Chapter 57
Operation of Community Associations
This chapter builds off of the previous chapters dealing with the organization,
management and governance of community associations, and uses acronyms and
terms defined in those previous chapters. For example, “GCA” means the Georgia
Condominium Act, “POAA” means the Georgia Property Owners Association Act,
“HOA” refers to a homeowners association, and “POA” refers to a property owners
association (i.e., an HOA that has been submitted to the POAA). Please consult the
previous chapters of this guide for more information and for assistance with
interpreting and understanding this chapter.
COMMUNITY ASSOCIATION FINANCES
The money-side of a community association is just like any other business
entity. The corporation brings in revenue. The corporation budgets for
expenses. The board members and officers make decisions and adjustments
throughout the year. The corporation files tax returns, evaluates investments,
brainstorms creative ways to increase income and sometimes sues its debtors to
collect funds owed to it.
ACCOUNTING METHODS
Cash Basis Accounting: Income recorded upon receipt; expenses recorded when
paid
Accrual Basis Accounting: Recognizes income and expenses when they are
scheduled to take place, not when they actually do take place.
For example, condominium assessments are due on the 1st day of each month. If a
community employs cash basis accounting January assessments that get paid in
February are report as income in February. Under an accrual method, this income
would be reported for January (even though it was not actually received in
January).
In reality, most communities use a hybrid cash and accrual basis of
accounting. Income and expenses are reported on a cash basis, but certain other
items are entered on an accrual basis.
FINANCIAL STATEMENTS
Income Statement: Reflects corporation’s profitability for a specific period of time.
Balance Sheet: Corporation’s assets, liabilities, and members’ equity at a specific
moment in time.
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Assets - things owned by the corporation
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Liabilities - debts of the corporation
Members’ equity - value of assets that the corporation owns outright.
Budgeting:
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ZERO-BASED BUDGETING - the necessity and amount of each line item is
evaluated each year. Historical data is not used.
INCREMENTAL BUDGETING – each line item in previous budget is updated
incrementally year after year. No evaluation or decision if each line item is
needed for the following year.
State law does not require the preparation of a budget (However, GCA
requires one in the disclosure package from the declarant to the first
purchaser of each new condominium unit)
State law does not define what line items should be in a budget
INCOME
o General Assessments
o Special Assessments
o Specific Assessments and Fees
o EXPENSES
ƒ Operating Expenses
ƒ Capital Improvement Expenses
ƒ CAPITAL RESERVES - Acts as a savings account to pay for
capital improvement expenses that will be necessary at some
future date.
ƒ Spreads out costs over time by “saving” each year so
special assessments might not be necessary to pay for
these expenses when the work needs to be done in the
future.
ƒ Georgia law does not require reserve funding for any
type of community association, but FNMA and FHA
guidelines do require adequate reserve funds in order to
insure loans in a condominium.
ƒ Reserve studies help determine:
ƒ remaining useful life of each capital asset
ƒ when each capital asset will need to be replaced
ƒ how much it should cost to replace the asset in
the future
ƒ how much the corporation needs to “save” each
year to meet the future financial needs
Approving the Budget:
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Follow process described in covenants and bylaws
Some covenants require members to approve/adopt budget by specific vote
at a meeting. If owners are happy with proposed budget they do not show up
to the meeting. No quorum is obtained, no vote can be taken. Board then
forced to use new budget that is not properly adopted.
BETTER PROVISION – some covenants state that budget approved/adopted
by the board unless disapproved by a certain percentage of members at
annual or special meeting. Better because if owners do not like budget
adopted by board they will show up at meeting, there will be a quorum and
there can be a vote.
QUESTION: Once approved, can the budget be changed?
ANSWER: Yes, the budget is an active document. It should be evaluated on a
monthly basis. Sometimes there will be unexpected expenses -- increases in utility
charges, termite issues on the common property, broken pool pumps . . . The money
needs to come from somewhere to address these issues. Other expense items need
to be removed or lowered to create available funds for these expenses. It’s possible
that the holiday party may not be as elaborate one year because that money was
needed for some required expense during the year instead.
Creating the General Assessment from the Budget
The amount of the general assessment SHOULD BE calculated by determining the
amount of money needed to pay the budgeted annual expenses less budgeted
income from sources other than the general assessment and dividing the sum by the
percentage of ownership income for each condominium unit or by the number of lots
in an HOA/POA.
NOT A GOOD IDEA -- Some boards of directors “back into” the budget by deciding
what they want the general assessment to be, determining how much income that
creates and then evaluating how to divide that income through the expense line
items in the budget.
QUESTION: What do we do if we need more money?
ANSWER: The association may need to impose a special assessment, a specific
assessment or obtain a loan.
Special Assessment: The covenants hopefully include a provision allowing the
board to impose a special assessment. If such a provision exists, then the board
must comply with the described process or the special assessments could be
challenged in the future.
The GCA states that as long as the condominium legal instruments allow it, the
board can impose a special assessment of not more than an average of $200 per unit
per year without a vote of the association members. If the condominium documents
do not include a provision that mirrors this one in the GCA or if the board needs to
pass a special assessment for more than an average of $200 per unit, the board will
need the consent of a majority of the condominium owners.
Specific Assessment: A specific assessment is a “charge back” to a particular unit
or lot owner for an expense that would be inequitable to pass on to all the
owners. The GCA and POAA permit specific assessments as long as the covenants
allow them. In an HOA, the covenants need to permit specific assessments.
For example, an owner drives into the front entrance sign. Insurance might pay to
rebuild it, but the association will have to fund the deductible. That amount should
be passed on by specific assessment to the owner who caused the problem. In a
condominium, expenses for limited common element repairs and maintenance can
be specifically assessed to the owners of the units benefited by the limited common
element so the association can recoup some of those funds. For example, if the
patio or deck for one unit needs to be repaired, the association can charge back the
repair costs to the owner of the unit attached to that deck. Doing this sets a
precedent, so it’s important to determine whether the short term gain of funds from
the specific assessment is the right route.
