Hi, How Can We Help You?

Blog

New Board Member Overview

Posted on Author By Francis J. McGovern, Jr., Esquire

 

Board Member Duties

Fiduciary Duty. Board members have a fiduciary duty to the Association.  The “business judgment rule” is the standard by which board action is measured.  So long as the board members fulfill their duties of “care” and “loyalty” and their decisions are not patently unreasonable, their decisions will typically not be second-guessed by a court.

“Care” obligates the board to make their decisions only after “due diligence” – after the board members have become reasonably informed about the issue at hand.  The board members may rely on experts such as engineers, architects, lawyers, accountants, contractors, etc. in fulfilling their duty of care.

“Loyalty” obligates the board to make their decisions for the benefit of the Association rather than for their own benefit.

Confidentiality: Board members are necessarily given access to otherwise confidential information.  Examples of confidential information are Members’ financial information, Members’ health status, certain employee information, requests for proposals and bids, attorney-client communications and communications regarding litigation even if the communications are not with the Association’s attorneys.  Confidential information must be kept confidential even if the Board member did not sign a confidentiality agreement.  Board members should be particularly cautious when using e-mail, text messages and computers as no one other than the Board member should have access to confidential information.  Breaching confidentiality exposes the Association to, among other things, business losses and suit.

Board Member Protection

Indemnification, Exculpation, Trustees and Officers Liability Insurance.

Board members should confirm that the Association’s governing documents contain provisions indemnifying, defending and holding them harmless in case of a claim against them arising out of their board service.  Board members should also confirm that the Association has appropriate Officers Liability Insurance and that the carrier is immediately notified of any threat against them or the Association.  Insurance carriers deny coverage if they are not timely notified of a threat.

 

Meetings

There are two basic Association meeting types: 1) Board meetings and 2) Membership meetings.

I.)  BOARD MEETINGS are where the Board Members act by voting.

A.)  Workshop Board meetings are where the Board makes no decisions.  They are essentially informational meetings.  The Members do not attend, and no minutes are taken.

B.)  Executive Session Board meetings are where binding decisions are made on the following limited matters, but the Members are not permitted to attend:

(a) Matters the disclosure of which would constitute and unwarranted invasion of individual privacy. Ex: decisions on debtor accounts, handicapped accommodations etc.; (b) Pending or anticipated litigation or contract negotiation; (c) Matters falling within the attorney-client privilege; (d) Matters involving employee promotion, discipline or dismissal.  Members do not attend but minutes are taken.

C.)  Open Board meetings are meetings where the Members are notified of the meeting, Members may attend, watch and, in most cases, can make comments.  Except for decisions on the limited topics noted in subsection B., Board Members are required to make all their binding decisions at open board meetings.  Minutes are taken.  Members do not participate in the decisions.

II.) MEMBERSHIP MEETINGS are where the Members act by voting. Membership meetings are rare.  Examples are:

A)  The Annual Membership Meeting where the membership acts to elect trustees.  Minutes are taken.

B)  Special Membership Meetings where, depending on the Association’s governing documents, the Members may be required to act to remove a board member, amend the Governing Documents, authorize a special assessment etc.  Minutes are taken.

How Member Concerns Get to the Board Table.

Via the Manager or Via Open Board Meeting Member Comment

Member concerns are to be directed to the Association’s Manager via in-person or e-mail communication.  Member concerns may also be directed to the Board during the Member comment portion of the Board’s open board meetings.

Via the Manager

If a concern or question is brought to Management’s attention, the Manager will bring it to the Board’s attention during the Board’s workshop meeting.  Not all questions and concerns require formal Board consideration.  For example, some issues may be immediately addressed by Management.  If the Board determines that formal Board consideration is necessary, the Board will direct management to place the issue on the agenda for one of the Board’s forthcoming Board meetings.

Via Open Board Meeting Member Comment

If a concern or question is brought to the Board’s attention at an open Board meeting, the Board will take note of the concern or question and, if the Board determines that formal Board consideration is necessary, the Board will direct management to place the issue on the agenda for one of the Board’s forthcoming Board meetings.  The Board may however address concerns or questions at the same meeting where they are raised in its discretion.

Board Consideration

Once a concern or question is on the Open Board Meeting agenda, a Board member places it on the table for consideration by moving to, for example, “consider the Member’s request to have a ping pong table placed in the library”.

Motion Dies on the Table

If no one seconds the Board member’s motion, the topic dies there and is generally not subject to further discussion.

Second, Board Discussion and Vote

If another Board member seconds the motion, the Chair will call for discussion between and among the Board members only.  At the Chair’s discretion, the Board may also entertain comments from the Members but only on the motion.  Once the Board Members have concluded their discussion, the Chair will close discussion and call for a Board Member vote.  The motion and vote will be recorded in the minutes and the matter is closed.

The Board may always “table” an issue for future consideration.  The Board may also refuse to formally entertain a concern or question.  The most common reason a Board refuses to formally entertain a concern or question is that the concern or question was previously disposed of by the Board.

