MEMORANDUM (note that this online version does not contain footnotes)

DATE: October 14, 2005

TO: Members of the Ocean Pines Association Board of Directors.

FROM: Joe Schanno

RE: Mandatory Fees Charged by the Ocean Pines Association

 I have had a chance to review your proposed resolution to be presented before the Ocean Pines Association (OPA) Board of Directors by which you propose that the board have placed in escrow certain mandatory fees charged by the association for services in connection with applications before the Environmental Control Committee (ECC). The purpose of the escrow is to allow time for the board to seek a legal opinion and then decide if collection of the fees is in fact a lawful and proper exercise of the association.  It is also my understanding that the board will consider a resolution to make the $250.00 Resale Certificate Fee a mandatory fee.  Based upon my research of the relevant enabling statutes and the language set forth in the Declarations of Restrictions for several of the sections that comprise Ocean Pines, I believe that your proposal is a sound proposal that should be enacted by the board and that the proposal to make the resale certificate fee mandatory should be rejected.

DISCLAIMER

 I prepared this memorandum on my own behalf as a person owning property in Section 11 of Ocean Pines. As a former board member I have continued to follow the activities of the association and board  As of the date set forth above I do not have a client that is interested in my lobbying a specific outcome of the matter before the board of directors or in seeking redress from the OPA for any of the fees that have been collected in the past or could be collected in the future.

 To satisfy my own curiosity, I undertook research on the subject.   It was a significant study but not at all exhaustive.  The questions that beg for answers have never been directly addressed by the Maryland Court of Appeals. It is anyone’s guess upon the filing of full briefs and argument how that tribunal might resolve the issue.  This memorandum should not be construed as the rendering of a final legal opinion of counsel but rather a general discussion that should be further reviewed by counsel.

BACKGROUND

 Recently in some circles in the Pines there has been significant discussion over the legal  validity of the fees charged for certain services of the ECC and the OPA staff that provides support services to the ECC and also under takes inspections of property within the community to ascertain compliance with the various covenants and restrictions.  These fees include review and inspection fees, completion agreement deposits, variance requests, tree removal requests, home occupation fees, and fees for resale certificates.  The payment of each of these fees is considered mandatory by the ECC and the OPA before the ECC or the OPA will consider the request of the property owner for the issuance of a permit or other service by the committee or association .

DISCUSSION

 The purpose of my research was determine the sources of authority upon which the OPA as a homeowners association under the Maryland Homeowners Association Act, Md Anno. Code, Real Property Article §§ 11B-101 et al, could assess fees and charges against property owners.  The Ocean Pines regime has several documents that govern its operation.  First are applicable Maryland statutes, including the Homeowners Association Act.  Second, are the Declarations, Third is the corporate charter. Fourth are the by-laws and finally, the resolutions and acts of the board of directors .  In the event of a conflict the statutes and declarations prevail over any of the inferior documents, with the terms of the statutes prevailing over the declarations.

 §11B-101 provides the definitions of key words used in the Homeowners Association Act. Part of the section is as follows:

“(d)(1) "Declaration" means an instrument, however denominated, recorded among the land records of the county in which the property of the declarant is located, that creates the authority for a homeowners association to impose on lots, or on the owners or occupants of lots, or on another homeowners association, condominium, or cooperative housing corporation any mandatory fee in connection with the provision of services or otherwise for the benefit of some or all of the lots, the owners or occupants of lots, or the common areas.

(2) "Declaration" includes any amendment or supplement to the instruments described in paragraph (1) of this subsection.” (Underlining mine).

 It is readily apparent that any authority for mandatory fees must be found in the four corners of the relevant declaration otherwise the declarations and the Act are meaningless.   The Act does not disclose or make possible the exercise of authority from another source.  The Act can not be disregarded by agreement.

§11B-103 VARIATION BY AGREEMENT PROHIBITED “Except as expressly provided in this title, the provisions of this title may not be varied by agreement, and rights conferred by this title may not be waived. A declarant or vendor may not act under a power of attorney or use any other device to evade the requirements, limitations, or prohibitions of this title.”

 Construed together the referenced sections make it apparent that the terms of the Declarations could not be changed by subsequent agreements such as turn over agreements, board resolutions  and the like that did not conform to the requirements for amending the declarations.  A second point supporting the argument suggesting that turn over agreements and the like contain language that justifies the subject fees must fail because they have never be lodged in the county land records or have been part of the documents the association has identified as governing documents to disclose to potential property owners.  

 We should view the Maryland Homeowners Association Act as consumer protection legislation designed to protect property owners from the acts of homeowners associations that go beyond those authorized in the Declarations.  To this end they should be construed liberally in favor of the property owners so that the property owners can rely on the information disclosed in the public documents that on file in the land records and which a seller must make the buyer aware of at the time of a sale. 

