One Part "Sigh of Relief" Mixed with One Part "Caution Ahead"

That's what you call the recipe for the Texas 2009 Legislative (regular) Session (although the folks who tracked, lobbied and arm-wrestled with State senators and reps over the record number of POA-legislation might invoke some more colorful metaphors to describe this session!).

Even though the vast majority of Property Owners Association-related legislation died on the floor of either chamber, or languished in sub-committees to be dusted off in another two years, this session was anything but ordinary. Of course, for those of us with vested interests in maintaining the sanctity of the Texas Property Code chapter 201, et. seq. relating to POA powers and governance, which should include all proponents of POAs, Boards of Directors, attorneys and the like, the conclusion of the legislative session was a welcomed sigh of relief.

However, the session did produce some new laws that POAs still need to be wary of, lest they let down their guards in the wake of the twin Property-Code-omnibus bills' failure to complete the legislative gauntlet. These comprehensive bills will be back, you can bet on that. One law in particular that I want to focus on is exactly one of those "housekeeping" type laws that could catch many unsuspecting POAs napping (and be costly in the form of lost assessment collections). Read on.

Senate Bill 1919 ("SB 1919"), relates to that most mundane of Association documents, the Management Certificate. SB 1919 modifies Section 209.004 of the Texas Property Code to add some "biteback" against those Associations that fail to file a proper Management Certificate in each county where a portion of the subdivision is located. The Management Certificate must list certain items of data, including the subdivision's name, the association's name, recording data for the subdivision and association dedicatory instruments, the name and mailing address of the association as well as its manager or other designated representative. See Tex. Prop. Code Ann. § 209.004(a) (2009).

Now under SB 1919, if a POA fails to file a Management Certificate, Section 209.004(d) states that "the purchaser, lender, or title insurance company or its agent in a transaction involving property in the property owners' association is not liable to the property owners' association for ... any amount due to the association on the date of a transfer to a bona fide purchaser, and any debt to or claim of the association that accrued before the date of a transfer to a bona fide purchaser" (emphasis added). Moreover, Section 209.004(e) states that the lien securing any amounts due on the date of transfer to a bona fide purchaser are enforceable only to the extent that amounts accrue AFTER the effective date of sale. OUCH.

Why such harsh legislation? It may have something to do with NOTICE and the logic makes sense. A Management Certificate is, after all, just another way of letting people know that a particular subdivision is deed-restricted, governed by a POA, and subject to terms and provisions contained within whatever dedicatory instruments are on file with the county of residence. In addition, these certificates provide a point of contact for those prospective and current homeowners who always whine that "they cannot contact their POAs" whenever issues of delinquent maintenance assessments and/or deed-restriction enforcement surface.

So is this new law, SB 1919, a procedural pitfall? You betcha. Ignore it at your own peril if you are a POA (or its Board of Directors, manager, agent or attorney). The ramification of non-compliance means that past-due indebtedness is effectively "wiped out" when a delinquent homeowner sells its property to a third-party buyer if that management certificate isn't on file with the county. But, when you look at the costs of compliance with SB 1919, e.g. creating and filing that darn management certificate, then the reasons for not doing so are NIL. Even if you have an attorney draft and file this (usually) 1-page document, you are only looking at a few hundred bucks versus thousands of dollars potentially lost in past-due assessments and collections costs. So the decision becomes a simple one when you look at the dollars-and-cents exposure to the POA.

*Special thanks goes out to Sharon Reuler, who maintained constant vigil over this year's legislative session and provided many timely updates and bill interpretations/amendments, as well as insight into the effects of these bills on POAs across the State. Ms. Reuler practices in Dallas, Texas and can be reached at www.txlandlaw.com. Kudos, Ms. Reuler!

Baked Alaskans

Forgive the play on words in the title, but this article originates from an Alaska Supreme Court case and highlights the notion that Associations shouldn't necessarily interfere in "neighbor v. neighbor" disputes, nor do they have the duty to do so under the deed restrictions in most cases.

