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The Smart Board & Property Manager Legal Guide: Repair & Maintenance Obligations: Limits of Board Business Judgment

Alan Tannenbaum, Esq.:

I'm Alan Tannenbaum. I'd like to welcome everybody to our Smart Board session on Repair and Maintenance Obligations: Limits of Board Business Judgment. I'm here with my partners, Jon Lemole and Cindy Hill and our associates, Jim Turffs and Jennifer Hicks. This is going to be one where we're each going to have some level of participation.

So we always come back to maintenance and repair. And the reason we come back to maintenance and repair is, it's the central obligation of both the condominium and homeowner association. It's the main purpose that associations are constituted. It's the main obligation of associations is to undertake repair and maintenance with an HOA. It could either be association owned property or lots that the association has maintenance and repair obligations over. Certainly, with Florida condominiums and co-ops. It's all the commonly owned property that the association is obligated to maintain and really, the central function of the board is to do that activity prudently, raise funds, sufficient funds for that to be undertaken.

In 2024, there's lots of challenges in undertaking that function budgetarily. With insurance costs and some construction costs rising, there's certainly a lot of budgetary pressure on boards undertaking the function. And as we all know, the Florida legislature in regards to condominiums, especially condominiums three stories or more, have imposed substantial obligations that have strained budgets for condominium associations around the state, which places even more of a burden on boards to try to manage the maintenance and repair function, but we will try to get to as many of your questions as possible and hopefully give you appropriate context for undertaking that function.

So there's the agenda. We're going to cover the Lamden Rule. We've discussed it before. It's well worth repeating. We're going to talk about the statutory provisions that impact the board's actions relative to maintenance and repair functions. We're going to talk about some of the case law that's developed, that's pertinent to both board liability and association liability of the repair and maintenance functions are not carried out appropriately, and we'll answer some questions at the end. I'm going to start with the Lamden Rule, which is the court-created doctrine about... or defining what board's obligations are relative to maintenance and repair from a common law perspective. And Jon, if you would go to the next slide.

All right. This Lamden Rule was adopted in a decision back in 2010, Hollywood Towers Condominium Association versus Hampton. There's a citation there for anyone interested in looking up the case. But it actually was a rule adopted by a New York court that was then adopted by a California court. And now the Florida court in 2010 adopted this Lamden Rule, and this defines, again, the common law boundaries for boards and undertaking the maintenance and repair function. The first element, the board has to be duly constituted. People properly voted in, they haven't exceeded their term limit.

The second point's very important. In order for the Lamden Rule to protect board members in undertaking the maintenance and repair function, there needs to be reasonable investigation done. So if you're on the board of directors and you've called for an engineering study and somebody from the association's challenging the board, "Why do we need to spend that money to get an engineering study in order to support undertaking a repair?" You can cite the Lamden Rule that boards are only protected in their decision making on maintenance and repair if there's been a reasonable investigation undertaken to support what the board has decided to do regarding a particular repair element. You have to operate in good faith, that's pretty obvious. In the best interest of the community. That's obvious. With all those things in place, if the board exercise its discretion within the scope of its authority under statute, the documents, to select among means for discharging an obligation to maintain and repair developments common areas or should defer to the board's authority and presumed expertise.

Now, what does a Lamden Rule doesn't say? Or what doesn't it say? It doesn't say... If you go back, Jon, for a moment. It doesn't say that the board has discretion to decide, when a repair is required, not to do it. So that doesn't protect from that. But once the decision is made to undertake the repair, if you meet these requirements, an owner can't challenge the specifics of what the board decides to do, that if it's going to use a certain type of paint or repair a certain area in a certain way, that's not going to be challenged by an owner in the [inaudible 00:06:41] court situation. So reasonable investigation, good faith, authority, you're not going to get a court challenge to the way you decided to undertake the repair and maintenance function, but you can't ignore that maintenance and repair function, the Lamden Rule does not protect you from that. But let's move on, Jon, to the statutory provision.

James "Jim" Turffs, Esq.:

All right. So Alan sort of explained the business judgment rule in a broad sense. As long as you're acting in good faith and you're acting reasonably, you're probably going to be okay as a director. But what happens when a director goes beyond that bound and behaves unreasonably? Well, we have two statutes that deal with that. We have 718.303 for condos and 720.305 for homeowners associations. They're identical for the purposes of our conversation today. And now you probably recognize those statutes because they're the ones that give associations the right to fine owners or to suspend their use rights for various violations. But one of the lesser known functions of both of these statutes is also to allow owners to sue the board, and in the case of exceeding business judgment, even individual directors. So we look at all that sort of stuff and it provides the outcome and the options like what sort of causes of action the owners can have against the associations?

So Jon, if you want to go to the next slide. So we look at 718.303, again, looks just like the 720 version, and it says that owners have the right to pursue actions for injunctive relief and/or damages. So by way of example, let's think about a condo that maybe has a common element dock, and the association has the obligation to maintain that dock and it's fallen apart, it's old, it's in bad shape. The board says, "Well, you know what? We need to repair this." But then the directors in their infinite wisdom go, "You know what? This thing's terrible. Let's just tear that sucker out, build an entirely new dock, bigger, better. Everything's great. The owners will thank us for it. We won't do any sort of vote to approve it. We don't need to. Let's just skip all that and go on."

Well, they would've just exceeded their business judgment because in a condo, a change like that requires an owner vote. It's a material alteration. So an owner sitting back there can go, "Well, wait, you've now built this dock. That's not cool." So the owners can sue the association, and in this case the individual directors because they willingly and knowingly decided to exceed the limits of their authority and they could ask for injunctive relief, which in this case would be a court order, compelling the association to remove this new dock and reconstruct one that more accurately complies with the original version. In the event that the association's action actually caused damage... Let's say that owner had a dock next to this one and they damaged that owner's dock, well, the owner could then potentially also include a claim for money damages against the association and again, the individual directors, to try to recover the cost of repairing their dock. So that's sort of an example of how that would work.

And again, the threshold for individual director liability is a knowing and willful violation. If they're acting in good faith and there's evidence to support the idea that an individual director or the directors as a whole really thought they were doing what was proper and it appeared to them reasonably so, that individual liability won't attach. Under those cases, the association is the party that's going to be responsible for the damages. It's really once the directors individually knowingly go beyond that authority that they can be held individually liable. It's a rather high standard, but something to be aware of. You want to move on to the next slide? The owner's now sued and let's say the owner wins. "Yeah, you got to tear out that dock. Yeah, you got to pay the owner for the damages you did to their dock." Well, now the owner is the prevailing party. And so they can also have their attorney's fees and court costs paid by the association and potentially the individual directors jointly.

In that case... And it's important to note that it's a prevailing party statute too. So if the association did prevail, and let's say a judge said, "You know what? That's not really a material alteration, that is just maintenance. The board did nothing wrong." Well, fine then, the association would be able to recover their attorney's fees and court costs from the owner. So it works both ways, because whoever wins gets their fees paid. But importantly for an owner, if they prevail, let's say they get a $150,000 judgment against the association, and the association simply doesn't have $150,000 to pay out, a special assessment would be required. So every owner in that community would be sent a special assessment having to pay their share of that attorney's fees bill, that money judgment. Well, the statute provides here that the owner who brought this to the court's attention, paid to prosecute the case and had this all dealt with. As the prevailing party, they're going to be exempt from that portion of the special assessment that relates to their award.

So basically, you can't charge a prevailing owner to pay their own attorney's fees. The concept is that an owner who gets awarded their attorney's fees really gets made whole. Nothing is going to be out of pocket for that owner. So it's just to protect the owner for doing the right thing, really. If you want to skip over to the next slide? So this is 720.305. This is the HOA version. Again, almost identical. Here, the individual direct liability comes in at subsection C rather than D, but that's irrelevant. And again, it just doubles down. The standard for HOAs is the same, knowing and willful violation of the governing documents, or as Alan explained, that business judgment rule, is really where that limit is typically held. Exceeding reasonable business judgment decisions is where you're going to get held up. And just like in 718, a prevailing party in an HOA action like that is also going to be entitled to recover their attorney's fees and court costs as well. I think we move on to fiduciary duties.

Cindy Hill, Esq.:

Yeah, my computer was not letting me unmute. That was fun. Thanks, Alan. So fiduciary duties, self-dealing, bad acts. So if you didn't already get the sense from what Jim just told us, certain bad acts are going to get you in trouble, but those bad acts are going to be, what I just call, pretty much, straight-up bad acts. So both condominium homeowner association and not-for-profit statutes, which apply to both community associations, impose on directors and officers a fiduciary duty toward the owners, which means in sum, you need to act in the best interest of the community as a board and not in self-interest or interest that is not best community interest. So what does this mean specifically? It means you can't get kickbacks or other freebies, and this applies to directors, officers and managers. So it's not just your board volunteers, also your management companies cannot receive kickbacks or other freebies.

Cannot fail to perform their duties. And when the failure is a knowing violation of criminal law, that's pretty vague, but at the same time, we all know that certain acts are going to be criminal without even looking at a statute. For instance, if you know a board director is taking money out of the association and using it for personal purposes, that's going to be a potential violation of criminal law, theft. Engage in self-dealing transactions, directly or indirectly act recklessly. Act or fail to act in bad faith or with a malicious purpose or in a manner exhibiting wanton and willful disregard of human rights, safety or property, related to the overall point of the presentation in terms of maintenance and repair, this could be an issue where a board or board of directors ignore a dangerous condition on the property that does require repair.

So moving on to the next statute... sorry, next slide, which is a statute. This is the part of the Condominium Act that specifically discussed that the condominium association is a corporate entity and that the officers and directors of the association have a fiduciary relationship to the unit owners. Again, this is a statutory fiduciary relationship and again, here an officer, director or manager may not solicit, offer to accept, or accept anything or service of value or kickback for which consideration has not been provided, and that doing so can be a violation subject to a civil penalty pursuant to 718.501. Note though, that the bottom of the statute says, "This paragraph does not prohibit an officer, director or manager from accepting services or items received in connection with trade fairs or education programs." So to the extent you go to our local CA day and take some pens or some other fun swag items from a vendor's table, that's not what this is talking about. Or the extent you attend a presentation put on by a vendor and lunch is provided, that's not what this is talking about. This is talking about specific self-interest, self dealings.

And I want to add that effective July 1, one of the new legal provisions for this is that now accepting a kickback is a felony of the third degree and that a director or officer who does so must be removed from office. And the Condominium Act further defines a kickback now is anything or service of value for which consideration has not been provided for an officer, a director or manager's own benefit, and that of his or her immediate family, from any person providing or proposing to provide goods or services to the association. I don't know that that's the most tightly worded definition I would like to see, but again, I think we all know that certain acts cannot pass a smell test, so to speak, so that's what I would keep in mind when it comes to kickbacks. Again, going to trade shows, attending an educational event, getting a free breakfast or lunch is not in the window. Other things very much can be.

Jon Lemole, Esq.:

Cindy, but in terms of maintenance and repair, I think the takeaway here would be in selecting who's going to do the work, you'd have to be mindful of this statute because you don't want to hire your cousin to come in and do the work or somebody who's a family member of a board member. Is that fair to say?

Cindy Hill, Esq.:

Well, there are conflict of interest provisions where if you did want to hire... For instance, let's say a board director did have a son who was a vetted vendor, someone who does good work in the community, there are provisions where you could still potentially hire that person with full disclosure. But what you don't want is to be pushing for the board... or you don't want to be hiring a vendor that then gives you... because the vendor got, let's say, a $30,000 project, the vendor gives you three grand as a board member, that's going to be a kickback. That's going to be something that doesn't pass a smell test. And I don't want to scare associations with this. Again, if you're acting within what you know is really good, we all know we really should not be taking $3,000 back from somebody because they got a $30,000 bid. We all know we shouldn't be digging into the funds of the association and taking them up to the Hard Rock Cafe and gambling.

There's a certain level of common sense here, but these new laws do have some new criminal penalties. I am bringing that up just so that people are aware that there are provision. If your owners ask about them or if you hear about them through the grapevine, so to speak, they are in the statute. But again, if you keep in your lane, so to speak, and make good decisions, and Jon's pointing out specifically when it comes to making contracts with vendors for maintenance and repairs, these provisions are only going to be out there on paper, they're not going to apply to you. So the next slide, please.

This one, again, is part of the Condominium Act and talks about, again, another violation of criminal law. If a director, officer or agent does not discharge their duties in good faith with the care of an ordinarily prudent person in a like position. So just keep in mind, there are some teeth out there, but you keep in your lane and you're going to be fine. And again, the manner exhibiting wanton and willful disregard of human rights, safety or property, for the purposes of this presentation, I would say if you have a dock out on the bay that's failing and it's unsafe, that's not the kind of thing you can ignore, that could be a problem. You do have a duty as a board to know if there's unsafe property conditions and to take action to fix them. The next slide. This is the HOA version. We just looked at the condo. HOA. Again, statutory. Officers and directors of an association have fiduciary relationship to the members. So for both condominiums and homeowner association, that fiduciary relationship is statutory.

For the next slide. This one is very similar to the one we just discussed with the condominium where officers, directors and managers may not solicit, accept goods or services, which consideration has not been provided. Again, you cannot take kickbacks. And also, in the new laws, kickbacks have been added more specifically to, again, be a felony of the third degree. So these are something that the legislature is seeing apparently a need to try to specifically criminalize, but if you're not in the lane of getting a kickback, the criminal penalties are not going to apply. And you can see, also, in the HOA Act, a director or officer charged by information or indictment with a felony theft or embezzlement is to be removed from office. So again, if you're stealing funds from the association, not directly related to our conversation as to maintenance and repair, but these are things that we all know we shouldn't be doing as any sort of volunteer for a not-for-profit association. So with that, unless there's questions, Jon, in the chat related to this, I will turn this over to Jennifer Hicks.

Jon Lemole, Esq.:

I am not seeing anything directly related to this. There are a lot of questions about some other topics, but I think we'll get through this and then we'll start to answer these questions. So I think we'll kick it over to Jennifer because she's going to talk about the fact that condo associations and homeowners associations are also not-for-profit corporations under Florida law. And so in addition to what's in condo and the HOA Act, there's a whole nother set of statutes that relates to directors and boards of those types of organizations. So you're on, Jennifer.

Alan Tannenbaum, Esq.:

We don't want to leave co-ops out.

Jennifer Hicks, Esq.:

Thank you. So yes, so the not-for-profit statute, well, we all know in our documents, all of our associations say not-for-profit. Most community associations actually fall under 501(c)(4) as social welfare organizations. So that's how we get into the nonprofit or not-for-profit statute. And what we're seeing here in 617.834 is a protection for board members to make them have some kind of protection against personal liability for monetary damages for their actions as board members. So your votes or decision or even a vote not to act. Now... next slide, please... this protection is not available when a board member breaches their duties. Obviously, as we've been discussing for maintenance, something like not acting to repair a broken dock or an item that needs to be corrected. So that's going to be recklessness or acting without regard for safety or property or human rights.

The other two is... obviously, one is a criminal act. So you're not going to be protected under the not-for-profit statute if you're acting in a way that is a criminal manner. So again, taking kickbacks or something that you know shouldn't be doing, that's generally going to remove your protection. The other is, if you're acting in an improper personal benefit. So again, your conflict of interest and kickbacks that Cindy was just discussing, those are going to come into play with the not-for-profit as well, and going to remove your ability to say, "Hey, I'm a board member. I'm protected." You're not if you're acting in these ways. So it's very slimmer into what we see in 718 and 720, it's just, yet again, somewhere else telling our board members, "Act the way you should." If it doesn't smell right, you're going to have a problem no matter what statute you're going to try and protect yourself with. But also, if you're acting correctly and you're taking advice of your experts, you do have some protection from personal liability in these situations. Next we have the condo safety act?

Jon Lemole, Esq.:

Yeah, I'm going to take that, Jennifer. Thanks. So we've spent the last few minutes talking about all of the high bars, I'll say, for finding that a director or an officer has breached their fiduciary duties. And I think the general tenor of the theme of the conversation is that you really got to do some bad stuff in order to have that liability. It's not easy. It doesn't happen often. I'll tell you from experience that is very difficult from a litigation perspective to prove cases of breach of fiduciary duty against directors and officers. So it doesn't happen very often.

Now, with the condo safety legislation that was just passed in the last couple of years in Florida, I hate to say it, but the legislation has thrown a little bit of turmoil into this mixture. Obviously, this is a new statute, it hasn't been litigated, we haven't gotten any court decisions on it, so we don't know exactly what the limits are, but you need to be mindful of this, especially for those folks who are managing and are on the boards of condominiums who are subject to the milestone inspection regime and the structural integrity reserve study regime. And that's because the legislature has addressed the fiduciary duty in relation to those two studies.

So we're going to start with 718.112, sub two, H, and that's talking about milestone inspections. So just real quick, you remember that if you have buildings that are three stories or higher, you have to every 10 years or so get a milestone structural inspection done of your buildings. And of course, for a lot of you who are coming up on 30 years, you have to get that done pretty soon. There's some deadlines coming up. And the legislature was pretty serious about making sure that this was done because they put in a provision and it addresses, and you can see it in the bold yellow section here, "If the officers or directors of an association willfully and knowingly fail to have a milestone inspection performed, such failure is a breach of the officers and directors fiduciary relationship to the unit owners under 718.111(1)(a).

So we talked about 718.111(1)(a), the legislature here is saying, "Look, we're serious about the milestone inspections. You got to get them done. If you willfully and knowingly fail to have them performed, that is a breach of the fiduciary obligation to unit owners." Now, we've talked about willfully and knowingly being a pretty high bar. I would be careful though, because there's been enough talk, enough legislation, enough news, enough for everybody to know that these things are due and they need to be done by a certain period of time. And so it's going to be, I think, awfully hard for directors and officers to disregard getting those reports done and claim that they didn't know about them.

But there's a difference between knowing something and willfully disregarding it. So there is that kind of ace in the hole here because it's got to be willful and knowing. And so you may be in a situation where you can't get it done, but you have some reasonable excuse for it. And again, I'm speaking... this is all just interpretation of lawyers. We haven't had cases yet to kind of define the parameters of this. But I think that in situations where you're trying to get it done, you're making reasonable efforts, you're having difficulty getting engineers lined up, or you have an engineer lined up but they're just not able to get to your project in time, that probably is not a situation where we're looking at a breach of fiduciary duty. But what this statute does do, is it certainly places a burden on you folks to make sure that you're taking the reasonable steps that you need to take in order to get these studies done on time, even if you may not be able to ultimately get them done on time. But the moral of this story is don't wait, be proactive about them.

Now, when we get to the structural integrity reserve study statute, it's a little bit different, and I think the legislature, again, has kind of made things a little bit muddy here. If you are a condominium that requires a structural integrity reserve study to be performed... So again, we're talking about where you have buildings three stories or higher, the legislation currently provides that if an association fails to complete a structural integrity reserve study, such failure is a breach of an officers and directors fiduciary relationship to the unit owners under 718.111(1). Now, let's talk about what the statute doesn't say. Unlike the previous one we looked at with milestones, it doesn't say willfully and knowingly, it just says failure to get it done, failure to complete it is a breach of an officers and directors fiduciary relationship.

I don't know how the courts are going to interpret that. I don't know how they're going to kind of bring that into some harmony with 718.111(1), which this is referring back to, which creates kind of, at least in the statutory language, a higher bar. That all remains to be seen. But this is what the statute says. It just says, if you don't complete it, you've breached your officers and directors fiduciary relationship. So all I can say in regards to this portion of the new legislation structural integrity reserve study is get them done, and don't be the association that potentially faces that lawsuit and that case of first impression, which will eventually come down the road where a court is called upon to determine what is the limits of the directors and officers responsibility in getting these SIRS reports... in obtaining these SIRS reports.

I wish I could give you a little more clarity on it, but we don't have it yet. All we have is the statutory language. But I think the legislature is pretty... by writing it this way, they're pretty clear that they want this stuff done and you need to be proactive about it. So we've talked about the statutory authority, which kind of informs the association and the directors and the officers, and even the manager's obligations in regards to taking and discharging their maintenance and repair obligations. I think we're going to talk a little bit about board liability versus association liability and where that distinction lies. Alan's going to address that. And then we're going to go into some specific cases to kind of give you some facts about how these things can play out in your community. So I'll flip it back to Alan. He's going to talk about board liability versus association liability.

Alan Tannenbaum, Esq.:

Okay. All right. We're dealing with corporations. So a corporation is a legal entity. It is administered by a board of directors. So, so far in this presentation we talked about what the obligations of individual board members and what the exposure of individual board members are in maintenance and repair considerations. The corporate liability of the association is something different. It's broader than the potential liability of individual board members. And the cases that we're going to go over are cases where an owner or another entity sued the association based upon the association's undertaking of its repair and maintenance responsibility as a corporate entity. And the first decision... Jon, if you could flip to Coronado.

This was a decision going back to 1988. Still very pertinent. The association had the obligation that this condominium to maintain that common area sewage system. The owner suffered damage in their unit as a result of an overflow of sewage. Personal injuries were involved. And under 718.303, which we've talked about, the owner sued the association for their interior unit damages and personal injuries that was caused by the backup and the sewage system. And the trial court did two things. It granted a mandatory injunction requiring the association undertake those repairs. It also awarded $160,000 to the unit owner for their personal injury and property damage. And under 718.303, there was an award of attorney's fees. And the appellate court made it very clear that under 718.303(1), there was an abject failure of the association to comply with the requirements under statute and under the documents for maintenance and repair. And as a result, the damage was now the responsibility of the association.

So this was a judgment against the corporation, again, for the failure. Now, the board may have been making the decisions, but in this particular instance, the board wasn't sued, the association was sued and was found to be accountable for the damage. One thing that we have not emphasized yet in the presentation is that there's actually two sources of association obligation and maintenance repair. One were all these statutory requirements under statute for maintenance and repair, but primarily for homeowners associations and condo associations and co-ops, the documents themselves are going to have a list of obligations. And all of these statutes say that if the documentary requirements on maintenance repair are violated, that that's also a basis for association liability. So with that, Jon's going to talk about Coconut Key.

Jon Lemole, Esq.:

Yeah, and just real quickly following what Alan just said, and let's be clear here, we're talking about... there's a distinction between the association's liability and individual director's liability. Directors are held to the fiduciary standards we talked about. But the association itself, it has statutory or contractual, i.e. in the governing documents, obligations. In a condominium, the obligation that the association has an absolute obligation to maintain and repair the common elements. The HOA associations, duties of maintenance and repair are generally set out in the declaration and it may depend upon what common areas there exist, whether they're like connected town homes and so, the association has to repair and maintain the roofs and stucco and things like that.

So a great case, as an example of that, and also an example of losing the battle but winning the war is the Coconut Key case out of the fourth District Court of Appeal 2018 case. This involved a homeowner's association, it was a single family homeowner's association, and the lot owner in that case alleged in a lawsuit that she had been damaged because her property, her lot had been damaged as a result of the association's failure to maintain a common area drainage swale, right? So if you're familiar with HOAs, there's a lot of drainage ditches and swales and other drainage structures on the common areas that the association maintains. So this owner said, "Hey, association, you're not maintaining this thing. It's flooding and it's causing damage to my lot." And so she asked for monetary compensation and she also asked the court to enjoin the association, where in other words, direct the association to fix the drainage swale.

Now, when I say lose the battle but win the war, here's what happened. The court... and I can't remember if it was a jury or judge trial, but either way, whatever... the ultimate decision was that the lot owner had not proved that she suffered monetary damage, that her property was specifically damaged by this failure to maintain the drainage. However, it was also found that the association was not properly and reasonably maintaining the drainage swale. So they said, "Look, you're not maintaining the swale. We don't think it caused damage to the lot, but we're directing you, association, to repair the drainage swale." So the lot owner didn't get her money damages, but she got an order, a judgment of the court directing the association to do something. And although she didn't get the money damages, she then sought attorney's fees, reimbursement of attorney's fees. We looked at the statute. Jim talked about the statutes that authorized that, and the court said, "Yes, you prevailed. You got a judgment directing the association to fix the drainage swale, that's prevailing. You are the prevailing party, so we're going to award you reimbursement of your attorney's fees."

What also happened in the case is that the association, in order to defend her lawsuit, assessed every lot owner for the litigation costs. And so she also recouped the assessment that she had to pay in order for the association to defend the suit that she brought. So although she walked away without damages, she walked away with getting the association to repair and also reimbursement of her legal fees. It was pretty expensive for that association. So that is the parameters here. I think that's the perfect case, especially in homeowners association land of how important it is for the association to discharge its obligation. This is not a director's liability case, but it is an association liability case. With that, I'm going to go back to Alan. Alan's going to talk about a very important case, Colony Beach case. And let me get the slide up. Colony Beach and Tennis Club. That's a case right here in Sarasota... Longboat Key to be exact.

Alan Tannenbaum, Esq.:

So this was an unusual condominium. It was actually operated as a hotel. There was a hotel corporation that managed the hotel operation. The owners were allowed to stay in their units for a month a year, and for the other 11 months, the condominium units were pulled for use by the resort. The buildings were deteriorated. The board of directors of the condominium association made a determination not to repair these wood buildings that had been subject to abuse by sun and the gulf for many years. Actually took the hotel operation down because the town of Longboat Key said, "Because of the disrepair, we are closing the resort down." The resort operator was not very happy with the condominium association's determination and sued them for money damages. By that time the action was in bankruptcy. The bankruptcy court decided that there was no responsibility on the part of the association to the hotel corporation, and a federal court in Tampa sitting as an appellate court reversed the trial court.

It went into that they couldn't reject their maintenance and repair obligations. And it's pretty obvious based upon our analysis here today that that's consistent with what the association's obligations were. But there was an interesting aspect of the decision and the appellate court, the federal judge sitting as the appellate court, also made a determination that by the association allowing the building to deteriorate, actually created a material alteration to the common elements, which was sanctionable to the association board and the association. And you see the citation here where the court said, "By allowing the colony to deteriorate, the board and the majority of the members impermissibly altered the common elements to the detriment of a minority of the members. Deterioration of the common elements is an alteration and a change against which Condominium Act protects the members who favor preparing the common elements."

Interesting aspect, again, allowing the building to deteriorate can be a material alteration, which is prescribed in the Condominium Act. But a second element of this is... and association boards faces. Let's say you have 300 units and there's a roof leak that's only affecting one unit, and the majority of the owners in the community don't want to spend the money to fix the roof over that one particular unit. The board does not have the discretion. Association does not have the discretion to ignore that problem. It owes that obligation to that specific owner.

So here, a majority of the owners were in favor of allowing these buildings to deteriorate, wanted actually to have the condominium buildings condemned, wanted to terminate the condominium and sell their interests. But there was a minority of owners who wanted to have the condominium survive as well as, obviously, the hotel operator. And the bankruptcy appellate court decided that the association, indeed, couldn't walk away from that obligation and that if the building's deteriorated, it would be a material alteration. So interesting case. And Jon's going to talk about our last case, which is a new case, Mcllenan versus Cypress Chase North.

Jon Lemole, Esq.:

Yeah, this just came out. This was issued June 5th. Now, this is an interesting case, factually. I think we'd all agree that if in a condominium, let's say there's a problem with the common elements that causes damage to a unit owner, that the unit owner can expect the association to repair both the common element and also the damage that was caused in the unit. I don't think anybody would disagree with that. In McLlenan, the upstairs unit owner had a backup in their plumbing system or the tub or something, it was like some sort of issue with something in that unit, which then caused a further backup in the common element plumbing and ultimately migrated into the unit below and created a lot of unsavory problems for the unit owner below, including... You can imagine what kind of water damage and mold and things like that.

Now, I think that there would be a general feeling among people that if the source of the problem in a unit is from another unit, that perhaps the association doesn't really have a dog in that fight, and that's really between two unit owners. But the McLlenan decision said, "Wait a minute. Hold on." And this is a decision you all need to be aware of. What the appellate court said in McLlenan is that, "We don't care how the damage started. What was the cause of it?" But eventually the damage inside the unit was the result of leaks that were occurring within the common element, even if those leaks were caused by a problem that was within the unit above. And so the association was held... The appellate court said, "We believe that there is a cause of action here against the association." Now, this wasn't a trial decision, it was a summary judgment motion. It was returned to the trial court.

Basically the trial court said, "We don't think the association's liable here." The appellate court said, "Not so fast. You need to determine whether or not the association... whether there were problems that affected the common elements. Even if the cause was the upstairs unit, if the common element problems are what caused the issue in plaintiff's unit, then there is a claim against the association to repair that damage inside the below unit owner's unit." And those repairs are pretty substantial. There was quite a lot of damage, water intrusion, mold, so on and so forth. So the takeaway here is that even though the cause of the damage in one unit may be within another unit, there is, at least according to this court in the fourth DC, a viable potential claim against the association for not stepping in and fixing the problem and then the association dealing with it.

Now, I don't know how this is going to play out throughout other appellate districts, this is one appellate court, but this is what this decision says, and it's kind of interesting. The facts were pretty egregious here. The association was pretty callous in this instance. And I think that in this instance, this appellate court decided... This is one of those cases where the judge has decided, "Look, we don't like these guys. They really did some boneheaded stuff, this association. We are going to smack them down a little bit here." That may be at play, I'm not sure? But you need to be aware of this. So I think the takeaway here is, if you have a condominium association and you've got this situation where a unit owner is complaining about water intrusion or damage as a result of something that's occurring in the unit above, that's not a, "Hey, that's not our problem. That's between you two unit owners." I think you need to be more mindful of those scenarios.

And if a unit owner is calling upon you to do something about it as an association, I think the best takeaway here is get with your general counsel and look at the facts very carefully, because this appellate court, at least one appellate court has been more than willing to allow a claim to go forward against the association. Now, we will see what the end result is. It was returned to the trial court, so we don't know what the actual end result and ultimate decision as to the association's fault will be, and we won't know that for some time. But that decision is out there. You need to be aware of it.

Okay, we're going to get to some questions. I'm going to take the first couple... or the first crack at some of the questions we're seeing in the chat. And by the way, the poll is coming up. You managers, please complete that. You can see a popup on your screen. I saw a couple of questions in the chat about, "Hey, we're having a project done. The county or the municipal inspectors just come by and do a quick drive by. How do we know that our job is being performed correctly? How do we know that the work is being performed effectively by the contractor if we can't really rely on the building officials and their inspectors who are just doing a drive by or very cursory inspection of the work? What level of protection does the inspection by the county provide us?"

Okay, well, first of all, the issuance of a permit and the issuance of a completion certificate by a county does not protect a contractor from a claim that they violated either the Florida building code, or that their work is in some way negligent, or that they breached whatever contractual obligations you have with them for the performance of the work. I do a lot of construction defects cases. Every one of them has been approved by the county or the municipality, so that doesn't protect a contractor at the end of the day. Now, I think the questions that we're seeing are coming more from the perspective of, "We'd like to be able to rely upon the inspectors to know that the work is being performed right, but we're not so sure we have a lot of trust in those folks."

All I can say is, I think it's pretty clear, municipal inspectors, county inspectors, they're very busy. They're overburdened. They can't go and look at every project in detail, right? They're looking for certain kind of big ticket things, I guess, and maybe that... And so I don't know that it's necessarily wise to rely on those folks. Look, folks, if you're going undertake a major project, and I say this to every client that we have that is undergoing a project, get an engineer involved or a consultant involved to not only look over the project details, or maybe even set the project details for the contractor, but also to do contract or construction administration work. Have your own person in there who's going to review the pay applications, who's going to approve the pay applications, who's going to inspect the work and determine whether or not the work is performed according to the contract, according to the building code, and according to standard contractors duties of care.

It's a big project. I would not necessarily rely on the municipal building inspectors to get it right. I know that's an extra expense, but that is the best advice I can give you under the circumstances. Any other questions? I'm going to leave that... Cindy, Jim, Jennifer, Alan, you've probably been monitoring the chat for a little while so you guys can jump in here.

Alan Tannenbaum, Esq.:

Yeah, I see a question. What is the role and responsibility of the management company and the [inaudible 00:53:16] in advising the HOA board and following up on the direction of the board? There's also a question about whose role is it to vet vendors? Is it the board or management? Every association board has a unique relationship with its management company. A lot of boards advocates substantial responsibility for a management company to inform the board of vendors, inform them of all the information that they need to make certain decisions. That's certainly appropriate. Management companies qualify as one of those experts that the board and its fiduciary obligation can rely on in order to make appropriate decisions.

A lot of times the management company has a greater knowledge of the vendors that are out there, is involved in the trade organizations where the vendors may be making presentations and so forth. And also, within a management company, you have the knowledge and experience of all the managers with a whole series of vendors that they all deal with and they pull their information. So board relies on management for that is very appropriate. Let me see what else we have. There's a question, "Who can give a board an unbiased opinion on when a structure needs to be repainted? Engineering studies tend to be conservative. Painting contractors are biased."

We do heavily rely upon engineering firms to make recommendations on painting, but certainly there's a lot of different sources. You can talk to manufacturers, you can talk to parties who have been in the painting business who are no longer operating, so you don't have that sort of bias. Certainly talk to other associations, your management company, all kinds of sources of good information that you can rely upon. I'm not understanding that question. Again, I think Jon answered the question about building department inspection. The Florida Supreme Court decided in 1985 that building inspectors and building departments were not liable for negligent building inspections. Frankly, a lot of building departments treat building inspections as a source of income more than fulfilling a public duty, and that's why you need independent participation by your own engineer or consultant to observe the property. And I think-

Jon Lemole, Esq.:

Sorry. There's an interesting question that was asked in follow-up to the Coconut Key case. It's a little bit different, but as I'm interpreting the question, it's the association was experiencing flooding on a lot owned by the association, and so it was a common area where there was flooding. The association spent a bunch of money to mitigate the flooding issue, and it's still flooding. It may be because the work that was done was not done correctly. At least that's what the person suspects in asking the question, does the association have the responsibility to ensure that the defective work is corrected? I mean, the short answer to that is, the association, I'm assuming under your governing documents, has the duty to maintain and repair the common areas. So I think that if the work that was done on the common area was done incorrectly and is continuing to cause flooding on the common area, that is a maintenance issue.

Your owners have the opportunity and the right to be able to use the common areas that they'll work correctly, or probably not... I don't know what this common area is, so I can't really say what its purpose is, but certainly, I think the association, if the work was done incorrectly, needs to take action or should take action to address that. Because the alternative is that a lot owner says, "You're not maintaining the common area appropriately. It's flooding," and the association could be exposed to liability back to the lot owner, similar to what happened in Coconut Key.

Alan Tannenbaum, Esq.:

Okay. There's a question about whether SIRS applies to town homes? I'm assuming that if it's an HOA, no. If it happens to be a town home that's three stories and is in a condo, yes. Would that... Let's see.

Jon Lemole, Esq.:

Yeah, SIRS does not apply to HOAs.

Alan Tannenbaum, Esq.:

Okay, some of these questions are pretty specific. I'll answer this one last question. Maybe this was just an observation. There was a roof replacement where the contractor drilled through the... I guess, the roof deck and there was damage that precipitated, certainly that sets up a claim against a roofer in their insurance company. With that, it's 12:03. We'll attack some of these questions offline, but I want to thank everybody for attending today. Again, if you're a manager, the CEU credits, work with Michelle on those. And this presentation will be posted on our website within probably a week to 10 days. So thank everybody for attending today, and we will see you next month.

Jon Lemole, Esq.:

Thank you, everyone. Take care.

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The Smart Board & Property Manager Legal Guide: Effectively Dealing With Covenant and Rule Violators

Alan Tannenbaum, Esq.:

Welcome everybody. This is Alan Tannenbaum, Tannenbaum, Lemole, and Hill. I'm here with my partners, Cindy Hill and Jon Lemole and our associates, Jim Turffs and Destinee Small. We're going to run today's session primarily as a panel. So we're going to each be chiming into a degree on all the topic matters, and today's session is about effectively dealing with covenant and rule violations. Send your questions through chat. We're going to mute everybody during the session. We will attempt to deal with your questions during the session. We will go on after noon. If there's a number of questions to be answered, we'll continue on past the noon hour. And this presentation will be available on our website probably about a week after we're completed. So if you want to share it with anyone, that would be the place to do it.

So as an introduction, one of the most difficult things for community associations is to enforce its covenants and rules and regulations. It's become even more difficult in the last few years based upon a decrease in the civility in society in general. There are more obstinate owners who don't want to comply with rules. People have emphasized their individual freedom over governmental oppression, and it certainly has impacted also in the community association field. And I'm sure what you'll hear today from some of our panelists is there are situations that are just very difficult because of the individuals involved. But we're going to give some tips on really how to mitigate some of the challenges that you're going to have in enforcing your rules and regulations.

So these are the topics we're going to cover today, which basically covers the gamut of covenant and rule enforcement. And I'm going to start and bring on my partner, Cindy Hill, to talk about establishing clear restrictions and processes and the documents and in the rules and regulations. Cindy, you're on.

Cindy Hill, Esq.:

All right, thank you, Alan. Okay, so even though this is going to be more of an interactive presentation, I'm going to start with some of the basics here at the beginning of the presentation so that we're all on the same page, so to speak, before we start getting into the more substantive discussions. So there's an important distinction between use restrictions or what is also called covenants, and then board-created rules and regulations. Your use restrictions or your covenants are going to be the use restrictions in your declaration of condominium or your declaration of covenants of your homeowner association. So those are generally going to be parking limitations, maybe some limitations on pets. If you're in an HOA, limitations on fences. Those are going to be in your recorded declaration of condominium or declaration of covenants or restrictions.

Those use restrictions in covenants have a strong legal validity when challenged in court because the court deems the purchaser to have notice of those restrictions before they bought the property. The fact is that no one buys a property being forced to do so. When you buy a unit in a condominium or you buy a lot in an HOA, you've made a decision to purchase that property and the court deems you to be making an informed decision about purchasing that property. So those recorded restrictions that are in declarations are given a high presumption of validity.

Now of course, there are the conversations where people say, "No one told me. I didn't know." But that's a different conversation. For this opening here, I want to distinguish between those recorded covenants and restrictions and then what can be board-created rules and regulations. Board-created rules and regulations can be, the example I like to give that's the easy one to process. For instance, if you have a community pool, the pool rules. The board can create the rules for the use of the community pool. Those are not the same concerns as parking, pets, fences, other issues. These are rules that just make sure the pool's being used in a manner that's not only consistent with state and county requirements, but also consistent with your community and the noise levels, the use levels, the size of the pool, all those factors.

So board rules and regulations can be very useful for those rules that are more about the day in, day out that aren't rules that necessarily would stop someone from purchasing a property if they knew about them. But they cannot be in contradiction with your use restrictions and covenants. You cannot have a contradiction there. So your board can't be overreaching. For instance, if your declaration of covenants or condominium doesn't say anything about pets, you cannot create a board rule that says no pets or only two pets or pets are limited to 30 pounds because there's nothing in that declaration limiting pets. And again, I'm trying to give some broad examples here so that we're all on the same page going forward. I know there's going to be a lot of questions about some of the nuances of these issues.

Board rules and regulations are also subject to a test that's been established by the Florida courts for decades. And going back to, well, does the board acted within the scope of its authority? The number one part of that test that's listed on the slide, meaning is there even any authority for the board to create a rule about pets, for instance? I even see some documents that don't even give the board authority to create any rules, period, or maybe just give them the authority to create rules for the common areas, but not for the units or the lots. So that's an important distinction that really is essential that you know that legal counsel has guided a board on that issue so that you don't lose any rule enforcement concern over the fact that you just didn't even have the authority as a board to start with the rule.

And then the second part of the test, is the rule reasoned or is it in contrast arbitrary and capricious decision making? Usually a board rule is going to be deemed reasonable and reasoned if it has the interest in the safety and welfare of the community, if it's consistent or industry standard with many other communities. In contrast, it's going to be arbitrary and capricious if it seems to have no real value or is maybe even meanly targeted at certain people or certain activities on the property.

Similarly, ACC or ARC, architectural rules, although those might be created by a committee or the board, you have some of the same similar concerns there. Generally those rules are to help assist in determining, for instance, what colors of paint you can use for certain improvements to your home or types of construction material or permitted plants. But again, you need to step back and make sure that the ACC has the authority to control those colors to offer the limitations on plants or the construction materials. So I know that's a lot to take in in a very short few minutes there, but those are the big picture considerations for the differences between use restrictions, covenants, and board or architectural rules and regulations. So moving on to the next slide.

Alan Tannenbaum, Esq.:

Cindy, there's a question whether rules and regulations have to be recorded.

Cindy Hill, Esq.:

There was some confusion on that at one point. There were changes to the homeowner association act that seemed to imply they did. That was not the intent of the legislature. They came out and changed that and said that that had not been their intent. So there was a time period going back a couple years. I lose time in COVID. It might've been three years, where the position was you did need to record them. The legislature changed that reading, specifically changed that statute. So no, unless there is a particular requirement in your community's documents, there is no statutory requirement to record rules and regulations for either a condominium or a homeowner association.

Jon Lemole, Esq.:

Cindy, are the rules and regulations, and this is a question in the chat, are the rules and regulations enforceable to the same extent as the, let's say, the declaration or provisions, restrictions in the declaration?

Cindy Hill, Esq.:

Well, presuming that the rules and regulations were properly created and are reasonable, yes, they are. So again, you want to make sure that your rules and regulations have been vetted, so to speak, by legal counsel to make sure that you don't lose enforcing a rule because you just didn't check all the boxes, which is what I'm getting to with slide two, enforcing your rules and regulations. This is an example of an arbitration case before the division of condominiums up in Tallahassee. For those of you who don't know, there is an arbitration section, and we're going to discuss some of that in this presentation that does hear certain condominium disputes.

And this case is an example of a potential enforcement problem with drafting restrictions or rules. And this particular condominium, there were board rules that stated, and I do have them listed on the slide and I'm summarizing the important parts for the discussion, that driveway and sidewalk areas must be pressure cleaned as required and that driveways may be stained in a light tan color. This case were involved a number of violations, but for this one on point, the driveways. The association claimed that the respondents, the owners, were leaving their driveway discolored from staining.

And the association requested an order from the arbitrator requiring the respondent's owners to "clean the driveway of all oil stains and if the oil stains cannot be removed through cleaning, to submit the proper application to stain the driveway the approved color." That's the end of the quote. The association also took the position that the owner should replace their driveway if the stains could not be completely removed. So what did the arbitrator do with this? Next slide. This is a bit of a long read here, but I think it's important for understanding how rules may not play out the way that a board intended to understand this one. Go back to the next slide, Alan.

Alan Tannenbaum, Esq.:

All right, there you go.

Cindy Hill, Esq.:

There we go. This is what the arbitrator said. "It is undisputed that respondents, the owners, caused their driveway to become stained. However, nothing in the association's rules or other governing documents make it a violation for a homeowner to have stains on his or her driveway. All the rules require is that a driveway must be pressure cleaned as required. The undisputed evidence is that respondents have pressure washed their driveway numerous times, that they intend to keep doing it, that the stains got better with each pressure washing, and that the respondents wish to stain the driveway a gray color to remove the stains, but the association denied their application to do so. Respondents have in good faith tried to remove the stains and intend to continue trying doing so. The arbitrator concludes the association failed to carry its burden to provide that petitioners violated the rules by causing stains to occur on the driveway."

And then in a footnote to this paragraph, importantly, the arbitrator adds, "Moreover, even if there were a violation, nothing in the rules or governing documents give the association the right to require a homeowner to pay or have his or her driveway demolished and re-poured." So the arbitrator gave a pretty hard no to the association here. So what are the takeaways? Be sure that the rule requirements you have are consistent with enforcement demands. Here there was no basis to demand the complete removal of the stains or to replace the driveway and noticeably not to replace the driveway. There's nothing about that. What's the other takeaway here? Be reasonable. Here the rule allow the driveways to be stained a light tan color. But notice that the arbitrator mentioned that the owner wanted to stain the driveway a gray color to cover the stains. The arbitrator brought that up. While we cannot know why, it does seem that the inference can be made that it was not reasonable to only allow a light color that would not cover the stains when a darker color might've done so.

So I hope that this example serves to give some of the what might be unperceived pitfalls and what seemed to be a pretty straight-up situation, a stained driveway. But pitfalls and rules can be a lot more complicated than this example. Unless there are questions, we can move on to the next slide, which is the very last part of my opening before we get into the more meat of the matter, so to speak.

The last consideration then is your Fair Housing violations. We could speak for a whole hour, if not two or three, about the violations of the Fair Housing Act that can occur in condominium and homeowner associations. But these are just some of the examples to be cognizant of if you're making board rules. There are federal courts who have ruled against associations who had rules against playing. Well, you think, well, why might that be a problem? No playing in the stairways, right? Well, playing implies children. So when you are making rules governing what might be a poor use of the stairways, let's say, you want to be careful to say, instead of saying no playing in stairways, maybe no running. No use of sporting equipment. No loud activities. Don't use playing.

A similar restriction is having a restriction on toys. Again, implies children. Can be discriminatory against families. So instead of saying toys, no use of toys in a certain area. Say no use of skateboards, no use of bicycles, no use of pool floats, whatever the item is. Don't use toys. Don't use playing. Rules prohibiting noise that targeted against children can be a problem. If you are limiting noise in an area that's primarily used by children, such as an open green area where they play or a playground, that can be problematic. Rules limiting the times or areas where minors can use the amenities such as a adults only time at the pool from 2:00 to 4:00, let's say, every day. You can't limit the use for families to use the pool in the same manner that everyone can. All these, by the way, are accepted if you're an over 55 community. That's the legal exception.

And then finally, rules requiring that minors be supervised by an adult. A lot of people think that that's pretty much a no-brainer. You can require that. No one would disagree, including the federal courts. You're talking about a toddler. But if you're talking about kids 14 and older, you're really getting into a danger zone and that those kids, federal courts have deemed to be old enough to not necessarily need adult supervision. And that the answer to that is just if a particular child is problematic and acts in such a way, that you can demand that that particular child's parents control that child. But you can't just make a blanket limitation. So I've exceeded my slotted time for our opening here, and I know there's a lot of questions. So Alan, do you want us to proceed on to Jim or how?

Alan Tannenbaum, Esq.:

Yeah. I'm going to bring on Jim Turffs at this point. And next several portions of the presentation are going to be about tips for better enforcement. And Jim's going to talk first about the importance of educating the membership about what the declaration requirements are and what the rules and regulations provide for the community. So people in theory are not surprised when they get contacted or get a letter about an enforcement situation. Jim, take it away.

James "Jim" Turffs, Esq.:

And as Alan and Cindy have both talked about, you get this great set of rules. You've got your bylaws, you've got your declaration. But when I'm talking about rules and restrictions here, we're also going to be talking about your rules and regulations, your architectural guidelines, all that great stuff. You put that all together, you've got the framework to run a really great community. But of course, if your members have never read it, doesn't do you a lot of good. So one of the key things that an association can do is make sure that your members are getting copies of these rules and regulations, of bylaw amendments, of declaration amendments. And as you pass those things out and as you make those more available to the unit owners, you're going to start to get more compliance. People will have a better grasp of what restrictions they're living under. And of course it helps when you're dealing with owners who are in violation.

So as the default right now, if we're talking about a covenant enforcement action, you've got an owner who's violated a rule or an architectural guideline. If anybody's been through that enforcement process, they have certainly seen the owner go, "Well, I didn't know that was the rule. Nobody ever told me." And the current rule in the courts is adopted that old cliche, ignorance of the law is no excuse. The courts will tell that owner, that defendant, once you get to that point, "Too bad. You took ownership in an HOA. You took ownership of a condo. It's your responsibility to go out and understand what you just agreed to by doing that."

That's really helpful once we get there. But of course, for every group of owners who's sitting there going, "Oh, I didn't know." There's actually a group in there, a subset of what I like to call innocent violators. Those innocent violators really wouldn't have painted their house green if they knew there was an architectural restriction that said you could only do it white or gray. And so for those innocent violators, keeping them educated would actually save them from violating in the first place. So it's always a best practice for an association to make their documents. And again, by documents, I'm not just talking about your declaration and those amendments, but your rules and regulations and those architectural standards.

Make those available for your unit owners. You're going into a board meeting or a members meeting, keep a stack of governing documents with you to hand out for people who need them. To some degree, condos have a requirement now to keep their governing documents available on their website as long as they have 150 or more units. But otherwise, there's really no obligation at the moment for associations to provide those documents to the owners. But you still should. And-

Alan Tannenbaum, Esq.:

What about a new member package? You, as new owners, come into the community. Do you recommend that the association give a welcoming letter and-

James "Jim" Turffs, Esq.:

Absolutely. That's a great practice.

Alan Tannenbaum, Esq.:

... advise them of what the general rules and regulations are and so forth?

James "Jim" Turffs, Esq.:

Absolutely. That's a great practice. That's a very first step. And I've even seen some associations that make new owners sign a document saying, "We've received the governing documents at this point." And again, very helpful. I mean, at that point, it eliminates that violator's ability to say, "Oh, well, I didn't know." And that also ties into what I was going to get to next here with the new proposed bill, House Bill 59. Sister bill is the Senate Bill 50. And this is not a law yet, may never become a law. But if it does, what it requires in its current version is that HOAs, and this is specifically designed to address 720 HOAs, like I said, 718 condos already have some requirements similar to this.

But the change to 720 would require that associations provide a copy of all the governing documents to all current members before October 1st of this year, and then also provide copies of those governing documents to every new purchaser as they buy into the community. So that ties into that welcome packet. If this is enacted as law, it would be more than a voluntary submission to the owners. It would be a requirement. Now that proposed bill does allow for e-distribution. Under certain circumstances, posting on your website's going to be sufficient. If people consent to receive notices through email, you can email them the governing documents.

And so on top of everything else, it's also really important to remember how technology makes it a lot easier now to give your governing documents and those rules and those architectural rules and the changes to them just via email. And it's certainly becoming more prevalent. We're seeing a lot more associations having owners sign email consents. So a lot of things just being sent out by email anyway. So going forward, it's a best practice I think for associations to just make your governing documents and rules, regulations, and especially changes to them over time, available to the ownership so that they can honestly, at least the association can honestly say, "Ignorance really is no excuse. We've informed you. We've given you every opportunity to learn this, and you have no excuse not to comply with our rules."

Alan Tannenbaum, Esq.:

We'll get to as many as we can. But Destinee, you're going to talk about attempt to resolve violations first in an informal non-confrontational manner.

Destinee Small, Esq.:

Yes, I am. Thanks so much Alan. So yes, I'll be covering attempting to resolve violations in an informal manner, meaning before an official notice is sent or before contact between an owner and legal counsel is initiated. So this section is a little bit different because rather than understanding statutory guidelines here, the most important part of informal contact is actually understanding just basic human nature and the context of each specific situation. So it's important to understand that informal communication is great, but when possible. But it's just simply not always possible to do. So for example, if an immediate health or safety risk is present, then informal contact is likely not the best starting route. Similarly, if an owner is a repeat offender and non-confrontational, likely did not work in the past and would not work in the current situation.

But generally board members are in the best position to know if it even is possible to resolve these violations in an informal manner. Board members will know the context of the owner's previous interactions and whether that owner has previously been violent or hostile, for example. And in that case, we would recommend that that owner receive a formal letter right away. So now that we've covered when informal communications are likely not possible, let's discuss when these informal communications would generally work. It's important to understand that informal and non-confrontational contact provides the board with very broad discretion. However, informal contact does not mean just showing up to an owner's front doorstep. It can mean contacting an owner via email, a phone call, a friendly reminder from management. It can even be a private interaction after a board or member meeting if that owner is in attendance. But what's important is gauging these interactions and reading context clues. That's vital for the board before and even while engaging with an owner in informal contact.

So generally, if you have to second guess whether that informal approach will work with a particular owner or if you've just never had any interactions with an owner, if you don't have enough information on their previous behavior to make an educated guess as to whether the owner would be even open to informal interaction, then it is likely better to simply start with just a formal route. But again, all of this, it requires a circumstantial context. So just in general, a lot of personal judgment is involved and each of these previously mentioned factors to determine whether or not informal communication will work is all relative. So it's up to the board to use human judgment and understand the correct context to determine two things. First, is the friendly approach even proper in this situation? And then number two, if it is, what route are we going to take? How are we going to do that informal interaction?

Alan Tannenbaum, Esq.:

All right. Thank you, Destinee. We're going to move on to the next topic, really important of uniformly enforcing the rules and regulations and the covenants because it brings up a potential defense for against enforcement. Jon, take it away. Jon Lemole.

Jon Lemole, Esq.:

Thanks Alan. Yeah, so eventually in the life of an association, there comes a time when you've exhausted all the possibilities of trying to resolve a problem in the community with a particular owner, and you've got to ratchet it up a little bit and take the next steps. One of the things that, and I know this may sound a little bit, and I don't mean it to sound trite or denigrating in any way. But one of the things that I as a parent of four kids, and Alan also has four kids and we've discussed this in the past, is you have to look at the owners in your community almost like the way you would look at your children if you're a parent. I mean, how many times as a parent has the lack of uniform application of the rules and regulations and expectations come back and turned the tables on you?

So when you're dealing with your owners and you're dealing with restrictions and covenants and rules and regulations and so forth, one of the guiding principles in your community has to be uniformity of application. There's a number of reasons for that. Apart from the practical considerations is that people need to have an understanding that everybody will be treated the same. There are some serious legal implications that can result from the lack of uniform application of your covenants, restrictions, rules, and your lack of uniform application of your enforcement procedures. We call this in the law, you'll hear the term from time to time something called estoppel, and that is a huge defense. If you find yourself in a situation where you are having to bring some enforcement action, whether it be in arbitration at the DBPR or whether you have to even go to the most drastic step, which is filing a lawsuit against an owner in your community.

Estoppel is a legal defense, which essentially means you are held to your past conduct. If you did something in the past and the person has relied on that conduct, that's a defense. And so I've got up here on the slide, two important cases in Florida that have addressed that issue. Probably the most important case is the first one that I've cited there. It's a case called White Egret Condominium versus franklin. That was a Florida Supreme Court decision from 1979. And what was going on in that case is that an owner in a condominium had children residing in the condominium and there were rules regarding children residing in the community. And unfortunately in that community, in that condominium, there were other instances where the board did not uniformly apply those restrictions. And so the court held that condominium to task for that. And the quote that I've put up on the screen, and I'll read it.

"At the time Marvin Franklin," Mr. Franklin was the condo unit owner, "purchased his condominium apartment, at least six other children under the age of 12 were living in this condominium complex. Further, the record reveals that the six children were in two separate households and that some of the children were substantially under the age of 12. We agree with the district court's finding that this constituted unequal and arbitrary enforcement of the restriction. Although the restriction was reasonably related to a lawful objective..." In other words, the court is saying there, they may have been able to enforce this restriction under general circumstances. In this case, the White Egret Condominium was estopped from enforcing or selectively enforcing the age restriction. And so that case in 1979 was what really solidified this estoppel defense. And so if you're going to bring an enforcement action either in arbitration or in circuit court against a unit owner, you better have a real understanding of how you've applied that particular restriction in the past, and you better be certain that you haven't turned a blind eye to other violations of that.

So another good example of this concept is in another often cited case called Plaza del Prado Condominium Association versus Richman. This was an... Can you go back, Alan? This was an intermediate appellate court decision, but it's very often cited. In fact, it was a 1977 case that was cited in the White Egret Florida Supreme Court decision. This is a case where a unit owner wanted to make some changes to their terrace railings and they were denied the ability to do that and they ended up suing or making those changes and they ended up getting sued by the condominium association. The quote I have here is that, "The record also reflects that the defendant's brother," Mr. Richman's brother, "who owns the unit directly below him, had previously been granted permission by the developer/owner to make the identical changes to his terrace railings. Further, other unit owners were also permitted to make changes to their terrace railings with the permission of the owner/developer or the association. Based on this evidence, the condominium association is a estopped from claiming any lack of compliance with the bylaws."

So again, that's a situation where the association had allowed something in the past, decided that in this particular instance they weren't going to allow it, and the court prevented them from enforcing that restriction. There's another aspect to the Plaza del Prado case, and that raises another issue with how you enforce things, and that is something called... It's an equitable defense called laches. It's a time-based defense. So another part of that decision, the court said, "Under the circumstances, we also point out that the condominium association was under a duty to assert itself sooner than one year after the defendant's alleged violation of the bylaws." So two things we get from this case, uniformity of enforcement, uniformity of how you apply your restrictions, your governing documents, your rules of regulations. That's number one.

Number two, in those instances where there is a violation, you need to do something about it. Now, there's this five-year statute of limitations, but there is an equitable defense and that was raised in Richman called laches. And so even though you may be within the statute of limitations, if you sat on that issue and the other person relied upon it to their detriment, the unit owner or the lot owner relied upon it to their detriment, maybe evidence was no longer preserved or some other thing that caused some prejudice in the case or to their ability to defend the case, you may be faced with also a defense based upon your lack of pursuing that in a timely manner.

Now, I'm going to leave you with one thing. We know that in the history of various communities, there's been lax enforcement in the past. That doesn't mean that you cannot enforce things more robustly in the future, but what you need to do is you need to basically put the word out to your community. Whatever may have happened in the past, we are not going to do that anymore. We are going to strictly enforce our rules and regulations and our governing documents. So if you're in a situation where there are things that you now want to enforce robustly that were not enforced so robustly in the past, one of the best things you can do is inform your entire community that going forward, this is the standard so that everybody's on notice of that and you can successfully avoid a defense of lack of uniform enforcement of your rules, regulations, restrictions, and covenants.

So with that, we are now going to go back to Cindy and she's going to talk about setting clear deadlines for compliance, making clear demands for action when you're in that situation that you have to move forward in your enforcement timeline.

Alan Tannenbaum, Esq.:

And Cindy, keep in mind that we're a little bit behind time, so let's go through this as expeditiously as possible.

Cindy Hill, Esq.:

No problem, Alan. I plan to do so. There are a lot of questions in the chat about how you make sure that owners and tenants do know about rules and regulations. So following up on what Jim has said, another opportunity you have here is when you do send out the violation letters. I see some violation letters that are sent out where it just says, "You need to fix this and this is why." And it maybe even says, "Pursuant to rule 3.5F." But it doesn't actually write the rule in the letter. I'm of the opinion that putting the actual violation, the covenant or rule that's being violated, putting it in the letter will go a long ways to helping any arguments about, "I don't understand why I need to do this," coming from the owner or the tenant. Or, "I don't understand why you're telling me to do this." Or, "I don't know anything about these documents you're talking about."

Because the other problem I see is a citation of let's say rule 3.5F. That's a typo. It's actually 4.5F. So I'm a firm believer in actually putting the rule or a covenant being violated in the letter or you can print from the page that it's in the declaration of rules, attach it, highlight it, but make sure that the owner or tenant is seeing that rule because that's again, another opportunity to get rid of these arguments that nobody told me I didn't understand. So that's clear demand part of it.

Clear deadlines. Are there specific deadlines in your documents for which owners have to undertake action for violating? If so, you're going to want to follow those because otherwise you're opening up a door to a counterargument being you didn't even follow your own declaration and demanding that I fix this or your own set of rules. You don't want that coming back from an owner or a tenant. And by the way, if you don't like those deadlines, if you think they're too short or too long, well, get with your counsel and consider amending them. But do look in your documents to see if there are set deadlines that tenants have the opportunity to, to correct actions.

So next, what timeframes for corrective action are reasonable? Well, 10 days seems very reasonable to ask someone to get a boat out of their yard but not to put a new roof on their house. So not only do you want to consider industry standards in terms of what other communities would be asking, and you want to be consistent with that, but you want to be thinking about the actual demand you're making. And particularly after we had hurricane damage in this area, the fact that people couldn't even get contractors to make certain repairs for months was something that was frustrating to some communities, but really did need to be recognized because those are legitimate concerns.

Finally, should a demand letter threaten next action if the owner doesn't fix it? I'm a firm believer in, don't make a threat you're not willing to go through with. So if you don't actually want to sue an owner as an association, don't threaten you're going to sue them. If they don't take next action, you just say the board will take the next legal steps it determines in its discretion. You can put something in a letter, counsel can do that for the board, where it's going to be clear that the board's not just going to let it sit. But don't say you're necessarily going to sue someone or take them to pre-suit mediation or fine them if you're not prepared to do so. So Alan, that's my two-minute spiel on that slide so that we can move forward.

Alan Tannenbaum, Esq.:

I think on this topic following through, I think Cindy hit that correctly. The boards are in a difficult situation. You don't want to seem too top-heavy. You don't want to be running a fascistic dictatorship in your community or have the owners have the impression. But at the same time, if you're too lax, owners are going to feel that they can violate the rules with impunity. So give people an opportunity to comply, send them a very clear directive if they don't. And if they still don't comply, take action and follow through. That's the only way that you're going to have an opportunity to have a reasonably controlled community where everybody can enjoy the property. And Jim, why don't you say a few words about fining? We have several questions about fining. Why don't you set forth what the parameters are?

James "Jim" Turffs, Esq.:

Sure. And of course we could probably do a whole presentation just on fining in general. So I'm going to hit some really broad notes and we'll head back into the chat to try to get more specific answers. But broadly, both 720 and 718 have very similar if not completely identical fining statutes. When your governing documents authorize you to levy fines, and yes, your governing documents, your bylaws, or your declaration somewhere in there has to say, "The board can levy fines." Once that authority is given to the board, they have to follow the statutory guidelines. There's very little room for deviance in there. You can come in and say, "The statute says I have to give you 14 day notice before a hearing. Here I'll elect to give you 21." I can be a little bit nicer to you via modification in my governing documents, but I can never be more strict than what the statutes say.

You can alter the fee cap, the fine cap. Each statute says there's $1,000 cap. Currently, by amendment you can waive that and you can increase that, but that does require an owner vote to supersede that limit. You have to be very careful when following that statutory process. When you have a strict statute like that, the courts are going to hold you to it very closely. So if you do deviate, if you give 13 days notice before a hearing instead of 14, if you levy a $1,200 fine when in fact you were only allowed to levy $1,000 fine, not only do those fines become invalid, but if you attempt to enforce them in court, the owner's going to get a judgment in their favor and you're going to have to pay your attorneys and you're probably going to have to pay their attorneys for having to defend that action.

So when it comes to fining, make sure you have the authority, make sure you follow the statutes as closely as possible, and be very careful before you elect to go forward and certainly consult with counsel at any point where you have any questions. It's a daunting process. There's a lot of legalese in the statute, but once you get the hang of it, once your lawyer explains that process to you a little bit more, you'll find it's not that difficult. So those are the very broad notes about fining, and I'll jump back into the comments here in a minute. I'm also going to go on to the next section as well. So...

Alan Tannenbaum, Esq.:

Yeah. I did see one question about whether you need to have a fining committee in order to exact fines. I guess the issue is can the board be the fining committee itself? How is that done?

James "Jim" Turffs, Esq.:

Yeah, and in fact, no. Both statutes require a fining committee and they require the fining committee to be comprised of people who are not on the board and are not married to board members and things like that. So a fining committee is required. It has to be a somewhat neutral board in order to ensure the fairness of the process. The way the statutes are set up is to give what is really due process rights to owners who are facing monetary damages here. So it becomes a small court process in and of itself. So you have the right to notice. You have the right to essentially an impartial committee to review your fine, and that committee is the one who ultimately decides whether your defense is valid and whether that fine is enforceable or not. So no, do not let your board become its own fining committee. You'll be in trouble.

Alan Tannenbaum, Esq.:

And there was a corollary question that if the board can't get anybody to serve on the fining committee, that association I suppose is not going to be able to exact fines. 

Cindy Hill, Esq.:

That's right, Alan. I'll just jump in there because I get this complaint a lot where we can't get volunteers. We can't get people who want to be on the fining committee. Well, it's a requirement. There's no getting around it. If you can't get the volunteers, fining is not going to be an option for your community. And there are other enforcement options, fining's just one of them. So not being able to fine doesn't mean you can't enforce your covenants or your rules, but it does mean you're not going to be able to fine.

Alan Tannenbaum, Esq.:

All right. We're going to quickly move to the last segment, which you could probably do a whole program on this one to., and I'm going to ask Jim and then Jon a very quick overview of what happens. All the attempts have been made, the letters have been sent, and now it's time to go to either mediation, arbitration, or the court system. What do the statutes require?

James "Jim" Turffs, Esq.:

So that also dovetails into that question, what do we do if we don't have a fining committee? Well, assuming the violation is ongoing, you still have these other enforcement mechanisms. And so I'll go a little out of order and start with arbitration. Arbitration used to be the go-to method for resolving use violations. DBPR had a program set up. You as the association would mail in your complaint about what this owner has done after you've gone through all the pre-suit stuff, the owner would send in their answer, the arbitrator would read everything and usually just issue a written decision. It could get more complicated than that, but that was really the typical process.

However, over time the number of complaints that were coming into arbitration really started to skyrocket. Resources for the DBPR started to dwindle. And so the statutes have recently been changed to focus more on pre-suit mediation. So DBPR now is really going to only arbitrate, at least for HOAs, election disputes, recall issues. Every use violation is going to be subject to pre-suit mediation. So under the statutes, pre-suit mediation is required if you want to preserve your right to attorney's fees at the end of an enforcement action. So you at least have to make the attempt. You have to send out a demand to the owner saying, "Here's our demand to pursuit mediation." The statutes have that whole form laid out. We send that, we schedule the mediation. Mediation-

Alan Tannenbaum, Esq.:

Will that apply, Jim, to condo and HOA?

James "Jim" Turffs, Esq.:

It does. 718.1255 is also relying very heavily on pre-suit mediation now. Basically the DBPR is trying to wash its hands of that and put it more into the cooperative person to person resolution here, which is really what mediation offers, a chance for the board or at least some board members to get into a room with the owner, lets both sides talk to each other directly or not depending on the circumstance. Sometimes you end up in different rooms with the mediator translating for you. But once you get that conversation started and you get the people in a room, we find very good success in mediation. And that's because when you're in arbitration or when you get to the court system, judges are only able to award money or force the owner to do something.

When it comes to mediation, you can be a lot more creative. You can say, "Hey, the owner concedes that this improvement has to go away." But the [inaudible 00:45:35] say, "Right. Well, we'll come in and we'll pay to tear it out for you." That's something that a court couldn't do, and under certain circumstances, that's the quickest, cheapest and best way to resolve an issue. So mediation is great. At the end of the day, if you don't reach an agreement, you're free to go onto the courts. But if you do reach an agreement, all the parties sign a contract right there in the room and that makes it a lot easier to enforce if somebody still doesn't do it.

So let's say you have a mediated settlement agreement where your owner is agreed to tear out an improvement. 30 days or whatever timeline passes and they still haven't done it, now the board has a contract where they can just go right to court and say, "I don't need to prove the violation, I don't need to do anything else. I just have to show you that this owner said they were going to tear it out. They didn't. Now I need a court order to force them to do that." So it simplifies the process. Most of the time that doesn't happen. When a party agrees to a deal, they usually mean it. And so compliance almost always follows a mediated settlement agreement and it provides a great option. But at the end of the day, even arbitration decisions and mediation may require court involvement and that's where I'll let Jon jump in to talk a bit more about the circuit court.

Alan Tannenbaum, Esq.:

Jon, a couple minutes, just a general thought on what the litigation process is about in covenant enforcement.

Jon Lemole, Esq.:

Yeah, sure. As unpalatable as it may be, there are times where the association may have no choice but to go access the court and step up the enforcement action into litigation. That is a case that is like any other litigation. It's a time-consuming, long, lengthy, most times expensive practice. In a typical circuit court action to enforce the covenants, the governing documents, rules and regulations, whatever they may be, the association would be bringing an action for a mandatory injunction, injunctive relief. That is an action which is tried in front of a judge, not a jury. But despite that, like any other litigation or it is the same as any other litigation and so the association needs to make that decision with due deliberation. But again, there are times where it's just you have no other choice.

Now the one good thing or the one thing to keep in mind about litigation is you have to go that route is that both the condo act and the homeowner's association acts provide for prevailing party attorney's fees. If you are the prevailing party, if you're the association and you win that lawsuit, you prevail in that lawsuit, then you have the opportunity to recoup the fees, the attorney's fees that you expended to bring that action. That's not normal in American litigation. But in the case of community associations, that provision is there. To get back to the pre-mediation part of this, that's why the pre-mediation step is really very important because if you ask for pre-litigation mediation or pre-suit mediation, if the unit owner or lot owner does not take you up on that, they lose. They may lose their ability. Even if they won in litigation, they may lose their ability to seek reimbursement of their attorney's fees. On the contrary, if the association wants to preserve its ability to seek attorney's fees in litigation, that pre-suit mediation step is vitally important.

So when we get to that stage in our office where the violation just has not been able to be resolved by all of the other means that we've been talking about or have been exhausted, then the first thing we do is a pre-suit mediation demand to preserve all of our rights regarding attorney's fees and also hopefully, as Jim said, to try to resolve the matter. And if that fails, either the unit owner or lot owner doesn't take you up on that offer or they do and you're just not able to resolve it, you have to take that next step of enforcing it in court. Again, you've done everything that you need to do in order to preserve your right to recover attorney's fees assuming you win that enforcement action.

One other thing because there's a question in the chat I want to address, what if the association doesn't follow up on a violation that somebody else has alerted the board to? An association needs to keep in mind and a board needs to keep in mind that its prime duty is to enforce, besides operating the community, is to enforce the governing documents of the community. If the board just turns a blind eye of violation, then the board is and the association is at risk. A unit owner or lot owner may be able to sue the association to force the association to enforce those governing documents. And that is a case again, where if a unit owner or lot owner prevailed in securing a court order for the association to enforce its governing documents, again, attorney's fees are a real risk there. So these are all very, very important considerations. They should not be taken lightly. You should be consulting with general counsel when you get to that stage where all other efforts have failed and now you need to step up your game. Don't do it without some guidance from general counsel for your association.

Jon Lemole, Esq.:

Alan, there was a question, I flagged it and I forgot to raise it on what I was just saying. So someone asked a question, well, what do you do in the situation where another resident sees a violation but doesn't want to put in a formal complaint, doesn't want to put something in writing, doesn't want to be known, doesn't want their identity exposed? What can you do about that? That happens really often. We see it a lot. People just don't want to create a bad relationship with their neighbors. So they may see something, they may report something confidentially to the board, but they don't want to really be formally involved in the process. That makes it very hard to enforce.

You may be able to get away with some basic enforcement tools like, hey, we've got information that this violation is taking place. A cease and desist. We demand that you stop. But if you really want to step up your game and you have to follow through on this, especially if you have to follow through in litigation, court cases require evidence, it can be awfully hard to prove something if you don't have somebody who's able to provide evidence that's admissible in court as to the nature of the violation. If it wasn't seen, if it wasn't observed by whatever board representative is testifying on behalf of the association, it can be very hard to prove. So that happens a lot.

Cindy Hill, Esq.:

There have been a lot of questions about the Fair Housing Act questions or issues, and I want to just generally say that some of them are so specific, they cannot be answered without looking at a community's documents. But yes, an over 55 community is a legally created exception where there is no requirement for the community to prioritize families in the way that everyone else has to. That being said, over 55 communities still have to follow the requirements of the Fair Housing Act that aren't families. For instance, persons with disabilities, persons of different backgrounds or religious leanings. So it is not a get out of jail free card, but it is a community that can rightly restrict minors.

Alan Tannenbaum, Esq.:

There was a question, Jim and Cindy. What happens if the association fines an owner, they don't pay the fine? What could the association do?

James "Jim" Turffs, Esq.:

And your governing documents may shape that to some degree. Usually your fines aren't going to become a lien, so it's not like you can go foreclose on them. Sometimes they are a lien. Again, it depends on what your documents say. But that aside, those fines operate as a pseudo lien on the property. So when a new purchaser is coming in, they're requesting their estoppel. They're being notified that there is a fine on that account and they have to pay it. There's going to be a statute of limitations that's going to apply to that fine as well, so it will become unenforceable after five years. But you can also elect to sue to collect the fines, but that's not usually the best course of action. The attorney's fees and costs will outpace it and you create a lot of animosity usually for something that's $1,000 or less. So voluntary compliance is really the goal. It's usually the best you're going to hope for, but depending on the circumstances, there are enforcement options and collection options available.

Alan Tannenbaum, Esq.:

I also saw a question about if you fine an owner for a violation and they pay the fine, does that mean they don't have to correct the violation?

Cindy Hill, Esq.:

It does not mean that, but it's surprising how many owners think that. And that can again be a pitfall with the fining process, that owners figure if they pay the fine, well then they're good to go. So your fining process totally did not achieve your result. And if you're not already picking up on it, I'm not a big fan of fining as a resolution for some of these issues because it seems to potentially create more problems than it solves. And as Jim was just saying, if you do have to sue to collect the fine, you create a lot of animosity.

Alan Tannenbaum, Esq.:

What about violations by renters and guests? Who are those enforced against, if they can be enforced?

James "Jim" Turffs, Esq.:

The owner is going to be held responsible for anything their guests, tenants, anybody that they're assigning their rights to. Those people, the owners are, it's always going to come back to them. Again, your governing documents can be tailored to be very specific about that. For example, if you're leasing it out, you can put provisions in your declaration that say, "All leases have to include a copy of the declaration and rules and regulations." And again, specifically say, "Owners are going to be responsible for the acts of their guests or tenants." But that's where the responsibility lies.

Alan Tannenbaum, Esq.:

All right. There's a question about what do you do about children who come in from other communities, from outside the communities and break the rules? It sounds that's maybe more like a police situation with or trespassing action. Cindy and Jim, what do you have to say about that? How do you curtail that?

Cindy Hill, Esq.:

Well, Jim, I saw that you did answer that one on the chat at least partially if you want to run with it.

James "Jim" Turffs, Esq.:

Yeah. Again, so I'm willing to bet there was more to that question than they put in the chat. I've seen similar circumstances and I'm willing to bet there's a neighboring association or a master association or something like that involved. But without knowing more, basically if somebody's coming onto your property and they don't belong there, you're looking at a trespassing. Contacting the authorities is the best way to do that. If it's cost-effective for the association and they have the ability, putting up fences. Pools need to be fenced in in general as a matter of civil liability and just avoiding people tripping and falling into your pools at night. But you can take certain security measures. We don't want you to go overboard with security. Don't hire guards or things like that. But usually contacting the authorities. We'll have them come in and at least provide notice. Say, "Hey kids, get out of here or you're going to get arrested." And usually it works.

Alan Tannenbaum, Esq.:

There's a question from Linda about a board's knowledge of violations and she makes a comment that they don't want to walk around looking for violations. So other than waiting for a report to come in from another owner about a violation, Cindy and Jim, do you advise at least a periodic drive around the community to pick up on what may be obvious violations?

Cindy Hill, Esq.:

Well, I guess I'll run with this one. A lot of communities have their management at least drive through once a month. Sometimes some of the bigger ones once a week. And if you're going to do any drive through or looking for restrictions, I would recommend you have your management company do it because it can get personal if you give it to a particular owner who will maybe take the role a little more seriously than they should and walk through the community of the clipboard on a regular basis, turning in all the violations. So if you are going to have anyone review violations on a regular basis, I recommend the management company so you don't get any of that personal dynamic that can really make something more difficult than it needs to be.

At the same time, that being said, if you're not a large community and you don't have a manager contract where they drive through, it's not a legal requirement that that happen. The board is only obligated to act on what it has been informed as to and then what it should reasonably know. So what does that mean? Well, that means if somebody does report a violation, the board needs to look into it. But if a violation isn't reported, if it's not apparently open and obvious or there's not a reasonable basis for the board not to have seen it, it may be that they would be in a position to say that they did not need to take action because they didn't know. But I can't give a black and white answer to that issue. Jim, do you want to add anything?

Alan Tannenbaum, Esq.:

And there was a question about whether the board can be stricter in its requirements than the statute allows. What's your take on that?

James "Jim" Turffs, Esq.:

I'll lead off there because I think that's based on something I said. It just depends on how you're using the term stricter or looser, I think is what the discrepancy there was and what I said. So for example, when I was talking about fining and I said, "The statute requires 14 days." You can, by rule, provide a longer period of time. So really the issue is you can be more friendly to the owners in your governing documents than the statutes are, but you can never be meaner than the statutes are. So I think maybe that's just a better way to phrase that and I hope that answers the question.

Alan Tannenbaum, Esq.:

Okay. Let me see.

Jon Lemole, Esq.:

Cindy, Jim, there was a couple of questions, and I think this comes up fairly often during turnover where maybe the developer was not as proactive about enforcement as maybe the now turned over owner control board would like to be. So what should a board, a new recently turned over board of directors do in order to level set and be able to uniformly enforce things across the board going forward where maybe the developer hasn't done so in the past?

James "Jim" Turffs, Esq.:

Yeah. I'd have to be cautious in the answer there because I have a law professor that said, "You're always looking for the one-handed lawyer so that he can't go, 'Well on one hand but then on the other hand.'" And unfortunately that's the case here, so it really does depend on what rule enforcement we're talking about. If the developer let an entire phase of the community go through and install fences when the declaration said they weren't allowed, you're going to have a real hard time as a post turnover board trying to go back and say, "You have to take out all those fences." On the other hand, if the developer wasn't enforcing a yard decoration ban, you're probably going to get away with saying, "All right, the developer maybe didn't notice that, and we can still go ahead and enforce that."

But one of those options regardless is if you find yourself in a situation where the developer sat on a right to the point where it may now be unenforceable is you can issue a line in the sand letter. And a line in the sand letter is a tool we use that is sent out to all the members and it says, "Previously the board didn't enforce this restriction. We had the right, we didn't. Sorry about that. Going forward from this day on anybody who violates that restriction again, they're going to be subject to enforcement." So you can reset that. But again, it really depends on what exactly we're talking about as far as the violation in the first place.

Alan Tannenbaum, Esq.:

Yeah. There's a question from Bridget, other examples of what you could do to enforce if you aren't enacting fines. Basically the only other option is to go the mediation circuit court route. You're not going to get assistance anywhere else. So that's basically what it's been down to. There's a question about rental restrictions. If the documents have an original rental restriction, what's going to be required documentation-wise to make that stricter?

Cindy Hill, Esq.:

Well, that one, and I'll run with that one. That's a general question about restrictions. If you're going to change your rental restriction so that for instance, maybe before you didn't require an interview but now you're going to, that's a different change than changing, let's say maybe the terms of rental used to be six months and now that you're going to change it to one year. For that second example, if you're going to change the terms under which units or lots can be rented, there are statutory provisions that control. So if you're going to make that change as an amendment to your declaration, you're going to have to keep up with who votes yes and no because those statutes do say that if an owner does not agree to that change, they are grandfathered in on those terms. So that's a conversation I could spend another 20 minutes discussing. But the long story short is that it depends on the terms being changed and really because there are statutory provisions to control, I recommend consulting general counsel for any changes like that.

Alan Tannenbaum, Esq.:

There's a question about what in a community with private roadways, what do you do about speeders? Any insights on that?

James "Jim" Turffs, Esq.:

Oh, that's just an incredibly hard question to answer. I mean, in some ways it's maybe really easy to answer. Quite frankly, not much. Signs. If the community is willing to pay for it and it's cost-effective, you can put in speed tables, speed bumps, things like that. We don't normally see association membership approving that sort of thing. There is a statute that says you can contract with the local authorities that come in and police the speed in your community. In my years of practice, I've never actually seen that accomplished. The local authorities don't like to get involved in it. They're going to do everything they can to avoid it because it's more work for them and it may open them to liability if everything isn't done exactly right.

So the best you can do maybe is keep some record of who is speeding, whether that's a camera at the gate or a speed camera or something. Again, if that's cost feasible, and then treat it as a violation. And again, a lot of work has to go into that. You need to set up your documents properly to make that an option. But if you do, you can act as an enforcement agent. But yeah, really there are a lot of hoop to jump through before speeding is something you even want to think about.

Alan Tannenbaum, Esq.:

What about towing? At what point can the association tow a vehicle that may be in violation, let's say, of a parking restriction?

Cindy Hill, Esq.:

Well, that's a twofold answer because you're going to need some towing rights or some just general property rights to even have the ability to do that. And by general property rights, I mean that we all know you can't necessarily park a car in certain places anywhere you go, for instance, on the grass in front of a building. But as for parking spaces, whether or not there's towing rights for an association, could be related to what's in your documents. You're going to need that right. And then there's a towing statute specific as to signage that has to be put up, a process that has to be followed. The towing companies are very familiar with that statute and know its limitations.

But as Jim was saying, with speeding, this is really a very loaded answer in terms of you don't just want to start towing cars. That's not going to end well. You certainly don't want to be towing cars without using a professional licensed and insured company. And then you're going to have to look at your documents and see if you even have any towing rights other than, again, we all know that vehicles can't be parked in certain places and be left there.

James "Jim" Turffs, Esq.:

Towing does open you to liability. And so I'm not a fan of it. In fact, I'm passionate about advocating against towing in communities. Just too many things can go wrong. The association can open itself up to too much liability. Fine them, sue them. Don't try to become a towing authority. It's just not a good idea.

Cindy Hill, Esq.:

Yeah, but I would add to that sometimes there are people who park and block access, block emergency exits, block... So some communities really do have to at least be prepared for that problem.

