An indepth look at new state laws that affect HOAs

The 81st session of the Nevada Legislature came to a close on June 1, and there were several bills that were signed into law that directly impact Nevada’s common-interest communities, the boards of directors that govern them and the residents who live in them. There were bills that passed this session that need to be discussed as they probably will result in substantial changes to various aspects of Nevada’s common-interest communities.

Here is a brief summary of some of the more important aspects of the bills that are pertinent to Nevada’s common-interest communities and some discussion about what their impact might be. The information in this article is not meant to serve as legal advice on any particular matter but only serves as an informational discussion of the bills identified. Persons seeking legal advice regarding these bills or their application in any given situation should consult their attorney accordingly.

Senate Bill 72

This bill affects limited-purpose associations; health, safety and welfare violations; and attorney-client discussions in executive board sessions.

It was initially introduced by the Nevada Real Estate Division. The content of the bill came from the task force established by the director of Business and Industry, which was established pursuant to SB392 of the 80th session of the Nevada Legislature. The purpose of the task force is to study issues and areas of concern that affect Nevada’s common-interest communities.

SB72 addressed three main issues: (1) foreclosure of assessments liens in limited-purpose associations; (2) determining the amount of fines that can be impose for violations that pose an imminent threat to the health, safety or welfare of a community or its residents; and (3) establishing the right of an executive board of directors to meet in executive session to have communications with the association’s legal counsel that are protected under the attorney-client privilege.

First, under existing law, limited-purpose associations are associations that, because they are limited in their expressed purpose, are not required to comply with most of Chapter 116 of the Nevada Revised Statutes, which is the NRS chapter that governs primarily common-interest communities in Nevada.

Before SB72, limited-purpose associations were not subject to the nonjudicial foreclosure statutes that prescribe how an association can foreclose on its statutory assessment lien. The nonjudicial foreclosure statutes for the foreclosure of assessments liens are found at NRS 116.3116 through 116.31168. There was little clarity about the requirements and processes that a limited-purpose association would have to follow to foreclose on its lien for unpaid assessments. For those associations, they had no statutory lien for assessments and, instead, the recorded declaration of covenants, conditions and restrictions constituted the lien. With SB72, those nonjudicial foreclosure statutes in NRS 116.3116 through 116.31168 now apply to limited purpose associations.

Second, SB72 made changes to how fines for violations that pose an imminent threat to the health, safety or welfare of the community and its residents are determined, with other clarifying changes regarding the processes that need to be followed before fines can be imposed. Under NRS 116.31031, if a unit owner committed a violation that posed an imminent threat of causing a substantial adverse effect on the health, safety or welfare of the other units owners or residents (called “health, safety, welfare violations”), the association’s executive board of directors could impose a fine against that unit owner in an amount that the board of directors deemed to be “commensurate with the severity of the violation” and, as such, the fine could potentially exceed the $100 limit on fines for violations that do not pose such a threat to the health, safety or welfare of the unit owners or other residents.

However, the statute provided little to no guidance as to what constitutes such a health, safety or welfare violation and no parameters on the maximum amount of fines that could be impose for such violations. These determinations were left solely to the judgment and discretion of the association’s board of directors. That being said, any determinations that were unreasonable and not otherwise supported by the particular facts and circumstances of a situation would not be upheld if challenged legally.

Nevertheless, SB72 delegates some of that judgment and discretion to the Commission for Common-Interest Communities and Condominium Hotels by mandating that the commission adopt regulations that establish criteria to be used in determining what constitutes a health, safety or welfare violation and any limitations on the amounts of fines that can be imposed. The pertinent language in SB72 in this regard reads as follows:

The commission shall adopt regulations establishing the criteria used in determining whether a violation poses an imminent threat of causing a substantial adverse effect on the health, safety or welfare of the units’ owners or residents of the common-interest community, the severity of such violations and limitations of the amounts of the fines.

Through the commission’s regulatory process, it will establish the criteria for determining health, safety and welfare violations and the amounts of the fines that can be imposed for those violations. The regulatory process allows input from common-interest community industry participants, which should help guide the commission in promulgating fair and equitable criteria to be used by boards of directors when exercising that judgment and discretion.

Also, SB72 makes other clarifying changes to the processes for imposing fines. It clarifies that, for non-health, safety and welfare violations, no more than $100 for each violation or a total of $1,000 can be imposed per hearing to which the owner, tenant or invitee has been called to. The change to intended to clear up existing ambiguity where it has been wrongfully argued that no more than $1,000 could ever be imposed for any non-health, safety or welfare violation. This per-hearing limitation does not preclude the application of subsection 7 of NRS 116.31031, which authorizes a fine in an amount up to $100 to be imposed every seven days for so long as the underlying violation remains uncured. Total fine amounts for continuing violations may appropriately exceed $1,000.

Also, the limitations imposed on boards of directors when imposing fines against a unit owner for violations committed by the unit owner’s tenants or the unit owner’s invitees have been relaxed. SB72 clarifies that tenants can be fined for violations. Also, under NRS 116.31031(2), an owner could not be fined for violations committed by his or her tenant or invitee unless one of the following three factors could be shown: (1) The unit owner participated in or authorized the violation. (2) The unit owner had prior notice of the violation. (3) The unit owner had an opportunity to stop the violation and failed to do so. Under SB72, none of the three factors applies where the underlying violation is a health, safety or welfare violation. In other words, where a unit owner’s tenant or invitee commits a violation that constitutes a health, safety or welfare violation, the association’s board of directors can call that unit owner to a hearing and impose a fine without having to first establish any of those three factors as noted above.

Third, SB72 clarifies that boards of directors may meet in executive session with the association’s legal counsel to hold communications that are protected under the attorney-client privilege. Existing law under NRS 116.31085(3) exclusively lists those matters that a board of directors may discuss in executive session of the board.

One of those matters includes consultation with the association’s attorney “on matters relating to proposed or pending litigation” if the contents of that discussion would otherwise be privileged under NRS 49.035 through 49.115. SB72 eliminates the qualification that such discussions be limited to “proposed or pending litigation” and now permits discussion in executive session of the board of directors with the association’s attorney on any matter where such discussion would be protected under the attorney-client privilege statutes of NRS 49.035 through 49.115.

Gregory P. Kerr and Michael T. Schulman are attorneys at Wolf, Rifkin, Shapiro, Schulman &Rabkin in Las Vegas.

Barbara Holland is a certified property manager and holds the supervisory community manager certificate with the state of Nevada. She is an author and educator on real estate management. Questions may be sent to holland744o@gmail.com.