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.

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.

Texas Requires All Governing Documents Be Recorded!

As has been widely discussed over the past year, the 82nd Texas Legislature made many changes to the laws affecting property owners' associations (including condominiums and single-family residential HOAs). Perhaps the most important legislative mandate from this session deals with how associations must disseminate their governing documents.

Prior to January 1, 2012, it was required that a property owners association provide copies of any informative documents regarding membership in the association. Additionally, owners must be provided with documents such as the property's Declaration, any Restrictions, Bylaws, Rules and Regulations, and any other documents that help govern the establishment, maintenance, or operation of any property under the association's control.

New Texas legislation requires that all governing documents be recorded with the relevant County's Real Property Records. Pursuant to Texas Property Code Section 202.006, any governing document that is not recorded with the appropriate county by January 1, 2012 will have no force or effect. If you are a property manager or board member, this means that you should check on whether your documents have been appropriately recorded.

Amending a Texas Condominium’s Declaration

The procedure for adopting changes to a Texas condominium’s declaration differs depending on the year the condominium’s declaration was recorded. Chapter 81 of the Texas Property Code governs if the declaration was recorded before January 1st of 1994, at which point Texas adopted the Uniform Condominium Act. For properties that recorded their declarations before this Act was adopted, the process for amending the condominium’s declaration is simpler. Section 81.111 states that any amendments to a declaration that was previously recorded with the county clerk must be made at an “apartment owners” meeting. (Under Chapter 81, “apartment” means an enclosed space within a building that has direct exit to a thoroughfare or common space. Today the same parcels of a building would typically be called “condominiums” or “units”.) The amendment needs to be supported by at least 67% of the ownership interest in the condominium.


Chapter 82 of the Texas Property Code, which is the Texas Uniform Condominium Act (“TUCA”), is applicable to any condominium that recorded its declaration with the county clear after January 1st of 1994. According to § 82.002, it also applies if a condominium that recorded its declaration before January 1st of 1994 either puts a provision in its declaration saying that this Act would apply when adopted or if its declaration is amended to say that this Act will apply.


The process to amend a declaration is more involved under Chapter 82. According to § 82.067, support of 67% of the ownership interest is still required, but the amendment can be adopted by written ballot or an owner’s meeting that all owners have been informed of in writing. If an amendment is adopted, it must be recorded in every county where part of the condominium sits.


Section 82.067 also specifies certain amendments that require 100% of the votes. These amendments include, but are not limited to, changing special declarant rights, increasing the number of units, and changing unit use restrictions. Even with 100% owner support, an amendment may not increase or otherwise modify the obligations or rights of a declarant without the declarant’s agreement.


The association’s board must further designate an officer to prepare, execute, record, and certify any amendments made. If the board does not do so, the president of the association may take on the role of officer. The declaration can be amended by the association to allow the board to evict a tenant for not following the association rules, for not paying for damage he caused to the condominium, or for being at least 60 days delinquent on rent payments.


While the Texas Property Code sets specific requirements for amending a condominium’s declaration, it is important to remember that these are not the only rules governing such amendments. Condominiums can place different rules or procedures directly into the declaration itself. If this is the case, the rules set out in the declaration are valid unless they are in direct conflict with the language of the Texas Property Code.


***This article was prepared by Rachel Robinson and edited by Austin Attorney Chloe Love.

Texas Laws Governing Condo Associations

Although condominium associations in Texas are private entities governing developments, this does not mean that they are outside the reach of public law. Of the many rules and regulations that condominium associations must abide by, federal law is the strongest. Regardless of their status as a private entity, associations may not do anything that goes against a federal law, and as federal law changes, so must the practices of condominium associations. All condominium associations must respect laws like the Helping Families Save their Homes Act of 2009, the Fair Housing Act, and the Americans with Disabilities Act.

The next set of governing restrictions comes from Texas state law. Just as Texas associations must abide by federal law, associations cannot take any action that is outside the realm of what is allowed by Texas law. The Texas Property Code, with acts like the Uniform Condominium Act, can directly control what actions condominium associations are allowed to take. Finally, condominium associations are governed by the local ordinances, codes, and regulations of the city or county in which they are located. This means that what is legal is Austin may not be legal in Houston. Because the associations are governed by these laws, it is important that property owners boards stay familiar with the current laws and how they are changing.

Texas Condominium associations are also governed by any documents relating to the property that are properly adopted and recorded with the county real property records. The recorded documents that govern are usually created by the individual developments. These typically include the recorded declarations, CC&R’s, articles of incorporation, and bylaws – in order of superiority. The bylaws must be in line with the articles of incorporation, which must be in line with the declaration, for example. The key to this is that the document that created the development, whether that be a declaration or a CC&R, will always rule (as long as it is within the legal limits set out by public law). These documents created by the developments are recorded with the county and treated as official legal documents, and the condominium associations must give them that level of reverence.

The final, and weakest, governing power on condominium associations are the policies and practices of the condominium association board. When the board makes a rule or implements a policy, it must be respected as long as it complies with all public law and recorded documents.

***This article was prepared by Rachel Robinson and edited by Austin Lawyer Chloe Love.

TUCA: Where do liens come from?

Amongst condo-dwellers and their property management (to a lesser extent, single family home-owners subject to an owners’ association), I frequently hear the phrase, “Let’s just file a lien.” This is often mentioned when an owner and member of the association has failed to make timely payment of their regular monthly assessments. However, “filing a lien” is not really an accurate statement of how the Association should perfect it’s interest in the property.

Under the Texas Uniform Condominium Act (“TUCA”), which applies to all condos in the State of Texas that were formed on or after January 1, 1994, the Association already has a lien against delinquent owners, without the need of any filing. TUCA Section 82.113 provides that an assessment levied by an association against a unit or unit owner is a personal obligation of the unit owner and is secured by a continuing lien on the unit and on rents and insurance proceeds received by the unit owner and relating to the owner’s unit. Emphasis added.
Furthermore, the association’s lien has priority over many other types of liens. Typically, the governing documents for your condominium will echo the statement from §82.113 of TUCA, further stating that a continuing lien in favor of the association exists whenever an owner is delinquent in payment of his/her assessments.

Usually, once I provide this explanation, condo board members follow up with a very good question, “If the lien already exists, why are we filing anything in the real property records?” The answer to that question is simply one of logistics. For sake of explanation, let’s say Bad Neighbor owes the Association $10,000 in past due assessments. Let’s further assume that Bad Neighbor has indicated that he has no intention of ever paying his assessments, because he disagrees with the management decisions that have been made by the Board. If Bad Neighbor then chooses to sell his unit to Innocent Purchaser, there would be nothing to indicate to the innocent purchaser that there are any current amounts owed to the Association. However, if the Association has chosen to file a “Notice of Lien” in the real property records, potential purchasers and title companies will be able to see that Bad Neighbor owes money to the Association. Typically, a title company will require that all liens be cleared before they will issue title insurance, which will likely result in the Association being paid. Therefore, filing a Notice of Lien may just be the lowest-cost method of collection past due assessments. (However, beware of first lien holder foreclosures, as has been discussed previously in this blog)