Maine Condo

This post is one of a series about 10 Most Common Misperceptions About Condominium Laws And Operations, which I presented at the Maine Condo Forum and Expo in Portland, Maine, on September 25, 2010.

“There are known knowns.  There are things we know we know.  We also know there are known unknowns, that is to say, we know there are some things we do not know.

But there are also unknown unknowns, the ones we don’t know we do not know”

This was Donald Rumsfeld, discussing the Iraq war.

His comments were widely ridiculed.  But he was right, and his comments are especially pertinent when you, as a volunteer board member, find yourself dealing with complicated matters such as the operation of a condominium.  You are governed by a complex condominium act and various other statues, not to mention long condominium documents, which are sometimes poorly written.

If your documents say “no pets” and a disabled person wants to move in with a service animal, your unknown unknown might be the existence of the federal Fair Housing Act, which overrides your documents and provides very substantial penalties if you don’t make a reasonable accommodation for his disability.

Your condominium documents do not cover all the legal requirements for condominiums.  The Maine Condominium Act has “default” rules that apply in the absence of contrary provisions in the declaration or bylaws.  Many requirements found in the Maine Nonprofit Corporation Act will not be listed in the Bylaws.  And, you may be governed by another condominium act, the Unit Ownership Act, which applies to condominiums created prior to 1983.

You cannot possibly know all aspects of condominium operations.  Sometimes you do not know what you do not know, the unknown unknowns, and can be unpleasantly surprised by something that comes at you from left field.

There’s lots of free information out there:  use it.  Sources of information about unknown unknowns also include your property manager, your attorney, various written materials about specific topics available from CAI and elsewhere and resources available online, including the CAI website.

Recommendation:  When facing a non-routine issue, actively reach out for advice and information from other sources to discover your unknown unknowns.  Some sources you might check:

1. Condominium laws of Maine, at my website: http://www.mainecondo.com/laws1.html
2. Community Associations Institute website: http://www.caionline.org/Pages/Default.aspx
3. Community Associations Institute, New England Chapter: http://www.caine.org/

This post is one of a series about 10 Most Common Misperceptions About Condominium Laws And Operations, which I presented at the Maine Condo Forum and Expo in Portland, Maine, on September 25, 2010.

The biggest disaster that can happen to a condominium is a fire or other casualty which destroys or substantially damages a building.  Proper insurance coverage lessens the pain.   But insurance is a changing thing.   Coverages change, property values go up or down, deductibles go up and new perils arise, requiring adjustment of the policy.

Unfortunately, associations do not always keep their insurance coverage up to date.  What’s more, insurance coverage for condominium associations is not a topic that all insurance agents are adequately informed about.

It is not only property and casualty coverage either.   The association must insure itself against liability claims such as slip and falls on the common elements.   Then there is Directors and Officers coverage, which insures the Board against claims made against them when they exercise their duties as directors.  If the association hires anyone who could be considered an employee, they may need Workers Compensation insurance.

The Maine Condominium Act has lengthy and complex insurance requirements for condominium associations.  Your condominium documents usually contain additional requirements.   If the Board does not follow these requirements, their Directors and Officers (D and O) insurance coverage may not cover them in case of a claim made by a unit owner that the Board neglected its statutory duties.

Recommendation:  Make it an agenda item every year for the Board, or a committee of the Board, to sit down with an insurance agent, knowledgeable about insurance, to review your coverage and make changes as needed. Consider whether to change your documents to require unit owners to obtain insurance for their unit, and to make them pay the association’s insurance deductible in case of a claim for damage to a unit.

This post is one of a series about 10 Most Common Misperceptions About Condominium Laws And Operations, which I presented at the Maine Condo Forum and Expo in Portland, Maine, on September 25, 2010.