James "Jim" Turffs, Esq.:

Yeah.

Alan Tannenbaum, Esq.:

The last question before we close, and again, any questions we don't answer, if you want to email us, we can attempt to answer. It was about home-based businesses. If somebody is selling furniture on the Facebook Marketplace, is it considered a commercial use? My thought, and Cindy or Jim may disagree with me, is if somebody on a one-time basis is selling their own furniture through Facebook Marketplace, it's probably not operation of a business. But if they're bringing furniture in from the outside and people are coming to the home to pick up furniture that's brought in, that does sound much more like a home-based business that could be a commercial enterprise that could be prohibited. So Cindy or Jim, you have any disagreement with that?

Cindy Hill, Esq.:

No.

James "Jim" Turffs, Esq.:

No. I think you're spot on. I think-

Alan Tannenbaum, Esq.:

All right. So we're going to conclude, again, especially Jim and Cindy have answered several questions in the chat in writing. You can certainly review those questions and answers in the chat. You can email us with any additional questions and we can attempt to answer. Not specific to your documents, but a general question. This session will be available on our website in about a week to 10 days. You can see it there. If you'd like a copy of the PowerPoint, contact Michelle Colburn, and you'll see on the bottom of the Q&A her email address. And at this point we're going to say goodbye for the day. We will see you next month with hopefully a new and topical item to be discussed. And we thank everybody for attending today. Thank you. 

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Florida SB 154 - The Condominium Safety Legislation "Glitch Bill"

Alan Tannenbaum, Esq.:

My name is Alan Tannenbaum of the law firm of Tannenbaum, Lemole & Hill. And I have my partners, Jon Lemole and Cindy Hill, and our associates, Destinee Small and Jennifer Myers, are on with us today. Today's program is going to be run by Jon and Cindy, who have been more closely attending to the particular bills at issue, which have to do with the milestone inspection legislation applicable to building codes under Chapter 553 and the structural reserve studies and funding under Chapter 718 and Chapter 719. What's interesting from a legislative perspective is how reactive and not proactive state legislatures tend to be. It's a good example here. Historically, in 1981, there was the collapse of the Harbour Cay Condominium in Cocoa Beach. It was a condominium under construction. There were 11 workers who died, and that brought about a major change to the building code requirements in Florida as a result of that collapse in 1981.

Then in 1992, Hurricane Andrew hit South Florida. And what the experience was was that one community that was impacted by the storm had relatively minor damage and another community got destroyed. And there were investigations, major changes legislatively into the building codes that arose out of that. And then of course, in 2021, we had the horrendous Champlain Towers collapse, which again brought about a major legislative effort last year, in 2022, to react to that particular situation. Does it create an atmosphere for the best legislation to be created? Usually not, but that's symptomatic. And it's interesting, as we look at the events in Hawaii, the questions are asked, "Well, how did they let it happen?" and so forth. And unfortunately it takes a terrible tragedy sometimes for things to be improved, again, unfortunately. So at this juncture, I'm going to turn the program over to my partner, Jon Lemole, and he's going to start the discussion of what the legislature did this year to fill in some of the gaps and make some of the corrections to the hastily adopted legislation of 2021. Jon, take it on.

Jon Lemole, Esq.:

All right, thank you. Good morning, everybody. We've got a lot of ground to cover, but we want to make sure... I expect there will be a lot of questions, so we're going to hope to leave enough time and answer questions at the end of this. But the general format of today's agenda, if I want to try to distill the agenda today, the first two sections we're going to talk, basically I call it the who, what, when, and to some extent, where, of the two different inspection regimes. Number one, the milestone inspection regime, and then secondly the structural integrity reserve study process and the rules around that. And then in the third section, I'm going to flip it over to Cindy Hill and we're going to get a little bit more in detail about some reserve funding issues, reserve funding methods and things that you all will need to know as you head into budget season.

And then lastly, Cindy's going to touch on the fiduciary issues, the fiduciary duties question that these inspection regimes and reserve funding regimes raise for directors and managers of condominiums and co-ops. I want to just say that I'm primarily going to be talking about condominiums today. And so if there is a co-op person on here, understand that these are basically identical provisions in 718 and 719. And so if I don't mention co-ops, understand that that's just for ease of discussion but you can take away the same principles for your co-op communities. And as Alan said, for you HOA folks, first of all, if you're a manager, this will be for CEU credit. That's good. And secondly, you'll have some insight into how the legislative process works. So let's jump into the first topic, which is going to be the milestone inspection regime.

One of the main focal points of the legislation that came out last year was that over a two-day legislative session with what appeared not to be a whole lot of input from the architectural and engineering communities and the legal communities, the legislature created a regime for studying the structural integrity or the structure of condominium buildings in Florida. And so for a year now, we've been dealing with that legislation. And in a lot of respects it created a lot more questions than it answered, there were a lot of ambiguities in there.

And then in March, I think it was March, the governor signed a second round of legislation which tried to clear up, I think, some of those issues. It did, to some extent. I think there's still some questions that remain a little bit confusing and unanswered and we'll try to point those out today. But the first thing that they tackled was actual engineering inspections of certain condominium buildings in Florida, and they created this milestone inspection regime. And if you're looking for it, it's not in 718, it's in Chapter 553 of the Florida Statutes. That is the chapter that relates to the Florida building code. So if you're looking for it in 718, that's not where you're going to find it.

What the legislature did, and this is kind of interesting, in this Glitch Bill, they changed the focus a little bit of the legislative intent of this regime. So in the original statute, the overriding intent of the law referenced "maintaining the structural integrity of a building during the service life of the building." And that was a little bit confusing because service life is somewhat of an engineering term of art. And if you ask some folks, the service life of a building in Florida is limited, and a high-rise condominium may have technically a service life of 50 years, let's say. And so that created an open door, if you will, for some challenges to the law, and the legislature kind of took that on in this Glitch Bill and they closed that up. So now the overriding legislative intent of the milestone inspection regime is to "maintain the structural integrity of a building throughout the life of the building."

So however long this building is going to be standing, it made it clear that the obligation of owners of those buildings and associations who maintain those buildings is to maintain them for as long as they need to be maintained, and so theoretically, as long as as they're condominium buildings. So that was a very integral provision in the Glitch Bill. The other thing that they did right out at the opening is changed some of the wording about the professional practice standards for managers, and so you managers want to be aware of this. What they changed was previously the statute said, "If a community association manager or a community association management firm has a contract with a community association that has a building on the association's property." They've taken that phrase out, "That has a building on the association's property."

You'll see why in a minute because there's some provisions about mixed-use buildings. But what they've made clear here is that if you're a manager or you are a management company and that you have a contract with a community association that is now subject to 553.899, which is the milestone inspection regime, that you must comply with that section as directed by the board. Okay, so let's get into the meat of this. Mandatory structural inspections for condominium and cooperative buildings. The legislature has tinkered a little bit with the definition of a milestone inspection, and what it reads now is that it's "a structural inspection of a building, including an inspection of the load-bearing elements." They took out the word walls. So now they've made it pretty clear that they want engineers to look at any element in the building which impacts the load-bearing capacity of the building. So that can be slabs, it can be foundations, it can be pilings, it can be structural columns. It's not just walls, and so they broaden that.

And so it's "a structural inspection including an inspection of the load-bearing elements and the primary structural members and primary structural systems as those terms are defined in Florida statute 627.706, by an architect licensed under chapter 481, or an engineer licensed under chapter 471." So 481 and 471 are the sections of the Florida statutes that regulate architects and engineers operating and licensed in Florida. The purpose of it is to attest "to the life safety and adequacy of the structural components of the building, and to the extent reasonably possible, determining the general structural condition of the building as it affects the safety of such building, including a determination of any necessary maintenance, repair, or replacement of any structural component of the building."

Now, key thing at the end of this, "The purpose of such inspection is not to determine if the condition of the existing building is in compliance with the Florida building code or the fire safety code." That's important because this is not in a study which is directed at necessarily bringing buildings up to current code, but it is an engineering study to determine the safety of the building. Now, the current code may have to be complied with if there are changes and repairs that need to be made to the building, but it's not a code inspection.

We got a lot of questions after the first bill came out, and not only from owners, from associations, from managers, from directors. We got a lot of questions from engineers as to who can do these inspections. There was a lot of concern that the only folks that could actually do these inspections were the engineers themselves, the PEs. And so that was creating some confusion and frankly a lot of backlog. And I think the legislature responded to the concern about that there was not enough engineering services around to go around to complete these inspections on time. And so they address that in 553.899(2). And so now what they talk about in the new Glitch Bill is that these inspections can be performed by a "team of professionals." So, "The milestone inspection services may be provided by a team of professionals with an architect or engineer acting as a registered design professional in responsible charge with all work and reports signed and sealed by the appropriate qualified team member."

So what that practically means is that that engineer who's signing that report doesn't necessarily need to be onsite all the time, doesn't need to be the one who's going crawling around that building and dropping down on scaffolding or lifts and inspecting all of this stuff. They can come in with their usual team, but the engineer at the end of the day has to sign a report, sign and seal the report that is provided to him and based upon information that his team provides to him. So hopefully that provides a little relief for the engineering and architectural community to be able to meet these inspection deadlines, take on more of your communities and get the work done. Because there was a serious question as to whether there was enough folks, enough engineers and architects to go around the way the old statute was worded. So you should start to see some relief, I'm hoping, as you're trying to get these services taken care of in your communities.

The Glitch Bill also changed a little bit, slightly, the definition of substantial structural deterioration, because that is the essential element that the milestone phase one inspection is directed at. It's directed at determining whether there's substantial structural deterioration of a building. And they've opened that up a little bit and it used to say "substantial structural distress," full stop. They've now added this extra phrase, "or substantial structural weakness." From an engineering standpoint, I'm a lawyer, I'm an engineer, I don't know how an engineer looks at that and says, "Well, what's distress versus weakness?" In my mind, it makes it a little bit more expansive. In other words, distress is perhaps a little bit more extreme than weakness. And so the way I read this is that it gives an engineer or an architect a little bit more flexibility to say that there is an issue that may not rise to the level of distress, but does create some weakness in the structure.

So for example, you've got spalling concrete in support columns or in your foundation. Is that distress or is that weakness? Well, it may not be distress, but it may be weakness. So what you may see coming out of this Glitch Bill is that there are going to be more buildings flagged for phase two inspections. Maybe that's a good thing, I suppose all things considered, that is a good thing. That may not be a good thing when considering the financial impact of that on communities. But be prepared for that because I think it opens the door to some more engineering studies that may have to be done. But anyway, deterioration is distress, "substantial structural distress or substantial structural weakness that negatively affects a building's general structural condition and integrity." They've kept all the other stuff about what it doesn't mean: "surface imperfections, cracks, distortion, sagging, deflections, misalignment, signs of leakage or peeling of finishes, unless of course the engineer or architect determines that those surface imperfections are a sign of substantial structural deterioration."

So you've got maybe some water intrusion problems. That doesn't necessarily mean that your building is in distress or that it is structurally weak. You may have some stucco cracking. Again, that doesn't necessarily mean those things. It has to rise to a little bit of a higher level. So if you've got those concerns in your building, that may not be a necessary cause for alarm. But at the end of the day, it's going to be up to the engineer to decide whether those things are issues that need to be addressed or not.

Okay, so at the very beginning before we started the presentation, there was some discussion off the record, and we were talking about who's covered under these milestone inspections and who isn't. The gap that was closed in this Glitch Bill is that there was concern about mixed-use buildings, commercial condominiums, and how did they fall under this regime? Well, SB 154 has tackled that, and so now they refer to "an owner or owners of a building," first of all, so that may be a mixed-use type of situation. And the statute now says that "An owner or owners of a building that is three stories or more in height, that is subject in whole or in part to the condominium or cooperative form of ownership as a residential condominium or cooperative." So what that means is first of all, any commercial building is excluded. It has to be whole or in part residential.

And the primary responsibility is on the owner of the building. That may not mean that the condominium association is the primary party responsible for these milestone inspections and arranging them. So we're going to talk on the next slide a little bit about mixed=use condominiums and so I'm going to reserve for a second here. So owner or owners, three stories or more in height. And the DBPR, so you all know, seems to think that above-ground covered parking is a story, so be aware of that. Those are the buildings that are going to fall under the milestone inspection regime. Those folks, those buildings must have a milestone inspection, an initial one, done by December 31st of the year in which the building reaches 30 years of age. And that's going to be measured by when the certificate of completion of that building was issued by the local building official.

And then every 10 years after, it needs to be done again. Now, there's a huge change when it comes to the issue of coastline buildings because if you'll recall, in the original bill, there was a definitive 25-year first milestone inspection for buildings that were three years from the coastline. And the coastline was not really well-defined except it referred back to... There is a coastline definition in the Florida Statutes, but it was very, very unclear. And so you had a lot of confusion among folks that were on bays and bayous and canals and other things as to whether they were under a 25-year schedule or a 30-year schedule. So what the legislature has done is they've essentially eradicated that.

What they've done instead is they've made it essentially the discretion of the local building official. So if the local building official determines, for a variety of reasons, including the proximity to saltwater, if that local building official feels that a milestone inspection is required prior to 30 years, at 25 years, then the local building official can determine that, and then can obviously tell those buildings, "This is when you need to have your first milestone inspection done." So if you're in that category where you're not sure, you're going to have to probably wait for some clarification from the building official. I know that's kind of hard to predict where that's going to shake out for you folks, but everybody's on a 30-year schedule until told otherwise by the building official. That's the best we can do coming out of this legislation for now. There is an exception for one, two or three-family dwellings, or buildings that have one, two, or three-family dwellings with three or fewer habitable stories above ground.

So these are perhaps your villa-style condominiums. They may be three habitable stories above ground, but if there are three families in that building, three dwellings, separate dwellings in that building or less, those folks are not going to need to comply with the milestone inspection regime. All right, so we said we were going to talk about mixed-use buildings. Milestone inspections are now required of "whoever is responsible for the operation, maintenance and repair and replacement of the structural components, whether a condominium association or not." However, the condominium association that may be attached somehow or involved in the operation or maintenance of that condominium within that mixed-use building, that condominium association "is responsible for the costs associated with inspecting the portions of the building for which it is responsible to maintain under the governing documents."

So if you have a mixed-use building and there is a condominium association that is responsible for the maintenance and repair of the structure of the condominium portions of that mixed-use building, although it is the building owner's responsibility to arrange the milestone inspection, the condominium association is going to have to budget for its portion of those costs. So be aware of that for you folks in those situations.

They've given some relief in this bill to when the milestone inspections need to be completed. There was a lot of confusion about this. Because originally the statute said that any building that had a certificate of occupancy issued on or before July 1st, 1992, had to have their first milestone inspection performed before December 31st, 2024. That's still the case. But what happened to buildings that turned 30 after July 1st, 2022? There was some concern that they had a very short window to complete these studies. And so what the legislature has done is that they've created this kind of gap, and they've said that, "If a building reaches 30 years of age between July 1st, 2022 and December 31st, 2024, those first milestone inspections on those buildings is due before or by the end of 2025." So for some of those folks that turn 30 right after, let's say on August 1st, 2022, you've got a little bit of extra time to complete your milestone inspection.

They also gave a little bit of extra relief in that the local building official can extend the deadline for good cause, but only if you have an inspection contract signed. So if for some reason you have a contract signed, but the engineer's just overburdened, they can't get out there, they're running behind schedule, it's just not going to be able to be completed, the local building can issue an extension for good cause. There's some additional stuff -- in the interest of time, I'm going to jump ahead a little bit here -- about the local building enforcement agency providing notice, who they need to provide notice to, and how long you have after getting that notice in which you must complete the milestone inspection phase. That hasn't changed too much from the original bill, so I can answer some questions after we're done in the chat if anybody's got some questions about that.

Now, some of you may find yourselves in a phase two situation. The phase one study's been done, the engineer decides that you need to go to phase two because they found signs of structural distress or structural weakness. And so if you are in that and you have to go to phase two, that phase two inspection hasn't changed much in what it encompasses. It could involve destructive testing, it could involve other forms of inspection and testing of the building, but you're going to need to do it. And more importantly, what has been added is that that phase two progress report, a progress report must be reported to the local enforcement agency with a timeline for completion of phase two within 180 days after the engineer issued their phase one report.

So you can't drag your feet on this. If you got to go to round two, the engineer's got to report on progress in completing phase two within 180 days after they've issued their phase one report. So that could create some burden financially because you're going to have to get that engineer engaged to do that and pay them to do that. So be aware of that timeline. Disclosure, this is going to be very important. So, "Phase One/Phase Two reports must be submitted," and they've added this, "along with a separate summary of findings and recommendations." So the engineer has to issue the report and a summary. And they have to be issued to the association, the building owner and the building official. "Within 30 days of receiving the report, the association must distribute a copy of the separate summary."

You don't have to disclose the entire report, but you got to send around the separate summary to all of the unit owners. And it's got to be by mail or hand delivered. And if there's an email address, also by email or fax to those addresses that the association has on file for notice purposes. So everybody gets this summary. And if your association must maintain a website, within 30 days after you receive the separate summary, you have to post that summary and the full report on the website. So there's no hiding. This has to be fully disclosed to your unit owners.

So those are the main differences in the milestone inspection and we're going to now move on to structural integrity reserve studies. This is in 718. They've tweaked the definition of a reserve study, a SIRS, I'm going to call it a SIRS. It's now the study of reserve funds required for future major repairs and replacement. They took out common areas. There's a reason for that. It's "reserve funds required for future major repairs and replacement of condominium property as required under 718.112(2)(g)." Now there's a very big change in the SIRS regime. First of all, it only applies to residential condominiums again, and co-ops, not commercial. So commercial folks can disregard this. It doesn't mean they can disregard the old reserve requirements, but they can disregard this SIRS process. And the SIRS also no longer applies to "portions or components of a building that are not submitted to condominium or cooperative form of ownership, or any portion of a building that is maintained by someone other than the association."

So again, in those mixed-use situations, the SIRS doesn't necessarily need -- and I don't know how this is going to be done -- but it doesn't necessarily need to be performed on the entire building. That's going to create some questions, I think, but I want you to be aware that that's in this new SIRS regime under the Glitch Bill. Also, they've increased who can perform the SIRS. In the old bill, there was a lot of concern that really this had to all be done by engineers or architects, and that's no longer the case. Any person qualified to perform such studies can perform the studies. So your traditional reserve study professionals can do portions of the SIRS. Not the entire thing, because the visual inspection must be performed by an engineer or architect, or "a person who is certified as a reserve specialist or professional reserve analyst by the Community Associations Institute," they did some good lobbying there, "or the APRA," which is the American Professional Reserve Appraisers, or the Association of Professional Reserve Appraisers, I think is what it stands for.

So the visual inspection doesn't necessarily need to be done solely by an architect or engineer. If somebody's a reserve specialist certified by CAI or a professional reserve analyst by APRA, they can actually do the visual study. Then all the calculations in the funding in the reserve amounts that are done after the visual inspection can be done by other folks who are working with those engineers, architects, reserve specialists or professional reserve analysts, so that creates some relief. But the specialists must do the visual inspection. What does it contain? A SIRS, "At a minimum, it must identify each item of the condominium property." They took out common areas because these areas aren't always necessarily common areas.

"Each item of the condominium property being visually inspected, state the estimated remaining useful life and the estimated replacement costs or deferred maintenance expense of the common areas being visually inspected, and provide a reserve funding schedule with a recommended annual reserve amount that achieves the estimated replacement costs or deferred maintenance expense of each item of the condominium property being visually inspected." So not limited to common areas.

You're all familiar with this list in 718.112(2(g). They've changed it. They've taken some things out, they've added some things in. What must be inspected in the SIRS? "Roof, structure, including load-bearing walls and other primary structural members and primary structural systems, fireproofing and fire protection, plumbing, electrical systems, waterproofing and exterior painting, windows and exterior doors." They've added exterior doors, they've kept windows. I know that creates a lot of ambiguity. "And any other item that has a deferred expense exceeding $10,000. And the failure to replace or maintain such item negatively affects the above systems." However, they put in a big caveat here. "The SIRS may recommend that reserves do not need to be maintained for any item for which an estimate of useful life and an estimate of replacement cost, cannot be determined." It can recommend a deferred maintenance cost or the maintenance reserve. But if it can't be determined what the estimated useful life or replacement cost is, then you don't necessarily need to have a reserve for replacement in this study.

And the SIRS can also recommend that no replacement cost reserves for an item need to be maintained where the estimated remaining useful life is greater than 25 years. So that should provide some relief when you get to things like foundations and slabs and things like that. You don't have to replace the slab. Who's covered? Buildings three stories or higher, same as milestones. And the same exception applies here, but not one, two or three-family buildings with three or fewer habitable stories above ground.

For covered buildings, i.e., buildings that are three stories or higher, residential buildings that are three stories or higher, "The SIRS only needs to be performed on the portions of the building submitted to the condominium form of ownership or for any portion or component of a building that is maintained by the association." This is still going to create a lot of issues around windows, because windows may not be maintained by the association, they may be maintained by the unit owner, but they are submitted to the condominium form of ownership. So there's probably going to continue to be some arguments over windows, folks. I don't know that this bill has solved that. The SIRS is due within 10 years of the creation for covered buildings. It's due within 10 years of the creation of the condominium. You can read that as recording of the declaration. For condominiums turned over before July 1st, 2022, so if they were under owner control, unit owner control prior to July 1st, 2022, the first SIRS report is due by December 31st, 2024 on those covered buildings.

If, however, you have a condo that is not required to do a milestone inspection before December 31st, 2026, those folks can delay their first SIRS and coordinate it essentially with the milestone inspection and deliver those reports together at the same time. So that's going to help, folks, because you can basically have an engineer doing both and not having to have separately timed reports, which was a problem under the old statute. So those are the major changes. I know we ran through those really quickly so we could fit them in with some time to spare. I'm going to now send it over to Cindy, who's going to talk a little bit about the reserve funding issues, the actual funding issues that you all are dealing with. So go ahead, Cindy. You're on.

Cindy Hill, Esq.:

Thanks, Jon. Good morning to everyone. Before getting into the details, I do want to start with an issue that still seems to create some confusion generally with these new reserve requirements, and that is what is fully funding a reserve item? It is not funding the entire amount that's due within the upcoming statutory deadlines. So if you need $100,000 to replace your roof in 10 years, you don't need $100,000 by December 31st, 2024. What you need to do is start fully funding to have that $100,000 within the 10 years it's been estimated it's needed. So really what fully funded means is meeting the reserve funding schedule. It does not mean forcing everything up until December 31st, 2024. So those of you who don't yet understand that, don't have a panic attack over that, it's not that bad. That being said, this of course is a burden to associations that you are on this call because you want to know how to best to deal with this.

The new statute added an alternative funding method, which I don't want anybody to get excited about because I doubt anyone on this call is going to be able to use this. Specifically, the Glitch Bill now allows members of an association that are operating a multi-condominium to determine to provide no reserves or less reserves than required under the new laws if there's an alternative funding method that's been approved by the Division of Condominiums, Timeshares and Mobile Homes. Well, that sounds interesting, doesn't it? Until you look at the actual definition of alternative funding method they provided in the Condominium Act, and that is that it only applies to multi-condominium associations that are operating at least 25 condominiums. So that's pretty much a no deal for I would guess everybody on this call and most everyone who's not in a big metropolitan area. So don't let that term or addition create any sort of excitement or confusion. It really is only applicable to a small number of associations in the state.

The Glitch Bill did not help us with the component versus pooled funding, unfortunately. It has been the Division of Condominiums, Timeshares and Mobile Homes' position since the Building Safety Act was implemented in response to the Surfside tragedy that pooled funding is still allowed. Well, okay, that's great, but what does that mean? So the Glitch Bill did not help us with that either. Although the division still says pool funding is allowed, we have that, the industry's starting to lean toward maybe having two pools of funds, one for SIRS and not SIRS. But that's something really to discuss with your professionals and your counsel because, again, we unfortunately still don't have good answers on that.

So with the G components that Jon was just discussing, they're the ones that are mandatory under the SIRS. And of course then you have your funding reserve requirements that have existed since the Condominium Act. So what now can you waive or reduce and what can you not, and what are the deadlines that are coming? Associations are required to get a SIRS and maintain reserves for the G items, which they're responsible pursuant to their declaration. They can vote with a majority vote of the total voting interest for no or reduced reserves up until a budget adopted on or after December 31st, 2024.

So up until a budget that is adopted on or after December 31st, 2024, associations can vote for no or reduced reserves for the paragraph G items. But after that pumpkin appears on December 31st, 2024, you no longer have any discretion to do that. Those amounts have to be fully reserved, which means that it might not be in an association's best interest right now in that window that exists to be voting to waive or reduce, because once December 31st, 2024 happens, you have no discretion. And you also cannot vote to waive the interest on those funds, by the way.

That being said, you can still continue to vote to waive or reduce funding for the non-paragraph G items, but it has to be approved in advance by a majority vote of all the voting interests of the condominium. There was some availability before to just have the voting interests that were at a meeting at which a quorum was attained. Now it's everyone. If you have 100 units, you're going to have to get 51 people that agree to waive or reduce funding for any of your non-paragraph G funding reserves responsibilities. Just briefly, because I know we're coming up to the end of time here, developer reserve funding. Developers really have no discretion to -- lack of a better way put it -- to mess with reserves at this point. Before turnover control, a developer-controlled association may not vote to waive reserves or reduce funding reserves.

Also, they may not vote to use reserves for purposes other than those which they were intended. Which I should add, that's also starting December 31st, 2024 for these paragraph G items. Non-developer controlled associations are not going to be able to vote to use those funds for other than they were collected as well. So this is a deadline to be calendaring and to be budgeting accordingly. I know that there are a lot of questions about these issues. The Glitch Bill has helped with some, not with others. So again, do reach out to your counsel, get these issues resolved and have a plan.

The last item we had was the fiduciary duty. This was disconcerting when the Building Safety Act was released in that under standard law in Florida operating for decades, condominium association board directors and officers don't have liability -- personal liability, I should add. Not to mean the association itself isn't liable -- do not have personal liability unless they really created some egregious acts, such as theft, fraud, maliciously taking action against donors. It was a very high bar. So it was disturbing to see that the Building Safety Act suddenly threw in this provision that said if directors and association failed to complete a SIRS that failure could be a breach of their fiduciary duty. Well, the Glitch Act did soften that a little bit. It now states, as you can see in the slide, the additional language is underlined. If the officers or directors of an association willfully and knowingly fail to complete a SIRS, they can be liable under their fiduciary relationship to the unit owners.

So that's still a disconcerting provision to have in the act, but willfully and knowingly is a much higher standard than simply fails. Fails could arguably be an event where you thought you had a contractor lined up, you didn't get a contractor lined up, or miscommunication, something went wrong. Suddenly a board director's in a position where they're looking at personal liability just due to a set of bad facts. Willfully and knowingly is more along the lines of you know there's an obligation and you just do nothing about it. So that is some better news for volunteer board directors. And I believe we are at the time that we ask questions.

Alan Tannenbaum, Esq.:

Cindy, if I can add something on the breach of fiduciary duty part. There's going to have to be a reevaluation on your fiduciary insurance and some discussions with carriers about it, because one thing about fiduciary insurance, under the old statute, if there was an act of misfeasance and malfeasance, it wouldn't be covered under your policy. The insurance company would be required to defend you from a claim, but actually the payment of the claim wouldn't be covered. Now with this new language, where it's really negligence that somebody fails to get the study, whether that's going to be covered appropriately by your insurance policy. And so it's certainly worth having a discussion. The carriers are going to have to adjust those policies to potentially cover this specific liability.

Cindy Hill, Esq.:

I agree, Alan. That's a very good discussion to have with the insurance agent.

Alan Tannenbaum, Esq.:

Yeah. The other point, and I'm just curious, even by a show of hands out there, has anyone had a structural inspection under this legislative regime actually performed by an architect? And this is the anomaly, because architects are not licensed to do structural inspections. And it's a question of whether by the legislature including architects in these bills as being allowed, whether that's overcoming the restrictions under the licensing law. But I think more importantly is I'm pretty aware of what professional liability coverage is, again for architects, and I don't believe that most professional liability policies for architects covers them doing structural work, anything outside of their core architectural requirements. So even though legislature included architects in there, I think most architects won't be doing them. And if you get an architect to do them, they're probably bare without professional liability coverage, so it may not even be advisable to seek them out. But I would be surprised if you find architects doing that. So anyway, with that-

Jon Lemole, Esq.:

Alan, there's a question-

Alan Tannenbaum, Esq.:

Sure, go ahead.

Jon Lemole, Esq.:

... I want to address about the SIRS. The question is from Donna Childress. It says, "We had a reserve study professionally done before this statute passed for our own information. Is that acceptable as a structural integrity reserve study?" The answer to that question is maybe. One of the things that was added to 718.112, and it's subparagraph seven, I'm going to read it. It says, "If a milestone inspection or an inspection completed for a similar local requirement," so like in South Florida, some municipalities have building certification inspections. "If it was performed within the past five years and meets the requirements of this paragraph, such inspection may be used in place of the visual inspection portion of the structural integrity reserve study." I mean, the way I read that is if you've had within the last five years, a thorough structural engineering study of your building, you may be able to avoid having to do that part of it again to meet your SIRS responsibility.

That report can be taken by a reserve analyst, perhaps, and they can create a SIRS report that meets the requirements of the statute based on that. But if you just had a basic reserve study done in the last five years, I wouldn't say automatically that that would constitute a report that satisfies these requirements under the new statute. It's going to be a case by case situation as to whether that report meets all of those requirements. So it's possible, but you're really going to have to have a professional look at that report, general counsel or maybe the engineer that did that earlier inspection, to determine whether or not that would meet those requirements. So no easy answer on that question.

Alan Tannenbaum, Esq.:

Jon, there was a question from Donna about the reluctance of Pinellas County and the City of Tarpon Springs to accept reports. I don't really know what that means, accepting, but really the reluctance of building officials to be involved in this entire process. What would be our recommendations for dealing with building officials who say, "Nobody asked us about all this additional requirements that we have to be involved in. And no, thanks, legislature"?

Jon Lemole, Esq.:

It's imposing a tremendous burden on local building officials because now those municipalities have to deal with the enforcement regime that this statute creates. But at the end of the day, a statute is a statute and you have to comply with it. So I would say that even though your municipality may not be totally on board or up to speed, that's not where I would necessarily take my cues. I would be sure to comply with the statute because you have an independent duty to your owners. And the failure to discharge the duties that are required by the statute exposes the association to potential liability to an owner who says, "Hey, you're not complying with the statute." And I don't know that it's an acceptable defense to say, "Well, we haven't gotten any guidance from our local building official." That's my take on it.

Alan Tannenbaum, Esq.:

Yeah, I think it's really built into the statute now that if you make a good faith effort to comply, for instance, scheduling your engineer and there's delays on that, and then you apply to your building department for an extension and they don't respond, you've done all you have been able to do as a manager or a board member to comply, there probably in the end will be forgiveness. But one of the things that's important is with the engineers being as busy as they are, don't wait. The earlier you get started with the process, the better, and get on their schedule. If you start the process late and then expect that, well, we'll be excused, you're going to be subject to questions about why you waited so long to get that process started. So that adds to your burdens, but there's no way around that. So it looks like-

Jon Lemole, Esq.:

I'm still seeing some questions about one and two-story condominiums and reserve requirements there. If your buildings are not under the SIRS regime, in other words, they're not three stories or higher, you're still obligated under I'll call it the old, preexisting traditional reserve requirements that were in the statute and continue to be in the statute, as far as I know, Cindy.

Cindy Hill, Esq.:

Yeah, that's right.

Jon Lemole, Esq.:

Don't take the fact that you're not under the SIRS regime to mean that, "Well, I don't have to reserve anything anymore because my building isn't high enough." There are still reserve requirements, they still exist. Those reserve requirements for your buildings in the less than three stories or higher category are the same as they always were. So we'll leave it at that.

Cindy Hill, Esq.:

I agree. There's also a question in here about exterior doors. Do they include sliding glass doors? What if there's lanais? I have to say, that's all going to be dependent on your declaration of condominium. Because sometimes lanais are part of the units. Sometimes they're limited common elements. Sometimes the windows are part of the units. Sometimes the sliders are, sometimes they're not. I'm not trying to be facetious at all, this is literally a document-driven answer. So that unfortunately can't be answered without getting individual counsel to assist with that.

Alan Tannenbaum, Esq.:

Jon, the last question. There's a question, are there any changes on the timing of the full funding for SIRS items? Is it still January 1st, 2025?

Jon Lemole, Esq.:

Cindy can probably take that one, but I think the answer is going to be for a budget adopted after December 31st, 2024, that those SIRS items, the items in 718.112(g)(2), have to be fully funded going forward.

Cindy Hill, Esq.:

Correct. And it's actually on that date or after. So if you vote for a budget on December 31st, 2024, that date counts.

Alan Tannenbaum, Esq.:

Okay, folks, it's 11:59. Thanks for responding to our poll. Any of you managers who are concerned about your CEU credit, you'll contact Michelle Colburn of our office. Her email, I think, was presented at the bottom of the presentation. These materials will be available for anyone who wants them. Contact Michelle on that. And this program will be published on our website, probably within a week to 10 days. So you can always access our website under, I believe it says news and resources. Not only this particular presentation, but most of our others that have been previously recorded. Also contains a transcript of the preceding piece. You need some bedtime reading, that's available. And with that, we will see everybody next time. Thanks for filling out the poll. And any questions you have, keep sending them. We'll respond as best we can. Thank you.

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Smart Board & Property Manager Legal Guide: Key Elements In A Repair Contract

Alan Tannenbaum, Esq.:

My name is Alan Tannenbaum, and our firm is Tannenbaum, Lemole & Hill, and we are giving a presentation today on key elements in a repair contract. Since the last Smart Board, we've had two lawyer additions to our firm. And you'll see today, Destinee Small and Jennifer Myers, who have joined our firm as associates and they'll be presenting a segment of today's presentation. So everybody, welcome Destinee and Jennifer to our team. As you can see on the screen, we're community association lawyers. We do general counsel work, but we also have specialization in the field of construction law. So for community associations, we both do general counsel work and we serve their construction needs, which include turnover claims and what we call repair consulting. And repair consulting is assisting groups in negotiating and perfecting contracts with both engineers and contractors and helping to enforce those contracts as your projects get completed.

We've been very busy on the construction side on the condo side, because of what happened in Surfside, the legislation that has emanated from that. Groups are getting their buildings inspected. Engineers are finding issues and major repair projects are being negotiated. The hurricanes from last year caused significant damage, which required a lot of repairs, both for HOAs and condominiums. So there's a lot of repair work going on. One of the things that occurred is that, especially in relation to the hurricane, is that there was a great influx of out-of-state contractors who came into Florida, some licensed, some not offering their services. There's also a significant group of, I call them brokers or marketers. They will sell you repair services, but actually somebody else is going to do the work. So there's been an issue there and one of the things that we're including today at the beginning, which is not on our list, is vetting your contractor.

So you may get a proposal from somebody who, may not be licensed in Florida, they may be assigning the work or subcontracting the work, and there's ways to vet them corporately. There's some great tools in Florida for determining licensing and sometimes an online search, you find lawsuits and so forth. So know who is coming in to do your work. So into the basic program, I'm going to turn it over to Jon Lemole who's going to talk about detailed and on-target plans of specification.

Jon Lemole, Esq.:

Thank you. I'd venture to say that there's not a more stressful situation in the life of a condominium or a homeowner's, say a townhome homeowner's association, than having to do a major repair project. It makes owners unhappy. They're unhappy with not being able to move about as freely as they may otherwise be able to do it. The loud noises, the activity, the parking, the trucks. And so what today is going to be about is really taking a hard look at how an association can manage that process right from the very beginning by having a very good repair contract negotiated with that contractor. I'm, I'm going to steal something that Alan says. He often says, "Imagine that when the contractor shows up on your project and these employees and subcontractors start walking onto the job. Imagine it's a group of 17-year-old boys that are showing up." And so if you've had 17-year-old boys or 17-year-old sons, which I've had, you know that you have to be very clear with them on everything.

So that's where we're going to start. The first item on the agenda is detailed and on target plans and specifications. Why is that important? Well, think about it. If you've ever not had clear communication with your kids, and I have a kid who's like this, they will find all manner of reasons to poke holes and find the gaps in the communication. So we want to start every project, every major project with an investigation of what the project's needs are going to be and some details about how the work is going to be done. Take an example of painting. You're going to paint all the buildings. Well, what is paint? What does painting mean? Have you selected the type of paint? Is there going to be some sort of treatment of the building exterior before the paint is applied? Is there going to be stucco crack repairs, is there going to be caulking done? Is there going to be power washing done?

Not only that, how are you going to protect shrubs and plantings and landscaping and cars from paint splatter? Is that going to be part of the contract or not part of the contract? You can bet that if you don't specify things that you're not going to have very strong protection when you find out that the contractor maybe didn't do stucco crack repair well or maybe didn't provide adequate protection for landscaping and vehicles in the area. So, you always want to have a detailed and on-target plan and specification. Now where does that start with? The best way for the most part in any major project, take a big re-roofing project or maybe a structural repair project, they're going around and they're fixing concrete, falling concrete, or facade, stucco. It always makes sense to have a consultant come in first, like an engineer or some other consultant who can prepare, not only investigate what needs to be done, the scope of the repairs that need to be done, but how it's going to be done and be very specific about it.

Why is that important? Well, number one, if you've ever been in the middle of a project and you get faced with a bunch of change orders because all of a sudden there's a bunch of conditions that the contractor didn't foresee, you know that that's a real pain in the butt. Price escalations. Contractors love to put price escalation clauses in their contracts and if they come across something that they didn't anticipate in their proposal, that they're going to have to fix, like a bunch of roof framing or roof sheathing, then you're going to get charged for that. And it may not be at the prices that you expected to be charged for it for the materials when you executed the contract many, many, many months ago.

Unforeseen conditions cause delays, always. So it's always a very good thing to have an independent consultant come onto the project before you hire the contractors, take a look at what are the conditions, what's causing the conditions. Because you may not always know that. Maybe that requires a little bit of invasive investigation. Maybe they take a couple of roof cores and see what's the condition of the framing underneath, and then provide a very detailed set of plans and specifications that not only address what work is going to be done, how it's going to be done, what materials are going to be used, how the community's going to be protected, what are the hours of the work, where's the contractor going to park their vehicles? How are you going to protect landscaping? How are you going to protect the safety of residents in the community? All of those things should be specified.

And by the way, if you do that, that creates a much more competitive bidding situation for the owner, for your associations. Because now you're getting three contractors, let's say, who are providing you price proposals and they're all looking at the exact same specifications. And so instead of just going out and having three contractors come in and tell you well we're going to do X, Y, and Z, and this one's going to do A, B, and C and here's what we're going to charge for that, you may not have a really truly competitive bidding environment and competitive pricing on that project.

So that is a critical first step in any major repair project. We get called in the middle of projects that have gone sideways and a lot of times we see A, a really poor contract, and B, that there has been no effort on the front end to control the work on the project by use of independent consultants and engineers who've determined what that should be. So with that, I'm going to turn it back over to Alan and he's going to talk about a balanced draw schedule.

Alan Tannenbaum, Esq.:

Money is power on a construction project. And what's the goal for an owner? It's pretty simple. Always have the contractor if you can have more invested in the job than they've been paid. And that's the greatest assurance that you're going to have your contractors stay on time and stay on goal and complete your project. The worst scenario is when the contractor is 60% completed with the contract and they've been paid 80% of the contract price. They will now look at your job or have the possibility of looking at your job as a loser. And they would prefer to send their crews out to another project that they're not ahead on. So that's the basic premise. I have a real problem with deposits. Contractors more and more are requiring deposits. They will tell you that it's to purchase materials, but most good contractors have good credit with the supply houses. They don't need your money to buy materials, but they say they will.

A lot of times I think they're just taking their profit upfront. So we either like to eliminate deposits or reduce them considerably. Retainage is holding money back until the end of the job. If you can negotiate that into your contracts, you're better off. And there's also a key, and sometimes the engineers are not really discerning about this, but it's making sure that draw schedule's balanced so that you're ahead of the game financially near the end of the project or at least it's an equal playing field. We see too many contracts where by three quarters through the project, the association is upside down and it's very difficult to get the contractor out under those circumstances.

I'm going to next talk about insurance requirements. Real problem these days in Florida. So here are some basics. Number one, when you're using industry contracts, industry form contracts, which frankly are intended for the construction of a 50-story high-rise in Chicago and New York and not intended for a Florida repair project, but because of the way those contracts are designed, they have owner insurance requirements that often require coverage that's not even available for condominium and homeowner associations in the Florida market. So be very careful on the requirements in the standard form contracts for the owner insurance that you don't sign a contract that has requirements that exceed what your agent is actually going to be able to secure coverage for.

On the contractor side, there's a whole slew of insurance that the contractor's going to need. Most of the standard contracts do contain decent insurance provisions, but it's really important, especially on the commercial general liability, GCL policy for the association to be named as an additional named insured. That gives you direct rights against the insurance company. It allows you to be notified if in fact coverage is being canceled as an additional named insured, you have protection on that. But in the current market, in order to be an additional named insured, there has to be an endorsement issued by the insurance company that's either a blanket endorsement that says anytime a contract requires it, that additional named insured status is granted, or it's a specific endorsement that names the owner or names the association as that additional insured. So you have to get that endorsement. Oftentimes a contractor has to pay at least a few hundred dollars to secure that endorsement. So they resist it, but it's really important to get.

The other part of it is making sure that the subcontractors who enter the job have workers' comp and that they have their own insurance that names you also as additional named insured if you can get that. So you want to include in your general contract that they're only bringing in insured subcontractors to your job. And again, sometimes we find laborers doing subcontracting work, it protects against comp claims, liability claims. So you have to look carefully at those provisions. So I'm going to move back to Jon who's going to talk about damages for delay.

Jon Lemole, Esq.:

So I want to start by dispelling a common myth that I run into quite frequently. People I think have this expectation that contractors are these well-capitalized companies that have many, many employees at the ready to go out and work on your project. It's just not true. You ought to assume in most instances that a contractor probably is going to sub out most of the work that is being done. They're probably relying on leased labor, leasing laborers. The people working on the job are not necessarily going to be direct employees of the company, of the contractor. And keep in mind that the contractor, they're a for-profit business, they're in business to make as much money as they can. And so every day when that owner of that business wakes up, he's got to decide how he's going to staff the projects that he's currently got underway. And those decisions are going to be influenced by a couple things. They're going to be influenced. Well, which one is he or she making the or most money on?

And secondly, if they're not making the most money on a particular project, the contractor/owner is going to think, well, what's my risk on any particular project? Am I getting a lot of headaches from this project versus another project? So one of the big things that you need to be thinking about when you're having any kind of major repair project is how am I going to stay on that contractor's radar? How am I going to position this project to be that project that that contractor wakes up every morning and says, "I got to make sure that I've got that one adequately staffed and on-target." And on-target for completion on time. And so there are two ways apart from the money aspects which Alan kind of talked about a second ago, but there are two other ways to control that.

Number one are damages for delay clauses. Folks, I get called into the middle of disputes all the time and a lot of times the disputes are the project was supposed to be completed in three months, we're now at five or six or seven or a year out, and this is a problem. And I look at the contract, and there's very, very little in the contract which provides any kind of hammer over the contractor to completed on time. And I scratch my head and I wonder, well, why wasn't that, and generally the reason is that nobody looked at the contract or they didn't have a lawyer look at the contract before they executed it, the owner didn't. So damages for delay clauses are important. You need to insist on them, but they have to be drafted correctly in order to be enforced.

If you want a damages for delay clause to have teeth in it, you have to know that if it goes to the mat and you have to bring a claim, a delay claim, that that damage for delay clause is going to be enforceable in court. And they're not all, they have to be drafted properly. So number one, make sure that you have a properly drafted damages for delay clause in your contract so that you know and the contractor knows that if I go to court over this thing, this thing is going to be enforced by the court.

Number two, and this is something we see all the time, and since COVID it's gotten way more prevalent. Contractors love to put these very broad force majeure clauses in their standard contracts. Now what's force majeure? Force majeure is like the act of God type of unforeseen situations where the contractor gets to A, increase the time for completing the project, or increase the price of the contract. And so your delay for damages clause will have no teeth in it if there's this broad... If the contractor can call anything force majeure. So weather, weather conditions in Florida. The contractors love to put in there unforeseen weather conditions. Well, that should be defined. What's an unforeseen weather condition in Florida? I mean Florida gets some rainy weather. Is that an unforeseen condition? If you allow it to be, it will be. And so every day it rains, the contractor will say, "Oh, that that's an excusable delay day." Well, if your project's going on in the summertime, it rains every day in the afternoon. So you can imagine that contractor saying, "Well, we couldn't work."

Now, sometimes they can't work in the rain and that's okay, but you have to be able to define that very carefully. So when we're negotiating contracts for owners, and you see me looking down, I'm looking at the time because Alan likes to remind me when I'm going on too long. Number one, we always want to put a damages for delay provision in there. We want to make sure that it's properly drafted, it has to say the right magic words in order to be enforceable. And secondly, we want to take a very, very, very good look at that force majeure clause and we want to carve out as many things as we can reasonably carve out that give the contractor the right to say, I couldn't work this day or I couldn't work this week or this month.

Look, contractors love to say we can't get materials. That's a force majeure issue. We had difficulty getting materials. Well, they may have difficulty getting materials from their regular supplier, but have you required them to look at other reasonable suppliers in the geography where they might be able to obtain the materials, and demonstrate to you that they've made that search and that they've looked at other suppliers and they still aren't able to obtain the supplies that they need for the project within a reasonable time to complete the project on time?

I've seen all of these things come up as reasons why a contractor has not been able to complete the job on time. And typically when I go look at that force majeure clause, I say to myself, "I wish I had drafted that before I've had to deal with this dispute." So very important, look at those things early on before you put your pen to the paper and the president of the board signs that contract. It is generally recommended to have a lawyer take a look at those issues because they're difficult issues, they're issues of contract interpretation, they involve how courts look at these things and interpret these things. And so sometimes legal counsel, legal review of that is going to be very important.

So moving on from there, I'm going to throw it back to Alan and he's going to talk about the right, I'm sorry. No, I'm wrong, I'm still up. We're going to talk about the right to inspect and reject work. Okay, so what I encounter, again when we get involved in a dispute is that the first time that the work is being inspected by the owner is when the work is complete. The owner has made all of the payments under the contract, and the only thing that has not been paid is the retainage, which is usually 10% of what the contract value was, what was supposed to be paid to the contractor. 10% is held back in retainage. And that's sometimes the first time that anybody looks at the work and determines whether or not the work was sufficient. Well, as you can probably imagine, that contractor has probably been paid most of their profit on the work. That 10% retainage may be relied upon the contractor to pay the last of its subcontractors, the last of its material supplies, bills for materials and supplies.

And so there's very, very little incentive for that contractor to jump on those issues. I've seen more projects get bogged down in the lengthy correction of work after the contractor's already delivered the certificate of substantial completion and they've been paid 90% of the contract price. And then all of a sudden the project drags out for months and months and months while the contractor is negotiating over what needs to be corrected, punch lists, all kinds of silliness. The best way to control that, and especially where you have a contract that is going, a bigger project where you're going to have progress payments made is that every time that contractor submits a payment application, your contract gives you the right to inspect and reject that payment application because the work is not right. If you want to get a contractor's attention, then you tell them, "Hey, I got your pay application, I'm going to have my consultant go out and look at this work."

And when the consultant goes out and looks at the work and determines that something isn't done right, you are writing back to the contract and your contractor and you're saying, "I'm not going to pay this payment application because A, B, C, X, Y, and Z need to be redone." That's going to get your contractors immediate attention. They need that payment. They have subs to pay, they have suppliers to pay. They may have credit terms that they're not really fond of that they need to take care of getting suppliers paid so that they're not incurring additional interest charges. And it also sets up a relationship where that contractor knows they need to deal with you every time they make an application to get paid on that project. But here's where the rubber hits the road. If that's not in your contract, that's a problem.

So you need to specify that. That definitely needs to be in there. And you need to be, and I mean it makes a heck of a lot of sense to make that determination about whether the work is done right and whether the pay application should be paid to make that determination be the province of a consultant, somebody other than the owner. So if you had the engineer or the consultant do that, those detailed plans and specifications, then you want to make it in the contract that that person is going to come back and do the routine project inspection. Does it cost you money? Yes, it does cost you money. Is it going to cost you way less than the dispute you'll have at the end of the project when you're arguing with that contractor to finish the job both in time and money? It's going to be far less to pay it upfront rather than doing it and waiting till the end. So reserve the right to reject and inspect and reject the work, and especially reserve the ability to do that with each pay application.

Alan Tannenbaum, Esq.:

Jon, somebody asked a question about having a separate owner's representative on a job. And let me answer that. So engineers, if they're doing inspections, most of them do periodic inspections. They're not on the job every day. So if you're doing a major project, you need somebody, a superintendent of the works, an owner's representative on behalf of the association. A lot of times boards say, "Well that's our manager's job." Well, management companies generally are not set up for that purpose. Some of them have maintenance crews that you can purchase services to act in that capacity. But it's a good idea, especially during a time when your board is going to be out of town, like over the summer to hire an owner's rep who can act on your behalf and be there to watch the project on a daily basis if it's a significant project. So that's definitely a good idea. I've had projects where there's a very experienced board member who knows construction well, but they go back to Indiana in May and the project is going on throughout the summer and nobody's watching the store anymore.

But let's switch to the next topic, which is the right to reject or replace subcontractors. I love this picture. I'm not quite sure how you get the car into that garage. But anyway, so people believe when they're hiring a contractor, that they're hiring this company that gave you the glossy brochure that has a nice website that gives you all these references. The people you're actually hiring to do your job is the superintendent and crew from the contractor and the subcontractor to show up at your property. And every contractor has, or many of them have superintendents who have been with them for 20 years, and they have superintendents who they hired last week. They have subcontractors who they're comfortable and used to dealing with, and your project's starting and that subcontractor's not available.

And they go into the marketplace and bring in a second tier subcontractor to staff your job. And as these folks walk towards you or towards your building, you really have to be proactive about who is it that's actually coming to our building? Do we know who the subcontractor is? Are they keeping discipline on the job? Are they following safety standards? And you need the ability to go back to the contractor and say, "This subcontractor needs to be taken off of the job. They're not following the specs, their employees are disrespectful, they're not following safety standards," and have the ability to reject them and have a new subcontractor brought in. So having control of the project that way is really important and understanding that you need to know.

And I learned this lesson a long time ago personally, I hired a friend of mine who was a commercial contractor. He had just got into home renovation work. And I hired him to do a renovation on my personal residence and I found out a month into the job that the superintendent who showed up had been hired a week before. So I literally had experience with that and there was a reason why the job wasn't going very well is because of who my friend happened to provide to me. So make sure you vet the people who are coming to the site. All right, with that I want to turn the session over to my partner, Cindy Hill, who's going to talk about protection against liens.

Cindy Hill, Esq.:

Thanks Alan. So the first step that needs to take place when you have a major project is to be sure that a notice of commencement is filed by the contractor. I do hear scuttlebutt about how contractors will say it's really not necessary or the project doesn't warrant it. Any big project, candidly, there's no good reason not to file the notice of commencement because what it does is it provides notice of record as to the project, the contractor and the owner. And it's that notice that when you have subcontractors or suppliers who are part of the project, they can use that notice of commencement to be able to send their notices that they have to send after providing their labor or services, their notices to owner to let the owner know, in this case your association, that they are part of the project. It's a statutory obligation that they have when the process is followed.

And when you get one of those, when you get a notice to owner from a sub or a materialman, it's best policies to reach out and even give them a call and say, we got your notice to owner. No, it wasn't exactly an invitation to a birthday party or anything, but it is notification that they're on your property, they're providing services, and if you reach out to them and call them and make some contact with them, you start a relationship that may benefit you if things do go south or if payments become an issue. Having a point of contact and making that friendly phone call can be a really good step to making sure that you got it, they know you got it, and everybody knows who everyone is.

So as the project proceeds, depending on the complexities you might have draws, it may be just a one lump sum. Regardless, you do want to get final or partial releases of lien as the project is progressing or when it completes. You want to get payment affidavits. You want to be sure that you get all of this from those who serve notices of owner to you, which is again why you want to make sure you reach out to them and keep them in contact, not just your contractor. And then your contractor will have to provide a final payment affidavit. And the final payment affidavit will have to include anyone who's not paid. So these are all very important documents that are part of 713 under the construction lien law. And it sounds self-serving, but I have to say it. It's best to make sure that you do have your association's attorney involved in these notices and keep them in the loop on them.

But if you're not going to do that at a minimum, again, make sure that these notices get put in a location where the board knows about them, can access them, reach out to the subcontractors and materialmen in a communication can go a long way to avoid problems. If in a worst case scenario you do get a lien on the property, first thing to do is take it to your attorney and let them look for some problems with it. There very well could be some problems. For instance, the deadline to file a lien is 90 days after the last furnishing of labor materials. If they've missed that deadline, that contractor or subcontractor, whoever it is, has a problem. The lien is good for a year. So you might even think, "Hey, we got a lien on the property but nobody's doing anything about it." But they've got up to a year to file a lawsuit. The lien does extinguish if a lawsuit isn't filed in a year though, so that's a good window to keep in mind.

You do have some options for contesting a lien if there are problems with it. One of them is notice a contest of lien in the statute which shorten shortens the lien period to 60 days. Now that's kind of a double-edged sword. You can get rid of the lien by contesting it in that manner, or the contractor might turn around and decide to sue. Again, conversations to have with your counsel. One last point for liens that's important to recognize is that when liens in a condominium for work on the common elements are on the entire condominium property. So they impact the units. And I have gotten some frantic phone calls from some of my association clients. We have a lien on the property, what do we do? We have an owner who's got a unit listed for sale. Well, there is a mechanism where those who want to refinance or sell their units can make a proportionate payment of that lien amount and continue with title transactions. It's not the end of the world.

That being said though, it does impact every unit owner when there is a lien on the condominium property and that's important to recognize. Whereas in homeowner associations, it will not. The work done on the clubhouse in the homeowner association, if that's liened, that's not going to impact the individual residences in the homeowner association. So I know we're running short on time, sorry to hit these issues so summarily, but they are important points to keep in mind with your counsel. So then I believe next we have Destinee.

Alan Tannenbaum, Esq.:

To clarify one point that Cindy brought up, in the significance of a notice to owner. Notice to owner, it has to be filed within 45 days of a subcontractor initiating work on your project or materialman supplying supplies for your project. And what the notice to owner is, it's a notice to you that they are prepared to perfect their lien rights against your building. So when we say, "Well, it's good to contact them." The contact is, we got your notice and we do not want a lien on our building or on our condominium property. So let's work together to make sure that doesn't happen. So if the contractor gets behind on paying you, we would like to know about it. Because you want to get paid and we don't want a lien. So I firmly believe it's good to have that conversation.

Jon Lemole, Esq.:

Alan, so the importance to get back to the notice of commencement and why that's so important, and correct me if I'm wrong, the notice of commencement is what basically then requires the subcontractor to serve a notice to owner in order to protect their lien rights.

So it all starts with that notice of commencement because now, if that subcontractor wants to potentially protect lien rights on the project, they have to give you the notice to owner. So now who the subs are who potentially have lien rights on your project. And if they don't give you that notice to owner, shame on them. But if you get it, then again, you have some A, knowledge, and B, you can establish that relationship.

Alan Tannenbaum, Esq.:

All right, next, let's get on to payment and performance bonds. And we're going to save some of the questions until after the session is over at noon. So hold our responses until then so we can get through with the substance of it. So payment and performance bond. A payment bond is basically a security that your contractor's going to pay their subcontractors and suppliers. So if your contractor doesn't pay their subcontractors and suppliers, you go to the surety, the surety's responsible for those payments. The other thing that a payment bond does is it takes your project out of the construction lien process. The subcontractors and suppliers need to look solely at the bond in order to perfect their rights, it's no longer a lien situation against your building. So it does have that benefit, at least as it relates to subcontractors and material suppliers. The prime contractor would still have the ability to lien your building under those circumstances.

A performance bond is security that the project is going to get completed. So if the contractor goes bankrupt mid-project, the surety comes in and either completes the project or pays you as the owner a sufficient amount of money so that you can contract for completion. So they're important protections. We definitely recommend them on larger projects. On smaller projects you may not even be able to find a surety to give payment and performance bonds. So they usually have minimum contract amounts that are involved. The hidden value of payment and performance bonds, especially the performance side is that the contractor never wants you to contact the surety. So they're going to pay extra special attention to that, a bonded job to make sure it's performed so you never make that call or contact the surety because that affects their ability to be on the amount of bonding that they can qualify for the next year.

So if a contractor is starting five jobs, and two of the jobs are bonded and the other three aren't, they're going to pay more attention to the two jobs that are bonded. So it's an incidental benefit to having payment and performance bonds and we definitely recommended it, and it's important that your performance bond extend at least a year after the contract completion to at least cover a portion of the warranty that you get. Usually they won't go more than a year, but there's some bonds that end upon completion and you have no protection under the warranty. Most sureties will extend that performance bond protection to a year. All right, so the next section is on dispute resolution procedures, and I'm going to bring in Jennifer Myers to talk about precautions relative to dispute resolution.

Jennifer Myers, Esq.:

Hi, like Alan said, today I'm going to talk to you about alternative dispute resolutions and contracts. You see these in almost every contract you sign. I see them in my lease contracts, I see them in my form contracts, they're everywhere, they're in everything. Relevant to today's topic, these are arbitration clauses that you really don't want to have in your contract. You want to have them removed from your contract. Instead, what you want to have is a contract that allows for, or that calls for a trial by jury. More specifically, you want to have a trial by a jury of your peers. You want to have people that own homes. You want to have people that understand the issues you might be going through, issues that your community might be going through, rather than an arbitrator. Arbitrators are primarily architects or engineers. They're lawyers. So they're not going to understand the plight of the everyday person, what you're really going through or you're really struggling with. So you want to make sure you have that clause in your contract that calls for a trial by a jury of your peers.

In addition to that, you want to make sure that your contracts match. So whatever contracts you have, you want to make sure that you have the jury trials in the same circuit court. So you want to make sure the circuit courts match where the property is. So this is going to make it easier for the parties to get together. So the takeaway, in the essence of time is that you want to remove the alternative dispute resolutions from the contracts, and you want to check to make sure that your contracts match, that they are going to allow for the same circuit for a jury trial. So you have everybody kind of working together in the same place where the property's located. And I'm going to move on to-

Alan Tannenbaum, Esq.:

Jennifer, before we leave that, where key conflict often occurs is you sign a contract with your engineer. I had one of these, where it says the dispute is determined in the state court but in Hillsborough County. And then the association was about to sign a contract with the contractor that said the dispute was determined in state court in Pinellas County. And that meant that if an issue on the project was emanated both from design and construction, that now you were forced to try different parts of the case or different cases in two different counties.

So look first at your engineer or owner consultant, owner/architect contract. Make sure that contract calls for disputes to be determined in state court and the jurisdiction where the project is. And then when you sign your owner/contractor contract, make sure the dispute resolution in that contract is also in that same county where the project is. And the other thing that Circuit Court gives you is really broad-ranging discovery. A lot of times in arbitration it is restricted that way. So with that, Destinee Small is going to talk about prevailing party attorney's fees and cost provisions in your contracts.

Destinee Small, Esq.:

Hi everybody. All right, in the essence of time, I'm going to wrap us up today so we can answer some questions and then get you all out of here. So as Alan said, the final piece of a repair contract involves attorney's fees. So associations want to ensure that their contracts include a provision allowing for the prevailing party's attorney's fees and costs. So practically this breaks down into one general idea, which is leverage. So for example, if a contractor files a claim against an association asking for unjustifiable, unreasonable damages, which happens less often, or if an association files claims against a contractor that isn't necessarily a high dollar or high damages amount, then that attorney's fee provision essentially evens the playing field, so to speak.

These provisions basically create that deterrence factor from nonsense contractor claims because if that contractor is responsible for your fees as well, it essentially ends up costing more to litigate the matter. In a similar way, these attorney's fees provisions provide leverage in negotiations that happen at the outset of the project as well. And the general idea is just to keep the contractor as interested as possible in your project, as Jon stated before, making your project a priority. Because they understand what bad behavior could cost them in litigation costs, attorney's fees, and court costs. So that's just a general summary of this essential provision, and we're going to go ahead and take any questions that we may have.

Alan Tannenbaum, Esq.:

All right, I see a question from Greg. Is it good to have a request for proposal and have that as an addendum to the contract? I think what Greg is getting to is what are the contract documents? So there's generally, and I'm looking at the form industry contracts, they generally have this provision that lists all of the contracts, well all of the documents that are comprised what the contract is. So one of the big problems that we find is that they're contradictory. There could be supplemental conditions that differ from the general conditions. And there could be items in the base contract that differ from those two. And then the engineer comes up with a project manual that has also general conditions in them that may conflict with something in the plans and specifications or in the industry form general conditions. So a lot of our time in drafting is spent on reconciling it.

And then what you do is you have a supremacy clause, which is really important, because there's going to be built in conflicts between some of your contract documents. You need to have a supremacy clause that says in the case of the conflict, which one governs? And so I find this strange thing that I've seen over and over again, when you list a supremacy clause, and the last thing in the supremacy clause are change orders, requests for information and so forth as having the last in the supremacy. And I always talk to the engineers and say, "You need to reverse that because obviously a change order should overcome the base contract and the specifications because it's a change in the field during the construction and should have requirement." Somebody asked a question about liens, which is, can a subcontractor who doesn't file a notice to owner within the 45 days of beginning work on the project, can they lien your project? And something we need to clarify is it doesn't take anything to file a lien other than going down to the courthouse or the clerk's office and recording a lien against your property.

It's not a valid lien if in fact that subcontractor didn't provide you with the notice to owner. And you have means under the construction lien law to have that lien removed, but liens are easily filed, even the ones that aren't valid. So when we have said that in the circumstance of a subcontractor that you didn't know about showing up at the project and eventually saying, "Look, I'm entitled to be paid or I'm going to lien your property." You could certainly tell that subcontractor that we filed a notice of commencement, we did not get a timely notice to owner from you, and you have no lien rights.

That doesn't necessarily stop them from doing that. And what we generally say to the general contractor is we don't even want the possibility of a lien being filed against the property. So before we issue the final payment, you need to get us a lien release from that subcontractor or material supplier even though it didn't comply with the statute because we don't even want to mess with having to go through the process of having that lien removed. So when they show up, it has to be dealt with, even though they may not have a valid lien.

Jon Lemole, Esq.:

Alan, that raises a good record keeping issue because I've come across this, you ask a client, "Well, did you get any notices to owner?" And they look at you like, "What?" If you get these notices to owner, have a process. Because if you have to go to court and demonstrate that you didn't get one, the absence of an entry in the association's business records is an exception to the hearsay rule.

So you want to have a process for when you get those that you're recording them, you're logging them in, you're putting them somewhere as business records on this project so that number one, you can prove the ones that you know, which ones you got. But also if you don't have a record of having one and that contractor says, that subcontractor says, "Oh no, we sent it." That failure to have that evidence is evidence, it's admissible. And so I can't stress enough that you need to keep accurate records relating to NTOs that you get on your projects.

Alan Tannenbaum, Esq.:

All right, well we're hitting the end here. I don't think we're going to carry over because I don't think there's any additional questions that we didn't answer. But if somebody thinks of a question, certainly email us if we can answer the question, we will. Michelle has put up a poll, it would be great if you could respond to it before you leave. For all you managers, make sure Michelle has your manager information so that she can converse with the state and get you appropriate credits. Again, for your other board members or other managers, this presentation will be on our website a week till to 10 days with a written transcript that goes along with it. Some people find that to be very helpful. So you can refer your board members to our website within the next couple of weeks if you want to have them see this presentation, you can have the slides for whatever value they have. If you want some funny cartoons, that's the greatest value on the slides we use today. That's not anything very substantive there.

We thank everybody for participating today. It was good having you on board. Everybody enjoy the rest of your summer, and anything we can help you with, you'll let us know. Until next time, next month, we'll see everybody later. Thank you.

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Demystifying Budgets & Assessments: Insights from Industry Leaders

Video Insights:

Importance of Reserve Studies

  • The Surfside tragedy in Florida highlighted the importance of saving funds for older buildings and brought attention to the lack of best practices in funding reserves.
  • The latest law on waiving reserves is increasing the threshold for waiving or partially funding reserves, encouraging boards to stop passing the buck and ensure they have enough money for necessary projects.
  • Getting a Reserve study from an independent qualified professional is crucial for homeowners to ensure proper maintenance and avoid potential issues.
  • Failure to conduct required studies can result in breaching fiduciary duty and voiding transactions in homeowners associations.
  • It is crucial for HOAs to regularly update their reserve studies and effectively communicate the reserve component list and funding plans to their constituents.
  • Potential homebuyers prioritize knowing the budget and the last Reserve study of a homeowners association to understand how it is funded before making a decision.
  • It is important for homeowners associations to have a reserve study and maintain at least 10% of their dues going into reserves.


Budgeting and Financial Planning

  • "Proper budgeting is one of the most important things you can do."
  • "Establishing a realistic budget is a key metric for homeowners, and the Community Association Institute provides a helpful step-by-step guide for budgeting."
  • It is important to establish a trend by using past budget and year-to-date data along with service provider information to make informed decisions.
  • Homeowners are encouraged to participate in a zero-based budgeting process, where every line item is challenged and prioritized by different committees, ensuring transparency and accountability.


Transparency and Communication

  • Transparency is crucial in the budget process and when implementing special assessments for homeowners.
  • Taking the temperature of the membership is crucial when making decisions about significant special assessments, such as a 400% increase in insurance on a Barrier Island.
  • The best thing homeowners can do is communicate and be transparent with their ownership, even if they may not like the answer they receive.

Summary of Video:

We would like to talk about the pivotal role of money management and budgeting in homeowners associations, particularly focusing on the recent changes in the Florida law that requires reserve funds for various building maintenance expenses. The importance of these provisions cannot be overstated, as they become mandatory for certain items by the year 2024.

Through our deep dive into this issue, we're aiming to empower homeowners by imparting crucial information about financial management within associations. With insights from our panel of industry experts, our guidance is based on a wealth of experience, allowing us to meet the needs of community associations and ensure robust financial health.

Legal changes in Florida have necessitated that condominiums and homeowners associations set up reserve funds for future expenditures. This legislation emerged in response to problems encountered by retirees who hadn't planned ahead adequately. The law now mandates reserves for structural integrity, fire protection systems, plumbing, electrical systems, waterproofing, exterior painting, windows, and exterior doors, depending on the building's age, size, and maintenance circumstances. It's also important to note that by December 31, 2024, the Condominium Associations' Structural Integrity Reserve study items must be fully funded, with no room for waiver or reduction by owners.

Homeowners are advised to take active roles in maintaining their condos and ensuring regulatory compliance by undertaking regular reserve studies and communicating the financial health of the community. Waiving reserves could lead to insufficiency of funds for necessary projects and may risk breaching fiduciary duty. Moreover, professional Reserve analysts and Reserve Specialists can now conduct Structural Integrity Reserve studies as per Senate Bill 154.

Also critical is homeowners' understanding of the reserve schedule, even for items not explicitly required. Proper financial management should discourage waiving reserves, which can leave the board with inadequate funds. Frequently obtaining a Reserve study from a qualified professional is encouraged for the correct repair and maintenance of buildings.

Homeowners' associations need to maintain transparency about their financial health, as it significantly impacts potential buyers. Failing to provide this information can result in fiduciary duty breaches and void transactions. Therefore, sound money management and open communication are paramount for associations.

On the topic of budgeting, homeowners should strive to understand reserve studies, funding methods, and how to create realistic budgets. Tools like the online Community Association Budgeting Basics can provide invaluable guidance. Preparing for potential increases in operating dues and special assessments is part of this learning process.

Budgeting should also involve interaction with service providers, trend establishment using past budget and year-to-date data, future project prioritization, homeowner involvement in decision-making, and budget amendment to manage unexpected expenses without needing special assessments. Homeowners are advised to consider all costs associated with a special assessment, including postage, printing, and follow-up payment notices, to avoid using the operating budget.

When exploring financial options, homeowners' associations should look at the community's budget, financial health, and potential engineering studies. They should be aware of interest and late fees for collections and consider the circumstances of a mortgage foreclosure before pursuing a lien foreclosure.

Lastly, homeowners need to maintain communication and transparency, update reserve studies, address delinquencies, and seek legal advice. Remember that while boards have limited options to handle delinquencies, they cannot indefinitely delay payments or show favoritism towards specific owners. Homeowners should also leverage professional help to navigate economic downturns, insurance challenges, and understand building funding requirements, using available resources to tackle homeownership challenges.

In conclusion, as homeowners and members of associations, being aware and knowledgeable about the financial aspects and responsibilities can ensure that everyone is prepared for future projects and possible economic downturns. This level of preparedness is what helps to build and maintain strong, prosperous communities.


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Unpacking the Legislative Changes Impacting Florida Community Associations

VIDEO SUMMARY:

In the rapidly evolving world of community associations in Florida, new legislative adjustments have necessitated a swift and informed reaction from legal professionals. The legal landscape of community associations has been dramatically transformed, primarily due to two legislative areas: tort reform and construction defect claim reform. In light of these modifications, community associations, lawyers, and homeowners alike face unprecedented change.

Tort Reform and Its Impact on Community Associations

At the center of these modifications is House Bill 837, which has redefined the statute of limitations for negligence claims. Previously, a generous four-year window permitted the filing of such claims. However, this duration has been sliced in half, now restricting such cases to be presented within two years. This abrupt transition has set off an avalanche of lawsuits as lawyers rush to file cases beyond this two-year limit.

This limitation overhaul requires that board members and managers maintain a vigilant eye on the ticking clock when filing lawsuits or claims. It's essential to distinguish between a negligence claim filed by the association and a covenant enforcement action, both affected differently by these legislative changes.

Understanding Different Types of Claims

The importance of accurately identifying a claim's nature cannot be overstated. Depending on the circumstances, a provision in the Declaration may necessitate reimbursement from a negligent unit or lot owner. This repayment can be framed as a covenant enforcement action, bypassing the two-year statute of limitations.

It is highly recommended that associations consult with legal counsel, particularly a general or litigation attorney, to avoid missing out on potential claims. Security measures and claims related to third-party criminal acts on a property are equally noteworthy, as these issues are covered extensively in the new bill.

Navigating Liability with Intentional Torts and Criminal Acts

The new legislation has shifted the approach to intentional tort cases, compelling the court to assess everyone's fault involved, including the injured party, the association under the lawsuit, and the perpetrator of the act. This framework is particularly significant in cases of intentional torts, where earlier, certain damages weren't subjected to apportionment.

Simultaneously, the law introduces liability protections for associations operating multi-family residential properties, provided they have implemented specific security measures in response to criminal activity. This provision places associations in a powerful position to deny liability, provided they can demonstrate adequate security measures such as a robust security camera system, sufficient lighting, trained security staff, and key-card or code-controlled access gates.

Maintaining Safety: A Mandatory Expectation

Under the new guidelines, associations must adhere to strict safety procedures. These requirements include maintaining well-illuminated parking lots and walkways, installing lockable exterior doors complete with peepholes on each unit door, and securing pool areas with lockable gates that require a key or fob for access. The law also advocates for crime prevention through environmental design assessments, diligent employee training, and robust onboarding procedures for new hires.

Amid these safety procedures, the law stipulates that the number of dwelling units on a parcel determines the application of the 'smart board law,' creating confusion around townhome communities governed by HOAs. Furthermore, the law has potential profit implications for vendors, security companies, camera, and lock providers, and insurance companies.

The Transition to a Modified Comparative Negligence State

Florida's transition from a comparative fault state to a modified comparative negligence state has far-reaching implications. This change influences the compensation awarded in lawsuits involving accidents or injuries caused by negligence. In this new system, it is imperative for associations to document accidents promptly and establish thorough accident investigation procedures.

Associations must remember that documenting an accident could prove decisive in showing that the injured party was more than 50% at fault. This allocation of fault significantly affects the payout of claims and the injured parties' ability to recover from injuries. Furthermore, there's a significant focus on attorney's fees, especially on multipliers. It's important to note that the legislature has now put limits on this, stipulating that attorney's fees, in most cases, cannot surpass the total recovery amount.

Calculating Attorney's Fees in Legal Cases

As a key change in the legal landscape, attorney fees are now determined by the 'lodestar' method. This involves considering the time litigators have spent on the case and their hourly rates. While it is presumed that the lodestar fee is reasonable, challenging this could only occur under rare and exceptional circumstances.

Construction Defect Claim Reform: A Closer Look

Regarding construction defect claim reform, the changes have seen a four-year statute of limitations continue for actions related to design, planning, or real property improvements. However, the trigger point for this timeline now rests on when a temporary certificate of occupancy is issued. The deadline for latent defect claims has also been curtailed, reducing to seven years.

Navigating Construction Defects in Condominiums

Condominium situations present their unique challenges. For instance, 718 124 stipulates that a cause of action on behalf of a Condominium Association does not accrue until turnover. The seven-year time frame does not extend this statute in the case of latent defects. This creates a complex scenario, potentially leaving communities without recourse for construction defects.

Given this uncertainty, it's wise to conduct an engineering study as early as possible, preferably even before turnover. Homeowners, they might need to act before turnover to safeguard their claims. In addition, construction performed under a duly issued building permit may not extend the statute of limitations or repose. Interestingly, the legislature has included a clause providing a limitation extension for those who purchased the model home.

Understanding Statutes of Limitations for Property Management Legal Cases

Recent statutory changes have extended the deadline for filing access claims until July 1st, 2024. This is applicable even if the statute of limitations had previously expired. Each building is treated as a standalone for multi-building properties when determining a limitation period, leading to potential confusion. Lastly, introducing the term "material violation" in the Florida building code now requires engineers to highlight any code violation that may significantly impair a building's performance or systems.

Navigating the New Property Management Legal Guidelines

These newly adopted terminologies in property management legal guidelines pose challenges for engineers. Given the unfamiliar language in these guidelines, testifying in trials or depositions can become daunting. Moreover, engineers will now have to answer questions regarding every defect, further increasing the complexity of their role.

On a brighter note, these guidelines may provide some benefits by limiting owners' rights to pursue negligence charges. However, the industry will undoubtedly grapple with these changes' added complexities.

Confronting the Limitations of Pursuing Developers for Warranty Claims

Lastly, the limitations of pursuing a developer for warranty claims, especially in larger communities built over an extended time, are a noteworthy concern. For instance, a Master Association spanning 30 years with over 7,000 homes may find this a daunting task. While there are some routes for connected townhomes to recoup costs from the developer for negligent maintenance, financial claims, etc., the extended statute of limitations and warranty exit provisions in HOAs offer little consolation.

The bottom line is that while these legal changes have brought a mix of opportunities and challenges, staying well-informed and proactive is essential to navigating this new legal landscape successfully. It's always advisable to seek professional counsel when needed, and remember that the session will be recorded and available on their website for future reference. 

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The Addition of Charging Stations to Florida Condominium or HOA Properties: Requirements, Concerns & Challenges

Alan Tannenbaum, Esq.:

One of the things we're not going to be covering today is how local municipalities and counties have been responding to permit requests, and so forth for the installation of this type of equipment, and whether there are any local codes or ordinances that might apply. We're not going to go into depth on that because, obviously, it's going to be different all around the state.

This is an industry where the technology is fairly new. The companies are a little bit behind the eight ball in their maintenance facilities, their ability to perform maintenance. They've built far more than, apparently, they've been able to maintain. The legislature got involved, especially on the condo side, passing legislation that's somewhat confusing and contradictory, which Cindy's going to get into in a moment.

One of the things that we found, and we'll talk about it in-depth, is that some properties have the electrical capacity to support charging stations, some don't. Upgrading your electrical system in order to support a charging station is a significant project in and of itself, so we're going to talk about that. With no further ado, Cindy, why don't you talk a little bit about what the Florida Legislature did for condominiums in the area of charging stations?

Cindy Hill, Esq.:

Okay. Well, generally, those of you who have lived in condominiums, or managed them, or had familiarity with them over the years know that you can't make changes to common elements in condominiums without being concerned about what's called a material alteration. A material alteration has been a concept, even though it's not actually in the Condominium Act, it's been a concept that's been accepted by the courts in Florida for years as being any change that would palpably or perceptively appreciably affect or influence the function, use, or appearance of condominium property. That's a mouthful.

What that comes down to in the case law is that if you change the color of the building, if you change from asphalt to pavers, if you change a tennis court to a pickleball court, any of these types of changes are going to fall into your material alteration analysis, where you need to see if the statute's going to require an ownership vote for these changes, or if your documents are going to provide different guidance, because the statue says 75% of the owners are needed to approve a material alteration to a condominium, unless the condominium's declaration states otherwise.

Usually, making a change like we're going to discuss today, to install electric vehicle charging stations would be a big burden before you even started looking into the logistics of it, but that's not the case because the legislature decided to create a statute on point for this. For once, in many instances where I get asked questions about, "Can we do this? Can we do that?" I say, "Well, I don't really know what your documents say if you're not my actual client." In this case, this is statutory. You might have some practical logistical issues with this statute, but the requirements are going to be statutory, not document-driven, so you're going to want to pay attention to the statute if this is an issue for your condominium.

Why did the legislature do this? Well, they specifically put in the opening of the change to the statute, and it is quoted here on the page 718.113(8), that they found that the use of electric vehicles conserves and protects the state's environmental resources, provides significant economic benefit savings to drivers, and serves as an important public interest. It's under that hat, so to speak, that the legislature has deemed to make electric vehicle charging stations something that is outside of the normal requirements for installations that would normally impact material alterations to the common elements.

The next slide, I believe, is going to lay out the next part of what I'm going to discuss. Okay. The statute has basically two lists of what's going to apply when you go to request ... By the way, this is the part, the request from a unit owner to install. We are going to discuss a little later the part where the association itself wants to put in a public, or not necessarily public, but one for the use of all owners. This analysis is for when you get a unit owner who wants to install an electric charging station for their vehicle.

First of all, they have to have a limited common element or exclusively designated parking space. If you have open parking and no one has the right to a particular parking space, you might have to stop there. Next, the installation cannot cause irreparable damage to the condominium property. Some of these conversations about how your older condominiums maybe aren't outfitted for these changes, the analysis might have to stop there as well.

For those of you who have assigned parking, newer buildings, newer communities, let's get to the next hurdle for this. The unit owner's responsible for the cost of the installation of the station, as well as maintenance and repair, and that includes hazard and liability insurance. For those of you who are concerned that if someone puts in an electric vehicle charging station, there's not necessarily parameters for how that should be done, or who should pay for it, it's right here in the statute.

The unit owner has to pay for the installation of the station. The unit owner has to pay for the maintenance for it. The unit owner has to pay for the repair for it, and the unit owner has to pay insurance for hazard and liability for it.

Then the next question might be, what happens if they sell the unit and the next owner doesn't want it? Well, the statute's clear on that too. If the unit owner even decides him or herself that they no longer want it, or they sell the unit and the new purchaser doesn't want it, that owner is responsible for the cost of the removal of the electric vehicle charging station.

Just in case there was any doubt, the next portion of the statute does provide that the unit owner must comply with all applicable laws and governmental regulations. Going back to, Alan was saying earlier, we're not going to delve into those because they are going to be dependent on what area of the state you're in. There's no question though that the unit owner who wants to install electric vehicle charging station has to comply with whatever those local requirements are.

The next part of the statute says ... Those were all the must, you must do this if you're a unit owner. The next part is the condo association may require the unit owner do to the following: Comply with industry safety standards. I don't know why that's a may. I have no idea why the legislature thought that'd be a may. I would put that in the must category, but it says you may do it, which means I would recommend you do so.

The next may category is compliance with reasonable architectural standards, so to the extent there is a way to position an electric vehicle charging station in such a manner that maybe it doesn't stand out like a sore thumb, or that there may be some aesthetic barriers you could put around it. As long as those are reasonable, the statute does allow that.

The condominium association may also require the unit owner to engage the services of a licensed vendor who is familiar with electrical charging stations. That's a practical requirement that might be hard to meet based on some of the things I've been hearing about the industry, but that is something that they can require. I would recommend if you do that you have some vendors on your list that you recommend that they contact.

Also, you may require the owner to provide a certificate of insurance. I don't consider that a may. My clients that have had electrical vehicle charging stations installed pursuant to a unit owner request have required that certificate of insurance. Then I have advised, and they have done so, they've taken that to the association's insurance agent to ensure that the coverage is in fact applicable and appropriate for what the requirements need to be for the liability for the community.

The final may is that the unit owner can be required to reimburse the association for any increase in insurance premium costs. That's not something I've actually experienced with my clients, but that's another concern to discuss with the association's insurance agent. Is there sufficient insurance for the potential liability of what could happen with an electric vehicle charging station? If so, is the coverage adequate?