Transition:

Evaluate, Communicate & Negotiate but…should we litigate?

“Transition” is the due diligence process required by the board members’ fiduciary duty.  In sum, the homeowner-elected board members must determine if the sponsor did what it was supposed to do and, if not, take action to get the deficiencies corrected. Upon assuming board control homeowner-elected board members must:

1) evaluate the association’s physical and financial condition;

2) communicate the findings to the members and the sponsor;

3) negotiate for repairs, money or a combination of repairs and money.

Evaluate.  Due diligence begins with evaluating the association’s physical and financial conditions.  These evaluations must be undertaken promptly.  Delay may result in losing some or all claims due to expiration of warranties, statutes of limitation and/or the statute of repose.

Engineers, architects, accountants and other experts are enlisted by the board and the association’s attorney to ferret out deficiencies and “connect the dots”.  “Connecting the dots” requires experts to:

1) Identify the duty – statutes, architectural drawings and specifications, building codes, industry standards, manufacturer’s specifications, etc.

2) Specify how the duty was breached – for example, required building wrap was not installed;

3) Specify the damage – for example, moisture got behind the siding and was not shed down and out; instead the moisture damaged the substrate and structural members;

4) Specify how the breach caused the damage – for example, if the required building wrap had been properly installed, water that got behind the siding would have been shed down and out of the building envelope without damage to the substrate and structural members.  Instead, the water was absorbed by the substrate and structural members resulting in rot and mold growth.

After “connecting the dots”, the association’s experts should carefully determine how much it will cost the association to fix the various physical and financial defects.  This “cost to cure” report provides the board with a basis for prioritizing the deficiencies and evaluating how much the association should spend on attempting to compel the sponsor and others to remedy deficiencies.

Without reputable experts solidly connecting the dots and determining the cost to cure, the association has little prospect of transition success.

Assuming the experts connect the dots and accurately estimate the cost to cure, the board, its experts and counsel must finally evaluate the probability of recovery.  Is there an individual or entity that has the resources to cure the deficiencies or pay the association so that it may cure the deficiencies.  Is it the sponsor?  Is it the sub-contractors? Is it one or more insurance companies?  Typically transition is resolved with contributions by all of these but, if there is little or no prospect of recovery, the association should carefully consider other options such as self-funding repairs, obtaining a bank loan to fund repairs or phasing repairs over time while using “Band-Aid” fixes in the meantime.

Communicate. Many boards are reluctant to communicate expert findings to the membership.  This is a mistake.  Everyone hopes that the transition process will be smooth and amicable.  However, transition can be long, contentious and expensive.  If the membership does not support the board, management, its attorneys and experts, half of the battle is already lost.  The board must share as much information as possible with the membership during the transition process so that the members know what it going on, know why various items have not yet been fixed and know why it is important for the association to spend the time and money to see the transition process through to resolution.

Negotiate.  Once the board has a comfort level with the experts’ findings and recommendations, the board and counsel will negotiate with the sponsor, developer, sub-contractors and others.  In most cases this negotiation results in an amicable transition agreement whereby the sponsor and other responsible entities make repairs and/or pay the association so that it may make the repairs.  In exchange, the association gives the responsible entities a release and hopefully everyone lives happily ever after.

But…should we litigate?  If there is no amicable resolution, should the association litigate?  This is a big decision and the “cost to cure” and “viability of recovery” evaluations become that much more important.  There are many times where a litigated transition is necessary.  The board should not shrink from turning to the courts on behalf of itself and its members.  But, before doing so, a cost-benefit analysis must be carefully considered.

If the cost to cure and probability of recovery outweigh anticipated expert fees, attorney fees and other expenses, litigation likely makes sense but if the board finds that it is more economical, certain and timely to merely fix the deficiencies itself, it may do so and sign no release.  In any case, transition releases should not be signed in exchange for nominal or no consideration.

IMPORTANT ALERT From NJ-LAC Regarding Proposed DCA Regulations

Posted on Author By Francis J. McGovern, Jr., Esquire

On June 3, 2019, the New Jersey Department of Community Affairs (“DCA’) published proposed regulations concerning association elections among other matters.

The public may comment on the proposed regulations until August 2, 2019.  The full text of the proposed regulations can be seen here: https://www.nj.gov/dca/divisions/codes/codreg/pdf_rule_proposals/PRED_Election_Regs.pdf

 

Written comments can be submitted by email to geraldine.callahan@dca.nj.gov.

 

Or Mailed to:

Geraldine Callahan

Department of Community Affairs

P.O. Box 800

Trenton, NJ 08625

 

Your LAC has fully analyzed the proposed regulations and has submitted a letter of in response. View the letter submitted by CAI- NJ LAC HERE.

