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Lessons From Storm Sandy

Posted on Author By Patricia McGlone

1. FEMA has again extended the deadline to file a proof of loss

If you want to contest the amount of payment from a flood insurance policy or you need to supplement a prior claim with additional information, the new deadline is April 28, 2014.

FEMA waived the proof of loss requirement to expedite the claims process for payment of Storm Sandy claims. This applies to Standard Flood Insurance Policies and losses related to Storm Sandy only. Insurance adjusters were permitted to issue payment based on the “evaluation of damages contained in the adjusters report” instead of a proof of loss signed by the insured or an insured-signed adjusters report.

FEMA has stated that if a policyholder wishes to submit a supplemental claim or disputes the amount paid, it may request additional payment by submitting a signed and sworn poof of loss statement as required by the terms of the insurance policy. Initially this paperwork had to be submitted by October 28, 2013. There was concern that additional damage may be discovered during the rebuilding process or there was not sufficient time to gather and submit all of the supporting documentation.

 

2. It may be time to revise the Association’s governing documents

This is a good opportunity for the Association to review its governing documents. Many Associations were surprised to learn that their documents did not contain a provision for destruction of the property and the procedure for deciding whether to rebuild. If rebuilding involves the common areas, the Association may want to provide that it will retain one contractor to do all of the work.

The sections regarding distribution of insurance proceeds should be reviewed to make sure they meet the needs and desires of the community. The Association should review and understand whether the Association’s policy includes coverage for the individual units. Will the restoration after a loss be full replacement, i.e., which would include upgrades that existed prior to the loss or will the unit be restored to builders grade only? The board may want to add a provision regarding payment of the insurance deductible in various situations.

 

3. Keep good records

Storm Sandy reminded us that good records lead to good claims. The insurance company requires documentation or proof to establish the damage or loss being claimed by the Association. Keep records with the date of purchase or installation, receipts or contracts for the work and photographs of the items. If these records are detailed and easily accessed a claim for payment for the insurance company will be proceeded faster and with a better result. The Association’s inventory should be updated annually as well.

Storm Sandy also reminded us that it is a good idea to keep a back up of all important records off site in the event that original records or computers are destroyed.

Contracts for Insurance – Covered Repairs

Posted on Author By The Association Lawyers

 

When natural disasters or fires cause massive destruction to association property, it is not only important to find the right contractor to conduct the repair work, but it is also critical to negotiate a well-worded contract with that contractor.  Specifically, an association needs to protect itself from unexpected bills that are not covered by insurance.

In order to protect an association from the nasty surprise of a bill for uncovered repair work, the following provisions for any insurance-covered repair or remediation project should be included in the contract:

The Contractor Should Agree to Accept the Price Approved by the Insurance Carrier.

Many times, the costs associated with cleanup and repairs from a natural disaster, fire or other major loss are not fully-known when the cleanup or repair work is ready to start.  Rather than waiting for the insurance carrier’s coverage decision or – worse yet – signing an agreement at the price quoted by the contractor, an association should require the contractor to accept, as payment in full, the insurance proceeds for the work performed – and nothing more.  In this scenario, a specific dollar figure is not included in the contract, unless as coverage decision has already been made.

The Association Should Not Have to Pay Until Insurance Proceeds are Received.

In addition to requiring contractors to accept payment in the amount approved by the insurance carrier, contractors should not be permitted to demand payment for work until insurance proceeds are received from the carrier.  Otherwise, an association may find itself fronting the money for the insurance carrier – money the association may not have.  Late payments could then result in otherwise unnecessary interest charges that will not be covered by insurance.  In some instances the insurance proceeds may not be received for several weeks or even months after the remediation and repair work is completed – especially when the damage was caused by a widespread natural disaster, like Superstorm Sandy, and the insurance carriers are handling numerous claims at once.

Additional Work Must Be Approved by a Change Order.

Contractors are experts at finding additional work that needs to be performed once they are onsite for insurance-covered damages, but they should never be given open-ended authority to make “necessary” repairs.  If the issue requiring repair was not related to the covered loss, the association will usually end up being responsible for the cost of the repair.  In order to avoid this problem, contracts should specify that all repairs not covered by insurance proceeds must be pre-authorized by a signed written change order.

Most contractors will not perform additional work without at least speaking to the association first; however, when repairs are related to insurance-covered losses new potential problems arise.  As already discussed the scope of work and approved repair costs may not be known before remediation and repair work start.  This creates a risk for contractors to guess wrong about what work will be covered.  The contractor may believe that an item needs to be completely replaced, but the insurance carrier’s final determination may be that the item was repairable – or not covered at all.  Recently, this problem was exacerbated in flood zone areas after Superstorm Sandy when many contractors performed work on damaged property that was below the “base flood elevation” (BFE), and that work was not covered by insurance.  Had the work been performed above the BFE, it would have been covered by insurance.  By structuring the contract to protect the association, the risk of these types of repair costs being shifted to the association is minimized.

New Jersey – Manager Licensing Bill

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

Today, January 9th 2014, the New Jersey State Senate passed the “Manager Licensing Bill”.

The bill will now go to the Governor for his signature.

The bill is available for viewing and downloading here.

This bill was first introduced in 2012 and has been working its way through the system.

We will keep you updated on any progress with regard to the actual signing of the bill by the Governor.

 

 

History of the bill:

3/8/2012 Introduced, Referred to Assembly Regulated Professions Committee
6/18/2012 Reported out of Assembly Comm. with Amendments, 2nd Reading
6/25/2012 Passed by the Assembly (51-26-1)
6/28/2012 Received in the Senate, Referred to Senate Commerce Committee
6/13/2013 Reported from Senate Committee with Amendments, 2nd Reading
6/13/2013 Referred to Senate Budget and Appropriations Committee
12/5/2013 Reported from Senate Committee, 2nd Reading
1/9/2014 Substituted for S2578 (1R)
1/9/2014 Passed by the Senate (29-7)
1/9/2014 Received in the Assembly, 2nd Reading on Concurrence

Bill
Manager Licensing Bill

Health Care Providers – Compliance Issues

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

Health care providers are increasingly scrutinized for compliance with health care and insurance laws.  In light of this, health care providers must be proactive in creating and implementing a compliance program.