That's quite a long list of considerations. I have recommended that my associations that are going to allow unit owners, because they can, they have the feasibility to allow electric vehicle charging stations, create a board policy and a form for the owners to fill out so that these hurdles are clear from the start.

In my experience, unit owners putting in electrical vehicle charging stations really don't have any idea that the condominium even needs to be involved necessarily, much less whether or not the cost is going to be borne by them, they'd have to get insurance. These are all pieces of information that a unit owner should have in their hands before they go out and hire an electrician to put an electrical vehicle charging station in their garage, and then find out later that there's an issue. I give that example because it has happened with my clients.

One final point I want to make, and it's more of an academic point than a practical one, but it goes back to the fact the legislature decided to give this exception to the material alteration for electrical vehicle charging stations, and is that the legislature also creates an easement for the installation of the electrical vehicle charging station and hooking it up through the association's common elements. That practicality engineering part is covered by the legislature as well.

I know someone was asking for some good news. I will say, having brought up the owner who put the electrical vehicle charging station in their garage without association approval and without an electrician, my client made a demand that they rectify those issues. They were rectified and he now happily has an approved electrician-certified electrical vehicle charging station in his garage. That's one piece of good news I can offer in a world where it seems like we don't get too much of it.

That is that statute in a nutshell. Again, the citation for it, you can get it on the Florida Statute's website and start making a checklist for your board, for your community as to what these obligations are.

Alan Tannenbaum, Esq.:

Cindy, let me ask you a question. Are there circumstances where you would recommend a declaration amendment versus a board trying to govern the charging stations through just merely a board rule?

Cindy Hill, Esq.:

There could be circumstances where that'd be recommended. I would say if the community was particularly concerned with the aesthetics of it and wanted it in a particular area in a garage or a parking area, that would be a very good amendment to the declaration to be clear on that. Because the statute does say that you can put reasonable architectural standards on the installation of these chargers, but doesn't give any more guidance than that.

Alan Tannenbaum, Esq.:

One of the things with a certificate of insurance, and this applies to anytime the association desires to be an additional named insured, insurance companies have changed their policies. It used to be you got a certificate of insurance and in the bottom box, there was an indication from the agent that the association was now an additional named insured of the policy.

Several insurance companies are now requiring that there actually has to be an issued endorsement naming the association as an additional insured. Sometimes, the policyholder has to pay for that endorsement. If you're just getting a certificate without that endorsement, it may not qualify to make you an additional named insured, so ask for that endorsement also.

If you would turn the slide, I don't know if Jon or Michelle are controlling the slides. This is what ... Go back to the prior one just for a moment. This is the ... The prior one. Sorry. This is the statute that Cindy cited about there being an easement over the common elements. I want to talk about this for a moment because I'm not sure the legislature thought through this one.

The electrical service could be far afield from where the owner's residence is. Does this mean that an owner can bring a contractor in, do an open trench to create a new electrical line to bring the service over? We don't really know what the legislature intended with this, but there's going to be some interesting issues when somebody says that, "I'm entitled to have my own charging station. My meter won't support it, so I want to be able to utilize the association's electrical service in order to supply my personal charging station." How will that be charged for? All kinds of issues got created in the process, so big question mark.

Let me turn to my partner, Jon Lemole. Jon's going to talk about the installation of charging stations by the association itself and what happens with a homeowners association. Jon, take it away.

Jon Lemole, Esq.:

All right, thanks. In condo land, there's a wholly separate subsection, subsection 9 in 718.113 that's different from the subsection that Cindy was talking about, and there's some key differences. Number one, it's much shorter, but there's some other very key differences.

What Cindy was discussing, 718.113 sub 8, and that's where a unit owner wants to install a charging station, you'll notice that the operative word there is that the association must allow the installation. However, by the time you get through all of the different requirements that the association could put on that allowing a unit owner to install their own charging station, it probably makes a lot of unit owners not want to install the charging station, and so what do they do?

I've seen some questions in the chat already. They come to the association and the board, and they say, "We want you, we want the association to fund and install charging stations on the common elements of the condominium." What governs that situation where a condo is being asked to do that? That's the separate subsection 9 of 718.113. I'm going to flip to the next slide because I've got the statute written here.

Let's look at some of the key distinctions between what Cindy discussed and this section of the law. The first big, noticeable exception is that where the association itself ... We're talking about condo associations here. Where a condominium association is being asked or is considering whether to install a charging station on common elements, the board may make that available. The board does not have an obligation to make that available. It's a may not a must.

You can certainly say, "We're not going to do it. You can do it, unit owner, but here's all the hoops you have to jump through." That may make it unpalatable to the unit owner, or the board can decide, "Well, we're going to do it, and let's look at the statute and what requirements are imposed in the statute if we choose to do that," if the board chooses to do that. There's really not a lot in this statute when it comes to the board choosing to install charging stations on condominium property.

The two biggies are that the association has the ability to establish the charges or the manner of payments for the unit owners, residents, or guests who use the charging station or natural gas fuel station. It covers both. The board is well within its rights to pass those costs on to the owners who actually use this facility.

I've seen some questions in the chat where they've been asking, "Well, does everybody have to pay for this?" At least according to the statute, the board can decide that it doesn't need to be assessed to all unit owners. It can be assessed to the unit owners who use the station. Now, how do you determine those costs? I guess, you've got to figure out who's using the charging station and then determine those assessments accordingly. Certainly, that number may go up and down as people have electric vehicles, get rid of electric vehicles, and more people buy electric vehicles. You're allowed to do that as the board of a condominium.

Now, Cindy touched on this very early in her presentation. Is the establishment of a charging station or a natural gas station, is that a material alteration? Because those of you in condo land know that a material alteration is a very difficult thing to do, typically. You need to get a lot of approval for it. Statutorily, there's a very high bar to approving material alternations. That may be changed in your declarations, but that usually requires a vote of the unit members.

In this case, the legislature has made it very clear, explicitly clear in the statute that if the board decides to install charging stations on condominium property, that is not a material alteration or a substantial addition to the condominium property, so takes it out of that area where you'd have to go and meet the approval requirements either by statute or by your governing documents.

The board can do this. They don't need to get widespread approval of it. They don't need to comply with the material alteration voting requirements, and they can distribute the payment, the cost of this among the unit owners who use it. At the end of the day, it's a may not a must, and the board can choose to do it or not to do it.

Now, I want to talk about HOAs. We've been spending a lot of time talking about condominiums, but in homeowners associations, as is the case with a lot of things with homeowners associations, there's much less statutory authority around what a homeowners association can do versus a condominium association. In this case, there is no provision, statutory provision that guides homeowners association on the issue of electric vehicle charging stations.

At the end of the day, a homeowners association is not required to allow an owner to install a charging station, but let's think this through. Let's suppose that your governing documents don't say anything regarding electric vehicles charging stations. Can an owner then construe that silence as the ability to do it? Well, arguably, they could after complying maybe with whatever architectural review standards the homeowners association may have in place.

This is a case where silence may not be a very good thing for a homeowners association. If your governing documents do not address this issue of lot owners wanting to install their own charging station, this might be a good time to review whether you want to put some requirements in there. Because if you don't do that then, arguably, a lot owner can do what they want. They may be able to comply with some minimal architectural review standards, but then it's solely up to them.

Here's what the difficulty is. As you saw in the condo statute, there's a concern about insurance. There's a concern about maintenance costs. There's a concern about indemnification of the association if that charging station causes damage. You can imagine a townhome situation where one of the connected lot owners decides to put a charging station in their garage and it causes damage to the building, and damage to the common areas of that building that the association may have some other duty and obligation to maintain.

If this stuff is not specified in the governing documents, that may not be an optimal situation for a homeowners association. You folks in HOA land have a lot of things to be concerned about, but this is certainly an area where if you're starting to get lot owners who are requesting this, you may want to bite the bullet here and start thinking about putting some language and restrictions into your governing documents about it.

Probably, the condo statute is a good place to look for what those restrictions might be because it's very well-specified. Insurance, maintenance costs, reimbursing the association for its increased insurance charges as a result of that.

Now, what if the homeowners association wants to install charging stations on common property or common areas? It can do that. It can do that by a board vote, so that's an area where the association can decide to do that as well in a homeowners association. Those are the two big differences, if you will, between a homeowners association and a condominium in terms of electric vehicle charging stations. Certainly, I know there's probably going to be a ton of questions about this in the chat, so we'll try to get to those at the end.

One of the things we didn't cover, I don't know if there's any co-op folks on here, but I heard Alan, earlier today, asking Cindy whether there was a statute addressing this in co-cops. I think the answer was no, Cindy?

Alan Tannenbaum, Esq.:

There isn't. The co-op statute is silent.

Jon Lemole, Esq.:

Okay, so similar to the HOA statute with regard to co-ops. With that, we're going to pass it back to Alan, and Alan is going to discuss the challenges, the practical challenges with installing and operating charging stations.

Alan Tannenbaum, Esq.:

Jon, before we get off the last point, just to be clear, there are some HOA documents that restrict improvements to the property. Also, from a budgetary standpoint, some of them have limitations on what the association is able to spend on new improvements, so there could be some peculiarities in the CCRs of certain homeowners association that would not allow a board carte blanche to make, for instance, a $200,000 investment-

Jon Lemole, Esq.:

Certainly, yeah.

Alan Tannenbaum, Esq.:

... for an improvement without some approval mechanism, but some documents do require that. Okay.

Jon Lemole, Esq.:

Right.

Alan Tannenbaum, Esq.:

Challenges with installing and operating charging stations. A lot of the concerns and questions in the chat are about these topics. Again, probably not well-thought-out by the legislature. Again, I don't think the industry has ... Their sales department has greatly exceeded both their maintenance and their safety departments, and there have been some horror stories around the country.

The first challenge, and I'm sure the folks who are not necessarily supportive of green energy will understand the irony of this, that in order for a charging station to operate, it obviously has to have electrical power. You're making use of the electrical grid to support something that is green energy in mind, which is electric vehicles.

Again, we're not going to get into a political debate, but it is a practical issue, which is even if a condominium or a homeowners association desires to create a community charging station, it does draw substantial electrical power and then creates a capacity issue. What we have found on the ground is some developers have installed very sufficient electrical systems that could support capacity greatly in excess or substantially in excess of the normal electrical load for the condominium or for a homeowners association, and some don't.

We have a property on Longboat Key where they're all identical buildings, six of them. For some reason, one of the buildings has a very substantial power capability relative to the other buildings. Well, no problem with the one building with substantial capacity installing a power station. Whereas, the building nextdoor, which is the same building, but for whatever reason, has insufficient capacity, they would have to substantially upgrade their power system in order to support a charging station. Maybe what needs to happen is the one condo needs to put the charging station on its common elements and allow the other buildings to utilize its charging station for a cost.

I don't know what the solution's going to be, but upgrading the power capacity of a building could be a difficult process. It's certainly an expensive process, so the first inquiry for any HOA or condo who was thinking about doing a community charging station is to do that investigation and study to determine what the requirements will be from an electrical power capacity for that particular charging station. It may impact how many different stations can exist. It's certainly something to be looked into because it could be quite expensive.

All right. Problem and challenge number two, getting the electrical service to the station. Again, there's all different kinds of configurations in HOAs, and condos, and co-ops about where the main power source is for the community, what kind of lines are running from it, what paths they're taking. In determining the location, even if you have sufficient electrical capacity, in determining the location, is it a location that's appropriate relative to getting the power supply to that particular area?

The irony is, you would think about it, that you would put the common charging station in an area of somewhat open space. Well, that may be an area that nobody ever planned electrical service to go into that location and you have to, either through open trench, which means maybe upsetting some asphalt or they have different jetting systems that can create, or can place electrical service without disturbing the ground, but of course, then you get into the issue of all the other utilities that might be in the area.

I was at a mobile home park in Largo yesterday, where one of the energy companies came in about 10 years ago, jetted a new electrical service to a large part of the mobile home community, and they didn't take into account that they were jetting at the same level as the sewage system, and the sewage piping for the project, in some cases, actually jetted right through the piping, causing some problems. If you're adding electrical service or do electrical lines, then you always have the issue of, "Are we now interfering with other services?" Potable water, or sewage has to be looked at. That's a challenge and certainly part of the cost.

One of the things that's interesting that we have determined with the companies that install charging stations, they don't want to be involved, most of the time, in bringing the electrical service to the charging station. They will recommend contractors who they're comfortable with who do that service, but it's typically not included, so they're requiring that the association separately contract with a contractor who's going to bring the electrical service to the station.

They want that electrical service there in sufficient capacity, properly done to support the charging station which they're going to install, but they generally take no responsibility, even when they're recommending that particular contractor, for getting that electrical service. He may end up contracting with a company you don't know, you have not dealt with, and there may be electric companies that are local that don't understand the peculiarities of charging stations and what type of electrical service to bring, what type of material to utilize. There is definitely going to be some confusion in that marketplace.

All right. Maintenance. There's studies that have been done in California, which by far has the most installed charging stations probably in the world per capita. The anecdotal stories out of California is that you're on the highway, you go to a charging station. There's eight different pieces of equipment, and there may be four or five of them that are down at any given time. There's a big problem with the companies keeping up with the maintenance of the charging stations.

I reviewed a contract for a condominium with one of the national companies and it said that if there's a problem with one of the charging stations, that within 24 hours, they will do a diagnosis on their software of what the potential problem is, and if they can fix it remotely, they will do so. The paragraph on maintenance ended there.

I went back to the company and I said, "What if it can't be fixed remotely?" They refused to include any language in the agreement that had any requirement at that point for them to be out within any particular time to do any particular operation on that charging station. All they could offer was that they won't charge for the service while that particular station is down. This maintenance is very difficult, and equipment is technical enough that you can't find a local contractor who's going to touch it.

In fact, the contracts that these national companies have put out around the country indicate that it has to be an approved vendor who actually does the maintenance, although, "We can't promise when that vendor is going to be out, how much they're going to charge, and we can't promise, if it defaults again, that we'll be out within any particular time to do anything."

Maintenance is a big issue. This is another problem with the fact that the companies have been out selling this equipment. They do a pretty good job of getting there within at least a matter of a few months to install the equipment, but once they leave your property, you're kind of on your own and at the whim of the industry as to when they're actually going to get there to maintain it. That's a big, big problem nationwide.

Okay. Insurance. You take all the horror stories, you take the cars having fires. Obviously, there is electrical charge in this equipment. They could be run into. They could be abused. They could be vandalized, and it creates a big insurance risk for associations who are installing this type of equipment, so it's really essential that you go to your insurance agent and determine what additional coverage that you would need to purchase to cover a charging station. It's an atypical risk. There may be a separate policy that you could purchase. Certainly, an endorsement that covers that type of equipment, because I'm sure that most policies, right off the bat, have exclusions that would cover the installation of a charging station in an HOA or a condo.

The thought that, "Well, we have property and liability insurance, so we have no concern," both property and liability insurance, of course, have a multitude of exclusions and exceptions. Sometimes, they have limitations on the amount of coverage that might apply to a particular situation. Really essential that you contact your agent and make sure that either through a separate policy or through an endorsement on your current policy that the specific installation is charged, that there is sufficient coverage that's going to apply to the risk involved.

Station abuse and damage. It's really a problem. They're very attractive pieces of equipment. You can have teenagers in your community who are making use. You have people who don't know how to use the equipment, and there's always the potential of abuse and damage. Anytime you have vehicles driving up to be charged, you have the possibility of the equipment being run into and a multitude of abuses, so you got to think of security cameras that are focused on the facility. You have to have rules and regulations in place that are very strict and holding anybody who causes damage to be accountable for that damage. There's a lot of thinking and policymaking that needs to go in.

Now, there is some great literature on this. One of the places that you can look is there's a lot of public facilities. In the public facilities, they have adopted rules and regulations. Some of the municipalities have charging stations for their employees, so there's literature online that, let's say for a municipality that has installed this type of equipment, what conditions do they put on their employees who want to use the facilities? There's a lot of good literature online that you could pull, but you got to do some thinking because, think about it. It's an unusual use.

If you have a clubhouse, you have standard rules and regulations about use, and so forth, but nobody's really operating any equipment, unless you're talking about a common coffee maker or something. This is a piece of equipment, it could be damaged, abused, and so forth, and there needs to be conditions imposed.

User claims. This is really where associations got to think about, in your documentation, including indemnification. Which, think of all the things that people can claim. "My car was damaged. While I was trying to pull in, somebody else was pulling in and there was an accident." "My car doesn't work anymore because I hooked it up to the association's equipment and after I was done using the equipment, my car wouldn't start, so it must have drained my battery."

All kinds of potential, and your documentation needs to say that, "Look, if you're utilizing this equipment, you're on your own. We are not representing that it's going to charge to any certain level, that it's going to be effective, that it's not going to cause damage to your vehicle." There should probably ... I'm going to get into signage next. There probably should be signage that makes it very clear where you pull in, and so forth. Striping, things like that should be considered so people are actually pulling in straight to the charging station. Thinking of some sort of barriers between the parking bumper and the station itself, something to be considered.

The documentation that somebody is going to use it, they should be indemnified, the association, and releasing the association from any claims having to do with the capacity or the operation of the equipment. Signage, I talked about. Again, there's probably online, you could probably find, look up charging station signage, and there'll be a municipality or a public facility where they have an excellent set of signage. Sometimes, signage has to be pretty obvious, stating the obvious.

All right. This next part, which is passing the cost of installation and use on to the users. The companies that either lease or sell this equipment, as an additional profit center they also, they handle the accounting and the charges associated with the equipment. Some groups, rather than trying to account for all of this themselves, may want to, as an adjunct to their contract with either leasing or buying thee equipment, also buying the accounting package that the company sells.

They will actually take care of signing up all the users, assessing the appropriate charges, the rate charges, and so forth. It's a mechanism of including all the development charges in the cost so it's passed on to the users. I don't think any of the management companies are really jumping at the prospect of being the ones who set up the accounting for this type of equipment, so probably will default to utilizing the companies that regularly charge for this.

Again, there's a lot of good online research for how to charge, how to set up accounts, so that it really doesn't become the association's business. It really happens automatically that someone, in order to access the equipment, has to put in a particular code. The company somewhere records that usage, and has an arrangement with your management company or directly with the user to pass on the cost of the operation. That's, I believe, how most groups will be going, utilizing the accounting and software programs of the installation and leasing companies that lease the equipment.

The last point on user agreements. It's a really good idea that for anybody who's going to be utilizing the equipment that the association have a written document that they have to sign off on. Could be an online sign-off, but they have to sign off on that. If they're going to be utilizing the equipment, this is what the unit owner, or the lot owner in an HOA, or their guest have to agree to.

Now, that raises a question of whether you should even allow guests to utilize the equipment. There would probably, a pretty strong argument that the use of the equipment should be limited to owners and their tenants who have, before use, signed onto a written user agreement that binds them and that will have all the conditions of use, and the mechanism for charging for the facility, their agreements for indemnifying the association, and so forth.

I think the idea of associations opening up their equipment for use by the general public is a bad idea. I think even guests, it would be a bad idea. There may be certain type of guests. Potentially, if somebody's having a prolonged stay as a guest to the unit, maybe they can be made an exception for, but leaving the agreement or the use to owners and their tenants probably makes sense with a written user agreement.

Again, the agreements are online. You can check out a bunch of municipalities. Again, if an employee wants to use the municipality's charging station, there are user agreements that municipalities have adopted. Run it by your general counsel because there may be some things you need to ... Florida law, either in the Condo or HOA Act that have to be incorporated. There are prevailing party attorneys' fees, the venue for disputes. That would all have to be locally determined.

Let's look at some questions. I don't know, Jon and Cindy, while I've been talking, whether, hopefully, you've been glancing over the questions in chat, but if there's anything in particular that you want to take on, go ahead.

Cindy Hill, Esq.:

I have been trying to respond to answers in chat. There's been a lot of questions about people just plugging their ... Or unit owners I should say, plugging their electric vehicle stations into standard plugs either in a garage or a common element parking area. I'd advise that concerns about, electrical concerns need an electrician, but if they are plugging-in in a parking lot, those unit owners are using common element electricity for a purpose it was not intended. I would suggest that those associations with a concern like that consult their general counsel for some rules or prohibitions to put an end to that because that is not an appropriate use.

Alan Tannenbaum, Esq.:

All right. Anne says, "Great moneymaker," which is possible. Well, there's no restriction on what the association can charge for the use. There's nothing in the statute for condos that says that the charges have to be for actual use. Therefore, associations can pick up the development cost, the cost of bringing the electrical service to the charging station. There, in theory, could be a profit on top of that. I don't know, Cindy, if you have a thought about the taxable basis for anything that's greater than the cost coverage.

Cindy Hill, Esq.:

That's a really tricky subject. The Condominium Act is not intended to be a moneymaking endeavor, so where there have been, for instance, laundromats, vending machines, events in the past where associations tried to make some extra money, so to speak, the Division of Condominiums has come down pretty hard on that.

I would not advise at all pursuing that option without consulting with general counsel, because once you get down a path and then find out maybe you can't, as an association, do that act, you will have spent, arguably, more money finding that out, and then have to back up and lose more money. I highly recommend, anyone on here who's considering that, get with your general counsel before you pursue that option because that's a lot more tricky than you would think.

Alan Tannenbaum, Esq.:

All right. Steven has a recommendation of a particular company that he's liked. You can look at that in chat.

Cindy Hill, Esq.:

Oh, good. Right. Yeah, I did see a question about recommendations for electricians. I don't have a list of that, but I did say we'd try to come up with some folks that have been used by some of our clients.

Alan Tannenbaum, Esq.:

Well, the companies generally will recommend approved electricians in their market. Again, I don't know if they are remunerated for those referrals or not. What they'll tell you is, "We're recommending this company because our clients have had good experience with them. We can coordinate the schedule," and so forth, but you'll have to consider if in fact it would be better to go with a local company.

I don't know, and I haven't had conversations with the power companies about what their thoughts are, because they have capacity issues too. They may have something to say. I have not seen the power companies in our area, Duke Energy or FPL state their yay or nay on the idea of charging stations being installed and how it might impact. I don't think they're a huge draw on energy, so it probably wouldn't be sufficient. I see Michelle is putting out an evaluation form. I see a couple of companies are being mentioned in the chat. Anybody can make it. There's a term I haven't heard in a while, meter maid. Somebody's dating themselves.

Jon Lemole, Esq.:

The point is, it brings up a good point though. The issue is cars staying, folks leaving their cars at the charging station beyond when the charging is complete. There's really two issues. I think the charging ... The company that manages the charge and the billing for it can charge penalty fees for being hooked up to the charter past the vehicle being fully charged, but that doesn't solve the problem of, what do you do when the person comes down and unhooks the vehicle and still leaves it parked in the charging station parking spot?

I don't know that there's a very easy answer for that, except other than if you have a towing policy, then if that vehicle's parked there and not charged into the charging station, you tow it. I don't know that there's a more ready answer than that.

Alan Tannenbaum, Esq.:

Yeah, and I think, Jon, I think with the subject of security cameras that it would be a really good idea for multiple reasons, including to see if somebody's overstaying their stay, to have security cameras that's recording the use of the equipment. Would pick up vandalism, would pick up cars that are overstaying their use. If there happened to be a dispute between two different users, you would have some photo documentation of that.

Probably for groups that do have the capability of upgrading their security camera system, if they do install these, it would probably be a good place. Because, again, it's the unusual fact that this equipment operated by owners that's either owned or leased by the association and is unlike any other use that you might have considered with HOAs. Again, there's recreation use. There may be a kitchen, but this is a pretty unusual use. Legislature has-

Cindy Hill, Esq.:

I would add ...

Alan Tannenbaum, Esq.:

Yes, go ahead.

Cindy Hill, Esq.:

I would add to that that a lot of gated communities have cameras at their gates, particularly the gates that are, let's say the back entry gates that are just your arm gates, for the same reason that when the gates get damaged, they have video footage and they can try to determine who caused the damage and bill them accordingly. In that sense, the charging stations wouldn't really be any different, viewing them in terms of watching for damage on that issue.

Alan Tannenbaum, Esq.:

All right. Just some technical issues that are well beyond our expertise that are being asked about. At this juncture, we're going to conclude. We will look at some of the answers in chat. I think what we'll consider is that in a future session, we will bring in some technical experts, maybe electricians, maybe a representative of one of the companies, maybe a local official, and have an additional segment where some of the technical issues can be discussed.

We'll put it out there that in a few months, we'll come back and cover the subject from a more technical standpoint. Until then, we look forward to seeing you next month. Thank you for your participating. Any of the managers, be sure to be in touch with Michelle if you have any questions about getting your CEU credit for today. Our program will be on our website. The video and a transcript will be on our website, hopefully, within a week, and so you or your board members can then make access to it. Everybody have a great day. Thank you again.

Jon Lemole, Esq.:

Thank you, everyone.

Continue reading

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Smart Board & Property Manager Legal Guide: Where Do We Find The Money?

Video Transcript

Alan Tannenbaum...: Good morning everybody. This is Alan Tannenbaum, of Tannenbaum, Lemole & Hill. I'm here with my partners, John LA and Cindy Hill.

Alan Tannenbaum...: And we ask everybody to put themselves on mute. If you have questions, send them through the chat feature. We will ultimately get to everybody's question. If you have questions after the program, you can email us. We're happy to respond to what we can as long as it's not two document specific.

So we're going to be talking money today. Big topic for every condominium and Homeowner Association in Florida. Financing was difficult to knock in past years, but today we have a series of added burdens, one that the legislature created primarily for three story condominiums, but also other condominiums in Florida. You've had the impact of two major hurricanes in the last season that have thrown the insurance markets into a tail spin, with greatly increased insurance premiums, not only for associations, but also for individual owners on their individual policies. Add to that increased construction costs and supply side problems in the construction industry, and you have a lot of financial pressure on associations.

We're going to be taking at 10,000 square foot view today of some of the things that you should be keeping in mind. We're not going to get into the weeds as far as the statutory changes on reserves for condominiums. We're not going to be tackling the depth of the insurance crisis. So this is a 10,000 square foot view of things that you should be keeping in mind, maybe some bullet points and recommendations for you as you approach next year's budget season on best practices. So for those who wanted to detail explanation of the new reserve statute of the condo, this is not going to be the seminar for that. You can go to some of our other seminars that we have put on in that topic and review those.

So let's get on it and we're going to cover first, and I'm going to ask Cindy to cover first the subject of reserves, but primarily from the standpoint of where do reserves fit in when you're looking at the financial health of an association and how to confront financial challenges. You're on Cindy.

Cindy Hill, Esq...: Well, as Alan was saying, we're not getting into the weeds with this, so for those of you who have some specific reserve questions, you might be a little frustrated by the overview I'm going to give, but again, the point of this seminar was to hit some more broad topics and as Alan was saying, some of these more specific reserve topics are previous conversations we've had on smartboards that are available on our website.

So with that caveat, reserves. Very different topics for condos and HOAs, but I'll try to briefly address each before we get going on how this can be part of the big financial problems that associations are seeing in our current economy. So ideally, both HOAs and condominiums should have been fully funding their reserves, whatever reserves they would have, but ideally we should all be saving a certain amount for our retirement every year and are we all doing that? No.

So if you're in an unfortunate position where you have not been fully funding and you're a condominium, you are looking at the upcoming deadline of December 31st, 2024 for the requirement that you fully fund certain structural reserves, and those include your roof, waterproofing painting windows, if the association's responsible for the windows. These are a statutory list that you should be consulting with professionals to make sure that you're going to be prepared for this because you will not be able to waive those reserves after that 2024 date unless the legislation changes, which I would not expect to change. There are some current bills up in front of the legislature now to adjust some of these issues that are in the new laws, maybe fix a little glitch here, put a bandaid there, but I'm not seeing substantive changes. So I would be still planning for that deadline and knowing that you're not going to be able to have owners who can waive reserves after that time on these structural issues. So those are your definitely mandated reserves.

I will briefly address the Division of Condominiums has taken the position that the condominiums under three stories still have to do this as well, that they will no longer be able to waive their reserves on structural issues either. That is one of the issues though, in some of the new bills that is proposed to be changed, so watch this space. For homeowner associations they might not have any mandated reserves at all depending on how they were set up. Regardless, I would say if you have structures that you reserve for such as a clubhouse or you have private roads, if you've not gotten a reserve study in the last few years, I think it's time to revisit that because inflation has raised the cost of everything and you might not be saving for the adequate amounts.

Moving on to discretionary. Condominiums will still be able to vote to waive non-structural reserves. Again, consult with professionals and your counsels to what that list would be for your community, but as an example, it would include paving the parking lot, resurfacing the pool. These are not going to necessarily be structural reserves which you can no longer waive. So it's important to remember that once the new law takes an effect on 2024 at the end of the year, you're going to have two categories. The category you cannot waive per statute and the category you can waive. So again, consult with your counsel, make sure that you know what those lists are and you're prepared. For homeowners associations if your reserves are discretionary and not mandatory, you may want to consult with your counsel because there is an option in the Homeowner Association Act where you can change that, where if you want to, you can make your reserves mandatory. There could be good fiscal responsibility reasons for doing that. On the flip side, there could be reasons why the community wouldn't do that, but I do want HOAs to know that they have that as an option, that if the majority of all the lot owners approve, a homeowner association can have mandatory reserves.

Moving on to what we experienced in this area last year with Hurricane Ian, looking at your reserves as you revisit them, think about damages that were not covered, both for condominiums and HOAs. I had an HOA that had a couple hundred thousand dollars worth of landscaping that was just eviscerated by the hurricane, and of course that was not covered. I know condominiums that lost landscaping. I know of condominiums that lost carports that were not covered. I've heard of condominiums and town homes losing lanai screens that were not covered. These are not necessarily issues that are going to be reserve items, but these are issues that could be reserve items and should be addressed as you think about how you're going to save funding going forward and the lessons that we've learned from Hurricane Ian, which relates to a similar issue, the insurance deductibles. Some of the insurance deductibles that my clients had after Hurricane Ian, before they even got coverage, were a shock to them. They honestly did not know what the deductibles were, and I think that's because we had all gotten pretty comfortable here in the greater Sarasota Tampa Bay area at least, that hurricanes weren't really a big concern for us. So our hurricane insurance was not something that we revisited with some sort of scrutiny.

So again, not directly related to reserves, but I do feel like when it comes to planning ahead, thinking about the lessons we've learned from Hurricane Ian and thinking about adding reserves for some of this funding is definitely worth a revisit. So with that in mind, I think that takes us to budgeting, Alan.

Alan Tannenbaum...: Jon, can go to the next slide. So the topic, establishing a realistic budget and just some things statutorily to keep in mind. First for condos, and again, this is a 10,000 foot level view, but remember some basics. The budget must be adopted at least 14 days before the start of your fiscal year. So if your a condo, and it's the summer season, it's good time to start the budget preparation because if your fiscal year starts January 1st, the budget must be adopted by the middle of December and there's a lot of things that proceed that. So it's actually the budget, the preparation for a condo where you're on a normal calendar fiscal year, your process actually needs to begin in the fall at the latest. The budget meeting, of course, has to be open to the owners. The proposed budget has to be presented to the owners at least 14 days in advance.

So again, look at the timing. If you have to adopt the budget by the middle of December and you're going to have the meeting right up at the deadline, you're going to have to get that notice out by at least December 1st, and we recommend that that occur earlier.

An owner has a right in a condominium to object to the budget, but they have to have 10% of the owners going with them on that challenge. If the budget assessments exceed 115% of the proceeding year, but remember that 115% does not include reserve increases, non-reoccurring expenses and betterments, those are excluded from that 115% calculation. So consider really, if normal operating expenses go up more than 15%, then that 10% can object to the budget. Then there's a procedure for adopting an alternative budget. I don't think that happens very much and there would be a lot to be ironed out, but just be aware that they have that right.

Really important, we're not going to go through it here, but if you're preparing the budget, you need to look very carefully at 718, 504 21, which actually is in the developer section of the statute, but gives a detailed recitation of what needs to be in a condo association budget, all of the line items that need to be accounted for are set forth in detail, and it's a requirement of 718 112 that your budget meet the requirements that are in 718 504 (21). We're not going to go through those here, but everybody should be aware.

But comparing that to HOAs and Jon, if you go to the next slide, this is one of the great distinctions between operating a condo association and operating an HOA. There's very little that 720 governing HOAs has to say about budgeting. There are some elements that have to be in the budget that's covered by 723 036 (a), but beyond that budget adoption is document driven. So you're not going to have the detailed requirements that are statutorily required for a condo for an HOA, but look carefully at your documents because they may have something to say about what needs to be in your budget. Also, the reserve requirements are far different. HOA doesn't actually need to have reserves unless it's mandated by your documents.

Now here's an important thing to consider and that is a line item in your budget, you could call it a contingency. I think that's a good description for it or call it the line item for surprises. So you can include in your adopted budget a contingency line item that would cover cost of overrides in any of the existing budgetary elements. So for instance, it certainly was possible for an association, if they were anticipating insurance increases, to include in the line item for insurance what they paid last year, but also either in the insurance line item or in a C line item, an additional amount of money to cover what might be potential increases.

Now, nobody in Florida expected that their insurance was going to go up 200 or 300%, so it was very doubtful that anyone was going to have a contingency that would've covered. But in an age where the legislature is acting, we can't control what's happening in the construction industry or the insurance industry, probably a good idea going forward to have a decent amount in that surprise or contingency line item going forward to cover the volatility that you may be seeing over the next four years.

So realistic budget means certainly determining through an intelligent process what the anticipated costs are going to be in each line item, but also incorporating in there something for surprises. So with that, Cindy is going to talk about budget amendments.

Cindy Hill, Esq...: So before we get to the discussions on special assessments and borrowing, which I know that many of you're going to have questions about, I can already see them showing up in the chat, I want to remind everyone that budget amendments are an option. Both condominiums and HOAs, unless there is some odd provision in their documents, can amend their budgets any time throughout the year for reasonable basis. So why would you want to amend rather than special assess or borrow? Well, some documents have some restrictions on the association taking out a loan that might present a hurdle. They may require a very high owner percentage, for instance, and the same concern may be there for a special assessment. Some older documents don't even mention special assessments in them. So you may have concerns about whether there could be a legal challenge and maybe you want to amend your documents and fix that, but in the meantime, you need the money right now.

So just remember that budget amendments are an option, and if they are looked into, you do need to make sure they're treated with the same notice provisions that your annual budget is, they have to follow the same, notice to the owners decided at open meetings, whatever provisions your documents provide or the statute, depending on if you're a condo or HOA. So I just want to put that reminder out there and now we'll get onto the topic that I'm seeing-

Alan Tannenbaum...: Let ask you a question first, Cindy, before we move on.

Cindy Hill, Esq...: Sorry?

Alan Tannenbaum...: Let me ask you a question first.

Cindy Hill, Esq...: Oh, okay. Go ahead Alan.

Alan Tannenbaum...: So with that 115% provision in a condo, let's say that three months into a new budget, there's a budget amendment that increases that year's budget above the 115% level. Do you think that owners would still have the right to, more than 10%, now challenge the amended budget?

Cindy Hill, Esq...: I think they arguably have the right to challenge because there's not a provision in the statute that makes an exception for a rise in insurance. I don't think the legislature saw anything like this coming. There is a provision that says if it's basically like a one-time expense, and I'm paraphrasing, it's written more detailed in the statute, that's not anticipated for future years, it can't be part of that assessment to be challenged, but I don't know how we could... and you could make the argument, maybe we could all hope that these high insurance premiums will be this year and not next year, but I don't think that that's an argument anybody can make with any real knowledge, that's too out in the ether, so to speak, but at the same time, ultimately the board has a fiduciary duty to ensure that the facilities are insured in condominiums, that's specifically in the statute. Governing documents for HOAs are likely to put a similar burden.

So if owners want to challenge insurance, they can challenge it, but at the end of the day, the associations are going to need to take the insurance actions they need to take, even if owners object to the high costs, just like FPL can raise their rates for instance, but we all can't just decide not to pay it because we don't like it, FPL will shut us off. It's not the same example, but it's a similar example, there's obligations that are not discretionary.

Alan Tannenbaum...: I think the dreaded special assessment is next. Why don't you take that on?

Cindy Hill, Esq...: I've never seen so many special assessment questions in a season as I've gotten this year, which tells me that a lot of condos and HOAs, condos in particular, imposing special assessments and understandably so, not just the insurance, but for condominiums of a certain size, the milestone and the servs inspections and reserve studies are really hitting their budgets hard with these tight timeframes legislatures put on us.

So one of the mistakes I see made, and I've seen it over all the years I've practiced, is that with a special assessments decided by a board, people don't necessarily realize that that means that at the same time the statutes for both HOAs and condos require that that board meeting be noticed to the owners. There's a disconnect there where there's kind of a presumption of it's a board meeting, all we have to do is post the meeting like we always do, and notice the board. No, both the HOA and the condo statutes, and I've got the sites up here on the PowerPoint, require 14 day notice to the owners. So if you make that fundamental error, your special assessment could be questioned right out the gate. So I cannot emphasize enough, reach out to your counsel, double check on your special assessment requirements because if you mess up the procedural part of them and you have an angry owner or someone who wants to be difficult, you've got a problem. So that 14 day notice is something I can't emphasize enough.

The other issue is you do have to put in that notice specific statutory requirements, and I've quoted them again on the PowerPoint here. For condominiums the notice must specifically state that assessments will be considered and provide the estimated cost and description of the purpose for the assessments. Now, that doesn't mean you need to provide a three page list of all of the changes that are going to be made in terms of what sort of materials are going to be used to change the roof, that's not what I'm saying. But what I'm saying is you make need to make a good faith effort to say, "This special assessment is going to be for roof replacement," so that everyone knows what the funds go to.

For HOAs, similar requirement, you must include a statement that assessments will be considered and the nature of the assessments. A little more vague there, but again, the requirement is to try to tell the owners in good faith what the funds will be spent on.

For condominiums, that's particularly important because the condominium statute requires that if you do end up with surplus special assessment funds and you don't need them for that particular cost anymore, again, let's just say a roof, you cannot just then use them for something else. You either have to credit the unit owners on the general assessments or return the funds. So it's very important that you say what these funds are going to be used for.

Something to consider also when voting at a board meeting to have a special assessment, and again, this conversation is for the board meetings for special assessments, think about having a formal resolution. I do encourage my clients to have that. It doesn't take a lot of attorney's time to present you with a formal resolution so that you have a document the board can sign and fill in the blanks, so to speak, at the meeting in terms of what the assessment will actually be, whether it's going to be one payment, multiple payments when they're due, when will they be late. That resolution sets all of that right there at the board meeting and again, solidifies that you have done the process correctly and that going forward, you're going to be able to collect on it without having procedural concerns. And if you don't do the resolution regardless, once the special assessment is imposed, you do have to let the owners know the amount and the due dates. It makes sense, doesn't it? But you really have to do that. You can't just presume maybe that somehow they'll get word or however it will go through. You need to have a specific procedure, and I recommend actually sending out a paper notice, even if you already have some sort of system with management that maybe wouldn't be as formal.

So I know we're going to have a lot of questions on special assessments, but I would say first, Alan, did you have something in the chat you're seeing or Jon, did you have something you wanted to bring up before?

Alan Tannenbaum...: Well, let's do this. Let's get through the program and we'll hopefully have at least 10 minutes at the end to go through all of the questions on that. We'll give you an opportunity to study them and pick some of the ones out that you think are appropriate.

Cindy Hill, Esq...: And I am trying to... when I look like I might be distracted, I'm not distracted. I do try to answer some of the questions on the chat. So yeah, that's the quick download of the importance of the notice and procedures for special assessments. So Jon, I believe you're up next.

Jon Lemole, Esq...: Yep, I am. So I represent the litigation side of the firm. So I get to talk about claims and despite your best practices and best efforts to create a very good and solid budget for your communities, sometimes things happen and those things can potentially throw a budget completely out of whack. So what we're talking about here is, for example, you have a repair project or an improvement project that goes wrong, it's not done correctly, or maybe it's even completed and sometime later you find out that the contractor did defective work or like we had last year, you have a major hurricane that comes through and creates a whole bunch of different expenses for your community. So there may be potential claims that you can bring, whether it's a first party claim against your insurance policies or whether it's an actual claim against a contractor for defective work, and one of the things, and this is really a philosophical, I guess, discussion or issue, one of the things that I see often is that communities and people in general, review the idea of bringing a claim of some sort as an expense item. And that's primarily because it's no secret that lawyers, litigation costs can be expensive.

So when evaluating whether or not you should bring a claim of some sort, I think there's a natural bias to be very wary of it because, "Oh boy, that's going to be expensive. Lawyers are expensive, court costs are expensive," and that may be true, but I think that if we turn that around a little bit philosophically and look at claims as a potential source of revenue, it makes the discussion a little bit easier to digest and a little bit easier to present to your owners as well for those situations, like in homeowners associations where you may need to have owner approval in order to go forward with a claim.

Folks, we handle a lot of litigation on behalf of community associations. We handle defects claims when repair jobs go wrong, we handle claims coming out of turnover against developers and builders, and our job and any lawyer's job is to achieve a net result for that association, which creates positive cash flow. Okay?

So let's break that up down a little bit. Let's suppose you put a new roof on your buildings and six months after the project is completed, your roofs are leaking and you realize that the contractor did a really bad job on these roofs. So you can look at that potential claim as an expense item, "It's going to cost us a lot of money to go after that contractor. Also, we're going to have to make repairs," and if you make those repairs, that's all going to come out a hundred percent funded by your association and your owners.

If you look at it as a source of revenue, even with the expense of going forward with a claim, and it doesn't matter whether it's a net positive result of 10%, 20%, 50%, whatever it is, that reduces the burden that has to be shouldered by the owners in your community or by your budget, frankly, whatever that number is, less than a hundred percent, that's a positive result for the association. Now, any lawyer hopefully is going to try to maximize that net result for their client and that's our goal, that's always our goal, but it doesn't have to be complete reimbursement or a hundred percent I've been made whole because anything less than a hundred percent is still a positive result for your association.

So whether it's pursuing a claim for defective, for defective repair work or a defective improvement work, or whether it's a potential first party claim because we've seen a lot of associations that have, maybe for a variety of reasons after the hurricane decided, "Well, we probably don't have a claim. It's probably not going to be in excess of our deductible. Whatever we do, we're going to have to pay a lawyer or it's going to come out of the recovery or if we get an adjuster involved, that's going to come out of the recovery. All of that stuff is expensive, we may not have a very valid claim." Don't think of it that way. Look at it as a potential source of revenue. Investigate that, talk to your general counsel, talk to a first party insurance, plaintiff's attorney, talk to a firm like ours that handles construction litigation.

The other area, which I want to just touch on really quickly for some of the newer associations, is when you come out of turnover. We've represented a lot of associations coming out of turnover, whether it's a condominium association or homeowners association and we've been able to bring revenue back to the association by pursuing claims against developers and builders for, whether it's defects in the buildings, even in a single family home homeowner's association, for site issues, pavement issues, drainage issues, your site improvements.

So for your associations that are coming out of turnover or approach or approaching turnover or going through the turnover process or recently having gone through turnover, look at the idea of getting engineering studies done and I know it's an expense, but typically when you do those studies, you may find that you have potential claims against the developer and the builders, which can, as I've said, be a source of revenue for your association if you pursue those.

So even after you've paid the engineering expense and the expense of lawyers and costs to bring those claims, the net positive or the net result of that is money being returned to the association to help offset the costs of maintaining those conditions, fixing those problems that may have been identified by the engineer or putting money back into reserves for fixing things down the road, which may not need immediate attention, but may result in a shortened life expectancy for those systems, components, roads, drainage systems, lift stations, whatever they are. All of that is a way of managing the future cost for the association in a way that creates less of a burden on the association itself and the owners and returns money into the reserves of the association to handle those things.

So that's it on claims as a source of revenue, but that's the takeaway here, look at claims as a source of revenue, not necessarily just an expense item. With that, I think I'm throwing it back unless anybody's got questions or comments. I'm going to throw it back to, I think, Alan on loans and lines of credit.

Alan Tannenbaum...: Yeah, one more addition to what John just said. In a turnover situation the other inquiry is, did the developer handle our money correctly during the period of developer control of the association? So getting an auditor in to make sure that the developer used association funds only for association purposes and not for developer purposes, that all of the contracts were market value contracts, that association funds were not spent incorrectly, those are additional inquiries and additional sources of claim possibilities. I think 2, 3, 9, 6, 3, 3, there you go. Thank you.

Okay, next topic. Loans and lines of credit. I'm a great proponent for associations to consider project loans and lines of credit. I've been around long enough to remember the time early in my career when a condominium association president would go to a bank to say, "I need a loan." The first thing the bank officer would say was, "Well, what property can you put up as collateral?" And the association president would tell the bank, "Actually, a condominium association doesn't own anything other than maybe the office furniture and the pool furniture," and the bank officer would say, "No problem, I just need your personal guarantee and I will be happy to give you this loan." And the association president would say, "I'm not quite paid enough to put my personal assets on the line for my condo association." But what banks have finally realized, and this occurred over the last decade, is that condominium associations and HOAs, as long as their default rated on their assessment collection is low, are excellent risks, and now there's a bunch of banks that are happy to assist associations with project loans and lines of credit.

Now, what are the benefits of borrowing? And I'm talking about specifically for unanticipated or non-reoccurring expenses. So your reserves are not sufficient, and you have a major repair roofing project to undertake. Your choices are include that cost of that extraordinary expenditure in your normal budget or do a budget amendment if it happens bid year or do a special assessment.

But there's a fourth possibility, which is to borrow the money, either through a line of credit or a project loan, to undertake that repair effort. And the benefits are you're now spreading the cost of that project over several years rather than paying for an assessment upfront, and if you think about it, in the commercial world, if a company is going to build a new warehouse or a new factory, they don't necessarily put that on their current balance sheet. They may, from a strategic standpoint, borrow the money that's necessary in order to undertake that major project, and it doesn't become a normal balance sheet item. So you're spreading it over several years instead of the assessment upfront.

Now, as John indicated that if there's a claim involved. So let's say that you're going to make a claim against a party. The process is going to take a year, a year and a half to get the recovery, but you need to spend the money now to repair it or to even study it. That gives you the opportunity, through a line of credit, to pay those expenses and then when the recovery's made, then you pay the line of credit off, and all the association has incurred in the process is the carrying costs on the loan rather than for the entire repair, knowing that recovery is coming in the future.

For turnovers. So let's say you've an HOA has just turned over, you're going to get an infrastructure study by an engineering firm that's going to cost $75,000. You're going to get an audit from an auditor that's going to cost $10,000, and you're going to pay some legal fees for the negotiation of those issues with the developer. So you get $150,000 line of credit, which you use for those extraordinary expenses and after a year of negotiations, after you have all those studies done with the developer, the developer says, "We'll rent a check for $200,000 back to the association to cover those issues." and you could then recover the cost of what has been spent on that engineering cost and the legal cost and so forth without having to hit the owners with an increase in assessments that they're normally going to get anyway after turnover because the developer has understated those claims. So it gives a significant amount of flexibility. Again, the debt service and not the project cost will be reflected on the balance sheet and you're spreading it over it.

But here's a real key of where a line of credit is really helpful. Let's say you have a roofing project and it's a combination of a fixed price, but there are some allowances, let's say how much decking may be removed from the roof in the process. There's going to be some fascia and soffit work that's done that until you get into the project, you don't know what that cost is going to be. The contractor has in their contract that if the price of materials goes up over a certain amount, that they're able to increase the project cost by the amount of the material increases.

So you really don't know what that roofing project is going to cost, but if you have a wider credit, instead of having to go back to the owners to say, "Well, we passed a special assessment for $100,00, but we're really going to need $110,000 or $120,000 to finish the project and then try to go back to the owners, amend the budget, go for another special assessment, is having a line of credit gives you the flexibility to pay for extras or increased cost of a project more so.

So consider it is as an additional source of funding that has more flexibility, is not necessarily governed by some of the restrictions that might apply to a special assessment or a budget amendment or a budget adoption. But Cindy is about to kick me under the table because she's going to tell me that, just be very careful that your documents actually allow you to borrow money. Some documents don't allow that, some documents have other types of limitations. So the first thing you need to do if you're considering either a project loan or a line of credit, is to make sure you have your general counsel review your documents. You might need an amendment to support your ability to borrow money, but it presents an excellent source of flexibility for associations, and frankly, it's something that most corporations for profit and frankly governmental entities, utilize as part of their fiscal management. And I think that associations should consider it as a tool, especially in a era of fluctuating expenses, unanticipated, you always should have that backup.

If you think about it from a hurricane situation, a hurricane hits, you have immediate costs that you need to spend, totally unpredictable and to have that line of credit available to take care of emergency situations is really important capability to have if there's any type of casualty loss, hurricane situation and so forth, really important for that too.

With that, I'm going to turn it back over to Cindy who's going to give us a little tutelage on collection before we get into your questions.

Cindy Hill, Esq...: Yeah, I can see that there's definitely a lot of questions, and I particularly like to try to answer the ones where I feel like maybe I didn't speak as clearly on something as I had hoped to do. So I do want to make sure we got question opportunity to clarify any statements I made that may have confused anyone. That's the downside of trying to do quick nuts and bolts is sometimes it can be confusing.

So with that being said, the last part of this piece is efficient assessment collection. With the special as assessments, I'm seeing my clients impose I can promise you there's going to now be some collection issues. People are not necessarily going to be able to pay all these special assessments, particularly if they need to pay them more quickly rather than more spread out, which is more likely to be the case considering that these special assessments are coming from a need for quick funding from associations.

So one of the best things you can do as an association is set up a collections policy, work with your counsel, work with management, set up a policy that puts the timeframes or the delinquent amounts for each step of the collection process and for HOAs and condominiums, you have to do a first letter now that people call it various friendly things, the friendly letter, the pre attorney fee letter, there's all kinds of names for it. It is a first letter that goes out before you can impose any attorney's fees on the collection process. So there needs to be a conversation about who does that letter, if it's management or the attorney. For reasons you can probably guess, I recommend the attorney do it, not at any criticism to manage it, but I feel like it's unfair to put the burden on management, that's a legal requirement such as that letter puts.

That being said, it's each board's decision, and then to have a policy for the next two letters that come after that. The first one, which is the pre lien letter, and then the second, which is the claim of lien on the property, and then if you need to proceed with a lawsuit on the lien. The reason I highly recommend you involve association counsel and that discussion is a lot of board directors are not aware of how that process actually plays out and what it means to file for lean foreclosure for assessment collection, and that community associations can actually take possession of a property in the same way that a mortgage can if you don't pay your mortgage. Too much information to delve into right now, but certainly things to think about.

A policy also helps you avoid arguments of selective enforcement because whether or not a board is trying to let somebody slide and somebody not slide, which is unlikely, it's more likely that the board maybe isn't aware that this person's just as behind as this other owner just because board members are volunteers, managers are overwhelmed, maybe you're even self-managed. So a policy will help avoid treating one owner a little differently than another when it comes to assessment collections.

My last piece of advice is a practical one on this. Make sure you're getting regular updates from management or counsel on collections. I can tell you as counsel, I have been frustrated by trying to reach out and say, "Okay, the next step in this process is," and I don't get an answer back, and it's not because anybody... Well, I don't know, maybe they don't like me. There's always that, but I'm going to presume it's not because they don't like me, it's because there's not really a process in place where on the board meeting for each month it's being discussed, what the status is and what the attorney needs to know to move forward. So I highly recommend having a process.

Then the last caveat to that is there are debt collection laws where associations can get into legal trouble if they appear to be disparaging someone who has a debt. So with that in mind, I highly recommend always referring to the unit number, the lot number, the address. Do not use people's names when you are going over these matters and board meetings. So that's my quick and dirty on collection processes.

Alan Tannenbaum...: All right, Cindy, let's get into some questions. The question I'll answer right away, doesn't take much. David asked, "Do we have permission to use the seminar videos and transcripts to educate our board members and association members?" The answer is yes. They're published on our website. Our website is open for public view, have at it. So Cindy, you said you saw a number of questions. What do you want to respond to?

Cindy Hill, Esq...: I saw a lot of questions about special assessing for not having sufficient reserves. This is an issue that is a new issue for a lot of associations because up until the statutory deadline has been imposed to fund reserves, there's never been a need to necessarily a special assess for any reserve issue. So I hope that my answer has helped make clear that generally the practice is to put your reserves in your budget and have them be part of the special assessments, even if that means amending your budget because you're now going to have to fund for fuller for larger amounts. But I also wanted to make clear that that special assessing for reserves can be a set of circumstances that could make sense in particular facts, scenarios, and documents.

So I cannot advise as to what that would be. You will need to get with counsel on that, but I can say it's best practices to go ahead and be planning in your budgets for these increased reserve amounts and doing so earlier rather than later. Even if you want to go ahead and amend your budget for this, you're arguably doing your owners a favor if you're starting to set those costs out sooner rather than with a shocking amount later.

Alan Tannenbaum...: Cindy, I see a question from Donna about whether loans or lines of credit can be used for a reserve shortfall, and I'll handle this and you can edify on it.

Cindy Hill, Esq...: Sure.

Alan Tannenbaum...: Right now, the statute Condo Act does not allow you to get a line of credit or in order to fund reserves, and several folks have imposed it, but the legislature's not acting on it yet. So reserves have to be fully funded, but what's interesting about having a line of credit is you can use a line of credit to cover a budget shortfall. There could be a situation where you use a line of credit, you fully fund the reserves, but if the association runs out of money by the end of the year, you use a line of credit to cover operating shortfall, which is not restricted by the statute.

Cindy Hill, Esq...: That's absolutely right, Alan, it's a tap dancing act to use the line of credit that way, but again, at the risk is selling like a broken record, that's why these issues have to be individually dealt with counsel. The lending restrictions in your documents and how you're going to handle are vital to be analyzed.

Alan Tannenbaum...: Okay, so Diane says, "I'm working on a $700,000 loan for an 18 unit renovation interest rate. The only lender who will lend for 125 units is 11.5%, which is $80,000 in interest for...

Cindy Hill, Esq...: Woo.

Alan Tannenbaum...: Diane. I'll do it for 10%. So... no, don't call me. I haven't heard that. I didn't realize, and if you maybe contact some of the lenders that are involved with, for instance, the CII chapters, run that by additional lenders, but maybe some underwriter has determined that for a smaller condo, there's a greater risk for them. But I had not heard anything like that quoted. It's good to know.

Cindy Hill, Esq...: I haven't heard that either, but I will say at least one of my small condos did get a small business loan from the government for the damages due to Hurricane Ian and the percentage rate on that was like four something, and it's payable off in 30 years. So I don't know the circumstances of the facts you read Alan. Unfortunately, I can't find that scenario in the chat, but I throw that out there as something that might be available to an association.

Alan Tannenbaum...: Okay. There's a question from Susan, "Can an association especially assess for the entire projected cost of a project and not draw down the reserve funds for that asset line item? Possible reasoning is to have funds on hand for overrides to start up the funding again for that asset." So if I understand the question correctly, let's say that an association condo has a roof reserve with $200,000 in it and they need to do a re-roofing project. Do they have to use the reserve in order to fund that re-roofing project or can they separately pay for that re-roofing project outside of the reserve process? Does that make sense?

Cindy Hill, Esq...: I'm still trying to process. I'm sorry.

Alan Tannenbaum...: Okay. So you have a $200,000 reserve for roofing and you have a re-roofing project. Do you have to use the reserve for the re-roofing project or can you just pay for that roofing project either by borrowing or out of regular assessments? I don't see any necessary restriction on that. There's nothing that says you have to use a reserve to pay for an ongoing project if you choose not to.

Cindy Hill, Esq...: Yeah, it's the flip side that you can only use the reserve money for the project it's reserved for.

Alan Tannenbaum...: But there's nothing requiring you use the reserve to fund a project, you can use other sources of [inaudible 00:51:20] a restriction on that.

Cindy Hill, Esq...: That's a question honestly, I haven't gotten before, and I would always, again, would want to look at someone's documents. But yeah, I guess if there was a reason to do it that way, and it sounds like there is a reason based on the question, I'm not aware of a restriction that would prevent that.

Alan Tannenbaum...: So you raised a specter of somebody on your opinion on windows, which we've got.

Cindy Hill, Esq...: Yes.

Alan Tannenbaum...: So there are some condos where the windows are actually the maintenance and repair responsibility of an owner, which is never a good idea, but some documents require that. So I've heard differing opinions on whether it's appropriate or necessary for the association to reserve for an item like that where the maintenance or repair obligation for the windows is actually on the unit owner.

Cindy Hill, Esq...: And I will say this for what I call maybe villa or town home style condos, which are small ones, it's not unusual to see that the windows are the responsibility owner because they are more single family style structures. But I agree with you, Alan, there's a bigger problem if windows are the responsibility owners on a 10 story building and I do see that on occasions. This unfortunately gets complex, which is why I advised in the chat, if the windows are not the association's responsibility for your condominium, get with your counsel and find out what the answer on whether or not that's an issue, first of all, that should be looked into and assessed whether it makes good sense and maybe the documents be amended and/or if it's an issue where you're going to need to fund for it or be able to say, "No, we don't because we are not responsible for those costs." So that's a very document driven issue if it's not a hundred percent clear that the association's responsible,

Alan Tannenbaum...: I think you answered this question, but Diane asked, "Is insurance an item that could be excluded from the 115% rule?" And I think you answered that can't be excluded. It cannot be excluded.

Cindy Hill, Esq...: Yeah.

Alan Tannenbaum...: So if the new budget contains a great increase in insurance and it does increase the assessments by going over the 115%, then 10% of the owners can object, but here's the problem with the statute and the legislature kind of like boxed associations in, it says that you have to maintain and repair your buildings, you have to have insurance, you have operate appropriately, but yet, owners can come in and say, "Well, we want this alternative budget." Well, what line item will these 10% of owners suggest that the association cut? They can't cut something that's necessary to repair maintenance. As Cindy said, they can't say, "Okay, we'll cut the electric bill out this year, so we'll do a year without electric."

So I see what the legislature's trying to do, which is give owners some control over the expenses that their association that's going to assess for in a condo, but the solution that they came up with frankly is not very workable, and we rarely actually see owners trying to pass an alternative budget, most of the time they don't even know how to prepare an alternative budget to be considered.

Cindy Hill, Esq...: Correct.

Alan Tannenbaum...: Yeah. Let's see. Anything else you see, Cindy, you'd like to respond to?

Cindy Hill, Esq...: There's unfortunately more questions than I can get to, and I see the concerns. Let's see. There's so many of them. My apologies, there's just not enough time to get to everyone.

Alan Tannenbaum...: Yeah. Somebody's asked whether the new reserve and structural requirements applied to hospitals and apartment buildings over three stories. That answer is no.

Cindy Hill, Esq...: Correct.

Alan Tannenbaum...: It's only condominiums. And let's see. The question from Claire, "Is there a rule of thumb for reserve percentage of total quarterly assessments or is that too dependent on the unique circumstances of each association?" And I think, Claire, that your instincts were correct. If an association has had underfunded reserves for 20 years, the reserve portion of the assessment may be several times what the regular assessment is. So they're really not tied together. Your reserve assessment calculation is an independent calculation from what your operating assessment is going to be.

Cindy Hill, Esq...: Alan, I did see a question where someone was frustrated they can't get amendments to their community documents because they can't get enough people to come to a meeting. Although that's not a so much a financial question, although it might be related to trying to amend documents for financial issues, I will say I advise my clients when you're trying to do any kind of amendment due to apathy of owners and landlords who don't necessarily pay attention, you're going to have to get a committee to do a lot of reach out, go door to door, make phone calls, emails, get those proxies. Another option is instead of trying to update the documents with several issues and people get confused and ask questions, update the documents only with a change of the threshold needed. So let's say you currently need 60% of the owners to agree, you change it to 60% of the owners present at the meeting. Lower your threshold, that's another option, but that's really just some practical advice for anyone seeking to get document amendments.

Alan Tannenbaum...: Cindy, and we'll go on for a few minutes, even though we've passed noon, Sarah asked, "What is the current requirement for the amount that needs to be in the reserves from an HOA?" She says, "All the items in their reserves were damaged by Ian and I guess, utilized for Ian, will either be fixed or replace. How low can we draw down the reserves and for the future, what is the percentage of replacement cost reserves we need to have?" So remember, it's HOA, it sounds like it's fairly document driven, that question.

Cindy Hill, Esq...: Unfortunately, all the HOA reserves are going to be document driven because you have to start with the analysis of whether they are going to be statutory reserves, which require certain notice notifications to the owners at the annual meeting if they're not fully funded or if they're non statutory reserves. HOAs can be in either category and it sometimes isn't easy to determine what that category is. So you're going to have to start with the documents on those questions to see what needs to be done. I will say that odds are you've got a lot more flexibility, is going to be the good news in terms of correcting that deficiency.

Alan Tannenbaum...: Kathy, ask a very interesting question. "Does anyone have all-encompassing list of potential reserve items, a list that is not related to a specific property style, but would be of value for most property types?" Well, let's take an HOA for example. Most HOAs have a significant amount of landscaping, they may have carports, and sort of applies to condos too. And one of the things that groups discovered, as we mentioned during the hurricane, was, you lose hundreds of thousands. Some groups lost over a million dollars worth of landscaping. There could be project fencing that is lost, carports, none of which are covered by insurance policies, and it's up to each particular association whether you want to reserve for those issues in mind and would be quite a sizable reserve for that purpose.

Again, I talk about borrowing capacity. One of the things that a homeowners association has that a condo association doesn't have is real estate that actually can be leveraged to support a loan. So an HOA, for instance, let's say they lost $500,000 worth of landscaping, you could reserve for that, but that's keeping a lot of money on the sideline for an habit eventuality that they never occurred. But if instead the association had a line of credit that was available, it could fund that $500,000 landscaping replacement project, spread that cost over several years and that actually may be a more intelligent approach than necessarily reserving for that item.

So again, the flexibility of loans versus reserves is really exemplified there. But really for a condo, most of the things that you need to reserve for are statutorily required, but then look to your common grounds that are not generally affected by reserve requirements because reserve requirements in the Condo Act are primarily tied to buildings and systems, not to project amenities, not to your pool and landscaping and so forth. So if you're going to create additional reserves over the statute, you can look at those. Carports is another good example.

Cindy Hill, Esq...: Alan, I-

Alan Tannenbaum...: Yeah, go ahead.

Cindy Hill, Esq...: I was going to say, I've also seen some questions about borrow repayment options where, for instance, can an owner pay the amount that's their portion of the loan, so to speak, and avoid interest? Those are all going to be document driven questions in terms of how the loan is established and again, how the special assessment was imposed. So you should have those questions answered before the board imposes a special assessment for a loan or before the board takes out a loan. Again, I hate to be a broken record and say really is document driven, but those are the loan documents that need to be coordinated with the board's authority and whether there can be, let's say, incentive for owners to maybe pay upfront if they can do so, but then give other owners the opportunity to pay off a special assessment in stages, but also have them pay the interest on that. So just to give a general answer to that, there are options.

Alan Tannenbaum...: There's a question about foundation reserves. One of my favorite questions because I haven't figured the legislature out yet, of how you do a reserve for a building foundation without excavating under the building to figure out how that building foundation is functioning, which doesn't make a lot of sense. You'll probably cause more damage in the excavation process than it was worth. And really the whole subject of structural reserve, how do you come up with a number of, when you talk about hidden columns in buildings, slabs foundations, unless it's... if that the balconies are deteriorated to the point that they're going to need to be replaced, you can certainly come up with a number for that. But the super structure of the building is really intended to exist for the lifetime of the building and not be replaced. But they call them replacement reserve.

Cindy Hill, Esq...: And Alan, that's part of some of the, I mentioned earlier, there are some band-aids and glitches to the bills and the legislature. That is one of the issues that looks like they're trying to give some more advice on, but until there's actually new legislation that's up in the air.

Alan Tannenbaum...: Cindy, I've been given the hook by our producer, he says that we need to close down, but she has invited me to ask you to give some closing remarks on this whole topic. So you're on.

Cindy Hill, Esq...: Oh, well, again, my apologies I couldn't get to everyone's questions and I hope that at least this gave you some sense of where to start when looking at these issues because really that's what the point of this was. We're not going to be able to give detailed answers to scenarios that we don't know enough about, but I hope this gives you some guidance and some red flags to watch for, some options that are out there.

I want to thank the couple of participants who told us, first of all, about the problem with funding less than 25 units. I was not aware of that. Another participant mentioned that they've been offered a line of credit that's going to be secured by reserves in a CD. I had not heard of that either. So we're learning from all of you too, is what I would say.

Your comments are welcome, your questions are welcome. We appreciate the challenges as we all face these new issues that have been brought by the hurricane, the new statutes, inflation, just this trifecta of issues that have been presented to all of us. And those of you who are volunteers on the boards, my sympathies to you and my kudos to you for being involved with your associations in these troubled times. And again, thank you for the managers who participate as well, because usually the managers are the first people that the boards talk to. The better managers are informed on some of these issues, the better they can help their boards. So I really do appreciate this opportunity. And again, I am sorry we could not get to everything, but I hope the bullet points really were helpful.

Alan Tannenbaum...: Yeah, any questions you didn't get answered, email us and we'll try to hit it after the session. Thanks everybody for attending. See you next month.

Cindy Hill, Esq...: Thank you. 

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20230118-164258blog-smart-board

New Insurance Laws Passed by The Florida Legislature Impact on Condo Associations and HOAs

Jon Lemole, Esq.:

Well, I want to welcome everybody today, and thank you for joining us. My name is Jon Lemole. I'm a partner at Tannenbaum Lemole & Hill. I'm joined today by my partner, Cindy Hill, and we have some distinguished guests, which I will introduce or actually let them introduce themselves in a second. Just by way of background, our firm is a full service community association firm. We handle general counsel representation for community associations as well as litigation. So our firm does both. Alan Tannenbaum and myself head up the litigation team where we handle covenant enforcement, collections, construction consulting, major repair, project consulting, construction litigation, construction defect litigation, turnover claims for any of your associations that are getting ready to or have recently gone through turnover. That's what I do. Cindy, why don't you tell us a little bit about what you do with our firm?

Cindy Hill, Esq.:

I'm Cindy Hill and I do general association representation. So your day in, day out, condominium homeowner association issues, that's what I address and I do it all day every day.

Jon Lemole, Esq.:

So I venture to say that there's not many things that are more vexatious to the management and operation of a condo association or HOA right now than insurance coverage. Within the last couple of years, it seems like there's been a perfect storm, and that is a pun very much intended, between spiraling premiums, non-renewals, hurricane claims, especially for community associations in southwest Florida. We've seen carriers pull up stakes. We've seen carriers make increasingly restrictive inspection demands. We've seen carriers requiring roof replacements on roofs with reasonable remaining life expectancy. Reinsurance rates have driven up premium costs exponentially. Property value is increasing. That's both a blessing and a curse. We've seen a tragedy in Surfside place a spotlight on building maintenance like it's never been placed before.

We've seen what some may believe is a runaway assignment of benefits regime, which drives out of control litigation against carriers and stress on insurance. And a series of devastating hurricanes have produced massive claims. We don't envy your position. You're dealing with a very stressful situation. Arguably with these concerns in mind, Florida legislature recently went into special session and produced what is supposed to be an insurance relief, some insurance relief legislation. So today we want to give you a very introductory overview of this new legislation. We have an hour, so this is going to be a very 30,000 foot view of this, but more importantly, we want to discuss how this new legislation affects you on the ground. Does it really help or is it just a bailout for carriers? And we want to provide you with some practical advice along the way to help you with your renewal efforts in making sound decisions when faced with potential claims as a lot of us are facing and have faced recently with the hurricane.

So we have a very distinguished panel. Cindy and I are going to not do too much talking today, so we're happy to sit back and let our distinguished panel here handle this. So carrying the ball today will be Dave McMahon who's a senior commercial advisor at Atlas Insurance. Mike Angers, who's a senior VP at Brown & Brown Insurance, and Kelly Fantetti who's a partner with Stockham Law Group. Stockham Law Group is a firm which focuses on first party insurance claims and litigations. Dave, why don't you start and tell us a little bit about what you do? And then we'll go to Mike and then Kelly.

Dave McMahon:

Hello and thank you. Welcome everybody. Appreciate the introduction, Dave McMahon with Atlas. Atlas Insurance has been around for 70 years, three divisions, the commercial, residential, and financial. In the commercial we serve hundreds of associations in the tri-county area of Manatee, Sarasota and Charlotte County and have a great staff that has over 100 years of experience and I rely on them. I might be the one in front of everybody, but quite frankly, they're the backbone of the business. Thank you. I'll turn it over to the next.

Jon Lemole, Esq.:

Mike, how about you? What do you do?

Mike Angers:

What I do. Well, Mike Angers. I've been doing condo association insurance for 27 years. That's all that I do. I'm with Brown & Brown. We have about 450 offices, I think 30 some in Florida. So I have a great pulse on the marketplace. So obviously you can see the gray hair here. That's from just years and years of working with associations, but we do it. We've been probably the largest writer of condos for the past 10 years in Florida.

Jon Lemole, Esq.:

Okay, thanks Mike. Kelly, can you tell us about Stockham Law Group and your practice?

Kelly Fantetti, Esq.:

Sure. As you mentioned before, our focus is almost exclusively on first party property issues. So we represent homeowners, business owners, condo associations, homeowners associations in claims against their insurance companies. If anything is improperly denied or underpaid, we deal with those and pursuing claims against the insurance company.

Jon Lemole, Esq.:

Okay, thanks. So Mike, let's start with you. We want to talk about how we got where we got and where we are in Florida and in particular with the Florida insurance market and property insurance market. So if you can talk to us a little bit about the storm that we're in, how we got here. Maybe you can tell us a little bit about the reinsurance process and some of the things that Citizens was facing, and kind of set up how we are where we are.

Mike Angers:

Yeah, definitely. Let me first start off by saying, please let's not shoot the messenger or messengers today, myself and Dave. We're just bringing the facts today. My insurance myself and not just associations are getting hit, but homeowners, anybody that owns property in Florida is getting hit. We're going to talk about associations today, but let you know that we feel free to, we've been doing this a long time. We understand this is a large budget item, so we both David and myself take that very seriously. So I want to make sure everybody understands because I hear things in the marketplace from my clients and it kind of bothers me sometimes that they really don't have an understanding of where we are and how we actually got here. The reality is this. Been doing this 27 years, the market goes up and down peaks and valleys. This is one of those big peaks and honestly, this is the worst peak that I've seen in 27 years, and I'm sure David will agree with that.

And it's getting worse by the day. Every day I open up my email, it's a little bit worse, but why is that? People say, I haven't had claims, we haven't got hit that hard in Sarasota, why are we being affected? What the heck's going on here? Well, the insurance companies are obviously doing many things. They protect you for the hurricanes and then they plan for that. What they did not plan for is all the lawsuits. So what's going on is if we all remember Irma in September 2017 hit. That went, came and gone, we dealt with the claims. Then all of a sudden we had an aftermath of a ton of claims, a lot of fraudulent roof claims probably two or three years after the fact. Carriers weren't ready for that. Since then, we've had continuous roof claims, fraudulent roof claims. And what I mean by that is to where there's people out there soliciting roofers, insurance agents, attorneys, engineers, hey, we can get you a new roof. Sign this assignment of benefits, we'll get it done for you.

Boom. They don't need it. It's not an insurable loss, it's just maintenance reserve, but they're going out and filing these million dollar claims. So all of a sudden the carriers are like, wait a minute, we weren't prepared for this. Okay, they're getting hit in the gut. Fast forward, all of a sudden, here comes Ian, this past year that was the final punch. So the carriers that were leaving the state already because of all these lawsuits, now it's just that final push. So people say, well, wait a minute. These people have been making money for years. Why are they leaving us? Think about this. If you're an investor in an insurance company and for every dollar you take in, you're paying out $2 and 50 cents. You can't make a business like that. So David's going to talk about some of the new changes that will hopefully help us.

It's not going to be a quick fix, which I'm sure he'll talk about, but until we get a hold on and these carriers are comfortable that they can come back and do business in not being sued left and right fraudulently, we're going to be in a tough boat. Where's that put us? So when the carriers leave the state, and we've been in this situation before, anyone that's been in Florida, I was born and raised here, we've been in this boat before. When the carriers leave the state, what do we got? We got Citizens, which is the state pool. State pool was formed. It was actually formed as the FWA back in '92 after Andrew. Then it became the JUA. It's now since I think 2002, I could be wrong on that date, it is now called Citizens, but they're out. Their setup is to provide temporary placement for people that can't find coverage elsewhere. Seven years ago, 10 years ago, tons of people were in Citizens. Then the market came back, the carriers came back and everybody left Citizens.

That was fine. But what we're seeing now, Dave and I talk all the time, is Citizens now when we need them, the state, a non-for-profit, unfortunately their guidelines are tougher than any carrier out there and they're actually declining people. So it's putting us in a very tough spot. Not only are they declining people, but the ones that they are looking at... Dave and I are coming in with these increases. I saw some of these comments before. What increases are you seeing? Shoot, I've seen anywhere from 25% to over 900%. Not only that, imagine Dave and I are having to go out there and deliver these increases the day before. We're not getting some of these numbers, so we need to get a fix to this. And Dave's going to talk about it himself, but I personally, the legislation is not going to do anything immediate for condo associations in my eyes, and Dave will talk about that.

I think it'll help out on the personal line side, but condos, it's going to be a long haul for all of us. So I know that was long winded, but that kind of sets the stage on where we are and then David can take it and tell you what the new legislation was and how that will help us out.

Jon Lemole, Esq.:

Mike, can I ask you though, before we go to Dave, can you talk a little bit about... Because it seems to me like a big component of the legislation is focused on the reinsurance market, and a lot of folks here may not understand what that really means. And how does the reinsurance market, or does the reinsurance market really drive a lot of the problems that we're facing? Is there an over-reliance on reinsurance carriers? And talk about maybe what's perceived to be the bailout via a reinsurance pool.

Mike Angers:

So let's think about this. You hear reinsurance. What is reinsurance? How does that work? So you may see a carrier, whether it be American Coastal, Centauri, Heritage or whoever on your policy for an association, but what you don't see behind the scenes is all the reinsurance. It's basically insurance for an insurance carrier. Let's just say in a typical loss like a Heritage or an American Coastal, their entire book of business may be through Ian gets hits, I'm just going to throw a number out there, a billion dollars. Out of that billion dollars, Heritage may only be on the hook for the first 5 million. The rest is shared between all these reinsurers. And they build these reinsurance treaties once a year, they negotiate them. And it's insurance for these insurance companies. What's going to happen here, Jon, is these reinsurance treaties are negotiated typically once a year, sometimes twice, but typically once, and it's typically somewhere around the beginning of the year.

So the rat that we've been feeling already that was just knee jerk, these are knee jerk increases and changes in terms and conditions. Once these reinsurers meet with these carriers and say, hey, we got killed last year with the hurricane. We got killed with all these lawsuits. We're in thousands of lawsuits from Irma still. Here's our offer going forward. Here's the cost of it. Here are the terms. And they give it to the insurance carriers, and that trickles through to us. Now we've got this new legislation that helps these carriers buy up to a billion dollars of reinsurance at a discounted rate, a billion dollars. I mean, realistically, that's nothing in the world of insurance in today's world. Think about it. I think, what are the numbers here in Ian? I'm hearing like $70 billion. So that fix that they're saying is a change in legislation that's going to help us, I don't see that doing anything.

Dave McMahon:

I'll just make a quick addition here. One thing that Mike and I talk about quite a bit is how it was too little too late for this particular crisis. In the past, in 2004 and five, after we had all those hurricanes, we were not only able to rely on Citizens, but the surplus, excess and surplus, the Lloyd's of London type markets to help support the risks that we insure. The problem with this one is the excess and surplus markets, they just walked away. They are frozen. They offer us nothing of value, and consequently we have to go to Citizens who's become more difficult to work with. So the combination of that reliance and when they made the decision not to participate in the market anymore, it really put us in a very difficult position in this crisis compared to the past. And part of it is, and again, too little too late, we know the lawsuit's going to be coming because of Ian. We still deal with them because of Irma years later. So years from now, net 2023, the rest of 2023, '24, we're going to see the lawsuits from Ian. And that tale of losses is something very difficult for the carriers to predict and is a part of the reason why they're basically have picked up the Santos and left.

Jon Lemole, Esq.:

One of the key aspects or main aspects of the new legislation is this $1 billion, and Mike, you hit on it a little bit, this $1 billion reinsurance pool. And based on the numbers that you were throwing out there before, Mike, it sounds like this is really a drop in the bucket. Is this going to have any impact really on rates on the ground for insurers? Or is this really just as some people said, a handout or a bailout for reinsurers?

Mike Angers:

No. I personally don't think it's going to have any effect at all. I mean, not even a smidge. And as Dave says, this problem, we've seen this coming. This didn't happen overnight. So I know that Dave's team lobbies, we lobby, and we actually have somebody on the board of directors at Citizens now. Nothing in the state or the legislation changes overnight, but it has me scratching my head that we are in this position. Dave and I are fighting on a daily basis. When I say fighting, I say fighting harder than I've ever fought in my 27 years to get the state pool, which was set up to help us in this situation to insure us, to insure something. Not a matter of get them a good rate, we just want to get them insurance and they're declining probably 50% of the risks that are out there.

And Dave will talk about the roofs and everything, but it's really tough to explain that to your client when their mission statement is to provide temporary housing to people in this type of environment. So everyone is frustrated. We're frustrated as agents because we are the front people trying to present this. We're trying to do the best job we can, but the tools that are out there as we are talking, all the carriers left. So now there may be only one carrier providing a quote, which is Citizens and the quote's astronomical with terms that are ridiculous

Dave McMahon:

That come days before the renewals do.

Mike Angers:

If it's Citizens... You want to hear something interesting? I was talking to the underwriter at Citizens, our underwriter, and she says she has about 50 submissions on her desk, 50 submissions that have an effective data one, one or prior that she's working. One, one. That was yesterday, that's 10 days into the policy. Citizens is overwhelmed right now and it's going to get worse because we're getting into what we call condo season. And Dave, I mean, it is overly frustrating that they're just not getting it.

Jon Lemole, Esq.:

So let's switch gears and talk about A, some of the provisions in the bill that relate to Citizens coverage because if I'm not mistaken, there are some new requirements, and what can we do? What can condo associations and HOAs do in this environment and in view of this new legislation? Dave, you want to tackle that?

Dave McMahon:

I think first and foremost, Mike introduced it with assignments and benefits. In one way attorney fees is the problem and I think stick with us on some of the minutia here of the bill, but I think everybody will be very interested in what Kelly has to say when it comes to talking about the assignments and benefits in one way attorney fees and whether it helps or not. You as an insurer, when it comes to some of the things that are going on, the $1 billion reinsurance pool, that might be nice, but keep in perspective the chaplain tower that went down, that was a billion dollar event. You can just imagine when we get hurricanes for 40, 50, 60 billion, it helps, but it's [inaudible 00:19:49] gesture in our opinion, what really needs to happen to create a more healthy market. But we'll take anything we can get and one billion reinsurance pool may help some of the emitted less financially secure people or carriers grab some additional money prior to building their tower of reinsurance that they need to protect them.

Reinsurance is just a shock absorber for these carriers that are not financially secure or do not have the financial wherewithal that you would typically see in other parts of the country. When it comes to some of the technicality, Citizens is requiring flood insurance now if you're a Citizen's policy holder. So if you're a residential policy holder for new policies with Citizens, if you're in a flood zone, you need to have a flood policy by April 1st. If you're entering Citizens for the first time and you're in a flood zone, you need to have a flood policy. If you are renewing with Citizens and you're in a flood zone, you will have to get a flood policy by July of 2023. For other zones, dependent upon the value of the property, they will glide path you in and require you to have a flood policy. So the question becomes was it wind or was it flood?

And at times there is a combination of damage, one by flood or one by wind, and Citizens is now going to require flood to manage that, their portion of the loss and they will manage the lesser portion of their loss dependent upon how the adjusters agree if it's a flood or a wind issue. Now, does it apply to condominiums associations? Not the master policy, but it does apply to the HO6 policy, the unit owners. If you have to get to Citizens, you'll have to go ahead and follow the path of what Citizens requires in terms of a flood policy. Now, further down-

Kelly Fantetti, Esq.:

Does that apply even if the unit owner is on the 25th floor?

Dave McMahon:

Great question. I would assume it would apply no matter what.

Kelly Fantetti, Esq.:

My reading of the bill is that there's no exceptions.

Dave McMahon:

That's right.

Kelly Fantetti, Esq.:

So it's kind of interesting the way that portion of the bill was written that these unit owners and these high-rise condos are going to have to have flood insurance.

Dave McMahon:

I think what it is, Kelly, it's the possibility that the building gets condemned because the erosion is so severe that you saw that on the East Coast with Nicole and that sooner or later if it did collapse because of the erosion on the beach, that when the corp engineers considering it's uninhabitable, you have to have a flood policy even if you're on the 10th floor. That's my gut when it comes to that, but I don't see an exception to that. They went ahead, and there was a time Mike and I dealt with this more in 2004 and five, and if there was a private carrier that was more expensive if you will, within a Citizens policy that you still had to go with a private carrier because Citizens was again, a last resort and you had a carrier that renewed you but at a higher rate than you can get with the state program. They don't want that. So basically they have a threshold of 20%. If the private market premium is within 20%, we cannot enter Citizens.