Obtaining a Loan: Increasingly more common for community associations
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Real property no longer required as collateral (meaning no liens will be
required on the common property or any individual lots or units)
Personal guarantees by directors no longer required to qualify
Association’s income stream is used as collateral now – lender takes lien on
assessment income
Loan Terms vary – usually between 3 and 10 years
Lenders look at owner-occupancy ratios, delinquency rates, association
reserves, impact of the debt service (loan payments) on the budget.
Lenders need to see:
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legal docs (declaration, bylaws, articles of incorporation, corporate
certificate of organization)
annual budget, balance sheet, income statement, reserve statements,
banking financial statements
accounts receivable listing
corporate resolution authorizing borrowing
minutes of board meeting and membership meeting (if required)
approving the loan
an attorney opinion letter regarding the association’s authority to
borrow money
title search results of association’s common property
an environmental questionnaire
copy of construction contracts/proposed contracts for the project (may
need AIA form)
payment and performance bonds from contractor, architect or
engineer
evidence of insurance naming the lender as an additional insured
COLLECTING DELINQUENT ASSESSMENTS
Georgia case law has established that owners have the legal obligation to pay
lawfully imposed assessments. In Forest Villas Condominium Ass’n, Inc. v. Camerio,
205 Ga.App. 617, 619, 422 S.E.2d 884, 886 (1992), the Georgia Court of Appeals
held that:
There is no legal justification for a condominium owner to fail to pay valid
condominium assessments. This reflects a clear choice by the legislature that the
owner’s obligation to pay assessments be absolute…The obligation to pay the
assessment is independent to the Association’s obligations to provide services. This
is necessary because the communal business of the condominium association for the
benefit in common of all condominium owners continues unabated during the
pendency of any…individual dispute. The public policy expressed in the [GCA] assure
that fulfillment of obligations and the functioning of a condominium association as a
whole not be jeopardized or compromised by individual disputes, which may or may
not be meritorious.
Case applies to GCA, but it is used to support the assessment obligation in
HOAs/POAs also.
In Timberstone Homeowners Ass’n, Inc. v. Summerlin, 266 Ga. 322, 323, 467 S.E.2d
330, 332 (1996), the Georgia Supreme Court enforced an HOA’s right to impose a
lien and file a lawsuit for past due assessments against an owner who claimed that
he did not affirmatively agree to the fees and never used the common property. The
Georgia Supreme Court held that the covenants created the lien right and since they
were recorded in the county land records, the owner took title to the property with
“constructive notice” of these obligations. The court stated:
The purpose of mandatory assessments is to maintain the common property in the
[community] for the use and enjoyment of all owners. The effects of invalidating
mandatory payments of assessments for maintenance of amenities in a community
without affirmative acceptance would render the provision of services or facilities in a
community an impossibility because it would permit property owners to determine
for themselves what portion of the amenities they would be willing to accept or to
reject.
Collections can be broken down into 5 steps:
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Lien
Lawsuit
FiFa
Association Foreclosure
Finding Assets
How Do We Know What To Do?
Boards should establish a collection policy.
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Due date of an assessment
Date late fee can be charged (if permitted by docs)
Amount of late fee to charge (if not specified in docs)
Date interest can be charged (if permitted by docs)
Amount of interest to charge (if not specified in docs)
Date monthly assessments can be accelerated (if permitted by docs)
Date notices will be sent to delinquent owners
Amount of delinquency triggering the need to forward account to attorney
Date attorney fees can be charged (GCA and POAA allow associations to
charge delinquent owners the reasonable attorney fees actually incurred in
collecting a past due balance. As of July 1, 2008, Georgia law also permits
HOAs to collect reasonable attorney fees actually incurred from owners when
the payment of assessments and fees arise from the covenants.)
o Notice to the public that a creditor claims an interest in a debtor’s real
property for payment of some debt.
o Community association lien rights arise from GCA, POAA and
covenants
o Lien must be paid at sale of property or buyers and buyers’ lenders will
not be able to obtain title insurance and lien will be ahead of buyer’s
ownership interest and lender’s security deed.
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Liens lapse after 4 years and cannot be the basis of collection litigation
after that time
LIENS
GCA/POAA Liens
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Associations benefit from GCA/POAA collection powers ONLY IF same
collection powers are referenced in association’s legal docs.
Written liens not required in county land records for unpaid assessments or
other charges
Automatic statutory lien against the delinquent owner’s unit or lot for all
unpaid sums lawfully assessed by the association for common expenses, fines
and other charges
Lien principal automatically increases as additional amounts come due and
remain unpaid
As long as association covenants provide, lien also includes:
o Late charges of the greater of $10.00 or ten percent (10%) of the
amount due
o Interest at the rate of ten percent (10%) per annum on unpaid
assessments and charges
o Association’s costs of collection of delinquent assessments, including
reasonable attorney’s fees actually incurred
o GCA and POAA state that association’s automatic, statutory lien is
superior to all other liens on the condominium unit or lot except:
ƒ A lien for ad valorem taxes on the condominium unit or lot
ƒ The lien of any first priority mortgage on the condominium unit
or lot;
ƒ The lien of any mortgage recorded before the declaration was
recorded
ƒ A lessor’s lien
ƒ The lien of any secondary purchase money mortgage on the
condominium unit or lot if the secondary purchase money
mortgage holder or his/her grantee was not the seller of the
condominium unit or lot to the then owner
What Options are Available if a GCA/POAA Lien is Wiped Out by a Tax or
Lender Foreclosure?