 

While there are numerous areas of serious concern, the NJ LAC draws your attention to these particularly troubling provisions:

  • Fines – Section 5:26-8.14 provides that DCA may fine any person who violates the regulations, even if only a technical violation.  This includes violations by board members and managers!  Fines can range from $50 to $50,000!
  • Public Ballot Tallying – Section 5:26-8.9(h)(2) states that all ballots shall be publicly tallied and open to inspection by any member for a period of 90 days.
  • All Votes Must be Anonymous Including Absentee and Proxy Ballots – While some association bylaws require anonymous balloting, Section 5:26-8.9(h)(3) mandates that all forms of votes be anonymous, which can create serious, practical election issues.
  • Removal of Board Members by Petition – Section 5:26-8.11(d) allows automatic removal of one or more board members upon presentation of a petition signed by 51% of the members.
  • No Binding Board Votes in Executive Session – Section 5:26-8.12(e)(2) mandates that matters that could have previously been voted on in executive session (pending litigation, matters of personal privacy, personnel matters, etc.) must now be voted on in a meeting open to the members.
  • 7-Day Notice of Board Meeting with Agenda of All Items for Discussion and Action – Section 5:26-8.12(c)(3) requires posting of a notice of board meetings seven days in advance (current regulations provide for 48 hour advance posting) and fails to include current regulation’s provision that agendas must be posted only “to the extent known.”
  • Associations with Affordable Housing Units Must Reserve a Board Seat for Affordable Owners – Section 5:26-8.10(a)(2) provides that when the bylaws do not set aside a board seat for affordable owners, the Association must amend its bylaws to provide for an affordable-owner reserved seat.

 

While these are not all of the troubling proposed regulations, they are some of the more important ones.  Write to the DCA to voice your objections.

PLEASE TAKE A FEW MINUTES AND SEND AN EMAIL TO THE DEPARTMENT OF COMMUNITY AFFAIRS EXPRESSING YOUR CONCERN WITH THE PROPOSED REGULATIONS. 

Objections to the Proposed DCA Regulations

Posted on Author By Francis J. McGovern, Jr., Esquire

On July 18, 2019 the New Jersey CAI Legislative Action Committee (“LAC”) submitted its comments to the Department of Community Affairs with respect to the proposed regulations.

The full submission is in the following link:

https://www.cainj.org/wp-content/uploads/2019/07/Ltr-from-CAI-LAC-NJ-to-DCA-re-proposed-regulations-7.16.19.pdf

Please submit your objections to the proposed regulations by August 2, 2019 to:

Geraldine Callahan

Department of Community Affairs

P.O. Box 800

Trenton, NJ 08625

e-mail: Geraldine.callahan@dca.nj.gov

(fax) (609)984-6696   

 

Thank you to the CAI-NJ’s Legislative Action Committee for its hard work. The LAC Committee members are:

George Greatrex

A. Christopher Florio

Joseph Chorba

Michael Pesce

Lisa Rayca

Elizabeth Comando

Barbara Drummond

Matthew Earle

Vincent Hager

Sue Howe

Steve Kroll

Christine Li

James Magrid

Thomas Martin

Glen Masullo

Jack McGrath

Paul Raetsh

J. David Ramsey

Caroline Record

 

Please contact me with any questions. Fran

DCA Proposes New Association Regulations

Posted on Author By Francis J. McGovern, Jr., Esquire

DCA Proposes New Association Regulations Including Fines & Penalties

On June 3, 2019 the New Jersey Department of Community Affairs published proposed new association regulations. A copy of the DCA’s summary and the full text of the proposed amendments and new rules can be found here:

https://www.nj.gov/dca/divisions/codes/codreg/pdf_rule_proposals/PRED_Election_Regs.pdf

The proposed requirements are granular, and the proposed enforcement and penalty provisions should be carefully considered by board members, managers, management companies and professionals.

If you desire to submit an opinion, your opinions on the proposed amendments and new rules must be submitted in writing by August 2, 2019 to:

Geraldine Callahan

Department of Community Affairs

P.O. Box 800, Trenton, NJ 08625

e-mail: Geraldine.callahan@dca.nj.gov

(fax) (609)984-6696

Some proposed sections of note include:

N.J.A.C. 5:26-8.9(h)3 which proposes that: “All ballots shall be cast in an anonymous manner.”

N.J.A.C. 5:26-8.9(h)4 which proposes that: “If the bylaws permit, and the association member consents, a ballot may be cast electronically if it is administered by a neutral third party and anonymity is maintained.”

N.J.A.C. 5:26-8.10(a)2 which proposes that: “When affordable units represent a minority of units in the development, the bylaws shall reserve a seat or seats on the executive board for election by owners of affordable units.”

N.J.A.C. 5:26-8.12(a)2 which proposes that: “The board shall provide a brief explanation of the basis for and cost entailed in the matter that is the subject of any binding vote and include the explanation in the minutes for the meeting.”

N.J.A.C. 5:26-8.12(e)2. which proposes that: “A vote taken at a closed meeting shall not be binding. If the matter requires a binding vote, it shall be taken at a subsequent open meeting in a manner that does not disclose any confidences.”

