MEMORANDUM. Summary of 2011 Legislation Affecting Texas Homeowners Associations and Condo Associations

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1 N I E M A N N & H E Y E R, L.L.P. ATTORNEYS AT LAW WESTGATE BUILDING, SUITE COLORADO STREET AUSTIN, TEXAS CONNIE NIEMANN HEYER TELEPHONE (512) WILLIAM M. HEYER FAX (512) CONNIEHEYER@NIEMANNLAW.COM WILLIAMHEYER@NIEMANNLAW.COM MEMORANDUM To: From: All Client Homeowners Associations and Condominium Associations Connie Heyer Date: June 15, 2011 Re: Summary of 2011 Legislation Affecting Texas Homeowners Associations and Condo Associations The Texas legislature has completed its 2011 session. Numerous bills were passed which, if signed into law 1, will affect property owner associations in Texas. For purposes of this memorandum, reference to homeowners associations (HOAs) refers to every association except condominium associations. Condominium Associations are legally defined by Texas Property Code Ch. 82. In short, if the association as an entity owns the common area, it is an HOA. If each owner owns an undivided portion of the common area, it is a Condominium Association. This memorandum discusses all bills passed that affect HOAs and Condominium Associations. In some cases, these bills affect both HOAs and Condominium Associations. In other cases, the bill only applies to HOAs. (There are no bills addressed herein that apply only to Condominium Associations.) This memorandum is organized as follows: First, a summary of what we believe are the major legislative changes made this year (including information as to the effective date of the legislation and a reference to the source bill); Second, a list of all recommended (or legally required) action items for our clients, as a result of the bills passed this session; and Third, a detailed Summary of all 2011 legislation Affecting HOAs and Condominium Associations. Our hope is that this memorandum will assist you in bringing your association into compliance with these new laws and in keeping it in compliance. These new laws will require most HOAs and Condominium Associations to adopt new rules and procedures. As always, we are available to provide legal advice and counsel regarding compliance with these and all other statutory requirements. Thank you. -- Connie N. Heyer 1 Governor Perry has until June 19th to veto any bill passed by the legislature. Otherwise the bill becomes law. At this time, we have no reason to believe that Governor Perry will veto any of the bills discussed in this memorandum. As such, clients should assume that all of these bills will become law (subject to their effective dates) no later than June 20, Our firm will send out a supplemental memorandum if and when any of these bills are in fact vetoed by the Governor.

2 SUMMARY OF MAJOR LEGISLATIVE CHANGES Laws Applicable to both HOAs and Condominium Associations Solar Devices (HOAs and Condominium Associations). All owners have a right to install solar devices, subject to limited rulemaking authority of associations. Effective Date: September 1, (HB 362) Display of Religious Items (HOAs and Condominium Associations). All owners are allowed to display a cumulative 25 square inches of religious items on their doors. Effective Date: Immediate (i.e., upon signature of Governor or, if not signed or vetoed, on July 1, 2011). (HB 1278) Recording of Governing Documents (HOAs and Condominium Associations). All governing documents must be filed of record to be enforceable. Effective Date: January 1, (HB 1821) Display of Flags (HOAs and Condominium Associations). Owners have a right to display US, Texas, and US official or replica military branch flags; association may adopt certain restrictions. Effective Date: September 1, (HB 2779) Laws Applicable to HOAs Only Foreclosures by HOA (HOA only). In all instances where an HOA is pursuing collection of delinquent owner debts and gets to the foreclosure stage, the HOA will have to participate in a judicial hearing and be granted a court order before foreclosing the HOA lien and selling the related lot. This requirement applies to HOAs even if the governing documents expressly authorize non-judicial foreclosure. Effective Date: January 1, (HB 1228) Amendment of HOA Declarations (HOA only). Any HOA Declaration instrument may be amended with the approval of owners holding at least 67 percent of all the votes in the HOA, unless a lower percentage is set forth in the Declaration. Effective Date: September 1, (SB 472) Payment Plans and Application of Payments (HOA only). HOAs must adopt payment plan rules and follow a mandatory application of payments schedule. Effective Date: January 1, (HB 1228 and HB 1821) Additional Notice Prior to Turning Account Over to Attorney/Collections Agent for Collection (HOA only). HOAs required to send additional notices before turning account over to attorney/collection agent. Effective Date: January 1, (HB 1228) Posting of Governing Documents on HOA website (HOA only). All HOA governing documents must be posted on any association website. Not applicable if HOA does not have a website. Effective Date: January 1, (HB 1821) HOA Records Retention and Production (HOA only). An HOA board must adopt rules related to retention and production of HOA records. Imposes cap on charges to copy records. Requirement with regard to how long records must be maintained. Effective Date: January 1, (HB 2761) Notice of Board Meetings; Alternative Voting Mechanisms for Members (HOA only). HOAs must give 72 hour notice of all board meetings to all owners, with limited exceptions. Owners have ability to vote electronically or by use of absentee ballot. Effective Date: January 1, (HB 2761) Niemann & Heyer LLP 2 (512)

