Condos: 2015 Legislative Update

The 84^th Texas Legislature made multiple changes to the laws affecting property owners associations.  The majority of the changes impact single family HOAs, but one important change was made to Chapter 82 of the Texas Property Code, or the Texas Uniform Condominium Act (“TUCA”).  Section 82.119 takes effect on September 1, 2015, and represents a major change to construction defect litigation.

 
The new section, entitled Construction Defect Litigation, requires the condo board to take specific steps prior to initiating a lawsuit for construction or design defects of units or common elements.  Specifically, the condo board must obtain an inspection and report from an independent, licensed professional engineer.  Another important aspect is that the condo board must notify all parties that may be subject to a claim that an inspection will be taking place.  The potential parties must be given at least 10 days’ notice, and must be permitted to attend the inspection.  The report must identify the location of the defect, describe the current physical condition, and describe any modifications undertaken by the Association or the homeowners. 

Upon completion, the inspection report must be provided to each party potentially subject to a claim.  To the extent that defects are found, the statute provides for a cure period, allowing the developer, contractor, or subcontractor the opportunity to remedy the defect.

As if the foregoing hurdles were not enough to protect the developers, the condominium board must obtain approval of at least 50% of the total votes in the Association prior to filing suit or initiating an arbitration proceeding.  

I have long recommended that homeowner boards undertake an engineering inspection upon turnover.  This inspection is sometimes referred to as a “turnover inspection”.  This seems especially important given the new requirements of section 82.119.

Legislative Update: Let's Talk About Xeriscaping...

Now that the session of the 83rd Texas Legislature has come to a close, I have begun looking at the various bills that were passed effecting Texas Homeowners' Associations.  During the length of the regular session, approximately 55 bills related to HOAs were introduced.  I will look at a number of the bills that were passed, starting with a bill related to xeriscaping.

First we should discuss what, exactly, is xeriscaping.  Xeriscaping is a style of landscape design that requires little or no irrigation.  The style is frequently found in arid regions.  Xeriscaping is designed to conserve water and protect the environment.  In Texas, this usually means pebbled ground cover, drought-resistant and native plants, and other water-conserving natural turf.

The new law, which was proposed by Sen. Kirk Watson and Rep. Dawnna Dukes of Austin, mandates that Texas homeowners can now xeriscape their properties without being scrutinized by their homeowners association.  HOAs are still permitted to require preliminary plan approval of new xeriscaping plans, but the Association's ability to reject plans including xeriscaping is limited.

Working with an HOA/COA Lawyer Part III: Budgets and Boundaries

This is the final entry of the "Working with an HOA Lawyer" series.  You can find the previous entries in the series in Part I and Part II

Budgets: The Downside of OPM

One of the more difficult tasks as a home owner association or condo owner association board member is to decide priorities and budgets.  You are, after all, spending not just your own dues, but you are also spending dues of non-board members who are represented by the Board but are not themselves often entitled to vote on priorities.  So the issue can be difficult, since you are at times deciding between your own personal priorities and the slightly different priorities of your neighbors.  Obviously listening to the members is important, and very often priorities can be aligned if rationale and reasoning can be communicated.  But sometimes complete disclosure is not possible, particularly in the legal realm.  This can get very tricky, and is the reason why legal budgets are some of the most misunderstood of the building expenses.

In deciding on a legal budget, many properties, to their peril, often only budget what they paid last year, and very often those budgets only include some very minor funds for collection efforts on dues and the occasional declaration/policy enforcement.  In other words, they rarely, if ever, budget for every day dialogue with counsel.  This is a mistake.

When making a legal budget, prudent boards budget for contingencies, and think about legal issues in their reserve planning.  What would your budget look like if there were a major common area construction defect?  What would your legal budget be for advice to avoid problems with consistent and problematic residents?  How would your property afford a lawyer to review your governing documents and to assist to make sure changes to the declaration and/or policies are done correctly and would be supportable under TUCA and survive challenge by a resident?