N.J.A.C. 5:26-8.14(e) which proposes that: “The Department may levy and collect fines and may issue penalties as set forth in N.J.A.C. 5:26-11. 1. For associations that are controlled by unit owners, the Department may issue cease and desist orders, may issue a monetary penalty, may transmit the case to the Office of Administrative Law, or may file and action in the Superior Court.”

Please contact me with any questions.

Francis J. McGovern, Jr., Esquire

Nick Foles On Leadership

Posted on Author By Francis J. McGovern, Jr., Esquire

In his article this morning, Inc.com journalist Justin Bariso highlighted Eagles’ Nick Foles’ team leadership style.  During the post-game Press conference, Foles said “I think that the big thing that helped me was knowing that I didn’t have to be Superman. I have amazing teammates, amazing coaches around me and all I had to do was just go play as hard as I could and play for one another and play for those guys…”.

Bariso’s application of Foles’ comments to corporate leadership generally is also applicable to Association leadership in particular.  Associations are administered, lead, by a team.  Each team member has a role.  The manager leads day to day by implementing the global policies set by the board.  The vendors: legal, financial, engineering and trades are called upon as needed to counsel and make specific things happen.

Too often today, management services have been bid down to unrealistic rates.  This leaves a leadership vacuum where a Board Member is compelled to step in as Superman/Wonderwoman, vendor expenses spiral as vendors struggle to fill the void, and the Membership loses its mind as things don’t get done in a timely manner.  Associations are real corporations, intimately impacting their Members’ lives.

Board members should not be Superman or Wonderwoman running the day to day affairs.  Instead, Management, suited to the task and paid its worth, should manage.  Team is what it’s about and, with the right team, everybody wins.  Justin Bariso’s article is available at Inc.com and Nick Foles’ post-game Press conference is available at Youtube.com.

Bankruptcy Filing Doesn’t Discharge Association’s Lien

Posted on Author By Francis J. McGovern, Jr., Esquire

In its January 29, 2018 decision captioned Indian Field at Hardyston HOA, Inc. v. Trudnos, New Jersey’s Appellate Division reaffirmed the common-sense concept that (with certain exceptions) bankruptcy only discharges a debtor’s personal debt, not an Association’s lien on the property.  In doing so, the Court also affirmed a significant Association attorney fee award noting that the Debtor’s actions greatly increased the Association’s “expenses for what otherwise would have been relatively straightforward litigation to collect about $6,500 in overdue assessments”.  We often pursue foreclosure as New Jersey’s Foreclosure Unit is processing cases more quickly and homeowners’ equity has often risen to the point where debtors will settle and pay rather than risk losing their equity.  Foreclosure also remains a valuable tool in addressing non-paying vacant homes where the debtor has died or abandoned the home.

Bipartisan Legislation Limits Municipalities Ability to Protect Associations

Posted on Author By Francis J. McGovern, Jr., Esquire

Senate Bill 3233/Assembly Bill A1425 from the 2016-2017 Legislative Session was signed into law by Governor Christie on January 16, 2018.

Unfortunately, per the Assembly Judiciary Committee Statement, and with very limited exception, “a municipality will only be able to require developers to post performance guarantees that cover improvements being dedicated to a public entity”.  One has to wonder where this legislation came from.  Presumably not the League of Municipalities as municipalities are in the best position to help associations and their members during build-out.  Especially with respect to typically-bonded items like grading and drainage, roadways, sidewalks and storm sewers.

Perhaps the builders?  But won’t the lack of bonding just lead to more litigation by Associations directly?  In the past, often (but not always) defects in these items were corrected as part of the bond reduction/release process.  Suffice it to say, going forward, Associations and their members will have one less protection and will face greater challenges in making sure they get what they paid for.

Contingent Fee Agreements For Transition Litigation

Posted on Author By Damon M. Kress, Esquire

Litigating against a community’s developer over construction defects and other issues is a long, slow and expensive process.  An average transition lawsuit can take between five (5) and seven (7) years to reach conclusion.  As if the glacial pace were not bad enough, if an association pays for its transition litigation “out of pocket”, attorney fees could cost $750,000 or more, even if the matter does not reach trial.  In addition to engaging an attorney, associations must hire forensic engineers, and often forensic accountants to substantiate their claims against the developer and numerous sub-contractors.  The cost of those forensic services can easily add another $200,000 to $600,000 to the cost of the litigation.  Therefore, the total average cost of transition litigation can easily range from $750,000 to more than $1,000,000.  In certain cases, the total cost of the litigation can substantially exceed $1,000,000.

Few associations can afford to spend such substantial sums on litigation, especially when recovery is not guaranteed.  Even those associations that could amass sufficient funds from the membership, to pay those costs, may prefer not to because increased assessments may be unpopular with the members.  Whatever the reason, over the last decade, contingent fee agreements have become a more popular option for transition litigation.

