Deck Police – The New Mandate for HOA’s Takes Safety to the Next Level

Joseph A. Ferrentino | Newmeyer Dillion | November 7, 2019

A recent California law will hold homeowners’ associations accountable for the safety of their decks. SB326 now mandates all homeowners’ associations to have decks inspected at least once every nine years by an architect or structural engineer to determine whether the decks are safe and waterproof. This law (Civil Code section 5551) follows SB721 which was passed in 2018 and requires a similar inspection every six years for other multifamily dwelling units. Failure to comply can result in paying the enforcement costs of local building agencies.

Details on the Mandate:

More specifically, the 2019 law requires inspections of wood “decks, balconies, stairways, and their railings” more than six feet off of the ground and designed for human use. Additionally, the engineer or architect must (1) certify that he or she has inspected for safety and waterproofing, and (2) certify the remaining useful life of the system. Further, the inspector must inspect a random sample of enough units to provide 95% confidence that “the results are reflective of the whole.” In other words, in addition to the inspector, the association will have to hire a statistician.

The nine-year timetable for inspection is no coincidence. After all, the statute of limitations for construction defects is ten years. In fact, associations are required to give notice to their members before filing a suit against a builder. However, under the new law, the association can delay giving notice to its members “if the association has reason to believe that the statute of limitations will expire.” Also, recent case law held that builders could add requirements to CC&R’s to limit a board’s authority to file lawsuits – i.e. adding a supermajority vote by members. Under SB326, any such provisions are now void. Hence, “supermajority” voting provisions are now invalid.

Impact on Construction Litigation

These recent laws are clearly a reaction to the tragic collapse of an apartment balcony in Berkeley in 2015 that resulted in the death of six college students. While it is imperative that decks be structurally safe, the requirements of SB326 will fuel more construction defect litigation.

Common Charges In Mixed Use Condominiums

Smith Gambrell & Russell | September 16, 2019

Condominium boards that operate buildings with both commercial and residential units frequently ask us for assistance in disputes involving the calculation of common charges.

Determining common charges in buildings that are completely residential is typically straightforward — the board develops a budget and then divides the projected common expenses among the units based on each unit’s respective percentage of the common interest. However, in a mixed use building where there are both commercial and residential units, the New York Condominium Act permits them to be allocated common charges differently where authorized by the condominium’s declaration and bylaws. Unfortunately, in our experience, boards and managing agents often refer to the condominium’s offering plan for a description of how common charges are to be billed, without checking the bylaws and declaration as recorded in the City Register, resulting in mischarges.

For example, an offering plan might provide that costs are allocated to the residential and commercial units based on the costs attributable to the operation of each. Using this method of allocation, only a small percentage of the condominium’s labor expenses might be allocated to the commercial unit (on the assumption, for example, that doormen serve only the residential units) even though the commercial unit’s percentage of the common interests might be substantial. Referencing the offering plan, the condominium’s managing agent might then use this method of cost allocation when preparing budgets, and continue using the method year after year, until and unless someone checks the condominium bylaws and declaration as recorded with the City Register, and discovers that they allocate costs differently.

Based on the language of the Condominium Act and prevailing case law, the provisions of the bylaws and declaration as recorded with the City Register supersede the offering plan. However, once a discrepancy is found between the bylaws and declaration and what has been charged historically, both the board and the commercial unit owner are bound by a six year statute of limitations insofar as recovering past charges is concerned. Each party may also argue that this six year period has been effectively shortened by the doctrine of “waiver” where the other party knew about the discrepancy for a meaningful period of time and failed to act. The success of this argument will depend on the specific facts of the situation.

Recalculating past charges is typically called a “true-up”. If the commercial unit owner owes past charges based on the true-up and fails to pay, the board can exercise the same remedies it normally has for unpaid common charges, including filing a common charge lien against the unit. If the discrepancy is substantial, litigation sometimes ensues.

The Accidental Construction Owner: a Checklist of Considerations for HOAs Engaging in Construction

Jason T. Strickland | Ward & Smith | July 26, 2019

Homeowners associations (“HOAs”) do not typically act as construction owners.