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The association can find and sue the delinquent owner based on his/her
personal obligation to have paid the past due amounts
Special assessment to all the owners for the unpaid assessments (not the late
fees, interests, court costs or attorney fees)
The association can collect the excess proceeds, if any, from the foreclosure
sale (NOT LIKELY)
Usually the HOA writes off the lien amount as uncollected debt
GCA/POAA Lien Payoffs:
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Closing attorneys/title examiners – required to contact association for a
statement of any amounts owed in connection with any sale or refinance of a
unit or lot in that association
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Association is required to provide the statement of amount owed (payoff
letter or closing letter), within five business days of the association’s receipt
of a written request
If association does not respond timely to a proper request association’s lien is
extinguished
Payoff/Closing letter is binding on association, so it is better be right (even
though lien lapses after 4 years, payoff letter should include those amounts)
If payoff/closing letter is submitted timely, but association is not paid from
seller’s closing proceeds, lien remains on property ahead of buyer’s title
interest and lender’s new security deed, buyer becomes personally liable (and
can be sued) for the full amount owed by the previous seller
HOA Liens:
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No automatic, statutory lien rights
Lien rights must exist in recorded covenants. If docs are silent about lien
rights, HOA cannot file lien
Must file written liens in county land records against delinquent owner’s
property
Recorded HOA liens only protect the amount of debt shown on the lien – so
new liens must be filed as additional assessments remain unpaid
As long as association covenants provide, lien also includes:
o Late charges (in the amount specified by the covenants)
o Interest (in the amount specified in the covenants, but not more than
18% per annum)
o Association’s costs of collection of delinquent assessments, including
reasonable attorney’s fees actually incurred
o Other than tax liens (which trump everything) HOA liens have no
special priority (like GCA/POAA liens) HOA lien priority is based on the
date the lien is recorded in the county land records where the property
is located (“first in time, first in line”)
o The foreclosure of any lien with a higher priority than the HOA lien
extinguishes the HOAs lien
What Options are Available if an HOA Lien is Wiped Out by a Prior Liens
Foreclosure?
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The association can find and sue the delinquent owner based on his/her
personal obligation to have paid the past due amounts.
The association can collect the excess proceeds, if any, from the foreclosure
sale (NOT LIKELY)
Usually the HOA writes off the lien amount as uncollected debt
LAWSUITS AND JUDGMENTS
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If association files collection lawsuit against delinquent owner and wins,
association records a Writ of FieriFacias (“FiFa”) in the County’s General
Execution Docket (not land records).
FiFa is a judgment lien
Judgment liens are enforceable for 7 years from date of judgment
Judgment liens can be renewed after 7 years or they become dormant
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Dormant judgment liens can be revived within 3 years after becoming
dormant
Post-Judgment Collections:
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The best asset information is the association members and records
Review/copy checks (not necessary if on lock box), correspondence and
envelopes from owners
Obtain banking, employment and off-site residence information
Board members or manager might know where someone works
Board members or manager might be able to obtain owner’s automobile
license tag info
Credit check/Skip Trace/Private Investigator:
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Might find owner’s: bank accounts, employer, lenders, potential lenders
Some people/entities listed may have taken a credit application or financial
statement from the owner
Subpoenas can be sent to get copies of these documents
Garnishments
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Garnishee is a person or entity holding or controlling money belonging to the
delinquent owner
Types of garnishments:
o Bank (holding money in owner’s bank accounts that can be obtained
by association)
o Wage (paying owner money, some of which can be sent to association)
o Rent (tenant owes rent to owner, which can be paid to association
instead)
o Certain funds are exempt from garnishment:
ƒ Some social security benefits
ƒ Some life insurance benefits
ƒ Non-IRA pensions
ƒ Retirement plan benefits
Suspension of Use Rights and Services
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Suspend delinquent owners’ use rights and services to:
o Vote
o Use the recreational property
o Park on the association common property
o Suspend an owner’s cable, satellite, internet and trash service (if
provided by the association)
Suspension of Utilities: There are different requirements for condominiums,
homeowner associations and property owner associations to suspend utility services
provided by association (gas, electric, heat, air conditioning and water). Either way,
this right is only available as a valuable remedy if there exist separate exterior
cutoffs to individual units or lots.
GCA:
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Must have a judgment or judgments totaling at least $750.00 against the
owner
Must send notice of the suspension to the owner before suspension
To restore service - owner required to pay judgment balance plus the costs of
suspending and reconnecting service
HOAs/POAs:
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Do not require a judgment
Association’s docs control
To restore services association docs. usually say owner must have zero
balance
Other services paid for as a common expense (cable, satellite, internet and
trash service)
Personal Property Levy
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Association notifies sheriff’s office of FiFa and requests sheriff collect owner’s
personal property (TVs, appliances, cars, etc.)
Association pays to transport and store the property and advertise the sale of
the goods
Sheriff’s office sells goods at judicial sale to satisfy FiFa
Levy process can be costly for little return
Post-Judgment Discovery
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Interrogatories. Questions about specific asset information.
Requests for production of documents. Requests for specific asset
documentation.
Compliance is mandatory. If owner does not comply, motion to compel filed in
court.
If owner does not comply with court order, motion for contempt. Jail time
and additional attorney fees.
ASSOCIATION FORECLOSURE
GCA/ POAA:
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Association must provide 30-day notice to the delinquent owner prior to filing
lawsuit seeking an order of foreclosure
If the owner does not pay or work out payment arrangements during 30 day
period AND if association’s lien is at least $2,000.00, association can file
lawsuit for money judgment against owner and foreclosure of lien
Results vary
Best Result - third party purchases property at foreclosure sale for price high
enough to pay off amounts owed to association by the delinquent owner
Alternative Result - association buys property at foreclosure sale and becomes
legal title holder, no money received by association but delinquent owner is
gone
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Worst Result - no one buys property at foreclosure sale and the preforeclosure status quo remains
OBSTACLES TO COLLECTIONS
Lender Foreclosure
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Non-judicial foreclosure (no lawsuit or court order necessary)
Extremely fast process in Georgia
First mortgage has priority so lender foreclosure extinguishes association lien
If excess funds after foreclosure sale, association might get paid some money
(unlikely in these economic times, properties are usually worth less than the
loans)
Bankruptcy
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Any and all collection action must stop immediately.
