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DBPR REPORT AND RECOMMENDATIONS House Bill 391 Study OCTOBER 2006 |
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Executive Summary Introduction
Governor Jeb Bush vetoed House Bill 391, relating to community associations, on June 27, 2006. The bill addressed a range of community association issues including: extending the deadline for fire sprinkler retrofitting in condominiums; providing for revival of certain community association covenants that have lapsed; providing procedures for securing mortgagee consent to amendments to condominium governing documents; enhancing certain protections that are currently afforded to condominium and cooperative owners to homeowners association members; providing for reserves, developer guarantees of assessments and financial reporting requirements for homeowners’ associations; and replacing the current homeowners’ association dispute resolution program administered by the department with a voluntary pre-suit mediation program not administered by the department.
In his veto letter, the Governor directed the Department of Business and Professional Regulation (DBPR) to conduct a study and make recommendations regarding the following issues:
The department solicited comments from the public and received 172 emails and 14 letters. The department also met with stakeholders representing community associations, unit owners, developers, and management companies on September 6, 2006, to discuss these issues.
Study Recommendations The department has analyzed the common interest realty laws existing in Florida and other states, considered the comments and recommendations from the public as well as industry stakeholders, and concludes that:
Improving and Expanding the Existing Alternative Dispute Resolution and Education Programs Under the current law, homeowners’ association members must petition the department for arbitration or mediation of election and covenant disputes, respectively, before taking the dispute to court. House Bill 391 provided for several changes to the program. First, the bill provided that a party to a dispute which is subject to mediation must provide the other party an offer of pre-suit mediation, rather than file a petition for mediation with the department. Second, the bill clarified that disputes involving the collection of assessments, fines or other financial obligations, as well as actions to enforce prior mediation settlement agreements, were not subject to pre-suit mediation. Third, the bill provided procedures for obtaining temporary injunctive relief rather than pre-suit mediation. Finally, the bill provided the form to be used for offering pre-suit mediation.
In his veto message, the Governor expressed his concern that the bill replaces the mandatory mediation program with voluntary pre-suit mediation not administered by the department. Further, he indicated that a return to civil litigation for typical owner-association disputes would reduce the time saving and financial benefits of mandatory mediation over protracted court proceedings.
Public input was generally positive regarding the homeowners’ association alternative dispute resolution program. Many shared suggestions or requests for speeding up the mediation/arbitration process and for certifying additional mediators. The stakeholders attending the meeting indicated that there should be a bigger pool of mediators and that the mediation process should be mandatory.
There are better ways to expand and improve the department’s existing Alternative Dispute Resolution (ADR) and educational programs. The department recommends: • Parties to an HOA mediation case should be provided the ability to seek an abatement of the mediation proceeding in order to file for an emergency injunction in court in an appropriate case. • There should be a 90-day limit for mediation proceedings after which an impasse will be declared and the mediation proceeding will be dismissed, allowing the parties to file their dispute in court. • The issues subject to ADR with the department should be expanded to include disputes regarding the association’s compliance with the laws. Concurrently, the department should deemphasize the post turnover regulation and enforcement model. • The parties should be required to cooperate with the department and the mediator or risk the case being declared an impasse. • The department should expand its use of private mediators, and employ or reclassify existing employees to serve as in-house mediators. • With respect to condominiums, the Legislature should clarify the role of the Condominium Ombudsman by amending sections 718.5012(7) and 718.5012 (8), Florida Statutes, to specifically require the Ombudsman to provide mediation and education services. • As part of its educational outreach, the Ombudsman’s office should encourage association boards of directors to work jointly with them to present educational programs to unit owners which not only address Florida Statutes and Rules, but also educate the association regarding it’s own governing documents.
With regard to education, the department is in the process of enhancing the HOA website to provide greater educational opportunities. We are working to provide direct links to websites which offer online community association training and education; provide technical solutions to financial reporting issues; and address other topics, including hurricane preparedness and legal questions. The website links, combined with the information available on the department’s site, will provide homeowners with a network of knowledge and technical expertise.