Now it is admittedly easier to budget for maintenance expenses on a pool, or to build a gazebo, these are things the residents see being completed.  But legal is often spent for the Board to get advice, make sure the Board is doing things correctly, and to make sure the governing documents are structured in accordance with the property's priorities and to increase value.  But good legal advice from experienced counsel familiar with these laws is not inexpensive. But budgets should reflect an understanding that as Board's act, they need to be free to consult the Board's lawyer freely to ensure that bigger issues are avoided.  This is basically "an ounce of prevention is much less expensive than a pound of cure." Lawyers can help avoid future expenses, or repeating the problem if you do it wrong.  Budget for your Board to spend some time with lawyers several times a year and you'll likely avoid bigger issues down the road.  It is tough for your residents to see that value, but it is most certainly there if you choose counsel wisely.

Boundaries: Whose Lawyer Are You?

For many HOA and Condo Association Board Members, they're residents and not necessarily people used to dealing every day with lawyers.  This is one of the reasons we wrote this series.  But one of the biggest issues a lawyer has to deal with, that is often misunderstood by Board Members, is the concept of representation.

Typically, and technically, the lawyer for a property owner's association does not represent the individual members of the board, the developer or the individual owners of the membership interests.  They also don't represent the property management company.  The lawyer for the owners' association represent the association itself.  The owners association, typically a non-profit, will be controlled by a Board and those Board members are typically elected by the membership interest owners (usually in an annual meeting).

Unlike most professional services (realtors, CPA's, business brokers), a lawyer has to be clear as to whom he or she represents.  The concept is foreign to most clients, but it is a very dicey thing for a lawyer to navigate, particularly when corporations are involved.  Corporations have their own distinct interests, apart from their individual owners and apart from their officers and directors.  While it is true that corporations can only act through humans, those humans are seen collectively and not individually.

For example, what may be best for an owners' association is to build a walking trail through the neighborhood.  It will increase amenities, will likely increase property values, and generally show the association's money is going to something all could potentially enjoy.  But it is an expenditure of money, and it has to be adjacent to someone's lawn somewhere.  So individual members of the association (as well as different Board members) may be for or against it for a variety of reasons ("I don't want screaming strollers rolling near my back yard", "I'm 95 years old and I won't be able to use it", "I live too far away from the entrances, it's not worth the money", "This is great! My property is next door and my kids will love it!").  So when the Board asks whether they need to change the declaration to accomplish the goal, it is very important to know that the advice given is from the perspective of the Association as a whole, and not anyone who is "for" or "against" the building of the trail.  Therefore, it is not appropriate for the Board president to say to their association lawyer, "keep this from Hannah, but we're going to build this anyway", or "let's find a way to draft the language so that it goes by my property".  The lawyer represents the interests of the entire association, not the individual membership or Board members, so its directives need to come from the entire Board.  So when the lawyer tells the president in this situation "no", he or she is merely doing their job.

Very frequently the board members individually will ask advice of the lawyer on their own dealings with the association.  And although a lawyer could provide answers generally, and can state the opinion that he or she would provide to the Board on the topic, everyone should know that the association lawyer does not represent that person individually, cannot keep information confidential from the Board, and cannot represent the individual with a dispute with the association.

In other words, don't ask the association's lawyer anything that you wouldn't want the entire Board to know about.  And if you have disputes with the association, you will need your own lawyer that represents only you to deal with those issues.  Sure it may be convenient for you to discuss with a lawyer that is already familiar, but it is not recommended due to the duties that lawyer has to the association.  This is the nature of "conflicts of interest" and is unfortunately the way the Texas bar has developed.  It may not be logical for seven lawyers to be involved in the discussion, but Texas law and its licensing board often require this duplication to make sure everyone has someone representing only their interests.

Now do all lawyers draw the line in the same place? No, and it is pretty tricky to navigate with constantly changing issues and board members.  But a prudent board of directors for an owners' association that knows what is appropriate to discuss and what is not will make the lawyer's job a lot easier.  No lawyer likes to decline providing help, but sometimes it is the requirement of the position.

Working with an HOA Lawyer Part II: Duties and Responsibilities

Coordinating with a Texas HOA/COA lawyer can be tricky.  Keeping costs down is a great goal, but board members often forget that they also have a duty to the members to make sure that things are done correctly, and that costs are not always smaller by ignoring the issue or having cheaper labor do the work. You often would not select the lowest bidder to do your open heart surgery, nor would you want a hospital administrator to do it either.  You similarly should let professionals in the legal arena do the legal work.

