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Archive for the ‘Professional Liability and MPL’ Category

HOAs and COAs increasingly confront owner challenges to regulation of short-term rental

Posted on: May 28th, 2019

By: Justin Boron

By now, it’s clear that short-term rentals are neither a passing fad nor the high-minded pretense that underpinned their growth—laid-back homeowners who connect through an online platform with other like-minded individuals just looking for a place to crash for a few nights.

Instead, the short-term rental market is a full-fledged, real-estate business disrupter that is highly profitable and attractive to condo owners in areas with vacation appeal.  For condominium and homeowner associations, the word ‘disrupter’ is all too true.

Take your pick of the “disruptions” that short-term rentals can cause HOAs and COAs.  Safety, noise and pollution, insurance issues, inability to obtain mortgage financing, short-term rental taxes, violation of condo rules and destruction of property by the transient renter.

In response, HOAs and COAs have tried to push back on short-term rentals by attempting to enforce existing restrictions in their governing documents or by adopting new restrictions on short-term leases.  But unit owners eager to take advantage of the income-potential in the short-term rental market aren’t going away quietly and have gotten ever-more creative in avoiding HOA and COA restrictions.

The battle-lines have been drawn, and many of the disputes are making their way to court.  Below are some of the more interesting cases involving short-term rentals and potential solutions to the problems they present.

Can A Condo Association Ban Short-Term Rentals?

Putting aside the question of whether it should, whether a COA or HOA can ban short-term rentals outright, of course, depends on the authority granted to the association and the board in the governing documents.

Many associations have some sort of restriction on leasing of units within the association, whether it is durational (e.g., no less than six-month rental terms), a ban on commercial use of a unit, or an owner-occupied requirement.  But on the other side, there are individual property rights that courts must balance.  HOAs and COAs have met court challenges when attempting to ban short-term rentals using these types of restrictions, which in almost every case, were not drafted with the short-term rental market in mind.

For example, several condo owners successfully argued that a condo association’s ban on short-term rentals was beyond its power because its founding documents did not grant the association the right to restrict leases by duration.  See Wilkinson v. Chiwawa Cmtys. Ass’n, 327 P.3d 614, 621 (Wash. 2014).

Condo owners waged a similar challenge based on an association’s attempt to rely on its covenants against commercial use to ban short-term rentals.  See Houston v. Wilson Mesa Ranch Homeowners Ass’n, 360 P.3d 255, 261 (Colo. App. Ct. 2015).  The court agreed that short-term rentals used for sleeping and eating did not fit within the definition of a business use.

In instances where a HOA or COA lacks authority to ban short-term rentals in its governing documents, its next best option is likely to amend its governing documents according to the procedures supplied in them—typically a supermajority vote of the unit owners—to specifically ban short-term rentals.

Flouting An Owner Occupied-Requirement

HOAs and COAs might take comfort in condo documents that affirmatively require any units to be “owner-occupied.”  But an enterprising owner developed an interesting work-around for the owner-occupied requirement.  He placed his unit in an LLC, and then he sold small percentage shares of the LLC to would-be short-term renters that the LLC documents required the purchaser to sell back to the LLC at the end of their stay.  It allowed the short-term renter to say: “I’m not a tenant.  I’m a co-owner.”[1]

The COA could argue that the owner’s arrangement is essentially a time-share, which many COA and HOA documents prohibit.  But in omitting a particular block of time that a member of the LLC owns, it lacks one of the essential qualities of a timeshare.  A COA would likely be more successful in arguing that the substance of the arrangement should be considered over the form.  None of the “owners” of the LLC could say with a straight face that they believed they were investing in a real estate venture.

The Absent Owner Renting Short-Term Under The Radar

The most ubiquitous problem related to short-term rentals likely arises when an HOA or COA has effectively banned short-term rentals.  Despite a clear prohibition, there is often an absent owner who flouts COA rules and rents short-term.  To the extent his or her violations are detected, boards can likely be effective in enforcing rules with notice and fines.  If the measures are ignored, most states’ legislation for HOAs and COAs permit the association to obtain an injunction to end a unit owners’ violation.

If you have any questions or would like more information, please contact Justin Boron at [email protected].

