 Aloha and welcome to our regular weekly show, Kondo Insider, about 30 to 40 percent of our population live in an association in Hawaii, and we try to educate both board members and homeowners on what it's like to live in a condo, what the issues are, and what their responsibilities may be. We've decided to do something a little bit different for the next four weeks. Last year, the Real Estate Commission, we have Continuing Education for Realtors, and the course B for last year's Mandatory Education for Realtors was Condominium Law 514B, the three hour course. So I've decided to bring in a real expert on this, and I'm going to ask him in a minute why he's an expert, but Scott Shirley, who's been with us before, and talk about over the next four weeks, we're going to divide this real estate mandatory class into four parts and deal very specifically with what the law is for 514B and what your requirements are. So Scott, again, welcome to the show. Well, thank you for having me again. Obviously, I've done a good job. You had me back. I couldn't find anybody else. Yeah, that figured as much. Not true. But you just don't get to go teach this course on Continuing Education. What else about the course itself in general terms and why you're qualified to talk about it? Well, every two years, a real estate licensee has to take 20 hours of Continuing Education in order to renew their license. And part of that 20 hours is two mandatory core courses, as they call them. And the last licensing period of 1516, the Real Estate Commission decided that what they referred to as the hot topic for those two classes was going to be on condominiums. So in 2015, the topic was how condos are created. And then more exciting to me was Core B, which was last year, which was the governance, how condo associations are governed. And of course, in order to teach this course, you have to attend a session. You and I both attended a training session on this. And I've actually been doing real estate Continuing Education for over 20 years, including writing my own courses. And you and I have actually team taught this particular course a couple of times last year. And I think it was an excellent course to have realtors understand what goes on in a condominium. Yeah, actually, I was impressed with it. And meanwhile, we've lobbied the Real Estate Commission. And this course is actually about to be online for anybody to take it online. Any, you don't have to be a realtor, anybody can go and kind of get the very specific because my experience is 514b is often misunderstood and it gets confused with the old 514a, which we'll come back to. But not to give you a surprise question. But so when is the condominium created? How is it created? Does it come from the heavens in a lightning bolt or how is the condominium? Well, it's not a quick and easy process. And under 514b, it has the whole section on how to create a condominium. And of course, it also goes through a review by the condominium consultant, which is hired by the state to review all the documents that are going to create the condominium on paper. And that includes the bylaws, declarations and things like that. And the Real Estate Commission in itself doesn't approve the project to be built. It approves the documents that create the condominium, but it's still up to the individual counties to approve whether or not that condo is going to be built in the way that it's been created. You know, that's very true. But on a very technical basis, a condominium is created, number one, when they submit the fee interest or the lease interest into the condominium property regime. And number two, they file their declaration. They can't sell it. They may not have any rights, but it's really born and becomes a legal entity the moment the fee or the leasehold interest is submitted to the condominium property regime. And when the declaration is recorded with the Bureau of Advances, and that's where it suddenly becomes born an entity. And you and I have been around long enough, maybe too long, where we remember it wasn't called a condominium property regime back under 514A. It was called a horizontal property regime, but condos can be more than horizontal. So when they recodified the law into 514B, they changed it to condominium property regime. Yeah, I'm glad you brought that up. I was talking to an architect that day, he was giving a class and he says, tell me what a horizontal property regime is. I said it's an instinct entity. I like that. He looked at me and said, what do you mean? I said, well, he changed it to mean condominium property regime. So even though you'll find HPR horizontal property regime all over the place, it's the identical thing as a condominium property regime, CPR. But the current language everywhere is a CPR, not an HPR, and a lot of people don't understand that. Well, there was also one other tiny little change when they recodified the law and that was we still commonly refer to it as an AOAO, Association of Apartment Owners. But 514B changed it to Association of Unit Owners, AOUO, because a condominium can be more than an apartment. It could be air. You have what they call airspace condominiums. It could be a storage facility. It could be commercial. And I actually heard one of my students telling me they almost, but didn't quite finish it, almost condominiumized boat slips. And I thought to myself, why the hell didn't I think of that? Well, one of the interesting things about that I just want to briefly mention before we go into part one of 514B is that we all know there's 514A, the original act, followed by 514B. Then section five, governance in 514B automatically applies to 514A whether you opted in the 514B or not. What a lot of people don't know is it creates confusion in the marketplace. I'm confused enough already. But that being said, there are two bills before the legislature today to sunset or retire 514A that it will become repealed and no longer in existence. And so the goal is to have 514B repealed effective January 1, 2019. And people say why January 1, 2019? Because believe it or not, there's some very old public reports out there where the developer hasn't quite finished his condominium. They used all the 514A language even though it's been overridden by 514B in certain areas. And so they're giving them a chance at a low cost to get off the pot and get the condominium developed or not. But at the