The transition process typically begins when the Declarant-run Board of Directors is replaced by Directors elected by the unit owners.  However, transition is not simply the transfer of leadership.  This critical process continues as the newly elected Board starts to identify and preserve any potential claims that the Association may have in connection with the physical conditions of the common element property, the financial condition of the Association, and the management of the Community.

One of the first actions a newly elected Board of Directors typically undertakes is to hire independent and experienced legal counsel to coordinate the transition process.  Legal counsel can assist the Association with identifying and securing all documentation relevant to the creation, construction and operation of the Community from its inception to the turnover of control to the Association.  Additionally, it is the newly elected Board of Directors’ responsibility to determine whether the common element property has been turned over to the Association in the condition promised by the developer.  In this regard the Board will often retain an independent professional engineer to conduct a thorough inspection and evaluation of the property for defects and/or deficiencies in the construction of the Community.  In our experience, legal counsel’s coordination with the Association’s engineer is essential; counsel can ensure that the engineer understands the warranty provisions applicable to the property, and they can evaluate the findings of the engineer to determine whether the Association has any claims for the defects and/or deficiencies identified by the engineer.  Legal counsel also assists the Board in evaluating the Association’s financial condition which may include the hiring of an independent accountant to determine whether all required capital contributions and all regular assessments owed by the developer have been paid as well as whether all expenses paid out of the Association’s account were expenses of the Association as opposed to the Developer’s expenses. 

The results of the inspections and analyses conducted by the Association as part of the transition process must be evaluated by the Association to determine whether there are any potential claims which the Association should be pursuing on behalf of the Community.  While it is always the Association’s goal to resolve matters amicably with the Declarant, to the extent the Declarant fails to correct the construction defects and deficiencies identified by the Association, otherwise breaches its obligations to the Association, or is uncooperative with respect to the transition process, litigation may be the Association’s only recourse. Multiple questions arise as the Association navigates through the transition process.  What are the Association’s damages?  Who is responsible for the damages?  What is the likelihood that the Association can recover the damages from the responsible parties?  Does the Association have the right to pursue a claim for such damages?  What is the statute of limitations for pursing such claims?  If the Declaration does not correct the defects, who will bear the costs of repair?

All of the foregoing issues should be carefully evaluated by the Board and its legal counsel.  The Board must weigh the costs of pursuing such claims against the cost to the Association and its unit owners should they choose to correct the defects themselves.  While the transition process may be time consuming and often requires the Association to make certain expenditures, our experience has clearly demonstrated that the Association’s failure to properly evaluate the overall condition of the Association can be much more costly in the long term.  In the latter event, not only will the unit owners ultimately have to bear the costs of correcting the defects that should have been the responsibility of the developer, but the newly elected Board may find themselves exposed to liability where the prompt identification and assertion of such claims would have protected the interests of the Association and its unit owners.

If you have any questions about the transition process for your Association, contact Adam Marcus or Keely Carr at Marcus & Hoffman.

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. 

In last month's Newsletter, we discussed whether an individual owner sitting as a Member of the Board of Directors assumes personal risks associated with actions taken by the Board.   This edition continues with that theme by discussing the benefits and protections afforded to Associations by retaining a qualified expert when needed.

Have your Board Members ever asked you as a professional property manager whether a tree looks dangerous?  Have they asked you whether or not a retaining wall looks like it may be leaning a bit too far?  Have you been asked for advice on detailed topics like complex financial investing?

While property managers are experts in the field of property management, which encompasses many topics, managers are often asked for advice on complex issues outside their scope of expertise.  At those times, you may wish to advise the Board to seek the advice of a qualified expert in the field at issue, such as attorneys, engineers, accountants or other professionals.

There are many benefits to obtaining the advice of a qualified expert.  The Board is obtaining important information that will allow it to fulfill its fiduciary duty and make the best decision possible on behalf of the Association.  Further, as we discussed in the August edition of the Newsletter, a decision based upon the advice of a qualified expert protects the Association generally and the individual Board Members specifically from allegations or lawsuits alleging that they have failed to meet their fiduciary obligations.  And finally, an insurance company will have greater difficulty denying coverage in the event that a lawsuit is filed, when the Board has relied upon the advice of a qualified expert.

Often the authority to consult experts is granted by the Association's governing documents and, in the event they do not, both the Uniform Planned Community Act, at Sections 5302 and 5303, and the Uniform Condominium Act, at Sections 3302 and 3303, specially provide the Board with this power.  This power is retroactive and, as such, most likely applies to all Associations regardless of the date on which they were created.

We hope that this Newsletter is helpful to you and we welcome your feedback and suggestions, particularly on topics that you would like to see featured in a future edition.  Thank you.

With autumn fast approaching, many Community Associations are beginning preparations for their annual meeting and many face the reoccurring problem of a lack of candidates willing to run for the Board of Directors.  One concern which may keep unit owners from running, and which is often shared by sitting Board Members, is personal exposure to liability for actions taken by the Board.

As a general rule, Board Members are well protected against personal liability which may arise from actions they take while discharging their fiduciary duties as Board Members.  The sources of this protection often include the Association's governing documents, Pennsylvania law, including the Uniform Planned Community Act and the Uniform Condominium Act, and federal law, including the Volunteer Protection Act of 1997.

As permitted by Section 5302 of the Pennsylvania Uniform Planned Community Act and Section 3302 of the Pennsylvania Uniform Condominium Act, the governing documents of many Associations require that the Association defend and indemnify its Board Members.  The Governing Documents may also require that the Association secure Officers' and Directors' insurance.  Furthermore, pursuant to Sections 5303 and 3303 of these Acts, Board Members have no personal liability so long as they discharge their duties in good faith, exercising care to make informed decisions and act in the best interests of the Association.  Finally, some additional protection may be provided by the federal Volunteer Protection Act which offers protection, with some exceptions, to volunteers acting within the scope of their volunteer responsibilities.

Of course, the laws and governing documents cannot offer protection for actions that are criminal, such as embezzlement, or intentionally wrongful acts.  One of the best protections against personal liability is to consult the opinion of an expert when required.  We will discuss the Board's power to consult experts in more detail in our next Newsletter.  Ultimately, so long as Board Members make informed decisions and act in the best interests of their Association, the risk of personal legal liability is minimal and should not deter volunteers from running for election to the Board of Directors.