A compliance program is a framework, voluntarily implemented by the health care provider, to help insure compliance with laws, reveal breaches of law and provide a mechanism for addressing any improper conduct uncovered.  Through increased budgets and a large array of enforcement tools, State and Federal agencies as well as third party payers have pursued enforcement of health care and insurance laws with increased tenacity.  The increased enforcement budgets result from Governments’ acknowledgment of the tremendous amount of money spent on Health Care (especially Medicare and Medicaid), a perception that past spending practices have made the health care field fertile ground for fraud and a recognition that health care fraud negatively impacts the quality of care.

Though health care providers cannot do much about the increased funds spent on enforcement, health care providers should carefully note the consequences of a failure to comply with applicable laws.  These consequences include: loss of professional licenses, criminal conviction with jail time, substantial fines, ineligibility to receive payments from government programs (i.e. Medicare), disgorgement of payments, fines, interest, attorneys fees and punitive damages (i.e. double and treble damages).

In light of the well funded and aggressive compliance initiatives and the onerous nature of the consequences for failure to comply, a provider compliance program is a must.  Not only will a health care compliance program help ensure compliance with law, reveal problems and provide a mechanism for addressing improper conduct, if a compliance program is in place, it may also avoid implementation of a more burdensome governmentally imposed program.  Further, if a compliance program is in place and a violation is found the penalty may be substantially less than the penalty that would have otherwise been imposed.

The Department of Health, Office of the Inspector General (‘OIG’) promotes voluntary compliance programs for health care providers.  The OIG maintains a website at http://www.dhhs.gov/progorg/oig which provides information on compliance with health care laws and, though much of this information relates to hospitals and other entities rather than providers, there is substantial information for providers.  For example, a fraud alert addressing physician certification for home health services.

The OIG and others have used the United States Sentencing Commission Guidelines as a reference point for the minimum requirements of a compliance program.  The compliance program should include the following:

  1. The development and distribution of written standards of conduct as well as written policies and procedures that promote the health care provider’s commitment to compliance and that address specific areas of potential fraud such as self referral, unbundling of services, up coding and improper claims submission.
  2. The designation of a compliance officer charged with operating and monitoring the compliance program.
  3. The development and implementation of regular, effective education and training programs for all relevant employees.
  4. The maintenance of a process, such as a hotline, to receive complaints and to protect whisleblowers from retaliation.
  5. The development of a system to respond to allegations of improper/illegal activities and the enforcement of appropriate discipline with respect to employees who have violated compliance policies or requirements of federal, state or private health care programs.
  6. The use of audits and/or other evaluation techniques to monitor compliance and assist in the reduction of identified problem areas.
  7. The investigation and remediation of problems and the development of program modifications to address future offenses.

The scope of each portion of the compliance program will depend upon the size and complexity of the health care provider.  The larger and more complex the provider, the broader the scope and the more formal the development and implementation.

In March of 1999 the Office of Inspector General and the Health Care Compliance Association co-sponsored a government-industry roundtable discussion so that the Health Care compliance industry could inform the OIG of issues surrounding the implementation and maintenance of compliance programs.  This meeting was also an opportunity for the OIG to present policy objectives underlying compliance program guidelines.  The report on this roundtable meeting, which is posted on the OIG’s website, highlighted some of the comments and suggestions raised.  These are summarized below:

Developing a Compliance Program

  1. Providers were concerned that the OIG’s compliance guidance appears to focus on compliance to the exclusion of medical ethics and this may discourage some providers from implementing a compliance program.  Further, some providers expressed concern over the cost of compliance programs.
  2. It was noted that emphasis on federal health care programs, especially Medicare, detracted from the need to scrutinize the same issues when dealing with private payees.  Risk areas are generally identifiable through OIG information including fraud alerts, OIG work plans and fraud settlements.  However, self analysis should be a source of risk identification and prioritization especially if there has been a particular history of violation
  3. Smaller providers which may not have a designated compliance committee, can form a task force to address compliance concerns as they arise.
  4. Close collaboration between personnel and compliance personnel is required especially in areas of training, hiring, discipline, establishment of a hotline and complaint follow-up.
  5. Conflicts for compliance officers might be minimized by establishing a strong and active compliance steering  committee on assigning compliance to a well respected manager.
  6. Compliance officers can be more effective if they have an open door policy and are pro-active rather than reactive.
  7. Compliance efforts may be outsourced but cost in an issue, especially when many providers found the concerns raised were often personnel rather than compliance issues.
  8. Compliance training in the areas of billing and coding was perceived as imperative.

Evaluating Compliance Program Effectiveness

  1. Continuous Review is necessary.  Further three types of audits were recommended:

a) Baseline audits (initial audits)
b) Proactive audits based on identified risk areas (i.e. OIG fraud alerts etc.).
c) Issue based audits (where a provider knows there is a problem and is attempting to determine the depth of the problem.)

Thorough interviewing of potential auditors was suggested and an annual forensic audit of major risk areas was recommended.  Compliance personnel noted that audits had a chilling effect on individual physicians and some compliance auditors noted physician downcoding and have directed attention to proper documentation rather than fraud and abuse concerns.

In demonstrating effectiveness of the compliance plan, documentation is very important.  The following must be documented: audit results, logs of hotline calls and their resolution, corrective action plans, due diligence efforts regarding business transactions, disciplinary action and modification of plans and procedures.  Further documentation of billing irregularities and disclosures of refunds of overpayments was encouraged.  Documentation of employee training was also strongly endorsed.  Additionally providers should document all communications with the Health Care Financing Administration.  Even with thorough documentation however, the OIG evaluates the effectiveness of a compliance program based on how it works in day to day practice, not merely what it is on paper.

Internal investigation and self disclosure requires that the provider ask itself the following questions:

—        What is the origin of the issue being investigated

—        When did the issue under investigation originate

—        How far back should an investigation go  (i.e. inquiry should be expanded if the results of an initial review suggest a broader problem.)

