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Hot Topics for 2023 - Condos and HOAS

Alan Tannenbaum, Esq.:

Yes. I'm Alan Tannenbaum with my partners Jon Lemole and Cindy Hill. The title of the session today is Hot Topics for 2023 Condos and HOAs, so we put values with questions; questions about hurricane claims, questions about the impact of the new legislation relative to structural inspections and reserves for condos, and the new insurance legislation, we're going to cover the top things that we've heard from people that they've been concerned about. We can't account for the legislature. One of the things that the legislature in Florida has done historically, like many state legislatures, is when there is legislation that's affecting an industry or governmental sector, they have historically brought all the stakeholders together, the lobbyists, the lawyers involved in a particular field, the companies involved in the industry, gotten their input and fashioned a piece of legislation that at least takes into account the various interests of all the parties. That's changed very much in Florida in the last few sessions.

The condo legislation was basically cobbled together in two days. Some of the folk involved in the condo industry apparently were brought into the conversation. The insurance legislation was apparently a product of lobbyists for the reinsurance companies, and a lot of the folks who were involved in the industry, otherwise, certainly folks affected as consumers were not involved in the process of that legislation being corrected. Then it all gets adopted and then we as lawyers are tasked with trying to explain it, which is not the easiest thing because we have a hard time understanding parts of it ourselves. One of the questions that keeps coming up is there going to be a corrective bill, especially for the condo legislation? There is one that has been filed, whether it's progressed itself through the legislature, the law is unknown at this point. It's not sponsored by the leadership, but it is sponsored by a Republican representative, which is a positive sign of at least a possibility.

But it's a complex bill and they may not have time for the information to take it up, but there is one filed. Okay, I'm going to cover the first section, which is insurance. One of the big problems obviously is non-renewable, but I'm going to cover our insurance losses first. So one of the big surprises in Charlotte County down into southwest Florida were the things that were not covered by insurance at all. We had a community that lost $2 million of landscaping, made a claim against their insurance carrier. The insurance carrier said, "We don't cover landscaping." There were card boards that were down that were not covered by any insurance policy. So if you're a community that has a significant amount of landscaping and the idea after a storm is to replace it, you need to think about having some sort of reserve for an item like that for an HOA. So be very careful.

I did a single claim years ago in a community in Central Florida and none of the buildings were affected by the entire site was affected including half of the guardhouse that went and fell down into a sink hole in the entrance. The only thing the insurance company covered was replacing the guardhouse, none of the other damage at the property, which was massive because it wasn't covered by the sink hole coverage. Be aware of your deductibles. There's been a lot of surprise deductibles, when coverage usually has a very significant deductible. A lot of groups are surprised that when they make a claim that hundreds of thousands of dollars of the loss needs to be covered by the association coverage itself. Flood insurance, it's also very restricted on what it actually covers. Imagination going to ask if everybody could mute. Okay. Ask if everybody could mute. Okay. Oh, I'm getting feedback from myself. I'm sorry.

So watching deductibles, non-renewal's becoming a big problem. Insurance companies are not required to cover you. We did have legislation in Florida that there was a state-mandated parents company, but now they're eliminating the properties that they're going to insure. So Florida now has created gaps for communities that are just not going to be able to get coverage even though, especially for condos, it's statutorily mandated that they have it. So we're seeing a lot of issues with groups with non-renewal and part of the impetus of the structural inspections, which we're going to be talking about is insurance companies are watching those. If you're not meeting the mandates of the statute, it will give an insurance company an excuse to drop you. So we have folks around the state that we've talked to say, "Well, legislators going to correct some of these things. They're not going to require these inspections in the end." First of all, it doesn't appear unless this bill goes somewhere and it doesn't cover everything that that's going to happen.

But secondly, one of the risk is for non-renew your insurance coverage. I don't know if there's another slide, Jon, but you can go on to the next one. This is actually published by one of the insurance companies and it shows the pressures on the home insurance market, material increases lumber and wood product prices going up, roofing going up, all the disasters including hurricanes that the insurance companies have endured. They've also talked about the job openings in the construction industry in Florida have probably a very large portion of that. So those are all concerns going in. So cover the uninsured losses, be aware of your deductibles. The premium increases are potentially going to continue and get your buildings in shape so that you don't risk being non-renewed. With that, I'm going to turn it over to my partner, Cindy Hill, who's going to cover reserves.

Cindy Hill, Esq.:

Okay. Jon Lemole is going to cover the SIRS part of that and the milestone inspection after I'm done, so I don't want to delve into that. This is about the reserve issues, though, that've been created by these new laws. Jon, if you could move to the next slide. I'm going to start with the issue that people are beginning to become aware of, and that is to the extent when the legislation came out, and this is the new condominium legislation I'm talking about. Condominiums that were three stories or less thought, "Oh, okay. We don't have to worry about the Milestone or the SIRS. We're smaller villa style condominiums or shore buildings." Well, the Division of Condominiums posted on their website that is their interpretation of the obligation to not be able to waive your reserves that came with these new laws applies to all condominiums.

So let me back that up. Part of the new legislation said that certain structural parts of the condominium buildings owners can no longer vote to waive those reserves to use the phrase that gets used a lot, to kick the can down the road. That new legislation is obviously going to be an enormous financial burden on condominiums in Florida. But again, smaller villa style condominiums or smaller buildings were thinking they didn't have to worry about that concern. The Division of Condominiums has said otherwise. I have up here on the slide the exact question and answer quote that is from their website. The question was, "I live in a two-story condominium, is our association still permitted to waive reserves?" The answer is, The Division does not consider this provision to base an association's ability to waive reserves on the number of stories that an association's buildings have."

Very wordy response really meaning that we, the Division considered the obligation to now no longer be able to waive certain reserves applies to all condominiums, not just to one's three stories and higher. Jon, if you can move to the next slide. What am I talking about in terms of what items no longer can be waived or now have to be fully funded? That is what is referred to in the industry now as Subsection G, and I have it up here on the screen. That would be your roof. That's a structural component of everyone's building. We can agree on that. Any load-bearing walls or other structural parts of your building, your floor, your foundation, your fireproofing, your plumbing, your electrical systems, your waterproofing, your windows, and then you have the little catchall at the bottom here, "Any other item that has a deferred maintenance expense replacement cost that exceeds $10,000."

That's not a high burden in these days, "and the failure to replace that item negatively affects any of the items above as determined by an engineer or architect performing the Structural Integrity Reserve Study." Well, that's really a bit of a glitch there, because the condominiums that are smaller in size don't have to have a SIRS. So I don't know quite what to tell you about that catchall for the smaller condominiums. But what this means is a matter of let's use some common sense since we have to, since the legislature threw a lot of things at us. If it's going to be integral to the structure you're building, you're going to want to defer on assuming it is part of this catchall and making sure that you're not waiving reserves on it so that you don't run into a problem. Now I've gotten a lot of questions, and we could spend the next part of the presentation trying to address, "Well, what if we're not responsible for the windows," or, "What if there is no problem?" "How do we fund for a replacing a foundation?"

These are issues that are legitimate questions. I don't want to go down that path 'cause it's meant to be more of a spot issue. But I would say that that's really going to be answered for the three stories and above condominiums by the report you get from an engineer. If the engineer doesn't see a problem with your foundation and there's no basis to fund for your foundation. That's really the ten-second answer to that. So in the interest of time, I also want to circle back before I hand this over to Jon to mention what Alan had mentioned that reserves for HOAs are not impacted by any of these new laws, but reserves for HOAs need to be readdressed in terms of now that we've been part of a hurricane to think about those items, as Alan was saying, that you're not necessarily reserving for because you're not anticipating losing them, such as landscaping.

I've had tens of thousands of dollars my communities have lost and hundreds of thousands of dollars for some of the larger one that lost landscaping. Mulch is wildly expensive. We all should have gone into the mulching business. But I say that facetiously, but the idea is these expenses were hard on my communities to suddenly have to decide what to do to replace them. Landscaping isn't something we think about. So to the extent condominiums have a really large burden now for reserves, I would also encourage HOAs to reassess what they're reserving for, what their insurance is covering so that they can also remain fiscally sound and solid properties that people are going to want to buy into. So I know that raises a lot of questions and a lot will take in a few minutes, but I'm going to turn it over to Jon. Again, we are going to answer questions at the end.

Jon Lemole, Esq.:

All right. Thank you, Cindy. I give a lot of talks to different groups of managers and condo directors and I continue to see, and it's surprising to me that there's still a lot of confusion as to first of all, the difference between the different types of inspections that are required under the new safety legislation, the timing of those. I think I heard some statistics recently that less than a third of condominiums that would fall under these inspection requirements have taken any steps to move towards doing those inspections and reports, which was surprising to me because the proverbial clock is ticking and these deadlines are going to sneak up on folks pretty quickly. The other important thing that I want to say at the outset is that if you have a condominium that is captured under the regime of performing milestone inspections and Structural Integrity Reserve Studies, waiting is probably not the best idea because engineers who can do these and both of these studies or reports require the participation of a professional engineer or an architect.

As you can imagine, those folks are pretty busy. So scheduling these things needs to be more of a forefront priority if your condominium is part of or captured under that regime. But what I want to do here today is give a really quick overview of the two different, and let's keep in mind and I want to stress that, these are two different inspection requirements because there seems to also be some confusion as to whether these are a blended process or blended inspections, and they're really not. They're two very separate types of studies that are required, and in fact, they're in two different sections of the Florida statutes. The milestone inspections are covered under the building code provisions of the Florida statutes and the Structural Integrity Reserve Studies are captured under the condominium statute if that's any indication as to the legislature's understanding and commitment to the idea that these are two very separate studies that need to be done.

Now that doesn't mean that they can't be done together by an engineer, but the reporting on this has to be, in my opinion, kept separate so that you can be sure to comply with the regulations and you don't have your local municipality coming at you and saying, "Well, it's not clear to us whether this is a milestone inspection or not, so you need to go back and do it again." So I want to talk about them separately. So we're going to start with the Milestone or sometimes we call them structural safety inspections. What I did, and hopefully, you all got is I put together for our firm what I call a quick start guide or a quick reference guide, which is just a real step-by-step discussion of what each of these different reporting requirements are. So we're going to start with the Milestone Structural Safety Inspection.

Now you've heard Phase 1, Phase 2, I have heard from folks who think Phase 1 is Milestone and Phase 2 is Structural Integrity Reserve Study. That's not true. Phase 1, Phase 2 specifically refer to the milestone inspections, so let's make sure that we have the terminology correct. In the milestone inspection, if you have buildings that are three stories or higher in your condominium, you have to do a Phase 1 milestone inspection. So let's talk about what is a Phase 1 milestone inspection. It's a visual inspection of a condominium building for evidence of, and the firm of art here or the statutory term is substantial structural deterioration. Now the statute does provide a not particularly helpful definition of what substantial structural deterioration is, but that's an engineering decision that will need to be made by the licensed engineer or architect who performs this. Now we talked a little bit about this, there's a Senate bill floating around there.

I actually looked at it this morning real quickly for the very first time. I can tell you that the provisions relating to the milestone inspections, there's not a lot in there. There's not a lot of clarification in there. So what you see and what we're talking about here is what still is on the books and what at least in the bill that I've seen is going to continue to be on the books. So visual inspection for evidence of substantial structural deterioration as that term is defined by or determined by a licensed professional engineer or a licensed architect. As you can see, in the second section of this slide which says who does these reports, it's got to be a licensed architect or engineer. Now, we've talked about this in the past, are architects technically statutorily permitted to do structural inspections? That's debatable.

I don't want to argue that point right now, but what I would say to you on a practical level is if you're considering or you're being approached by an architect to do a structural milestone Phase 1 inspection, it'd probably be a good idea to make sure that they've got adequate insurance coverage for that because is there's some questions as to whether that falls within their scope of licensing. If an architect regularly performs structural work, then arguably they can do that. But I don't want to get into the finer points of that. I just want to alert you to that fact and that it's probably a good idea to take a good look at the insurance coverage for that architect who may be doing those in that Phase 1 milestone inspection. Okay. Who has to do a Phase 1 milestone inspection? Any condominium that has a building three stories or higher, and you have to do it for every building that is three stories or higher, so if you have multiple three story buildings or higher, you have to do a milestone Phase 1 inspection that covers each of those buildings.

There's a lot of discussion about what constitutes a story. It's not particularly defined in the legislation. There are some other statutory provisions that we can take a look at, and when we do look at those, what we have determined and what appears to be the general consensus among engineers, lawyers and other professionals is that a story includes ground floor covered parking, which you often see in condominiums in Florida. You've got a ground floor covered parking and there are two stories of habitable condominiums above, that is a three-story building. I get asked all the time, "What if you have a two-story building but the top floor has a loft or a mezzanine of some sort? Is that three stories?" That's a very difficult question to answer. The building code defines what a story is and has a very particular definition of whether a loft or a mezzanine constitutes a separate building story. It's highly complex, highly convoluted.

I would tell you that in this instance, if you're not sure, you ought to consult with an engineer or an architect and let them make the determination as to whether or not your two-story building with a loft or mezzanine is actually a three-story building for purposes of the building code. Because remember, the milestone inspection provisions are in the statutes which relate to the building codes, and so that's what's going to govern that determination. Okay? So if you're within this regime, you've got a building that qualifies as a building that is three stories are higher and you're in a condominium, you got to do a Phase 1 inspection. So what is done in a Phase 1 inspection? What's inspected? For any building three stories or higher at a minimum, A Phase 1 inspection is a visual inspection of the habitable and non-habitable areas for evidence of substantial structural deterioration. We talked a little bit about what that term is. It's not very well-defined, but that's the determination for the engineer or the architect to make.

If in the course of that inspection and reporting, the engineer or architect determines that there is evidence of substantial structural deterioration, then they must do a Phase 2 milestone inspection, so keep that terminology straight. Phase 1, Phase 2, that applies to the milestone study. So a Phase 2 inspection is a much more detailed process and frankly will be a much more expensive process. The engineer is going to drive that. The engineer has to in their professional determination decide what they need to know in order to determine whether there needs to be any work that they will recommend to correct the evidence of substantial structural deterioration. It may include destructive testing, but at the end of the day, the engineer is going to determine in that Phase 2 inspection what the actual structural issues are and then how to correct them. So that report, that Phase 2 will be a much more detailed report about the issues at the building and it must include the recommendations for remediating those defects. Now if you do get to Phase 2 and you have a Phase 2 report, you got to do something with it.

If there's a remediation recommendation by the engineer, you're going to have to implement those repairs and implementing those repairs will be monitored by the local building official, and you'll have a certain amount of time to do that. If you don't do it, you're going to have a very upset building official and that will all be enforced through municipal ordinances. When are these reports due? Now here's where here's surprised that we have a very low percentage of folks that have even started this process. They're due by December 31st of the year in which the covered building reaches 30 years of age. That 30 years of age is driven by when the certificate of occupancy was issued for the building. So if the certificate of occupancy for your building that's three stories are higher, your condominium building three stories are higher was issued, is coming up on its 30-year anniversary, then by December 31st of that 30th year, you've got to do the Phase 1 milestone inspection for that building.

There is a grace period for buildings that were completed prior to July 1, 1992 'cause remember, this law went into effect July 1st of last year. So if you have a building that was completed that had its certificate of occupancy before July 1, 1992, those buildings have until July, I'm sorry, December 31, 2024 to do their Phase 1 milestone inspection. I'm not going to get into the little gaps that creates for some folks that may have had buildings turning 30 before December 31st of 2024, there's some little inequity there for those folks, but it is what it is. That's what the statute says. Adding further confusion, the legislature has put a 25-year schedule for buildings, within three miles of a coastline. They don't really even provide a very good definition of coastline however, and so that's created a lot of confusion and there really isn't a very solid answer for this. I know that's unfortunate, but there's a statutory definition of what constitutes a coastline, and that is the mean high watermark of where the land meets the sea and there's not a very good definition of what the sea is.

So I can't tell you whether the gulf is determined to be the sea or whether a bayou or an inlet or a canal is similarly determined to be a coastline. There's a frequency here, it's not one and done. After your initial Phase 1 milestone inspection, then you have to do another one every 10 years. There's reporting disclosure requirements. Every unit owner must get a copy of the Phase 1 milestone inspection. It must be posted on the property. If your condominium is required to maintain a website, then it must be posted on the website, and then the report must be maintained in the official records for 15 years. Okay? So that's milestone Phase 1 or Phase 2. There's a whole separate reporting requirement and that's the Structural Integrity Reserve Study. You'll find that in Chapter 718. What is the SIRS? It's a completely separate inspection. Its purpose is to define recommended reserves for replacement or deferred maintenance of certain common areas as set forth in, and Cindy referred to Subsection G, which is 718.112(2)(g).

Who does it? Same as a Phase 1 milestone inspection. It must include a visual inspection of the common areas by a Florida licensed engineer or architect. Now here's where this is a little bit different. This is a reserve study, so the reserve calculations don't necessarily need to be made by the engineer or architect, but the visual inspection of those areas that are in G must be done by an engineer or an architect. So if you've got a reserve study team coming in to do this, know that that inspection, that visual inspection needs to be done by a licensed professional. Again, who is captured under this? It's condominium buildings three stories are higher. The story is going to be the same definition as you would find and we talked about moments ago for a milestone inspection. What's inspected? For any building three stories are higher, a visual inspection of the common areas to establish their remaining useful life, the estimated replacement cost or deferred maintenance expense and a recommended annual reserve amount for that common area.

Again, this refers back to those things that are listed in section G. When is it due? Effective July 1, 2022, every developer has to do this report prior to turnover. So for any building, any condominium that is turning over after July 1st or has turned over after July 1, 2022, the developer's got to deliver this Structural Integrity Reserve Study. For owner-controlled associations which turned over prior to July 1, 2022, the very first SIRS reserve study is due by December 31, 2024. Then the frequency thereafter is you have to do one every 10 years commencing with the initial Structural Integrity Reserve Study. These reports need to be maintained and disclosed. They have to be maintained by the condominium and official records for 15 years. If the condominium is required to maintain a website, the SIRS must be posted on the website.

Okay? So those are the two different inspection regimes, and it's very important that you keep them separate. Now, condominiums may be doing and engineers may be proposing to do these two reports under the umbrella of a single inspection. I'm not going to comment on whether or not that's okay or not. You should discuss that with your association's general counsel. But as a practical matter, I would be ensuring that from a reporting standpoint that there's a clear delineation between the milestone reporting and the Structural Integrity Reserve Study reporting so that you can be sure to comply with the statutes and comply with the municipal building ordinances that apply to the milestone inspection because it's the municipality that's going to be enforcing that.

You want to make sure that they have a clear record that you've done a dedicated Phase 1 milestone inspection report. So if you're in doubt and you've got a proposal from an engineer, you can run it by general counsel, you can certainly run it by a construction law firm such as ourselves. We review engineering studies all the time and engineering consulting agreements all the time. So that's really where you need to make sure that you're, your reporting and your inspection process is going to comply with the statute and with local municipal ordinances. I know that's a lot. We'll answer questions afterwards and certainly you can always email us with some questions about this, but we're going to flip it back to Cindy now. She's going to talk about dealing with board and owner resistance to significant assessment increases.

Cindy Hill, Esq.:

Okay, thank you. I think that's solved it. Before I proceed with that, there seems to be some confusion from the chats. I do want to clarify what I was discussing earlier was the reserves requirement. Jon just discussed the inspection requirements. Inspection requirements are for condominiums under 718 that meet that three-story threshold, which as he had discussed, can be an issue if you have a garage or maybe a loft, but that's where that applies. All condominiums are now obligated under the current laws and the division's reading of the current laws to not be able to waive reserves for those item G components, the roof, the windows. So I hope that that helps clarify that issue. In hindsight, I think maybe Jon should have gone ahead of me and I should have gone after Jon to help with that clarification. Moving on, though, to the now hefty bills that condominium associations are looking at to start to fund their reserves and no longer waive them.

If you've already been not waiving your reserves, that's great, but many condominiums do at least partially waive reserves to help with expenses. You're going to get a lot of owner pushback to some of these bills. There's also going to be bills for the inspections for the larger condominiums. First of all, I want to advise, don't feel like you have to do this alone. Counsel for each association can help provide explanations to the owners as to why these actions and expenses are not discretionary. This is not the same thing as deciding, "Hey, let's redo the pool and make it look nice. Get new pool furniture or get new club furniture." No, these are not discretionary decisions. These are obligations that the condominiums have to follow under the act. So I would start with that informed conversation with your owners. Make sure they know that as a board, you are trying to comply with the law.

You're not just trying to put an onerous position on the owners. The other thing to keep in mind is to the extent that some owners may not be able to afford these expenses, it sounds rather harsh, but in life sometimes people have to make some decisions. If something has become too expensive for them to keep, they might have to make some personal decisions about that. Not to say that the board needs to be crass about that, but it's not the board's problem candidly to solve personal financial problems. Now that being said, at the same time, the board does want to be cognizant of the community and try to do what they can to make sure that it's not any worse than it needs to be, for lack of a better way to put it. So waiting for some of these issues, until we get closer to that 2024 deadline, actually means that they're just going to get more expensive. I've been advising my associations to start planning now for these issues.

Go ahead and get yourself in line for the inspections if they're necessary. Start looking at your reserves. See what you're looking at in terms of raising the assessments to fund the reserves. Do these things sooner rather than later. No, they're not fun. But the longer you wait, the more expensive it's going to get. You can also consult with your counsel and see if as for bridging the gap, so to speak, between this now requirement that's going to put some financial burdens on a community and thinking forward, it might make sense to take out some kind of loan to assist with that or rather than at a large special assessment. You can also do special assessments in stages. You're not required to necessarily do a special assessment. That's just a one fund. You can do special assessments where people pay periodically. These are all going to be driven by what's in your documents, though. So I can't give specific advice on that.

I'm just trying to put out some ideas that you can think about with your counsel and to try to best put out the expenses without creating more burdens than you need to for your owners, because I don't need to tell you people are going to complain. No one likes the cost of living going up. Again, starting with what I started this part of the presentation with, think about the communications with your owners. In my experience, a lot of problems can be solved with good communications. Letting owners know that these are not discretionary. They're also going to help you maintain or keep insurance on your buildings and they're going to help you with your property values. Banks are looking now at what financials are for community associations. So these are all sound principles. These are not things that owners are going to like, but it should be things that when owners are told, what the reasoning is for these that they will at least understand. Alan, I think you're muted.

Alan Tannenbaum, Esq.:

I can add to that the people who show up at meetings are often the people who are upset about assessment increases. You may not hear from the vast majority of owners, but the people who do show up generally is with a complaint. Some people want to sell their unit in six months and that's their major concern. We've had boards where there's a board member who is trying to sell their unit and there's a conflict between the long-term decision making that they need to make for the benefit of the association and what their individual interest might be. So I've always told associations that your obligation is for the long-term sustenance of the community, not to deal with short-term interest. With that, it's proper planning, meeting reserve requirements, getting your inspections done and so forth. So that's what we're looking for. We're going to leave a little bit of time for questions, but I want to cover real quickly this last topic of complacency.

We have a lot of people hoping that the legislature is going to modify the condo legislation to extend deadlines to make it less onerous. It may happen, but I was on the construction law committee of the Florida Bar yesterday and one of the pieces of legislation that is actually going through right now, and probably will be passed is to shorten the statute of repose. The time period for pursuing latent construction defects to actually make it synonymous with the statute of limitations. It used to be 15 years, legislature moved it to 12 years, then the legislature moved it to 10 years. Now they're proposing to move it to four years. That's what the legislature is really top of mind in the legislation right now, plus other things that have nothing to do with our industry. So whether they're going to be able to get to a glitch bill or not is very doubtful, so don't wait for that.

There's now fiduciary obligations for condominiums that put individual directors at risk for any kind of delay. One thing I know and any of the construction people on the Zoom will tell you is that building problems do not get better with time. A problem that you have today will be more expensive to repair tomorrow and certainly more expensive to take on in five years, so buildings don't wait. Champlain Towers is the most drastic example, but they knew for years that there was a significant amount of money that needed to be spent both in investigation and repairing that building, and they waited too long in the process to get to that building. There's many other buildings in Florida that face the same consequence. So Cindy or Jon, do you have anything to add to the topic of complacency? Jon?

Jon Lemole, Esq.:

Not anything other than what I had talked quickly about in my section was just the market supply and demand. We're seeing engineers, for example, that are not even in milestone inspections, just doing other types of building forensic inspections and they're booked four, five, six months out. So you don't want to get caught by waiting too long and then you can't get an engineer to do these inspections in time to meet the time requirements. The faster they have to work, they may charge more as well. They may charge premium pricing for faster service.

Alan Tannenbaum, Esq.:

Let's get into some of the questions, and I'm looking at Robert's question. "I was wondering if the laws which came out of Tallahassee will also apply to hospitals, hotels and apartment buildings?" I don't think so. The legislation that was created reserve and inspection requirements was a reaction to a horrendous condominium building collapse at Surfside. Until there's an apartment building that has the same fate or a hospital or another hotel or commercial building, I doubt that there will be evidence on the part of the legislature to impact those issues. The other aspect that you have is obviously hospitals are and hotels and apartment buildings are owned and operated by large commercial interests, much more difficult to legislate anything with a large commercial interest in the political climate of 2023. The reality for Condominium Homeowner Associations is there doesn't seem to be any detriment politically for the legislature to act. In fact, the outcry after Champlain Towers was for the legislature to do something drastic to protect the occupants of buildings. So I doubt whether any of this is going to extend any type of commercially-owned buildings, including hotels. Let's see.

Cindy Hill, Esq.:

Alan, I can add to that. That new legislation actually is exempting commercial condos from these new requirements. So I think that you're spot on with where the legislature's going with that.

Alan Tannenbaum, Esq.:

Okay. There was a question about a apply the laws to one-story condo villas, and I think Cindy did clarify that the general reserve requirement does apply. The legislation that Jon addressed would not apply to a one-story villa, but the reserve requirements as interpreted by the Bureau of Condominiums is that fully-funded reserves without waiver are going to be required even for a one-story villa condo.

Cindy Hill, Esq.:

Correct.

Alan Tannenbaum, Esq.:

Let's see. Are there any exclusions from loss assessment coverage in homeowners policies? I've never seen an insurance policy without an exclusion, so that's an easy one to answer. I can't say offhand unless Cindy has more information about what specifically might be excluded.

Cindy Hill, Esq.:

No, I don't. That's policy driven.

Alan Tannenbaum, Esq.:

I'm sure there is one. Let's see. "Can they deny coverage to an HOA that functions as a condo, i.e., master policy as condo after the rooms hit 17 years of age?" Cindy, you want to attack that one? Generally, an insurance company does not have to have a reason for cancellation. I know there was something on recent legislation that had to do with, 'cause you can't have an automatic cancellation because a roof reached 15 years of age.

Cindy Hill, Esq.:

That was recent legislation, but depending on what the building is, that legislation might not apply. It was meant to apply to residential independent structures, not commercially-insured structures like condominiums are. So that one can't really just be answered without more detail other than I would say generally, the insurance companies are dying because they can. The industry's a mess. Insurance is not going to help you though in any circumstances.

For homeowner associations, not condominiums for homeowner associations, reserves can either be statutory under the Homeowner Association Act or they can be discretionary in the documents. So that one, unfortunately, cannot be answered as a blanket answer. You're going to have to get with your counsel and see what flexibility you have. I can say if your reserves are not statutory and not governed by the Homeowner Association Act, it will be very easy for the board to make an adjustment for that.

Alan Tannenbaum, Esq.:

All right. Jon, you may want to attack this, "Under the new legislation, must a Condo Association engage the Independent Reserve Study Analysis or can an association do an in-house study performed by unit owners?" Okay, why don't you attack that? Can you attack that one, Jon?

Jon Lemole, Esq.:

Yeah. So look, if your condominium building fall within the definition of buildings that you're required to perform a Structural Integrity Reserve Study for, you're going to have to do the SIRS. So buildings three stories or higher, the legislation requires a Structural Integrity Reserve Study. A Structural Integrity Reserve Study, at least part of it, requires the participation of an engineer or architect to do the visual inspection of the Subpart G components in determining the remaining useful life, the integrity, the remaining useful life of those components. So unless you've got a Florida licensed engineer or architect involved in that reserve study process, then you cannot do it in-house. You've got to engage somebody to do that because of that requirement to have a professional involved.

Speaker 4:

I'm talking about the numbers aspect. I get the fact that we need an engineer to do the on-site inspection, but we talk about two components to the inspection. One is the visual by an engineer and the second is the actual numbers, the costs. The question is the cost aspect of the inspection, does that need to be done by outside professional or can it be done in-house?

Jon Lemole, Esq.:

That's a good question and I don't know that the legislation provides a clear answer on that. Arguably, as long as the engineer or architect is involved in making the inspection and essentially providing the useful life data can you determine the reserve requirements in-house? The statute doesn't address that, but the report part of this, that that's where I think you may have some issues because you've got to have a Structural Integrity Reserve Study. It's a report. So I don't know how you would put that report together using a combination of an outside engineer and somebody in-house or an in-house committee who's making those calculations. There may be a way to do it, but I don't have a ready answer for that because the statute doesn't specifically address that.

Alan Tannenbaum, Esq.:

All right, just a minute. So I'm very wary, and Cindy will back me up on this, of board members undertaking and providing information that normally would be provided by an expert that is going to be relied upon by the association and its determination. So perhaps if you got bids from contractors and use that as a basis for your reserve numbers, that would pass muster. But if individual board members, based upon their experience, for example, are coming up with what required reserves numbers should be on their own, let's say somebody's a retired contractor or retired engineer in their community, they're putting themselves at personal risk in making those calculations.

So part of the reason why you hire a professional to perform these functions is you don't want an association making determinations based upon individual determinations by know even knowledgeable board members. So the same reason why a CPA who's on the board doesn't do the association's tax returns, and for legal advice they call Cindy for general counsel questions and not rely upon one of the board members who happens to be a lawyer. They're putting themselves at personal jeopardy and trying to take something like that on.

Cindy Hill, Esq.:

I agree.

Joseph Rickey:

I also think the business judgment rule would come in would be impacted there too because by not consulting an outside expert to assist in those calculations, you may be at risk of not having the protection or the full protection of the business judgment rule as a board.

Cindy Hill, Esq.:

What Jon is referring to is that protection you have as board directors to make reasonable decisions and be shielded from liability for those decisions. If you make a decision based on the advice of a professional, it's very difficult for you to be found liable as board directors for that decision. So if that professional's in-house, so to speak, that protection is not as clear.

Alan Tannenbaum, Esq.:

Okay. Again, you can continue to send your questions through chat. It's very difficult in a session like this to respond directly to oral questions during the session. So whoever was asking to have further back and forth send your question through chat, and we're going to continue 'cause there's a lot of questions. I see one here, "If the association documents only reference 617 and not 718 or 720, would they still fall underneath the requirement?" Dahlia, we'd love to see those documents because I'm not sure I've ever seen for a homeowner association or a condominium association a set of documents where 720 or 718 do not apply.

Cindy Hill, Esq.:

I have seen them.

Alan Tannenbaum, Esq.:

Okay. Well, Cindy, well, how would you respond to that?

Cindy Hill, Esq.:

Sometimes the documents are older.

Alan Tannenbaum, Esq.:

Right.

Cindy Hill, Esq.:

The provisions in 720, a lot of them were originally in 617 and moved over to 720-

Alan Tannenbaum, Esq.:

Okay.