Most people have little to no actual experience entering into contingent fee agreements with attorneys. Instead, most people’s only familiarity with contingent fee agreements comes from movies and television where lawyers always seem to get paid a third (1/3) of whatever they recover for the plaintiff.  Unlike television, however, in New Jersey the Supreme Court adopted very specific rules and limits for how much an attorney may charge as a contingent fee for the majority of claims an association would pursue against a developer, and its sub-contractors.  Those rules are found in Court Rule 1:21-7.

As explained in Court Rule 1:21-7(c), in any matter where the association’s claims for damages are based upon the alleged “tortious conduct” of another (tortious conduct generally means civil wrongful acts, or an infringement of rights, that arise out of something other than a contractual agreement), a contingent fee arrangement may not exceed the limits set forth in the Rule.  The Rule lays out a five-tiered framework for calculating the contingent fee, where each tier establishes a ceiling on the percentage of the recovery the lawyer can charge the client as a contingent fee.

Under a tort-based contingent fee arrangement, the Association’s attorney may only collect:

  1. 33⅓% on the first $750,000 recovered;
  2. 30% on the next $750,000 recovered;
  3. 25% on the next $750,000 recovered;
  4. 20% on the next $750,000; and
  5. On all amounts recovered in excess of $3,000,000 the attorneys must apply to the Superior Court for a determination of a reasonable fee in light of all the circumstances.

It is also important to remember that, pursuant to Court Rule 1:21-7(d), the contingent fee is computed on the net sum recovered after deducting all disbursements in connection with the litigation, regardless of whether those disbursements were advanced by the attorney or by the client.  These disbursements include investigation expenses, expenses for expert or other testimony or evidence, and any interest included in the judgment pursuant to certain Court Rules.

An example of how to calculate a contingent fee for a hypothetical transition litigation should help put the application of these concepts and rules into context.

Example:

Association entered into a contingent fee agreement with Lawyer to sue Developer.  The contingent fee agreement was written in accordance with the limits set forth in Court Rule 1:21-7.  Association succeeds in its case and wins a $3,000,000 judgment against Developer.  Association paid a total of $500,000 to cover various disbursements spent in furtherance of the Association’s successful litigation.  Developer immediately pays the $3,000,000 into Lawyer’s attorney trust account satisfying the Association’s judgment in full.

Question:        How much does Association owe Lawyer pursuant to the contingent fee agreement?

Gross sum recovered:             $3,000,000

Less – Disbursements:            ($500,000)

Net sum recovered:                 $2,500,000

Contingent Fee Calculation:

  1. 33⅓% on the first $750,000 recovered           –           $750,000 x .3333 =     $250,000
  2. 30% on the next $750,000 recovered             –           $750,000 x .30 =         $225,000
  3. 25% on the next $750,000 recovered             –           $750,000 x .25 =         $187,500
  4. 20% on the next $750,000; recovered             –           $250,000 x .2 =           $50,000

Total Contingent Fee:           $712,500

Answer:          In this case, the Association owes Lawyer a contingent fee of $712,500.  In this example, Court Rule 1:21-7 did not require an application to the Superior Court because the net sum recovered did not exceed $3,000,000.

It is important to understand the limits the Supreme Court placed on the calculation of contingent fees because it can dramatically affect how much an association pays for these legal services.  For example, in the scenario described above, if the fee agreement simply provided that Lawyer would receive one-third (1/3) of the gross sum recovered ($3,000,000) Association would owe Lawyer a $1,000,000 contingent fee.  Not only would Association’s fee agreement violate Court Rule 1:21-7, the improper fee agreement would also result in Association overpaying Lawyer $287,500 for this litigation ($1,000,000 – $712,500 = $287,500).

Moreover, if the fee agreement simply provided that Lawyer would receive one-third (1/3) of the net sum recovered ($2,500,000), Association would owe Lawyer a $833,333 contingent fee.  This fee agreement would also violate Court Rule 1:21-7 and the improper fee agreement would result in Association overpaying Lawyer $120,833 ($833,333 – $712,500 = $120,833).  Either way, both improper fee agreements result in Association overpaying significantly for the legal services.

These examples demonstrate how easy it is for an association to overpay for legal services under a contingent fee agreement if the board of trustees does not take precautions to ensure the agreement complies with Court Rule 1:21-7.  The overpayment can potentially skyrocket in instances where the net sum recovered exceeds $3,000,000.   Furthermore, even if the agreement itself complies with the Court Rule, board members should also be vigilant to ensure that any contingent fee the association ultimately pays to the lawyer is calculated in compliance with Court Rule 1:21-7.

How can a board of trustees reduce the possibility the association is overcharged under a contingent fee agreement?

An independent attorney could review the contingent fee agreement for compliance with Court Rule 1:21-7.  As explained above, the Court Rule provides a very simple tiered framework for the calculation of contingent fees.  An independent counsel should have little difficulty determining whether the agreement the association is considering entering into, or already entered into, complies with the Court Rule.

