By Kathy Danforth / Published August 2017
Hurricanes are not the only source of ill winds in communities. Whether from good intentions or bad, people are behind a host of issues that can confound an association—particularly condominiums, with their closer bonds. Theft, accidents, construction defects, financial distress, and lawsuits are some of the hurdles that communities encounter, as well as less common incidents, such as terrorism or hazardous material spills. While some of these difficulties are unavoidable, exposure to problems made by people can be minimized.
Matthew Zifrony, attorney with Tripp Scott Attorneys at Law, explains the current context of association management: “Throughout the day-to-day operation of an association, boards are constantly challenged: What are the right things to do or not do to avoid liability? For example, if the trees on swales by sidewalks are trimmed too often, they could be weakened and fall down and hit someone. If they aren’t trimmed enough, they may block streetlights, and the association could be named in a lawsuit if there is an accident and a claim there was insufficient lighting. The board can say they don’t want to take on the responsibility of cutting the trees and being caught up in potential liability; but, then the community won’t look as good, and owners will be making threats that the board isn’t doing its job to keep values up. No matter what the association does, the liability is there in almost every decision the board makes.”
Amanda Barritt and Traci McKee, with Henderson Franklin Attorneys at Law, describe the situation associations face when crimes occur within their communities. “In recent years, condominium and homeowners associations have become a target for negligent security lawsuits and claims. In a negligent security claim, the crime victim claims that the association failed to implement reasonable security measures which would have prevented the crime. In most instances, the injury to the victim is severe, resulting in a large potential exposure to the association.”
According to Barritt and Mckee, “Under Florida law, landowners, including associations, owe residents and guests a duty to take reasonable steps to protect against foreseeable crimes. Whether an association’s safety measures were reasonable is typically a question for a jury. To determine whether a particular crime was foreseeable usually depends upon multiple factors, such as past crimes at or near the property and an association’s knowledge of dangerous propensities of an individual.
“Gated and high-end communities are especially susceptible to negligent security claims. Residents and guests in these communities perceive themselves as being safe and immune from crime and, thus, fail to take ordinary precautions to protect themselves—leaving doors unlocked, leaving windows open, and failing to set alarms.
“Between litigation costs and damage awards, as well as the increasing cost of insurance, negligent security claims can be quite expensive for associations. While each association needs to evaluate the unique risks it faces, the following simple steps should assist in reducing the potential liability of an association for a negligent security claim:
“An association that follows these steps and makes safety a priority will be in a better position to defend itself against negligent security claims should a crime occur on its property,” advise Barritt and McKee.
“Liability comes down to a negligence standard,” says Zifrony. “Associations should take reasonable steps to avoid any type of claim, whether through inspection of the property or by running ideas by the association’s attorney or insurance agent. Have your insurance agent identify problem areas through their experience, and do your due diligence, both before and after decisions. If the board is put on notice that there is a problem, take it seriously. If an association does nothing, there’s a better chance that they are negligent. For example, if there is a complaint of speeding, investigate. Is it true? Maybe a traffic study is needed. Talk to the police. If someone says to put in speed humps, what if it slows down an ambulance or fire engine and someone claims that contributed to their injury? Do your homework and document research in the minutes. If homework indicates you should take corrective measures, take them, or you have a ‘smoking gun.’ Due diligence doesn’t mean no one will get hurt—it means you didn’t contribute to the harm.”
In the case of an accident, “Get professionals involved,” advises Zifrony. “The board and management should not make statements one way or the other on behalf of the association. If needed, any research relating to the issue can be presented as a defense.”
Mitchell Krauss with Associa® relates, “Most of the accidents we see involve employees serving the community. Employees need to know what they can and can’t do. Many associations try to save money by doing work in-house. You should seriously weigh the risk of the safety of the employee and others in the community. If the task is outside the employee’s comfort zone or requires licensing or permits, tread cautiously.