The following may be used by the compliance officer in prioritizing issues:

—        Has the OIG required the compliance officer to focus on certain issues

—        Does the problem pertain to a discontinued practice or a current practice with prospective exposure

—        Can deficient billing be suspended or ceased until a review can be completed

—        Can the issue under investigation have a significant impact on providers Medicare cost reports or interim payments

—        Does an issue present evidence of ongoing misconduct that may violate criminal, civil or administrative law and does it require immediate disclosure to a government authority

—        Has the provider established a standard of time required to address incoming billing concerns.

The attorney-client privilege and the attorney work product doctrine should also be properly used to withhold results of an investigation if appropriate but abuse of these doctrines may result in their waiver.

Upon discovery of billing mistakes, the provider should return the funds to the affected provider and add the issue to its list of topics to be reviewed during internal monitoring. The obligation to disclose to the government may depend on the size of the error and whether the error represents a pattern.  For example, a small isolated error may merely require return of an improper payment while a large overpayment or a pattern of over payment may require proceeding through the OIG’s provider self disclosure protocol.

In sum, governmental agencies are looking for conscientious and consistent implementation of comprehensive compliance programs combined with prompt, effective remedial action if problems are discovered.  Providers should consult with their counsel and auditor regarding design and implementation of a compliance program and/or addressing any known problems.  If a provider does not have an attorney or accountant/consultant that is familiar with compliance issues, this does not mean that the provider must replace its counsel or accountant.  Many practitioners who focus on compliance programs will partner with the current counsel and/or accountant as part of the compliance initiative.

Sources:  OIG ‘Building a Partnership for Effective Compliance’ – A report on Government -Industry Roundtable, April 2, 1999 available at http://www.dhhs.gov/progorg/oig/modcomp/roundtable.htm.  Health Care Fraud and Abuse, New Jersey Institute for Legal Education, New Brunswick, N.J. pub # S526.98 Bograd, Bonney, DiPasquale, Frey, McFadden, Kearney, Levy, Nittoly & Zoubek 1998; 1999 Health and Hospital Law Symposium, New Jersey Institute for Continuing Legal Education, New Brunswick, N.J. pub # S025a.99 Schaff, Benesch, Dobro, Faulk, Friedman & Lubic 1999.

Francis J. McGovern, Jr. is a 1988 graduate of Rutgers School of Business and a 1992 graduate of Rutgers Law – Camden.  Mr. McGovern has his practice, McGovern Legal Services, LLC, in New Brunswick where his practice focuses on corporate affairs and creditors’ rights.

Business Use Of Home Or Lot

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

Absolute Standard Versus Association Impact

May a Home and/or Unit within an Association be used for a business purpose and, if not, what would constitute a prohibited business use. Many Associations’ Master Deeds or Declarations contain provisions that purport to prohibit Association residents from conducting any business in their homes.

Twenty years ago conducting business at home was not as hot an issue as it is now.  Further, disputes regarding conducting business out of the home often involved activities that were easily identifiable as businesses for example, music schools and dentist’s offices.  However, the proliferation of personal computers, modems and fax machines combined with early retirements, corporate downsizing and alternative working arrangements for women and men with children increase the probability that residents will attempt to conduct some sort of business out of their homes.

As the following case examples demonstrate, covenants restricting use of units and/or homes to residential use are upheld almost without exception.

In The Four Hundred Condominium Association v. Gatto the court held that a restrictive covenant prohibited doctors from maintaining offices in certain areas of a condominium complex; in Diefenthal v. Longue Vue Management Corporation the court held that restrictive covenants banning commercial activities would be enforced although some commercial activities were acquiesced to by the adjacent property owners; in Greater Middleton Association v. Homes Lumber Co. the court held that a Covenant included in the majority of the deeds to lots in a subdivision over a period of forty-five years restricted the use of the lots to “residential purposes exclusively”; in Walton v. Carnigan the court found that when the restrictive covenant language is clear and unambiguous it will be enforced; therefore, operation of a day care center violated the restriction on commercial activity; in Fick v. Weedon the court found that Deed restrictions were not ambiguous in restricting use of the property to a private dwelling for one family, therefore, use of the property as a bed and breakfast violated the restriction and was enjoined; in Fox v. Smidt the court found that phrase “residential lot” in a subdivision indenture precluded the use of a building for commercial purposes, even though the building sought to be used as a warehouse had the exterior appearance of a residence; in Metzner v. Wojdyla the court found that a “bright line” rule should be applied to prohibit any business activity in a subdivision subject to a restrictive covenant providing that the property may be used for residential purposes only; in Gerber v. Hamilton the court found that enforcement of a restrictive covenant regarding home business depends on whether the residential character of subdivision is compromised.  In Gerber a beauty salon was prohibited; in Robbins v. Walter  the court found that the use of a residence as a bed and breakfast violated a covenant restricting use of lots to noncommercial use.

The above decisions do not involve decisions by New Jersey Courts.  However, New Jersey has long recognized and upheld restrictions limiting use to residential purposes.  This is demonstrated by the 1924 case of Dottsloff v. Hockstetter where the limitation of use to residential purposes was upheld and a corner grocery store was prohibited.

Though the above cases upheld restrictions against conducting business activity, they did not provide a framework for determining what constituted use of property for a non-residential or business purposes.  Instead, they applied a “we’ll know it when we see it” analysis.  However, two of the above courts did supply some guidance.  In the Metzner case a “bright line” rule was applied to prohibit any business activity in a subdivision subject to a restrictive covenant providing that property may be used for residential purposes only.  The Metzner Court tackled the analysis by evaluating the home owner’s actions.  For example, a major factor considered in determining whether the defendants were “conducting a business” was whether they accepted money for services. Since accepting money for services constituted “conducting a business” the home owners’ activity was banned.

However, through a more subtle analysis, largely arising because of specific governing document language, the Gerber Court analyzed restricted action by reviewing the impact the home owners’ activity had on the community.  Here, factors that the Court found should be considered when determining whether a resident was conducting a professional or prohibited commercial activity included:

  1. Whether the residential character of the subdivision is compromised
  2. Whether client visitation is required
  3. Whether the activity produced additional traffic, noise and activity

The way many documents are written, it appears that Courts could apply a “bright line” test and hold that any activity that is not strictly residential is prohibited as in the Metzner case.  This would eliminate the home/office fax/computer arrangement, even if it had no impact on the community.