What is the difference between the duties of a board member, a lawyer and a property manager on a legal issue? 

The best way to ensure everyone knows their duties is to actually think about this question.  In the legal arena, not unlike any area of maintenance and system design, the best solution is to talk with the legal team about how they believe the duties should be allocated.  If you've hired a law firm with experience in advising in matters of property management, it should come as no surprise that perhaps they've seen duty allocations that work and those that don't.  Relying on that experience for a proposal is a great way to get the issues out in the open.  It should also be reviewed periodically, particularly if there is new property management, a new board or new legal counsel hired.

Specifically, though, the board members, the property manager and the lawyer all have different jobs to do, and some of this depends on the size of the operation.  Large condominiums in downtown areas will often simply have more legal needs than fewer single family units with little or no amenities.  The duties also vary based on the tasks and the risks.  The more likely the action is to be challenged by a member, the more likely you'll need everyone to be in on the discussion of duty allocation to avoid unintended consequences.

Duties of the Board

For the most part, board members should be similar to a board of directors, understanding the big picture, having a feel for the members' wills and desires, watching the finances, thinking long term.  They should be involved in the decision of what law firms and professionals to hire, since the law firm represents the Association and not the property manager or management company.

Duties of Property Management/Management Company v. Lawyers

Depending on the issue, typically the property manager should usually be administrators,  a messenger and facilitator.  Think hospital administrator and not surgeon.  They make sure people get paid, that messages get sent, that invoices are correct, that information is disseminated to the right people, assist in the administrative process, assist in enforcement of decisions, help maintain records, and ensure that meetings are properly scheduled and organized.

But property managers should not be the ones performing the "surgery".  Inexperience by board members (and property managers), and the desire to cut short term costs, often leads to property managers being asked by board members to perform tasks that they are ill equipped to handle.  Property managers are good at administration, but they are not trained as litigators, they don't know what decisions are and are not legally consequential, or whether procedures and decisions are subject to legal challenge.  The number of times a "small change to the documents", or a "quick letter to a resident about a dispute" has turned into thousand of dollars added in litigation has happened more times than many organizations like to admit. 

That said, your lawyers are not your property managers.  It is inefficient to have lawyers attend every board or member meeting that discusses purely private issues (like priority of location of landscaping, or whether money should be used to re-carpet the foyer).  It is equally not cost effective to have them approve every minor communication with members.  But they are still the professionals you're hiring to make sure your long term obligations to the members are appropriate exercised, and that decisions made will be binding and not futile wastes of time.   It should be a bright line rule in your community, particularly if the budgets are large, that all issues relating to a contractual agreement or litigation process (like assessment, foreclosure, settlement, contract negotiation/execution and contract disputes) should be communicated to the lawyer with the lawyer likely running "point".  All issues related to any establishment of new rules or change to the governing documents should be discussed and approved by counsel (if not drafted by them), well in advance of any voting or planned voting of same.  And any questions about procedure or interpretation of existing rules should be discussed with counsel.  There are more, but these are the biggies. 

But basically, board members take the temperature of the members, think strategically and long term, determine goals, and hire the implementers. Property managers assist in communication, implementation, coordination of the execution of the goals. The lawyers help assess the goals from a legal and risk framework, draft or review documents used to implement the goals, and control the legal strategy based on the "business" parameters set by the board.  And if in doubt as to whether the lawyer should be involved, ask them.  And if you don't trust them to ask, find another lawyer.


How should communication with the lawyer be handled?


This is different for different sized associations, and largely depends on the issues involved.   Typically the owners association, for time and convenience, treat lawyers like just another subcontractor being managed by the property manager.  While it is helpful to have property management often involved in decisions and strategy sessions, for a number of reasons treating lawyers like a subcontractor of the property manager is not advisable as a general rule.

