Homeowner and Condominium Owners Associations: 10 Frequently Asked Questions

7 12 Advisory Condohoafaqs Social Linkedin

Understanding the laws that govern homeowners and condominium owners associations is crucial for both board members and owners. These laws encompass various aspects of COA and HOA activities, such as board meetings, association fees and the multitude of responsibilities that HOAs and COAs must fulfill. Here are 10 of the most commonly asked questions as it relates to laws impacting COAs and HOAs.

What laws govern my association?

In Florida, Homeowners Associations (HOA)s and Condominium Owners Associations (COA)s are not for profit corporations and therefore are governed partly by Florida Statutes Chapter 617 (the Not for Profit Act). More specifically, HOAs are governed by Florida Statutes Chapter 720 (the HOA Act), and COAs are governed by Florida Statutes Chapter 718 (the COA Act). There are other statutes that affect specific areas of HOA and COA governance, for example, in collecting delinquent assessments the association must abide by the Fair Debt Collection Act, and in adopting and enforcing rules the association must abide by the Fair Housing Act. 

In addition to the above statutes, the governance of the association is controlled and informed by the association’s declaration, bylaws and articles of incorporation, collectively, the governing documents. These documents are a contract between the association and the owners. Therefore, any violation of the governing documents by either the association or an owner is a breach of contract for which the HOA Act, or COA Act, along with the governing documents themselves, provide a means of enforcement. What an association board of directors and/or owners can and should do is impacted by the specific language of the governing documents. Therefore, it is rarely enough to look to the applicable statutes in a particular situation. Knowledge of the statutes must be backed up with an understanding of the governing documents of the particular association; however, if there is a direct conflict between the statutes and the governing documents, the statute controls. This sometimes happens when associations neglect to review and update their governing documents as statutes change over the years.

As a new Director, what do I need to do?

This is a multi-layered question; however, from a statutory standpoint, one of the first things a new director must do, whether elected or appointed, is be certified. Both Florida Statutes Chapter 720 (the HOA Act) and Florida Statutes Chapter 718 (the COA Act) require that new board members be certified within 90 days of being elected or appointed. New directors can meet this certification requirement in either of two ways. One way is for the new director to certify in writing to the secretary of the association that they have read the association governing documents and will uphold the same, and they will faithfully discharge their fiduciary duty to the association members. The other way is to complete and submit a certificate of completion of an approved certification course given by an approved provider. Varnum LLP is one such approved provider that offers approved certification courses on a regular basis.

What can the association’s board of directors do about owners that don’t pay their assessments?

Associations rely on the collection of regular assessments to fund the operation and maintenance of the common areas and amenities of the community. Additionally, a high delinquency rate can adversely affect the association’s credit rating, backing it harder for the association to secure lending if needed. The association’s authority to levy and collect assessments is granted by Florida Statutes Chapter 720 (the HOA Act) and Florida Statutes Chapter 718 (the COA Act). The procedures for levy and collecting assessments as well as addressing delinquent assessments are articulated in the statutes and further defined in the association’s governing documents. 

In short, associations can levy both late fees and interest against delinquent accounts, and if the account remains delinquent, the association can ultimately record a claim of lien against the owner’s property and then file suit to foreclose the lien, resulting in a foreclosure sale to satisfy the amount owed the association. The collections, lien and foreclosure process all require specific notices to the owner and minimum timelines that must be followed. Therefore, it is essential that the association’s board of directors work with a qualified legal counsel to draft and implement a collections policy that meets these requirements and informs the owners of the process and repercussions.

In addition to liens and foreclosures, the association has other tools to address delinquent accounts. If an owner remains delinquent for more than 90 days, the association can suspend their voting rights and use of the common amenities. This may include the use of the clubhouse, fitness center, pool and other recreational facilities. The association may not, however, suspend the use of the common areas that provide ingress and egress to the property, such as roads and sidewalks.