3 ACTION ITEMS Actions either required or recommended due to 2011 legislation HOAs and Condominium Associations Transfer Fees. All associations should determine what transfer fees they charge, ensure that each is authorized under the governing documents or State law. If one or more transfer fee is not so authorized, the Association should discontinue charging that fee or discuss with an attorney steps that can be taken to legally authorize the fee. Action Deadline: September 1, (HB 8) Solar Rules. All associations should adopt and record solar rules. Absent adoption of such rules, owners will have an absolute right to install solar devices. Action Deadline: September 1, (HB 362) Recording of Governing Documents. All associations should ensure that all governing documents (e.g., declarations, bylaws, articles, rules and amendments to same) are filed of record in the county(ies) in which the development is located. Any governing document not so recorded is unenforceable. Action Deadline: January 1, (HB 1821) Flag Rules. All associations should adopt and record rules related to the display of flags. Absent adoption of such rules, owners will have an absolute right to fly US, Texas or military flags. Action Deadline: September 1, (HB 2779) Rain Barrel Rules. All associations should adopt and record rules related to rain barrels. Absent adoption of such rules, a legitimate question arises as to whether associations can impose limits on the size, type, screening, and materials for rain barrels. Action Deadline: September 1, (HB 3391) HOAs Only Rules Related to Records Retention and Production. HOAs must adopt and record rules regarding retention, production and copying of HOA records, including a fee schedule for copy charges. Action Deadline: January 1, (HB 2761) Payment Plan Rules. HOAs must adopt and record payment plan rules. Action Deadline: January 1, (HB 1228 and HB 1821) Resale Certificates. HOAs must include on all resale certificates a statement of all fees associated with the transfer of ownership, including a description of each fee, to whom each fee is paid, and the amount of each fee. Action Deadline: January 1, (HB 1821) Copies of Governing Documents on Website. If an HOA or its management company maintains an HOA website, that website must include copies of all governing documents of the association (e.g. declaration, bylaws, rules, articles and all amendments to same.) Action Deadline: January 1, (HB 1821) Niemann & Heyer LLP 3 (512)

4 SUMMARY OF ALL 2011 LEGISLATION AFFECTING HOAS AND CONDOMINIUM ASSOCIATIONS Legislation Affecting Both HOAs and Condominium Associations SB 101. Foreclosure; military protections (effective ). The bill requires special notification to members of the military for non-judicial foreclosures. When association attorneys send homeowners a notice of intent to foreclose, they must now include a conspicuous statement alerting military members to assert their rights (mirroring the language provided in the statute). HB 8. Transfer fees (effective ). The bill prohibits certain transfer fees, but protects transfer fees for associations and foundations. All contractual transfer fees are banned, with limited exceptions. Association transfer fees, management fees and association administrative transfer fees are all specifically excluded from this definition and are therefore still legal. However, in order to be enforceable/collectible, the fee must be stated in the governing documents of the association (such as a transfer/working capital fee), or collectible under state law (such as a resale certificate fee). All associations should determine what transfer fees they charge, ensure that each is authorized under the governing documents or State law. If one or more transfer fee is not so authorized, the association should discontinue charging that fee or discuss with an attorney steps that can be taken to legally authorize the fee. HB 362. Solar devices (effective ). This bill gives owners the right to install solar panels and shingles with certain limitations. Limitations are only allowed if the association incorporates these limitations into their documents (e.g. adopts rules to this effect). Associations may adopt restrictions regarding owners right to install solar energy devices in certain circumstances. The restrictions may prevent an owner from installing the device(s): (1) in violation of any law; (2) on property owned by the association; (3) in common areas; (4) anywhere but on the owner s roof or in his fenced yard or patio; (5) so that the device extends beyond the roofline or does not conform to certain allowed design