The Secret Meeting

The Trumpets Lease

The board has voted and Chef Tirzo Hernandez is coming to Sun City.

But what else is at play in this leasing drama?

Everyone is excited to pass on and learn about the results of the board’s Trumpets bon appétit vote on the lease in support of Chef Tirzo Hernandez. Few cared to learn what the indemnification clause was all about and the board was not going to help those who expressed their concern. The board, seemingly oblivious to resident concerns over indemnifying Chef Tirzo, chose to withhold specific details, preferring instead not to inform or share its language in advance of the board’s favorable vote on the Trumpets lease.

For those more touchy legal issues, the board relied on the services of the not so reticent input from the corporation’s legal counsel, Edward Song, a principal in the John Leach law firm and who happens to be a regular at board meetings. After listening to Mr. Song’s delivery, one quickly learns that hitting the nail on the head with a succinct statement of fact is not his style. Mr. Song prefers to drive the nail home and then some. However, in the process of responding, Song is more apt to overstate his position to its detriment and perhaps as a defensive tactic, while at the same time avoiding critical issues.

A case in point is the issue of whether the association has the authority to lease. While I know of no one who would now seriously dispute the association’s authority to lease, Mr. Song tackled this “authority” issue ad nauseam as if it was the linchpin in the case against leasing. But that’s simply not true. As attorneys are sometimes prone to do, Mr. Song had merely erected a straw horse to easily knock down. Citing every governing document reference possible and having firmly established his point upholding the authority of the association to enter into a lease, Mr. Song inexplicably stopped talking as if he had settled all pending lease issues once and for all. While the board had other more immediate lease issues to mull over, the “authority” issue was not even on the board’s or the audience’s radar on this occasion. So, you may wonder, what was all that legal mumbo jumbo really about?

Here is my take on Mr. Song’s unusual behavior. If you do not wish to discuss or deal with the real issue staring you in the face, the next best thing to do is to divert the attention of the audience away from what really counts to what doesn’t count at all and while you are doing so appear to make a big issue out of it. Song’s presentation successfully avoided any mention of the issue that initiated the legal brouhaha over the lease a year ago and, interestingly, caused the prospective lessee Chef Tirzo to demand and receive indemnification. That issue was whether the board could enter into a lease without first securing a formal vote of approval of the unit owners.

When Mr. Song came to the issue of the indemnification agreement, the one demanded by our prospective lessee due to the NRS issue discussed below, Mr. Song seemed especially eager to downplay its significance, suggesting that there was nothing for homeowners to worry about because indemnification clause as written has virtually no consequence, so he claims. Some homeowners had been alerted to the possibility under NRS that they (rather than the association) could be held individually liable for any claim in the unlikely event the Trumpets venture went south. When Mr. Song was later pressed on the significance of the indemnification clause, he acknowledged that as members of the association, with or without the indemnification clause, we are all potentially liable for any judgments against the association.

What was especially remarkable about Mr. Song’s presentation was not what he said but what he failed to say. Incredibly, and no doubt with a purpose in mind, Mr. Song managed to omit any mention of the only issue on the table, namely whether the association can enter into a lease without obtaining the approval of the unit owners. With that elephant in the room, how in the world could Mr. Song have missed the only issue having the potential to overrule the board’s expected approval of the lease?

Some folks believe that we are bound by our governing documents, including NRS 116 on Common Interest Ownership provisions as applied to HOAs like Sun City Anthem. On the other hand, some folks are content ignoring those provisions of NRS 116 they happen to disagree with. The later are called members of the board. As to why Mr. Song deliberately chose to ignore the bull in the china shop issue, the one thing that has the potential for upsetting the Trumpets lease apple cart, is anyone’s guess.

This one issue, if it is raised, has the potential of upsetting every HOA in Nevada since we are led to believe that no HOA is complying with NRS 116 on this particular matter of securing voter approval for certain board actions. The problem of securing unit owner approval is especially acute for Sun City Anthem since if NRS 116.3112 is applicable, then our own governing documents may come into play. If they come into play, in contrast to NRS 116 on this subject, which mandates a simple majority approval, our own governing documents require a two thirds approval, or an approval by 66.67% of all unit owners, or 4,763 unit owners voting in favor before the board can take certain actions, like a decision to lease.

