates with the association’s CFO or accountant, and then is responsible for communicating financial issues to the board. But what happens when another officer of the association feels that they need to be involved in every decision made on every issue, and goes off on their own tangent? Perhaps this person adjusts budget items after the budget committee has prepared them, or gives separate, inconsistent direction to the financial personnel. Who are they to follow? Having two bosses in a corporation is a recipe for disaster. Officers need to stay in their own swim lanes! The directors, at a board meeting, should clearly delineate the responsibilities of every officer (it’s already done for you in a lot of association documents) and then those officers should stick to their jobs. It’s efficient, it ensures that mixed messages aren’t given and it keeps individual officers from accidentally or intentionally subverting the will of the board. Because ultimately, it’s up to the board, as a whole, to determine the direction of an association, and the officers are simply intermediaries who make sure that vision becomes reality.

It’s hard being a director or officer of an SOC—something that can really only be fully understood by those of us who have served. But that doesn’t mean that we, as officers or directors, have the right to present ourselves as latter-day Napoleons. Serve your community honorably, listen to your neighbors and respect your fellow board members and officers—that’s the recipe for a happy, healthy Shared Ownership Community.