Archive for June, 2009

Homeowner’s Association Boards and Members

Monday, June 22nd, 2009

Are some rules meant to be broken?

I take a break from lease issues this week.

I was visiting my Dad last weekend. He lives in a very restricted community in Virginia. The community has a lake, golf course and golf club, community clubhouse, several public pools, stables, and more. All highly regulated by a powerful Board of Directors, who are not shy when it comes to creating regulations (such as no towels hanging on your deck at any time if visible from the lake). On Saturday morning I went for a short run on the main road around the lake. While running I noticed the golf course signs which stated that runners and walkers were not allowed to do so on the golf course trails while the course was open for golfers. I recalled that my Dad had indicated that this was a huge controversy and the golfers, who are those with the most power, ruled the day. After much discussion and argument (members against the Board), the edict was made, and unless you like to run when it is pitch black many of the trails through the community are off limits. The Board rationalized this as a measure for the protection of the public. But I wondered, who will protect those overweight gentlemen sitting unprotected in their motorized golf carts. As I ran I pondered this thought until, once again, I found myself being chased by an unleashed dog. A huge black one this time, much larger than one I had ever seen before. My folks moved to this community over twenty years ago, and the rule has always been the same. Pets must be leashed in the common areas. After breaking free from the threat of that dog, I came upon one of the few public parks in the community. I call it the “Brick Park” because it has a fenced pile of bricks, with the picture of a house that sat upon the site and was the headquarters for Stonewall Jackson, or some other confederate officer during the Civil War (I don’t want to give too much information for fear of revealing the name of this community). As I entered the small park I began to run on a paved trail when I came upon another unleashed dog. This time a small dog, with the owner a short distance off, watching. Yet another clear violation of a rule that has been consistently broken for years.

As I represent so many homeowners associations, I began to think about association rules and regulations and some of the clear downfalls to associational governing systems. I guess I was thinking about these things somewhat more than usual due to a series of emails I had recently received as a homeowner in my own North Carolina planned community. One of the neighbors (who I do not know) started the communication by sending around an email to all of the neighbors stating that her cat had gotten loose in the neighborhood. She requested that if anyone had any information about its whereabouts, she would appreciate the help. A few days later another email came around letting all of us know that her pet cat had been found; however, she unwittingly indicated that the reason that the cart had been lost was that she was trying to help the cat transition to being an “outside” cat. Basically, she had admitted to taking action that was clearly in violation of our pet restrictions within the common areas (another restriction indicating that pets must be leashed). That email to all of the neighbors elicited this response from one of the other neighbors (set forth without edit or correction, capitalization included):



All of this got me to wondering about where Homeowners’ Associations go wrong in regard to bylaws, rules and regulations. My conclusion is that discontent and division occurs among neighbors either when an Association has too many rules, or when they simply do not have the resolve or mechanism to enforce rules in place. When a set of rules is already in place, and those in charge allow rules to be violated, but thereafter create new and additional rules of special interest, many owners seem to lose faith in those who are elected. Rules end up being broken time after time (such as in my Father’s development with respect to the leash rule). They then simply become quite impossible to enforce. As new special interest rules are created, those interested in the original rules simply walk away with a bad taste in their mouths, coming to the conclusion that the leadership is a joke.

My experience helping Associations with their covenants, bylaws and rules and regulations has led me to believe that a key to the ability to enforce the easy case (the case where the violation is egregious and an overwhelming majority would vote for enforcement, if they had the chance), is the strict enforcement of the cases which do not seem so offensive. If you are a leader in a North Carolina homeowners association, you need to know that your lack of uniform enforcement of a covenant, bylaw or rule will make it more difficult to enforce that obligation in the future. I have come to the conclusion that the best Association is one with rules made specifically for the unique community to be regulated, and which are enforced uniformly. After establishment of this finely tuned and uniformly enforced set of bylaws, rules and regulations, amendments should be few and far between, and the appearance of favoritism, or special interests, should be avoided at all costs.

As an aside, it was interesting to me that the email quoted above did not receive negative response as to the correctness of the position being made by the sender (technically, she is correct). The barrage of responses obviously came back with concerns about the tone of the response as communicated. Another topic, for another day, and a different blog.


Tom Grella

Option to Purchase and and Right of First Refusal

Thursday, June 11th, 2009

The Failure to Document and Perfect – Tenant Beware

One of the most common mistakes that Tenant’s make in commercial leases is the failure to properly document and perfect a right they might have to purchase the leased space. Generally, these rights are either found in the form of an option to purchase, or a right of first refusal. Normally, an option to purchase will give a tenant the absolute right to purchase the leased premises, on or before a specified date, and at a certain price (or a price that can be ascertained with certainty). A right of first refusal, on the other hand, does not give the tenant an absolute right, but most often expresses that the tenant has the right to purchase the leased premises from the landlord prior to the landlord moving forward with a sale to a third party.