Cindy Hill, Esq.:

... 20 something years ago. Generally, unless your documents are really old, and we're talking over 45-years-old, you're not going to be a condominium unless it references 718.

Alan Tannenbaum, Esq.:

Okay. There's a question about being three miles from the coast. The only concern for a building three miles from the coast is if you're a three-story building. So if you're a one story or two stories and you're by the coast, you have no special requirement other than if you're a condo meeting the typical fully-funded reserve requirements. Cindy, there's a question of pooling, I don't know if you want to take that on here.

Cindy Hill, Esq.:

Pooling did show up in a couple of questions. I answered one of them. The Division of Condominiums has said that pooling reserves is still okay, but they didn't give us any guidance. So honestly, there is no rule for that now other than we can still pool. I've been under the reasonable assumption, and that's all it can be is reasonable, that you can still pool for the items that are not the item G, like the roof, the waterproofing of the building. For instance, I give the example repaving your parking lot, looks like you can still pool for that. It looks like you probably cannot pool for those other structural items G though. But again, we don't have answers.

Alan Tannenbaum, Esq.:

There's a question from Peter, "Is there any provision of the statute defining procedure for establishing the reserves for one and two-story buildings?" Absolutely. That's right in the Condominium Act if you're a condominium. So the reserve requirements are there for one and two-story buildings and they were there before this legislation passed. So it's right in 718. Cindy, you said for 720 there's a reserve requirement also, I believe.

Cindy Hill, Esq.:

There is, and I could spend a whole hour on that, but each homeowner association's counsel can advise them whether they're reserves are governed by the Homeowner Association Act, what we call statutory reserves or if they were reserves created only by the documents of that community and are therefore, governed by the documents of that community.

Alan Tannenbaum, Esq.:

Okay, so in an HOA, there's nothing in the documents about reserves. Does the 720 section apply?

Cindy Hill, Esq.:

Most likely not. Again, the legislature changed the reserve components for the statute just last year for homeowner associations as well adding to some confusion. If there were no established reserves at the beginning of the community, odds are the reserves are completely board discretionary. Odds are.

Alan Tannenbaum, Esq.:

Jon, I don't know if you want to take this one on, "Services due by 12/31/ 24, budget for 2025 would already be complete for condos under calendar year. Would that information then be used for 2026 budget?" You have a ready answer for that one?

Jon Lemole, Esq.:

I don't know that it's a ready answer, but I would say that, yeah. Off top of my head I would say that's probably accurate; however, as again, I was reading this Senate bill that's out there and they do address that, or at least in my quick reading of it, and I need to look at it in a little bit more detail. But it looks like they may be addressing that issue because they talk about budgets adopted after December 31st of 2024. So I don't want to give a definitive answer on that. I would say to you you ought to sit down with general counsel, take a good look at the statute and make that decision with the advice of counsel. But it looks like if at least the legislature is looking at that particular issue and trying to provide some clarification on it.

Alan Tannenbaum, Esq.:

Okay. Gail asked, "I recall that we have to fund 110% of structural reserves." has either of you heard about that, Cindy or Jon? You don't have to reserve for structural more than your engineering report or would say is a reserve number, there's no [inaudible 01:00:16]

Cindy Hill, Esq.:

There's no magic number. Yeah.

Alan Tannenbaum, Esq.:

Okay. Gail also asked, "In a mixed building, some one-story villas and a mid-rise, can assessments only be on the mid-rise owners, can reserves be split?" So if this is a condo, which I'm assuming it is, I had a case a long time ago where the condo consisted of a mid-rise building on a row of townhouses and the mid-rise building needed significant repair, including redoing the elevators. The town homeowners couldn't figure out why their assessment included having to pay for the mid-rise building. The answer was that's what the condominium documents provided at the outset, equal assessments to all condominium owners. The town home owners needed to understand that they own just as much of the mid-rise as they did their own exteriors of their town home. So the general answer is, unless your documents are very unusual, the assessments and the reserve requirements for your mid-rise building would have to be absorbed by the villa owners the same way as the owners in the mid-rise.

Unfortunately, you're in the same mix as that condo that I just described. One-story buildings have structural items that do not apply to multi-story such as garage doors. So where do those fit? That would be very document intensive to answer that question. We're going to skip the pool reserves because of the doubt at this juncture. All right. This a good question, "What could a unit owner do if they feel that their self-managed association is cahoots with the board to keep fees low and underfund reserves?" So the way I read that question, if you're a unit owner and you're board is not complying with the law, you have a Bureau of Condominiums that governs condominium operation in Florida, you can file an administrative complaint and if you don't want to go that route, or in addition to that, you can go see a circuit judge to ask that the Condominium Act be appropriately enforced at your condominium. For HOAs, there's no state agency that governs your operational issues.

If you're unhappy with the way your board is operating other than recalling the board, you would need to go to the circuit court to straighten things out. Let's see. All right. Diane asked whether there was any science behind the decision to declare three-story buildings as a minimum height requirement for these rules and regulations. We don't know what was in the minds of those particular legislators and that they met for two days and fashioned that legislation as to why three story minimum was determined to be the necessary minimum for that legislation to apply. "What could be done with property managers that I'll advise the board that the reserve requirements don't apply to their condominium association?" Gary, I guess you can terminate a management company that gives you bad advice like that. Other than that, they are also licensed entity managers.

Cindy Hill, Esq.:

Well, on the flip side of that, I would say board directors should not be relying on legal advice that doesn't come from a lawyer. Don't put your manager in a position to answer questions your lawyer should.

Bill:

 Can I ask a question 'cause I'm having trouble sending through chat?

Alan Tannenbaum, Esq.:

Okay, Bill, I'll make an exception for you 'cause you have a nice beard. Go ahead.

Bill:

Thank you. I appreciate that. You too, by the way. We have a situation here where the owners are responsible for the upkeep of their windows, et cetera; yet, 718 shows that that'll be part of the inspection process. How do we handle that, please?

Cindy Hill, Esq.:

You're going to need to get with your general counsel on that one because there's no clear answers on that. The legislature did not put in any recognition of the fact that not all condominiums are responsible as an association for the windows. There's no clarification on that. So you're going to have to get advice specifically from your counsel based on your documents, based on the age of your building, based on how many windows have been replaced and haven't, if there's any liability concerns. Unfortunately, we can't answer that one directly.

Bill:

Thank you. I appreciate it. Thank you.

Alan Tannenbaum, Esq.:

"What about a 50-year-old building that is three stories, but very sound, but not to current codes such railing height or width?" Well, Jon, I don't think there's anything specific in the statute that would require upgrade to current codes what the structural inspection would do to determine if the structure is sufficient, but it doesn't necessarily require that it be [inaudible 01:06:31] the current code. Do you agree with that?

Jon Lemole, Esq.:

Right. The Phase 1 is just an inspection for substantial structural deterioration. It's not a code inspection. Now, if the engineer finds that there is substantial structural deterioration, progresses to a Phase 2 and then determines in the Phase 2 report a repair scope or a remediation scope of work that needs to be done, that may put you in a position of having to comply with newer building codes depending upon the work that's being recommended by the engineer, but not for Phase 1. It's not a building code inspection.

Joseph Rickey:

Thank you.

Alan Tannenbaum, Esq.:

Cindy, Brenda has a question. "The fully funding mandate is confusing. I am interpreting a lot of me, we have to begin fully funding as of 2024, but the reserves does not have to be fully funded by 2024." You want to tackle that one?

Cindy Hill, Esq.:

It is confusing, first of all. I'll open with that. What is going to have to be fully funded is going to, first of all, depend on the reports if you are a building, three stories are higher. So I'd have to give individual advice on that issue, but the statute is not clear. But the interpretation that most attorneys are taking, I'll go with that, is that fully funded does not mean that, for instance, I'm just going to make up numbers, if you need $400,000 to put a new roof on, it doesn't mean that by 2024 you have to have $4,000 in the bank. It means that you need to be a schedule that in 10 years when you need that roof, you will have $400,000 in the bank. But then again, that's the interpretation of counsel because the statutes are not clear.

Alan Tannenbaum, Esq.:

All right. There's a question about, "Does the Condo Association and HOA have different requirements for reserves?" That's definitely-

Cindy Hill, Esq.:

I did put in the chat that condominiums are governed by Chapter 718, the Florida Statutes Homeowner Associations by Chapter 720. I know that's not a good layman's answer, but those two numbers will trigger which camp you are in, so to speak. So as an owner, if you're trying to do some research and learn about your community, if you know you're a condominium and you see 720, you don't need to look at 720, and vice-versa, if you're in HOA and you see 718, you don't need to look at 718.

Alan Tannenbaum, Esq.:

Cindy, there's a question, "If you're governed by the 718, can you add a new reserve category for landscaping?"

Cindy Hill, Esq.:

There is a catchall in the established Condominium Act that items of $10,000 in expenses can be added to the reserves. It wouldn't surprise me at all if a condominium is spending more than $10,000 on landscaping.

You can send us some questions via email also, and we will try to get to everybody's questions. So thank you for attending today. We're going to conclude for today. We'll be back next month. I hope we cleared out more confusion than we created today. It's difficult to do in this climate with the legislation that we're dealing with, but we appreciate everybody attending.

Cindy Hill, Esq.:

Thank you.

Jon Lemole, Esq.:

Thank you, everyone.

Alan Tannenbaum, Esq.:

Thank you, everybody.

Continue reading

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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20220614-171136Screen-Shot-2022-06-14-at-1.08.49-PM

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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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.

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Repair & Maintenance Obligations

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

Alan Tannenbaum, Esq.:

We take homeowners associations and condo associations through turnover, help set up their engineering and accounting studies, post turnover for the groups that are interested in pursuing claims, both for HOAs and condos. We're involved heavily in that. We also do repair consulting as construction lawyers, so on major repair projects. We'll be involved in reviewing the contracts, revising the contracts, both with the engineer and the general contractor. We help administer those agreements and any projects that don't go well, we are heavily involved in cleaning up some issues that may follow either bad work or change order claims and so forth. So, those are our two capacities. I personally have done that work for now over four decades, and my current firm has been operating for 26 years.

We have offices in Orlando, Clearwater, Sarasota, and Fort Myers, so our market is from... The space goes across Central Florida to Tampa Bay and above, and then down to Naples. We stay out of South Florida, unless it's a really great case that somebody wants to co-counsel with us and we don't go to North Florida because it's too difficult to get there. So, that's what we do. We don't do general counsel work. We stay within the construction realm. So, let me introduce today's topic. So, everybody is aware of what happened in the Surfside situation.

You had an older condo, a lot of engineering reports about problems over the years. The board had difficulty inspiring the owners to pay a special assessment to do the repairs, and they finally did pass the special assessment, and before the repair could be implemented, the buildings came down horrifically where the building did. A very drastic situation, probably unlikely to be repeated, but it did spark a number of issues. First of all, number of condo boards have gone out and gotten the prepared review by an engineer. There's a lot of remedial work that's being planned or implemented at this juncture as a result, and it's brought into focus the whole issue of what is the obligation of a condo board or an HOA board to undertake or to direct repairs and maintenance on their properties, what leeway does a board have in making decisions in that regard, what's required, what's not required, we're going to cover all that today. And, I'm going to ask Brian Tannenbaum, our associate, to put up the Lamden rule, if you can, Brian. Am I going to be able to see it, Brian?

Brian's going to get up the Lamden rule, but while he's getting it up, let me read it. This is the current rule in Florida concerning the board business judgment. We're a dually constituted community association board. Upon reasonable investigation, in good faith and with regard for the best interest of the community association and its members, exercises discretion within the scope of its authority under relevant statutes, covenants and restrictions to select among means for discharging an obligation to maintain and repair a development's common areas. Courts should defer to the board's authority and presume expertise. So, let's break that down.

The end of the Lamden rule is, where should courts defer to a board's authority and presumed expertise? There it is, and Brian, can you bring it up so we can see the whole thing? Well, that's not it. Well, we're having little technical problems with our visual, but the end result of the Lamden rule is, where should a court defer to the board's authority and expertise? There it is, and then it sets forth all the conditions that precede it. So, what the courts of Florida have said is, we don't want to hear the disputes between condo associations and homeowners associations and their owners about the wisdom of how a board is approaching repair and maintenance. Under certain conditions, the court's going to say, "Look, we're not going to hear this dispute, we're going to defer to what the board's authority and expertise is, but what are the conditions for a court to defer to that?

And, that's what's preceding it in the Lamden rule. So, the board has to be duly constituted, so you have to have a board that was duly elected. Upon reasonable investigation, Jon Lemole is going to deal with that in a few minutes. So, in order for the court to defer to the board, there has to be a reasonable investigation supporting the board's decision making. Good faith is obvious. The best interest of the community association and its members, but one important exception to that is if you have 300 owners in a condo and there's only one owner who is getting leakage, it doesn't matter if the other 299 owners don't want to repair the roof on that building.

The obligation to protect that owner from that damage, even if the rest of the community doesn't want to do it is overwritten by statutory requirements. Then, does the board have the authority to make the decision? Which we're going to go through, so all those things need to be in place. So, I'm going to ask Jon Lemole to talk about investigation because that's one of the requirements of the Lamden rule for the court to defer. So Jon, take it away on the issue of investigation.

Jon Lemole, Esq.:

Thanks, Alan. That's probably the heart of the Lamden rule is that the board's decision in regards to maintaining and repairing the common elements in a condo association, or the areas where it has duty to maintain and repair in a homeowner's association, the heart of the Lamden rule is that the board's judgements and decisions are protected as long as they're based upon reasonable investigation, and so anytime the board is determining a course of action to take in regards to discharging its maintenance and repair obligations, there has to be in the back of the board's mind and board members' minds, the idea of what investigation have we taken in order to discharge this fiduciary duty, this obligation that we have?

One of the things that we've discovered lately, I guess, as a result of what we've seen over in South Florida with Champlain Towers and some other things that I'll hit upon in a second, is whether inaction is okay. If you don't know of a particular issue that needs to be addressed, you don't have a roof problem, you don't have a problem with roads or other drainage systems or things like that, what is the board entitled to do or to rely upon in not performing any kind of investigation of the community and the things which it has maintenance and repair obligations for?

And as we go forward in time, I think what we're going to see is that boards are going to be held and associations are going to be held to a much higher standard in terms of not only discharging their duties with regard to things that they know about, but also discharging their duties in regards to continuing almost like wellness of the buildings and the grounds in their communities. We go to the doctor periodically for checkups. There may be nothing wrong with us that we know of at least, but yet we go for an annual physical. We want to know how we're doing, we want to know how our cholesterol is, we want to know how our blood pressure is. Well, I think that's kind of a, an area of the board's duties that's been a bit overlooked and is going to be much more, or increasingly under a microscope as we go forward in time.

I don't know whether there's going to be some legislative activity that comes out of this that's going to affect that or not, but let's talk about what is the typical situation for a condo association or homeowners association in assessing the health of their communities, the health of their buildings, the health of the systems that they maintain. Sometimes associations get reserve studies, sometimes. Maybe they do, maybe they don't. In condo land, there's an obligation to fully fund reserves, and...

Alan Tannenbaum, Esq.:

They produce a budget with fully funded reserves.

Jon Lemole, Esq.:

Produce a budget with fully funded reserves, and so from time to time, a condo association may get a reserve study done, and in fact, at turnover, there's typically a developer's inspection report, which includes a reserve calculation for the things that the developer is supposed to include in that turnover report.

But that may be it, that may be the last time that a condo association board or condo board does any kind of real significant stem to stern type of investigation of the community. And in an HOA, it's really driven by whether the documents require that. There's no statutory requirement as there would be in the condo act and it's purely document driven. So, you may have associations, which are proceeding year to year with very little information about the health of their buildings, the health of the systems that they maintain and are obligated to maintain, and that's a problem.

As we've discovered from recent events, buildings have a finite lifespan, systems have a finite lifespan, and especially in Florida where we have a very difficult environment and difficult climate that takes a toll on buildings and takes a toll on systems, it's very important that going forward associations and association boards start to think about routine investigations, routine forensic investigations, and a board may not be able to rely going forward. I'm not saying that this is law. This is something that may come out of legislation, but at some point we may see case law statutes start to align to impose a stricter requirement on boards to assess the health of the things that they have maintenance and repair obligations over.

What's reasonable? What's a reasonable investigation for a board to not take action with regard to its maintenance and repair obligations over the structure of a building, let's say? Is the board entitled to rely on the mere fact that they don't see anything, that they're not noticing any problems or does reasonable investigation mean that you should have some sort of engineering evaluation of your buildings? And if it comes out that there's nothing that needs to happen, great. Obviously, if it comes out that there's something that needs to be addressed, then the board will have to address that, but can the board just re eye on not seeing anything, not noticing anything, not hearing any complaints, not having any patent visual things that are staring at it and jumping out at it to not take steps in terms of evaluating health of their buildings, or their grounds, or their site improvements?

Alan Tannenbaum, Esq.:

Jon, let me ask you a question. So, Lamden rule, would you agree that it's really a minimum standard, it's talking about where a court is not going to interfere, but not necessarily the best practices for an association? So, my question always to a group is whether you have building problems or not, how can you make decisions about the long term repair maintenance of the building, unless you have a proper investigation that you can rely upon to make those decisions? So, there's a minimum standard, which in order for a court not to overturn what a board does, there has to be an investigation, but the depth of the investigation really is the best practice for an association in proceeding with this obligation to lead the maintenance and repair, you see that?

Jon Lemole, Esq.:

Yeah, absolutely.

Alan Tannenbaum, Esq.:

All right. Jon, let's move to the issue of neglecting repair and maintenance in its entirety. So the question is, you have a board of directors and the owners are really opposed to any kind of special assessment. There's problems with the building, but the consensus of the owners is, look, I'm only going to be here for a few more years, or I'm selling. We don't want to really fund a major special assessment to do the repairs, and the inquiry is whether for either a condo association or a homeowner association, the decision to not do anything in the face of problems that may exist, is that ever a justifiable position? And, we're going to have Brian Tannenbaum at this point take us through the statutes, and show us whether the decision to do nothing is actually something that a board of directors of a condo association or a homeowner association in Florida is authorized to do, to do nothing. Brian, what say you?

Brian Tannenbaum, Esq.:

What say I, I say no. Well first and foremost, 718, which governs condos, 718 111 1A, and what's important here is that the officers and directors of the association have a fiduciary relationship to the owners, so they're responsible to the owners.

Alan Tannenbaum, Esq.:

What's a fiduciary relationship, Brian?

Brian Tannenbaum, Esq.:

Say that again?

Alan Tannenbaum, Esq.:

What does that mean? What's a fiduciary relationship?

Brian Tannenbaum, Esq.:

It means that they're liable to the owners. They have a relationship. It's the next sentence in here, an officer, director or manager may not solicit or accept anything of service or value or kickback for which consideration has not been provided.

Alan Tannenbaum, Esq.:

But, a fiduciary duty is a higher standard than a typical duty that one person in society would have for another, correct?

Brian Tannenbaum, Esq.:

Well, right. It's in the statute, so it's codified in the statute specifically, and if you look at C, it says that the unit owner does not have any authority to act for the association by reason of being a unit owner. So, it's especially heightened because a unit owner can't act for the association on their own. The only way for the association to act is through the officers and directors.

Alan Tannenbaum, Esq.:

So, if on a condo the roof is leaking and the penthouse owner stays in their ceiling, can they hire a roofer go up and fix that roof?

Brian Tannenbaum, Esq.:

They cannot.

Alan Tannenbaum, Esq.:

And, specifically 718 111 C provides that they can't do that. So, if the board doesn't act and get a roofer out there, they're really setting the association efforts of liability. Go ahead, Brian.

Brian Tannenbaum, Esq.:

Right, so that brings us to 718 113 1, which basically defines the maintenance or repair obligations of a condo association, and the maintenance of the common elements are the responsibility of the association. Where this comes into play with inaction some of the time is when there's a project that might be classified as a material alteration, which under the statute says that there shall be no material alteration without 75% of the voting interest of the association.

However, if you have something that falls under your repair and maintenance responsibilities, such as a roof or a failing balcony or windows, where the only way to repair that common element is to make a material alteration, so for example, if you have a roof that was-built maybe 20 years ago, 30 years ago, and the material that was used to build the roof is no longer available, it doesn't allow the board to say, well, because it's a material alteration to use a different material, we have to have 75% of the vote. The maintenance and repair responsibility of the common elements is above and beyond the material alteration section. Now, if there is a similar material or the same material, then there would be an obligation to use that material.

Alan Tannenbaum, Esq.:

Let me ask you a question, Brian, what's the significance of the beginning of that section using the word responsibility? Is that different than may or could? How is that significant?

Brian Tannenbaum, Esq.:

Right, there's no way out of it basically. You have to maintain the common elements. There's no exceptions, there's no excuses, there's nothing you can do. The main maintenance of the common elements is the responsibility of the association.

Alan Tannenbaum, Esq.:

So, would you agree that that sentence alone, standing alone would make the idea in the face of an existing problem, make the concept of a board not doing anything a violation of that provision of the statute?

Brian Tannenbaum, Esq.:

Correct, if there's no maintenance of the common element, then there is a dereliction of duty by the association to maintain the common elements.

Alan Tannenbaum, Esq.:

All right. What's the significance of 718 113 3 at the bottom?

Brian Tannenbaum, Esq.:

So, 718 113 3, it kind of goes with C up here where a unit owner cannot do anything within their own unit through a common element that would adversely affect the safety of the common elements or any portion of association property. So again, a unit owner cannot do anything on their own [crosstalk 00:29:06]-

Alan Tannenbaum, Esq.:

Both within the unit or in the common element?

Brian Tannenbaum, Esq.:

Right.

Alan Tannenbaum, Esq.:

So again, you can't have individual owners in a condo doing anything to the outside of a building, even though there's water intrusion or other damage being caused. The statute says that that owner cannot act and they would be in violation of the act if they did so, correct?

Brian Tannenbaum, Esq.:

Right, so moving on to the remedies, 718 303, what this says is that the association is governed by and must comply with the provisions of this chapter, as well as the declaration of documents creating the association. There are actions for damages or injunctive relief for failure to comply with the provisions, and they can be brought by the association against a member or by a unit owner against the association, or any director who willfully and knowingly fails to comply with the provisions of chapter 718.

Alan Tannenbaum, Esq.:

Now, just to assuage directors, even though that's what it says in 1B, that doesn't necessarily bring about liability upon directors because the director also in addition to that will have had to have acted it with their own [inaudible 00:30:33] gain in mind, or with some malicious or illegal purpose. So, it's not enough to say, well, the board didn't act, it saved that board member of the assessment that would've been assessed against all of the owners, and therefore they're liable personally under 1B. There isn't an additional requirement in another section of the statute, which requires that in order for there to be individual liability that it almost has to rise to the level of a criminal act, not just neglect. I don't want anyone to get overly nervous about 1D because it's a very, very narrow field of potential liability for a director. Even if they fail to undertake the repair process or administer it, but the association does have significant liability. Go ahead, Brian, sorry.

Brian Tannenbaum, Esq.:

And, then the last part of 718 303 that we have highlighted here is that there are attorney's fees that are recoverable as well as reimbursement of any assessments that were used to fund the litigation. So, the owner's assessments are not being used to pay for the litigation against them. They will be reimbursed and they will recover attorney's fees that they spent themselves.

Alan Tannenbaum, Esq.:

What about homeowners association?

Brian Tannenbaum, Esq.:

Homeowners associations are governed by chapter 720. The officers and directors of a homeowners association have a fiduciary relationship to the members, so it's the same as in the condo statute. They also have a fiduciary relationship to the members. The difference is the powers and duties of the association are those that are set forth in the governing documents, beyond what is already in the statute. And again, here it says a member does not have the authority to act for the association by virtue of being a member, so the same thing.

Alan Tannenbaum, Esq.:

Before you pass on that though, just to make it very clear, for condominium associations there's a statutory obligation to maintain and repair on the part of the association the common elements. It's also required in the documents what Jon Lemole is going to go over. In a homeowners association, the obligation to maintain and repair the association owned property or connected town homes within an HOA really comes from the documents. There's no specific statutory obligations to maintain and repair like there would be for a condo. It all comes from the documents. Go ahead, Brian.

Brian Tannenbaum, Esq.:

And, then 723 05, again, are the remedies for homeowners association, and it has the same remedies as the condo statute. The refusal to comply with these provisions may be brought by any member against the association or any director or officer of the association who willfully and knowingly failed to comply with these provisions, and it again, has the prevailing party of attorneys [crosstalk 00:34:02].

Alan Tannenbaum, Esq.:

The key is there's severe repercussions for the association, either in HOA or condo if there's failure to undertake the maintenance and repair responsibility in the face of ongoing problems. Obviously, it will be responded to by the association of insurance carrier, but you have too many of those claims, and all of a sudden the association's not going to be able to get coverage in next year. So, there's a real impetus to thoughtfully undertake the investigation and the repair and maintenance obligations, again, and this answers the question. Statutorily, doing nothing is not an authorized act. That's not going to protect a board under the Lamden rule because doing nothing is not an authorized act of an association in the face of ongoing problems. So, what we're going to do now, because we talked about documents, I'm going to switch it over to Jon Lemole, who's going to give some examples of how condo declaration provision and HOA declaration provisions impact repair and maintenance. Go ahead, Jon. Brian, go to the next slide there.

Jon Lemole, Esq.:

I'm going to jump into that in a second. Christopher Carter asked a great question right now that I think is something that this is a good point to address. He says, does the business judgment rule absolve incompetence? Here's my take on that. First of all, you have to define incompetence. Is incompetence just not making the right call? Sometimes boards don't make the right call, but if they've done their due diligence, if they've done their investigation, go back to the Lamden rule, if they've done their reasonable investigations and they're making a decision in the best interests of the community, it may not always be the perfect decision, it may not always be the absolute right decision, but typically the business judgment rule is going to is going to provide cover for that. Now, if incompetence is that they didn't make a reasonable investigation of the issue that they're dealing with, and they just decided a course of action out of the blue that had no real connection to what the problem may be, that is the heart of the Lamden rule, that is the heart of what the business judgment rule protects and doesn't protect.

So, I think that was a good question, and that'll be kind of the theme that we see as we go forward. Anyway, jumping to some typical governing document provisions. So, you know you have statutory obligations and in the condo act, you've got a very robust statutory scheme and in the homeowner's association act not quite as much. And so for a homeowner's association, much of the association board's obligations are going to be driven by the declaration. And so, it's very key that both board members and managers understand what the governing documents say or the declaration says about these association's duty to maintain a repair.

So, let's look at section 2.24 in this particular declaration, and I'll tell you that this is a town home community, but where you start with, and this is a section that would apply probably to town homes or even single family HOA, but you can see all of the areas, and if you follow my cursor, you'll see that the association shall, not may, shall in its sole discretion install, maintain, repair, and replace any and all improvements within the common area. Such maintenance shall include, without limitation, you all know these things, electrical wiring up to the meters, water pipes up to the meters, cable television lines up to the cable box, sewer lines, landscaping, lighting, irrigation, if that's something that is included in your community, amenities, pools, parks, entry gates, roadways, sidewalks, walkways, paths, trails.

That's pretty common for most HOAs. Now, Brian, if you'll scroll down to the next section, 2.25, because this is a town home community, you'll typically have a second area of maintenance responsibility for town home buildings. Now, this is where it gets a little crazy in town home world, folks. In connected town home world, these provisions run all over the map. They can be very vague, they can be very, very detailed. Now, this one's fairly detailed, painting of exteriors, maintenance and repair of exterior cladding and walls, party walls, roofing, and related components, waterproofing elements, gutters, downspouts, that's, as we've seen a pretty, a pretty robust and well-defined maintenance and repair obligation. Here's an opportunity for each of you to go back if you're in a town connect to town home community and look at what it actually says in your declaration because we've seen declarations where it may say the roof covering.

Now, think about that, think about a town home community, where the association only has an obligation to maintain the roof covering. Well, as you probably all know, sometimes when you do a roof repair, a roof replacement, you may need to repair some of the roof structure, decking, trusses, rafter tails. Is that included in roof covering? Maybe, maybe not, and that creates a lot of problems for an association when they have to make those calls, and it's not really well specified in the declaration. That's always an opportunity for a smart board to go back and consider really defining, maybe there's an amendment that's needed, to define exactly what the association's duties and obligations are in that community because when it's ambiguous, that's where a lot of problems arise. The board is not clear what it's supposed to do, lot owners are not clear about what the board's duties are, and that creates a lot of opportunities for litigation. [crosstalk 00:40:57]-

Alan Tannenbaum, Esq.:

Jon, to clear up the point, because there's no statutory obligation like there is in the condo for the common elements of a condominium, which would be the exterior walls of a roof's structure, it was really left to developer lawyers in connected town homes and HOAs to define the maintenance and repair, and they did it to the developer's benefit, not to the owner's benefit, so that has to be cleared up, but Jon, it's 11:39, I need you to do the condo declaration quickly [crosstalk 00:41:32]-

Jon Lemole, Esq.:

Run through the condo real quick. All right. Folks, condo declarations are pretty typical because they generally would track the statute and there's a statutory obligation as well, but generally you're looking at all of the common elements. So, here you see all drainage and storm warm water systems, driveways, private courts, all water and waste water lines and piping serving unit, which are not contained within the physical boundaries of the unit, landscaping, gates, walls, fencing. I'm not going to go through this and read it in the interest of time, but it's in our handouts, you can take a look at it, but this is a pretty standard condominium declaration provision relating to the condo association's duty to maintain and repair common elements. [crosstalk 00:42:26] specify some other areas where they have limited common elements or other areas where separate condominium property that may fall under that, but I think if you look at what we have here in materials, you'll see something that for those of you that deal with condos, you're pretty familiar with.

Alan Tannenbaum, Esq.:

All right, but Jon, let's emphasize, again, the first line of 7.1, it says... Well first of all, under section seven, you use that word responsibility again.

Jon Lemole, Esq.:

Right.

Alan Tannenbaum, Esq.:

And, then in the first line of 7.1, which is very typical, the association shall, doesn't say may, it says shall, so for condos, you got a statutory obligation that's unambiguous to maintain and repair the common element, and it's backed up by the declaration, which also makes it a mandatory obligation. So, a board of directors of a condo association or an HOA burying their head in the sand or yielding to owners who were complaining about assessments and not taking is a statutory violation and a violation of the documents at the same time will get an association in a lot of trouble. So, let's move into the cases. We have about 15 minutes.

We're going to go through these quickly. Coronado versus Scher, a condo association did not take care of its common element sewage problem. The owners had sewage in their unit. They won a major judgment against the association at an injunction requiring the association to correct it, and you can see in the decision that section 718 113, which we talked about, was cited as a basis to also award attorney's fees. So, that's a very important... It's a one page case Coronado, but it really backs up everything that we've said about what the association exposure is. Go on to the next case, Brian. And, these are excerpts. If you want the whole case, just let Michelle know and she'll get it to you. Coconut Key, this is an HOA, there was a flooding problems in the area owned by the association affected this owner's lot and the association wasn't correcting it.

