Frequently, in an effort to contain the cost of legal representation, HOA directors will avoid consulting experienced HOA lawyers and make important decisions that are based upon the input of an apparent knowledgeable or assertive, self-confident board member, or the associations retained property manager. While volunteer directors and property managers who are not licensed to practice law are invaluable to the operations of a homeowners association, they cannot be relied upon for the expertise that is provided by an experienced, licensed attorney. In fact, state laws prohibit the “practice of law” by unlicensed people. The question thus becomes, “What constitutes the practice of law” ?
Every state has statutes and court case decisions that cover the topic and typically provide standards for defining or recognizing what constitutes the practice of law. For example, in California, the “practice of law” has been broadly defined as dispensing legal advice or service, even if not related to a matter pending before a court. Such state laws are designed to protect citizens of the state from the damages and consequences that can result from the improper conduct of people who engage in activities that constitute the practice of law without a license.
Some court cases around the country have provided some guidance on the issue of what conduct within the typical operations of a homeowners association by people who are not licensed as an attorney constitutes the unlicensed practice of law. A Florida Supreme Court decision articulated that the following actions by association managers are examples of the unlicensed practice of law:
- Determining unit owners’ voting rights;
- Drafting proxies;
- Determining use restrictions, including restrictions on leasing of units;
- Determining whether membership in a master or recreational facilities association is mandatory and, if so, what fees are be charged per unit type;
- Preparing and filing liens against owners for delinquent assessments;
- Advising boards regarding the timing, method and type of notice required for association corporate action;
- Advising boards what vote is required to take association action;
- Advising boards how to or whether they can reject a sale or exercise a right of first refusal; and
- Advising boards how the statutes pertain to them or what actions would violate the law or the governing documents.
Based on the above guidelines that were established by the Florida Supreme Court, it is safe to say that there are a lot of HOA board members and property managers around the country who are regularly performing acts that if scrutinized, would be found to be the unlawful practice of law. In the context of HOA operations, the activities that boards and property managers should be careful about engaging in without guidance from an attorney include advising HOA directors about rights, duties and liabilities, and preparing documents that affect rights, duties, and liabilities. These are very broad categories and can involve many different activities that are regularly engaged in by HOA directors and property managers.
It is also important to note that, because the unlicensed practice of law is considered a crime under state laws, the exclusions in insurance policies will apply and an insurance carrier who might have otherwise provided coverage for damages caused by negligent acts will not provide coverage for those acts. Typical insurance policies contain provisions that relieve the insurance company from providing coverage or the defense of claims that are based on acts or damage arising out of an illegal act that has been committed by or at the direction of the insured. Additionally, the indemnity provisions that are often included in a property manager’s contract with an HOA will not protect the manager from the consequences of practicing law without a license. HOA board members should also be aware that the protections from personal liability for their actions as a director under the “business judgment rule” will likely not apply to situations where claims are based on unlawful activities that constituted the practice of law.
In conclusion, it is important to understand the risks that are associated with providing and relying on the free legal advice that is often provided to HOAs by individual board members and/or property managers. The expertise of individual board members and association property managers is invaluable, but should not be a substitute for obtaining proper advice and guidance from an experienced attorney on matters that constitute the practice of law. Because many associations avoid consulting legal counsel in an effort to avoid costs that have not been budgeted for, it would be prudent for associations to recognize the need for legal consultation during the course of a year and incorporate an appropriate amount into their annual budget to cover such expenses.