“Preventing trip hazards is incredibly important,” according to Krauss. “Roots are always pushing up a sidewalk and creating opportunities to trip. Everyone’s heard elevator horror stories. It is essential to work with experts to handle heavy machinery correctly.”
Zifrony reminds associations, “As well as the liability, there is also the moral grounds of decisions regarding safety. If a little kid is hit by a speeding car, and I didn’t want to look at the problem, I would have a hard time sleeping.”
While boards may have the thought that surely some responsibilities can be signed away, Zifrony says, “Boards need to understand that it’s difficult to avoid liability with the documents. The claims are always saying the association is negligent in some way, and in many states, you can’t waive negligence through a contract, which is what the governing documents are. It’s also very difficult politically to put in the documents that the association is never responsible, even if the harm you suffered is due to our negligence. Even if the documents did say that, it wouldn’t work against guests, tenants, and others.”
Ken Direktor, attorney with Becker & Poliakoff, advises, “No matter what the documents state, if an association doesn’t operate prudently, the documents can’t protect you. The documents can help in some ways; they can provide clarity, for example, in stating who maintains what. When you have a plumbing leak, you want to pay a plumber, not a lawyer. They should also give the association the right to enforce owners’ maintenance obligations and to perform maintenance if needed so problems are arrested before they become an issue—fixing an owner’s hurricane shutters so they cannot become projectiles, for example.”
People can steal from associations in many and varied ways. Krauss observes, “We try to guard against the opportunity by looking at where and how a thief can gain access. To mitigate risk, anyone handling funds should be covered by a fidelity bond—board members, management, or members of the community.
“Inventory control is important, especially for those with lots of assets, equipment, and supplies,” Krauss observes. For those with substantial line items for equipment, protection is from both internal and external sources. “This can be as simple as putting up a tool board with the tool outlines traced on the board. Janitorial supplies walk very easily, and all those things cost money. Management should know within reason how much of each supply is needed. Chemicals are not necessarily cheap, and individual bottles can easily be taken for personal use. A mixing station to dilute chemicals from concentrates is much easier to control. Cameras in these areas can be beneficial.
“A desk audit is important, especially in a busy manager’s office,” states Krauss. “Are checks, petty cash, or sensitive information within reach of a visitor? We’ve seen a high number of cases in recent years of check washing—once the check has two signatures, they erase the name of who it was to be paid to and redirect it.
“The less dependence there is on physical checks, the more secure the system generally is,” advises Krauss. “A bank with a lockbox set up for payments is more secure than having checks dropped off at the office. Miami-Dade County created a task force to investigate condominium fraud, and their first ‘bust’ was a bookkeeper who had opened an account with a name similar to the association’s and was sending assessments there. It’s also critical to not accept cash in the association office, even for expenses like gate fobs or clickers, because those amounts add up.
“A one-man operation is typically where fraud is more likely,” Krauss relates. “Know who is working with money in the management office and check for separation of duties in the accounting office. There also needs to be separation of duties for payroll because for some associations that is the biggest line item, and there’s always the risk of fraud in stealing time.”
Direktor recommends, “Follow the operational protocols recommended by the independent auditor. Accurate information should be provided to the board and should be available to all the members. More eyes help in looking for unexpected expenses, credit card charges with no detailed bills, etc.”
A more common means of theft involves vendors, with kickbacks, bid rigging, or conflicts of interest. “The larger the project, the more formal the request for proposal (RFP) should be,” says Krauss. “The community should have a solid RFP with insurance requirements, how to submit those, who to contact for questions in the bid process, and information on the pre-bid conference, so everyone gets the same information at the same time. The more formal and detailed the process, the less you see interference from one person influencing the decision.”
To circumvent the spectrum of negligence/liability/lawsuits/expenses, Direktor sees diligence in management of the physical property as key. “First, you have to be prepared to inspect the most sensitive components on the property—water heaters, plumbing lines running from the toilet to the shutoff valve, hurricane shutters—including those components that are the owners’ responsibility,” Direktor states. “When an item has deteriorated, the association needs the authority to replace the item and then chase the owner for the money. It’s always better to chase the money later than to leave the issue unaddressed and have a water leak or flood occur.
