Assessments are the means by which all associations operate, and assessments provide the necessary income to maintain and enhance a community’s assets to protect and maximize unit values. When assessment levels get too high, the very assessments that are essential to sustain a condominium community may very well end up hurting the market values the association is seeking to increase and protect.
Indeed, in addition to unit types, amenities and location, the single most important factor in condominium unit resale is the amount of association assessments. Consequently, those communities with higher than average assessment levels will find that they are at a market disadvantage. In order to sustain and enhance market value, condominium communities must therefore find ways to lower or stabilize assessment levels, without reducing services necessary to properly maintain and enhance the community’s assets.
One relatively simple but important way to curb what are typically unnecessary and often significant costs to an association is to ensure that 2 common and misleadingly-innocuous bylaw provisions are drafted to reduce, rather than expand, the association’s financial exposure. Those associations that do not ensure that these two simple but important bylaw provisions are working for them will invariably find that they have higher assessment levels, making their communities less desirable in the resale market.
The first provision that may result in significant and unforeseen costs to an association can be found in the “reconstruction and repair” provisions of the condominium bylaws (typically found in Article V). Both older and newer bylaws often include what is referred to as an “incidental damage” provision. This provision typically applies when the common elements, or the maintenance, repair or replacement of common elements, damage personal property located within or fixtures attached to a unit. A standard incidental damage provision reads as follows:
The Association shall be responsible for the reconstruction, repair and maintenance of the common elements and any incidental damage to a unit caused by such common elements or the reconstruction, repair or maintenance thereof.
While this provision appears to be relatively straightforward and potentially harmless on its face, this simple provision is often the source of considerable confusion and dispute. This provision also invariably results in an association paying for damage to items that are not common elements, that the association may not even know existed, and that the association is not otherwise responsible for maintaining, repairing or replacing on a day-to-day basis.
The confusion and disputes can arise by simply trying to determine what encompasses “damage to a Unit.” In an attached condominium setting, most condominium documents define the unit to only include airspace. Therefore, a purely technical reading of this provision arguably limits an association’s exposure after a casualty to making sure the airspace is fit for human occupation (e.g. the association must remediate any airborne mold resulting from the failure of a common element). That being said, it would not be unreasonable for a Court to determine that this language invariably covers more, such as damage to floor coverings, paint, or any other item that would normally be the co-owner’s responsibility, as these items are not common elements and are essentially located within a unit’s airspace. In fact, the incidental damage language is potentially all-inclusive (personal property, built in appliances and equipment, etc.), and operates to greatly expand an association’s potential liability in any casualty involving common elements or the maintenance, repair or replacement of common elements. Because a portion (i.e. the deductible if there is insurance coverage), if not all, of these expenses will be paid out of assessment income, the “incidental damage” provision has the ability to significantly and unpredictably increase the expenses that the association assessments must cover (either directly or through increases in insurance premiums due to more expensive claims), thereby increasing overall assessment levels.
An association can protect itself from this common and often severe financial unknown by simply removing the “incidental damage” provision from the documents altogether and instead tying the respective responsibilities of the association and the co-owners to each party’s insurance obligations. This will not only achieve clarity and consistency but will also greatly limit the association’s exposure to what could be significant costs resulting in sizeable assessment increases. These changes, of course, would need to be accomplished via an amendment to the condominium bylaws that is approved by 2/3rds of those co-owners entitled to vote and their mortgagees.
The second provision that increases an association’s costs is found in the condominium bylaw restriction provisions (typically Article VI). As with the “incidental damage” language, this provision is contained in both older and newer documents. The language provides that co-owners are responsible for damages or costs incurred by the association resulting from “negligent” damage to or misuse of any of the common elements by the co-owner or the co-owner’s guests. The increase in cost to the association arises because the “negligence” requirement provides an unnecessary hurdle for passing on costs that arise from an item for which a co-owner is responsible.
The key to understanding the problem with the negligence requirement is to understand what constitutes negligence under the law. Contrary to what may be intuitive, negligence does not arise merely from having responsibility for an item that fails. Rather, negligence arises when a co-owner fails to discharge a legal duty. In most cases where the association is dealing with a failure of an appliance, such as a washer machine, or piece of equipment, such as a hot water heater, while it may seem fair or appropriate to charge the co-owner with those expenses, the fact is that unless the co-owner did or did not do something that actually caused the failure and was their duty to do or not do, the co-owner has not breached a legal duty and there is no negligence. Indeed, even a lack of maintenance does not constitute negligence unless the association can show that the co-owner was on notice of an obligation to perform the maintenance.
Following are typical scenarios where a co-owner item fails, but where the association often cannot prove negligence: broken or plugged refrigerator water lines; broken or plugged air conditioner condensation lines; overflowing toilets, sinks or bath tubs; overflowing washer machines; and hot water heater failures. Because the association cannot prove negligence, and even though it is a co-owner item that causes the damage, the association is left with utilizing precious assessment income or insurance to pay for the needed repairs.
As with the “incidental damage” provision, the association can protect itself by simply removing the “negligence” concept from the documents. That is, the association can amend the condominium bylaws via the approval of 2/3rds of those co-owners entitled to vote so that co-owners are responsible for all costs to the association, including the association’s deductible, that arise from an item that the co-owner is charged with responsibility. Making such a change will avoid the time and money spent on determining whether negligence is involved, and will ensure that the association can pass on costs necessitated by the failure of a co-owner item.
Boards are charged with the duty to protect and enhance unit values. By reviewing the association’s governing documents and potentially revising two common condominium bylaw provisions, boards can protect their associations from incurring what could otherwise be significant but unnecessary costs, thereby protecting assessment levels and the community’s competitiveness in the market place.