Q: Can the president of a condo association use association money to personally sue someone because he believed someone embezzled association money?
A: If someone stole association money, two things should happen. First, contact the police or the local county/city attorney, and second, file a claim with your insurance company.
However, the president cannot do this on his own. The board of directors — in consultation with the association attorney and property manager — must authorize all steps that have to be taken.
Yes, the association can file a civil suit against the culprit. But once again, the board has to authorize the expenditure. The president cannot unilaterally file suit on behalf of the association nor can the president personally file suit. The president’s money was not stolen; only the association would have legal standing to sue.
I would discuss this with the association attorney as soon as possible. I hope she is not representing the president in that lawsuit, because that would be a clear ethical violation.
Q. I am a board member of our association and am responsible for landscaping, grounds maintenance and security. Over the years, our association has had a number of contractors who render service to us — whether this be in the form of snow removal, landscaping services or trash removal. Some of us on the board are not happy with those services. Other board members (myself included) do not know whether the price we pay is competitive. Basically, things have just continued with little or no oversight. Do you have any suggestions?
A. Yes, I have a number of suggestions and recommendations.
The first thing you should remember is that the board is — or must be — in charge of the operations of your association. You rely heavily on your property manager — as you should — but the ultimate decisions must be made by the board. As Harry Truman often said: “the buck stops here.”
Furthermore, the fact that you have been using the same contractors each and every year does not mean you should continue the status quo.
Ask your property manager to prepare a list of all contracts. This list should be updated at least quarterly. Furthermore, the manager (or your association attorney) should review each contract to determine how these contracts can be terminated, and whether these contracts will automatically renew unless advance notice is given to the contractor.
Then, when a particular contract is about to expire, the manager should solicit at least three bids from potential contractors. The manager should prepare a brief summary of each bid, and make a recommendation to the board. But the board — and only the board — should make the ultimate decision.
This highlights perhaps the most important point of this article: You must have a written contract for every contractor used by your association.
Why? Because you want to know — in advance — exactly what services the contractor will provide, what the cost will be, and how you resolve disputes should they arise.
This is not a hypothetical situation. My law firm has handled hundreds of contractor disputes, ranging from disatisfaction with services, arguments over the scope (or quality) of the work to be performed, to questions of how much the contractor should be paid.
Why take a chance and rely on the “he said, she said” informal approach? Good management practices require a properly drafted contract.
Q: We plan to add a new room to our house and have talked with several contractors. We are about to select one but don’t know what kind of contract to use. Can you assist?
A: Your question appropriately follows my response to the condo board member. All too often, contractors give the homeowner a contract that I call a “two-page special”; it does not contain any of the important items that must be included in any construction contract.
I would contact the American Institute of Architects.They sell a number of forms which can be tailored to your needs. They can be found on the web at www.aia.org.
Here are what I consider mandatory issues to be included in any construction contract:
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1. Dispute resolution procedures. Should you agree to arbitrate any disputes or do you want to go to court? My belief is that although arbitration is clearly faster and usually less expensive than litigation, the arbitration process is not in the best interest of homeowners. Often, the arbitrator “splits the baby in half,” without regard to the merits of the case. Usually, the arbitrator does not allow either side to obtain discovery prior to the hearing. In any event, if you decide that arbitration is the best route, the following clauses should be included in the contract:
a. the arbitrator will issue a written opinion;
b. the arbitrator shall award attorneys fees and costs to the prevailing party.
2. Payment schedule. You want to spell out in writing exactly when the contractor will be paid, and under what circumstances you have the right to withhold payment.
3. Provisions for final payment. Make sure that a professional has inspected the work when the job is finished, and that you obtain a release of mechanic and subcontractor liens before the contractor receives the final payment.
4. If you are doing a big job, consider hiring a project engineer or architect. This person will be a buffer between you and the contractor, and will have to approve the work before payments are made.
5. Limit the hours of the contractor. You do not want to have the concrete blasted at 6 a.m. on a Sunday, but you do want to make sure that a heavy snowfall is plowed early in the morning. Also, all contracts should require that the contractor maintain appropriate licenses and insurance.
This column cannot cover all of the important legal aspects which must be included in any contract. You should review this with your attorney.
Q: I am selling my house to a good friend and taking back 80 percent by way of a promissory note and a recorded deed of trust. I have heard I need to comply with the AFR but don’t really understand it.
A: AFR stands for “Applicable Federal Rate.” Every month, the Internal Revenue Service publishes a list of interest rates for short-term, mid-term and long-term loans. If you are lending money, you must charge the applicable rate stated by the IRS on the month the loan is made. If the interest rate you charge is below the AFR, that is considered “imputed interest.”
Example: You loan your son $200,000 to buy a house and being the generous father, you are not going to charge him any interest. The AFR for long-term loans in March was 2.33 percent. Accordingly, the IRS will impute interest in the amount of $4,660 ($200,000 X 2.33 percent) to you, and you will have to pay tax on money you did not receive. I call this phantom income. Interestingly enough, if your son has recorded the mortgage (deed of trust) among the land records where the property is, he can actually deduct that amount for tax purposes.
This is something you must discuss with your tax advisers before entering into any such transaction.