If the owner is delinquent and the property is tenant occupied, the association can demand that all rent and other monies due to the owner from the tenant be paid directly to the association until the delinquency is cured. If the association makes such a demand and the tenant pays the sums to the association, the tenant is protected from an eviction action by the landlord for non-payment. Likewise, if the tenant does not pay the association after such a demand the association can evict the tenant for non-payment. In pursuing this course of action, the association does not take on any other obligation of the landlord.

Can Directors be removed from the board?

The short answer is yes; Directors can be removed from office under various circumstances. If the director is more than 90 days delinquent in a monetary obligation to the association, in addition to the repercussions above as an owner, the director is deemed to have abandoned their seat as a director. 

Florida House Bill 919, which passed in this year’s legislative session, provides that a Director or Officer of an HOA must be removed if charged with certain offenses, including:

  • Forgery of a ballot envelope or voting certificate used in an election;
  • Theft or embezzlement involving association funds or property, Florida Statutes;
  • Destruction of, or refusal to allow inspection or copying of, an official record of a homeowners’ association within the required time periods in furtherance of any crime; and
  • Obstruction of justice. 

See Florida Statutes, Section 720.3033(4)(a).

Additionally, directors can be recalled by the members. Florida Statutes, Section 720.303(10) for HOAs and Florida Statutes, Section 718.112(2)(l) for COAs give detailed procedures for the recall of directors and the director’s right to challenge the same. Member groups concerning pursuing a recall attempt as well as directors facing a recall effort are engaged to seek experienced legal counsel.

Are Directors personally liable for their actions as Directors?

Directors are generally not liable for their acts as directors, but can be held liable under certain situations. Directors are generally shielded from personal liability as long as they use their best business judgment in fulfilling their fiduciary duty to the membership. At the same, the directors and offices do have a fiduciary duty to the membership and can not act only in their personal best interest. Directors can have additional protection if they rely on the opinion of an expert in the area at issue. For example, if the directors rely on legal counsel regarding a question of law, or rely on a certified public accountant or tax expert regarding the tax question. However, the director will not be able to rely on the opinion of one not qualified in the area at issue. For example, the directors could not reasonably rely on the opinion of a New York attorney that happens to be an owner in the association regarding a question of Florida law. Such an opinion may or may not be helpful. However, it can be a substitute for the directors’ business judgment or the qualified opinion of legal counsel, licensed in the governing jurisdiction.

Associations carry Directors and Officer Insurance to insure against claims of directors and officer misconduct. This insurance may also cover employees and agents of the association, but normally does not provide coverage to the individual for intentional acts of misconduct or gross negligence. Directors with questions about their insurance coverage should consult their insurance carrier, or qualified legal counsel.

Who is legally obligated to pay association assessments?

All owners of real property within the association are members of the association with the rights, privileges and obligations of membership. The legal owner of record is obligated to pay the assessments and is subject to legal action for failure to do so, regardless of whether the owner of record occupies the property or not. This can sometimes create an issue when couples that own property jointly separate or divorce with resolving the legal title to the property. Even in the face of an agreement between the couple regarding the property and the payment of the assessment, each owner of record, as shown in the public records, is legally responsible for the assessment obligations and can face legal action for failure to pay the assessments.

Florida courts have repeatedly held that the only prerequisite to an owner’s obligation to pay assessments is the ownership of property in the association and that the assessment was properly levied. Any other dispute or claim the owner may have against the association is not a legal defense to failure to pay the assessments. See, Coral Way Condo. Invs., Inc. v. 21/22 Condo. Ass’n, Inc., 66 So. 3d 1038 (Fla. 3rd DCA 2011).

Can the association ban “pit bulls” or other dog breeds?

The association’s board of directors has the right and responsibility to adopt and enforce reasonable rules and regulations regarding the operation of the association, including issues regarding health, welfare and safety. These rules and regulations routinely include restrictions on the number, size and types of animals allowed in the community. What restrictions are reasonable varies demanding on the association.

While not categorically forbidden, our opinion is that breed-specific prohibitions or restrictions are not the best way to address the concerns related to animals, specifically dogs, within a community. As in other areas, the best approach is to regulate the behavior, not the label. For starters, while the term “Pit Bull” is commonly used, it is not a specific breed recognized by most canine associations. What is commonly referred to as a pit bull may be several different breeds, and determining a dog’s breed to the level of certainty for enforcement of a breed restriction may require an expert opinion of a veterinarian or even genetic testing of the animal.

