By Lindsay Smith, Winzenburg, Leff, Purvis & Payne LLP
As general counsel to community associations throughout Colorado, my job is, first and foremost, to provide legal guidance to the Boards of Directors who represent and act on behalf of my clients. Often, my clients have their managers act as my main point of contact. This can increase efficiency and decrease unnecessary legal fees, but can create conflicts when the managers take actions they shouldn’t be taking – or fail to take actions they should take. This article addresses common errors that I see from the general counsel perspective, and offers tips intended to protect both my clients, and their managers, from conflict and liability.
Managers as Agents
Community association managers often walk a fine line between encouraging Board action and taking action for a Board. When a Board is non-responsive and time is of the essence, a manager may take action for the Board, knowing that the Board will agree to that action at a later date.
Don’t do that.
A community association manager is typically an agent of the corporation. As a corporate agent, the manager will have broad authority to entertain negotiations with third parties, and often has “apparent authority” to bind the corporation to a contract or other course of action.
Sometimes, a community association manager will exercise his or her apparent authority in an inappropriate context. For example, the manager will select a contractor rather than wait for the Board to vet bids, or will approve a payment proposal offered by a delinquent owner. When a community association manager steps into the Board’s shoes without legal authority to do so, third parties who rely on the manager’s actions are usually permitted to enforce the agreement made by the manager. While the third party will be entitled to the benefit of the bargain made, the manager might not be as fortunate. Because the manager has taken action on behalf of the corporation without legal authority, the manager may face personal liability from the corporation for the contract. Put simply, if a manager contracts for an association without legal authority, the manager might have to pay for whatever was in that contract.
This is a general statement and will necessarily be impacted by the language of a management agreement. While all contracts differ, it is crucial to recognize the scope of management authority and to avoid making assumptions regarding a Board’s potential decision. Additionally, Colorado law requires that certain decisions only be made by the Board (e,g. foreclosure). Make sure that you know what you are permitted to do on behalf of your client, and what you are not permitted to do. When in doubt, ask, and get it in writing.
Managers as the Board
A community’s governing documents will often permit the association to charge a negligent or improperly-acting homeowner with the costs associated with that owner’s bad acts. Communities subject to the Colorado Common Interest Ownership Act can assess unit owners for common expenses caused by their misconduct without additional authorization in the Declaration.
These provisions beg the questions – what is negligence? What is misconduct? And should the manager be the person who makes that determination?
Negligence is the failure to act in accordance with a legal duty, in a manner that causes harm to another person. The legal duty, in the community association context, may be a failure to maintain the interior of a condominium unit, a failure to report damages caused by exterior sources, or a similar failure to act as a reasonable person would in a similar situation. Misconduct is more affirmative in nature, and would include deliberate harm to common elements or gross negligence, such as drunkenly destroying a railing or cutting down a tree.
In light of these definitions, when a Board needs to determine whether a homeowner’s negligence or misconduct has caused $25,000.00 in damages to the common elements, a manager should step back and make sure that whatever determination is made, it is made by the Board. In the event the homeowner challenges the determination that he or she is responsible for the damage to the common elements, and the challenge rises to the level of a lawsuit, the manager and the association will almost certainly find themselves with a conflict. To avoid this, and preserve your client relationships, stay in your lane and make sure your Boards are making the fact-based decisions.
Managers as Psychic
Your clients may rely on you more than you know. If your management agreement provides that you are the association’s agent, you might have more responsibility than even you know! A recent case out of Texas held a property management company jointly and severally liable with the community association for failure to make repairs to a retaining wall as recommended by a reserve study. The court found that the management company’s contract imposed upon it duties to maintain the common elements. While the association did not expressly delegate the obligation to maintain the common elements to the management company, the management company assumed a duty to properly maintain the common elements by making this obligation part of the contract.
The court found that the management company and the association were liable for the failure to repair common elements, even after the membership refused to approve a special assessment intended to fund the repairs.
Additionally, a recent case out of Maryland held that owners had a negligence claim against the board for failure to properly bring a construction defect lawsuit against the developer in a timely manner. While the case did not address the manager’s liability, there could be liability based on a contract with the association. When managing relatively young communities, carefully consider whether there are defects in the developer’s construction, and consult with professionals (and the Board) to protect yourself, and your communities.
The lessons in these cases are twofold: managers need to carefully consider the content of management agreements, and associations need to be diligent and proactive in investigating repairs for possible construction defects as well as funding repairs and associated reserves.
Conclusion
While not all liability can be avoided, it can be mitigated – for both the manager and the association – by ensuring that all parties are on the same page with respect to what actions are appropriately handled by management, and what actions are not to be delegated by the Board.
Lindsay Smith is a community association attorney with Winzenburg, Leff, Purvis & Payne LLP. Her practice focuses on general community association matters such as document amendments, governance, and document interpretation.