Creditors can proceed with collection efforts if the bankruptcy is discharged,
dismissed or the bankruptcy judge allows creditor to do so
Pre-petition debt
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All debts owed by delinquent owner prior to filing bankruptcy petition.
Addressed by bankruptcy court.
Post-petition debt
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All debts arising after bankruptcy petition is filed.
Must be paid by the delinquent owner as they accrue.
Chapter 7 – Liquidation
Complete relief from personal obligation of pre-petition debts – lenders typically
foreclose after owner surrenders property.
Chapter 13 – Reorganization
Association receives partial or full payment of secured pre-petition amounts owed
over a five year period - association secured by liens (GCA/POAA – automatically
includes all principal owed upon petition. HOA – only includes amounts listed in
recorded liens)
Results of Bankruptcy
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Dismissal: Bankruptcy is concluded and owner remains responsible for prepetition debts
Discharge: Creditors permanently prohibited from collecting pre-petition debt
from owner (except if property is retained by debtor, liens remain on property)
Audits/Financial Review: Often required by bylaws; prepared by an independent
CPA
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Audit: More expensive and larger in scope – examines financial records,
budgeting and accounting methods, checks operating accounts, reserve
accounts, records of expenses.
Financial review: Less expensive and smaller in scope – typically reviews the
operating accounts
QUESTION: What does the association do if the common property tax bill is
really high?
ANSWER: The board should file a real property tax return which will trigger a
revaluation of the property and a new tax assessment notice. If the assessment
notice continues to show a high fair market value for the common property, the
board should appeal the taxes and explain why the common area property should be
assigned a nominal fair market value. Most county tax assessors’ offices and boards
of equalization will remedy the tax valuation of the common property without a
hearing. Sometimes a hearing will be required though.
QUESTION: Is there a problem if the HOA/POA is not getting a tax bill for
the common property?
ANSWER: Yes. This could mean that the common property was never properly
conveyed from the developer to the association. Most likely, the developer is getting,
but not paying, the tax bill. The association needs to obtain title to the common
property and then pay the unpaid back taxes, penalties and interest to the county or
the common property could be lost at a tax sale.
TAXES
Property Taxes
Condominiums: Corporations rarely own property (common elements owned by all
unit owners as tenants-in-common and taxed as part of the intrinsic value of the
unit). No tax bill for common elements.
HOAs and POAs: Corporations usually own common property/amenities – fair
market value should be nominal because owner easements make it impossible to sell
to third party for any real value. The FMV of each home in the HOA/POA is higher
because the owners have the right to use and enjoy the common areas, so each lot
is being taxed inherently for the value associated with the common property. Taxing
both the lot owners and the association for the value of the common property
creates double taxation.
Income Taxes
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Community association are non-profit, but rarely tax exempt
Federal and state tax return due on the 15th of March if the association’s
fiscal year is the calendar year. If fiscal year is different from calendar year,
tax returns must be filed on or before the 15th day of the third month
following the close of the fiscal year
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Associations have two methods for filing income taxes
IRS Form 1120-H
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Association prohibited from carrying over losses from previous year
Income received from member operations (i.e. membership dues, fees and
assessments) is excluded from taxable income
Subject to certain exceptions, association pays tax on gross taxable income
(interest income, clubhouse rental income)
Tax rate is a flat 30 percent
IRS Form 1120.
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Corporation can carry over losses
Corporation pays taxes on all income (including assessment income)
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Association can choose what type to file each year (and change each
year). Most CPAs do both computations each year and file the return that
results in the least amount of taxes to the association.
No matter which federal income tax form is used, all associations must file
Georgia Form 600.
Associations may have to pay personal property taxes to a city or county
municipality
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For example, personal property taxes could be charged on playground equipment or
pool furniture and equipment owned by the association.
1099 Forms
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Used to report various types of income paid to others that would not be
reported on a W-2
Required for payees receiving $600 or more during any calendar year
Must be filed with IRS by the end of February for previous calendar year
(copies must be sent to the payee by the end of January)
TRUST ACCOUNTS
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Brokers holding money for other people must hold the money in a trust
account.
Trust accounts - rarely used in the community association industry because
the association’s money is not in an account under the broker’s name or
broker’s EIN. The association’s money is in an account under its own name
with its own EIN.
The CAM/Broker usually has access to the association’s funds because they
are listed as a signatory on the association’s accounts, but the funds are not
being held by the broker for the association so they do not have to designate
the account as a trust account.
If funds are held by a broker for another party, the account the money is
deposited into must be a trust account.
These accounts must be federally insured, bank account designated as trust
accounts.
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Within one month of opening a trust account, the broker must register it with
the Georgia Real Estate Commission (GREC).
The broker must notify GREC in writing of the funds move to a different bank,
a different trust account or if the broker closes a trust account.
The broker must provide the GREC with the name of the bank and the
account number and provide them with the authority to investigate and
examine the records of that account at any time.
This account may or may not be interest-bearing. If it is, there must be a
written agreement between the parties giving direction as to who receives the
interest. (In the community association industry, the association always
keeps the interest on its money.)
The qualifying broker must have signatory power on the trust account.
The broker must maintain a journal of each trust account.
The broker must reconcile their trust account balances at least once a month
and make a written report comparing the broker’s total trust liability to the
bank balance of the broker’s trust account.
Each broker is responsible for establishing written policies about trust funds
(especially cash) and making sure their licensees understand how trust funds
will be received and acknowledged.
The Commission may, upon reasonable request, examine a broker's trust
account. The Commission may accept a certified report about the trust
account from a CPA instead of examining a broker's account.
