Budgeting for Legal Costs Worth Every Penny

Budgeting for Legal Costs

For most people, the thought of legal fees and litigation costs are enough to cause heightened anxiety and maybe a heart palpitation or two. Consider that same scenario when it comes to board members in charge of the well-being of an entire homeowner's association. That's serious pressure—and one of the reasons why boards and their attorneys try so hard to plan for any and all contingencies when it comes to the cost of protecting their HOA's legal interests.

A Professional in the Know

There are certain things we do to protect ourselves in life: we take vitamins so we don't catch that spring cold, or buy homeowner's insurance so we don't have to worry too much if that shaky-looking oak tree drops a limb on our roof. Having a trusted attorney on hand is one of those things that a homeowner's association should be doing to protect themselves and the residents who call their condo or co-op community home.

With an attorney on the team, a board should find themselves better able to avoid possibly contentious situations. The key is keeping that lawyer informed and up-to-date on potential issues or important pending decisions. Attorney Gary Rosenberg of the Law Offices of Gary Rosenberg in Florham Park suggests having the board's attorney on hand for each board meeting.

"They should have the attorney there at the association meetings so that he or she can stop things before they happen," he says. "Having the attorney there at the meeting usually will end up saving the association money in the long run" by cutting problems off at the pass.

A Fair Wage for a Fair Day's Work

When it comes to paying that attorney, in the state of New Jersey there are a handful of preferred methods. Some buildings and attorneys will decide that a straight quarterly billing schedule works best for all involved. In this instance, the board and the attorney will determine a set dollar amount for the year and divide that up into payments to be made every three months. This fee will cover any and all legal issues short of litigation and collections.

Day-to-day issues and questions would be covered, however—no matter how many persistent and panicked calls the board may make to their attorney. Rosenberg cites an example: "If a unit owner has a leak in their building and wants the association to fit it, then the board might call their attorney to ask if they have to cover it—or to find out whose responsibility it is to take care of it."

Lawsuits and collections both reside outside the realm of the flat fee agreement, and would be handled on an hourly basis. At the time that the attorney and board agreed on their original retainer contract, they likely would create a collection agreement, which would define a certain amount of money for special tasks such as issuing collection letters, handling a foreclosure or engaging in litigation.

Boards may decide on a looser agreement with an attorney, choosing to work on a strictly hourly basis for all matters. "Everything would be charged by the hour in that case," Rosenberg says. "Even if a phone call comes in and you have to do some bylaw research. That would be billed."

A third, slightly more niche arrangement also exists in relation to fledgling co-op or condo communities that have just been built and are being transferred from the care of the developers to the associations that will govern them.

"An HOA may need an attorney if there are problems with things, such as the common areas," Rosenberg says. "They may need someone to negotiate with the developer." In this case, the work will either be billed on an hourly basis or through a modified contingency fee agreement in which the board will issue a set amount of money and the attorney will bill against that amount until it runs out. After that, the lawyer may take a fee of one-quarter or one-third of whatever is collected from the developer.

Rosenberg believes that the retainer model provides a better financial option for most homeowner's associations. "We've had associations with a quarterly schedule decide to change to an hourly rate, and it usually ends up costing them more," he says.

Boards should decide how often they think they will need an attorney's counsel. "Usually if an association is self-managed, they'll have more questions," and require more time from the lawyer, Rosenberg says. If the association is professionally managed, they can turn to their property manager for a lot of issues and perhaps have less of a reliance on or need for an attorney, meaning the hourly setup could work well for that particular HOA.

Unexpected Circumstances

In the event of an actual lawsuit in which the HOA ends up on the losing side, there usually are safeguards in place to cover those costs. "Most associations have insurance that will protect them in the event of lawsuits," says attorney Ronald Perl of Hill Wallack Attorneys at Law in Princeton.

If those legal cost overruns have more to do with a protracted case rather than a judgment against the HOA, the board will turn to its residents to help cover the added expenses. "They'll put fee overruns in assessments," Perl says." If there's a costly case, that's where the money will come from. If a case comes up, the board will modify their budgets mid-year." If the board knows the case will be going on for some time, they will make long-term financial plans to cover those added costs.

If the case ends up in the association's favor, the money from the judgment will be returned to the unit owners, either in the form of reduced maintenance fees or a cash payout, Rosenberg says. He adds that a cash payout often makes more sense because it goes directly back to the people who paid the initial assessment—not to new residents who may benefit from the reduced maintenance fees, but who did not actually contribute financially to the cause.

When a case arises, it usually proves prudent for board members and their attorney to sit down and try to estimate the potential costs of the legal goings-on, and then budget accordingly. "Most associations will put aside a certain amount if they anticipate litigation," Rosenberg says. "They'll maybe put up $50,000 if they think it's going to be a million-dollar lawsuit. Usually that money would be raised through the assessment."

Legal Slush Funds?

Given that legal costs can go over budget and perhaps cause unwanted assessments, why don't associations squirrel away a little money on an annual basis to pay for that rainy, litigious day—like a capital reserve fund, which boards use to save for long-term capital improvements and other projects?

"In most HOAs, they would prefer not to put aside money that they don't know when and if they'll use," says Perl. "Many unit owners would legitimately resent being taxed for something that may never be used. Unlike capital reserve funds, where they are paying their fair share of a cost that affects everyone, this is just building up a fund of money. Other owners might also object to building up a large fund, because it's easy to invade that fund for other purposes."

Other legal professionals put it even more succinctly. According to Jerry Liebowitz, a partner with the law firm of Liebowitz & Jurecky LLC in Fort Lee, "Never in all my years have I seen an association put funds aside for that purpose. The only way I could see that developing is if the association became involved in a very, very large case and the attorneys were being paid as the case went along. But I've never seen an association have to do that. Generally, they will build their legal fees into the annual budget. If they knew they would be facing heavy litigation, they would plan for that. Basically, legal fees are a line item—and an association will plan for them just as they would for any other expense."

Tax issues also close the proverbial door on the concept of legal reserve funds. "Reserve items are usually tax-exempt," Rosenberg says. "These fees would not be tax-exempt."

Finally, Perl believes that putting money aside for legal battles might actually create an inadvertent impetus for boards to go to court more often, something that ultimately could be bad for the financial health and well-being of the association and its resident.

"There are some legal firms that encourage clients to litigate," Perl says. "Other lawyers like myself advise them not to litigate. I would suggest boards not build litigation war chests. People should not be encouraged to sue."

Instead, Perl says he feels that it's better for associations to investigate every avenue of reconciliation before taking matters to court, whether it's through attorney discussions or official mediation methods.

In the end, the best way to avoid litigation and all the unpleasant and costly legal side effects that come before and after it, is to hire a trusted attorney and keep him or her as a close member of the association's team. With a good legal mind on hand to keep decisions in line and decipher that sometimes-confusing fine print, homeowners and board members all will rest easier in the knowledge that someone is looking out for their legal interests. That sense of security no doubt will be worth every penny of those attorney fees.

Liz Lent is a freelance writer and a frequent contributor to The New Jersey Cooperator.

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