Alternatively, we recommend that the association adopt a provision in its governing documents whereby the members covenant not to bring an aggressive dog into the community and to indemnify the association from all claims related to their animal(s) regardless of whether such claim is related to the animal’s aggressive behavior or otherwise. We recommend the provision further specifically empower the board to require the removal of any animal the board determines to be aggressive or otherwise pose a danger to the residents and/or guests of the community.

Are Directors’ personal emails official records of the association?

Florida law in this area is slightly unsettled and may be changing. Historically it has been understood that personal emails of the directors, even if discussing association business, are not official records. However, there are a few circumstances that may result in those emails becoming official records. For example, if the association’s manager, or CAM, is included in the email, the CAM’s emails are official records of the association. Likewise, if the email account is owned by the association, then the emails are likely to be considered official records.

It is important to remember that even if it is not an official record of the association, directors’ emails are discoverable in litigation if they are relevant to the issues of the litigation or reasonably likely to lead to the discovery of relevant evidence.

The best advice for directors regarding emails is to keep it professional, and don’t put anything in an email you would not want to be posted at the community pool. Once a director sends an email, they cannot control where it goes and who receives it.

Additionally, directors cannot vote by email, so, the board cannot have the CAM, board president or directors send an email asking what everyone thinks should be done about a situation or seeking approval of a course of action and then count that as a board vote for approving a particular action. All board votes have to occur at a duly noticed board meeting.

Can the Association restrict the owner’s access to the association’s records?

Owners have the right to access the association’s official records; however, the board of directors can adopt reasonable rules regarding said access including the frequency of requests. When an owner requests access to the official records, the association is obligated to make the records available within 10 business days. The association may, but is not required to, provide copies of the requested records. The requirement is to make the records available, not to provide copies. Many associations meet the requirement to make the records available by having all official records on a server that owners have login excess to. Other associations do not necessarily digitalize all records and have them in a file cabinet or even a simple banker’s box that the owner may search through to find the requested records. Either method, or a combination thereof, is acceptable, as long as the records are made available in the manner normally maintained in the normal course of business.

How should the board conduct board meetings?

This is a complex question that could be the subject of an entire article on its own. However, there are a couple of key points directors and managers should keep in mind. 

Florida Statutes Chapter 720 (the HOA Act) and Florida Statutes Chapter 718 (the COA Act) require that board meetings be properly noticed at least 48 hours in advance except during a declared emergency. During an emergency, the statutes allow for board meetings with “reasonable notice.” However, the best practice is still to give as much notice as possible and only shortcut the 48-hour requirement in a true emergency.

The meeting notice is to include an agenda of the item the board is to address at the meeting. In regard to HOAs, this is a recent change to the statute, passed in the last legislative session, which takes affect October 1, 2023. Historically, the agenda requirement applied to Condominium Associations but not Homeowner’s Associations; however, the legislature has seen fit to make the two statutes coincide on this point. 

Board meetings are to be open to the members, except the board may hold a closed executive session for two reasons. One is to discuss litigation issues with the association’s legal counsel. This is to preserve attorney-client privilege. The other situation that warrants a closed meeting is to discuss personal issues. This is to preserve the privacy of the employee involved.

The HOA Act and COA Act also provide that members have the right to speak on any meeting agenda item; however, associations can impose reasonable restrictions on member’s comments. Reasonable restrictions may include a time limit for each speaker and/or requiring those wishing to speak on an agenda item to sign up to speak before, or at the beginning of the meeting.

Board meetings should be conducted with a certain level of professionalism and decorum to maintain respect for all involved. Meetings are the place for open dialogue but should not be a debating society where directors or members feel compiled to justify their vote on any issue or convince others of the rightness of their position.

Please contact your Varnum attorney with any questions.