“The next step in preventive maintenance,” according to Direktor, “is to do the work you are responsible for and enforce the owners’ maintenance responsibilities. Owners also need education—how many know to put algaecide in their air conditioner condensate lines? But if those lines back up, you have major water issues. By having inspection, education, and follow-up, you head off a lot of problems.”
Vendors are another area for scrutiny. “Make sure every association vendor is licensed, insured, and qualified,” notes Direktor. “Every service contract should have a clause for termination with or without cause, so if the work is substandard, the contractor can be terminated. Owners should be required to use licensed, insured contractors, and vendors should be required to get permits as the job requires. Vendors should be required to show their permit to access the property. Many problems can be avoided if owners have some assistance from the association, the items they are required to maintain are periodically inspected, and they are directed to the right contractors.”
Krauss points out, “It is very important for an association to know what vendors are working for owners in a high rise in case they affect someone else or cause damage to the building, especially regarding air conditioners on the roof. Insurance should be on file for any contractor working in the building.”
Matthew Zifrony is with Tripp Scott. For more information, visit www.trippscott.com.
Amanda Barritt and Traci McKee are with Henderson Franklin. For more information, visit www.henlaw.com.
Mitchell Krauss is with Associa. For more information, visit www.associaonline.com.
Ken Direktor is with Becker & Poliakoff. For more information, visit www.bplegal.com.
Michael Chapnick is with Siegfried, Rivera, Hyman, Lerner, et. al. (SRHL). For more information, visit www.srhl-law.com.
Scott O’Connor is with TRC Worldwide Engineering, Restoration & Inspections Group. For more information, visit www.trcww.com.
Association projects are the third major area of exposure where Direktor recommends a major proactive role. “Management cannot just be motivated by cost containment,” he states. “The board should spend association funds prudently, but neither the board nor management should be expected to serve as an architect or engineer when they are neither. The project specifications should be prepared by an independent consultant. That’s the only way to get apples-to-apples comparisons. That consultant will also help secure licensed, insured contractors.”
Proper professional assistance at the front end will prevent many construction defect claims, explains Direktor. “If I’m going to spend $1,000,000 on a new roof, it’s worthwhile to have counsel review the contract—which is typically drafted by the industry. An engineer is needed to protect you, the property owner, by seeing the work is done according to specifications and is completed properly before payment draws.”
“In the case of construction defects, bring in experts,” advises Zifrony. “Sometimes a defect is in the eye of the beholder. Don’t bring suit unless there’s a strong reasonable belief you will prevail. Exhaust all other remedies because lawsuits quickly become expensive, and there’s no guarantee you’re going to win.”
“Sometimes things just go haywire,” remarks Direktor, “and, at that point, you want to evaluate what went wrong, the cost of repair, and the prospects of recovery. You don’t ignore a problem, but you have to know costs and make intelligent business decisions as to where to allocate resources so you don’t spend $50,000 in legal fees on a $10,000 problem.”
In the sidebar on page 18, Scott O’Connor with TRC Worldwide Engineering Inc. discusses the situation some communities face when they inherit structural issues in their condominium.
A lack of adequate funds is always unpleasant and can start what seems to be a death spiral, with the higher fees needed to fund improvements to attract owners also driving owners away. The usual causes are not dramatic, unexpected scenarios, but rather the lack of routine, responsible policies. “Poor fiscal management is the main cause of financial disaster,” observes Direktor. “That means budgeting responsibly. Keeping assessments down to be re-elected to the board is a recipe for disaster at some point.
“Not funding reserves is a major problem for associations with people who are not able to withstand a large special assessment,” according to Direktor. “Often these communities don’t allow the board to levy special assessments or borrow money without membership approval. Without the funds for necessary maintenance, how will they pay for repairs? Who will be on the board when it becomes clear they can’t do their duty?”
