Community Associations Update - February 2014
Control Your Board Meetings
By: Robert F. Carney, Esq.
There are many circumstances under which litigation can arise between members of a community association and the community association or its board of directors. One tactic employed by members who are litigating with or otherwise adverse to the interests of the community association is to disrupt the open meetings of the association by having the member’s attorney attend the open board meetings as a “designee,” “proxy,” or “representative.” This article addresses how a board of directors responds to the attendance of an attorney representing an adverse party at its board meetings.
The members of the community association elect a board of directors, and the board of directors is typically charged with responsibility for the operations of the community association. The right to attend, speak at, or vote at an open meeting of the board of directors is traditionally granted directly to the members of the community association. The board of directors has the right to conduct the meetings of the board for the efficient operations of the condominium’s business. Furthermore, the board of directors has the right to adopt and amend reasonable rules and regulations, to transact its business, and to do other acts appropriate to promote and attain the purposes set forth in the governing legislation or the governance documents of the community association.
The obligations of the community association to allow its members to attend, speak at, and vote at open meetings are obligations that run to the members and not to third parties. While the community association cannot deprive its members of those rights, it has no obligation to protect the ability of a third party to exercise those rights on behalf of members. The board can prohibit an attorney for a unit owner from attending its meetings. Prohibiting an attorney from attending a meeting on behalf of a member of the community association does not deprive the member of any fundamental right or benefit of membership.
In a recent case, SB Liberty, LLC v. Isla Verde Association, Inc., 217 Cal. App. 4th 272 (2013), the Court of Appeals of California, 4th Appellate District, Division 1, addressed a circumstance where a member of the community association attempted to have its lawyer attend open meetings of the association. The attorney attempted to attend two meetings. The first one was cancelled and readjourned in a member’s residence. At the second meeting, the board met in executive session and voted to exclude the attorney’s attendance at the meeting. The lawyer, upon being so advised, left the meeting but immediately commenced suit on behalf of the member against the community association seeking to compel the community association to allow his attendance at future meetings.
The trial court and appellate court both upheld the right of the board of directors to vote to exclude the attorney from the meeting. The courts found that excluding the attorney did not deprive the member of the association of any rights that the member was granted under the governance documents or enabling legislation. Further, the courts held that the board had the authority to determine how to conduct its meetings and, thus, the power to prevent a nonmember from attending and participating in those meetings on behalf of a member as its representative. Excluding the attorney from the meeting in no way impacted upon the member’s rights.
The lessons from the SB Liberty case are readily applied in the Mid-Atlantic jurisdictions. It is unquestioned that the board of directors has the right to conduct its meetings as it deems in the best interests of the association and to promote the efficient operation of the association. Attendance by lawyers representing adverse parties can be prohibited by the board and the board should not be intimidated by attorneys for adverse parties into allowing the attorney to attend board meetings. Furthermore, such attendance would obviously have a chilling effect on discussions both by the board with the members of the association and by the other members with the board. This would obviously impact upon the efficient operations of the association. The association is entitled to enact rules and regulations to promote the efficient operations of the association to prohibit such interference.
Furthermore, quite aside from the board’s powers under Maryland law, the board is also entitled to some protection under the rules that govern lawyers’ behavior. One of the Rules of Professional Conduct applicable to lawyers prohibits communications by a lawyer directly with a person who the lawyer knows is represented by another lawyer, unless the lawyer has the consent of the other lawyer or is authorized by law or court order to do so. When the person represented is an organization, the prohibition extends to the officers, directors, and managing agents and the agents or employees who supervise, direct, or regularly communicate with the organization’s lawyers. A lawyer attempting to communicate with an adverse party that is an organization must first make inquiry to ensure that the agent or employee is not an individual with whom communication is prohibited under the Rules of Professional Conduct. Clearly, communications with the board of directors or management of the community association fall within the protection of this rule. Thus, attendance by an attorney representing an adverse member of the association is prohibited at a board meeting because such attendance is an effort to communicate with the association’s board of directors or management, unless the lawyer representing the association has consented or there is other authorization by law or court order. Violations of this rule in the form of attendance by adverse attorneys can be referred to the appropriate disciplinary bodies of the applicable state bar.