Court Ruling Delays Enforcement of California Privacy Regulations Until 2024

7 10 Advisory Delayedcaregs Social Linkedin

In a recent decision, a California court blocked the California Privacy Protection Agency (CPPA) from enforcing its recently promulgated regulations. The court’s decision, announced on June 30, 2023, stems from the mandate outlined in the California Consumer Privacy Act, which requires the CPPA to establish final regulations by July 1, 2022, and commence enforcement on July 1, 2023. However, due to delays, the final rules were only unveiled on March 29, 2023, leaving a brief window between the regulatory issuance and the intended enforcement date.

As a result of the ruling, the CPPA is now prohibited from enforcing the regulations until March 29, 2024. Among other things, these regulations prohibit the use of “dark patterns,” require businesses to recognize opt-out preference signals, and mandate that businesses provide a notice at the point of collection. This decision grants businesses additional time to review the finalized regulations and proactively address any gaps within their compliance programs. Additionally, it signals that future CPPA regulations are likely to be subject to a one-year implementation period, providing businesses sufficient time to implement new requirements.

While the enforcement of the regulations has been temporarily postponed, it is important to note that the CPPA remains committed to enforcing the California Consumer Privacy Act (as amended by the California Privacy Rights Act), which took effect on January 1, 2023. In light of the court’s decision, the CPPA reaffirmed its dedication to upholding this law and is actively bolstering its staff to ensure robust oversight.

Businesses should take full advantage of this additional time to carefully review the finalized regulations, identify any compliance gaps and proactively address them. In so doing, businesses can ensure a smooth transition and position themselves well for when the (potentially robust) enforcement period begins in 2024.

For more information on how state, federal and international privacy laws may impact your business, contact your Varnum attorney.

The Latest Employment Law Updates: Affirmative Action, Religious Accommodations and Employee Protections

7 6 Advisory Latestemploymentlawupdates Social Linkedin

The week of June 25, 2023, was full of new information for employers. The Supreme Court of the United States addressed two important pending issues—affirmative action and religious accommodations—while the General Counsel to the National Labor Relations Board (“NLRB”) issued new guidance on protections for employees. Below is a brief summary of each, as well as considerations for employers.

Affirmative Action

On June 29, 2023, the Supreme Court issued a ruling that will prohibit higher education institutions from considering the race of an applicant when evaluating them throughout the admissions process. Specifically, the ruling in Students for Fair Admission v. Harvard and Students for Fair Admission v. University of North Carolina holds that the race-conscious admission process and policies of Harvard University and the University of North Carolina are unconstitutional because they violate the Equal Protection Clause of the Fourteenth Amendment. The decision overturns a 2003 Supreme Court case, Grutter v. Bollinger, that justified the use of race in university admissions on the basis that “student body diversity is a compelling state interest.” Therefore, this ruling ends affirmative action as we currently know it in the higher education system within the United States.

Although this ruling was specific to institutions of higher education, it is anticipated the decision will have broad implications for employers as well. Potential considerations for employers include complications for companies with federal contracts that are subject to special affirmative action requirements by the government, the potential for an increase in reverse discrimination cases brought against employers, the legality of certain diversity, equity and inclusion programs and the disruption in the flow of racially diverse applicants from diverse universities to the workplace.

Religious Accommodations

On June 29, 2023, the Supreme Court also issued a decision in Groff v. DeJoy, a case where a former USPS employee, an Evangelical Christian, sued USPS on the basis of religious discrimination.

Title VII requires that employers denying requests for religious accommodation show that the accommodation would result in undue hardship to business operations. Courts had previously applied a standard that anything more than a de minimis cost to an employer met the burden to show an undue hardship. However, in the Groff decision, the Supreme Court has made clear that a de minimis cost standard does not satisfy the Title VII test. Rather, in this unanimous decision, the Supreme Court explained that in order to deny a request for religious accommodation under Title VII, the employer must show that the accommodation would result in substantial increased costs in relation to conducting business.