MAINTENANCE AND REPAIR IN COMMUNITY
ASSOCIATIONS
General Rules for All Communities
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Whoever owns it, maintains it - unless the community documents state
otherwise
Community documents often state otherwise
To figure out the association vs. owner responsibilities follow these three
steps:
STEP 1: Figure out what needs to be fixed and where it’s broken
STEP 2: Check boundaries of lots/units in the documents to see who owns
what
STEP 3: Check maintenance section of documents to see if one party
maintain something the other party owns
Condominiums
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If governing documents are silent, follow GCA, which states:
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unit owner maintains/repairs unit and limited common elements to the
unit
association maintains/repairs common elements of the condominium
Example: Documents state that exterior walls are the unit boundaries in a
townhome condominium. Unit owners are responsible for maintaining their unit, the
driveway serving the unit, and the step or the patio serving the unit. There are no
other maintenance responsibilities assigned to the unit owner. The association is
responsible for maintaining all items outside of the unit boundaries unless otherwise
assigned to the unit owner.
An owner’s HVAC system is stolen from the ground outside her unit.
STEP 1: HVAC system needs to be replaced
STEP 2: Boundaries are exterior walls
STEP 3: Maintenance Section of Declaration
Maintenance Section of the Declaration says:
Owner maintains: unit, driveway and steps/patio.
Association maintains: all other areas outside the unit boundaries.
Since the HVAC system was located outside the unit boundaries and the association
is responsible for all areas outside the unit boundaries (except the driveway and the
steps/patio), the association must replace HVAC system even though it serves only
one unit. (The answer is the same even if the HVAC system is a limited common
element – because docs are not silent, so you don’t follow the GCA.)
Paying for Maintenance and Repairs
General Rule -- whoever maintains it, pays for it
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HOA/POA
o Common Areas – association maintains – association pays*
o Lots – owner maintains – owner pays
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Condominiums
o Common Elements: association maintains – association pays*
o Units: owner maintains – owner pays
o LCEs -- if Declaration is silent, GCA says owner maintains – owner
pays
o LCEs – if Declaration says owner maintains LCEs – owner pays
o LCEs – If Declaration says association maintains
o LCEs – association pays
o THERE IS AN EXCEPTION! (See below.)
*Unless an exception exists (see below), not only does the association pay to
maintain the common areas/elements, but the GCA and POAA affirmatively prohibit
an association from charging back costs to an owner for such maintenance/repair.
IMPORTANT: The condominium declaration can state that the association
does not have to charge the cost back to the owners, but if such language is
not in the condominium declaration, the GCA REQUIRES the board to pass
on such costs to the relevant unit owner(s).
Example: If the declaration requires the association to maintain the roofs, the
association cannot specifically assess a roof repair to a particular unit owner (even if
the roof serves only one unit).
Exceptions to the General Rule
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If Association Maintains LCEs - GCA states that association is REQUIRED to
charge LCE maintain/repair/replacement costs back to the relevant unit(s)
unless declaration specifically states otherwise
Example: The condominium declaration states that the driveways are limited
common elements (“LCE”) to the townhomes. Another declaration for a different
condominium states that the hallways are limited common elements to the units on
the floors of a high-rise building. Both declarations require the association to
maintain the LCEs. According to the GCA, the first association is REQUIRED to
maintain the driveways as a common expense of the association, but also REQUIRED
to charge back the cost of each driveway repair to the relevant unit owner (to
reimburse the association for the work on the LCE). According to the GCA, the
second association is REQUIRED to replace the hallway carpet as a common expense
of the association, but also REQUIRED to charge the carpet replacement cost back to
all the owners of the units on that hallway.
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If Owner Damages Association-Maintained Property – GCA, POAA and most
governing documents state that if an owner damages an area maintained by
the association, the association must repair the damage, but the association
can charge the costs of doing so back to the responsible owner as a specific
assessment.
Example: An owner crashes through the entrance gates of the community in her
car. The association must fix the entrance gates. If permitted by the governing
documents, the association can assess the costs of repairing the gate back against
the owner as a specific assessment.
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If Association Deliberately Damages Owner-Maintained Property – GCA and
most governing documents state that if an association damages an area
maintained by an owner in order to complete an association maintenance
responsibility, the association is required to repair the damage it caused to
the owner-maintained area.
Example: If an association cuts a hole in the ceiling of a unit to fix a common
element pipe, the association must repair the hole. The association must put the
property back to the condition it was in when it was originally built – not when it was
damaged.
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Negligence - The negligent party is responsible for paying to repair any
property or item that was damaged because of that party’s negligence. This
applies both to the association and for unit owners.
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Insurance – If the association maintains insurance covering the damages that
need to be repaired, the carrier will pay for the repairs (less a deductible)
even if the damaged area is supposed to be repaired by the owner.
INSURANCE ISSUES IN COMMUNITY ASSOCIATIONS
In general, however, there are 4 types of policies that an association carries:
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Directors’ and Officers’ Insurance
Fidelity Insurance
Liability Insurance
Property Insurance
Directors and Officers Insurance
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Directors’ and Officers’ Insurance, known as (“D&O”), protects officers and
directors of an association from liability resulting from their actions or
inactions, where the claim is not a result of bodily injury, personal injury or
property damage covered under the GCL
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D&O typically covers wrongful acts on the part of an officer or director of the
association. Be sure it also covers past (not just present) officers and
directors.
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A D&O policy also should cover any volunteers, committee members or other
person acting on behalf of or as directed by the board of directors.
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Typically any intentional, dishonest, fraudulent, criminal, or malicious acts are
excluded from coverage.
Example: If a director steals association funds, his actions will not be covered under
D&O insurance. Likewise, if a director slanders another person, the claim will
typically be excluded from coverage.
Fidelity Insurance
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Fidelity insurance protects associations from loss of money, securities, or
inventory resulting from crime
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Common fidelity claims allege employee dishonesty, embezzlement, forgery,
robbery, safe burglary, computer fraud, wire transfer fraud, counterfeiting,
and other criminal acts
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An association is NOT REQUIRED BY LAW to have fidelity insurance, but
most community association documents require it. Plus, most property
insurance policies have some coverage for dishonest acts of a director, officer
or an employee
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Condominiums seeking FHA project approval and buyers seeking conventional
loans to purchase condominiums compliant with FNMA guidelines must have
fidelity insurance equal to AT LEAST three months of assessments plus the
amount of reserves.