end of the day, there's still be no 514A. And part of the reason behind that as well is too, is it's usually small developments or mom and pop developments as they call it. So they're giving them an opportunity to get that all cleaned up before 514A fades away. And personally, I think it's been a long time coming. Oh, I think so. And there's a lot of reasons why it didn't go that way. But going back to the purpose of this next four weeks to educate so all of our board members and our homeowners truly understand every comma semicolon in 514B, let's just briefly let me just summarize the course and what we're going to do for the next four weeks. When you look at the objective of the course for the realtors, it was to accomplish four things. Number one, governance structure. Governance structure. Number two, governance process. Number three, fiscal matters, financial matters. And four, review certain issues that are commonly misunderstood. So today's show, part one, we're going to talk about government structure. And then in future shows, we'll, in the next two, three and four, we'll discuss the other issues that are in this course that realtors took. So anyway, governance structure. What is the basic concept or structure for governance of condominiums? Well, it's called self-governance in that I liken it to your typical county in your county or even the state, even at the state level, you elect a governor, you elect a legislature and their job is to maintain the state, fix the roads, fill the potholes, whatever the case may be. And that's the idea under self-governance is that the owners of the association elect a board and their job is to maintain the property, fix the parking lot, maintain the exterior of the building and things like that. So the idea of self-governance is not any different than how the county runs its job or how the state runs its job. It's the owners through the board of directors who maintain and run their property. Well, I guess the best way to describe it was it's not practical to think that all the decisions at the association will be made by a majority vote of the owners. It's not practical because we have owners who live here, owners who live in the mainland, people who are on vacation, on and on and on. So it's just not practical. So like you use as an example, associations are governed by elected board who's elected by the homeowners under certain rules and conditions which we'll get to in part two of the 514B next week. But the concept behind it is they have the greatest stake in this. We're electing people who have the greatest stake. The owners are electing them and as in a republic, they're going to set the rules. It's not quote democratic because that would mean everybody voted on everything. So the basic principle is self-governance. And what are, when you form this condiment, I mean you have this self-governance, briefly name the three typical documents that exist in economy. I know there's exceptions incorporated all these different things. Just keep this simple and deal with the basic three documents that are the cornerstone to condominium governance. They're the cornerstone and it's a document that every owner should be familiar with, especially at the time that they were purchasing it. And that would be your bylaws, your declarations and your house rules. And of course on top of that you have 514B state law that applies in certain areas. But your bylaws are your true governing document, your declaration tells you what you own basically. And the house rules are telling you basically what you can and cannot do in your unit or with your unit and things like that. Important things to know when you're buying into a condominium. Yes, and I think we have to admit people should understand coming in the door when they buy into a condominium, they're giving up certain rights. Rights you may feel that you're entitled to by being an American or a Hawaiian citizen or whatever it might be. But when you move into a condominium you're basically agreeing to agree to these governing documents. It will come back to those in a second. And you're going to abide by them and you're going to accept the governance of your board. Which may mean you have to give up certain rights. For example you might like to swim in the pool at 11pm a night but there are pool rules. The pool closes at 10pm a night. So you are going to be forced to give up certain things or change your lifestyle. You might not be what you originally were used to in a house. It's, comments have been made that you give up rights in a condominium that you normally would not give up if you were living say in a typical subdivision in Hawaii, Kai or Mililani. But that's not necessarily true either. Because when you buy into one of those subdivisions they have restrictive codes and covenants that say you can't paint your house purple and green and things like that. So even if you're not in a condo and you're in a typical subdivision there are rules there too that you have to abide by when you live there. But briefly we talked about the three basic documents. I'm going to summarize them. Correct me if I'm wrong. Although the last time I was wrong was 1971. But, well forget that. A little bit of history for you. But the reality of it is there's a declaration. That's the highest document. Like the Constitution. It defines what your obligations are to the project. What you pay for, what you pay maintenance fees for, which is a common expense of the association. What you own and have to fix what the association owns has a fix. It may define what we call limited common elements where you get to use something, personally it's assigned to your apartment but it's still owned as a common element by the association. That declaration defines governance by saying we will have bylaws and the governance sets the size of the board when they're elected. All sorts of rules of governance about voting and proxies or a whole bunch of other things. And finally because you live in a condominium you will set up house rules with regard to parking, pool hours, quiet time to make the place safe and comfortable, quiet enjoyment for the people who live there. Is that a fair way to define it? Absolutely, fair way and I also liken the house rules to, I call them common sense rules because of things like quiet times and stuff like that. Although I'm beginning to think common sense has become a