After the turnover of a community, many associations face the prospect of litigation with the developer of the community or the contractor and subcontractors who constructed the condominium building or HOA common areas. Such litigation may be a construction defect lawsuit or a dispute over missing reserve funds. These lawsuits can sometimes be hastily filed because prior boards have “kicked the can down the road” and failed to examine these issues in a timely manner, creating concerns about the statute of limitations and/or statute of repose for the association’s claims. But taking a few moments to ask the association’s law firm pointed questions can alleviate a lot of problems later on and save an association significant amounts of money.
There are three main types of fee arrangements offered by community association law firms: straight hourly, contingency, and modified contingency. Depending on your community’s needs, each can have significant pros and cons that you should be familiar with.
Straight hourly is the most traditional fee arrangement. Under this arrangement, the association is billed and the attorney is paid as the attorney incurs time on the case. This arrangement works best for smaller disputes involving litigation that will not be very “high dollar,” either in the amount of attorney work involved or the amount of the anticipated settlement or judgment. For instance, if a community has a reserve funding claim against the developer for $400,000, it is anticipated that a law firm may bill the association $50,000 when collecting that money for the association. That leaves $350,000 for the association and isn’t too bad a return on its investment. If that same community had gone with a contingency fee arrangement whereby the attorney would receive the typical take of 40 percent of the recovery, suddenly the association’s law firm just got paid $160,000 to do $50,000 worth of work, and the association is left with only $240,000 for its reserves. That’s a pretty bad deal for the association and a brand-new Bentley for the association’s lawyer.
As hinted at above, a contingency fee arrangement is a fee arrangement whereby the association’s law firm takes a percentage of the settlement or judgment amount at the end of the case. The pros for this fee arrangement are that the association does not pay fees up front, and the attorney has some “skin” in the game along with the association. The negative is that there is a payday for the attorney at the end of the case, sometimes in the millions of dollars. The more that is paid at the end to the association’s attorney, the less that is left over for use by the association to correct real problems. This can really cause strife during a mediation because suddenly the attorney is bickering with his or her client over whether to accept a settlement offer or not. Suddenly a “good” offer isn’t so good because the attorney is taking 40 percent of the amount being offered. For this reason, a contingency fee arrangement works best for cases with a very high dollar claim amount in the millions of dollars. The bigger the settlement, the easier it is to split it up. A contingency fee arrangement is also the only fee arrangement that will work for associations that are very strapped for cash and simply do not have the money to spend on expensive litigation. For a large construction defect case against multiple parties, the fees can run in the hundreds of thousands of dollars
and a contingency fee arrangement allows an association to pay at the end of the case instead of “as you go.” Pro tip: carefully look over the fee arrangement and make sure that the association has the ability to negotiate the fees charged by experts hired by the association’s law firm. These costs are also paid by the association at the end of the case, can be many hundreds of thousands of dollars, and will be deducted from the association’s recovery as per the Florida Bar rules.
The third and final fee arrangement is the modified contingency fee arrangement. Under the modified contingency fee arrangement, the percentage taken by the association’s law firm at the end of the case is lower than usual—perhaps only 20 percent or 30 percent. In return, the law firm bills the association at a much lower hourly rate than it would normally. This fee arrangement is great for medium to large size cases and especially cases where prevailing party attorneys’ fees are at issue, such as reserve funding cases brought under the Orange County Gated Communities Ordinance, because the association’s law firm can recover a contingency risk multiplier from the developer should the association prevail in the case. As you can see, there is no “one size fits all” when it comes to a fee arrangement for your association’s litigation. Your association law firm will be happy to answer any questions you may have and should be able to offer any of the fee arrangements mentioned in this article.