The Court in this case held that there is no actionable claim against the Association for "insufficient vigilance."

Actually, and for the very reasons outlined in this case study, the deed restrictions for a community oftentimes include an "anti-waiver" provision for Associations to invoke so that the Association isn't forced to litigate every single nuisance-like occurrence or event reported by disgruntled homeowners. Sometimes these incidents are between neighbors who may have a beef with one another -- and not the Association -- but will do anything to drag the Association into their personal vendettas as the "hired muscle" to bend the offending neighbor to their will or punish them.

Speaking from personal experience, Association involvement in arguments that can be more appropriately characterized as neighborly disputes only ends in needless (and escalating) legal fees for the Association (which affects ALL the members when it comes time to planning for annual budgets and possible assessment increases) and hurt feelings by one or more of the warring parties.

In the Alaska case, the homeowner had a series of complaints against the Association and her neighbors for various items of conduct including: failure to repair a leaky roof, failure to sand the unit's porch, failure to remove snow from the unit's porch and driveway, installing a fence to prohibit parking in the courtyard, verbal harassment and assault by neighbors, theft of the homeowner's plants, mail and mailbox tampering, vandalism of the homeowner's vehicle by the residents, and intentional infliction of emotional stress. Conversely, the Association also held legitimate claims against the homeowner for violative conduct against the deed restrictions including parking a vehicle in the Condominium's courtyard and walking a dog without a leash.

At trial, the Court ruled that the homeowner had no actionable claim against the Association for "insufficient vigilance" in enforcing the deed restrictions, but instead should have sued her fellow condominium owners to whom she attributed the offensive conduct against her. The Association was also successful on its claims against the homeowner for the violations of the deed restrictions. On appeal, the Alaska Supreme Court sided with the Association, ultimately, because the evidence tendered by the homeowner was deficient and the Trial Court had not abused its discretion when issuing its ruling(s) based on that evidence and the lack of an actionable claim against the Association.

*To read the full saga of the "Baked Alaskan (neighbors)", see Gilbert v. Simonka, Nos. S-11470, S-11841, 1282, Alas. Supreme Ct., July 25, 2007.

Covenants Survive the Developer's Demise

I came across this Washington state appellate court case and felt that the message, while off-jurisdiction, was nonetheless still worthy of repeating here.

The dispute in this case centered around a denied ACC application for the subdivision of two residential lots. The deed restrictions prohibited the subdivision of lots "without the written consent of the developer," but the developer in this case had already filed articles of dissolution and ceased operation several years prior to the ACC denial. The aggrieved homeowner challenged the covenant in court because he reasoned that the "developer" was the only one who could enforce the covenant against him. The homeowner reasoned that, if the developer was out of the picture, then he was free to subdivide the lots as he saw fit. The homeowner ultimately lost on appeal. Why was this?

It seems that the developer had granted specific authority to the Association to enforce the covenants against the membership. The Association, as both successor in fact and by implication, "stepped into the shoes of the developer" and was able to assume certain powers and duties that may have been labeled "for developer" only explicitly in the covenants' provisions. Courts will liberally construe covenants to give effect to their intended purposes, and so the result reached in this case was not unreasonable. The Court also found that while the developer was still viable, the Association was the entity enforcing the covenants (which demonstrates implicit, if not express, agent authority to do so) and the homeowner even submitted his ACC application directly to the Association and not to the developer.

Finally, the Court reasoned that such covenants benefit the owners of property within the subdivision and so the goal for interpreting these covenants must be to protect those collective homeowners' property interests. Any ambiguity in covenant interpretation would be resolved in favor of the interpretation that avoids frustrating the reasonable expectations of those individuals affected by the covenant. In this case, requiring a checks-and-balances on the further subdivision of individual lots protected the character of the community. Likewise, the homeowners relied on this provision and others when they purchased their properties which act as safeguards to the collective property values in the subdivision.