The secondary mortgage market, which is the middleman for the sale of mortgages from banks to investors, collapsed two years ago, along with the collapse of the housing market.  This led to a classic overreaction by regulators, resulting in new, onerous requirements and more strict compliance with existing rules for financing condominium units.  As a result of this, many condominium purchasers turned to the Federal Housing Administration loan guarantee program.   Unfortunately for these buyers, the FHA has tightened its eligibility requirements as well.  Association actions and policies do have a major effect on the ability of owners to sell or refinance.  Some examples of troublesome Fannie Mae (FNMA) and Federal Housing Administration (FHA) rules are below.  Note that these rules change frequently and the listings below may become obsolete.

-FHA:   “Spot loans” eliminated or scaled back.

-FNMA and FHA:  Non-owner occupancy of more than 50% of units may disqualify all units from loan approval.

-FNMA and FHA: Fidelity insurance required for condos with more than 20 units.

-FNMA: Unit owners must obtain their own policies  (HO-6) in some cases.

-FNMA and FHA: no more than 10% of units may be owned by a single person or entity.

-FNMA and FHA: at least 10% of budgeted income must be designated in a capital reserve fund for replacement reserves and adequate funds budgeted for the insurance deductible.  Can get exception where unit owners are responsible for maintenance.  A satisfactory reserve study less than 12 months old will meet FHA standards.

-FNMA and FHA: no more than 15% delinquency (more than 30 days past due) on condo assessments.

Recommendation:  Consider changing your documents to require fidelity insurance.  Consider requiring unit owners to obtain their own policies (HO-6). Consider setting a ceiling of non-owner occupants at 50%.  This is complicated and sometimes politically difficult, but legal.   Include 10% of your operating budget for reserves in your next budget, or if you think you don’t need this amount, have a reserve study conducted.  Be aggressive about keeping the 30 day delinquency below the 15% threshold. Finally, if your condominium is a large one, consider obtaining FHA project approval for your condominium (one estimate says this might cost $3,000-$5,000).

This post is one of a series about 10 Most Common Misperceptions About Condominium Laws And Operations, which I presented at the Maine Condo Forum and Expo in Portland, Maine, on September 25, 2010.

“In the last 5 or 10 years, another issue has risen, and that is overreaching or perceived overreaching by the board…. It is really a hot button issue and I say perceived because in some cases I don’t think that it’s real but in other cases I know that it is real.  So we now have a committee that’s hard at work drafting what we call a Homeowners Bill of Rights.  A lot of it is procedure stuff. In the procedural stuff is a lot of substance:  by way of example, requiring the board to give notice to the unit owners before adopting the rule, requiring the association to give notice to the unit owners to before commencing litigation, mandating that an association cannot act arbitrarily, requiring open board meetings, dealing with the whole contentious issue of foreclosures with regard to assessments needs.”

-Carl Lisman, Chair of the national committee writing the latest revision to the Uniform Condominium Act.

Most of the procedural requirements for condominium associations in Maine are governed by the Maine Nonprofit Corporation Act, which was really designed for volunteer groups with a limited mission.  The Corporation Act vests most power in the Board of Directors, and this is appropriate for such groups.

Condominium associations have a much more pervasive influence over the lives of their members.   Membership is mandatory.  The association has the power of mandatory assessment and enforcement of its rules; it invites comparison with the powers of a municipal government.

Since a condominium association looks much more like a municipality that a local chamber of commerce or Rotary club, its members are beginning to expect the same rights that are written into Maine’s open meeting law, which applies to all levels of Maine government, for instance.  Those rights do not legally exist, for the most part.

Lack of a voice in association governance, lack of transparency, perceived arbitrary behavior on the part of Boards, lack of due process; all these create a gulf between the board and its members, creating distrust and conflict.

It might appear that this is not strictly a legal issue, but this is not exactly the case. Challenges to a board’s authority are powered by distrust.  Where there is distrust there is motivation to fight the board; indeed, to create legal challenges to board action.

Recommendation:   Try to meet the expectations of unit owners with open meetings of the Board.  Keep them informed of what is going on. When enforcement of rules or collections of assessments are required, make sure that the owner feels that the process has been fair.