guidelines; (6) if it is taller than the fence line; (7) if it is installed in a manner that voids material warranties; (8) without prior approval by the association or its designated architectural committee; or (9) if the device would substantially interfere with the use and enjoyment of land by causing unreasonable discomfort or annoyance to persons of ordinary sensibilities. However, owners can overcome this argument by getting all neighboring owners written approval. Associations must allow owners to install shingles of certain materials made to resist wind and hail, provide heating/cooling efficiency, or generate solar energy, as long as they resemble other approved shingles in the subdivision, are more durable or of better quality than normal shingles, and they match the aesthetics of the property surrounding the owner s property. All associations should adopt and record solar rules. Absent adoption of such rules, owners will have an absolute right to install solar devices. HB Religious displays allowed on doors (effective immediately). The bill requires associations to permit certain religious displays on owners doors. The association must allow an owner to display religious items on his front door or doorframe unless the display contains obviously offensive language or graphics or is larger than 25 cumulative square inches in size. Niemann & Heyer LLP 4 (512)

5 An owner may not exploit this law to use a material or color for an entry door that is prohibited by the governing documents. Associations have the right to self help under this law they may remove an item that violates deed restrictions, provided the deed restrictions don t conflict with this statute. HB Resale certificates; recording of documents (effective ). Resale Certificates. Either the purchaser, seller or their agent or a title company may request a resale certificate. The purchaser pays for the resale certificate fee unless otherwise agreed by the purchase and seller. Associations may require payment before beginning the process to issue a resale certificate but may not process payment until the certificate is available for delivery. The bill requires itemization of the various fees and clarification as to the purpose of the fees and to whom the fees are paid. Recording Requirements. Associations must record all dedicatory instruments (i.e., all governing documents declaration, bylaws, articles, rules, etc.) before these documents are legally effective. All associations should ensure that all governing documents (e.g., declarations, bylaws, articles, rules and amendments to same) are filed of record in the county(ies) in which the development is located. Any governing document not so recorded is unenforceable. HB Flags and flagpoles (effective ). The bill prohibits any restrictions on an owner s display of the US, Texas, or military branch flag, with some limitations. An association must adopt restrictions if the association desires to apply the permissible limitations; otherwise there are no limitations on displays of US, Texas, or military flags. The only permissible restrictions an association can impose and enforce regarding US, Texas, and military flag displays are the following: (1) requirement that U.S. and Texas flags be displayed in accordance with the US/Texas flag code; (2) requirement that a flagpole (freestanding or attached to a dwelling) be constructed of permanent, long-lasting materials, with an appropriate finish that is harmonious with the dwelling; (3) requirement that the display comply with all applicable zoning ordinances, easements, and setback requirements; (4) requirement that the flag and flagpole be maintained in good condition and any deteriorated flag or structurally unsafe flagpole be repaired, replaced, or removed; (5) regulation of the size, number, and location of flagpoles displayed (except the regulation must allow a minimum of at least one flagpole per property that is not more than 20 feet in height); (6) regulation of the size of a flag; (7) regulation of the size, location, and intensity of any lights used to illuminate a flag; (8) reasonable restrictions on noise caused by an external halyard (hoisting rope) or flagpole; (9) prohibition against owners locating flags or flagpoles on common areas. All associations should adopt and record rules related to the display of flags. Absent adoption of such rules, owners will have an absolute right to fly US, Texas or military flags. HB Rain barrels (effective ). The bill amends current rain barrel law and requires associations to permit owners to install and use rain-harvesting devices if they meet certain architectural requirements. Associations may prohibit owners from installing a rainwater harvesting system on property owned by the association, in common areas, or on an owner s property between the front building line and the street. Associations may also prevent owners from installing devices that are a different color than or inconsistent with the home s color scheme. Associations may regulate the size, type, shielding of, and materials used in the construction and/or installation of the device(s) if visible from the street. However, the regulations cannot make it Niemann & Heyer LLP 5 (512)

