In 2010, the Department of Housing and Urban Development (HUD) turned the financing of FHA mortgages upside down by announcing the end of spot approvals for condominiums and a new requirement of biannual community-wide certification for FHA mortgages. Many condominium associations went through the process of obtaining initial FHA approval, but the two-year recertification period has now come and gone – or is approaching expiration – for many of those communities.

WHEN TO SEEK RECERTIFICATION:  Condominium associations can seek recertification up to six months before and six months after the expiration date of their FHA certification, which is good for a two-year period. This process is essentially identical to the process of obtaining the initial FHA certification – with minor tweaks in HUD’s documentation requirements.

Associations should calendar the expiration dates of their certification to ensure that recertification can be obtained without a gap. When associations wait to seek recertification until a potential buyer discovers that s/he cannot obtain an FHA mortgage, unit sales often fall through due to the typical six to eight week approval process. Since many industry commentators suggest that 30% to 40% of condominium mortgages are FHA-backed, FHA certification should increase the potential market for buyers of condominiums in an association.

BARRIERS TO CERTIFICATION:  Whether an association is seeking initial certification or recertification, the following issues are the most common barriers that prevent associations from obtaining FHA approval:

  • Delinquencies are in excess of 15% of the membership.
  • There is ongoing litigation that is not covered by insurance – especially litigation involving construction defects.
  • Rentals exceed 50% of the total number of units.
  • There is inadequate reserve funding – less than 10% of the annual budget.

Embarking on projects that are so costly that the association is required to finance the project through a bank loan.  The first mechanism limits the association’s “power to spend.”  In these instances a provision is included within the governing documents limiting the association’s ability to spend, more than a predetermined sum, on any given project without first securing approval from a specific percentage of the community’s membership.  These provisions provide the membership an opportunity to pass upon what the governing documents classify as “large” projects before the board obtains the authority to spend those funds.  These provisions also protect the membership against being compelled to pay for a large project unless a sufficient percentage of the community agrees that that the project is necessary.

The second mechanism that may be included within an association’s governing documents limits the association’s “power to borrow” in order to fund a specific project. In these instances a provision is included within the governing documents limiting the association’s ability to borrow more than a predetermined sum without first securing approval from a specific percentage of the community’s membership.  These provisions provide the membership the opportunity to pass upon whether the association should be permitted to borrow funds to complete what the governing documents classify as “large” projects before the board obtains the authority to borrow those funds.  These provisions also protect the membership against being compelled to repay loans for large projects unless a sufficient percentage of the community agrees that that the project is necessary.

Although your governing documents may not include both provisions, if either provision is present, the association’s board of trustees should be cautious about attempting to secure a bank loan to finance a large project without first securing the membership’s approval.  In an Unpublished Opinion issued on January 22, 2013 in Claridge House One Condominium Association, Inc. v. Claridge House Owners for Justice, et al., 2013 N.J. Super. Unpub. LEXIS 135 (App. Div. 2013) the Appellate Division of the New Jersey Superior Court affirmed the trial court’s decision limiting the association’s power to borrow money unless it first obtained the membership’s approval to spend the money on the project for which the funds were borrowed. This “Unpublished Opinion” is not officially binding on any courts throughout the state.  However, it should provide board members insight in what it likely to happen should their association fail to heed its warning.

fmcgovern@theassociationlawyers.com

The Common Interest Community Manager Licensing Act is close to being law: What does it mean for you?  As many people already know, the Act provides for the licensing of common interest community managers, but what you may not know is that it also creates a Common Interest Community Board, provides accounting and insurance requirements and mandates continuing education.  Below are answers to a list of frequently asked questions.

Question: Who will be on the Common Interest Community Board?  The Board will consist of nine members:

  • One member from the department in the Executive Branch of State Government, appointed by the Governor;
  • Two public members appointed to represent the interests of the public; and
  • Six members who have been actively engaged in providing management services for at least five years immediately preceding their appointment (after the first Board is appointed, the six members must be licensed common interest community managers).