Those who think the issue is merely securing unit owner approval, which in the case of getting Trumpets back in operation just might be a sure thing, they would be wrong. The issue is far greater than that. No board here or elsewhere wants to be hogtied or unnecessarily restricted in what actions they can take. Least of all, no board is really anxious to expend the effort to secure unit owner approval prior to board actions to lease or amend certain governing documents. That process can be arduous and the result of any such effort will not necessarily produce a positive outcome. As a practical matter, even when the need was acute, as when the CC&Rs were amended a few years back to provide for the collection of a fee on the resale of homes, that process can take not only months to achieve, but also entail hundreds of volunteer hours of knocking on doors to secure the required number of signatures needed to ensure passage. So, it's no wonder HOA boards are reticent to put pressing issues to a vote of the homeowners.

So, when the matter was finally put to Mr. Song during the resident comment period of the Trumpets portion of the board’s agenda, how did he address this sensitive matter? Incredibly, Mr. Song sought to portray the matter as if it did not exist. For those who are familiar with this issue and the language under NRS 116, Mr. Song’s response came across as strange, even bizarre especially for one in the legal profession. This will take some further explanation. The crux of the matter is somewhat technical and revolves around whether or not the definition of the term “lease” is incorporated within the term “conveyance” as that term is used in NRS 116. In other words, is a lease of the type proposed by the association in the case of the operation of the Trumpets restaurant recognized as a type of conveyance? In response to that specific question I raised with Mr. Song, his response was, NO. Had Mr. Song responded, YES and not NO, he knew he would have a problem since admitting to the possible equivalence of these two terms would pose a real conundrum or legal problem for the firm he represents. Unknown to most homeowners, this lease/conveyance issue has been raised with the corporation’s legal counsel in the past, although in a different context. Then as now, the issue was whether or not the definition of the term lease was incorporated within the legal meaning of the term conveyance under NRS. When this issue was first raised, Mr. Leach offered his legal opinion in writing on this matter. Mr. Leach’s then written opinion, as was Mr. Song’s oral argument at this month’s board meeting, was that a proposed lease by the association was not a conveyance under NRS. For some, that should have settled the matter. After all, the board is in possession of written opinion on the matter by the corporation’s legal counsel, John Leach.

Unfortunately, as Mr. Song is no doubt well aware, that does not resolve the lease/conveyance issue at all. It merely confounds the issue. Why might that be? First, we must recognize that legal opinions are as valid as the foundation on which they are based. Second, we must recognize that legal opinions are sometimes rendered or tailored to meet the particular needs of the client. In other words, a different client or a different need may result in a different or contrary opinion. Some might even say that’s what the legal profession is all about.

So what did Mr. Leach tell the board about a lease that’s so terribly important or unusual? He said that a lease is not a conveyance. On first blush, that opinion does not appear too terribly shocking or unusual at all. In fact, most can agree that a lease tells us something about how property will be used while the term conveyance tells us something about how property is transferred from one person or entity to another. Clearly, one assumes, these two terms are two completely different concepts, right? But is that true?

In support of his opinion, though, Mr. Leach, being the attorney that he is, took the unusual step to support his opinion by citing his source, almost as if he were intentionally qualifying his opinion by signaling a red flag to the reader that his particular source is not necessarily the end of the story on this issue. In fact, the reader may take his opinion with a grain of salt, that is, with skepticism. How did Mr. Leach perform that delicate task? He did so appending his “legal” opinion by relying on a layman’s dictionary definition of the terms lease and conveyance, rather than relying on the legal definition of these terms. In other words, by using a layman’s dictionary definition, Mr. Leach deliberately sought to convey a meaning quite different from the meaning he would have conveyed had he instead relied on any legal dictionary. It’s not so much that a definition from a layman’s dictionary is necessarily wrong as it is incomplete and is not intended to answer questions on legal usage. But we can assume that Mr. Leach is acutely aware of that distinction.
Being the smart legal professional that Mr. Leach is, one can only conclude that Mr. Leach chose to avoid relying on legal definitions inasmuch as those definitions would have in this instance produced a contrary result to the one he was intending to convey to his client. Had Mr. Leach been representing the State on this issue, he would have relied on a legal dictionary to arrive at how legal terms are defined and used under law and not a layman’s dictionary to define legal terminology employed in the Nevada statutes.