She was able under 7200, even though they decided 718... Go further in the case, Brian. And if you look at it, you see what the court did. After careful review, three days of testimony, the trial court had issued the injunction. The owner approved a clear legal right. It says the association violated discovering documents by failing to properly maintain the surface border management system. Go on the next page, Brian. She proved the harm, how the flooding problem was impacting her, and she didn't have an adequate remedy and she was entitled to the injunction and then they awarded attorney's fee. So, that's an HOA case, a more recent event. The association did not properly maintain and repair the association-owned property. It caused flooding on this lot, and the owner was able to get a judge to force them to do the repair, and also to pay her attorney's fees.

Go on the next case, Brian. All right, Colony. This is a bankruptcy decision, not necessarily precedent, but a very interesting case. So, the Colony was a hotel condominium and the condo association still had the obligation to maintain and repair the common elements. The owners got to stay in their units one month a year, and for the other 11 months of the year, their unit was in the hotel full for rental to the population at large. Very interestingly, George W. Bush had 150 rooms reserved on September 11th, 2001 at the Colony the day he was speaking at an elementary school in Sarasota, and that's the same Colony that was involved here. So, they got into a dispute with the hotel operator and the board of directors chose not to repair the common element, and there's really great language in here that goes through all the older cases about the association's obligation and basically this was the appeal from the bankruptcy court. It basically said that the association's decision not to do repairs was not authorized.

There's also an interesting ending to it though, which is... Brian, if you go down a little bit. All right, it starts at 563 on the bottom left, further by allowing the Colony to... Go up. Well, to deteriorate. Impermissibly,, altered the common elements to the detriment of a minority of the members. It talks about material alteration. So, what this court said was, very interestingly, that deterioration of the common elements is an alteration that without an owner vote was not an authorized act by of the board. So, it basically said by neglecting it, it altered the common elements and an additional means for the court to act was that was a material alteration that was not approved, very interesting court decision. So, Colony is a very interesting case. By the way, the colony no longer exists because in the end, the buildings went into total disrepair and had to be raised by order of the town of Monroe Key, so that was the result. All right, let's get to Miller, and yes, Miller... Jon, talk about Miller.

Jon Lemole, Esq.:

Miller is a 2019 case, so it's very recent. It's an interesting case. In Miller, a homeowner wanted to build a garage and there were height restrictions, and there was also a restriction against the use of flat roofs. He submitted an application to the architectural review committee, it was approved by the committee, the design, but in construction the design was changed and it appeared very much like it may have been too high and it may have been a flat roof. So, the association notified the owner that it was going to seek covenant enforcement against him. The owner came back and said, look, I've got a statement here from the contractor and from the building department. The contractor says this is not a flat roof as that term is commonly understood in construction and engineering, number one.

Jon Lemole, Esq.:

Number two, the building department verified that the height was X, which meant it was in compliance with the height restriction in the CCRs. Five years after the fact, the association permitted or approved of the as-built garage, relying upon that contractor's statement, relying upon the information from the building department. A neighboring lot owner sued the association and said, you didn't enforce the covenants, and you failed to exercise proper business judgment as a board. The court said no, and the thing that's interesting about this case, the court said, yes, the board's actions after the fact approving this was okay, and the reason why is because the board made a reasonable investigation, they exercised due diligence, they considered the statements of the contractor.

They considered the statements of the municipal building department, and they came to the conclusion that the as-built was compliant with the CCRs and the restrictions on height and flat roofs. And so, the takeaway there is that in some instances the board doesn't have to go out and pay its own people to go make these determinations from them. The board can rely on professional advice, even if it's coming from the lot owner or the unit owner or whatever the case may be. So, that's kind of an interesting wrinkle on the board business judgment rule.

Alan Tannenbaum, Esq.:

All right, Brian, why don't you talk about ho Hollywood Towers?

Brian Tannenbaum, Esq.:

Sure, so Hollywood Towers was a condo case. It involved an association that wanted to perform repairs on balconies of certain units, and the association's engineer said, in order to repair the balconies, we need to demolish three feet into the interior of the unit where the repair needed to start. The unit owner sued to not have that done in the interior of their unit. They hired their own engineer who came out and said it's not necessary for them to be three feet into the unit, and what the court said was that basically in applying the business judgment rule of condo associations, that they limit their review to whether the association has a statutory authority to perform the act, and if the board's actions are reasonable, and this is where they cite the Lamden rule from the California Supreme Court and the court adopts the test court in Lamden to give deference to the condo association decision if that decision is within the scope of their authority and is reasonable.

Alan Tannenbaum, Esq.:

Brian, just to give a little history. So in the 80s, what the court system allowed, if an owner objected to the way the board was doing a repair, the owner got their engineer, the association's engineer, and the battle of experts, and I think the court system got tired of the battle of the experts as it applied to condo repairs, and it metamorphasized into the Hollywood Towers decision where it said, look, as long as the board of directors has appropriate investigation and an engineer supporting the repair approach that the board wants to undertake, we're not going to give any credence to the fact that the unit owner's engineer thinks it to be done a different way. As long as a board's position is supported by a proper engineer, that ends the case, and that's where the Lamden rule actually was developed. It was part of the decision adopted in this Hollywood Towers case, I believe in 2010. So Brian, what about Scher? That's the next one.

Brian Tannenbaum, Esq.:

Scher's a very recent case, and this involved the structuring of assessments levied on different parts of an association, and basically they just reaffirm what it's said in Miller, and they talk about how the court presumes that the directors acted in good faith and the court must give deference to the association's decision if that decision is within the scope of their authority and is reasonable.

Alan Tannenbaum, Esq.:

Well, let's focus on that because this is a good ending point. So, this is a 2021 case decided by the Fourth District Court, which is Broward County across the state, and that one phrase, courts must give deference to the association's decision and look at the requirements. If that decision is within the scope of the association's authority, again, doing absolutely nothing in the face of a problem is not a decision within the scope of the association's authority because both the statute and the documents, do not allow non-action in the face of problems. The second part is reasonable. Well, in order for a board of directors' decision on maintenance and repair to be reasonable there has to be an appropriate investigation. It's not just a willy-nilly decision by the board maybe working with a contractor to fix something that really requires an engineer's overview.

Alan Tannenbaum, Esq.:

It's not reasonable if it's a half solution. It may not be reasonable. I've seen board of directors where they have five buildings, they get an opinion that all the roofs on the five buildings need to be replaced, and a board comes back with a decision that, well, we'll do one roof a year and we'll have a five year plan. It's always interesting that none of the board members ever have their units in that fifth building, but the owner in that fifth building says, wait a second, the engineer's report says our roof is shot today. It's unreasonable to delay the replacement of our roof for five years ahead. So, you could argue that the only reasonable thing that a board of directors can do, when it has an opinion from an engineer that all the roofs are shot, they all need to be replaced, is to figure out a way to do that in one project and not delay it over five years, which may include getting some financing and so forth.

So again, that's a really short recitation, but a good recitation. Arbitrary, capricious, or in bad faith, if the repair request or the need comes from the most obnoxious owner in the community, and the last thing the board wants to do is take care of that person's problem because they've been really a difficult owner for the board, the board can't sit there and say, well, we're not going to do the repair because that's the obnoxious owner that's been showing up all the meetings making our life miserable. So, that also would not be a supportable decision.

Brian Tannenbaum, Esq.:

I see a couple good questions in the chat. I don't know if you want me to read them to you, but [crosstalk 00:58:20]-

Alan Tannenbaum, Esq.:

Go ahead, Brian.

Brian Tannenbaum, Esq.:

So George asked, for amenities such as tennis courts, pools that are under an HOA's responsibility, can they shut them down in order to make those repairs?

Alan Tannenbaum, Esq.:

I think that would be very difficult to justify under the current case law. It's that part of the amenity package. If they are repairable, probably just shutting them down wouldn't be justified. Now [crosstalk 00:58:50]-

Brian Tannenbaum, Esq.:

I think shutting them down to make the repairs was the question.

Alan Tannenbaum, Esq.:

Oh yes, obviously in order to do a safe repair you need to shut them down, but what you don't want to do is, and unfortunately with the delays right now it's difficult, but you might not be able to get that pool repaired until nine months from now. The question is, do you have to try to keep it alive until then? Difficult questions, no clear answer to that. There's a question about material alterations. Yes, the case law says that the material alterations will be trumped by the need to do a repair, and there are cases from the 80s that will support that. Jon, do you have any ask parting word? You're muted right now, Jon.

Jon Lemole, Esq.:

Sorry. Look, always go back to the Lamden rule if there's any question. Look at what the board and the association's duty is, and then if you have a decision to make over how to discharge that duty, make sure that you're doing a reasonable investigation. It all comes down to due diligence, and if you do those things, if you make a decision [crosstalk 01:00:15] reasonable investigation as to something that is in the repair and maintenance authority of the association, the courts, as they are trending, will back that decision up.

Alan Tannenbaum, Esq.:

Brian, any thoughts?

Brian Tannenbaum, Esq.:

No, just doubling down on the attempts to investigate the issue are very important in the court sentence. You just can't do nothing.

Alan Tannenbaum, Esq.:

All right. Well, I have a final thought and the thought is a little bit off point, but any of you managers or board members who are getting proposals from engineers, be very wary of the general conditions that they're attaching, very restrictive general conditions, limitations of liability. So, they're handing you a certificate of insurance for liability coverage of $1 million and they're handing you a contract that limits their liability to maybe the amount of fees that they're going to get paid under the contract, and if you're doing a $1 million repair, $2 million repair, that's not going to cut it, so be very wary of what their insurance companies are requiring that they put in their contracts now before you allow your board to sign that. You need to look that over, so we are very much involved in that issue.

Alan Tannenbaum, Esq.:

We'll stay on to answer a few questions. We've officially hit noon, and I'm going to scroll up to see if there's anything that we can particularly answer. And so, thanks for the people who have to get off now, but we'll answer some questions. What if the maintenance issue is cosmetic versus structural based upon an engineer's report? Obviously, the structural issue should be given priority, but I don't know what cosmetic means. If it's just aesthetic, probably it's not a repair that's going to be number one on your list, but based upon what they said in the Colony, if it's an aesthetic item that will make the property look different than it did originally, you probably do have to get it corrected. Somebody's got a long question about a fence, which I would rather answer offline.

All right, in condos, what remedies are available owners outside of litigation? You're probably not going to get the Bureau of Condominiums to act on... It's now called something different, but to act on a repair issue. So, your circuit court may be the only place you're going to get some relief.

Jon Lemole, Esq.:

Alan, here's one. Is the Lamden rule ever used as a way to move forward with material alterations without getting the needed 75% vote?

Alan Tannenbaum, Esq.:

If it's a necessary repair, you could probably get outside the vote, but there was a key case back to the 80s where a group wanted to go from wood shakes to a more reliable roof system. They didn't get the approval. The engineer said the replacement would last longer and be cheaper, and that association got sanctioned by the court for not getting the vote. So, you got to be very careful where that applies. What sort of direction or action would have been taken if an owner paid for and caused to be installed insulation in an elevator shaft? So, it sounds like they went into the common element, put in insolation. If it was probably a condo, that would've been a violation.

So, that was a self-help opportunity by an owner that was not allowed by the statute, probably not allowed by the documents, and you can take action to have that altered. Frankly, if it doesn't cause a problem, would it be worth it to pursue that? The problem is you don't want to establish a precedent where you've allowed that to occur, didn't take action, then all of a sudden another owner is trying to do something to the common element and they're citing the fact that the board allowed that. So, you may be obliged to take some action there, maybe reach settlement with the owner, so as not to make a precedent for other owners.

Aaron asked a question about cooperatives. I believe you do have similar provisions in the Cooperative Act, Aaron, yes. Somebody asked what common elements were. In a condo, the common elements, it's usually everything outside the unit, unless it's a limited common element. In a homeowners association, you don't use the term common element. There's two types of elements in a homeowner's association. Either you have association owned property, which could be the roadways, the waterway so forth, or you have connected town homes, which are actually still owned by the owners, but maintained to some degree by the homeowners association. So, technically you don't have common elements in HOAs, only in condos.

Yes, 718 needs to be stronger. We are going to see some alterations there. We answered that one. Is a structural inspection only visual or destructive? Well, Ronald, your question kind of answers that. If you have a structural issue and you're only doing a visual inspection, you may not be able to get to the bottom of what's really wrong, and what the engineer will probably recommend is there to be some level of destructive examination in order to actually figure out the problem, so that's a good question.

The Fannie Mae and Freddie Mac condo lending restrictions, I'm not directly familiar with those, but they're going to cause groups to get their engineering and inspections done and do repairs and have adequate reserves in order for their owners to qualify to get Fannie Mae or Fred Mac financing. I think we covered it, so we're going to sign off. If anyone has any questions, you can contact us directly. We'll answer some questions for anybody who has it [crosstalk 01:07:52]-

Brian Tannenbaum, Esq.:
Where do they send their license numbers in?

Alan Tannenbaum, Esq.:

The license numbers are going to go to Michelle M. Colburn at tannebaumscro.com and she has that. You could see that she's highlighted that in the chat. You'll find it there, and again, we hope that you found this helpful. It's a big discussion that's going on right now throughout the state and we look forward to presenting next month to you, so see you next time.

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Connected Townhomes Administered by Florida HOAs

Alan Tannenbaum, Esq.:

Everybody. We're going to try to keep everybody on mute during the presentation. To keep the crosstalk down. We will have an opportunity at the end to answer some questions. If you have questions, send them through the chat feature. We do look at them and hopefully we can get to them.

For those of you who this is your first session, we're Tannenbaum, Scro, Lemole and Kleinberg. We're construction lawyers. We spent a lot of our time representing homeowner and condominium associations first in investigating and pursuing turnover claims for groups that have come through turnover and even some properties that are a little bit more mature but less than the 10 years of age of the buildings, which is what the statute of repose is in Florida. The absolute deadline to pursue construction defects is 10 years. You're a manager and you've just taken over the management of a property that's 9.5 years old and is having problems, please let the green lights go off to know that you might have to get some advice pretty quickly.

The other part of our practice involves construction consulting on major repair projects. We do that for a lot of groups. Our market is from the Space Coast across to just north of Tampa Bay, Hernando and Pasco and down to Naples. We stay out of South Florida, that's to prolong our careers. We stay out of North Florida because it's too difficult to get to. 

All right. We've got to mute there. We'll get started. Connected townhomes, and I'm going to include duplexes in there. It used to be that that type of building, where you had multiple units combined, where every unit started as a ground floor unit, it used to be when they built that product they created it as condominiums.

Until probably the late '90s you had duplexes and connected townhomes, developers placed them under a condominium regime. The advantage of that was the owners owned their unit, everything else was common element and the maintenance and repair obligation was on the condominium association to maintain all the common components of those type of structures. Common mechanical, common electrical, common structural.

If you built a duplex or a connected townhome and it's in a condominium and you have foundation problems, it's the association's responsibility to fix it. If you have roof framing problems, association's responsibility. Certainly the roof. Anything that's not in the unit is typically in a condo, the association's maintenance and repair responsibility. It's actually a system that's worked very well since the first condos were built in Florida in the '60s, which is how maintenance and repair is divided in a typical condominium situation.

Developers I think in the late '90s came up with this brilliant idea, it was brilliant for them, for nobody else, of placing duplexes and quads, and sixplexes and eightplexes all connected buildings under an HOA regime. Now why did they do that? Well, under the Condo Act, if you're a purchaser of a condo unit you have statutory warranties that apply to that sale, they can't be waived by a developer. They're very broad warranties. The warranty is not only from the developer but it's from the general contractor, the subcontractors and the suppliers. Very unusual warranty. The legislature stuck that in the Condo Act in the '70s and developers have tried to amend it out and they've never been successful. If you the developers don't want to give statutory warranties, they look for a way to not be a condo and instead stick these buildings in an HOA regime.

Condominium documents have to be approved by the state. You make a filing with the state, they check your documents against what the statutory requirements are. Sometimes developers got to go through three or four revisions to get their documents through. There's no such review for an HOA set of covenants, conditions and restrictions. There's no submittal to any state agency for approval. It's a fairly easy process, which basically once you get your land use done, file the CCRs and you're on your way. Much different in a condominium regime. Condos are much more heavily regulated, if you've ever measured the thickness of the Condo Act versus the HOA Act, you'll see the Condo Act's much thicker, there's a lot more operational requirements than for an HOA. Again, you have a state agency that administers condos, does not administer HOAs, so a developer has a much tougher regulatory scheme with a condo.

There's also a very interesting statute that's in the Condo Act, which is 718.124, which simply says that a cause of action on behalf of a condominium association cannot begin to accrue until turnover. You know if a condo turnover is delayed that all your causes of action are preserved until turnover and then you have usually four years, let's say, for a construction defect after that. Very conveniently, legislature left that out of the HOA act. There's no savings clause in an HOA act, and so if you have a turnover that's been delayed, there's properties out there, many of the managers probably know of them, where turnover occurs 17, 18 years after the original development started, and it causes a real problem as far as statute of limitations and so forth. Developers in an HOA don't have to worry about that.

There was a lot of economic reasons why developers started to stick these duplexes, and quads, and sixplexes, and eightplexes under an HOA regime. Here's the, it caused a huge problem. I'm going to at this point turn the mic over to my partner, Salvatore Scro, and he's going to talk about the maintenance and repair dilemma that was created when developers chose to stick this type of product under an HOA regime.

Salvatore Scro, Esq.:

Good morning everyone. Thanks for joining us again. I wanted to just touch, I know some of you deal only with condominiums, and interestingly enough, I'm going to share a screen here with you. This here was a condominium, is a condominium. Interesting enough, the way the declaration read, the interpretation by the contractors and the developer was that this was an apartment converted to a condominium, was that the owners were responsible for their own balcony. Even with a condominium sometimes you have some issues that you have to make sure, if you have a poorly drafted declaration with regard to limited common elements, it's important that you look at that. That was one of the battles we had in this.

Believe it or not, I mean, imagine if you are the bottom unit and you need to repair yours, you're kind of responsible for everybody up above you. The same at the top. What happens if you repair yours and you add weight, and unfortunately beneath you will have these type of issues. That's what was in this particular condominium. It was a poorly drafted declaration, but just imagine if each owner had to repair their own balcony in that situation.

Let's talk about the connected home owner association buildings. Here you have, this is a eightplex here. You can see where they tried to cover over the cracking stucco, all the spider cracks throughout the stucco. If the association is responsible for painting the exterior, and one unit has a stucco problem, ironically they all have stucco problems in this one, that needs repair, how is the contractor going to assure that his work is resistant to the weather elements when the unit adjacent is going to have old, defective stucco? It's virtually impossible.

What if you start taking apart some of this building here and you find out that there is defective sheathing? Well, you probably can replace the sheathing on the one unit, but I don't think that they put the sheathing on where it stops at one unit and continues with the next. The same with the framing. How would you replace framing or sheathing that carries over to the unit adjacent to yours? The answer is you can't.

I don't think the rot knows where one unit begins and the other one ends. It's going to continue its way. If you're experiencing problems with your unit, one issue again is what if you're experiencing problems with your unit but the source is from your neighbor unit? Here we go back. Here you have issues here, other issues that you may have. We showed this in our last one, some of these, and I cut them short here. If you have issues with some of the windows and it's leaking onto the other units, what are you going to do? Can you force your neighbor to repair them? Can you make them pay? Sometimes a declaration will direct some of these things, sometimes it will not. It's very important that the building envelope and the building foundation should be the responsibility of the association so that it can be done properly, it can be done as one.

Other issues that you have are that insurance may not cover it. If you have construction defects, and I have plenty of slides that show that, I didn't put them on here. If you have construction defects, it's typical that the insurance will not cover a construction defect. They will cover damage from an event. They will cover damage from hurricanes. It'll cover damage from a tree falling. If they determine that you have defective construction, it's unlikely that the insurance company is going to cover that.

Everything that affects the building, whether it be the foundations, the plumbing, the electrical, the HVAC, if you have gas in some instances, but usually not in these connected units. Everything enters the building envelope. That means that there are going to be penetrations through the building envelope that are the possibility for water intrusion that will lead to deterioration of the building, and that should be something that is uniformly addressed by the association. How do you do that? You do it by amending the declaration to make sure that it provides for repair and maintenance of the building envelope, the building exterior. Sometimes they exclude windows, even windows though sometimes should be the responsibility of the association.

The foundation should be the responsibility of the association. Could you imagine if you have a settling problem with your neighboring unit and they're going to either do nothing about it or they're going to do some sort of repair and it affects your building or your unit? How is that going to be addressed? Maintaining these buildings should be the responsibility of the homeowner's association as a whole. I don't know if I could say much more about it than that. I know I'll be talking about when you do that later on as far as the benefits of doing it as a whole.

Alan Tannenbaum, Esq.:

I want to add something at this point for clarity's sake. With a condo, you have a statute that defines the responsibility of the association for the common element. Then you have a developer lawyer who drafts a set of condominium documents, which have to be consistent with what the statute requires. It's very clear what the declaration has to say about the division of responsibility.

In the HOA world, an individual developer lawyer who's hired by a developer to prepare the CCRs or the documents for a particular development designs this line of demarcation between association responsibility and owner responsibility. We've seen enough documents to know that they're across the board. There are eightplex documents that say, for instance, the association's responsible for painting only on the exteriors.

The roof, we were dealing with one that said the association's responsibility is limited to roof coating, which is not defined, but the owners of the sixplex had to decide among themselves when the roof needed to be replaced how that was going to be done. You have HOA documents that run the gamut from a good set of documents that very much mirror let's say what the Condo Act requires as far as the maintenance and repair line of demarcation, to ones that the association has very minimal obligation for maintenance and repair.

You literally have owners, because some connected townhomes are like three stories high, you have owners who are responsible of doing exterior repairs and structural repairs three stories high on their own. Portions of the structure that might tie right into their neighbor's structure, you could see that it's a colossal mess and there's no state regulation of it. I don't know where developer's lawyers come up with these documents, but again, we've seen them across the board. All kinds of anomalies got created.

Anyway. Jon Lemole, my partner, is going to talk about what the anomalies are as far as even investigating defects, depending on what the documents say.

Jon Lemole, Esq.:

Good morning everybody. If you've been on these panels with us each month, you know that one thing that we firmly advocate here is the use of engineers and other professionals to investigate both at turnover and if you have a major repair project. It's always good practice to engage engineers to investigate your buildings, to investigate the work that needs to be done in a repair project so that you can have a good spec developed and delineate exactly what work you need to do.

Let's take the turnover concept a little bit further in this context. I always say, if you're buying a house, you'd never rely on the seller to get you an inspection report. Who would ever do that? Who would take the seller's inspection report as the basis for determining whether or not to buy a house? In a homeowner's association a lot of times that's exactly what happens.

You have a board at turnover, qualified people, well meaning people, but people who are about to be invested with a very large and important fiduciary duty to manage this association. These folks are coming into possession and having to make decisions about millions and millions of dollars of infrastructure, of capital, improvements, building exteriors and things like that. It's a perfect opportunity to do a thorough investigation of site improvements, buildings, especially in connected townhome situation. The buildings, the building exteriors, the roofs. It's also, if you're going to do that, a perfect time to take a look at your declarations. Because the association doesn't have standing to investigate and spend money, the board doesn't have the opportunity to spend money to investigate areas that it doesn't have maintenance and repair obligations over.

Similarly, in a repair project, let's suppose you're doing a re-roofing project, and take the example that Alan just talked about, where you have a declaration that says roof coverings. You're doing a roof replacement, I'll even show you a picture. I have one here I can use to illustrate. Let's suppose that in the process of doing this roof replacement on this building, and this is a typical let's say eightplex townhouse, the roofer uncovers a substantial amount of rot. That rot goes down into the trusses, the framing of the roof. Well, now you've got a roofer that's going to be looking at that and having to expand the scope of work to include removing a significant amount of the sheathing, not only the sheathing but also doing some significant structural repair to the roof. If your declaration doesn't cover that, it only covers the roof coverings, that puts the association in a real quandary for a couple of reasons. Can you do the work? Can you spend the money to do the work?

Secondly, you haven't done an investigation, if you haven't done an engineering investigation you didn't know this going into it and you didn't do this type of investigation because you didn't have standing to do this investigation. Now you have a situation where you've got these necessary structural repairs and you don't have any specification for it, and you may not have the standing to have an engineer actually take a look and do some more investigation, take some of this sheathing off, look at the nature and extent of it, how far does it go? What is the spec that needs to be performed to correct this problem?

The delineation of the maintenance and repair obligation of the association in the declaration, whether it's just for basic turnover, a critical turnover inspection, or in delineating what is the scope of a major repair project, such as a re-roofing project, it's critical.

I'll give you an example. I don't have a picture of this, but let me tell you something from real world application. We had a case where we were investigating extensive building leaks in a townhome community. When we got into doing some testing of the buildings, we found that a lot of the problems were emanating from windows. In fact, what the developer and the general contractor had done is they had basically made all of these, taken single windows and butted them together to create double window units. They failed to, where they joined the two windows, which some of you may know is a mold window, they didn't do that joint properly. They didn't do the mullions properly and there was water that was getting all back in behind the windows, down into behind the stucco. It was creating a lot of problems. When we started to open those stucco, do some destructive testing, we saw that a lot of the framing underneath the stucco was completely just rotted out, obliterated. It was like dust.

Now the problem here is that in this community the windows and the window frames were not within the maintenance and repair responsibility of the association. All of a sudden we have a situation where you've got major problems being caused by windows throughout the association causing problems to areas that the association did have maintenance and repair obligation, and it was a little bit of a quandary. We solved it. I won't get into too many details. It involved an amendment of the declaration to cover those things to enable the association to make those repairs. 

Alan Tannenbaum, Esq.:

Okay. Here's a practical dilemma. The association, let's say in this instance, only has jurisdiction over the roof covering, finds this. There may be no mechanism in the documents for the association to be able to require that owner to correct these underlying problems. What does the association do? Do they put now the roof covering over this mess, which will assuredly fail, but there may be no mechanism in the documents to require the owner to do that.

The other problem here is let's say that the feet title or the boundary on one portion of this roof ends let's say at one of those, looks like tiles, the next tile is on the adjacent owner's property. How do they decide between them as to how that's going to be investigated, how it's going to be repaired? What if the adjacent owner, it's in an estate, tied up in an estate battle? You can't even get an answer from somebody about participating. Many of the documents have no guidance at all on how those adjacent owners are going to make those repair and maintenance decisions. It's a multi tiered problem. Again, the documents are across the board so there's all kinds of different dilemmas for each little project. Anyway. I interrupted you, Jon. Keep going.

Jon Lemole, Esq.:

That's all right. I think I'm getting close to my allotted time, but I'll show you something else real quickly. Here's a situation where you have what was and definitely appears to be significant water intrusion damage that's really showing within the unit. This is a garage, but which is emanating from, again, some other portion above, and it may be even the next lot owner's window being flashed improperly. You can imagine the problem that this creates because this unit owner, this lot owner is having significant damage inside their garage that needs to be corrected. It may be emanating from somewhere else that's not even part of their unit, it's outside their unit and at the exterior of a different unit. Yet nothing can be done about it. You've got very unsatisfied unit homeowner here who's looking at anybody and everybody to fix the problem but may not be able to get relief from anybody. This problem is just getting worse.

Well, let's suppose that this is really coming from a flashing problem, or a stucco problem, you can bet that they're going to want to hold the association to task for that, and the association may be saying, "Yeah, but in our declaration we're only responsible for painting the exteriors because that's what it says." It doesn't include windows. It doesn't include anything other than painting and it leaves it completely open to interpretation. Now you have a huge conundrum, which whenever you have huge conundrums it generally opens the way or paves the way for litigation and claims, and everybody pointing fingers at everybody, and that always means money in legal fees that's going to be spent typically by the association.

What we're advocating here is that it's always good practice, and there are two key points if you have never done it, turnover being one of them. If you're going to undergo a major repair project these are always opportunities to look at your declarations and really have a conversation about what makes sense for the association to cover in terms of maintenance and repair. Don't always assume that the developer has done something which is enlightened, smart or in the association's best interest.

Alan Tannenbaum, Esq.:

Jon, and we touched a little bit on insurance coverage, but the insurance anomalies are that, first of all, the insurance industry has not figured out how to insure a townhome community where the association has repair and maintenance responsibility for some items and not for others. What kind of policy do you issue for that kind of community? The risk is that the association's coverage will be broader than its maintenance and repair responsibility.

If somebody has a problem that's caused by a unit issue that an owner had an obligation to maintain, yet the association's coverage is called upon to pay the claim, and you have a terrible situation of your insurance company covering a claim that the association has no control over the source of. Then a real opportunity to get canceled the next year because you have a claims history and the insurance company realizes that the source of the problem is actually not under their client's or their insurance control. Really tough issues that are following this maintenance and repair dilemma.

Let's go into another issue, which is sometimes these townhome communities have very severe construction defects and there's a desire on the part of the owners to get some recompense from a developer for those problems, but you have documents that don't cooperate. Brian Tannenbaum now is going to talk about the challenges for pursuing responsible parties when you have documents that have very scattered repair and maintenance responsibilities. Are you here, Brian?

Brian Tannenbaum, Esq.:

First of all, there's no obligation by a board to sue a developer or a contractor to get the cost of repairs recouped. If a board wants to undertake all the repairs and do it on their own, that's absolutely fine. If you would like the developer or the contractors to share in that cost of the defects that they're responsible for, it's important to amend your documents because there's an important rule of civil procedure, which I will put on the screen right now, which says ... Can you see that okay? 

All right, so what it says is, "A homeowner or a condo association, after control of such association is obtained by homeowners or unit owners other than the developer, may institute, maintain, settle or appeal actions or hearings in its name on behalf of all association members concerning matters of common interest to the members. Including but not limited to ..."

One is the common property area or elements, so that for an HOA is just going to be roads, any lawns, anything that's a common area. Importantly, number two and number three says, "The roof or structural components of a building, or other improvements." Importantly in this parenthetical it says, "In the case of a homeowner's association being specifically limited to those improvements for which the association is responsible." If your documents do not give the association responsibility for repair and maintenance of an aspect that has a construction defect that a developer or a contractor would be responsible for, you do not have standing under rule 1.221 to sue as an association. The same for number three.

Importantly, what that does is it allows the association to bring the claim, rather than if you have a sixplex, an eightplex, having those homeowners try to bring those claims either together or on their own, which can lead to expensive legal fees, expensive costs. It also doesn't resolve what happens when you recover. If you have six owners who recover a lump sum from a developer or contractor, there's nothing that controls how that money is spent, how those repairs get done. It just leads to more problems and more litigation.

Alan Tannenbaum, Esq.:

To give a concrete example. We represented a townhome community, sixplexes and eightplexes in Pasco County, where about eight years after the buildings were developed really severe ridge cracking developed at the second floor. It was first floor block, second floor wood frame. It was determined that the major driving force in the stucco cracking was deficiencies in the roof framing of these connected townhomes. Association did not have maintenance and repair responsibility over the roof framing. In fact, it said just building painting, so they didn't even have jurisdiction over the stucco system. Massive repairs needed to be done to the framing on 25 buildings, and we told the association, you don't have standing to pursue this claim, or you could try a common law class action, which is very cumbersome.

Brian Tannenbaum, Esq.:

Right, and I have, just for an example. If you think this is small, I have the common law class action rule on the next slide, which looks like that.

