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Community Associations Update - Summer 2008

Date: August 21, 2008

2008 Virginia Legislative Update General Assembly -- House Bill 516
The Virginia General Assembly enacted significant legislation this year, most of which took effect on July 1, 2008, that impacts common interest community associations (i.e. condominiums, cooperatives, and homeowners associations).
By: Raymond J. Diaz

The new legislation creates a new regulatory body in the Common Interest Community Board (CIC Board), establishes licensing for property management companies and certification requirements for common interest community managers, requires that associations establish complaint resolution procedures, mandates certain insurance coverage, establishes an Ombudsman office, amends the resale disclosure requirements for condominiums and homeowners associations, and limits charges assessed under the Virginia Property Owners' Association Act. The following is a brief synopsis of the most significant features of the legislation.

Common Interest Community Board
The legislation created a new regulatory authority for common interest community associations. The CIC Board consists of eleven members appointed by the Governor. The eleven members include three common interest community managers, an attorney, a certified public accountant, a representative of the time share industry, two real estate developers, a Virginia citizen who is a member of a common interest community association board, and two Virginia citizens who are residents of common interest community associations.

The CIC Board is empowered to promulgate regulations governing the licensing and certification of community managers and regulating the complaint process created through an Ombudsman office. The CIC Board will also take over certain responsibilities of the Virginia Real Estate Board, including the registration of condominiums and the administering of the Common Interest Community Management Information Fund. The CIC Board has the authority to assess individuals up to $1,000.00 for any violation of newly added Chapter 23.3, Title 54.1 of the Virginia Code. The Board may issue cease and desist orders to a board of directors of a community association if the Board determines, after a hearing, that the board of the association has violated any statute or regulation which governs such community association. The CIC Board may also seek court orders and injunctions against any
Common Interest Community Manager it has reasonable cause to believe is unable to properly discharge his or her fiduciary responsibilities to the community association.

The CIC Board shall establish by regulation a requirement that each community association establish reasonable procedures for the resolution of written complaints from the members of the association and other citizens, which procedures shall include the following:

A record of each complaint shall be maintained for no less than one year after the association acts upon the complaint.
The association will provide complaint forms or written procedures to persons who wish to register written
complaints. The forms or written procedures shall include the address and telephone number of the association or its community manager to whom complaints shall be directed and the mailing address, telephone number, and electronic mail address of the Office of the Common Interest Community Ombudsman. The forms and written procedures shall include a clear and understandable description of the complainant's right to notice of adverse decisions pursuant to this section.

The CIC Board has the authority under the legislation to annually assess each Management Company for licensing fees amounting to the lesser of $1,000.00 or 0.02 percent of its annual gross receipts. The CIC Board will also be partially funded by similar assessment of common interest community associations through their annual registration fees.

Management Company Licensing and Manager Certifications
The legislation requires, subject to certain exemptions, that any person, partnership, corporation, or other entity providing management services to common interest communities (Common Interest Community Managers) hold a valid license on or after January 1, 2009, prior to engaging in such services. The term "management services" means: (1) acting with the authority of an association in its business, legal, financial, or other transactions with association members and nonmembers; (2) executing the resolutions and decisions of an association or, with the authority of the association, enforcing the rights of the association secured by statute, contract, covenant, rule, or bylaw; (3) collecting, disbursing, or otherwise exercising dominion or control over money or other property belonging to an association; (4) preparing budgets, financial statements, or other financial reports for an association; (5) arranging, conducting, or coordinating meetings of an association or the governing body of an association; (6) negotiating contracts or otherwise coordinating or arranging for services or the purchase of property and goods for or on behalf of an association; or (7) offering or soliciting to perform any of the aforesaid acts or services on behalf of an association. The legislation includes a transition period during which Common Interest Community Managers may obtain a one-time provisional license that is valid through June 11, 2011 in order to allow the Common Interest Community Manager time to comply with all of the licensing requirements.

Common Interest Community Managers must secure a blanket fidelity bond or employee dishonesty insurance policy covering both the Common Interest Community Manager and its clients. The manager must also establish certain internal controls and policies and have its records independently audited annually. These licensing requirements are effective January 1, 2009.

Insurance
Common interest community associations are also required to obtain and maintain either a blanket fidelity bond or employee dishonesty insurance policy insuring the community association against losses resulting from theft or dishonesty committed by the officers, directors, or persons employed by the unit owners' association, committed by any common interest community manager or employees of the common interest community manager. Such bond or insurance policy shall provide coverage in an amount equal to the lesser of $1 million or the amount of reserve balances of the unit owners' association plus one-fourth of the aggregate annual assessment of such unit owners' association. The minimum coverage amount is $10,000. The governing board of the common interest community association or Common Interest Community Manager may obtain such bond or insurance on behalf of the common interest community association.