One issue involves privilege protection and its potential waiver.  In Owner Associations, the privilege is "owned" by the Association, which means that discussions with lawyers and legal strategy decisions and its protection as privileged communications cannot be intentionally waived by a single board member (unless they are so authorized by a vote of the board).  But the further away the lawyer's communication is with the Association, and the more people not directly involved are included, the less likely the discussions will be privileged from discovery.  This can be a big deal in litigation.

In Texas, the legal communication privilege includes communications with contracted professionals that are not employees, but it is tenuous and can be waived, particularly if the communications are not with on-site management.  This is a complicated area, so lawyers should be consulted for your specific situation, but the safest route of communication to maintain privilege of the legal discussion with legal counsel is one in which the board at a meeting discusses it directly with counsel or sends the information directly to counsel without a go between. 


That being said, not every issue involves a large concern over privilege.  The more frequent concern of having a property manager solely control communications between the lawyer and the board is having the legal issue or solution miscommunicated (in either direction).  Just like a game of "telephone", as the message gets transmitted, it can get altered based on the understanding of the persons in the middle.  Wherever possible, if it is an issue that might involve a lawyer, it is often important enough to convey the instructions directly, and hear the response directly.  If entire attendance at a meeting with a lawyer is not possible/practical, we often suggest that an owner association have a primary point of contact as a "legal liaison".  This is typically the board president, but it does not have to be so.  For example, there are instances where lawyer/owners sit on an owner association board as a director, and they may be better able to transmit the instructions and serve as "translator" for non-lawyer members of the board.  Similar to having someone who understands building maintenance or "numbers" run those committees.

This is not to say that the property manager being involved, say, in the implementation of a new rule passed by the board, or scheduling/organizing the meeting to approve, may be very helpful and advisable.  There are many instances that property management may have information only known because they manage the property and talked to the residents, so this is properly a case-by-case discussion.


But the main point is that your association is paying for the experience, expertise and advice of a lawyer, as a board member you should have the opportunity (and may have the duty/obligation to the members) to hear that advice directly, have your questions answered in real time (to reduce costs), and maintain the privileged nature of those communications as much as possible to minimize the loss of privilege or the likelihood that the legal advice is miscommunicated / the parameters set by the board are miscommunicated to the lawyer.  And that means direct interaction between the board and the lawyer as much as possible.

City of Austin Regulates Short Term Rentals

In early August of 2012, Austin City Council voted 5-2 to pass a new city code regulating short-term rentals (STRs). Under the new ordinance, short-term rentals are defined as any rental term of 30 days or less. The ordinance further breaks STRs into two categories.

 

 

The first category includes only those residential units that are owner-occupied. Under the new ordinance, these owner-occupied units may not operate without first obtaining a license. These units must be rented out in their entirety, with the lease covering the entire dwelling unit. As was true before the new ordinance, hotel occupancy taxes must be paid on these STRs. Finally, these owner-occupied STRs cannot operate without providing the tenants with certain information including the following: (1) name and contact information for a local responsible party;(2)occupancy limits; (3) noise restrictions; (4) parking restrictions; (5) trash collection schedule; and (6) information on burn bans and water restrictions.

 

 

The second category includes STRs of properties that are NOT owner-occupied. This second category of STRs is subject to all of the same regulations as the first, with one notable addition. No more than 3% of single-family homes in any given census tract may be granted licenses to operate as a "Type 2" STR.

Working with an HOA Lawyer Part I: The Hiring Process (Austin Lawyer Tip)

Finding the right lawyer for your Texas owners' association is not always the easiest task, particularly for volunteer Board Members that have little experience with property management.  This post is an attempt to provide a framework, from a lawyer's perspective, of what a board of directors or members should be looking for in an HOA lawyer.

The Lawyer and Areas of Practice

It is important to note, at the outset, that lawyers are not all the same.  The concept of the general practice lawyer that knows everything about every law passed is more of a TV myth than reality.  We've all seen LA Law episodes where the same lawyers handle criminal trials, civil trials, large transactions and divorces.  This is fiction.

Typically, lawyers find core competencies.  These are largely (and roughly) divided between transactional lawyers (who may form businesses, review contracts, advise on business transactions, review real estate title documents, etc.), or litigation lawyers (those that go to court, file lawsuits, advise on disputes or potential disputes).  Some lawyers do both, to be sure, but going to court or not going to court seems to be a dividing line most of the time.