*This particular case can be found at Jensen v. Lake Estates, No. 36094-2-II, Wash. App. Ct., May 13, 2008. Thank you CAI Law Reporter!

Deny it within 30 Days, Or Live With it Forever

This article goes out to all of those homeowners who are civic-minded, vigilant, or crazy enough to serve on their HOA's Architectural Control Committee (ACC). If your Declaration of Covenants, Conditions and Restrictions (the "Declaration") sets forth a time limit for approving or denying homeowner improvement applications (usually a 30-day window), then by all means DON'T IGNORE IT and make sure that the ACC has taken some form of action (and reduced it to writing or some format calculated to reach the applicant) -- or else that charteuse-marbled electric-neon stereophonic bird bath may become a permanent fixture in your neighbor's yard.

The inspiration for this article arose from a Corpus Christi Appellate Court case that was decided last year. See Huntington Park Condo. Ass'n, Inc. v. Van Wayman, No. 13-05-00464-CV, Tex. App. Ct., Feb. 28, 2008. In that case, the soon-to-be homeowner had submitted an ACC application before he ever even purchased a unit in the Condominium complex seeking the addition of an enclosed patio area to his prospective unit. The ACC did not respond to the application and the homeowner purchased the unit, then subsequently built the patio enclosure some three (3) years later. The HOA then sued the homeowner for violation of the Declaration and sought injunctive relief including the removal of the patio enclosure. THE HOA LOST. TWICE.

How could this happen? After all, when the application was submitted for the patio enclosure, the individual wasn't even a homeowner yet. Why would the ACC even need to respond to such an application then? It's called ESTOPPEL. Estoppel simply means that a person or entity is precluded from taking a subsequent action contrary to a previous action (or inaction) from which another person relied upon.

In this example, the homeowner relied upon the ACC's failure to respond to the patio enclosure application and purchased the condo unit under the presumption that when the homeowner was ready to build, the HOA would not prevent it. The Court ruled that the patio enclosure was a "fundamental factor" in the homeowner's decision to purchase the condo unit, and so the ACC's failure to respond to the application was an implicit ratification of the homeowner's requested improvement. Therefore, the HOA was precluded, or ESTOPPED, from preventing the installation of the homeowner's patio enclosure. The ACC also had the duty to conduct due diligence on the application as part of its mandate under the Declaration and the Court ruled that the ACC had failed in that regard.

Bottom line: if you serve on the ACC, and you receive an application for an improvement by a homeowner (or a prospective one!) then RESPOND to it, or you might just be stuck with an unpleasant consequence (cue the neon bird bath reference above).

*Thanks again to the CAI Law Reporter for the original case cite and synopsis of the case.

Excess Proceeds and Subordinate Liens

One of the Association's primary tools in collecting delinquent maintenance assessments from its homeowners is the enforcement or foreclosure of the lien against a homeowner's real property securing the indebtedness. However, when a superior lienholder such as a taxing entity, a purchase-money lender, or *gasp* the IRS, comes a calling, their lien enjoys "priority" over the Association's lien. What this means is that if any of these entities foreclose on their superior lien, this effectively extinguishes the Association's lien for the homeowner's indebtedness.

But, Texas law does allow, in some cases, for an Association to seek another avenue to recover its delinquent maintenance assessments in the face of a superior lien foreclosure: file a petition for excess proceeds.

For example, the Texas Tax Code chapter 34 allows for lienholders to petition for excess proceeds pursuant to a tax sale foreclosure of property. See Tex. Tax Code Ann. § 34.04(a),(c) (West 2008). The relevant provision(s) state:

(a) A person, including a taxing unit, may file a petition in the court that ordered the seizure or sale setting forth a claim to the excess proceeds. The petition must be filed before the second anniversary of the date of the sale of the property. The petition is not required to be filed as an original suit separate from the underlying suit for seizure of the property or foreclosure of a tax lien on the property but may be filed under the cause number of the underlying suit.

