Sunday, January 27, 2019

Condominium and HOA Approval Issues - Part 1

     A few years ago a client sought to purchase a small cooperative unit on Palm Beach at a price far south of $100,000.00.It was a cash purchase by a very successful independent contractor.  The contract was summarily rejected by the Cooperative Association without any written explanation.  When pushed, they said it was an income issue, they had just completed a large project with high monthly unit expenses, and they were concerned that my client did not have sufficient “regular income” to pay the estimated $1,300 extra per month.

     My client amended the contract to add her daughter as a purchaser, and resubmitted the application, showing that the daughter, a salaried employee made six figures a year.  The revised contract was also summarily rejected by the Cooperative Association, again without any written explanation.  At this point my client called me and after threatening the Association with a lawsuit, they agreed to approve the sale, subject to our client maintaining a three year escrow of assessments of nearly $40,000.  While there was a suspicion of animosity toward my client due to her religion, it was never proven and she has had no further issues.

     This story illustrates a growing problem for certain buyers and tenants looking to buy or rent in many communities in South Florida.  Communities are increasingly adopting tighter rules regarding ownership and occupancy, in order to improve their communities and to reduce the number of investors and renters in favor of family owners who will reside in the home full time.

     The tools adopted by Associations relate to criminal history, credit, employment and past history.  The starting point for any Association is having the actual power to restrict ownership and leasing.  This power must be in the Declaration of Covenants or Declaration of Condominium.  Absent enabling power to regulate sales and leases, the use of simple Board level rules is suspect at best and most likely unenforceable if challenged in court.

     Assuming the power to regulate ownership and leasing is granted in the Declaration, the Board has authority to establish rules regarding such powers (as long as such rules are not unreasonable, discriminatory or exceed the authority granted in the Declaration).

     To enforce these rules, Associations require all applicants for ownership/residency to submit a detailed application about their past living and employment history as well as an applicant’s agreement to submit to a credit and criminal background check. Fees for the application may be charged and are capped by the Condominium Act at $100 per person (husband and wife are considered one person).  Most Associations also charge for the criminal/credit check, which can run $30-$70 per person.

     Many Associations have adopted outright bans on any applicant with a criminal history, regardless of the length of time since the act or the nature and severity of the criminal act.  These restrictions have been challenged successfully based on the grounds that such bans are discriminatory in nature since many felonious applicants are minorities. 

     The US Housing and Urban Development has issued guidelines regarding this issue, after a study showed that the recidivism rate for felons was no greater than non-felons after seven years and the Supreme Court allowed challenges to rental restrictions based on past criminal behavior.  This means that banning someone for a felony more than twenty years ago would, on its face, be deemed discriminatory in most cases.  In addition HUD requires Associations to adopt reasonable rules regarding those with criminal backgrounds, including whether a conviction was obtained, was the criminal conviction for a violent or non-violent crime, how long ago was the crime committed, how old was applicant at the time of the crime and other factors to show that the Association is using the least discriminatory policies possible.

     At least two exceptions exist with regard to the foregoing limitations, a criminal act relating to a felony conviction for drug manufacturing and distribution and a felony conviction as a sexual predator.  It appears that lifetime bans for these actions may be reasonable and enforceable by an Association. 

     In my next post I will address the Associations review relating to credit, employment and life history, and address possible compromises to assist owners and tenants in obtaining approvals.