superpower now in these days but they're common sense rules. You don't have parties or loud music after 10 o'clock. You're no nude swimming after 11. We're going to take a quick break but I just want to again say that the declaration is the highest. So the bylaws is different than the declaration. The declaration will take precedent and the bylaws will take precedent over the house rules. Exactly. That's the order of priority, kind of like federal law, state law, that kind of thing. But we're going to take a short break on condo and cider. We'll be back in one minute with more on part one of 514B. You're watching Think Tech Hawaii Citizen Journalism from Hawaii. Finding the intersection of our sense of place and our place in the world right here at home. Great content for Hawaii from Think Tech. Hello, this is Martin Despang. I want to get you excited about my new show which is called Humane Architecture for Hawaii and Beyond and it's going to be on Think Tech Hawaii from downtown Honolulu on Tuesday afternoons 5 p.m. And we're going to talk about to make architecture more inclusive on the islands which is one of the definitions of humane, which is being tolerant of many people of nature, of many other influences. So we're going to have some great guests like today's guest for example my collaborator David Rockwood who is the author of the awesome manifestation of humane architecture in the background. So see you on Tuesdays 5 p.m. I look forward to. Welcome back to condo and cider. We're on the very early discussions of Hawaii condominium law 514b. We invited Scott Shirley who's my resident expert on this matter since he has been qualified to teach this by the real estate commission. And again our goal is to go through 514b over the next four weeks and in sufficient detail that hopefully all of you understand it better. So we talked about the declaration of bylaws and house rules and self-governance and the board makes these decisions and sets the rules etc. Are these enforceable? I mean can courts I mean how much power is there in these rules? Are they going to snub your nose at you and say we don't have to follow it? These rules are very important and they're all binding upon the homeowner. As soon as you close escrow and own that unit you have now become a member of that association and as a member of that association you are bound to all the documents like the declarations bylaws and house rules that govern the use and control of the property itself. So are these fines enforceable or can you get an injunctive relief from a court if someone said I'm not going to do it which I've seen many times by the way? It depends on the rule you know some boards can get a little heavy-handed or carried away in some of their house rules where it might be determined though that was just too much but generally speaking the bylaws and the declarations that's the written and stone rules for the association and very rarely do they change although they can be amended but that takes a vote on the association. Owners and board members ought to be aware that that these are supported by the courts. The courts will enforce the fines and enforce injunctive reliefs to prevent you from doing something which under the statute those costs can be charged back if it's the owner refusing to do it back to the owner all those legal fees can be charged back to them and the courts are actually enforcing those so it's not something you should just snub your nose that and ignore and figure you're just an owner too on the board I'm not going to do it that could create problems for you. Yeah and you know you would want as living in a condominium and you know it's been my joke for many years everyone's entitled to buy a condominium but not everybody was meant to live that close to other people so sometimes that fit of living in a condominium sometimes doesn't always work but that doesn't mean you're not bound by these because you are a member of that association. And we also talked to the declaration to fines like the common elements and the limited common elements which the association is responsible for which you pay for indirectly through maintenance fee and then you have your apartment that you're responsible for so what happens because I own my apartment it's three o'clock in the morning and the pipe breaks in my apartment and I'm saying I'm not going to let you in it's middle of the night I don't want you coming in my apartment. Can they force themselves in the resident manager or or the resident manager with the plumber to stop it and the answer is yes the board has a duty to protect not only the limited common elements or the common elements but also protect other units that might get damaged from what's happening in your unit and you and I both know after all these years usually when you're asleep is not when the pipe breaks it's usually when you leave for vacation or you left for work and it's back in the days when water beds were still popular they never sprung a leak while you were sleeping in them they only sprung a leak when you left for work that day. Well just to give you a quick example can we have a really heavy schedule today but I had a property manager who there was a water leak in apartment the second floor causing water to go into the first one called gravity and it was a grave situation and it was gravity was causing the problem and what happened was the property manager our property manager went to the door and the front door was unlocked and open but the screen door was closed knocked on the door yelled a few times can I get your attention we need some help because this unit was leaking and so she stepped inside the front door by about four feet and the owner came out screaming I hear your trespassing and actually filed a lawsuit against her saying she was trespassing and the court not only threw out the lawsuit that made him pay thousands of dollars in legal fees because the board had to write to go in and stop this problem and and this person lacked what I call common sense but there are just some people who like you said like the twist people's tail so owners need to understand and board needs to understand they have an obligation to protect the property and safety of everybody and they have a right to enter private property the apartment in emergency I think that's another good point that you made is not only to protect the property the safety