Again, comparable coverage. My feeling is Citizens will determine if that's comparable coverage, but if they are the last resort, a organization that had about 450,000 policies three, four years ago and are ballooning to 1.5 million finally by the end of this year, that's how dysfunctional the marketplace is. They don't want the business and they're going to have to figure out how to get rid of it, so they increase the threshold. If a private carrier gives you a renewal or a quote whatsoever, but it's more than Citizens but less than 20%, you have to take that quote.

Cindy Hill, Esq.:

Dave, there's a question in the chat that I think might be worth clarifying. One of the participants says, is flood insurance required by Citizens if you are not in a flood zone?

Dave McMahon:

If it's not in a flood zone, you will go ahead, and it's based upon insured property value and it will begin to phase in in 2024 through 2027. I do not know what the property valuation steer steps are. We talked about 500,000 plus, 50 plus, a million plus of property value. Then they'll go ahead and start demanding that you have a flood policy, but that's not until 2024.

Kelly Fantetti, Esq.:

My understanding is that at a certain point they're going to require every Citizens policy holder to have flood insurance regardless of flood zone, but it phases in slowly.

Jon Lemole, Esq.:

That is true.

Kelly Fantetti, Esq.:

So it's not going to be for several years until that kicks in for everyone.

Dave McMahon:

Yeah, there's a little bit of a budget.

Mike Angers:

And that's residential, Dave. I'm being clear, that's residential right now. That's not commercial residential which is the condo associations.

Dave McMahon:

Right.

Mike Angers:

So everybody's clear.

Dave McMahon:

That's correct. Thanks, Mike. Let's see here, what else? That was that behind. I think the biggest thing is, I think Mike and I continue to hammer this to everybody involved and that is what do you do? Right now I think everything we've provided you have no control of. So the question is what do you control if you're not an association board or even a unit, what do you control? And that is first understanding the history of the cycles. Understand that this history will soon pass like it did in 2004 and five. We have a lot to handle now, but it will take time. Cannot move this Titanic ship overnight. I don't anticipate, neither is Mike, anything will change in 2023. It's going to be a fight every day, every week, every month. Possibly in 2024 we see some stabilization if the reinsurers start to come back into the market or admitted carriers come back into the market.

But what you do control is the number one underwriting criteria, and that's roofs. You have to control roofs. That, regardless of a high rises or not, garden style communities two high rises, the roof is the number one underwriting criteria and they are demanding inspections. They're bringing the drones out to inspect. They're asking for updated reports, the engineers to give an inspection, roofing companies to give inspections. And you have to meet criteria of having a solid roof. And you've heard 15 years, you've heard 20 years. There is a lot to those dates, but they are becoming very severe in how they look at roofs and whether or not they will enter in an agreement to go ahead and insure you. Besides that, because of what happened in May or in the special session, we know the high rises have a burden now to be more well maintained, so they're asking for engineering reports.

Do you have an engineering contract with an engineering company? They're asking for more underwriting data on the concept of maintenance, not just the roofs. It could be the painting and water, it could be restoration. Anything and everything related to what was done in May in that special session, they are asking questions about. So you control maintenance, you control the roof, you control some of these investments and these are the things that Mike and I look for because we're trying to make you look good out there in the marketplace and we need every bit of information.

Jon Lemole, Esq.:

Hey Dave, let me ask you a question. Dave can I interrupt for a second? 'Cause you raised the issue of the safety legislation that was passed last year. I talk a lot about that. In fact, I did a presentation yesterday to a group of managers cams on the new legislation and one of the things I hear frequently obviously is that, oh my gosh, this is going to cost a lot of money to do these inspections and comply with this regime of milestone phase one, possibly phase two inspections. But can you flip it on its head and look at it as a blessing in disguise too? Because if you do those inspections and you do well and your buildings have a clean bill of health we'll say, after that phase one milestone inspection, do you think that that would affect underwriting rates for renewals? Is that a positive thing that will be looked at by carriers? I would think it would be.

Dave McMahon:

Yeah, it's definitely leaning that way. We thought when they provided mitigation reports, they were looking at increases or decreases based upon who you are at that address. It's even getting more intense granular underwriting. They are no longer flying at 10,000 feet saying this zip code we're going to have increases or decreases in rates. They are looking at building by building, association by association, what have you done? And unfortunately, I think kicking the can down the road for those associations that have done that, those days are over and you have to be on top of your game to go ahead and prove as they allocate capacity and they determine the rate, are you worth inuring? And if they don't look at those logs, maintenance logs, those engineering reports, those mitigation reports, they can say we're not offered insurance. And then the Citizens is going to be more strict and they're going to have the higher rate, there's no question about it over time. Right now they may be less expensive, but wait until Citizens catches up, they're going to get more expensive rather quickly.

Mike Angers:

Hey Jon, mind if I pigtail on that? I think that can go both ways because that inspection can help you out tremendously, but it could also hurt you. Obviously we all know these inspections are done by engineers. They're going to find issues just as Dave said, they're droning, they're getting more specific in a market like this and you're giving someone, an underwriter that's basically wanting to get out of off the risk anyway. They're basically teething. It's going to give them some ammunition to get off. So I'm being very cautious with those inspections if I [inaudible 00:30:18] because I don't want to hurt the association. There's going to be things in there, and remember this, here's somebody sitting at a desk, maybe everybody's got to know how the process works. There's somebody sitting at a desk with 1,000 at least applications on there. They've got enough business where they can pick and choose what they want, so they're just sitting there, yes, no.

So we want to help them try and get in yes column, but it just as easily we can get them in the no column with one of those engineers reports. If they look at them, they see something or I'm in inspection of the drones, oh my goodness, the drones, they're picking out the worst stuff on those drones. There's a little crack in a tile. I have a new roof two years ago and I've got cracks and they're saying, oh, we want a new roof or we want this. They are being so tough. So I think in the future it's going to help, but I'm also being cautious that it doesn't hurt my clients as well. So we have to. And I know David and I juggle that, it used to be mitigation forms weren't that important. You didn't want to get the new mitigation forms because they took away credits. Now you almost have to get them because you need them with Citizens. So there's a lot of underwriting and things that go on behind the scenes where we take the data you give us and we try and work with the carriers to make you look the best possible.

Dave McMahon:

Mike, don't you think it's probably the intensity of submissions are two to three times more difficult than they used to be four or five years ago?

Mike Angers:

I'd say they're 10 times as hard to get through right now. And it's again too, these guys are being tougher. Think to yourself, this what I was saying earlier, all the carriers left the state, so now we only have a handful. Well, where did all their business go? It went to the couple carriers that are remaining. So now their stacks are like this and they're cherry picking. And that's the reality of it. It's sad, but these guys can sit there and say, we only want the creme de la creme, so we have to make you look good. You have to make yourself look good. We don't want to make you not look good by sending in an engineer's report that may have, you'll look good in another year or two once you do these things. So it's a very fine line. Our job is very tough in the data that we have to give them right now. People think that, hey, just give us a proposal. The data that we have to provide Citizens is astronomical. Astronomical.

Dave McMahon:

One last comment. I'll give it back to Jon, I just want to make people understand this. A lot of question are asked. Dave, can we self-insure? Well, I don't know. Let's say the building's worth 20 million. I don't know how that association's going to come up with 20 million and then some, should there be multiple events. So a lot of times we hear questions of people getting creative or trying to get creative. The bylaws and docs, the Florida statute 718 box you in and they box you in for a purpose. Board of directors come and go, but there's standard things that need to be done on a regular basis and those are done by the bylaws and docs and the Florida statute and of course when we deal with a flood, NFIP, the professional flood insurance program. So it's not like you have a lot of leeway and that's done on purpose. I know you want, Jon, go ahead and take it from here. I know we have [inaudible 00:33:21]-

Jon Lemole, Esq.:

In the interest of time, I want to get to Kelly because in fact one of the comments in the chat is the elephant in the room is litigation and claims and litigation costs. And Kelly may be having a problem with her video, but hopefully she's there with audio. So one of the provisions as I understand it in the new legislation has to do with attorney's fees and claims litigation. So let's talk about that Kelly, and in particular there's some folks that are saying was is it retroactive? If I've got a claim now against my carrier, do I no longer have a right to recover attorney's fees? Take us through some of the legislative changes that are going to affect insured's rights.

Kelly Fantetti, Esq.:

You are correct, I am all of a sudden having an issue with my camera, so my apologies on that. Yes, this is a question I am getting a lot, is does the new legislation affect my claim? Now, it used to be traditionally in Florida, if you had to sue your insurance company to get your claim paid appropriately, if you recovered a dollar against your insurance company, they would have to cover your attorney's fees. They changed that a couple of years ago, I guess that was summer of 2021, they started requiring a pre-suit notice. So before you could sue your insurance company, you had to put them on notice that you were going to sue them and that had to include a demand for settlement. And that demand then became the bar that you had to meet at a trial in front of a jury in order to recover your attorney's fees. And there was this whole mathematical equation based on the percentage of the jury award versus the percentage of your pre-suit demand and the insurance companies pre-suit offer to determine what percentage of your attorney's fees would be covered. Then in the special session that we just had this year in December, they said, just kidding, we're going to get rid of attorney's fees altogether.

So the way that that is supposed to work based on the laws that our courts have set forth is your insurance claim is governed by the laws that are in place at the time that your insurance policy went into effect. So if there is a new law that goes into effect after your policy went into place, if they try to apply it to an existing policy then that is considered to be what we call retroactive. Things that are simply procedural in nature, for instance, this bill has requirements for how quickly they respond to communications, things like that, those may be arguably procedural and may apply retroactively. Things that are substantive rights such as your right to recover attorney's fees if you have to sue your insurance company, or your right to assign a portion of your benefits to a mitigation contractor, those are substantive rights. So those parts of the law definitely should not be applied retroactively to existing policies. Those should only apply to any new policies that are issued after these laws went into effect in December.

That said, I know of carriers that are already trying to apply those retroactively to things that are already in suit and already been litigated, so that isn't to say that the insurance company isn't going to try to argue that there is no right to attorney's fees on Ian claims. We'll see that shakeout in the courts the next couple of years, but the senator that sponsored the bill has said that he does not believe that the law should apply retroactively to Ian claims.

Jon Lemole, Esq.:

Are there any other provisions in the new legislation that affect insureds' rights? I know that there were some language in there maybe about assignment of benefits and burden shifting on claims. Can you talk about those, Kelly?

Kelly Fantetti, Esq.:

Yes. So as of January 1st of this year, insureds cannot assign benefits related to their claim to anyone else. So it used to be if you had a large water loss and you needed to get a water mitigation contractor in there right away, instead of having to pay that company directly and then submit all that to your insurance company, you could just say, hey contractor, I'm just going to sign this contract. I'm going to let you go after my insurance company directly, work it out directly with them and I'm going to take myself out of the process. There was good intent behind those assignment of benefits, and it was a way to allow the insureds to get the work they needed to be done at their home, especially in emergency situations without having them to come out of pocket significantly for these costs. Unfortunately, there were just abuses in that process as Dave and Mike referenced earlier, particularly on the roofing side. Where you had roofers taking assignment of benefits for roof replacements and not actually replacing the roof until they got a payout from the insurance company.

So these homeowners are sitting here with this leaking roof while their claim is in litigation on an assignment of benefits for two, three, four years and they can't do anything to control that. They have essentially lost control over what is going on with their own roof and their own property so that became very problematic. Also, the assignment of benefits gave the contractors the opportunity to kind of hold the insurance company's hostage. So whereas the normal course is you might go out and get several bids for the replacement of your roof and have some competitive advantage of choosing which roofer you want to do your property. Whereas these roofers, you're just, oh, okay, I don't need to get bids. I'll just sign this and you get paid by my insurance company and then they go to your insurance company and demand three, four, five times what the actual competitive market rate is. It became something where the insurance companies were really held behold into these assignment of benefit contractors in a lot of situations.

So it's one of those things where it was done with good intent, but became an abusive scenario. So the legislature has now said no more, we're not allowing that at all. So if you entered into an assignment of benefit contract before January 1st of this year, that should still be enforceable. If you try to enter into an assignment of benefit contract this year or anytime moving forward, it's not going to be enforceable against your insurance company.

Jon Lemole, Esq.:

Yeah, you have some information here about claims reporting and time limits on claims reporting. I would imagine that's pretty important, and probably more importantly because of that window that you now have. Investigation of your claim and your damage, there's a real spotlight on that so that you don't miss the boat. Can you talk a little bit about that?

Kelly Fantetti, Esq.:

Sure. The law did not use to articulate a specific timeframe for reporting an insurance claim. There was a timeframe for filing a lawsuit, it has always been five years, but there was never a timeframe for reporting. The policies always just said prompt notice or reasonable notice. Then after, I think it was primarily after Andrew, we were getting a lot of claims that were being reported three, four, five years down the road and then they were going straight into litigation because there wasn't any time for adjustment. So the legislature put into place at that point a three year limit for hurricane claims only. And so we operated within that three year limit for a while, and then I believe it was in the special session last year they changed that to two years for all claims, but they gave you three years for making supplements. And what a supplement was defined as is if you open a claim, you adjust it with your insurance company, and then once you start the actual repairs and you discover additional things you can resubmit that to your insurance company. They gave you three years for that.

They have now narrowed that window even further. In the most recent special session, you have one year to report all claims and 18 months to submit any supplements. So that may seem like a long time, a year and a half, but on a massive hurricane claim, especially on a condominium property or if you're a large home one, some people do not discover these damages for some time. Their roof may look like it's okay initially after the hurricane, and then a couple months later they realize it's leaking all over the place and they finally climb up there and realize, oh, I've got a lot of broken or missing tiles. So it may take some people some time to discover, but by the time it's investigated, you get engineers involved, you finally get a payout and then you start doing your repairs, a lot of times you're way outside of the 18 month time period. And so it's going to be really tight for a lot of people, and I think that is going to be one of the things that is going to hurt, that squeeze on the timeframe of making these claims to your insurance company.

Jon Lemole, Esq.:

So in a hurricane situation what we're saying is that time limit would be effectively measured from when the event happened?

Kelly Fantetti, Esq.:

It is from the date that the hurricane makes landfall in the state of Florida.

Jon Lemole, Esq.:

Okay. So then if you do have or suspect you may have hurricane damage going forward, you have a real interest in doing a thorough inspection investigation early on to ensure that you've captured all of the potential losses and damage that your community has incurred?

Kelly Fantetti, Esq.:

And we've been contacted by a number of condo associations, and I know that a lot of condo associations have taken on really high deductibles in the last couple of years to try to offset these premiums. So their hurricane deductibles are very high and they're thinking, oh, well, my damages aren't going to be above my deductible, so I don't need to report it. Report it. If you have any damage, report it because it may end up being worse than you initially thought and you are going to come outside of that one year window very quickly. So if there is anything going on at your property, report it, explore it, figure out exactly what's going on, because once you're outside of that one year it's going to be too late and you're going to be kicking yourself.

Jon Lemole, Esq.:

That's a very valuable piece of wisdom, Kelly. Let's in the next minute or two and then we'll do some question and answer. We've got a lot of stuff in the chat, but let me go back to Dave and Mike maybe 30 seconds each. To start with Dave, give us one takeaway here, in particular, what can associations do to put themselves in the best position to either get renewed or to control their renewal premium?

Dave McMahon:

I would say control the controllable variables, and that is really walking through and thinking about your property from a roof standpoint, from painting, from restoration, control what you can control and plan for it. The second thing is, and Mike and I don't see a white horse coming down with a few carriers saving the day. So you cannot have your head in the sand in this crisis, that's why you're on this Zoom call and I would say you have to plan out next year, two, three years in terms of what's really happening. Appraisals are going up. Rates are going up. This is not going to be settled in a year, maybe even in two years. Plan accordingly and control what you do so you can make us help you look good out there to the carriers that want to write your business. Mike?

Mike Angers:

Yeah, I would agree. I think the key is it's a lot of data. I know I'm causing a lot of managers and boards headaches asking for more data, but the more data we have on the roofs, updates, any kind of update information makes you look better. Obviously think about it, we're painting that picture for an underwriter sitting at the desk with thousands and thousands of applications. Yes, no pile and then they rate it up. You hear what are the rates going to be? I had somebody send me a table of rates today, hey, is this table right? No, I can't get my thumb on what the rate increases are. I know everyone that's a huge concern, I've seen a couple things pop across. What are my rates going to be? I don't know. They're going crazy. Citizens and the rest of the carriers, I don't know if we're going to get out of this if we don't fix the contractor's roof fraud. It's interesting, in May we had that legislation pass, I think it was bill 2(d) talking about putting the hammer on the people for contractor solicitation for roofs.

After Ian, the day after Ian I was out on Siesta and Longboat Key talking to some of my clients, and they had people soliciting, hey, I see Ian damage. Let's talk about a new roof. Let's talk. I went out to Siesta, they barely had any damage out there. I mean, I grew up on Siesta. So until we can curb that, the market is going to continue in the path that it's because that tale of all those lawsuits is building up. And as we know, anybody that's been in a lawsuit and Dave you see them every day like I do, it doesn't happen overnight. There's attorney's fees, there's investigations, and it's not just 10, 15, 20, you're talking thousands and thousands. Everybody wants something for nothing. They think the wind blows, they strike gold. That hurts us all. So-

Dave McMahon:

We have about five, 600,000 claims from Ian, I believe, but that's the right number. And you can just imagine the percentage that are going to be problematic from that to Mike's point.

Jon Lemole, Esq.:

Look, let's get to some questions with the time remaining. There's one here that Susan Brown asks about new roofs. I think the question is what is accepted as a new roof? Is it recoated roof or a new coating over the roof satisfy as new roof? Can anybody tackle that?

Dave McMahon:

Yeah, I think we smiled at the same time because this is one that we hear. Remember a coating in their eyes, and nothing against those that are doing this business. And at one time it was okay, but it's just not okay because they perceive it as a band-aid over an existing or an old roof that does not meet code. What Florida is recognized for is that new buildings meet code, and they're doing a darn good job. Well, you're putting a coating over an old roof system and that does not meet code and they're trying to get everybody to get to the code that they feel very confident in that that works.

Mike Angers:

Agreed.

Jon Lemole, Esq.:

Okay. There's a question, and maybe this is for you Cindy, there's a question about selecting an insurance agent and whether or not that can be done unilaterally by the president of an association. Maybe you can provide some perspective on what are good practices for a board in selecting an insurance agent or carrier and maybe being protected by the business judgment rule.

Kelly Fantetti, Esq.:

Well, as with any big business decision, the board should be making the decision. Now, it could be that an association, that the board could delegate to the president and specifically say at a meeting president, we want you to go out and research and choose our agent. But odds are that's not what's happened in this question. A board president, and candidly I see this with my volunteer boards, sometimes the president thinks that as the role of president they somehow have a higher power than the rest of the board members. But that's actually not accurate, the only real power the president has is to run meetings and even then the board can vote to have someone else run the meetings. So best protocol will be to have the entire board reviewing proposals from agents, interviewing agents and making these decisions. And these are very significant decisions. Not to put anybody down, but this is not a decision about who to hire to do the landscaping, which is also important, but these are very big decisions in terms of making sure that you're going to have coverage.

Which I've had a number of my associations after Ian come back and say, we trusted our agent, we signed onto this policy and then we found out we had this enormous deductible and we really didn't know. And I'm not blaming the agent in that scenario, everyone should be reading and asking questions and be involved with these decisions, but I'm using that as an example. The entire board really should be involved in these processes.

Jon Lemole, Esq.:

Mike, they're coming out to inspect your buildings because it's renewal time, talk about just some real practical things. I mean, you don't have time to maybe do a full maintenance protocol, but what are some just basic no-brainer type things that an association can do to give themselves a leg up here?

Mike Angers:

It's pretty simple. The idea is to try and make yourself look good, properly maintain your association. As Dave said earlier, the better you look, the better chances you are that you're going to be accepted. It's not a matter of rate difference, it's a matter of acceptance. The rates are the rates with these guys. It's a matter of being accepted and looked at that pile and put in the good pile. So whether it be just maintaining the exterior of it, painting on it, obviously the first question, Dave and you know this, and the first question we get ask is, when was your roof updated? Recoatings obviously don't count. Roof is number one, and then they go to the rest of the big updates, which is the plumbing and the electrical. So they just want to make sure that they're just not buying into a problematic associations. There's a lot of nice associations out there that do this, there's a lot that literally as we know it just will do whatever is necessary to keep the building standing. So you need to show them that you are one of the good associations and the budget is including in the way you reserve, so they just want to make sure you take care of the property.

Jon Lemole, Esq.:

Kelly, I got a question for you and maybe you covered this and I zoned out for a second, but given the new insurance fee provisions, is this going to put a real chill on associations wanting to pursue claims in litigation or even lawyers wanting to take on those claims? Provide some perspective on how this is going to affect that first party litigation where attorneys fees may not be available?

Kelly Fantetti, Esq.:

It will certainly put a chill, especially on smaller claims. So if you have a single family homeowner or condominium unit owner where there's less than $100,000 in damages in dispute attorneys will think twice about taking those claims. Especially because it used to be that we could get the insurance companies to pretty reasonably settle a strong claim quickly and then we don't need a lot of fee for that. We're getting it resolved for the insured, we can take the small claims and resolve them for the homeowner or the property owner fairly quickly. Now, the insurance companies are taking more and more of these all the way through to a trial. So if I'm considering taking a case, I have to consider I'm going to be working on this for possibly two years through a jury trial. If I'm taking it on a contingency fee, which is just a percentage of what the claim value is, as an attorney who has to feed my children and pay my mortgage, can I afford to take on this claim on a percentage? And the reality is by the time my percentage comes out, any costs and things of having to litigate this come out, there may not be anything left for the property owner to actually fix their property.

Even if I win, even if I get a jury to say, oh yes 100% of what you're asking for you deserve it. The homeowner may be left with nothing at the end of the day. So I do think there will be a significant chill, and that is what they wanted. They wanted to stop a lot of these lawsuits, but I think the people that get hurt here are the owners with the smaller claims for sure. I think the association claims the bigger things, those are still going to be able to be litigated where it's large enough to make it financially feasible. The smaller ones, people are going to get hurt.

Jon Lemole, Esq.:

Yeah, but you still have the same problem with the larger claims. If your claim value is, I don't know, just throwing a number out there $2 million, but at the end of the day, after paying your attorney's fees, you've got a much lower amount in your pocket and how do you get the repairs completely done? I understand the motivation is to reduce litigation and control litigation costs, but I think at the end of the day that may end up hurting, as you say, hurting insureds who have claims.

Dave McMahon:

Jon, and Mike and I talk about this and we don't disagree. It's going to be very interesting as the pendulum swung the other way to get to this point. Is there a chance in the future as they look at this to find a happy medium or some controllable arena to that? I don't know, but you make great points, Kelly did as well. I think it does put a lot of pressure on the insureds.

Mike Angers:

Jon, I got a question maybe for the attorneys real quick. And it's something that's going to happen, it's happening elsewhere, it hasn't happened to me yet thank goodness. Say you have an association that can't get full limits, can't get coverage, you got closings, you got board of directors that are sitting there, what do you all as attorneys... I know I had one that was really close. We had attorney involved, there was closings waiting to happen. This is going to happen. It's happening down south, I know Dave and I talked, it's going to happen where people either can't get coverage, can't get full limits, or the deductibles are over and beyond what's accepted. What are you all advising as attorneys for them? Because again, do I want to be the board if I don't have the proper insurance? What about the banks? What are the banks going to do? Are they going to fourth place coverage? What are you guys telling your clients and have you run into this? And if not, it's happening down south I know that because the bigger values down south, it's going to trickle up here because the capacity of these people, they only have so much that they can write. They're running out really quickly, so I'm just curious on your thoughts on that.

Cindy Hill, Esq.:

Well, I hate to say it, but everything that happens down south tends to be bellwether for what's coming our way. So thank you Mike for telling me that because if it's happening at that volume down in Miami area, it's definitely coming our way. There are no easy answers to that. And the reality is, if you can't get a carrier to write you coverage, well, you can't force them to write you coverage. So my general advice though, because I think we could talk another hour about this, is that the boards do need to be doing everything they can to show in the event that this becomes a problem they took reasonable steps to try to get coverage. That they've worked with their agent, that they've reached out, that they've tried to do what they can and they've documented they've tried to do what they can because again, you can't force an impossibility.

Dave McMahon:

I want to mention I just saw a real quick question regarding proposals from agents. I can't get proposals from agents. You won't. Your job as a board is to find the agent you want to work with and assign them to represent you. And I think that was mentioned earlier by interviewing an agent to go ahead to determine who you want to represent you because there's not enough carriers in the state of Florida to manage all the risk. It's only a small number of carriers. You're looking for experienced professionals like Mike, like myself, like the others that are out there that have years and years of experience dealing with these cycles and this stress. But it's not like you could get a phone book and start calling agents, that does not exist in Florida. Maybe it does up north, but not down here.

Jon Lemole, Esq.:

So folks it's 12:03, we'll probably hang out here for another five minutes or so to continue to go through some of these questions. You're obviously welcome to stay with us, but we recognize that some of you have other places to be. Dave, Kelly, Mike, are you guys okay for another couple?

Dave McMahon:

Absolutely.

Jon Lemole, Esq.:

So there's a question here about carports. My insurance rep told me some companies are not covering Carports. Who wants to take that one?

Dave McMahon:

All you, Mike.

Mike Angers:

Well, it's pretty simple. Think about it. They're trying to eliminate the risk. Most of the carports you see out there are like kites. They're open sided structures, they're the first things to go so a lot of carriers already have been excluding them. More carriers are jumping on that boat. So yes, it's going to be tough to find coverage for carports. You may be self-insuring for those in the future. It's been going that direction for a while.

Jon Lemole, Esq.:

There's another question here. So if a condo building is 17 years old and roofs last 30 or more years and we coat with a sealant, that doesn't change the life or add value as a maintenance issue?

Dave McMahon:

I think everybody's starting up get their arms around or maybe becoming more understanding that whatever the warranties are when it comes to roofs and the suggestion that it lasts as long as they do, is not a reality. All that it was done in the past under old laws, old permitting, not modernized to today's ordinance of law features that we feel from a construction standpoint serve wind loads better. So you have an older roof, if the warranty or the roofing company says it will last 30 years, I'd really question that. We haven't seen that. We see 15, 20 years at best when it comes to roofs, it's just a very severe weather pattern here. So when it comes to recoating, they don't recognize that as well. As I mentioned earlier, it applies to an older roof system. Maybe they'll change as new roofs become updated. Maybe that recoating could be a mechanism to extend it, but right now it's not seen that way.

Jon Lemole, Esq.:

Kelly, there's been a couple questions about controlling roof fraud, which I'm not exactly sure what the question is specifically directed at, but I would suspect that's really ties into the AOB, the assignment of benefits issue. That was a source of some real problems, right? With spiraling roof replacement costs?

Kelly Fantetti, Esq.:

Yes. Traditionally like I said, you had a more competitive bid market and that kept the cost of roofs down, and the insurance company wasn't quite so beholden. By eliminating the assignment of benefits, we are kind of getting back into that bid market for the roofs. The other thing that they tried to do is they tried to limit the roofer's abilities to solicit, knocking on doors and talking to people about their roofs and telling people to file insurance claims. But then there was a roofing company that filed a lawsuit for an injunction on that law because they said it violated the First Amendment rights of the business and they've actually been successful in that argument. So the legislature actually backed down on that in the most recent legislation.

Mike Angers:

It has me scratching my head here because through Irma we talked about all the roof fraud and in our area there was one big roofer, an insurance agent and an attorney working together. Obviously this new legislation was passed in May, Irma comes along the same roofer, the same insurance agent and so forth is out there doing the same thing. So I guess the question, and I'm pigtailing off of the other one is how are they going to put a stop to it? It continues to happen. Literally the day after the storm, same people that are in litigation with tons of litigation with the carriers are still doing it. These people are costing us all money. It's killing us. I just don't understand it.

Kelly Fantetti, Esq.:

And that's kind of the sad thing about the changes that were made, is the people caught in the crossfire are the property owners, and they weren't able to find a tailored solution to really go after the bad actors. So they just got rid of everything for everybody, and the people who aren't going to have the resources they need to fix their property are going to be the property owners and it's really unfortunate. So as I think it was Jon who mentioned before, maybe as things shake out we'll be able to revisit some of this and make a more tailored solution, but the way it is now, they've just eliminated everything for everyone.

Dave McMahon:

Killed it. Yeah, killed it.

Jon Lemole, Esq.:

Well folks, I want to thank everybody for joining us. I want to thank our presenters, Mike, David, Kelly, for giving us some really, really helpful information. Cindy, for giving us some perspective from the general counsel seat. As I said at the beginning of this, this has been recorded so if you want to replay it'll be available probably in about a week or so on our website. And our website is www.tlhlegal.com. You can also email, I know there were a lot of questions. We tried to get to some, we didn't get to all of them. If you still have some questions, you can email those to Michelle Colburn, This email address is being protected from spambots. You need JavaScript enabled to view it., and she'll pass those on to the appropriate person and we'll do our best to provide some answers via email. So I want to thank everybody for joining us today. I hope this helped a little bit. I know this is a very tough, tough issue to tackle in an hour. Maybe we'll continue to present some monthly programs on insurance issues as people get more comfortable with this new legislation and what's going on in the market, but please remember to join us every month. We have this smart board legal guide presentation, and we hope you'll continue to join us in the future. So I want to thank everybody and wish everybody a good remainder of their week and hopefully we'll see you all next month.

Dave McMahon:

Thanks, Jon, Cindy and Kelly.

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Smart Board & Property Manager Legal Guide: Repair & Maintenance Obligations

Alan Tannenbaum, Esq.:

I'm Alan Tannenbaum, principal of Tannenbaum Lemole & Hill. I'm here with my partners Jon Lemole and Cindy Hill.

So let me tell you a little bit about our law firm. Prior to this year we were primarily construction lawyers and litigators working in the community association field. And Jon Lemole and myself led that practice and we have been representing in turnover claims, construction consulting, repair consulting, we have done covenant enforcement and we did that from the Space Coast across central Florida to the Tampa Bay area and down to Naples. We've stayed out of South Florida and stayed out of North Florida. And Jon and I, we're not doing general counsel work, but we've transitioned our practice. Jon and I are still leading our construction team and our claims team in all the markets I talked about from the Space Coast across the Tampa Bay and down to Naples, but we've also now become a general council firm and which is why Cindy Hill is here. We brought Cindy in experienced general counsel.

Now, to be clear on our boundaries the general counsel portion of our practice is from the northern reaches of Manatee County. We do some work also in East Bay and Hillsboro and down to Naples. We are practicing general council community association law, whereas, our construction practice is in the original market that I talked about. So the market has been a little bit confused about us, but here's the low down. Anybody on this call if you have a construction litigation or litigation issue or a turnover, we'd be happy to talk with you. If you have a general counsel issue and you're in from Manatee County Northline down or East Bay down, we'll be happy to talk to you about general counsel matters. If you're out of that market and have general questions, we're going to refer you to a great general council in St. Pete or Clearwater or Orlando or Melbourne, but we won't be taking on the general council work. So hopefully I haven't confused you, but we are a full service general council and a construction law firm but the region that we practice construction law in is broader than the region we do general counsel.

And I probably created more confusion with what I just said than clarity, but I did my best. Okay, so what we're going to be talking about today is Repair and Maintenance Obligations: Limits of Board Business Judgment. And one of the reasons we brought this topic back is that the legislature recently acted when it passed the Condo Safety Act, and passed two sections of that act that directly relate to individual board of director exposure on repair and maintenance activities. Which through all the lawyers in Florida [inaudible 00:04:08] because it was a diversion from where the law had been both from the common law, the court created law and what the legislature had said about breach of fiduciary duty. So part of the excitement of being a lawyer is that you think you have it all figured out and then either the judge or the legislature acts and you have to totally alter your thinking and your recommendations and your opinions because they threw you curve ball.

That's part of the excitement of the law, and then we have to try to explain it, what the court system and the legislature did which is not always an easy thing to do. So I'm going to talk first about the common law. So common law is literally the law that's created by the courts when a judge or an appellate court makes a determination and I'll give you an example. Many decades ago the Florida Supreme Court said that there's an implied warranty of fitness in merchantability that applies to the sale of new homes. It wasn't clear what the law was until the Florida Supreme Court decided that, and all of a sudden there's now based upon that decision an applied warranty in the sale of new homes. Now, the legislature has acted subsequently to that to alter things, but that's when a court says we're creating something new and making law in Florida, which courts do, that's the common law. So what was happening in, and especially in condo world in the early 1980s is there was a series of court decisions that were coming down.

Where a board of directors of a condo association decided that it was going to repair something in a certain way, and one of the owners challenged it. That you shouldn't do it that way, I have an engineer who says there's a different way to do, it'd be cheaper, it's going to last longer and it went to the trial court. The trial court's trying to decide which engineer was right, the association's engineer or the unit owner's engineer and the cases got up to the appellate courts. And finally the appellate court said, we're tired of hearing... I'm interpreting here, but we're kind of tired of hearing these disputes so we're going to establish a precedent. And the precedent ended up being the adoption of the Lamden Rule, which really clarified what a board's authority is to make decisions on repair and maintenance and what's challengable by an owner once the board has made those decisions. And it cut out a lot of that litigation when the courts adopted this Lamden Rule. And Jon, we can go to the next slide.

So this is the Lamden Rule, the basic court created law about board business judgment in Florida as it relates to repair and maintenance. So in order for the board business judgment to be a protection, the court system has said you have to meet these criteria. So the first criteria is a dually constituted community association board. That means that do your elections properly so that everybody who is sitting on the board where the decision's made is appropriately in a position as a board member. It also probably means, although it doesn't say it here, make sure your meeting notice is correct. So that when you make a decision about repairing maintenance and hiring an engineer or hiring a lawyer, whatever it is, then it's properly documented, was on the agenda for a board meeting, the board voted to go forward with and so forth. I think that would probably be subsumed within duly constitute community association board at a duly notice meeting. Now, the next criteria upon reasonable investigation.

So why do we as community association lawyers tell you that if you're going to do a major repair project you should involve an engineer? Well, the first reason is we think that there's a better opportunity under those circumstances to have a successful repair. But it also is applying this Lamden Rule. One of the things that allows board business judgment to be a protection is that the board has undertaken a reasonable investigation. Which means you've had professionals who have studied the problem, who have come up with a solution. We have groups where we have retired contractors and engineers who maybe are serving on the board, and they're out making decisions about how things should be repaired. Big mistake. We have former contractors who are doing supervision of jobs out in the field who are on the board. That's also a bad idea. So reasonable investigation is a key, and usually that involves some professional of some sort.

In good faith and with regard to the best interest of the community association and its members. So good faith means you're not entering into a repair project where you have a pecuniary interest, a board member has a pecuniary interest. You're hiring a board member's brother in law at a above market rate. Bad idea, that's bad faith for a board member. Or you're taking an action that's vindictive. You don't like a particular unit owner so you don't do repairs on their unit, you go to another building. You can't do that. That's not good faith and the best interest of the community has to be taken into account. Now, don't get confused, if you're in a condo for instance and it has 15 buildings and only one building's taking in water, you can't say, well, the best interest of the community is for us to ignore that building because most of the owners are not affected by the problem. You can't do that. You have to have the best interest of the community mind.

So if all those things are in place then if the board exercises discretion with the scope of its authority, does it have authority to make this maintenance and repair decision? And that selects among means for discharging an obligation in repair and the court should defer to the board's authority and presumed expertise. So what that means is if it's a duly constituted board, the investigation's been reasonable, it's acting in good faith in the best interest of the community, and it exercises discretion as to the extent of repairs that are necessary or how to undertake a repair it's not going to be challengable. An owner's not going to be able to come in and say, my engineer says it could be done a different way or a better way. Or I shouldn't have to pay this assessment because the board's spending too much money, it could have put off this repair another two years, it doesn't need to do it now.

None of those arguments are going to hold any weight in court applying the business judgment rule because of the adoption of Lamden rules. so just make sure all of the criteria are in place. Duly constituted, you've done a reasonable investigation, you're acting a good faith, and you have the authority to make the decisions that you're making about repair and maintenance. If all those things are in place, the court's not going to disturb it. The board's decision is protected. So that's the basic common law, courted created law. Now Jon Lemole is going to tell you how the legislature took that basic common law approach that the court system adopted and contorted it in all kinds of ways to create the dilemma that I talked about is how the heck do we advise people based upon now what the legislature has done? So Jon, tell us what our fine legislature over the years has done on the issue of fiduciary duty and board liability.

Jon Lemole, Esq.:

Thanks. So as Alan said, you have this weird commingling of common law, which is the business judgment rule under the Lamden test. And then the legislature has weighed in with various statutes that address primarily a director's fiduciary obligations. And so navigating that minefield of exercising business judgment while at the same time not doing things which may be statutory violations of your fiduciary duty can seem like a really difficult prospect or path to navigate for directors and officers and even managers because some of these statutes address managers as well. But let me stay at the outset and I think if you've been on these, you've heard Alan say it as well a couple of times, this is not to scare anybody. It's extremely rare for directors to find themselves in personal peril for their decisions as directors. Not only does the business judgment doctrine provide a strong layer of protection, the Florida statutes which actually address the fiduciary obligations of directors and officers are also in a way protective of a general level of immunity for directors from personal liability.

But that's not to say that there aren't circumstances where a director can face individual liability for their actions. There are instances where indiscriminate directors, officers can find themselves boxed in by their statutory fiduciary obligations. So what I'm going to talk about here is how that box gets created. Taking the box metaphor a little bit further, think of a wood crate, and what we're going to talk about is putting that wood crate together with hammer and nails. So let's talk about the hammer. Most of the penalties for violating your obligations as a director or officer or even manager are not self-executing. There are some rare instances where they can be, and we'll look at those in a minute, but they're not normally self-executing. And so the hammer, the thing that is held over everybody's head are provisions in both the condo statute and the HOA statute which authorize lawsuits by unit owners or by HOA members against either the association itself or in some instances a director or any one of the directors or even perhaps all of the directors.

So 718.303 in the condo statute, and 720.305 in the HOA statute both authorized member lawsuits against the association and/or directors and officers for failing to comply with the law, the statutes, and the governing documents of the association. Lawsuits can seek damages or they can seek injunctions. In other words, requesting a court to force the association to do something or to force a director to do something. And obviously, if you're faced with one of those lawsuits, they can be very expensive. But compounding the problem is that if you lose and if the member wins, both of these statutes also authorize the prevailing party in that case to recover attorney's fees and costs. So not only is the association or the director dealing with having to fund their own defense, the cost of defending the action, but if you lose, you may also be called on to pay the member's attorney's fees that they've expended in order to get the association or the director to do what they should be doing under the statute or under the governing documents.

Interesting thing to note about the condo statute, doesn't say this in the HOA statute, but a prevailing unit owner can also recover any assessments levied against them for the purpose of paying the defense of that lawsuit. So if the association gets sued and the association passes a special assessment in order to pay their lawyer to defend against the case and they lose, the assessments that unit owner incurred can also be reimbursable. So we can look at the statute and I've highlighted some of the relevant provisions. This is 718.303, the association shall be governed by and shall comply with the provisions of this chapter, the declaration, the documents creating the association, bylaws, all of the governing documents. And actions for damages or injunctive relief or both for failure to comply with these provisions may be brought by a unit owner against the association and/or any director who willfully and knowingly fails to comply with the provisions.

And you'll see that a little bit further down in that section of the condo laws where the prevailing party attorney's fee language appears. I'm going to run through this really quickly in the interest of time, but we talked about it. The prevailing party can recover their attorney's fees. And in the case of condos, if that prevailing party is the unit owner, they can also recover any assessments that were levied against them to pay for the association or the director's defense. Now, let's look at 720.305. Basically the same for HOAs. The language is essentially identical. The only thing missing here is that language about recouping assessments, and the HOA statute just says in the prevailing party in any such litigation is entitled to recover reasonable attorney's fees and costs. So those two sections are the hammer as this box is created, that's what provides the enforcement mechanism in situations where there's a potential breach of fiduciary obligation.

So let's talk about the nail. What is the nail? The nail are the fiduciary duties as their legislatively defined, and the breaches of fiduciary obligations as their legislatively defined in the condo law and in the HOA statute. So we're going to take a look at them broadly, condo, HOA and the general not-for-profit statute in 617 also comes to plain here because it's referenced and so there's some cross-reference to that statute as well. But taken together the condo law, the HOA law, the not-for-profit corporation statute impose on directors and officers of fiduciary duty towards owners. They impose that, they say that. And generally they define a breach of that fiduciary obligation in a series of things that you cannot do, and those things that you cannot do generally are receive kickbacks and freebies. Failure to perform your duties, and the failure is a knowing violation of criminal law. Or engage in self-dealing transactions directly or indirectly or act recklessly. Sorry, there's a typo in there. That recklessly should be at that last bullet.

Act recklessly or act or fail to act in bad faith or with a malicious purpose or in a manner exhibiting wanton and willful disregard human rights, safety or property. Let's take a little bit of a deeper dive into the statutory language. So first we'll start with the condo statute and the general parameters of the fiduciary duty of officers and directors is in 718.1 11. And in the section (1)(a), it provides that the officers and directors of the association have a fiduciary relationship to the unit owners. Now, here's what I want to look at next, is all the things that are deemed to be violations of that fiduciary duty. And notice I've highlighted manager here because while the duty, the fiduciary obligation refers to officers and directors, the things that cannot be done also include managers. So you may not solicit, offer to accept or accept anything or service of value or kickback for which consideration has not been provided for his or her own benefit or that of his or her immediate family from any person providing or proposing to provide goods or services to the association. Okay?

So that's pretty simple. You're going to hire a vendor to do something at the property, you can't hire that person or that company because they're giving you a tip or a kickback or some other money on the side as an inducement to hire them. That's pretty simple. I think we all get that. But the statute then goes on to say, and this is where it pulls in the not-for-profit corporate fiduciary obligation statute in 617 and it refers to it within the Condo Act and frankly repeats it. You're not going to see something similar in the HOA Act. In the Condo Act, it incorporates that into the statute. So in the condo statute a director, an officer who fails to perform his or her duties and the breach or failure to perform those duties either constitutes a violation of criminal law, constitutes a transaction in which the officer or director derived an improper personal benefit.

Now, don't confuse that with kickback. That can also include other forms of self-dealing like hiring a family member, steering a contract, a vendor contract to a family member. Or maybe you've got some a holding company somewhere that you've got a series of intricate corporate structures where you have a personal benefit, principle interest or financial interest, although it's not obvious. Those are the types of self-dealing acts which the condo statute prohibits. So self-dealing or the act constitutes an act of recklessness or an act or omission that was in bad faith with malicious purpose or in a manner exhibiting wanton or willful disregard of human rights, safety or property. We've heard that already. Now, these are the things that constitute violations. 

Jon Lemole, Esq.:

Okay. Now, obviously if you're acting within the business judgment rule, if you're applying the Lamden test then you're probably going to not have a problem with these. I mean, there is some overlap here where if you're following that Lamden test that Alan spoke about before, you're probably not going to run into these situations because you will already have been anticipating these types of breaches and avoiding them. But just good to know that the statute's there and they define what the fiduciary obligations are and how to violate them. Look, you can turn... I'm sorry, I've had this cold for three weeks and I can't get rid of the cough. Excuse me. The HOA Act is somewhat similar. 720.303 defines that officers and directors of a homeowner's association have a fiduciary relationship to the members who are served by the association. So that's similar to the condo statute, it tells us that we have that duty.

It then says that the officer or director or manager, and this is the anti-kickback language, you can't take kickbacks. Now, I talked about self-executing penalties, this is where you find one in the HOA statute. If the board finds that an officer or a director has violated this subsection, the board shall immediately remove the officer or director from office. So be aware of that. Thank you. Michelle just brought me a cup of water. The HOA statute also incorporates in it a director or officer charged by information or indictment with a felony theft, not convicted, charged with a felony theft or embezzlement offense involving the association's funds or property is removed from office. So that's another self-executing penalty under the HOA law. But then the HOA law goes back and refers instead of taking the language from the not-for-profit corporation statutes and repeating it in it, it refers to chapter 617.

So in HOA land, you've got to go back and look at the language in 617.0834 because that's where the same types of things that we talked about before in the condo law are referred to for the HOA folks. And so again, you'll see that a breach of a fiduciary obligation happens when the officer or director breached or failed to perform his or her duties, and the breach or failure to perform constitutes either a violation of criminal law. There is a little bit of a relief valve here unless the officer or director had reasonable cause to believe his or her conduct was lawful. Or had no reasonable cause to believe his or her conduct was unlawful. Or the transaction from which the decision constitutes the transaction from which the officer or director derived an improper personal benefit directly or indirectly. We talked about that in moments ago, self-dealing.

That's the classic example of approving a vendor contract to a family member for example. Or the act was reckless or an act or omission, failure to act, that was committed in bad faith or with malicious purpose or in a manner exhibiting wanton and willful disregard of human rights, safety or property. So those are the two statutory schemes which define A, fiduciary obligation that exists and then the ways that you can breach them. And as you can see, breaching those fiduciary obligations, you've done some pretty bad stuff if you've breached them. So you've really created the box for yourself with the hammer and nails. Now, the new condo safety legislation, and so this is just for condo folks. All of a sudden the legislature has thrown that scheme into a little bit of confusion, because what they've done is they've tacked on to the new condo safety legislation what may be an additional fiduciary obligation for officers, directors, and managers.

And so there are two different places where this appears. One in connection with the milestone inspections, the structural safety milestone inspections, and the other in regards to the structural integrity reserve studies. So in 718.112(2)(h), the legislature has now said that if an association is required to have a milestone inspection performed, you got to do it. And if the officers or directors of an association willfully and knowingly fail to have a milestone inspection performed when they're supposed to do it, such failure is a breach of the officers and director's fiduciary relationship to unit owners under 718.111(1)(a) which is the section we referred to earlier and we were looking at. And similarly, in 718.112(2)(g) it's essentially the same language and this time it's regarding the failure to conduct and arrange for and obtain a structural integrity reserve study if your condominium is required to have one of those. Now, as legislatures often do they put this here and it creates some confusion. We don't know and it's probably going to require a court to get a case and determine whether this is a whole new subsection for example of something that is a breach.

Or whether these sections are informed by or impacted by those other sections that we looked at, which talk about self-dealing, which talk about reckless acts, which talked about malicious purpose and bad faith, and whether those define the duties that are created in these two new sections. And we don't really know the answer to that, and we probably won't know unless we either get some clarification from the legislature or somebody gets sued for not doing this and the case goes up on appeal and we get some clarification from the court system. But from a conservative approach, I think a lot of lawyers looking at this language would say, look, the statute says what it says. If you've got to do this, you got to do it so do it because if you don't it's a breach. So that remains to be seen, and of course if you have some concerns about it, you should talk to your general counsel and get their opinion and recommendation of how they view the parameters of these two new sections addressing fiduciary obligation.

So with that, we're going to I think go to Cindy, and Cindy's going to talk about board liability for maintenance and repair failures versus association liability Because oftentimes there's this confusion as to who is really responsible? Is it the association or is it the directors or both? So Cindy's going to clarify that for us hopefully.

Cindy Hill, Esq.:

So this is an issue where Jon has discussed the incidents where personal liability for a board director can be an issue in terms of if you act in a self-dealing matter or fraudulent matter, all those bad faith actions. There's a difference between though a board member being individually liable or multiple board members being individually liable, and then the association itself being liable. So for instance, if a group of board directors decide they don't like their management company, I'll just give an example, and they decide that they're going to go ahead and fire their management company and they don't do so with the assistance council, they just tell them to go away. The management company had a contract that was good through the end of the calendar year and they fired them that year, and then they're surprised to find out the association gets sued to pay the remainder of the contract.

Well, that would be an example of a lawsuit where the association could be potentially liable. But it would also be an example where the board directors wouldn't be personally liable because maybe they made what could arguably be a bad corporate decision not consulting with counsel and following the terms of a contract and terminating the management company, but they didn't make a decision that was fraudulent, criminal, self-dealing, any of those higher standards of breach of fiduciary duty. So that being said, I cannot recommend that boards take that personal protection that the statute does offer them where they can make some arguably bad decisions and go ahead and make some arguably bad decisions. Because once the association is sued, those board directors are going to need to most likely attend depositions, answer discovery requests, be participants in the litigation to defend the actions they made although again, they will not be personally liable.

They won't have to be concerned about a judgment against them as a person, but they did have a fiduciary duty to act in the best interest of the association and now they have to defend their actions in a lawsuit. So I see board members who sometimes worry about being sued individually and then when I assure them that the standard is high and they're acting in good faith, they're going to be okay. But then they don't necessarily make that connection to, well, at the same time, going back to the point Alan made very early in the presentation, when a board reaches out to a professional such as an engineer, the attorney, the accountant, whatever the applicable issue is and gets guidance on certain issues it can be a very strong protection from liability. So that you don't as a board necessarily take steps that aren't in bad faith, aren't fraudulent, aren't self-dealing, but are still not the best corporate decisions because ultimately board directors are volunteers.

You are not trained professionals in all areas of the law that could in any time end up in a board meeting on the agenda that you need to discuss. So I always recommend best to reach out to professionals, get the advice that you need to go forward. It doesn't mean that you will not be sued either individually or as an association. Let me make that clear, no one can guarantee that. People can sue you for anything they want. I could be sued, I'm going to be a little facetious, but it's true somebody could sue me for having red hair. Does that mean the lawsuit will survive any sort of court proceeding and not be thrown out by a judge? No, but it does not mean that I could not get sued. So in acting in your best interest to your association, getting the advice of the professionals applicable to a situation can avoid that. And in the event that you do get an angry owner or I don't know how many of you might have encountered someone who is a lawyer in another state and now lives in Florida and is retired and is angry over certain issues.

If they decide to sue and don't follow the proper procedures and sue the board members individually, you have all your ducks in a row so to speak, in terms of defending yourself against what was a lawsuit that was not necessarily properly vetted before it got to the courts. Oh yeah, go ahead.

Alan Tannenbaum, Esq.:

Well, let me give a concrete example to highlight this difference between board liability and association liability. So let's say the board is making a decision, it has three buildings to reroof and the board makes a business decision that it's going to reroof the first building this year and the second building next year and the third building in the third year. And it's a business decision that the board can make, it may or may not require professional decision making. And then that third building has a major leak event and there's damage to the building and the interior units. It's not going to create personal liability on behalf of the director because of the high standard for breach of fiduciary duty. But when that owner sues the association for the maintenance failure, for not doing our building, the standard that's going to apply is a negligent standard. So let's say the board of directors had a report from an engineer that said all three roofs need to be replaced now.

So the owner finds that report or their lawyer finds that report, and the lawyer's going to go into court with that report and say they had an engineering report that said the roofs all had to be replaced today. It was not reasonable for the board to defer that third roof to two years from now, and therefore the association's liable for the damages that my unit suffered as a result of the decision to defer which was negligent. But that does not create individual liability, but the association and the association's liability carrier will need to respond to that claim. So what we're trying to portray is that the corporate liability of the association is a lower standard. It's a negligent standard. Whereas, individual board liability is this higher fiduciary obligation. And that's part of the reason why the legislature's addition of this new statutory language is concerning because all this was is to say, if the board has this obligation to have the reserve study and the engineering study under the Condo Safety Act. And if the board doesn't do it 'cause it wants to save the association money or wants a deferent or is concerned that we have a lot of owners who are already being lean for not paying their invoices and we just can't afford it, or insurance is too expensive and geez, we just can't comply with the statute.

All of which would seem to be at least arguably good faith decisions on a board of directors. The legislature said, if you make that type of decision relative to these two statutory provisions, it's a breach of fiduciary duty and you're going to get sued individually. So that's where in our view, it was an aberration for where the flow of the legislature had been before that and the common law. Which is you got to be really doing a really bad thing as a director in order to have personal liability and basically ignoring a statutory requirement for a reserve study or an engineering report on time now creates individual liability. That's concerning for us. What's our last segment, Jon? All right, in the last few minutes we're going to cover something that is really pertinent to post hurricane relief and some confusion that board directors have. So we are dealing with a number of groups in our market in South that have had substantial hurricane damage. They're working with public adjusters or first party insurance lawyers to try to get compensation to cover the repairs that are necessary.

And so we have communities that may have 50 roofs and half the roofs have a blue tarp on them. And the association has yet to hire a roofing contractor to replace the roofs that need to be replaced and the argument being that, well, we're waiting for our insurance claim to be processed. Interestingly in the Condo Act and in all of your documents, there's nothing that says that our repair responsibilities are suspended if we're waiting for an insurance company to respond. So it's really perilous for associations of board of directors in the face of having storm damage to really believe that you can wait too long of a period of time for an insurance claim to be resolved before you take action on the repair and maintenance front. And I was on a panel just a couple of weeks ago and with a couple of insurance agents, and the insurance agent said, well, don't go ahead with repairs because you want to make sure that the insurance company has documented all the problems. And I raised my hand and I said, well, I can't totally agree with that.

I definitely agree you have to protect the insurance claim, put the carrier on notice, let them know that you're going to be doing repairs and so forth, and make sure your engineers get in there and document the problems. But I said, I don't know how you would justify in a community with somebody whose roof is already tarped in October of 2022 that when May of 2023 comes on and our rainy season starts in Florida and that roof and that tarp doesn't hold up, which it's not intended to, and that unit now gets wet. It's going to be very difficult for the board to argue that we had to defer that work because we were waiting for an insurance company to respond. So that repair and maintenance obligation persists even in the face of that. And there some tough business decisions because the association says, well, where are we going to get the money from to fund this repair unless we have the insurance money? And what some groups do is they get a line of credit or they do a special assessment and they tell the owners, when we get the insurance company paid or the insurance claim paid, we'll come back and deal with it.

Cindy Hill, Esq.:

I would add many of my association clients who dealt with hurricane damage, storm damage, whether it was just landscaping or it actually damaged buildings have had to tap dance, so to speak, into a situation where they find that they're going to have to get funding 'cause the insurance companies are overwhelmed with the claims. They're not responding in a way that maybe everyone might have expected, and it's an issue that's been a learning curve actually for my associations down in Charlotte County and South Sarasota who are dealing with this problem. And it's something that going forward the area is no longer going to be able to assume that this is a Miami problem or a Fort Lauderdale problem, Sarasota is now on the radar for these problems. So these are things that definitely need to be thought about going forward before the next hurricane season.

Alan Tannenbaum, Esq.:

Let's take some questions. I'll go to our chat, and there's been a couple of really interesting questions asked. There's a question from Diane. What if a board member's relative is employed by a roofing company of questionable experience, but the board hires them in disregard and qualified roofing companies resulting in more leaks post storm than that there were prior? That's a very good question.

Cindy Hill, Esq.:

Answering that one in the chat just so you know Alan, and she clarified it's an HOA not a condo.

Alan Tannenbaum, Esq.:

Okay. Well, either way, hiring a relative is usually a bad idea so that should be avoided. If it's a relative who's qualified and that board member doesn't participate in the vote and the services are priced at a market rate, doesn't necessarily mean it's a violation but best avoid that whole situation. Especially if they're not qualified, that's another law, so not really a good idea.

Cindy Hill, Esq.:

Well, the Condominium Statute has a conflict of interest provision you have to follow for notifications and transparency to the ownership if a board director does recommend or wants to potentially hire someone who's family. So that's why I asked in the chat if it was condo or HOA, and I don't know if everyone's aware of that distinction. There is a specific conflict of interest statute in the Condominium Act.

Alan Tannenbaum, Esq.:

There's a question. Does reasonable investigations, this is from Lewis, require the board to obtain proposals from more than one expert? The answer to that would be no. If you have a qualified expert, you have vetted them appropriately those type of investigations are very expensive, there's really no reason for redundancy. Does it provide an additional protection if you get a second opinion? It would, but I wouldn't say at all that's required. But again, it's not only who you retain, but it's what you allow them to do. So if you have a high-rise building with major problems and you call an engineer in and say, we only want you to do a visual inspection we don't want to pay you to do any kind of destructive testing. And the engineer says, well, I can't really determine the problems without some level of destructive testing. You may have limited the scope, and limiting of the scope may be unreasonable. So it's not only hiring an appropriate engineer but also the scope.

Now, what's interesting about the Condo Safety Act is that there are provisions of the Condo Safety Act where the legislature's taking it outside of the board's discretion to limit the scope of what the engineer does. If they're going to do a phase two structural inspection, then it's up to the engineer who has total discretion as with the level of investigation they do. Which it's been joked about within the attorney community that if you have a child in college now, send them to engineering school or have them get an engineering degree because the Florida legislature has created enough work, especially for structural engineers in Florida to keep them all busy for the next five decades. So that may be something if you get a call from a college student who's trying to decide between a philosophy major and a engineering major, push them towards the engineering side, especially the structural end of it and you'll get there. I see Michelle has put a poll up. Thank you, Michelle, and I'm trying to see if there's any other questions we haven't answered yet.

Jon Lemole, Esq.:

Alan, there was a question about what does reckless mean? What is a reckless act? That's actually defined in 617.0834, the nonprofit corporation statute. Let me share my screen again because I actually have it here in the presentation so quickly you can see what it says there. And it says that for purposes of this section, the term recklessness means the acting or omission to act in conscious disregard of a risk that is known or so obvious that it should have been known to the officer or director. And known to the officer or director, or so obvious that it should have been known to be so great as to make it highly probable that harm would follow from such action or omission. So that's a pretty high standard, it really relates to knowing or a reasonable person would know that there's a risk and ignoring the risk makes it highly probable that some harm, and that could be personal harm or property damage or property harm, would follow from either the action of the failure attack. So you have a statutory definition for that, and I would argue that that applies in either the condo regime or the HOA regime.

Cindy Hill, Esq.:

I agree.

Alan Tannenbaum, Esq.:

One more question I see. Let's see, somebody has a question about one of the board members doing work. Let me see where it is again. Okay. Richard says, what minor repairs can members make or authorize an owner to make? Can a person with elevator controls reset or attempt to reset motionless elevator car? Does your answer change if people are stuck in it? Well, can owners and the board do simple screw tightening on hinges? I think moving propane tanks to secure a area would be okay. We have directors who are up on ladders today doing stuff at their property. I'm greatly in favor of maintenance work being done by either an employee of the management company or a hired maintenance company. I'm very much in favor of repair work being done by a contractor contracted for the association. Self-help by directors has several perils. Number one, if somebody performs negligently they can be held liable for it. So I've confronted an engineer from Illinois who's on the board of directors, and he's designing repair work at their condo. And I've said to this engineer from Illinois, I said, if you still have professional liability insurance I bet it doesn't cover unlicensed engineering in Florida.

And so you're undertaking an act that's completely uninsured. You're not licensed to practice engineering in Florida, so you're breaking Florida licensing laws. It's an unauthorized practice of engineering. Do you really want to volunteer your services under these circumstances? They would apply it to an accountant who was doing the association's books, or a lawyer who is second guessing their general counsel on giving legal advice. Really, really not a good thing. So there may be some really minor things that I could see a board member doing, certainly under an emergency circumstance. If you need to get somebody out of an elevator stuck in it, well, and ThyssenKrupp or the elevator company can't get out in time and you need to rescue somebody. I guess all holes you're open to take emergency action, but short of that I don't like to see board members or directors doing stuff. That's why you have a management company. That's why you have a maintenance person. That's why you have outside contractors and engineers. And it's virtuous 'cause you think you're saving the association money. Some folks just like to be handy and useful, but it's very perilous if you're undertaking it on behalf of the association.

Cindy Hill, Esq.:

And Alan, they may not also have insurance for that. Workers' comp can be a complicated issue, that's the insurance that covers people who are working. And it may be your volunteer falls off a ladder gets hurt and you find unfortunately, there's no insurance coverage for that for your community. So I also advise not to use volunteers for any dangerous circumstances. And do review with your insurance agent what your coverage is if you have volunteers doing much of anything 'cause people can get hurt crossing a room, holding something too heavy.

Alan Tannenbaum, Esq.:

I got a comment that I cut Cindy off before she was done with her portion of the presentation. So Cindy, is there anything you wanted to say that I didn't allow you to say?

Cindy Hill, Esq.:

Alan, you went ahead and gave an example that really just solidified the points I was making, which is that these decisions they're not get out of jail free cards. There's ramifications to the decisions the board make even when board directors are not personally going to be liable.

Alan Tannenbaum, Esq.:

Okay. There's a question from Tim. I will stay on for a few more minutes for the folks who want to hear some answers. What happens when boards alter replacement schedule for ruse, pavement, et cetera, delaying replacement by five years or so and leaving a community short on funding? Well again, if it's a condo, then under the provisions of the Safety Act that may cause the board some individual responsibility under the provisions that we talked about. Funding is a big problem with what's happened with the insurance premiums and boards have to look really closely at the rest of their budget. What can we defer in order to afford this exorbitant premium that we got to pay this year? And it's a really tough business decision, and again, the Condo Act and your documents don't say that the repair and maintenance obligation is suspended when the association doesn't have the funds to undertake the work.

Cindy Hill, Esq.:

Correct.

Alan Tannenbaum, Esq.:

And that's why the whole subject of condo terminations is coming to the forefront because with what the legislature has mandated, you might have an older condo with multi-million dollars of repair responsibility with a membership that is not in the position to be specially assessed and pay a special assessment to undertake that. And there may reach a point where the appropriate thing for that board to do is push towards a termination rather than try to keep this old building in very bad shape going, especially where the membership can't afford it. I had a termination situation in a condo in Tampa, and they needed to assess the owners $30,000 each to do repairs. And there was a potential of each owner realizing $300,000 if the land was sold and the condo is terminated. And I confronted a woman who actually was handicapped at the condo meeting where termination was being discussed, and she said, "Where am I ever going to find a unit where I can wheel my wheelchair right into the first floor unit?"

So she voted against termination and then the board said to her, well you're going to have to pay the $30,000 assessment for repairs. And she said, "Well, how could I possibly do that? I'm handicapped with no income." And the dilemma for the board was that, well, there were only two possibilities. The repairs had to be done or the condo terminated, but there was no third alternative, and this owner didn't want either. I don't want to be assessed and I don't want to lose my unit and those are some very tough conversations. We've had other condos that the owner said, you can't terminate my beachfront condo 'cause I'll never be able to afford another condo on the beach. Well, that may be true, but unless you're willing to come up with the $150,000 necessary to do your repairs where are you going to be? So I think we basically covered. Somebody's asking about the reserve studies and so forth, and that's a little bit too in depth to get into here.

Jon Lemole, Esq.:

One comment, and this always comes up when we do a presentation on fiduciary duties and business judgment rule, and now the new condo safety legislation is why would anybody want to be a director at this point? Cindy always has a pretty good answer to that. So I'm going to paraphrase it real quickly, but Cindy will maybe jump in and provide her perspective. But at the end of the day, these provisions are not... You have to do something really bad. You have to disregard your duty significantly to face any kind of personal responsibility as a director. So you shouldn't look at these talks as something that it's a big scary thing. And there is a need for directors and there is a need for good people to manage communities, manage them effectively and that should not be a scary thing. Comply with the statutes, use due diligence, rely on experts, vet the vendors, don't engage in self-dealing, act in good faith and you're going to be fine. Cindy, do you have anything to add to that?

Cindy Hill, Esq.:

That's really the synopsis other than some people are not necessarily going to want to be the bad guy, so to speak, the one with the bad news. So I think that's a reality that the managers are dealing with. So at the same time, their counsel should tell them exactly what Jon just told you, what I would tell the group if John had not. There really is no reason for board directors to feel that they're going to be personally liable for their actions as long as they're acting in good faith and using professionals. And if they are concerned, checking with your insurance agent over the directors and officers liability coverage is always a good conversation to have.

Jon Lemole, Esq.:

Right. Generally you have coverage for that, for your actions.

Alan Tannenbaum, Esq.:

And John and Cindy, the only counter I would have to say is if you're in an older condo subject to the Condo Safety Act and you have to meet those requirements. And again, the thought process, well, let's delay the reserve study or let's delay getting the inspections that are required 'cause our group can't afford it or we are paying too much for insurance, so let's do it next year and you're at that deadline. The Florida legislature seems to be saying or may be saying that that's an exception. That even though your heart was in the right place, so to speak, you're still going to have personal liability, so that would be the only exception. And again, the whole premise of the presentation today is the legislature always takes us lawyers on a journey and the associations with us.

Cindy Hill, Esq.:

Well, now that's why I said a board working with professionals. If a board is working with their general counsel, working with engineers on these issues, doing their due diligence, that's going to be the protection that they are needed. As opposed to ignoring it, kicking the can down the road, which is of course what created this whole statutory provision.

Alan Tannenbaum, Esq.:

All right, the last question somebody's asking about every year, this comes up about a freebees include cookies, candies, or gift back from vendors. Are they bribes or are they considered not valuable? Isn't there a dollar limit, Cindy?

Cindy Hill, Esq.:

$25 is the statutory limit. A bit unreasonable with today's inflation to think that anybody getting a benefit more than $25 is somehow getting a kickback. But that's what's in the statute.

Alan Tannenbaum, Esq.:

So what if a big gift basket is delivered to a management company. If they share it among like 10 managers and it's under $25 each, is that okay?

Cindy Hill, Esq.:

Well, honestly there's not a lot of law out there on this being enforced, which doesn't mean it shouldn't be recognized. I'm not saying that, but I think you could make a good faith argument that if a basket was sent to a group of people that a management company with five, 10 managers and the basket's worth maybe let's say $75, you're not in violation of the statute. I find again, the $25 is really rather unreasonable because if you went out to lunch with a manager at let's say a little more on the water upscale location, $25 for lunch could run up quite easily if somebody had some snow crabs and a few things. And that wouldn't seem to be a kickback. What I advise in these situations is don't take what appear to be obvious kickbacks. I mean, if a company's trying to send a manager, hey, we want to give you this TV 'cause we really want you to encourage your board to hire us. Again, acting in good faith is going to keep you out of this, but I can't give full advice on this 'cause there's not a lot of pointers and $25 is not a good measure in today's economy.

Alan Tannenbaum, Esq.:

And one of the exceptions is if it's an educational presentation which is why when you go to vendor lunches that they give educational presentations as part of it, besides the CEU credit, it's an exception. It makes that lunch not a bribe because you're actually learning something. That's what the legislature has said that as long as there's an educational component. So if we take you out to lunch, we're going to have to bore you for 10 minutes with an education on some topic and then we're good. All right, we are going to conclude. I think we covered most of the questions. If anyone has a question that wasn't answered, you can contact us and we will answer it if we can.

We always get the question about co-ops and we always leave you out because it's such a small population in Florida, but I think that fiduciary obligation requirements of the co-op statute are very similar to what's in the Condo Act. And so yes, you're going to be facing the same restrictions. So we're going to close down for today. Thanks everybody for attending, and we will figure out a great topic for January. Everybody have a great holiday season. Merry Christmas and happy Hanukkah if you do that, and we'll see you all back in 2023. Goodbye everybody. 

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20221120-205750hurricane-ian-legacy

It's Not Too Early To Start Preparing Your Association For The Next Big One

Alan Tanenbaum, Esq.:

So I'm Alan Tanenbaum, and I'm here with my partner Jon Lemole. Cindy Hill, who is our third got called away at an emergency meeting. So you're just going to be hearing from Jon and myself today. And the subject of today's episode is Hurricane Ian's Legacy: It's Not Too Early To Start Preparing Your Association For The Next Big One. So we've got a lot of calls in the last few weeks. We're currently in Osprey, Florida, which is in the mid to southern part of Sarasota County. We've been hearing a lot from groups to the south of us in various stage of distress.

We heard their immediate issues and prize for help. We have been helping them work through their hurricane claims, their issues with their owners, a lot of confusion and a lot of stress. And we are pretty attuned to procedures and processes for groups that have done well in the face of enormous problems and groups that are not handling their issues quite as well. And we've developed this program today, which is to provide some tips for all associations based upon our experience in the last few weeks about things that probably should be cleaned up now, procedures that should be adopted now thinking that should be done at this juncture. So, Jon, if you can go to that first slide.

I'm not sure which storm this was. I think this was, yes, this was the recent one. And if you recall, when the storm was north of South America and south of the island, we were all under a threat. Nobody knew exactly where the storm was going to hit. And based upon the projections of the last couple of days, they really blew the forecast pretty substantially. I can recall a couple days before the storm hit in southwest Florida, one of the main predictions was it was going to be a category one storm hitting in the Tallahassee panhandle area. And what happened obviously is while it was a much stronger storm and stronger than they predicted, it made its turn to the east and surprised a lot of people in Collier Lee and Charlotte counties especially who many of whom were not prepared for what occurred. But one of the first things that we're going to talk about are the documents.

So with condos it's pretty basic. Under the statute it's pretty well defined what are common elements, there's some confusion about limited common elements and for some groups, but it's pretty obvious that the association for the most part is responsible for the common elements. The owners are responsible for their interiors from basically the drywall inward. Sometimes where there's some confusion after storm is whether there's interior unit damage, who's responsible to do the immediate cleanup, who needs to get in there and do the dry in, and so forth. I think what most condo associations do is despite what the documents say, they may get a remediation contractor in right away to do the dry out and then work on the common element issues. That's not the larger problem. The larger problem is in the world of multi-family homeowner associations talking about villas, duplexes, triplexes, and quads.

A really big problem. Number one, there's confusion about what a villa or a duplex owner or a quad owner is responsible for. Some of the documents look like condo documents where the associate, where the HOA is responsible for everything in a multi-family unit other than what's from the drywall in. Some of them have very little maintenance responsibility for exteriors. Maybe it says that the associational paint, maybe the association will be doing roof maintenance but not replacement. But there's HOA owners who do not understand those distinctions. So one of the things that could be done is really educate your owners on what those lines of distinctions are because there's a lot of confusion out there. And we recommend, and we have given presentations on this, consider amending your documents to create an intelligent maintenance and repair protocol. We have properties where there are six duplexes with a roof that spans all six units and the replacement of the roof is responsibility of the individual lot owner and the roof is destroyed across all six.

There's six insurance adjusters adjusting that claim. Maybe one of the homeowners doesn't even have insurance, maybe one of the homeowners is on a safari in Africa and not even contactable, maybe one of the homes is in an estate. How six individuals can make a decision about how they're going to replace an element is going to be going to be very difficult. And in a hurricane situation, the documents have created mass confusion. So our first point is if you're an HOA and there's any portion of your property which is multi-family and I'm including duplexes in that, think about logically from an insurability standpoint and a maintenance or repair standpoint, what's the best way to organize the maintenance and repairs so that especially at a crisis, things can be taken care of and make those adjustments by way of amendment.

And the second part is really the education, which is, I mean, we're confronting board members who don't understand their documents as far as where the line of demarcation is between the association and an owner as far as prepare who calls out the insurance adjuster, what does each of them cover? And whether it's in writing, whether it's at meetings, it's really important for the board to educate their owners because we have board members who in the face of the very difficult circumstances are dealing with basic confusion on the part of their membership about who's responsible for what. And those things need to be cleared up. So Jon, I'm going to turn it over to you. Is your association adequately insured? Why is that an issue?

Jon Lemole, Esq.:

Well, apart from the obvious, to touch on something that Alan was just saying about confusion among owners as to who's responsible for what, I think we find often that a lot of people don't understand exactly what's covered under the association's policies and in particular, unit owners or lot owners may have the biggest misunderstanding or misimpressions as to what may or may not be covered. And so that creates a lot of conflict and confusion. And so one of the most basic things that I think any association can do is to the extent that you can do that, educating your members about what might or might not be covered in a storm, what are the limits of coverage on the association's policies, what's covered in a hurricane event, what's not covered in a hurricane event? So those basic things are not a mystery to everybody. And in fact, often we see board members that may not know exactly what their insurance policies say.

So, for Ian, and in the wake of Ian, some of the biggest challenges we've seen are questions relating to coverage for water intrusion. And as a general proposition, hurricane insurance will cover water intrusion if the water intrusion is a result of storm damage. But you're all familiar with the idea of the storm having to create an opening in the building through which rain enters. Well, there's a lot of communities that weren't necessarily impacted that way and I'm going to talk about an extreme example of that in the next section that I take on, which is correcting building vulnerabilities. But associations need to understand and appreciate what water cover damage may be covered versus what water damage may not be covered because you don't want to find out after the event and have this rude awakening that some of this damage may not be fall under your insurance policies and it's going to be something that the association needs to take on.

Apart from that, there's just some generally good insurance practices that everybody on this presentation should be thinking about. Understand your deductibles. You may have great insurance and you may have a covered loss, but if the damage doesn't exceed your deductibles, again, that's another area where the association would have to appreciate what its potential financial responsibilities are after a big storm. And if you haven't discussed that and you don't have a contingency plan for that, that's going to be a big problem. So appreciating the financial or the potential financial burden of meeting deductibles should definitely factor into decisions around adequate storm contingencies. Another example is ensuring that your insurance covers up to date replacement costs. So obtain periodic insurance appraisals so you can ensure that your replacement coverage will be adequate. Finally, look, every renewal period, there's a couple of things that are going on. First of all, for those of you that just went through recently went through a renewal period, there's a huge surprise, right, because premiums went up drastically.

And some of you may have found that you weren't renewed because your carriers just not renewing certain policies in the state of Florida. But how can you impact that? I mean there are certain things that market forces that you're just not going to be able to influence to deal with or influence. But there are certain things that you can do to give your association a leg up. So this is an opportunity to be in the best position to continue to be offered insurance at as reasonable rates as you can get in consideration of the current market. So things like staying on top of maintenance and repair obligations and documenting those so that your carrier knows during renewal time that your buildings have been adequately maintained, well maintained. Believe it or not, one of the beneficial aspects that we've been talking about with regard to the safety legislation, the recent safety legislation in condo world is that this is an opportunity for buildings and condominiums that have buildings in good shape to demonstrate to their carriers with these milestone reports that, hey, our buildings are in good shape so we're a good risk.

So, when I've been talking to associations and they're upset about wondering why or how or when they're going to do these milestone inspections, and my gosh, the cost of this is going to be a burden, maybe turn that discussion and especially with your members, turn that discussion around or on its head and say, look, this is an opportunity to spend some money now, if we know that our buildings are in good shape and they've been well taken care of, this is a good opportunity for us now to spend this money, not wait because we've got a very difficult insurance market and if we've got a positive milestone report, certainly that's going to help us save money when it comes time to renew our property and casualty insurance.

So these are all just things that keep in the back of your mind that the more you document the condition of your buildings, the good condition of your buildings, you keep those buildings in good condition, that's going to provide you with the best coverage at the most affordable rates that the market can offer to you. So all of those things will put you in good stead for the next time something hits. And as I said at the beginning of this, communicate with your members so that they know that, and they have an understanding of what those policies cover as well.

Alan Tanenbaum, Esq.:

Jon, a couple points. Obviously, the flood insurance is going to cover the storm surges. Your liability and property coverage has more to do with the impact of wind and wind driven rain. So don't get those confused. Both are very necessary to have the coverages. And the first thing that the wind policies argue in defense is that it was a water and a storm surge event, it wasn't a wind event. And then the store federal flood insurance program will sometimes contend that it was a wind event and not a storm surge event. The storm surge insurance is somewhat a limited coverage, so you may have much more damage than that coverage is going to cover. Be aware of code requirements. So if a portion of a building is destroyed, the building department's going to require that you rebuild according to current code.

So if you have a condominium property where a lot of windows are blown out and you had older style windows, the replacement is going to have to be with the current hurricane resistant windows, which are much more expensive than your original configuration. So you need to have the coverage that will cover code requirements for new construction. And then obviously construction costs have gone up enormously. So if you're basing your amount of coverage based upon somebody who determined replacement costs five years ago, you're going to be way out of whack on the amount of coverage that you have. So be aware of that. Jon, let's go to the next slide, which is vendor relationships.

So needless to say, there's an extreme amount of competition right now to get capable remediators and remediation companies out to properties. If anyone noticed, and I'm sure it's much worse in Southwest Florida, I mean the amount of time that even a refuse, be it organic or otherwise, it takes for that to be all collected. You're talking about contractors that were way overburdened, and any of the remediation contractors have incredible burden right now. So what some of the remediation contractors offer is the opportunity for an ongoing relationship. So you sign onto their program and first of all they'll do an inspection of your property to assist you with locating vulnerabilities, things that you may be able to correct in the interim. They know your units, they inspect your units, they know your property, and they will assist in documenting before storm what the issues are. But probably the more important aspect of their programs is they're now a preferred customer.

So when the storm comes, you are on their list of properties, number one, that they'll come out and potentially on their own and see how you fared. And then if they have a hundred groups that are calling them for service and you happen to be among the 30 that are on their program, they are going to give a priority to you. So have those relationships in advance. I mean, for buildings that have roofs, you should already have a relationship with the roofing company that's potentially doing your annual inspections, but you have an opportunity during the quiet time to have your list of preferred vendors. Certainly the management companies fulfill that role, and make the relationships that you're going to need in advance because if the storm comes your way next time, you're going to want the people that you're able to call and assist.

So the planning is, okay, if come next season, and I'm presuming that there's not going to be another store this season, but come next season, if a storm impacts our area like Southwest Florida was impacted this time, who are we going to call? Who do we have relationships with that are going to help us out of a major mess? And you should know who those people are, who the companies are, have the conversations, get educated on the process. Because if you're trying to do that in the midst of a crisis, obviously it's a lot more difficult. So Jon is going to talk about correcting, building and site vulnerabilities.

Jon Lemole, Esq.:

So, again, another fairly obvious thing to think about is understanding where your buildings and your site may be vulnerable to a big storm. It's not always easy to implement that though in practice. I'll give you an extreme example because this came up, this is real world stuff that we've been dealing with in our office, for example. Our firm is aware of some newer condo communities with buildings that were built with these off ridge vents. So these are attic ventilation, but they're not at the peak of the roof, they're kind of like a little bit down from the peak of the roof and it's almost like a long cover that provides the venting.

And what happened in Ian is that these vents ended up and now there was no other damage that was done by the wind or the storm, but what happened is the rain ended up going right through these vents, and I'm aware of a couple of communities where that's created a significant amount of water damage into the units inside those buildings. And that's been a real problem for these communities because of the questions about whether that's covered or not, number one. Number two, what is the association now going to have to do in terms of repairing or contributing to repairs for those units because this was a water intrusion that came through and these are condos that came through a common element in the building.

So, I'm not saying that this would have been discovered, but this is an example of a situation where if you had, or this community had done, for example a turnover, these are newer communities, if they had done a turn turnover of engineering inspection, that condition may have been found and it's correctable, at least I'm told by engineers and contractors that it's correctable. The other part of it is if it were found, it's probably a potential designer construction defect, which arguably you would have a claim back to the developer and the builder for. And so you could have dealt with that, not only understood it, discovered it, but dealt with it and perhaps obtained money back in order to correct that condition. So that's just one example of understanding the vulnerabilities in your building that may not have been obvious. I mean we can walk around our communities and say, oh, we've got some obvious things that we ought to take care of.

Everybody does that during a storm, but there may be some things that you're just not aware of. And so frequent periodically it's a good thing to just have somebody come in, a professional, do a checkup of your buildings even if you're not in under safety legislation. A periodic inspection of where your buildings may be vulnerable to a big storm event is a good thing. What are some other areas? Because we tend to think in our communities of our buildings, but we don't always think about our site conditions. Is your community itself, the neighborhood, the site, is it well prepared for the massive amount of rain and storm water drainage that it will need to handle in an event like Hurricane Ian? So take a look at your drainage ditches and your swells and your retention ponds and other retention structures.

If they're not well maintained, you may not realize because in a normal storm event they're okay, but because they haven't been well maintained in a big storm event with a massive amount of water, even if you're not in a flood zone and you don't have flood storm surge, you may have surface flooding because you haven't stayed on top of controlling erosion into your ditches and swales and stuff that gets into the drainage systems, the underground.

And so those are all an opportunity to look at your drainage maintenance program and make sure that those drainage systems are in good order. And then there's just obvious things mean how many fences did we see blown down in the storm? And I'm not even talking, I'm talking about Sarasota and Manatee County, I mean fences were down all over the place. So take a look at your fences. Are they in good repair? Trees? You may not be able to stop a tree from falling over and being blown over, but a lot of branches came down, big branches came down on trees. Are those trees clear of your buildings? If a branch falls, is it going to fall on a roof and impact that building or some other common element structure? There are things you can do landscaping wise to make sure that the damage or the loss that's probably going to occur in the storm will where you can minimize the impact as much as possible to your buildings.

So these are all just basic maintenance issues. They're sometimes overlooked, you set it and forget it or add a sight out of mind, but a storm like this is a good opportunity for you to take stock in your communities. Go around before the next one comes and say, okay, have we been proactive about maintaining areas of our property, of our site that can be potential issues if we have another big storm. And I think we're going back to Alan who's going to talk about maintaining effective communications when communications otherwise have otherwise significantly broken down or are impossible.