Ombudsman
The legislation establishes the Office of the Common Interest Community Ombudsman, which falls under the Director of the Virginia Department of Professional Occupational Regulation (Director). The duties of the Ombudsman, who must be an attorney in good standing with the Virginia State Bar, include:

Assisting common interest community association members in understanding their rights and the processes available to them under the declaration and bylaws of their respective common interest community association;
Receiving complaints;
Assisting common interest community association members in using the procedures and processes available to them in their community associations, by providing nonbinding explanations of laws or regulations governing common interest communities or interpretations thereof by the CIC Board and by providing referrals to public and private agencies offering alternative dispute resolution services, with a goal of reducing and resolving conflicts among common interest community associations and their members;
Ensuring that community association members have access to the services provided through the Office of the Ombudsman and that they receive timely responses from the representatives of the Ombudsman to their inquiries;
Providing to the Director, for dissemination to the requesting parties, assessments of proposed and existing common interest community laws and other studies of common interest community issues when the Director receives a request from any of the standing committees of the General Assembly having jurisdiction over common interest communities or the Housing Commission;
Monitoring changes in federal and state laws relating to common interest communities;
Providing information to the Director so that the Director can report annually on the activities of the Office of Ombudsman to the standing committees of the General Assembly having jurisdiction over common-interest communities, and to the Housing Commission; and
Carrying out activities as the CIC Board determines to be appropriate.

Annual Report Fees Paid By Condominium Associations and Property Owners Associations, and Recovery Fund Fee
The annual report fee is increased by an annual assessment equal to the lesser of $1,000 or 0.02 percent of the
common interest community association's gross assessment income in the preceding year. Again, this assessment is used to partially fund the operations of the CIC Board as well as the Common Interest Community Management Information Fund.

The legislation created a new Common Interest Community Management Recovery Fund to be used at the discretion of the Board to protect the interests of associations.

Each common interest community manager, at the time of initial application for licensure, and each association filing its first annual report after the effective date hereof, shall be assessed $25, which shall be specifically assigned to the Recovery Fund.

Resale Certificates and Association Disclosure Packets
The resale certificate provisions in the Virginia Condominium Act and the association disclosure packet requirements in the Virginia Property Owners' Association Act have been amended. The amendments include changes to: the documents that must be included with the resale certificate or association disclosure packet; the fees that may be assessed; who is responsible for the payment of such fees; and the delivery of the resale packet.

Condominium unit owners associations and property owners associations will now be required to include copies of any approved minutes of the board of directors and member/owner meetings for the six calendar months
preceding the request for the resale packet.

A condominium unit owner association and a property owners association may charge fees as authorized by this legislation for the inspection of the property, the preparation and issuance of the resale certificate in the case of a condominium, and an association disclosure packet in the case of a property owners association, in order to comply with requirements of the respective statutes.

The fees vary for communities managed by Common Interest Community Managers and for communities that are self-managed. For communities that are managed by a Common Interest Community Manager, reasonable fees include the following:

A fee not to exceed $100 for the inspection of the unit or lot, as authorized in the declaration for the property and as required to prepare the resale packet.
A fee not to exceed $150 for the preparation and delivery of the resale packet in paper format (for no more than two hard copies). A fee not to exceed $125 for the preparation and delivery of the resale packet in electronic format (for no more than two electronic copies). Only one fee shall be charged for the preparation and delivery of the resale packet.
At the option of the seller or his authorized agent, with the consent of the common interest community association or the Common Interest Community Manager, an additional expedite fee not to exceed $50 may be charged for expediting the inspection, preparation, and delivery of the resale certificate.
At the option of the seller or his authorized agent, a fee, not to exceed $25 per hard copy, may be charged for an additional hard copy of the resale certificate.
At the option of the seller or his authorized agent, a fee not to exceed an amount equal to the actual cost paid to a third-party commercial delivery service for hand delivery or overnight delivery of the resale certificate.
A post-closing fee to the purchaser of the unit in an amount not to exceed $50, collected at settlement, for the purpose of establishing the purchaser as the owner of the unit in the records of the unit owners' association.