* * *

(c) At the hearing the court shall order that the proceeds be paid according to the following priorities to each party that establishes its claim to the proceeds:

(1) to the tax sale purchaser if the tax sale has been adjudged to be void and the purchaser has prevailed in an action against the taxing units under Section 34.07(d) by final judgment;

(2) to a taxing unit for any taxes, penalties, or interest that have been due or delinquent on the subject property subsequent to the date of the judgment or that were omitted from the judgment by accident or mistake;

(3) to any lienholder, consensual or otherwise, for the amount due under a lien, in accordance with the priorities established by applicable law;

(4) to a taxing unit for any unpaid taxes, penalties, interest, or other amounts adjudged due under the judgment that were not satisfied from the proceeds from the tax sale; and

(5) to each former owner of the property, as the interest of each may appear.

In the Association's case, it could file its petition for excess proceeds pursuant to Section 34.04(c)(3), assuming that there are any leftover proceeds after the foreclosing entity's lien has been satisfied by the tax sale (although this is not always the case due to market forces or other factors).

So all is not automatically lost for the Association to collect its delinquent maintenance assessments if a superior lienholder forecloses its lien. Just remember that filing a petition for excess proceeds may just be an oft-unheralded remedy that your Association can utilize to collect on those old homeowner debts.

*Thanks to the CAI Law Reporter for uncovering this gem of a case, Belt v. Point Venture Property Owners' Association, Inc., No. 03-07-00701-CV, Tex. App. - Austin 2008), upon which this article and excerpts were based.

General Guide to Restrictive Covenant Enforcement

It's always good to periodically revisit old practices and check against established norms to confirm that your Association runs a sound deed restriction enforcement program.

Generally, and in most cases, it is the Board of Director's (the "Board's") fiduciary duty to enforce the deed restrictions on behalf of the Association membership. The Board must select when and what to enforce based on its best business judgment, while also taking care not to enforce the restrictive covenants in a discriminatory, arbitrary or capricious manner - the triumvirate of behaviors that will get an Association in hot water quicker than you can say "homeowner files civil suit against her HOA." It is impractical to expect that a Board can maintain absolute vigilance over the community and catch each and every potential deed restriction violation as it occurs in a community at any given time. Instead, the Board must exercise its own business judgment when considering whether to pursue an alleged violation.

The first thing the Board should always do is consult the deed restrictions for the community. Oftentimes, the deed restrictions will set forth express powers and authority that the Association can wield in its enforcement arsenal, like imposing fines or bringing equity suits for injunctive relief against violating homeowners.

Here is a list of the typical remedies available to an Association that seeks to enforce its deed restrictions:

1. Impose a fine - this power is typically derived from the DCCRs, by-laws, or even Texas statute. A homeowner must be given notice of the violation with an opportunity to cure same before any fines can be assessed for first time violators. Note: for "repeat offenders", the opportunity to cure is usually waived and the fine can be levied upon notice of same. The only problem with fines is that this won't motivate some people to correct the violation(s).

2. Small Claims Court - the Association can always file a suit in small claims court (the Association usually represents itself in these courts); however, the Association will only be able to secure a money judgment (which doesn't correct the violation(s)) and these courts are "courts of no record." Meaning, that if the homeowner wants to appeal the judgment, then the case is removed to County Court for a brand new proceeding, complete with all of the document review, pre-trial discovery and any other litigation procedures accompanying such efforts. As a result, small claims court can become just as expensive as its District and County counterparts with no concrete result and no violation remedy, especially if the homeowner appeals the small claims judgment.

3. County Court or District Court - like small claims court, but the Association is almost always represented by counsel; these are courts "of record" meaning that evidentiary rules and civil procedure must be observed to create and preserve the trial record in case of appeals by either party. Litigation in the District or County Courts can be expensive, but the Association can seek injunctive relief and an order by the Judge to cease the violative conduct and/or correct the deed restriction violations. Further, if the homeowner chooses to ignore the injunctive order, then the Judge has the power to level contempt sanctions against the homeowner, which includes more severe fines and, ultimately, incarceration for continued misconduct until the violation(s) are corrected.