HOAs are set up as entities to maintain and manage planned unit communities. The most important and common role of the HOA is to maintain the common elements of the community. However, in that capacity, HOAs will typically be compelled to undertake a construction project. In these circumstances, the HOA plays the role of a commercial construction owner but is doing so without the experience that a commercial construction owner has in managing a construction project. The following is a list of considerations for the HOA that is engaging as a construction owner:

Written Contract

The HOA will typically hire a contractor to perform the construction work. Sometimes the HOA will also hire a designer to develop a design for the work and to inspect construction of the work. In each instance, there should be a written contract put in place between the owner and the contractor (and between the owner and designer, if the latter is involved). The contract should have express terms and be clear and understandable.

Payment

Payment for the work should be set out in the written contract. The two most common types of payment are cost-plus or lump sum. In a cost-plus situation, the contractor will be paid for the materials and labor it provides to the project, plus a markup which is intended to compensate the contractor for its overhead and profit. In a cost-plus situation, the HOA should strongly consider requiring a guaranteed-maximum-price or GMP. A GMP caps the total costs and fees for which the HOA will be responsible — there is a maximum cap above which the HOA does not have to pay.

The second arrangement is a lump sum whereby a fixed price is paid by the HOA to the contractor for the work. This price is negotiated at the outset of the project and set forth in the contract. Unless unforeseen conditions are encountered, or the scope of work is changed for some reason, the owner is required to pay the lump sum, no more or less, to the contractor for completion of the work, regardless of the actual costs. This arrangement is generally more favorable to an HOA but is generally disfavored by contractors.

The HOA should also have the written contract set forth a process for the timing of payments (i.e., when and how payments are made) and the paperwork that must be submitted in order for the contractor to establish its entitlement to payment.

Scope of Work

Written contracts should set forth the scope of work to be performed. There should also be some provision that determines how the work will be accepted, including whether there will be inspections by the owner and/or the designer, and what happens if work is rejected.

Time

The contract should set forth the time in which the contractor is required to complete the work and the remedies available to the HOA if the work is not completed in the time required. Remedies for late completion are typically in the form of liquidated damages, which are a daily rate fixed at the beginning of the project. For each day late that the contractor finishes the project, the contractor will pay to the owner an amount equal to the daily rate. It is important in the contract to not turn the liquidated damages into a penalty. The liquidated damages should be a reasonable approximation or estimate of the actual damages that the HOA will suffer if the project is not completed in the time required.

Liens

In the event of a dispute with a contractor, there likely will be liens asserted against the project. These liens can be asserted not only against the common elements, but also the individual units in the planned unit community. Thus, the HOA’s members, the unit owners in the community, are subjected to being defendants alongside the HOA. This can create problems between the HOA and its members. The HOA should keep its members informed of the construction project. In the event of a dispute or if a dispute looks likely, the HOA should try to get ahead of the problem by informing its unit owners of the problem. Although the assertion of a lien by a contractor or subcontractor cannot be wholly prevented, certain key provisions, if present in the contract, can reduce the likelihood that liens can be successfully asserted against the common elements or the individual units.

Insurance

A written contract between the owner and the contractor (or between the owner and the designer) should set out insurance requirements for the contractor or designer, including specific dollar minimums and types of insurance the contractor is required to maintain.

Sequence

All of the above considerations must be considered in light of the sequence in which negotiations with the contractor are conducted. If the HOA gets too far into negotiations with a specific contractor and becomes wedded to using that contractor, then the HOA has little leverage to negotiate contract terms with the contractor and likely will be forced into a situation where it must sign the contract presented by the contractor as a fait accompli. Therefore, an HOA proceeding as an owner on a construction project should make sure the issues listed above are put forward, considered, addressed, and made part of negotiations at the earliest stage so as to prevent a loss of leverage and avoid being forced into a contract with inappropriate, unfair, or harmful terms.

Conclusion

The HOA should consult with its attorneys, and if necessary, have its attorneys refer them to a competent construction attorney to advise them at the very earliest stages of the construction project. Doing so will allow the HOA to avoid or at least mitigate the risks and losses associated with acting as a commercial owner when the HOA lacks experience doing so.

Don’t Jump Without A Parachute! Understanding Community Association Insurance Needs

Adam Beaudoin | Ward and Smith | July 22, 2019

In the aftermath of Hurricane Florence, many Community Associations located in the Eastern part of the state had a rude awakening when they discovered they didn’t have the right amount and/or proper type of insurance coverage. 