The resale fees shall be collected at the time settlement occurs on the sale of the unit and shall be due and payable out of the settlement proceeds. The seller shall be responsible for all costs associated with the preparation and delivery of the resale certificate, except for the costs of any updates or financial update, which costs shall be the responsibility of the requestor, payable at settlement. Neither the common interest community association nor its Common Interest Community Manager shall require cash, check, certified funds, or credit card payments at the time the request is made for the resale certificate.

If settlement does not occur within 90 days of the delivery of the resale packet, or funds are not collected at settlement and disbursed to the common interest community association or the Common Interest Community Manager, all fees, including those costs that would have otherwise been the responsibility of the purchaser or settlement agent, shall be assessed against the seller (i.e. the owner of the lot or unit), shall be the personal obligation of the seller, and shall be an assessment against the unit and collectible as any other assessment in accordance with the provisions of the declaration and respective statutes. The seller may pay the common interest community association by cash, check, certified funds, or credit card, if credit card payment is an option offered by the unit owners' association. The unit owners' association shall pay the Common Interest Community Manager the amount due from the unit owner within 30 days after invoice.

A property owners' association that is self-managed may charge a fee for the preparation and issuance of the resale packet reflecting the actual cost of the preparation of the association disclosure packet, but not to exceed
$0.10 per page of copying costs or a total of $100 for all costs incurred in preparing the association disclosure packet. In addition, there is no requirement that fees for the preparation of a disclosure packet be paid at the time of settlement.

If a common interest community association which is professionally managed or its Common Interest Community Manager has been requested in writing to furnish the resale packet required by the statute, the preparer of the association disclosure packet shall be liable to the seller in an amount equal to the actual damages sustained by the seller in an amount not to exceed $1,000. The damages are limited to $500 for property owners' associations that are self-managed.

A settlement agent may request a financial update. The requestor shall specify whether the financial update shall be delivered electronically or in hard copy and shall specify the complete contact information of the parties to whom the update shall be delivered. The financial update shall be delivered within three business days of the written request. A settlement agent may also request a financial update from the preparer of the resale packet. The preparer of the resale packet shall, upon request from the settlement agent, provide the settlement agent with written escrow instructions directing the amount of any funds to be paid from the settlement proceeds to the association or the Common Interest Community Manager. There shall be no fees charged for a response by the association or its Common Interest Community Manager to a request from the settlement agent for written escrow instructions; however a fee may be charged for a financial update. The settlement agent, when transmitting funds shall, unless otherwise directed in writing, provide the preparer of the resale documents with: (1) the complete record name of the seller, (2) the address of the subject unit or lot, (3) the complete name of the purchaser, (4) the date of settlement, and (5) a brief explanation of the application of any funds transmitted or a copy of a settlement statement, unless otherwise prohibited.

New Restrictions on Fees Assessed by Property Owners Associations
The new legislation also amended the Virginia Property Owners' Association Act to prohibit a property owners' association from levying any charges or assessments unless such charge or assessment is expressly authorized by the statute, the declaration or by law with the exception of any charge or assessment related to services provided by or through the association or related to the use of common area.

Community Associations and the Virginia Graeme Baker Pool and Spa Act Of 2007
By: Matthew L. Troiani

On December 17, 2007, President Bush signed into law the Virginia Graeme Baker Pool and Spa Act of 2007. The Act was designed to create universal standards for public pool and spa facilities in order to protect children from drowning, the second-leading cause of death of children under the age of 14. Owners and operators of public pools and spas have until December 20, 2008, to come into compliance with the federal standards.

"Public pools" as defined under the Act specifically include pools that are open exclusively to members of residential real estate developments like community associations. Associations must therefore comply with the standards set forth by Congress. All public pools must be equipped with a drain cover that is sold in the United States and meets the standards established by Section A112.19.8 of the American National Standards Institute as published by the American Society of Mechanical Engineers (ASME/ANSI standards). The Act requires that all public pools with one main drain include at least one of the following entrapment prevention safety systems: (1) a safety vacuum release system; (2) a suction limiting vent system; (3) a gravity drainage system with collector tank; (4) an automatic pump shut-off system; or (5) a drain disablement system. The requisite entrapment prevention systems must also meet the standards of ASME/ANSI Sections A112.19.8 and A112.19.17. Public pools equipped with an unblockable drain must have a drain cover but are exempt from the entrapment prevention system requirement.

In order for a state to be eligible for funding under the Act, the state must adopt the federal standards for drain covers and safety systems. Maryland has adopted by regulation the federal ANSI standards for public pool drain covers and safety systems. The District of Columbia is subject to all federal statutes and has not specifically enacted statutes or adopted regulations establishing ANSI standards for public pool drain covers and safety systems. Virginia has established standards for pool drains and safety systems, but these standards are not specifically linked to the ANSI standards.