Finally, the division with assistance from the Ombudsman, will explore opportunities with its existing provider of condominium education to assess the feasibility of expanding the curriculum to include alternative dispute resolution education for both unit owners and parcel owners.
Potential for Protections Afforded Members of Homeowners Associations to Approach Parity with Condominiums The second issue the Governor asked the department to examine was the extent to which protections afforded members of mandatory homeowner associations can approach parity with those afforded condominium owners while still upholding legislative intent that homeowner associations not be regulated.
The department received suggestions from the public and stakeholders indicating that certain portions of the condominium law should be incorporated into the homeowners’ association law. Specifically, parity should be approached incrementally, starting with elections, operational issues, dispute resolution, turnover and financial issues.
The division reviewed Chapter 718, Florida Statutes, governing condominiums, and Chapter 720, Florida Statutes, governing homeowners associations, and found many similarities between them. The two chapters are fundamentally similar with respect to the following matters: • Both statutes provide for similar association powers and duties included in the laws and governing documents. For example, under each statute, associations are required to be Florida corporations and the officers and board members have a fiduciary duty to the members of the association. • Both laws provide for core unit owner rights such as the requirement of prior notice of meetings and the opportunity for owners to speak at board meetings. • Both laws require the association to maintain certain official records that are open to inspection by a member. A member who is denied access to the records is entitled to statutory damages for the willful failure of the association to timely provide access to the records. • Both types of associations must adopt annual budgets detailing the anticipated expenses of the association. • The year-end financial reporting requirements of the two statutes are similar. • Both laws permit the members to recall the board by written ballot or by vote at a meeting, with or without cause, by the affirmative vote of a majority of the total voting interests. • Both laws provide members with the right to use the common areas of the development. • Both laws require that members and other residents, as well as the association, comply with the statute and documents. • Both laws provide that contracts entered into by the association for the purchase or lease of materials or equipment, that are not to be fully performed within 1 year, are required to be in writing and are subject to competitive bidding requirements (with certain exceptions). • Both laws prohibit the inclusion or enforcement of rent escalation clauses in leases of commonly used facilities. • Both laws provide that the right of the developer to unilaterally amend the governing documents must end at turnover of control of the association to the residential parcel owners. • Both laws provide procedures for amending the controlling association documents including the articles of incorporation, bylaws and any applicable declaration. • Both condominium and homeowners’ associations are authorized to impose assessments that will become a lien on the parcel if not paid and each statute allows the association to fine an owner for violations of the documents. Neither statute allows an unpaid fine to become a lien on the unit. • Both laws create a private cause of action for prospective purchasers who rely on false advertising. • Both statutes allow the developer to control the operation of the association for a period of time during the initial stages of the development by permitting the developer to elect or appoint a majority of the members of the board of the association. Section 718.301, Florida Statutes, provides five conditions that trigger the right of the unit owners to elect a majority of the association board: • Three years after 50 percent of the units are conveyed. • Three months after 90 percent of the units that will be operated by the association are conveyed. • When all of the units to be operated by the association are completed, some have been conveyed and none of the others are being offered by the developer. • When some of the units have been conveyed and none of the other units are being constructed or offered by the developer. • In any event, not later than seven years after the condominium was created. By comparison, section 720.307, Florida Statutes, provides two conditions that trigger the right of the parcel owners in a homeowners’ association to elect a majority of the board: • Three months after 90 percent of the parcels that will be operated by the association are conveyed to the parcel owners. • Such other percentage sellout as may be required in the documents in order to comply with the requirements of any governmentally chartered entity with regard to the mortgage financing of parcels.
Due to the different nature of the subdivision developments in which most homeowners’ associations exist, the build-out stage of the homeowners’ community may be 25 or more years. Development work may be sporadic during the build-out period; therefore, the turnover provisions of the Condominium Act should not mirror those of the HOA law, and no changes to the HOA turnover provisions are recommended.
Although the two laws share many similarities as listed above, there are some differences. In order to approach parity with condominiums, the following issues would need to be addressed in Chapter 720, Florida Statutes: reserves, developer guarantees, purchaser warranties, voting rights, elections, proxies, financial reporting, use of association funds, apportioning assessments and the right to sue. These are discussed in more detail as follows.