Alan Tanenbaum, Esq.:

Yeah, what are the things to that, to Jon's point, as horrendous as the conditions in southwest Florida were, there's a tremendous body of information that has been developed. So when you see boats that are piled up, is there a better way to attach boats to protect boats? So that type of damage doesn't occur. And there're all kinds of studies now of buildings, how they subsisted during the storm, what did well and what didn't well. So just pay attention to the literature that's going to come out and the studies that are going to come out because every storm we learn a lot. This particular storm, number one, it was a very powerful storm as far as a wind forces were concerned. It moved very slowly, so you had sustained hurricane force winds for a much longer time than may have been for a typical storm.

It's also the path that it took where the storm surge was at its greatest. So there's a tremendous amount of lessons learned in a body of information that will be developed and study that and think, well, if that came to our community, what are the things that we could do now so that we could at least mitigate some of that damage. Jon, if you can go on to communications. So days after the storm, people were still being looked for, lost cell phone communications, couldn't contact people, were they even in the state of Florida? Had they left? Really a massive effort to find people. Owners could not find their board. Some of the management companies were down, board members couldn't find their managers.

So it's a huge challenge. But years ago, what we did as a law firm is we established a line of communication with a law firm or law firms on the east coast of Florida. And here was our arrangement. If the big one hits the east coast, you can have all of your clients, all and your management and so forth, contact us over here on the West coast and we will be the repository of communications because yours have been taken out of service. And we had the same arrangement in case form hit over here.

But if you think about it, the same arrangements can be made for condo and homeowner associations that if communications get knocked out, internet gets knocked out, that there is a fail stay, a place where any owner can contact who is out of the area and where they can expect that a communication is going to get through. So set does networks in advance so that if an owner in a southwest Florida property in this particular storm wanted to find a board member, it hasn't had a means of making contact with somebody in order to do that, certainly the owners need to know email addresses and phone numbers for people who they may need to contact. You need to know where your owners are. There are groups that did not actually know who was in residence at their community when the storm hit. So that's obviously a really important and set up mechanisms so that you know, knew who left town and who you would need to check on.

All those things have to be thought of in advance. And obviously information on how to make contact. And again, to have some sort of a network, and I'm sure there are people who are much more technologically adept than I am of establishing an out of area contact that individual owners or board members and so forth can contact. I think the management companies did a pretty good job of establishing groups that they can call so that their board members can be reached. But communication was a real serious problem. Jon, why don't you talk about access to emergency funds?

Jon Lemole, Esq.:

Yes, I just wanted to add one couple thought on the communication issue. Look, in Lee County and Collier County's, property managers were affected, lawyers were affected just as much as owners of condo unit owners and town homeowners. So, one of the things that I would advocate for, and as Alan said, management companies probably are doing this already, but it's really an opportunity now for the managers and their clients to sit down together and understand, okay, if we can't reach you, who's the backup? Who do we go to? What's the management company's contingency plan? What is your general counsel's contingency plan? Alan touched on that a little bit. Frankly, we had lawyers in Lee County who our office was assisting with helping their clients because they just didn't have the ability to do it. These lawyers were struggling with their own losses and in inability, no phone service, no cell phone service, no whatever.

And so we knew that and where we could, we pitched in and helped. But the takeaway here is be talking to those folks that help you manage your community, your management companies and your lawyers and understand where can you go if you can't reach them, if the communication has completely broken down, because you're going to have questions, you're going to need to talk to somebody. And so just know that beforehand. Now onto access to emergency funds. There's going to be in the immediate aftermath of a storm, things that need to get done, safety conditions are going to need to be dealt with.

Temporary emergency measures are going to need to be taken in order to prevent further damage, to mitigate losses is, but water removal companies are going to be very active and they're going to need to be brought in. Gaps in the roof are going to need to be fixed so that you don't have continued water coming in if it continues to rain after the storms. And you may not be able to have those conversations with your insurance carrier right away in order to figure out where you stand in all of this. If you haven't adequately planned for access to funds, that's going to be a pretty big burden for your community. So one of the things that communities can do, and I know that a lot of communities, they think about borrowing money as a bad thing, but having a line of credit available in these situations is something that I think every association should consider. You may not use it, but it's there and you have the ability to write some checks that desperately need to be written.

One of the other things that you can do, like look, communities do emergency management planning. When I say communities, I mean municipalities, right? Every municipality has an emergency management plan where your communities should have an emergency management plan as well. So you probably all realize or recognize that before most major storms, the governor issues an emergency order, which suspends compliance with a lot of requirements. And typically one of the things that gets suspended is your association's responsibility to strictly comply with rules and regulations and statutes that impact board decision-making. And so that's an opportunity for you folks to have a conversation ahead of time as to, okay, who's got authority in this community to make some emergency decisions, to write checks, to secure needed urgent work in the community? Who, who's going to be the person or people that do that? And again, that gets back to what Alan was saying earlier, you may have people, board members who are not there.

And so you need to know that. And you need to know what is the mechanism that the people who are here on the ground, the directors that are here on the ground can make these decisions and amongst themselves. Or maybe it's just one person who you're vesting with that ability to do that. But you've got to have those lines drawn clearly so that there's no confusion. And then after the fact, nobody's pointing fingers at why this was done or who did this. You've got to empower certain people in your community to be able to respond to these things when the means of communication may not be available for group decision-making and collective deliberation on those issues. So lines of credit and emergency management plan, just like municipalities do, is definitely a good thing. And then I think the last thing that we're going to talk about before answering some questions is dealing with first party insurance claims and repairs. This has been a really, really big area of contention in the aftermath of the storm. So, Alan is going to talk about that.

Alan Tanenbaum, Esq.:

Not very happy right now with the remediation industry and the public adjusting industry, we're really seeing horror stories on a day to day basis. And I hope I don't offend anybody here who's been a public adjuster, but we're saying some of the old problems come back again. So what's a public adjuster? A public adjuster is a company that has experience in adjusting insurance claims. They typically operate on a contingency basis. The contingencies are usually between 10 and 20%. So they come to your community and they in the aftermath of a storm and they say, look, we will get contractors in to document the damages. We will refer you to remediation contractors and we will make the claim with your insurance company. We'll get your insurance company out. And at the end of the day there will be a number that will be presented to the insurance company to cover your claim.

And usually a joint check will be issued and the public adjuster will take 10 to 20% of the overall claim. The incentive of a public adjuster is to increase the claim to its maximum, and obviously if you're on a percentage basis, that will mean the maximum financial recovery. Now, what does a public adjuster not do? First of all, a public adjuster generally won't scour your documents to see what the appropriate line of demarcation is between association responsibility and owner responsibility. So don't look at them as legal advisors who are going to make those distinctions. If they could include what should be owner claims against an owner's own policy in their claim, they will do so. Because again, it's going to increase the ultimate amount of their claim. So be sure you get independent legal advice, understanding your documents when you're working with a public adjuster so that they don't cross boundaries that are inappropriate.

So what's the immediate need? You need to stop water getting into your building. So there'll be roofers coming out and companies that coming out will do the roof tarping. We've seen that. There's good roof tarping, there's bad roof tarping. So you should have somebody knowledgeable making sure that the tarping that's done is appropriate. There needs to be appropriate dry out. So you need to get a company into and to do that. Your insurance company may give you some interim money to take care of things like that because it reduces their loss. But we've seen some real oddities where these remediation companies come in, the roof is tart and they're doing more than dry out. They're ripping out drywall, they're replacing drywall. It doesn't make a lot of sense in most cases to replace drywall when the roof hasn't been a permanent roof, hasn't been installed.

We've seen remediation contractors who just go around the community knocking on doors saying, I'm here to fix your drywall without having any contractor, any authority to do so. That's happening all over. That process has to be gain control over. One of the problems in a storm is that everybody wants everything fixed as quickly as possible and get the community back in operation. But it doesn't suspend the association's obligation either in HOA or a condo to make sure that repairs are administered in an appropriate fashion. So what happens in Florida, unfortunately it's happening now, is contractors are coming in from all over the country. They have flooded southwest Florida, many of them are not licensed in Florida.

Many of them are doing repairs that are outside the scope of their competence. Many are not seeking building permits for work that does require a building permit. So the rules about good contracting are not suspended during a hurricane. And we've included here some tips, you can go back through them, but you need a vet who's coming to your property, even under emergency circumstances. You need to have an appropriate contract with them. You need to have third party supervision of the work that they're doing. Will you be able to meet all the conditions for good repair protocol? Probably not. But we're saying instances where there's really no implementation of proper procedures contracting and so forth as an entity who's working on your property, are they insured?

Did they give you a certificate of insurance? We have people who show up, they have FEMA badges on, they're not with FEMA. There're all kinds of schemes and scams going on that you have to get control of. Now, one of the problem, we have villa communities where again, these folks are going door to door. They may be even telling them that they have the authority of the board of directors to be going in their unit. Well, maybe not, but who's watching this contractor as they're in a unit from issues like theft. I've seen some very loose criteria there. Who's watching what they're doing is, are they doing the work that's appropriate? Are they doing it correctly?

And again, very concerning when they're not under contract, they're just flowing into the buildings and doing repairs. And again, what they're looking for is, well, the insurance company's going to pay us, so they operate even without a contract. So there has to be a communication with the owners. And again, this is part of the advanced protocol, which is to let the owners know that in a case of a storm, this is what they're responsible this for. This is what the association's responsible for, this is who you should be opening your door for and who you should not.

Because if a storm occurs and somebody knocks on your door and they say they're authorized by the board to come in and do repairs, we have a whole group of owners in one community who contacted us and said, we have this contractor coming into our units and we don't even have damaged drywall in many of these units, and they're ripping the drywall out. Again, that's a company that is looking for some short-term profit to take advantage of the circumstances that exist. And it's really unfortunate. So, Jon, if you go to the next slide, I think there's another slide.

Yeah, here's some of the warning signs. You get people showing up FEMA badges who are not with FEMA. They have a fancy jacket on. Unsolicited offer of services. I don't know how many groups where a roofer has, this is during non-hurricane. A roofer shows up and says, I've noticed that there's some tile slippage here. You could have an insurance claim, best not to contract with them. Upfront payment. Not such an issue now. But if you hear that, that's a sign. And they're saying that they work with insurance companies and so forth, kind of being worried about that.

But again, the same processes at good times, which is having a good contract, knowing who you're dealing with, making sure they're licensed, making sure they've secured the appropriate permits, having third-party supervision, all those things even in a hurricane situation where the repairs being done, all those protocols should be in place. Now our bias is if it's a significant claim to hire a first party insurance lawyer, they're going to be more sensitive to the document restrictions on who's responsible for what. They will get the same remediation contractors in, but under better control. And in the end, hiring a first party lawyer is not going to cost the association anymore than dealing with a public adjuster, except you have a lawyer on your team versus a public adjuster who, some of them are good, but again, their accentuation or their attitude is really to increase, in most cases the amount of the claim to a maximum.

We had a situation where a group was ready to re-roof all of its roofs, had a contract for it, public adjuster came in after the storm and they tried to elbow the roofer out of the contract to say, and told them that we could get a lot more money from the insurance company than you were already contracted to pay, which was insurance fraud right up front that they didn't seem to have any problems admitting to. So really the key is to keep your protocols in place as best as possible for good relations with contractors and be aware of some of the unfortunate things that are going on in the industry. Jon, I think we can cover some questions at this point. There's a question, a little bit off topic, but about skipping the normal reserve study and go for the surge. What would you say about that?

Jon Lemole, Esq.:

I'm sorry, I'm looking for the question. What is the question?

Alan Tanenbaum, Esq.:

First question, would it be advisable to skip the normal reserve study and go for the serves?

Jon Lemole, Esq.:

Well, if you have to do a surge, just do the serves. I think at this point, because first of all, getting it done in a timely fashion, although it may seem like the deadline for that is a little ways away, these companies are very over stressed right now, scheduling them is difficult. It may be a while before they can get there. The engineers are really stretched thin. So you got to factor all of that in. So it's really a hard question to answer because it may be a while before you can get the surgery report done. And so then do you have to make some reserve decisions and so do you get an interim report? Or do you just work on getting the services done now? I mean, financially, I don't necessarily see a reason for spending money twice, because you're going to have to do that report anyway at some point if you're under that regime based on your building height. So I think that's really more of a financial question. Do we want to have two reports instead of one?

Alan Tanenbaum, Esq.:

Yeah, it's unfortunate. A lot of the reserve study companies are seven, eight, nine months out, maybe longer. So if you're starting now to do your budget for next year and you haven't gotten your reserve study done, you're going to have to figure out a way to calculate those reserves because you're not going to get a report within a month for your budget process. There's a question for communities that are in the middle of the inspections and the repair scopes, how would you recommend handling the conversations with the carriers during the bidding process? A very difficult question. Any conversation with an insurance carrier right now is a tenuous one.

You're lucky enough to establish coverage. I don't know what the insurance companies are asking by way of documentation. There are insurance companies that they've notified their underwriters to write as little as coverage in Florida as possible. So they're looking for reasons to reject you. So I'm not sure what you're going to tell them. I think in any other insurance situation, what you're trying to convince the insurance company is that you're a good rest. So certainly telling them that you're getting all the inspections done, you're meeting the statutory requirements, the association tends to repair the buildings to make them serviceable. Should make your insurance company feel a little bit better about ensuring your particular risk. There's a question about ordinance or law coverage, yes, that's necessary. That will cover an instance such as the code has changed and you have a replacement cost that's increased as a result of an order by the building department that you have to meet the current building code law and ordinance coverage will cover that. I think it's a good coverage to purchase, usually not that expensive.

There's a question in a multi-family multi-story building, how to determine when wind blow water damage to a unit is the responsibility of the owner and when it is the responsibility of the building. All right, I'm presuming this is a condo situation. So here's our typical response. No matter what the source of water, if there's interior unit damage, the homeowner or the condo owner should be advised to make a claim against their own carrier for that interior damage. And if that carrier wants to subrogate against the association's carrier, it can do so. The key, what the association's policy, condo associations policy is covering is typically damage to the common elements. And that's really what the claim should be. Now, some of them will carry some cover cemetery damage, but in every instance we would advise that the owner for any interior damage do their own repairs.

The other problem with that claim coming through the association is how is it adjusted? The board of directors and management don't want to be in the business of determining on a unit by unit basis how much of an insurance claim an owner's going to be entitled to and certainly doesn't want to be in the business of contracting for interior repairs beyond dry out because then you're going to have potential years of dispute over the adequacy of the work, did they get the finishes that they desired it? It's very problematic. So let the owners deal with their interior issues beyond dry out, which may be good to handle from an association standpoint. But let the owners make a claim against their own carriers for that interior damage and undertake the corrections with what they're able to recover. There will be a transcript and Michelle has already responded to that.

So let me see. I think somebody asked an esoteric insurance question. Differentiating between actual cash value versus replacement cost coverage. And Kirk, you had to go and answer a question that I don't have a specific answer to. Replacement cost coverage sounds like a policy that says whatever the actual cost bid for the work is what you're covered for, whereas actual cash value is a stated amount and even if it ended up costing you significantly greater than that, that's the limit of your policy. But that's what those words seem to me. But I could be corrected by somebody who's an expert on insurance jargon. Jon, do you have any closing thoughts?

Jon Lemole, Esq.:

When you know a storm is coming, prepare your community for the fact that there may be repairs that need to be done for a while and the community may not look very good. That's a thing I keep hearing from folks that we represent, is that the residents are getting really upset at seeing these tarps. When can we fix the tarps? When can we fix the roof? And it's a stressful enough situation to have to deal with the storm. Owners are confused, they don't exactly know what's going on. They get frustrated, they vent their frustration at management, they vent their frustration at directors, and you all sit there and say, well, there's really nothing we can do about it right now. And so it's probably a good idea before the storm to say to your folks, look, we don't know what's going to happen here, but if something does happen, we may be dealing with it for a while and you have to be patient with us as we work through the issues of insurance coverage, paying for it, paying for it at competitive rates, dealing with reputable contractors who are available.

And understand that you are going to see a lot of contractors come this community who may not be reputable. So don't assume that we're just not doing work. We may not be selecting folks that because they're available, they're available for a reason as opposed to reputable folks who may not be immediately available. It's just transparency, good communication.

Alan Tanenbaum, Esq.:

The thing I have to offer in closing, I've been around long enough to remember that we used to have civil defense drills. I was around long enough to remember when they said, look, if there's a nuclear blast, they were teaching the students to get under the desk would do any good anyway. But civil defense training is preparing a population by practicing. So it's a good thought, which is, okay, it's November, and there probably will not be a hurricane again until May or June of next year. And have a session within the next couple of months where you run through with the board and potentially the owners of what if we recreate the situation that occurred in southwest Florida that happens to our property? What are we going to do? Who do we know? Who do we contact? What education needs to occur? What are all of our protocols? And get them set now. And learn from the experiences of all the folks in who and the studies that are going to be coming out of this particular storm and use that body of knowledge in order to do some great planning.

That's what I'll leave everyone with. And somebody named Diane Shapiro has put in a very great comment to close on, which is anyone could register for CERT training, Community Emergency Response Team, and anyone who needs that information, we will get it from Diane and supply it to you. There's Diane, she even put her email address. So, dianeshapiro93yahoo.com has anticipated what we were going to say today and already knows of a program that offers training for community emergency response. So thank you Diane. So we're going to say goodbye at this point. Thanks for coming on. We're going to have another presentation next month. Any other questions that anyone has, you can send them to us, and we will provide a response. So we will see everybody next month. Thank you.

Jon Lemole, Esq.:

Thank you.

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20221019-170915Screen-Shot-2022-10-19-at-1.04.31-PM

Managing Owner Concerns Given the Insurance Crisis and New Inspection and Reserve Requirements

Jon Lemole, Esq.:

Our firm is a full service community association law firm serving southwest and central Florida. We handle all facets of association representation, including serving as general counsel, turnover and construction claims counsel, covenant enforcement and assessment collection. Our topic for discussion today continues to explore the effects of the recent condo safety legislation on Florida condo associations. To some extent, some of today's discussion we hope will also be helpful to those of you that are part of HOAs as well, especially when we discuss dealing with spiraling maintenance and repair costs and spiraling insurance costs in Florida, which I'm sure you're all dealing with.

We're going to do things a little differently today. We're going to actually have a panel discussion, and so we've invited some folks here to talk about some of the things that we know from hearing from condo associations that you're dealing with, and especially with regard to the increased financial burdens that associations are facing and how to deal with those, and especially how to manage community expectations and deal with members, because a lot of condo associations, especially, and homeowners associations are facing a very difficult budget decisions, and we know that.

And so we hope that this discussion will give you some good ideas, some best practices for managing those issues in your community. So our panel today is consisting of Cindy Hill and Dan Greenberg, and let me introduce both of them. Cindy Hill is a partner with our firm. Cindy's had a long time practice handling general representation of community associations in southwest Florida. She recently joined our firm and we're very happy to have her. And so Cindy will be speaking on some issues today. And then we've also invited Dan Greenberg and a lot of you know Dan. He's a frequent speaker. I've been on panels with Dan. Dan is a partner in Greenberg, Nickoloff, and his firm also does full service community association representation there in Dunedin, Florida. They represent community associations throughout the Tampa Bay area and central Florida. And Dan's a great friend of our firm and we hope that we're great friends of his firm.

I know that you all saw probably in the invitation we were hoping to be joined by Diane Simons. Diane's an also very, very capable and longtime community association lawyer based in Fort Myers. Her practice serves Lee and Collier counties. Unfortunately, as you can probably imagine, her practice and her life, frankly, has been severely impacted by Hurricane Ian. And unfortunately, she is unable to join us today. And so our thoughts are with Diane and all of our colleagues and managers and boards and residents of community associations down in southwest Florida who are still struggling with the aftermath of the terrible storm. So I've got the topic for today. You should all be able to see it on your screen. And the topic is managing owner concerns given the insurance crisis and new inspection and reserve requirements. So let's take a look at some of the topics that we hope to cover today.

So what we're going to do today is a short recap of the new safety inspection and reserve requirements, which are driving the very difficult budget decisions faced by association boards. We're going to also talk quickly about the nature of the present challenges faced by boards resulting from the inspection and new budgeting requirements. In the past, we've talked about some of the ambiguities in the legislation. So we're going to review some of those, and as we've dealt with this legislation and lived with it now for a few months, some consensus has started to develop around some of the areas of that legislation that were unclear. And so we're going to talk a little bit about that today and hopefully help you all resolve some of your questions about what does it apply to, who has to meet these requirements, who's subject to the new reserve requirements in the new legislation?

A lot of you have asked us in the past about the parts of the legislation that are directed towards manager and director fiduciary obligations. There's some language in there. And so we're going to talk about the changing landscape of board member and manager fiduciary duties and how does that change board decision making, if any, and frankly, why would anybody want to serve on a board anymore? And then probably the thing that a lot of people are really interested in today is how do we manage our members as managers, as directors?

We know that we're going to deal with members who are either not fully informed about the new legislation or who just continue to want to look at alternative reserve funding, waving funding, reducing funding, and those are issues that everybody's going to probably continue to deal with. So we're going to talk about how do we deal with those members and provide some pointers and best practices for that. Look folks, we know that a lot of you are facing very, very difficult budget decisions that are going to potentially increase special assessments for your members and for some of our associations out there, there may be members who are just not able to pay who are financially strapped and who are having financial difficulties. What do we do about those folks? How do we handle those issues when they come up?

A lot of you are also concerned about, well, we've got these inspections we have to do and we don't know what they're going to say, and we've got other projects that we were planning to accomplish, whether it be repair projects, maintenance projects, improvement projects, modernization projects. All a sudden we've got a lot of unknowns about how we should be prioritizing these things. So we'll talk a little bit about what are some of the ways that you can prioritize or should be thinking about prioritizing the projects that you were either contemplating or maybe are getting ready to perform given the new inspection requirements and not really knowing what that may entail as a result of those inspections.

In particular, right now, a lot of you are dealing with hurricane repairs and maintenance projects, and some of that may be covered by insurance and some of it may not be covered by insurance. So what do we do in this situation? We've had a lot of associations who have been coming to us and asking those questions. And then the very last thing that we're going to talk about, which is a topic that really could be its own webinar, but we're going to touch on a little bit because for some associations termination may be the option. And so we're going to talk about a little bit about how you should be thinking about that, what may be entailed with that. We're not going to spend a lot of time on it, but we certainly want to put it on your radar because for those of you that may be considering termination, that's a big step and there's a lot of planning involved in that.

So let's jump in. As you all know by now, the new safety legislation has brought positives and negatives to condo world. Certainly many people are relieved by the legislatures response to the tragedy at Champlain Towers in Surfside. Certainly, however, those safety initiatives and studies may be very costly for condominiums. Certainly the required reports will also need to be followed by costly repairs and repaired maintenance projects. Quick recap of the features of the inspection legislation. For buildings three stories are higher, and this is for condos only and co-ops, for buildings three stories are higher, condo associations are now mandated to have an engineer or architect perform structural milestone inspections every 25 or 30 years depending upon where your buildings are located relative to the coastline, 25 or 30 years from completion of the building, and you're also required to do a separate structural integrity reserve study every 10 years from formation of the condominium, and that's usually when the declaration was recorded.

For older buildings, those first milestone inspections are due by the end of 2024. For condominiums, the structural integrity reserve study is now due either before turnover by the developer or by the end of 2024 for associations which were under unit owner control prior to July of this year. The new legislation is also brought with it major changes in reserve funding requirements. It appears that gone are the days of reducing or waiving full funding or redirecting the use of reserves. Obviously these new inspection and reserve funding requirements are expected to cause a lot of financial pain, especially for older condominium condominiums or condominiums which are traditionally underfunded reserves. When we consider these new financial burdens in tandem with spiraling construction costs and a very stressed Florida insurance market, boards and managers can expect to face very difficult decisions about prioritizing maintenance and repair projects and annual budgeting.

There's also the possibility of dealing with uninformed and difficult owners or even owners who just don't have the means to pay higher assessments. There are also new considerations for directors and managers relating to their fiduciary duties. Today we'll try to provide some clarity and best practices for dealing with these issues. So I'm going to turn it over now to Cindy Hill. She's going to tackle the topic of ambiguities or talking about some of the ambiguous language in the legislation, defining who has to perform milestone inspections and structural integrity reserve studies and what reserves need to be fully funded and how they are to be funded. I know Cindy just got back from a two day symposium on the east coast where she was talking with condominium lawyers around the state, and so she has some good information for us. So Cindy, help us understand some of the ambiguities here. So two big areas are what constitutes a three story building and then who's subject to the new reserve requirements? Tell us a little bit about those.

Cindy Hill, Esq.:

Well, going back to attending the conference I did over on the East coast with about 500 other condo association attorneys, obviously a group of attorneys can't make decisions that judges will. So these are not set in stone decisions, but they are consensus, and one of the consensus that was reached amongst the attorneys is that the three stories is not limited to what you might call habitable stories. So for instance, the fact that you have a under story that's parking as opposed to three stories of all under air conditioning, is not something that any of us are seeing in the statute that's differentiated. It's quite clear that the statute does just say stories and the building code does not differentiate between habitable or non inhabitable. So I do understand that that leaves still a little hanging issue for folks who have maybe just a little top where they have a viewing area or maybe a half mezzanine on a story.

But I think that the consensus is that if you have a three story structure in the bottom story is parking, that's going to be a three story structure that's impacted by these bills. Again, these decisions have not been made by judges. The legislature has not changed any of the language, but this is the consensus among the community association attorneys and attendance at that conference and amongst those who were not also in attendance at the conference who we all keep in touch... We have an industry that's very communicative, so that that's going to be the consensus, that's going to be the conservative way to take this approach. Does it mean a year from now a judge might rule otherwise? No, I can't guarantee that, but I do advise my clients to take the conservative approach so you don't end up with a surprise. So that is the consensus on the three stories right now.

We will see where the law goes. There was a question earlier in the chat that Senate bill four is very unclear that if you have less than three stories, so not even talking about three stories, let's say you're a one or two story condominium, if you're going to have to follow the requirements of the not being able to waive reserves starting at the deadline of December 31st, 2024. And the division of condominiums, for those of you who are not familiar with that entity, it's a governmental entity based in Tallahassee, has some offices throughout the state, they came to the conference, and candidly, they're traditionally rather cagey about answering specific questions unless they do so in writing, but at this conference, they surprisingly said that they've talked to the legislature and it's going to be their position that yes, all condominiums, whether or not there are three stories.

So one or two are going to be subject to these fully funding requirements. Now let me clarify, fully funding for these structural requirements, the painting, the roofing, just with every other condominium, you are not going to be required to fully fund for areas that are not structural, such as if you have a gazebo picnic area, that is not going to be subject to fully funding for anyone, but everyone is going to see the painting, the roofing, the other what we call paragraph G list that your counsel for your association go over in detail with you.

Those are no longer going to be able to be waived whether you are a three story, one story, two story. So those are some clarifications on the ambiguities. I want to also clarify that there are still so many other ambiguities. All of you should be working with your counsel as you sit down and plan for these because there are no clear answers for some of these issues. And again, even some of the consensus I just participated in last week, we could have a judge who rules otherwise.

Jon Lemole, Esq.:

Thank you, Cindy. Dan, let's talk about fiduciary duties because there's language in the new legislation that presumably adds some elements to the fiduciary duties of both managers and directors. So the question for you is how does those provisions in the legislation, if any, how does that change board decision making and what should managers and directors know about any changes in their fiduciary obligations?

Dan Greenberg, Esq.:

Well, thanks for having me on, John and Cindy, it's always a pleasure to do presentations with you and especially on this topic which everyone is rightfully concerned about. Well, the cagey attorney answer, I suppose, is that it really doesn't change anything with respect to directors and officers fiduciary duty because long before 4D, directors and officers have always had a fiduciary duty to uphold the association's governing documents, follow Florida's statute and act in the best interest of the community. So in previous years, that was really more so related to the maintenance of the building, ensuring that the board properly undertook required maintenance to keep the building in a safe condition. Now with the new statute, that point has been hammered home because 4D has a specific [inaudible 00:18:15] that says it is a breach of an officer or director's fiduciary duty if they willfully and knowingly fail to have a milestone inspection performed.

So what that really does in the statute is create a per se violation, meaning the fact that you didn't do it, performed the milestone inspection is evidence of itself that you have breached your fiduciary duty. So it's not so much a factual issue anymore. The fact is you didn't perform the milestone inspection on time, therefore you have reached your fiduciary due to the corporation. And so that could theoretically lead to personal liability on behalf of an officer or director. And what I mean is normally you're protected by your directors and officers or errors and omission policies. So if the board makes an honest mistake and they are sued in their individual capacity, that case will be handled and covered by the association's directors and officers policy. Now though, if a board willfully chooses not to perform a milestone inspection and they are held in breach of their fiduciary duty by the statute itself, there's a very strong likelihood that the directors and officers policy will not cover those individual directors who voted not to perform the milestone inspection.

And I highlight that because, and this is true in all scenarios, when there's a controversial topic or something that may lead to a liability type of situation, those directors who try to do the right thing and are on record in the minutes voting in favor or against, depending on the situation, that issue, they would very likely be absolved of personal liability. Every director is a one person, one vote situation, so you can't necessarily force your other directors to do the right thing legally. So in this case, those that vote no or who choose to ignore the situation entirely could find themselves on the other end of a personal lawsuit attacking their personal finances.

Jon Lemole, Esq.:

Dan, we've heard from a lot of folks why would anybody want to be on board anymore given the things that they're expecting as a result of this legislation and the battles that are going to have to be fought with members? I would think that in some respects, this new fiduciary language in the statute also provides them with a ready answer to members who are creating issues around assessments and reserve funding.

And that kind of dovetails with the next topic that I'm going to ask you to talk about is you've got owners who are either uninformed, and I don't mean that in a bad way, they're just living their lives, they don't know what the statute says, and then there's probably a second class of owners who, despite what the statute says, and maybe knowing what the statute says, still are resistant to the reserve decisions that the board now has to make. So give us some ideas for how directors can handle that and managers as well, how do they handle those folks?

Dan Greenberg, Esq.:

Yeah, so this is an age old problem that we've dealt with in various capacities is general counsel attorneys for condo's and HOAs for as long as I've been doing this for 12 years, it's just that now the situation seems to be heightened or the stakes seem to be heightened because of the magnitude of the projects that we're [inaudible 00:22:04] undertake. So the philosophy is the same. And to answer your first question, it's hard enough to get board members to volunteer. 

So why would anyone want to volunteer when now the stakes seem to be even higher and all these things? Well, the answer remains the same, again, we need good directors to run associations and it is a difficult job. It's always been a difficult job. It will always be a difficult job, but if the good responsible well meaning people don't step up to run their community, then we kind of know what that's going to default to, and for as much as it may be a daunting task for a good, intelligent, well-meaning person to step up and see their community through this process, the alternative is far more damaging and destructive. And so I do want to make sure I'm very clear that those directors that step up through this difficult time and serve dutifully and bring their community through the other side are protected. So your coverage will protect you in those decisions that you make.

And it's very critical at this stage for condos, particularly the three story and higher condos that are going to have to go through these inspections and possible reconstruction projects to have as responsible of a board as possible to mitigate any of the various issues that could arise as we progress through this over the next couple of years. So I will continue to encourage directors to hang in there. It may get a little more difficult, but then to answer the second part of your question, the key is to surround yourself with good qualified vendors and professionals that are going to aid the board in making these decisions and getting the building properly inspected and reconstructed if necessary, and not only that, but the good vendors should help the board communicate these issues to the membership to avoid the very question that you've raised, which is some owners simply are not going to be informed about these issues.

They're going to be questioning why we're doing it, they're going to be pressuring the board or badgering the board to do it on the cheap or to try to keep assessment levels low and their perspective is going to be in the wrong place and not aligned with these responsibilities. So that all then comes down to communication. Boards are going to have to try to step up their efforts to ensure that the community understands why we have to do these things.

And that could include inviting in the attorney and the engineer and the reconstruction experts and the insurance agent in to additional meetings or putting that on as an agenda item at the next few meetings, offering these on Zoom where maybe you didn't in the past to try to encourage your out-of-state or out of country owners to join. The more that we can get the message out and get owners geared up for what is about to happen, I think the better chance we will have for the board to have a relatively easy path because the last thing we need is internal strife and resistance to what is already going to be a very challenging and likely costly project.

Jon Lemole, Esq.:

How about, Dan, business judgment rule? Is that affected? We heard Cindy talk a little bit about some ambiguous areas in the law. There's some consensus and Cindy, please weigh in as well. There's some consensus building on some areas, but take the reserve funding issues, although DBPR apparently says, or the division of condominium says that even two story buildings have to comply with these, where there are those ambiguous areas, does the board risk facing a charge of breach of fiduciary duty by making the call on some of these things or do they still have the benefit of the business judgment rule?

Dan Greenberg, Esq.:

Yeah, they absolutely do especially if they do the right thing and rely on the expert opinions to the best that we're able to provide guidance. This is a prime example of when the board needs to employ those folks to help guide the decisions. Business judgment rule protects board members when they act reasonably and in an informed and good faith manner. It does not mean that the project or the decision has to work out. Sometimes things go sideways for no fault of the boards at all. Sometimes it could be a vendor issue, sometimes it could be something unanticipated. That's life, and directors are not held to a perfection standard, but what they can't do is simply take everything on themselves and say, well, in an effort to save money, for example, we are not going to listen to or engage professionals to help guide these decisions.

We're going to wing it and hope for the best. That's the scenario where if the project goes sideways and the owners are financially damaged or worse, physically damaged in a worse case scenario, that's when the board's decision making is going to come under very intense scrutiny, and for those boards who choose to forego the wisdom of professionals who do this for a living full-time and who like you and I have been digging into this now for months, for hours and hours on end, it's our job to advise the board so that they can make the best decision possible for the association. And again, it's not a perfection standard. We can't guarantee results, but what we can do is try to guarantee that the process that the board follows is the correct process and then hopefully we end up with the right result.

Cindy Hill, Esq.:

And I'll add to that, Dan, I think one of the questions from the chat touched on boards not necessarily using a professional to put together the reserve study. That's a really ill-advised approach for these structural items. I'll again use the gazebo picnic bench example as if your board is anticipating what it's going to cost to replace gazebos and picnic benches, I'm not concerned as legal counsel, but if your board is trying to, as volunteers, come up with a budget for what it's going to take to do your structural parts of your building, I am very concerned because no insult to any board member, but you're not going to be qualified to have that objective knowledge and information and make those decisions and then you're going to lose that protection that Dan alluded to that when as a board of directors you get advice from a professional, you're able to say, well, we followed the advice of a professional.

Dan Greenberg, Esq.:

Yeah, And SB4D actually specifically addresses that issue with respect to the structural integrity reserve study and says that these structural integrity reserve studies cannot be performed by the management and the board alone. So the SIRs by statute has to involve a visual inspection by the engineer and then the completion of the report by a professional. And I'm glad Cindy raised the point, because historically speaking, many associations got by in years past without a formal reserve study, which was never required under the law. It was always a best practice. So it was very common for boards and managers to work together to build a reserve schedule based on either their own observations or working with local contractors like the roofer or the painter, to establish the useful life remaining on the component and the replacement cost. That is literally illegal now to do with the SIRs.

So we have to now rely on these third party companies, and I saw a question just come up in the chat with respect to the milestone, but also with the SIRs. What if we end up with a report that we don't agree with and we question the competence of the person preparing that report? That's a very problematic situation because you are essentially bound to use the findings of that report. So it really highlights the fact that you have to do your due diligence on the front end. Do not just sign the contract with the cheapest vendor or the one that says, I can get you on the schedule in three weeks. I would really question that vendor in their competence at that point.

You're going to have to do whatever due diligence you can, lean on the management company to use their resources, ask around to other communities who have used engineers. If you have never used an engineer, ask your attorney. You're going to have to really find the right people to produce these reports because I think the answer is on the back end, if you don't like the report that was presented, you're going to have to hire another company to produce a second report that you can then reasonably rely on, and these reports are extremely expensive. So that is really a last resort. So I'm going to encourage you to do as much due diligence on the front end as possible.

Jon Lemole, Esq.:

Cindy, one of the questions in the chat is if board members follow the recommendations of property management regarding financial decisions, does this offer legal protection to the board under the business judgment rule? So I think what the question is getting at is in terms of the reserve funding questions, is it enough to rely upon the guidance of property managers? Should board members be consulting with general counsel on these issues? What are your thoughts around that?

Cindy Hill, Esq.:

Well, property managers have their niche of knowledge, just like the attorneys have their niche of knowledge, the engineers have their niche of knowledge. Asking property managers to answer questions or outside of their niche is not going to be good practices, and it also puts property managers in a really uncomfortable position to the extent that you do see boards who want to try to minimize cost by not asking attorneys, engineers, accountants questions, asking them of their managers. Well, the managers can share their experiences. The managers can share their knowledge of the statutes when it comes to providing notices, the rights of owners to speak at meetings, but managers are not going to be in a position to be the professionals that answer these more complex questions [inaudible 00:32:43] laws. They are not engineers, they do not have law degrees, I'm not putting any managers education or knowledge down, but they are not the right professionals for a lot of these questions.

Now that being said, managers can share industry knowledge that they have from knowing their colleagues and knowing what they're seeing with their clients. But no, I would not want managers or boards to be relying on one another for these structural new issues in the law. And there is also now a provision that says that managers can actually be held liable in these scenarios. And I don't know what the legislature was thinking doing that, candidly, managers can only take action when directed by the board. They're not independent actors. So putting that additional liability burden on them I think was a terrible thing to do, but I think that just is going to add to the hesitation that managers are going to have to want to be the advice source for these issues. And I don't think it's fair to even do that to them. So I would say you can look to your manager for guidance, but don't look to your manager for answers.

Dan Greenberg, Esq.:

Yeah, I think that was clearly the intent of this statute was to separate boards and managers from their longstanding and usually mostly successful practice of keeping as much in-house as possible, saving money on these reports, kind of getting things done on a modest budget, which some communities did successfully, some others not obviously, but with these particular functions, the milestone and the SIRs, the statute is just abundantly clear that the intent is to take that decision making outside of the scope of the board and manager and put it into the hands of qualified professionals so that you can really ensure that your building, in its structural integrity, which is fundamental to everyone's safety, living in a mid and high rise condo, is really affected and governed by professionals whose job it is to ensure structural integrity and we have to accept it. This is not something that we're going to be able to push back against or fight against.

I get that question a lot. What changes do we anticipate in the statute? Will they relax things? People are trying to push projects off until the next legislative session. I'm not optimistic that we're going to see significant changes in the law, particularly not when it comes to the basics of the law and the inspection requirements. There may be some softening of deadlines, perhaps maybe some clarification of categories of review, but I think at this point, the genie's out of the bottle, the state has weighed in and said, we now care about the health of these buildings and we're going to mandate you to care as much as well to ensure that a Surfside never happens.

So we have to just, I think, accept that, we have to budget for it accordingly, and we're going to have to let the professionals do their job to help give everyone in the building peace of mind and ensure that these buildings, some of which are 30, 40, 50 years old, which I think John will get to later, can remain standing for theoretically another 50 years. And that's the goal here.

Jon Lemole, Esq.:

Cindy, I would imagine that there are probably a lot of older condo communities, middle income type communities that are really going to be affected by these requirements and they may have folks that just can't pay. And so what do we do? What does a board do in that case where just financially this is not doable, or maybe they have some that can and some that can't. What is some best practices that board members can think about in terms of those types of communities?

Cindy Hill, Esq.:

Well, looping back to the fiduciary duty of the board, the fiduciary duty of the board is to make the decisions that are in the best interest of the community. So to the extent that, let's say you have a scenario where 40 of the owners can pay whatever the costs are, but maybe five or six cannot, you can't prioritize the five or six and give them breaks that you would not give to the 40. So whatever approach you're going to take has to be fair and even. The other issue, that's the kind of harder one to take for those of us who do sympathize with people in life, and I would like to think that almost all of us do, is that this is a business. Your condominium, your HOA is a business, and to the extent you have owners who can't pay bills or can't sort out personal issues, it's not your issue to fix.

That's not to say you can't be sympathetic. It's not to say you can't listen, but it's not a board's job to help someone figure out how they can refinance their property. And it's a decision that a lot of people have to make at some point in life, which is, can I afford to stay where I am or do I need to move? And those are going to be hard things to hear, particularly if you have a larger group of owners. Going back to if you don't have five or six, maybe you have 20, maybe a 30, and you get told at a board meeting that you're booting them out of their house, that you're doing all these horrible things. As board directors and managers, you're going to have to remember you are taking action as part of a corporation. You are not an evil person, you are not a bad person.

These accelerated costs that are now coming down to condominiums are statutory, they are not discretionary. That being said, at the same time, your board can look at instead of maybe raising assessments at a higher rate right now, would it make sense to gradually raise them? Would it make sense to have a special assessment that can be paid off over time? That might help some owners. Would it also make sense to maybe take out a loan to help bridge the gap? But these will all be bridge the gap fixes, so to speak, because once the statutory deadline comes for the fully funding of the reserves annually structural items, there's not going to be this window to help bridge that gap between what's going to be much larger expenses from now to that time period.

So as you make these decisions, don't consider taking out a loan thinking somehow it's a resolution necessarily for what's coming. It may make sense for now, it may not. It may be that raising the assessments is going to help some people make some hard decisions sooner rather than later that may be better for them in the long run. So there are no answers to that other than I'd always encourage my boards to listen to complaints even when they feel painful. Listen to your owners, do what you can, but stand hard with [inaudible 00:39:20] this is a business and these requirements are statutory and going forward, it's only going to get more expensive, unfortunately.

Dan Greenberg, Esq.:

And speaking of the expenses, from what I'm seeing on proposals just starting to come in for the milestone and SIRs studies, we're looking at anywhere from two to $400 per unit milestone inspections, and for the combo platter, if you're going to use one firm to do both milestone and structural integrity reserve together, you could be looking at anywhere from four to $600 per unit.

So these are very expensive studies. And so when we talk about budgeting, although the full funding requirements don't hit until the 2025 budget, you really need to start now because you've got tens of thousands of dollars worth of engineering coming within the next 18 to 24 months. And then once we get those reports in hand, you're going to have one year to commence any repairs that are called for under the engineering study, the milestone protection. So within the next few years, it's very possible that you can be looking at tens of thousands of dollars worth of cost just to get you to the point of potentially remediating your building, which then could be tens or hundreds of thousands of dollars.

So this year's budget I think is really critical in a couple of ways. Number one, I would use this budget cycle to advise the owners of what's coming. You're going to have to use a three to five year forecasting plan, I think, because that's realistically what we're looking at. And those owners, to Cindy's point, those owners that are financially strapped or that are going to be financially strapped when these costs hit, they need to know that now, not necessarily in 24 months when $10,000 special assessment is going to have to be levied. You need to give them as much time as possible to start doing their own planning. And you may want to talk to your bank now and talk about opening up a line of credit so that you're not rushing to get funds, or if you're trying to avoid special assessments and a bank loan is a good option for you, start talking to them now.

Make sure that that relationship is solid and that money will be there for you. That is not a guarantee, by the way. And so depending on the health of your building on your delinquency levels, your leasing percentages, you may or may not qualify for traditional lending. So that is a conversation to have now in order to evaluate that because it very well may factor into your long term planning this budget season. And because we're going to have to start fully funding those accounts, the structural accounts in 2025, a lot of groups are starting to increase their reserve funding levels this year, those groups that are not fully funded just to try to lighten the burden in 2025 so it's not such a dramatic increase. So we really need to start this year, even though it's a couple of years off. I think you will be impacted immediately.

Jon Lemole, Esq.:

Cindy, so what I heard Dan just say is that the affected condominium associations are going to be facing engineering costs, they're going to be facing the possibility of having to do something as a result of the engineering inspection because we don't know what the engineering inspection is-

Cindy Hill, Esq.:

There will be something I think.

Jon Lemole, Esq.:

... going to say. So we've got all of these-

Cindy Hill, Esq.:

It could be a lot of somethings. Yeah.

Jon Lemole, Esq.:

Yeah. So we've got all of these unknowns about oh my gosh, we've got to pay the engineer, we may have to do some major repair projects in the future, how does an association prioritize right now? Do they just put a halt on any repair and maintenance projects until these reports are done? Did they have a continuing obligation to continue to do these maintenance and repair projects even though they may have a milestone inspection a year from now, which has additional things that need to be done? What is the association, the board's manager's duty around prioritization of their maintenance and repair obligations right now?

Cindy Hill, Esq.:

The new laws don't change any ongoing repair maintenance obligations that have been existing or continue to exist. The statute doesn't give any exceptions to that, doesn't allow the board to go, well, we were going to do this project but now we're not. At the same time, the board still has a discretion to decide that more aesthetic projects can be put on hold. But some of our associations are taking the approach, and I think it's a good way to do it, that to the extent they've already had some big projects in the works, they're getting them done before they do these studies and before they step up to the statutory requirements with the thinking that what these issues already done that will actually assist them in having a reserve study that won't be including a project that's right on top of what's needed to put it that way.

So, the statute doesn't change the obligations the board has to maintain the repair, the safety, the integrity of the buildings has to do whatever maintenance has been scheduled, but at the same time, getting it done right now might actually be a good decision before proceeding with some of these studies so that those items are 30 years out now, so to speak. I'm not going to give actual numbers for what the issues might be, but yeah, the obligations have not stopped, at the same time as a practical reality to the extent you might have been looking at changing the furniture in the entrance foyer, you might not want to do that now.

Dan Greenberg, Esq.:

Yeah, totally agree with that. If you can push anything, it would be those luxury kind of items right now because I totally agree with Cindy that the rest of the maintenance obligations in your declaration are not halted at all. You still have an obligation to maintain all the rest of the property as well, including your other facilities and capital improvements and amenities that these are items that the owners care about more so than all the stuff that we're talking about.

This now becomes your burden, but the reality is for most homeowners is they want the landscaping to continue looking nice and the gate to function and the tennis court to be not... They want to go on with life and the board has an obligation pursuant to the governing documents to continue maintaining other portions of the property as well. So this is just this additional sideline project that somehow has to be managed and funded while you continue on doing the ordinary business of the association.

So you may be able to find a little bit of room in this budget for some of the extra projects that you had in mind. Those may go fall to the wayside, but the other areas remain. So if you have your parking lot and you're due for a paving project because you've got potholes and whatever, even though that's not included in the structural integrity reserve study, your owners are still going to expect that they've got a nice parking lot and an entrance way to traverse. So that does not change and it's going to make it even more difficult for the board to manage everything else on top of the ordinary day-to-day obligations.

Jon Lemole, Esq.:

How are folks feeling, Cindy, you had mentioned this to me the other day. You were talking about the hurricane and you're hearing from a lot of associations about how to prioritize repairs relating to insurable events versus non insurable events. Talk a little bit about what you're hearing and what you're telling associations in regards to hurricane damage that they may have?

Cindy Hill, Esq.:

Yeah, from the maintenance obligations, because I could speak another 20 minutes on this, but just to give the quick on down to the extent that a unit owner's responsible for maintenance of certain areas doesn't mean that they're responsible for hurricane damage. The associations generally have the insurance coverage on your structural parts of the building and the association's going to be looking to their insurer to get these matters resolved. So I strongly advise if there's any question about any hurricane damage to the structure of you're building as opposed to maybe an owner who, oh, I don't know, left their door open and the rain came in, get with your counsel because these distinctions are very important. If you don't take the right path early on after an insurable event such as a hurricane, you may find that later on you lost opportunities for insurance coverage. So don't make any presumptions.

Contact your association counsel on these issues. The other thing I am seeing is some of the vendors don't understand, the mitigation vendors who are coming in and doing the dry out and clean up, some of them don't understand that condominium buildings or not apartment buildings. I was on the phone with a vendor earlier this week who was insisting that the association hire him to just remove everything from everyone's unit and just dump it in a dump and you can't do that.

And he was insisting, well this is how I've always done it. I do this, I've been doing this for 30 years. Who are you? What do you know? Okay, well no, don't let vendors insist that because they've been doing this work that they know how to address a condominium. I was telling this vendor, I'm not questioning what your issues are in terms of knowing that water damaged items [inaudible 00:48:43], what I'm telling you is you can't just carte blanche in a condominium, go and take out everyone's property. It doesn't work that way. So I strongly advise everyone on the call if there's been any hurricane damage to a property you manage or that you live in, that you contact your counsel and make sure that these issues are being addressed properly. And again, I could spend half an hour on that. I don't want to go down that path. But now is the window to get with your counsel.

Dan Greenberg, Esq.:

Couldn't agree more. It is imperative that you do so. Then the last comparable event that we had, at least here in the Tampa area was Irma, and unfortunately everyone was kind of asleep at the wheel when that one hit. No one had dealt with that magnitude of damage. There was a lot of confusion about what was covered by association insurance policies, how that dovetails with individual homeowners HO6 policies, how to document things, how to file claims, whether we should allow owners to do work within their unit or whether we should control it.It was a nightmare. And a lot of clients I think were prejudiced by not having a plan in place or at least a proper response. So if you are a southwest Florida client and you've been affected, I could not agree more with Cindy, this is an issue that you've got to let your property manager work with your attorney help resolve in order to maximize your insurance recovery and minimize your output for issues that really may not be an association responsibility.

These are tough issues to work through and the magnitude typically exceeds what the property management firm can reasonably handle. So you normally do have to get the attorney involved at least to help provide guidance in a situation like this. So I know we got very lucky on our side of the bridge, but I know many of you down further south did not. So any of us on the call that can be of assistance to you, do not hesitate to reach out.

Cindy Hill, Esq.:

Yeah.

Jon Lemole, Esq.:

And let's take a few minutes, so let's talk about condo termination real quickly. Again, we could spend an hour or two on the topic. Here's an interesting statement that we uncovered in the early '80s. Robert Crane, a well known engineer in the condominium construction defect world, was asked by HUD to opine on the anticipated useful life of condominiums buildings built in Florida. His conclusion was 50 years. Are we going to see a major uptick in condominium seeking termination? Cindy?

Cindy Hill, Esq.:

I think you will. I don't know how the [inaudible 00:51:23] is. I don't know if the we're going to see it as much in this area, for instance, as they will in south Florida where a lot of condominiums that were built down there, there's a lot more volume, a lot of older ones. Going back to the issue of can people afford this? Do they want to afford this? It may make sense for a 50 unit condo that was built in 1974, is close to the water, has not been well at maintaining reserves, all a hypothetical. But those owners might get together and decide, you know what? It's going to cost a prohibitive amount of money per special assessments, per raising our assessments to address these issues that are now being imposed on this by the legislature. Would we rather get together and look for a developer to buy our property? I think those conversations are going to happen. I think that the developers are ready to have those conversations. Are we going to see-

Jon Lemole, Esq.:

They're always ready for those conversations, I would imagine.

Cindy Hill, Esq.:

Yeah, exactly. And I don't think so. I think a lot of people people have bought condominiums for the purpose of enjoying the Florida lifestyle. Some of them also bought for the purposes of Airbnb or rental income. People weren't ready to turn around and suddenly give up their investments. So I don't know that we're going to see a large intake in it, but we are going to see it. It's going to happen. What are your thoughts on that, Dan?

Dan Greenberg, Esq.:

I agree. I think it's going to be certain specific subsets of condominiums, typically the older ones that folks have been living in since maybe the '60s and '70s and that are more fixed income, older crowd, but yet those buildings are treated the same as any other newer project. They have to be maintained and maintenance is expensive, and particularly in those older buildings that have kind of eschewed full funding of reserves and done minimal maintenance on the buildings, which unfortunately there are plenty in that boat.

For those types of communities where owners may be faced with tens of thousands of dollars worth of special assessments to reconstruct their buildings, that's probably the prime example of the group that may want to consider termination. I agree with you. For most other condos that are kind of middle aged so to speak, I think you're going to probably just suck it up and do the assessments, take the bank loan, reconstruct the project, even if it's a half a million or a million dollar reconstruction project, the reality is the investment is worth it and most owners are going to agree that this is what has to be done.

I'm not looking to give up this condo for all the reasons that you mentioned, so let's just get it done. I think we're going to find mostly a get it done attitude, but there will inevitably be some groups that just simply cannot bear that burden. So I think we'll have a handful of terminations throughout the state and it's an opportunity for redevelopment. We'll look at it positively. I suspect that this will lead to some good development and for the rest of us, I think we're just going to have to bear an increase financial burden to get our buildings into the condition that they should be in. But whenever I give this talk to my clients, I always remind them that what the legislature is now forcing us to do is something that we all should have been doing for the past three or four decades. So they're now just controlling the situation.

I think what we found was that the hands off nature of reserves and building inspection and maintenance requirements throughout the past few decades has come back to bite us a little bit. Some groups have been very good about it, others have not been. And now we're all being forced to look at the condition of the building, which should be of the upmost importance anyway to all owners living in a mid and high rise building. What could be more important than ensuring that the building itself is healthy and in good conditions? So before we go complain and I'll write millions of letters to our legislature saying, please get rid of these requirements, think about what you're asking for because I think at the heart of this legislation is good intent and it's for everyone's safety and I think we are going to have to just do it.

Jon Lemole, Esq.:

Good information, Cindy, Dan, appreciate it. Let's get to a couple of questions because we're almost at noon. Let's talk about windows because that's still an area where everybody scratches their head and goes, well we don't cover windows. It's not within the maintenance. They're part of the units. Cindy, [inaudible 00:56:08], were they talking about that at all? Was there some clarification on the thinking around windows and who's responsible for why windows are in subsection G?

Cindy Hill, Esq.:

Well, I actually tried to answer that in the chat and sending it to one person instead of the group. I'm not the most tech savvy person. The consensus seems to be that the legislature did not intend to nuance that issue. If the association is responsible for the windows, they're going to have to reserve the windows. If they're not, there's no mechanism in there where they force the owners to do it. So the consensus seems to be take the statute as it's written. If the list applies to you, you apply it. If components of the list don't apply to you, you don't apply it.

Dan Greenberg, Esq.:

Yeah, I agree with that. And the one conversation I had with an engineer about that point specifically, they said the same thing, which is that they will get an opinion from the association's attorney as to whether or not the association is responsible for the replacement.

Cindy Hill, Esq.:

Oh, that's an excellent way to proceed.

Dan Greenberg, Esq.:

So we are not responsible for window replacement, it's going to be a zero in the report, and the other things I guess I'll just put out there from conversation with the same engineer, with respect to the foundation and the structural members, which are two categories that everyone has a lot of concern about because at first blush we were all thinking, well, how are they going to value the foundation of a 20 story building? That's insane. That would be millions of dollars or something. So the answer that I got was that it's probably also going to be a zero because from an engineering perspective, there's no work that has to be done to the foundation of the building unless there's some issue or some degradation, which that can then usually just be fixed with some concrete restoration or shoring. So it's not going to be a replacement cost.

You don't replace the foundation of a high rise condominium. Same with the structural members. So what I think is going to happen when these SIRs start getting promulgated is that you're going to have some concrete restoration, deferred maintenance on those items and the engineers will kind of tell us that [inaudible 00:58:24] you probably look at those and maybe you do have to do a little bit of touch up work, but it's not an actual replacement.

But you have to remember that reserves have always contemplated deferred maintenance as opposed to just replacement. Deferred maintenance means we can do something to that component without replacing it, but it's extending its useful life, like an elevator modernization. We don't have to swap out the whole cab. We can do for a third of the price a modernization and get another 30, 40 years out of that elevator, for example. So we may end up having deferred maintenance costs as opposed to replacement costs, and it may be less than we were all initially anticipating or fearing.

Jon Lemole, Esq.:

Right. There's a question, do you need to order a SIRs from an engineer or can we rely on our reserve study provider? I think that's pretty clear, right? The SIRs, at least the visual inspection portion of the SIRs, has to be done by an engineer. A licensed engineer or architect in Florida needs to do the visual inspection of the structural components of the building.

Cindy Hill, Esq.:

Yeah. Otherwise you're not going to get-

Jon Lemole, Esq.:

The reserve calculations could be done by a reserve study provider, correct?

Cindy Hill, Esq.:

Yeah. Otherwise you're not going to get a professional assessment. I'll just give an example, after the hurricane, my parents had damage on their tile on their roof and I went over their house and told them, because they're snowbirds, and then the roofer went out there and said, actually the damage is worse than you think because there must have been some sort of a whirlwind that moved tiles on the top of the roof. My visual inspection didn't reveal that. The roofer revealed that. So I'm making a point that's a bit facetious, but the point I'm trying to make is don't go cheap on this. Make sure that you're getting the proper professionals to give you the reports you need because these reports are going to be relied on for many years and you don't want to set your association up with a bad beginning.

Dan Greenberg, Esq.:

A 10 year report. Both of these, the milestone and the SIRs are certified for 10 years, and what the statute says is, like Jon said, with the SIRs you still have to have an engineering component. So to answer the question, some reserve companies are going to have engineers on staff that can satisfy that component of the statute. So some of the reserve companies that you've been working with may be set up to do that, or they may partner with an engineer to come in to do the visual inspection part, then they will build out the reserve component.

Some of the engineering firms are doing both. They've basically staffed up so that they can provide reserve schedules as well or some of them have been providing reserve schedules for years. So you may end up using the same firm for both. You may have two different firms, but if you have two, they're going to have to talk to each other because we want the SIRs group looking at that milestone inspection so that we're kind of jiving and you don't get disparate reports either.

So ideally, sure, using one company would be great. The problem there is if you are less than 30 years old or 25 years, if you're within three miles of the coast, you don't want to do the milestone inspection early most likely. The SIRs requirement hits before the milestone requirement. The SIRs, everybody is three stories or higher, is by the end of 2024. Milestone is tied to the age of the building. And if you do the milestone early, you're creating an extra reporting cycle for yourself. And as we discuss, these are expensive reports.

So if you're a 15 year old building and you're not due for another 10 or 15 years on milestone and you do it now just to knock it out with your SIRs, you've created a full extra cycle of milestone inspection for your building, which could cost you tens of thousands of dollars. Now if you want the peace of mind to do that, by all means go ahead, but don't let the companies talk you into doing both because they say it's going to be more convenient. You'd really need to be sure that you're okay with that and it meets your long term plan because you're not obligated to do that milestone now or by the end of 2024 if you are a younger building.

Jon Lemole, Esq.:

Cindy, last question. Cindy, question was asked, I'm not going to read it verbatim, I'm going to interpret it a little bit, but you had said that the division of condominiums is taking the position that even a two story condo has to have full reserve funding for the reserve items that are specified in that subsection G, which defines what needs to be reserved for and included in instructional integrity reserve study. Does that also mean that those condos can also use those reserves for other uses? In other words, they have to keep those reserves for that specific purpose as well. So they're equally in the same reserve funding and reserve management regime as a three-story building would be.

Cindy Hill, Esq.:

That's correct. So to use the roof is an easy one because every building has a roof, funding is now going to only be able to be used for the roof. You're not going to be able to use it for other components that are part of that, what we call paragraph G, the structural components.

Jon Lemole, Esq.:

And that's across the board for everybody.

Cindy Hill, Esq.:

Per the division's take on this, and it's been the one that's really the conservative way to read the statute, candidly, to the extent it was surprising to hear the division say it out loud because they are so just touchy about not saying things other than what they've written. It makes sense. These are components that are of course bigger safety issues with larger buildings, but going back to some of the points [inaudible 01:04:04] have made, and Dan brought them up in terms of when you are avoiding a big structural necessary item, you're imposing a financial falsehood on some of your owners and they can end up with big bills they can't afford. So I think it makes logical sense even though it's painful to have these items be maintained in a way that everyone can feel that, hey, to the extent maybe we can't remodel the clubhouse, we know we have the money to do the roof and nobody's going to do $30,000 assessment because we didn't have the money.

Jon Lemole, Esq.:

Well, I want to thank both Dan and Cindy for this great information. I want to thank all of you for joining us. I hope you came away from today with some good ideas and some best practices for having some of these discussions in your communities and managing expectations of the members of your communities and dealing with a lot of the things that you're going to have to be dealing with in the coming months and year. And as always, we apologize if we couldn't get to everybody's questions in the chat.

Cindy Hill, Esq.:

Yeah, there were a lot. So definitely.

Jon Lemole, Esq.:

There were a lot today. But we would encourage everyone, feel free to email either our firm, You can email myself, Cindy, you can email Dan Greenberg, and we will be happy to take a look at those questions and provide some thoughts around those as well. And again, if you would like a copy of the presentation PowerPoint, you can email Michelle, I know a lot of you have asked for it in the chat and Michelle is monitoring that. And in about a week or so, maybe two weeks, we'll have this whole presentation both in video and transcribed up on our website, which is www.tlhlegal.com. 

Daniel Russo:

Can you give us the Florida statues that you've been referring to in sub section G?

Cindy Hill, Esq.:

It's 718112 paragraph two, paragraph G.

Jon Lemole, Esq.:

Okay, thank you everybody.

Continue reading

Grappling With The Havoc The Florida Legislature Has Wrought On Condo World

Grappling With The Havoc The Florida Legislature Has Wrought On Condo World

Alan Tannenbaum, Esq.:

Okay. Welcome, everybody. This is Alan... No, I am Alan Tannenbaum. I'm here with my partners Jon Lemole and Cindy Hill, and we're going to give you a presentation on some of the really hot issues relative to this new legislation. It's going to be somewhat of a more casual look at the issues. We're not going to cover everything in the statute, but in the last couple of months we've been peppered with questions. We've talked to lawyers around the state, engineers and insurance people also, about some of the definitional issues that they're grappling with, we're going to cover those. But we actually have another video that was more of an overview of the entire statute that you can look at on our website and find that. Our firm is a full-service community association firm. Up until about three months ago, we were a construction firm that was specializing in representing the community association industry, doing turnovers, repair consulting, and repair-contract enforcement.

But we made a determination, my former partner, Chad McClenathan, decided that he wanted to retire, and wanted to know if I wanted to take over his practice, he's a general counsel. And I contacted Cindy Hill, my new partner, and said, "Cindy, do you want to come along with us? We'll take on Chad's practice, we'll take on your practice, and we will become a full-service community association firm." And that's what we've become. Jon and I spend most of our time on the construction side. Cindy spends most of her time on the general-council side. Chad McClenathan and is still with us on a council basis. We have offices and in Fort Myers, Sarasota, Clearwater in Orlando, but we've been contacted actually from groups all across the state. And with the advent of Zoom, we are now representing clients in the far reaches of Florida. So we're available for everybody, and we network with a number of lawyers around the state.

Couple of ground rules. Any questions you have put in the chat, and keep yourself on mute. We will stay as long as to answer all of your questions even after our hour period is complete. So with that, let's get into the program. One person I'd like to introduce also is Michelle Colburn, who actually engineers these programs for us, any issues that you have before or afterwards, you probably have been in contact with her, is also my new wife, we got married about 12 days ago. And so I have to be especially nice to her about any engineering flaws that may occur. So let's go on to the... You can put up the next slide, Jon, and we'll get you started.

Jon Lemole, Esq.:
Yeah, let introduce what we're going to talk about. So the title of the presentation today is Grappling with the Havoc the Florida Legislature has Wrought on Condo World. And that's a pretty bold title for our program, but as you all know by now, the new condo safety legislation came about after a pretty whirlwind two-day special legislative session. When it was announced, the focus of the condo community and the legal community tended to be on these big-ticket items that were contained in the legislation. And we, in the early stages, looked at them from the 10,000-foot level. As with all game-changing legislation, however, as time go goes by, we begin to learn the gaps and ambiguities contained in the new statutes. And this statute, this legislation is no different. As associations and lawyers have begun thinking about how to meet these new legal requirements, we've all been left with some pretty big areas of uncertainty.

So while the intent behind the legislation was good, it certainly appears that the hasty drafting of it has left many of us having to make difficult decisions on how to interpret these new laws. In our conversations with members of the condo community, the Safety Act has indeed wrought some havoc in that community. So we want to focus today on some of these big areas of ambiguity, because these are the tough questions that you all are going to have to deal with in how to meet the requirements of this law. Unless the legislature provides us with some guidance, associations and their legal counsel and their general counsel are going to need to make some difficult calls. And we hope that the takeaway from today is that every community, every condominium, which is potentially subject to these new provisions, or closely with general counsel, make decisions which can be supported by the business judgment rule. And good luck with some of these tough calls.

So let's talk about our agenda. We're going to talk about meeting, and I think instead of possible deadlines, that should probably say impossible deadlines, because they may be impossible for some. We're going to talk about meeting impossible deadlines. We're going to reflect on some of the big areas of ambiguity in the new legislation. Alan is going to discuss this issue of architects, and are our architects licensed and insured to undertake structural inspections and reporting. He's going to talk about structural engineers being already overburdened. We're going to look at indemnification clauses and limitations on liability in engineering agreements, because those are going to be front and center as you engage engineers to do your studies. Cindy's going to talk about insurance premiums skyrocketing, how's everybody going to afford it? And a little bit of a talk about what do you do with owners who can't afford a special assessment to take on the work that may need to be taken on as a result of the studies.

And then hopefully our goal here is to leave some good time for a question and answer. So we'll jump right into it. So meeting impossible deadlines, let's take a quick review of what some of the deadlines here are for condominiums. And these apply to co-ops too. And maybe if there's one co-op person represented on these things, it's probably a lot, but we're focusing on condos. So there's two inspection schemes you'll recall. There's a milestone inspection scheme, which is really just focusing on the structural integrity of buildings. And then there's a second reporting that's required for some of you, and that's a structural integrity reserve study. So these are two separate investigations and two different types of reports. That's an important thing to remember, because as we're starting to see some engineering companies try to jump out in front of this, it's not always clear where the distinction is between milestone inspections and structural integrity reserve studies.

And so if you want to be in compliance with the law, you really need to be paying careful attention because these are two separate reports. Let's talk about milestone inspections, and let's refresh when they're due. First of all, they're due every 10 years after the completion of the condominium buildings which are subject to those inspections. So milestone inspections every 10 years from completion, which is really when the certificate of occupancy was issued. And those studies need to be done for all buildings three stories or higher. So if you've got buildings three stories or higher, you've got to do a milestone inspection every 10 years, the first one being due 30 years after the condominium was built. And if you're on a coastline, and we're going to talk about that a little bit in a few minutes, if you're on a coastline, the first one is 25 years from when the condominium was built.

Now there's this really weird little gap here, because what the legislature did, is that because the law took effect on January 1st of this year, they said any condominium that's subject to these milestone inspections, which was completed prior to July 1st, 1992, which was 30 years ago, is going to have until December 31st of 2024 to do their first milestone inspection. So they gave those much older condominiums a grace period, but here's where here, here's what's a little bit ambiguous and where this gets a little difficult, and why we're calling it an impossible deadline. Let's suppose your condominium buildings three stories or higher have certificates of occupancy from November of 1992. Well, the legislation says that you have to complete your phase-one milestone inspection by December 31st of the year in which your subject buildings turned 30 years old. So you can see where a condominium that has a three-story or higher building, that was given a certificate of occupancy in November of 1992 is now 30 years old in November of 1992.

And all of a sudden they've got this really tough schedule to complete a phase-one milestone inspection. And same thing for condominiums that were completed in 1993. So this is going to put some real pressure on some condominiums as to how they're going to meet this obligation. Let's talk about the structural integrity reserve studies, that's a completely separate report. Now they made that a little bit of a different timeframe. So any condominium which was still under developer control before July 1st of this year, the developer now has an obligation to provide a structural integrity reserve study before turning the condominium over to the unit owners. If your condominium was turned over after July 1st of this year, every owner-controlled condominium now has to do a structural integrity reserve study by December 31st of 2024. And that again is for buildings that are three stories or higher.

So you can see where, right away, some condominiums may be in another difficult situation because there is some overlap between the structural integrity reserve study and the milestone inspection, because they both involve a visual inspection by an engineer or architect of the structural components of the building. And so there are some condominiums which may be able to combine those, and we've seen some engineers starting to offer that, but there may be some condominiums which may not have to combine those, and maybe looking at having to do one report really quickly, and maybe not wanting to spend the money to do the other report right away. So that's going to create some ambiguity and some tough decisions for condominium. And then with the structural integrity reserve study, let's just remember that after you do your first one, then you have to do one every 10 years thereafter.

So that should give you some sense of some of the problems that some condominiums are going to face in meeting these deadlines. Now, one other thing, and Alan's probably going to talk about this a little bit when he speaks about the areas that he's going to talk about, but we've been talking to a lot of engineers. In fact, I was on a panel with one yesterday. They are overburdened. They are looking, at least right now, the ones that are doing these, six to eight months out in some instances for being able to be ready to get out to your communities and do these inspections. The takeaway here is don't wait. If you're going to have to comply with these provisions, you need to be thinking about them right away. And especially if you have a short timeframe for doing that milestone inspection, you need to be jumping on that, because you're going to find that engineers, as they start to take on this work, are getting further and further stretched out in their time and their availability to be able to complete these reports.

Alan Tannenbaum, Esq.:
Jon, could I point out something? One of the things that groups have asked us is, "Well, we just wait to see if the legislature does a glitch bill? Maybe we will be relieved of some of these deadlines of some of these requirements." I used to work in the legislature, you can't predict at all what they're going to do in the next session or the session after, it's a perilous journey. Our recommendation is that you make every attempt to comply with the statute, make a record of all your attempts. Some groups have told us, "Look, I called seven engineering firms and they couldn't get anybody out." Keep a record of that, because if you're ever challenged, anything happens to your building and they challenge, "Did the board make a good-faith effort?" You want to have that record. So even though the statute may present some impossible deadlines, and the marketplace will not produce for you right now, making the effort is really important in establishing that record. But Cindy, isn't there also a reporting deadline by the end of this year?

Cindy Hill, Esq.:
It's a simple reporting that simply designates the buildings that are going to be subject to this new statutory regulation that are on the condominium property. We can provide the link to the new report. I'm not sure where we would want to put it. We can certainly provide it, we have it, your new wife Michelle has shared it with all of us. And it's something that if managers don't have, they definitely want to have, if in doubt, report. Now, how the division is going to handle all this information is another conversation. But yes, there is a deadline to report if you have buildings that are going to be subject to this. And it is buildings, I want to clarify, since this is a point, it is not just necessarily residences that the owners live in, it is buildings, that's the word. So if you had any three-story buildings on your condominium property, regardless of whether they're recreational or residential, they need to be reported.

Alan Tannenbaum, Esq.:
But the key is, by the end of this year, every condo that's subject to the statute has to do that reporting, it's just letting the state know that we qualify under the statute, so that the state has a record of every condo in Florida that, I guess they have to pay attention to. Go ahead, Jon. I'm sorry.

Jon Lemole, Esq.:
Yeah. Okay, let's shift and look at some of the big ambiguities or ambiguous language in the statute, or statutes, because it's actually multiple statutes, but this is where other tough calls need to be made. One of the things is this area of engineer versus architect. I'm not going to talk about that, Alan's going to spend a little time on that in a couple minutes, but I just want to throw it up there so you know it's coming. I talked to an engineer yesterday and I asked him, I said, "Is there a definition for substantial structural deterioration? Is there an industry standard? Is there something that an engineer could point to that defines that for all engineers?" And the short answer to that question is no. And so every engineer may define what substantial structural deterioration is a little bit differently. And that may be a question of how risk-averse the engineer is.

This is a really tough question right now because, and I'm going to jump to another slide here, the phase-one milestone inspection, the whole purpose of it is for a visual examination of the habitable, and I'm going to talk about habitable in a second, and non-habitable areas of a building, including the major structural components of a building, to provide a qualitative assessment of the structural conditions of the building. If the architect or engineer finds no signs of substantial structural deterioration to any building components, then you don't need to move to phase two of the milestone inspection. Now, the legislature tried to define substantial structural deterioration a little bit, and they defined it by what it may not mean, but it's really not helpful, I don't think, it's not clear, and I think engineers were also grappling with this.

But the legislature was good enough to say, "Substantial structural deterioration means substantial structural distress that negatively affects a building's general structural condition and integrity. The term does not include surface imperfections such as cracks, distortion, sagging, deflections, misalignments, signs of leakage, unless the architect or engineer performing the phase one determines that such surface imperfections are a sign of substantial structural deterioration." So I don't really know. I mean, I'm not an engineer, but I would imagine if an engineer is looking at the outside of your building and sees misalignment, deflection, sagging, distortion, I think, not withstanding what the legislature may be saying is that not necessarily indicating substantial structural deterioration. I think if I'm a pretty conservative engineer and I'm worried about my insurance premiums, I'm probably going to make the call in favor of moving to phase two. So I think we can expect to see that a lot of buildings are going to end up going to that phase-two inspection because of the lack of clarity about what substantial structural deterioration really means.

Another term, what is coastline? Coastline is defined in another statute. It's definition is equally confounding. To paraphrase it, it's the point where the mean and high-water mark of the sea, and that's the term that's used, the sea meets the land. Now, buildings that are within three miles of the coastline are going to have to have their first milestone inspection 25 years after completion, but we really don't know what the coastline is. I don't know what the sea is. I don't know if the gulf is the sea, I don't know if it's a saltwater bay or a bay, or a harbor, or a saltwater estuary, is that the sea? Is a fresh-water river, is that part of the coastline? Really not clear. So that's why it's going to be important for your associations to sit down with general counsel, get some legal advice on it, make a call, protect yourselves as board members, for those of you that are board members here on this presentation, protect yourself by asking those hard questions, getting opinions from legal counsel so that you can make a call that will be protected by the business judgment rule.

Now, three stories, we've got a ton of questions on this, because the reports, both milestone and structural integrity reserve studies are for buildings that are three stories or higher, and that's the language in the statute. What is three stories or higher? Does it include buildings that have two stories of habitable units and parking on the ground floor? There's a lot of buildings that look like that. What about underground parking? What about two-story condominiums that have a top floor, has a penthouse, or two stories that have a penthouse? These are all questions which have come up. I think the general consensus right now, without further guidance from the legislature, is that three stories means three stories, whether it's habitable or non-habitable. So if you have ground-floor parking and two floors of units, that's a three-story building.

So essentially three full stories above the ground. But here's where it gets weird, because they've exempted certain villa-style condos, one, two or three families at most, that have no more than three habitable stories above ground. So they went to that next little habitable part of the definition for those villa-style condos that are exempted from these reporting requirements. I don't know why they didn't do it, or may not have done it for the rest of the buildings, but that's what it is. So there's an exemption from reporting if you have one, two, or three family villa-style condos that have no more than three habitable stories above ground. Here's a question that came up in a panel discussion we had yesterday, "The reporting is for each building three stories or higher. So does that mean you have to have a separate report, standalone report for each of those buildings, or can one report cover all of them?"

We don't know. That may affect how engineers price their studies. If you're asking them to produce a separate report for each of your buildings that fall under these requirements, then they may charge a little bit more money than doing one report. I really don't know where they're going to come out on that, but that's certainly a question that you need to discuss with both the engineer and you need to discuss with general counsel so that you can make the right call, or at least make a supportable call on that question. If we go back to the definition of a phase-one inspection, it says, "Perform a visual examination of habitable and non-habitable areas of a building." Well, we've talked to engineers that are grappling over whether this means that all habitable units have to be inspected, do they need to go into every unit? And if not, do they need to go into some statistically relevant number of units, so maybe 20% or 30%? So that's another area of conversation that you'll need to have with both the engineers that you're talking to and general counsel, because some engineers may say, "Look, we want to go and inspect every unit." So you're going to need to prepare your members for that.

There's this huge question of pooled reserves, or component-funded reserves. There's also this question about, "Even if you don't have to do a structural integrity reserve study, do you still have to comply with the rules around fully-funded reserves and use limitations on reserves?" I'm not going to spend a whole lot of time on that, Cindy may touch on that a little bit. But those again, are tough questions that you're going to have to sit down with general counsel and look at both sides of the coin and make a call on how to handle your reserves depending upon what type of buildings you have.

So the takeaway here is, there's a lot of unanswered questions, you may not be able to answer them, you may only be able to make the best call you can make, but in order to protect your decision, sit down, talk with engineers, talk with general counsel, get their opinions so that you can rely upon them in the exercise of your business judgment, so that if they are called out in the future, you've done your duty under the law. And with that, we're going to talk about the issue of architects, and Alan is going to spend some time there. So take it away, Alan.

Alan Tannenbaum, Esq.:
So I've working with engineers and architects for four decades. And in all difference to the architects or retired architect may be in session today, I've never quite understood what architects actually learned in school. I know they certainly know how to coordinate design, they can make a building or project look beautiful, but the technical training I never quite understood. And here's a little cartoon of a architect making a presentation, and keeping that structural engineer at bay as they say, "Well, wait a second, you're not going to be able to do that, or it's going to be very expensive."

But it was very odd to me that the legislature set up the potential of using architects to do structural inspection. And if you go to the next slide, Jon, here's the problem. The problem is that the only exemption in Florida for licensure for an engineer is, "An architect can do engineering services only which are incidental to his or her architectural practice." That's in 481.229. In 471.003, "No person other than a dually licensed engineer shall practice engineering." And again, the old exemption for an architect is if they're performing services which are strictly incidental to his or her architectural practice. So architects are not licensed to do what the legislature has allowed them apparently to do under this legislation.

And if you go to the next slide, Jon, please. Okay, so this is my test. So if any architect, and you can use this, if any architect says, "I'm prepared to do the structural inspection for you," they have to figure out this equation in order to qualify. And I have put this in front of 10 architects, they all failed. So none of them. Anyway, it's a joke that goes to training. Structural engineers, when they're, for instance, examining a reinforced slab, there's a lot of great computer programs, but actually it takes quite an analysis to determine load calculations, at what level the steel has to be placed, and certainly to evaluate whether there is a potential of instructional failures outside of the training of an architect. So beyond that, and if you go on to the next slide, because this is what the legislature indicated, again, structural inspection probably disqualifies architecture right away, they're not trained to review load-bearing walls and primary structural members. And certainly if you go to the next slide, Jon, they're not trained to make these type of calls.

So they're not trained to do it, they're not licensed to do it. Probably also importantly is that their insurance policies do not cover structural design or structural investigation. So any architect, and I haven't heard of any who are taking this on, maybe I can be educated, they would be foolhardy to step into this and take on these type of examinations, because their insurance policy is not going to cover them for undertaking issues outside of their field of expertise. And so it's an anomaly that they're in there, but I don't think it's going to save the workload at all for engineers. And if you look, next slide there, Jon, this reporting requirement. So after all these inspections are done, the structural integrity or the structural inspections are done, there needs to be a sealed copy of the inspection report with all of these criteria. Again, an architect who seals a structural investigation is going way outside of their field of expertise and licensing to determine whether dangerous, it's just not architecture. Go on, Jon, next slide.

Okay. Well, now I've disqualified architects in the state of Florida from doing this work. Let's talk about structural engineers. So there was already, before Champlain Towers went down in Surfside, that unfortunate tragedy, there was already a limited amount of structural engineers who were servicing the condominium field. Most structural engineers work for developers, and they're happy working for developers. They like to do new design, they don't like to mess with board of directors or condo associations. So there's already a limited amount of engineers who wanted to work for community associations or condos at all. Then Champlain Towers occurred, and it scared the boards of condos around the state, and the engineers, their phones were ringing off the hook, "We don't want to be a Champlain Towers, as an anomalous as it was." And their workload increase dramatically.

Now, did the legislature contact the engineering society and say, "We're about to increase the workload of all the structural engineers in the state of Florida who service the condominium field, a multifold, are you ready to handle this load?" I don't think that call was made. Caught the engineers out of the blue, and they're already created a situation where they already burden structural engineers, or their workload is now even increased. Go on the next slide, Jon. So what have they done? Well, there's a couple things happening. Number one, the workload. Number two, all this ambiguity in the statute that they're facing and required to do these inspections and these reports, and the insurance industry paying a billion dollars on the Champlain Towers disaster.

And they're looking at all the structural engineers in Florida and saying, "Okay, you want to be in the structural-inspection business on condos in the wake of Champlain Towers?" Well, even a few years ago, I was talking to an engineer for a million dollars worth of coverage, the premium was $200,000 for a million dollars worth of coverage. And the deductible was a $100,000 under the policy, that's not much coverage. But the insurance companies, what they did is, they said to engineers, "Look, if you add some clauses to your contracts, it'll decrease your premiums. And they along with other industry groups, published for engineers general conditions, which most of them are now attaching to their agreements.

And I'm going to just cover a couple. Jon, if you go onto the next slide. So limitation of liability, we see this all the time, it could be a $3-million repair job on condominium, and the group is ready to go into contract with the repair contractor, he says, "Well, where's your contract with the engineer?" "Oh, that was signed two years ago." They finally find it, and then I find this, which a $3-million repair job, and the engineer is limiting their liability to 25,000 or $50,000, or the amount of fees that they're paid on the job. And they hand you the certificate of insurance for a million dollars or $2 million, board's feeling pretty good about it, but you have this limitation of liability clause embedded in the documents, and something bad occurs, the association sues the engineer, their insurance company shows up, sends you check for $50,000, "We're done."