Here, the former employee expressed to USPS that he believes Sunday is a day for rest and religious worship, not for secular work and delivering worldly goods. He took the delivery position when Sunday deliveries were not generally required and before USPS entered a contract with Amazon that required Sunday deliveries. Because he was unwilling to work on Sundays, USPS made other arrangements and redistributed those shifts to other employees when it could. However, he continued to receive progressive discipline for failing to work Sundays. He eventually quit his position and brought this lawsuit. Notably, the Court did not make a decision as to whether the employee would prevail in this case, it only clarified the standard courts (and employers) should be applying. In light of this decision, employers should take time to review, and possibly revise, handbooks, policies and procedures regarding religious accommodations.

Workplace Protections for Conversations About Racism

Concluding this busy week, the NLRB General Counsel, Jennifer Abruzzo, published an advice memorandum on Friday, June 30, 2023, regarding workplace discussions of racism. In short, the GC’s memo explains that workplace conversations around racism are inherently protected by the National Labor Relations Act (“NLRA”), noting that other NLRB case law addresses social justice issues.

In particular, the case that prompted this memo involved Home Depot’s dress code policy, which prohibited employees from wearing political messaging. Specifically, the dress code was applied to prohibit an employee from wearing a Black Lives Matter slogan on his work apron. The memo notes the definition of protected concerted activity should include wearing buttons or pins. The GC also argued in favor of returning to the NLRB’s prior approach requiring rescission of rules that have been unlawfully applied so as to restrict rights under Section 7 of the NLRA.

While the GC’s memo is not case law or binding, employers should take note since the GC will be focused on enforcement in similar cases.

Please contact your Varnum attorney if you have any questions.

2023 summer associate Cole Anderson contributed to this advisory. Cole is currently a student at Wayne State University Law School.

SECURE 2.0 Again Expands Requirements for Part-Time Employees’ Retirement Coverage

6 29 Advisory Ltpt Social Linkedin Static

Recent laws have expanded who must be allowed to participate in employer retirement plans. Historically, employers have been able to require employees to complete up to 1,000 hours of service in a plan year to be eligible to participate in a 401(k) plan; however, the two SECURE acts have changed that. The original SECURE Act of 2019 required employers to permit part-time employees to participate in the elective deferral portion of their 401(k) plan if they completed three consecutive years of 500 hours of service, disregarding service before 2021.

SECURE 2.0, enacted in 2023, revised the requirement for covering part-time employees. Effective January 1, 2025, employers must permit part-time employees who complete at least 500 hours of service for two consecutive years to participate in the elective deferral portion of their 401(k) plan, disregarding service prior to 2023. This revised requirement also applies to 403(b) plans. (The SECURE Act of 2019 applied only to 401(k) plans).

While the rules expanding participation to long-term part-time employees do not affect participation until 2024, they do require current action. Because the requirement looks at service completed in prior years, employers should already be tracking employee hours in accordance with both acts. Employers should also coordinate with HR, payroll service providers or another consultant to ensure that hours are being tracked properly and to ensure that tracking will be reflected in retirement plan eligibility beginning in 2024. An illustration of these tracking requirements is below, ordered by the year an employee started working.

Employer Tracking Table for Part-Time Employees

Start of EmploymentActApplicable PlanHours Needed for EligibilityYears of Service for EligibilityFirst Year of Coverage
2021 or earlierThe SECURE Act of 2019401(k)500-999 hours per 12-month period (beginning January 1, 2021)3 consecutive years (beginning January 1, 2021)2024
2022The SECURE Act of 2019401(k)500-999 hours per 12-month period3 consecutive years2025
2023 and beyondSECURE 2.0401(k) or 403(b)500-999 hours per 12-month period2 consecutive years2025 (or later)

Other Important Considerations

Beyond the counting of hours, there are several aspects of these rules that employers should keep in mind. First, employers do have a choice about who they allow to participate. The SECURE Acts set minimal requirements that allow long-term part-time employees who regularly complete 500 hours or more to be allowed to participate. However, employers can choose to be more generous than required by the SECURE Acts, either by removing the plan’s hours requirement for eligibility, or simply setting the hours requirement at no more than 500 hours (either of which would eliminate the need to track part-time employee hours over multiple years).