However, New Jersey courts have read a reasonableness requirement into restrictive covenants and their enforcement.  See, Billig v. Buckingham Towers Condom Association I, Inc., 287 N.J.Super. 551 (1996).  It is likely that application of this “reasonableness factor” will cause courts to evaluate “doing business,” not by a “bright line” test but by more of a case by case “community impact” test using factors such as the three listed above.  This is even more likely in light of the growth of the internet, fax machines and computers.  Further, this “impact” standard frees the Association and its manager from the virtually impossible task of enforcing a “bright line” standard.  Rather than having to ferret out every home/office, the Association will likely only have to intervene where a community impact is created.

In conclusion, in enforcing ‘residential purposes only’ restrictions, board members should be aware that Courts may evaluate ‘conducting business’ by varied standards.  Until a clear decision is made regarding ‘conducting business’, associations must weigh the value of enforcing a ‘bright line’ standard for ‘conducting business’ and risk losing an action to enjoin the business activity against the value of enforcing a ‘community impact’ standard and risk being sued for failing to enforce the provisions of the governing documents.  In light of the technological progress and societal changes noted above, it is likely that courts will turn to a ‘community impact’ standard to determine what activities are prohibited in communities that restrict activity to residential purposes.

Homeowners Must Install Carbon Monoxide Detectors

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

In the fall of 1994, international tennis star Vitas Gerulaitis died while staying in the guest house of a Long Island Estate.  His death was caused by carbon monoxide which came from a faulty heater.  Some sources estimate that carbon monoxide is the number one cause of death by poisoning in the United States.  Further estimates suggest that in excess of one thousand people per year die from exposure to high indoor concentrations of carbon monoxide.  In addition, even if carbon monoxide levels are not lethal, headaches, nausea, fatigue, dizziness, brain damage and aggravation of heart problems may occur.

Carbon monoxide is a toxic gas that is produced when fuel is burned with incomplete combustion.  Home fuel burning appliances (for example: furnaces, fire places, hot water heaters, stoves, generators etc.) produce carbon monoxide.  Carbon Monoxide is especially dangerous because it cannot be smelled, tasted or seen.  The United States Consumer Product Safety Commission suggests that the best line of defense against Carbon Monoxide is to have your home fuel burning appliances inspected each year, preferably before the start of the home heating season, to make sure these appliances are in good working order.

At the time of Vitas Gerulaitis’ death, effective, low cost Carbon Monoxide detectors/alarms were not available.  Since then, relatively inexpensive Carbon Monoxide detectors/alarms have become widely available (check hardware and home supply stores).  In light of this, the New Jersey Legislature has mandated the installation of Carbon Monoxide detectors. The statute provides that every unit of dwelling space in a multiple dwelling (a condominium etc.) shall be equipped with one or more carbon monoxide sensor devices that bear the label of a nationally recognized testing laboratory and have been tested and listed as complying with the most recent Underwriters Laboratories standard 2034, or its equivalent.  This statute became effective February 8, 1999 and applies to Condominiums and other multiple dwellings.  The Department of Community Affairs Commissioner has released a regulation which specifies that single station carbon monoxide alarms shall be installed and maintained in full operating condition in the immediate vicinity of each sleeping area in any room or dwelling unit in a building that contains a fuel-burning appliance or has an attached garage.  There are some very limited exceptions to this however, most often the exceptions do not apply.

The required carbon monoxide alarms must be manufactured, listed and labeled in accordance with UL 2034 and must be installed in accordance with the requirements of the regulation and NFPA 720.  Installation and operation instructions should be provided by the manufacturer.  Carbon monoxide alarms must be battery-operated, hard-wired or of the plug-in type.

Department of Community Affairs’ inspections will check units for compliance with the carbon monoxide regulations and will likely enforce this regulation by assessing fines against those who do not comply.

Association Rules And Regulations

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

1. REASONS FOR ASSOCIATION RULES AND REGULATIONS

a) PRESERVATION AND ENHANCEMENT OF PROPERTY

Developers prepare and implement rules and regulations in an effort to, among other things, preserve the value of the homes in the community.  This is the basis for many architectural rules and regulations.  Since many community associations involve high density housing, developers and governmental  planners have used rules and regulations in an effort to avoid the problems suffered by non-association high density housing.

Among other things, non-association high density housing problems involve the wide range of care and maintenance provided by the individual home owners and the wide range in taste with respect to painting, decorating and landscaping properties.  Rules and regulations provide a framework which standardizes the level of maintenance and the look of the homes.  With a set of rules and regulations in place, purchasers can expect the community’s physical attributes to remain similar to what they were when they purchased their homes.  Rules and regulations provide a mechanism for purchasers to enforce a certain look and level of home maintenance, thereby preserving the property values throughout the community.

b) PRESERVATION AND ENHANCEMENT OF COMMUNITY HARMONY

Complimentary to preservation and enhancement of the physical property is the idea that rules and regulations also preserve and enhance community harmony –  relationships between home owners.  An association would be hard-pressed to maintain property values if the only power it had was the power to designate the color of the homes and the type of landscaping.

Importantly,  associations also have the power to regulate relationships between unit owners and between unit owners and the association.  These rules and regulations run the gamut in most associations.  They vary from regulation of noise to keeping of pets to maintaining recreational equipment outside of units to conduct in the swimming pool to parking and driving regulations.

This type of rules and regulations regulate how people are to act while they are in their units or upon association property.   This is an important facet of maintaining property value in high density housing. Many people of varying  backgrounds and lifestyles choose to live in close proximity to one another.  Because of the differing backgrounds and lifestyles and close proximity, without settled rules and regulations, friction could lead to unbearable living conditions.  In a city, municipal regulations regulate people’s conduct. Municipal regulations also apply to community associations however,  though enforceable, they are generally not the number one priority for municipal enforcement.  Police forces can hardly be expected to quickly respond to calls regarding people playing loud music when they are responding to calls involving threats to health, safety or property.

