Attention to detail is key when negotiating vendor contracts for community associations. A vendor proposal lacking specificity that is signed by a manager or board constitutes acceptance of the terms laid out by the contractor and creates a binding contract. In this event, associations are at risk when disputes and disappointed expectations sour the relationship between the board and the contractor. The good news is that with some careful, pre-negotiation planning and a checklist of key contract terms and the assistance of legal counsel, a manager and board may secure a contract that best protects the interests of the association. This way the risk of costly litigation will be significantly reduced and the association will be protected should a vendor stray from its obligations or an issue arise that was anticipated and planned for in the written contract. Important clauses to be aware of include, but are not limited to:

Scope of Work:  The contract should always include a detailed description of the work to be performed so both parties know exactly what to expect.

Timing & Payment:  The contract should contain the start and finish dates for the work, the schedule for completion, the contract sum, and any payment terms. The association should make sure it can withhold payment or setoff payments owed if the work is defective.

Warranties:  There should always be a warranty for work and materials provided by the contractor. The length of the warranty will depend upon the particular industry. Also, any manufacturers' warranties should be signed over to the association upon completion of the project.

Insurance:  The contractor should always have insurance and the contract should specify the types of insurance and amounts required. A construction contract will often require builder's all-risk coverage, commercial general liability insurance, automobile insurance, contractual liability coverage for indemnity obligations, workers' compensation, and employers' liability.

Indemnification:  There should be an indemnification clause requiring the contractor or vendor to indemnify the association against claims of damage or injury resulting from the contractor's conduct.

Attorney Fees:  In the event of a dispute, the contract should provide for an award of attorney fees to the prevailing party. If the association is not entitled to attorney fees under the contract, the association may find that the attorney fees expended in pursuing a breach of contract are equal to or greater than its damages.

A checklist of key vendor contract terms will assist boards in negotiating better contracts. Legal review of vendor contracts is prudent to assure that the agreement is complete and to customize the agreement to the association's advantage based on the particular materials and services being provided.

One of the primary differences between a condominium and homeowners' association relates to the ownership of common elements.  In a condominium association, the unit owners each own an undivided interest in the common element property.  Accordingly, there is not a separate deed conveying the common element property to the condominium association.  In a condominium association when the developer conveys a unit to a buyer, the developer is also conveying an interest in the common element property to each unit owner in conjunction with the deed to the unit.  However, in a homeowners' association, the association owns the common elements.  Accordingly, the developer of a homeowners' association must separately convey the common elements to the association.  Therefore, separate deeds for the common element property from the developer to the homeowners' association must be prepared and recorded.

It is important to determine whether the common elements and open space in your community have been conveyed to your association.  Fox example, when overlooked, issues may arise with respect to the taxation of common element property.  Common element property is taxed in a homeowners' association by including the interest of each unit owner in the common element property (by virtue of their membership in the association) as part of the determination of the assessed value of each unit.  We have encountered separate tax bills for common element property in various communities as a result of the failure of the developer to properly convey the common element property to the homeowners' association.

The conveyance of common elements and open space to the homeowners' association typically takes place during your community's transition process from the developer to the unit owner controlled homeowners' association.  A review of the final recorded development plans, tax records and recorder of deeds records is necessary to determine whether the developer has properly conveyed the appropriate real estate parcels to the association as required under the association's governing documents.

Our firm has extensive experience in providing associations with the information they need to successfully navigate through the transition process.  Our involvement in the transition process generally includes working directly with the Board of Directors or its duly designated transition committee, the association's engineers, accountants and the local municipality to complete the transition process and to protect the association's rights with respect to any potential claims in this regard.

If you have any questions or concerns in connection with the association's ownership of its common elements or transition in general, please feel free to contact us.

On July 6, 2010, Governor Edward G. Rendell signed into law the Permit Extension Act (S.B. 1042, Act 46), which Act provides relief to those owners and developers with projects that have stalled in the current challenging economic climate.

The Act covers state and local approvals for development projects in the Commonwealth of Pennsylvania, including planned communities and condominium associations.  Subject to several exceptions, discussed below, development approvals, permits, agreements, authorizations and decisions in effect January 1, 2009 or after are extended to July 1, 2013.  The extension is automatic, except in the City of Philadelphia, where the approval holder must first give notice to the applicable City agency.

The Act also extends the time frame within which to convert convertible real estate or to withdraw withdrawable real estate in a condominium or planned community.  However, it does not appear that the Act is intended to apply to additional real estate.  While the Act does make reference to the entire Pennsylvania Uniform Condominium Act and Pennsylvania Uniform Planned Community Act, when it discusses its applicability to specific provisions, it specifically references only convertible and withdrawable real estate - not additional real estate.

