Homeowners associations are governed by a private board, generally comprised of residents of the condominium. Just because board members are unpaid volunteers, however, does not exempt them from exposure to lawsuits. Indeed, HOA board members are held to the same standard as their for-profit corporate counterparts where the law is concerned.
According to the Community Associations Institute (CAI), 54.6 million people lived in private associations in 2005—up from just 9.6 million 25 years ago. With so many residents, lawsuits are an inevitability. A homeowners association's exposure could range from mismanagement of funds by a board of directors or a board member, to slip-and-fall lawsuits for negligent sidewalk maintenance during an ice storm, to disputes with contractors, employees and residents.
What kinds of legal actions are the most common in New Jersey? How can homeowners associations lessen their risk of exposure? What steps can be taken to redress small problems before mountains are made of proverbial molehills? And are lawsuits as ubiquitous as they seem? The following may shed light on these questions and more.
It's the Money, Stupid
If there's one thread that joins the disparate types of lawsuits seen in the state involving homeowners associations, it's green in color.
"It's always about money," says Karim Kaspar, an attorney with the Law Offices of Lowenstein Sandler in Roseland.
Probably the most common type of lawsuit involves injuries sustained on the premises due to alleged negligence—the so-called slip-and-fall. Ice is not removed promptly from the front steps, someone slips and breaks their ankle, and presto—instant lawsuit.
Surprisingly, for as common as lawsuits are in HOAs and the amount of time they take up, it's not necessarily the association's general counsel who always goes to bat for the HOA in such situations. "Not much of our time is taken up with working on the really common cases," says David Byrne, a shareholder attorney with Stark & Stark in Lawrenceville. "In general, the insurance company will appoint the lawyer for such claims."
That's because these kinds of claims are generally covered under the homeowners association's liability insurance. In a slip-and-fall case, the board would contact their insurance carrier, who would assign an attorney to handle the case. Personal injury claims, even if paid for by liability insurance, can make rates go up substantially.
If the condominium is large enough to have employees, this increases legal exposure. Employees must be managed, which means hiring them—and sometimes, firing them. This exposes the board to possible discrimination claims for violating Title VII of the Civil Rights Act, which prohibits job discrimination by gender, race, religion, country of origin and age.
The association is also responsible—to a degree—for how its employees behave. If, for example, a gardener employed by the association makes lewd comments or advances upon some of the residents, the association could be liable if the board knew about the problem but did nothing (or not enough) to correct it.
Fortunately, such claims are relatively rare. With employees, the most common claims involve workers' compensation, for which associations that employ workers have insurance.
Board vs. Contractor vs. Residents
It is also common, Kaspar says, for disputes between boards and contractors to escalate into litigation. "Board members are volunteers, and maybe they're not in the unit all year-round. In those situations, it's easy for disputes with contractors to arise."
Judith Jennings, who has her own law office in Medford, notes that disputes frequently arise concerning building defects. For example, a homeowners association could sue a contractor for installing a faulty air conditioning system; the contractor might then countersue, claiming the problem was with the maintenance, not the unit itself.
Then there are the internal fights, one that pits neighbor against neighbor, or resident against board.
"These usually arise out of a perceived right to services," explains Robert Shanahan, of Kilcommons Shanahan in Annandale. "HOA residents can have a landlord-tenant mentality, and they don't pay their dues if something goes wrong. The board moves to recover the fees, and is hit with a countersuit."
For example, a resident might have a broken toilet in his apartment. He insists that the board have the toilet repaired, although the association's bylaws may explicitly state that he is responsible for the toilet. In protest, he decides to stop paying his dues.
These kinds of cases rarely end well. Residents, of course, are forbidden by the bylaws to withhold maintenance fees, so these cases almost always work against them, and they wind up covering the board's legal costs out-of-pocket.
Finally, there are suits that can be brought against the individual board members. Because no sane person would expose herself to such liability for an exacting volunteer position, boards take out Directors & Officers (D&O) insurance policies to cover their members should the need arise.
Under the so-called fidelity and honesty provisions of D&O policies, board members are not liable for honest mistakes.
"If they are acting according to the advice of their attorneys and other professionals," Kaspar says, "that's OK. If they act arbitrarily and don't follow advice, that's when they get into trouble."
If laws are broken, however, all bets are off. "Fraud is fraud," Kaspar says, "and a board member who commits fraud would be convicted criminally and sued civilly."