In addition to reviewing the agreement for compliance with the Rule, when the litigation reaches conclusion, the association may also wish to have independent counsel review the calculation of the contingent fee for compliance with Court Rule 1:21-7.  Having independent counsel evaluate the actual contingent fee payment for compliance with the Court Rules should provide the board of trustees the greatest assurance that the association is not overpaying.

An association may benefit from having an independent counsel review the contingent fee payment at the conclusion of the litigation regardless of whether the association had independent counsel initially evaluate the agreement.  Court Rule 1:21-7 is very clear, “an attorney shall not contract for, charge, or collect a contingent fee in excess of the following limits.”  In light of this language, even if the Association voluntarily enters into a contingent fee agreement that does not comply with the Rule, the attorney is expressly prohibited from charging or collecting a contingent fee from the Association that is calculated in a manner that does not comply with the methodology established by Court Rule 1:21-7.

Contingent fee agreements are one option a board of trustees can consider.  With some relatively simple counsel and oversight, the board of trustees can ensure that their association does not overpay for the services the association receives under the contingent fee agreement.  Please contact our office regarding our contingent fee agreements or if you would like to have our firm evaluate an existing contingent fee agreement.

The information in this article is provided solely for information purposes. It should not be construed as legal advice on any specific matter and is not intended to create an attorney-client relationship. The information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based upon particular circumstances.  Each legal matter is unique, and prior results do not guarantee a similar outcome.

HOA Homeowners Associations

Bonds May Be Released But The Association’s Claims Are Not

Posted on Author By Patricia McGlone

The transition process involves an engineering evaluation of the Association’s common elements to determine if there are defects.  The engineer’s evaluation  typically identifies defects within the site improvements, for example, the landscaping, roadways, sidewalks, detention basins, etc.  These site improvements are often subject to performance bonds with the municipality.

New Jersey statute N.J.S.A. 40:55D-53 permits municipalities to require a developer to post a performance bond guaranteeing the construction of site improvements.  The amount of the performance bond is calculated by the municipal engineer and is intended to cover the cost of constructing the site improvements in the event that construction is not completed or completed improperly.  The developer is then required to post a cash bond, a surety bond payable to the municipality, or a combination of the two, in order to guarantee the construction of the required improvements.

As construction progresses, the municipal engineer will inspect each site improvement and issue a report stating whether it was constructed in accordance with the approved plans.  The municipality (typically a township council) will then decide whether to reduce or release the performance bond after taking the municipal engineer’s findings into consideration.  Each municipality enacts ordinances setting forth the requirements and procedures for the performance bond process.  Therefore the process may vary depending on the municipality where the construction site is located.

The Association’s transition engineering evaluation should be submitted to the Township Clerk and Township Engineer when received, because the Association wants to alert the municipality that construction defects have been identified in the site improvements before the developer’s performance bonds are released.  This way the Township Engineer will have the benefit of reviewing the Association’s engineering report, and the description of those defects, when deciding whether to recommend a reduction or release of the performance bond to the municipality.

Interestingly, in K Hovnanian at Lawrenceville, Inc. v. Lawrence Township Mayor and Council, 234 N.J. Super. 422 (Law Div. 1988) the court held that the Township Council could not refuse to release or reduce the performance bond where the Township  Engineer recommended doing so.  The court noted that homeowner complaints of defective soil and drainage conditions were not sufficient for the Township Council to deny the developer’s request for bond reduction.  However the court stated that the Township Council would have discretion to deny the request if confronted with competent evidence such as an engineering report.

What happens if an Association receives its transition engineering evaluation after the performance bond has already been released?

Some developers “refuse to consider” an Association’s construction defect claim for bonded improvements if the municipality already accepted the construction of the improvements and released the associated performance bonds.  Do not accept this disingenuous argument.  The Association may pursue claims against a developer, for the defective construction of bonded improvements, even if the items were subject of a performance bond and the municipality already accepted the construction and released the developer’s performance bonds for the improvements.

  1. First, submit the engineering report to the municipality anyway as there may be a maintenance bond in place.  Most municipalities require developers to post a two year maintenance bond once the performance bond is released.  The municipality may perform repairs or replace unacceptable improvements and charge the cost against the maintenance bond.
  2. Second, the Association may pursue claims against the developer for the defective site improvements because the Association is not a party to the performance bond agreement.  Instead, the bonding agreement is only an agreement between the municipality and the developer.  As a result, the Association is not bound by actions taken by the municipality or the developer, pursuant to the bonding agreement.
  3. Third, the municipal engineer’s report indicating that construction was completed in accordance with the plans is not binding on the Association.

The municipal engineer’s report recommending release of a performance is similar to the municipal construction official’s issuance of a certificate of occupancy.  In DKM Residential Properties Corp. v. Township of Montgomery, 182 N.J. 296 (2005) the New Jersey Supreme Court held that a municipal construction official had authority to issue notices of violation for failure to comply with the Uniform Construction Code to a developer for defective EFIS construction after the certificates of occupancy were issued by the municipality.  The court noted that the Code does not limit its enforcement after a certificate of occupancy has been issued.