Question: Who does not have to be licensed? 

  • An officer or member of a community association;
  • An attorney representing an association;
  • Real estate broker, broker-salesperson or salesperson;
  • Certified public accountant, professional engineer, insurance agent or broker, or any other person in any other related profession requiring registration, certification or licensure by the State, who is acting within the scope of practice of his profession
  • An employee performing clerical or ministerial functions;
  • An employee solely performing accounting services;
  • An employee whose sole participation is to assist a common interest community manager in the preparation of budgets, financial statements or other financial reports;
  • A person who acts solely in the role of a superintendent for, or providing maintenance services to, a common interest community;
  • A person who acts as a receiver; and
  • A declarant.

Question: What are the requirements necessary to be eligible to be licensed as a common interest community manager? 

  • Be of good moral character
  • Be at least 18 years of age; and
  • Have completed a training program approved by the board and successfully passed an examination or have passed an examination that is developed in accordance with national standards accredited by the National Commission for Certifying Agencies.

Question: What if I have been a manager for many years?  Do I still have to apply and meet the same standards as new managers?  For 180 days after the application process has been opened, a manager may pay a fee to the Board and submit a written application and that manager will be licensed, so long as he or she is of good moral character, has been actively engaged in providing management services for at least 12 months and successfully completes a training program and examination that is the same or substantially similar to what is required by the Act.

Question: What are the requirements for handling association funds?  The Act goes into more detail, but generally speaking, if a manager/management company controls, collects, has access to, or disburses association funds, the manager or management company (1) must have a policy of employee dishonesty insurance in place; (2) must either maintain separate, segregated accounts for each association or, with the consent of the association, combine the account of one or more associations, but separately accounts for the funds of each association; and (3) must obtain the appropriate general liability and errors and omissions insurance to cover any losses or claims against community association clients.

Question: How often do I have to renew my community interest community manager license?  All licenses shall be issued for a two-year period and shall be renewed upon filing of a renewal application within thirty days of the license expiring, the payment of a licensure fee and presentation of satisfactory evidence that the renewal applicant has successfully completed the continuing education and insurance requirements.  If the renewal application is not made within thirty days after the expiration of the license, the applicant may be required to be reexamined and may not act as a manager until licensed.

Question: What are the continuing education requirements?  The Board, once created, will establish standards for continuing education, but the number of credits will not exceed 18 credit hours biennially and at least three credit hours will be required to be in professional practice ethics.

Question: When will this Act take effect?  The Act will take effect as soon as it is signed into law, but managers will have 360 days following the creation of the Board to get licensed.

Open Board meetings are generally the most stressful part of any board member’s tenure.  We all know that people who come to open meetings are usually not there to let the board know what a wonderful job they are doing.  Instead, at best, they are there to listen, note problems and offer suggestions and, at worst, they are there to complain, berate and embarrass.  In spite of this, open board meetings should be embraced.

Open meetings are required by law. Both the Condominium Act, N.J.S.A. 46:8B-13, and the Planned Real Estate Full Disclosure Act, N.J.S.A. 45:22A-46, require that, with limited exception, if the Board is going to make a binding decision, that decision must be made at a public meeting open to attendance by all unit owners1.  This means that the membership must be allowed to watch.  This does not mean that the membership participates in the decision.  Further, all unit owners must have been given adequate prior notice of the meeting.  The notice requirements are ordinarily specified in each association’s by-laws although N.J.A.C. 5:20-1.2 actually defines “adequate notice” in the condominium context and this section might be applied by analogy to home owners associations.

Topics specifically excluded from having to be decided upon at an open public meeting and reserved for executive session are:

(1)  Any matter the disclosure of which would constitute and unwarranted invasion of individual privacy.  Often this involves debtor account collection decisions.

(2) Any pending or anticipated litigation or contract negotiations.  Often this involves transition decisions and vendor negotiations.