6 economically impossible to install the device(s). The statute is not clear as to whether regulations must be in rules or simply applied on a case-by-case basis when the owner submits a barrel plan for architectural approval. We recommend that all associations adopt rules to ensure that the ability to control the aesthetics is protected. All associations should adopt and record rules related to rain barrels. Absent adoption of such rules, a legitimate question arises as to whether associations can impose limits on the size, type, screening, and materials for rain barrels. Legislation Affecting HOAs Only (n/a to Condominium Associations) HB Records and Meetings (effective ). The bill addresses several areas: association records, open meeting requirements, restrictions on board authority, election procedures, the board s transition from developer to homeowner control, and developer protections. Association records. Owners may have access to association records, but they must submit written requests to the association or its representative by certified mail to the mailing address of the association or authorized representative as listed in the current management certificate. The request must identify the records requested and indicate whether the requesting owner wants to inspect the records or have the association forward copies. The association then has 10 business days from receipt of the request to, as appropriate: (1) provide written notice of dates on which records may be inspected, or (2) provide the requested copies, or (3) provide the owner written notice that it is unable to produce the records within the 10-day period and provide a date, within an additional 15 days, by which the records will be sent or made available to the owner for inspection. Owners are responsible for the costs of producing and copying association records; costs are capped at approximately 10 per copy. HOAs must adopt and record rules regarding production and copying of HOA records, including a fee schedule for copy charges. These costs cannot exceed those listed under the Texas Administrative Code s charges for providing copies of public information (1 TAC Section 70.3) approximately 10 per standard paper copy, $1 per CD, $3 per DVD, 50 per oversize paper copy, etc. HOAs may require the owner to pay in advance. HOAs may keep certain records confidential and decline to make them available (e.g., violation histories of owners, owners personal financial information, owners contact information other than address, and association personnel files) unless the owner gives written approval or a court orders the HOA to release the information. Associations with more than 14 lots must adopt a records retention policy that includes, at minimum, the following categories and retention periods: o Account records of current owners (5 years) o Contracts for terms of at least one year (4 years after expiration of contract) o Minutes of owner meetings and board meetings (7 years) o Tax returns and audits (7 years) o Governing documents (permanently) Owners denied access to records are given JP court remedies Open board meetings and closed executive sessions. Board meetings (regular and special) must be open to owners. The board has the right to adjourn a board meeting and reconvene in a closed executive session for certain issues (e.g., personnel matters, litigation, contract negotiations, enforcement actions, confidential attorney communications, matters involving the invasion of owners privacy, or matters involving parties who have requested confidentiality and the board has agreed to honor that request). Decisions made in executive sessions must be summarized orally in general terms, including any expenditures approved, and recorded in the minutes. Boards must keep written minutes as record of each regular and special meeting and give owners access to approved minutes. Niemann & Heyer LLP 6 (512)

7 Boards must give members notice of upcoming board meetings (regular and special), including the date, hour, place, and general subject of issues to be brought up in executive sessions. The Board s notice of meeting must be either: o (1) mailed to owners at least 10 days beforehand; or o (2) provided at least 72 hours before meeting by: (a) being posted notice in a conspicuous location (i.e., in a common area or on an association website); and (b) being ed to all owners who have provided their address to the HOA. An owner has a duty to keep his address updated with the HOA. Board meeting notice is not required if: o o (1) The board meets by telephone, , or in any alternate manner whereby all directors speak their opinion and are heard (or the opinion can be read via ) by all other directors, (2) the board acts by unanimous written consent on routine or administrative matters, or (3) the meeting is necessary to address an urgent or emergency situation that requires immediate action. The foregoing right of a board to meet and vote without prior notice to the members does not apply to the following matters: (1) fines; (2) damage assessments; (3) initiation of foreclosure