FOR
OREGON
HOA’S
Senate
Bill 1206
Relating
to Organized Communities
Condominium and
Homeowner Association Laws
By: A. Richard Vial
Vial Fotheringham LLP
September 23, 1999
Introduction
Since the late
1970s, Oregon has enjoyed one of the most comprehensive and sophisticated
condominium acts in the United States.
It has taken the key elements of uniform laws adopted by various
industry committees, and focusing primarily on protecting the rights of both
property owners and developers achieved a remarkable history of very little
amendment since its original adoption.
While there have been “tweaks,” from time to time, the Act remains
largely as it was originally adopted.
This fact is testimony to the thoughtfulness that originally went into
its adoption. In spite of thousands of
units in hundreds of projects developed since then and twenty years of
operating history, few serious problems have been identified.
Those homeowner
associations not developed under the community act have not enjoyed the same
level of sophisticated statutory guidance.
The adoption of the Planned Community Act in 1981 did little to ensure
that many subdivisions developed in the last eighteen years had adequate
organizational documents to address the interdependence of owners in
maintaining their common property and values.
This problem was largely due to the fact that the Planned Community Act
had such broad exceptions that almost all projects could be done without the
necessity of abiding by its requirements.
Senate Bill 1206 passed by both bodies of the Oregon Legislature June
18, 1999 and effective October 23, 1999 significantly increases the number of
properties which will now be required to comply with certain minimal standards
ensuring an organized association is available to assist owners in governing
these private municipalities.”
Originally
conceived in an effort to bring the Planned Community Act into alignment with
Oregon Condominium Act, a number of issues were identified where both types of
projects could be improved. This paper
will address these general improvements to Oregon’s homeowner association law,
and note the significant expansion of the applicability of the Planned Community
Act to properties with common interest.
A.
Reserves.
One of the most significant parts of a homeowner association budget is
the requirement to reserve funds for the future repair, maintenance or
replacement of common properties.
Formerly the law did not specifically speak to the issues of maintenance
and repair, but only addressed replacement.
This became a definitional problem and it was soon realized that
expensive maintenance (such as the overlay for asphalt surfaces) should also be
included in reserves so as to avoid the need for special assessments at such
time as these expenditures became necessary.
Of particular
interest was the addition of paint as a reservable item. Formerly the law merely discussed those items
which were commonly deemed “capital.”
Under a variety of tests, including those used by the Internal Revenue
Service as well as a number of insurance companies, paint was not deemed to be
capital. More and more, associations
are finding that to paint the buildings may not be quite as expensive as
roofing the buildings, but nonetheless is significant enough that it would
require a special assessment if reserve funds were not available. By adding paint to the list of items for
which reserves should be accumulated, many associations will avoid the pain of
special assessment elections.
Another common
problem in Oregon’s condominium and homeowner association law has been the lack
of a requirement that the association review its reserve calculations. The law now requires an annual reserve study
or review of the existing reserve study to ensure its accuracy from year to
year.
B.
Issues
relating to the Association’s involvement in litigation.
Until now, the law has not clearly provided the association with the
right to bring an action on behalf of aggrieved owners both relating to their
privately owned space, as well as common areas. The law now makes it clear that an association may do so, but
only after giving each affected owner notice of the association’s intent to
seek damages on their behalf and provide them with a mechanism for proceeding
individually. Under the new provisions,
while an owner may choose not to have the association seek damages on their
behalf, they would not be relieved from the obligation to pay any assessments
arising out of the costs to the association for pursuing the litigation on
behalf of others.
The new provisions
also clearly allow the association to avoid further liability in the event that
an owner opts out.
C.
Insurance. In
an attempt to clarify and make consistent the provisions relating to insurance,
the law actually eliminates some of the items which were formerly required in
insurance policies in the condominium statute.
However, the key provisions maximize the ability of the association to
determine whether it is economically reasonable for common assessments to be
used in insuring individual properties.
The Act reflects the fact that each association has a different set of
criteria by which it determines the most effective way to fund its insurance
needs, while at the same time requiring, if possible, waivers of subrogation
against the officer, directors, and owners.