The state must also require by statute that public pools be enclosed by barriers that will effectively prevent small children from accessing the pool without supervision in order to receive a federal grant. Many states have already enacted pool enclosure or barrier requirements, but the Act does not require states to enact such statutes unless
the states wish to receive funding under the Act. Maryland does not require by statute that a public pool be enclosed by a fence or barrier, but a fence or enclosure is required by Maryland state regulations. The District of Columbia has adopted by regulation, but not by statute, the requirement that public pools be enclosed by a fence or barrier. Virginia has statutorily authorized counties and cities to enact ordinances requiring that pools be enclosed by a fence or barrier, but there is no statutory requirement. Virginia regulations do require that pools be enclosed by a fence or barrier. Accordingly, Maryland, the District of Columbia, and Virginia are not currently eligible for the federal block grant under the Act.

Please do not hesitate to contact any of our community association attorneys with any questions regarding compliance with the Baker Pool Act, ASME/ANSI standards, or state and local requirements consistent with the Act.

Maryland Court of Appeals Hands Victory to Condominium Associations
By: Thomas Mugavero

Three Whiteford, Taylor & Preston attorneys (the author, Joe Douglass and Julie Dymowski) recently represented community associations in two interesting cases involving claims brought by the same insurance company for damage to individual units within the associations.

Background
Dianne Anderson and Charles O'Connell lived at the Gables On Tuckerman Association and Bridgeport Association, respectively. Each of their units suffered water damage within the unit itself, but no other units were affected. Both had homeowner coverage with Erie Insurance, and both sought to have their respective associations either perform or at least pay for all the repairs due to the water damage. Because the costs of repair were below the association's deductible under their individual master insurance policy, the associations refused. Erie ultimately paid for the repairs and sued the associations for indemnification.

Erie Insurance filed suit to force the associations to reimburse the costs of any and all repairs for damage within these units. On April 15, however, the Maryland Court of Appeals issued an opinion explaining the respective duties of the association and a unit owner to repair damage within the condominium building. In a unanimous opinion, the court stated that an association had no responsibility for any repairs within the unit itself.

In the trial courts, the claims against the two associations were dismissed before trial, and the cases were consolidated on appeal. Before the Court of Appeals, Erie argued that the Maryland Code required an association to carry insurance on a "condominium," which was defined as both units and common elements combined, and required the association to repair any damage to the "condominium." As such, Erie asserted, the association was required to either repair or pay for any damage to any individual unit. On behalf of the associations, the author argued that the code also stated that an association was responsible for "maintenance, repair and replacement" of the common elements, while the unit owners were responsible for their individual units. As such, the requirement to repair damage to the "condominium" had to be read to mean damage to the property as a whole, not to any individual unit.

As the court saw it, the issue facing it was: "whether a condominium council of owners under the Maryland Condominium Act...is required to repair or replace property of an owner in an individual condominium unit after a casualty loss." After reviewing both the history of the Condominium Act and the nature of condominium property (that is, that a condominium is a hybrid form of ownership, with individual ownership of the unit itself and joint ownership of the common elements), the court concluded that the master insurance provision of the Act was intended to cover only damage sustained to the common elements or the structure of a condominium, not damage within the four walls of an individual unit. To rule otherwise and make the condominium association responsible for repairs within a unit would make the association "responsible for repairing or replacing property in a unit within which the council has no right to enter to make inspections or perform preventative maintenance."

One more issue remained. Under § 11-114, the deductible under the master insurance policy is a common expense, effectively to be shared among the association. If the bylaws so permit, the first thousand dollars of that deductible could be shifted to the unit owner who caused the damage, but the rest of the deductible remains a common expense. The Court of Appeals held that because the master insurance policy did not apply to the damages in this case, there was no deductible and the costs of repairs were not a common expense.

The Ramifications of the Court's Opinion
The court's opinion was, at once, sweeping and limited in its scope. On one hand, the court specifically held that an association was not responsible for any repairs of any kind within an individual unit. That is, it took a "paint inward" approach - anything from the drywall into the room itself is the responsibility of the unit owner. Moreover, the duty to repair any part of the structure may apply only to "stacked" (i.e., highrise) condominiums, and not to townhome developments. As the court noted (at page 34 of the Opinion), "it is clear, moreover, that in town home condominium properties, where no stacked units exist, insurance on the individual town homes was not contemplated by the Uniform Act." In this sense, the opinion establishes a clear division of responsibility, placing much more responsibility on the individual unit owner.