Flagpoles - Recent Changes in Delaware Law and a Summary Comparison to Maryland and Virginia
By: Chad J. Toms, Esq.
Under the Freedom to Display the American Flag Act of 2005 (the “Act”) community associations are not permitted to ban owners from displaying the American flag on the owner's unit, lot or in any area where the owner has exclusive use or possession. However, the Act does permit community associations to place reasonable regulations on the time, place and manner in which the American flag is displayed, including the regulation of flagpoles.
However, the General Assembly of the State of Delaware has further limited a community association’s ability to regulate flagpoles through recent amendments to sections of Title 25 for the stated purpose:
… to permit a real property owner or tenant to display an American flag on a pole attached to the exterior of the property’s structure or on a flagpole located within the property’s boundaries, provided the flagpole does not exceed 25 feet in height and conforms to all setback requirements. Any and all community restrictions to the contrary will not be enforceable.
Previously, the Delaware Unit Property Act and the Delaware Uniform Common Interest Ownership Act expressly allowed for the display of the flag of the United States of America, measuring up to 3 feet by 5 feet, but only “on a pole attached to the exterior wall” of a unit owner’s unit or the limited common elements appurtenant to that unit.
The previous statutory language requiring the flagpole to be attached to an exterior wall became a point of contention for one Delaware community. In that community, the governing documents strictly prohibited free-standing flagpoles. Nonetheless, the board gave special, temporary permission to a homeowner whose son was serving in the armed forces overseas to put up a free-standing flagpole, with the understanding that the pole would come down when the son returned. However, even after the son returned to the U.S., the homeowner wanted permission to retain the flagpole.
As tension surrounding the issue grew, legislation was introduced to amend Delaware law to expressly allow preexisting flagpoles to remain in place for the sole purpose of displaying the American flag, and to explicitly state that a flagpole could be located within the "property's boundaries," not necessarily attached to an exterior wall. Finally, the new amendments sought to make clear that community associations may not adopt certain rules pertaining to the installation of flagpoles.
These amendments leave open the question of what is intended in the Delaware statute by the undefined phrase "the property's boundaries." It is unclear why the amendment did not utilize the statutorily defined terms of unit, common element or limited common element, each of which has a precise meaning within the Delaware Uniform Common Interest Ownership Act. It will be interesting to see if unit owners in common interest communities try to use these code sections to install free-standing flagpoles on limited common elements adjacent to their units or, indeed, on the broader common elements.
Finally, it is worth noting that the Delaware code amendments relate only to flying the flag of the United States of America. As reflected in the Delaware House Administration Committee Meeting minutes, the sponsoring representative emphasized that the bill was American flag specific and did not apply to any other flags such as a Confederate flag or those of other nations.
Virginia
By comparison, Virginia Code sections (Va. Code § 55-513.1 of the Property Owners’ Association Act and § 55-79.75:2 of the Condominium Act) provide that no association shall prohibit an owner from displaying the U.S. flag on his own property as long as the display conforms to federal law, rule or custom. The association bears the burden of proof to show that its "restrictions as to the size, place, duration, and manner of placement or display" of flags are "necessary to protect a substantial interest" of the association.
Prior to this provision being added to the POA and Condo Act there was a case in Henrico County, Virginia, where an association filed a lawsuit against an owner for his failure to comply with its rules related to flag poles. In Re: The Wyndham Foundation, Inc. v. Oulton, et al., 56 Va. Cir. 217 (Henrico Co., 2001), the association filed suit against the owner who had erected a large flagpole on their lot without obtaining prior design approval, as required by the association’s governing documents. The association argued that the flag pole did not comply with the association’s regulations regarding the erection of structures. The court found that the pole was a "structure" that was regulated by the covenants and restrictions, and concluded that the flag pole had been erected without the required preapproval from the association and, therefore, should be removed.
