What’s in a name: Supplemental v. Special Assessments

What’s in a name: Supplemental v. Special Assessments

We are all familiar with the famous line from Romeo and Juliet, when Juliet laments, “What’s in a name?” Considering the outcome for the young lovers, words carry a plethora of meaning, and our choice of words, or lack thereof, can lead to a lot of litigation.

To lenders, everything is an improvement and, thus, a “special” assessment, and therefore, something they are not obligated to pay as part of the priority lien.

Unfortunately for condominiums making assessments in Massachusetts, Chapter 183A does not define the terms “supplemental” and “special.” Neither is there any definitive case law on the matter.

California Court of Appeal Decision Sheds Light on the Importance of Describing Assessments Properly

Though it is an unpublished out-of-state case, a recent decision by the Court of Appeal, Fourth District, Division 1, California, demonstrates what can happen when a board uses incorrect terminology, and it is left to a court to determine the meaning. In Taggart v. North Coast Village Home Owners Association, 2023 WL 8228855 (Nov. 28 2023), the issue was whether assessments made by the homeowners’ association (HOA) were “regular” assessments or “special” assessments, the latter of which would require prior homeowner approval under the HOA documents. While I will avoid engaging in a discussion of California HOA law as compared to Massachusetts condominium law, what is important about this case is the judge’s analysis.

In 2020, and again in 2021, the Board of the North Coast Village Home Owners Association determined a shortage in the budget existed due to a rise in, amongst other things, insurance, utilities, minimum wage and other operating expenses. The Board approved a $1,000.00 assessment per owner in both years, but in communications with owners, the Board referred to the assessments as both “special” and “additional” assessments to cover increased operating expenses. Owner Tim Taggart sued, claiming that the HOA failed to obtain the required prior owner approval for a special assessment. Taggart’s argument hinged on the fact that the Board itself referred to the assessments as “special” assessments and gave owners payment options instead of charging monthly payments like the regular monthly fees. Taggart further argued that the Board’s labeling of an assessment as “special,” thus made it a “special” assessment, and the Board’s contention it was for operating expenses constituted fraud as the Board was attempting to circumvent both the law and the HOA documents and turn a “special” assessment into a regular assessment.

In its decision, the court acknowledged that it is the Board’s obligation to establish a budget to pay for the day-to-day operating expenses of the HOA and that sometimes a board may need to make additional assessments in order to close budget shortfalls. As California law and the HOA documents failed to define the terms, the court looked to Merriam-Webster’s Dictionary for the meaning of “regular” and “special” and further took into account the purpose of the assessments. The Court of Appeal affirmed the trial court, which had “concluded that the assessments were regular assessments, regardless of how they were labeled by the HOA, because they were used for recurring operating expenses.”

Massachusetts Condominium Act: “Special” and “Supplemental” Assessments

In Massachusetts, the condominium statute, Chapter 183A, § 6(c), specifically excludes from the priority lien “any amounts attributable to special assessments, late charges, fines, penalties and interest assessed by the organization of unit owners.” Yet, the term “special” is not defined. Section 6(c) also does not expressly refer to “supplemental assessments,” which is also not defined in G.L. c. 183A.

Merriam-Webster’s Dictionary defines “special” as “different from what is ordinary or usual: exceptional; distinct from others: unique; limited to or intended for a particular function, application or occasion; additional; extra.” The Dictionary defines “supplemental” as “something that compensates for a deficiency or constitutes an addition; a part or section as of a book giving additional information or correcting errors.” Remember when you were young and your parents always said you were special and that you could be anything you wanted to be when you grew up? They called you special, which meant that you were one-of-a-kind or extraordinary. They never called you supplemental. People may have a second job to supplement their income. We don’t refer to it as “special” income.