On the other hand, the opinion is limited by the questions presented to the court. In each of the cases on appeal, there was no damage to any other unit. There was no structural damage to the building itself, no impact on the common elements, and no issue of water coming from elsewhere in the building and causing damage within the appellants' unit. In that sense, therefore, this case did not hinge on the "hybrid nature" of condominium ownership, because all the damage was within one unit, where one person had sole and exclusive ownership of the property. Because the damage was not so extensive as to involve the community at large, the interests of the association as a whole were never affected. This case involved only the problems of one individual unit owner, not the community itself.

Erie Insurance presented the court with a fairly radical position: that the Condominium Act forced an association to repair any damage, no matter how slight, within a condominium unit. At oral argument, one judge specifically asked if that included a scorch mark left on a kitchen counter from a hot saucepan; to which Erie's counsel replied simply, "Yes, it does." The court rejected this position and held that the Maryland Condominium Act did not require the association to repair damage within the unit. In this sense, the court has merely affirmed the idea that one is responsible for what happens within one's own home.

This opinion, therefore, really speaks only to a very discrete situation, where all the damage is confined within one unit and does not affect the community itself. Seen in this light, the court's decision should have little effect upon the normal, day-to-day activities of any condominium association.

Nonetheless, the court's opinion may have implications for future association action. Mortgage lenders may require "single-entity" coverage for the master policy, whereby the association would return the individual units to the same or equivalent condition as when the developer initially sold the units. In the event of a catastrophic loss - that is, where one or more units in a condominium are rendered uninhabitable because of flood, fire or other destruction - an association may find that it has no choice but to restore the units to their original condition, both
because of mortgage lender requirements and because restoration is the only way to preserve the property values and attractiveness of the other units. Many master insurance policies, however, are written to cover only those repair costs that the association is "required" to pay, and given the court's opinion here, an argument can be made that the association is not "required" to pay for the level of restoration required by the mortgage lenders. Such an argument would seem to follow from the language of §11-114(c), which states that a unit owner is insured
under the master policy only "with respect to liability arising out of his ownership of an undivided interest in the common elements or membership in the council of unit owners ..." In short, an association may find that it is forced to pay for repair costs only to have those costs rejected by the master insurer.

The case may also have some precedential value in the District of Columbia. Virginia's Condominium Act already spells out the respective obligations of unit owner and association, stating that the association has the duty to repair the common elements, and the unit owner has the duty to repair the individual unit. [See Va. Code § 55-79.79, see also Highridge Place Condo. Unit Owners' Ass'n v. Langley, 66 Va. Cir. 185, 2004 Va. Cir. LEXIS 260 (Nelson County, 2004).] D.C., on the other hand, is more ambiguous: an association must carry insurance on the condominium property, excluding "improvements and betterments installed by unit owners." D.C. Code § 42-1903.10. The association is required to repair any damage to any part of the condominium "for which insurance is required ..." (id.). A similar ambiguity appears to exist in the D.C. statute as in the Maryland Code, and the D.C. courts may look to the Gables case as persuasive authority.

Summary
Association boards should take three steps to protect themselves and their associations. First, the board should
review any applicable mortgage lender requirements. Second, they should make sure that these lender requirements are spelled out within the governing documents. (Because the declaration and bylaws of the association establish the obligations of the community, placing mortgage lender requirements within the governing documents would strengthen the board's position, in the event of catastrophic loss, that it was "required" to restore the individual units.) Third, the board should review its master insurance policy provisions to ensure that, in the event of some kind of catastrophic loss, there is sufficient insurance coverage to allow the association to rebuild.

The Pack Rat: A Community's Dilema
By: Andrew J. Terrell

Unfortunately, Community Associations confront a most difficult situation when a "Pack Rat" lives in the community.

The Pack Rat is an individual who simply cannot or refuses to dispose of any materials. While each and every one of us could be more organized, this article is not addressing unkempt units. Rather, it discusses a serious problem that may easily confront your community - unit owners with floor-to-ceiling newspapers, garbage, clothes, and other items. These units are often uninhabitable and can be serious sources of insect and vermin infestation. Frequently, this type of behavior is the result of mental illness.

For members of a board of directors, the Pack Rat creates a complicated situation. Board members usually receive notice from other members of the community complaining about odors or vermin coming from the problem unit. But by the time the board learns of the problem, the condition of the unit is o