If you manage an association that has a convertible or withdrawable real estate deadline approaching and you have questions, we recommend that you contact your legal counsel regarding the potential implications of this Act. 

It is finally the evening of your Association's annual meeting to elect members to the Board of Directors. You have been working hard to assure that tonight will go off smoothly and without a hitch.  You sent your request for nominations out to the entire community along with the notice of the meeting weeks ago.  You have received the candidate bio sheets and provided them to all of the members of the community along with a second notice of the meeting.  You have even prepared absentee ballots (if specifically authorized by your documents) or directed proxies identifying the names of the candidates.

Now, just as the candidates are introducing themselves, someone stands up and asks, "are nominations from the floor allowed?"  All eyes turn toward you.  What do you do?  First and foremost, you turn to your Association's Governing Documents to determine whether they specifically provide for nominations to be submitted from the floor at the election meeting.  Often times, the language concerning nominations may be very complicated and you may wish to seek an opinion from your Association's legal counsel prior to the election so that you have a clear understanding of this issue.  Often times, however, the documents are silent regarding this issue, which is the reason that this subject has been selected for our November Newsletter.

We recommend that the Board of Directors establish a Policy concerning the acceptance of nominations from the floor when the documents are silent on this issue.  This Policy should be established by the Board of Directors and adopted by a Resolution of the Board.  In this way, the Board of Directors may avoid the appearance of a conflict of interest when determining whether to accept nominations from the floor.

Your Policy may take into account the number of vacant seats as compared to the actual number of candidates running.  For example, you may only wish to accept nominations from the floor when the number of vacant seats is equal to or less than the number of candidates running.  If you would like us to review your Association's Governing Documents to help determine whether nominations are required to be accepted from the floor or to help develop a Policy for your Association, simply contact our office.  As most election meetings occur at the end of the year, now is the ideal time to take care of this housekeeping matter to assure that all of your hard work at the next election meeting pays off. 

The distinction between employee and independent contractor can be hazy, however, misclassification can have serious consequences.  As part of the stepped up enforcement of workplace laws, the U.S. Department of Labor plans to hire 100 additional investigators to target employers who misclassify employees as independent contractors.  Misclassifying employees as independent contractors can be costly with the employer being potentially liable for unpaid employer taxes as well as a portion of both the income tax that should have been taken from each employee's paycheck and the employee's share of Social Security taxes and Medicare taxes.  Misclassifying employees as independent contractors can also violate other laws such as the Fair Labor Standards Act's minimum wage and overtime requirements.

Many community associations classify maintenance personnel and other workers who do various jobs for the Association as "independent contractors" to avoid withholding federal income tax and dealing with unemployment, workers' compensation and other employment issues.  Associations are normally under the belief that simply classifying an individual as an "independent contractor" insulates them from any potential liability.  However, simply calling someone an "independent contractor" doesn't mean they are, in fact, an independent contractor. Many other factors must be analyzed.

Generally, employees are subject to their employer's right to control how, when and where they perform their work.  Independent contractors are not subject to control over the manner in which they deliver services.  More specifically, the IRS considers factors in three categories, including:

1.      Behavioral Control - If an employer trains and directs work, including hours of work, tools and equipment to be used and how the work is to be completed, the worker is likely an employee.

2.      Financial Control - This factor includes how the worker is paid, whether the worker may work for others at the same time and whether the worker can incur a profit or loss.

3.      Type of Relationship - A contract that states that a worker is an independent contractor is not enough to determine the work relationship.  If a worker provides services that are a key aspect to the business and his work is presented as that of the employer, the worker is more than likely to be considered an employee.

Within these three categories, you must look at the following criteria to determine employee or independent contractor status:

The existence and specific terms of a contract.

When and where the work is performed.

Who owns the tools and equipment that are used? 

What degree of instruction is given to perform tasks?

Is the worker subject to a performance evaluation system?

Is training provided to the worker?

Are expenses reimbursed?

Is the worker permitted to provide services to others?

What is the method of calculating payments to the worker?

Classifying workers can be challenging. We encourage you to discuss this issue with legal counsel in order to avoid potentially expensive disputes.

Every year since he came home from serving in World War II, John Smith has placed a sign in his front lawn to show his support for the political candidate of his choice.  This past summer, John and his wife sold their house and moved into a retirement community association.  Now with the annual political season approaching, John has received, much to his displeasure, a notice from his community association telling him that the political campaign sign he has been displaying is prohibited and that he has to remove the sign within the deadline or face fines and other sanctions.  Irritated, John phones his community manager, certain that this must be some kind of mistake.  After all, as an American citizen, John knows he has a right to free speech.  It's his right to display political signs!  Isn't it?