Alan Tannenbaum, Esq.:

All right. Well, very complex, difficult. Sometimes it takes a year to get class action status under a 1.220 class action. Whereas 1.221 you have automatic standing. In order for that group to pursue its construction defects, it had to amend the documents to put the roof framing and the exterior wall system under the jurisdiction of the homeowner's association. They did that and then they pursued a successful case. People have asked us, "Can you amend the documents eight years later to put the maintenance and repair responsibility with the association so that you then have standing under rule 1.221?" The answer is yes. We did it. We've done it. Nothing in the rules says that you can't create standing by modifying the documents to match what the rule and procedure requires.

The rule and procedure was created by the Florida Supreme Court specifically to deal with connected townhomes because it was an issue as to what the standing was. The Supreme Court is ahead of a lot of associations because the Supreme Court said, "You have standing, but you better have documents that support your using the rule." Many communities don't. If you want to get recovery in the most convenient way by far, the documents have to be amended so that the association's maintenance and repair authority is expanded to cover an area of the building or a component of the building that may be defective. Good job, Brian. Okay.

Brian Tannenbaum, Esq.:

You had a question about insurance in the chat. About using the HO6 policy, the condo policy, why you wouldn't want to do that.

Alan Tannenbaum, Esq.:
Well, that probably came from Dave McMahon. Dave, you want to talk about that for a moment and we'll make you a special guest star here?

Dave McMahon:

It's a tough one for us. At the end of the day, we really struggle with communities, and quite frankly I kind of walk away from it when they are connected and they're not insured like statute 718, because we do know chaos will ensue when a catastrophic event occurs. The finger pointing will happen. The responsibility of rehabilitation of the property will take much longer. The integrity of the rehabilitation is in question. We don't know if the unit owners are insured correctly. There are no appraisal on the entire property. It becomes a conundrum of insuring that property correctly when you have two, four, six, eight units together.

Many of the ones that I do do have changed and amended their documents to become very similar to mirror the insurable responsibilities to statute 718 in order to bring the fiduciary responsibility of the board to light so the rehabilitation of the property, it's significantly better doing it that way. They feel better in sleeping at night that they will have a community after a problem, like a tornado or a hurricane, versus the other way in which many of these are being done.

Alan Tannenbaum, Esq.:

Yeah. I mean, if you think about it, let's take a worst case scenario that a tornado causes major devastation for a sixplex. There's no statutory guidance as to the insurability of that building. If the insurance proceeds come in, who decides how the building's going to be rebuilt? You've got to have six owners who are going to agree on that. What if the insurance coverage doesn't cover the entire rebuilding? How do those six owners agree on funding the gap? Again, what if one of the owners is incapacitated, on safari in Africa, whatever they might be?

Can't even get in touch with them. Then you have the possibility of up to six insurance adjusters each insuring a part of the building.

Dave McMahon:

Essentially what will happen, and this is a problem, I'm 100% confident that if we had the six or eight unit owners lined up, they would all have different policies. Different limits to the policy. What will happen is the adjusters will pay for the limits that the insured had signed up for. If it's not enough, the unit owner is going to be assessed. Now it becomes do I have enough money to repair correctly? One unit owner wants to repair correctly, another one doesn't have enough money. The proceeds from their insurance are not going to cover it. They will pay into what the limits say on the policy, period.

From there it becomes very difficult what engineers you get, what contractors you get. One wants to do it correctly, another one has to pay for what they could afford. It becomes very difficult. I really have only seen chaos out of this, and consequently I'd rather walk away from insuring it than be a part of the tornado that occurs after everybody starts pointing their fingers at each other.

Alan Tannenbaum, Esq.:

All right. Well that's very helpful. If you haven't figured it out, Dave is one of our great insurance agency partners. Not a partner in our firm, but a vendor that we deal with regularly. Now we're getting a little bit behind, so we're going to cut some of these short. I'm telling my partners because we have 17 minutes left. Sal, talk a little bit about economy of scale in undertaking repairs and the benefit to having the association be the contracting party versus owners.

Salvatore Scro, Esq.:

Anybody that's walked into Publix, what's the first thing you see? The buy one, get one table. It's common sense that the bigger the purchase, the better the price. That's no different when you're doing repairs to a project. There's other things to consider as well. I'll just put a list up here of some of them. Can you read that okay? I hope. These are things that some of these things have to occur no matter what, and some of them, because you're taking on the project as a whole, as a community, rather than each owner by owner, there's a benefit to it.

Typically, what's called general conditions in a project, there would be supervision, either by the general contractors, project manager or superintendent, depending on the size of the project. You're going to be paying for the labor and time for these people. Depending on the type of project, they may need a job trailer, so you're going to pay for them to bring their equipment in. If it's one unit, you're paying for it. If it's 100 units, or 30 units, or 400 units, that price goes down. The time may go up further because you're extending the time to do all the work, but overall it's more cost effective. Storage of supplies. If you're going to be doing a project on your own and they have materials, where are they going to put them? Are they going to put them in your garage, on your roof? Where are these materials going to go? It's just one of those things that helps when you're doing this as a whole.

Transportation for material and the management. There's a cost for transportation, and you know today those costs are skyrocketing. All of these things, it's nice when you can spread them out. Clean up, that's another thing. They're going to put in time every day. I'm sure plenty of you, if you've seen work going on, you may have grabbed a nail in your tire or something. It's the responsibility of the contractors to make sure they clean up daily. That's an added expense that they're going to charge you for.

These things here I'm not making these up, these are in the cost quotes. When we work with clients in construction defect cases, these are the things that people ignore. These are the things that the defense and the insurance companies don't realize are out there. You may have a $2 million repair project for an association and $500,000 of that is incorporated in all of these things. They do get expensive, and they are things that people forget about. Landscape repair.

Alan Tannenbaum, Esq.:

Sal, let me give an example. We had a duplex community under HOA regime in Sun City. The first major windstorm shingles blew off the roofs throughout the project. The replacement of the roofs was on the duplex owners, so you had each duplex owner, the two owners had to agree what are we going to do about this shingle roof problem. Imagine, because there was some engineering done and the engineer said, "This is the worst shingle job I've seen, and all of these roofs need to be replaced. None of them can beat the wind load requirements of the code." Imagine what a roofer would charge on a per roof basis versus a roofer who got the job to do 150 re-roofs. All of the things that Sal is talking about, the economy of scale built into each one is going to be a much greater, the cost per building is going to be significantly less. Sal, that's just a example that we ran into that hits on all of these issues.

Salvatore Scro, Esq.:

I'll wrap this up here just with a couple things that are different. You can see all these things. One of the important things are scaffolding though, every time you have to put it up and take it down. If you're doing a multi unit building and each does it on their own, they'd have to set up scaffolding for each unit. Versus if you do it as a whole, it's in and out with the same scaffolding. Some of the things that you don't realize are the permitting. You can do permitting all at once, that saves you some time and your engineering costs, things like that. Insurance, as far as insurance, that's another added benefit. Not only the insurance that you may have covering any defective work, but the insurance that you may have to pay to cover if there's any hazard that occurs during the construction.

One of the things that you may not do on your own, or even if you're just one or two units, is you may not employ an owner representative. You may not employ somebody to be out there to supervise a project, to look at the materials, to make sure that what you've ordered is delivered and is actually there. To make sure that they secure the materials when they go home for the day.

Then one of the things too, it may be typically it's either not available or it's not financially feasible on a single project, would be a bond, Whether it be a performance or a payment bond. The bigger the project, the more protection you can have.

Alan Tannenbaum, Esq.:

Sal, one thing that's not on the list is that if you're going to have a contractor re-roof 150 roofs, you actually have the ability to afford a construction lawyer to help you with the review of the contracts and getting a good contract. Where an individual owner replacing the roof, it's not cost effective to hire their own lawyer for a re-roof job, so that's not going to happen. Anyway. Quickly on to Brian Tannenbaum, who's going to talk about some safety concerns with owners doing their own repairs sometimes three stories high.

Brian Tannenbaum, Esq.:

All right. Well, if you have owners who are doing repairs on their own without any kind of consistency, what you're going to have is you're going to have different contractors, different employees of those contractors, different subcontractors doing work on different parts of buildings. What that means is if you are in one unit of a building and your neighbor is doing construction work on your building, you may have contractors that don't have worker's comp, you may have contractors that don't have the required permits, and they may be damaging your building, or they may be opening you up to liability for any injuries that occur while on your property. I think that's a [crosstalk 00:47:31].

Alan Tannenbaum, Esq.:

Can you imagine everybody having their own lift? Company coming in with their own lifts, they're going to be damaging paving. Landscaping's going to be damaged. The association has no control of it, and I can tell you the liability with having a contractor taking a lift up to a third story for each individual owner is a ridiculous mess.

Dave McMahon:

I'd just like to say, Surfside was another tipping point on how insurance carriers are looking at high rises too. The game is changing and can't say enough about having the experts involved in looking over everything because Surfside, we're going to see ramifications of that in legislation, but Surfside definitely was a tipping point for high rises. Insurance carriers are looking at them significantly different than before.

Alan Tannenbaum, Esq.:

Yeah. That could be impacted. Jon, I left out the aesthetics. Talk about project aesthetics and the issues real quickly that can be caused if owners are doing their own window replacements and exterior stucco work and so forth.

Jon Lemole, Esq.:

Yeah. Well, I would venture to say at some point if we've ever been over to the west coast everybody's seen these duplex communities that have multicolored roofs between the two units. That's probably not what the original intent was, but that's how it was set up.

Roof coverings usually isn't a problem because usually developer declarations can at least cover roof coverings. Let's take a stucco situation. You may have a problem where a unit owner has to do some stucco repair, which is in association with whatever, repainting or what have you, and a lot of times there may be architectural features on the stucco which they don't like, and so that may be changed, and you may have a hodge podge throughout the building of different qualities of stucco work, of different architectural flourishes, which certainly wasn't what the intent was. Let's face it, aesthetics are important to market value.

Windows are hugely important. Look, folks, proper window installation is a critical part of the building envelope in Florida. I can't tell you how many times when we investigate water intrusion there's problems with the window flashings, and that's a big cause. How many associations put windows within the control of the unit owner? You may have all kinds of different windows, all kinds of different contractors doing good work, not so good work, and that can create problems for other owners next door, down below. Because water travels, water usually goes the path of least resistance and it may wind up two units over, it may wind up down below, it may be in that person's garage like we saw in the earlier picture.

In order to maintain the integrity of the buildings, these are the types of things that the declaration should have in them to maintain consistency, uniformity and the ability of the association to do a good job in its fiduciary obligation, the board in its fiduciary obligation to maintain the buildings and to get good insurance, as Dave said. You have real insurance problems where you don't have solid declarations and a clear understanding of what the association's maintenance and repair obligations are.

Alan Tannenbaum, Esq.:

One of the things that is pretty obvious through this all is property value impact. You have owners doing their own repairs, it's going to affect aesthetics. You're going to get known as a project that has leakage problems and you're leaving it to the owners to resolve them. Eventually the word's going to get around and that community's going to suffer from a property value standpoint.

Let me tie this all together, because the last part of this in six minutes. Now that we've told you all the problems, we're lawyers, we're problem solvers. We're going to spend six minutes on problem solving. Here's the solution. The solution is, you have the ability, according to what the documents require as far as percentage of owner approval, to amend the documents, to correct all of these anomalies. You can create a set of documents that basically mirror the chapter 718 Condo Act line of demarcation between owner repair responsibility and association responsibility.

In a condo, for instance, if you have a mechanical component that's only serving that one unit, or electrical service that's serving one unit, or any of the mechanical electrical that's in the unit, typically the owner's going to have maintenance and repair responsibility over that. Anything that's common, that's a shared structural, mechanical, electrical, is going to be the association's responsibility.

Our recommendation is that the maintenance and repair responsibility be moved over to the homeowner's association to as closely match what would typically exist for a condominium association. Now, we have announced this in public meetings and we've had groups say, "Oh, so you're trying to turn us into a condominium." No. You're still going to own your townhouse, and fee simple. It's not going to affect title to anything. This is just altering the maintenance and repair regime to something commonplace. What I've often told people is the condo method of dividing repair responsibility has been in existence in Florida for 50 years. It's worked. There's a lot of things that don't work with condos, but that has worked, the division of maintenance and repair responsibility. Why not adopt that in the amendment?

Now, the one interesting thing that you can do also is you can exclude things. We've told groups, let's say you have garage doors. People always back into them. They don't always do that, but they sometimes do that. Exclude the garage door. Maybe the association would be responsible for painting it, but if an owner backs into their garage door, leave that problem to them. Front entrance door, maybe the same thing. If the front entrance doors people have different colors of those, leave those out, let the owners have replacement and repair responsibility for that. You might have some architectural control over it, which you can do. There's things actually you can leave out.

What we recommend is that you get a architect, or a contractor, or engineer in, look very carefully at the documents, and the question to ask them, what makes sense as far as the line of demarcation between the association and the lot owner? That will then be the guidepost for modifying the documents to meet that.

A lot of problems get solved with the amendment. The ability to pursue claims. Economy of scale. The ability to have problems appropriately investigated. The aesthetics will improve. Property values will be preserved. It corrects a lot of ills.

The groups that don't do it, 10 or 15 years from now, maybe earlier for some of them, you're going to have huge issues. If a storm, hurricane or tornado, hits any of these properties where the maintenance and repair responsibility is misplaced, and therefore the insurance coverage is misplaced, you're going to have massive battles, a lot of litigation between owners. Either clean them up and have an opportunity for a successful project, or leave them be and you'll have a guaranteed mess, if not today, down the road. That's where you sit.

Brian Tannenbaum, Esq.:
It's about assessments and maintenance fees, aren't they going to go up?

Alan Tannenbaum, Esq.:

Okay. That's a great question. We've been asked this. Well you're talking about now raising assessments to meet a new maintenance and repair challenge. Here's what you tell the owners. Somebody's going to pay for this. Somebody's going to pay for the repair and maintenance of these buildings, it's either an owner coming out of their own pocket to pay a contractor or an engineer, or paying an assessment so that the association can do it.

The reality is that the cost per unit, almost guaranteed, will be less if the jurisdiction for repairs is turned over to the association on common issues, because the association's going to be able to take care of issues on a per unit basis less than an individual owner will be able to. Somebody's got to pay, it's just the method of payment and who's doing the work and contracting. Yes, assessments will go up. At the same time, the amount of checks that an individual owner writes out of their own pocket to a contractor is going to go down. The savings is going to be more so on the association side if they have maintenance and repair responsibility.

All right. Well we've hit 12. We'll stay on for a couple of minutes if anybody has any particular questions. I can't seem to see the whole chat, so I have to rely on Brian Tannenbaum to tell me if there's any more questions.

Brian Tannenbaum, Esq.:

Yeah, there's one more question about where the common elements begin in a condo. Exterior wall-

Alan Tannenbaum, Esq.:

Well, typically the owner's responsible from their interior paint in, and typically the association has a responsibility for everything else. That's a typical division of responsibility. Again, it could easily apply to an HOA. There's some variations on the theme. There's some crazy condo docks that, as has been pointed out, say that the owners are responsible for placing their windows. We have 10 story buildings where in a condo the owner's responsible for replacing their windows and sliding glass doors, which is an abysmal situation because when they leak guess who gets wet? The two units underneath.

Those documents need to be cleaned up. Some of the older groups, they'd never seem to clean them up because an owner just spent $25,000 replacing their windows and they're saying, "Well, I'm not going to agree to change the documents. I just spent the money." It's problematic with some groups who are a little bit older. Thanks for taking our poll.

Brian Tannenbaum, Esq.:

Yeah. Another question for you. Could the owners request that the developer make some of these changes before turnover?

Alan Tannenbaum, Esq.:

Well, developers by design want to put as much of the maintenance responsibility on the part of the homeowners so they can avoid 1.221 and that class action procedure. It's going to be very rare that a developer is going to agree to the transfer of that responsibility and then open themselves up to the potential that now they've created a convenient class action for the association to pursue them. You could try, but I don't think many developers are going to agree to clean that up. Certainly worth a try. All right everybody, we're going to conclude. Thank you for taking our poll. Hopefully this was helpful. It's a battle the industry is fighting all over Florida. It's affecting insurance agents, contractors, engineers, lawyers, managers.

One of the things for management companies, if you go through an amendment process, be sure that your management contract is adjustable to account for the greater degree of responsibility that the management is going to now have. Probably most management companies that are handling HOAs should have clauses in their contract that say if there is an amendment that greatly increases the association's maintenance and repair responsibility that the price per door just went up to accommodate for that increased responsibility. Word to the wise to all the managers out there to certainly account for that. You don't want to get your $3 door and all of a sudden you're in the building maintenance and repair business and your company's losing money. We don't recommend that.

Okay everybody. Thank you.

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VIDEO: Guest Panelist Engineer Felix Martin, P.E., S.E.

Whether new building post-turnover, or a 40 year old building in need of rehab, or streets or other site improvements which are showing signs of distress, building defects are often not discernable without some level of invasive examination and testing. In our next panel, we will feature engineer Felix Martin, P.E., S.E., who has investigated tens of thousands of condominium buildings, connected townhomes, and site improvements in Florida. Learn what is entailed in discovering hidden defects and damage.


Video Script:

Alan Tannenbaum, Esq.:
I'm Alan Tannenbaum of Tannenbaum Scro Lemole & Kleinberg. I have my partners with us today, Salvatore Scro and Jon Lemole and our associate Brian Tannenbaum and we also have our paralegals Meaghan Skillman and Courtney Callahan because I thought it would be really good for them to learn what we do on a daily basis out there in the field when we visit condo buildings and town home [inaudible 00:00:34] so they're joining us and of course Michelle Colburn who sets up these panels for us and runs our technology who's our business development director, she's on with us and we have as a special guest today one of the engineers that we utilize on our cases for forensic engineering testifying and so forth, Felix Martin and Sal Scro and Felix Martin are going to lead the show. Jon, Brian and I are going to interject questions at times and will repeat some of your questions as they go along. Going to be very interactive in the sense of there's going to be a number of photos put up and explanations and so forth, so you should enjoy that.

For managers this is not a CEU course so don't get disappointed with that, but you're going to learn a lot. But before I turn it over to Sal, I would tell my lawyer-engineer-accountant joke, it's very quick. So the question that's posed to a lawyer, an engineer an accountant, what's two plus one? So Felix Martin answers on behalf of the engineers and he's furiously working on his computer for a half hour, he's sweating, he says, "Well, by my best calculation with a coefficient of 4.26, I believe it's approximately three." Then the accountant sitting there says, "Well what do you want it to be?" The lawyer says, "I'm not quite sure but it's going to be a little more than I first thought." So anyway, that's my lawyer joke, lawyer-accountant-engineer joke for the day. So with that said, I'm going to turn the program over to my partner Sal Scro.

Salvatore Scro, Esq.:
Morning everyone. You've heard us talk a lot in all of these seminars and if any of you have been to our CEU courses, you've heard us talk a lot about the importance of inspecting your building and the importance of finding the right person to inspect your building, and I have stressed quite often that in my opinion, if you have roof problems or stucco problems, you don't call the roofer or the stucco in most situations, you should call an engineer. Today, we have Felix Martin with us who is an engineer that we've worked with substantially in investigation of buildings. So rather than hear us talk about it today, you're going to get a chance to see some of the things we do. I'm going to share a screen with you and you should all be seeing the what lies beneath screen and let's make sure I have this okay.

All right, so let's make sure ... You know what? I want to go back here. One thing, let me stop sharing this for a minute and it's working, okay, we're good. All right. So what lies beneath, the importance of looking below the surface and detecting building problems. So this is what we do. We find the problems that you don't see and with that, I have some information on some of the areas that we've looked at in destructive testing, but we have Felix Martin. He's a structural engineer with Marcon Forensics. This is generally what they do. Felix, if you want to interject, I'll let you give a quick introduction of yourself before we get into the meat of things.

Felix Martin, P.E., S.E.:
Sure. Thanks Sal. So as Sal mentioned, my name is Felix Martin. I am an engineer. I have been doing forensics work, strictly nothing but forensics work, since 1996. I have been involved in investigations across the United States, in Florida, in Nevada, in California, in Colorado and Arizona and Utah and in Oregon. I have worked with the Tannenbaum firm for a number of years, probably 10 or 12 years by now, and I have to say that as far as one of the constructions defect law firms out there, they have certainly been one of the better firms to work for as they have a lot of experience in this type of situation. They understand what the problems are and they understand how to address them and how to essentially recover for the homeowners. But with regards to my own work, my firm became a forensic firm in 1996 and since then that's been our focus. We accept no work from developers because we want to avoid any conflict of interest and the work that we do is largely representing homeowner associations so that we can determine when there is a problem, what the problem is, what the extent of the damage is and ultimately how to repair that damage. Back to you, Sal.

Salvatore Scro, Esq.:
Okay. So what we're going to do is show you some things and we may, depending on the time, we may skip through a little bit. But for example, here's one of the first projects I worked with Felix Martin on. Felix, when we first went into this project, we went out and we did a walkthrough of the project. Tell me what you were looking for just walking through, looking at these buildings when we went out there.

Felix Martin, P.E., S.E.:
Well this is a very good project to start out with. This is a project that we worked on quite a while back, about 10 years ago. It's a project that again, it didn't really to the untrained eye, it did not really seem to have a lot of issues. There was some stucco cracking certainly but nothing to the extent that we later found out was evident. So it's the kind of thing that I think someone without the background of knowledge that we have, that Sal and I have, would really not be able to notice right off the bat. But as we walked the project, we could definitely see telltale signs that there are issues and some of those telltale signs are in the form of the stucco cracking.

Now people will say stucco cracks of course, but the question is what sort of cracks are there, where are they occurring? What is the nature of the cracking that we see? What are the conditions that we see that have been historically problematic? Because we have the background, we're able to take a look at areas that we know historically have had problems with water intrusion and damage and we can focus on those as we do our visual inspection and Sal, because like I said, he's done a lot of this work, he's really good at doing this type of investigation as well. He can take a look at a property and already from his background and experience be able to tell what doesn't seem like a lot of damage could actually be problematic.

So as you look at this photograph right here, you don't see a lot of evidence of damage. It doesn't really seem like this is a problematic project and yet as we walked through it, we could see that there was a lot of evidence that was visually available to us to tell us that this was going to be a project that was going to be essentially in deep trouble, even though it didn't look that way.

So the types of things that we look for are areas like I said that we have known previously to be historically problematic, and typically these intersections between the roof and the stucco have been a problem in the past. You have a very code in Florida. The Florida Building Code is a very good document, but there are areas that it doesn't really necessarily address very specifically and that is the intersection of different installations, such as the intersection of the roof with the stucco, and those are installations that are done by two separate subcontractors. You have the roofing contractor and you have the stucco subcontractor, and pretty much a lot of the times they're focused on their own work and they don't necessarily focus on the interaction between the work that they do.

So when we get to these areas where the two intersect where you have problems with the flashing at these roof to wall intersections, those are typically areas that have been problematic in the past and in this project, that was exactly the case. As we took a look at it, we could see that the installations that existed, even though again to the untrained eye as you see this photograph, doesn't seem to be a problem, doesn't seem like there's a problem there. The fact is we know that these installations are problematic, and that water is getting in and causing damage.

So once again, you look at these elevations that Sal is showing you here, and you don't really see much that you as an untrained person could see that was an issue, that would say, "Okay, this is speaking to me that I'm in big trouble here." But when Sal brought me out to this project, he already knew that this was a problematic installation because he has, like I said, he's been to these types of projects before and he's learned to recognize the issues or the locations where potential problems occur. So by the time he brought me out, essentially he already had a pretty good idea that this project was going to be something where the construction had been deficient and where that deficiency in the construction was going to allow water to penetrate and cause damage.

Salvatore Scro, Esq.:
I have to say it is important, the managers of the associations, they play a big role in assisting our attempts to recover for the construction defects and assisting the engineer in doing the proper investigation. So I know on this project we had great assistance, so for the managers, don't discount your role in helping the association in addressing these issues.

Felix Martin, P.E., S.E.:
Sal, as we're looking at these pictures, what was the age of these buildings at this point?

Salvatore Scro, Esq.:
This was an apartment complex built in 2004. When we first got out there, it was maybe ... It was converted a few years after and we got out there and I think we did an initial look at the place in 2011 and in 2012 I think was when we did the investigation of the project. So one of the things too here is you're looking at this and walking through it and we knew that there were some complaints of window leaks and stucco cracking, but with Felix out there walking through, the areas that we pointed out in the prior slides, those were things that he identified, this isn't necessarily a stucco problem. There were stucco problems, but one of the major concerns and you'll see is how some of those little pieces that we walk by every day and don't even pay attention to make a big difference in the interior of the building and if you don't address them in a timely fashion, you're going to run into a lot of trouble. So what's this Felix?

Alan Tannenbaum, Esq.:
Before you get there, there's a question. How do we know when to have an inspection if we don't see problems with an untrained eye?

Salvatore Scro, Esq.:
Well that's a really good question because again, that's what it takes. Most of the time, what happens is that you may get a couple of leaks from the roof and you may think, "Well, that's kind of a situation to be expected." But I guess the first answer would be don't minimize when you have some water intrusion. Because the problem is that even a small amount of water coming in can cause a horrific amount of damage.

So the first indication would be if you're having any kind of a problem at all, you should definitely be contacting someone to come out and make sure that what's happening is either not a problem or something that needs to be addressed right away, and that should be stressed. It needs to be addressed right away if it is a problem because even a small amount of water within a contained space is going to cause a lot of damage. Because the problem is that most of the damage that will occur will occur under the building finishes, and so when it comes time to repair, you have to remove the finish, and that makes the repair a very expensive proposition. So rather than stick your hand in the sand, what you have to do is you have to be proactive about this, and if you have any kind of indication that water is coming through, you should definitely get someone out.

But in addition to that, I think that if you have a project that is approaching a certain age, you should definitely have someone take a look at it and the best people to contact of course would be the law firm because they would be able to tell you first of all if there is a chance for recovery should there be an issue, but also they have the resources like someone like myself to come out and call and say, "Hey Felix, can you go out and take a look at this," and we can do that.

Alan Tannenbaum, Esq.:
But what we would recommend and what your general counsel probably would recommend is that all buildings, whether you think they're problematic or not, should be inspected on some periodic basis by an engineer. A lot of times the insurance companies require that anyway, so that would be the answer. If nothing's obvious, have an engineer out there to make sure that what you're seeing is what is in fact the situation. So Sal, go ahead.

Salvatore Scro, Esq.:
All right. So Felix, I'm going to lead you into this a little bit. Why is it that this was a location that you decided to investigate?

Felix Martin, P.E., S.E.:
Yeah, so this is a location that we decided to investigate because it offers a lot of good information when we're doing our investigation. So what you're looking at is the front of the building, and you're looking at an intersection of the lower roof first of all or I should say the lower roof there. There is an intersection between the roof and the stucco and then at the same time it's the lower corner of a window. So by essentially cutting the stucco out in this one area, we're getting information with regards to the window installation, the flashing around the window, the installation of the stucco, the installation of the building wrap, the installation of the roof, and the installation of the flashing between the roof and the wall. So in just this one location, there are a number of components that have historically been problematic and yet with a single cut, we can remove the stucco at that location and get a lot of information as to how that was put together. How did the contractors install the stucco? How did they install the windows? How did they install the roofs? How did they install the flashing? So we select these test locations so that we get the maximum amount of information and we minimize the impact on the community.

So we don't want to be just cutting holes everywhere. We cut a good-sized hole, but we select locations that are going to provide the maximum amount of information as far as all the different traits that were involved in a project.

Salvatore Scro, Esq.:
So how do you select ... If you have multiple buildings or even a single building, how do you select the areas that you want to test? Do you just look for the bad areas?

Felix Martin, P.E., S.E.:
No, no, no, we don't, and there's good reasons for that. The first thing is that when we select the areas to test, we try to get a spread across the site. So we don't focus on just the older buildings, we don't focus on the newer buildings. We try to pick locations that are spread out across the site so that we get a good sampling of data. But to say that the problems are going to occur only where you can see obvious signs of damage is not what we do. Because what we have determined from history has been that even areas that look perfectly good, once you open them up and you test them, you will find that there are going to be massive amounts of damage behind it. So just because it looks good it's not an indication that there isn't water intrusion taking place and damage taking place. So these locations are selected not so much by the way they look as by getting the information across the site. Construction, when it comes to production housing, is repetitive. It's like a car factory. You have people that do the same task over and over and over again. So typically if we find a problem in one corner of a project, we're going to find that same problem across the site because the installer that's doing that installation improperly is going to repeat that mistake all the way across the site.

Salvatore Scro, Esq.:
So we have a question here. Do you participate in the turnover from the developer, and I don't know if the question is to the engineer or to the attorney, but I will tell you from the attorney standpoint yes, we think it is important that you have an attorney participate in the turnover from the developer for several reasons. One is if it's a condominium there's an extensive list of items that need to be turned over at turnover. Some of those things include an inspection report by an engineer, and there's certain things that have to be in that report. So many times, we'll see those reports are either left out or if they are turned over, they are not given with the information required by statute. It's also important to get a list of the contractors and subcontractors and the work they perform so you know if you have problems, not only the general contractor and developer but what subcontractors you should go to to address these issues.

Alan, one of the things we talk about sometimes we hear from the owners is that they have warranties, and they have a one-year warranty, and they should come out and fix these things. What's the response to that with regard to ... That there's other avenues regarding whether it's a condominium, if there's a statutory warranty or HOA? What other means can owners and associations address any construction defect problems?

Alan Tannenbaum, Esq.:
Well, that may be for a whole nother session, Sal. Here is the key.

Salvatore Scro, Esq.:
The quick version.

Alan Tannenbaum, Esq.:
Here is the key, our firm takes HOAs and condo associations through turnover. We help you get the engineering, we help you get the evaluations, and then we handle the claims. So that is basically what our firm does and we bring in engineers like Felix upon turnover and engineers who do site evaluations for HOAs, we bring them in to do the analysis, we help with the scope of the analysis and so forth. So that's what we're here for. But Sal, I want to see the rest of the guts of this building, so get to it.

Salvatore Scro, Esq.:
All right, here we go. So here we are at another position here at a chimney and this was another area selected because as Felix pointed out, he found the area of the roof to wall intersection with some flashing that was an issue. So I'm going to skip through some of these and why don't you explain the process here Felix and I'll slip through some of these as you speak.

Felix Martin, P.E., S.E.:
So again, as you saw initially, before we actually started testing that, the stucco did not really appear to be heavily damaged. But we saw the connection and the way that the flashing appeared to have been done between the roof and the stucco, and we could see that historically this has been a problem. So we selected this as one of the areas that we wanted to test, and sure enough, as you see here, as we started removing the stucco, we found that water had penetrated from the roof into the wall, and then that had started causing the type of damage that you see here.

Now what you're looking at there is as we're chasing the water damage down, you can see the amount of rot that has taken place, to the point where the framing is actually being, the structural framing is being damaged by this water intrusion. Even though there was really no visual evidence on the exterior before we started testing that this was taking place. So this is an example of where a small amount of water, when it starts to penetrate over a long period of time, is going to cause an extensive amount of damage. Keep in mind, this is starting up at the high roof. Water flows downhill, and so as that water is coming in, that damage actually extended all the way from the roof to the bottom of the wall, which meant that the repair for that conditioning essentially required that all of that framing had to be taken out and completely replaced. So even a small amount coming in at the roof to the chimney intersection produced enough damage where you now had to take all the stucco off and take all the framing out and repair it or replace it, which again, gets kind of expensive.

Alan Tannenbaum, Esq.:
All right, everybody's still hearing us, I hope. Yes?