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The Georgia License Law requires real estate brokers who have access to
$60,000 or more of association funds to be covered by fidelity insurance or a
fidelity bond in an amount equal to AT LEAST three months of assessments
plus the reserves for all associations it manages. Each association must be
listed as an additional insured on the broker’s fidelity insurance or bond
Liability Insurance Coverage
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Most community associations obtain commercial general liability insurance
(“CGL”)
CGLs cover claims of bodily injury or property damage occurring on the
common property/elements caused by the negligence of the insured, unless
the injury/damage is caused by something excluded by the policy, such as
injury from mold or asbestos
A typical CGL policy also includes coverage for indemnification and hold
harmless provisions in association contracts.
Example: A management contract requires the association to indemnify the
manager and the management company from lawsuits brought during in the course
of its work for the association. Someone slips and falls on the common
property/elements and sues the association and the management company claiming
the area was not properly maintained. The typical association CGL carrier will
provide coverage for the defense of the association AND the management company
in the lawsuit. Without the indemnification and hold harmless coverage in the CGL
policy, the carrier would pay for a defense of the association but the association
would have to come out of pocket to pay for the defense of the management
company in the lawsuit.
HOAs and POAs
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NO GEORGIA LAW REQUIREMENT for HOAs and POAs to carry liability
insurance, but if it OWNS COMMON PROPERTY, the HOA/POA SHOULD obtain
a CGL covering the common areas
Association legal documents might set the minimum amount of liability
insurance
When determining the amount of insurance, boards of directors should work
with their insurance agents to evaluate the amount of common area owned,
the number of owners and/or guests on the common areas and the uses of
the common areas
Condominiums
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GCA requires condominium associations to carry a CGL policy that covers
bodily injury and property damage at the condominium in an amount not less
than $1 million for a single occurrence and $2 million aggregate
An association’s liability policy does not cover injuries incurred inside of a
unit. Each unit owner should carry liability insurance covering themselves,
the unit occupants and their guests inside of the unit.
BEWARE: If a claim relates to any wrongdoing by the manager or management
company, it is usually EXCLUDED from the CGL policy. If the association has not
made a similar exception in the indemnification provision of the management
contract and a claim is brought against the manager/management company for its
wrongdoing, the association’s CGL carrier may deny the claim and the association
will have to defend the manager/management company out of pocket.
Property Insurance for HOAs and POAs
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Property insurance is hazard or casualty insurance that protects the actual
physical property and equipment of an association or owner against loss from
theft, fire or other perils.
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NO GEORGIA LAW REQUIREMENT for HOAs and POAs to carry property
insurance, but most association legal documents require full replacement
coverage for the common area damages occurring from standard perils such
as fire, windstorm, hail, vehicles, etc.
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TOWNHOME COMMUNITIES ARE TRICKY.
o Some association documents require the owner to insure the entire
townhome (even if the association maintains it) – just like a single
family home owner insuring his/her house.
o Some legal documents for townhome communities require the
association to maintain insurance over all areas the association
maintains/repairs in the community – which might include the exterior
building surfaces and roofs. Essentially, this means the TOWNHOME
ASSOCIATION might purchase a CONDOMINIUM PROPERTY
INSURANCE POLICY. (Doing this does not make the townhome
community a condominium, but it definitely confuses real estate
agents and lenders.)
Property Insurance for Condominiums
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GCA REQUIRES condominium associations to carry hazard/casualty insurance
(fire and extended coverage or basic perils insurance) covering the full
replacement value of all the condominium building(s), less deductibles.
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If a condominium association experienced a total loss of the building, there
should be enough insurance coverage to rebuild back to the original
condition. Without “guaranteed replacement cost coverage” in the policy, a
condominium association must regularly obtain insurance appraisals of the
entire property to ensure it is maintaining enough insurance for full
replacement costs.
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Fire and extended coverage will cover the damages caused by the following:
o Fire
o Windstorm
o Hail
o Explosion
o Aircraft
o Vehicles
o Riot
o Civil commotion
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The GCA requires the association to cover the following building structures,
including the common elements, the limited common elements and the units:
o all common elements of a condominium, including all limited common
elements;
o the building foundation;
o the building roof and roof structures;
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exterior walls of the building, including windows and doors and framing
therefore;
the HVAC systems serving a condominium unit;
all drywall and plaster board comprising the walls and the ceilings
of units; and the following items in a condominium unit in the like
type and quality as originally installed: floors and subfloors; wall,
ceiling and floor coverings; plumbing and electrical lines and fixtures;
built-in cabinetry and fixtures; and appliances used for cooking,
dishwashing and laundry.
Personal belongings of an owner or occupant, and any betterments or
improvements made by a unit owner are NOT required to be covered by an
association’s insurance. Any upgrades or changes made by unit owners (even
if the upgrades were part of the contract for the original purchase of the unit)
are not required to be included in the association’s policy.
Example: If an owner replaces the original tile in a unit with an upgraded tile or
slate floor, the association’s insurance would not cover this upgrade. In the event of
a fire, the association’s insurance carrier will replace the flooring that was originally
installed in the unit.
Application of Insurance Deductibles in Condominiums
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A deductible is like a service charge taken from the insurance proceeds and
kept by the insurance carrier. The loss is adjusted and the insurance
proceeds determined. Then the deductible is reserved by the carrier and the
remaining proceeds are sent to the association. Essentially, the insured “selfinsures” for the amount of the deductible.
The condominium legal documents identify the party responsibility for the
deductible. Usually it is allocated to person(s) responsible for the loss in the
absence of insurance.
