An Open Letter to the House Commerce and Human Relations Committee

Senate Bill 1310 is going to be reviewed by the House Commerce and Human Relations Committee on Wednesday.
My firm, Vial Fotheringham LLP, is going to try to become involved. Here is our press release and separately, a letter to the committee members. If any news outlets provide additional coverage, I will try to link to each as they come online.

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In an attempt to address the issue of homeowner association fines Senate Bill 1310 represents the beginnings of a promising effort. Hopefully, Senator Rice’s effort will also streamline existing government regulations, reduce red tape, and stop bureaucratic waste before it begins.
“The laws currently governing the community associations industry are incomplete. The limited Condominium Property Act only applies to condominium associations. Idaho corporate law is a poor fit for the industry as a whole,” says Jeremy Evans, an HOA attorney with Vial Fotheringham LLP.
Homeowner associations, in the meantime, have grown dramatically in Idaho, but largely been left ungoverned. The current legislation aims to address this issue, but only by regulating the way HOAs enforce their rules. “The problem with this approach is that it creates two competing sets of regulations. This is a bloated and inefficient approach which will incur greater expense, waste and red-tape for homeowners and lawmakers to deal with over time,” Jeremy added.
“Idaho has the opportunity here to be an example of smart, efficient, effective government by streamlining existing law into single framework that would serve all homeowner and condominium associations at once.”
Vial Fotheringham hosts regular training for association boards and managers, and is hosting a forum at the Centre on the Grove this Saturday, March 8th where Senate Bill 1310 and other HOA issues will be discussed.

Also, my open letter to the committee members (apologies in advance, it’s kind of dense reading):

In 2008, the Senate estimated that Idaho had “nearly 2,500 homeowner associations.” That number has surely grown in recent years, as this form of ownership is the fastest growing segment in the country. In Idaho, residents purchasing homes in homeowner association-run neighborhoods in the Treasure Valley are leading population growth statewide. Vial Fotheringham represents hundreds of associations in Idaho and throughout the region and we have observed this growth first-hand.

Homeowner associations are, for the most part, operated by boards of directors who are themselves elected volunteer homeowners. These boards provide a valuable volunteer service by assisting counties and municipalities in maintaining property values and regulating local neighborhoods pursuant to their recorded covenants. Homeowner associations and their boards deserve your attention and concern.

Senate Bill 1310 introduces, for the first time, legislation and regulation of the internal governance of all homeowner associations in Idaho, by addressing fines. Fines are a helpful tool for boards, because when used properly, they are a simple way to penalize and incentivize compliance with recorded restrictions. Without fines, a board must take each and every unrepentant violator to court to seek an injunction, or else the board must let the violations go essentially unenforced and abdicate the board’s fiduciary duty to enforce the restrictions. Many boards are frustrated by this stark choice. The legislature certainly could lend a hand in clarifying how fines ought to work.

Until now, many homeowner associations in Idaho have only been regulated by the Nonprofit Corporation Act. This is a poor fit as it does not address fines or the government function of boards, and does not clearly address membership arising from real property ownership. The limited Condominium Property Act (Chapter 15 of Title 55) applies only to condominium associations. On the other hand Idaho law already defines condominium associations as homeowner associations for lien purposes, and condominium boards face the same problems as other homeowner association boards. However, condominium associations already governed by the Condo Act may face provisions that conflict with the Bill.

For instance, §55-1513 of the Condo Act specifically authorizes hired managers to enforce violations in common area at law. In the past this has been interpreted to include by use of fines authorized in covenants. It is unclear how this would work under the Bill’s proposed limitations. Condominiums and traditional homeowner associations and other forms of common interest ownership should all be governed under the same law.

Idaho should adopt a comprehensive common property ownership bill that addresses all forms of common property ownership. While a good start, Senate Bill 1310 is focused on only one aspect of homeowner association governance. Focusing on only one issue at a time increases the risk that Idaho will end up with an unworkable patchwork regime of common ownership laws.