By analogy, the municipality’s acceptance of a site improvement does not limit the Association’s right to pursue a claim against the developer for Code violations or other basis of construction defect.  The Association obtains its right to pursue construction defect claims against the developer by virtue of the contractual provisions of the Public Offering Statement, the contracts of sale between the developer and the various purchasers, and the Association’s other governing documents.  In addition to these contractual rights, the Association also has independent rights to pursue the developer, on behalf of the unit owners, for various tort based claims relating to the common elements. See Condominium Act, N.J.S.A. 46:8B-12, Siller v. Hartz Mountain Assocs., 93 N.J. 370, 380, cert. denied, 464 U.S. 961 (1983).

Practical advice:

  • It is often helpful to keep the lines of communication between the Association and the municipal engineer open because the Township can be a great asset by holding the developer’s “feet to the fire” and making sure the site improvements are constructed properly.
  • If the Association’s engineer identified construction defects after the bonds are released, the Association’s transition counsel should be armed and ready to dispute the developer’s contention that it is not responsible for site improvement defects once the municipality has accepted them and released the bonds.

Pending legislation of concern:

Finally, everyone should be aware of pending legislation that is attempting to limit the developer’s obligations for performance and maintenance guarantees under the Municipal Land Use Law (A1425).  The proposed legislation would only require a performance bond for those improvements that will be dedicated to the municipality after completion and a municipality would only be able to require a performance bonds for privately owned perimeter buffer landscaping. The proposed bill would remove the following improvements from the performance bond requirement: culverts, storm sewers, erosion control and landscaping.

This legislation, if adopted, would leave an Association with defective private roadways or storm sewers to fend for itself with regard to construction defects and removes the first layer of protection that was provided by the municipality and the performance bond.

The cost to remedy construction defects in these improvements can be substantial.  This proposed legislation does not benefit Associations.

New Election Law For Associations

Posted on Author By David W. Merritt, Esquire

On July 13, 2017, the State enacted P.L. 2017, Ch. 106 often referred to as the Radburn bill, a supplement to the Planned Real Estate Development Full Disclosure Act intended to ensure Condominium, HOA, and Cooperative elections are conducted in a fair and open manner.  The new Law contains important new procedural and substantive requirements for: (1) Membership Voting Rights; (2) Board Elections; and (3) Bylaw Amendments.  Management and Boards must navigate these new requirements carefully, else they may face costly challenges to the validity of Association elections and Bylaw Amendments.

Except for new notice and ballot rules for elections in Associations with 50 or more Units, the new Law became effective on July 13, 2017.  The new notice and ballot rules become effective on October 1, 2017.

1. Membership Voting Rights:

The new Law provides, “Membership in the association of a planned real estate development shall be comprised of each owner within the planned real estate development[.]”  N.J.S.A. 45:22A-43.1.c.  This means that except for owners not in good standing, all owners must be permitted to run for the Board and vote on Board elections and Bylaw Amendments, even if otherwise prohibited by an Association’s Governing Documents.

The new Law also creates a definition of standing to be applied in determining whether a member is eligible to run for the Board and vote on Board elections and Bylaw Amendments:

“Good standing” means the status . . . applicable to an association member who is current on the payment of common expenses, late fees, interest on unpaid assessments, legal fees, or other charges lawfully assessed, and which association member has not failed to satisfy a judgment for common expenses, late fees, interest on unpaid assessments, legal fees, or other charges.”  N.J.S.A. 4:22A-23.7.

Members who are compliant with a payment plan or who are actively disputing the charges in ADR or in Court must also be permitted to run for the Board and vote on Board elections and Bylaw Amendments.  N.J.S.A. 4:22A-23.7.

It is important to note the new good-standing requirements do not apply to revocation of other Membership rights, such as use of the amenities.  Good-standing clauses in Associations’ Governing Documents still control as to those rights, meaning many Associations will now have 2 separate tiers for members in bad standing.  For this reason, some Associations may decide to simplify the categories by amending their good-standing clauses to conform with the definition in the new Law.

The new also Law permits Tenants to run for the Board and vote on Board elections and Bylaw Amendments if both: (a) permitted to do so by the governing documents; and (b) granted the right either by the Unit Owner in writing or by historical practice of the Association prior to enactment of the new Law.  N.J.S.A. 4:22A-23.s.

2. Board Elections

The new Law establishes new procedural requirements for Board elections:

1.  All proxy ballots must contain the following disclaimer.  N.J.S.A. 45:22A-45.2.a.

Use of this proxy is voluntary on the part of the granting owner.  This proxy is voluntary on the part of the granting owner, and can be revoked at any time before the proxy holder casts a vote.  Absentee ballots are available.

2. If proxy ballots are permitted, then absentee ballots must also be made available.  N.J.S.A. 45:22A-45.2.a.

3. Associations must allocate election votes equally amongst the units unless the Governing Documents weight the votes based upon the size or value of each unit.  N.J.S.A. 45:22A-45.2(c)(9).