Association rules and regulations provide the tools for managing unit owner conduct on a scale that is manageable by the association’s Board of Trustees,  management company and attorneys.  These relational type rules and regulations and their conscientious enforcement may provide as much impact on property values as the impact of rules and regulations directed toward preservation and enhancement of property.

c) NEW RULES AND REGULATIONS

At one time or another, most people have been told that the “squeaky wheel gets the grease”.  This is no different in the community association field.  In many associations, especially more mature ones, home owner apathy allows a few interested and active individuals to provide the majority of input on how the association is run.  This is often advantageous because these individuals are usually  community-minded and will work with the association’s management and attorneys to maintain property value and amicable unit owner relations.  However, there are times when personal agendas are advocated and adopted to the detriment of the association as a whole.  There are also times when an association’s board is bullied by one or a few outspoken homeowners and the board gives into these demands.

Boards should be cautious not to accept suggestions for new rules and regulations solely because they are strongly advocated by one or a few individuals (the ‘squeaky wheels’).  Instead, whether formally or informally, the association’s board should attempt to determine other association members’  feelings on the proposed rules and regulations.  This avoids the situation where a small group of zealous advocates champion new rules and regulations, the new rules and regulations are adopted, and the ‘silent majority’ erupts with extreme hostility and disfavor.  Rule and regulation creation and implementation without association input  has lead to turnover of entire well functioning boards under the wrath of a no longer silent majority.  Unfortunately  board members in this position are often  surprised and disappointed because they were acting in good faith and they thought they were doing what the people wanted.   Turnover of a board causes instability which often leads to difficulty in managing and representing the association.  Communication and investigation prior to rule and regulation  creation and implementation is critical.

Failure to gain association consensus on proposed rules and regulations may also lead to divisiveness on the board.  Without consensus, a single board member may split from the board and advocate against the remaining board members.  While debate among board members is healthy, divisiveness impairs the board’s ability to get work done and function on a day-to-day basis.  Rather than the board polarizing, consensus should be  worked toward in creating and implementing new rules and regulations.

Unfortunately, obtaining community consensus and feed back is difficult.  Informal surveys are thought to be  less accurate and less reflective of the true feelings of association members.  However, formal opinion surveys/referendums can do more harm than good because rules or regulations that may “need” to be implemented may not receive a majority of  votes in a formal survey.  Then, home owners are naturally inclined to believe that, since the proposed rules and regulations did not receive a majority vote, the new rules and regulations are not going to be implemented.  This is contrary to the function of the board.  The board, as a representative body, knows the day-to-day workings of the association, its management company and attorneys generally have an awareness of the need for the rules and regulations.  What may seem unwise upon superficial  review by a non-participating homeowner may, from the board’s perspective, be critical for the proper functioning of the association.

We generally advise against performing  surveys on proposed rules and regulations but do advise that the board notify the association of the proposed rules and regulations through a news letter or otherwise to attempt to obtain the community’s feelings on the proposed rules and regulations.  This may be combined with open discussion at meetings prior to rules and regulations adoption.

2) SOURCE OF RULES AND REGULATIONS

a) STATUTE   

Rules and regulations in community associations arise from a number of sources.  Among numerous other statutory provisions, the Condominium Act appears atN.J.S.A. 46:8B-1 et. seq. and the Cooperative Recording Act at N.J.S.A. 46:8D-1 et seq.  Homeowners’ associations are generally left to the provisions in the deed of restrictive covenants with provisions from other statutes being applied by analogy.  The Community Association Institute is advocating passage of  a single statutory framework for community associations: The Uniform Common Interest Ownership Act. The hope is that the Uniform Common Interest Ownership Act will provide a standardized statutory basis for all forms of common ownership of real property in New Jersey and thereby provide a clearer basis for administering common ownership associations.

b) GOVERNING DOCUMENTS

Regardless, most association rules and regulations are not derived from statute but, are generally outlined in the association’s deed of restrictive covenants or master deed.   Generally these documents empower the association’s board to create and enforce rules and regulation for the common property and residents’ conduct within the association.   So long as the rules and regulations are implemented pursuant to the association’s governing documents, they are generally upheld.  However, the other source of rules and regulations is case law.

c) CASE LAW

Case law generally arises when the association and a unit owner become involved in a suit over implementation or enforcement of a certain rule or regulation.  Generally either a statute, rule or regulation is not one hundred percent clear or the facts are such that they do not fit exactly with the statute or regulations.   To resolve a dispute, the court will look to statute, the association’s governing documents and decisions of past courts to form an opinion as to whether the particular rule or regulation and the enforcement of such rule or regulation is valid.

Once a court decision has been rendered on a particular rule and regulation, that decision comes into play in considering enforcement of the subject rules and regulations in future cases with similar facts.  The decision may even bind the association with respect to future rules and regulations.  This was demonstrated, to the chagrin of many associations, when the court in Walker v. Briarwood Condominium Association, 274 N.J. Super. 422 (App. Div. 1994) struck down an association’s ability to impose fines for violations of rules and regulations and the court in Holbert v. Great George Village S. Condominium Council, Inc., 281 N.J. Super. 222 (Ch. Div. 1994) struck down an association’s ability to impose late fees.  Note that both of these court cases were statutorily overruled by passage of the amendments to the condominium act. See, N.J.S.A. 46:8B-15(e) and (f).

3. NOTICE OF RULES AND REGULATIONS

a) GENERALLY

Notice of rules and regulation may be provided in a number of ways.  First, individuals are generally put on actual notice of rules and regulations by receiving a copy of them at the closing of the sale of their home or by receiving a copy when the rule or regulation is passed.  The purchaser’s closing attorney should have reviewed all rules and regulations in the governing documents and otherwise with the purchasers. However, this is often not  done and, though copies of the governing documents are received, they are never reviewed.  Upon enforcement, many claim that they never heard of the rule and regulation.

If  the governing documents containing the rules and regulations and/or separate rules and regulations are recorded in the County Clerk’s office, the home owner is bound by the rules and regulations through constructive notice.   With constructive notice, individuals purchasing real property are conclusively presumed to have notice of documents affecting  their real property that are on file with the County Clerk’s office even though they may have never read the documents.  See, Camp Clearwater, Inc. v. Plock, 59 N.J. Super. 1 (App.Div. 1959).  Since master deeds and deeds of restrictive covenants are filed with the County Clerk’s office, property owners are bound by the rules and regulations contained therein. See, N.J.S.A. 46:21-1.