D.
General
Association Operating Issues.
1.
Board
Meetings. Clear language allowing a board to
deliberate an executive session with respect to matters affecting litigation,
employees or contracts with third parties has been provided. This is an exception to the open meeting
requirements found elsewhere.
2.
Annual
Meetings. A specific requirement for a minimum of one
meeting per year of the association has been added. (This may seem obvious, but it allows owners now to enforce this
requirement against associations who are lax in conducting meetings.)
3.
Closure or
Elimination of Common Facilities. Further clarifying the policy
reflected in earlier condominium statues, the legislature has decreed that the
board of directors has authority to close common facilities. While the board may seek to get association
input through vote on most facilities if it desires, it is not required to do
so except with respect to swimming pools, spas or recreation or community
buildings. These items must be approved
by a majority of owners voting at the matter at a duly called meeting where this
issue has been noticed.
4.
Termination
of Utilities. The law provides direction to an association
with respect to the adoption of rules regarding term9ination of utility
services and/or use and access of recreational and service facilities. Notice and an opportunity to be heard must
be provided an owner before such termination can occur.
5.
Budgets.
The laws require annual review and adoption of budgets by the board of
directors. Failure to do so ensures
that the last adopted budget remains effective.
6.
Charges for
Furnishing Records. The ability of the association to charge for
the costs of retrieving and furnishing records upon request by an owner or
owner’s representative has been adopted.
7.
Voting.
The law has clarified the ability to conduct written ballots unless
specifically prohibited by the association documents.
8.
Removal of
Directors. Once again unless specifically provided to
the contrary in the association documents, directors may be removed by a
majority of those present at a meeting where the removal is specifically
noticed as an agenda item.
9.
Right to
Assign Income. The law clearly provides that the
association may assign its income stream for purposes of borrowing. Most lenders will require an assignment of
the assessments to secure loans.
Although this practice has not been wide spread yet in Oregon, it is
likely that to avoid special assessments in cases where adequate reserves have
not been maintained, associations will seek loans from conventional lenders
secured by such assessments.
E.
Recording
Notices Affecting Project Property. Although not recognized by
statue, it has been the practice of management companies, attorneys and
associations for some time to place in the public record various notices,
permits or authorizations that may be necessary to ensure the subsequent owners
are apprised of particularly unique circumstances affecting that lot or
unit. For example, a permit which
allows a violation to continue on a particular lot or unit under some
“grandfather” provision but expires upon sale of the lot would be recorded to
protect the association against a claim by a future owner that they had no
knowledge of the expiration of that right upon transfer. Currently some counties refuse to accept
such documents on the basis that their recording ordinances do not provide any
authority for recordation of such documents.
The new law makes it clear that these documents should be accepted for
recording.
F.
Assessments
and Liens. The law clarifies the ability of the
association to claim a lien upon assessment of property. This is important in cases where no notice
of lien may yet have been filed but a bankruptcy occurs by an owner. This allows the association to argue that it
has a priority interest over other obligations of the bankrupt owner. The law clarifies the ability of the
association to charge attorney fees in connection with any necessary collection
action and it further clarifies the obligation of a buyer for unpaid
assessments. Fortunately, title
companies generally are very diligent in determining whether there are any
unpaid assessments before transferring property subject to a homeowners
association.
Major Changes
to the Oregon Planned Community Act.
A.
What
Projects must Comply. Previously projects with 20 or fewer units
or lots, or projects in which the assessment level was less than 2% of the
value of the lots in any given year upon inception were not required to
organize under the Planned Community Act.
The threshold for application of the Planned Community Act has been dropped
to any project with more than 12 units, or any project in which the annual
assessment was more than $100 per lot or more than $1,000 total. It is that last provision that ensures that
virtually all properties with common expense requirements will be
included. $1,000 per year would be a minimum
amount to ensure and maintain any level of common property to ensure virtually
any level of common property.
B.
Limitations
on Period of Developer Control. While the Act allows a
developer to provide for a period of developer control, it requires the developer
to form a transition committee made up of owners upon the sale of 10 lots or
50% of the project, whichever is less.