As a community manager, you may have been faced with this situation before or it may emerge for the first time during the next election season.  There can be no question that people who display political signs feel strongly about them and that they often resent being required to remove those signs from public display.  Yet, the governing documents of community associations often prohibit the public display of signs, including political campaign signs.  Is such a prohibition an unconstitutional limit on the right to free speech?  The answer may depend upon the facts of the particular case at hand.

In one such case decided in 1996, the Pennsylvania Superior Court issued a ruling upholding a community association's prohibition on the public display of signs from windows in the case of Midlake on Big Boulder Lake v. Cappaccio.  Although unit owners claimed that the prohibition on signs violated their right to free speech, the Court disagreed and ruled in favor of the association.  In its decision, the Court observed that "t]he courts of this Commonwealth have vigorously defended the rights which are guaranteed to our citizens by both the federal and our Commonwealth's constitutions.  One of the fundamental precepts which we recognize, however, is the individual's freedom to contractually restrict, or even give up, those rights.  The [Unit Owners] contractually agreed to abide by the provisions in the Declaration at the time of purchase, thereby relinquishing their freedom of speech concerns regarding placing signs on this property." Emphasis added.

The decision of the Court in the Midlake case demonstrates the balancing that courts use when the rights of individuals are in direct conflict.  In the Midlake case, the balance tipped in favor of the Association's prohibition on signs, while in other cases, the courts may find in favor of the unit owners' right to freedom of speech.  The law regarding First Amendment rights is an especially impassioned area of law and when hearing such a case, the courts may be unwilling to adopt a hard and fast rule and may prefer to take each controversy on a case by case basis. In the event that you should have a dispute of this kind arise in your association, you may wish to seek advice tailored specifically to the facts involved in that particular dispute from the association's legal counsel.

We hope you enjoy your subscription to our Newsletter and we welcome any suggestions you may have for topics you would like to see in a future issue.

As a professional Property Manager, I am sure you have seen this scenario before.  You are faced with a chronically delinquent unit owner who has made no good faith effort to bring their considerably delinquent account current.  They frequently bounce checks or specific bank account information is not available, so a writ to attach their bank account is not likely to result in the recovery of monies due to the Association.  What's the Association to do?

Your legal counsel has obtained a title report for the delinquent unit which reveals a significant amount of equity in the property.  As a result of the property's considerable equity, the Association can proceed with a foreclosure action.  Problem solved.  The Board approves the foreclosure action and your legal counsel moves forward to secure a judgment and schedule the unit for a Sheriff's Sale.  On the eve of the Sheriff's Sale, the Board instructs you to go through with the sale, but under no circumstances does the Board want to take ownership of the unit.  Herein lies the problem, as these instructions are incompatible.

As legal counsel to over 200 community associations, we go to great lengths to assure that our clients have a clear understanding of the foreclosure process and the possible outcome of a Sheriff's Sale.  One such outcome is that the Association takes title to the unit and recovers the delinquent assessments through resale of the unit.

Ideally, the foreclosure of the property will result in the unit owner's payment of the past due assessments or a third party will purchase the property at the Sheriff's Sale for an amount sufficient for the Association to recover all past due assessments. However, in the event that the unit owner does not pay and the matter proceeds to Sheriff's Sale, there is a real possibility that a third party may not purchase the property. So what happens?

To the extent that there is no willing third party buyer at the Sheriff's Sale, the property is "sold" to the Association by the Sheriff for "costs." The "costs" of the Sheriff's Sale vary widely from county to county, as does the timing and method of payment required from the Association. However, the Association may then proceed to recover the past due assessments and costs incurred with respect to the Sheriff's Sale of the property by cashing in on the Unit's equity through the resale of the property. This is why it is critical that the Association confirm that there is sufficient equity in the property prior to commencing a foreclosure action. Legal counsel should be consulted in order to evaluate the priority of the Association's lien for unpaid assessments and to determine if the extreme measure of foreclosure is appropriate on a case by case basis. Finally, the Board must have a clear understanding of the possible outcome of the Sheriff's Sale and be committed to seeing the process through to conclusion.

In response to the recent downturn in the housing market, the Federal Housing Administration ("FHA") has implemented new requirements which condominiums must satisfy in order for the condominium units to be eligible for FHA mortgage insurance.  The "spot loan" approval process is scheduled to be entirely phased out by February 1, 2010.  Therefore, absent any postponements of the phase-out deadline, after February 1, 2010 condominium units will only be eligible for FHA mortgage insurance if the entire condominium project receives FHA approval and, for the first time, lenders may now determine whether a particular condominium project meets the FHA requirements.