However, the general rules and regulations outlined in the master deed and deed of restrictive covenants often do not fit the day-to-day needs of the association closely enough and the association’s board is often required to implement rules and regulations within the scope of the master deed and by-laws that better fit the day-to-day operation of the association.  These rules and regulations are, so long as they are within the scope of the provisions of the master deed and by-laws, passed by a resolution and should be kept in a resolution book that is held by the association’s manager and is open for review by homeowner owner or potential homeowner.  Additionally, many property managers provide a summary rule and regulation booklet that advises homeowners of all specific rules and regulations (this summary should be distributed with the closing package).  This is  wise  because it highlights the rules and regulations before an actual breach.

b) RECORDATION REQUIRED

While it is not necessary to record every rule and regulation in the Clerk’s office, it is wise to record rules and regulations which will significantly affect the lifestyle of the homeowners (i.e., banning of pets) or would significantly affect the unit owners’ ability to deal with their property or the common property (i.e., regulations relating to installation of decks).  These two types of rules and regulations must be addressed very carefully.  They must be recorded because the association will want to have the benefit of the conclusive presumption that home purchasers are aware of the rule and regulation.

Prior to implementation, the board must also have these types of  proposed rules and regulations carefully reviewed by the association’s management company and attorney.  This is so because rules and regulations which will significantly affect the homeowner lifestyle or the homeowner’s ability to deal with their property may require amendment to the master deed and/or the by-laws.  This  generally requires a solicitation and vote of all homeowners.

Further, the proposed rule may so significantly affect the lifestyle of the unit owners or the unit owners’ ability to deal with condominium property that the rule works a “change in a unit” such that, statutorily, the proposed regulation requires an affirmative vote of every unit owner.  This is required by the Condominium Act at N.J.S.A. 46:8B-11 which provides that “unless otherwise provided therein, no amendment shall change a unit unless the owner of record thereof and the owners of record of any liens thereon shall join in the execution of the amendment or execute a consent thereto with the formalities of a deed.”  This is supported by the New Jersey Supreme Court’s decision in Thanasoulis v. Winston Towers 200 Association, 110 N.J. 650 (1988).  InThanasoulis the Court determined that a regulation passed by the association’s board which charged non-resident unit owners higher monthly parking fees than those charged resident unit owners constituted a proscribed “change in a unit” and therefore could not be affected without the unit owner’s consent.  In the Matter of 560 Ocean Club, L.P. 133 B.R. 310 (Bkrtcy. D.N.J. 1991) the court determined that the association’s attempt to pass a regulation which proscribed short term leases constituted a “change in a unit” requiring the consent of each homeowner.  “Change in a unit” is not defined in the statute but the New Jersey Supreme Court has said “we assume that the legislative intent was that a unit owner should retain essentially the same property rights originally deeded to him for as long as he owns his unit unless he affirmatively consents to them being altered”.  Thanasoulis, 110 N.J. at 663.  The Thanasoulis court described the parking space as a vital component of the unit and held that the revised parking rules had the effect of confiscating a portion of the property interest the unit owner acquired when he purchased the unit, thereby denying him economic value of a portion of his unit.  Whether a rule or regulation ‘changes a unit’ must be evaluated on a case by case basis.  However, any time a proposed regulation may change the  property rights originally deeded to the unit owner, the Board should evaluate whether it will be able to obtain the consent of all unit owners.  This would likely be the rare instance.  Recordation of rules and regulations which significantly affect lifestyle or use of a unit is required.  However, these significant rules and regulations must be carefully evaluated because special procedures may be required for their implementation.

4. ENFORCEMENT OF RULES AND REGULATIONS

In most cases, rules and regulations are complied with after a simple notice from the management company.  However, at times, unit owners are recalcitrant.  This involves enforcement through other means.

First a notice is sent to the homeowner to remedy the violation with an indication that the homeowner may seek alternate dispute resolution.  If the homeowner chooses alternate dispute resolution, the homeowner meets with the alternate dispute resolution committee or individual and the dispute is typically mediated.  The Committee then makes a recommendation as to resolution.  The board then makes a decision with respect to enforcement in light of the alternate dispute committee’s recommendation.

If the required compliance is not met by the unit owner, the association’s board may then institute a fine for singular violations or a number of fines for a continuing violation.  See, N.J.S.A. 46:8B-15(p).  Fines should be collected in the same fashion as  any other homeowner assessment.

The association, after consultation with its attorney, may also take self-help measures.  The association may have the ability to correct the violation and charge the homeowner for the expense involved in the correction.  The association’s attorney must be consulted when considering self help as property ownership and control issues arise as do problems regarding breach of the peace.  Further, self help may become expensive and the association should, if possible, avoid becoming a significant creditor.

Compliance with the association’s rules and regulations  may also be enforced through injunctive actions.  Injunctive actions involve the association’s attorney requesting that the court issue an order requiring the homeowner to do or not to do something.   The problem with seeking injunctive relief is that  attorney fees become very expensive, requiring numerous hearings and significant time in preparation of detailed witness certifications.  Generally, injunctive relief actions are reserved for significant rule and regulation violations, emergency requests, where quick relief is necessary or where a unit owner is “judgment proof” that is, where a unit owner does not have the funds the pay fines even if a judgment were entered.  An injunction or court order will compel the homeowner to comply where the pressure of fines may not.  In cases where a homeowner is judgment proof, the action for injunctive relief may be followed by a foreclosure action to dispossess the homeowner and motivate the mortgage company to foreclose.  Again, this  is costly and time consuming.

a) FIDUCIARY DUTY

It is a board’s Fiduciary duty to enforce association rules and regulations.  This is an important consideration which is often overlooked in the enforcement process.  Usually the violating person argues why they should be permitted to continue the violation or be given some type of special allowance.  Rarely does the association’s board highlight the fact that every other unit owner purchased and continues to maintain their homes in reliance on the association’s governing documents which include the rules and regulations.  The value of maintenance of the rules and regulations should be reflected in the value of the home.  Therefore, if the association’s board fails in its fiduciary duty to enforce the rules and regulations, the association’s board may be subject to suit by the non-violating homeowners for failure to enforce rules and regulations.  It is very important that board members keep in mind that it is their affirmative duty to enforce the rules and regulations.

b) REASONABLENESS IN APPLICATION

Keeping in mind that it is the fiduciary duty of the board to diligently enforce the rules and regulations of the association.  This is balanced by the “reasonableness” factor that it is imposed by case law in New Jersey.  Essentially, courts have read into association rules and regulations a reasonableness factor whereby the association, while maintaining enforcement of its rules and regulations, must do so reasonably.  See, Billig v. Buckingham Towers Condominium Association I, Inc., 287 N.J. Super. 551 (App. Div. 1996).