More often than not, such lessons were very expensive, and the purpose of this article is to educate Community Association Board members regarding the types of insurance their Community Associations should consider carrying, and which gaps in insurance coverage they should be wary of when evaluating and selecting the right insurance coverages for their Community Associations.

Types of Insurance Coverages Community Associations Should Consider

  • General Liability Insurance
  • Property Insurance
  • Directors and Officer Liability Insurance
  • Crime and Fidelity Insurance
  • Umbrella Policy
  • Worker’s Compensation Insurance

General Liability Insurance

General liability insurance coverage protects Community Associations against third-party claims of bodily injury or damage to someone else’s property but does not protect the Association’s own property.

Both the North Carolina Condominium Act (“Chapter 47C”) and the North Carolina Planned Community Act (“Chapter 47F) require all Community Associations in North Carolina, regardless of when formed, to carry liability insurance in reasonable amounts, but leaves the actual particulars of the coverage (i.e., amounts, deductible, exclusions, etc.) up to each Association’s Board of Directors.

Typical liability insurance coverage gaps to be aware of are:

  • Coverage for automobiles hired under contract on behalf of or loaned to the Association.
  • Low MedPay coverage. MedPay coverage pays medical expenses on behalf of the Association for individuals who are injured during an accident on Association property, regardless of who caused the accident.
  • Community Manager not covered as additional insured.
  • Name of the Association is incorrect on the policy.
  • Low limits, especially when the Community Association owns amenities such as a pool, pond, playground, and/or park.

Property Insurance

Property insurance provides protection against most risks to property, such as fire, earthquakes, hurricanes, tornadoes, mudslides, and vandalism.  All Community Associations in North Carolina are required to carry property insurance on common elements equal to at least 80% of the replacement cost after the deductible is applied, exclusive of land, excavations, and foundations.  In the case of condominiums with horizontal boundaries, property insurance must include the units.

Property insurance coverage gaps to be mindful of include:

  • Address of property incorrect on the policy.
  • No blanket coverage. Blanket coverage provides multiple types of coverage on one property (i.e., contents and the actual structure), or groups multiple properties together under a single policy.
  • No water and sewer backup insurance coverage. This coverage is different from flood insurance in that it covers water or water-borne materials backing up into a unit or residence. This typically happens through sewers, drains, a sump pump, or related equipment.  This coverage is very important in condominium and townhome communities.
  • No ordinance or law coverage. This covers loss caused by enforcement of ordinance or laws regulating construction and repair of damaged buildings and is particularly important for older condominium and townhome communities to carry.
  • Understanding whether flood insurance coverage is warranted.
  • Property is grossly over or underinsured.
  • Insured to value report has not been conducted every 24 months.
  • Not all properties owned by the Association are listed on the policy.

Directors and Officers Liability Insurance

This insurance is payable to directors and officers of the Association, or to the Association itself, as indemnification for losses or advancement of defense costs in the event the Association suffers a loss as a result of legal action brought for alleged wrongful acts in their capacity as directors and/or officers of the Association.  Currently, neither Chapter 47C nor Chapter 47F makes this type of coverage mandatory.  For a detailed understanding of the importance of carrying director and officer liability insurance, please click here.

Crime and Fidelity Insurance

Crime and fidelity insurance helps Associations manage the loss exposures resulting from criminal acts such as robbery, burglary, fraud, forgery, and other crimes committed by an Association’s own directors, officers, committee members, and managers. Community Associations are not currently required to carry this coverage, but the NC legislature has been flirting with the idea over the last several years, and there is currently another opportunity this year for the legislature to enact mandatory crime and fidelity coverage.

Common gaps in insurance coverage filled by crime and fidelity insurance coverage:

  • Coverage over both operating and reserve accounts of the Association.
  • Reliance on the property manager’s crime and fidelity insurance coverage, because the majority of “money crimes” are not the manager.
  • Coverage of Board members, committee members, volunteers, spouses, bookkeepers, accountants, and cleaning staff

Umbrella Policy

This is liability insurance that is in excess of specified other policies and also potentially primary insurance for losses not covered by the Association’s other policies.