Alan Tannenbaum, Esq.:
And you say, "Well, why did that happen?" "Because you allowed this limitation of liability to be inserted in the contract." Every day we are talking to the engineers, and saying, "Nice try. Well, what about at a minimum that you limit your liability to the amount of your insurance coverage?" Most of them will modify their agreement to raise the limitation of liability at that level. Some of them will compromise to 300,000 or $500,000, but you better get to it before the contract's signed, because very few of them will modify it after the fact. One of the things that you have to be careful of is, you might sign a contract two years ago that was just an investigation contract, but it also is the same contract you're using for the design and for contract administration, you're stuck with that limitation of liability. As they do these structural inspections, you're going to see these clauses, we can help you negotiate the out, but just be aware that attached to this engineering agreement will be these general conditions, you need to look at them. Jon, go on to the next slide.

All right, the real problem. So indemnification is when somebody agrees to be responsible for your actions, you're getting sued for your actions, you're transferring back the liability to them. And indemnification clauses in construction contracts historically were just the general contractor indemnifying the owner. There was no indemnification between a design professional and an owner, but what the engineers are now doing is they're sticking indemnification clauses in their contracts, which have the association indemnifying the engineer from liability that might arise from any of these structural inspections or repair work that they take on, even to the extent of identifying the engineer against their own negligence. So the engineer comes, does an inspection, misses something, and there's a building failure that is precipitated, or in a repair job, they design something improperly in the repair, it's clearly their fault, you have a $2-million insurance policy, but you've given the engineer an indemnity against their own negligence for a million dollars.

What the insurance company's going to do is, they're going to say, "Well, we will show up and defend this claim, but the first million dollars of defense costs and liability is the association's burden, not the insurance company's burden. We'll cover anything above the million dollars." And the board's going to council and saying, "Well, how did this happen?" "Well, you signed a contract that said that." One of the things to be very careful of, before I turn this over to Cindy, is if you have a contract that has that type of indemnity clause in it, go to your insurance company and try to purchase a writer that covers that indemnity exposure, because your standard liability policy will not pick up that indemnity exposure. So even if you have an existing agreement and check it, it has this indemnity clause, go to your carrier now and your agent and say, "We want to coverage to protect us from that million-dollar exposure under that indemnity agreement."

And if they say they don't offer it, one the things I've learned about insurance is, every risk in society, somebody will write a policy for it, even if you need to go to Lloyd's of London. So real problems with engineers, getting them out there, having them try to interpret a statute that's not written in engineering language, and then presenting you with agreements that are very risky for associations. So we can help deal with that, as we've dealt with engineers for quite some time. So with that, I'm going to turn the program over to my partner, Cindy Hill.

Cindy Hill, Esq.:
Thanks. Got a little humor here hopefully, that with the insurance premiums that are increasing for condominiums across the area, maybe you can just board up your mailbox and avoid getting those premiums in the mail. The reality though is it's obviously not that easy. The Condominium Act does require that every condominium insure the condominium property, which there's no exception to that. And that's been the case for decades. So this is a problem now because of the insurance industry and what has happened with the restrictions that they have implemented to protect their risk and the, not to get political, but rather late correction that Tallahassee has brought to some of these issues, and inadequate corrections, and this is more of an industry burden than it is in actual Condominium Act burden. So what are some of the issues that maybe could help with the rising bills and the insurance?

One of them is roofs. If you haven't already encountered this issue, if you have a roof that's over 15 or 20 years old, or multiple roofs, or even one roof, insurance companies are walking away from that. Why are they doing that? Everybody's had roofs at age for decades. Well, in 2017, Hurricane Irma came through a big chunk of Florida and left some roof damage, that somebody along the lines decided, "Well, let's look into some of this minor roof damage and see if we can turn this into a profitable industry for us." And they did. Some aggressive roofing companies and insurance agents came together and started reaching out to owners, individual owners, condominium associations, whoever they could get to, and said, "Look, if we make a claim on your behalf and go after the insurance company, if we get money to replace your roof, then you agree to hire us to do it."

And this is what happened. I don't have the statistics on it, but I can tell you I've heard enough anecdotally to realize it's happened in the millions of dollars. The insurance industry was not ready for this rather aggressive tactic. That's an issue that could actually be another hour discussed on, but long story short, that's why we're where we're at with roofs. So one of the things your association can think about is whether roof replacement makes sense in terms of putting it back into having more competition for insurance as opposed to having roofs that are 15 or 20 years old, which totally boots you to the side and takes you out of the standard insurance options. Even Citizens has been turning down insurance coverage for barrier islands, older roofs, waterfront properties. And they were supposed to be the insurance of last resort, that's what were they were developed to do.

And that is actually where, in my opinion, Tallahassee should be stepping in and doing some correction to the extent that Citizens isn't insuring some of these properties. I don't do insurance work, I don't understand why, but it seems to me that that's something all of you could be reaching out to your local legislators and saying, "Tallahassee, you need to get on this, you need to fix this." Because when you can't even get Citizens, going back to Allen's comment about Lloyd's of London, that's your insurance of last resort example, and those are always going to be the most expensive, because they don't have competitors. Yes, you can ensure almost anything you want, but the more narrow your insurance window is and the fewer competitors you have, the more expensive it's going to be. And there are no parameters on that, that's industry driven. To the extent you can only get one insurance coverage policy option to you, you really have to take it. Going back to the Condominium Act doesn't allow you to leave it. So something to consider.

When these Lloyd's of London policies that I'm referring to as the Lloyd of London policies get so expensive, because they're actually layered programs. And again, I'm not an insurance expert, but I do want to convey some understanding as to why this happens. Layered programs are when insurance companies come together as a group and offer coverage. So to the extent you have five, six, seven companies offering you a layered coverage, one of the reasons is so expensive is all those companies understand that risk and all of them want premiums for it. So that layered program is not where you want to be if you can avoid it. These are discussions you should be having if you're not already with your insurance agent, they don't necessarily have answers for all of them, but again, they are professionals in these fields and can maybe offer some suggestions for your particular property, maybe help you out. And in terms of, they can also maybe give you some verbiage to take to Tallahassee and say, "Look, here are some potential fixes to these problems."

I've gotten questions about self-insurance, can condominiums self-insure? Self-insurance colloquially is usually referred to as, for instance, someone owns a house, they don't have a mortgage on it, and they decide, "I'm not going to pay these enormous wind premiums for hurricane insurance. I'm just going to rough it out. If my house gets damaged, I'll take the risk, I'll pay for it." Again, the Condominium Act doesn't allow that. Condominiums cannot decide, "Hey, we have all this money in reserves. If we get hit by a hurricane, we'll just fix it, we won't insure." That's not an option. There is a self-insurance program in the statute that does allow the condominiums some options. It was enacted in 2007, it's rather convoluted, and so convoluted in fact, I'm yet to be able to find any condominium that actually used it after that time.

This provision came out with a lot of fanfare in 2007. If you do some Googling, you'll see there's a lot of excitement about it as being an option to not just be able to take whatever the insurance industry offers, but maybe be able to work together and create a self-insurance with other condominiums or other restrictions that the insurance code required. The reality is it became so convoluted no one did it. Again, this is something maybe you could discuss with your insurance agent, see if there's some options or some advice they could give about how Tallahassee can maybe fix that and help. The problem that really you have again is insurance industry problem, they are assessing the risk, they're charging you accordingly. And yes, it hurts, but it's like the inflation that we're dealing with now, you can't exactly walk into Publix and tell them you don't want to buy these strawberries, they're $2 higher than they were a year ago. If you want strawberries, you got to buy strawberries at the price they're at.

So I hate to have that level of bad news, but I hope it does at least provide some perspective. Now, what if these insurance premiums are so bad, and it's going to be the case for some communities, particularly the ones that are wood frame and have older roofs and are on the water, their insurance premiums are going to get so bad, if it's not corrected in the next couple years, is this even sustainable? Well, there is a statutory option called termination. And termination is what you can pursue when a condominium association is no longer sustainable to operate. The traditional example is the hurricane, where the hurricane just flattens all the buildings, it's not even worth the insurance to rebuild it.

It's a statutory process, it's a complicated one, it's one this firm has dealt with before. I hope that no one on this call has to pursue this option, but I want you to know that it is an option as a worst case scenario. So Jon, are you controlling the slides? Thank you. Oh, okay. Owners who can't afford a special assessment. Actually, I'm a little thrown off here. I'm sorry, I put the wrong cartoon up. I had a cartoon where there were a couple of owners coming in, and a real estate agent was showing a nice property and saying, "I think you can picture yourself struggling to make payments here." The point being, sometimes what we want is not necessarily our best practical option. And that's what we have with the special assessments, people who had bought into condominium properties and budgeted accordingly, made decisions, are not necessarily prepared for the special assessments that are coming, not only from the insurance, which I just discussed, but also from what Alan and Jonn were just discussing.

These costs are going to come with the structural inspections, the costs are going to come with raise reserves. All these costs are literally sticker shock for a lot of folks because they did not factor this in to their budgets. So special assessments, never been popular, but were easier to sell when they were for large-maintenance projects. Let's say you special assess because you wanted to revamp the boat basin or you wanted to remodel the clubhouse. Well, people may not like that charge, but at least they can see the increased property values, they can see the benefit that comes from that. Even special assessing for increased preserves has some sellability to it, in terms of you're going to be a more financially viable community that banks will be more tempted to give mortgages for, keep your property values up, but special assessment for insurance premiums, that has to feel like money just down the tubes. That's a really hard sell, but again, it's one that statutorily the boards have to do if they don't have the funds for it.

Now, special assessments don't have to be, if you've not already discussed this with corporate council, please do, they don't necessarily have to be all upfront funding immediately. To the extent you need a special assessment of let's say $3,000 a unit to cover a particular expense, there may be wiggle room in your budget where you can allow that special assessment to be paid off over six months, over a year, maybe even over two years. That's something you should discuss with corporate council, because if you can avoid sticker shock for your owners and do it in a budgetable way, you would want to do so.

Alan Tannenbaum, Esq.:
Cindy, let me make a point, because we've faced a lot of boards recently that, you hear the sob story in your community, and sometimes it's even a board member, of somebody who literally can't afford the assessment, they have no access to funds, and the board tries to alter the course of its business decision making based upon the lowest common denominator financially within the community. That's a very bad mistake. It may be very cold hearted, but I've told boards this for four decades, if you can't afford to maintain real estate, you should not be a real estate owner. Whether you own a single-family house or a condo, one of the prerequisites to qualifying yourself to own real estate is the understanding that it's going need to be maintained and repaired. And what groups have done all over the state is they deferred that because they never wanted to raise the assessment. And who shows up at the meetings are the people who were crying about the assessment all the time.

It's a sad story, but the board of directors owes as much of an obligation to the owner who is a multimillionaire living in your building as much as somebody who may be on a fixed income who's living in your building. And your obligation to all of the owners is to maintain repair it. And the legislature may have done all the boards in Florida a favor, because they've made it mandatory, and included a fiduciary duty obligation. Now you have a basis to look back and listen to a sad story and tell that person, "We have no choice. This assessment's coming along, and you're going to need to pay it. And we're going to need to lien and foreclose if you don't." Some groups have actually gotten voluntary funds that they've raised to help the lowest common denominator financially in their community pay an assessment. I suppose you could do that on a voluntary basis, it should be an association program, that's nice, but probably nothing the board should involve themselves in. Go ahead, Cindy. I'm sorry.

Cindy Hill, Esq.:
No, that's a segue into the point I was going to make with the little cartoon here, why would anyone under these circumstances continue to serve on the board, as the cartoon has a little executive session meeting with the attorney, and usually the attorney's shooting down these great ideas that the board wants to implement because the Condominium Act doesn't allow it, there's other provisions, it's not always fun to be the lawyer in the room. But here the lawyer can be supportive, because to the extent these decisions do put a fiduciary duty on the board of directors, there are general protections in the law that if you are taking advice as a board volunteer from professionals, you're protected from liability. So when you meet with your attorney, when you meet with your engineer, if you are taking action as they recommend and instruct, you are doing what you can do to protect your own personal liability in addition to doing what's best for the community, it's a win-win.

So if you're going to serve on the board and you find that the potential fiduciary duty violation is troubling, then that's the path I would recommend, make sure you are communicating professionals, the decisions you're making are recommended by professionals. And again, going back to Alan's point, that you're letting the owners know this is something you don't have any discretion regarding. You can't decide, "As board directors, we're going to take this path and not do what these new laws require in terms of the reserves and the inspections. We're just going to do what we think makes sense." Well, you can't do that, you could be personally liable for that. So the naysayers and the complainers who show up at the board meetings or the membership meetings, as Alan was saying, and they're in every community, they're going to have to be told, "Look, I'm, this is the reality."

And the reality may be a harsh reality, there may be some retired individuals, there may be some investors who look at their bottom-line budgets and go, "I can't afford to keep this unit if this is where it's going." Well, this is a corporation, the condominium has to be operated under the Condominium Act." And these personal decisions are ones that all of us have to make at some point in life, not necessarily regarding a condominium unit, but a car, a house, a wedding, a divorce, these are personal decisions and they remain that way, it is not the board's burden to fix the personal issues that this is going to raise for owners.

Alan Tannenbaum, Esq.:
Cindy, let's answer questions, because we've hit the noon hour. I see one question, which I will ask you to answer, "Does this new statute require full funding of reserves for associations which have buildings of only one or two stories?"

Cindy Hill, Esq.:
Unfortunately, the law is not clear on that, but no, I would say, but at the same time I would say expect it to follow. I think that that's going to be a follow up that Tallahassee is going to do. And I have not looked at the question since I started my part of the presentation.

Alan Tannenbaum, Esq.:
Okay. Well, that was one question. Jon, do you have a take on that?

Jon Lemole, Esq.:
On full funding for under two stories?

Alan Tannenbaum, Esq.:
Full funding of associations that don't have three stories.

Jon Lemole, Esq.:
I think that's still, as Cindy said, an unclear area. The statute is weird because it says... Well, it has that provision that says, "For the things that are referred to in subsection G of this new provision," which includes the structural integrity reserve study. So arguably if you're reserving for the thing and it falls under that subsection G, then whether you're two stories or three stories, it doesn't matter, you still have to comply with the full funding, but that's an unclear area.

Cindy Hill, Esq.:
It's an ambiguity. And I've been telling my clients, take the conservative reproach and start preparing for this.

Alan Tannenbaum, Esq.:
There's a question about the certification report to a local building official. Yeah, it's required that it be filed with the building official. In fact, they put a requirement of the statute that within any particular jurisdiction that the building officials figure out who's supposed to comply with the statute. And again, on the question of the three-story building, it's going to be very interesting. If you have an area like Anna Maria Island, there's one high-rise building on all of Anna Maria Island. That's the island actually between St. Petersburg and Sarasota, off of the coast of Bradenton. There's one high-rise condo in all of Anna Maria, all the other condo... Not all of them, but many of them are this first-floor stilt, two floors above. And you have the city of Holmes Beach, which is the major city on that island, and is the building official in Holmes Beach going to determine that this is a three-story building that needs the reporting or not?

So there's going to be some discretion on the part of building officials to make those calls, but if they don't make that call, are you relieved? Not necessarily. There's a question on the milestone inspection, "So we need to have the windows in our units included in the inspection when our governing documents specifically state that the windows are the responsibility of the owner?" Jon, are windows and door specifically called out in the statute as something that needs to be inspected, or only the structural aspects of the building?

Jon Lemole, Esq.:
Okay. So here's where this gets really confusing. So windows is one of the areas that is included in the part of the statute which says what needs to be evaluated in the structural integrity reserve study, it specifically says windows. Now, whether that means only if windows are common elements, we have no way of knowing, we have no way of knowing that. So that's a gray area, but I would expect that with window inspections, one of the other things you may be looking at, or that the engineer may be looking at, is not just the windows themselves, but the seals around the windows, the waterproofing around the windows. And all of that may be common elements. So don't just assume that because we exclude windows, they're part of the unit, that somehow you can maybe get around having to have the engineer inspect them and make a reserve calculation.

Now, go back to the milestone inspection as a whole separate report, the milestone inspection says the structural engineer will visually inspect the habitable and non-habitable areas. So to me, that would include looking at the windows, because if the windows are somehow not, and I'm not an engineer, I don't know how they would be not structurally sound, but whether they're in the unit or part of the common elements, if there's something wrong with the windows which is impacting the structural integrity of the building, the association's going to have to do something about it one way or another. And that may be either dealing with it themselves as a common element, or telling unit owners that there's a problem and they need to deal with it. So there's not an easy answer on it, the statute says what it says.

Cindy Hill, Esq.:
No, it's not-

Alan Tannenbaum, Esq.:
Cindy, let me give you the next question, "There's a provision of the Condominium Act that if the budget in a given year is increased more than 15% over the prior year, that owners can petition and restricts the board's ability to increase the budget. That wouldn't include a special assessment though, would it?"

Cindy Hill, Esq.:
Well, I started answering some of those questions earlier in the presentation because I saw them coming up. First of all, it's 115%, It's not 15%. And that's a common misconception. And it's when owners want to contest a budget that's raised 115% or more from the previous year, they have a right if 10% of them in writing request a special meeting to do that. And at that meeting, if the owners vote in either a majority at least, or maybe higher if it's in the bylaws, the owners can vote on a budget that they approved and not the board. Now, that 115 under the statute cannot include, and I've got it noted here so that I could go over it quickly, any authorized provision for reasonable reserves for repair OR replacement of the condominium property. So 115 does not include those reserves.

Any anticipated expenses, and that's what the statute says, anticipated expenses which will not be regular or may just be annual. So for instance, if you have an expense in the budget that involves, I don't know, resurfacing the pool, and you're going to do that this year, that's not something that you would do annually. And then finally, it does not include assessments for betterments. And that's all it says. That's a pretty vague category. So the 115% is not just a hard figure, it's a number that certain expenses have to be withdrawn from. And then the other thing to keep in mind is, even if the owners do take this action and approve a different budget, it's a budget. A budget is a guideline worksheet, so to speak. It is not a strict list that the board has to follow. So going to your question, Alan, taking 10 minutes to answer it, sorry, if the board had to special assess for a certain expense that it needed to special assess for, the fact the budget doesn't have it in there does not prohibit the board from doing that.

Alan Tannenbaum, Esq.:
Okay. And even if there was a financial restriction, the obligation to meet the statutory requirements would predominate over the restriction anyway, in my view.

Cindy Hill, Esq.:
I agree with that, that's absolutely right. So to a certain extent, this is a false alarm, this 115. I know people are nervous about it because it's in the statute, it's there, but ultimately it's not going to change the fiduciary duty that the boards are going to have to follow these new laws to insure the building and to do what they need to do it. It's really intended to keep boards from spending a lot of money doing things that aren't necessarily necessary.

Alan Tannenbaum, Esq.:
There's a question that's come up is, really, how do you reserve for a structure? And the gentleman who ask the question says that, "If the building has a $20-million value, does the reserve have to be 20 million?" And our answer would be no. It's a very ticklish issue for the folks who do reserve studies, because the major structure of a building is supposed to last until the end of the useful life of a building. A roof gets replaced every 20 years, in theory, you're going to have to do window caulking, waterproofing, but the building structure is supposed to last until the end of the life of the building. And I would say that the reserves, if there's identifiable problems that need correction, then certainly the reserve study, those figures would be included.

But you don't have to reserve for the entire replacement of all the structural components of the building if the person who's performing the reserve study comes to the conclusion that there's no necessary distress and this building should last on the end of it's useful life, that probably would not require any particular reserve amount. But again, this is something that, you know what a roof's going to take to replace, you go into the marketplace, especially on a high-rise building, you can determine what the appropriate reserve number for the structural elements are, really a big mystery to all the people who are doing reserve studies.

Let's see if there's one or more question. We will provide a copy of the presentation. Just let Michelle Colburn know. It'll be on our website also, the transcript and the video, probably within a week. And I'm not going to the HUD question in this session. Lot of insurance issues. Okay. Well, if anyone has any particular issue that's pertinent to their condo, feel free to shoot it to us, but we're going to at this juncture conclude. Hope that you found today's session helpful. Obviously there's lot of issues that will still need to be grappled with. Jon, one last question, somebody said, "For a 50-year-old building, when is there a study required?"

Jon Lemole, Esq.:
The phase-one milestone?

Alan Tannenbaum, Esq.:
Yes.

Jon Lemole, Esq.:
Well, you get a pass until December 31st of 2024.

Alan Tannenbaum, Esq.:
Okay. All right...

Continue reading

20220810-165022Screen-Shot-2022-08-10-at-12.50.00-PM

UNDERSTANDING FLORIDA'S NEW CONDOMINIUM SAFETY; INSURANCE BILL: General Counsel Perspective

Alan Tannenbaum, Esq.:

All right, I'm going to welcome everybody. This is Alan Tannenbaum and the name of our firm now is Tannenbaum, Lemole and Hill. So I promised last time that there might be little bit of surprise. And this is the first time we're appearing as Tannenbaum, Lemole and Hill. Hill is Cindy Hill, who is with us today prior to last month, Jon Lemole and I were a construction firm, construction law firm, serving community associations around the state. We noticed, in giving these sessions and other educational sessions, that we were asked a lot of general council questions constantly, which we had to defer.

And we made the determination that rather than defer them from now on, we will handle them. And Cindy Hill has joined our firm. She's an 18 year practitioner as a general counsel, highly regarded in the Sarasota-Manatee market. And she has joined us as a partner. She's a member of the Florida Bar Condominium and Planned Development Committee, which are the general councils around the state who meet periodically to discuss all the issues that might affect general counsel. And this legislation that we're going to discuss today has been very much on that committee's mind. So what Cindy's going to do is she's going to insert comments based upon what all of the general counsel are grappling with, with this legislation as we go through the various topic areas. Chad McClenathan, who is a 35 year general counsel, condominium homeowner practitioner has joined our firm as council.

So we now have two very experienced general counsel that are on our team. So we are a community association, general council and construction firm going forward. So let's talk about the legislation. And Jon, if you'll go to the first slide, I personally paid a visit to the site of Champlain Towers this past Saturday, and took this photograph. So, there's a Memorial being built on the site, but this is the current presentation out there. It's very eerie. It reminded me of going the World Trade Center site, after all the destruction there, it's now an empty site. This is actually what drove, obviously, the legislation that we're going to deal with today. It was a year ago, June 21st that, that building came down and resulted in the legislature act in this past session, the special session in creating the legislation. So terrible tragedy, terrible... Lives were lost. It did instigate some changes, which we're going to discuss.

Maybe we have saved, or maybe the legislature has saved some lives going forward. So I think, the greatest Memorial to the folks who lost their lives and the families who lost people is, have things now changed to avoid this kind of tragedy for others? I would say from my perspective, yes, as painful as it may be. Okay, let's get into the guts of it. And I'm going to go through the first section as quickly as possible because most of the questions we've seen have been on the reserve side. So Jon, if you can go on the next slide. Quickly on this, this set a new parameter, supposedly for community association managers. It's pretty innocuous. It basically says, "If you're a community association manager and the board directs you to comply with this statute, you should do it." Big news. Like your licensing already required that, your contracts already required that. So the legislature felt that they had to tell you that as the board tells you to comply with the statute, you should do it. So, did it increase your liability... Yes, Jon.

Jon Lemole, Esq.:

There's an interesting question. That's come up a couple times about this and it's converse. And the question is, if the manager tells the board that the board has to comply with these provisions and the board refuses to do it, what are the manager's obligations at that point?

Alan Tannenbaum, Esq.:
Maybe to resign. That might be a good idea.

Cindy Hill, Esq.:

That's what I would recommend, actually, that if the board is not going to act as directed or as recommended by management on such a large issue... I mean, we don't give advice to management companies, but they might want to think about having something in their contract that lets them automatically resign in these events. But I do like that, it's clear that the management must comply as directed by the board. Meaning if they don't get direction, the argument can be made, they didn't have any other obligation.

Alan Tannenbaum, Esq.:
Right. All right, Jon, next. So this is the first inspection requirement and these slides will all be available to you. So don't think that you have to write all of this down. Anybody who wants the slideshow, Michelle can provide it. So all kinds of definitional problems, the engineers don't know what these words mean. I certainly, as a construction lawyer, don't know what the words mean, but difficult words. Load-bearing walls, I think I know what that means. Primary structural members, not so much. So there's going to be a lot of debate about what that means. I think most engineers probably could figure that out.

The licensed architect and engineers. Now what the legislature did is they said, "Well, we're going to allow for both architects and engineers to perform the functions that are called for in the statute." I have a big question about whether architects can actually perform that function, whether they're licensed to, that's going to be a debate issue. But maybe more importantly, are they even insured to do structural inspections? And if you look at a liability insurance policy for an architect, it really restricts their coverage to architectural functions. And if they're doing something outside of an architectural function, there may not be coverage for that activity. So the legislature may have overstepped a bit.

And some of the associations may be calling architects out to do these inspections and find that the smart architects are going to tell them, "Sorry, no. It's outside of our licensure and outside of our insurability." Again, there's a definition about determining the general structural condition of the building. I don't know what the general structural condition of the building means as it affects the safety. Go ahead, Jon, to the next one.

Jon Lemole, Esq.:

One thing to note before we go onto that, Alan. So, these provisions regarding milestone inspections, as opposed to the other inspections that we'll talk about later, they're not in the Condo Act, they're in Chapter 553. And I've gotten a lot of questions from folks that are saying, "Well, where does it say this in the Condo Act?" It doesn't say it in the Condo Act. So if you're looking for it's in Chapter 553, so just make a mental note of that.

Alan Tannenbaum, Esq.:

Thank you, Jon. Again. And for anybody who's interested, this is a licensure requirements for architects and engineers. It basically says, "Engineers, can't practice architecture and architects can't practice engineering." The only exception for architects is if it's incidental to their architectural practice. So in theory of an architects designing a home, and there happens to be a load-bearing wall in the plans, the legislature gives them some leeway to do potentially that portion of the design. But it would be very tough to argue that being called out to do a inspection of a building in place is incidental to architectural services. So I have a big question about whether architects by licensure are even able to do what the legislature has apparently saying that they're now allowed to do. But again, I worry about the insurability issue.

The carriers are not going to go along with this or at least haven't yet. So, you may find, again, a lot of architects are just going to refuse to do what the legislature has allowed them apparently. Go ahead, Jon. All right, again, definitions. These are not terms that they necessarily teach in engineering school. And now you're having the engineers having to make these calls. Substantial structural distress that negatively affects the building's general structural condition and integrity. Again, if you go to a engineering textbook, you're not going to find that type of language. So now the engineers have to determine what these means.

Now, it says what it doesn't include. Doesn't include cracks, distortion, sagging, deflections, misalignment. Well, if a slab is distorted, sagging and cracking is an engineer going to say, "Well, I see all of that, but it doesn't mean that's structural distress." No, they're not going to say that, so I don't even know why they have that disclaimer. If there's a sagging slab you're not going to find a structural engineer in the state of Florida's going to say, "Yeah, well that's okay. That one passes." No, that's not going to happen. And then it gets into Phase One and Phase Two, which we're going get on next ahead. Go ahead, Jon.

All right. There's a really good slide at the end of the program so that you don't have to memorize all this. But this says when the inspections have to occur, this milestone inspection, it's a shorter time period for buildings, 30 years of age. If the building is located within three miles of a coastline, whatever a coastline is. That's not easily defined. There are inlets. There may be a coastline that... Where there's a river going out to the coast, where does the river end and the coastline start? A lot of questions about that. Where's that measurement to be taken from for any particular condominium? Legislature doesn't really help with that.

But 25 year old condos have a different deadline. Again, these are all summarized at the end of the program. The condominium association agent has to arrange for the inspection and ensure compliance with the requirements of the section. That's understandable. And the condominium is responsible for all costs. Now it says here, "Does not apply a single family, two family or three family dwelling with three or more habitable stories above ground."

Jon Lemole, Esq.:

Three or fewer.

Alan Tannenbaum, Esq.:

Yes. So everybody in condo world, lawyers, engineers, insurance, people are all saying that a first floor parking with two residential floors above it is a three story building. So the legislature hasn't given us guidance on that, but everybody in the industry is calling that a three story building. So, if you're managing a condo on a barrier island and the first floor is not occupied, but the other two floors are, it's a condominium. You better comply with the statute until the legislature says otherwise. And if you're in a homeowner's association, it doesn't apply. And if you're a condo or a co-op that is two stories, it doesn't apply. But if you're a condo, three stories, this all applies. Go ahead, Jon.

Jon Lemole, Esq.:

And just also to reiterate a point that bears reiterating. So these milestone inspections have to be done every 10 years and the starting point for these, unlike the other inspections we're going to talk about in a few minutes, is the completion of the building. And that would be tied to the Certificate of Occupancy. And there is a definition of coastline elsewhere in Florida statutes, it's equally confusing. I don't know what the answer is. You're going to have to sit down with your general counsel and decide whether you fit within the 30 or the 25 year mark. But Cindy, she'll probably tell you, there's a lot of ambiguity in that because the coastline definition is where the mean low tide mark on land meets the sea. So what is the sea? So, that's open for a lot of interpretation.

Alan Tannenbaum, Esq.:

Yeah. No, Jon, we could take the position that all of the condos on the Gulf Coast are exempt because they're on a gulf and not a sea. So-

Jon Lemole, Esq.:

Yeah, I don't know. I don't know if it only applies to the east coast or if it-

Alan Tannenbaum, Esq.:

Then nobody take that at phase value because we will not make that argument. Cindy, is there a reporting requirement to the state for three story buildings?

Cindy Hill, Esq.:

Yes, there is. In the middle of all of this more complex and expensive legislation that's coming down. It can be easy to forget that part of the legislation includes that condos that have buildings... Now, not just owner buildings, but any buildings, three stories more in height have to report that information to the division before January 1st, 2023. And I had to look at my notes on that and I don't have the best memory for numbers, but that information includes the number of buildings that are three stories, more in height. And again, buildings not just residential, the total number of units in all buildings, whether or not there are units in it. The addresses and of course, the counties in which it's located.

Cindy Hill, Esq.:

And then the division in turn has an obligation to then put that information on its public website. So that's a compliance that if you need any guidance with do get with your general counsel, but if you already know you have four or five buildings that are five or six stories, for instance, you need to be looking to report that to the division because you would not want to end up non-compliance with such a really relatively easy thing to do.

Alan Tannenbaum, Esq.:

And I'm sure the division's going to set out a mailer to all the condos in the state or email them.

Cindy Hill, Esq.:

 I'm sure they'll do something, what they'll do... But yes, I'm sure they'll do something because they're going to want this information coming in as fast as they can so they can turn around and get it processed. That's a lot of work to put on the division and I didn't see any additional funding given to the division to do this.

Jon Lemole, Esq.:

Let's just talk about a question really quickly, because it's apropos of this section here. And Joyce asks about the exception for single family, two family or three family dwellings with three or fewer habitable stories above ground. And I think what that's getting at is a Villa style, let's say, a Villa style condominium that maybe three stories, but only has up to three. So, like a connected kind... A Villa or a town home kind of building under a condominium regime where the maximum number of dwellings is three. And if there's a three story dwelling... Building that has three or fewer dwellings in it, that is an exemption that was carved out. So it's not the clearest thing in the world, but I think that's what that's getting at. And I hope that answers Joyce's question. No, Cindy?

Cindy Hill, Esq.:

It's a terrible provision.

Jon Lemole, Esq.:

Oh, okay. Yeah, it is. It is very confusing.

Alan Tannenbaum, Esq.:

All right. We're not going to dwell a lot about this. Again, this is a time period. And this gets the Building Department. I don't know if they were communicated with, they are also very busy these days, but now they have some obligation. So, looks like they're going to have to determine whether inspection's required and they have to provide written notice to the condo association. Condo association has 180 days to act. Again, how they know about it. I guess they'll have to go through their records and survey all the condos within their jurisdiction and figure out which ones meet the requirements of the statute and themselves send out notice. So they're, again, putting an additional burden on building departments that wasn't funded. Now really important is this last bullet point. This is a change in the law.

Alan Tannenbaum, Esq.:

All the cases that interpreted board of directors. Individual liability interpreted the statutory sections as saying that and I'll paraphrase it basically, "If you weren't stealing from your association or using your power for discriminatory purposes or vindictive purposes, or giving a benefit to your brother-in-law's company by buying services at greater than market value, there was no means of being personally responsible for bad business decisions and even neglect."

That was a line of cases that came down on individual liability, even to the extent of ignoring necessary building repairs. There were cases on that.

Cindy Hill, Esq.:

Yes.

Alan Tannenbaum, Esq.:

This changed it. This section, "If they willfully and knowingly fail to have the inspection performed." It's a breach of that fiduciary duty, which opens up personal liability on the part of a director that didn't exist before. So this is a change from the common law. Now that's bad news because there's liability. What's good news about it is, again, it's another talking point to give to the owners who are complaining about special assessment and complying with the statute. And don't want to do that show them this statute and say, "Fine, you take my seat on the board, you have this responsibility because the legislator's saying that I must do this and I have personal liability, even though it's protected by insurance and we have no choice, but to do this." And actually I think that's going to be helpful for board members and managers in order to actually do the job legislatures telling you to do it by having included this.

So I want to look at it on a positive sense that this is a talking point to say, "Look, we have no choice. And it's too bad that you have to pay the special assessment, but you got to do it." So bad news and good news at the same time. Go ahead, Jon. All right, this is a Phase One inspection, and it's a required inspection. Again, if you are three stories and more in height and don't meet that exception for single family or two family dwelling for condo or co-op, first they got to do a visual inspection. Now, the problem with it... There's a couple problems with it, one problem with it is, what can you tell from a visual inspection? Sometimes not a lot. And then they got to make a determination of no substantial structural deterioration. And there doesn't have to be the Phase Two. Well, what engineer in his right mind is going to pass a building and say, "It doesn't have to have a Phase Two."

Maybe some of them will under certain circumstances, but think of the liability, if they don't call for a Phase Two, and that building comes down or a portion collapses a year after. So their insurance companies they're not going to say, "Say a building passes okay on a visual inspection without doing the Phase Two and see if we insure you next year." So I think a lot of engineers are going to say, "The heck with it. I'm going to say the Phase Two is necessary." They don't need more business, but it also to be cynical, the choice will get them another inspection of a much greater value. So that's just kind of a strange thing than you put in there. Go ahead, Jon. I'm going to get through the rest of its equipment as possible. All right, Phase Two, engineer comes back and says, "I see some signs of trouble. I need to dig into this building." It gives the engineer the full discretion as to what needs to be done.

Look at the second sentence of the second paragraph, "As extensive or as limited as necessary to fully assess areas of structural distress. In order to confirm that building is structurally sound and safe." So on and so forth. And the program for assessing it, boy, that gives an engineer a lot of power, looks like they make the call. The board can't say, "Look, we don't want you to go that far." And the engineer says, "Sorry, statute says, I got to go as far as I need to go. That is my discretion." Very interesting transfer of power to a professional that the association is hiring but that's what they did. And it's going to create some very interesting scenarios when an engineer says, "We're going to have to rip apart this whole building in order for me to reach that Phase Two determination. And I'm sorry, folks, it's going to cost you $150,000 for my examination." So troublesome. Go ahead, Jon.

All right, then there's this report and it says what it's got to have in it, pretty heavy conclusions. But look at nine, it has to be distributed to each condo owner. And it says how, and it has to be available and put on your website. So forget hiding anything about your building. Once this Phase Two comes out, it's open for public view. And again, that's controversial, but it's going to have to go up there. You don't control what the findings are, whatever it says you're stuck with them, gets published. You have no choice. That's going to cause some interesting issues. Go ahead, Jon. All right. Again, this is the building department and now the county's involved.

So the legislature, I don't know if they called the building officials and the county officials and say, "We're about to put some burdens on you." But the building department can give penalties and timelines. What's really strange is that they move what the Board of County Commissioners does, which doesn't make a lot of sense because you can have four municipalities with their own building department functions within your county. And now the county has got some responsibility over what the building departments are doing, which is a mess even of itself. And gives county for some reason, now, jurisdiction over what may be a localized building of responsibility. A lot of confusion there. Go ahead, Jon.

Jon Lemole, Esq.:

Cindy, have they talked about... Because the big takeaway in this section is that if there are repairs recommended after your Phase Two milestone inspection, you have a certain amount of time, 365 days, to start to make those repairs. If any of you have performed a major repair project recently, I'm sure you've run into problems with delays because of the lack of materials, price escalations, things like that. Is there any kind of safety valve here, if you can't commence your project within 365 days, because there are labor shortages or supply shortages? Has that been discussed in your committee?

Cindy Hill, Esq.:

No. Well, it has because there are no protections in what's written here. The committee is putting together what they call a list of glitches, which are not necessarily the more substantive issues that come up in these conversations, but they are the, "Hey, wait a minute. Common sense, let's put something in here." And this is one of the glitches. What happens if there's a supply chain problem? What happens if there's a labor shortage? There's no cushion here for reasonable efforts from a board not being able to meet this requirements. That's definitely something the committee is put together and going back to the legislature with their list for the next session to fix without, again, trying to argue about some of the substantive provisions, but more just the, "Guys, you got to give us some guidance here."

Jon Lemole, Esq.:

Good. Well, hopefully they listen.

Cindy Hill, Esq.:

They don't traditionally do so, but the committee's trying. And again, we're trying with these soft serve requests, so to speak.

Jon Lemole, Esq.:

Oh, okay, good. All right. So now we're going to get into the condo statue portion of this. And this is where, I think, there's a lot more ambiguity here. And I think that's because as Alan said at the beginning, and we've heard as well from other folks the legislature was really focused during its special session on the safety issues and making sure that buildings were inspected. And that the state had and local officials had a good census of buildings, their ages, and what problems maybe on the horizon with some of these older buildings that may have been neglected. And so I think there's a lot more overall clarity in the milestone inspection provisions. There's definite timelines, and so that's a little less ambiguous. But then the second step that the legislature took, and this is really because how do you fund this stuff? The money has to be available. And for a lot of older communities, as you probably all know, there are problems with reserves. There are old buildings that are in need of repair and not enough money to repair them.

And so the legislature crafted this second shoe, if you will, in the Condo Act, which relates to reserve studies and reserve funding. So we're going to talk about that now, and I think you'll see there's a far more ambiguity here. And these are all areas where it is highly recommended, highly recommended that you sit down with your general counsel and look at these issues because there are going to need to be some interpretations made and some tough calls, in some instances.

Jon Lemole, Esq.:

So to jump into it, you have a whole second set of investigation for buildings that are three stories or higher. So the same buildings that fall under the milestone inspection also need to, every 10 years, perform something called a Structural Integrity Reserve Study. And there's a definition it's defined at a new section 718.103(25), subsection 25. Now what used to be in 25, wasn't taken away. It was just kind of shifted down, so that's where they've inserted this. But what is a Structural Integrity Reserve Study, we'll call it SIRS for short. That seems to be what everybody's gravitating towards as an abbreviation. It's a study of the reserve funds required for future major repairs and replacement of the common areas based on a visual inspection of the common areas. Huh? That sounds like a typical reserve study, right? That's what everybody's kind of familiar with doing.

However, they've added an extra little layer to this in a Structural Integrity Reserve Study. Can be performed by anybody who typically has performed them in the past. However, the visual inspection portion of the Structural Integrity Reserve Study must be performed by an engineer or an architect, licensed Florida engineer, or licensed Florida architect. So they've added this layer to the reserve study process where you actually have to have a licensed engineer or architect, who's looking at the building and evaluating the integrity and the estimated remaining useful life of a number of different components, and we're going to look at those in a second. But before we get to that, let's talk about what that engineer or architect has to do. It must identify, the study, must identify the common areas being visually inspected, state the estimated remaining useful life and estimated replacement cost or deferred maintenance expense of the area being visually inspected. Provide a recommended annual reserve amount that achieves the estimated replacement cost or deferred maintenance expense of each common area being visually inspected.

And so, it's a very detailed reserve study that is being done, but here's where the rubber really meets the road. The old statute had a couple of areas that reserves needed to be calculated and assessed for. Buildings three stories or higher, are now going to have to broaden the list. A little bit of the things that must, A, be visually observed and inspected by an engineer or architect and then reserved for. And that list, you'll see it here, includes roof load-bearing walls, or other primary structural members. I don't know exactly what that means, but I guess the engineers will determine what a primary structural member is for the building. Floors, foundation, fireproofing, fire protection systems, plumbing, electrical systems, waterproofing, and exterior painting. And here's the one that everybody gets up in arms about windows. And let's put a pin in windows for a second, we'll come back to that.

And then the catch all, any other item that has a deferred maintenance expense or replacement cost that would exceed $10,000 and the failure to replace or maintain such item negatively affects the items listed in sub-paragraphs A through I, as determined by the licensed engineer or architect performing the visual inspection portion. Okay. So as Alan said earlier, this legislation gives the architects and engineers, very broad discretion in how they do these inspections, what they recommend. And the same is true here because it's the architect or the engineer who is determining what things need to be inspected in that catchall section and whether or not they need to be reserved for. So let's talk about windows. Yeah, Alan.

Alan Tannenbaum, Esq.:

Well, one important point is that what's in J here, the $10,000 amount. It was always in the statute. So the statute had three discrete areas, roofing, painting, and pavement resurfacing had to be reserved for, and anything. In addition to that had a $10,000 more deferred maintenance or expense replacement cost. Now that always included the condominium structure. The problem is that very few reserve studies ever had a figure in for that, because it was so difficult to determine. You have a high-rise building, what number do you put in for balconies that may be deteriorating over time? The total replacement cost of replacing all the balconies, very few condos ever included that as a reserve item. The key now is that it's specifically required.

But again, how does an engineer determine that number? What is it? Is it, again, the full replacement cost? Is it repairs? Some very tricky determination by engineers to try to now meet the requirements of specifically reserving for things like foundation? What does that mean? How do you reserve for a foundation that you can't see and you don't know that really the condition of it, unless you do some very substantial destructive work under the building? So very tough engineering challenges by already very overburden engineers in the state of Florida. Go ahead, Jon. Sorry.

Jon Lemole, Esq.:

So the questions that I've seen about this Structural Integrity Reserve Study and what has to be inspected and reserved for, there are two things that keep coming up. There's the issue of windows and because in most condominiums, the windows are part of the unit. And so that's not a common area that the association has to maintain. So, how do they inspect windows and why should they inspect windows when the condo association is not the one that needs to reserve for replacement of windows. And the second thing that I've heard frequently is like, in the old statute, before this, you had things like pavement was specified, right? So that's not in this list. So, does this take priority and preempt what was in the old statute for buildings three stories or higher or not. So I'm going to throw that to you, Cindy, and ask if there's been any discussion about, A, the windows issue. And do you still have to also reserve for the things that you used to have to reserve for it, but that are not necessarily in this list?

Cindy Hill, Esq.:

I'll start with that. This is a different list. The list that exists currently before these laws were changed is still reserves that have to be scheduled and continue to do business as you've been doing with that. This is now a different box, so to speak, and there may be some overlap, and that's going to require some conversation with professionals. But it's not a replacement list, I want to be clear about that. Windows, and then plumbing and electrical are both part of the committee's glitch request because windows and also other glass enclosures on units. For instance, if a balcony's glass enclosed or something may not be at all the Association's responsibility. So we are seeking clarification on that issue, that to the extent the windows are not the Association's responsibility, why should they have to have them be part of reserve study?

And then the other concern the committee has of the plumbing and electrical systems, even though Jon, you've probably not got questions about that yet. Our concern is how do you save for the wholesale replacement of plumbing or electrical systems, when that's a rare event, usually plumbing is fixed ad hoc, as needed and electrical too. So, the committee is seeking clarification on that and hopefully the windows will be one that we get some clarification on. In the meantime, I would take the position, generally, that if windows are not the Association's responsibility, there's no way they can be trying to put together reserves for them. It'll be inconsistent with the Condominium Act and their documents.

Jon Lemole, Esq.:

Again, that's a conversation you all should have with your individual general counsel. And let them make the call and the recommendation on that for you. But obviously you can see that's a very confusing area right now. Now real quickly, let's talk about the timing of the Structural Integrity Reserve Study. So unlike the milestone, which is tied to the completion of the buildings, which we understand now to mean issuance of a Certificate of Occupancy. The Structural Integrity Reserve Study is timed towards the creation of the condominium. And so that would indicate that... When the condominium is created is generally with the recording of the declaration. And so, these inspections may be on different paths and timelines. They may not line up, although you would like them to line up, because it would be certainly more efficient and less expensive, unfortunately, that may not be the case.

And the other thing to keep in mind for the Structural Integrity Reserve Study is that it only applies to buildings that are three stories or higher. So if you have multiple buildings in your condominium, and some are lower than three stories. You don't necessarily need to include that reserve study for those buildings. It's almost on a building by building basis. Now, I don't know whether it has to be a separate reserve for each of those buildings or whether you can lump all that together. But I think that's probably another open area.

Cindy Hill, Esq.:

That's definitely another ambiguity.

Jon Lemole, Esq.:

Now, while requiring these studies and setting out the timing of the studies and what must be included in the studies. The legislature also made some provisions regarding assessment and collection of reserves. And so a couple of things are key about this, first of all, before... Now, after July 1st of this year, before a developer turns over control of an association. So if you've got a turnover that is that happened after July 1st, 2022, or is on the horizon here, the developer must now provide and complete and do that Structural Integrity Reserve Study. And so if you're going through turnover, in addition to all the other things that the developer is statutorily required to provide to you, you should be looking for this study because it now is required to be done. If you had an association which existed before July one and was under unit owner control at that point had turned over... It was created, turned over before July 1st, 2022. You have until December 31st of 2024 to complete your first Structural Integrity Reserve Study.

Okay. So, there's no avoiding this like with the milestone inspection, you can say, "Well, my building's not 30 years old yet. Or our buildings were only completed five years ago and we turned over two years ago, so do we need to do this?" And the answer to that is, "Yes, you have to do this and you have to do it by December 31st, 2024." Now hand in hand with this, in addition with the obligation on a developer to do the study before turnover, there's also now a requirement that the developer cannot vote to waive the reserves or the funding of the reserves that are required under that subsection G. All of that list of items, which must be included in the Structural Integrity Reserve Study.

So the developer cannot waive or reduce reserve funding for those items. So that opens up another opportunity for an association that has recently turned over, or will recently be turned over to take a look at the financials closely and make sure that you have full funding of reserves. Now, effective December 31st, 2024. So, they've given those folks that have turned over and are under unit owner control. They've given you a little runway here, not much of a runway, but they've given you a little runway. Once you get that reserved study done, after that, you've got to reserve fully. You cannot waive or reduce or use those reserves for purposes, and the interest on them, for purposes, other than their intended purpose. Now, this has created a lot of questions. There's a lot of ambiguity here, and Cindy can probably comment on that. And the question that most comes up is, whether you can do pooled reserve funding, whether you have to do individual full reserve funding for each of those components. Cindy, is that stuff come up in your discussions?

Cindy Hill, Esq.:

Oh, absolutely. This is completely unclear, in terms of it doesn't... And this leads to actually what you were bringing up earlier, that a lot of folks are confused about whether this is replacing reserves or whether the statutory traditional reserves are staying. There was no real attempt for the legislature to try to recognize the overlap there. So we have total lack of guidance as to pool reserves, whether you can pool them under the SIRS requirements now, whether it's okay to continue pooling as you have been under traditional reserves. The only good news I can, potential good news, I can say about that is the committees reached out to the division condominium, which does have rule making authority regarding reserves. And the hope is that rather than wait for the legislature to act on this rather complex condominium driven issue, the division will step in and create a rule that will provide the guidance everybody's looking for.

Alan Tannenbaum, Esq.:
Cindy, let ask you this question. The recommendation... So, this particular budget year, there could still be a waiver of reserves, correct?

Cindy Hill, Esq.:

Yeah.

Alan Tannenbaum, Esq.:

Okay. Knowing that you're going to have a mandatory requirement coming down the road, does the committee discuss what's the best practice for groups that have always waived reserved? Would it be a good idea, this particular season tom, number one, not waive reserves. Or recommend to the owners that if they're reduced, that they not be reduced to nothing. Do you have any thoughts about that?

Cindy Hill, Esq.:

Yeah, absolutely. This is an opportunity to bring to the owner's attention, what the waiving of reserves does for the long term. The Piper is calling, so if you continue to fully not fund reserves the next year, you're just setting up a bigger bill for the following year. So I would not recommend that as a practice. Now granted, every community has a different dynamic, I'm not giving specific advice. But the other concern you're going to have is this is now on all the radars of the real estate market is whether buying a unit into a condominium, has it been funding the reserves, is it in good shape? Am I making a sound investment? Is the mortgage holder even going to give me a mortgage on this?

So the sooner that a condominium can get itself in compliance with what's coming and anticipate the fees that are coming, the better. But that being said, I know some communities have had unexpected large bills over the last few years, unfortunately, that have already hurt them. There's a lot of complexities to that, but the best industry standard would be get yourself lined up for the fact that bills are going up.

Jon Lemole, Esq.:

Okay. Good. Good advice. Now we have a section in here on roof... There was some roof insurance and roof replacement issues. I'm going to skip that today because A, most of it doesn't apply to condominiums. I'll just say real quickly that there's a change to the old 25% rule. So, where you have a storm and if more than 25% of your roof needs to be replaced, the old building code required a full replacement of the roof up to the existing code standards that are in effect right now. That's changed. If your roof was constructed under the 2007 code or later, and you have 40% of your roof that's damaged in a storm, you now can replace the 40%. You don't have to bring the whole roof up to the new code standards and you don't have to replace the whole roof.

That's under challenge right now. The roofing industry has brought a challenge on that, so we'll see whether that's going to stay or not. At the end of our presentation. And if anybody wants this, you can email Michelle Colburn, and she will send this to you. But we put together a little timeline here for the major highlights and decision points and deliverables that need to take place under this new regime. Folks, here's some practical advice, okay. Alan and I deal with engineers all the time, we talk to them, we review their consulting agreements for homeowners and condo associations. There are some engineers that are not jumping into this pool right now, because they're uncertain as to what their obligations are. There are some engineers who have taken this on and they're ready to run with this. But as a lot of you probably have experienced, if you've tried to engage an engineer recently, they are stretched really thin.

So the practical takeaway here is, number one, if you've got to do these inspections, especially, milestone inspections, don't wait, because you're going to have a hard time finding engineers who, A, will do it, and B, can deliver it on time. So don't wait till it's like on the Eve of when this thing is due. Secondly, you got to be prepared. This is a big, additional, professional liability burden on engineers. Their prices are going to go up mostly because their insurance premiums are going to go up. And they're going to be looking for ways to insulate themselves from that liability in their consulting agreement. So, when you're presented with a consulting agreement for these studies, I would urge all of you take a good look at them, talk to your general counsel about them, talk to a construction lawyer about them and have those contracts reviewed.

Because what we're seeing is that in these engineering consulting agreements, there are all kinds of interesting provisions that engineers are putting in there to limit their liability. And that's never good for an association. And the goal of every association is to transfer as much risk away from itself as possible. So call us. [inaudible 00:53:31] Call your general counsel and take a good look at those things. So that's it for our presentation.

Alan Tannenbaum, Esq.:

Jon, I have a point on that. So what engineers are starting to stick in are indemnity clauses to say, "If we do these inspections and we get sued. Even if we're negligent, the association has got to indemnify us against that liability, including attorney's fees and so forth." We recommend that you go to your own liability carriers and say, "Is there insurance or a writer that we can purchase that will cover that indemnity of the engineer?" Because if you don't have it, you're now exposing the unit owners to substantial liability for the negligence of the engineer in performing the inspections. So the insurance industry is going to need to adjust to the risk. And it's fine for the association to have the risk of these inspections, if the association in turn is insured for that risk. Otherwise, the enormity of the exposure that the association, by assessment uncovered by insurance may be absorbing, could be very substantial.

So time to have a discussion with your agent, if you see an indemnity clause and you have no way around it, because every engineer has it, that you make sure that you can't purchase insurance to cover that indemnity exposure. So I can't emphasize that enough. So with that, we're now going to get into your questions. So if anybody wants to hang on, the official session is over for you managers. You've now cleared your CEU requirement by having attended the full session. But if you want to hang on while we go through some of these questions, then stay on with us. All right, I'm passing the Howdy Doody questions. I think we've hit the three stories or more. Jon, you want to look at-

Jon Lemole, Esq.:

She's concerned about the language, about three stories high and three miles from the coastline. Look, every building three stories or higher has to be studied. The only difference about whether you're within three miles of the coastline is whether you need to do that on a 30 year schedule or a 25 year schedule. So, it's a both. In other words, you start with three stories or higher and then look to see where you are related to the coastline to determine when you have to do those milestone inspections.

Alan Tannenbaum, Esq.:

All right, let's see. There's a question. The PE we use said he will not do the inspection until the regulation is better defined. He also says that many engineers are taking this. That's a problem. Again, the legislature didn't go to the Board of Engineers.

Cindy Hill, Esq.:

No.

Alan Tannenbaum, Esq.:

Or the Engineering Society and say, "We're about to impose this major burden on you with language you probably never heard before. What do you think about it?" There wasn't that type of discussion. That's one of the reasons I mentioned the indemnity clause because when all else fails and the engineers' taking out an assignment that they have, absolutely no idea how much exposure they're absorbing. The simple answer for them is, "Well, just have the association of deify you against any liability that may arise from this and go ahead and do it." And that's why somebody's got to assure this risk, if it does get transferred. But again, the legislature set these mandatory deadlines and what if an engineer won't do it? And what if the architects say, "We won't do it because we're not insured for it. And we may get our license taken away." And then what do you do?

And we've also heard associations say, "Well, we think we'll wait until legislator clarifies before we even try to get an engineer out to do any of these things." We don't think that's a good idea. At least have your record that you tried to find an engineer.

And then if somebody tries to sanction you, that's probably a pretty good defense. There's a defense for you lawyers out there that's called Impossibility of Performance. It usually applies to contractual requirements, but it's probably a decent defense to sub-governmental entity trying to sanction you, that your response is, "We've tried and we can't comply with what you're requiring. So we can't do the impossible." Let's see.

Jon Lemole, Esq.:

I'm trying to get back to where we were. Two story building, where second story has a loft. I don't believe the consensus that, is that a loft is another story?

Cindy Hill, Esq.:

That is one of the questions that's on the glitch list for the committee, by the way, the loft was considered, not just beneath parking.

Alan Tannenbaum, Esq.:

All right. There's a question. These items are for the Structural Integrity Reserve Study, [inaudible 00:59:29] Pavement is that under the $10,000 reserve requirement? I guess, no. Pavement is not structural. Okay. Cindy, clarify this again. I'm being told one and two story condominium buildings are required to have a reserve study and fully fund the reserves. Correct. And is it correct that they're not required to have a reserve study, but they are required to fully fund or to provide a budget that has a fully funded reserves under the original statute?

Cindy Hill, Esq.:

I'm looking at the question now, because I think there's some overlapping that's happening here. The SIRS study applies to the building that are three stories. The one and two stories do not have a SIRS requirement. So I'm not entirely following the question. I'm sorry. No,

Alan Tannenbaum, Esq.:

Well, they don't have to have a reserve study because that's discretionary. What they have to do is a budget that has fully funded reserves under the prior statute, if they're a one and two story building. They still have to present a budget that has fully funded reserves, meaning the prior statute. But there's no requirement necessarily, although, it's a good practice, that they utilize a reserve study in order to come up with their numbers.

Cindy Hill, Esq.:

Correct. Yes. They don't have to utilize a reserve study. That is right. They can continue the manner in which they've been operating to determine their reserves.

Alan Tannenbaum, Esq.:

Right. But they have to at least show in their budget fully funded reserves, like they always did.

Cindy Hill, Esq.:

Yes, I'm following now. Thank you.

Alan Tannenbaum, Esq.:

Question. If the entire board resigns, because the owners do not want to pay for compliance with these provisions then who is liable under this statute? So this is what happens, if the entire board resigns and it could be for any reason, there's a provision under both 718 and 720 for the appointment of a receiver. So an owner can go to the Circuit Court, say, "Nobody's on the board and nobody's running for the board." And the court can order a receiver to be appointed to take over the operation of the association. That receiver in-turn should comply with the requirements of this act. And as a receiver, hire the engineers and get all this done. Now the next question would be, does that receiver then have individual liability if it doesn't get done? And that's not covered by the statute, but there is a provision for a condo association in Florida that loses its entire board and the owners don't don't want to comply. Now, the other part of it is, and Cindy, you can indicate that, the board passes a special assessment. It doesn't need the owner's approval for that.

And if they go on strike and say, "Well, we're not paying it." Then the association needs to hire its lawyers to lien and foreclose on all those units.

And what you're going to find once you do that is that these folks who are very brave to protest are now with the prospect of facing the loss of their units by a lien foreclosure are now not going to be as brave. And they will comply. So, there's going to be some cards that's going to be necessary on the part of board of directors to call the bluff of owners who say, "Well, we're not going to do it, or we're not going to pay for it. Or..." And rather than resign, let them take you out of office by recall. And if they don't do that, then raise the money, pass assessment. And then you'll see a lot of, in my experience, you'll see a lot fewer or now have the courage to continue their protests. So there's going to be a need for some courageous board members and managers to step up and take on owners who just want to bitch about what's going on.

Jon Lemole, Esq.:

Alan, interesting question. David Troy asked about conversions. So he says, "Building built in 1962, but was converted to a condo in 2015."

Alan Tannenbaum, Esq.:

Be careful because he represents the association, so just give a really good answer to this one.

Cindy Hill, Esq.:

No pressure.

Jon Lemole, Esq.:

Well, taking the conversion generically, it's an interesting question because I think the milestone inspection is tied to the Certificate of Occupancy. So, I don't think the conversion really affects that if the building is more than 30 years old and it's now a condominium, at least, my interpretation... And Cindy, I don't know whether you agree with this, but my interpretation is that you still have to do the milestone inspection, because your building is 30 years old. Now it gets interesting with the Structural Integrity Reserve Study because that's tied to the creation of the condominium and typically in a conversion, there's a conversion engineering report.

That would've preceded the conversion or had been in tandem with the conversion. And there are certain reserve requirements that are a little bit different or warranties that are given if reserves aren't funded. So I wonder whether the Structural Integrity Reserve Study needs to be done on a converted condo that, say, is only five years old as a condo.

Alan Tannenbaum, Esq.:

Well, I think the argument would be tied to the declaration of condominium being filed, which would not occur until the conversion.

Alan Tannenbaum, Esq.:

And then that would set that time period.

Cindy Hill, Esq.:

That's the position I'd take as well.

Alan Tannenbaum, Esq.:

Okay. All right. There's a question. Is a 12/31/23 deadline for condos that have met the... I don't know what CO means there. Certificate of Occupancy timeline, definitely, in effect. We've been told from various sources that 12/31/24 will be the actual timeline for everyone. I don't know if either of you can interpret that question.

Jon Lemole, Esq.:

Well, for buildings built before 1992 so, i.e, buildings that are already 30 years old as of July 1st, they have to do their first milestone inspections by December 31st, 2024, three story or higher buildings. Okay. So, that is going to apply for any building built before July 1st of 1992. Sorry. The reserve study, Structural Integrity Reserve Study for buildings that are three stories or higher. Doesn't matter when they were built.

Jon Lemole, Esq.:

If they were turned over prior to July, first of this year, they're going to have, to have that first Structural Integrity Reserve Study for each building that is three stories or higher by December 31st of '24. So, that you cannot get out of, as I read the statute.

Alan Tannenbaum, Esq.:

All right, there's a question. What about town homelike structures classified as condos, four units per building. First floor is garage with additional living, but insurable area. Then two floors above that. However, no units are on top of each other. The floors are all from the same unit. You wanted to get that one, Jon? I don't know.

Jon Lemole, Esq.:

Well, the exemption for the milestone reports is one or two or three family dwellings that are three stories or less. And if we're saying that a story includes ground floor parking, if you've got a four family townhome dwelling, that's operated as a condominium.

A fourplex that is three stories two ground floor garage, two habit habitable floors above that. I would think that falls within the milestone inspection and reporting statute. It's funny. They don't say anything about that same exception in the SIRS section. So, there's another open item.

Jon Lemole, Esq.:

But taking the literal reading of the milestone inspection language, that would seem to me to mean that yes, that is going to need to be inspected.

Alan Tannenbaum, Esq.:

All right. There's a question from Dale, "Our engineer advised us to wait on the inspection till after the legislature tweaks, these new regulations." So this is why you don't rely on engineers for legal advice, and you don't rely on lawyers for engineering advice. I worked in the Florida legislature back when I was in law school. And I was in the inner workings of the process and the predictability of what a legislature might do in the next session or the session after, or the session after is kind of like predicting whether the Mets are going to win the Pan Am, they have one once or twice, but whether they're going to win it this year, nobody knows. And that would apply to even the Phillies. Anyway.

So, no. Don't wait, because they may not do a glitch bill at all in the next two years, they may fix some glitches and not others. So the key for association is if you have a statute to comply with, it's on the books, comply with it. If, again, the engineers refuse to act and you can't find anyone to fulfill it. At least you've made a record of an attempt to comply as best you can. So, if then a governmental entity or an owner comes at you and says, "You didn't do your job." You have a record that says, "You made the attempt, with the best advice from lawyers who are competent in the field. We attempted to follow the statute as best we possibly could. And we just were unable to do so, or meet a deadline." And so forth.

But if you don't try at all, you're, you're actually maximizing your potential exposure. And again, imagine if the very unfortunate circumstances that there's some sort of building collapse in the next couple of years. And you're on one of the boards that decided to wait to see, based upon what some engineers said, and you waited to do anything, because you wanted to see if the legislature would clear up the ambiguities. You're going to get sued individually. And the defense that the statute was confusing and some engineer told us to wait is not going to help you. So I don't recommend that. So whoever that engineer was sue them for legal malpractice, because that was a bad answer. And then I'll say, "Well, I'm not a lawyer. So you had no right to rely on my legal advice, anyway."

Cindy Hill, Esq.:

I see a question here. Is there mandatory, full reserve funding for items not considered of a structural nature? And the answer to that is, no. It's these new structural components that are mandating full reserve, your other not structural components can still be treated in the way they've been treated traditionally. Now there's overlap there. So I'm not giving specific advice, but just answering that question generally.

Alan Tannenbaum, Esq.:

Okay. I think we talked about windows. There's a question. Are sliders considered a window?

Cindy Hill, Esq.:

Well, that goes back to the issue I brought up that the committees discussed is to what extent is something, a window or something glass. This is very document driven. Windows are not a given in terms of, I can tell you what your documents are going to say about who's responsible for your windows and what is considered a window. What is considered an opening? What is considered a covering? These are all document driven issues, unfortunately.

Alan Tannenbaum, Esq.:

All right. And this will be the last one. Sorry to interrupt. This will be the last one. Wouldn't the windows and sliders be covered because they would cause damage to the building itself if water intrusion. So although not a funding requirement, would the association be required to force an owner to maintain? Well, I personally think that any set of condo documents in a midrise or high-rise building that leaves the maintenance and repair of the windows and sliders to the owners, in my view, should be amended to make that a common element or if not a common element, least the responsibility association. Because having individual owners repair their own windows, getting potentially, equipment to get up there. And then if somebody doesn't maintain their windows, it could damage to the building and the unit below. I was called in recently on a project where it was actually the president's unit, their windows were linking causing damage below.

And I figured out early on why the general council was bringing us in because we could sit on the president and not worry and not be worried about losing the account, but that's what exactly what we had to do. First of all, the president was sitting in on the board meeting at which his obligation to repair his windows were being discussed. I said, "Not a good idea. Excluded him from the meeting and the rest of the board needs to make the business decisions relative to how to handle that." And they listen to it, but it causes all kinds of complications. So, if you happen to have documents where the sliders and the windows are maintainable by the owners, you better be brave enough to start enforcing the requirements of the documents and bringing injunction actions, if you need to, in order to require that those repairs be done properly.

Otherwise, you're going to have damage to the rest of the building. You have the owner underneath now probably suing the association for failing to require that, that owner act. A lot of confusion. So I don't think you should reserve for the windows, but I think you should take action against the owner whose windows are not being maintained and make sure that they fulfill their requirements. That's my long-winded answer to that very difficult question. But my preference is that you just amend your documents to make it an association responsibility, which would clear up a lot of issues, funding-wise and otherwise.

Well, it is 12:20. Thanks, everybody. You guys hung on. This whole video will go on our website within a matter of days. So you can review it. You can send it to your other board members or other managers. And anybody who wants the written materials will let Michelle know and she will send them to you. If you're a manager, make sure we have your licensure information so we can get your CEU credit and we'll have another informative program next month and look forward to announcing it. Thank you. 

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Understanding Florida's New Condo and Safety Insurance Reform Bill

Alan Tannenbaum, Esq.:

Okay. Welcome, everybody. This is Alan Tannenbaum of Tannenbaum, Lemole, & Kleinberg. For those of you who don't know us, we are construction lawyers, primarily serving the community association industry. So, we take condo and homeowner associations through turnover, assist them with engineering and accounting analyses. We pursue claims against developers for recovery under those circumstances. We also do repair consulting for older groups that are having major repair projects. We help negotiate the contracts with the engineers and with the contractors. We enforce those contracts on behalf of our groups. We also handle complex covenant enforcement actions that general counsel choose not to take on. We do that as a service to them.

I have with me, John Lemole, who's my partner and Brian Tannenbaum, who's our associate, and we're going to break the presentation up into segments. I'm going to handle the first part of the statute, John, the reserve portion and the roofing issues with insurance and so forth, and Brian is going to present a really helpful timeline at the end that's a good summary of when things have to be accomplished under this new legislation. So, the Florida legislature. When I was in law school in Tallahassee, I worked in the Florida legislature. I know how the process works. It's oftentimes not a very pretty process.

In this particular case, it's our understanding that this bill was formulated, passed both houses of the legislature in special session over a course of two days, affecting the condominium industry, engineering field, insurance construction, and was produced in two days. Which stakeholders were contacted about this bill and the wording of it and so forth is an unknown. I know from talking with a number of community association lawyers that the lawyers who work in the field, for the most part, we're not communicated about this bill or input was not received. We, as a result, got a bill that everybody's questioning from a number of angles that we're going to cover that today. So, why was this legislation passed?

Before I get too far into it, we're not going to talk about co-ops today. But everything we say relative to condos is very similar, has a very similar impact on co-op. So, you should be able to extrapolate what we say to a co-op situation. So, why was this legislation adopted? Because the legislature, as it indicates in the statute, determined that there was a threat to public health, safety, or welfare, which is a fairly easy leap when a condominium building in Surfside collapses and kills more than 100 people. Couldn't be a more obvious threat to public health, safety, and welfare. Well, who's the target of the legislation? As it says in the statute, aging condo and cooperative buildings three stories or more in height. So, that's what the legislature decided to create this legislative work of art to apply the buildings, condo and cooperative buildings three or more stories in height.

So, if you're a condo with two stories, you don't need to worry about this legislation. There's also an exemption, it looks like for condos that are townhomes, they also appear to be exempt, and I'll get to that section. So, Brian, if you can go to the first slide, right at the outset of the statute, the legislature stuck this provision in regarding professional practice standards and liability for managers. It seems to reiterate what is already within a contract for management company, which is you have to actually listen to what the board says. So, I don't think this ended up creating any greater liability for managers or management companies. Basically says, as it relates to these building inspections that are required, the manager or the management firm must comply with these sections as directed by the board. So, that's what usually management companies do. So, none of us are very excited about 468.4334 as creating any additional liability.

The management companies were already obligated to follow board directors that were within the law and the board telling management, "We need to get these inspections done," you're not going to find a manager or management company that will say "No, I'm not going to do it." So, we're not particularly concerned. Brian, if you could go to the next slide. All right. This is where the definitional problems really start because the legislature used a number of words of art that are really not well defined. So, milestone inspection, structural inspection, that's pretty understandable. I know what load bearing walls are. But primary structural members and primary structural systems is somewhat vague. What part of the structure is not primary? It all goes to the support of the building. So, I'm not sure that's a great distinction. They probably should have just said the structural members and structural systems. Not sure what primary meant there.

They're allowing the inspections to be done by licensed architects or engineers. I'm going to get to that issue in a moment as to whether architects are even licensed to do these type of inspections, but I want to get to that next. Now, this is what the engineer has to attest to. So, a test is engineers standing behind it. They're putting their liability behind it. They have to attest to the life safety and adequacy of the structural components of the building, to the extent reasonably possible, only a lawyer can add that to the statute, determining the general structural condition of the building, again, I don't know why general is there, but they put it in there, as it affects the safety of such building. Then there's got to be a determination of necessary maintenance, repair, or placement of a component. But then they add it's not to determine if it's a compliance with building code. Well, the building code sets minimum structural requirements. So, it doesn't have to be in compliance with the building code, the structural code. How is it adequate since that's a minimum standard? That's creating vagueness.

But let me get to architecture a minute. Brian, if you go to the next slide. So, both for the reserve study and for the milestone inspection, it says they can be performed by an architect. But architects can't practice structural engineering. We've provided a couple of statutes, which basically say that. The first is the architectural statute, 481.229. The second is the engineering statute. What they basically say is engineers can't practice architecture and architects can't practice engineering. The exception is if it's purely incidental to the architectural practice. Well, if an architect is going out and doing a structural inspection, issuing a structural report, that's a stretch to say that's incidental to the architect's practice. What that statute means, in our view, is if an architect is designing a home and there happens to be a structural member that may be incorporated within their design, they can design that structural member because it's incidental to the design of that home.

But you're not going to find an architect who's going to design a high rise building and design the structural elements of a high rise building or a mid-rise building. That would violate their licensure. Well, if they can't do that, they can't inspect those elements and issue a report about them. So, was the legislature trying to make an exemption to these architectural statutes and the engineering statute? That's unclear. But the big impediment for an architect is in my experience, there's no way that their professional liability insurance will cover structural inspections. So, any architect who shows up at your building saying, "I'm ready to perform these inspections per the statute," if one of your requirements is that the architect needs to have professional liability insurance and he says, "I do," your next question may be "Well, can we see a copy of your policy? Because I have an idea that it doesn't cover you as an architect for doing structural engineering or structural inspection."

So, I think the statute is an engineering relief bill. I don't think it's an architect relief bill because I don't think architects, in our view, can do these inspections and issue these reports. But for whatever reason, legislature stuck them in there as a possible author of such a study, and I think it would violate their licensure. But certainly, I don't think they're insured or could be insured for that. Maybe some architect will disagree with me, but I'd first ask them to call their liability insurance carriers to see, in fact, if that's the case. Okay. Let's get onto the next definition. Brian, if you could turn the slide. Substantial structural deterioration. This is where the ... Again if there are any engineers in this presentation today, you'll probably scratch your head just like we did. Okay. Substantial structural deterioration. Substantial structural distress that negatively affects the building's general structural condition and integrity. What the heck does that mean?

It has the generals in there. It has substantial in there. That's way open to interpretation. The next sentence says the term does not include surface imperfections such as cracks, distortion, sagging, deflections, misalignment, signs of leakage, or peeling of finishes unless the licensed engineer or architect performing the phase one or phase two inspection determines that such surface imperfections are a sign of substantial structural deterioration. That's a legislative pretzel. But my question is, if an engineer goes up and looks at a balcony slab and it's distorting, sagging, and deflecting, or misaligned, what are the chances that that engineer's going to say, "That's not a sign of substantial structural deterioration"? A sagging slag, or a sagging structural member or a deflecting structural member or a misaligned structural member, what engineer in the right mind is going to say, "Well, I saw sagging deflection misalignment, but I'm not calling it a sign of substantial structural imperfection"? So, I'm sure the engineers are scratching their heads about all of that termination or terminology.

Brian, if you can go to the next slide. Here's the wet, and Brian Tannenbaum's going to cover at the end the timelines on these inspections. But again, for each building that is three stories or more in height by December 31st of the year the building reaches 30 years of age, the milestone inspection has to be done and every 10 years thereafter. But if the building's located within three miles of a coastline, which is an interesting measurement of exactly what that means, I guess it's if there's a portion of the coastline that jets inward, that you're stuck being within three miles, you have to have it within 25 years and then every 10 years thereafter. Now, one of the questions that you might have is we just had an inspection done two years ago. Do we get another 10 years or do we have to do this inspection again?

I don't know the answer to that question. I would go back to the same engineer and say, "Can you reinspect our building and issue a report that complies now with the new statute?" They won't have to reinvent the wheel by doing the entire inspection over again. But it's probably good to get the report that complies with the statute, even if they issued a report because it doesn't have all the criteria that is included in the report. So, you probably will have to bring that engineer back to do it again. The association has to arrange for the inspection to be performed. That's pretty obvious. The association is responsible for all costs associated with the inspection, that's pretty obvious. But this is where there's an exemption for, it looks like townhome buildings that are three-story in height that are part of a condominium regime. It looks like they're exempt from the statute in the way I read this.

I don't know what else would be a single-family, two-family, or three families dwelling with three or more habitable stories above the ground. So, it sounds like a three-story townhome building that's a condo probably does not have to comply with the requirements of the statute, the way we read that. Okay, Brian, if you could go to the next slide. There's an exemption for certain buildings where the CO was issued before July 1st of 1992. It gives them until the end of December of 2024 to comply, which is funny because now some of the older buildings have a later deadline than ones where the CO was issued in August of '92, they have to have an inspection quicker than ones that were before. That's just an anomaly in the statute. Okay. Now, here's where you get the building department involved. the building department's got to determine that a building must have a milestone inspection. So, now the building department's got to keep a record of all the buildings and their ages within the jurisdiction of the building department.

They have to provide written notice that the association is required to have the inspection done. So, you have the building department involved. Once that request is made, the association has 180 days to complete phase one of the milestone inspection. Well, you don't wait until the building department tells you got to meet the dictates of the statute, but this, I guess, is a protection to make sure that they do occur, you get the building department involved. But here's the problem. Some engineers, well, they are all very busy. Are you going to be able to get them out within six months when every older condo association in the state is mandated to do these inspections? They don't have enough engineers on their staff to handle the current workload. This imposes an even greater workload on them. You're going to have a hard time getting engineers out to not only undertake the inspection, but to complete it within 180 days. So, that's going to be a real challenge.

Now, here's where they've created liability for directors. I understand it, why the legislature did this, but it's going to create a real burden on getting people to serve on board of directors of older buildings because it says that the officers and directors who will fully fail to have the inspection performed, the failure is a breach of their fiduciary duty to the owners, which could, and John Lemole is going to go into it a little deeper, is going to create potential liability. I guess the message is comply with the statute. Have your inspections done. If your owners protest, pull out the section of the statute and say, "Look, I'm the one who's subjected to the potential liability. If you want to get out there and have the liability, take my seat on the board." So, managers, take this section of the statute, board members, take this section statute. If you're getting resistance among your owners about spending the money to undertake these inspections, you need to pull out this section because it creates significant liability.

Now, what's interesting for your fiduciary insurance that you purchased, make sure that there's no exclusion for this type of liability. So, you should check with your carriers and see what those policies say about potential liability under the section. Again, what happens if you try to get an engineer out under the date sequence that the legislature called for and you just can't get an engineer to be out there, what is it that you can do? Okay. Let's move to milestone inspection. Brian, if you can go to the next phase one. All right. So, this is the first inspection required. Again, it talks about an architect. I don't think they could do them. But again, the architects may disagree. But I don't think their licensure would support them doing this type of examination. So, the phase one is a visual examination.

Now, here's what's odd. How do you do a visual examination that includes the major structural components of a building? Because the major structural components of the building are, for the most part, hidden from view or behind finishes. So, what is a visual examination of the structural components of the building? That means you can see the balconies. You might see a garage column. But you can't visualize the internal columns in a building because they're behind the building finishes. You can't see the roof deck because it's under the roof. So, what really does this visual examination provide? The other issue about it is, and we've been to buildings, let's say wooden structures where the exterior facade looks pretty good. But behind the facade, there's rotted wood. So, the visual inspection may tell you very little about what the actual structural condition of a building is. So, I don't know the great advantage of the milestone inspection.

But here's, again, the problem for the engineers. If they find no signs of substantial structural deterioration, then no phase two inspection is required. What engineer in his right mind is going on a visual inspection, going to attest the fact that, "Hey, I don't see any major structural condition here"? They're going to be inclined almost in every case to say, "You need a phase two because I'm not putting my seal on a report that says it looks great to me only to have a part of the building collapse or a major structural problem show up a couple years later," and then everybody's looking to the engineer about what they missed. So, the impetus is going to be on the engineers to go and recommend the phase two study or not be willing to undertake these engineering examinations at all. So, I question the phasing there.

But then we go to phase two. So, if the engineer says in their phase one report, "Oh, I have to look deeper. I can't make an analysis. I think that there could be signs of structural deterioration that I can't see," then you go into the phase two inspection and it may involve destructive or non-destructive testing at the inspector's direction. Inspection may be as extensive or as limited as necessary to fully assess areas of structural distress in order to confirm that the building is structurally sound and safe for its intended use and to recommend a program for fully assessing and repairing distress and damaged portions of the building. Okay. So, if an engineer does a phase two and doesn't go far enough and structural problems occur after that, they're going to get blamed for that. They're going to get sued for that. So, what the statute has set up is really, the impetus on the part of the engineer to direct the most extensive destructive testing possible so that when they put their seal on that report, they're very, very confident that the building is structurally sound.

So, it creates a massive liability. Their bias is going to be, "We need to go much deeper into this," or, "I don't want to do these inspections at all because there's too much liability potential." Now, here's a strange section that somebody stuck on to this paragraph. When determining testing locations, the inspector must give preference to the locations that are the least disruptive and most easily repairable while still being representative of the structure. Okay. So, again, I don't know exactly what that means, but it sounds like it's an open door for owners to complain about the extent of the engineering inspection and to go to court and say, "The engineer who's doing our building is not complying with the section because they've chosen locations that are disruptive and not easily repairable and therefore, we're allowed to stop this job or this inspection process because it doesn't meet that condition of the statute." So, there's a lot of danger in the legislature having added that section in as to exactly who can enforce it.

But let me go quickly into the next section, milestone inspection, and I'm sorry, we're going to be limited on the questions that we can take because we have a lot of material to go through. The milestone inspection report. There's got to be a report for phase one. If you go to phase two, there's got to be a report for phase two. It's got to be sealed, it has a summary, and the summary requirements, what has to be in it is in the section. It has to identify any substantial structural deterioration within a reasonable professional probability, based on the scope of the inspection, has to describe the deterioration, identify recommended repairs, state whether unsafe or dangerous conditions exist, which the bias is going to be to say that they do because if you don't say that and the building has a problem two years later, you're going to get sued for that, recommend remedial measures, and then the report has to be distributed to the owners. It has to be available in association records. It has to be posted.

So, you have all of those requirements for this report. If you go quickly to the next slide, Brian, the milestone inspection local enforcement agency can prescribe timelines and penalties. But then it switches to the board of county commissioners. So, now, the county's involved and not the cities, and the county can adopt an ordinance requiring schedules for the commencement of the repairs. But in either case, the repairs have to be commenced within 365 days after that phase two report is received, which again, is it possible even in today's market for that timeline to be met? Then if you can't submit proof that the repairs have been done, the enforcement agency can review and determine the building's unsafe for human occupancy.

So, I'm going to hand the ball off to John Lemole at this point to talk about reserves. But what you're going to be hit with is engineering firms who are willing to even do this work are going to give you limitations of liability in their contracts. More importantly, they're going to ask for indemnification. They're going to require that the association indemnify them against any liability if they want these to be done and the associations need to talk to their liability carriers to make sure that your liability insurance covers an indemnification that you may give to the engineer who's doing these inspections. Otherwise, it may not be covered by your liability insurance policy, the indemnification and the owners are going to be exposed for defense costs and potentially great liability. So, right now, I'm going to hand it off to John Lemole to talk about reserves.

Jon Lemole, Esq.:
Morning, everybody. Brian, can you flip? Thanks. So, we're going to talk about a whole different type of report. Despite the similarity in its name, Structural Integrity Reserve Study, sure sounds like the type of thing that's also contemplated by the milestone report. I don't want anybody to misunderstand that this is a separate report that condominiums and co-ops are going to have to undertake, and they have somewhat different timeframes. Whether these can be done by the same person, by the same engineer in conjunction together with a milestone report, it's all going to depend upon the age of the buildings vs. the age of the condominium itself because a structural integrity report, a reserve study, as you'll see, is tied not to the time that the building was completed, but tied back to the creation of the condominium.

So, let's talk about what a structural integrity reserve study is. Really, this study is directed at the financial end of the issues that emanated out of the Champlain Towers collapse, which is the financial mismanagement perhaps, the lack of reserve funding for providing major structural repairs and all of the problems that have been determined and we've seen arise when associations waive or reduce reserve funding. That's really what this is intended to fix. So, 718.103, that's where the definitions are in the Condominium Act and it shifted some things around. So, it creates this new subsection 25. I don't want anybody to think that it replaces what was already previously there as 25. It just kind of moves everything beyond past 25 down a little bit. Then it adds as a new definition, a structural integrity reserve study.