4. Filing a Lien - if provided for in the deed restrictions for the Association, a lien can be filed in the real property records for the county wherein the property is located. This lien puts any potential purchasers of that property on notice that this violation exists and is an encumbrance of sorts on the land until resolved. While inexpensive, this remedy typically only nets a result at the time of property sale or refinancing (since the mortgage financiers generally will not fund the transaction until any encumbrances on the property are removed first).

5. Self-Help - if provided for in the deed restrictions, an Association can initiate self-help and enter the homeowner's property to correct the violation. The costs of effecting any removal or cleanup or other correction of the violation(s) is then charged back to the homeowner's account. This remedy can be tricky though, since expenses might be difficult to collect from a homeowner that is already non-responsive about the violation(s) while the homeowner may be able to claim trespass, damage to property or even personal injury arising from the Association's corrective measures. When utilizing self-help, the Association needs to take great care and document everything it does, including photographing or videotaping the actions it took.

6. Suspension of Member Privileges - if provided for in the deed restrictions, an Association, after notice and a hearing, may suspend certain member privileges if a homeowner refuses to correct the violation. This remedy, however, might prove useless if the homeowner does not utilize the privilege (like suspension of pool access privileges if the homeowner does not use the pool).

7. Mediation/Arbitration - based on whether or not the Association's deed restrictions require this or not; can be formal like a lawsuit (binding arbitration) or informal (non-binding mediation). Depending on the mediator/arbitrator, can be very cost-effective and less confrontational than a traditional trial, unless there is no middle ground from which to negotiate (e.g. the hot pink painted house cannot remain hot pink in color).

8. Police and/or County/Municipal Intervention - Most counties, cities and local municipalities have ordinances for nuisance conduct, inoperable vehicles, disorderly conduct, disturbing the peace, etc. The Association should always consider contacting the local authorities when handling certain deed restriction violations as these agencies may be better equipped to deal with specific matters as the need arises. In the very least, the Association should maintain a good rapport with local law enforcement and government offices and cooperate with them when and if these entities are brought in to investigate the homeowner's misconduct as a violation of local civil and/or penal statute(s).

Associations Avoid Getting a "Bad RAP"

Mention "RAP" to legal practitioners and they may audibly groan as they recall their days in law school when the sometimes confusing "Rule Against Perpetuities" was taught in their respective property law classes. The Rule Against Perpetuities, or RAP for short, states that "[a property] interest is not valid unless it must vest, if at all, within 21 years after the death of some life or lives in being at the time of the conveyance." Huh? Say what?

Basically, RAP safeguards against the future vesting of property if it requires a waiting period or other delay in transfer of title lasting longer than 21 years. Really, it is a policy favoring the free transfer of property NOW versus the hording of that property for distribution or conveyance LATER.

Fortunately for Associations, property interests created by restrictive covenants - interests that "run with the land" - while seemingly "perpetual" in nature (since these DCCRs typically automatically renew every 10-20 years by express provision), actually vest when title in the property vests. Thus, there is no "remote" vesting of title in these interests and they would not violate the RAP. So the good news for Associations is that annual maintenance assessments, and any other restrictive covenants contained within the Association's deed restrictions, do not upset the Rule Against Perpetuities and remain valid property interests.

This RAP issue reared its head in a somewhat novel legal challenge by a homeowner who had been sued by his Association for delinquent maintenance assessments. The homeowner alleged that the deed restrictions for his community were invalid because they automatically renewed every 10 years after the initial 20-year term, which seemingly would violate the RAP. The Court didn't bite. Instead, the Court ultimately found that the covenants to pay assessments, as well as the lien that attached to each homeowner's property, were covenants running with the land and, as such, vested when the homeowner took title to the property. Thus, the homeowner in this case lost his argument and the Association avoided getting a "bad RAP."