[1] Marshal Granor, Emerging Trends and Hot Topics in Condominiums and Homeowners Association, Ch. 2 Short-Term Rentals (2019).

Avoiding Legal Malpractice Tip: Document, Document, Document

Posted on: May 24th, 2019

By: Greg Fayard

“Boy, I wish that was in writing!”

Having defended scores of attorneys over the years, more often than not, I wish my lawyer-client had either better documented his or her file, or memorialized a key conversation. It certainly helps defending legal malpractice claims when a pivotal issue is in writing as opposed to merely being oral.

While it is not possible to document every detail in a legal matter, having the mindset of documenting interactions with clients can reduce legal consequences should a client sue. A simple e-mail confirming a conversation, or a time entry stating the substance of a conversation can help in defending a legal malpractice claim. Letters work too, of course, but are more time-consuming. For a key strategy decision in a case, a quick “memo to file” in e-mail form works as well as something more formal. A lawyer’ mindset should be: something in writing is better than nothing in writing.

But writings are not only helpful in “defending” a claim. A contemporaneous writing on a key point or issue in a matter may be enough to dissuade the client from suing in the first place.

In sum: the lawyer who chooses to document a file, over not documenting, no matter how informal, will be in a better position in the event the client is later dissatisfied with the lawyer’s services.

If you have any questions or would like more information, please contact Greg Fayard at [email protected].

It is Time to Clean House – The Client Break-Up

Posted on: May 8th, 2019

By: Nancy Reimer

The end of tax season is an opportune time for certified public accounting firms to review their client roster to ensure existing clients are a good fit with the firm’s mission and culture. CPA’s are taught to exercise due diligence when accepting new clients. For example, a firm will  assess whether it has the required knowledge and skill to perform the work, whether the client’s expectations are reasonable, does its management team exhibit integrity and trustworthiness, had the client changed CPA’s often, is it negotiating down the fee, hesitant to pay a retainer, is the client delinquent in filing or does the client keep its records in poor condition? If satisfied with the answers, a firm will accept the client.

Once clients are in the door, however, should they stay? Is it difficult to get information timely from the client, does the client haggle over fees, fail to pay, act abusive towards staff, fake or inflate numbers to avoid tax payments or penalties, lack proper internal control or consistently fail to follow advice?

What about changes in the firm that may make servicing the client difficult? New technologies may make it difficult for certain clients to keep up, some clients may not be comfortable with online organizers and electronic engagement letters. Perhaps there is a staff-turnover losing technical expertise to perform certain services; or the cost of offering a service may outweigh the revenue generated by the service.

Firms should meet on an annual basis to review the direction of the practice and the client roster. It should determine how many clients it can comfortably serve, what services it performs best or at the highest rate of profit and the profile its ideal clients.  Problem or “toxic” clients should be terminated.

Once a firm has determined which clients it needs to terminate, it should devise a strategic plan for doing so. It is always a good practice to notify the firm’s insurer and liability carrier of its intent to terminate clients. Liability insurers may want to be informed of potential claims if a disgruntled client is terminated. Insurer’s loss prevention teams are experienced in terminating clients and may offer advice as to how to disengage a “problem” or “toxic” client.

Best practices dictate a disengagement letter sent by certified mail, return receipt requested is the best way to terminate a client. If, however, the client has formed a close personal relationship with a member of the firm then a face to face meeting may be warranted. Then a follow-up letter documenting the meeting should be sent.

Prior to notification, the firm should ensure all required documents are copied or scanned, all documents and authorizations are signed, all fees are paid (if possible) and all client documents are packaged and available for pick-up. Also, prepare the transfer authorization letter ahead of time for the client’s signature so the file can immediately be transferred to the successor CPA.

The disengagement letter need not identify any specific reason for the termination. Ideally, there are no impending, or tax filing, deadlines. If there are the firm should list those deadlines and what needs to be done to comply with the deadline. It is also a good idea to list all of the services the firm had performed for the client. If any projects are in progress, identify the stage of the project and what is necessary for completion.  The disengagement letter should identify the client’s responsibilities moving forward and issues to be addressed with the successor CPA. Finally, the firm should state it will assist in transferring the files to the successor CPA in accordance with the firm’s professional obligations.