The reasonableness test is whether the interests of the unit owners as a whole are served, advanced or protected by the board’s action.  If so, the regulation will likely be determined to be reasonable, if not, the association may have to give deference to the unit owner desires.  This reasonableness standard helps avoid draconian imposition and enforcement of rules and regulations.  It further recognizes that, though rules and regulations may appear perfectly suitable on paper, their application often involves consideration of factors that were not considered during the drafting and implementation process.  The reasonableness requirement speaks to application of rules and regulations in the daily living of homeowners and the good faith application of these rules and regulations.

c) FAILURE TO ENFORCE

Most, if not all, association governing documents contain a provision which specifies that, if the association’s board’s fails to enforce rules and regulations, such failure to enforce will not work as a waiver, release or estoppel against the association enforcing these rules and regulations at a later date.  This is important because in other contractual arrangements, if a party fails to enforce a certain provision, the person that the regulation is being enforced against can claim waiver, release or estoppel and may successfully overcome enforcement of the regulation.  Association living is an arrangement involving more than a mere one on one contract.  It is a mutual relationship among homeowners and between the homeowners and the association (essentially, a small form of government).  It is important that associations always take the position that, even if a certain rule or regulation was not previously enforced, the board may enforce it in the future and past non-enforcement will not be considered a waiver, release or estoppel.

d) ATTORNEY FEES FOR ENFORCEMENT OF RULES AND REGULATIONS

Most governing documents provide for collection of “reasonable” attorney fees if the association is required to take legal action to collect association assessment and fees.  However, many documents do not provide for the association collecting its reasonable attorney fees expended in efforts to compel a unit owner to comply with the association’s rules and regulations.  Additionally, most documents also do not contain provisions addressing cases where counterclaims are raised against the association by home owners that the association is seeking to enforce rules and regulations against. Homeowners should be held responsible for the reasonable attorney fees incurred by the association in enforcing its rules and regulations and in defending counterclaims if the homeowner is unsuccessful in prosecuting the counterclaim.  Though this is generally untested, associations may wish to attempt to amend their documents to provide for collection of reasonable attorney fees if the association is required to take legal action to enforce its rules and regulations and it successfully defends counterclaims either in  collection actions or in suits to enforce rules and regulations.  This is important because associations are often compelled to settle cases because of frivolous counterclaims but counterclaims which nonetheless generate insurance claims and non-recoverable attorney fees.

5. EXCEPTIONS TO RULES AND REGULATIONS

Often, though the association has exclusive power with respect to modification of the common elements and  association property, as an association matures, members will wish to modify certain portions of the units, or the common elements.  This has been seen with respect to the installation of attic fans, installation of satellite antennas, installation of skylights, homeowner maintenance of flower beds, installation of various landscaping modifications, installation of storage sheds and other modifications that somehow affect  homes, limited common elements or common elements.  While the association should take steps to maximize the use and enjoyment of the community, the association should be very cautious in granting use of and/or modification of property which is outside of that initially contemplated in the governing documents.

If the association does wish to grant these exceptional rights, the association must pass a specific resolution with respect to the particular unit addressing the proposed use. The association must also have the unit owner enter into a separate agreement with the association addressing the modification, and addressing the unit owners and his successors and assigns responsibility for the modification.  A copy of a sample agreement is attached hereto as Exhibit A.

Often the association will require a fee for the requested  use.  It should cover attorney fees for preparation of the various documents as well as the County Clerk’s recording fee.   The fee may also include a charge for inspection by the association’s contractor.  It is important that these types of agreements are recorded in the County Clerk’s office because they modify rights and responsibilities with respect to the particular unit and not just the particular unit owner but also his successors and assigns (i.e. people who purchase the unit from him, etc.).  The unit owner should also provide evidence of insurance and agree to maintain the modification in the future. See exhibit A.

Alternative Dispute Resolution In Community Associations

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

WHAT IS ‘ADR’

Alternative Dispute Resolution (‘ADR’) is any one of a number of methods designed to resolve a dispute without the necessity of a lawsuit or trial.

WHY ‘ADR’

  1. It is required.  New Jersey requires that parties to a dispute participate in some form of ADR prior to an Association imposing a fine and/or prior to proceeding to trial.
  2. Cost savings.  ADR often saves all parties costs in terms of attorney fees, court costs and time commitment.
  3. Risk Reduction.  The parties maintain control of the dispute outcome.  Rather than risk having a judge or jury, who may not be as familiar with or interested in the dispute, make a binding decision, the parties can reach a compromise where each may get less than everything but neither will risk losing everything.
  4. Post-Dispute Relations.  Parties to Association disputes will typically continue to live as neighbors or community members after the dispute.  This is unlike many commercial litigation cases where the parties are unrelated except for the subject of their dispute.  An agreed upon settlement may more quickly return relations to normal after the dispute is resolved.

METHODS:

Today the most common forms of alternative dispute resolution are mediation and arbitration.

Mediation is typically a loosely structured process involving a neutral mediator who assists the parties in identifying the key disputed issues, suggests solutions and aids in reaching a compromised resolution.

Mediation is probably the most common form of alternative dispute resolution in community associations.  The reason for this is procedural simplicity and flexibility combined with the fact that the parties retain control over their dispute.