Typical gaps include:

  • “Excess Insurance” vs. true “Umbrella.” Excess insurance is subject to all of the terms and conditions of the policy beneath it. In the event of a conflict, it is the underlying policy provisions that take precedence. There are no such limitations with an umbrella policy.
  • Association has an umbrella policy, but the policy does not cover directors and officer liability or general liability.

Also, it is a good idea to purchase an umbrella policy if your community has a pool, playground, park, or is a condominium.

Workers’ Compensation Insurance

This type of insurance coverage provides replacement and medical benefits to employees injured in the course of employment.  Any Association in North Carolina with three (3) or more employees is required to carry this type of insurance, and if the Association has even one (1) single employee, the Board members are considered to be employees of the Association despite being volunteers.

There are many Associations that believe they do not have any employees, so they do not purchase workers compensation insurance, but remember, just because the Association classifies the person as an independent contractor does not mean the State of North Carolina will not consider them an employee.  This type of insurance is generally very affordable, and it protects the Association against uninsured contractors and Association volunteers when they are injured working/volunteering on behalf of the Association.  There simply is no reason not to purchase this type of insurance coverage for your Community Association.

Make Sure Your Chute is Packed Properly

Accordingly, we strongly recommend that every Community Association deliberately review their insurance policies on an annual basis and obtain Insurance to Value reports every 24 months to make sure the Association is not self-insuring any of the gaps in coverage listed in this article.  Ultimately, there is no one-size-fits-all, but all Community Associations should use their insurance professionals as a resource to get the right types and amounts of insurance coverages in place each year.  Most importantly, remember that getting the right insurance coverage in place for your community is more than simply focusing on the cost of the policy, its coverage limits, and the amount of the deductible.

Condominium Conversions Defect Actions Under California Law: Not Your Run-of-the-Mill Defect Case

Brendan P. Bradley | Gordon Rees Scully Mansukhani | February 28, 2019

Condominium conversions may present developers and contractors with both additional defenses and potential liability pitfalls when a defect action is subsequently alleged by an HOA. On the plus side for the converter, unlike new residential construction projects, California Civil Code Section 896, which is commonly referred to as “SB 800,” or the “Right to Repair Act,” does not apply. This means that violation of the performance standards for construction components contained in SB 800 is not an independent basis for recovery in a suit brought by the HOA.

Further, statute of limitations defenses are commonly available to developers and contractors in conversion cases where the original construction is more than ten years old. California Code of Civil Procedure Section 337.15 sets forth a ten-year statute of repose limiting claims for latent defects. In many, if not most cases, the converted project will have been used as rental property for several years before its conversion to condominiums. This means that often, while any construction associated with the conversion may only be a couple years old when the HOA sues, the original construction may have been completed more than ten years prior. If the HOA’s claims relate to the ten-plus year old original construction, as opposed to conversion work, they are likely barred.

HOA counsel often try to skirt this statute of limitations defense by alleging that the converting developer should have identified and remedied or disclosed defects in original construction during pre-conversion investigation. Likewise, they argue that contractors who see defects in original construction while performing conversion work have an obligation to point out the defects, not cover them up. However, this requires the HOA to show that the condition actually existed such that it could have been identified at the time of conversion, which is often difficult for the HOA to prove.

On the other hand, conversion cases may pose a hornet’s nest of potential risks for developers, particularly where the developer (or its proxy) maintains control over the HOA board of directors for a period of time following conversion. If a suit for defects related to original construction was actionable during the period when the developer controlled the HOA board, it could be held accountable for failing to take action against the original builder, where the claims have subsequently been barred by the statute of limitations. Likewise, the HOA will commonly allege that defects which would otherwise be barred by the ten-year statute of limitations are actually related to the developer-controlled HOA’s failure to properly maintain the project, or provide adequate reserve budget funding to replace aging components after the conversion. Such claims can create serious insurance coverage concerns for the converter.

This is just the tip of the iceberg when it comes to potential conversion defect claim pitfalls for developers and contractors. HOA claims brought as to condominium conversion projects pose much more complex legal issues than seemingly similar cases related to new construction, even where the two projects may have identical defects. Therefore, it is vital that developers and contractors act with extra vigilance when faced with a claim by the HOA on a conversion project. Failure to do so can result in the developer or contractor facing serious insurance coverage issues, and waiving defenses which might otherwise have been available.