4. No more than 1 Trustee per Unit may serve on the Board.  N.J.S.A.  45:22A-45.2.f(1)(e).

For Associations with 50 or more Units, the following additional requirements apply, and become effective as to any election scheduled after October 1, 2017.

  1. No Trustee may be appointed without a Member election, unless to fill a vacancy due to resignation, death, failure to maintain qualifications or good standing, or removal by Membership vote.  N.J.S.A. 45:22A-45.2.f(3)(a).
  2. No Trustee shall be elected to a term of longer than 4 years.  N.J.S.A. 45:22A-45.2.c(1).
  3. Stand-ins with a valid proxy or power of attorney must be permitted to vote.  N.J.S.A. 45:22A-45.2.c(2).
  4. Associations must provide a first notice of the election at least 30 days ahead of the meeting notice, allowing the owners at least 14 days to nominate candidates.  N.J.S.A. 45:22A-45.2.c(3).
  5. All candidates in good standing must be included on the ballots if they were nominated by the deadline provided in the nomination notice, or if no deadline was specified, by the business day before mailing of the meeting notice.  N.J.S.A. 45:22A-45.2.c(4).
  6. Associations must mail a second notice of the election between 14 and 60 days ahead of the meeting, setting forth the date, time, and location of the meeting.  N.J.S.A. 45:22A-45.2.c(5).
  7. Unless prohibited by the Bylaws, the meeting notice shall include both a proxy ballot and an absentee ballot listing all valid candidates in alphabetical order by their last name.    N.J.S.A. 45:22A-45.2.c(5) & (6).

Election meeting notices may be sent electronically, but only if the Governing Documents permit electronic notice or the member agreed to accept electronic delivery.  N.J.S.A. 45:22A-45.2.c(5).

Smaller Associations with less than 50 Units are excepted from these additional requirements, although they must still hold fair elections, and should generally conform to the new notice requirements as the best practices recognized by the State.  N.J.S.A. 45:22A-45.2.b.

3. Bylaw Amendments

The new Law also enables Members to amend the Bylaws if the Governing Documents either don’t provide for such an Amendment, or if the Governing Documents require more than 2/3 of the Members vote to pass any Amendment to the Bylaws.  N.J.S.A. 45:22A-46.d(2).  In either of those circumstances, the following default provisions control:

  1. Members may amend the Bylaws by a majority vote of all Members in good standing.  N.J.S.A. 45:22A-46.d(2).
  2. The Members may call a Bylaw Amendment vote by petition signed by at least 15% of the membership.  N.J.S.A. 45:22A-46.d(2)(a).
  3. The Bylaw Amendment meeting must be held within 60 days of the Association’s receipt of the petition.  N.J.S.A. 45:22A-46.d(2)(b).
  4. The Association must revise the proposed Amendment to clarify any ambiguities and to conform with the other provisions of the Bylaws and with applicable laws.  Notice of the meeting, together with the proposed Amendment, must be sent to the Members at least 10 days prior to the meeting.  N.J.S.A. 45:22A-46.d(2)(c).
  5. If proxy ballots or absentee ballots are permitted by the Bylaws, then the Association must accept ballots submitted by mail, facsimile, and email up to 1 business day before the meeting.  N.J.S.A. 45:22A-46.d(2)(d).

Individual aspects of these requirements also control as default provisions if an Association’s Bylaws are not sufficiently clear on the procedure for amending the Bylaws.  N.J.S.A. 45:22A-46.d(2).

Finally, the new Law grants Boards the power to amend the Bylaws directly where either: (a) the Amendment is necessary to comply with the law; or (b) the Members are given notice and opportunity to reject the proposed amendment.  N.J.S.A. 45:22A-46.d(5).  If at least 10% of the Members oppose a Bylaw Amendment that is not necessary to comply with the law, then the Board cannot pass the Amendment.  N.J.S.A. 45:22A-46.d(5)(b).

Given the vast diversity of language in New Jersey Condominium, HOA, and Cooperative Governing Documents, application of the new Law will create many novel conflicts and issues that will have to be analyzed and resolved on a case-by-case basis.  Boards should be encouraged to review their Governing Documents with the Association’s attorney to identify and head off any such issues ahead of the Association’s next election or Bylaw Amendment.  Failure to conform with the new Law and resolve any conflicts ahead of time may result in an invalid Membership vote, putting the Board in the politically embarrassing position of having to void the results and administer a second meeting.

McGovern Legal Services, LLC, is thoroughly familiar with applying New Jersey’s ever-shifting laws and regulations to a wide range of Governing Documents and circumstances.  If Management or the Board have questions about how to administer elections or Bylaw Amendments in light of the new Law, anticipate Membership challenges and unrest at the Association’s next election, or struggle with reaching quorum to hold an election or amend the Bylaws, then the attorneys at McGovern Legal Services, LLC, would be pleased to assist your Association.

1 2 3 4 5 … 11