Salvatore Scro, Esq.:
Yeah, I'm having some issues here too. Can you still hear me?

Alan Tannenbaum, Esq.:
Yes. I can. Everybody else out there? Give a wave, yes? We're still good, okay, go ahead. Because we got a strange message.

Speaker 6:
Yeah, it just came back, we're good now.

Alan Tannenbaum, Esq.:
Okay.

Salvatore Scro, Esq.:
Felix? Are you there Felix?

Felix Martin, P.E., S.E.:
Yeah, I'm here. So once again, this is damage continuing down from that water intrusion that we saw at the top. Now as this water is penetrating, it continues to cause this damage. So like I said, you can literally follow the damage all the way down to the ground, where it started up at the top right there at that photograph, where we could see the flashing was not done properly and then as soon as we opened it up, we saw that confirmation that yes, the flashing had not prevented the water from getting it and you can see that the damage above that location has no damage. So it confirmed that the water was getting in at that intersection between the roof and the wall, just as we thought it had started.

Alan Tannenbaum, Esq.:
Sal, there's a question about town home communities, and hopefully you folks can still hear us. There's a question about town home communities and do the same type of issues apply? And the answer is yes. Most of them are built under an HOA regime and not a condominium regime. You don't have statutory warranties as a result. But you do have recovery for building code violations, for negligent construction, and some of actually our larger cases have been HOA town home communities, so it definitely applies.

As far as the question about HOAs, you may not have buildings. It may be a single family home community, but the same process exists. You get the entire infrastructure inspected, you look at the accounting and the budgeting from the developer also, you get engineers out to do those evaluations, and then we handle negotiations with the developer to make things right after the fact. So that is definitely a part of our practice.

There's a question about repairs to existing buildings. We're not going to cover that in this session, but really the same forensic analysis applies. If you have a roof that's leaking in an older building, you had better get a good engineering inspection done of that roof, which may include some invasive testing. Otherwise you really don't know what the recipe for solution is because you really haven't gotten to the root of the problem. So the same forensic process applies, even in those circumstances. Go ahead Sal.

Felix Martin, P.E., S.E.:
Yeah, I'm going to add to that, I'm going to go back on that for a second but the construction, the state of construction in the state of Florida is just horrendous. That's the best word that I can describe it. I mean like I said, I've done work in Nevada and Arizona which are dry states, where it hardly ever rains, and the conditions for waterproofing buildings in Nevada and Arizona are much, much better than what they are in the state of Florida. I've mentioned that there are good codes in effect in Florida, but the fact is that builders just choose not to follow them. So there are rules in place and they just do not follow those rules. That's one of the reasons why you have to be always cognizant of bringing someone in like Sal and Alan who are attorneys that know the rules and know what to do about making sure that those rules are followed or should have been followed or what to do about them.

So Alan just mentioned the whole issue between condominiums and town homes. The construction is just as bad for construction in town homes as it is in condominiums, but some of the rules are slightly different. Condominiums are required to provide a turnover report. Well a turnover report is a well-intentioned document that's prescribed by law, but who pays for that turnover document? The builder does. So the builder essentially pays an engineer to go out on inspection and say that the developer's work is deficient or not. Well if that engineer ever expects to get work back from that developer, what are they going to do? They're going to have these very, very basic reports that essentially don't want to see anything that's wrong. So turnover reports tend to be a source of a lot of misinformation in that they don't really go deep enough into analyzing what was done wrong. We've seen turnover reports that were done by a guy essentially driving through the community, inside his car and taking photographs from the car, without ever getting out of the car.

Alan Tannenbaum, Esq.:
Felix, to clarify that, actually the report is for a different intent. It's more like a reserve study than it is a defect report, and in fact the engineers who do them, many of them put right in the first paragraph of the report, make it very clear that it's not a defect report. So a lot of groups get confused that they get this turnover report, they say, "Well why do we need our own engineer?" The reality is everything that Felix said, but also the purpose of the report is much different. It is not a report to report on defects, it's more in the line of a reserve report.

Felix Martin, P.E., S.E.:
All right. Sal, you had a good photograph up there a second ago. Did we lose Sal?

Jon Lemole, Esq.:
While Sal's doing that Alan, I think another good point that Felix raised is that there's a lot of non-compliance with codes and people might say, "Well it gets approved by the county or the city building official, so what does that mean?" That brings up a good point about approval by the municipality doesn't necessarily mean that you're out of a claim because you can still bring a statutory claim for violating a building code if the contractor knew or should have known, regardless of whether there was approval.

Alan Tannenbaum, Esq.:
Jon, the simple answer is, every defective building in Florida that's occupied has a certificate of occupancy, and Felix will tell you there's a lot of occupied buildings with defects. So building approval at the outset really is not a defense to anybody, and the Supreme Court of Florida has said that. Go ahead Sal.

Salvatore Scro, Esq.:
We are shown the entranceway here and I think we're pointing over to this area here and inside, we found some ... Just a little bit of water. Just a little bit, but this was an area that Felix ... Actually, he found this in his walkthrough, and I have to tell you, and I say this during our seminars about the right expert and the key is to get an expert who can communicate. Somebody who knows what they're talking about and is interesting and I've sat through depositions and Felix is one of the best as far as when it comes to explaining to the general public what the issues are and how they found them, but I'm going to just flip through some of these because we have quite a few slides. This area here Felix, explain what this piece is right here. Because that's something of importance I think.

Felix Martin, P.E., S.E.:
Right. This is what's called a roof diverter and the idea is as you have water flowing down the roof meeting the water flowing down the wall, it serves to collect that water and is called a diverter because it's bent that way so that the water gets kicked out away from the face of the building. Unfortunately, this type of diverter that you see here is famous or infamous I should say for not really being watertight, and the problem with that of course is that it allows water to penetrate. You can see that in this photograph, the damage it's starting cause to behind it. It has water penetrating through a number of areas. I think earlier you saw a photograph of the backside of the diverter, which was not sealed, water got in through that. It also will have water that comes in through the front side of the diverter because the construction of the diverter is such that it leaks into the building.

So there's water coming in from the work that was done by the roofer in terms of not providing a diverter that doesn't leak. There's water coming in as a result of the work of the stucco installer in that the stucco was improperly installed and allows that moisture to get in, and there's water coming in as a result of the work of the painter because the painter didn't provide the sealant behind the diverter to keep that water from coming in. 

Salvatore Scro, Esq.:
I remember one time being in Jacksonville and talking to Felix on the phone and having him explain this to me and having me fold a piece of paper because some of these diverters are fabricated. So my advice to anybody that's having any re-roofing issues out there, if you're going to have a contractor out there, please have your contracts reviewed in advance, but one of the things you should also ask is maybe a review by a professional like Felix to review the contracts because one of the things I would say to specify is that you have a manufactured diverter as required in the project because what they do is they fabricate these out of L-flashing on the site and what happens is there's problems. So it's very important, the minor details, if you require certain things, they will be out there.

Felix Martin, P.E., S.E.:
Here's an example of a location where they actually didn't even bother to build a diverter. So you don't have that piece that essentially kicks the water out away from the wall. So once again, as water is coming down that roof, it gets to that termination and it goes actually inside the stucco. It's essentially being directed to go into or behind the stucco and into the wall cavity, which of course is never a good thing. If you have the diverter, at least you have something that's going to try to divert some moisture out, where you have it completely missing then it's just essentially pouring that water into a wall cavity and that's just going to be nothing but trouble. So you can see that the damage isn't occurring just to the wood framing, it's occurring to the stucco as well. The backside of the stucco that you saw there a second ago had a lot of rusted lath, and that rusted lath eventually expands to the point where it will begin to cause damage to the stucco and then that brings in additional water to cause additional damage.

Alan Tannenbaum, Esq.:
Felix, what is lath?

Felix Martin, P.E., S.E.:
Lath is essentially the reinforcing that's place inside the stucco. It's like rebar in concrete, except in this case it's stucco plaster. So the lath is what ... We used to call it the chicken wire that you put in there to reinforce the stucco so that as it expands and contracts, it controls the amount of cracking that you can have in it. But the other thing that it does is the means by which the lath, or sorry, the stucco is applied to the building, attached to the building. Because the lath is stapled into the building. So if your lath becomes damaged, first of all you have no reinforcing and so the stucco will become damaged, but the other thing that happens is the lath will lose whatever anchorage it has to the building to the point where it actually starts literally coming off the building and falling to the ground.

Alan Tannenbaum, Esq.:
So when it's concrete, when it's stucco on a concrete block, you'd typically have lath or is it just where it's a wood frame structure?

Felix Martin, P.E., S.E.:
No, you typically find lath when you have construction over wood frame. There is some construction over masonry where you can have lath, but typically you don't. When you apply stucco directly on masonry, what happens is there's an actual chemical and mechanical bond that occurs between the stucco and the masonry block, so that when it finally cures, it's actually like a single unit and you want to see that bond occur.

Alan Tannenbaum, Esq.:
Now a lot of the town home buildings that we've seen are built first floor block, second floor wood frame. So you have a different type of stucco application. What kind of issues does that cause?

Felix Martin, P.E., S.E.:
Well you have the same wood issues of course but when it comes to the block what you have is that you have water penetration and that water penetration typically occurs around the windows and then when that water comes in, what it does is it starts to delaminate the stucco from the masonry, and so eventually that stucco starts to pull away from the wall and again literally begins to fall off the building. The other thing that it does is because that water is coming in around the windows is it produces damage to the interior. People forget that even when you have a block wall, the interior of the building is furred out with wood framing and it has drywall which has paper in it, and so when that moisture gets in, it has an opportunity to produce mold behind the wall and that mold can be of course not a good thing to have around.

Alan Tannenbaum, Esq.:
All right Sal, we got about 20 minutes, so use your time judiciously. I won't interrupt again.

Salvatore Scro, Esq.:
Yeah, so I want to get through a couple of these. Felix, I'm going to run through these kind of quickly but here's an area that you looked at and it looks okay, but we're just going to flip through and I'll let you talk as we go through this.

Felix Martin, P.E., S.E.:
Yeah, once again this is an area where we were getting water intrusion around the windows, and that water of course was flowing down. As it flows down, you can see where that is, it's retained at the bottom of that wall and it's just ... Once it gets to that point where it's wet, you can see that doesn't look bad, but when you take it apart, you see that it's produced not just damage to the wall sheathing but to the framing as well. So after a while, you start wondering, "Well what the heck is actually holding up this wall?" Because the damage to the structural components has been so extensive that it's literally in danger of collapse. So again, even a small amount of water. A small amount of water, but every single rainstorm, you multiply that by the number of rainstorms that occur in Florida within a year, it builds up, and when that moisture level reaches a certain threshold, the micro-organisms that multiply and produce the rot just start multiplying like crazy and they just start chewing up on the cellulose and that's where it produces the rot damage that you see.

This is a condition that we see under the windows where the installation of the stucco is done improperly and the waterproofing paper is installed in such a way that instead of keeping water out and away from the wood, it actually guides water into the wood and as you can see there, it produces damage. One of the problems that we have of course is we have wood construction in Florida. Nothing wrong with wood construction, you just have to make sure that you protect it properly. But you have a wet climate like Florida where it's always going to be raining, and the danger is you have to make sure that you protect against that water intrusion, and that's just not being done by builders. You can see in this there's water coming in at the window, that's what you're looking at, and you see the damage directly underneath the window, because that water has come in around the window and through the window, and you can see the amount of damage that it's producing. Once again you multiply that water intrusion by the number of rainstorms within a year in Florida, by a few years, it's no wonder that you get this type of damage because that damage just continues to happen and it just ... It multiplies [inaudible 00:40:03] then you get the rot damage from [inaudible 00:40:07]. Go ahead.

Salvatore Scro, Esq.:
Sorry, explain what you're doing here with this window.

Felix Martin, P.E., S.E.:
Well here again, what we're doing is we have taken the window and we have done a water test on it, and there is a specific water test protocol that's been established by the American Society of Testing Materials where what you do is you mimic what would be wind-driven rain, and you do that water test to try and determine whether the water is coming in through the window or through the stucco or maybe both. So we conduct that water test, you can see that we've labeled it. There is a little dam that's built in the corner there, and we pour water into it. That's one of the first tests that we'll do, and this is testing whether the window itself is leaking into the unit. Because if it cannot hold that water, if the window frame cannot hold the water, then that tells you that the window is inadequate in terms of providing water protection. If the window is inadequate, then that water's going to leak, and you can see a little bit of the damage that's occurring at the very base of the window on the sill and then that water continues to percolate down and you can see underneath the damage that has occurred to the plywood underneath.

Salvatore Scro, Esq.:
So here's when they perform the work inside, just to show an example. [inaudible 00:41:33] they make sure they take everything apart and put it back the way it should be. That is an example of the lath. I am going to skip through some of these. Here's when we opened up inside in between units, and this is something that gets forgotten about sometimes. Why did you open up this wall here?

Felix Martin, P.E., S.E.:
This is a fire separation wall between the units, so this is intended to provide protection if there is a fire in one of the units so that the fire doesn't go across the wall into the next unit. What we find is that that fire separation is not done as required by the code. So what happens is you have things like the separation for example of the electrical outlets that you see there. There's a certain distance that those outlets have to be kept apart. You have to look at the blocking so that any fire that gets into the wall is stopped by the blocking. You have to take a look at the nailing of the wall to make sure that the size of the nails is sufficient to anchor that wall during a fire. Again, nails are made out of steel, so when there's a fire, there's a tendency for that nail to soften by the heat, become softened. If you don't have the right-sized nail, then it will not be able to protect you in a fire, or for a prescribed amount of time, and that fire will come into the next unit.

Once again, water intrusion from poor drainage on the site. In this case, what you saw there was just water coming into the unit at the bottom level because the water drainage was actually being directed towards the building as opposed to away from the building, which is what the code requires. So there's a code requirement but it wasn't met in this location, and the water was literally coming into at the base of the wall.

This is a post-tensioning cable which is used to reinforce the slab. This is what provides your foundation for the building and what we're seeing here is that that post-tensioning cable, which is a high-strength cable that's pulled during construction, and then when the concrete is set it's released, so that it compresses the concrete together, and it guarantees that you have a crack-free slab. Well this one has busted. It was pulled, it was cinched, they let it go, and then it snapped. So what you have is a broken cable here so now you don't have an active foundation system like you should have.

Salvatore Scro, Esq.:
So now we're going to talk about some high-rise buildings. Again, whether they're condominiums or HOAs, it really doesn't matter. Construction is pretty much construction and they should be investigated if you have turnovers or if you have issues or even if you need to know really what the condition of the building [inaudible 00:44:25] was delivered to you. So here's a high-rise that we looked at and they did a walkthrough but I'm going to play a quick video of some of the [inaudible 00:44:37]. When they go out to do their testing and they look a little bigger here because I stretched this video out for the purposes of seeing it here, but -

Speaker 7:
Is it bare concrete? Is it a primer concrete? Okay. Let's start there.  Nice and easy one, we'll move to that above ground planter and just take a look at the planter area.

Salvatore Scro, Esq.:
So they map out what they're going to do. What's happening here?

Felix Martin, P.E., S.E.:
This is what we call a tap test which is a simple test that is done when you have stucco over masonry, and what happens is like I said, when you start getting that water intrusion, the stucco begins to delaminate away from the masonry. So you tap it and you can hear the sound, you can hear how hollow that sound, and that's because the stucco has completely delaminated away from the masonry. That's not a good thing, because over time that will just get worse. This is a high-rise.

Now imagine if you would what would happen if you have stucco delaminating and falling off the building from a high-rise. That is a life safety issue because anybody walking down below, they could be seriously hurt by that stucco. So a few years back, the courthouse in Sarasota had some issues with this where the stucco was literally falling off the building and damaging cars as they were driving by, and so it required an intervention and a major repair if that stucco is not properly bonded to the building. So these tests that are being conducted here that Sal is going through is like I said first of all, we do that tap test to check the stucco, and then we literally cut into the stucco to show that is it bonded to the substrate, to the surface underneath, and you can see again here [inaudible 00:46:32] and then as he finishes that cutting [inaudible 00:46:34] how easily it's coming off because it's absolutely not bonded to the concrete and concrete masonry underneath. So that stucco is not bonded at all, and again over time, it becomes more and more loose as more water gets behind it, and eventually it literally will start falling off the building.

Same kind of situation here. So in this high-rise, we found that most of the stucco was not anchored to the building anymore. So again, a relatively new building, looks great, looks like it [inaudible 00:47:27], and within a few years, you would have the potential for that to literally be coming off the building and causing damage on their [inaudible 00:47:34]. Now this right here is a window in that same high-rise and you can see the water intrusion coming through the window. So here is a problem with the installation, not just of the window but again of the stucco around it, and the flashing between the stucco and the window that allows this to happen. Now once again, this is just proof that the construction was done in such a way that even for a relatively new building like this one, water was coming in and as you multiply that water intrusion over a period of time, it just causes more and more damage to the point where those repairs become just prohibitively expensive.

This again is a demonstration how the stucco is being removed and how it is absolutely not bonded to the [inaudible 00:48:18] underneath, like it's supposed to. You can see [inaudible 00:48:22]. There's absolutely no bonding anywhere on that stucco [inaudible 00:48:25] so that it is supposed to be literally anchored, chemically as well as mechanically, to the surface underneath, and it is not at all [inaudible 00:48:38] -

Alan Tannenbaum, Esq.:
How would that bond be created?

Felix Martin, P.E., S.E.:
Well that bond is created again by how you place the stucco. So the stucco, as you place it, stucco is concrete, is essentially cement, and the masonry, concrete masonry, is the same material. So when the two come together, they will chemically bond. When you apply the wood stucco on it, they chemically bond as well as mechanically because the surface of the masonry is rough. Where you have concrete, which has a smoother surface, you are required to use a bonding agent that chemically bonds that stucco to that surface. So the intent is to produce a finished product that's solid all the way through. Not two separate components, but solid all the way through. Because [inaudible 00:49:28] it creates a means for that water to travel between those two surfaces, and that's just something that you don't want to see.

Alan Tannenbaum, Esq.:
What likely did the contractor do wrong?

Felix Martin, P.E., S.E.:
Well there's a number of things that they did wrong. One of the things that they did wrong was again, they installed the stucco on a surface that was not clean, that had something on it. It can be dust, you can have dust so the surface is dirty, and so that stucco is not able to bond to it. It can be that there's no bonding agent on the concrete and the stucco as it comes onto a slick surface that's concrete will not bond to it. It can be that they misapplied a waterproofing material, something that's not approved, so that what happens is that waterproofing material creates a bond breaker between the stucco plaster installation and the material that it's supposed to attach to. If you have that bond breaker there, it means that that bond will never happen. So what you want is that chemical bond that puts those two together and if you have something preventing that, then you now have two separate surfaces that when it gets wet, that water will travel between and cause additional separation of the stucco.

Felix Martin, P.E., S.E.:
Once again, we did the tap test on these areas and we noticed that they sounded hollow and as you see this [inaudible 00:50:58] this piece, you can see once again. No bonding at all between [inaudible 00:51:04]. There is absolutely no bonding between that stucco and the surface underneath, and you can see the surface underneath is coated with the material. That's an example of the material that the concrete block was coated with, but unfortunately that coating prevented the stucco from bonding to it. It acted as a bond breaker. So rather than protect the construction, it actually created a condition where the stucco is now a separate skin. Kind of a loose skin on top of the masonry, and it's not bonded at all like it should be.

Alan Tannenbaum, Esq.:
What do we have here, Sal?

Salvatore Scro, Esq.:
Here we have some issues with the area beneath the pool. So we brought Felix and Marcon Forensics out there to take a look and you see a pool and a hot tub that looks pretty okay and then you go down below and you're finding that this is the -

Felix Martin, P.E., S.E.:
[inaudible 00:52:14] I was showing you photographs of the skimmer there, we find that the skimmer itself was fine, but the area around the perimeter of the skimmer was not properly waterproofed. So the water is getting in around the edges of the skimmer, and what you see there is the net result of that. Now you have this leak that's coming underneath, and this is constantly let because it's a pool. So there's water that's constantly coming through.

Salvatore Scro, Esq.:
So sometimes there's some testing that needs to be done on windows and I'll just go through some of this here. What are they doing here?

Felix Martin, P.E., S.E.:
So this is a spray test. I mentioned this before, this is based on an ASTM standard, an American Society of Testing Materials. It's a protocol that they've set up where you actually set up a spray rack and you put in a negative pressure on that window to simulate what wind-driven rain would be, which would be ... We're not talking hurricane strength here, we're talking about just a regular rainstorm and then the wind just essentially beating that rain against the window. The windows are required by the code to be able to resist that. They're required to not be able to allow any water to come in under this test. This is essentially the same test that this window would have gone to get certified in the state of Florida, you have to pass this. What you see is that as you start to spray the window and you apply this negative pressure, the water started to come in, and so that obviously tells you that this installation was not done properly, was not done in such a way to not allow that moisture to come through.

Salvatore Scro, Esq.:
Here's another type of building that you looked at.

Felix Martin, P.E., S.E.:
Yeah, this is a recent construction, recent investigation that we did. Once again, this is a masonry building, no wood framing here. Now we're looking at the roof, and the roof has a combination of metal roofing as well as membrane roofing and the metal roofing looked great. We asked them, "Have you had any reports of roof leaks?" And they said, "Yeah, we had a couple. Nothing really major." This is not a very old project at all, it's a relatively new project, and then lo and behold, we looked at the roof and we said, "Oh no. We think we may have some problems," and as we did our testing, you can see that as we removed the roof material, the roofing material from the roof, we found sure enough that there is extensive damage underneath. So there, you can see right there, that's the intersection of the metal roof with the membrane roof and you can see how much damage there is underneath. That's all rotted out. So once again, you get these [inaudible 00:55:08] and if they're not treated properly, [inaudible 00:55:18]. So this is a relatively new project that already has a high level of damage.

Felix Martin, P.E., S.E.:
Now this right here, again same project, this is an installation. Again, this is a spray test that we're conducting, and what you can see here is as the spray test is taking place, we placed this paper, this pink paper, that turns chartreuse when the water hits it. You saw in that video how that water is just coming in. Not supposed to happen. Not supposed to happen at all.

Salvatore Scro, Esq.:
There was nothing that you could really see over the sill or the sheet rock, was it?

Felix Martin, P.E., S.E.:
No. There was no indication that this water, when we first started this test, there was absolutely no indication that this was a problem area, and yet as soon as we conducted ... Well as soon as we opened up the window, we saw that there was evidence that water had been coming in. But from the finished outside, you would not be able to tell that. But once we removed the finishes, we saw some evidence that water had come in, and then we conducted the test, and that definitely determined that the water was coming in, it told us how the water was coming in, and to what extent that water was coming in.

Salvatore Scro, Esq.:
So I want to say something about this particular project here. This is one where we had some issues structurally but when we had this case, I brought Felix in, and all we did was a one-day testing. We probably could have done a three-day testing, but we did a one-day testing and we did ... The value of the case to address the defective conditions rose significantly, not because that we didn't know the defects were there, but because we had the appropriate expert investigation and testimony that made the case more valuable. So that's why I always say it's important to have an engineer in the project. Explain what a, I know you guys call them pot shelves, but explain that.

Alan Tannenbaum, Esq.:
We're hitting the end, so let's pick the best.

Felix Martin, P.E., S.E.:
A recessed window and once again here is a great photograph. It doesn't look bad. it doesn't look bad at all. But we observed that it had a negative slope. We saw how it had been flashed. We opened it up and when we opened up we had the oh my god moment. I mean you can see the lath is rusted, you can see the paper was improperly placed. That's a staple, you can see how rusted it is, and you can see the level of damage underneath it. So this location which did not appear to be a problematic location to the untrained eye, but which we identified as a problematic installation, definitely when we opened it up, we found a serious amount of damage. Sal mentioned this was a one-day destructive testing that we did. Typically we'll do a multi-day, but essentially from this one day that we did testing, we found that the damage to this community was extensive and again through Sal's work, they were able to recover funds and this community now is under repair. But had Sal not become involved with this and brought us on, this community would have essentially suffered some really serious ... I mean it's already serious, but some extremely serious damage to the community.

Felix Martin, P.E., S.E.:
We've seen projects like this that they reach a level of damage where the building department will red tag the project and require the tenants and homeowners to move out because they're in danger, and when it gets to that point, then they have to essentially move everybody out, and as a homeowner, you're still making payments to the bank, but you can't live there, because it's compromised. We never want to see that. We never want to see a project where it's going to get to the level where it's compromised like that, or even in some extreme cases, like the Champlain Tower collapse, where it gets to the point where the building is so structurally compromised by water intrusion that you get to the point where the building department has to kick you out.

Alan Tannenbaum, Esq.:
Well we obviously could go on for quite a long time and we'll keep Felix on for a little bit because I know there's people that have to go but I'm willing to let Michelle Colburn close us out because she has this [inaudible 00:59:53] that she's doing.

Salvatore Scro, Esq.:
One quick second, Alan. I do want to thank Felix because it was nice of him to take the time away today and come and help us out and explain some of the things that have gone on. Really appreciate that and if anybody has questions I'll let you pick up from there, Alan. Sorry.

Alan Tannenbaum, Esq.:
Yeah. If anyone has any questions about anything we provided you today, you can email us offline. If it's an engineering question we can refer it over to Felix, he's happy to give a quick response to something that doesn't take an in-depth investigation. We are involved in all facets of turnover, turnover claims, whether it's a site-related issue, a building issue, whether it's condo or HOA, contact us and we'll tell you whether it's appropriate for your building to have an evaluation. We make recommendations on who should be doing that. We also get involved extensively in repair work, helping with the contracts, helping enforce the contracts, and unfortunately, when you didn't call us in the first place we spend a lot of time cleaning up projects that didn't go well. So we are involved in that process too and again I repeat that the forensic methods that apply to new construction also apply to a mature building when you're trying to figure out how to repair it. Before you start a contract to do repairs, you better look carefully at what you've got before you go forward.

So I'm being told I have to answer the last question. It says we decided to have an engineering inspection on our 37-year-old building, but are having problems getting proposals. Okay, so this is the reality. After Champlain Towers South, a group of very busy forensic engineers became much busier for obvious reasons. So there is a delivery problem, a challenge these days because they're busy. We can connect you with them, use whatever leverage we have to get them out earlier, but that is a challenge. Champlain Towers South was a blessing and a curse or the engineers in Florida because people wanted the inspections done and if you're concerned about your building, you don't want to wait 60, 90 days for that engineer to do their inspection, but there's only a relatively small group of qualified engineers who can do these type of structural inspections. So my sympathies with the managers who are trying to get that done, but it is a challenge. Call us up and we'll try to twist some arms for you.

Speaker 10:
What about the question on who pays for repairs, special assessment or insurance?

Alan Tannenbaum, Esq.:
All right, well who pays for repairs? If it's a newer construction, what we do is get the developer to pay for as much of those repairs as possible. If it's a mature property, you either do it by special assessing the owners. You may have an insurance claim, if it's covered under a policy, that covers part of it. We have a lot of excellent banks who are very happy to loan money to associations if you have a fairly small fee fault raise on your assessment collection and a lot of groups rather than hit their owners with a major special assessment will get a credit line to cover an extraordinary expense or at least part of it.

Salvatore Scro, Esq.:
From our standpoint, if we are involved and it's something that we think there's potentially liable parties out there, we analyze your case and if we feel that we can gain a positive result, then that would be much that less if anything that the association would have to pay for repairs and sometimes, especially with newer projects, you may have some significant repairs or significant damage issues of what was supposed to be given. But when it's all said and done, you do have the ability to look at what needs to be done versus what should be done as far as what should be given to you so that you can pace things out so that you can use the money that's recovered to do what is needed to be done and you limit your out of pocket expense.

Alan Tannenbaum, Esq.:
Yeah. If I was to summarize what we do, we get developers, contractors, architects and engineers today as large a portion of the owner's obligation to repair as we're able to in any particular case. If you don't pursue responsible parties, it's guaranteed that the owners will pay 100% of the repair cost. If you do pursue responsible parties, you have an opportunity for the owners to share only a portion of the cost and with the developer and liable parties picking up the rest. So that's basically the guts of what a defect claim is all about. Helping get some money from other parties to take care of the association's problem. That's what we do, that's what Felix does.

Again, we thank everybody for attending. This will be available on our website within a week I am told and we have a really interesting session next month on connected town homes and the need to amend the documents so that there's coherent repair and maintenance and claim ability, so for those who live in that type of community, that should be very interesting. That one is a CEU for managers. So everybody have a great - 

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HOA & COA Guide to Multi-Family Re-Roofing Project

Jon Lemole, Esq.:

Good morning everybody and thank you for joining us. This is a great panel we've got planned for you today. We're happy that, so far, we've got 176 people joining us today. That's huge. We really appreciate that and we're glad that we see a lot of return faces, so I'll take that as a compliment that we're delivering some value for you all and we hope to continue to do that. So today, we're going to talk about reroofing projects, best practices for reroofing projects and this is going to be directed at multifamily buildings, obviously, so we're not talking about single family units. Obviously, those folks typically have to take care of themselves. But if you're an association that has maintenance and repair responsibility for a building's roofs, this is going to be a really, I think and I hope, a good walkthrough of best practices that you can all take to ensure that your project goes smoothly, little risk to the association or as little risk as possible to the association and that you wind up with a completed project that's defect free and will serve your association and its buildings for a long time to come. This applies to both condos and, typically in the HOA world, town home communities.

Why is this timely? You probably are seeing a lot of activity from your insurance carriers in terms of insurance carriers staring to say it's time to reroof your buildings. We're about 15 years out from the building boom prior to the recession and so you've got a lot of buildings that are approaching or have seen 15 years and so a lot of insurance careers are starting to tell you it's time to take care of your roofs. And given what's happened recently over in south Florida, we can expect that insurance companies are going to be even more vigilant and more adamant about building maintenance. We're expecting that a lot of you are going to be dealing with these reroofing projects in the very near future.

We think that we have a lot to bring in terms of advice and best practices. Let me tell you why that is and this may be a little bit against our self-interest as a firm because we handle typically... we do a lot of work in claims, in defect claims, and so we're uniquely suited to see what goes wrong with roofing projects when they don't go right. We know where the problems can be. We've seen all of the areas where things could have been done differently and a project could have... and that could have made a difference in how a project went. Another portion of our practice is to do major repair project consulting and our call to action here today to you folks is if we do have a major roof repair project or roof replacement project, I think there's a lot of people that tend to believe that that's a run of the mill type of thing and it's just a roofing project, but there's a lot that can go wrong and certainly we would encourage you to reach out to a construction lawyer, whether it's our firm or some other firm, and consult with them on the front end because there's a lot of decisions that could be made that can mean a huge difference in the way that your project goes.

What can you do if you have, besides consulting with us or somebody else, another construction lawyer, what can you do to ensure that your project goes smoothly? You can follow the best practices that we're going to run through today. We could spend hours on this, but we're going to give you a 30,000 foot highlight, a snapshot. We're going to talk about a bunch of things today, but obviously any one of these topics we could into in significantly more detail if needed. At the end of the day, I think I want to leave everybody with is the old saying, what did Ben Franklin say? A penny saved, pound foolish. I can't remember. Something like that.