Reserves Condominium association budgets must include reserves for capital expenditures and deferred maintenance for roof replacement, building painting, pavement resurfacing, and any other replacement/maintenance expenditure in excess of $10,000. Condominium associations are required to update the annual budget each year to provide detailed disclosures regarding the total life, the remaining life, the estimated replacement of maintenance expense, and the amount of reserves accumulated for each reserve item. Under the Condominium Act, the reserves included in the annual budget must be funded unless waived by a vote of the unit owners. Condominium associations may also establish reserves that are not required by the Act. After a condominium association establishes reserves, the funds must be set aside and are restricted for the purpose intended until expended for that purpose or until the unit owners vote to use the funds for some other purpose. In contrast, the maintenance responsibilities of an HOA are typically narrower in scope than those of a condominium association. Often the parcel owners of an HOA live in single family structures, the upkeep of which is the responsibility of the homeowner. There may be relatively few structures that must be maintained by the association. Notwithstanding these differences, homeowners’ association members may want their associations to set aside funds to prevent or decrease future special assessments for maintenance of common amenities which the association may be responsible for maintaining.
The bill provided that once an HOA has established reserves in the budget, the association shall thereafter include a reserve schedule in the annual budget and determine the amount to be reserved each year. Associations would be required to fund the reserves unless waived by the members. In order to accomplish this, the bill provided that associations may “opt in” to mandatory reserve requirements when initially established by a developer or when a majority of the total voting interests affirmatively elects to provide for reserves.
Because of the different nature of maintenance responsibilities found in the two types of associations, the two laws should address reserve issues differently. The “opt in” approach in the bill is complex and associations may not know if they are subject to mandatory reserve disclosure if they have been waiving reserves over a long period of time.
The department recommends that Chapter 720, Florida Statutes, should not require that reserves be established and funded, but if the association decides to create one or more reserve accounts, then any such funds included on the budget must be set aside and restricted for the purpose intended unless an alternate use is approved of a majority of the voting interests, as provided in the Condominium Act. The department also recommends that if reserves are established, the HOA should be required, in the annual budget, to disclose the purpose(s) of each reserve; the amounts accumulated in each account; and the amount, if any, that will be funded during the current budget year. Annual financial reporting should disclose the amounts accumulated and expended for each reserve item.
Developer Guarantees Section 720.308, Florida Statutes, provides that while a developer is in control of the HOA, it may be excused from the payment of assessments for any period of time that the developer is obligated to pay operating expenses in excess of assessments and other income of the association.
The department recommends that this section of the law should be strengthened and clarified in a manner designed to provide the protections currently afforded to condominium owners such as: requiring the developer to state the maximum amount of assessments that parcel owners will pay over a stated period of time; requiring that the developer fund the day-to-day cash flow needs of the association during the guarantee period; and ensuring that the developer guarantee obligation is tied to the expenses incurred during the guarantee period.
Purchaser Warranties Section 718.203, Florida Statutes, provides that developers are deemed to have granted to purchasers an implied warranty regarding real and personal property conveyed with a unit, and further provides that contractors, subcontractors and suppliers grant to the developer and to the owners an implied warranty of fitness as to the work performed or the materials supplied. This protects purchasers from shoddy construction and defective personal property.
While most HOAs do not have the common element structures typically found in condominiums, the project is likely to have roads, personal property amenities and other improvements that should be provided to the purchasers in a manner depicted in the promotional materials.
The department recommends that in order to provide HOA members the same type of protections as afforded to condominium owners, Chapter 720, Florida Statutes, should be amended to provide for purchaser warranties. The warranty on personal property for the purposes or uses intended should cover the same period as that provided by the manufacturer of the personal property.
Voting Rights Voting rights in a condominium cannot be denied to a unit owner because of delinquency in assessments or non-compliance with the governing documents.
Section 718.106(2)(d), Florida Statutes, creates the right to vote as an appurtenance to the unit (a valuable property right associated with ownership of a unit). Section 718.110(4), Florida Statutes, prohibits material changes to the appurtenances without consent of the unit owner. Based on these statutes, the department has historically taken the enforcement position that the right to vote cannot be suspended for the alleged nonpayment of assessments.