(3) Any matters falling within the attorney-client privilege, to the extent that confidentiality is required in order for the attorney to exercise his ethical duties as a lawyer.  This generally includes attorney-client communications.  Although there are exceptions, when in doubt, attorney communications and decisions requiring substantive attorney involvement should not be made at open meetings.  Note that involving the attorney in a decision cannot be used as a sham to permit decisions that would otherwise be required to be made at an open public meeting to be made in a closed session.

(4) any matter involving the employment, promotion, discipline or dismissal of a specific officer or employee of the association.

Besides open meetings being required by law, they are the keystone of Association  communications.  Association members can hear, first hand, what the Board is doing.  Further, open meetings provide a forum where Board members can stay in touch with membership concerns via the public comment session.  Although associations are not compelled to have public comment sessions, not having public comment sessions is unwise.  Although it must be explained that the membership does not participate in the decision making and they do not vote, excluding public comment is a recipe for mistrust, unrest and resentment.

Particular open meeting formats vary and are beyond the scope of this article however, each association should work with its manager, attorney, accountant, engineer etc. as the case may require to formulate the format that works best.  If it is anticipated that uncomfortable issues will be raised, they should be discussed with management and professionals prior to the meeting.  Often board members and other residents hear of “hot topics” long before others do.  Anticipation and preparation are essential to smoothly addressing “hot topics”.  In fact, more often than not, “hot topics” are better first raised by the board at open meetings rather than the members.  Membership generally appreciates this preemption.  The Board appears more informed and involved and it often steals the thunder of those who may be lying in wait to spring a hot topic on the Board.  In the end, open board meetings are required, are good and should be viewed as an opportunity to inform the members, listen to the members and showcase the board’s work.

1  Note that the board may meet in workshop sessions but may not make decisions at these workshop sessions.

Bankruptcy is a court case where a person attempts to have their debts wiped out (a Chapter 7 Bankruptcy) or attempts to have the court force their creditors to be paid under a payment plan (a Chapter 13 Bankruptcy).

The Petition date is the date that the person files the bankruptcy papers (the Petition) with the bankruptcy court.

The petition date is also the date that the Automatic Stay takes effect.  The automatic stay is like an automatic court order that orders creditors to stop pursuit of the person who owes the debt as long as the automatic stay is in effect.  Judges will impose sanctions against those who continue to pursue people in bankruptcy when the automatic stay is in effect.

What should a manager do when a bankruptcy notice is received?

First, immediately notify the association’s collection attorney and provide the attorney with copies of any bankruptcy documents received so that the association will temporarily stop collection efforts and will not be sanctioned for violating the automatic stay.

Modify the bookkeeping for the unit.  Set up one account to keep track of Pre-petition accruals (fees etc. that accrued prior to the petition date).  Only payments received from the Chapter 7 or Chapter 13 Trustee should be applied to the pre-petition accruals.  Set up a second account to keep track of Post-petition accruals (fees etc. that accrue after the Petition date).  Only payments received from the unit owner after the petition date should be applied to post-petition accruals.

A bankruptcy notice will typically be provided which will indicate the type of bankruptcy case filed and whether it appears that assets will be available for payment of pre-petition accruals.  If the notice indicates that assets are available, a Bar Date should be indicated on the notice.  The Bar Date is the deadline for the association to submit its Proof of Claim to the court so that the association may receive some of the assets available from the bankruptcy.  In bankruptcy, the bar date deadline is very serious and failure to file a proof of claim on time will typically result in loss of the claim.

The proof of claim is typically prepared by the association’s attorney.  The proof of claim specifies the amount of the pre-petition accruals and the property that secures the amount owed.  Typically the association’s attorney also prepares and files a notice of appearance which advises the court that the association intends to participate in the case.

In a Chapter 13 case the association attorney may also file an objection to confirmation objecting to the plan that the unit owner has proposed for paying off the pre-petition accruals (usually over a five year period).  If an objection is filed the attorney will have to appear at the Confirmation Hearing (A hearing before the Judge and/or Chapter 13 Trustee where the plan and the objections to the plan are reviewed).  If the court and the Trustee find the plan satisfactory, the plan will be confirmed and will bind those included in it.