of the other owners there you don't know what that lot water leaks going to cause it could short out things I was just reading an article the other day where the power went out in a particular town in the middle of the night and somebody was on an automatic oxygen machine fortunately they had a backup but can you see if something like that happened in the condominium and you couldn't get in there to stop the leak and it shorted out of the system where somebody is on oxygen or something else and the other thing the law does in the before we get into the actual government process it imposes a fiduciary duty obligation on the board but in the same time it doesn't define fiduciary duty so tell me in simple words what is the fiduciary duty of a board well the fiduciary duty of a board and it follows also in line with the national association of realtors with realtors and their obligation to their clients and customers is your duty of obedience diligence ordinary care loyalty good faith and what they call the business judgment rule I've always pointed out like on the business judgment rule I the board can make a decision today that seems like the right thing to do and then maybe two years later it turns out that wasn't the right decision but the board is not going to be held liable because they made a business decision based on the information they had at that time well and so the real issue is when you look at a board their fiduciary responsibility is to the association the entity which makes it indirectly to members but not to the end of members directly yeah so it's really an obligation to make sure that it's the highest standard of care in the law today in the fiduciary duty it is the highest standard of care so they have an obligation to first of all like a managing agent we're an agent for the board so we owe them obedience so they're not breaking the law and they say even though we think that's not the best business judgment decision but it's not illegal we can guide them but they still have the right once they make a legal decision managing agents have that responsibility obedience to support them what they're doing exactly and then diligence or ordinary care means that when you have an issue before you you're supposed to go carefully study it and look at it and because you're not an expert in plumbing or architecture or law rely on professionals that's the business judgment rule that you can protect yourself from personal liability if in fact you have relied on experts or people who are licensed to and you're following the decisions they recommend you know the answers they recommend so then like you said you owe them loyalty and you owe them good faith dealings and and that's what a fiduciary duty is and in our next show we're going to talk about conflicts of interest a little bit but not today because we have a tight schedule on this to do this whole 514b and I said four weeks it might take us four years to do this it's a complex thing so anyway you know so fiduciary owes them obedience loyalty diligence and good faith in their decision making and so who can serve on the board well the real question to that is why would you serve on the board no not really but the person who can serve on the board is an owner of record that could even be somebody who owns under an agreement of sale a trustee for a trust or a corporation those are good examples of an owner typically it's usually you know husband and wife are the owner and then you have occasionally where both the husband and the wife want to run for the board can they well they can't have they own more than one unit well they can but only one can be elected if they only own one unit you can't have more than one representative of that unit that's right you're only gonna have one representative for one unit but if you had someone who owned two apartments then the husband and wife could serve one under apartment one and one in the apartment exactly with respect to it but how about corporations sometimes this unit's owned by a corporation who can serve from the corporation whoever the corporation has designated as their representative on for that particular unit yeah two quick stories on that number one but what a legislature today is a proposed law because we have sometimes a unit owned by a church and or a corporation and it has that vague language or their designated representative doesn't say an officer of the corporation it could be whoever they want to designate so sometimes what happens is that entity appoints a tenant and that upsets the board because they really don't have anything at stake there with respect to the common elements they just want to keep it cheap and they're rent low and so the current current bill prohibits tenants if it gets adopted from serving on the board which will prevent corporations and or churches or other entities from appointing someone that doesn't have some direct relationship to the entity that owns it either by an officer or or somewhere along that line but I was at a annual meeting on Monday last week and what we had was a trustee of a trust we had it in writing they were a trustee of a trust and then during the year they were not reappointed to the trust and so the attorney the association said that creates a vacancy now he's not on the the trust he can't serve which is the correct ruling and and so what what happened was an owner suggested that the board passed a resolution to opt out of the state law I know and I suggested she opt out of the state all together not pay taxes but the reality of it is that you can't do things like that well like you and I waving the speed limit that's you and I have agreed that we don't have to drive 55 but that's not going to hold up with the police officer that pulls us over anyway we're we actually went out of time I can't believe it and we're almost done part one so we'll have one little question beginning next week but again this is part of a four part series to go through 514 be in detail you can always call in our hotline we'll give you the number next time but thank you for listening to condo insider and hope to see you next week hi this is Jane Sugimura I'm the co-host for condo insider and we're on think tech Hawaii every Thursday at three o'clock and we're here to talk about condominium living and issues that affect condominium residents and owners and I hope you'll join us every week on Thursday aloha