Again, the inclination for roofing projects is that this is a thing that... a kind of a routine type of maintenance project for an association and it's anything but. It's not a time to cut costs, it's a time when an association should be saying, "How do we do this right, do it right the first time, control our risk and make sure that the project is delivered on time, complete, defect free?" because this is one of the primarily defenses to your buildings from water intrusion and the possibility that you could have a poor product, a poor result, which could create a lot of other problems for your building. And as we've seen recently, those problems can multiply, spiral and create significant problems for an association.

Let's just into the subject. Where we want to start is really quickly, and I'm going to introduce Brian Tannenbaum, who's an associate with our firm. He's the next generation of Tannenbaum to be part of our firm, but what Brian is going to talk about real quick is just to remind everybody of what the source of an association's authority is in terms of mainlining and repairing and replacing roofs on your buildings. With that, we're going to have Brian take it away and just cover that real quickly, give us a primer on that subject. Take it away Brian.

Brian Tannenbaum, Esq.:

Fixing the roofs, dealing with the windows, dealing with anything that comes up. But in the context of a multifamily home or a condo, these things are regularly maintained by the association. Now, for a condo, the law comes from Florida Statute 718 chapter 718, which gives the association the responsibility for maintenance of the common elements. It doesn't give an option and there's no ambiguity. It's not vague. It says that maintenance of the common elements is the responsibility of the association. 718.108 defines the common elements as, in part, the condominium property which is not included within the unit. This can be your roof, the balconies in some cases, any part of the condominium that is outside of the unit.

On the other hand in an HOA situation, there is no statutory basis that requires the association to maintain and repair any part of the property. Where the authority comes from is the declaration, so it's important to know what the declaration says about maintenance and repair of the property. For both an HOA and a condo, the board has a fiduciary duty to the members. Because they have a fiduciary duty to the members, it's important that they undertake repairs in a timely and appropriate way so that there's no liability opened up for the association or for the board members. When looking at your documents, you need to know what kind of things is the association responsible for and when do I as a board member or a manger need to make sure that those things get done.

There's a very heavy burden on the association and the board and it's important that those things get taken care of in a timely manner so that you can avoid that liability and that you can keep your building safe and secure.

Jon Lemole, Esq.:

Okay. Thanks Brian. Just a little segway from something that Brian touched on and I want to explore a little bit further before we move on is, and this is more appropriate to HOAs and town home HOAs than condos because the condo statute is pretty clear about common elements and there's not a similar statute or similar provision in 720, it's important to look at your declarations and understand whether, not just what the declaration requires the association to do, but whether the declarations enable and provide the association with the ability to do that work capably and completely. We've run across a lot of declarations that are typically the original declarations that were drafted by a developer, which are pretty ambiguous about what the associations begin and end in regards to roof replacements or roof repairs is.

If you've got a roof project coming up, you've got a situation where you're needing to replace a roof on a town home building for example, it would be a great time to look at your declarations and ensure that you can complete the job and that you don't have some sort of limitation in the declarations which may prevent you from doing a thorough job. Let me explain what that means. We've run across provisions in declarations where the association is responsible for the roof covering, the membrane or the shingles, but what happens if the roof, if over time there's damage to the framing, to the sheathing, to the roof trusses and that's not specified in the declaration as being part of the association's repair maintenance and repair responsibility? That can create some serious problems for an association.

If you've got a project that you're thinking, that you're expecting down the road, it's time to take a look at the declarations and make sure that you can do that work and that you don't have some ambiguity in your declarations. Folks, if you're in an HOA that's coming out of transition, a perfect time to review the developer's declarations and ensure that the association can do the work that it's going to need to do in order to completely, capably and without problems, without ambiguity discharge its repair obligations. What good is it if an association can only replace shingles, but can't correct damaged sheathing? You leave that to the lot owner and that may never happen and then you're just putting shingles over a problem that's just going to continue to further deteriorate the building, so don't always assume that the declarations are going to provide the association with a clear path to do what it needs to do in order to discharge its obligation.

Alan Tannenbaum, Esq.:

It's not only might the declaration impose some limitation on what an HOA can repair, but also arguably you can spend money on investigating the issue if it's not within the association's purview. And for a newer association, obviously the problem is the association can't pursue claims for an HOA for anything it doesn't have maintenance and repair responsibility over, so there's multiple reasons that the documents should be amended beyond just the fact that it constricts the ability of the association to do a full repair.

Jon Lemole, Esq.:

Well said. Thank you, Alan. So with that, let's turn to the subject of investigation. I'm going to ask my partner, Sal Scro, to talk a little bit about what are best practices in determining what you should be doing, what the scope of a roofing project should encompass because I think a lot of times, we just tend to assume that it's just a question of we're just going to put a new roof on the building. This is a time when an association can really take a good look and see what the scope of work should really be and that may involve some need to do some investigation, maybe bring some engineers in, but I'm probably talking too much and I don't want to steal Salvatore's thunder. So Sal, turning it over to you. Talk about investigation and engineering issues.

Sal Scro, Esq.:

Hi. Good morning everyone. The first thing that we're going to talk about is understanding why your roof may need to be replaced. There's a couple reasons. The first would be it's just an old roof, it's time to replace it. That's usually easy to figure out. You have your reserves. You have your reserve studies that usually tell you what your expected useful life is and you know if it's coming to an end. You can tell by the... if you're experiencing problems with an old roof, but then you may have a roof that's not so old and it may just be a bad roof. If that's the case, there's other things you may want to do versus just having to reroof before you just go out and get somebody to do the reroof on an old roof. If you have a bad roof, you may want to do some other things.

If, for example, you're having water intrusion and it may be coming from... you may have bad stucco and I've talked about this several times, you may cracking stucco. You may have water that's coming in through your windows. Water's going to seek its level. It's going to find its way into your building. That could be... One of the sources could from the roof itself. So any time you're having troubles with a roof, the first thing, my suggestion would be is if it's a fairly new roof, if it's something that has been constructed within 10 years, then I would suggest that you contact an attorney that does this construction defect work because they can recommend you to the right person to do the investigation so that if there is a problem with the construction, then you have the right team together to address that with the potentially liable parties.

If you have just an old roof, then maybe a good roofing company, a consultant or an engineer, but also if you have... The more changes you have in a roof as far as what I'm talking about changes, if you have different directions or slopes or different roof to wall intersections, a lot of valleys where roofs come together, chimneys, then you may want to engage the services of an architecture, an engineer to give you a detailed set of specifications so that the person going to do the work knows exactly what to do to apply the materials, to limit any possibility of water intrusion. That's one of the things.

The other thing that you may want an engineer for is, for example, if you plan on changing the type of material. If you have a shingled roof and you want to put a tile roof on it, you want to put a metal roof on, any changes in material, aside from the fact that you need to get approval from associations if you're a condominium, if you're going to change that, you definitely want to engage the services of a structural engineer because the weight. That's the key, the weight is the difference. If you've ever driven by and seen a roofing project and you see all the materials stacked up on the roof, they're all in different locations and it's not to make it easier so that they don't have to walk so far, it's because if they pile them all up in one spot, they're going to collapse the roof because it just can't handle the weight so it's important that you have engaged an engineer if you're ever going to change materials.

Also, if you have a roof that is a flat roof, that's something also you may want to do some pre investigation of before you just let somebody come in and say, "WE're going to just reroof this. And hey, here's your best way to do it. We can put this material in that will cover it. We can add vents to it so it'll let water evaporate out," all these things, my suggestion would be is do some investigation, particularly with an old flat roof because you have different layers of materials under that roof. What is the condition of each of those materials as you dig down? You don't know and you won't know unless you open it up, so I would suggest bringing an engineer in, having them uncover the roof, look down there and give you a detailed set of specifications.

There's a lot of times you can look at a roof and it looks old, but as you open it up and dig down, you find there's a pool under there, there's water, and you're not going to know that, you're not going to see it unless you open up. So if you have an old flat roof, sometimes it's best just to uncover the entire roof.

Alan Tannenbaum, Esq.:

Sal, an example of that. We had one recently. It was a built up roof and the contractor came in and said, "We're going to scrap the gravel, the loose gravel off of the built up portion, and then we're going to put a new roof on top of that." Well, it turns out that underneath this built up roof was a lightweight concrete fill that they used a couple of decades ago as roof insulation and the lightweight concrete fill was water saturated. What really then needed to be done on that particular roof was it needed to be taken all the way down to the structural deck and then a new roofing system installed above the original structural deck, but there would have been no way of knowing that unless somebody did a core through the built up roof, determined that it was indeed lightweight fill under that and do some moisture testing to determine what the condition of that is because you can't put a new roof over a bad subsurface. It'll cause a lot of trouble.

Sal Scro, Esq.:

Right. And we just did a testing the other day on a roof. It was metal and then there was a flat TPO roof. It's a Thermoplastic Polyolefin or something like that is the name for it. Anyway, that roof was three or four years old and I tried to get a video to show you, but I couldn't get it to transfer from my phone, but as we did the investigation, I lifted up some of the TPO roof, the flat roof, and I could pick up the sheathing and it would crumble in my hands. This was a roof that was three or four years old, so age isn't always a factor. It's the construction is very important. Why would want detailed specifications? Again, as I stated, the more cuts you have in a roof, the more differentiation in slopes and levels, you're going to want that.

You will also want to look into the... If you're going to have an engineer and they're going to provide year old with a set of specifications, you're going to want to have somebody look at that contract with your engineer as well. Make sure that they don't have a limitation of liability just for the money that you've paid them. The contract for roof, I had a project that we represented clients on, seven multifamily buildings and their contract to do all those seven buildings for hundreds of thousands of dollars, one page. It was a one page contract. It pretty much said, "I'm going to reroof your buildings," and that was it. You want to do an investigation if you have any type of roof that has layers to it, as Alan said, as well, especially those flat roofs.

You're going to want an engineer if you're having trouble because, as I'll talk about later, you want to make sure you look at this information so that you gather your information and your evidence if you need to address it to a potentially liable party, but you also want to engage a confidence defect attorney because you do not want to destroy your evidence if you're going to do that. You want to make sure you gather it appropriately. And also, if you have bids that you're going to receive, it's nice to have a consultant or an architect or an engineer to help you weigh through those bids. They help you get through the minutia of it. And also, they can bring up things that you may not think about, down to the little things like safety requirements, access to the building during construction for your owners, daily cleanup, daily magnetic sweeps so you're not having nails all over the place.

Those are some of the things that you want to keep in mind when you're about to do a roofing project. The main thing is, is it just old and is it a simple roof or is it a flat roof or does it have a lot of cuts or are you having trouble with it? Then you need to do some investigation. We will turn that over to Alan now.

Jon Lemole, Esq.:

Let me just say one thing to followup on what Sal said before we jump into contractors. Look, there are many, many, many fine roofing contractors in Florida. This is not intended to denigrate any of them. But in my experience and I would venture to say Sal and Alan would probably share a similar experience, when we get called in to bring investigative, potentially bring claims relating to a roofing project that has gone not so well, has gone badly, a lot of times those are projects that did not involve... I mean, it's very rare that we would come across a project where an engineer or a roofing consultant was involved in investigating and setting up a scope of work. Sal is absolutely spot on when he's talking about and especially flat roofs. We've seen a lot of projects where roofers come in and basically covered over an existing roof or some existing components of a roof and a lot of times that's a problem, least of which... Most of which. I'm not sure which way that goes, but you're relying on that existing layer of what's there and is being covered over to watertight and wind resistant.

It may not be a water issue, folks, it may be a wind issue. Unless they've done some uplift testing to determine that that substrate that they're attaching their system to is secure, you may have a roof that's not entirely resistant to high winds and hurricane winds. Those are the scenarios that we typically see is an association has either fallen under the spell of a roofing contractor or it was decided that rather than spend the money to have investigation by an engineer and an engineer involved in setting the scope of work, they've gotten that scope from the roofer. The roofer has either come up with a solution that's not a complete solution and those associations have had to deal with problems further on down the road.

Again, it may be more money, but it's money well spent because the flip side of that is if you have a claim, you're going to be paying lawyers to bring claims. It's going to take a long time. You may be having to do a roofing project in the middle of that because you've got water intrusion that can't be fixed with spot emergency fixes. You may be doing two roof projects where you thought you'd only have to do one. With that, I'm going to turn it over to Alan Tannenbaum and he's going to talk about contractor selection and this is really important in determining how to get the best contractors to come and take care of your project. So thank you, Alan. Go ahead.

Alan Tannenbaum, Esq.:

Thank you. All right. The roofing contracting industry in 2021. I'll give some buyer beware tips. Number one, there are companies out there, they're not actually roofing companies, they are roof replacement marketing companies. They have very good sales people. They travel around the state. Their pricing is pretty good and they have a clause in their agreement that once you signed the contract, they can assign it to another roofing contractor and all these groups do is sign contractors up and then they shop that job to other roofing contractors and take a margin on it. Be prepared or be aware that you need to have actually a bonafide roofing contractor.

Secondly, if you have a particular manufactured system, you want to be sure that the roofing contractor you're considering is a qualified installer for that roofing manufacturer so that you in fact get a bonafide warranty on that roofing system at the end of the day. The third for a HIRA, especially where you have mechanical equipment, drains, air conditioning equipment sitting on the roof, you're not just hiring that roofing contractor, you're hiring the roofing contractor and the air conditioning subcontractor that it decides to bring in to lift up that air conditioning equipment so that the roof replacement can occur. There may be a need for a plumbing contractor to be involved to determine drain size. You may have ancillary repairs like stucco repair and so forth on mansard walls, so you need to qualify under those conditions not only the roofing contractor, but who the heck they're going to bring in under them.

Do not let your roofing contractor do plumbing and air conditioning work that's not within the purview of a roofing contractor. There's a limitation on it. There's an interesting part with permitting. The air conditioning work and plumbing work associated with a roofing replacement, it doesn't necessarily need a separate permit for the air conditioning work and the plumbing work, but what's required is that that appropriated licensed air conditioning people and plumbers actually be the ones performing that work, so qualify your contractors as to their ability to do the totality of the work. The best recommendations for roofing contractors come either from other association and managers, certainly the engineers and contractors will do it, will give recommendations also.

You need to qualify also the superintendent, the subcontractors who might be working on the job. For 40 years, I've been telling associations that you're not actually hiring a roofing company, you're hiring a superintendent and laborers that they assign to your job so you need to know who they're sending. You can get their resumes and qualify them and make sure you get one of their top superintendents coming out. There's a lot of good contractors who take an extra job that they don't have the manpower for and something usually goes wrong on the job where they've either hired a journeyman superintendent and now they're assigned to your job, so you need to qualify.

The most important thing besides third party supervision I think that contractors will always perform better when they know somebody with knowledge is watching what they're doing and you're likely to get better performance. But we go back to the fact that without clear plans and specifications, it's impossible to determine and compare bids. Like Sal said, if you got a one page agreement and it says roof replacement and you have a bid for $60,000 and another one for $80,000 and another one for $100,000, they're not even comparable because you don't know what they're going to do. You also don't know how well insured they are and you don't know if they've even paid their workers comp. There's a lot about qualifying a contractor beyond looking for the lowest number.

There are good ones out there. There are bad ones out there, but I had third category, which is contractors with a really good reputation who happen to do a bad job on your roof because of who they send out or they're too busy or they're subbing things out that they shouldn't. Keep all those considerations in mind. That's my nutshell there, Jon.

As you mentioned, one thing that's important is that the manufacturer may do inspection, but what they're looking for is just whether their particular product was installed the way it should have. They're not looking necessarily at the way the air conditioning systems were remounted. They may not be looking at the flashing. Their warranty is qualified to saying that our system was installed per our manufacturer specifications, but they don't give a totality specification generally for the entire reroofing project so you just can't count on that.

Jon Lemole, Esq.:

Yeah. To amplify something that Alan said, if you're getting multiple bids or proposals or estimates, it's so important to have on the front end a defined scope of work that was set by somebody like an engineer or a highly qualified roofing consultant, and there are some very good ones out there, because then you know that you're getting estimates that are apples to apples and that is key to making a quality choice. You know that if you're taking the least or lowest estimate out of three, they're all competing on the same playing field and they're all estimating the same scope of work. Certainly, the engineer or the consultant can be vital in helping you evaluate those estimates. 

Okay. Let's talk about contract drafting because that's kind of where the rubber hits the road in terms of as association being able to take some steps to really control its risk in this project being completed on time, being completed properly and without problems. We're going to a little bit of time here and walk through some key things that should be in any reroofing contract. We have a whole course, folks, that covers this. We could spend at least an hour, so I apologize in advance if we're going to run through it a little bit quicker. But if you want, you can, the next time we deliver the course, the in-depth course on repair contracts, key provisions in repair contracts, please join us. But I'm going to run through some of the key areas for contract drafting.

Sal brought up an interesting point. He said he's seen projects, and we all have. We've all seen projects where you got a pretty sophisticated reroofing project that's covered by a one page contract and I would venture to say a lot of you folks and managers have faced that situation too. On the other hand, we've seen the full AIA contract that's 15 pages long with its attending general conditions document. I'm not saying one is necessarily any better than the other, probably a one page contract is not going to cover all the bases, but do you need the full AIA long form contract? Probably not, depending upon the nature of your project and the size of it. The takeaway is not how many pages the contract is, the document is, whether it's an AIA document or not, as long as the document covers some very key elements, it can be the AIA form, it can be in a different format or template, but it's important to have a couple of very specific things, some key things that should be in there.

Let's talk first about careful specification of what constitutes contract documents. Okay. I've seen contracts that haven't clearly spelled out what constitutes the terms of the agreement between the association and the roofer. By that, I mean what is the scope of work, whether there are drawings that need to be followed, whether there are engineering specifications that need to be followed. The very first, and especially if you've spent the money to have an engineer involved or a roofing consultant involved, it's important that your contract document specify the engineer's specifications, the engineer's drawings if they've done some. If the roofing consultant has done specifications and drawing, that should be specified. If there's going to be a warranty involved, let's see the form of the warranty that the roofer is going to issue.

I'm not talking about the manufacturer's warranties, a lot of roofers though will provide a warranty on their workmanship. Well, let's see that warranty up front, that form. Let's make that form part of the contract so that you know going into it exactly what kind of warranty you're going to be getting when this project is completed. I've seen many a project where you're arguing over the terms of the warranty after it's too late. So if you have an engineer involved and the engineer has done a project manual, obviously you'll probably have a form contract that's going to specify everything that needs to be in there, but if you haven't gone that route, it's very, very important to make sure that the contract specifies what documents constitute the work that is to be done. That may rely on some others that need to be part of that.

The second main area that you'll want any good reroofing contract to address is the draw schedule. How is the roofer going to be paid? Let's think about a typical roofing company. Every morning, that owner or that general manager, whoever's in charge of running the day-to-day operations of that roofer, he or she wakes up in the morning and has to determine how they're going to staff the seven, eight, 10, 20 different project that they've got going at any one time. Okay. They're going to send their best folks to the project that is either giving them the most grief or has the highest amount of risk to the roofer. The best way that an association can control risk and ensure that that roofer has some continuing day-to-day risk on the project is through the draw schedule or through any of the provisions in the contract about how that roofer gets paid, progress payments.

You want to make sure that the way the roofer is paid during the progression of the job is in a way that that roofer is not... they haven't gotten their profit paid to them yet. There's a lot of different ways you can do that. I can't tell you a specific way, but typically you want to make sure that you're minimizing any deposits that you pay upfront because a lot of times the deposit is the profit. The more of the profit you pay upfront, the less that that roofer is incentivized to come and complete your project on time or in a diligent fashion.

If you can't get away from having to pay some sort of deposit, then you want to negotiate for the lowest amount of deposit or you want to redress that, if you will, that's probably not the right word, but you can maybe build in some retainage on progress payments and pull some of that back to ensure that the roofer completes on time and free of defects. The draw schedule is the best way to, one of the best ways, to ensure that every morning what that roofer is determining who he's going to send and where he's going to send them to, he's going to be looking at your association's reroofing project and saying, "I got to get this thing done because if I don't get it done, I'm in the hole. I'm negative here. I don't have my profit on this job. I'll earn my full profit on this job until I complete it." Don't ever give them a reason to get paid what they're going to ultimately make early on.

Alan Tannenbaum, Esq.:

Jon, the bottom line from my perspective is that you don't want the contractor that having paid 80% of the purchase price when only 60% of the work has been completed because it's awfully difficult to get them out at that juncture.

Jon Lemole, Esq.:

Right. Project supervision is another key area. Who for the owner is going to be responsible for day-to-day supervision of the project? I've seen many a situation where it's they've designated somebody on the board because they've had some sort of experience or because they've dealt with a roof replacement before. There may be some people on the board that are very qualified to do these things, I'm not saying that. But even if you haven't hired an engineer or a consultant to design your project, it's always worth considering having somebody come in, a third party come in and oversee and supervise the completion of the project and take a look at what the roofer is doing, inspect their work as the project progresses, somebody who's got experience in that area because that's usually one of the first... If a qualified person is doing that, they can nip problems in the butt obviously.

If the roof is not going on the right way, it's better to learn that early rather than later because later may mean a complete tear off and redo; whereas earlier may be, "Okay, we've got to take a section and redo it," and it's not a huge problem, so think about and have some provisions in your contract regarding project supervision. Subcontractors. Alan touched on this and especially in the area where you've got other things like air conditioning work that needs to be done, plumbing work that needs to be done, you want to have the ability to know who those subs are going to be that the roofer is bringing to do that work and you want to have some ability to maybe make some objections to that. So at the very least, you should negotiate or try to negotiate a provision which requires the roofer to tell you who else he's going to bring to the job and to allow you to have some opportunity to object or reject those subcontractors. Now, a lot of times you may not get away with being able to reject them, but you should know who they are.

Who determines completion? Does the roofer get to say the project is complete? And completion is a key element in a contract because that may determine final payment. You've got warranties that flow from that. It's evidence that maybe come back to haunt you if you ever have to bring a claim or the statute to repose, so substantial completion or completion of the project is a very important date to fix and should be fixed cavalierly. So are you going to let the roofer determine that or are you going to have an engineer involved who gets to make that decision or a roofing consultant who gets to make that decision? Obviously, I think you know what we would recommend.

How are in-project disputes handled? If you are unhappy with something that the roofer is doing, how are you going to handle that? Is there a mechanism for dealing with that? Are you going to have weekly progress meetings with the roofer? Are they going to do weekly inspections where you get to look at the work and have a meeting to review what's been done? All of that is key. Here's a biggie. Alan touched on this. Nonassignability. I can't tell you how many times we've seen roofing projects where you've signed a contract with somebody and you've got a completely different entity that shows up to do the work. If you picked a roofer for a reason, then make sure that that roofer isn't going to assign the contract or sub the work out to some other roofer. Those clauses are very rarely in contracts and so it's important that you take a look and make sure that you negotiate that into your contract.

The next thing is near and dear to our arts as lawyers, as litigators, because we usually end up dealing with the aftermath of a project gone bad and that's alternative dispute resolution. We'll often see contracts which require arbitration. We don't like those. Arbitration is not all it's cracked up to be in our experience. You'll hear that it's cheaper, it's faster, but, A, it's not necessarily cheaper because the cost to file a lawsuit at Circuit Court is, I don't know, I think like $405. On a couple hundred thousand or a few hundred thousand dollar roofing project, the filing fees at the American Arbitration Association may be thousands of dollars, plus you pay the arbitrator's fees hourly, so it's not necessarily cheaper.

I don't know, maybe faster, but you don't get discovery, you don't get full discovery, you don't get to take depositions under the American Arbitration Association rules, so that's a potential problem. Folks, at the end of the day, we don't recommend arbitration. Certainly in most cases, we would want to be in Circuit Court in front of a jury and so it's important to make sure that your contract doesn't require you to waive your right to a jury trial. We've seen plenty of contracts that we were not involved in negotiating and where we're now bringing a claim that have not had a prevailing party attorney's fee clause and that may be a problem. We would want a method for recovering our client's attorney's fees for bringing a claim for a roof project that was defective and so you need to take a look and see whether there are provisions in the contract for prevailing party attorney's fees.

Alan Tannenbaum, Esq.:

Very quickly, we want to answer these questions.

Jon Lemole, Esq.:

Final payment. How long do you have to do your final payment and release any retainage and under what conditions? That's essential as well.

Alan Tannenbaum, Esq.:

I want to get to some questions. Richard asked how to find a top notch engineer. We do know of some good ones. Do they perform the same in every job? Just like a contractor, sometimes you run into a glitch. If you hire an engineering firm, make sure the person they assign to you is actually one of their roofing specialists. Sometimes they have that capability sometimes not, but we can make some recommendations on that. I think, again, some other management companies and associations might know who they've had a good experience with. Barry asked a question about work that was done by an owner above the roof line. I bet that's an HOA, I hope it is. Who's responsible? Depending on how it was entered into and what your documents say, usually if an owner adds an improvement, it's on them to either remove it so that you can do a proper reroofing job or not, but the devil is always in the detail with documents.

Somebody asked a question about allowances and it's a very good question because, for instance, you may enter into a roofing job, you have a wood deck and there's an allowance per square foot or for board foot of the sheathing removal and replacement. Number one, you want to make sure that the price that the contractor's putting on replacing sheathing is a market price and they don't have an extortionate number for it. Secondly, you need to quantify how much, when it's opened up, how much wood actually needs to be pulled off the roof and how much is being pulled is being pulled off the roof because all of a sudden you get an overage of $30,000 or $50,000 at the end of the job and the wood that was removed has already gone into the dumpster and been taken away and how would you ever verify how much the contractor did, so that's a very good question and it ends up being a real problem.

Somebody, I think Mark [Spursion 00:53:49], mentioned that you also have to be careful of what type of products are going to be installed. There are different types of roofing systems. They carry different types of warranties. Definitely, your choice of roofers should also include vetting the roofing system that they're proposing to install because they are all different types of quality warranty limitations and so forth that come with the roofing project. There's one question about fiduciary responsibility. What is an HOA property management and board's responsibility to ensure proper funding of reserves under Florida statutes and case law? Well, the board has a fiduciary obligation to follow Florida statute and HOAs, there's no statutory requirement for the funding reserves. If it's in the documents, it is required.

If an HOA doesn't properly fund reserves, I doubt that that creates a case fiduciary for a fiduciary violation. It may be a poor business practice, but I don't think that it's going to create liability. So sorry, Jon, I thought we needed to get some of those questions answered.

Jon Lemole, Esq.:

Okay. That's fine. I want to make sure we answer the questions as well. That's good.

Alan Tannenbaum, Esq.:

Right. And we covered project supervision and completion, so Sal if you have something to say about construction defect claims that you can say in three minutes, the floor is yours.

Sal Scro, Esq.:

Yes, thanks for letting me have all this time. There was one question out there that was what about material failure on a fairly new roof? That kind of hits what I'm going to talk about. If you have a roof project, a new one that was done or one that went wrong or an existing roof that is wrong, what do you do? Well, you have four years statute of limitations to act on it, not to exceed 10 years and that 10 years is based upon when it's discovered. For example, if it's a latent defect, so the four years runs from either actual possession by the owner of the certificate of occupancy date, the date of completion of the project. If there's an abandonment of the project, which a lot of times leads to legal action, that would be the date that commences your statute of limitations. The date of the completion of a contract between the contractor, the architect, the engineer and their employer, so if you happen to employ the architect separately, then the time they've provided you with those details, that's your statute of limitations on that part of it. But typically, they're involved in larger projects so it's whichever is latest.

The statute of limitations runs four years. We're talking to community association managers here, so what do you do? You guys get complaints. You get complaints of problems with roofs, leaks, windows, anything like that, you document them because they usually come to you in writing. You talk about them in meetings, so you have meeting minutes. That documentation, what does that equal? That equals evidence. That equals evidence of your knowledge of a defective condition, which if you wait too long can hurt you, so it's good to document things, but you want to make sure you act upon them. For example, if you're having complaints of stucco cracks and you keep patching the stucco and patching the stucco. Later you find out that, well, it's not really the stucco, it's coming from the roof installation and the flashing, don't think that your discovery of that roof problem happened when you discovered it, it may have happened when you found the cracks in the stucco so it's going to be important that you investigate these issues by somebody competent to let you know, not just any contractor that goes out there.

If you see stucco cracks, you call a stucco contractor. He's going to tell you, "Okay, I'll fix your stucco." He's not going to talk about roofs necessarily and he's not going to uncover it, so it's important that you look for a competent investigator, an engineer, somebody to look into it. Usually, you go to the construction defect attorney first. That's what we do. We would recommend the right person for you to do that. One of you I know here today, we talked just recently about owner surveys and I use the word owner in quotes here. Should we send out written document... an email or a letter to all the owners and say, "Are you having any problems?" We recommended, again, if you want to talk to them, great, but if you're going to do these owner surveys, most of the time you're creating evidence, you're creating evidence that is going to probably not get you a lot of feedback and it's going to be more of a problem than it's worth.

I could talk about it for a while, but we don't have a lot of time so I want to touch on the 558 process. Before you commence any action to address construction defects, you have to give notice under Florida Statute 558 and it's specifically 558.004. If you're 20 units or less, you have to give that notice 60 days in advance. Tell them the potentially liable parties, what the defects are, what the damages are, give them a general idea of where the defect is located and they have 45 days to respond. It's 120 day pre suit notice for if you have 21 or more units and that is a 558 process for dummies statement there. There's a lot to it and it's important to use an attorney that knows how to handle these things appropriately to give the proper 558 out there.

Evidence preservation, exfoliation of evidence, destruction of evidence, that's very important. So when you're doing these investigations, it's always nice to have somebody martial it through. I know if we handle a destructive investigation, I make sure I notice the potentially liable parties. I tell them what's going to happen, when we're going to do this investigation. They can come out and look. They can't talk, they can't talk to the owners, they can't direct any of the investigation, it's our investigation. They can go out there and watch it and they can see what's there so they can't say we destroyed any of the evidence and the people you have out there doing it, it's documented. Sometimes this comes into question if you have emergency repairs, water coming in. Well, managers, direct somebody to take pictures before, during, after. Videos are good, but we don't want closeups. You got to start far out so we know what you're talking about.

I can't tell you how many times I get a picture of a round wet spot in ceiling that doesn't tell me anything. I need to have something back to look at to say, "This is the building. This is the street, the building, the unit number, the interior," and then you can zoom in on it. There's a lot to talk about on that, but the main thing is you have four years from discovery, not to exceed 10 years. So any of you with buildings or improvements that were done, any renovation projects that were done that are 10 years or less and you're not sure about their condition, my recommendation would be get a competent person to go out there, do a walk around, do an inspection. We know people that will go out there a lot of times and just do a free walk around if it's something that you think you're having a concern with.

If you're not having concern, obviously these engineers aren't readily available to run out there, but if that's the situation, it's always good to do. Thanks.

Jon Lemole, Esq.:

Okay. So roofs are your first line of defense to water intrusion. One of the most important components of your buildings. You've got reroof your building, the takeaway today is to follow best practices. We've laid them out for you. If you have any questions about a project that you may be contemplating undertaking, reach out to us or reach out to a construction lawyer to help walk you through what would be some of the key things to do in order to make sure that the project goes well. We thank you all for joining us today, you managers. I think Michelle will take care of getting you all of your credit reported to the DBPR. Hopefully we'll see you on our next panel, so thank you very much for joining us.