How can an Association proceed against a non-paying unit owner if a bankruptcy is filed?

Obtain Stay Relief by filing a stay relief motion with the bankruptcy court.  The usual basis for this motion is that the unit owner has continued to fail to pay post-petition accruals or the bankruptcy was filed in bad faith.  If this motion is granted, the association will be able to continue pursuit of the unit owner.  However, if the unit owner dismisses his bankruptcy case and then files another one, a new automatic stay takes effect and the association’s collection efforts are stopped again.  After serial filings, the association may apply for Prospective Stay Relief.  If the association obtains a prospective stay relief order, the association may continue to pursue the unit owner even if a new bankruptcy is filed.  Note that, even if stay relief is granted, if a plan is confirmed, the plan will bind the association.

Often, prospective stay relief is the ultimate goal because serial filings for the purpose of delay are common.  Though hard cases generate attorney fees in obtaining prospective stay relief, associations should discuss this option with collection counsel because, if the association does nothing, non-paying unit owners will be happy to live for free and mortgage companies cannot be counted upon to aggressively obtain stay relief and finalize foreclosure.  If the association obtains prospective stay relief, the association may foreclose and have the unit owner removed from the unit.  This may not generate money for the association but it will help expedite turnover of the property to a new paying owner.  Many associations rent units during the period from the association’s foreclosure sale to the bank’s foreclosure sale.  Lastly, in a chapter 7, the case is typically closed quickly.  Once closed, the stay is gone and, though personal liability is discharged, the lien on the unit survives and may be foreclosed.  This is why pre-petition accruals should not be automatically written off, even in a chapter 7.

Regardless of who is ultimately found liable for damages related to the golf course and golfing, the Association would almost certainly be sued along with the golfer who hit the ball, the course manager and any other person or entity somehow related to the incident.

In light of this, the manager should check the Association’s insurance information to determine whether or not the Association=s liability insurance provides a defense and coverage in the event of either a personal injury and/or property damage claim resulting from a stray golf shot.  If the current policy does not cover such claims, the insurer should provide the Association with a quote for the appropriate insurance protection and such insurance should be obtained.  In addition, the Board might also request guidance from the insurer as to whether certain protective measures should be undertaken by the Association in those areas, if any, that are a potential problem.

Below, I discuss some of the sources of liability claims with respect to administering and maintaining an Association golf course.  This is not and exhaustive list, like any other business, the sources of claims are myriad.  For example, additional sources of claims could be environmental law (use of pesticides and fertilizer, failure to monitor and report on well usage), immigration law (use of illegal aliens as grounds personnel) and workers compensation law (injury to an Association employee).

NEGLIGENCE CLAIMS

The Association is required to exercise reasonable care in the administration and maintenance of the golf course.  Whether a defendant exercised reasonable care is determined by the jury.  However, a court could find that the homeowners and others assumed the reasonable risks associated with the operation of a golf course (i.e. stray golf shots). In the case of Sans v. Ramsey Golf and Country Club, Inc., 50 N.J. Super. 127 (App. Div. 1958) affirmed 29 N.J. 438 (1959) the plaintiff sued to stop use of a certain tee, the court noted that generally Apurchasers of home plots bordering the golf course must be held to have taken them subject to the ordinarily incidental discomforts of such proximity, such as the hazards of stray golf shots….

However, as described in the nuisance section below, if a member shows that an inordinate amount of golf balls were striking their house or falling into their yard, a court could conclude that this invasion of property is greater than an Aoccasional stray shot@, the situation constitutes a nuisance such that the Association must abate the nuisance at its own expense and, if the plaintiff shows that the Association was aware of the nuisance but did nothing, damages might be awarded.

With respect to an Association employee or agent (possibly even a caddy) who is struck or injured, the Worker=s Compensation Act may bar recovery on a personal injury claim.  In the case of Harrison v. Montammy Golf Club 227 N.J. Super. 409 (1988), a caddy was struck in the face by a ball and sued the club and others, the golf club was granted summary judgment in its favor based on the Workers Compensation Act.