Krauss advises, “The reserve study should be done every three years and updated in between so you have an expert view of remaining useful life to budget properly. We see a lot of lenders for prospective buyers scrutinizing association financials and asking about reserves because they have an interest if they’re going to loan money.”
For financial health, Direktor holds that associations on the ocean exposed to tropical winds need a line of credit available. “With occupancy low in the summer, if a storm hits, it could take weeks for a board to meet, levy an assessment, and collect funds. Obtaining a loan or line of credit after a storm could also take weeks, when having the funds for immediate repairs is very important.”
For properly managing money, Zifrony observes that communities need to forecast the possibilities down the road. “Take the budget process seriously, and then don’t spend too much too early. Communities should find out if the money is available for a project, either in reserves or operating funds, before spending—such as $20,000 to remove landscaping that’s an eyesore when worse problems may be coming. There are both foreseeable and unforeseeable expenses; if you manage against the foreseeable expenses, then you have a good chance of success. But, there will always be unforeseeable costs that are hard to manage against—bringing a lawsuit that costs $50,000 when the legal budget is $10,000; lightning hitting landscaping; encountering four or five accidents that don’t trigger the deductible instead of the usual one or two; or unexpected breakage of guard gates, sewer pumps, etc.
“Delinquencies are a main cause of financial distress,” Zifrony recounts. “To correct that, the association needs to send the message that when you’re prioritizing bills, the association needs to be on top. When an account becomes delinquent, it’s time to send a letter that it’s with the attorney. Treat everyone the same, and pursue collections against everybody. I don’t want to be uncaring, but it’s not fair for everyone else in the community if they’re footing the bill for 20 owners who aren’t paying.
“For higher-end communities, banks pursue their own foreclosure so associations can sit back and wait a little,” Zifrony notes. “For lower-cost homes, the banks are still moving slowly in many instances. Associations may have to work out payment arrangements with an attorney so that legal fees are collected at the end of the process.”
Krauss concurs that poor budgeting is the main cause of financial problems. “So many communities take the budget process for granted. They get pressure from owners who don’t want to see assessments increase, and they don’t plan in the budget for ‘unforeseen’ expenses. A big part of the problem is lack of reserves. Too many communities have waived reserves, and then they have to special assess for large amounts.”
An asset Krauss recommends utilizing is the expertise of the owners. “Many associations have the benefit of savvy business people in the community—financial experts, attorneys, CPAs, and engineers,” Krauss points out. “Far too often boards don’t ask for assistance, but I encourage them to set up committees and tap into these resources.”
Fraud and being underinsured are two other causes of financial problems, according to Krauss. “Condominiums and homeowner associations are different than average businesses, so you need an insurance agent who is experienced in serving communities,” he recommends.
To get out of a financial dilemma, Krauss says, “First, identify how you got there. If it was from poor budgeting, people need to know it’s ok to raise assessments from time to time. The board has to improve property values, not diminish them. Part of performing due diligence is obtaining adequate funding.”
On the other side of the equation is cutting costs. “Energy management can save money, especially in high rises,” according to Krauss. “Water conservation and other measures can also cut expenses.”
Zifrony cautions communities to give preferential treatment to health and safety issues, insurance, and security, even when the budget is being trimmed. “And, don’t put aside looking into a safety issue—like speeding—if it comes up. Cut discretionary items first, even if it’s unpopular; turn the pool heater off or cut clubhouse hours. You have to view expenses in terms of health and safety; keep streetlights replaced instead of clubhouse lights. You need to cut overgrown landscaping that blocks the view of cars, but you can wait until you have the funds to replace landscaping plants that have died.”