For losses covered by an insurance policy required by the GCA, the
association is permitted to allocate up to $2,500 of a deductible to a unit
owner. For losses covered by an insurance policy that is not required by the
GCA, there is no limited on the amount of deductible that can be allocated to
a unit owner.
Some insurance policies have a PER OCCURRENCE deductible. No matter how
many units are damaged in one event, there is only one deductible allocated
to the association or the entire event.
Some insurance policies have a PER UNIT PER OCCURRENCE deductible. The
same amount of deductible is allocated to each unit damaged in a single
event.
Important Notes about Condominium Insurance Deductibles
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Water damage is NOT covered by fire and extended coverage policies and the
GCA does NOT REQUIRE a condominium association to carry water insurance
covering losses from conditions like pipe bursts, washing machine overflows,
toilet or tub overflows, etc.
If the condominium association obtains a separate insurance policy covering
water damages it will typically cover "accidental discharge or leakage of water
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or steam as the direct result of breaking or cracking of any part of a system
or appliance containing water or steam."
Specifically excluded from most water damage policies are any damages
caused by the continuous or repeated seepage or leakage of water (such as a
leak from a nail puncturing a pipe or a recurring window leaks), or the
presence of condensation or humidity, moisture or vapor that occurs over a
period of 14 days or more.
Also, water insurance does NOT cover the costs of repair to the appliance,
system, or pipe itself. It covers only the damages caused by the discharge of
water. Example: If a water pipe serving a unit suddenly bursts causing
damage to three units, the damage to the units will be covered, subject to
any deductibles, but the repairs to the pipe itself will not be covered.
Condominium Unit Owner Insurance Policies – HO-6
These policies have three types of coverage:
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Coverage A - real property – coverage for damage to the parts of the unit not
covered by the association’s policy. For example, owner betterments and
improvements. **Be careful here -- most HO-6 policies cover named perils,
not special perils.** Water damage typically is covered by special
perils. Consequently, owners should confirm that they have special perils
coverage to receive payment for water damage.
Coverage B - liability – coverage for bodily injury and property damage inside
a unit because of the owner’s negligence.
Coverage C - personal property and association deductibles – coverage for
personal property inside the unit, wall paper and carpeting, and betterments
and improvements to the unit. Coverage C also reimburses a unit owner for
deductibles under an association’s master policy that are passed along to the
unit owners. **Be careful here -- deductible coverage in this part of the
policy should match the amount of the association’s deductible.**
*Most condominium documents require HO-6 policies for each owner.
**Most residential lenders require HO-6 policies as a condition of loan
approval (primarily because FHA and FNMA require HO-6 policies).
COVENANT ENFORCEMENT
Covenants
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An obligation to do or not do something with your real property required
simply because you own that property.
Use Restrictions (provisions that restrict an owner’s use of his/her real
property) and Architectural Controls (provisions that control the architectural
improvements that can be made to an owner’s real property) are, by
definition, covenants affecting the use of land.
To be enforceable from one owner to the next, they must be recorded in the
county land records so they remain in the chain of title of the property.
Once recorded, the new buyer “gets what they are given”… property with
covenants recorded against it. The new owner does not need to be given a
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copy of the recorded documents for them to be enforceable. (The documents
are public records and the new owner is on CONSTRUCTIVE NOTICE of them.)
Must be clearly drafted so courts can strictly interpret them during
enforcement actions
Three-prong test for the interpretation of restrictive covenants:
1. Is covenant clear and unambiguous? If yes, it gets enforced.
2. If covenant is ambiguous, court applies rules of contract construction
by looking at the entire document to resolve the ambiguity.
3. If the ambiguity still remains the question regarding what the
ambiguous language means and what the parties intended must be
resolved by a jury
QUESTION: Who can enforce covenants?
ANSWER:
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Other owners who are also subject to the covenants can enforce them.
Usually the association (through the board of directors) can enforce a
covenant (as long as the covenants and the corporation are “married”)
A committee of the corporation can sometimes enforce the covenants (for
instance, the architectural control committee might be given such authority).
QUESTION: Who can be sued for violating the covenants?
ANSWER: Any owner subject to the covenants who violates the provisions is subject
to enforcement mechanisms and can be sued to cease violating the covenants.
QUESTION: What about an owner who purchased property that had a
violation on it before the conveyance?
ANSWER: Generally, the purchaser must have actual or constructive notice of the
covenant violation for the association to enforce the covenant after the conveyance.
QUESTION: How can we make sure that purchasers have actual or
constructive notice of the violation?
ANSWER: The association should record notices of violation in the county land
records. The notice simply states that the real property is the subject of a covenant
violation dispute. Doing so will put prospective purchasers on notice of existing
violations. Once a notice of violation is recorded in the land records all potential
purchasers have constructive notice of the violation. In order to avoid a potential
claim for slander of title, it’s important to make sure the association legal documents
affirmatively permit the recording of notices of violation as an enforcement
mechanism.
QUESTION: How can you enforce the covenants after filing notices of
violation?
ANSWER:
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The association can impose fines ($25 per day has been approved by the
Georgia Court of Appeals)
The association can use “self-help” – going onto the real property, fixing the
violation and charging the costs back to the owner. (This can only be done
peacefully. If the owner walk outside with a gun and threatens to shoot or
call the police, the association representatives engaging in self-help should
walk away.)
QUESTION: If the association files suit to get a court order requiring the
owner to fix the violation, is there anything the owner can say in defense
that might make the association lose the case?
ANSWER: Yes. The person can argue that he/she is not the owner of the property.
Otherwise, there are 6 typical defenses to most covenant enforcement cases:
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Statute of Limitations
Selective Enforcement
Waiver
Laches
Estoppel
Vague and Indefinite
Statute of Limitations:
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Two years from the date of the covenant violation.
Same statute of limitations for permanent violations and continuing
violations.
For instance, a covenant enforcement suit must be filed within 2 years after an
owner installs an unapproved fence. Each day the unapproved fence remains in
place does NOT start a new 2-year period.