The department recommends that this protection should be brought over to Chapter 720, Florida Statutes, which in section 720.305(3), Florida Statutes, currently allows a homeowners’ association to deny delinquent owners the right to vote on association matters. In this manner, a parcel owner who may be contesting the validity of an assessment would still be entitled to vote.
Elections and Proxies The Condominium Act and administrative rules adopted by the department provide detailed election procedures that ensure secrecy of the ballots, uniform treatment of the candidates, independent verification of the election results, and prohibit the use of general proxies in elections. Condominium elections are required to be conducted by secret ballot or voting machine per section 718.112(2)(d)3., Florida Statutes and Rule 61B-23.0021, Florida Administrative Code. Associations may vote to opt out of the detailed election procedures of the Condominium Act and adopt different election procedures, which may include voting by general proxy.
The use of general proxies in a condominium association is restricted by section 718.112(2)(b)2., Florida Statutes, to establishing a quorum and voting on nonsubstantive issues. Limited proxies direct the proxy holder how to vote on the specific question under consideration. The use of limited proxies offers unit owners more protection because a proxy holder cannot use a limited proxy to vote on any other issues that may come up at the meeting for which the proxy was given. In this regard, the owners are given a more direct voice in items presented for an owner vote and in the operation of the association.
However, Chapter 720, Florida Statutes, simply provides that homeowners’ association elections must be held at or in conjunction with the annual meeting or as provided in the governing documents. This allows associations to conduct elections by general proxy and to establish nominating committees, which can bar owners who would otherwise desire to serve on the board. Such practices can often result in a group of owners perpetuating themselves in control of an association because, unlike secret ballots, proxies can be manipulated to achieve a desired outcome.
While the logistics of a homeowners’ association election may be quite a bit more involved than that of a condominium association due to a larger number of voters, members should vote by ballot rather than by general proxy, and nominating committees should be prohibited. However, the law should provide that the members of an association may opt out of this provision and establish alternate voting procedures in their bylaws, as is the case with condominiums.
The department recommends that Chapter 720, Florida Statutes, should be amended to restrict the use of general proxies and provide election procedures and protections similar to those found in the Condominium Act.
Financial Reporting Financial reporting is addressed in two different sections of Chapter 720, Florida Statutes. Section 720.303(7), Florida Statutes, contains the same reporting requirements as found in the Condominium Act, except for the deadlines. The Condominium Act provides the association a maximum of 120 days after the fiscal year end to prepare and distribute the financial statements, and Chapter 720, Florida Statutes, provides that some types of financial reports are due in 60 days while others are due in 90 days. To provide uniformity and consistency in common interest realty laws, all financial reporting due dates should be established at a maximum of 120 days, unless the governing documents provide otherwise. Section 720.3086, Florida Statutes, contains the financial reporting requirements for homeowners’ associations that existed prior to the creation of section 720.303(7), Florida Statutes. These two sections are contradictory and section 720.3086, Florida Statutes, should be repealed.
Additionally, the Condominium Act provides that the audited financial statements covering the period from inception through turnover from developer control be prepared at the developer’s expense. Since condominium associations must be turned over to the unit owners within seven years after the recording of the declaration, the turnover audit will not cover more than seven years.
As previously noted, many HOAs remain under developer control for an extended build-out period. It is unreasonable to require associations to maintain financial records for this length of time. Alternatively, HOAs with more than 50 parcels should be required to prepare audited financial statements during the developer control period, unless waived by a majority vote of the parcel owners present in person or by limited proxy at a duly called meeting of the association.
The expense incurred to prepare and distribute the financial statements should be a common expense of the association, and should not be considered to be a developer expense. The developer should be restricted to voting its interests on this matter for the first five fiscal years of the association operation, or turnover of control, whichever occurs first. This section of the law should only apply to those associations for which there is a mandatory turnover required.
Many of the regulations that provide guidance regarding financial statement disclosures for condominium associations are contained in the Florida Administrative Code.
