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December 11, 2005 | By Margaret Bar-Akiva, President of C-IHC

The Shortcomings of S805 (previously S2344) and A798 (previously A3855) , The proposed New Jersey Uniform Common Interest Ownership Act (UCIOA)

In June of this year the NJ General Assembly passed A798, the Uniform Common Interest Ownership Act (UCIOA), a bill drafted mainly by attorneys of the Community Association Institute (CAI).   The CAI is a trade organization that represents attorneys, accountants, management companies, property managers, administrators and board members. The bill was rammed through the Assembly without sufficient notice and without any meaningful discussion about its shortcomings.  All attempts to inform the legislators about how detrimental A798 would be for HOA residents fell on deaf ears. 

Shortly after the Assembly passed the bill, the CA/PAC, the political action arm of the CAI, donated $5,000 to Assemblyman Joseph Roberts, the Majority Leader, and $2,500 to Assemblyman Wilfredo Caraballo, the chief sponsor of the bill.  These monies come from annual contributions made by HOA boards to the CA/PAC, often without the homeowners’ knowledge.

At this point, S805, the Senate counterpart to A798, is lurking at the Senate doors.  Its chief sponsor is Senator Joseph Doria. CAI’s chief lobbyist is Adam Kaufman from Capital Public Affairs. Mr. Kaufman used to be Senator Doria’s chief of staff when he was Speaker of the Assembly several years ago.

As with documents that are designed to deceive, S805 cannot afford a careless reading. At first blush S805 appears to use all the right buzz words.  It even makes the bold claim that it has adopted “many of the recommendations of the Task Force of the Assembly to Study Homeowners Associations”.

Many HOA residents are aware that in 1998 the NJ Assembly Task Force to Study Homeowners Associations issued a report of its findings and recommendations aimed at comprehensive reform of New Jersey’s inadequate statutory regime governing community associations.  The Task Force report included recommendations to:

(1) improve Alternative Dispute Resolution (ADR) procedures between associations and homeowners; (2) ensure fair election procedures; (3) speed the transition from developer control to owner control of the board; (4) require competitive bidding for substantial expenditures by associations; (5) ensure access by homeowners of vital financial information; (6) establish an Office of Ombudsman for Homeowner Associations; and (7) recognize “the increasingly governmental nature of the duties and powers ascribed to the homeowners’ association board.”

In our view, the Task Force recommendations provided an excellent blueprint for legislative reform of community associations.  What remained to be done was to craft legislation to give meaning and content to these broad aspirations, so that true reform could emerge.

Unfortunately, S805, although it purports to give effect to the recommendations of the Assembly Task Force, actually subverts and undercuts many of the Task Force recommendations.  Among its deficiencies, the bill gives far too much power to association boards, and does far too little to ensure that the rights of homeowners are adequately protected. 

The Assembly Task Force report laid the groundwork for real reform. But S805 does not follow through on that promise. It does not achieve the objectives of transparency, accountability, and oversight that are the keys to real reform in community associations, nor does it address a homeowner’s due process rights, rights of public participation, and rights to equal treatment. 

The following is a detailed outline of the shortcomings of S805.  If you agree with our analysis call or write your legislator and tell them not to support tthis bill.  Anyone who is genuinely interested in bringing democratic reform to HOAs should reject S805 outright.

Updated March 11, 2006
Originally posted December 11, 2005

The Shortcomings of S805
The proposed New Jersey Uniform
Common Interest Ownership Act (UCIOA)

A. Generalized shortcomings of S805

1.  S805 is based on UCIOA, but the fundamental principles underlying UCIOA are deeply flawed, because UCIOA fails to recognize the quasi-governmental nature of community association boards.  Moreover, UCIOA has not been adopted in the most populous states that contain the greatest numbers of community associations – states that have much more in common with New Jersey than the states where UCIOA has been adopted. 

S805 is based substantially on the Uniform Common Interest Ownership Act (UCIOA), a uniform law that has been adopted in some states but not the states that have the greatest numbers of community associations -- such as California, Florida, Arizona, Texas and New York. 

New Jersey, which is also a leading State with respect to the number of community associations, has much more in common with the above-referenced non-UCIOA states than it has in common with the UCIOA states, such as Minnesota and West Virginia, which have relatively few community associations.[1]

A question arises: Why have states with large numbers of community associations not adopted UCIOA?   A clue may be found in this “prefatory note” to UCIOA, which sets forth the general principles underlying UCIOA:

A fundamental precept of UCIOA is that full and adequate disclosure to purchasers is a viable alternative to governmental registration and supervision.  Declarants are bound by representations made in the declaration and in the public offering statements. . . . and are held to statutory limitations and standards to protect consumers.