Stray shots are just one example of a basis for a claim arising out of administering and maintaining a golf course.  Lightening strikes have resulted in suits against golf clubs.  In Maussner v. Atlantic City Country Club, Inc.  299 N.J. Super 535 (App.Div.1997), a golfer who was struck by lightening on the course overcame an attempt to have the case dismissed on summary judgment.  The Appellate division stated AAll golf courses have a duty to post a sign that details what, if any, safety procedures are being utilized by the golf course to protect its patrons from lightning.  If a particular golf course uses no safety precautions, its sign must inform golfers that they play at their own risk and that no safety procedures are being utilized to protect golfers from lightning strikes.  If, however, a golf course chooses to utilize a particular safety feature, it owes a duty of reasonable care to its patrons to utilize it correctly.  This latter standard means, for example, that if a golf course builds shelters, it must build lightning proof shelters; if a golf course has an evacuation plan, the evacuation plan must be reasonable and must be posted; if a golf course uses a siren or horn system, the golfers must be able to hear it and must know what the signals mean; and if the golf course uses a weather forecasting system, it must use one that is reasonable under the circumstances. The Association, the developer and the course manager must determine what safety procedures with respect to lightening, if any, will be implemented.

Additionally, golf clubs have been subjected to suit for other hazards, in O’Connell v. Forest Hill Field Club, 119 N.J. Super. 317 (1972), the golf club was sued when a child trespassed on to the course and fell into a hole.  Similar suits have been brought for sledding, ice skating and drowning accidents.

In the end, liability cannot be predicted.  The cases turn on the particular facts and the Association will invariably be sued.  The Association must act reasonably in administering and maintaining the course and must be certain that it is covered by insurance.  If a claim is asserted against the Association for broken windows, dented cars, personal injury etc. the Association should immediately contact its attorney’s office and insurance representative to evaluate the claim.

NUISANCE CLAIMS

In the case of Sans v. Ramsey Golf and Country Club, Inc., cited above, the plaintiff sued to stop use of a certain tee, the court noted that generally Apurchasers of home plots bordering the golf course must be held to have taken them subject to the ordinarily incidental discomforts of such proximity, such as the hazards of stray golf shots…. The court qualified its opinion by stating that both the developer and owner of the residential community was Areasonably bound to lay out the golf course with fair regard to the minima of residential comfort and convenience for the occupants of the plots laid out along the borders of the course and sold for dwelling purposes as part of a common project.

Under Sans, a homeowner assumes the incidental risks when purchasing a home along the golf course.  However, if the homeowner can demonstrate that the developer did not reasonably lay out the golf course so as to minimize the discomforts then, the developer and the Association (the corporation to whom the developer conveyed the golf course) may be subject to injunction (and possibly damages) (golf course design in this regard is necessarily an issue to be raised in transition).  In Sans, the plaintiffs demonstrated that the developer failed to meet its obligation with respect to location of the third tee.  The court in Sans held that the owner of the golf course was required to Arearrange its golf layout in respect of the third tee, (This would be a significant expense if the Association had to move a tee itself).

Each and every affected Association homeowner who purchases his or her home with the knowledge that it borders the golf course assumes certain risks associated with the location (i.e. stray golf balls).  However, if there has been a historic problem with certain homes along certain portions of a golf course, then, as in Sans, the affected homeowners might make a case against the developer and the eventual owner (the Association).  If there are certain known areas along the golf course that could prove or have proven to be dangerous, they must be addressed.  However, responsibility/liability issues must be balanced by the intended reasonable use of the golf course. If there is a historical or obvious potential problem, it should be addressed.

TRESPASS CLAIMS

Trespass claims have also been asserted against golf clubs for errant balls and/or golfers going onto lots to retrieve balls.  To prevent trespass claims, the Association should consider amending its governing documents.