Since there is no state agency charged with regulating homeowners’ associations, the department recommends that Chapter 720, Florida Statutes, should be amended to provide guidance on financial statement disclosures such as reserves, special assessments, limited common elements, guarantees, turnover, etc.
Use of Association Funds Chapter 718, Florida Statutes, contains specific safeguards on the use of an association’s funds. Under section 718.115, Florida Statutes, allowable common expenses may only include expenses relating to the operation, maintenance, repair, replacement, and protection of the common elements or association property, and certain expenses identified in the condominium documents. There is no similar spending limitation expressed in Chapter 720, Florida Statutes.
The department recommends that Chapter 720, Florida Statutes, should be amended to provide that the use of association funds is restricted to valid association purposes as determined by the declaration of covenants and the association documents.
Apportioning Assessments The Condominium Act mandates how assessments are to be apportioned and levied on the unit owners. Section 718.115(2), Florida Statutes, requires that assessments be collected in the same proportional share that each unit owns the common elements, and section 718.104(4)(f), Florida Statutes, requires that the ownership of the common elements be apportioned either by relative square footage of the units or by an equal fractional basis.
On the other hand, Chapter 720, Florida Statutes, permits the developer as drafter of the HOA documents to apportion common expenses in any manner desired without regard to the relative size or number of parcels in the development. Section 720.308, Florida Statutes, only requires that the documents describe the manner of sharing expenses and specify the proportional share of expenses. This may be different among different classes of parcels based on stage of development, level of services, or “other relevant factors.” This ambiguity may result in an unfair and changing apportionment of assessments.
The department recommends that Chapter 720, Florida Statutes, should be amended to limit the circumstances in which parcels may pay different proportionate shares of expenses to those based solely on the stages of development. In this manner, a developer may limit assessments against undeveloped parcels, but would not be able to avoid assessments on unsold but developed parcels by claiming that the unsold parcels were not receiving services from the association.
Right to Sue The Condominium Act does not require a vote of the unit owners before the association initiates a lawsuit. On the other hand, Section 720.303(1), Florida Statutes, restricts homeowners’ associations from initiating lawsuits.
For example, before commencing any litigation involving amounts in excess of $100,000, a homeowners’ association is required to obtain the approval of a majority of the voting interests. The board has a fiduciary duty to the owners, and is subject to recall if the members believe the board is not acting in their best interests. This restriction would allow a developer to delay a lawsuit on structural defects past the point in time that such an action must be initiated under other laws.
The department recommends that this restriction be removed from Chapter 720, Florida Statutes.
Should a Common Interest Law Be Established Finally, the Governor asked whether, using the Uniform Common Interest Ownership Act (UCOIA) as a starting point and analyzing the laws of other states, Florida should move toward establishing a comprehensive common interest realty law.
Public comment was evenly divided on this issue. Some felt that the statutes were too complex and the issues involved too different to utilize a combined statute. Others felt that a combined statute would make the regulation and management of associations less confusing for owners, managers and practitioners.
The first Uniform Common Interest Ownership Act (UCIOA) was adopted at the 1982 Annual Meeting of the National Conference of Commissioners on Uniform State Laws (ULC). The UCIOA became the law in five States. In 1994, the ULC adopted significant amendments to the UCIOA. Chapter 718, Florida Statutes, governing condominiums, Chapter 719, Florida Statutes, governing cooperatives, Chapter 720, Florida Statutes, governing mandatory homeowners’ associations, and the 1994 UCIOA have been examined and compared in the context of this report, and the comparison reveals similarities as well as differences.