Improving the Odds
If board members are supposed to listen to their professionals, what do professionals advise, to lessen the chance of litigation? Given that many of the lawsuits involve neighbors, most pros stress the importance of communication.
"Have a fair system where you can hear people," advises Shanahan. "Show you're willing to listen to their grievances. And try to work it out."
Anything that improves communication among neighbors is a good idea, Shanahan continues, including periodic newsletters from the board, even a summer barbecue for residents can foster better, friendlier relationships wherein people are more likely to work out their differences amicably than resort to litigation.
"We've lost the ability to work things out," he says. "Now, everything is a perceived threat. If you can show that the people in your building are nice people, it brings the pressure down—it brings the volume down a lot."
If tensions escalate, the first step is to try and defuse the situation outside of a courtroom. New Jersey state law requires that an alternate dispute board be the first step in resolving grievances—in fact, if this step isn't attempted, a judge will throw out any lawsuit of this kind.
According to Joel Meskin, vice president of community association products at McGowan & Co., an Ohio-based insurer specializing in HOA coverage, most lawsuits are avoidable.
"There's a lot you can do to avoid claims," says Meskin. "Know your bylaws and any other governing documents, and make sure that new association members receive and sign off on the bylaws and governing documents when they move in. Also, avoid emotional involvement [in disputes]—that can lead to some of the greatest wastes of time and resources." Meskin also strongly recommends alternative dispute resolution between board and residents, management and residents, and residents with other residents.
To that end, Shanahan suggests working with nearby homeowners associations.
"Even if it's arbitration, you make a ruling," he says. "If it does go to court, the judge either agrees or disagrees—you're not going to get in trouble."
As lawsuits are inevitable because it's the nature of the beast, Shanahan suggests having as much money as possible on hand to cover unanticipated legal expenses, "without being ridiculous."
Jennings and Meskin both agree that communication is the single greatest tool in avoiding lawsuits and harmony-destroying squabbles between neighbors. "It's difficult for some people to attend board meetings," Jennings notes. She recommends posting non-privileged information on a community website, so everyone can feel that they're in the loop and not being kept in the dark about the HOAs goings-on.
"Communication is the key to resolving problems," adds Meskin. "An association should consider having a mechanism in place for the community association to address conflicts and grievances."
For her part, Jennings suggests letting a professional management company do the heavy lifting, even if your homeowners association is small. "In the long run, it saves money," she says. Also, Jennings points out that since managers don't live on-site, they don't have to worry about dealing with a neighbor. In this vein, there has been talk in legal circles about introducing the idea of professional, compensated board members but this hasn't caught on yet.
Kaspar has different advice. "First, don't go outside the scope of your by-laws," he says. "Lawsuits commonly arise when boards act outside their scope of authority, such as borrowing money, when it's not explicitly stated that they can do so."
Second, Kaspar says, rely on the advice of a good attorney and other professionals.
Shanahan, too, prefers that disputes are settled out of court. "The problem with court is, someone will lose. And they may never talk to the other person again."
The Good Ol' Days?
While the consensus holds that there are more lawsuits now than in the past, Shanahan says you have to go back decades to the 1960s, when many new regulations were codified, to get to a time when litigation was not rampant.
"It used to be, you'd never think of suing because you ate something bad at a restaurant," says Jennings. "You'd just let them know and that was that. But now…"
Does the preponderance of lawsuits stem only from the new regulations in the Sixties, or is there more to it? Shanahan's theory is that Baby Boomers have higher expectations than their forbears, and when those expectations aren't met—and met promptly—they get angry. And anger means lawsuits. (Full disclosure: Shanahan just makes the Baby Boomer cut-off).
Jennings believes the perception that an HOA's insurance company has "deep pockets" convinces some would-be suit-filers to move forward—although if the ones filing suit are residents, they eventually will pay the price in future dues or assessments.
Whatever the reason, litigation is here to stay. Lawsuits are part of the business. As Shanahan puts it, "The only thing that changes are the people involved and the amount of anger."
And it's important to take threats of legal action seriously, says Byrne. "A lot [of claims] are legit," he says. "It wouldn't be true to say that every lawsuit was frivolous."
Given that, it's vital that your own HOA be prepared for the inevitable with good legal counsel and a clean financial house. And in the meantime, perhaps you can prevent some of that inevitable litigation with good communication between board and association members and by fostering a more robust sense of community among your members.
Greg Olear is a freelance writer living in Northern New Jersey.