actions or enforcement actions; (4) increases in assessments; (5) levying special assessments; (6) appeals from denials of architectural control approval; or (7) suspending rights of an owner before the owner has an opportunity to appear before the board. o Practice Point: For routine decisions involving anything but fines, damage assessments, approval of foreclosures, assessment increases, ACC appeals, or suspending common area use rights, boards can still make decisions via phone meeting, , or unanimous written consent, provided all board members are privy to the phone call or communications. o Actions taken without prior meeting notice must be summarized orally, including any actual or estimated expenditures approved, and documented in the minutes of the next noticed meeting. Elections and voting; notice and ballots. HOAs must give owners notice of an association-wide election or vote at least 10 days before it occurs, regardless of any provision in the declaration or bylaws to the contrary. Ballots must be in writing and signed by the member. Electronic and absentee votes are valid if the ballots meet certain requirements, regardless of any provision in the declaration or bylaws to the contrary. Owners right to vote. Property owners may not be disqualified (for any reason) from voting. For example, an owner s right to vote cannot be suspended because of past due assessments. Owners right to run for board election. The association cannot adopt or enforce restrictions that prevent owners from running for a position on the association s board, excepting only when the board is presented with written, documented evidence that a potential candidate (or sitting director) has been convicted of a felony or crime involving moral turpitude. Any such evidence against a sitting director results in that director becoming immediately removed from the board and prohibited from future service. Recounts. HOAs must conduct a recount of an election vote if an owner requests one in writing by certified mail, return receipt requested, or other USPS confirmation service or in person to the association s managing agent within 15 days after the date of the election. The request must be either: (1) mailed to the association s mailing address as listed on the latest management certificate; or (2) delivered in person to the managing agent or the address designated for return of absentee ballots. Costs of the recount will be borne by the requesting owner, including the required cost to hire a qualified non-member to do the recount, unless the recount changes the results. Recounts must be completed within 30 days of the owner s request. The board may continue to act in the meantime. Declarant control period. A declarant may appoint and remove board members during the declarant control period. Niemann & Heyer LLP 7 (512)

8 Regardless of what the declaration states, 120 days after 75% of the lots that may be created have been sold to non-declarant owners, at least one-third of board members must be elected by the owners, not the declarant. Annual meeting. The board must call an annual meeting of the members. If the board fails to call an annual meeting, an owner may demand it and, if the board against fails to call the meeting, three or more owners may form an election committee and, subject to certain procedural requirements, cause the annual meeting to be held. SB 472. Voting; Declaration amendments (effective ). The bill: (1) addresses the procedure for passing amendments to the declaration; and (2) expands the permissible methods for owners to cast votes (e.g., electronic voting and absentee ballots). There is certain mandatory language that must be included on absentee ballots. Votes cast by absentee or electronic ballots are valid for quorum purposes only for items (votes) appearing on that ballot. Electronic voting and absentee ballots. Members may vote electronically or by means of absentee ballots; absentee ballots must include certain language; electronic and absentee ballots count toward the quorum only on matters listed on the ballot, and do not count at all if the ballot item is modified at the meeting prior to the vote. Ballot requirements. A member s vote in an association-wide vote must be in writing and signed by the member, except for uncontested races (e.g., one candidate to fill one open director seat). An electronic ballot is deemed to be in writing and signed. Owners right to vote. Property owners may not be disqualified for any reason from voting on board member elections or issues that affect the owner s rights and responsibilities. For example, an owner s right to vote cannot be suspended because of past due assessments. Owners right to run for board election. The association cannot prevent owners from running for a position on the board, but if the board is presented with evidence that the director or candidate has been convicted of a felony or crime involving moral turpitude, that person is ineligible to serve on the association board. Restricted access to ballots. A person who is running for election or is the subject of a vote (and that person s relatives) cannot have access to ballots