[Prefatory Note of the Drafting Committee of the Common Interest Ownership (1994) Model Act, as published in the Uniform Law Annotator, at 836-37]

As briefly discussed below, the UCIOA premise that disclosure is a viable alternative to government regulation is fundamentally flawed, at least as applied to the needs of New Jersey homeowners today. In particular, that UCIOA premise overlooks the conclusion that community associations in New Jersey have become quasi-governmental -- a conclusion that already has been expressly and repeatedly recognized by this Legislature, as well as by the courts of this State.

Thus, for example, the 1998 report of the highly regarded New Jersey Assembly Task Force to Study Homeowners Associations expressly recognized “the increasingly governmental nature of the duties and powers ascribed to the homeowners’ association board.”  Report, at 2.  These formidable powers often include powers traditionally carried out by municipalities, such as maintenance of streets and open space, collection of curbside trash, review of proposed architectural changes to homes and the promulgation of rules governing home occupancy. Then too, the broad powers granted by the Legislature to community associations include, most importantly, the power to levy fines and penalties against unit owners, see N.J.S.A. 46:18B-14(d), 46:8B-15(f), a power that the New Jersey Appellate Division has expressly termed a “governmental power.” Walker v. Briarwood Condo Ass’n, 274 N.J. Super. 422, 428 (App. Div. 1994).

Then too, many community associations in this State receive direct public subsidies under the Municipal Services Act, N.J.S.A. 40:67-23 et seq., for the cost of maintaining privately owned streets. On what ground would the Legislature require the expenditure of substantial public funds for the maintenance of private property but the valid ground that the private property is subject to a public interest?  Although there exists no current estimates of the total statewide cost for this benefit to community associations, the Office of Legislative Services estimated the cost as $62 million as of 1990, at a time when there were far fewer community associations in this State.  As of 2005, this statewide expenditure must surely exceed $100 million.  Such an enormous public expenditure, by itself, undercuts the claim that community associations in this State are purely “private” entities.

Moreover, the New Jersey Appellate Division has held that the right of free expression guaranteed by the State Constitution extends not merely to public property, but to community association property as well. See Guttenberg Taxpayers v. Galaxy Towers, 297 N.J. Super 404 (Ch. Div.), aff’d, 297 N.J. Super. 309 (App. Div. 1996).  

The foregoing statements of legislative policy and court decisions make one point crystal-clear: community associations in New Jersey are not purely private organizations. On the contrary: associations have public purposes and perform quasi-governmental functions.  Any true legislative reform must recognize and give effect to this reality.

***

Against this background, S805 -- based substantially on the passive UCIOA model act grounded in the concept of mere “disclosure” -- is plainly deficient.  Although it is true that S805 has added some safeguards of homeowner rights beyond the rudimentary protections contained in the model UCIOA, these safeguards fall far short of the basic protections that are required. Some of the more egregious shortcomings of S805 are outlined in Part B below.

To sum up: S805 is based on UCIOA, but the fundamental principles underlying UCIOA are deeply flawed, because UCIOA fails to recognize the quasi-governmental nature of community association boards.  Moreover, UCIOA has not been adopted in the most populous states that contain the greatest numbers of community associations -- states that have much more in common with New Jersey than the states where UCIOA has been adopted.

2. S805 is technically deficient, because it is an overlay on top of existing law and does not, by its terms, repeal inconsistent provisions of existing law, meaning that the proposed legislation, if enacted, will generate enormous confusion and years of wasteful litigation to resolve myriad legal ambiguities and conflicts

S805 will not even lend much certainty or clarity to the existing patchwork of laws governing community associations.  Actually, the bill, if enacted, will make the confusion far worse.  This is because the S805 does not repeal existing law, but rather is an overlay on top of the existing patchwork of laws. That, of course, guarantees years of litigation, as the courts attempt to sort out the mess created by conflicting provisions in the new legislation as against provisions in the Condominium Act, the Planned Real Estate Development Full Disclosure Act, the Municipal Land Use Law, etc.   This is not real reform; it is a step backwards.[2]

***

B. Particular shortcomings of S805

1.  Remarkably, S805 actually extends the time frame for transition from developer control to board control in some circumstances, notwithstanding the Assembly Task Force’s key recommendation that the transition period be shortened

Buried within S805 is a definition of “special declarant rights.”  See Section 3. That definition effectively permits longer developer control of the association board when a developer chooses to build additional units – a choice that, under S805, may be made without homeowner approval and without prior disclosure. The net effect of this provision would be to effectively delay the date of transition to homeowner control to some indeterminate point in the future.

Moreover, this “reform” is accomplished not by amending the existing statute governing the transfer of control in community associations -- i.e., N.J.S.A. 45:22A-47 -- but by an obscure provision contained in the definitions section of S805.  That obscure provision, in addition to being unjust, is certain to create confusion and litigation. 