If you have any questions or would like more information, please contact Nancy Reimer at [email protected].

California Attorneys Who Fail to Comply with the State Bar Re-Fingerprinting Rule Risk Monetary Penalties and License Suspension

Posted on: April 30th, 2019

By: Paige Pembrook

April 30, 2019 marks the initial deadline for California attorneys to comply with California Rules of Court, Rule 9.9.5—the rule that requires attorneys to re-submit fingerprints to the State Bar so the Bar can obtain records regarding attorney arrests and convictions.  Attorneys who fail to comply with the re-fingerprinting rule by April 30, 2019 will be subject to monetary penalties. Attorneys who fail to comply with the re-fingerprinting rule by the final deadline of December 1, 2019 will have their licenses suspended.

For the past 30 years the State Bar has not been complying with its statutory mandate to use attorney fingerprinting to obtain information about attorney arrests and convictions from the California Department of Justice (DOJ).  Although attorneys were fingerprinted at the time of admission to the State Bar, neither the Bar nor the DOJ retained those fingerprints for purposes of reporting arrests and convictions of admitted attorneys.

Rule 9.9.5 rectified this situation by requiring all active licensed attorneys to be re-fingerprinted by December 1, 2019. The State Bar and DOJ will retain the fingerprints to enable the Bar to receive state and federal criminal record information, including a summary of arrests, criminal charges, and sentencing.

Thus far, the re-fingerprinting rule has revealed that over 2,000 practicing attorneys have previously unreported criminal records, including 20 previously unreported felonies. The 20 previously unreported felonies have been sent to the State Bar’s Office of Chief Trial Counsel for review and potential disciplinary action.

Regardless of the re-fingerprinting rule, attorneys are required to report criminal convictions to the State Bar under the self-reporting mandate. The State Bar may discipline attorneys for failing to report a conviction to the Bar, for the conviction itself, or for both.  The best practice is to self-report any convictions as well as timely comply with the re-fingerprinting rules.

Even attorneys who have no criminal history should be sure to submit their fingerprints by the final December 1, 2019 deadline. Otherwise, such attorneys risk license suspension and exposure to liability for the unauthorized practice of law.

If you have any questions or would like more information, please contact Paige Pembrook at [email protected].

Engagement Letters Can Reduce The Risk of a Legal Malpractice Claim

Posted on: April 26th, 2019

By: Greg Fayard

Lawyers often ask: what can I do to reduce the risk of a legal malpractice lawsuit? They can do several things, but a clear, narrowly-tailored engagement letter can certainly help decrease the risk of a claim. Here are some tips on effective lawyer-client engagement letters.

• Treat the letter more as an opportunity to build rapport with the client, and less as a formal, intimidating contract. How the relationship begins often determines how it will end, thereby mitigating the risk of a dispute down the road.

• Specifically, identify who the client is to avoid confusion. For example, an engagement letter can state the client is a corporation while excluding officers, directors and shareholders. Stating who is not the client can be as important as stating who is the client.

• State clearly how long the representation will last. Will it end upon settlement, a plea, a conviction, judgment enforcement, but not an appeal? For transactional matters, will the representation end when funds have been transferred and received or after any monitoring provisions lapse? A well-defined length-of -representation clause can also aid the lawyer in a statute of limitations defense. Statutes of limitation begin to toll on termination of the lawyer-client relationship.

• A good engagement letter should also specify precisely the fees in a matter, how fees are calculated, how fees are different than costs, and who is responsible for costs. Contingency matters should also be precise in terms of the percentage going to the attorney, and if different percentages apply, when those percentages apply. Whether a personal injury attorney is entitled to additional funds upon successfully negotiating a medical lien should be succinctly laid out as well. However, the client should be given the opportunity to consult independent counsel with regard to extra attorney compensation for negotiating a medical lien.

• Most importantly, an engagement letter that specifies the scope of representation can help address any misunderstandings over whether the lawyer was to advise a client on all legal issues faced by the client, or only a specific matter. A general scope of representation clause in an engagement letter can lead to a client believing the lawyer represents the client on all of its legal issues, indefinitely, causing some clients to believe the lawyer has an ongoing duty of representation.

For any questions, please contact Greg Fayard at [email protected].