For example:

Grant of Easement:

Every Lot in the Association is hereby burdened with an easement allowing golf balls to come over and/or onto every Lot.  All persons related to the golf course, including but not limited to, golfers, caddies and Association agents and employees shall have an easement to come on each Lot in the Association for the purpose of seeking and retrieving golf balls.  The forgoing easement shall not relieve individual golfers using the golf course of any liability they may have for property damage.

Thousands of Americans die needlessly each year because they had no access to relatively inexpensive and user-friendly life-saving equipment.  In March of 1999, the New Jersey Legislature determined that more than 350,000 Americans die annually from out-of-hospital sudden cardiac arrest.  The American Heart Association estimated that almost 100,000 such deaths could be prevented each year if automatic external defibrillators (AEDs) were more widely available.  AED refers to a medical device heart monitor and defibrillator that, upon determining that cardiac arrest has occurred, automatically charges and delivers an electrical impulse to the victim’s heart (hopefully restarting it).  Because the AED monitors the heart and determines if defibrillation is needed, people who are not medical professionals can be easily trained to use them.

The Legislature also determined that many New Jersey communities have invested in 911 emergency telephone equipment, ambulances and the training of emergency personnel.  However, not all emergency personnel have been trained in or have immediate access to AEDs.  Legislation was passed to encourage greater acquisition, deployment and use of AEDs by emergency personnel and other trained personnel throughout the state.  The AED law has been of particular interest at “55 and over” communities, some of which have purchased AED equipment and implemented life-saving programs.  AED’s have also been appearing at golf course club houses and shopping malls.

While AEDs do much of the “thinking” for an operator, the AED law has important acquisition, maintenance and training requirements.  Before an AED can be purchased, the person or entity acquiring the AED must show a “prescribing licensed physician” that it has a protocol in place to comply with the AED law.  The AED equipment must be maintained and tested according to the manufacturer’s guidelines.  Certain emergency medical services providers in the region must be notified of the existence, type, and location of the equipment and all operators must meet certain training requirements.  An AED operator must successfully complete and hold a current certification from the American Red Cross, American Heart Association or other training program in cardio-pulmonary resuscitation and use of a defibrillator which is recognized by the Department of Health and Senior Services.  Professional medical assistance must always be obtained after use of an AED, however it is wise, if possible, to put out a call for help immediately so that help will be on the way while the AED is being used.  Other requirements are set forth in the AED law.

In order to encourage the use of AED equipment in an emergency and remove operators’ fears about being sued after a bad outcome resulting from a life-saving attempt, the Legislature instituted certain immunities and limited civil liability.  As long as the AED was acquired or provided, or the emergency care was rendered or supervised in good faith, and compliance with the AED law can be demonstrated, there should be immunity from civil liability for any resulting personal injury.  However, there is no immunity for acts of gross negligence or willful or wanton misconduct; failure to use the AED is not considered gross negligence or willful or wanton misconduct absent an otherwise pre-existing duty to do so.

In light of the AED law, purchase, installation and use of an AED is not tremendously cumbersome however, specific requirements must be met – especially to qualify for the immunity provided by the law.  Associations (and others) which may want to implement an AED life-saving program should contact their attorneys to ensure that all aspects of the law are met.  An association must also contact its insurance carrier and advise of its intentions with respect to use of an AED.  An additional policy endorsement with an additional premium may be required.  Further, if Association management is to be trained to use the AED, the management company should consult its own legal counsel, as it may affect some of its business and insurance decisions.

In the end, AEDs or “do it yourself” defibrillators are a life saving tool that can provide immediate assistance when minutes can be the difference between life and death.  AED equipment and policies must be implemented carefully however to avoid liability exposure that could be very large.

fmcgovern@theassociationlawyers.com

Woodlake at King’s Grant Condominium Association, Inc. v. Coudriet and Mesy.  What it Means and What Associations Should Do Going Forward

It’s common knowledge that Burlington County Chancery Judge Karen L. Suter has not been receptive to Associations’ applications for appointment of rent receivers.  This has been true even when a unit is abandoned, vacant and worth less than the balance of the mortgage.  Nevertheless, we believe that Judge Suter and New Jersey’s other Chancery Judges will, in the proper circumstances, continue to grant Associations’ applications for appointment of rent receivers.