Michael Chapnick, attorney with Siegfried, Rivera, Hyman, Lerner, De La Torre, Mars & Sobel P.A., reminds communities of the need to have a plan in place to deal with any disaster, including legal misfortune. “Community associations frequently become involved in lawsuits as both plaintiff and defendant. You plan for this by establishing a relationship with a knowledgeable and experienced community association attorney and insurance agent who works with associations, and also by making sure the association has not only sufficient liability insurance but also directors and officers insurance (aka errors and omissions). When the association becomes a defendant in a lawsuit, immediately place your insurance carrier(s) on notice and provide them with a copy of the complaint. When the association believes it is appropriate to become a plaintiff and initiate a lawsuit, talk with your association attorney about the prerequisites for doing so, as well as other options that might be available to resolve the situation.”
“Check the documents before initiating a lawsuit because there may be requirements, such as for owner approval, non-binding mediation, or notice letters,” advises Zifrony. “Seek legal advice to make sure you have a likelihood of success and also recovery if you are the prevailing party. Consider the political ramifications if the suit sends a message. Will you communicate ‘comply with the documents or there will be consequences,’ or will you come across as discriminatory or as condo commandos?”
Direktor advises, “A lawsuit should always be the last resort because they are time-consuming, they are expensive, and in most cases, nobody really wins. A rush to lawsuits is never a good strategy. A business flourishes when it devotes its resources to its constructive purposes; when you’re embroiled in litigation and spending your valuable resources on lawyers, you’re diverting resources.”
That said, Direktor acknowledges, “There are times when a lawsuit is unavoidable. If an owner is violating a short-term rental prohibition with Airbnb, you will have to pursue an injunction because the fine may mean nothing compared to the income. You have to ask, if you’re not prepared to enforce provisions, is it worth having it in the documents? If an owner fails to perform maintenance that is the unit owner’s responsibility, the association has to be prepared to legally compel them or, if allowed under the documents, perform replacement or repair and then pursue the money.
“You would be amazed at how two relatively obvious steps can help you avoid a lot of misery,” states Direktor. “First, have operational protocols that are business-like and adhere to them. Second, make sure the documents work for you.” If getting enough participation to make needed changes to documents is a problem, Direktor has suggestions. “Try online voting. Bring proxies to every meeting to
collect. Engage in a phone campaign. I’ve had clients throw a dinner party to discuss and pass amendments. The first step, instead of tackling a contentious issue, is to change the amendatory provisions—for example, base passage of amendments on the percent of those who participate rather than the entire community. You want to make it feasible for decisions to be made by the people who participate.”
Many associations face dilemmas that leave them feeling, with Pogo, that, “We have met the enemy, and he is us.” With diligent effort, communities may regain the morale behind Oliver Hazard Perry’s original statement—“We have met the enemy, and they are ours.”
“Man-Made Disasters”—What Should You Do When Water Intrudes into Occupied Spaces?
By Scott O’Connor, TRC Worldwide Engineering
Sometimes new condominium structures spring leaks causing damages that may result in costly repairs. If left unattended, over time, greater damages such as mold infestation or corrosion may occur. To minimize damages and expenses associated with restoration due to “man-made disasters,” you should act as soon as possible—time is of the essence. During the initial construction, numerous components should have come together to make a “waterproof” envelope of the building. In some cases, the flashing or other detailing was not properly installed and will go unnoticed; if this is not corrected prior to the building receiving its occupancy permit, it can cause problems from the very beginning. Undetected issues may escalate for months or even years. By the time the problem is detected at some point in the future, it could be more difficult to control and costlier to repair than if identified earlier. Other culprits of water intrusion on new buildings include the following:
- Deck planters not properly waterproofed
- Pool or recreation decks not fitted with appropriate drains or faulty connections
- Expansion joints not properly installed
- Waterproofing membranes not appropriate for the conditions
If you have discovered water entering the occupied space, what should you do?
The first step is to contact your insurance provider. The next step is to contact a qualified professional such as your engineer to conduct a thorough moisture investigation. After the final report is generated and the intrusion source is located, a detailed restoration or repair procedure will then be developed to return your property to its pre-disaster condition.