A comparison of the UCIOA and the various Florida community association statutes shows that both address the same basic areas of purchaser protection, association operation, developer rights and duties, and the creation and termination of the development. However, as a general matter, the UCIOA contains less detail in association operations and leaves more discretion or operational autonomy to owners, developers, and associations while Florida is more specific and detailed. For example: • Under UCIOA, purchasers who buy their unit from a developer are able to waive their implied warranty rights and may modify the statute of limitations for such warranty rights, while these rights under Chapters 718 and 719, Florida Statutes, may not be waived or modified. • Under Chapters 718 and 719, Florida Statutes, turnover of control of an association must occur within seven years of the creation of the project, while turnover under the UCIOA may never occur. If turnover does not occur, any cause of action the post-turnover association may have against the developer for building defects and warranties, may never accrue. • While elections in condominiums must be held by secret ballot and not by general proxy, the uniform act requires no specific method of conducting elections. The UCIOA also offers less consumer protection in the following areas: • Section 718.404, Florida Statutes, like section 1-2-7 of the UCIOA, authorizes the creation of mixed use condominiums consisting of both commercial and residential units, but the Florida condominium statute goes a step further and contains specific provisions prohibiting the declaration from skewing the allocation of common expenses to the residential owners, and prohibiting the declaration from providing commercial owners with authority to veto amendments to the governing documents. • Both statutes allow a development to be built on leased property, but Chapter 718, Florida Statutes, only allows a leasehold condominium to be built on land where the underlying lease has an unexpired term of at least 50 years. • Section 2-123 of the UCIOA permits large developments, termed “master planned communities,” to be built and affords developers a large measure of discretion in determining the size and time schedule for build-out, while section 718.403, Florida Statutes, allows a condominium to be built in phases, with great flexibility in the number and size of units, within defined parameters as set forth in the initial disclosure documents, and further requires a build-out within seven years. • The UCIOA does not require that common expenses be allocated in accordance with any particular formula, while Chapter 718, Florida Statutes, requires that percentage ownership of the common elements assigned to each unit and the percentage share of common expenses, be based upon the relative square footage of the units or be equally proportioned. • The UCIOA permits an unpaid fine to become a lien on the unit/parcel, while Chapters 718, 719 and 720, Florida Statutes, limit the association lien to unpaid assessments. • Turnover in a community subject to UCIOA, does not require a turnover audit of the association records to verify that the association, while under developer control, only paid legitimate expenses and that the developer paid any assessments owing on developer-owned units. A turnover audit is required for condominiums and cooperatives in Florida. Also, section 3- 103(d) of the USIOA does not put a cap on the number of years that a developer may retain control of the association, and appears to exempt a master planned development from any turnover requirement, while the cap on developer control in Florida is seven years for condominiums and cooperatives. • Under section 3-105 of the UCIOA, contracts entered into between a developer-controlled association and a company not affiliated with the developer before turnover may be terminated at turnover only if it is shown that the contract is not “bona fide” or was “unconscionable.” Section 718.302, Florida Statutes, permits cancellation of all contracts upon the concurrence of at least 75 percent of the non-developer voting interests. • The UCIOA does not provide the members with the right to be present and speak at board meetings, the right to address questions in writing to the board, or the right to tape record board meetings. These rights are afforded to all association members living in Florida condominiums, cooperatives and homeowner associations. • The right of access to official records under UCIOA does not include statutory damages where an association willfully fails to provide access, does not specify which records are official records subject to inspection, and does not address questions such as whether records otherwise protected by the attorney-client or medical privilege are protected from disclosure, unlike the three Florida statutes described herein. • Section 4-108 of the UCIOA, while providing purchasers with a 15 day voidability option after signing a purchase contract and receiving a public offering statement, does not extend that right to amendments to the documents prior to closing which materially and adversely affect the purchaser, as in the case of condominiums. The department recommends that Florida should not adopt the uniform act. Florida law is more evolved, mature, and has a greater emphasis on consumer protection. Instead, the Legislature should move incrementally towards more uniform common interest realty laws regarding the issues that are similar, such as records, elections and financial reporting. Exhibits Appendix “A” Bill text – HB 391 Appendix “B” Governor’s veto letter Appendix “C” Public comments (See ATTACHED PDF.VERSION) Appendix “D” Stakeholder input (See ATTACHED PDF.VERSION)
CCFJ, Inc. COMMENTS TO REPORT AND RECOMMENDATIONS CCFJ, Inc. RESPONSE House Bill 391 Study DBPR REPORT AND RECOMMENDATIONS (PDF.VERSION 17.1 MB) |