In Woodlake at King’s Grant v. Coudriet and Mesy (decided April 1, 2014), New Jersey’s Appellate Division reviewed two of Judge Suter’s decisions denying Woodlake’s motions for appointment of rent receivers where the units were abandoned, vacant and apparently worth less than the balance of the mortgage.  The Appellate Division upheld Judge Suter’s denials.

We did not participate in the Woodlake case.  However, we do not believe that Judge Suter has anything against associations nor do we believe that the Woodlake decision should inhibit Chancery Judges from granting Association’s future rent receiver applications.

In Woodlake the Appellate Court noted that “The Association has not demonstrated that defendants have an affirmative obligation to rent their respective units…”; “[the Association has not demonstrated]…any authority…to rent those units to new tenants”; “Nor have we been presented with any indication that defendants misappropriated rents”; “[The Association has not provided] any other agreement between the parties [that] provide[s] for the appointment of a rent receiver” and “…the Condominium Act does not expressly authorize such relief…”.  However, nothing in that laundry list is determinative of whether or not a rent receiver should be appointed on an Association’s application when a unit is vacant and abandoned.  At issue is the Court’s power, not the association’s power.  Chancery courts have the inherent power to prevent waste, mitigate fire risk, mitigate vandalism risk and prevent squatting.

The decision is left to the broad discretion of the Chancery Judge.  Arguably, the County Chancery Judge has the broadest powers of any judge in the judicial system (the late Judge Alexander Lehrer once said “Mr. McGovern, in this courtroom, I am king.”  He then offered to trace the history of the Chancery Court’s equitable powers back to the kings of England).  Chancery Judges have the power to grant equitable relief – a power broader and more flexible than Law Division Judges.

Chancery Judges ask themselves: “Does this seem right?”, “If I deny the requested relief, will the applicant be irreparably harmed?”, “If I grant the requested relief will another party or, worse yet, someone who has not had the opportunity to be heard, suffer greater harm than the applicant?”

Beyond the laundry list noted above, the Woodlake Appellate Court discussed rent receivers in the context of cases involving banks attempting to have rent receivers appointed against mortgagors.  Early in my legal career I represented banks and was involved in a number of hotly contested cases involving a bank’s right to rents.

The Woodlake Appellate Court did not plumb the distinctions between rent receiver applications in the bank-mortgagor context and rent receiver applications in the association-abandoned unit context.  In the bank-mortgagor context, typically the bank has lent money to the mortgagor to purchase the property (perhaps an apartment building, office building etc.).  If the mortgagor defaults, the bank attempts to collect the rents via a rent receiver so that its loan may be repaid.

Courts look at such relief as extraordinary for a number of reasons, for example: the right to collect rents and proceeds generally follows ownership and possession rather than lienholder status, appointing a rent receiver may put the mortgagor out of business if the mortgagor’s business is real estate investment and appointing a rent receiver may put the mortgagor out of an operating business if the mortgagor’s business is a (or the only) tenant in the financed real estate.  Courts also consider whether the lender is “adequately protected” by the value of the property.  Judges ask: Is there an “equity cushion” such that the value of the property exceeds the mortgage sufficiently to protect the bank’s loan amount plus amounts, such as taxes, insurance, security etc., that the bank may have to continue to advance.

The reasons judges are cautious in appointing rent receivers in the bank-mortgagor context do not however apply in the association-debtor context where the unit has been abandoned and is vacant.  In the association-debtor context, where the unit has been abandoned and is vacant, waste/fire/vandalism/squatters and possible impacts on third parties are the primary concerns – the debtor has already walked away from the unit.