What is it? It's a study of the reserve funds required for future major repairs and replacement of the common areas based on a visual inspection of the common areas. Okay? So, similar to the phase one milestone report, this is a report that's solely based on visual inspection, and it's a structural integrity reserve study may be performed by any person qualified to perform such study. However, and this is important, the visual inspection of the portion of the structural integrity reserve study must be performed by an engineer licensed under chapter 471 or an architect licensed under chapter 481. Why do they make that distinction? Well, because you may have portions of a reserve study, which really are more CPA driven or functions that ... We know that there are certain companies that are out there that perform reserve studies and look at the financial aspects of how to project out what needs to be assessed for reserves.

But because this is now tied to an inspection of the property, the visual part of the inspection upon which the reserve calculations are going to be determined has to be done by an engineer or an architect. I'm not going to go into what Alan talked about before about the difference between what an architect can do and an engineer can do because theoretically, that might be the same problem here. What needs to be contained in the structural integrity reserve study at a minimum, it must identify the common areas being visually inspected, it has to state the estimated remaining useful life and the estimated replacement cost or deferred maintenance expense of the common areas being visually inspected, and provide a recommended annual reserve amount that achieves the estimated replacement cost or deferred maintenance expense.

I've highlighted this language because I think it's going to be very important of each, and I want you to pay attention to the word each, of each common area being visually inspected by the end of the estimated remaining useful life of each common area. Folks, it's one little word in the statute. They changed the to each, and I think that's going to be important because a lot of folks have been asking question about component funding vs. pooled reserve funding. I'm going to talk about that in a second, but I think that's an important distinction. Can we go to the next slide? What gets inspected in a structural integrity reserve study and when must it be done?

So, a structural integrity reserve study must be completed every 10 years after the condominium's creation. Pay attention to that language that I've highlighted, after the condominium's creation. When is a condominium created? In the statute, a condominium is created when the declaration is recorded. Okay. So, this isn't tied to building CO. This is tied to when the condominium came into existence. So, you have to complete this study every 10 years after creation for each building on the condominium property that is three stories or higher in height. So, three story buildings every 10 years after creation and the study has to include, and there's a list at subsection G, it's what will be the new 718.112, subsection G. The things that need to be included in this reserve study are a little bit more expansive than what used to be in what continues to exist for under two story buildings, but now has changed for three story or higher buildings.

So, this study has to look at the roof, load bearing walls, other primary structural members, we already talked about that a little bit about milestone inspections, the floor, the foundation, fireproofing and fire protection systems, plumbing, electrical, waterproofing and exterior painting, windows. Then again, it has the catchall of any other maintenance, any other item of that has a deferred maintenance expense or replacement cost that exceeds $10,000 and the failure to replace or maintain such item negatively affects the items listed in the above paragraphs. So, if it's more than $10,000 to maintain it and it may negatively impact the roof or the floor or the foundation, that's got to be included.

These are determined by the engineer or the architect performing the visual portion of the structural integrity reserve study. So, really the professionals, the engineer and the architect, is going to be driving what are they going to look at in their visual inspection that they're going to be doing for your structural integrity reserve study. Okay? So, if you got to do these studies, it's a study that's going to involve a professional, an architect or an engineer, there's going to be a very detailed visual inspection of your buildings, and you got to do it every 10 years after creation of the condominium. Now, go to the next slide, please, Brian. Let's talk about how this is going to be phased into existence. First of all, the act is effective on July 1st of 2022. So, a little less than a month from now.

So, who's going to have to do these and when? Well, developers are going to have to do one now for buildings require a structural integrity reserve study. I think we're probably all going to be calling this a SIRS in no short order. So, again, three story buildings. Before the developer turns control over to unit owners, the developer must have a structural integrity reserve study completed for each building on the condominium property that is three stories or higher in height. Okay? So, every turnover is going to involve one of these reports now. For associations under unit owner control and which exist before July 1st of this year, so if you've got an association that has buildings three stories are higher, it's under unit owner control, it was created before July 1st, those associations are going to have to have their structural integrity reserve study completed by December 31st, 2024, again, for each building on the condominium property that is three stories or higher in height. Okay. So, that's how we're going to phase this in. Okay?

So, developers need to do it. Unit owner controlled association's existing created prior to July 1st, they're going to have until December 31st, 2024. Anything that's unit owner controlled and existing after July 1st, 2022, you're under the 10 year regime. Okay? So, you're going to have to look back and see when your condominium was created in order to determine when you're going to need to comply with this. Now, the other thing that the legislature did in implementing this is they made a major overhaul of reserve funding requirements. So, let's talk about that. Before turnover of control by the developer to the unit owners, and the statute doesn't make a distinction here between any type of condominium, doesn't talk about whether there are three story higher buildings or not, doesn't talk about whether it's a building that requires a structural integrity reserve study or not, before turnover control of an association by a developer to unit owners other than developer, the developer controlled association may not vote to waive reserves or reduce funding of the reserves.

Effective December 31st, 2024, a unit owner controlled association may not determine to provide no reserves or less reserves than are required. That's an important thing that's changed in this statute. Then effective December 31st of 2024, the members of a unit owner controlled association may not vote to use reserve funds or any interest accruing there on for purposes other than their intended purpose. Now, the question has come up about component funding vs. pooled funding. Let me start by saying, we're construction lawyers. We don't typically get involved with budgeting. We really don't ever get involved with budgeting decisions. These are really questions that you should be directing to your general counsel. So, I want you to take that very important point back with you. Go talk to the general counsel that represents your association and ask them for their opinion on the funding issue. It appears that because of the word each common element area or each area that needs to be reserved and the change of the to each, it appears as though the legislature is intending for component funding.

That's not clear in the statute. So, you're going to need to go back to your general counsel and when you're making these budgeting decisions, you need to consult with them and get their opinion and their recommendation on that. I would also say that it appears that the legislation is intended to require that that you can't borrow reserves from a different reserve fund for a different element to pay for something for ... You can't borrow from the roof reserves to pay for a foundation reserve or an electrical reserve. But that's not entirely clear in the statute. So, I really want you to take this very important disclaimer and takeaway. When you're sitting down to do your budgeting and make your budgeting decisions and start looking at your reserve requirements, sit down with your general counsel, get their take on what this legislation intends.

Certainly, there may be some additional guidance that we'll get from the legislature going forward. Maybe some case law will come down interpreting this. So, I think the jury's still out, as they say, on that issue. Next statute. Next slide. Sorry. Just like with milestone inspections, the legislature has put an important provision in here about fiduciary duty. So, if an association fails to complete a structural integrity reserve study pursuant to this paragraph, such failure is a breach of an officer's and director's fiduciary relationship to the owners. Now, again, that's not entirely clear what that means, and certainly, you should be talking to general counsel and getting their perspective on this. As you all may know, there's a section in 718.111, which defines a officer or director's fiduciary duty and when that is breached, and there are certain limitations on that.

Generally, they involve self-interested dealings. They involve reckless acts or an act or omission that was in bad faith or with a malicious purpose or in a manner exhibiting wanton and willful disregard of human rights, safety, or property. Now, we'll tell you that in this section here on fiduciary duty, it refers in the actual statutory language, it does refer back to the corporate fiduciary duty language and statute. So, I think there's a tie in there to this structural integrity reserve study and the part of the original and existing statutes regarding fiduciary duty, which talk about, and in particular, a breach which exhibits wanton and willful disregard of human rights, safety, because that's what this is directed to, safety, or property. So, I think the legislature here was trying to further define where officers and directors have a fiduciary duty to make sure that these studies are being done. Okay?

So, that's reserve studies. That's structural integrity reserve study, reserve funding. Now, I've been asked this and there's probably questions in the chat if I look at them. Okay, I have a building that's not three stories or higher. Then what do I do? Well, the legislature kept the same reserve budgeting language in there and then added the structural reserve study language. As we know, that applies to buildings that are three stories or higher. So, if you have a building that's not three stories or higher, it would appear that the same old statute that you've been dealing with all along in terms of what needs to be reserved for is undisturbed. Again, it's not entirely clear. There's a little ambiguity there. So, again, talk to general counsel, get their perspective on it when you sit down to start doing your budgeting and reserve calculations.

But it's definitely clear that waving reserves and/or lessening reserves, regardless of the building, are going to be a big no-no in the future. All right. So, that's the condo safety portion of this presentation concluded. Now, what was also included in this special session and what came out of it is some relief under an insurance bill that provides some insurance relief and some provisions regarding roof repairs and replacement. I don't want to get into all the particulars of the insurance bill except as they may relate to roof replacements because that's been a really, really difficult issue for associations lately. This applies to all associations.

It used to be under the Florida Building Code that if you had to repair or replace more than 25% of an existing roof, you had to redo the entire roof. Okay? We're all pretty familiar with that. What the legislature did in the condos, in the new bill is that they've relaxed that a little bit. If your roof was installed under the 2007 Florida Building Code or later and you have a roof replacement or repair that impacts more than 25% of your roof, you're not required to do the whole roof. You can repair or replace the portion that needs to be repaired or replaced. So, that's a very different thing than we've been dealing with for a long time in Florida. I will tell you that there's a lawsuit that was just filed challenging the constitutionality of this provision and some other provisions. So, we'll see whether this survives a judicial review.

Now, everybody's talking about, "My carrier won't renew my insurance because my roof is 15 years old." So, there's some relief in this bill if you're starting on July 1st, 2022. So, if you've had this problem before July 1st of 2022, I'm sorry, but you may still have to deal with the difficulties that you've been dealing with. But the takeaway here is that an insurer may not refuse to issue or refuse to renew a homeowner's policy insuring a residential structure with a roof that is less than 15 years old solely because of the age of the roof. Now, they can come in and say, "Well, there are all kinds of other problems with the roof," but they can't non-renew you if your roof is under 15 years of age just because of the age of the roof. If your roof is more than 15 years old and they come in and they say, "We're not going to renew you because your roof is over 15 years old," well, you can now get an inspection.

As long as that inspection is done by an authorized inspector and those folks are a licensed home inspector, a licensed general building or residential contractor, a professional engineer, an architect, and the statute says, or anyone approved by the insurer, if you can get that inspection done, and it says, and the inspector concludes that the roof has five or more years of useful life remaining, then the insurer cannot refuse to renew your coverage on the basis of the roof being more than 15 years old, as long as you have a report that says that the roof still has five or more useful years of life remaining.

Alan Tannenbaum, Esq.:
It should be noted that there's already been two lawsuits filed by the roofing industry attacking that particular requirement about the 15 years. Roofers want the 15 year replacement provision to remain in and they've already filed suit to attack it on the basis that the legislation covered too many topics. It was not a single topic legislation. So, that's up already up for challenge.

Jon Lemole, Esq.:
No, and the other part of that challenge is the roofing industry is concerned that in situations where they think the roof needs to be replaced that the insurers are going to resist that because they can use this section as a proverbial sword instead of a shield and say, "Well, we're not going to provide insurance funds because the roof doesn't need to be completely replaced under this new statute. We can replace only part of it," and a contractor may think otherwise and say, "Well, no. We really need to have the entire roof replaced." Obviously, the roofing industry has some self-interest here because they'd rather do full roof replacements than partial replacements. So, they're challenging that. We'll see what happens with that challenge and how the court rules on it.

Alan Tannenbaum, Esq.:
Okay. So, what we've provided here, and again, this outline's available. Just email us. But Brian did this very effective timeline that will need to be followed. So, it's a good checklist to have. So, just email us and we can provide it. We'll go a little bit of overtime because I know there are a lot of questions and we tried to cram in all the material to fit within the 55 minutes. John, I'm going to let you handle the reserve questions because they're the toughest one and you studied in a little bit closer than mine. I'm going to answer Robert Smith's question. Does a licensed engineer or architect need to do a visual inspection on buildings two stories or less for purposes of a reserve study? What do you say to that one, John? You're on mute.

Jon Lemole, Esq.:
Sorry. What was the question again, Alan?

Alan Tannenbaum, Esq.:
Two stories or less, do they have to do a reserve study?

Jon Lemole, Esq.:
No. The structural integrity reserve study's for three-story buildings or higher.

Alan Tannenbaum, Esq.:
Okay. But you got to do your normal reserve requirement.

Jon Lemole, Esq.:
You got to do your normal reserves. Correct.

Jon Lemole, Esq.:
After 2023, starting in 2024, this is for all buildings, you can't reduce or waive reserve funding.

June:
Okay. Alan, this is June from Sunfish Bay. I have a question. The way our condo is set up, there's a bottom floor where people live and then there's a second floor. The second floor has an upstairs. Is that considered a three-story building?

Alan Tannenbaum, Esq.:

You're probably okay. But that's an interesting question. But you're probably okay. It's not a full story. So, it sounds like it's less than three stories. But who knows? Let somebody challenge it and we'll see what a court says. Let's see. [inaudible 00:56:59]. Is a three-story multiple-family condo.

Is a three-story multi-family condo subject to milestone inspection requirements? Yeah. So, if it's multi-family, yes. The only exception would be condos that are townhouses probably would not be required if they're three-story. But if it's a condo building that has more than three families in it and it's three stories, it would be required to have an inspection. Let's see. Will the milestone inspection report suffice as the inspection for the structural integrity reserve study and then a reserve specialist can complete the remaining life and cost estimates? Darlene, that's a difficult question.

Yes. I would say that if you did both at the same time if you did the milestone inspection report, that probably could serve as the basis for the portion of the reserve study that has to do with the structure. So, I guess I think you can combine that information and it would suffice. Then the reserve specialists can do the rest of it. Yes. The question is, what is considered three miles from the coast? Because our coast is not a uniform line. So, if it's normally three miles from the coast, but there's an inlet that juts in, are you now qualifying as being within three miles of the coast? The legislature did not define what the coast was. So, people are going to be getting their measuring tapes out.

Brian Tannenbaum, Esq.:
It is actually defined as the line of mean low water along the portion of the coast that is in direct contact with the open sea and the line marking the seaward limit of inland waters as well.

Alan Tannenbaum, Esq.:
Okay. Brian has pointed out they do have a definition, but he uses the word, sea. So, I guess the Gulf of Mexico is not required to meet the requirements because it's not a sea. Then somebody says is the coast a major river? No. I don't think it would apply to a major river. It's talking about the coast of Florida, not the coast of our inland river. For roof replacement and insurance over 15 years, does it have to be inspected by an engineer? I think John answered this. It's a qualified roofing inspector. So, it does not necessarily have to be an engineer.

Jon Lemole, Esq.:
That's correct.

Alan Tannenbaum, Esq.:
The Question is, our windows are not common area on our docs. How do we handle that? That's a good question. I don't know if you would have to reserve for them, even though the statute does require it. By the way, every time anybody asks us whether it's a good idea for your windows to be maintainable by the owners, I will tell them no. In every situation where you have documents that have the owners maintaining their own windows, those properties have had problems because if an owner doesn't maintain their windows, where does the water go? It goes into the unit below or maybe the two units below. But that's an interesting question. I'll let your general counsel tackle that one in your documents. I don't have immediate clarity on that question. John, why don't you answer this one from Aaron? If a condo over three stories performed a reserve study last year and if what was covered meets the requirement of the current reserve requirement under the statute, do they have to do a new one anyway?

Jon Lemole, Esq.:
Well, again, if we're talking about the structural integrity reserve study, it's tied to when the condominium was created. I'm presuming it's unit owner-controlled. So, if it existed before July 1st, 2022, it's under unit owner control, then by December 31st, 2024, and it's in three stories, you have to comply with the structural integrity reserve study requirement. Now, is your existing reserve study compliant with that new structural integrity reserve study? It depends. Was there a visual inspection by an engineer or architect of the components that need to be required in the study?

Jon Lemole, Esq.:
So, you're really going to have to go back to who did the study, talk to your general counsel, look at the study, and determine whether it hits all of the items that need to be in there, whether it's based on a visual inspection by an engineer, and importantly, whether it sets out a ... Again, this gets back to the component vs. pooled. How are we calculating reserves? Because there are very different ways of calculating what the reserves should be, how they're allocated, and how the association's going to assess them. So, these are all kinds of technical issues and I can't really say whether that report's going to qualify or not. I would tend to believe it probably it might not.

Alan Tannenbaum, Esq.:
Okay. Does a one-story building within three miles on the coast ... Is it affected by the statute? No. But again, you still have to do your normal reserve study, but nothing is affected by this particular legislation. If an inspection discovers a structural defect, it would need to be repaired and replaced immediately, regardless of cost? I have to say yes to that question. We have a whole different presentation on condo termination, and what's going to happen with some of these older condos, frankly, is that the owners are going to see the price tag on repairing an older building or older buildings that need an enormous amount of money to revitalize and meet the conditions of the report and the owners are going to have to think seriously in some cases about voting to terminate the condo, selling the property, and dividing the proceeds rather trying to keep a very old patient alive, except the fact that every condo in Florida, especially the ones on the coast, at some point in time are going to be terminated at a point when they're no longer repairable.

Alan Tannenbaum, Esq.:
Now, where [inaudible 01:04:42] I don't know. But yes. If the report says you got to repair it, you got to raise the money and repair it, and there's going to be situations where owners cannot afford that. You're going to have banks taking back some units and we're going to have a real mess in some properties. So, to avoid that, groups may have to think very seriously about termination and very drastic circumstances. Are a building that has a ground floor as a parking garage and three floors of condos above considered to be a four-story building? I would say yes. For two-story condos, are pooled reserve calculations still allowed? I would say yes. Will the requirements of the reserves, based upon the new statute increase cost requirements, trump the documents regarding the limit of an increase in the assessment of 115% without the approval of the membership?

Alan Tannenbaum, Esq.:
I would say that, yes, the requirement for maintenance and repair is a statutory requirement, which has predominance over any restrictions in your documents. So, if there's an assessment that increases by 150% and an owner attack it saying this violates our documents, in my view, if they're going to the circuit court with that, they're going to lose because of the statutory requirement for repair predominates over any documentary restrictions. So, I think that would be a very poor attack by those owners and frankly, a very poor excuse by the board to say, "Well, we want to comply with the statute, but we can't because our documents don't allow us," just pull out that fiduciary duty section. Again, that's going to predominate.

Alan Tannenbaum, Esq.:
What's always interesting too, is that if you get financing and don't assess, does that trump any assessment increase requirement? That may be a way out. If your defaults on your assessment collections are very low and you can get financing, now you probably could get around that 115% requirement anyway. Is there anywhere where the details of the milestone inspection are defined? Yes, in the statute, and the definition is pretty vague. So, good luck. Maybe the legislature will help with that, or maybe there'll be a court decision one day. But right now, you're stuck with what the statute says. Can we hold a board meeting, executive session, or something similar to discuss these issues before firing up the owners? I like that terminology.

Alan Tannenbaum, Esq.:
There's no such thing in condo-land as an executive session. It's the unicorn of condominium operations. There are only board meetings where anytime the majority of the board gets together to discuss association business, it's a board meeting, that has to be noticed. If it's less a majority of the board, let's say you have a management committee that has a five-person board, you have two board members and three non-board members, you could probably get away with that as a committee without noticing. But there's no such thing as an executive session on the board. It's a board meeting either way.

Alan Tannenbaum, Esq.:
The only exception is you call your general counsel and say, "We want to discuss possible claims," and you can have a session with them without the owners being involved. But maybe the owners should be fired up. Here's a question. Should we wait until all the lawsuits and ambiguous language are fleshed out before enacting inspection? Not a good idea because a lawsuit could be filed against you and your association. So, I wouldn't wait until there's been lawsuits and adjudications or legislative changes to comply with the statute if that was the implication. Are two stories over parking considered three stories? I would think it is. Yes. If the first story of parking is a full story, then that's a three-story building, in my view. All right.

Brian Tannenbaum, Esq.:
Can I just clarify the pooled reserves issue? What the statute says is that members of a unit owner-controlled association may not determine to provide any reserves or fewer reserves than required for items listed in paragraph G, which is the structural reserve study. It doesn't limit it to three-story and above. So, it would appear that any of those items or reserves cannot be waived for and they need to be kept separately.

Alan Tannenbaum, Esq.:
Michelle says to email our questions. It looks like she wants us to get done. John, do you want to answer that one last question from Chrissy Nelson? Do you see it? Where a roof is more than 15 years old? Do you see that one?

Jon Lemole, Esq.:
Can you read it to me?

Alan Tannenbaum, Esq.:
Where a roof is more than 15 years old and an insurance company is threatening the discontinued coverage based on the age of the roof and then the event that an engineer certifies that the roof has at least five more years of remaining life, how much longer does the insurance company have to continue coverage? Does that make sense to you?

Jon Lemole, Esq.:
Well, that's a good question. You get renewed year over year. So, the statute simply says that if your non-renewal is solely due to the age of the roof and your roof is over 15 years, and if the report says you have five more useful years of life, then the carrier cannot non-renew you that year. So, that's a pretty good question. Does that give you a five-year pass? I don't know. It doesn't say. It's kind of up in the air. Do you have to then go back next year and say, "Okay, I need another inspection that says I have five more years of useful life"? Well, number one, the insurance carrier will probably say, "Well, that can't be because you had a report last year that said you had five years," or whatever it says, six years.

So, I honestly can't tell you that the legislation is clear on that. But presumably, if you have that inspection and if we were engaging in interpretation of an ambiguous statute and you have a report that says my roof has got five years of useful life, then the carrier's not going to be able to come back over that next five years and say, "All other things being equal, no other change conditions, there hasn't been a major storm, and your roof hasn't been impacted somehow in that five year period of time," then presumably, you would be able to make that argument. But that's a big, big leap because year over year, what can the carrier come back and say? "Well, within the last year, we had two major storms or we went back and looked at it and conditions are a little bit different now." So, good question. I don't know that there's an easy answer to it.

Alan Tannenbaum, Esq.:
Yeah. The insurance agents will chime in. Well, we're going to close up shop shortly. The one question that I wanted to respond to was is there a chance that the legislation's going to stay on the basis of a court challenge? Maybe portions of, it's possible, like the insurance portion, but with what happened in Surfside and the pressure that got put on legislators, I don't think any circuit court judge is going to stay the entire legislation based upon an attack because again, circuit judge doesn't want to be the one to have said these things can't go into effect and all of a sudden, there's another collapse and everybody looks at that judge and says, "It's only because of you that this occurred." So, I don't think that's going to happen.

Get prepared to comply with the terms of the statute. I want to thank, as usual, Michelle Colburn for being the engineer behind the scenes of this presentation, and John and Brian for their efforts in preparing this. Brian does all our PowerPoint work. So, he id a fine job of that and we thank him for that? So, we're going to close off. Any questions that you have, you can email them to us. The ones that we can answer, we'll answer via email. If your question is too far in-depth, we'll probably tell you to contact your general counsel, especially if it's outside of our field of expertise. But thanks, everybody. Hope you know a little bit more about this statute than you did before and are very sorry if we scared anybody, but that's our job as lawyers, right? Okay. All right, everybody has a great day. Thank you.

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The Smart Board & Property Manager Legal Guide: The Devil Is Indeed In The Details...

Alan Tannenbaum, Esq.:

All right. My name is Alan Tannenbaum, I'm managing partner of Tannenbaum, Lemole & Kleinberg. We are construction lawyers and work primarily in the association committee association field. We take groups through turnover. HOAs and condos help them garner engineering and accounting studies. And for the groups that want to pursue claims we certainly are involved in that. But the second part of our practice is in repair consulting. So for an older condominium or even a Homeowners Association that has a significant repair project that they're undertaking, we negotiate the contracts with the engineers and consultants. We negotiate the contracts with the repair contractors. We help with best practices in undertaking those projects, and where it's necessary we're involved in enforcing repair contracts and warranties flowing from there.

I personally have been doing this work for over four decades. And our current market is from the Space Coast across Central Florida. Pasco and Hernando on the west coast down to Naples. More recently, we have taken on some clients in Palm Beach County, but that's our market. But I've been dealing personally with engineers for time I started my career when I was 24, and I've seen the entire evolution of the practice of engineering as it relates to condominium and Homeowners Associations. Historically, the owners had the upper hand when it came to engineering and construction contracting. Generally, there was a deification clause that might be in favor of the association or the owner that was given by the contractor. There was no restrictions on liability of damages relative to anything that the engineer or the contractor did but that market has changed.

Prior to the Surfside issue, which has put the engineering firms that were involved on this project, their liability carriers are going to pay a lot of money to resolve those claims. The liability insurers in Florida are already a bit nervous about dealing with engineering firms because a lot of engineers had been sued on not only original construction projects but also repair project. If you think about, it's a lot easier for an engineer or a consultant to design a brand new structure. They know every facet of the design, they figure out how it's being put together appropriately, they choose all the products and materials, and if they do a thorough job and they have the capability of doing it, probably they have fairly small exposure from liability and claims.

A repair job is a totally different thing. When an engineers coming into a property they do not have x-ray vision. They may not know at all how this particular building was built. In Florida, the idea of having as-built plans, I call it the unicorn of the construction industry in the sense that very few instances are there as-built plans, especially for a structure that may have been built in the '70s and '80s. So they may have a set of plans but who knows if it was built according to those plans. And then the engineer's got to figure out based upon some visual examination, maybe some destructive testing, how to design a repair for what this older structure and with all the details, and materials, and products, and so forth. They are messy jobs, they are difficult jobs, they are jobs that sometimes exceed the expertise of the contractors who are taking on the contracts, and it opens up a great field of liability for engineers in undertaking those jobs.

There are also some significant damage exposure if in fact, the engineer doesn't do an appropriate job. In Champlain Towers, the engineers were really investigating it. Some of them recommended some repair protocols, but really the major repair job hadn't been attempted yet. And yet when the buildings went down the engineers ... Any engineer who would touch that property has been sued and those liability insurance carriers are going to pay the freight. They're difficult jobs, there's a great potential for liability, the damages could be very significant.

The other thing with dealing, especially with condos, is they're not necessarily the easiest client to deal with. If an engineer's working for a sophisticated developer, they usually have an understanding of the construction process, construction costs, the construction processes, but you could have an engineer who's being hired by a condo association where it's, obviously, a volunteer board, they may have no expertise in construction. And it's just a more difficult owner to perform work for so they're dealing with that. And right now engineers are extremely busy. We've had engineers quote jobs that indicate they can't even come out to the property for six months. Any engineer these days, and we deal with a lot of them, who is promising a report by a date certain, we have very little current confidence that promise data is going to be met based upon the current circumstances. So the busy they are the more potential there are for mistakes.

And there's been a situation where there's a number of engineering firms who have totally gotten out of the condo repair market and this has caused a workload to increase for the engineers who have taken it on. Now, the result has been that with what the insurers have paid on the Champlain Towers and other projects, that they have raised the premiums of engineers to an extraordinary level. I was talking with an engineer. For a million dollar liability policy, the premium is $200,000 and the deductible per claim is $100,000 dollars.

So it's extraordinarily expensive for the engineer these days. The carriers have really increased their ... The cost of getting their coverage. Again, chasing some engineers out of that field. So you might have an engineer say, "Look, I'll be happy to do an inspection for you. I'll do an inspection report. I will recommend certain things but I'm not going to be the one to seal any repair drawings at this juncture. Or I'll stay within the field of testifying in cases but I'm not going to do repair design anymore." So when we go out into the marketplace for associations and try to locate the firms that are willing to do this work, willing to pay the insurance premiums to do the work, we have a field of engineers that is decreasing as time goes on.

So what's been the result? The result is that the insurance companies have communicated to the engineering firms that there are ways that you can prepare your contracts and agreements to limit your liability otherwise protect us as your insurer. And we're now seeing engineering contracts coming in with standard conditions that are very detrimental to owners and associations. And we're going to highlight those today. And I'm going to turn the program over to my partner Jon Lemole and our associate Brian Tannenbaum to talk about some of the most deleterious aspects of engineering contracts that we have seen in the last couple of years pop up that have to be seriously considered by associates. So, Jon, take it away.

Jon Lemole, Esq.:
All right. Thank you. Good morning, everybody. So the name of this presentation or at least the part of the name of this presentation is the devil is indeed in the details. When we say the devil is in the details what we mean is one of the most overlooked parts of an engineer's contract is the general provisions sometimes called the general conditions but typically general provisions. If you've ever seen an engineer, a typical engineer's contract, you'll know what I mean when I say that many client, many of our clients, many, many community association managers, boards, the folks that are looking at these contracts view this section as boilerplate, they may view it as non-negotiable legalese. And yet these maybe some of the most important provisions to look at and to try to adjust to an association's benefit. And why do I say that?

Well, let's start from the fundamental proposition that at its base a contract, any contract, is a risk allocation agreement. If and when things go wrong who is responsible? And many clients, however, view the contract solely for the purpose of determining the work to be done, the price to be paid, and so we're all focused on well, what is the engineer going to do? What is it going to cost us? And yet because of the intense pressures on the building engineering industry right now, engineers and their insurance carriers, and Alan touched on this, and you can bet that they're getting the assistance of some very savvy lawyers on their side, but they're paying extremely close attention to these risk allocation provisions with the goal of being to transfer as much of their risk on the project to someone else, and typically that's going to be the client. How can they transfer as much risk to you when things go wrong? So don't let that happen. And these are sophisticated provisions sometimes that require close legal analysis but they're important.

So what we're going to take a few minutes to look at here is some of the typical ways that engineers have recently been attempting to use creative language in their general provisions to transfer more risk to their client. We're going to show you some provisions that we've seen in some contracts, talk about them so with the hope that when you get an engineering contract, when you see this type of language, that's probably a good trigger for you in your mind to say, "I need to get somebody to take a look at this because this is pretty important and critical stuff."

So we're going to start with limitations of liability clauses. Whoever's running the PowerPoint, Brian or Michelle, I can't remember, could you go to slide eight, please? All right. So a limitation of liability is probably the easiest thing to see. When you see it you'll know it. So let's take a look at the second part of this slide, the second full paragraph under limitations of liability. And it says "In recognition of the relative risks, rewards, and benefits of the project to both the client and consultant, the risks have been allocated such that the client agrees that to the fullest extent permitted by law, the consultant's total liability to the client for any and all injuries, claims, losses, expenses, damages, or claim expenses arising out of this agreement from any cause or causes shall not exceed the amount of $10,000 or the amount of the consultant's fees whichever is greater." I'm going to stop there.

So a typical engineer is covered by insurance, and that insurance policy may have coverage of a million or $2 million. And yet in this provision, you have a very broad limitation of liability which essentially says that if you've got a claim against that engineer, the total amount that you can recover is $10,000 or whatever you pay the engineer. If you pay the engineer $40,000, the limitation of the engineer's liability is $40,000.

Now, I can tell you from experience that when things go wrong, especially on a big project, the liability is very rarely 10 or 20 or 30 or $40,000. We're talking typically, hundreds of thousands of dollars, maybe millions of dollars. If you've got a claim, if you've got damage that is caused because of an engineer's faulty design work, and you sign a contract with this limitation of liability, there's a pretty good chance that you're going to be out of luck on anything over and above what that limitation of liability amount is. This is a pretty easy thing to spot. So if you see anything like this in a contract, this is where your antennas should go up and you need to be looking at it and saying, "No, no, we can't limited in this fashion."

Alan Tannenbaum, Esq.:
Some of the engineers, on the cover page, when you get their proposal, they let you know that there is a limitation of liability. So they highlight it. The particular provision that you're seeing here is some pages that are usually attached to the contract or in maybe the last few pages of it. And when they hand you the agreement they're not saying, "Oh, by the way, even though I'm giving you the certificate of insurance that's for a million dollars, if you ever bring a claim against me all my insurance company's going to do is write you a letter and say, "Here's $32,000 because that's the limit of liability. We're done." So I at least respect some of the engineers who right up front tell a manager or an association, "Look, this is my maximum exposure," but there's also engineers who hide it in the back pages and don't let you know that that's what they're handing you. Go ahead, Jon, I'm sorry.

Jon Lemole, Esq.:
And that's the natural reaction when you get that contract and you see the provision that says that the engineer's got an insurance policy of a million or $2 million liability coverage and they're going to make the association the additional insured on that policy. And that sounds all great. A lot of people get lured into thinking that well, this is perfect, there's plenty of coverage here if something goes wrong and the engineer does ... Makes a mistake. But buried, we've seen a time and time again. The fine print, as they used to say, are clauses such as these which totally undo what you think you may have so it's very important that you pay close attention to those things.

I want to touch on one other thing in regards to limitations of liability. When things go wrong and there's an engineering claim, a claim for a design problem, a design defect, it is very typical to make a claim, if you wind up in litigation, against both the insurance firm ... I'm sorry, the engineering firm. But don't forget that plans are designed, signed, and sealed typically by an individual engineer, a professional engineer. And normally they have responsibility. They have duties, professional duties, and professional standards of care.

So one thing that you may see, and this is allowed under a statute in Florida, Florida statute 558.0035 if you want to look it up, there are ways that engineering company can potentially limit the individual engineers own exposure personally for their professional malpractice. There's some very strict things that have to happen in that agreement. There has to be boldface, all capitals, five points bigger than the rest of the language in the contract saying that the individual engineer is not liable. So pay close attention to that because here's what happens.

Here's why that's important. You may sue an engineering firm. On a very large claim, you may reach the limits of their liability. You may get an excess judgment over and above what the insurance coverage is and you may never be able to collect against that engineering firm because typically what ... Engineering firms may not have capital, they may not have property, they may not have buildings that they own, they may not have large bank accounts that you can go after. And so that's why it's important to try and also keep in the mix, so to speak, the individual engineer because they're the ones that are making the decisions, designing the plan, signing and sealing the plans so that's another area that you should pay close attention to. All right. So limitations of liability being the first thing.

The second area where we typically see engineering firms and their insurance carriers try to adjust risk are in very craftily worded indemnification clauses. So what is an indemnification? An indemnification is where one party contractually obligates itself to cover damages, costs, claims, defense costs, attorneys' fees, it can be any number of things or all of them, assessed to another party. It may include the duty to defend the indemnified party if a claim is brought against the indemnified party. So damages, and attorneys fees, and costs, and litigation costs they're all at stake here. Brian, go to slide five, please, and then we'll come back to this one.

So you may get an engineering contract with a very, very long paragraph under the heading of indemnification. And folks, I'll tell you sometimes I read them and I glaze over them so I can understand if you're reading them. They are long, they're confusing, they're full of a lot of legal terms. Okay. But here's some things that are easy to spot and you should be on the lookout for it. So taking that first paragraph which is an indemnification provision in an actual engineering contract that we've reviewed. "The engineer shall indemnify and hold harmless the client," meaning the association in most cases. And I'm going to skip here in the interest of time. "Against any and all claims, damages, losses, and expenses to the extent, they are caused by the negligent acts, errors, omissions of the engineer and its employees and the performance of its services under this agreement."

Okay. We're good so far, right? The engineer's saying, "Look, if we screw up and you get sued, our design causes somebody to be injured on the project or a pedestrian to be injured because we didn't design safety measures correctly, we're going to indemnify the association." Okay, we like that. Here's where it gets a little tricky in the next section. "The client shall indemnify and hold harmless the engineer from and against any and all claims, damage, losses, and expenses arising out of or resulting from the performance of the services provided that any such claims damage loss, or expense is caused in whole or in part by the negligent act or omission and or strict liability of the client," meaning the association. "Anyone directly or indirectly employed by the client," contractor.

So here's what that means. Even though the engineer may be partly liable, if the association is partly liable, if the contractor is partly liable, that triggers the association's duty to provide complete full indemnification including perhaps attorney's fees and defense costs to that engineer. We don't like that. That is not a very good provision for the association to agree to. And so you should be on the lookout for something like that where the indemnification is not reciprocal. Where one party's being asked to do more and typically, the association is being asked to do more than the other side is being asked.

Alan Tannenbaum, Esq.:
Jon, you may have glossed over something there though. Because if you look at the first section that you quoted, you see where it says they're subject to the risk allocation provisions? So even though the engineer here, for their own negligence, is indemnifying the association, the limit in this contract is going to be ... Let's say there was a $10,000 limit of liability, that indemnification is also limited by the same limit. They stuck that subject to the risk allocation provisions in here. Even on the engineer's indemnification, it's limited.

Jon Lemole, Esq.:
And the fact of the matter is that under Florida law there is ... Not to get too technical here. A lot of times these types of provisions aren't necessarily necessary because we have something in Florida, negligence law that's called comparative negligence. And basically, that allows the fault to be a portioned among and between all of the parties at fault. And sometimes what you see in these indemnification provisions is an effort to contractually change that. And a lot of times these indemnification provisions create a situation where we go back to something that used to be in Florida law which is no longer in Florida law and has been pretty much overruled and statutorily gotten rid of in most states, something called contributory negligence.

Contributory negligence used to be a defense that if the party suing was at fault in any way, in any proportion by any percentage, that was a complete defense to the party, person being sued. So you'll see that a lot of these indemnification clauses are trying to change what's already the law in Florida in regards to comparative negligence and create something that looks a lot like the old contributory negligence defense which has been overruled and changed as violating public policy at least in this state and plenty others.

Let's look at the second clause on this slide. "For third-party claims to the full extent permitted by law, the client," again, that's the association, "hereby agrees to indemnify hold harmless and defend." So puts the association in the position of being an insurer with a duty to defend the engineer from and against all third-party claims including bodily injury, property damage, products liability, demands, damage, losses, causes of actions, so on and so forth caused or alleged to have been caused by anything other than the negligent performance of the engineer of services under this agreement related to the project.

So you may find yourself in a situation under this clause where if somebody gets injured, that person sues the engineer, the owner, the association, the contractor basically. You know how it goes. You've heard this before. They sue everybody. And if the engineer raises the defense that it wasn't a pro ... We didn't cause this we're not at fault here. Even if that may be contested, arguably this provision creates the possibility that the association may have to provide defense costs for that engineer. That can be very expensive. I don't need to remind you that lawyers are ... Can be very expensive, especially in litigation.

So these are very, very dangerous provisions. And when you see in the fine print of an engineer's contract anything having to do with indemnification, you should be consulting a lawyer because they're difficult to understand and there are a lot of legal implications to these clauses that you should be getting some legal assistance on. Brian, can you go to ... What slide is this? This is five or eight? Which one is this, Brian?

Here's another indemnification provision. "Client shall indemnify defendant hold harmless the consultant from and against any and all claims, damages, losses." In the interest of time again, I'm skipping a little bit. "Provided that any such claim damage, loss, or expenses caused in whole or in part by the negligent act or a mission of the client or anyone directly or directly employed by the client." So again, this is another situation where the engineer is attempting to provide some insurance against having to fund and potentially pay damages relating to claims brought against it where there may be somebody else partially at fault for this claim.

So again, a worker sues the engineer, a passerby sues the engineer, the contractor, the association. You can bet that the engineer's going to raise this claim and say, "Well, to the extent that any of this loss is the fault of any of these other parties, then our defense costs are covered, our damages are ... Any damages assessed against us may be covered." And again, not only are these difficult provisions, a lot of times they're ambiguous when we actually go to apply them in litigation and a court. A judge has to make a decision as to what this means. So again, you see these, these are important provisions to be on the lookout for and get some advice before you agree to them. 

Alan Tannenbaum, Esq.:
Jon, let me add too on insurance side. So these indemnification provisions like this have been in standard owner general contractor contracts for decades. And the insurance companies who insure contractors know that the contractors are indemnifying the policies. Their insurance policies have been written to cover this indemnification exposure for a contractor. These are new clauses that engineers are starting to embed in their contracts and your liability policies have not adjusted yet to meet this indemnification exposure.

So I would definitely recommend every association that's getting into a contract with an engineer, take the engineering contract before you sign it, go to your insurance agent and say, "Look, here's the indemnification provision in this contract, if the engineer takes advantage of this is this covered under our association's liability policy? Will the insured utilize his insurance money to pay this indemnification exposure?" If they say no, the next question is to your agent, "Can we buy that coverage? Can we buy a writer that will protect us from this indemnification exposure?" The real bind is when the carrier comes back and says, "We won't do it. We will not cover this exposure," and then you're putting association assessment money at risk to back up this indemnification exposure. It is a real problem. Go ahead, Jon, I'm sorry.

Jon Lemole, Esq.:
All right. So we're going to move along here a little quicker because we want to give some time for questions and answer. Another thing to be on the lookout for is something called a waiver of consequential damages. What are consequential damages under an engineering contract? Consequential damages under an engineering contract are ... And it may say in the provision things like loss of profit, loss of business revenue, rental expenses, storage costs, things like that. But also consequential damages in the area of insurance coverage is a very, very specific term. And I will tell you that most professional or commercial general liability policies don't necessarily provide insurance for the defective work done by the contractor, defective design done by the engineer. In other words, it doesn't cover having to redo the work. What those policies typically cover is if that defective work causes bodily injury, property, and other damage to other property at the association.

So take a very simple example. You've got a new roof being put on, and for a variety of reasons the roof design and installation is defective. Well, insurance isn't going to cover those folks to redo the roof but if that defective design and installation causes water leakage, causes moisture intrusion, causes damage to the substructure, causes damage to the frame, it causes damage to interior units, all of that is consequential damages and that's how insurance companies define it.

And so while you may be looking at a waiver of consequential damages provision and it says, as in the AIA contract, it says "To include but not be limited to," and it has all these things about lost revenue, lost profits, storage costs, rentals, things, and you say, "Okay. We can agree to that." That provision can also be construed as providing a defense to an insurance carrier who's ensuring that engineer or that contractor, for that matter, as a basis for saying that we can't ... We don't have to cover consequential damages either because you waived it. So when you see a waiver of consequential damages, even if it has a list of things that don't look that onerous, you need to pay really close attention to that because of the way that the law defines consequential damages and the way that insurance carriers and policies typically define consequential damages. The last thing I'm going to talk about-

Alan Tannenbaum, Esq.:
Jon. Let's move through assumption of risk really quickly, Jon.

Jon Lemole, Esq.:
Assumption of risk. Assumption of risk is similar to limits of liability. If you look at slide six you'll see that it's a very similar type of limit of liability clause. And to look at it real quickly but the client assumes the risk. Now, this is not necessarily limited. It's worded a little bit differently but basically, here the client assumes the risk. The association assumes the risk of any damages in excess of $10,000 or the amount of the fee that was paid to the engineer. It's a limit of liability but said a different way. So it may not say limit of liability it may say assumption of risk or it may say here risk allocation, which sounds pretty benign but you need ... Anytime you see that risk allocation you need to pay attention to it. Okay. So those are four key areas or things that you'll see in these contracts. Now I'm going to flip it over to Brian. Brian's going to talk about a couple of other areas where you should have bells ringing when you see them in these contracts and get some legal analysis on them.

Brian Tannenbaum, Esq.:
Right. So good morning. Some common clauses in these contracts that are a little bit more simple.

I'll talk loudly anyways. So the first thing is reduced statutes of limitations. So under Florida statute 95.11, there's a four-year statute of limitations for negligence claims or claims based on a contract. A lot of these engineers will stick into their contracts a reduction of that statute of limitations that's not based upon any sort of reasoning or method, it's really just a way to shorten the time for an association to discover any type of defect. The statute of limitation starts running as soon as that damage or negligent act was discovered.

But under this clause that they've been sticking in these contracts if you don't discover that within two years ... Or if you don't bring a claim within two years, your claim is barred. So what the problem is, is you now have basically two years to go speak to an attorney to discuss these claims and if an attorney doesn't see that two-year statute of limitations has been altered in the contract they may be expecting a four-year statute of limitations for these claims and you may miss the statute of limitations deadline and your claim may barred. So it's very important to pay attention to any limitations periods that they put into these contracts.

Another issue that comes up a lot is arbitration and no prevailing party attorneys fees. So most of these contracts that are not in arbitration contain prevailing party attorneys fees but some of them don't. But what a lot of them include are very, very narrow arbitration clauses that require sometimes just an arbitration paid for by the association. Sometimes the arbitration is split between the parties. Usually, they have to follow the American Arbitration Association rules. What that removes is the association's right to take it to court and have a trial by jury.

They have limited discovery involved in arbitration. You don't get to use the rules of civil procedure. You also may have an arbitrator, and you most likely will have an arbitrator who is in the construction industry, is in the engineering industry, and is not necessarily a person who lives in your area who is a homeowner, who is a condo owner, who lives in an HOA, who has any sort of sympathy for an association. So we always prefer that these claims are resolved in circuit court because you have that opportunity to present it to a jury of your peers. Another thing with arbitration is that they are, for the most part, not appealable. So the arbitrator's decision is the decision and that's what you get. So there's no way to appeal up to a higher court if the arbitrator makes an improper decision based on an improper interpretation of the law or an improper interpretation of the contract.

The last thing I'm going to talk about is the venue clauses. So most of these contracts that allow for circuit court claims have a venue in the contract. And you'd expect that if, for instance, a contract or a job was performed in Lee County, that the venue for the lawsuit would be in Lee County. But a lot of these contracts insert either on purpose or inadvertently have venue clauses that are in different counties in Florida. So you may have an engineer that's based in Lee County, a condo association in Lee County, the work was done in Lee County, all contractors were in Lee County, but the contract calls for venue in Charlotte County or Pinellas County or Marion County or any other county. So it's important to make sure that you have a venue that makes sense under the terms of the contract.

It's also important because you may have a contract with an engineer and a contract with a contractor that call for different venues. And what this doesn't allow is for you to bring those claims together and you'll be required, as the same in arbitration, you'll be required to bring your claim separately against the contractor and the engineer and it will increase those litigation costs. I think that's all I have for now.

Alan Tannenbaum, Esq.:
Okay. Again, these are clauses that could come back to bite you. There's so many now embedded that it really it's good to have them reviewed. One of the challenges with the engineering contracts is also in the phasing of the work. You might hire an engineer to do an investigation, but within that contract, they talk about stage two of their work may be to draw a set of contract documents, and stage three may be contract administration. So you signed a contract two years ago and now you've asked the engineer to do this project manual but you don't remember that this contract that was signed a year or two ago, that was really for the purpose of investigation, those provisions are now buying the association as you go into the next phase which is the project manual.

So the liability of an engineer for inspection is usually not that great. So you might sign one contract that but before the project manual is created go back managers and look at that contract. Pull it out and say, "Okay, what did it have in it that the association may have signed?" That's the time to negotiate a new contract before the engineer gets the work to actually do the project manual.

So here's a sequence. I think if we haven't frightened you enough during the progress of this session about what engineers are doing in their contracts, call me I'll frighten you more. But the key is, tomorrow if an engineering agreement is put in front of you, or a consulting agreement, look carefully at the terms. You can contact a lawyer like our firm to tell you what is deleterious in there. Most of the engineers will negotiate. They will change their limitation of liability from $10,000 maybe to the policy limits. Sometimes they will remove the indemnification clauses. They will clear up the venue problems. All the things that we have occurred on a daily basis we're negotiating with engineers to correct these issues.

What's difficult is after they've already done their project manual and you're about to go into ... Because a lot of times that's when we get a request from the association to look at the general contract, the proposed general contract. A bidder's been accepted for the work, would you please look at the general contract? And we say almost invariably "Yes, but let us also see the contract that you have with your engineer," and that's when we usually find these things. A little bit late because engineers are very reticent to say, "Okay, we'll agree to alter our contract but not to apply the work that we've already done. We'll agree for the contract administration portion of the contract to alter it," which is a little bit late in the process.

It's again, the major liability's going to be during the design phase. What's in that project manual? Where it fell short? Where it fell short in the design? And that's the part, the most important part, to have an appropriate contract for and it may already be too late. The message out to managers is, when any engineering agreement comes in front of you, that's the time to review it. If you happen to have an existing contract where all the engineer has done so far is the investigatory work they haven't the project manual yet, before they do the project manual look at the contract and that's the time to negotiate a different contract for the remainder of the work which is certainly possible at that point.

But call us up we're open. Anytime you get a contract and you just want to send it to us as a manager and say, "Give me the talking points to my board as to why we shouldn't sign this agreement like it is, or they shouldn't," we're happy to do that. And I'll do that gratis for every manager out there. Anyway, solutions. Jon, tell us what the solution to these issues are besides having a good construction lawyer and reviewing the contract, what could be done on a broader basis industry-wise to mitigate against his problem?

Jon Lemole, Esq.:
Right. Well, as Alan said, and just reiterate it really quickly. Some of these are negotiable and we've had some success negotiating them. But when you can't renegotiate them there's some other things that perhaps you can look at, and more importantly, maybe there are some things that if enough people put pressure on engineers and even legislators, maybe there'll be some creative ways of dealing with some of these issues. Engineers price their work based upon their risks. And so if they have these broad indemnification clauses and limits of liability, that may be a part of what goes into their calculation of how they're pricing the work that they're planning on doing for your project.

And so if you can't change the risk allocation one possibility is to change the pricing. And I know nobody likes to think about paying more but it may be worth it to pay a little bit more to the engineer in order to induce them and their carriers to alter that risk allocation. And it's a downstream thing. You pay the engineer more, the engineer may get some additional coverage for that project or expanded coverage for that project so they'll have to pay a little bit of an extra premium for it but that's one option.

The other is related to the premium part of this. Per project premiums paid by associations for enhanced coverage. So creatively you may go "Bring the engineer's carrier into the conversation." And is there a way that we can perhaps cover that difference in premium as a way of inducing the carrier, the engineer, to be more comfortable with a different risk allocation on the project?

And then there's a third option which we've not found yet, but if enough people pursue it maybe it will be created. And that is through the creation of some novel insurance coverages. And one of the things that we've been talking to a lot of insurance agents, brokers is whether or not there's coverage that an association can buy that would cover the association's risk under these allocation provisions that put more risk on the association.

So it's almost like gap insurance. Some of you may be familiar with gap insurance with autos. You have a period of time where you've got to provide some additional insurance from when you buy the car and you actually take delivery of the car or whatever. But we've gone to some insurance producers to see whether there's a product like that and so far we haven't found it. But the insurance industry is always looking for ways to make money and if they can come up with a way of coming up ... Of creating a policy, you may soon see that there are coverages that the insured ... Sorry. The association can buy. If you can't get the engineer to readjust those indemnification provisions, those limits of liability provisions, those assumption of risk provisions well, at the last resort maybe there's some insurance that the association can buy to cover that additional liability or risk that the association faces.

Alan Tannenbaum, Esq.:
Jon, we have reached out to the insurance industry and they're not knocking down our doors saying those policies currently exist. It's a matter of advocacy by the Community Association industry to fill that gap. Years ago, there was a $12 million repair project we were involved in, the engineer had $1 million of coverage. And we went to the engineer's insurance company and said, "Look, we don't think $1 million is sufficient, can we buy up the coverage?" So what we did is we negotiated a 14,000 premium just on the project to raise the engineer's limits of liability to $5 million and the association paid the premium. And on a $12 million job at least had $5 million of a professional liability coverage for the engineer. Now again, in today's market, that's much more difficult because they're all running for the hills on all insurance coverage in Florida, but we're going to certainly keep pressing for them. Jon, I don't know you were concluded but we should leave a couple minutes for some questions that I see have come up.

So I have a question from Neil. Should associations have attorney review liability carrier's policy limitations on this? Absolutely, but I will throw it back on the agents. If you have a very good insurance agent, that's really their first line obligation to go back and question their own insurer about what the coverages are. They asked the question about the indemnification of whether that's covered. That's part of what an agent gets paid. The service that they're to provide is be the conduit between the insurer and the carrier, make sure that these risks are covered. Once they come up with a solution we certainly are there to review it but your agent really has the frontline responsibility. And get them to indicate in writing that yes, this policy now does cover this risk and pin that down. Let me see.

There's a question. All right. Asking if there's an AIA form agreement. The owner architect agreement let's say under the AIA is not a bad form. It historically did not have these limitations of liability clauses in it. These are recently added industry requirements. Frankly, I don't think an owner engineer agreement needs to say much. Here's the service we're providing, here's the charges that we're making. The standard of care is already set by state statute of what an engineer's standard of care is in Florida. And when I see a one-page contract, as I sometimes see from an engineer, here's my rates, here's the cost, here's what I'll do, and here's my insurance, and you get your date insured under their policy. It doesn't need a lot of language because their professional liability is already set by state statute and regulation so it doesn't have to be a dramatically long contract but they have made them so.

If any of the folks who've been around a long time remember, we didn't have any lengthy owner engineer contracts. They were pretty basic one or two-page documents maybe with a price sheet attached. Only the engineers have made them complicated. Let's see if there's anything else. There's no new legislation on inspections. I just asked that. Unfortunately, the legislature was involved in other things this session. Didn't tackle insurance, didn't tackle the inspection situation state-wide on older buildings, and certainly, of course, didn't cover any of the insurance issues that we have. Nothing on reserves. Nothing passed. All the lawyers who are going to do the legal update this next year saying, "What are we going to talk about for two hours because legislature didn't do anything?" So that's not going to happen. All right. Well, we've hit noon.

Michelle:
Alan, there's one more question from Alessandra. It's if the developer is handling the project should the HOA still seek additional protection?

Alan Tannenbaum, Esq.:
So if the developer's handling a project, that's the way I read it, you better make sure that the developer is bringing insured people to the site so there certainly should be a question that's asked. But Alexandra, there's probably much more to that question so it's nothing we're going to handle today.

Jon Lemole, Esq.:
Well, it would've also probably depends. Who's the contract with the engineer between? Is it between the developer and the engineer or is the developer making the contract between the association and the engineer? That would definitely come into play.

Alan Tannenbaum, Esq.:
Send us more information on that, Alexandra. So we will make this recording available. So if you want to send this along to anybody it'll be available probably in about a week on our website. And again, we're always happy to sit down with a group for an hour gratis. If you have a project coming up, you have questions about engineering contracts, we offer a free hour consultation so take advantage of it. If you're a manager, you want us to talk to your board, we'll do that, and just let us know. Contact Michelle. And we will get the certificates out for the managers who attended today and I hope you found it valuable. And we will see you next month with hopefully another topic of interest for you. Thank you, everybody.

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20220419-185257Screen-Shot-2022-04-19-at-2.51.46-PM

'I can't sleep': Sarasota, Charlotte homeowners in limbo over unfinished houses.

Excerpt from article :

Alan Tannenbaum, a Sarasota construction litigation attorney with Tannenbaum Lemole & Kleinberg, once represented about 125 investors who found themselves in a similar situation as many of the Konsul Development's clients, with large deposits paid out and half-finished homes in North Port and Charlotte County.

That case eventually resulted in the fraud conviction of a Tampa banker and mortgage broker, but often criminal charges are difficult to prove, he said.

"This is a repeat of a problem that has plagued Charlotte County and North Port," he said. "You can't take construction funds without intent to finish construction."

Tannenbaum is not representing any of the people who had contracted with Konsul Development and did not know all the facts in the individual cases.

But he said that generally, inexperienced contractors can "box themselves in" by undertaking several contracts at once. The costs come due and the contractor loses money or doesn't have the means to finish construction. 

Link to article : 

https://www.heraldtribune.com/story/business/2022/04/18/sarasota-charlotte-north-porth-homeowners-spent-money-houses-not-started-partially-finished/7281356001/

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20220412-171546Screen-Shot-2022-04-12-at-1.03.14-PM

Notice of Turnover...Now What?

Alan Tannenbaum, Esq.:

All right. It's 11:04 and we are going to begin. So I'm Alan Tannenbaum. Tannenbaum, Lemole & Kleinberg, we have offices in Orlando, Clearwater, Sarasota, and Fort Myers. And that basically defines the market that we work in. From the Space Coast across Central Florida, little bit north of Tampa Bay and down to Naples. We stay out of South Florida and stay out of North Florida. I won't go into the reasons why, but we do work also in Palm Beach County and above.

We are construction lawyers. We have extensive experience in taking groups, HOAs and condos, through the turnover process, handling turnover related claims. And those could include really buildings up to 10 years old, when you talk about construction defects. And we also do repair consulting, so groups come to us when they have a major repair project, we help prepare the contracts with the engineers and the contractors. Help enforce those contracts, help clean them up after, if a job goes south. Very much involved in that process.

I've been taking groups, personally, through turnover now for over decades, condos and HOAs. Personally, I've seen every variation on the theme. Turnovers that have gone very well, turnovers where groups have struggled to get information for years after turnover. What we're going to talk about today is a formula for a successful turnover.

I'm going to start the first segment, which I'm going to handle, is really the pre-transition part. I know there's some folks on the call who are pre-transition situation, and I'm going to go through some of the points about, if you're in a pre-transition situation, what can you do to get yourself ready for a transition that may be occurring in six months, a year or even two years? And here's my points.

Certainly attend board and association meetings to gather as much information there as possible. Not that most developers operating their boards of directors give out much information, but it's always good to stay involved. Attend, read the minutes that the developer may produce during the period of association developer control.

Certainly inspect the property. If you find conditions that are defective or deficient, place a developer on notice of those. And one thing that's really important is, whether it's a committee or a group of owners that have formed ad hoc, and they're reporting things to the developer, reporting problems is fine, but you don't have any authority to settle anything, agree to anything, sign off on anything. You don't have authority under the documents. You don't have the authority under statute.

Tell the developer everything that you see that's wrong in the property, or you think is a problem. But when the developer comes back and says, "This is what we intend to do to correct it." And says, "What do you think? Do you agree with it? Do you approve of it?" That's not the role of owners or even a committee pre-transition to sign off or agree on anything. You don't have the authority to do that. They'll sometimes put you in that position.

Meeting city and county authorities, border management district. I tell groups, pre-transition, go make friends at the building department. Go make friends at the planning department. If you're an HOA, get the development order for your property. Usually at some sort of planning department. See what it says. There may be a bond where the developer has some requirements to meet before the bonds release, and know what that is. Maybe you need to remind the public official about what their own development order says. You empower them to enforce it. Get your documents from those amenities that you've got. I ask everybody to be on mute, if you can. [inaudible 00:05:02]. I think we can still be able to find them. There we go. Okay.

You have the right to make document requests to the developer for association documents, not developer documents, but everything in the statutes that is an association record, as an owner, pre-transition, you're entitled to those records, so ask for them. There's a procedure under the statute. Sometimes you have to set it by certified mail. Now, with a condo, you have a state agency that you can go to. If the documents aren't produced, you can make a complaint to the state.

That same state agency does not perform the same service for HOA. Other than go to court, there's not much if you're in an HOA, and the developer association is not producing documents, there's no real penalty involved, unless you go to court. Condo association or you're in condo, you have much greater rights to get the state to enforce those requirements.

Certainly, study the documents for your development. What some groups do, since it's usually easier to amend the documents pre-transition, some groups either with the help of a general counsel or not, suggest to the developer, "Look, can you change these particular provisions in the documents to make operations easier?" And if the developer is amenable to it, it's much easier for the developer to do those amendments pre-transition than go through the amendment process post-transition. So some groups do that.

Remind the developer of its turnover obligations. Look at the statutes and the developer copy of the statute. If turnover of a condo is three months away, other than the audit, the developer's got to turn over all of those association records at the time of turnover. Well, they need to prepare to do that. So you might want to remind them of that. "Turnover is in three months. This is to remind you that these are your requirements." And it might spur the developer to get some of those things done. With an HOA, unfortunately, as we'll talk about, developer actually has 90 days after turnover to produce anything. But it's good to remind under either the 720 or 718, what their obligations are.

You want to make sure that turnover occurs on time. I have never advised a group, in 40 years, not to accept turnover as early as possible, because it gives you the power to take action. It gives you the power of the purse string. You're not waving anything by accepting transition of association control. I never see a benefit for trying to delay turnover. Sometimes developers have to be reminded that the threshold under the statute has been reached. So you got to keep tabs, or somebody should keep tabs of what the unit sales are, to know, let's say at an HOA that you're approaching the 90% sellout. Time to remind the developer it's time to schedule the meeting and go through the turnover process.

Really important, you have the ability to start interviewing legal general counsel, construction counsel, like our firm, engineers, reserve specialists, CPAs, insurance agents, bankers, the whole gamut. And they will. They will come to your property, they will speak to you. You can speak to the current vendors if they're willing to, to understand what their maintenance contract is, what they're doing.

Don't interfere with what they're doing, but many of those companies are very interested in being retained, post-transition, and they generally will be cooperative and attentive to your question. It's really a time to get ready for all the folks that you're going to hire, or should hire post-transition. You can certainly start interviewing them in advance. It's a good opportunity to get a head start.

And this last item, which is politicking. I've seen many very qualified and effective pre-turnover committee who's done a lot of hard work, they're very well prepared to be great board members, they don't get elected. Somebody who has no experience with the community may run and get elected, but there's something more sinister that happens within some associations, which is some of the very smart developers find people within the community who are friendly to them, one way or another, and they are able to get them enough votes to be on the initial board.

I have gone through turnover with groups where the developer's cousin is one of the three board members who get elected post-transition. I have seen contractors who work for the developer who live in the community, they get elected to the board post-transition because somebody has made a great effort to collect proxies, votes, and those folks get elected.

If you're going through a great pre-turnover process, doing all this hard work, and you don't do the politics to make sure that you get a great slate of board members elected, you're probably at the end doing your community a great disservice. Don't forget the politics. Don't forget to get that great board elected post-transition.

There's one question, can a transition committee and current expenses, engineering studies consultation before turnover, and have the HOA pay the expense? Or can that only happen after turnover? Well, some developers give ad hoc or owner committee some money to hire engineers or lawyers and so forth. Allowed to come out of the association budget. Sometimes that occurs. And with the developer's permission, they could spend that money. Question is, who's the contracting party?

If you hire a lawyer pre-transition and it's association money that's being spent, as the lawyer is now being hired by the developer control association, does it cause a conflict? They seem to get around that, but who controls the work product? So I'm a little bit worried about those relationships.

The owners certainly can raise money voluntarily, and hire somebody. But for the most part, we believe that pre-transition, it's the time to know who the good experts, who the good vendors are out there in preparation for hiring them after transition, not before. I've seen groups raise their own money and get some work done in advance. So I've seen both aspects. With that, I'm going to turn the-

Brian Tannenbaum, Esq.:
Can you talk a little bit about what a transition committee actually is, and whether there's any authority for a transition committee to do anything?

Alan Tannenbaum, Esq.:
Thank you for the question, Brian. A transition committee has no statutory basis, no basis under the documents. It's a group of owners taking action without any specific legal authority. Shouldn't be signing contracts, certainly shouldn't be settling anything. Doesn't have the authority to say we are representative of anybody. Sometimes folks have that illusion, but there is not the authority. It's maybe an advisory board. Maybe they can investigate. They can make recommendations. They should not be deciding or agreeing to anything that purports to bind the owners. With that, I'm going to turn the floor over to Brian Tannenbaum, who's going to talk about the actual transition process once the meeting is called.

Brian Tannenbaum, Esq.:
Okay. Good morning. While you're preparing, you're getting your committees ready, you're doing all that research and looking for all that information that we just spoke about, the important thing when you're actually getting towards the meeting is to make sure that, one, that the nominating and voting procedures are accomplished per the statutes and the documents. For the condo act, it's going to be chapters 718.301. And for HOA, it's going to be 720.307.

What's important is you need to collect proxies for your desired slates for the board of directors. As we discussed, just because there's been some involved owners for maybe years before turnover, doesn't necessarily mean they're going to get elected to the board. And then all that hard work is basically for not, unless you can get elected later.

So what that requires is for you to get proxies from owners who might not be as involved, might not show up at the meeting. And once that process is over, you need to get those owners who haven't submitted proxies to actually show up at the meeting and vote. Because if you don't get your slate elected, you're going to have no control over how your association is run.

Another thing you need to do is make sure that the developer has produced all of the documents that they're required to produce under both the Condo Act and the HOA Statute. And then once that board is elected, they need to elect directors. So I'm going to go through some of the things that are required for, first, condos. So the first-

Alan Tannenbaum, Esq.:
Brian, before you get into that, I have some carryover questions from the first segment. The main question is the developer appointment of the transition committee. So again, this is another intelligent business decision on the part of developers to try to control the transition committee process. So they appoint people to it. They'll give them space to hold their meetings. They say who's on the committee and who's not on the committee.

My belief is that you can reject the entire process and just form your own ad hoc committee that's outside of the realm of the developer. The exception is there's some really large HOAs where I've seen developer appointed committees being pretty effective, but I don't like the idea of the developer controlling who the makeup is. It's one thing for the developer to facilitate it, it's a totally different thing for the developer to say, who could be on it, who can't be on it.

If there's a developer who is trying to restrict who could be on that committee, my preference for folks is that they all walk out and say, "We're going to do this ourselves, because this is an owner process, and we don't know why you're mandating or directing it." So be wary of that. 

Brian Tannenbaum, Esq.:
So for a condo, the first thing that this says is that if owners other than developer own 15% or more of the units, that the unit owners other than the developer are entitled to elect at least one third of the board. What that means is you'll never have a majority, the developer will always have the majority. And basically it's a way for you to have a voice on that board, but ultimately it doesn't do much towards pushing the developer to do anything, unless you have a particularly agreeable developer.

It also can lead to some issues. If you are in that spot and you have hopes of being on the board later on once it's controlled by the owners, you may have the owners coming to you for any bad decisions the developer made while you were in that one third spot on the board.

Next, the three years after 50% of the units will be operated by the association have been sold is the turnover date. Or three months after 90% of the units have been sold. What's required under the Condo Act for a developer to turnover to the owners at the turnover meeting are, one, certified copies of the declaration, bylaws, articles, minute books, other books and records, rules and regulation, the resignation of the developer directors. That's very important. The developer is supposed to resign all of their board members prior to, or at the turnover meeting.

The financial records, including the source documents, that's very important. Now, the audit, which is also very important, the developer actually has 90 additional days from turnover to deliver the audit to the association. While you may receive some financial records, you're not going to get an accounting audit of your association until, hopefully, 90 days at the most. They'll also turn over the association funds, personal property.

Plans and specifications, that's very important. The statute says that they are supposed to contain a certificate that they're as-built, but 99% of the time, there is no as-built set of plans submitted to the building departments. So it will be difficult for you to obtain as-builts if they don't exist.

Alan Tannenbaum, Esq.:
Yeah. We call those the unicorns of the construction industry, as-built plan. We rarely actually see a real set of as-builts turned over.

Brian Tannenbaum, Esq.:
Another unicorn is the list of all contractors, subcontractors and suppliers, which is very important for any warranty claims, anything like that, it's important to know who actually built the buildings. But again, with some of these large developers, you don't usually get an accurate list of subcontractors. We've had multiple projects that we've represented where either none or very few of the subcontractors on that list actually did any work at that property.

You need to get a list of your insurance policies. Certificates of occupancy and permits are important. The certificate of occupancy triggers that statutory warranty under the Condo Act per building. You need to have your contractor, subcontractor warranties. A roster of unit owner is always important. Any leases, employment contracts, any other contracts, and a turnover inspection report by an architect and engineer.

The developers turnover report cannot be relied upon long term for maintenance repair, or any kind of defect or warranty claims against the developer or the contractor. What that report is, is basically a reserve study. It's a visual only inspection. They will fly a drone up to the roof. They may not even get on the roof. They don't look at any of the flashings, the underlayment. They don't do much. It's just a visual, for the most part. And there's also no guarantee that the developer is going to fix those problems just because they're in that turnover inspection. And then lastly, a certificate-

Alan Tannenbaum, Esq.:
There's even more of a trap there. So when you mention the roof situation, the engineer flies a drone, and finds that there's three broken roof tiles, and that's what's in the report. The roof's going to last 20 years, and there's three broken roof tiles. So the developer says, "I'll go up on the roof and I'll replace those three broken roof tiles."

Well, the determination by that engineer that the roof's going to last 20 years is based upon a drone flyover, which no engineer in their right mind could ever come up with a conclusion that that roof's going to last 20 years from a drone flyover. The tiles may not be appropriately attached. The flashings of the roof system may not have been done properly. The underlayment may not have been attached properly. You can't tell any of that from a drone flyover.

But we have had groups recently who have said, "Well, we don't need to get our own engineering report, post-transition, because we already got one from the developer." It's not the purpose of that report. And I really think developers put this requirement in the statute because they supported us, really so they could convince groups that, well, we fixed everything in the report, so we're good. And then the group goes on its very way. That's a dangerous trap. Go ahead, Brian.

Brian Tannenbaum, Esq.:
Right. And another thing we've seen developers do with that engineering report is not tell the owners that it's a statutorily mandated report. So we've had groups that come to us and say, "Look at this nice report that the developer did for us on their time. They're so nice. Look what they did for us." Not understanding that the developer is required to do that under statute. It's not a free inspection because the developer is being especially nice, it's a statutorily required inspection.

Next we're going to talk about homeowners associations. So under 720.307, you have three months after 90% of the parcels in all phases of the community are conveyed, or such other percentage of the parcels has been conveyed to members, or such other date or event has occurred as set forth in the governing documents. Now, you'll find this a lot with homeowners associations. Most of the rules are dictated by what is in the governing documents.

Now, the developer wrote the governing documents. That's important to remember. The developer's attorney wrote those documents to put the developer in the best position at turnover, not the owners. Again there's a list of things required for the developer to turn over. Except for an HOA, they don't need to be turned over until 90 days after turnover. So here you have deeds, the CCRs, the bylaws, the articles, minutes, other books and records, resignation of directors, same kind of things, financial records.

Now, if you don't have the financial records until 90 days after turnover, it's very difficult to run an association. So make sure that you're pushing the developer to get you those things as quickly as possible. Again, a list of contractors and subcontractors, again, not going to be accurate. Insurance policies, permits, warranties, roster of homeowners, employment service contracts and an audit. What you don't see on here is plans or an engineering inspection. For an HOA, those things are not required, which is a big distinction. What makes it even more important for a new board to get those things done as quickly as possible after turnover.

Alan Tannenbaum, Esq.:
One of the things that's important, if you're an HOA, you better make friends with the planning department and the building department, because that maybe the only place you're ever going to find plans for your project or the water management district. That may be the only source of those documents that you'll ever have, because it's not required by the statute. So very important to, especially for an HOA to make friends with the government. Go ahead, Brian.

Jon Lemole, Esq.:
Brian, why is the list of subcontractors important?

Brian Tannenbaum, Esq.:
Well, the list of subcontractors is very important for an association to have for any kind of common area warranty that you may have to figure out who built the property to get any information later on if you have to bring any claims. And again, it's not always going to be accurate. There's not really a way to verify the accuracy of the subcontractor list until there's some sort of dispute with the developer, and they're required by a court to provide the correct list.

Alan Tannenbaum, Esq.:
All right. Let's get into the next section, which is post-transition. So you've done all your great work. Developers produced all their documents. You've elected a great board at transition. The board's now elected its directors. Jon, what should they be doing?

Jon Lemole, Esq.:
Okay. Well, we're finally in the section of the presentation where you have an owner control board that can actually start to make some decisions and do some things effectively. And so there's a handful of best practices that this newly minted owner control board should keep in mind and take a look at. The first is to retain general counsel, construction counsel, CPAs, engineers, reserve specialists, or at least consider retaining those folks. And here's why.

On day one after transition, the owner control board of directors comes into exclusive responsibility for operating millions of dollars worth of capital improvements. And, probably most importantly, the responsibility to budget for the maintenance and repair of those improvements in the best interests of the association. So when you think about the typical condominium, or homeowners association board, you have a handful of people who have probably great life experience, or have been very successful business people in their lives.

But I would venture that, in many cases, despite that experience, having responsibility for things like roads, drainage systems, lift stations, multifamily building exteriors and roofs. That's not something that most people have ever had to deal with. And so engaging the right folks to assist and provide good counsel to the board in discharging their obligations is a very good thing. So for example, you may have gotten, or you will have gotten a ... especially if you're in a condo, you will have gotten a turnover report and a developer audit.

I always liken that to buying a house and accepting a seller's inspection report. Brian touched on it a little bit in the sense that these reports that you get from the developer, they're designed to discharge the developer's statutory duty, but they don't provide a whole lot of great information. They're not detailed. They're not in-depth. They're not what you would expect from a detailed, for example, engineering report. They're more in the nature of a reserve report.

And in discharging its duties to act in the best interest of the association, a post-turnover board ought to make an independent investigation of the state of the capital improvements, and timeline to maintain, repair and replace these items. I mean, if one thing Champlain Towers has taught us, it's taught us all of the need to make accurate budgeting decisions from day one, so that reserves are there when the need arises.

Carlos, going back to one of the questions that was asked, Carlos, and I have to find his question, but he asked, what exactly is a construction defect? Is it just something that the homeowners are saying, "Hey, there's a problem with this thing?" In any kind of claim against a developer for construction defects, they're going to be motivated by things which constitute legally supportable claims.

What are legally supportable claims? They are claims that relate to violations of the building code. So construction and design practices that violated the Florida Building Code. They'll be motivated potentially by claims which address the deviation from the standard of care. In other words, what does a typical contractor performing the work that was performed, what do they do? What is a typical architect in designing these features or these elements of a building or the site improvements, what are those typical design elements?

And so it's not just simply a matter of this doesn't look right, or something appears to be wrong, a developer's not going to be very motivated by that. They're going to be motivated by things that are supportable in court. And that's where a good engineering report comes in.

Alan Tannenbaum, Esq.:
Yeah. It's also a deviation from the file plan specifications, which is why your engineer will look and see what the plans called for to ensure that what was actually built met what was in the permit documents. It's pretty evident with defects. I mean, if your building is cracking, and it's six months after transition, you know that that building's only going to get worse as time goes on. And that's the reason to get the engineering study is to have some support for, what's a visually obvious building defect?

Jon Lemole, Esq.:
Right. Okay. These are the types of professionals that the post-turnover board should be looking at. General counsel is an obvious thing. Every association should have a general counsel on retainer. That's a lawyer who's guiding the board through decisions regarding meetings, regarding violations of covenants. You need to have a lawyer that's there providing legal guidance on what the statutory requirements are for meeting notices and agendas, and also taking on the ability of the association to perform its assessment role and enforcement of covenants, because that's a big area that an association typically is involved with.

Construction counsel. We're construction lawyers. We think, and certainly good counsel to consult with a construction lawyer post-turnover, and especially if as Carlos has indicated in his question, there are concerns, or there's definite visual evidence of some potential problems, or maybe you've had a history pre-turnover that you're aware of, problems with lift stations, problem with drainage, problem with ponds.

That's where it's very important to consult with construction counsel, and see whether you have a claim, potentially. What is the potential value of that claim? And what action should the association may be take in regards to that? Folks, you all know that there's a statute of repose, and that there's a statute of limitations in Florida. We've talked about this a lot. The clock ticks, and if you wait too long on claims that you want to bring against the developer or the builder, you may find that the courthouse door is closed to you. And these may be sizable claims.

In any situation where you're able to bring a claim against the developer, the builder, subcontractors, you're essentially recouping money that may otherwise have to be a hundred percent funded by the association's members to fix a problem.

A CPA. Why is a CPA important? You're going to get an audit, and that's going to come within 90 days, or at least statutorily, within 90 days after turnover, in either the condo or the HOA regime. That audit is arranged for by the developer. There's no question in my mind that a turnover, a post-turnover association should obtain an independent audit of the books and records, because you want to know whether that developer has funded reserves correctly. And this happens a lot. We've seen this, that developer expenses have been paid out of association funds.

And there's time and time again where an independent audit has found money that's due to the association, where reserves haven't been properly funded. This is a very small subset of condo cases, but some of you may be familiar with condo conversions. That maybe a coming down the line in Florida, with all of the apartment buildings that are being constructed. Eventually there will be probably a handful of conversions of apartments into condominiums.

And under the conversion portion of the condominium statute, if certain reserves are not properly funded, then that conversion developer owes statutory warranties, whereas they would not owe statutory warranties if they fund reserves properly and fully according to the statute. So that's a very, very important thing to be looking out for.

An engineer. We've talked about engineers a lot in these discussions. But it gets back to the idea that the developer's engineering report, or the developers' turnover report, it can be done by an architect or an engineer, but that report is a very, very limited investigation of the building. And a lot of times, even though there are problems, as Alan said, the report is going to say that the roof still has 20 years of life left. The pavement still has 40 years of life left, and so on and so forth. It's not until you get a really good forensic engineer who gets in there and looks at all of these things in detail, that you may find that, no, that report is really not complete. There are other things that should be addressed.

And that goes hand in hand with a reserve specialist. Have an independent reserve specialist look, and especially after an engineering report, look at what the reserve requirements should be, what kind of reserve funding the association should be implementing. And we've seen that this is vitally, vitally important with some of the recent things that have happened in South Florida. Just as an anecdote, I saw an article this week. I think it was the City of Miami or Miami-Dade County is shutting ... Condemning, I think it was an apartment, but another high rise building, failed its 50 or 40-year inspection, and is being basically shut down and people are being told to get out.

Alan Tannenbaum, Esq.:
Jon, I like to make a point about engineering reserve studies. The purpose of getting an engineering study, the main purpose of it is to create a baseline for the new board in the determination of their maintenance and repair responsibility. I mean, how do you know what to budget? How do you know what the long term maintenance plan should be? Unless you know precisely what you're dealing with. The main purpose of that engineering report is to create a knowledge base for the board in confronting, potentially, years of repair maintenance and reserve determinations.

If it reveals problem, instead of discretionary act on the part of the board as to whether it wants to get into a claim situation or not. But we're a proponent that every board, whether it's an HOA or condo, coming through transition, because maintenance and repair is a main responsibility for a condo or an HOA, either association-owned property in an HOA or common elements in a condo, that's the major responsibility.

The engineering report is a crucial piece of information by which, for the board and management to make some great decisions. And that's why the investment should be made. And if certain groups decide on the basis of that engineering report, or an audit that is an interest in having somebody else pay for that, those repairs, then we certainly can get involved, but every group should know about their infrastructure and know what they're repairing and maintaining.

Please contact us about which engineers to get in there, because there's some that are appropriate for the purpose, who are willing to get into a claim situation that's necessary. So we like to get in there early to give some advice on who to retain for those purposes. I personally like the reserve study to be done by a different engineer or a different company that does the defect study, or the engineering investigation, because it could eventually cause problems later in trial.

And I've seen it where an engineer has called out significant problems, let's say in a roof, and they're in trial. And somebody pulls out this reserve study that they did at the same time that put a 20-year roof life on the roof. And they have to explain why they put that 20-year figure on there, because that didn't presume any defects in that roofing system.

Again, putting a number on that type of roofing system in a general fashion is something that lasts 20 years, but it could be a defective installation of that type of roofing system, which may need to be replaced at three years. And they're caught by the fact they put this 20 year statement. So they serve a different purpose. I say get a reserve specialist to do the reserve study, hire an engineering firm, to do the building analysis, and it ends up avoiding that potential conflict. Go ahead, Jon. I'm sorry.

Jon Lemole, Esq.:
Thanks. There's a question. What is the statute of limitations for claims against the developer? I'm going to talk about that really quickly. The statute of limitations on construction defect claims is four years. And that's four years from discovery, or four years from when the defect should have reasonably been discovered. Now, understand there's a slight wrinkle in condo land, because the statute of limitations is to hold until turnover. So that doesn't run until turnover occurs.

That's a pretty short period of time. I mean, I know four years sounds long, but it's really not that long, and it comes up quickly. And especially if you have obvious open patent types of things, like you're seeing problems with your ponds, you've got lift station problems, you've got stucco that's obviously cracking and failing. You don't want to wait for that because there's a lot of things that need to happen before you file that claim in order to put yourself in the best position. Don't ever wait. If you see these things, you ought to be talking to a construction lawyer, and evaluating what needs to be done from there. All right, we're going to some of these other ... Sorry.

Alan Tannenbaum, Esq.:
Let me just avoid some confusion on warranties versus statute of limitations. So if you're a condo, there are specific warranty periods during which you need to discover the defect in order to take advantage of the statutory warranty. You then have four years under the statute of limitations to take action on that.

But another important deadline is 10 years. So 10 years is the outside period for a latent defect, a defect that was not discovered early on to take action on that. So if you're in a building that's nine years old, and a problem comes up for the first time that you've never seen before, under the statute of repose, you have one year left to take action on that defect. So there's a 10-year absolute outside period for a late defect to take action. So be wary of that. Go ahead, Jon. Sorry.

Jon Lemole, Esq.:
Okay. Review existing contracts to determine if any should be canceled, and interview possible replacement vendors. So after turnover, you will have inherited a bunch of contracts relating to the operation, maintenance, and management of the association. It's a good policy to take a look at those contracts, and determine whether any of them may need to be replaced. Now, there's some important things you need to know about this, depending upon if you're in a condo or in an HOA. The condominium statute at 718.302 ... Hey Brian, can I share my screen real quick? Can you ... All right. Thanks.

718.302 addresses canceling or effectively changing contract for the operation, maintenance, or management of a condominium. I could probably spend 15 minutes. This is how long the statute is. Okay. But the key takeaway here is that, and I've highlighted some of the important information here, any contract made by the association prior to the assumption of control of the association by unit owners other than the developer that provides for the operation, maintenance, or management of the condominium, first of all, it needs to be fair and reasonable.

If the association operates only one condominium, so we're going to assume that for the time being, just for purposes of this conversation, unit owners other than the developer and the unit owners other than developer have assumed control of the association. The cancellation of a contract for the operation, maintenance, or management of the condominium shall be by concurrence of the owners of not less than 75% of the voting interest, other than the voting interest owned by the developer.