Furthermore, the “special declarant rights” provision flies in the face of Assembly Task Force’s recommendation that the existing transition period to owner control be shortenedSee Task Force Recommendation # 8.  And this “reform” flatly contradicts the Supreme Court’s recent decision in Brandon Farms Property Owners Ass’n v. Brandon Farms Condominium Ass’n, 180 N.J. 361, 371 (2004), wherein the Court observed that the existing legislative scheme “demonstrate[s] the Legislature’s understanding that … the unit owner’s interests take precedence over any outside interest, whether that interest is a developer, an umbrella association or any other outside party.” (emphasis added).

S805’s provision governing “special declarant’s rights” is bad public policy.  And the provision, as noted, is certain to create confusion and litigation. The provision should be scrapped.

2.  S805  permits the delegation of key association powers to "umbrella" associations – rather than associations that are directly elected and directly accountable to unit owners -- a delegation of power that is fundamentally at odds with existing law, and that constitutes bad public policy

As noted above, the Supreme Court in Brandon Farms Property Owners Ass’n v. Brandon Farms Condominium Ass’n, 180 N.J. 361, 371 (2004) observed that the existing legislative scheme “demonstrate[s] the Legislature’s understanding that … the unit owner’s interests take precedence over any outside interest, whether that interest is a developer, an umbrella association or any other outside party.” (emphasis added).  Unfortunately, S805 will subvert that long-established legislative “understanding” and public policy of this State by permitting “umbrella associations” to exercise broad powers over unit owners – notwithstanding that these associations are not directly elected and not directly accountable to unit owners.  See Section 44.  This “reform” is actually a step backwards.

3.  The “reform” of the association contract bidding procedures does not go far enough 

Section 71 of S805 contains new contract bidding procedures that are applicable to community associations. But the scheme contains so many exceptions from competitive bidding requirements, that the exceptions swallow the rule.  This “reform” allows cronies and family members continued access to lucrative association contracts, at homeowners’ expense.

New Jersey doesn’t need any more “pay-to-play” chemes; we need honest and fair bidding of contracts at all levels of government, and in the thousands of community associations around the state that, in the words of the Assembly Task Force, are “increasingly governmental [in] nature.”

4.  S805’s “pay per view” scheme governing a homeowner’s access to an association’s records should be rejected

Under section 66 of S805, homeowners are required to pay merely to view association records.  That is hardly a meaningful “reform” to promote access to records or to ensure the transparency of an association.

 

5.  The investment power granted to associations seemingly provides association boards with a license to speculate with homeowners’ money

Under section 49 (b) (15) of S805, association boards will no longer be limited by the fiduciary trust law, but instead will be permitted to invest homeowners’ money in any manner that the board chooses.  This is seemingly a license for association boards to speculate with homeowner funds, with the inevitable result that some associations will suffer severe catastrophic financial losses. 

To further compound this bad policy choice, S805 does not even require (as many other states do) that associations maintain a reserve fund for capital improvements. This serious deficiency almost guarantees financial instability in the ever-growing number of community associations in New Jersey.

 

6.  The express delegation of powers to community association boards is far too broad, and instead should be circumscribed, as is the case with the existing Condominium Act

The existing Condominium Act enumerates specific powers that can be exercised by condominium boards. See N.J.S.A. 46:8B-14.  These enumerated powers provide a check on the authority of association boards, and provides an important basis for judicial review. And the enumerated powers are not a straightjacket on association boards. Indeed, the Assembly Task Force found that association boards already had "great flexibility in their rule-making and administrative powers," but that boards needed further guidance and limits on their actions. 

Section 49 of S805 does just the opposite. It expressly permits association boards to exercise any and all powers that may be exercised by any not-for-profit corporation in the State. See Section 49 (16) (17). The express delegation of powers to community association boards is far too broad, and instead should be circumscribed, at least to the extent that is presently authorized by the existing Condominium Act.  Even further delineation is probably warranted, in accordance with the spirit of the recommendation of the Assembly Task Force.

     

7.  S805’s ADR procedures are deeply flawed

S-2334 calls for a mediator and arbitrator to be one and the same, and permits the mediator to decide in advance whether arbitration will be granted.   If the arbitrator does not render a decision within 30 days, there simply is no decision, and the only recourse for homeowners at that point is to go to court and litigate their dispute.  That, quite simply, is not an efficient or effective ADR process.