Waste/fire/vandalism/squatter issues weigh heavily in favor of granting an association’s request for appointment of a rent receiver.  However the “possible impact on third parties” prong could still be problematic.  In Woodlake the mortgage company was apparently not a party to the suit or on notice of the rent receiver motion.  Further, it also seemed that the mortgage company may have been proceeding expeditiously with its foreclosure and was close to completing the foreclosure process.  Although speculation, these two facts alone appear sufficient to support Judge Suter’s denial of the rent receiver application and the Appellate Division’s affirmation of Judge Suter’s decision.

Judge Suter, having been New Jersey’s Chief of Banking and Insurance Operations from 1998 to 2000 and Commissioner of New Jersey’s Department of Banking and Insurance from 2000 to 2001 is aware of the fact that banks, via their security instruments, often take an interest in rents and proceeds.  Therefore, she may feel that, even though the association is a junior lien holder and cannot foreclose the bank’s interest, in the context of a rent receiver motion, the bank is entitled to be a party to the action or, at a minimum, is entitled to have notice of the rent receiver application. Further, Judge Suter may also feel that, in cases where bank foreclosure is imminent, the administrative detriment to the bank of putting a tenant in the unit outweighs the brief benefit to the association.

In any case, we feel that Woodlake did not contribute meaningfully to the body of case law addressing rent receiver applications.  Rather, it reaffirmed the power that Judge Suter and the other Chancery Judges already had and have exercised regularly throughout the recent economic slump.  Whether or not a rent receiver is appointed with respect to an abandoned and vacant association unit depends on the facts.

It appears that, going forward, the bank should be put on notice of any association rent receiver application and that an Association should think twice before applying for a rent receiver where a bank is diligently pursuing its foreclosure action and completion of the foreclosure is imminent.  Associations should still however look to rent receiver applications as a valuable collection tool and not forget that banks may also be liable as mortgagees in possession.

Alternative Dispute Resolution – commonly referred to as “ADR” – has been an especially hot topic for community associations since the New Jersey Appellate Division’s 2012 decision in Bell Tower Condominium Association, Inc. v. Haffert. In that case, the Court held that “housing-related disputes” under the Condominium Act include disputes over the validity of special assessments for repairs and improvements to the common elements. Many commentators subsequently suggested that this holding meant that all disputes between an association and a homeowner must be submitted to ADR. Not so. The Appellate Division recently provided additional guidance on ADR in a March 25, 2014 unpublished opinion, Townsquare Village Homeowners Association, Inc. v. Walton. In that case, this firm successfully argued that the right to ADR has been waived once a person has participated in a trial on the underlying issues.

In Townsquare Village, the association obtained a judgment for unpaid monthly assessments after participating in a one-day trial with the homeowners. After winning at trial, the association filed an application for an award of attorneys’ fees with the trial court. In opposition to the application for attorneys’ fees, the homeowners filed a motion demanding that the judgment for monthly assessments be vacated, and that the matter be submitted to ADR as required under the Condominium Act (and the Planned Real Estate Development Full Disclosure Act Regulations). When the homeowners’ motion was denied, they appealed the matter to the Appellate Division.

On behalf of the association, this firm argued that the homeowners waived whatever right they had to participate in ADR when they elected to participate in a trial. The Appellate Division agreed – even though a judgment for attorneys’ fees had not yet been awarded in the case – and held that the underlying merits of the case had already been decided by the trial court, which was also in the best position to make a ruling on attorneys’ fees. Therefore, the association was no longer required to participate in ADR regarding the matter.

The Townsquare Village case clearly demonstrates that the expansiveness of the ADR mandate for associations may be more limited than many commentators previously thought.

“Interest” and “late fees” are different things.  Governing documents may provide for interest and/or late fees.  Judges are sensitive to the difference.  Judges will not allow interest if only late fees are authorized in the governing documents and judges will not allow late fees if only interest is authorized by the governing documents.

Judges essentially conclude that “late fees” only accrue on late payments while “interest” is charged on a continuing balance.  Many management companies are not set up to accrue interest; nevertheless, posting late fees (if not authorized by the governing documents) is improper.

Late fee postings are particularly troubling when late fees are compounded because of a single missed or late payment.  These “late fees” should really be interest on the continuing balance.