The Mediation process typically involves the following:

  1. Notice.  The Association sends the violation notice describing the alleged violation, notifying the accused of the date and time for the mediation and notifying the accused that non-attendance will be taken as a waiver of the right to alternate dispute resolution.
  2. Mediator.  Appointment of a mediation committee composed of non-Board members who do not know the parties to the dispute and who are not involved with the disputed issues.  An independent mediator (or arbitrator) may also be hired.  The advantage of this is that the independent mediator (or arbitrator) will likely be even more independent and may compel the parties to more seriously discuss the matter.  The drawback is that professional mediators charge significant fees.
  3. Process Overview & Confidentiality. The mediator must outline the mediation process and discuss confidentiality with the parties (determine which information he or she may disclose to the other side during the mediation process). Prior to the mediation the mediator should also discuss payment of any mediation costs, the attorney fees and who will bear such costs.
  4. Initial Statements.  Allow each party to explain their version of the facts without interruption.
  5. Individual Caucuses.  Often mediators will then separate the parties and discuss the nuances of each party’s position.  The mediator will also point out the strengths and weaknesses of each party’s position and highlight the benefits of settling versus pursuing the case through the courts.  During individual caucuses the mediator may learn of sources of friction that are not the original source of the complaint.  If possible, these additional issues should be addressed too.
  6. Framing Key Disputes & Possible Settlements.  The mediator will then bring the parties back together, frame the key disputes and suggest settlement scenarios.
  7. Reducing Settlement to Signed Writing & Providing for Default Penalty. If the parties reach an amicable settlement, the mediator should assist in reducing the settlement to a written instrument that is signed by both parties and that provides for penalties if the parties fail to abide by the settlement agreement.  If the parties cannot reach an agreement, the mediator should issue an opinion as to how the mediator feels the matter should be settled.  This would be an advisory opinion or a non-binding arbitration.

In contrast to mediation,arbitration is more formalized and involves one or more neutral or non-neutral arbitrators who, much like judges, listen to the parties’ arguments, review their evidence and render a decision.  The determination may be binding or non-binding.  In a non-binding arbitration the parties have the right to have the dispute reevaluated by a court.  In a binding arbitration, the arbitration decision is binding and enforceable against both parties.

In Association disputes, arbitration decisions are typically non-binding unless otherwise agreed to in writing.  This allows the parties to take the non-binding decision as advisory and either adopt it or reject it.  Further, settlements are limited by the Association’s governing documents and a binding arbitration decision regarding governing document interpretation may be unwise and/or unenforceable.

In sum ‘ADR’ need not be complicated, confusing or expensive but rather a simple method of attempting to work out a problem without the necessity of going to Court.

DCA Regulations Positive or Punitive?

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

On June 3, 2019, the New Department of Community Affairs (the “DCA”) proposed regulations that would significantly impact Association governance. Many of you raised concerns with respect to the proposed regulations.
On Monday, May 18, 2020, with few modifications, the proposed regulations became effective. The DCA issued a 112-page document outlining the public comments and the DCA’s responses. That document is available by clicking here: PREDFA Regulations May 18, 2020 The DCA declined requests for hearings on the public comments.
The good news is that, decades before the proposed regulations, most Associations, Board Members and Managers worked hard to provide transparency, member participation and good governance. Theoretically, not much should change for them.
The bad news is that, because of the relatively few bad-apple Associations, all Associations, Board Members and Managers are now saddled with micro-regulation backed by the threat of fines and penalties.
It is hard to know where this will lead. Increased transparency, member participation and good governance? I hope so. Increased administrative expenses? Yes. Increased D & O claims? Most likely. Decreased volunteer participation? I hope not. “Wag the dog” politics? Sadly, probably.
Let’s be positive and hope that the DCA will, as it historically has done, use a constructive approach rather than a punitive approach to assisting Associations and their members. A lightly marked up copy of the original proposed regulations may be seen by clicking here: Mark-up Copy

Business Judgement For Board Members

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

The Standards Of The Business Judgement Rule

Board members have a fiduciary duty to the association/corporation and arguably directly to the individual members.  Fulfillment of this duty requires that the board members exercise utmost good faith.

In ordinary corporate matters, the ‘business judgment rule’ is the standard by which board action is evaluated.  The business judgment rule generally provides that, so long as the board members fulfill their duties of ‘care’ and ‘loyalty’ the board’s decisions will not be second-guessed by a court.

The duty of ‘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.  The duty of ‘loyalty’ obligates the board to make their decisions for the benefit of the association/corporation rather than for their own benefit.  In the ordinary corporation, once the duties of care and loyalty are fulfilled, the board’s decisions, good or bad, will not be disturbed by the courts.

In associations, condominiums and co-ops however courts frequently graft a ‘reasonableness’ test on to the business judgment rule review.  Although often denying it, courts do in fact second guess association, condominium and co-op boards.  Courts ask themselves: ‘Assuming that the duties of care and loyalty were met, was the decision reasonable’

In your example, assuming a certain membership vote was required but was not obtained (which is likely since the board will not disclose the alleged vote results); the board is not fulfilling its fiduciary duty.  It is not acting in good faith.  It is not fulfilling its duty of care as it is not complying with the governing documents and is not fulfilling its duty of loyalty as it is pursuing its own agenda in spite of the governing documents’ membership vote requirement.

Be aware that, when considering the improvement you described, a super-majority membership vote is typically required rather than just a simple majority.  Regardless, the options are limited.  Typically one or more members will sue to enjoin the board from further action.  Court’s will issue such an injunction if the members can show that the members will be irreparably harmed in the absence of the injunction, the legal basis for the members’ claims is generally settled, the members are likely to ultimately succeed on the merits and the hardship that the members will suffer, if the project is allowed to go forward, will be greater that the hardship suffered by the board/association/corporation if the project is temporarily stopped.  Another, or possibly concurrent, option is the membership undertaking a board member removal vote.  Although the membership typically has the power to remove and replace the board members, this option is usually too cumbersome and time consuming to be used effectively in immediately stopping improper board action.

In addition to the injunction, the membership should also make the board members aware that, in knowingly proceeding without the required membership vote, the board members may be exposing themselves to personal liability.  This liability may not be covered by the Association’s insurance policy and the board members’ actions may take them outside of any exculpation provision in the governing documents.  Essentially, in not complying with the governing documents, the board members are generating unnecessary legal fees and risking having to pay their own defense cost and liability award if the membership proves damages.

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