So there are some very detailed rules in the condominium statute, dealing with what you can do with those contracts when you inherit them from the developer after turnover. So I just want you to be aware of that. Certainly if you have a question about that, talk to general counsel. If you're not sure of who to talk to, feel free to run the question by us, and we'll provide some assistance to you in that regard.

Now, let's look at the HOA section relating to that same subject, and it's a very different section, 720.309. Here's the thing that's important here. Any contract that has a term greater than 10 years that is made by an association before control of the association is turned over to the members other than the developer, and that provides for operation, maintenance, or management of the association or common areas, must be fair and reasonable. Only contracts over 10 years must be fair and reasonable.

So any contract that's less than 10 years in term, it may not be fair and reasonable. So that's why it's important to take a look at these. I will anecdotally just say that for those of you that are dealing with rec leases, there is a whole another set of provisions that address rec lease contracts. One of the big takeaways on that is that those leases cannot contain escalation clauses, but I don't want to get into that. It's a little bit beyond the scope of this discussion, but just be aware that there's a whole set of provisions relating to rec leases. Brian, you can share your screen again.

Alan Tannenbaum, Esq.:
So the takeaway, Jon, if you're in a condo, there's a procedure for canceling any contract that was made by the developer pre-transition. If you're in an HOA, it's got to be a contract more than 10 years, and has to be unreasonable. And there's no immediate ability to cancel it. You would've to go to court, in theory, to try to cancel it. HOA has got the short stick on that one. Go ahead, Jon.

Jon Lemole, Esq.:
Okay. The next area is establish banking relationships. Here's why this is important. There may come a time, for example, where the association needs a line of credit to fund a repair project, let's say. And many lenders, many banks will only provide lending to customers or associations that also give them their assessment collection, lockbox, general banking business.

When you're looking at banks, there's the initial need for a banking relationship for assessment collection, where you're going to have your operating and reserve accounts, lockbox services and all of that stuff. Choose wisely there. Because if there comes a time where you may need some funding of some sort, you may either be with a bank that doesn't really provide that, or doesn't provide it on very good terms. That's not their area. That's not something that they're very interested in. That may happen.

You don't want to have to switch banks for all of your regular business banking, all of a sudden, because you find yourselves in need of a line of credit. So take a real good look at those banking relationships. And when you're talking to those bankers to ask them about the potential for lending in the future if it's needed, and whether they provide it, and make smart decisions on the front end, so you can save yourselves some headaches on them.

Alan Tannenbaum, Esq.:
Jon, you got five minutes, so let's highlight the main points of the rest of your portion.

Jon Lemole, Esq.:
Got it. Consider document amendments. Again, Brian said the documents are drafted by the developer, and they're drafted with a view towards providing the developer maximum protection. Especially in the area of HOA maintenance and repair obligations, and especially with multifamily buildings. Those are documents that need to be very carefully looked at, because a lot of time those maintenance and repair provisions are not clear, and they can create a lot of problems for an association.

You may have an association having the obligation to maintain and replace roof coverings, but not necessarily roof framing. And so what happens if in the course of doing a re-roofing project, you find that there's framing damage, who covers that? Who's supposed to pay for that? Window is another big area. Everybody excludes windows, but what happens if the windows are the source of water intrusion, and that window water intrusion is now causing problems for stucco underneath, and the windows need to be replaced because they weren't installed right? Who's going to replace those if the association doesn't have standing to do that?

So it's very important to be looking at the governing documents and running them by an attorney to see if they make sense for the association being able to effectively operate, maintain, and repair the things that it's going to need to maintain and repair.

Establishing rules and regulations, and setting up architectural review. This is pretty common sense. You want to have consistent rules relating to design aesthetics and basically lifestyle issues in the community. You want to have a really good protocol for how owner request to do renovations are handled. And it's important to have those protocols. Why is that important? Because you want to avoid a charge of selective enforcement.

There are a lot of cases where associations have been, and this is a legal term, stopped from enforcing certain covenants relating to renovations or changes in design styles, because initially they didn't enforce them and then they choose to enforce them down the road, because they realized they made a mistake in not enforcing them. And that can get associations into a lot of trouble. So being very consistent in how you handle those things and having some protocol right up front is going to save the association from potential claims by owners in the future.

Alan Tannenbaum, Esq.:
Jon, with no discussion, can you just go down the rest of the items on your list?

Jon Lemole, Esq.:
Push developer to complete the turnover obligations. Gather remaining records from public entities. We talked about that a little bit earlier. Undertake reserve and engineering studies. We've probably exhausted that in the earlier discussions. CPA review of developer audit, I talked about that a little bit earlier. We covered that.

Establish warranty response and repair protocols. You want to know right at the very beginning, what is the association going to be responsible for? If it's a warranty claim, you need to be having a protocol for telling owners, no, you need to contact the developer or the builder directly for that, as opposed to-

Alan Tannenbaum, Esq.:
For unit issues.

Jon Lemole, Esq.:
Unit issues. Interior unit issues. It's always best practice to have interior unit issues referred first for warranty repair by the developer committees.

Alan Tannenbaum, Esq.:
Jon, let me make a point there, which is, you don't have to let the developer in to do whatever it wants to do. So a warranty response is a response by the developer that is going to be effective and long term. Not slapping some caulk up on a problem that's much more serious than that would entail. You're only obligated to let them in to do a long term intelligent repair. Go ahead, Jon.

Jon Lemole, Esq.:
Okay. Established committees. Look, the board is running a very large business, essentially. Three to five people can't do it all. So committees are very important, and they provide cover under the business judgment rule, so that the board can delegate certain functions to committees who can report back to the board so that the board is fully informed. And if they make a decision, they've made it based upon adequate evidence, information, due diligence, and that always is a good thing, especially when it comes to the business judgment rule, which provides protection to the board and the decisions that they make.

Inform the developer and other responsible parties of claims through construction counsel. That's just the general theme that we've run through here. If you've got potential issues that you want to bring to the attention of the developer, that should be handled right away. Don't delay. Delay can be fatal to seeking some satisfaction from the developer, the builder, subcontractors, whoever it may be. Get counsel involved, take a look at what claims you may have, and address them right up front. We're getting close to the end. I know we want to answer some questions, so I'll turn it back over to Alan.


Alan Tannenbaum, Esq.:
Yeah. Let me tie this all together. First of all, our outline is available. So whoever wants it, let Michelle Colburn know, and will get it to you, because this obviously covers the points that we covered today. We offer a free consultation of at least an hour for any group that's anticipating transition, who has gone through transition, to go over your individual situations in detail. Certainly take advantage of that, because every association's different, has different needs. And we also could give advice on general counsel, CPAs, engineers, reserve study folks who we feel are best situated to do the best work for you. So we are available for those referrals also.

We can stay on for a few minutes, a few folks who want to answer our poll, and we will let you know soon what is available next time. This program is available, will be available online within a matter of days. You can always go to our website if you want to listen to it again or refer it to somebody, the program will be available for that purpose. Or if you get tired and can't sleep one night and want something to put you asleep, you can watch it for that purpose, whatever purpose you want. We'll answer some questions. We'll stay on for a few minutes, but we are officially concluded. Let's see if there's any follow-up questions that we did not respond to.

Brian Tannenbaum, Esq.:
I've put them there on the screen for you.

Alan Tannenbaum, Esq.:
X out of it. Okay. There it goes. All right. I think we answered the first one, which was you need an engineer to verify that there is in fact a defect. You can't rely on the lay person within your community. The issue about appointment at turnover, I'm going to have to defer that question to one of our learned general counsel. And I think they're divided on that.

For instance, at turnover, it's a board of five, and there's only three people get elected. I would say that those three would be able to fill the other two seats. But there may be general counsel who might not agree with me, but that seems logical. If there's only two elected, I don't think those two can fill three seats, but three can fill the other two seats.

If there's not an audit within 90 days is one of the questions. If you're a condo, you can go see the state, and say that the developer failed to comply with that section of the statute, and the state can find the developer, then take action. If you're an HOA, you're out of luck, unless you want to go to court. That's what the legislature unfortunately left HOAs with. But a condo association can go ask the state for relief on that.

Okay. The developer failure to fund reserves. Yes, that is a potential claim against the developer going back, to try to recover the full funding of reserves. Understand in a condo, developer reserve fundings are required after at least the first two years of association operation. HOAs, a lot of times the reserve requirement is optional, not a required obligation of developer. It says a developer may fund reserve accounts.

You won't be able to enforce that if the developer in fact didn't do it, or underfunded them when it was a voluntary act on the part of developer under the HOA documents. Some attorneys say that since turnover is statutorily mandated lack of quorum does not hinder the election in a turnover meeting. Not going to touch that one. That would be a great debate between general counsel.

We talked about the reserves. Would it be considered a conflict of interest for the commercial condo developer attorney to be retained by the association? That's a difficult one. There are lawyers who serve as association counsel pre-transition who end up being the post-transition attorney. If they personally are representing the developer, then I think it would be problematic for that same lawyer to represent the association after turnover, if they were actually the developer's counsel.

I'm very curious as to why it is that that lawyer got hired by the post-transition association, if they were in fact a developer's lawyer. There's probably a really interesting story behind that one. Good luck with it. We've hit 12:07. I think we've answered all the questions. I hope that you found the session valuable, and we will see everybody next month. Thank you.

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Smart Board & Property Manager Legal Guide: Building & Site Defect Negotiations - Pitfalls to Avoid

Alan Tannenbaum, Esq.:
Welcome, everybody. We're going to get started in about two minutes. Just want to say hello to make sure that you know you weren't missing anything. We usually give a few minutes for people to get on. So in about two minutes we're going to get started. (silence). Okay. One more minute, we're going to get started. (silence). One more minute.

We're going to welcome everybody in and a few more people are joining us, and we'll get started. Any questions you have, submit them through the chat feature. And I'm being told to get started. So it's 11:04. Welcome, everybody. I'm Alan Tannenbaum. Our firm is Tannenbaum, Lemole & Kleinberg. And we have presenting today, myself, my partner Jon Lemole, and Brian Tannenbaum who's an associate in our firm. Our firm stays within the construction field as it relates to community association work. So we take condominium and homeowner association through turnover, handle construction and accounting claims that arise both for HOAs and condos up to 10 years old, which is the statute of repose which we're going to talk about today.

We also have been very busy lately with repair consulting for groups of any age that are undertaking major repair projects. We help them negotiate their contracts with their engineers and their contractors. We enforce those contracts either through negotiation or court action. We also do some complex covenant enforcement cases that general counsel don't want to take on, so that's basically our sphere. What we're going to talk about today are negotiations with developers and contractors. Much of it is going to relate to turnover claims, but we're also going to be talking about repair contract negotiations. So it should be applicable, at least portions of it should be applicable to everybody who's attending today.

When lawyers approach either new construction issues, or repair contract enforcement we have a lot of concerns. So today's presentations really are going to address those concerns. Things that you have to watch out for whether you're retaining a lawyer to help you negotiate, or whether you're trying to do it yourself. There are things that as lawyers that will concern us every day. Time limitations are certainly going to be a big issue. Making sure evidence is preserved, making sure you approach negotiations with power by having proper information and so forth. We're going to cover all those issues. But we're going to start something that's specific to condos upon turnover that we're always concerned about. And that's the issue of preservation of warranties. And as we go through this, any questions you have, send them through chat. But I'm going to bring on Brian Tannenbaum to talk about the whole subject of preserving warranties. Brian, you're on.

Brian Tannenbaum, Esq.:
Good morning. So I'm going to talk about condos first, and then I'm going to go a little bit into HOA purchase contract warranties and then repair contract warranties. But first and foremost is for a condo under section 718.203 the developer grants to every purchaser an implied warranty of fitness and merchantability. For the unit it's a three year warranty, for the roof and structural components of the building, the mechanical components, the electrical and plumbing elements, it's a warranty of three years from either completion of the building if it's just one building or from the completion of each building if it's a multifamily or multi-building condominium.

Additionally, the statute allows one year from turnover as an extension of the warranty period. For other improvements that are not within the unit and are not roofing or structural, the warranty is three years from the date of completion of that improvement. For contractors, subcontractors, and suppliers there's also a three year warranty from the completion of construction for the roof and structural elements, the building mechanical components, and the electrical and plumbing elements. The warranties granted by the contractors do not have that extension for turnover. So if you're at turnover, and it's been more than three years, your warranty with the contractor has likely passed. But if you get an engineering investigation done within that first year from turnover, you may still have a claim and you may still have warranties from the developer that need to be addressed.

Another thing to consider with these warranties is that they're conditioned on routine maintenance. Unless that maintenance is the obligation of the developer controlled association or the developer, so it's important to get an engineering study done within a year of turnover because it helps delineate any maintenance issues that were on the developer before turnover or on the owner controlled association after turnover. So that delineation is important because lack of maintenance is going to be a defense or an attempt at waiving the warranty because of the association's improper maintenance. So that engineering investigation can help you determine, one, where that line ends from the developers may to the owner's maintenance. And two, how to properly maintain your buildings despite what the developer was doing.

So that pretty much covers condos. For HOAs there are no statutory warranties. So if you want to rely on a warranty for an HOA as an association, you have to look at the purchase contracts of the owners. So it's really important to get your eyes on a purchase contract, and to have somebody look at them, if there are different developers, different sellers, the warranties can be different depending on each purchase contract. So it's really, really important to look at what the warranty says, look at the scope, look at any time limitations, look at any notice requirements, look at any repair opportunities that are required, and to make sure that you understand what those warranties cover and what they don't cover.

Lastly, for repair contracts if you're having roofing work done, if you're having stucco work done, any kind of repair contract, any kind of remodel or new construction, you're going to have warranties from the contractor, warranties from the manufacturer. And what's important is that you look at the manufacturers warranties because the contractor is not the one who's in charge of the manufacturer's warranty, you're in charge of the manufacturer's warranty. So make sure that you ask the contractor whoever is performing at work, that you have any manuals or product information because those are going to contain important warranty information that relate to the scope, any maintenance obligations, and anything like that.

And the last thing I'm going to cover under warranties is the warranty period which requires that the warranty or the defect be discovered during the warranty period. So it's not a statute of limitations, it just requires that the defect be discovered during the warranty period. So it's another reason why it's important to have an engineer go out to the buildings, do an investigation, and make sure that any defects are discovered during the one year from turnover that's allowed in a condo or during the warranty periods under an HOA or a repair contract. So it's very important because you need to have those defects appear during the warranty period, and it's not a statute of limitations. And Jon is going to discuss, not allowing claims to be time barred.

Alan Tannenbaum, Esq.:
Right. Before we move to that, Brian, and this is something we offer up to all the managers and boards out there. If you've just turned over or you have a contract that you feel you need to enforce, and you're concerned about time limitations, as a free service you send us your information, tell us when your buildings were certified for our occupancy, show us the contract, if it's a repair contract. And we will tell you if there are time concerns that you need to deal with. Because it is somewhat of a cumbersome task to review all of the conditions of warranties, and make a great decision as far as what it needs to be preserved. And this is something we deal with day in and day out. We can get to the time issue very quickly, and we're happy to do that gratis for anybody who contacts us about a situation like that. So with that said, Jon, what about claims becoming time barred?

Jon Lemole, Esq.:
Okay. So we gave the hard one on warranties to the young guy in the firm. This is a little bit easier so I'm going to run through this fairly quickly. But we've had many instances where a community with serious defects has waited until it's too late to bring claims against the responsible developer and/or contractors involved in whatever the project is. The development of the community or a repair project. What you need to know here is that Florida has some very, very strict time limits in which to file claims so that you can recover money in damages for serious defects that are discovered within your community. Defects that may have been discovered after a repair project and defective work by that contractor. Folks, if the clock runs out, you're out of luck. It's like the shot clock in basketball, it runs you're done.

We're going to talk about two different time periods that are at play here. The repose period, the statute of repose in Florida. Now, I've got up here the general statute of limitations section in our Florida statutes, which is Florida statute 95.11. And I'm going to talk about the part in red down below at the end of this section, and then we'll go to the part in yellow. But the repose period in Florida is 10 years. And that is a hard stop. 10 years from the completion of whatever the completion of the improvement to real property is. So the completion of the construction of the community, the completion of your reroofing project, a completion of your balcony restoration project. If you don't bring a claim against that contractor or developer within 10 years, you're done.

And I will tell you that the construction industry, and the developer industry is consistently trying to reduce this time period. There are bills and I'm not going to get into it, but there are bills floating around in the Florida legislature right now to reduce this to seven years or approximately seven years. So this is really important. You have to watch the clock here. Now consider a situation for example where you've got a developer that's held on to community before turning it over to owner control for a long period of time, the owner has finally come into control of the association, and you may have a very small amount of time within which to deal with issues relating to defects in your community. That's why we always advocate that after turn over, you should get an engineer in there do a really thorough inspection right after turnover, hopefully preserve your claims.

Okay. Statute of limitations, a little bit different. If you discover a defect, you have to bring a claim within four years. If the defect is latent, that date, that period of four years runs from when you should have discovered it or reasonably discovered it. So you can argue that there may have been a defect in original construction. Now you're bringing a claim in the ninth year within the 10 year statute to repose, but it's a latent defect. You don't really know what the cause of it was, what the exact parameters of the defect, and that's where engineering studies can really help you pull back in claims that may have had some patent obvious signs earlier on or beyond those four years.

Again, you need to consult with a construction attorney if you suspect you have defects in your community, defects in your repair project, because you have to be able to manage these time limits very, very carefully. So for newly completed communities, a thorough engineering inspection after turnover is great idea. But generally at the first sign of a defective condition, consult with a construction lawyer, take the right steps to preserve your claim in case a lawsuit is needed. And now we're going to go to Alan and Alan's going to talk about, how do we identify responsible parties?

Alan Tannenbaum, Esq.:
Before we go there, Jon?

Jon Lemole, Esq.:
Okay. Questions.

Alan Tannenbaum, Esq.:
Well, if you're a condo, there's also another statute that needs to be considered, which is 718.124. And 718.124 says that for condo associations, not for an HOA, but for condo association, the statute limitations does not begin to run until turnover. So if you have a condo that was held onto for a while by the developer, even for defects that were discovered that's a savings clause that allows additional time specifically for a condo association upon turn over. But all of these statues interrelate, but again you can see there's some complexity to it, same offer is there. We deal with these issues day in and day out. Call us saying, "This is what we got. Our buildings are this amount of years old, we just turned over. And where do we fit in as far as all these time considerations?" And we'll give you the answer. There is a question from somebody about five residential buildings built between 1994 and '97. They have type of piping which is a concern. Can they go back against the developer? The answer is no. You can't go back against the developer because that's outside the statute of repose.

Now, does that mean you have no claim? You may have a first party insurance claim. And so that should be checked out by a first party insurance lawyer to see if you potentially have a claim against your policy. But if those pipes need to be changed out, we would definitely be involved in helping you find the right engineering firm to analyze it, assist with all that contracting work. But you would not have a claim against the original developer, unfortunately, due to the statute of repose issue. Okay. Responsible parties. Let's talk about new construction. In many cases, you'll have a single purpose developer corporation who will be the developer of your condominium development. The problem many cases are not insured, and by the time it comes time to hold them accountable there may be a very limited amount of money left of the corporation, if any. So under those circumstances, we look to the other parties who are responsible, could be the design professionals, certainly the general contractor, the subcontractors, sometimes even material suppliers.

In the cases that we resolved, construction defect cases, oftentimes the developer entity pays less than 30% of the ultimate settlement. Most of the dollars come from subcontractors and their insurance companies. Sometimes if there's liability on the part of the design professional from their insurance company. So one of the things that we do in a new construction situation is we pull all the permit records, get the records from the developer, figure out who are the key subcontractors who worked on each building. We notified them of the issue, and ultimately they participate in the case, and their insurance companies pay much of the freight. On a repair contract situation, you can get into a situation, let's say, with a root replacement where there's damage afterwards. And you're looking to figure out how did this water get into the building for on this roof replacement?

And we have found instances where the roof actually was okay, but when the air conditioning contractor who was brought in to remove the condensing units so that the roof can be installed and replace the condensing units, they didn't, let's say, flash, the pitch pans appropriately, or didn't handle the drainage, or the internal drains properly. That's where the water came into the building that damaged units. So in a case like that, you may decide to include and give notice to both the roofing contractor, but also to any air conditioning contractor or plumbing contractor that they utilized in order to complete the work. And what you have the advantage of then are actually two insurance policies, one for the roofing contractor, and one for the air conditioning contractor to respond to that particular claim.

So you want to locate all parties, who [inaudible 00:21:26] them and their insurance companies be responsible financially for the issue. So one of the things that we do is make sure that everybody who should be invited to the party gets invited. We don't like to leave anybody out. So that's part of our role as your attorney. I'm going to now turn it back over Brian Tannenbaum. He's going to talk about chapter 558 Florida statutes, which was pushed by the construction industry probably 10 years ago. Come Florida law, it's something that we deal with on a day in a day out basis. And Brian tell about chapter 558.

Brian Tannenbaum, Esq.:
Right. So chapter 558, which is the Florida construction defect statute. It was meant to make the process easier on owners and contractors to resolve disputes. But what's ended up happening is it just makes the process very, very confusing for an owner. It really requires a gentle touch in the beginning, and it requires you to make sure you're keeping track of everything that's happening. And it requires you to do a good, detailed analysis of any potential defects that you may have. So what 558 says in part is that there's a requirement to notify any contractor or subcontractor supplier, notify them before filing any claim for an alleged construction defect. If you are an association with less than 20 parcels, it's 60 days notice before filing any claim. If you have more than 20 parcels, it's 120 days notice.

So what Alan was just talking about in regards to identifying the responsible parties, if you don't have the parties identified ahead of time, you're looking at a 60-day or 120-day delay because you're required to notify those parties before you bring any claim against them. The notice requires the owner to describe in reasonable detail the nature of each defect. Because it requires that reasonable detail, it's really important to have somebody qualified an expert, an attorney to go in there and be able to pinpoint where the defect is, so that when you are giving notice to those subcontractors or those contractors, they know exactly where to go to look for it, and they can't bring any defense of, "They didn't properly notify me of the defect."

The contractors then have 45 or 75 days depending on the amount of parcels to respond. They have a requirement to either respond with a repair proposal or a settlement proposal, or they can respond and say, "This is not a defect." And reject that notice. If you receive a repair proposal or a settlement proposal, you can reject that, and proceed with the claim under the notice requirements. What's important under 558 as well is there's a document demand procedure in 558, which allows you to put those parties on notice, and it requires them to preserve any documents, communications, anything related to the construction of the building. So it's important, again, to get that notice out to everybody you possibly can so that you're not losing any of that evidence. And I believe that unless there's some questions that Jon is going to discuss preserving that evidence next.

Jon Lemole, Esq.:
Okay. Folks. Thanks, Brian. Anytime you're negotiating. Hey Brian, could you go to the next slide, if you would? Anytime you're negotiating with a contractor or a developer, it's going to really help you have some leverage against them if you've preserved evidence. And failure to preserve evidence can actually be a problematic thing for a couple reasons. Let's talk about real quickly spoliation. There's something called a theme in the law called spoliation of evidence. If a piece of stucco, a big chunk of stucco has fallen off your building, and you think it's as a result of the defective application of that stucco, it makes a lot of sense to save that, log it, and certainly if you're at that point consulting with an attorney about the problem, you should be providing it to your attorney.

If you suspect that you have defects and you need to make repairs to mitigate further damage, then you should always very carefully document that repair project, so that if you do have to make claims in the future you can provide that evidence to the contractor or the developer. And this is going to be really important. If you suspect that you have claims against the developer or contractor, it might make sense, and this is something you should consult with a construction lawyer about. It might make sense that if there are repairs that need to be made, that you consider providing notice, even if you haven't sued or made claims yet. Sometimes it's appropriate to provide notice to the responsible parties so that they can see the damage, and see the work that you're doing. Because if you don't preserve that, you're likely to hear from them if you do have to file claims that you somehow not preserve their ability to investigate the damage that you're alleging, the effects and consequences of that damage. And that can be a difficult thing to deal with in litigation.

There's another real big reason why this should be done, and that has to do with insurance. If you're dealing with a single purpose entity that was the developer or you're talking about defects in a repair project done by, let's say, a reroofing contractor. Their insurance coverage doesn't cover the defective work itself, what it covers is damages resulting from that defective work. And so that's why preserving the evidence, and Brian will go back to the previous slide, documenting everything that's going on in the community is going to be really important. We have a whole course on documenting things relating to defective conditions in your community, and I'm not going to get to... I could speak for an hour on it.

But let's talk about two things that an association should always do, and that's they should have a robust record retention and record keeping policy. So home owner complaints, inspection reports. The manager walks around every once a month and looks at the community, and makes observations about the conditions of the common elements or the common areas. All of that stuff should be done with some sort of regularity, some sort of protocol, and retained. If there's an incident, if a piece is stucco falls off, if you've got a massive leak happening after your reroofing project was done, it should be documented. All of that stuff is, A, admissible, which is why I have the hearsay exception up here. I don't want to get into it, but it will be admissible in court.

And secondly, it may provide some of the information that you need in order to perhaps tie an insurance carrier into paying for a claim where you may not have a solvent, single purpose entity as a developer, or a solvent contractor. Or maybe you have a contractor that's just got really good creditor protection strategies in place for their business. So keeping evidence, having robust record keeping policies, recording incidents right away as they happen. These are all things which can help you successfully negotiate a claim. And we're going to, unless there's any questions, or unless anybody has any comments.

Alan Tannenbaum, Esq.:
Jon, I have some comments.

So just some issues that we've run into that are specific. We've had cases where a big piece of stucco falls off a building. Association reports it to us, and we find out about it. And where is it? Where is this piece of stucco? "Oh, we threw it in the dumpster and got taken away yesterday." That's not good. That piece of stucco would make a great piece of demonstrative evidence at trial. So think about the logic of it. You take that piece of stucco, if it became three pieces when it hit the ground, you could bag them together, label what building it came from. The person who labels it and bags it should place it in a storage area where it's going to remain in that place so that there's a demarcation of that that is a piece of evidence that came from that building. Great demonstrative evidence to save.

But also, obviously, there should be a photograph taken of the hole in the stucco and the building so it could be related to that piece of stucco that hit the ground. Great demonstrative evidence for a jury to see. I've been in cases where a group tells us, "We have a thousand great pictures of all the defects." And they provide us now digitally with a thousand photographs. And we look at it and we say, "Great. But you have 35 buildings at your project, what are these photos of?" And they don't know, they can't tell us. So one thing that I've seen the engineers do is the first photograph they take, before where they take a photograph of anything on the building is the street address for the building. And then they know that every digital photograph that appears in sequence after that is from that building. And then when they go onto the next building, first photograph they take is of the building address, and then they know digitally every photograph after that was from that building.

So a lot of it is just good logic in preserving that evidence. And if you go back to chapter 558 which Brian brought forth, you have to give the other side the opportunity to inspect before there's any changes made to the building, but there is an exception 558 for emergency repairs. So if there's active linkage in a unit, we may want to give the other side notice to tell them that there's an emergency situation. And if they can get over right away, they can see it, but certainly don't delay repairs in deference to providing all the notices and so forth because there is an emergency repair exception.

I want to respond before I go onto the next section. There's a question about HOA property where the developer never completed the clubhouse, or didn't complete it according to the original design, is that a 558 issue? Again, there's no warranty that's going to apply to an HOA unless we could make an argument from the original purchase contracts. But there may still be a cause of action that's available to enforce your rights to force a developer to complete the project. There may have been a development order from the county or the city which required the completion of those amenities. You may be able to leverage that development order in order to require it. There could be an action for misrepresentation. That's a little problematic because of class action rules in Florida against class actions when the basis is misrepresentation or fraud. But we can work through that.

So on that particular one, that's one if that individual wants to contact us, and give us the specific facts of that case. I think that we can fashion an argument to hold the developer accountable under those circumstances, not necessarily a 558 issue, but still potentially an issue that should be reviewed. I'm going to talk next about determining the settlement value of the claims. For a construction defect case in Florida, or even for a repair contract that goes bad, question is, what are the damages that would be recoverable? And for the most part in Florida, the damages recoverable when there's a construction defect or a default by a contractor on a repair job, it's going to be the cost of repair replacement plus the design, or engineering fees that are necessary in order to carry out the repair.

That's going to be your damages. So we spend a lot of time in our cases with damage experts who do estimates of what the repair cost is going to be. They usually include a quotient for design and contract administration of that repair job. And that's the basis of the damages. But does that mean that's what your claim is worth? Well, you may have some consequential damages which are things that the defect cause damages into the common element into the individual units. You want to make sure that you get your expert fees and attorney's fees accounted for in any settlement discussion. But then you get to the determining the settlement value, and you're going to look at several factors.

Number one, how strong is your claim? How strong is your proof? That's going to be a factor in how much you demand in any particular case? A defect case where there are obvious building code violations where there's been water intrusion into the units, or there's a safety violation, or a structural problem where you can go before a judge or a jury and present a very strong argument that the livability and the functionality of the property is at issue. People will understand the need to correct active order intrusion into unit or a balcony slab that's failing, or a fire code violation. And the jury, or the judge is likely to award really top dollar on that type of a defect.

Then we have groups coming to us and saying that some of the way the landscaping and the project was installed is causing some disruption of driveways. It's not affecting individual units, it's not affecting livability, it may be very annoying. But we don't rate that issue as being certainly equivalent to a violation of a fire code or water intrusion. So it's the quality of the defect which is also going to be at issue in determining the settlement value to the clients. What defenses does the developer have? If the association has done very poor maintenance, knowing that, let's say, under the statutory warranty that applied to condos that lack of maintenance is a defense, we would evaluate that client to be of lesser value because of actions the association took. Or if evidence wasn't properly preserved, and we know going into trial that we're going to have a hard time showing some of the defects because evidence wasn't preserved. That's going to be a factor in how we determine the settlement value of the case.

The other thing is collectibility. If a contractor without insurance is offering $50,000, you may think your case is worth $100,000 but the $100,000 may put that company out of business, and therefore you may accept $50,000 to settle that case because if you push any harder there might not be anything there. So all of those factors go into what a case should be settled for. And again, the advantages of using a construction lawyer who has negotiated claims in my case for over four decades is we've seen every type of case. We know how to evaluate them. We know how not to accept too little, but not to ask for too much. That will be the two main reasons why cases don't settle or don't settle for the proper amount. So you can rely on us to make that determination for you, but ultimately it's a board of directors that makes the business decision as to what to accept. Okay. The next area that Jon is going to talk about is the settlement paperwork. And Jon, why is getting the settlement paperwork right important?

Jon Lemole, Esq.:
Well, sometimes some of the hardest work comes after the settlement is reached in principle. I mean, think about a negotiation with a developer or a contractor. Lawyers on either side may be involved in talking mostly about numbers, and what is the responsible party going to pay in order to repair what defects have been claimed against them. And let's suppose that in those negotiations you've reached an agreement as to a monetary amount. Well, that's not the end of the story because, A, that's a contractual obligation, the payment. And so you want to make sure that that is enforceable in case the other side reneges on it.

And B, usually the payment of money and the resolution of claims involves the release of liability. And a release is a legal term in typically a legal document which formalizes the parties officially releasing claims against one another. And those are enforceable just like any other contract as well. And so great care in drafting settlement agreements needs to be taken, particularly in the area of the scope of the release. What are we releasing this contractor or this developer from? So you may have defects that you're settling, you're resolving, and you've got a contractor who's going to pay to settle claims for defects that you discovered when they reroofed your buildings.

And that release, you would typically want only to cover the claims that you were able to make in regards to that dispute up through the time of the release. Now, there may be other defects that you haven't discovered yet, and so you don't know about them. And so you don't necessarily want to release claims relating to additional defects that you had no knowledge of, and that you discover after the date of the settlement agreement. Furthermore, there may be warranties. There may be contractor warranties. There may be statutory warranties, and you want to be careful about preserving them if those haven't somehow been part of the negotiation process that you're settling with that contractor over. So the scope of the release is really important. We've had situations where clients have come to us with defects that they've discovered after they've already released a contractor or a developer from claims, and the release having been drafted way too broadly has presented a lot of problems in the ability to bring those claims for things which the owner didn't know about when they settled, discovered afterwards. So how you draft those documents is critically important.

The other thing is, as I said at the beginning of my comments, a settlement agreement is a contract. And sometimes they don't always get honored. There may be a number of reasons why you've entered into an agreement and somebody is supposed to pay your association money, and for whatever reason they renege on that. It may just be that suddenly they realize they don't have the money, or any number of reasons why that may not happen. You always want to make sure that your settlement agreements have an enforceability clause in there, that this agreement is enforceable in circuit court, and you want to also be sure to include that if you have to go to court to enforce this agreement that you've worked very hard on coming up with and negotiating, you want to be sure that you're going to get your attorney's fees if you have to go to court to enforce this agreement.

Some other typical things that you'll find that may be needing to be addressed in a settlement agreement are things like confidentiality, non-disparagement clauses. A lot of contractors and developers want to stick in very, very broadly worded non-disparagement clauses. You can't say anything bad about our worker, about our company. Those are mine fields for owners, and they have to be carefully scrutinized and minimized or restricted as much as you can. I mean you may not always be able to avoid them, but you want to have them as limited as possible. So there's a lot of work that happens after the settlement in principle is reached to get the terms of this contract right, because this contract is going to be binding on everybody forever. And that's something that you should definitely consult with a construction attorney. If you've negotiated something, maybe without a construction attorney but you want to memorialize this into a contract and obligations that will be binding forever and ever. This is something that should be taken with great care or done with great care.

Alan Tannenbaum, Esq.:
Jon, let's talk about a situation where the settlement agreement is calling for of remedial work. And let me just set it up for you. Because a lot of times groups ask us, or the developer or contractor may say, "Look, I want to come in and fix it rather than pay money." And it's an attractive alternative, but talk a little bit about out why the devil's in the details when it comes to making an agreement with a developer or contractor, for them to come back out to the property to undertake remedial work.

Jon Lemole, Esq.:
Yeah. Those are some of the hardest agreements to draft because you need to be very specific on what the scope of the work is, and you typically don't want to... You want to have that scope not be developed by the party that's responsible. You want to have an engineer in there involved in that, preparing a scope of work and specifications for the remedial work that's going to be done. Number one. So you want to have clear guidelines on what work needs to be done. Number two, you want have really a clear schedule for when the work is going to be done. You want to have clear provisions in that agreement about what constitutes completion, and who gets to determine whether the work is completed. You don't want the contractor coming back and saying, "We're done. We did it."

You want to have your engineers and best of all possible world, you want to have your engineers certifying that the work is completed. Your engineer being able to go in there and inspect the work. Permits. I mean there's a lot of little details that need to be addressed to make that remedial project as tight and as clear as possible as to what everybody's responsibilities are there. They're very hard to draft. I think we don't typically like those types of settlement agreements if there's the ability to get money, give money to the association and let them have control over the process. But sometimes it happens and particularly in site development, site issues cases, especially if it's right after turnover. We've had situations where the developer has offered to come back and do some substantial remedial work. But those have to be very carefully driven, but very carefully drafted with very precise details about how the work is going to be done when the work is going to be done, and how the work is determined to be completed.

Alan Tannenbaum, Esq.:
And of course, you have the issue of, you got to make sure proper insurance is in place during the work. And then the question of warranties, what happens if there's remedial work done? Is there a warranty in case it's defective? That has to be considered. I mean we negotiated a settlement for a homeowner's association where there was a lot of damage to the curbs of the roadways, but the developers still had several homes in the community to complete, and it didn't make sense to settle all of the roadways and curb issues for a monetary value because frankly we didn't know how much more damage would be done in the completion of the rest of the homes. So we entered into an agreement whereby there was a neutral engineer who was going to do an inspection of the roadways, and the paving upon the completion of all the homes in the community, and the developer was then on the hook to do the repairs that that engineer determined were necessary.

So it was a way to handle the fact that there was really no way to accept the monetary settlement because there was the potential further damage to occur. So be careful of the offer of repairs. A lot of times it ends up causing more complications than you had originally. And certainly never allow a contractor or developer onto your property which association certainly controlled after turnover on the general promise of, "We want to come in. We have the rights to come in and do repairs." That's a misnomer. There's no right of a developer or contractor to come in to do repairs of any type. What they should be allowed to do is come in to do repairs that are actually going to solve a problem. And you have no requirement to allow them in to potentially disguise problems or even exacerbate them which we've seen. The last section want to cover this quickly is-

Jon Lemole, Esq.:
Alan hang on. When you're addressing the last section, there's a question in the chat about confidentiality agreements and the public record and disclosure to members of the association, so I just wanted you to maybe hit that when you do your section here.

Alan Tannenbaum, Esq.:
All right. Well, yeah, so the owners are entitled to know what was settled. And if you have a requirement of the settlement agreement that it be kept confidential, that does not include reporting to the owners what the settlement was about or the amount. But if have a confidentiality clause, certainly tell the owners at the meeting that there is a confidentiality clause, and that they're not to repeat any of the terms of the settlement outside the community, and that really absolves the association of responsibility then because you can't control all of those conversations, and certainly the developers and contractors understand that. The last thing I want to cover and I'm going to do this quickly, because we have a short amount of time, justifying a settlement to the owners. So this really starts at the beginning of the case, or the beginning of the client, which is setting reasonable expectations to the owners about what's to be achieved in the litigation or if it's a repair dispute to keep them in a reasonable frame of mind about what the purpose of the claim is.

I often tell folks that the purpose of the work that we do in pursuing claims is to get a large chunk of money for our groups in order to take care of their problems. Notice that I didn't say make them whole, sometimes that does occur. But most of the time the purpose of any claim, whether it be an original defect claim, or an accounting claim, or a repair contract dispute resolution is to rest from the opposition parties a large chunk of money to contribute towards a resolution of the problem. And I tell groups this all the time, if you didn't pursue the developer and contractor or the repair contractor, the owners would pay 100% of the cost of putting the building back together or repairing the problem and so forth. If you end up getting the repair contractor or the developer to pay 70% of the cost of repair, that means you only have to go back to the owners for 30%.

And the owners should consider that if, again, they're probably educated a victory. But only if you set them up and have been realistic to them about what's to be achieved. And as you go back to the membership with the resolution of the claim, it's good to have an opinion from a lawyer like our firm that says, that we believe within the parameters of the work that we've done over four decades that this is a reasonable conclusion to your situation based upon the rest of litigation, the cost of litigation, the solvency of the parties that were being pursued, the defenses that the parties have, all the things that we talked about. So that the owners understand that they a good settlement is often better than a great trial result that could be appealed, could have a problem with collectibility. One thing about a settlement is the money is collected or the repair work is done and you have a known conclusion whereas going all the way through the court process there's some doubts.

Michelle says there's an evaluation that she's going to put up. There's a question about engineers, who do we recommend? Contact us offline and we will have some recommendations for you. And so take Michelle's poll, and we're going to thank everybody. And if there's any last minute questions we can take them on. But fill out Michelle's poll, which she's just launched. I see there's two more questions. I need to find out. In a remodeling job what if the contractors do not finish in the timely manner. Says he starts and then pulls away for months before everything is completed.

Well, I'll tell you away that there was something deficient likely in that contract that didn't have the type of time limits that Jon was talking about. If you don't have specific time limits for completion, it does revert to in many cases a reasonable amount of time to complete the job per industry standards. But there may be a clause of the contract that says that for nearly every reason in the world, the contractor doesn't promise that particular timeframe for completion. And if you have a clause like that, it's going to be a lot more difficult to require completion on timely basis. But we'd be happy to look at that for you to give you our opinion. And I'm looking to see if there's another question. The confidentiality, we covered.

As far as the information regarding the claim. I don't know if that's an attorney client question. Generally, a manager is included for attorney client privileges within the control group of the association for attorney client privilege. I don't know if the question is can the Elkem be involved or does the Elkem want to be involved? Because that's a lot of extra work, but usually our best information usually comes from managers or the maintenance person who works at the project. So certainly they should be involved in helping with that information gathering if I understood the question. And I think we covered all the questions.

We've hit noon. I hope you found this valuable. Certainly don't be afraid to contact us with questions. We are the type of law firm, we do not go on the clock until we're retained. So you usually get at least that one that free question, sometimes we get you a free hour. So if you're facing any of the issues that we're talking about, you have a repair project coming up, give us a call. We will give you free advice. We will help you orient yourselves to approaching these things. And so we're available. Just contact Michelle and she'll set up a meeting with me, Jon, or Brian, and we will help you out. And yes, we do review contracts for projects, Connie. We do that every day. I got several right on my desk right now. So we do that. All right. Everybody have a great day. Thank you.

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Keys to Selecting a Great Expert in Construction Defect Cases

Video Transcript:

Alan Tannenbaum, Esq.:
So welcome everybody. Send your questions through the chat function, stay on mute during the program and any questions we don't get to, we'll try to get to afterwards. So again, thanks for joining us. The program today is about forensic engineering. The value of it, why it exists, how it is here to support community associations, our firm, Tannenbaum, Lemole & Kleinberg. We stay within the construction realm in our practice, primarily serving community association. So we are involved in pursuing construction defect claims for buildings that are 10 years or younger or improvements that are 10 years or younger. We also do repair consulting for 30, 40 year old buildings that are in need of major repair projects. We help do the legal side of administering and those contracts.

We got somebody who's not on mute. If you can do that, mute yourself, please. Thank you. Okay. So that's what our practice is, we do it from the Space Coast across to Tampa Bay and down to Naples. But both on the defect side and on the repair side, we would be powerless unless we had some great forensic engineers supporting both our cases and also our repair projects. We're not licensed to design a repair project, we're not able to act as our own experts in our construction cases.

So we rely on a group of excellent forensic engineers. And we have one today that I'm going to be interviewing Rene' Portieles of Epic Forensic and Engineering. Their firm is a multidisciplinary engineering firm. Every aspect of your building or your improvements are covered by specialists within their engineering firm. They support defect cases around the state. They also assist in repair projects and we thought it would really be interesting to interview Rene' so that you fully understand how our forensic engineer works and what purposes they serve. So Rene' welcome. Answer my first question. My first question is, what role does your firm serve for condo and homeowner association in Florida?

Rene' Portieles P.E., G.C.:
Thanks, Alan. Great to be here. That's a great question to start off with. The engineers are your technical advocate, so we consult and we can guide you through in resolving all your building site issues. So in short, think of it this way. We're that doctor friend that you ask when you have questions to resolve all your concerns. The key here is to give a clear insight and direction on topics that you may not have a full grasp of. And that's what really what we're here for.

Alan Tannenbaum, Esq.:
Give an example, Rene'.

Rene' Portieles P.E., G.C.:
So for example, if there's a lot of issues that are happening within your space, and I will show you clear examples of these, I actually brought a lot of great photos with me today that I'm going to share with you, but you keep having water intrusion coming in and you have no idea why it's there. It's inside the wall. It's causing damage to the interior building. You've sent contractors, they fix the windows, they fix the stucco, but what it is, it's a flashing in a roof somewhere, which happens to run in a certain direction and then lands on a window inside the wall.

And you think it's the window, but it really isn't. So that's where you can ask us, "Hey, Rene', we're going crazy trying to figure out where this water is coming in from." We can help you understand where the water is and then get all that engineering jumbo out of the way and get down to the real repair.

Alan Tannenbaum, Esq.:
Now, your firm, there's some engineering firms that the head of the firm as a mechanical engineer, they're really good if a building has a mechanical problem of investigating that issue. Some of our HOAs were represented here today. They really don't have building concerns, but they are responsible for maintaining retention ponds, roadways, and so forth. Some groups that are represented today are high rises. Some are mid rises. Does your firm undertake investigation of all those different types of properties and how do you do that within the disciplines of your firm?

Rene' Portieles P.E., G.C.:
Well, we have different divisions with separate individual experts. And so what does this mean? This means that normally there's a Jack of all trades guy and that's the guy that you call that knows every single discipline in your entire building: structural, mechanical, electrical. However, that's only one person that has knowledge of all building disciplines. We feel that the key is not only to know all disciplines, but to really get hyper focused on the individual disciplines. This creates experts who are intended to resolve specific issues in their field. Look, this is not a new concept. You know that there's a doctor out there, that's your general doctor. And he knows just about everything about you. However, if there is a issue, what does he do? He sends you to a specialist. That shows how organized the engineer needs to be in order to not only know the global, which is everything about your site, but also have individual key personnel that can really get down into the details.

Alan Tannenbaum, Esq.:
So let me give an example. If one of the folks on the panel today as a manager of an HOA, single family, so the HOA is not involved in the single family home issues, but they're concerned about their paving and their retention ponds. Is that something that you personally would investigate or some somebody else in your firm take it on?

Rene' Portieles P.E., G.C.:
Well, we can investigate. It depends on really how in depth the issue is. We have specific disciplines that we go out there to assign to that project.

So what'll happen is you have one project manager that knows just about everything. And that's that Jack of all trades that we were talking about. And then once we find a specific issue that really needs a little bit more investigation, then we'll go ahead and assign or bring in an expert from our firm to really get down into the details and understand not just what's going on, but more importantly, how to fix it.

Alan Tannenbaum, Esq.:
All right. So you have site engineers, people who during their careers have really focused on site issues more than building issues. And for an in depth problem would be the one that you will bring in for that part of the investigation.

Rene' Portieles P.E., G.C.:
Absolutely. Correct.

Alan Tannenbaum, Esq.:
Okay. And your personal bias. I mean, where's your greatest strength as an engineer relative to building forensics? You personally.

Rene' Portieles P.E., G.C.:
Well, I started off doing structural assessments of stucco and concrete and post-tensioning, and since there's so much water intrusion that we find here in Florida, I gravitated over to windows and doors, and now I act as one of the primary glass and glazing experts for the firm. However, I am pretty dangerous in mechanical, electrical and plumbing also.

Alan Tannenbaum, Esq.:
All right. Let's talk about what purpose of forensic engineer serves in a construction defect case.

Rene' Portieles P.E., G.C.:
Perfect.

Alan Tannenbaum, Esq.:
Why are you important for a defect case?

Rene' Portieles P.E., G.C.:
So you have your engineers and you have forensics engineers. Okay, so what distinguishes both of them? Well, the forensic engineer has to effectively present the case, which he has to substantiate the defect found, he has to understand and find and know the actual causation that the issue has. And the proper remediation. But you say, "Well, an engineer could do that." Well, the forensic engineer has to be able to present that to a wide audience. He has to present it in a way that everybody can understand it. Why? Because in a mediation and a deposition in trial, who's in front of you? Well, you have engineers that you need to have the technical know-how.

You have the attorney, which knows the process and may or may not know the technical of the engineering. And then you also have common people, you have dentists, you have doctors. I mean, these are great individuals that are masters in their field, but are not masters in this structural engineering realm. So that's why it's really important to get a forensic engineer that can get a super complex issue and be able to make it so that everybody can understand it, and everybody can then know why the issue is happening and how to fix it.

Alan Tannenbaum, Esq.:
The other thing from a trial lawyer's perspective, there are a lot of competent engineers who can do an investigation, but we want somebody in an 11-hour deposition with a room full of defense lawyers, interrogating them who can hold up well under that type of process. And frankly, there are a lot of engineers out there who are very comfortable doing an investigation and doing a report, but the litigation process, the level of intensity of defense lawyers coming at them. For most engineers is a very unpotable circumstance. And they don't do well under that type of pressure and a good forensic engineer besides having the capability, knowing how to investigate, knowing what the standards are.

I can't say any of them enjoy being in deposition for 10 hours, because it's a grueling experience, but the good ones are able to endure that type of issues. So before we get into your photographs, because I know that people are desiring to see them and we'll get there, but let's talk about approach. How do you approach an investigation? Let's say a building investigation and where does invasive or destructive testing fit in?

Rene' Portieles P.E., G.C.:
Right. We're all about to take everybody here back to high school. If you remember a scientific method that is the root of our approach to an investigation. So what do we do? We come up to an area and we determine every single possible reason why the issue is happening. Our job now is to approach that in a manner where we start deducting all of those reasons and we're left with the actual solution.

So there's water coming in through a roof. Is it a pipe? It could be raccoons that are in your attic, true story, by the way. It could be your roof, it could be so many different elements. And our job is to not just show up and say, "Oh, there it is. Yeah, I know what that is." No, it's to actually prove why and what is happening so that we can fix it.

Alan Tannenbaum, Esq.:
And destructive or invasive testing. Where does that fit?

Rene' Portieles P.E., G.C.:
Well, it comes into determining that root cause. So if we know the root cause, then know the actual repair. Let me give you a quick example. You come to your building, your stucco looks like it's cracking. Maybe it's falling off the building. You say, "Oh, the stucco's bad, go get a contractor to fix a stucco." And you do that, couple months later, a year later, it starts happening again and again and again. Well, if we come up and approach with scientific method, then we can say, "Well, why is the stucco falling off the building? Let's look a little deeper. Let's take that stucco off and see if it's the concrete that maybe is bad. That's causing the stucco." "Oh, it's not the concrete?" "Let's dig a little deeper." "Oh, it's the reinforcing bars. Oh, that's what it is."

The reinforcing bars have an issue, they're causing the concrete to crack and expand and push the stucco off. So as you see, destructive testing was really the only way in that scenario to really get down to that core issue on why it was happening. And this is really important because fixing stucco can be from $10 to $20, a square foot. Fixing rebar can be from $200 to $400 a lineal foot. So you see how really knowing and getting into the destructive testing can really open up the actual core of the problem that is occurring.

Alan Tannenbaum, Esq.:
All right. Let's talk about different types of improvements. And we're going to talk about site issues first. And certainly at this point, bring in your the photos that you've prepared for today. So let's talk about investigating site issues, roadways, retention, cons, and so forth, your approach and give us some descriptive view by your photographs as to how you folks undertake investigation on a site issue.

Rene' Portieles P.E., G.C.:
Perfect, Alan. So what I'm going to do, I'm going to go ahead and share my screen here. Just give me a moment to set that up.

Alan Tannenbaum, Esq.:
We do see it, Rene'.

Rene' Portieles P.E., G.C.:
Okay. Perfect. All right. Let's talk about pavements. For HOAs. These are brand new sites, and immediately you start getting the photo on the top left, cracks in the pavements. On the top right, you see this alligator cracking pattern. On the bottom, you have all these cracks happening. You don't know why it's happening. We don't know why it's happening either. We need to find out. So the first step is, let's take some cores, scatter them throughout, get a good sample size of different types of different roads that are occurring in your neighborhood.

For example, if you have a one lane, two lane, is it a corridor? Is it a main road? And we get cores from that. We then look at, on the right side is a cross section of that core. And that really lets us know where they went wrong. Was it the asphalt? Was it the sub base? Is there debris? Was it never compacted correctly? So that's really how we approach the pavements. And then we're able to know the core again, issue with the site and then fix it.

Alan Tannenbaum, Esq.:
Rene', do you recommend that? Even where the paving looks okay to at least take some cores?

Rene' Portieles P.E., G.C.:
The reason is I would say yes, because it looks okay now, but remember a road can last 40 years, 50 years, 100 years. You do not want to say it looks good now and then two years for now, it starts to deteriorate. And now you're past your opportunity to get it repaired.

Alan Tannenbaum, Esq.:
What about like the height of the water table? How is that? I mean, is that something you don't want to find out, relative to paving where the water table is for that development?

Rene' Portieles P.E., G.C.:
Yeah, absolutely. So let's use the photo that's on the screen right now. You see how this one has all these little lakes, all these lakes then tie into... if you look at the perimeter of that photo, these lines that have... can anybody see my mouse on the screen?

Alan Tannenbaum, Esq.:
Yes, yes.

Rene' Portieles P.E., G.C.:
Okay. So all this drains into these lakes, and then it gets distributed throughout Florida's water management system. So what happens is you get all of these issues with the water table, where the control structures are either not designed correctly, they're missing or they're at the wrong elevation. And that directly impacts the water of that lake.

Alan Tannenbaum, Esq.:
And what's a control structure?

Rene' Portieles P.E., G.C.:
Yes. Because if the water control structures within area are designed to withstand a certain amount of water.

Alan Tannenbaum, Esq.:
Right.

Rene' Portieles P.E., G.C.:
A lot of times before a big storm, the cities will drain their areas. Well, that also causes your lake to drain if it's connected to that system, but there's usually a wire or water control structure that is designed to keep water on your site and not let it drain out with all the other... it controls the elevation of your area. I mean, there's plenty other things that we can go wrong. That was one of the examples.

Alan Tannenbaum, Esq.:
So on this photo of this retention pond, what issues are you seeing there?

Rene' Portieles P.E., G.C.:
So, one thing here is if you walk around and you see things like this in your HOA, as you see, this is a lake embankment issue. These lake embankments are supposed to be sloped in a certain way. So that one, you don't get at these abrupt changes in elevation. This is an open for litigation against your HOA. This is a tripping hazard. Also, it is for the landscapers. I've been on cases, we've had cases where we've had landscapers fall off and get seriously injured on their equipment because of the improper sloping.

And at the end of the day, it is absolutely the HOA's responsibility because they did not maintain the lake embankments. A lot of times, this is a construction defect, right from the first day, this photo that you see is in a property that's only maybe eight years old. So this should not be happening now. On the first day, it was like that. Another thing is the photo on the right top, right bottom. These are washouts. This happens when again, the piping is not designed properly with the lake embankment, which causes in a rain event water to rush through the pipe and then it takes all the soil with it causing damage to the lake embankment.

Alan Tannenbaum, Esq.:
All right. Rene', you want to move next to high rise?

Rene' Portieles P.E., G.C.:
Yeah. Before I go to high rise, I want to make sure that... for HOAs guys, today after this webinar, you're going to go get your lunch, walk around your HOA. If you're on one of these and just look at the dryer vents, this is something that can easily be done. You do not need an engineer to tell you to fix this. This is nothing but a dryer vent. There are two vents on the outside of your property. One is for your bathroom and that one has a screen. The other one is for a dryer. That one cannot have a screen. We've been on cases with fire, because all it is, is this screen is here. Reach up there, take that screen off. It comes right off with a screwdriver and leave it open. So you don't get any fires in your area. But let's talk about, mid rise. Sorry, Alan. I detoured a little bit there.

Alan Tannenbaum, Esq.:
There you are.

Rene' Portieles P.E., G.C.:
Now, what we see is there's a ton of issues that are happening on mid rise. But guess what guys? High rise have the same issue. So I'm going to of throw a mid rise and high rise together into the same pot and give you a little more examples. One thing that we constantly get with mid rise and high rise buildings is why are my pavers always stained? I've pressure washed my pavers many, many times. They're always stained, they're always calcifying. What's happening? Well, in this photo here, we determined that you see the three dots right here. Those are the drains. Those are actually the high points in the slab. That's a big no-no. The red area is where the water is just sitting, because it cannot get to the drain.

Some other issues keeping with the soaking of water on amenities deck. We have water coming through the decks and causing havoc on your waterproofing, it's waterproofing. This waterproofing on your deck, it's not a swimming pool. It is not designed to hold water for prolonged periods of time. That water under your decks, under your planters that are not drained correctly, will pond, cause damage to your waterproofing. Next thing you know, these are looking at interstitial spaces underneath the pool deck. This is actually the pool where it's causing damage in the waterproofing and now water is coming through, not just the pool area, but also in your expansion joints.

Guys, this photo was taken two months ago. This aren't photos that I find on the internet. Every single photos here, I have taken within the last six months, maybe. On every single photo in this entire show. Well, show or... What do we have here? We have expansion that are leaking. If you look on the right, those are roots. There is an amenities deck, two floors above this. The roots went from the planter down one floor and hit this floor, which is two floors below the planters. Again-

Alan Tannenbaum, Esq.:
What are the special challenges though? Because the architects I've seen, they like to create sometimes elevated pool decks and poles. They like to put planners on upper floors. What special challenges does that create from a waterproofing standpoint?

Rene' Portieles P.E., G.C.:
Usually, their designs a lot of times are okay. But the big issue that we're having is in the installation or maybe the wrong spec is used. So there's so many different things happening. There's the architect that has a ton of different little situations, wall to planter. Planter, wall to floor, there's an expansion joint, there's a concrete building adjacent to this. So there's so many different little details that happened, very easy for a mistake to occur. In construction, again, trying to determine all of those little details and incorporate them into a design and into the proper construction methods gets out of hand and they perform construction errors in the field.

Sometimes there's different products that need to be used and the contractor gets it and says, "Okay." He reads the first one and he puts that everywhere and unfortunately it's not like that. That one was only used for a certain area and he needs another specialty product for a certain other area. In this particular case here, this was an older building and it's really a lack of maintenance. It's not looking at your building. Guys, 40 years and not going to go into a 40 year certification dissertation, but 40 years is way too long to start looking at your building.

You should get an expert, an engineer out there who knows how to evaluate these areas. At least once every five years, you should have your own maintenance staff. Review the building, do walkthroughs yearly. Because if this simple two things that I just told you, would've been done on this property, we would not be having a $4,000,000 or $5,000,000 repair. It would not be there. It would be $100,000 repair.

Alan Tannenbaum, Esq.:
Let me ask you this Rene', you talk about product. So let's say we have an elevated pool. It's got a nice paver deck around there. What are some of the product choices as far as installing the pavers that you've seen cause problems in the field? What kind of product issues?

Rene' Portieles P.E., G.C.:
Well, really, it depends a lot on the mortar that holds the paver if you're mortar set. There are interior, believe it or not. Interior mortars that you can use on the inside of the property and there's exterior ones. The exterior ones are made to be saturated in water and do not calcify. And I'll explain, I have a photo of that, a real clear photo of that in a couple slides. Sand that is used, you just can't get shell rock out there and put any sand on your pavers. It has to be a sand that does not have a lot of calcification, that does not leach. Because that will clog all of your drainage pipes will wreak havoc on your structure. So it's really important that that happens and then also think of it this way guys, you have paver, you have sander mortar, you have some sacrificial slab that is used for drainage, you have your waterproofing and then your structural slab.

In order to get to your waterproofing, it will cost you $200 or $300 a foot just to get there. So what do you do when you get there? Do not choose a one-year product, do not use a three-year product, choose a product that can last a long time because the real money is in getting to that area. Once you get there, there's products that are only a couple dollars apart, but will give you a 15, 20-year life. So sometimes it's worth spending a little bit more on a better product so that you don't have to do all this over again in six or seven years.

Alan Tannenbaum, Esq.:
But let me talk about subcontractors too. And I think the pavers is a good example. So a developer has a favorite subcontractor, who's done all their ground level paperwork on their driveways and so forth. And all of a sudden that developer gets a design that calls for a paver installation on an elevated pool. And it's very easy for that paver contractor who does not necessarily have done an elevated paved job before.

Rene' Portieles P.E., G.C.:
Right.

Alan Tannenbaum, Esq.:
He's just doing the same job you did on the ground floor level, using the same products, taking it up to the third floor, where it may be a totally inappropriate use of products for an elevated deck of that sort. You find that?

Rene' Portieles P.E., G.C.:
All the time. It is amazing how many buildings out there right now currently have that exact situation that you just said there.

Alan Tannenbaum, Esq.:
Okay. Go ahead. What are we seeing in this latest slide here?

Rene' Portieles P.E., G.C.:
Well, this is another thing. If you guys are walking through a parking garage and you look up and you see gutters, that top right photograph right there. Okay, gutters don't belong in a parking garage guys. This is a temporary solution. This means that your expansion joints are leaking. Your waterproofing has failed on the floor above this, but what do you do? You put gutters on it. And then what happens when you put gutters on it? Look at the bottom picture. Water is leaking through the structure and causes the structure to corrode, causes the reinforcing bars to fall. And the concrete to crack. The association paid about $5,000 years ago to fix this. You see the left hand side, that is a $5,000 repair. A year and a half to two years later, they did not fix the core problem, which is that the waterproofing was failing.

Rene' Portieles P.E., G.C.:
So what happens? Look at that little area right here on the right. It's happening again, guess what? Got another $5,000 repair there. If you would've $7,000 or $8,000 instead of $10,000 now, you would've fixed this issue. And this is only in a little eight foot area. Imagine, these drudges are massive. How much of this issue is happening? Look at the left picture, top left. If you look around your garage, you look up and you see your drains look like this, waterproofing issues. Okay? You can see how it's just corroding the pipe. So now, instead of just having to remove and replace the entire drain body, the entire pipe, you are now having to do that and a waterproofing, do it once the first time. If you notice in this area, this has already been repaired a few times and the pipe that they just keep putting on just keeps corroding. Okay. Really it's important to get these things repaired.

Alan Tannenbaum, Esq.:
Rene', there's a question. Ronald asked, "Is there anything we, as condo owners can accumulate or document before contacting you, such as photos of cracks with a scale?" I'm assuming this is a question maybe pre-transition because if it's post-transition, you really should get the engineering firm out there as quickly as possible. Not only to nip the problems in the bud, but also there's time limitations that apply that really create a situation where you got to get the engineering done sooner than later.

But as far as documentation it's concerned from our perspective, photographs are great, videos are great. Make sure the time sequence, one of the things I've seen Rene' do when he is going to take on a multi-building project, the first picture he takes is the address of the building. And then the subsequent pictures, are flying to that building. Because we've had groups that have dumped a pile of photographs on us and they're not designated to which building or location it was. They're really not very helpful. So documenting when the photograph was taken, that's really important and who the photographer was is, is really important too.

Rene' Portieles P.E., G.C.:
Yeah. Especially before pre-turnover, what happens is any issue that you keep having, we've gone into rooms and that room looks perfect. And then we find out later that the building engineer, the chief of maintenance paints that room every month. Why? Because every time it rains, water comes into that room. But when the engineer went in there, it looked brand new. Why? Because he just happened to paint it the day before. So it's important for us to understand what issues have you had. A lot of times you get to a site and I hear the property manager say, "Oh, yeah, that pump. Oh, yeah, we replace that every six months." Thinking that that's normal because it's a big building and there's a lot of load on the pump.

No, that's not normal guys. Tell your engineer that, write it down. It may be that there's issue with capitation of the pump or prongs with the piping and it's not the pump, it's the pipe, that's the problem. So it's really important to just like Alan said, document, tell your engineer whether you think it's important or not, let your engineer decide, tell him everything that you have. And then in a nice list. And then as he does the investigation you can fix all of those things into account.

Alan Tannenbaum, Esq.:
Now, there was also a question about what do you do about birds getting into an open dryer vent? I don't know if that's an engineering question or?

Rene' Portieles P.E., G.C.:
Birds? We haven't had birds going into the dryer vents, but there are things for me because usually the dryer vent, unless the unit is shut down or closed for a long time. Birds don't like when you turn on the dryer and that hot moist there comes out and people usually once a week, maybe will turn on that vent. But if you are having some issue, you can put those little prongs, for the birds to sit on and just like near the entrance. So it deters them from going in there, but you cannot have streams on them because they will trap lint.

Alan Tannenbaum, Esq.:
Okay. Rene' let's move forward, have about 20-

Rene' Portieles P.E., G.C.:
There's also... and one more thing to that one. There's also, if your dryer vent is open, you can have a flapper, it's a little gravity flapper, or a spring flapper that will keep it closed. And then when you turn it on, it opens up and then it'll close. So birds won't get in there. So if you are having a bird issue going into your dryer vent, that's your solution, buy a gravity damper. They're pretty inexpensive. And have it installed on the outside of the building.

Town homes and duplexes. All right. Some issue that we see in the town homes, the duplexes, as you see the four on the left, beautiful roofs, all different colors. I mean, the work is amazing. You go inside, it is a disaster. Now, this is one thing guys that you can do right now. Super easy. Do not need again, an engineer to do this. We always get complaints, "Rene', it's hot in my room, but the living room is cold." Or vice versa. You go in the attic, the living room's installation is perfect. The bedroom looks like this, on the photo on the right. This is something super easy that you have to do right now, get your installation in order, make sure it's tucked. Make sure it is tight between the trusses and uniform and complete. These are small things that you could do right now.

Other issues that we see a lot with town homes and duplexes are roof leaks. Lot of roof leaks. Look at the photo on the left. This roof had a leak. So what did they do? They put another roof on top of the existing roof. Look guys, I can't make this stuff up. Look at the one on the right. When we went to the go take off and investigate where the roof leak was coming from, we had to remove a portion of the roof. When we did that underneath, yes. We found another roof under that. This is not the right way to do it. Let me tell you why. People say... because I've gotten this question before. "Rene', it's better to put a roof on top of a roof. It's double roof. What's better than one umbrella? Two umbrellas. What's better than that? An umbrella under a pavilion."

No, that's not how that works. The problem with double roofs is that they do hold moisture. Your roof is designed to breathe. It needs to breathe. You are trapping now and choking off the air that is in this area and it's causing the roof to retain moisture. Any moisture that goes on there gets retained. Doesn't allow it to breathe. Also, next slide, roof rot. If you have a roof leak, chances are you have rotted wood in your roof. So what did you just do? You put another roof on top of the existing roof and you nailed it into a rotted piece of wood. That will not hold, it actually causes now more holes in your roof and your roof will continue to leak.

Alan Tannenbaum, Esq.:
Rene', before you move forward, I do have to mention one thing. So when we talk about town homes and duplexes, sometimes a town home and duplex is under a condominium regime. The condo association has full maintenance and repairs for responsibility over the common areas, the roof, the walls, and so forth. What developers did, probably gone back at least 20 years. They started putting town homes and duplexes within a HOA regime. And it does not give the homeowners association, the automatic rate, to maintain and repair or even investigate roofing issues or wall issues or window issues. What it takes is an amendment of the documents in order to put that responsibility on the part of the homeowners association versus the owners. We continue to run in the situations, Rene' continues to run the situations where you have six connected town homes with a common roof structure.

And the documents say that it's each owner's responsibility to repair their own roof. And you can't divide a unified roof into five different sections and have five different roofers try to do repair or replacement on that roof. So it's really important if you're managing a homeowner's association that administered either in full or in part connected town homes or duplexes to really consider amending the documents, which is really the only basis that you can get an engineering firm out to investigate those type of common issues. Without that, in theory, you can't use association money to investigate an issue that's an owner issue. So very important that you consider that. Go ahead, Rene'.

Rene' Portieles P.E., G.C.:
Right. And now I saw a few slides left. So I'm going to talk about it, I'm talking too fast. I tend to talk really fast and loud. So bear with me.

Alan Tannenbaum, Esq.:
You're doing a great job.

Rene' Portieles P.E., G.C.:
For town homes and duplexes, we get a lot of issues with pavers, a lot of issues with tile, differential settlement of tripping hazards that occur when they have tile to concrete here to pavers. So there's a lot of that going on. And you know what? Let me switch gears a little bit. I'm going to tell you issues that are happening in all of these. Between mid rise, high rise, town homes, duplexes. If there are common elements that all these buildings have. So I'm going to call these all buildings.

And I got a few examples of these, the famous stucco issues. If you look up in your ceiling of your balcony is falling off, the stucco falling off your building. If you look around and you see on the photo in the left, this white staining that is happening, that is very important. That means that water's getting in behind the stucco and it causes this calcification, which is the minerals that it's taking from the actual concrete, that it leaves it behind the stucco and actually pushes it out and starts delaminating it.

So it's important to catch that pretty early, the infamous, famous water intrusion through a window. Okay? It doesn't matter where you live. It could be a residential house or a high rise tower. We are constantly getting water intrusion through windows, causing significant damage to the interior of the property. It's important as you see here on the right hand side, that plywood. I'm sorry, two by four with visine structure is a chamber test. We can test the window, determine exactly where it's coming from. So we don't have to remove, replace the window. We can change whatever portion of that window is causing defects and water intrusion. Sometimes you have to change out the whole window, but this will tell you exactly where it's coming in from.

Alan Tannenbaum, Esq.:
What are the signs? If you're looking at a window, what are the signs of a potential problem? What would you be looking for?

Rene' Portieles P.E., G.C.:
Sure.

Alan Tannenbaum, Esq.:
Okay.

Rene' Portieles P.E., G.C.:
It's right in the structure. Right here in this photo, I'll show you right here. When you look at that nice marble window seal that you have, look on the left and the right of it. And right here in this corner that I'm circling right here. There will be a little bit of a stain or a discoloration. Looks like somebody painted it or something, it's a little brown. That means you have water intrusion. Another area where these windows leak a lot is if you have like in this photograph, two separate windows, one window on the top, one window on the bottom, that's separated by this bar right here. That's called the mullion. In the middle here, you will see then again, stainy. You could also get your finger and tap it. And if your finger and tapping it goes right through it. That means that it's been wet so many times that it's actually deteriorated the wall.

Alan Tannenbaum, Esq.:
What about exterior cracks around windows? What do they signify?

Rene' Portieles P.E., G.C.:
The exterior cracks around the window, if there is a stucco issue that is occurring, it can cause water damage that goes in through the actual base here of the window or the top seal or the walls of the window. It also, if there's cracking around the sealants. So if you look at your window from the outside and you look at where that window touches, the stucco, there should be a little bit of caulking in there. Look to make sure that that caulking is nice and thick and not cracked. If you look at it and it's cracked, it really needs to be replaced. If not, that is the first avenue of damage to your window. Guys, understand that that little caulking that's around your window, that's really not the thing that causes water to go into your building.

These windows, have it into your ceiling, then that's your waterproofing. The problem is if that exterior ceiling is cracked, it allows water to go in and sit on top of that waterproofing sealant, it deteriorates it, and then it causes your window leak. Now, instead of just caulking the outside of your window, the only way to fix that is to remove the stucco around your entire window. Sometimes you have to take the window out, reinstall it. Depends on your system, but you have to then take out that structural sealant, reapply that structural sealant. So you could just imagine instead of $1 a foot, you are now at $20 a foot. And all it is, is just lack of maintenance. You just simply did not maintain the window properly, or it was installed incorrectly. It was installed with the improper or thickness of that sealant on the outside.

Alan Tannenbaum, Esq.:
Rene', we have a question. The HOA I manage came under homeowner control in September of '21, boards put it together a letter of developer deficiencies. Those items that were not listed prior, turnover as a developer still responsible to make any repairs after turnover. First of all, for most HOAs and condos, it's actually the list that's created after turnover that's really the relevant one. Because you have the ability to get an engineer and investigate the entire property. So certainly things that are discovered after turnover are very relevant to discuss with the developer. As far as the question, is the developer still responsible to make any repairs after turnover?

The answer is yes, but I want to make an important distinction. After turnover, the association is now in control of all the repairs that are done at the project. You should not let a developer or contractor in with no control just to undertake repairs. What you need to do is number one, have your own engineer indicate to you what needs to be repaired and how. Get the developer to agree to do it according to those specifications and let your engineer prove any work that's being done and make sure there's proper insurance in place while they're doing the work. The idea of just reporting a defect to a developer or a contractor and letting them come in to do whatever, oftentimes the problems hidden or exacerbated by what they do, you're under no obligation to accept insufficient or ineffective repair by a developer, go ahead, Rene'.

Rene' Portieles P.E., G.C.:
Right. Right. Yep. I'm almost done. A couple of other things that we constantly see. These are real photos here. The one on the left is a ceiling of a parking garage, the photo and people say, "How does this happen? How can you let this happen?" The photo on the right is of a different property. This is how this happens. It starts off where my mouse is with the little crack. That crack then gets a little stainy, that then falls off and it opens up, what does the association do? Paint it white, if you don't see it. This is not structural paint. It really needs to be cut out and redone because if not, the photo on the left occurs, this I believe right now is not yet repaired. This is all under investigation to try to determine the extent of this, but the photo on the bottom right is a project that we have currently right now of on property here, down in Miami, that we are fixing.

Again, this doesn't happen overnight. More importantly, this does not happen in one reign of a board. This is a board and then another board and then another board and then another board. Okay? That is, I think the key. If there's anything that you remember for this is you have to be proactive guys. You really have to understand your building, get somebody to help you understand your building if you don't and put things into priority. There's probably repairs that you don't have to do today. You can do tomorrow, but you know what? There probably repairs that you should do now because if not, that repair turns into a monster repair in the future.

Alan Tannenbaum, Esq.:
All right. We've got a question from Melinda, but Melinda probably too complex to try to handle in an open panel like this, but I'm going to give your question to Rene' and see if his mechanical people have some comments on it. So we'll have to respond to it offline. Rene', leave at least a few minutes to deal with how you do a report, but go ahead with your slides.

Rene' Portieles P.E., G.C.:
Sure. So again, issues with calcification. This is what we talked about. Improper mortar used to lay your tile down. Issues with sound. Everybody has issues with sound. You look inside the wall and it's supposed to have that sound continuation blanket. And then when you open it up top left, you see it's hollow. It's not there and then going into the reports. Okay.

Alan Tannenbaum, Esq.:
Let me set up the question first.

Rene' Portieles P.E., G.C.:
Sure.

Alan Tannenbaum, Esq.:
So what's the purpose of a written report and talk a little bit about the standards that you discuss within an investigative report.

Rene' Portieles P.E., G.C.:
Sure. The purpose of a report is to put things into perspective. Really, it's what it is. It'll separate if you're going the turnover. It separates what's a code violation, a deviation from the plans, a defect in construction and improper turnover maintenance. That's important because if you're going to be litigating, code violations are code violations. End of story. Deviations are deviants from the plan. That may be a problem. It may not be a problem. If a column is supposed to be here and they put it here, is that really a problem? Yes or no?

You need to decide that. Defects are defected construction. It can be aesthetics, the stucco goes this way in this area and then the other area, it goes up and down. What's the damage? Well, there could be a huge damage because maybe during construction, they had a major malfunction in some area of that wall and they had to redo it a few times.

That's important to understand. Improper turnover maintenance is when the developer has a rule of this property and gives the keys to you to take it. And it's your responsibility now. Well, guess what? If you didn't maintain it properly, you are now stuck with something that you cannot maintain. You have to remove and replace. That's a big problem, but going into a report, putting through perspective, we need to tell you where things are, what we observe. We split into these categories.

We tell you what discipline is the cause of that issue. And then why is the problem? I can't say that that is a problem because Rene' says it's a problem. No, I say it's a problem because the 2004 building code section 1403 says, it's a problem. And then a photograph to let you know what the issue is. If needed, there is a survey that you can find, if we go out there and there's water ponding on the roof, well guess what?

Maybe in the future, it's going to be a dry day, the water will be there. So we need to really put things into perspective. And the codes that we do is we do a full document review of all the documents relating to your property. For example, we put everything into perspective on your plans. Another thing... I've hit you guys a lot with this today, but another thing that I really want you guys to do and write this down is go through your plans, find out where they are, find out if they're complete. I can't count how many times I go to somebody, "Where are your plans?" And they open up a room and it's just boxes and boxes and boxes of just plans, stacked up top of each other. They have no idea what they have or what's going on.

This is first step. First step is get your plans in order. They're very, very important. I don't care if your building is one year old or 60 years old, doesn't matter. Get your plans in order, we have to review those, put them into perspective. We scan them, so they don't keep deteriorating in that storage room that you haven't locked in on. And then we also look at the applicable codes, find out all the codes of your building. We have to find out not just the codes, but who was responsible for all of the issues that your building has, because you may need to contact these individuals in the future. And if you're in a turnover, we need to know who of course was responsible.

Alan Tannenbaum, Esq.:
Yeah. One thing to keep in mind. Number one, there's a statute in Florida, 553.84, which says that if a party violates a building code, the party damaged has a cause of action, which is a very important statute that we utilize in our defect cases. But keep in mind that the building code is a minimum code, the minimum standard of construction. If you're purchasing into a high end, high rise, what the common law says that you're entitled to have a level of equality based upon a structure of like, kind and quality. So you could be in a luxury high rise, or actually the standard that the developer has to meet is much higher than what the building code requires. And frankly, what property is selling for in Florida, where even a fairly modest town homes are going for hundreds of thousands of dollars.

I would say the standard of quality that Florida construction needs to be measured against is a much higher quality standard than the minimum building code. And those are the type of things that will be reported on. Certainly planned deviations. Part of the implied warranty in Florida is, was the building built according to the plans and specifications, doesn't necessarily have to be a structural problem. It could be an aesthetic issue where the building look is different than what the plans required, or the developer left out an amenity is still a compensable event. Real quick, there's a question. Is there a specific building code requirement for windows that are... and Michelle put... there it is. That are to be used in EIFS wall construction. How about that one, Rene'?

Rene' Portieles P.E., G.C.:
Well, I mean, there's building codes for windows, there's that. There's ASTMs on how the windows is to be tested, how it's supposed to be manufactured, how it's supposed to perform. That goes for the building envelope. So you can be on wood, you can be on concrete, you can be on cast-in-place concrete. You can have an EIFS system. EIFS has its own also set of standards. And those as details on how it interacts with openings are important also.

So the building code is more of general, but it's when you really dig into what the building codes as inside of it, which is the ASTMs and all of those references. Those are the ones that really will call into EIFS openings, penetrations and windows as well.

Alan Tannenbaum, Esq.:
All right. There's a poll that Michelle put up, which we appreciate you responding to. Again, for you managers, make sure that Michelle has your cam numbers so she could report your credits for today. We have a few more minutes to answer some question. If it's cracked and peeling all around the window frame inside the building, is that a sign of a problem?

Rene' Portieles P.E., G.C.:
Yes. If it's cracked inside the building, that means that you're having movement of your window and you should not have that. That's either a structural problem, or that there's some water intrusion that is happening within that, which is causing cracking of your drywall and causing that little gap to occur. That could be either structural problem with the window or water intrusion.

Alan Tannenbaum, Esq.:
All right. There's a question from Jordan. What if the documents say the windows are the owner's responsibility? My first response to that is if there's any way to amend your documents so that windows are not owner responsibility for the long term, you'll be far better off. I put certainly sliders in that category, too. What happens is if an owner doesn't maintain their window properly, where's that work going to go that's going to get in. If you're in a mid rise or a high rise, it's going to travel by gravity downward, and you're going to have problems in the units below that presents a very difficult situation, same thing with sliders. And frankly, now you're having all different types of contractors show up at your building to do work. And you certainly want to avoid that. Rene', you have an opinion on that. Rene', you have an opinion on that on windows?

Rene' Portieles P.E., G.C.:
Yes. Yeah.

Alan Tannenbaum, Esq.:
You agree?

Rene' Portieles P.E., G.C.:
Oh, no. Absolutely. There's nothing I can add. You said it dead on. That's exactly...

Alan Tannenbaum, Esq.:
All right. Question, if a corner stairwell has had cracks for years as an engineer and report suggested? Probably, right? Yes? If a corner stairwell has had crack for years, is it good to call an engineer in?

Rene' Portieles P.E., G.C.:
Yes. Yes, because that crack only gets worse with the changing of the seasons and with if... it'll start increasing the decreasing, which is causing additional stress on that crack causing it to open. And the next thing you know, you start getting water intrusion coming in.

Alan Tannenbaum, Esq.:
All right. And the question, if there's just a few cracks in the stairwells, are they common or what necessitates further investigation?

Rene' Portieles P.E., G.C.:
It really determines on the size of the crack. If your crack is very, very, very thin, like a hair. They're called hairline cracks, you have to just keep a close eye on them. You might want to paint them. If the crack is greater than like your hair, so it's getting a little big or that the crack doesn't just separate, but it also has an offset. And it's separated, that's when you need to call somebody to come in and look at it. Because there's something else going on there.

Alan Tannenbaum, Esq.:
Yeah. There was enough close on this. We had a project in Sarasota where it was a 35 year old building. And the manager who lived on the fourth floor tried to get into their unit one day and they couldn't open the door. And fortunately, within a couple of days, all the occupants were out of the building. They had a major failure of a transverse lab at the fourth floor after 35 years. And one of the things about the serve site situation is at least from report of people at the project, that building was talking for at least a few days before it collapsed.

There was popping, there was different sounds that were coming from... and the building for somebody who had a discerning ear, would've known that something major was imminent, because those sounds are reported. So pay very close attention to your building by reacting quickly, you can avoid some catastrophic event and certainly a major crack showing up or a piece of stucco on the ground. The next chunk to fall off could be much larger than the one that you found the first time. So good to react to that. Anyway, Rene', you got one more parting word. It's 12:03, parting word.

Rene' Portieles P.E., G.C.:
Parting word. Guys, I need you to understand your building, walk around your building. Look at it. Just like Alan said, "Your building is talking to you. It wants to be listened to." And I'm not saying this in a mean or evil way, but don't take the word of one person who maybe is on the staff. Look around, there's so many issues with different building engineers that come and go, and then the information, the history doesn't get transferred to the new guy, the new guy then is by himself.

He doesn't really know where stuff is. It's really important to get a grasp on your building. If it's not with the chief engineer, get yourself an engineer, it doesn't matter who it is. Somebody with forensics really helps significantly because they get that to the root cause. And they'll be able to really give you a list of where your building is now and then using priorities. You can move on with the repair either today and tomorrow.

Alan Tannenbaum, Esq.:
Okay. Everybody-

Rene' Portieles P.E., G.C.:
And thanks having me on.

Alan Tannenbaum, Esq.:
Yes. Thank you, Rene'. Hopefully it was enlightening for folks and we will have a great topic for next time, which we haven't decided, but we appreciate Rene' being with us and everybody have a great day. Thank you.