Early Lessons from the Condominium Collapse
The tragic collapse of the Champlain Towers South in Florida has brought a laser focus to the community association industry, particularly issues involving evaluation of structural components and the way volunteer boards manage their communities. While it remains too early to tell the precise reasons for the collapse and any potential misjudgments that led to it, there are nonetheless critical lessons we can already glean from this tragedy:
- Importance of Reserve Studies. Periodic reserve studies by qualified engineers force an association to put expert eyes on important association structures. While some jurisdictions, like Virginia, affirmatively require periodic reserve studies that inform a board how much to budget for reserves, this should be done no matter what the law requires. Furthermore, reserve studies should be done by qualified professionals with the requisite training, experience and credentials.
- Importance of Reserve Funding. While reserve studies are critical, they are not enough. Prudent financial planning usually dictates actually funding long-term reserves through the current budget, so the association has ready means to undertake repairs when the time comes. If an association funds big repairs solely through loans or special assessments – which take time to accomplish – delays can occur. And delays can have real consequences, clearly.
- Don’t Ignore Evidence of Problems. The Florida condominium apparently had evidence of water damaging important structures in the building. Being on notice of harmful conditions can often create a duty to address them, particularly if those conditions involve health or safety issues. A board that ignores important evidence could create liability for the association or its board of directors, not to mention harm to persons and property.
- Having Enough Insurance. Whenever disaster strikes, insurance is front and center. It is not yet clear whether the Champlain Tower building was insured at the correct replacement value. All condo buildings should be insured for full replacement value based on prevailing market conditions. The tragic collapse also highlights the importance of directors’ and officers’ liability policies, which are the source of coverage when directors are sued.
- Clarity of Communications With Owners. Communications from the Champlain board (and other documents, such as meeting minutes) are revealed every few days and illustrate the state of mind of the board, the members and management regarding the issues faced by that community. Indeed, these documents may become exhibits in a future lawsuit – showing the critical nature of careful, thorough and well-written communications between owners and their board.
- Ensuring the Right Business Judgment. Whether the Champlain board acted with proper business judgment will surely be debated for years to come. Carrying out prudent business judgment by making informed decisions in good faith and after due diligence, including advice from experts, is a mandate for any community association. This may sometimes require that a board ignore pressure from owners to keep assessments low if the needs of the community dictate higher fees, either for building reserve funds or undertaking important repairs. Remember, it is the judgment of the directors that matters most – not the owners.
Our firm offers condolences to the victims of this tragedy and hopes that all community associations can learn important lessons from this terrible event.