Condominium boards are responsible for preparing a yearly budget to maintain the common areas of the condominium, over which they have exclusive control, and which budget includes the annual maintenance and repair of the common area facilities, maintaining a reserve account and insuring the common areas and facilities. Budgets are calculated based on the prior year’s actual expenses, plus expected maintenance issues and inflation; and unfortunately, things happen that are not always anticipated. When it is time for a major repair – such as for a roof or building façade repair – these repairs can be costly. Condominium boards typically have the power under the by-laws to “supplement” their budgets by imposing a supplemental assessment to close a budget shortfall. Section 6(c)(ii) of Chapter 183A states the priority lien is for the “…common expense assessments based on the budget adopted pursuant to subsection (a)…” Thus, in order to incorporate a supplemental assessment into the monthly common expenses, the budget needs to be adjusted by vote and approval of the board and communicated to the unit owners as to the nature and purpose of the assessment. Depending on the size, scope and ultimate cost of the assessment, boards should hold owner meetings to explain the necessity and purpose of the work to the owners and payment plans (e.g., in full, quarterly, monthly, etc.). Further, the assessment should always be referred to as a “supplemental assessment” – in all written and verbal communications to owners and on their unit ledgers as well.

In contrast, what then constitutes a “special” assessment? Again, as the statute does not offer a succinct definition, we turn to case law. The Massachusetts Land Court case of Bonderman v. Naghieh, No. 310980, 2005 WL 1663469 (Mass. Land Ct. July 18, 2005) (Piper, J.), in which a unit owner brought suit against the condominium trust and its trustees when the trustees referred to an extensive building repair assessment as a “special” assessment, sheds light on when an assessment constitutes a “special” assessment. In discussing what constitutes an “improvement” (one example of what could be considered a “special” assessment and also expressly addressed by G.L. c. 183A, § 18), the Bonderman Court observed:

Work which is extensive-and thus expensive– is not automatically (or even presumptively) an improvement. Work which fixes, restores, corrects, and returns to a more safe and modern condition the common elements may well constitute repair or restoration, even if the work involved takes considerable time, covers a wide scope and costs much. The volume and cost of the challenged work does not put it into the improvement category which only a vote by the unit owners may authorize.

What type of improvement requires a vote of unit owners? Something that is not already there and will increase the common expenses for all owners, such as adding a tennis court, a swimming pool or a clubhouse, to the condominium. For the building maintenance needs of the condominium, Bonderman Court noted:

There is not planned here any new building, any creation or expansion of habitable space, or any change in the structures and improvements of the condominium which would necessitate an amendment to the description of the units and buildings constituting the condominium in the registered master deed and accompanying plans.

By contrast, the Court noted that a plan to enclose two outdoor areas to create additional common areas by adding over 9,000 square feet to the condominium complex, would require approval of the unit owners and be seen as a “special” assessment.

If an amenity were present at the time the condominium was established, such as a swimming pool, then the maintenance and upkeep of the pool falls under the duties of the trustees. Lenders base mortgage loans on the value of the condominium unit which includes the amenities of the condominium complex, whether it be parking areas, a clubhouse, laundry facilities, or an elevator to name a few. The majority of lenders do not make the distinction between maintenance of existing common areas and creation of new amenities. To lenders, everything is an improvement and, thus, a “special” assessment, and therefore, something they are not obligated to pay as part of the priority lien.

Why do lenders confuse the terms? In our experience, national lenders do not like to make distinctions between state laws and prefer everything to be a “one size fits all” – thus their proclivity to refer to all assessments as “special” and all community living organizations as HOAs. Here in Massachusetts, condominiums and homeowner associations are distinct and separate legal entities. My explanation to lenders is that while condominiums and HOAs may both be in the big cat family, one is a lion and the other is a tiger – similar, but not the same animal.

When providing lenders with a priority lien breakdown, it is vital condominium counsel include a copy of condominium correspondence to owners explaining the supplemental assessment and its purpose – this shuts down any lender argument that the assessment is “special” or constitutes an improvement.

It is equally disheartening when I see owner ledgers that list the monthly condominium common expenses as either “rent fees” or “HOA fees,” as they are neither. Granted not all software programs contain the correct terminology choices; however, we need to remember that others will be looking at the ledgers in lien enforcement actions, particularly judges who are not always knowledgeable of condominium law and they may issue a ruling based on the condominium’s choice of language. Owners such as Taggart may be confused by the language choice and seek the litigation route to determine which meaning prevails. From the start, avoid confusion and litigation by calling the lion a lion and the tiger a tiger.

Laura Brandow Condo Law Blog

If you have any need for legal services related to this article, or any similar matter, you can email Laura Brandow at lbrandow@mbmllc.com or contact any of our other attorneys at Moriarty Bielan and Malloy LLC at 781-817-4900 or info@mbmllc.com.

Laura Brandow