Memorandum To Clients

Vol. XVI No. 11

MONEY, MONEY EVERYWHERE BUT NOT A DROP TO SPEND

As associations are approving budgets, many are looking to defer payments. An alternative that is increasingly utilized by associations is to borrow, either through a short term line of credit or a long term loan.

As with any tool, when used properly a loan may be very effective and assist an association. Conversely, we have all seen loans that have been obtained without proper due diligence which have caused great harm.

Associations considering loans are urged to do their due diligence. For example, associations should determine whether deferring payments is justified. Borrowing money for landscaping or day to day operating funds normally does not justify a loan because borrowing only means that more money must be paid later. Furthermore, some association by-laws require budgets to include current operational spending.

Associations should also consider whether the association= s A documents@ actually allow borrowing. Most documents are silent on this point. The Florida Not for Profit Corporation Act has a general statement regarding the power of not for profit corporations to borrow. Normally, lenders require associations to have legal opinions identifying authority to borrow funds.

Associations, like every other borrower, are cautioned against merely signing whatever is placed in front of them. The A standard@ terms that many banks use often can be negotiated. This is important because associations frequently have limitations upon authority that commercial borrowers do not have.

Loan commitments should be carefully examined with counsel just as any other important contract before signing. What is agreed to in a loan commitment sometimes is beyond what the association can provide. This is very problematic when associations agree that counsel will give certain opinions which may not be legally justified!

Associations must also take a practical approach to the long term cost of a loan. While a loan may avoid a special assessment, the cost for a loan may be very high. Associations should consider the closing costs, compliance requirements and attorneys= fees. It may be that the loan does not save money.

The bottom line is as always the bottom line. Please ensure that before you sign on the dotted line, you understand not only what it takes to comply with the loan documentation but whether the loan is financially appropriate and possible.

CONTRACTS: NOT A CONTRACTOR?

LOOK FOR SOMEONE ELSE TO FOOT YOUR LOSSES

What happens when a company that an association has hired is sued by someone else? If the company is not an architect, engineer, general contractor, subcontractor or materialman, the company may seek indemnification from the association for any losses it suffers. How your contracts are drafted and the type of work may impact potential claims.

For the first time, a Florida appellate court found that a relatively new Florida statute limiting indemnification in construction contracts does not apply outside of the construction arena. In Kone, Inc. v. Robinson, 31 Fla. L. Weekly D2297 (Fla. 1^st DCA, September 5, 2006), the appellate court ruled that the trial court erred in dismissing a contractual indemnification claim by a company which provided routine maintenance of elevators.

The facts of the decision indicate that Kone, Inc. entered into an agreement with Rouse & Associates, the owner of a parking garage to provide maintenance and service for the elevators. The agreement provided Rouse would indemnify Kone from any liabilities. Humana purchased the garage and assumed the obligations under the agreement. In February 2000, Angela Robinson, a Humana employee was injured when she exited an elevator. Robinson sued Kone for negligent maintenance of the elevator. Kone brought a third party complaint against Humana under the indemnity provision.

The trial court found that Humana was not a party to the agreement and dismissed both claims under the complaint. Even if Humana was a party to the agreement, the trial court determined the contract was unenforceable because Kone failed to comply with the statutory requirements for indemnification.

The appellate court disagreed. Section 725.06, Fla. Stat. (1999) provides a limitation on indemnification on Florida construction contracts. The appellate court pointed out the statute only applies to an owner of real property, architect, engineer, general contractor, subcontractor or materialman.

Kone maintained the elevators and as such, the court determined it did not qualify as one of the parties listed in the statute. A Had the Legislature intended this statute to apply to all contracts concerning real property, it could have simply included the term > contractor= in the statute,@ the court stated. The court found that the agreement which provided for the routine maintenance of elevators over sixteen years was not a construction contract.

Do not forget to vote! Bring your photo identification with you when you go to the polls to vote. For a copy of your precinct= s ballot, click onto: www.pbcelections.org