As part of the approval process, condominium associations are required to provide lenders with recorded copies of the condominium's legal documents, including the Declaration.  As such, it is important that you have a recorded copy of all condominium documents.  If necessary, your association's legal counsel can assist you in obtaining a recorded copy.

In addition, there are more specific requirements which condominiums must meet in order to be eligible for FHA mortgage insurance, including, among other things:

• no more than 15% of the total units in the condominium may be more than 30 days delinquent in the payment of assessments;
• the association's budget must provide for the allotment of funds in a specific manner, including devoting a minimum of 10% of the entire budget to reserves; and
• any condominium with more than 20 units must maintain fidelity bonds or insurance to cover directors, officers and any other persons who are responsible for handling the association's funds in an amount equal to three months total assessments on all units plus the total amount of reserve funds.

The current provisions of your association's governing documents may conflict with the new budgeting and insurance requirements and any issues with delinquent accounts could negatively impact upon the condominium's eligibility for FHA approval.  You may wish to consider having your documents and current delinquency policy reviewed by your association's legal counsel to address any potential problems which could prevent your condominium association from obtaining or keeping its FHA mortgage insurance approval.

Thank you for your continued subscription to our newsletter.  Please contact us with any suggestions for any topics which you would like to see in a future newsletter.

Illuminated plastic Santas, giant blow-up Rudolphs, thousands of twinkling lights . . . the holiday season is fast approaching and that means decorations may soon be adorning common areas, condominiums and homes within your community.  How should your association respond to the outdoor decorations homeowners may wish to display?

With respect to the common areas, it is important to remember that condominium and homeowner associations are made up of individuals with very diverse backgrounds and beliefs and this diversity must be considered and respected when considering holiday decorations.  Moreover, the Fair Housing Act and other fair housing laws prohibit discrimination on the basis of religion.  While there is certainly nothing wrong with decorating during the holiday season, associations need to be mindful that the holiday displays do not give the impression that the community favors one religion over another.  Therefore, when decorating the common areas, the association should consider using holiday decorations that tend not to pertain to a specific religious faith.  If an association decides to exhibit religious symbols such as nativity scenes or menorahs in a common area, it should give equal treatment to all other religious affiliations.

The Fair Housing Act restrictions do not apply to exterior religious displays by private homeowners.  However, your association's governing documents may prohibit holiday decorations altogether.  If your association does ban holiday decorations, it is essential that all decorative displays be prohibited.  In other words, you should not permit the display of holiday decorations for one holiday and then prohibit the display of decorations for other holidays.

While holiday decorations may be permitted by your association's governing documents, we recommend that associations develop and adopt reasonable rules which address size, illumination and time restrictions.  Typical holiday decoration rules should address how soon before a holiday such decorations may be displayed and how long after the end of the holiday the decorations must be removed -- otherwise, the association may be faced with holiday lights in the summer.  The size or total square footage of decorations should also be addressed.  In the event that the association does have rules and regulations in place, it should ensure that any holiday decorations follows the association's rules and regulations, receives the approval of the necessary committee, causes no damage to the common elements and does not create a safety hazard.

Happy Holidays from Marcus & Hoffman!

The answer is that the association already has an automatic lien against the unit.  Pursuant to the Pennsylvania Uniform Condominium Act and the Uniform Planned Community Act, the association has a lien against a delinquent unit which is always equal to the actual amount of delinquent assessments, late fees, fines, interest, costs and attorney fees owed from the time such amounts become due.  The lien exists by virtue of the recording of a declaration against the property at the time the condominium or planned community was formed.  The recording of the association's declaration constitutes the filing and perfection of a lien against all units to the extent that there are delinquent assessments due and owing to the association.  The lien is in place against a delinquent unit without the need to file anything with the Court.

So why does the association have to file a complaint against the unit owner if they already have a lien against the unit?  While the automatic lien protects the association with respect to a third party buyer's purchase of the unit from the unit owner, the association cannot execute on this lien.  The lien must be reduced to a judgment in order for the association to collect the delinquent assessments which it is owed outside the context of a sale of the unit to a third party buyer.  In other words, in order to attach a unit owner's bank account, execute against their personal property or foreclose upon their unit, the association must secure a judgment against the unit owner by the filing of a complaint in Court.  After securing a judgment, the association can proceed with the execution and collection of the delinquent assessments by the methods described above.

Notwithstanding the information above, it is important to note that the automatic lien for delinquent assessments is extinguished unless proceedings to enforce the lien are commenced within three years after the assessments become payable.  This means that the association must file a complaint within three years after the assessments become due.  Associations should be careful to pursue the enforcement of the lien by filing a complaint before the expiration of the three year period so that the association's lien is not extinguished.