For condominium and community developers, and their lawyers who draft and administer condominium and community governance documents, the tragedy of the Champlain Tower collapse in Surfside, Florida, should give pause.  Though condominium or community governance documents cannot prevent a structural failure, there are a few things you should consider when designing and drafting these documents.  No doubt that as we learn more about the collapse and the operation and administration of the community leading up to this terrible event, there will be lessons or, in some cases, laws that will become best practices, but there are a few things we can learn with the little information we have so far.  The suggestions below are orientated towards the education of future community leaders, the removal of political headwinds to action that can be taken to protect the community, or mechanisms to support reserve funding.  We all must keep in mind that the condominium association and major structural assets will eventually be managed by a board of owners elected by the community.  Governance documents can be drafted to educate the board and all owners, and remove impediments to whatever action is necessary to preserve community assets.  Obviously, laws differ from state to state, so some of these suggestions may not be possible (or may be adequately addressed by state law), or the project structure may require an alternate approach.

Member Approval for Increases in Assessments or Special Assessments

Very rarely should condominium or community governance documentation require the consent of owners as a precondition to allowing the board to increase assessments or adopt special assessments.  Requiring the consent of a majority or super-majority of owners will delay necessary funding to address needed repairs or emergency funding.  At a minimum, an approval carve-out for the funding of emergency repairs should be added to the documents.  It should be remembered that board members are elected and have a duty to act in the best interests of the community.  In some states, this duty rises to the level of a fiduciary.  Concerns about granting a “blank check” to the board are not realistic in practice.  Owners have the right to recall board members or otherwise call a special election to remove board members who they believe are capriciously raising assessments or calling for a special assessment.  The community, in almost all cases, has a professional manager who advises the board regarding assessments and the necessary costs for the community.  There will likely be experts or a reserve specialist who have also assisted the board analyzing the need for an assessment increase or special assessment. 

Insurance

Condominium or community governance documentation sometimes will incorporate, by reference, the applicable statutory requirements (if any) related to insurance and nothing more.  While this may be sufficient for purposes of complying with the applicable enabling law, thought should be given to providing more detail in the governance documents regarding required and/or recommended coverages and endorsements. In many cases, board members and managers (and insurance companies in the event of a casualty) look to the condominium or community documents and will often not think to review statutory requirements, and even if they do review those provisions, they may be ill-equipped to fully understand and apply such provisions.  Unfortunately, in some cases these requirements are not understood until after a  casualty occurs.  To take things one step further, the condominium or community documents can include provisions directing the board to obtain an annual review of property insurance coverage amounts and endorsements by an experienced underwriter or risk manager.   One of the worst things that can happen to a community and its owners is confronting an underinsured project in the event of a major catastrophe.  Education of unit owners about insurance is also important.  Owners should be provided detailed information related to covered items under the association’s policy and should be provided guidance on how they can bridge the gap to the extent necessary or desired. An insurance summary, prepared in conjunction with an insurance consultant or agent, with insurance limits and a description of coverage, as well as frequently asked questions can help educate owners and the board.

Scheduled Maintenance

We should expect the board and their manager to design a program to periodically inspect the building and take appropriate action based on inspections.  The condominium or community documentation can reinforce the importance of periodic inspections and maintenance by directing the board to obtain these inspections. Most likely you will not be able to mandate precise inspection criteria and requirements since those aspects may change over time, but the governance documents can underscore the importance of inspections, provide requirements for use of an independent and qualified inspector, and require that inspection reports be provided to all owners.

Reserve Studies and the Funding Mechanism

Reserves are often determined based on reserve studies, and sometimes those studies are not performed until after the community has transitioned from developer to owner control.  Some thought should be given to obtaining a pre-construction reserve study to allow the developer and manager to estimate and determine reserves for the project more precisely.  The governance documents can also require that an appropriate reserve study be prepared on a periodic basis or as recommend by a reserve specialist.  Consideration should also be given as to the items addressed in the study and whether those items should change as the project ages. Once reserves are established, reserves are usually funded from regular assessments, and sometimes supplemented by working capital assessments collected on each resale.  Since major capital repairs or replacements are often funded through third-party financing, the governance documents should not require owner approval as a precondition to obtaining such financing.  Subject to market conditions and state law, some thought should be given to implementing transfer fees when the condominium or community documents are recorded.  Transfer fees are in addition to working capital fees, are collected at resale (not the initial sale from the developer) and are usually a small percentage of the sales price, e.g., 0.10% of the gross sales price, or a fixed amount.  Transfer fees, if utilized, can be restricted to funding reserves, and the additional revenue may reduce the likelihood for increased assessments or special assessments should a major repair or replacement be necessary. 

Disclaimer: Content contained within this publication provides information on general legal issues and is not intended to provide advice on any specific legal matter or factual situation. This information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. Readers should not act upon this information without seeking professional counsel.