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Lessons Learned from the Tragic Surfside Collapse

Video Transcript:

Alan Tannenbaum:

I'm here with my partners, Salvatore Scro and Jon Lemole. Our presentation today is on Surfside Incident, Lessons Learned. So, I've been a construction defect lawyer for, going on 43 years. I've also assisted associations around the state in major repair projects, which is the basic substance of our practice. I've been fearing the type of thing that happened in Surfside, a couple of months ago.

It's a product of several factors. Let's start with the fact that it's a common ownership of property, which is problematic in itself. Remember that there weren't condominiums in Florida until the early '60s. And the idea of having many people operating one piece of property that they own, especially a building, is problematic to begin with because, they have to make joint decisions about potentially its maintenance and repair.

You have volunteer boards, many of whom are not experienced in management or building construction, who are responsible for maintaining millions of dollars worth of property, and protecting the people who've occupied the buildings. So, there's an expertise gap.

And then, you have all sorts of pressures on board of directors, you have the owners who show up at the meetings with the primary thought of, they want to keep their assessments down to a minimum, who exert substantial pressure on the board. You have people with different economic pressures in the community, who pull on the board's heartstrings about spending money on major repair projects. You have people that could even be on the board who are looking to sell their unit, and all they're concerned about is setting up a scenario that puts them in the best position to sell their unit this year or next year.

And you have investors and renters who maybe thinking short-term, maybe look at their property more as a real estate investment than as some place that they live. So, you have all these disparate interests all putting pressures on the board, to make decisions that may be contrary to the longterm interest of the building. So, this is something that I certainly have been aware of and our firm has been aware of, as a potential.

There have been buildings in Florida that over the course of the last couple of decades were near collapse, and fortunately didn't. There surely have been instances of portions of buildings that have collapsed, but Surfside was really the most dramatic example of what happens when deferred maintenance and repairs are put off to such an extent that you have the potential for tragedy.

So, I'm going to lay the ground rules again. Stay on mute. Any questions that you have, send them through chat. This is not a CEU course, so the managers are not going to get CEU credit for today. We have an outline. I'm going to turn the program now over to my partner Salvatore Scro, who's going to... Remember, this is lessons learned, so let's go back to original construction. What did Surfside, Sal, tell us about original construction defects and building vulnerability?

Salvatore Scro:

Good morning everyone. Thanks for joining us. Let me start with, I'm going to share some photos with you here to start out. Let's see if I can get this going right. Let's see here. Okay, I'm assuming everybody can see this.

Alan Tannenbaum:

Yes.

Salvatore Scro:

So, here's a condominium with a balcony. Some of you may have seen this before. I apologize, but I have some others here. But here's the balcony, it looks fine. From the street, everything's fine. Now, this building at the time in this photo was probably 45-50 years old. Let's see. So, we're going to look at this area right here, which is the top of the balcony. I just want to show you, there was a little hole here, but the other balconies had no hole. But this is what brought their attention to it.

Under that hole is the cantilevered steel that holds the balconies up, one above the other. That steel goes all the way into the building, and that's what holds up the steel. Now, that can't be seen. This is what it looks like throughout. That's what was holding up the balconies.

Here's another condominium. This is a wood frame condominium. It looks like it's in good condition. I want to show you a few things here. This was built in 1988 I believe. So, we're going to look at areas around the balconies, and we're going to look at areas around these support beams here. This is what you're going to see was behind in the walls. This is what's holding the building up. And you can see, that's the structure. So, it looks beautiful on the outside. And then, here's part of more support around this is what's holding that building up.

Now, these are the support beams we talked about. These beams aren't even touching the ground. So basically, this building was held together by glue of the stucco. That was that particular building. Here, a lot of the newer buildings they have, this is a pool room area, and you will see that here you have all water seeping through the concrete. They tried to seal it up, but you have water seeping through the concrete, and you do have this water intrusion. It's not necessarily a big deal right now, but it will be later.

Some of you may have seen these photos as well. This was a condominium building also. This is all wood frame. We did some investigation of the building and started to take apart areas. And beneath, that is what you found. Now, this was a fairly new condominium, so it did not take long for this to happen. These are the photos of what can happen if you don't address these issues, to start out.

Here's another area around the windows. Again, now, if you look and do your investigation the wrong way, this is what you're going to find. Nothing. But just inches below is where all the problem is. Why? Because you have flashing issues here. So, anytime there's a change in materials, change in direction, you're going to find issues that should be addressed.

Here's another project. You can see they started to mask over some of the cracks in the stucco. This area here is this area right here in the buildings. They're little, they call them pot shelves sometimes, because you lay a pot on them. So, it looks fine. As you open it up, this is what you're finding beneath. So, these are things... And again, here's another area. This is your framing issues that you cannot see, whether or not things are properly strapped. So, those are just a few photos.

Now, the commonality of all the damages in these photos... I'm going to ask a question, what all these photos have in common. Anyone know what it is? I know you're probably not going to answer this in this format, but I'm going to ask it anyway. The commonality is that, no one could see it happening. The other commonality about all these photos is that, they all had an opportunity to discover the defects and prevent this from happening. So the lesson to be learned here is, what you don't see can ultimately hurt you.

So what's the importance of a thorough turnover engineering study? You look at these buildings, the way they sell them, they sell nice clubhouses, they make everything look like it's new and fresh. But especially in new units, you need to take a look at these things. So you need a trained eye to identify the potential areas of the defective conditions. They may be small problems now, but they can result in bigger problems over time. So, it's like brushing your teeth. Today, it may not be a problem if you leave it alone, but over time, you're going to have problems. You're going to have cavities. So you need to address the things that you can't see.

So, what do these trained professionals look for? They will walk the site, they will look at areas where there is a change in direction, a change in materials, to make sure that the construction is performed properly so that they can identify if they need to do a further investigation. And all these investigative works that we've done, that we looked into, these engineers walked out there, they saw the same thing you saw in those photos. They saw a nice building, something that appeared nice. But, their trained eye can see something that we can't. And when you open it up, you find these things.

One of the other things to keep in mind is that, whether or not you want to pursue claims to create a fund to rectify the problems. So, the cost to correct these problems sometimes can be substantial, and it typically won't increase over time if it's not addressed. So it's better to address these things earlier than later. So obtaining a proper study of the building components by a qualified expert, typically we recommend an engineer together with a good team of construction defect attorneys, so that they can direct what should be looked for, is a way to develop an avenue to recover from the liable parties enough funds to use towards correcting the defective conditions.

If you wait too long, not only will you need the funds to correct the defective conditions, but also the funds to correct the consequential damages from the defective conditions, and you may lose your opportunity to recover from those parties as well. You also have the issue that, if you're doing repairs over a period of time, you may be destroying evidence. So it's best to have your properties looked at now at any point. So regardless of the study of the building, regardless, a study of the building components is a good idea. And here's why. If it's not to take advantage of inspecting as work was done, so if you weren't there to inspect the work as it was performed, or if you didn't have somebody competent to inspect the work as it was performed, then you may want to consider investigating the work now.

Another reason is, if it's just old, you may need to inspect the condition periodically. And then the other is identifying the longterm maintenance needs, which leads us to the next area, which my partner, Jon Lemole will be addressing.

Alan Tannenbaum:

All right. Thank you, Sal. So Jon, again, the lessons of Surfside, let's talk about budgeting and reserve funding. What lessons did we learn?

Jon Lemole:

Okay. Well, I think we learned probably what will be the most obvious area for the Florida legislature to address, some change in how condominium and HOA budgets are handled. Because right now in the statutes, as you probably all know, there's a presumption in favor of full funding .

There's a statutory presumption of a full funding of reserves, and especially for condominiums. And yet, you have this opportunity for the membership to determine, at least in condos and in HOAs, it depends on what the documents say, but you have the opportunity for reserves to be waived or reserves to be used for purposes other than for what they're supposed to be used for. So, that's probably the most likely area where we're going to see some change because, I think what we've learned from Surfside is that, buildings and especially high rise condominiums, they're very technical, highly technical structures to maintain. And leaving the line long-term maintenance and repair of them in the hands of well-meaning folks but folks who may have their own and interests in mind, their own short term interests in mind, was probably not the best thing for ensuring the safety of everybody in the building, and ensuring the integrity and the longterm integrity of the building.

So let's talk about reserve studies. Look, I get being a board member is probably one of the hardest things to do because, you've got to make some really difficult decisions that may not be in the particular short-term best interests of everybody in the community or in the building. And you've got to see these folks every day, and you've got to deal with people that are the squeaky wheels at your board meetings, and it's a very hard job. But, like any kind of fiduciary of an organization, it doesn't matter what organization, you talk about a public company, the board of directors has a duty to ensure the long-term viability of that company, and to frankly maximize shareholder value.

Well, a condominium really isn't that much different. The board has an obligation, a fiduciary obligation to ensure the long-term viability of the buildings, and to ensure that everybody's equity in the building is maximized. And so, that means that you've got to take care of the building. Now, a lot of folks who come down to Florida, typically come from up north, somewhere in the Midwest, they're used to owning a home, a single family home somewhere, and they've decided to move down to Florida, and move into a condo because they don't want to have all the maintenance responsibility. They don't have to mow lawns, they don't have to paint, they don't have to do all the things that they used to do when they owned it at home.

And sometimes I think when they move into a condominium or a Home Owners Association environment, they forget that, even though they don't have to do some of those maintenance things, they're still responsible for them. They still have a financial responsibility for it. And so, that kind of amnesia about doing those things is where you have a lot of problems with members who don't want to have to pay for those things. And so, they show up at meetings, they they're vocal, they try to elect board members who agreed with them.

I think that's going to change. I think we're going to have... It's got to change. I think we're going to see the Florida legislature step in here and create some guardrails or some curbs around how that's done. But again, let's talk about, I kind of got off the track, reserve studies. So if you're in a newer... Let's say you just turned over. What happens if, in a condo, let's talk about condominiums, you just turned over, the developers just turned over the condominium, they hand an engineering report that probably has also a reserve study attached to it, and you get a bunch of assumptions about the longterm life expectancy of all of the elements that have to be addressed in that report?

Frankly from my viewpoint, that's like buying a house and letting the seller give you a home inspection report. Why would you ever do that? So there's a huge benefit here to an association periodically, at least out of the gate, getting their own study done, getting their own reserve study done, getting their own engineering study. That goes back a little bit what Sal was talking about before, having the buildings looked at. But also, periodically getting reserve studies to know that you're funding reserve's at the right level, and that you're making sure that you're keeping up, and that the life expectancy assumptions that may have been made at the very beginning, haven't somehow changed.

That's very likely to happen in Florida especially, and with older buildings because, this is a harsh environment. We have a tendency to assume that buildings are constructed well, and that they're constructed with state-of-the-art technology. But think about a building that may be 50 years old. What was state of the art 50 years ago? And how has that held up in a harsh environment like Florida, especially in a harsh environment that's on the coast? So that's why it's important to do those studies periodically and update them, and make sure that you've got accurate numbers and accurate assumptions to reserve.

You've got to resist the urge to not fully fund reserves. Board members I think coming out of this, and management companies that are looking at Surfside, I think they're going to really have to rethink how they're dealing with requests and efforts to waive funding of reserves. I know that's hard. It's going to be very hard to do, and I think the legislature is hearing, the Florida legislature is hearing about that. Again, that's going to be an area where I think some protections are likely to be put in place.

Now, what do you do if you're in an older building and the over the years, reserve funding has been neglected? Now, all of a sudden you've got a problem, and you've got to deal with it. How do you do that? Well, there's a couple of different ways. You're either going to have to pass through a big assessment, a special assessment. Who's going to pay for that? Is it going to be letting the unit owners go out and deal with that? Maybe they have to get refinancing on their unit so that they can cover that, or is the association going to consider attaining its own lines of credit?

One option is for an association to fund that through some borrowing. That may not be available to all associations because, they may have problems with default rates. You have to generally have under a 5% default rate on assessment collections in order to get a lender to provide the association with a line of credit. So, these are some hard choices that are going to have to be made. But, I think there's help that's going to be on the way. I think, again, I think the Florida legislature has to act here and create some guard rails around the whole reserve issue.

Alan Tannenbaum:

Jon, one misnomer that I think people have about the reserve requirements of the condominium actually, there are three particular areas where there's required reserve funding, which is roof replacement, building painting, and pavement resurfacing. There are a number of condos around the state that only reserve for those three items. But, there's additional requirement under the reserve section. It says, "And any other item of the building that has deferred maintenance or replacement costs greater than $10,000." That's where this bonded stucco or cantilevered slabs that are going to need to be repaired or other structural issues in the building, at the pool level, the pool deck and so forth, those items also need to be reserved for under the provision of the statute that talks about replacement costs of greater than $10,000.

So it was a little bit misleading when the legislature created that statute because, it highlighted roof replacement, building painting, and pavement resurfacing, really to the neglect of structural issues, re-piping, which was going to be coming down the road for many buildings. A lot of major expenditures that were not picked up or were not subsumed within those three categories. So that's been a misnomer.

Jon Lemole:

Yeah. And again, what is likely to be more than 10,000 may change over time too because, as your building ages, and you may have environmental impacts, climate impacts that are accelerating some things, that now may become more pressing repair and maintenance areas. And so again, that's just another reason why routine studies of your buildings are going to be a thing of the future. A thing that every board and every association has to consider is, not set it and forget it, and maybe you'll do 30 or 40 years down the road, you'll do a study. Maybe if you're in a particular municipality, or county, or city that is going to require you to do that, so you'll do it.

But I think what every association needs to look at is periodic studies. Whether they have to do them or not by law or ordinance, doing it solely for the purposes of understanding what the current condition of their building is, and what their ongoing reserve funding obligations and efforts should look like.

Salvatore Scro:

I just want to address one thing here. One of the questions here was, so what was the lessons... Okay, I'll state what it says here. "What were the lessons learned from original construction of Surfside?" I guess since that's what we're talking about here, we're focusing at this point on investigating your property. Don't just let the... Don't judge a book by its cover. Surfside had investigations later on that showed issues. Don't ignore them. So the lesson, the main lesson from Surfside in my opinion is, if you do what you're supposed to do as a board, do not ignore what you find. Take action on it. Don't worry about the cost, or what the value of your properties, which is always a big concern. That's not your duty to make sure that you have a high value.

Your duty as a board, as a manager of the board, is to make sure that you're performing your fiduciary duties for the association that's there, and that will be there in the future. So the lesson learned from that is, get the studies and don't ignore the studies.

Alan Tannenbaum:

Yes. And Kevin, it's a good question, and I want to follow up with Sal. We don't know why Champlain Tower South came down, and it's going to probably be a couple of years of study. It may not be able to pinpoint one precise issue. But my A claim from what I've seen is, it looks like there were original design and construction defects in that building, which if they would have been corrected at the outset, let's say within the first couple of years, the likelihood of the eventual conclusion would have been lessened, of the building having to collapse 40 years later.

So, we have seen situations where buildings have had problems 20, 30 years down the road. And usually, there's a component of original construction defect that contributed to it. That if those items had been corrected and then the building properly maintained, then it would have been there. Maintenance is a misnomer because, if you have underlying construction defects that you don't repair, you're putting a band-aid on a problem and not necessarily getting to the guts of it. A good example is stucco cracking. Well, you can patch the stucco, you could even re-stucco. But if the issue, let's say in a wood-frame building, is the actual structure behind the sheeting, that's causing the distress, that's leading eventually the stucco cracking, you haven't really gotten to the problem.

So, the first thing that comes is correcting construction defects. And then, you're talking about longterm maintenance strategy once you've corrected the defect. But if you don't correct the defect, it is going to come back to bite.

There's a question about the life expectancy of a reinforced concrete multistory building, four or five floors. There is no discrete number that you could put on the life expectancy. There's probably some buildings that are reinforced concrete buildings that are going to last 60 or 70 years, and there are reinforced concrete buildings that because of original construction defects or poor maintenance, are not going to make 25 years. So, there's going to be a broad discrepancy. I would say that, based upon the studies that were done in the '80s, reinforced concrete buildings, even well-maintained, were certainly not going to last a century. And again, the one study that came out of it was the early 1980s, said an average life expectancy on the coast, of a high rise, reinforced concrete building, to be 50 years. But to put a precise number on a particular building would be very difficult.

Norman asked a question about reserves. What do you think? The far left says you will require full funding. Well, every year the board's got to come up with a budget that reflects full funding of reserves. The problem in the statute is that, the owners and many times it's at the suggestion of the board, then have to vote when the budget's adopted, to either waive the reserves in their entirety or reduce the reserves with full funding. Potentially, the legislature will, as they have done at some stage, will remove the waiver alternative for the owners, and the full funding be required.

But it goes back to the board having an appropriate reserves study that covers more than just the three designated areas of the statute. It covers any other item that's going to have greater than $10,000 replacement costs, That's going to include piping, it's going to include elevators, it's going to include structural window replacement. Those things are often left out when it comes to reserve funding. So the next segment.

Jon Lemole:

Because, we talk about life expectancy of buildings, and I think we put too much emphasis on... It takes away from what we really should be thinking about because, we tend to rely on, "Well, 50 years? I can sit tight for a little while." The three of us I'm sure, me, you, Sal, we can all point to examples of newer buildings that have had structural problems because, there's been a defect in the waterproofing that you may not see. I can think of two right now that we're dealing with where, there's been significant concrete spalling, and corrosion, and post-tensioning, and other effects on structural concrete, and they're frankly very recent buildings. But if the waterproofing, the latent waterproofing structures are defective, are not well performed, you're going to have a problem.

And so, 50 year life expectancy in that situation is meaningless. So that's why Sal, me, Alan, we constantly beat this drum. Get your buildings inspected. It doesn't matter how old they are.

Alan Tannenbaum:

Yeah. And probably at least every five years for a major structural mechanical inspection would be a good starting point. So, I'm going to get into the next segment, which is, we called it, nipping problems in the butt. So I think you've heard enough about water intrusion. In Florida, the biggest problem other than original construction defect, is the impact of water on the structure. If anywhere on your structure you're allowing water to get in, it can come through the roof, the windows, as Sal indicated, any change of building surface are areas of vulnerability. You're allowing that water to come in, it's going to create rot, it's going to create mold. You're going to have a pretty serious issue developing. So, the biggest target of maintenance in Florida is stopping water from getting beyond the outside surface on the building, and that's the ultimate struggle.

Somebody asked about plumbing. So, there's a lot of cast iron portable water systems or piping, you have your sewage piping, and again, not intended to last forever. The other thing that happens in the construction industry is, somebody comes up with a great idea about using a particular product or material, and 20, 30 years down the road, it doesn't look like such a good idea anymore. I think that is often discovered. I remember many years ago, somebody came up with the brilliant idea of using lightweight concrete fill as a roofing installation. The stuff got poured all over Florida, it was great. Great at energy reduction, you can slope it easily. The only problem was that, after a few years, they discovered that under the Florida sun, that the moisture from the concrete went up into the asphalt roofing that was applied to it, and you had asphalt roofs ever deteriorating well before their time, as a result. So you do learn things.

Now, what I've heard from plumbers or the plumbing companies, because there's companies out there that are doing pipe relining to extend the life of piping and buildings, and I've heard from more than one expert who has said, it's a viable approach, but not if you have allowed your piping to reach the point of deterioration, where it really can't be lined anymore. So, it's a great example of jumping on problems when they first become evident. Because, you're sitting on a piping system in your building, you get it inspected, there's some rust and deterioration. And then, the board sits on it for five years, six years, seven years, finally gets it studied after seven years of the problem first coming.

One of the companies that was going to be doing the pipe-lining shows up and says, "Look, the piping here is far too deteriorated to use our system or our process. The only thing that you can do at this juncture is a full replacement." So, one of the consistent themes that we've seen in buildings is, if you get at a problem quickly, you have the opportunity of correcting it cost-Effectively. If you allow problems to exacerbate, then the repair is likely to be much more expensive, much more difficult, and much more impactful on unit occupancy and so forth. So, get on those problems quickly.

So Sal, what I'm going to ask you to do in the next segment, we have a lot of topic areas that we were going to have you cover, but we've answered a lot of questions and so forth. So, why don't you give a fairly brief synopsis of contracting for repairs?

Salvatore Scro:

Okay. So, many times the defects that you encounter, the problems you encounter are because of poor instructions. You wouldn't buy a desk for example, that had to be put together, and just start putting it together, if it had all these parts. You read the instructions. Well, it's no different with putting together a building or repairing a building. You want to have proper instructions. So initially, you want to have that investigation. I know there was a question in there, Nancy asked, the inspection you recommend five years is separate from our reserve study? Yes. Reserve studies typically just look at the buildings. They don't do any investigation as to what the extent of the repair needs to be.

Alan mentioned cracked stucco. If you have cracked stucco, it may be a stucco problem, but it could be the framing beneath. It could be a lot of different things. So, you want to have an investigation to determine exactly what needs to be done. Because, just patching and painting the stucco, it may be damaged the next day. It won't solve the problem. You need to know what that problem is. So you want to know what the problem is. You want to get on point specifications as to what needs to be done.

To correct and avoid the defective construction, how will you know... How do you know what to do? And how do you know if the appropriate to work is in the plans or in the specifications? A couple of things. Number one, you should have an attorney review the contract, somebody who's knowledgeable in dealing with construction defect matters, and also have a good owner's rep, somebody who's knowledgeable, or engage the services of your own engineer to review those plans.

Salvatore Scro:

The other issue is, who's going to do the work? You can go get any contractor out there, but you're only getting the people that show up on the job. So a couple of things you want to know about these contractors, one, you want to ask for references. If it's a big project, even more so, you want to ask for references. You want to know what the bond ability is, if they need to obtain a bond. And again, with bonds sometimes, those are different amounts for different contractors. So that would depend. If some contractors cannot get a bond, some would pay more than others.

The other thing you want to look for is, if a contractor is asking for a significant deposit, because they have to buy materials or whatever, that's a big issue that will raise a flag to at least do some more investigation about the contractor and what they're able to do. You want to look at what the warranties may be for the work that's going to be performed. How long will that continue?

And then the contract administration, a good owners rep. Many of the community association managers out there, they don't really expect to sign up for that. So if they are going to do that, there may need to be a separate agreement with your community association manager, as to how much and how involved they're going to be. But basically, and I did see a question in here that leads into this, one is, Tasha asked, why can't all the construction defects be addressed before the developer leaves and turns over? Couldn't developers create budgets of properly funding the HOA or condo instead of the practice of having low fees for marketing?

Salvatore Scro:

So here's the reason, my opinion. They built something for a profit. They do not want to go and be there every day to repair these things, to make sure that everything is in order. They're turning that over to you. And the thing you're going to find most is, all these construction defects, they're not defects, they're just failure to maintain. I've heard some ridiculous things in just the last week, in depositions I've been in, where people have stated that, some of the problems that are causing the defective conditions of the association, are because of lack of maintenance. So, how do you see that? And the answer is, well I see dirt on the building. That's not maintenance. You cannot maintain something that is not properly put together.

So a developer or a contractor, most of them will just want to patch the situation, get through their statute of limitations, get a signed release. So it's important that you have your own people. And we've stressed this quite a bit. Investigate these things. That your contracts are based upon what your investigation finds, not what the developer says needs to be done. If they didn't do it right the first time, if the contractor didn't do it right the first time, you have to be concerned as to whether or not they're going to do it right the second time. Did they have the proper plans and specifications? Was all the information in there? How do you know what that proper repair is going to be? And who's going to do the work? Hopefully that was brief enough for you, Alan.

Alan Tannenbaum:

All right. Thank you. So Jon, let's talk about communication with the owners. And really, tying it back to the Surfside issue, what was the challenge that that board had as far as leading the owners, or leading the group to make proper decisions about what to do with that building?

Jon Lemole:

Well, I think first of all, there was a problem with getting... With conflicting information being circulated among membership and even within the board. So, in order to communicate clearly with your members, the board has to have a clear understanding of what their role is, and what the needs of the community are, at any given point. Because remember, again, at the end of the day, the board is there to represent everybody who has an interest in that community, for the long-term viability, and security, and safety of the building, and for management, for fiscal management of everybody's assessment and need to contribute to the management, and security and safety of that building.

And so, if the board doesn't have a clear understanding at the very beginning, of what that is going to entail, then they're going to have a really hard time communicating that effectively and in a transparent way to the membership, or the community. And so, transparency is the key. And look folks, I'm a big believer in risk management. Every entity, every board, every organization wants to manage risk as best it can, and transfer as much of the risk away from itself as it can. That's always just good business practice.

So think of, most boards, they may be some very smart, well-meaning, educated people. They have great and disparate backgrounds in a lot of different areas but, how well do they really know building science? How well do they really know building, upkeep, maintenance and repair responsibility? So look, how do you manage risk in that situation? You put it on engineers. So, if you want to be transparent and clear, and manage the risks associated with managing the long-term viability of the building, you get regular investigations of your building with engineers, and let the engineers speak for themselves, and let the engineering reports speak for themselves.

And if the engineers who also have a fiduciary obligation, and a heightened standard of care as professionals, and certain statutory requirements every time they sign a report or seal a report, they're the ones whose malpractice is an issue, if they're not providing accurate information. So the easiest to me, I'm just one guy, but to me, the easiest way for a board to manage clear and transparent communication, is to periodically investigate the buildings, and let the engineers tell you what needs to be done, because they're the professionals. Don't let the tail wag the dog. You can't let the members who come from all different kinds of backgrounds, they may be short-term, they may be long-term, this may be the place they're going to stay forever, they may be only here for a couple of years, they may just be investors. You can't let them and their disparate interests and backgrounds, be the driver of the decision-making for the long-term safety, security, viability of the structure.

Alan Tannenbaum:

Yeah. And Jon, the distinction, the board is going to have better information than an owner, but they also have the fiduciary responsibility that the owner doesn't have. So, that's really what distinguishes the board. The board is required to lead and direct. The owners are specialists in complaining and obstructing. That's what they're there for. The board can't let the complainers and the obstructors in the building dominate.

What I'd like to do really in the last 10 minutes that we have, my last segment was on termination. We do a whole presentation on that. Obviously, if a building has reached the end of its useful life, termination is going to end up being the solution. In Champlain Tower South, that condo is being terminated because, it can't be rebuilt. The owners are not in a position to do that. So, the property is going to be terminated. It was interesting that one of the discussions was, they're creating the site there as a memorial. Well, tell that to the owners who have the possibility of sharing some of the $30 million or $40 million that the land value was worth, for that to become a memorial. I think what will happen is, the property will be sold and you will see a new development in its place, with the owners sharing the proceeds of the sale of the property.

But I want to go back to really summarize what we've covered here. And again, the topic of the discussion was, The Lessons Learned. So let's summarize the lessons learned. The first lesson is, know your building. That talks about doing periodic, thorough engineering studies, covering the major structural issues, roofing, plumbing systems, mechanical systems, electrical systems, your pool, your elevators. Have the best information that's reasonably possible, so that you know and understand your building, the repairing needs and the maintenance needs of the building.

You can't plan, budgetarily, you can't plan as far as needed maintenance and repair, unless you have an appropriate baseline of information from which to proceed. In Champlain Tower South, they did have some engineering reports. Did the engineering reports cover everything about the building vulnerabilities? I don't know the answer to that question. But that's the starting point, is proper engineering investigation, so that every condo board in Florida knows the challenges that its buildings are facing. That's number one.

Number two is budgeting. It's not only looking what needs to be budgeted this year to take care of what needs to be taken care of this year, but it's funding for five years, 10 years, 20 years, potentially 30 years down the road. That takes a lot of hard work, it takes a lot of study, it takes a lot of forethought. You have to produce a budget that's going to potentially have bad news from the owners about how much their assessment is going to increase this year, in order to include a proper reserve component for future repairs. But, one of the problems that you have seen from Champlain Tower South is, the difficulty when appropriate reserves have not been collected, of then trying to go back to the owners, to collect an assessment that would have been in excess of $100,000 a unit, in order to undertake those repairs. A very, very difficult political challenge for a board of directors.

The likelihood of owners, and there were owners in that building that had just bought it a year before, and all of a sudden, the idea of having to pay $100,000 in addition for the immediate repair project, would have been very difficult news. So the idea of waiving reserves, and then facing a situation 20, 25 years down the road where, now owner's going to be assessed $25,000, $75,000, $100,000-$125,000, we've seen creates a very difficult situation. So really, the second part of it is fiscal responsibility, once you have the engineering study.

The third part of it is leadership. The board of directors has a fiduciary responsibility to undertake the associations statutory obligations to maintain and repair the common elements. So, it's a statutory obligation on the part of the association. The board's got a fiduciary duty in undertaking that statutory obligation. That translates into the board having the onus to make the very difficult decisions, that protect the long-term interest of the building and the membership. So that means that, the board's got to make the first difficult decision, which is, investing association funds to get the appropriate engineering studies.

Somebody asked a question about, how much do engineering studies cost? Well, they are costing more and more because, engineers are being deluged with requests for inspections at this juncture. So, I don't know what they're charging, but they're probably 10 or 20% more than if you would have asked for the same evaluation six months ago. But that's the pressure of the marketplace. So, it's the courage to get the appropriate engineering studies, and go to the owners for the assessments to pay for them. It's then having the courage at the appropriate time, to either with the use of reserve funds or special assessments, do repairs when they're needed and not let the problems exacerbate.

But, also maybe courage in a building that is under severe distress, of even telling the owners that, because the building is in such disrepair, that it may not be occupiable, which is also a possibility. So I would say, the combination of factors, lessons learned with Champlain Tower South, get the appropriate engineering studies, provide adequate funding to do repairs, do the repairs in a timely fashion. And for the board to understand what its obligation is, which is to protect the long-term interest and the safety of the membership, and not be concerned necessarily with owners who again, their interest may be short-term, their interest may be individual, financial difficulties, a whole slew of reasons that an owner's going to resist assessment or reserve funding. The board's got to have the leadership in order to respond to that. I'm sorry to dominate. Sal, Jon, do you have any closing thoughts?

Salvatore Scro:

I think we beat everybody up enough on the thing we see every day is that, the hardest thing for a board to do is spend money. Sometimes you need to spend money to find out what's happening. It's like going to the doctor. But it's also important that you don't take this on alone. You need direction, you need somebody to advise you. And there's a lot. Boards are not ignorant people. They're very smart people. But it's important to get the advice from the professionals that look at the buildings, from the people that deal with addressing the construction defects, whether it be the construction defect attorneys to lead you through the investigation, to make sure you pick the right people, to review your repair contracts, to make sure those are right, and that everything is being addressed so that you don't have a problem later on. It goes back to the question, why can't the developer set up a fund? Aside from the fact that they don't want to spend any more money, you want to make sure that they do it right the first time, and that you're protected. So it's important to get that direction.

Alan Tannenbaum:

All right. There, I see a question from Marshall Wizof about, can associations hire directors with pay? I don't think there's a particular restriction in the statute against that. I've never actually seen it happen. It's probably very unlikely that the legislature will ever require that, or your particular documents are going to allow it. But, it does make some sense.

There's a question about liabilities of the manager when the board doesn't listen to advice. As long as a manager documents what their advice was, and it's in the record, I don't think that creates any liability for the manager in any way. Your contracts have pretty strong identification language, so I don't think there's a great concern there. I think we've covered that.

Reserve studies, all right. Somebody asked a question about personal liability of board members. In Florida, it's a very narrow window for a board, individual board liability. Frankly, unless you're stealing from the association, or giving sweetheart contracts to your brother-in-law, or using your office for vindictive purposes, it's very unlikely that there's going to be a successful suit against an individual director for maintenance and repair decisions.