For the sake of cost and expediency, many commercial leases are created and executed without the aid of legal counsel. With the increase of free legal forms available from so many Internet sources, leases are often found and used without regard for the specifics of applicable state law. These facts, and the desire and need for the quick and cheap, often lead to less than what is commercially prudent as to formality. This has the potential of causing huge problems in the case of tenant options to purchase and rights of first refusal. In many instances, short term leases contain these options and rights with some expectation that the leased premises is on a short course for sale to the tenant. As a result, leases are in many instances executed without acknowledgement, and without thought of putting the purchase right on public record. Though many leases contain provisions that allow for the recording of a memorandum of lease to document the property rights of the parties, most leases are executed without any recording in the public records actually ever being made.

Unquestionably, a properly documented option to purchase or right of first refusal in a lease can create a legally binding contract between the landlord and tenant with respect to purchase rights described. However, when real property rights are concerned, the public records and the rights of third parties will always need to be considered. The failure to draft carefully worded legal documents that put all otehrs on notice of the rights under these types of options and rights may end with a trusting tenant losing its rights to an innocent third party purchaser.

Commercial tenants are well advised to understand that it is imperative that they both properly document (writing in proper recordable form) and perfect (by recording in the county register of deeds office) options to purchase and rights of first refusal. Without any intent to disparage commercial landlords (many of whom are my clients), I think it is important that the commercial tenant not rely upon the landlord to offer, or be responsible for, documentation and perfection of this right.


Tom Grella

Commercial Lease Tenant Security Deposits

Sunday, June 7th, 2009

The Commercial Landlord’s Obligations, or Lack Thereof, in North Carolina

I have been asked by clients many times about the responsibilities of a commercial landlord with respect to a security deposit to be held during a lease term as security for the Tenant’s performance of its responsibilities under a commercial lease. Are there only certain types of uses that the security deposit might be used for, and must the deposit be held in a certain type of account? It is my belief that the number of questions I receive about this issue is related to the fact that there are clearly spelled out North Carolina statutory requirements applicable to the holding of a tenant security deposit in a residential lease setting.

North Carolina has one single set of statutes that concern the rights and obligations of parties to a lease. That set of statutes is known as the Chapter 42 of the North Carolina General Statutes, entitled “Landlord and Tenant”. Basically, except as otherwise set forth in this Chapter 42, or as set forth in a case interpretation (and relatively speaking Landlord-Tenant case law is not an area of significant case law in North Carolina) the lease is a contract where the parties may define the agreement, with a generally wide latitude as to legal obligations between themselves.

Within Chapter 42, there is a specific set of statutes collectively known as the “Tenant Security Deposit Act” (which is Article 6 of Chapter 42). All of the statutes in that Act, either directly or by reference, only apply to “residential dwelling unit” leases. With respect to residential dwelling unit leases, because of this Act, there are clear requirements on the amount of a security deposit that may be required by a landlord, the manner in which the funds may be held, the types of uses for which the money may be used, and the procedure that must be followed in reconciling funds with the tenant once the lease has expired or been terminated.

To my knowledge, none of these specified statutes in Chapter 42 have been applied to the commercial lease situation. Apparently, the legislature, when drafting these laws, recognized the difference in overall bargaining position between a typical residential setting, and a typical commercial setting.
It is not uncommon for a commercial lease to have a provision similar to the following:

“20. SECURITY DEPOSIT. Tenant shall deposit with Landlord the sum of _________, which sum Landlord shall retain as security for the performance by Tenant of each of its obligations hereunder (the “Security Deposit”). The Security Deposit shall not bear interest. If, at any time, Tenant fails to perform its obligations, then Landlord may, at its option, apply the Security Deposit, or any portion thereof required to cure Tenant’s default; provided, however, if prior to the Expiration Date or any termination of this Lease, Landlord depletes the Security Deposit, in whole or in part, then immediately following such depletion, Tenant shall restore the amount so used by Landlord. Unless Landlord uses the Security Deposit to cure a default of Tenant, or to restore the Premises to the condition to which Tenant is required to leave the Premises upon the Expiration Date or any termination of the Lease, then Landlord shall, within thirty (30) days after the Expiration Date or any termination of this Lease, refund to Tenant any funds remaining in the Security Deposit. Tenant may not credit against or deduct the Security Deposit from any month’s Rent.”

This common provision could create some uncertainty as to statutory compliance in a North Carolina residential lease. However, unlike a residential security deposit, it would appear that in North Carolina, a commercial landlord is not required to hold a security deposit in any special type of account, is not limited as to the amount that might be required, can hold the security for any type of default of the tenant, and does not necessarily have to account or report in any set way, or in any set time frame, as would be required in the lease of a residential dwelling unit. Obviously, though there is no legal requirement, some of the practices mandated in the residential setting might in fact be good business practices in the commercial lease setting. Regardless, whether or not to hold a security deposit, and in what amount and under what terms, is therefore ultimately a business decision in North Carolina, subject to negotiation between the parties to the lease. Arguably that is exactly where the decision is best made in a commercial setting.


Tom Grella