Maryland
Maryland Real Property Code Section 14-128 governs the display of flags by homeowners. It specifically applies to Condominium, Homeowner, and Cooperative Associations. It voids any prohibition on the flying of the United States flag in an Association’s governing documents.
An owner is entitled to display on his/her property one portable, removable flag of the United States. Such display must be consistent with the requirements of 4 U.S.C. Section 4-10 and subject to reasonable rules adopted by the Board of Directors. Some of the restrictions in the US Code include, display of flag from sunrise to sunset; no display at night unless lit; no display during inclement weather unless it is an all-weather flag, and the flag is never to touch the ground. The Board’s rules can address placement and manner of display of flag. An example of a rule would be to limit the size of a flag pole upon which the flag is displayed.
Before adopting any rules or regulations on flags, the Board must provide advanced notice of the proposed rule to the owners, hold an open meeting on it, and provide owners with an opportunity to be heard at the meeting on the proposed rule before voting on it.
Should you have questions about the application of these statutes to your community, please contact our office.
Reserve Funds for Community Associations: Understanding the Why, How and When of Reserves
By: Raymond B. Via, Jr.
WHY
Community Associations maintain reserve accounts as a means of funding their long term needs for repair and replacement of major capital items. These Association assets typically include all common property under Association control such as roads, roofs, swimming pools and pool decks, sidewalks and clubhouses. Reserves are not intended to fund the Association’s everyday operating expenses, which are set forth in its annual budget.
Properly funded reserves are a critical component of a board’s fiduciary duty. Without necessary reserve funding, an Association can face painful financial realities that will almost certainly pinch the pockets of current homeowners and negatively affect the value of all the properties in the community.
For example, if an Association must replace its clubhouse roof and it has insufficient reserve funds to do that, it faces several unpleasant choices. It may have to enact a substantial assessment increase for the year in which the roof must be replaced, it may be compelled to levy a costly special assessment to fund the replacement, or, even worse, the Board may elect to defer necessary repair/replacement to the future, making the repair/replacement even more costly when the painful decision is finally confronted.
HOW
How does the board know how much to put in its reserves?
The most important tool in answering that question is a reserve study prepared by an engineer familiar with community association property. The reserve study assesses the condition of all common property, determines the useful life of those components, and determines the amount of money that will be needed to repair and replace these components when the time comes.
Based on this analysis, the board can see how much needs to be put in the reserve annually, and that payment is included in the annual budgets going forward.
The Association may also include an operating reserve in its budget. An operating reserve is used to cover expenses that could not have been reasonably anticipated, and is generally based on a percentage of the Association’s total budget rather than on anticipated long term expenses.
WHEN
In general, your governing documents will define the items that the Association is responsible for and therefore should be reserving for, and a reserve study will help decide how much to reserve.
Interestingly, in Maryland and the District of Columbia there is no statutory duty to create a reserve account or fund it in a particular amount. The Virginia Property Owners Association Act, on the other hand, requires that a reserve study be performed at least once every five years and that reserves be budgeted in accordance with the findings of the reserve study.
Regardless of the existence of statutory requirements, failure to adequately fund reserves or using reserve funds for the wrong kinds of expenses may subject the board to liability for breach of fiduciary duty. Appellate courts in several jurisdictions have imposed liability on boards for failing to establish or adequately fund a reserve account.
Further, it is a critical error for Associations to borrow funds from reserve accounts to fund deficits in an annual operating budget. In addition to breaching the provisions of the Association’s governing documents, borrowing funds in this manner can have negative tax consequences and can obviously lead the Association down a ruinous financial path.
In summary, one of the most critical aspects of the board’s proper exercise of its fiduciary duty is the proper allocation and use of the Association funds, including reserves. Simply stated, the Association’s operating fund is used for regularly occurring everyday expenses such as landscaping, property management, utilities expenses, insurance and taxes.
The use of Association reserve funds is generally strictly limited by the governing documents of the Association to expenditures for major capital expenses of a non-recurring nature.
If your board has any questions about the proper use and potential consequences of the use of reserve funds for a particular purpose, consult with your legal and tax advisors before authorizing such an expenditure.