So, what’s really going on with Mr. Leach and the board? In his capacity as legal counsel to the board, and other HOA boards as well, Mr. Leach would like to grant boards a degree of freedom to take certain reasonable actions, such as leasing, without the undue burden of obtaining homeowner approval, even if that approval is required by the statue governing home owner associations. So, what does Mr. Leach advise HOAs? Apparently, he advises them not to seek unit owner approval. He understands that if you start down that path, ostensibly the path required by NRS, the board’s action will establish a precedent that is difficult if not impossible to reverse. While Mr. Leach may believe that the state has no business interfering with board decisions to lease, his argument is ultimately with the Nevada Real Estate Commission, the state legislature or the courts to settle the matter. As to who is going to pay for that argument, we can only assume that Sun City Anthem homeowners will have to pay for any legal services provided to pursue the matter.

In discussing this matter with Mr. Song following the vote on the lease, I was led to believe that is exactly what will happen in the event the board’s failure to comply with the provisions of NRS 116.3112 is raised with the Office of the Ombudsman. I was told that the unit owner approval provisions of NRS has yet to be tested with the Ombudsman’s office, which is the initial step in the process. Meanwhile, in the event this matter is submitted to the state for their determination, the expectation is that food will continue to be served by Chef Tirzo.

If the legal issue is raised with the Ombudsman's Office and is finally decided, a year or two from now, it will likely make no difference on the operations of Trumpets or on the status of the existing lease with Chef Tirzo. Regardless of the way the matter is ultimately decided, the chances of any adverse impact on past actions of the board is virtually nil. In other words, any future decision will not apply retroactively but most likely will apply prospectively, that is, in the future. So, if the judgment is that boards must seek voter approval, that approval will apply only to future board actions.

The question for the future may be whether board actions to extend an existing lease constitutes a new leasing decision, which, in turn, may require unit owner approval. Also, there may be issues surrounding the legality of past board changes to certain governing documents without securing unit owner approval.

Bon appétit.

Ron Johnson, 31 May 2009

NRS 116.3112 Conveyance or encumbrance of common elements.

1. In a condominium or planned community, portions of the common elements may be conveyed or subjected to a security interest by the association if persons entitled to cast at least a majority of the votes in the association, including a majority of the votes allocated to units not owned by a declarant, or any larger percentage the declaration specifies, agree to that action; but all owners of units to which any limited common element is allocated must agree in order to convey that limited common element or subject it to a security interest. The declaration may specify a smaller percentage only if all of the units are restricted exclusively to nonresidential uses. Proceeds of the sale are an asset of the association.

2. Part of a cooperative may be conveyed and all or part of a cooperative may be subjected to a security interest by the association if persons entitled to cast at least a majority of the votes in the association, including a majority of the votes allocated to units not owned by a declarant, or any larger percentage the declaration specifies, agree to that action; but, if fewer than all of the units or limited common elements are to be conveyed or subjected to a security interest, then all units’ owners of those units, or the units to which those limited common elements are allocated, must agree in order to convey those units or limited common elements or subject them to a security interest. The declaration may specify a smaller percentage only if all of the units are restricted exclusively to nonresidential uses. Proceeds of the sale are an asset of the association. Any purported conveyance or other voluntary transfer of an entire cooperative, unless made pursuant to NRS 116.2118, is void.

3. An agreement to convey common elements in a condominium or planned community, or to subject them to a security interest, or in a cooperative, an agreement to convey any part of a cooperative or subject it to a security interest, must be evidenced by the execution of an agreement, or ratifications thereof, in the same manner as a deed, by the requisite number of units’ owners. The agreement must specify a date after which the agreement will be void unless recorded before that date. The agreement and all ratifications thereof must be recorded in every county in which a portion of the common-interest community is situated, and is effective only upon recordation.

4. The association, on behalf of the units’ owners, may contract to convey an interest in a common-interest community pursuant to subsection 1, but the contract is not enforceable against the association until approved pursuant to subsections 1, 2 and 3. Thereafter, the association has all powers necessary and appropriate to effect the conveyance or encumbrance, including the power to execute deeds or other instruments.

5. Unless made pursuant to this section, any purported conveyance, encumbrance, judicial sale or other voluntary transfer of common elements or of any other part of a cooperative is void.

6. A conveyance or encumbrance of common elements or of a cooperative pursuant to this section does not deprive any unit of its rights of access and support.

7. Unless the declaration otherwise provides, a conveyance or encumbrance of common elements pursuant to this section does not affect the priority or validity of preexisting encumbrances.

8. In a cooperative, the association may acquire, hold, encumber or convey a proprietary lease without complying with this section.