 I do not question that the corporate authority of the OPA is all that may be vested by the laws of the State of Maryland. There is no authority that allows the OPA to rely solely on general corporate law, disregarding the  HOA act.  The different parts of the laws need to read together in such a way as to allow both to be followed. To achieve this, general corporate law may be followed to the extent it does not conflict the specific terms of the HOA.  The act limits collection of mandatory fees to those authorized in declarations. If this limit on corporate authority of the corporation is proved to be too constrained to allow for the operation of the association there exists means to amend the declarations with the consent of the property owners.

 The Declaration of Restrictions for Section 11 ,  have very few grants of authority for the OPA to charge members for specific services provided by the association.  They are:

 1) Annual assessments, including bulkhead assessments;

 2)  $30.00 to accompany the submission of applications to the EEC to defray costs of   the committee;

 3  Interest and Attorney Fees in collection actions for late assessments;

 4) A reasonable fee for issuance of a letter stating that a member's assessments are   paid.

  In addition to the already mentioned ECC fees that are the subject of this memorandum there is no clearly defined authority for the OPA  to charge mandatory fees for amenities,  attorney fees in actions to enforce Declaration of Restriction or ARC Guideline violations, or for that matter, tree removal permit fees or dog catcher fees.

 There now exists a series of appellate decisions from across the country,  including one Maryland case, that hold or suggest that fees and charges not authorized in Declaration of Restrictions are void and uncollectible. The Maryland action, Campbell v. Lake Hallowell Homeowners Association, 152 Md.App. 139, 831 A2d. 465 (2003) case concerns the award of attorney fees to a homeowners association in a restriction enforcement action. The trial court at the conclusion of an action brought by a homeowners association in which the association was successful in securing injunctive relief against a property owner to correct a violation of restrictions awarded the association the sum of $12,000.00 for attorney fees.  The Court of Special Appeals reversed the trial court. The Declaration did not contain a clause allowing for the recovery of attorney fees.  The board of directors attempted to add the burden of attorney fees on property owners through a simple board resolution that was not sufficient to amend the Declarations. Furthermore the resolution was not filed in the land records as required by statute.  The appellate court held that basis for an award of attorney fees had to be found in a statute or in a contract between the parties.  There was no statutory authority and the resolution of the board of directors was not sufficient to change the declaration, which is the contract between the parties.

 Attorney fee awards in Maryland and most states have a special niche, normally requiring either authority under a statute or authority in a contract between the parties.  The statutory definition of a declaration suggests that rules for any fees charged by a homeowners association are comparable in effect to the rules for attorney fee awards.  To allow a board of directors to establish mandatory fees outside those specifically permitted in the declarations would clearly negate any protections afforded by the HOA act.

 The Declaration of Restrictions should be viewed as a contract between the OPA and the property owners.  By buying a lot you have agreed to live by the terms the Declarations for the mutual benefit of all the property owners, but so has the OPA and the other property owners agreed to live within the terms set forth in the Declarations. The purpose of the Declarations is to provide the property owner the terms of the agreement.  The Maryland statute requires that in this type of contract authority, mandatory fees must be stated.  It is common and contract sense that property owners should be able to ascertain from the document granting fee making authority to the homeowners association just what those fees could be or for what activity the property owner could expect a fee.

 Consider it like this: You contract with a hotel to rent a room with a bed for a night for $100.00 and pay the $100.00.  Beds normally come pillows. Halfway through the night the hotel decides that you must pay and additional $10.00 for the pillow.   Or, the contract does say that the pillow is going to cost an extra ten dollars.After you have signed the contract and paid the $100.00 you order your pillow and the hotel tells you that it will cost an additional mandatory  $100.00 for  delivery of the pillow by the maid. In both cases you would be up set because the hotel was demanding more than you understood that you had to pay under the terms of the contract..  Is the OPA now demanding more then what a property owner should be liable for under the declarations?

CONCLUSION

 To continue with the fees I believe is contrary to the Declaration of Restrictions.  It makes no difference if terminating the fees causes a problem with the budget.  Following the dictates of the law and declarations after such a long period is going to make balancing the budget a tough road to contemplate. Increasing assessments or cutting services is no fun.  However, if fees are prohibited, they are prohibited.  For years and years, past boards of directors, general managers and counsel have allowed this deviation from the Declarations of Restrictions to exist.  In my time on the board the question of fee setting authority was simply not raised. At all times  board members and general managers believed that they were acting in the best interest of the association in setting the fees.  Counsel was not asked the question and was not required to produce  an answer.  The fees paid not only the costs of operating the ECC and support staff but also added general revenue without the need to raise assessments.  Unless they were building a house or an addition to one, property owners did not concern themselves with the fees.  Now this long standing policy has been questioned. From whatever view you look at the policy, authority for same is proving deficient.

Please feel free to call me if you have a question

Joseph Schanno