Now, if a board member gets an engineering report that talks about the building that has significant problems, where there's a threat of collapse, and doesn't present that report to the rest of the board, or the board withholds that from management, there could be a potential for some liability under those circumstances. But generally, the decisions are going to be protected from individual liability. The association, under its liability policy, could have a pretty significant liability.

So, we'll look through the chat, and we'll cover some of the other questions offline. We appreciate everybody participating today. Hopefully the information that we conveyed was helpful. And we will-

Speaker 4:

I've heard Mr. Lemole mention several times, periodic inspections. Could you be a little more specific?

Jon Lemole:

Well, I don't know that I have a particular timeframe in mind, but that's going to be driven by what engineers say, and what you do in response to it. So, if you have a report that recommends... If you have an engineering study done that recommends certain repairs be made, and you do those repairs, maybe the best person to ask for when should we be following up on this, would be the engineer, just like you would do with a doctor, for example. So, no particular schedule of it, but just period... I think from time to time, you have to check the health of your building.

Alan Tannenbaum:

Yes. I'm going to answer David Baker's question. We can hang on for a few more minutes. David Baker says, a question regarding directors and officers insurance. I believe every association is obligated to carry this insurance. Actually not. It is a discretionary purchase. Is $1 million per claim inadequate? I think the bump-up of fiduciary insurance is not that great. So if you want to carry more coverage, I think the insurance people will tell you that, a bump-up over $1 million is not going to be expensive.

Now, the question of how effective is the insurance as far as providing security for board members and property managers? I don't think the fiduciary insurance that a board purchases, it covers directors and officers not necessarily management. But maybe one of the insurance people can correct me on that. The funny part of fiduciary insurance in Florida is that, it doesn't cover misfeasance and malfeasance on the part of the board. So the irony of it is, statutorily, board members have a very narrow window of potential liability, and the fiduciary insurance doesn't cover the issues of misfeasance and malfeasance.

So most fiduciary policies are really there to pay legal defense costs, where a board is actually sued for something that it doesn't have liability for anyway. I know though the insurance companies are very happy to write fiduciary coverage because, there's a very low claims incident against the amount of premiums that they're collecting for the coverage. But, just for the fact of to cover the potential defense costs, I think it's very important that the board of directors have that, but it's not an obligated request.

Yes, getting an engineering report after turnover, if we didn't beat you over the head with that, that's really important. I think we've basically covered the questions, at least the ones we were able to answer. All right. We're going to say goodbye at this point. We'll see everybody next month. Thank you. There will be a recording, and we'll provide you access to it. Thank you. 

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Aging Condo Buildings – Repair or Abandon

Even if expensive, by statute necessary repairs cannot be avoided for aging condominium buildings. Allowing the buildings to deteriorate could constitute a material alteration for which a unit owner could take issue. Termination is a cumbersome process, but should it be considered for aging condo properties? Does repairing the buildings no longer make economic sense? Learn what alternatives associations have when faced with aging buildings…Repair or Abandon?

Alan Tannenbaum:

Our topic today is Aging Condo Buildings – Repair or Abandon. We've all been affected by the horrendous circumstances that occurred in Surfside. We actually had planned to give this presentation weeks in advance of what occurred in Surfside. It pointed out some of the issues surrounding this whole thing of condominium repair, obviously in the most drastic way imaginable. We all feel for the people who perished, the families in that terrible tragedy.

From somebody ... And our firm is involved in construction defects and consulting on major repairs of condominiums and homeowner association buildings. I've been working in this field for over four decades, and what occurred in Surfside, from my perspective, was inevitable that at some point there was going to be a collapse and there was going to be loss of life because we're certainly aware that there are a number of buildings, mostly along the coast that have been deteriorating from the environment.

Adequate repairs, investigations have not been undertaken. You have the issues of infighting among board members, owners and boards not being able to agree on repairs and paying for repairs. Unfortunately, in Florida you have the whole issue of reserves. As everybody familiar with the Condominium Act knows, every year a board of directors is obligated to prepare a budget that includes fully funded reserves for all building repair items greater than $10,000.

Then the owners can vote at a meeting to waive those reserves or to agree in decreasing the reserves. Unfortunately, what boards have done time after time is they've accepted that owner vote and reserves have either been waived or decreased. You end up with buildings that need massive repairs and the funds are not there to undertake them. Then the ability of associations then to assess their owners sometimes into the six figures to do major repairs creates a great difficulty.

If you haven't maintained the buildings, adequate reserves have not been funded, you end up with a problem many years on, which is a substantial cost of repair, a great difficulty in a board being able to pass a special assessment [inaudible 00:03:53], a lot of resistance from the owners and sometimes board members and you end up with a tragedy as what occurred in Surfside. You got a substantial cost, you got lack of adequate reserves, but there is a decision to be made.

It's a decision that eventually every condominium in Florida is going to have to make, which is when is the cost of repair so excessive that the actual termination of the condominium should be considered? I use the example of a condominium in Tampa that we represented. They were down maybe a little bit north of [inaudible 00:04:44] Stadium and the owners needed to be assessed about $30,000 each to do repairs, but the land was very valuable.

If the property was sold, every unit owner would have been able to realize $300,000 from the sale of the property upon termination. The question for that association was, do we go through the process of assessing our 54 owners, $30,000 each to do these repairs on these aging buildings, or do we move to terminate the condominium, put the property on the open market, sell it?

Rather than every owner being required to come up with $30,000 to repair the property, in theory they would each get a very sizable six-figure check, but then of course have to find someplace to live other than where they did. That's what the topic that we're going to cover today is, do massive repairs or do we consider termination, and what are the complications of each?

I'm going to invite my partner, Jon Lemole, to talk about what is the statutory of documentary duty of condominium associations to repair their buildings?

Jon Lemole:

Got it. Thank you, Alan. We're going to start with some basics, which will then segue us into the more meaty part of this discussion about the problem of aging condo buildings, but we've got to start somewhere. I expect that most of you on this discussion today are probably come from someplace other than Florida, may have experience owning a single-family home somewhere up in the Midwest or the Northeast or wherever y'all came from initially.

Think about a situation where you own a home. One of the primary responsibilities of home ownership is to take care of your home. It's a big investment, and so we're probably all familiar with things like replacing roofs and painting our homes and replacing siding or clapboard or stucco, if you had stucco up north somewhere.

Those are all the things that homeowners are well aware of, the types of repair and maintenance things that you do to keep your home secure, safe, water-tight, structurally-sound. When you buy a condominium, you're in a type of ownership which doesn't give you complete control over the place that you live. You can maintain certain things within your unit, but you rely upon some other folks and an association in particular to take care of the things that you can't take care of.

The law in Florida, as well as perhaps your documents, your declarations, but let's start with the statute, the statute imposes a very heavy burden on an association and its board, a fiduciary obligation on the board members, to look after the best interests of the property, the common elements that every unit owner owns a share of, but doesn't have the ability to take care of directly. Where do we find that obligation?

Well, we start with the statute. I'm going to share my here so we can all look at some statutory language. For a condominium, we start with Florida Statute, Section 718.113. That's the essential burden on an association where we find the burden of the maintenance of the common elements. You'll see I've highlighted in sub-section one there that the maintenance of the common elements is the responsibility of the association.

That's pretty clear language. The association can't work around that. There's no exception. There's no misunderstanding, no ambiguity there. The association has to maintain the common elements of the condominium. Now, the declaration may include some additional things and some additional burdens and so you always have to consider what the declaration say in addition to that.

But at the very minimum, you've got a statutory prerequisite, a command, an unambiguous command on the association to maintain the common elements. It's very important that each of you, if you're on a board or you're a manager, you're aware of this particular section, you understand what the common elements are, typically building exteriors, roofs, maybe balconies or certain portions of balconies.

There are certain areas that are going to be common elements and that are going to fall within this statutory obligation. There may be other things that are imposed by your declarations and so it's very important that you understand what those declarations are as well, and what the responsibilities of the association are. It's interesting.

I want to jump down here to Section 2A, because you're probably all familiar with the differentiation between maintenance and repair, and then the other section of the statute material alteration. Why that distinction is interesting is because a lot of you probably recognize that the association always having the responsibility to maintain and repair the common elements, doesn't typically need membership approval to do that.

Board can take on that obligation on its own and create assessments to fund that work. You're probably all aware of Section 2A which requires that if you're going to make a material alteration or substantial addition to the common elements or to association property, it has to be done in a manner that's set out in the declaration. The declaration may provide some directives about votes of the membership, what percentage of the membership vote is required.

In fact, in the statute, it gives you a baseline. If the declarations don't provide some method for determining what sort of membership approval is required for material alterations, then the statute provides a baseline of 75% of the total voting interest. Here's where this is interesting. I think many of you may have heard of a case on Longboat Key. It was called the Colony case, is a long and tortured history of a condominium, actually a hotel condominium, that eventually fell into disrepair.

There was a tremendous amount of litigation around that. Eventually it's been demolished and the condominium was involuntarily terminated, and is now being developed by a big real estate developer. One of the things that's interesting about that whole saga is that there was actually a decision in the bankruptcy court and one of the earlier litigations involving the Colony case, where you have a judge ... And this is law in Florida.

You have a judge that said that by allowing the condominium to fall into such significant disrepair and by overlooking its repair and maintenance obligations to such a degree, that the condominium essentially became unrepairable, that that was a material alteration. Therefore, by allowing that to happen without a vote of members, that exposed the board and the association to significant exposure and significant liability.

The association there had to pay a heavy price for that. Let's talk about what happens when the association doesn't perform its maintenance and repair obligations. Let's just jump down to Section 718.303, and a lot of you know this. I've highlighted the relevant language here, that actions for damages or for injunctive relief, injunctive relief being an order by the court for an association to do something, or both, for failure to comply with the provision to maintain and repair may be brought by the association.

Let's talk about what the unit owner can do. A unit owner can bring a claim for damages or injunctive relief against the association. In other words, a unit owner can compel the association to do what it's supposed to do under the statute and to maintain and repair the common elements. If the association doesn't do that or is found to be liable for not doing that, the unit owner prevails, then the prevailing party ... And I'm here in the red.

The prevailing party in any such action is entitled to recover reasonable attorney's fees. There's a case that was recently decided, I'll tell you it's a homeowner's association case, but the statute for the homeowner's association is very similar to the condo association. It's called Gonzalez vs. Coconut Key Homeowner's Association. Recent. A couple of years ago, appellate decision. In that case, a lot owner brought in a claim for damages and for an injunction against the association for failing to maintain a drainage swale.Now, here's the interesting thing about that case. The owner was not able to prove that the failure to maintain the drainage swale caused her lot to be damaged, but she did prove that the association was not maintaining the drainage swale. As a result of that, the court issued an injunction and told the association, "You need to maintain the drainage swale." And awarded the homeowner, the lot owner, the attorney's fees for bringing that action.

Even though the association didn't have to pay damages, they had to pay quite a bit in attorney's fees based upon that action. A unit owner prevailing ... Let's look at the green. A unit owner prevailing in an action between the association and the unit owner under this section, in addition to recovering his or her reasonable attorney's fees, may also recover additional amounts as determined by the court to be necessary to reimburse the unit owner for his or her share of assessments levied by the association to fund its expense of the litigation.

Takeaway there is, if a unit owner sues the association for failing to maintain and repair, and the association passes on an assessment to defend that litigation, the unit owner, if they prevail, is going to get basically credited back for those assessments. Let me end my screen share here for a second.

Alan Tannenbaum:

Jon, just to make it clear, even though 718.303 talks about individual board member liability, there's other sections of the Condominium Act which really strictly limit potential board exposure. To use the example of the Surfside situation, I think that the association under its liability policy is going to have significant exposure under that policy against unit owner claims for their losses, including loss of life and so forth.

It's very questionable whether an action against the individual board members of that condominium association would be successful because the board members were acting on engineering reports. They had actually assessed the owners to undertake the repairs, would be very difficult to prove a breach of fiduciary duty on their part and expose themselves to personal liability. I wanted to say that before any of the board members who may be on this call are saying, "Gee, with that statute, I ought to get off the board."

Because another section of the statute strictly constricts the exposure of individual board members. Frankly, unless you're stealing from your association or giving sweetheart contracts to your brother-in-law or using your power in any kind of vindictive way, mere failure to assure that the association undertakes repairs probably does not open up an individual board member to liability.

The association might have significant liability, but not necessarily a board member. Jon, did you conclude your section? I don't know if you had anything else to add.

Jon Lemole:

That was basically it. Now we understand what the obligation on the association is. We're going to probably take a look here what happens when the association doesn't perform or meet its obligations in a reasonable way. I'm done with the initial primer on association obligation to maintain and repair.

Salvatore Scro:

Okay. Thank you, Alan. I've been allocated about 10 minutes for this. I could go on forever, but let me just touch on some of the basic parts of this. As a result of what's happened in Miami with the collapse of this condominium, I've received a lot of calls. I'm sure Alan has and Jon has, from associations concerned about the structural integrity of the building, rightfully so.

Today it may not be an issue for many of them, but as a result, especially with those that have turned over and we have investigations, over time, if these issues aren't addressed, they can become problems. That's what we do. We represent associations to inspect, analyze, address these construction defect issues so that they can be remedied.

With regard to the insurance, for the managers out there, I'm sure that the majority of you, if not all of you, handle the insurance policies, obtaining them, renewing them. You will be receiving the applications. Those applications have various questions on them. Usually, the applications are provided to the manager from the agent that you're getting the insurance from. My advice is read it, read every question because they fill in what they believe to be the factual situation.

Many policies, if there's a misstatement or an untruth or something that was known that was not disclosed in the application, that would be a cost for the insurance company not to insure. I've seen it. I've represented associations where the application stated that a policy was never canceled a revoked. That was not the case. The owners did not fill out that application, the agent did, but they signed it.

They took advice from the agency. They've signed it and ultimately a collapse claim was in jeopardy because of that application. The policy renewal disclosures, those are important. If you don't know the condition, that may not be enough. If you do not investigate it, sometimes the insurance companies will. The insurance companies will come out there, send someone out there. You may know it. You may not.

They may come out and do an investigation and the next thing you know is you get a letter stating that, "We are canceling your insurance because of the condition of your building, or we are canceling your insurance for this other reason, or we are not renewing your insurance." How many of the managers out there have gotten a notice from their insurance company that says, "We won't be renewing your policy unless the stucco cracks are filled and the buildings are painted."

That is one thing that you need to be aware of, that sometimes stucco cracks are not just the drying cracks of stucco over time. Sometimes if you find yourself with uncontrolled stucco cracks, significantly large stucco cracks, these are things you should be investigating. You should be calling in somebody to say, "Let's investigate this." Especially if you're a building under 10 years old, you really want to investigate it.

Or if it's been a repair job that's under 10 years old, you really want to investigate it because you may have a claim against the contractors or the developers, whoever did that work, that may be resulting in a construction defect. The other thing you want to do is you want to look at your policies. Just don't accept the fact that you have a policy and it covers things.

I've seen problems with policies, from those that cover the contractors to those that cover the associations. You want to look at where's the venue? Where is it that I need to address this issue if there's a problem? Some of you have larger associations and you have a Lloyd's of London policy. You might want to read it because it probably calls for these issues if they have to be litigated to be addressed under New York law, in New York.

There's a difference between what New York would require and what Florida would require for example. What is the obligation in that insurance policy? When it comes to the condition of the buildings and what you're insuring and what may or may not be covered, you want to look at those things. The other issue with policies and not addressing the conditions of the building is that if you do have a claim, you will submit it to your insurance company.

They aren't always out there just to pay these claims. They're going to look at their policy very thoroughly, and they're going to send you what may be a reservation of rights letter. They're going to tell you what they cover, but 90% of the policy is what they don't cover. A lot of times they don't cover faulty workmanship, material, construction, installation. I'm reading from a reservation of rights letter. They don't cover from various subs.

They don't cover deterioration, depletion, rust, corrosion, wet or dry rock. Now, they may cover that if it's hidden. There are exclusions and then there are exceptions to the exclusion. Certain weather events they may not cover. It's important that you read those policies, because what will happen is you'll put in your claim and you're going to get a letter back saying it's denied.

I'm going to share for you with these older buildings you really need to sometimes take a look at what's out there and see. For example, you can see ... I'm assuming ... Jon, tell me if I'm wrong, but you're looking at a picture of a balcony out there. Is that what you see?

You're looking at a balcony out there and next, this is a stack condominium. This one is an older building. These balconies look to be in okay condition. I mean, but what's going to happen is ... Let me see if I can get there. Let's see, where did it go? Why is it not moving? Are you seeing ... Nothing changing. Why is this happening? Okay. In that area there, you're seeing that there is an area of the balcony that we're going to concentrate on here.

Here we go. This area of the balcony that you see shows a hole in the structure, the ceiling above the balcony. Here's a closer look at it. What you're going to find is this is the condition under there. This is what's holding these things up. You're seeing the structural steel that is supposed to be holding this balcony up, that it's not even there. This is what you have with regard to those ... Stop the share here. With regard to the conditions.

It's not just enough to paint the buildings. It's not enough to just look at these buildings. No. At the time of construction of this building, it's important to have an engineering study because what may be disclosed in the engineering study is that there are defects in the construction that are going to allow water intrusion. These are covered areas, the structural steel. There's no reason they should be rusting like that.

It's important with any new building to look at that, because over time, what is sold to you as a beautiful, nice project with a beautiful clubhouse area and pool is something that underneath you're not seeing what the issues are. Unlike a person, when you're having problems inside your body you might feel pain, the people in Miami know that they aren't feeling any pain until it's too late.

That's important. It's important to address the buildings, have them inspected, be proactive about that. I will end that part of it with that.

Alan Tannenbaum:

The question was asked about the policy defenses in the Surfside situation. Those policies will have an exclusion for long-term construction defects, so I'm sure the insurer will defend the case based upon the fact that this was not a spontaneous occurrence. This was a result of long-term deterioration of the building, and therefore not covered under the policy. They probably would also establish a defense that the association making application failed to disclose these engineering reports that they had.

Again, the practicality is knowing that that case is going to end up in front of a circuit judge in Dade County, who is not going to give the insurance company a summary judgment, and might eventually end up in front of a Dade County jury. I'm very sure that that case is going to end up settling, even though the insurer on its face, may have some valid defenses. Before I get into termination, there's a few questions that have come by.

Louise has asked, "What if the board tries to address issues, hold votes, but only 74% of the owners approve, can the owners who vote to sabotage the actions be held responsible in some way?" Usually, a owner vote is not required to undertake maintenance and repair obligations and pass a special assessment for the undertaking of those. I don't know what vote that you're talking about. The way a repair worked is the board gets the investigation done, maybe it gets a determination from an engineer as to what repairs are necessary.

The owners need to be noticed at any meeting where a special assessment is going to be considered, but other than have a say at the meeting, it's actually up to the board to vote on passing that special assessment. The owners under most condominium documents should not be able to block the board going through with necessary repairs. Thomas asked, "Will the 40-year requirement for inspections be adopted statewide and how soon may it be adopted?"

I don't know if that's going to occur. Right now it's only in Dade County. I think waiting 40 years is too long. I would like to see it at a minimum have to occur after 20 years. There are groups that actually get an engineering inspection done every few years on their own, so having regular engineering inspections is the best way to go, but when the legislature will act, I don't know. 

Salvatore Scro:

There was one question out there about, does what we viewed just now constitute a criminal liability? I think that had to do with the photos we showed just now of the structural steel. I think that that's not really a question that we could answer specifically. There are many factors that would go into what would be criminal liability. We don't really address the criminal statutes. We do know that if you're aware of a problem, you do have the obligation to maintain. I think Alan can address that more because that issue was brought up in this Colony case.

Alan Tannenbaum:

Probably not there being criminal liability. Unless you're a board member stealing from your association or using your powers vindictively, I don't see a base for either civil or criminal liability on the part of a board member. The last question I'll answer because I want to get into the termination side, somebody asked, "Can a board member still be sued even though there's not liability? Is there exposure for attorney's fees and costs?"

Frankly, that's the main reason why every board should have a fiduciary liability insurance, mostly to cover the defense of an action. Most of the actions are not going to be successful, but it is going to cost money to defend them. That's primarily why you need that insurance in order to cover the defense cost. I'm going to get into termination. The statute in Florida is very cumbersome when it comes to termination. It's not easy to terminate a Florida condominium.

I want to go through fairly quickly the processes. It's all covered under 718.117. It's a fairly likely statute. There's one section that talks about termination because of economic waste or impossibility. It's a very difficult threshold to terminate under that portion of the statute, because the estimated cost of construction or repairs actually has to exceed the combined fair market value of the units after completion of the construction or repair.

It's very doubtful whether any condominium in Florida is going to meet that threshold. The second requirement. It has to be impossible to operate or reconstruct the condominium in its prior physical configuration because of land-use regulation. That particular section of the statute, economic waste or impossibility is likely only to be utilized where let's say a condominium is substantially destroyed in a hurricane. You'll have termination under that section.

That only requires if you do it under that section, that the amount of the membership vote is what's required in your documents to amend the documents. It might be 75% or less, or if there's a specific termination section in your documents. Most groups will not qualify for termination because of economic waste or impossibility. In a project termination, most groups are going to look at 718.1173. This is where a board of director submits a termination plan.

First has to be cleared by the division of land sales and condominiums, but it requires 80% of the unit owners agreeing to the plan of termination. It's not 80% of the voting members at a meeting where a quorum is present. You're talking about a full 80% of the membership have to agree on the termination. It's a very high threshold in order to undertake termination.

The real problem with the statute is that even with greater than 80% approving the termination, 5% of the membership can block the termination. In the condominium I talked about before, it was a 54-unit condominium in Tampa. The bulk of the membership wanted to terminate, collect a large check rather than pay $30,000 a unit to repair. There were more than 5% of those 54 owners who did not want to terminate. Of course the same people didn't want to pay the assessment either, but that's besides the point.

Those few owners were able to block the entire termination. Now, even if there's an impetus to terminate, you have the approval of more than 80%, there's a lot of due process requirements that are built into the statute. The mortgage holders are entitled to be protected. All of the obligations of the association have to be taken care of and accounted for, and you have a big problem with the provision in a termination plan of how the money in the eventual sale is going to be allocated.

There are a few different ways under the statute that valuation is determined. The key is that all of that is subject to challenge by any objecting owner, which then will send the termination valuation into mandatory arbitration. Then you have a full trial on whether the valuation was appropriate, the determination of how much each owner will end up with upon termination that will be entitled to. It may take quite a long time.

We did a termination where it was a 20-unit condominium, all the owners agreed to terminate, and it still took six to eight months to complete the termination process with really no objectors. The process will likely ... If there's anybody objecting, the process could take a year, a year and a half, or two years. Here's the problem. While the termination is proceeding, the association still has an obligation to maintain and repair.

It creates a situation where there is this period of time where the association still has some substantial exposure and it's going to take time for the process to conclude. There also may be a period of time where the units are no longer occupiable and the sale hasn't closed, which may take several months. You may have a situation where people are going to have to be housed or find housing and where they still haven't realized the proceeds of the termination.

There's a lot of issues in carrying it out. I personally think that the statute needs some revision. I think the percentage maybe needs to drop down from the 80%. I think that a higher percentage would be required to block the termination, but right now, 5% of the membership can block it. I think there needs also to be greater protection for people who are caught in the middle before the termination actually closes of how they're going to be taken care of as far as their living conditions and so forth.

It's quite a cumbersome statute. Now, there is a one-paragraph statute, 718.118, and it's called Equitable Relief, but I call it a judicial termination. This is the way the statute reads, "In the event of substantial damage to, or destruction of all, or a substantial part of the condominium property and if the property is not repaired, reconstructed or rebuilt within a reasonable period of time, any unit owner may petition the court for equitable relief, which may include termination of the condominium and a partition."

Now, it seems like that statute, again, was created for a hurricane situation where a substantial part of the condominium was actually destroyed, but it talks about substantial damage to, or destruction of all, or a substantial portion of the condominium. Now, in the Colony situation, you had the condominium buildings were under state of disrepair. A unit to actually used that statute, 718.118, brought an involuntary termination proceeding.

Again, there was no major hurricane damage, the buildings were just in disrepair and the owner was able to successfully terminate that condominium by judicial decree. You may see under 718.118, where you have a situation like the Surfside situation, where the building is in the state of disrepair, the board is not taking appropriate action. You may get into circumstances where 718.118 judicial termination is going to be utilized by a unit owner to request a circuit judge to actually terminate a condominium where the board is not following through on its maintenance and repair obligations.

Now, in the Colony it was pretty drastic. The buildings had deteriorated to the point where they couldn't be occupied anymore and the board was taking no action to repair. In fact, in a fairly unusual circumstance, the president of the association went to the town, invited the town out to do inspections, hoping that the town would actually condemn the buildings. The reason that occurred is the association could not garner the 80% vote that was required to voluntarily terminate the condominium.

It ended up actually the association through its court cooperated with that one owner who filed the judicial termination. They joined in that action and they circumvented the statutory requirement for approval by utilizing a judicial determination under 718.118. You may see more of those efforts coming, but right now the termination statute is difficult to work with, but eventually every condominium in Florida is going to reach the point.

It may occur this year or five years from now, or 10 years from now, or 20 years from now, where the cost of repair is going to be that excessive and the exposure of the association is going to be that great, or the building's reached a point where they're uninsurable because there's no insurance company, based upon the status of the condition, who's going to be willing to insure that building. That there's really going to be no choice on the part of the association, but to consider termination.

It ends up being that rather than face an assessment that may be six figures per unit owner, that it's going to make economic sense to terminate that condominium, sell it to a new developer who's likely going to raze the building, raze being R-A-Z-E, not R-A-I-S-E, raze the building and build a new development on that property. The proceeds of that sale will then be distributed among the membership who will then have to find a new place to live. That's basically how termination works.

What all these buildings are facing is undertake the proper engineering studies, listen to what the engineers say about what's necessary in order to prolong the building and make it safe, and either undertake those repairs and assess the owners to do so, or consider the possibility of termination. Then you get into that very difficult period of, what does a board do as far as maintenance and repair and occupancy while the termination is proceeding?

Again, the termination could take a year, a year and a half. There may be some statutory amendments that need to be made to the termination statute to make it a little bit more user-friendly on how it's undertaken. Let's see if we have any questions that we can face. There's a question from Christopher, "How about loss of property due to dissolution of the condominium?" Again, there should end up being an upside. I don't know what property Christopher you're talking about.

The question about insurance companies taking a hit, all of the boards and management know that there's just been a tremendous increase in the premiums that you're facing. Unfortunately, I think the Surfside situation is just going to make your insurance situation even the more difficult. That's why you're going to find, and based upon what Sal indicated, that you may find that there's more insured ... insurance companies are going to step up and refuse to actually issue insurance policies to some of these older properties, which is a problem. Let me see.

Michelle:

Alan, there's a question from a property manager that she wants to know what is the like ... Basically ... I'm sorry, I'm trying to find it now. From Pat, it's, "What is the responsibility of management company to recommend qualified vendors and follow through on work being performed?"

Alan Tannenbaum:

Okay. Any question that starts as, "What is the responsibility of a management company?" I always hesitate to answer that because their management contracts are written so wisely that management companies identify themselves against most kinds of liability. It certainly is part of a duty of a management company to help the board locate vendors, certainly to advise the board on the best way to undertake it.

I mean, one of the services that we provide as construction lawyers is that management companies bring us in to support the board in the contracting for repairs, for enforcing of the contract while repairs are going on, and if a repair job goes south, to help the board enforce the project. That is generally a role that the management company's taking on. What legal responsibility they have is dependent on what their contract would indicate.

Michelle:

This could be a question for either Sal or Jon. What is the description of the inspection that you ask for structurally maintenance-wise and which licensed professionals can do these? Then somebody else asked if they know of some issue, what is the obligation of the engineer to report the issue?

Salvatore Scro:

Well, as far as the type of inspection, it all depends on what you're doing. If you have a newly constructed condominium or homeowner's association that was turned over, you would want an investigation by a qualified engineer to do an investigation of the common elements. Now, would that start out with a visual inspection and then possibly a destructive investigation? None of you can really look at something and say what is beneath it.

We don't have that X-ray vision, so sometimes ... And I actually just received a call today from someone who is in the insurance business, who has an issue with a home that has water intrusion. They're aware of what goes through with this issue and the problem is, is that you don't really know where problems are coming from. If you see a symptom, if you have water intrusion or something, then you know, "Okay. There's a problem. I need to find out what the answer is."

You would ask for possibly ... And this is why, if it's something where you can address it to hold the potentially liable parties responsible within the statute of limitations or statute of repose, we always like to be involved in something like that, because we are able to direct you to the appropriate engineer. What it's called, there really is no name for it.

If you're not certain, then you should contact someone to help walk you through it. Don't take it on alone is always our advice, because sometimes you bring in somebody and they're going to give you an opinion. You may bring in somebody that's a roofer, but they're going to tell you about roofs. They're not going to tell you about the framing that may be causing the problem or other issues that are causing the problem.

Now you have an opinion in there that's going to hurt you if you don't know who the proper person is to bring in. That's one issue. I did see a question here that was, "Say the pool is an amenity and is leaking and to repair it is very costly. Can the board just decide to close the pool without an owner vote?" That was from George. Thank you, George.

No. I mean, the pool in all likelihood is an amenity that to take it out or to discontinue it would be a material alteration and cost is not a determining factor. Although it does play a role as Alan talked about, whether or not that cost would be considered economic waste. Sometimes you need to put in a whole new pool. To just say, "No, we're just going to close it up unilaterally." I think would be a problem.

Jon Lemole:

Hey, Sal, I mean, just to jump in and take the next step on something you had said about engineering. Folks, we're focusing on aging buildings today, and finding out whether there are things that need to be addressed or should have been addressed, but there's a huge opportunity and I bet there are some folks on here who are in newer buildings. It always struck me as odd. If I bought a house, I'm going to get a home inspection done.

I'm not going to have the seller give me their inspection or have the seller do an inspection report and hand it to me. For those condominiums going through turnover, think about what typically happens under the statute that the developer gives you an engineering report and says, "Here's our engineering report. The building's great." That's not always the case.

I'm not saying that it's not the case, but sometimes there are issues, which if you had uncovered them during or shortly after turnover, you'd be able to address them early on, perhaps get the developer to pay for it and not exacerbate a problem, or find that the problem over 10 or 15 years has been exacerbated and now you have a really big problem to deal with and no recourse.

I just wanted to take a second to underscore that the real importance here, for even newer condos, when you go through turnover and that board takes on the responsibility for maintaining millions and millions of dollars of property ... And these folks may be well-meaning educated people, but don't know much about roofs and stucco and building, waterproofing and roads and parking lots and asphalt and drainage systems and so on and so forth.

There's a huge opportunity to take and get an independent forensic engineering report and make sure you have a baseline of knowing what your building may have to deal with down the road. If there are problems, you can address them now, possibly get compensation for them, that they don't become bigger problems in the future and result in this situation where now you have a huge assessment to fix something that could have been fixed years ago, and what are we going to do about it?

Now you're dealing with that situation of an assessment versus termination. Don't overlook that possibility for you folks that are in newer buildings.

Alan Tannenbaum:

Good point. Folks, we're going to stay on because I know there's a lot of questions that haven't been answered yet. We'll stay on for a few minutes. Darlene had asked a question, if she's still here, "What inspection right