March 2011 – Lawsuits—that your HOA either initiates or must defend—often end up siphoning off money from your association that perhaps never needed to be spent. Here, our legal experts offer up seven rules for implementing policies and procedures and dispute-resolution practices that reduce the number of lawsuits your HOA is involved in.

1. Don’t accept contracts without negotiation or review.

“When you have a vendor, remember the importance of good contract negotiation and review before you sign them,” advises Jed L. Frankel, a partner at Eisinger, Brown, Lewis, Frankel & Chaiet PA in Hollywood, Fla., who advises community associations. “When you run into trouble, if you have a fair contract, there’s probably not going to be litigation.”

Frankel offers a typical example. “If you have a contract that expires on Dec. 31 on its own, you’re not going to get involved in litigation if you don’t renew it,” he explains. “But if it automatically renews for three years, the president who negotiated the contract has moved to a new association, and nobody else knows about that provision, and then you try to cancel, guess who’s going to be sued?”

2. Know your contractual duties, and document problems.

“Keep track of your contractual obligations, like when contracts expire and what you must do to terminate them properly,” says Frankel. “If you have problems, document them and notify the vendor in writing so that if you get to the point of sending a termination letter, you’ve got documentation to back up your termination. All too often, a client will say, ‘This garbage company was horrible.’ I’ll say, ‘Did anybody ever document it or call the company?’ The answer will be, ‘Maybe we had someone call in once, but we can’t remember who we talked to and didn’t follow up with letters.’

“I’ve also seen situations where associations sent notice of termination to the wrong person or did not send it by certified mail, and the vendor says, ‘Guess what? We think you breached, and you owe us liquidated damages and attorneys’ fees,'” says Frankel. “That puts the association in a bad position because it’ll be paying some damages, and there’s not much I can do to mitigate them.”

3. Perform regular maintenance.

“Maintenance issues come up in a lot of condo associations because of the association’s failure to do routine maintenance,” says Jenny Key, the Austin, Texas-based vice president of RealManage, a Dallas,TX, association management firm that oversees properties in Arizona, California, Colorado, Florida, Louisiana, Nevada, and Texas. “Then something goes wrong, and the association gets sued. So make sure you’ve got a maintenance schedule in place that covers, say, five years. Don’t just deal with problems as they come up.”

4. Don’t stubbornly stand on an expensive principle.

“I’ve seen boards litigating an issue based on the principle of the matter,” explains Michael S. Hunter, an attorney and partner at Horack Talley Pharr & Lowndes PA in Charlotte, N.C., who represents associations. “I always counsel my clients to pick their battles. You’ll always be able to find a CC&R violation, but not all are worthy of a lawsuit. Even if you’re right, the cost of being right might be too high.

“You have to remember that the association has to be a good steward of the money it collects from owners,” adds Hunter. “It doesn’t make sense to spend $40,000 on something the majority of the owners couldn’t care about because it happens to be a pet peeve of one of the board members. Don’t let personal preferences impair your judgment on things that aren’t suit-worthy.”

5. Don’t enact bad, illegal, or unfair policies or practices.

“When it comes to policies, a lot of associations get sued by homeowners when the board adopts a policy that’s not enforceable or doesn’t treat all homeowners fairly,” says Key. “Maybe boards didn’t get input from everyone or are trying to fix a problem with a few owners, but their rule also affects too many other owners unfairly. Or maybe the board wants to restrict owners’ right to rent. So it’ll enact discriminatory practices on or pursue fines more often against owners who rent out their units—or it won’t pursue the same fines against owners who don’t rent out their unit.”

Similarly, boards too often get sued because they enact policies they can’t enforce. “Sometimes boards pass rules that are just plain illegal,” says Key. “Maybe an owner claims a disability and wants to make changes to his home. But board members don’t like the way the alteration looks, so they deny the request. You do get some board members who say, ‘If you don’t like the house or neighborhood the way it is, buy somewhere else.’" Mistakes can be made, but it’s what happens afterward. If you have a hard time admitting mistakes, that’s when you get sued, and you’re probably going to lose.”

6. Treat association money as if it were your own.

“I’ve seen a lot of cases in which associations have refused to settle cases,” says Frankel. “I refer to it as being an irrational decision maker. Associations are multi-million dollar business enterprises, yet you’ll see boards not make the right business decision because it’s not their money. It’s not like they pay the litigation or settlement costs out of their pocket; they pay only a portion of them. You’d think a lot more about these cases if the costs were coming out of your own pocket.”

7. Listen to professionals.

“When you ask for your lawyer’s advice, follow it,” says Hunter. “I see a lot of cases in which associations have gotten into trouble by not following their lawyer’s advice. The same rule applies to accountants or any other consultant. If you’re paying for professional advice, follow it. Another big creator of liability is failing to seek out professional advice when you need to. The board says, ‘We don’t need an engineer to look at this roof leak.’ Or. ‘We don’t need an accountant.'”


Matt Humphrey is president of the Alameda, California-based, from which this article was adapted.

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