Selective Enforcement:
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Association does not enforce one of the covenants, but does enforce others (if
the board is not going to enforce it, remove it)
Association enforces a particular covenant differently (with no objective
reasons) between and among owners
Waiver:
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There is no test to determine how long the association can wait to enforce a
covenant before the courts determine that the association waived its right to
do so.
Georgia courts have said that if the enforcing body does not know of the
violation, they have not waived their right to enforce it.
Laches:
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If the association watches an owner spend money while committing a
violation of the covenants, but the board does nothing about it, the
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association will be barred by the defense of “laches” and will not be able to
enforce the covenant against the violating owner.
Georgia Supreme Court test to determine if laches exists.
Look at the:
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length of the delay
sufficiency of the defendant’s excuse for not acting sooner
loss of evidence because of the delay
opportunity for the plaintiff to have acted sooner
whether the plaintiff or defendant possessed the property during the delay
whether the defendant can show prejudice from the delay
Estoppel:
The association will not be permitted to successfully enforce the covenants if the
violator was influenced by the conduct or representations of the association.
For example, if a board member or ACC member tells an owner that the paint color
he is about to use to repaint his siding looks nice, the association may be “estopped”
from suing to make the owner repaint an approved color later.
Vague and Indefinite:
Georgia Supreme Court stated that if covenant clearly establishes the rights and
obligations of the parties, the covenant will not be deemed void.
For example, covenants prohibiting “noxious or offensive activity” and “anything
which may be or may become an annoyance or nuisance” were deemed too vague,
indefinite and uncertain for enforcement.
Limitations on the Enforcement of Covenants
Charter Club v. Walker
The Charter Club community adopted an amendment to its Declaration of Covenants
restricting the leasing of homes within the community. Prior to the amendment,
leasing was permitted in the community. The community adopted the amendment
following the amendment procedure specified in the Declaration.
A homeowner named Constance Walker voted against the amendment and leased
her home in violation of the new leasing restriction. Ms. Walker claimed that she
was not subject to the amendment since she voted against it. The Association lost
this case.
The case revolved around a statute that has long existed in Georgia, O.C.G.A. § 445-60(d)(4). That statute provides, in relevant part, that "no change in the covenants
which imposes a greater restriction in the use or development of the land will be
enforced unless agreed to in writing by the owner of the affected property at the
time such change is made." The Georgia courts for years have enforced community
association amendments like the leasing amendment in this case. The courts have
upheld amendments based on the understanding that, when covenants allow for
amendments to those covenants with approval of less than all owners, buyers of
property in the community have agreed to be bound by lawfully approved
amendments, even if they vote against the amendments.
In this case, however, the court ruled that the leasing restriction imposed a greater
restriction on Ms. Walker's use of her property and, since she did not consent to this
restriction, the amendment was not legally binding on her.
The effect of this case, at a minimum, is that amendments already adopted by many
homeowner associations may not be binding on any owner who did not agree in
writing to those amendments, if the amendments impose a greater restriction on the
use or development of the owner's property. This has broad application and could
include everything from leasing restrictions to any provisions that regulate
commercial vehicles and parking, pets, or architectural control and review
procedures. In other words, any amendment which created a greater restriction on
an owner's use or development of property can be challenged by any owner who did
not vote in favor of that amendment.
While the case suggests that amendments made by associations in the past may still
be binding on those owners who voted in favor or agreed in writing to the
amendments, the purpose of many of these amendments may be undermined if the
restrictions are only binding on those homeowners who voted in favor of the
amendment and not those who voted against the amendment or did not vote on the
amendment. Additionally, to enforce these amendments against owners who voted
in favor of the amendments, associations may be required to produce records to
show that particular owners voted in favor of the amendments. This can be a
challenge for many communities.
QUESTION: Where does this leave community associations?
ANSWER: First, this case does not apply to condominiums that were created under
the GCA. This would cover all condominiums created after 1975. The reason for this
is that the Condominium Act contains a provision that specifically states that O.C.G.A.
Section 44-5-60 does not apply to condominiums. Amendments to condominium
declarations, then, are not affected by this ruling.
Next, the POAA contains a similar provision stating that O.C.G.A. Section 44-5-60
does not apply. For communities that are subject to the POAA, amendments
adopted after submission to the POAA are not subject to this ruling. Certain
amendments adopted BEFORE the submission to the POAA may not be binding on
certain homeowners in the community.
However, for all homeowner associations, certain amendments adopted by the
community may be invalid and not binding on certain homeowners in the community.
QUESTION: What should community associations do now?
ANSWER: Any homeowner associations that have not yet adopted the Georgia
Property Owners' Association Act should do so now. This often will require a vote of
the association membership, but many community covenants allow the board of
directors to adopt the POAA without a homeowner vote. If the community covenants
require a homeowner vote for adoption of the POAA, the POAA itself permits that
amendment by the percentage approval specified in the covenants. This case would
not force associations to obtain 100% homeowner approval to adopt the POAA, if the
covenants provide for a lesser amendment approval vote, as the POAA is not
considered a use restriction.
Adopting the POAA now probably will not fix the problem associated with
amendments that were adopted prior to submission to the POAA, but adopting the
POAA will give the community legal power to make future amendments and to ratify
previous amendments. Additionally, the POAA greatly strengthens assessment
collection powers, which we believe benefits all homeowner associations.
If your community has adopted amendments in the past which impose a greater
restriction on the use or development of homeowner properties, even if your
community later adopted the POAA, the community should undertake an effort to
ratify or readopt those amendments.
The most efficient and cost effective way to validate amendments previously
approved by the community is to first adopt the POAA and then ratify earlier
amendments with a community amendment vote following the amendment
procedure stated in the covenants. Unfortunately, this process cannot be
accomplished without a community vote, but we believe that this process is the
simplest and least costly approach to make existing covenant amendments binding
on all homeowners in a community.