Beyond the court/no court distinction, lawyers also usually gravitate towards "areas of practice".  These are the topic areas, within litigation or transactions, that the lawyer learns at a larger level of detail to attract its clients to their services.  These are things like personal injury, or divorce/family law, or, relevant to you, owners association management.

So in selecting a lawyer, don't just go to any lawyer that advertises.  Understand that there are lawyers that have read the codes and laws related to owners associations, have represented properties in the past, have found solutions to problems similar to yours in the past, and they will have much less error rates than lawyers unfamiliar with the HOA practice area.

So ask questions like, "what other properties do you represent?" or "how often have you dealt with property management issues?" or "are you familiar with the laws associated with property owners associations?"

The HOA Lawyer and Fees

It is not uncommon for this to be the biggest issue on the minds of the members of the Board.  "How much is this going to cost?"

The unfortunate thing about lawyers and fees are that to gain this kind of core competency requires years of schooling, training, practice, repetition and risk.  So working with lawyers is not always inexpensive, depending on the tasks involved.

So what is a reasonable fee?  This will vary greatly based on the level of expertise of the attorney, experience level, the complexity of the legal issue, the level of adversarial relationships involved (it's always expensive to deal with "the crazy neighbor") and responsiveness level that you anticipate.  So, in some ways, you're setting your own reasonableness level to some degree, and sometimes this is set for you by outside forces outside of your control.

Typically lawyers charge for "unknown and uncontrollable" legal issues on an hourly rate.  Although the temptation for an HOA is to contain costs through flat rates, the best firms rarely limit themselves before they analyze the issues involved.  Law firms are still businesses, with overhead, employees, malpractice insurance, general insurance, and office/storage space (and sometimes student loan debt) like other professional services. And their time is their "product inventory".  If they spend all their time working on an issue for you and they aren't compensated for that additional time, they never get that time back to sell to someone else.

So, unless it is a largely administrative task, typically a law firm will want to bill hourly for its efforts.  You will notice that partners are usually billed at higher rates, and associates are billed at lower rates.  When you are having a lawyer work on your file, and you believe it to be a simple or repetitive task, you should probably inquire as to whether an associate can handle your work rather than paying partner rates for these tasks.  Good law firms will typically have more than one lawyer familiar with your organization, governing documents and goals for this very reason. It is not a "slap in the face" for an associate to be working on your cases.  Very often this is a way to make the work more cost effective.

So what are acts done for flat fees?  These are usually things like standard collection letters, filing notices of non-payment of assessments, sending out letters of violations from a form.  But advice on amending your declaration, or handing litigation and disputes are usually not susceptible to flat fees due to the uncertainty of the time commitments before the fact.

Prepared by Austin Attorney Marc Lippincott

Austin Attorney Tip: Working With an HOA Lawyer as a Board Member

When becoming a Board Member of a property association or neighborhood association, most members are volunteers that have never had a similar position before.  This can be a challenging endeavor, particularly since it is an unpaid position (not providing most folks with the time to learn sophisticated property management skills).

Over the next few weeks, LPV will be posting a series of blog entries describing how to work with an HOA lawyer in Texas from a lawyer's point of view.  Understand this is for Board Members and property managers, not a statement of how an individual with a complaint about their HOA should hire a lawyer.  That will be a different series.

This Board Member "Working with an HOA Lawyer" series will be divided into several topic areas, including (but not limited to) attempts at answering the following questions:

1. What lawyer or type of lawyer should our association retain?
2. What practice areas will we likely need to have a lawyer for a neighborhood association?
3. What are reasonable fees and charges for an HOA lawyer?
4. What is the difference between the duties of a board member, a lawyer and a property manager?
5. How should communication with the lawyer be handled?
6. Who should make legal decisions?
7. Should our lawyer attend meetings of the members?
8. Should I ask the HOA lawyer about my personal legal issues?
9. What should I expect for responsiveness of counsel?
10. How should our legal budget be set, and what should it include?


If you have additional question about how to work with a property owners' association lawyer, feel free to post it in comments.

Posted by Austin Attorney Marc Lippincott