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

Alan Tannenbaum, Esq.:

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

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

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

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

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

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

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

James "Jim" Turffs, Esq.:

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

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

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

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

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

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

Cindy Hill, Esq.:

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

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

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

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

Jon Lemole, Esq.:

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

Cindy Hill, Esq.:

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

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

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

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

Jon Lemole, Esq.:

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

Alan Tannenbaum, Esq.:

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

Jennifer Hicks, Esq.:

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

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

Jon Lemole, Esq.:

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

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

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

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

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

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

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

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

Alan Tannenbaum, Esq.:

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

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

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

Jon Lemole, Esq.:

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

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

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

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

Alan Tannenbaum, Esq.:

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

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

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

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

Jon Lemole, Esq.:

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

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

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

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

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

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

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

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

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

Alan Tannenbaum, Esq.:

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

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

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

Jon Lemole, Esq.:

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

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

Alan Tannenbaum, Esq.:

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

Jon Lemole, Esq.:

Yeah, SIRS does not apply to HOAs.

Alan Tannenbaum, Esq.:

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

Jon Lemole, Esq.:

Thank you, everyone. Take care.