for that election or vote, except as part of any recount process. Declaration amendment procedure. Regardless of language in the declaration to the contrary, all declaration amendments must be passed by 67% of the total votes allocated to owners, unless the declaration itself states a lower percentage. HB Collections; Payment plans; Foreclosures (effective ). The bill provides increased consumer protections to owners, including the requirement that associations offer certain payment plans. It also provides a priority of payments schedule, and it adds certain prerequisites to foreclosure. Payment Plans. HOAs with more than 14 lots must offer payment plans with a minimum term of 3 months. The provision regarding a maximum term is worded awkwardly, but it appears to prohibit plans longer than 18 months from the date the owner requests a plan. HOAs must adopt and record reasonable payment plan guidelines/rules. Owners making payments pursuant to an approved payment plan must not be charged monetary penalties. However, the association may charge reasonable administration costs and interest. Associations aren t required to offer a payment plan if an owner has defaulted on a payment plan in the last 2 years. Priority of Payments Schedule. Associations must apply owners payments in the following order: (1) delinquent assessments; (2) current assessments; (3) attorney fees and collection costs associated with delinquent assessments; (4) other attorney fees; (5) fines; (6) other amounts. Niemann & Heyer LLP 8 (512)

9 If at the time an owner submits a payment, he/she is in default under a payment plan, the association does not have to follow the above-described application schedule. However, fines cannot be given priority over any other amount owed under any circumstances. Foreclosure. The bill clarifies that only licensed attorneys may draft and file a lien on behalf of an association. The bill makes clear that existing law requiring attorneys to draft and file any instrument that affects title to real property applies to an association s lien, notice of claim of lien, or similar document. Before turning an owner s account over to a debt collector (attorney or other collection agent), the association must provide 30-day notice of the delinquency via CMRRR and advise the owner of payment plan alternatives to avoid collection efforts. Contingency fee arrangements between the association and its attorney or collection agent are prohibited. The association s collections contract with its attorney or other collection agent must require payment (the collection contract may not be contingent, and must hold the association responsible for paying costs incurred under the contract, so as to prevent de facto contingent arrangements in the form of well, just don t pay us if we don t collect it ). Per legislative testimony, this is to prevent historical abuses where a minimal amount of an owner s unpaid assessments turns into hundreds of dollars in collection costs due to contingent billing arrangements. Collection agents acting for associations must notify inferior/subordinate lien holders of the debt owed and give them a 61-day opportunity to cure before foreclosing. All associations pursuing foreclosure must go through an expedited judicial foreclosure process and receive a court order granting the association the right to foreclose. Any other foreclosure method allowed by the association s documents is prohibited unless an owner specifically agrees to it in writing. Members can vote to add or remove foreclosure provisions in the governing documents by a vote of 67% of all votes. To trigger a meeting for a vote on the issue, owners representing at least 10% of all voting interests may request the association hold a special meeting. HB Resale certificates; posting documents online; payment plans (effective ). Association records/other provisions regarding resale certificates. A resale certificate may be requested by an owner, prospective purchaser, the agent of either, or the title company. A resale certificate must have been prepared no more than 60 days before the date of delivery. (An owner will have to request a new one if a sale falls through and more than 60 days go by.) If the party requesting the information is a purchaser or purchaser s agent, the association may require him to provide the association with reasonable evidence that the purchaser has entered into a contract to purchase property in the subdivision or otherwise has a right to acquire property in the subdivision. HOAs must include on all resale certificates a statement of all fees associated with the transfer of ownership, including a description of each fee, to whom each fee is paid, and the amount of each fee. HOAs may require payment before beginning the process to issue a resale certificate but may not process payment until the certificate is available for delivery. Online association information. If an HOA or its management company maintains an HOA website, that website must include copies of all governing documents of the association (e.g. declaration, bylaws, rules, articles and all amendments to same). Niemann & Heyer LLP 9 (512)