 

8.  Proper State agency oversight of community associations requires dedicated funding by a modest fee on homeowners and placement of the responsibility for oversight in an agency other than the Department of Community Affairs

S805 vests expanded State oversight of community associations in the existing state agency presently charged with oversight responsibilities: i.e., the Bureau of Homeowner Protection of the Department of Community Affairs (DCA). That is a mistake. DCA is presently charged with establishing codes, regulating builders, licensing code inspectors, and administering the new home warranty program. Adding new responsibilities to that overburdened agency is not a good idea, especially because the agency already has close ties to developers and builders.  Indeed, the State Commission of Investigation (SCI) recently stated in a report on DCA: "The Bureau of Homeowner Protection is in name only."

Far better to grant the new oversight powers to an agency that is truly independent of the housing industry. An excellent choice would be the Division of Consumer Affairs within the Department of Law and Public Safety. Related to this: it is absolutely essential that State agency oversight and enforcement be financed with a dedicated (but modest) fee paid by homeowners. Only in this way can adequate staffing of this vital new state responsibility be assured. 

 

9.  S805 does not contain an attorney fee shifting provision in favor of homeowners, which would make available competent attorneys to represent aggrieved homeowners

Although a viable ADR procedure is the preferred route to resolve most disputes between association boards and homeowners, sometimes litigation constitutes the only means for homeowners to fully vindicate their rights.  Unfortunately, the cost of an attorney is beyond the means of many homeowners, especially in complex and protracted litigation. Thus, for all too many aggrieved homeowners, the theoretical option of litigation is, as a practical matter, not an option at all.

An attorney fee shifting provision in favor of homeowners would affect the affordability of legal counsel and, as well, make available many more competent attorneys to represent aggrieved homeowners. Moreover, the possibility of fee-shifting in favor of homeowners would have an important secondary affect of reigning in association boards that litigate with impunity, without adequate consideration to the merits (or lack thereof) of their legal position.

 

10.  Section 72 of S805 has very lax conflict of interest rules, and actually precludes an association from adopting more stringent ethics and conflict-of-interest rules.

Section 72 of S805 permits the curing of a conflict-of –interest of an association board member by mere recusal of the board member from a vote. Recusal may be appropriate in some situations, but S805 actually appears to prohibit more stringent ethics and conflict-of-interest avoidance procedures. This is one area where associations plainly need more authority -- so that associations may, in particular circumstances, determine if other more stringent conflict-of-interest avoidance procedures are warranted.


Footnotes:

[1] Approximately 1 million New Jerseyeans (1 out of 8) live in common-interest associations. In 2002, the New Jersey Department of Community Affairs estimated that the number of association-related housing units was 494,000 and growing at the rate of approximately 7% per year.

Although it is difficult to obtain reliable recent data on the geographic distribution of common-interest associations in the United States, the data that are available suggest that New Jersey is one of the leading states with respect to the number of association-related housing units, as well as the rate of growth in association-related housing in recent years. Unfortunately, the 2000 census did not count the number of association-related housing units, nor even the number of condominium-related housing units (which was counted in 1990). As of 1990 (the last year for which reliable state-by-state comparative figures are available), the Community Associations Institute (CAI) estimated that California and Florida alone accounted for approximately 40 percent of all common interest associations. CAI also reported that, at least with respect to condominium units as reported by the 1990 census, New Jersey, as of 1990, had more such units than any state other than Florida, California, New York and Illinois. In the past fifteen years, the substantial growth in the number of association-related housing units in New Jersey (approximately 7 percent per year, as noted above) strongly suggests that New Jersey remains in the very top tier of states with the largest number of common interest associations.

Because New Jersey’s experience with issues and problems associated with large numbers of common-interest associations is perhaps most similar to the experiences of fast growing Sunbelt states (e.g., California, Florida, Texas), New Jersey would be well advised to look to those states (and not the less populated states that have adopted UCIOA) for fresh approaches to state regulation of common-interest associations.

Note that the May 2, 2005 Statement accompanying Assembly bill A798 states that the UCIOA "has been adopted, in full or substantial part, by approximately 16 states." But the National Conference of Commissioners of Uniform State Laws has officially recognized only seven states as having adopted either the 1982 or the 1994 versions of the UCIOA (i.e., Alaska (1984); Colorado (1991); Connecticut (1995); Minnesota (1993); Nevada (1991); Vermont (1998); and West Virginia (1986)). The Assembly Statement does not identify the additional nine states that, according to the Statement, have adopted the UCIOA "in substantial part."

[2] By contrast, S2016, the New Jersey Common Interest Community and Homeowners Protection Act, takes the far more sensible approach of reforming common-interest law in New Jersey by way of a comprehensive amendment to the existing New Jersey Condominium Act, N.J.S.A. 46:8B-1 et seq.  S2016 thus avoids the pitfalls of S2334’s overlay approach, which leaves unresolved the conflicts and ambiguities that will inevitably arise as a consequence of the interaction of the overlaying law with the underlying existing law.  S2016 is sponsored by Senators Turner and Rice.

 



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