Our firm has represented homeowner and condominium owner associations in other states that are facing problems because of a patchwork approach. Further, Idaho’s unresolved problems, such as the obligation of declarants not to leave homeowner associations with undisclosed obligations, the rules governing third-party managers in their handling of association money, or the problems raised by unfunded reserve accounts, could also be addressed across Idaho by a comprehensive common ownership law.

If this is not reasonable at this time, Senate Bill 1310 should be amended. The Bill takes a broad unfocused approach by simply listing “prohibited conduct.” Right off the bat, the law would require litigation for the courts to identify what the consequence of this prohibition is. The costs of this litigation will be borne by covenant abiding Idaho homeowners. If the purpose of the law is to nullify improper fines, then it will require owners to challenge board fines in court. This is no improvement over the status quo, with the disadvantage that it will discourage some law-abiding boards from doing their job and possibly encouraging scofflaw violators.

In particular, subsection (2)(a) requires that fines be explicitly allowed by the covenants and restrictions of the association. Arguably, this is already required by Idaho common law, and so it already a defense that could be raised by any homeowner in court. A more effective piece of legislation would track the logic of the homeowner association lien (section 45-810, Idaho Code), and allow reasonable fines to be levied by any homeowner association in Idaho that complies with the fair notice and hearing requirements set by the legislature.

Subsection 2(a) requires a majority vote by the board prior to imposing any fine on a member. In a large association with hundreds of homes, requiring the full board, composed entirely of volunteers, to consider and vote on every single minute violation is a severe restriction of their natural corporate right to delegate. It would effectively render unenforceable many restrictions.

The concept behind subsection 2(b) is great: certainly owners should receive written notice of violations and be given an opportunity to be heard by the board. Again, this is a defense that could be raised by an owner in court under our current laws. However, the way the law is written would require a full thirty (30) days’ notice prior to a scheduled board meeting. In practice, this is an unworkable way to enforce rules on such things as lawn mowing and watering, or cleaning up after one’s dogs.

If a volunteer board meets every thirty days, then the Bill would require most violations to be heard at the meeting the month following the notice, from 31 to 59 days after the violation was noticed up. This is unwieldy for minor violations. Furthermore, if an extreme violation in underway, for example if an owner has started construction on an unapproved addition to the home, this requirement could severely impede the timely enforcement of the rules. A much shorter notice period should be permitted.

Finally, subsection 2(c) has the most dramatic problems. By imposing from above a limitation that “no fine shall be imposed” if the owner “begins resolving the violation” and “continues to address the violation in good faith,” the law will simply restrict conscientious boards from using fines at all. For instance, an owner that has been ignoring her lawn all summer could turn the hose on the lawn just prior to the board meeting, argue that she has “begun resolving” the problem, and reset the clock at least 30 days, if not more, until the next board meeting after new notice is given. A board faced with this approach would have trouble resolving a dead lawn within a single summer. Even worse, the volunteers on the board could face a lawsuit from the owner for imposing a fine authorized by their covenants. The costs of this lawsuit would have to be borne by the covenant-abiding owners in that neighborhood. The hidden cost is that it will become even more difficult to find volunteers willing to serve in the underappreciated board positions.

Something like the Bill should be part of a comprehensive common ownership act that fairly balances the competing and legitimate interests of homeowners, volunteer boards, developers, and realtors in Idaho. If a comprehensive common ownership law is out of reach at present, the legislature should at least consider a simple amendment that could improve all of these problems dramatically. Again, the legislature should follow the example of the HOA lien law.

In brief, amend the Bill to state that any homeowner association may impose and enforce fines if the elected board has adopted and followed a written policy that 1) specifically publishes in writing the full fine schedule; 2) gives any owner written notice and an opportunity to request a hearing by the full board prior to finalizing a fine; 3) revokes threatened fines upon the Board finding that the owner has, in the Board’s judgment, complied or begun to comply with the restrictions; and 4) prohibits fine proceeds from being used to increase remuneration of any board member or agent.

The Bill, with this small change, would better enforce the rule of law in Idaho’s homeowner associations, educate volunteer boards on how to best use fines, and put the responsibility for compliance into the hands of the local elected boards. It would also address the fairness concerns raised by Senate Bill 1310.
Sincerely,

Jeremy O. Evans

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