While the developer may thereafter retain operating control, the
formation of the transition committee ensures that there will be a means by
which the owners can gain access to and participation in association
operations. If the documents fail to
specifically provide for a period of developer control, a meeting to elect a
board of directors must be held within 90 days of the sale of 10 lots. Most developers will specifically reserve a
longer period of declarant control, but the new provisions will at least give
owners and potential owners notice of what that level of control will entail.
C.
Consistency
with Association Operation Provisions in the Condominium Act.
The biggest benefit of the amendments to the Oregon Planned Community
Act come in the provisions that make the association operation items consistent
with the Condominium Act. These include
everything from the rights held by the association to a number of key
definitions and include the recognition of the association as an entity
authorized to conduct business under Oregon law. While a number of these things may have been presumed under prior
law, there was no statutory provision to specifically assist the courts in
interpreting many of the planned community documents. The present provisions will assist both existing and newly formed
associations in achieving a stable operating environment. Naturally, the law remains that recorded
declarations supersede any provisions in bylaws and many of the provisions of
the act are subject to the statements made in such declarations. This is consistent with the concept that a
declaration constitutes a set of vested rights for those who have purchased and
they have a right to rely on its provisions.
D.
Reserves.
The provisions in the Planned Community Act specifically allow one owner
or mortgagee to request of the association that reserves be maintained. This would apply to existing associations as
well as future association (which should have the reserves provisions by terms
of the declaration anyway). It is
likely that over the next few years there will be many associations that, upon
request by a lot owner, will be required to undertake reserve studies and
institute the collection of reserves.
Remaining
Problems with Oregon’s Homeowner Association Law.
While Oregon enjoys a particularly good statutory construct for
homeowner associations, a few key problems remain which should be addressed in
future legislative sessions. In the
Author’s opinion, these include at least the following:
A.
Disclosure.
While ORS 105.465 mandates certain seller’s representations in the
context of a real property sale, and such mandates include basic information
about common interest properties, owners still may “opt out” of the disclosure
provisions and sell properties as is.
This means that the resale of condominium units and the sale of planned
community lots may be left without any disclosure whatsoever.
There appears to be
evidence that the disclosure requirements imposed on developers of new
condominium projects in the state of Oregon over the last 20 years has helped
to avoid many of the problems experienced by other states which often find
owners confused about their rights and liabilities. While there is some evidence that few people read such
disclosures, their lawyers are nonetheless required to advise them of the fact
that their receipt of the disclosures significantly impacts their ability to later
complain of lack of knowledge relating to their responsibilities.
This is one area
where the lack of consistency between condominiums and planned unit
developments or planned communities may create problems in the future. The level of common interdependence is often
less in planned communities than in many condos, but this is not uniformly
true. There are all levels of common
interdependence in condos as well as planned communities and consistency
between the two should be sought in future amendments.
1.
There remain
many projects developed over the past 15 or 20 years that provide for common
property and some architectural control allegedly provided to the owners, but
for which no association has been created and/or mechanism to carry out such
provisions exists. While this step was
not taken in Senate Bill 1206, further work to address the problems of
associations where the developer has left the owners without any governing
mechanism should be attended to. This
situation often results in those least able to afford the assistance of the
legal system being forced to a lawyer’s office because there is no provision in
their declaration for organizing themselves.
Often being smaller and medium sized projects, these folks find
themselves essentially allowing the protections allegedly contained the
declaration to expire for lack of attention thus leaving unsuspecting owners
with significant losses as properties are not maintained according to
expectations and property values decline.
This brief paper
has not been written to provide a detailed legal analysis of the changes made
in Senate Bill 1206, but only to allow a member of a Board of Directors or
manager dealing with homeowner associations to have general idea of the affect
of the act. A detailed summary of the
amendments has been prepared by Barbara Kanz of Oregon Title which, when
reviewed in connection with the enrolled Senate Bill 1206, provides a good road
map for each of the various changes.
The author would be happy to make copies of both documents available to
any reader of this document upon request.