Also note that while eligible part-time employees must be allowed to participate in the plan, employers are not subject to traditional non-discrimination testing with regard to long-term part-time employees who participate due to this rule, and employers are not required to make matching or nonelective contributions for these employees.

Finally, note that the new requirements do not apply to nonresident aliens who do not have U.S. earned income, or to employees who are covered by a collective bargaining agreement.

Contact a member of our benefits team with any questions or to discuss these changes.

2023 summer associate Grace Nyikes contributed to this advisory. Grace is currently a student at the Georgetown University Law Center.

Florida Legislative Update: Key Laws Affecting HOAs, Condos and Cooperatives

6 27 Advisory Condohoalegislativesocial Linkedin 1200x628

With Florida legislation shifting frequently, condo and HOA boards should be aware of the various new laws adopted by the State of Florida that are likely to impact how their communities function or otherwise operate. The following is a short summary of several of the recently adopted bills that focus on governance in associations:

House Bill 919

Effective October 1, 2023, House Bill 919, also known as the “Homeowners Association Bill of Rights,” introduces several provisions to the normal operations of an HOA. Board meeting notices must now include specific agenda items, except in the case of emergencies. Deposits that are collected from a member for construction purposes must be kept separately and returned within 30 days after completion of the project, looking much more like the requirements for security deposits in the rental of real property. Broad protections have been added such as officers, directors and managers are prohibited from soliciting or accepting anything of value without providing consideration in return, except for minor food expenses or trade fair-related goods or services. The immediate removal from office is now mandated for officers or directors charged with specific crimes, including forgery, theft/embezzlement, destruction of records and obstruction of justice. Disclosure of conflicts of interest are required annually for developer-appointed board members and officers, as well as for all directors and officers before voting on matters that are influenced by the conflict. HOAs that exercise their long-standing right to impose reasonable fines for violations must hold mandatory hearings before the independent hearing committee before the fine may be made due and owing. Additionally, a new section, Section 720.3065, has been added to address fraudulent voting activities and associated penalties, classifying them as first-degree misdemeanors. These provisions aim to enhance transparency, accountability and fairness within homeowners’ associations in Florida.

House Bill 437

Effective July 1, 2023, House Bill 437 introduces provisions that limit the ability of HOAs in Florida to restrict the installation, display or storage of certain items on parcels. Regardless of any association rules or covenants, associations cannot prohibit parcel owners or tenants from installing, displaying or storing items that are not visible from the frontage or adjacent parcels, such as artificial turf, boats, flags and recreational vehicles. This is likely to cause a lot of problems in HOAs, especially for communities that have homes that abut a body of water and are visible from the other side of the water. Finally, homeowners have the right to display up to two flags, including the United States flag, the official flag of Florida, military branch flags, the POW-MIA flag and first responder flags, in a respectful manner, including on freestanding flag poles. While the right to fly these flags is not new, its expansion to two flags and the expanded list of flags that may be flown are substantial changes that every HOA needs to be aware of.

Senate Bill 154

Senate Bill 154 introduces several changes and requirements for condominiums and cooperatives in Florida. Several of the key provisions is the mandatory structural inspection, now referred to as a “milestone inspection,” which assesses the life-safety and adequacy of a building’s structural components that have been changed or clarified in some way. The inspection must be conducted by a licensed architect or engineer and identifies necessary maintenance, repairs or replacements. Milestone inspections are required every 10 years for buildings that are three stories or higher and reach 30 years of age. Additionally, the bill establishes deadlines, exemptions and provisions for proximity to saltwater and acceptance of previous inspection reports.

The bill also introduces updates to the definitions and requirements for the Structural Integrity Reserve Study (SIRS) in condominiums and cooperatives. The SIRS is a mandatory study conducted for buildings that are three stories or higher as defined in the Florida Building Code, focusing on evaluating various components related to the building’s structural integrity and safety. The study identifies necessary repairs, replacements or maintenance tasks for components such as the roof, structure, fireproofing, plumbing and more. It establishes guidelines for reserve funding based on the findings of the study and sets deadlines for completing the study. Certain components are now exempt from the SIRS requirements while the limitation on waiving SIRS funding has not changed. “Traditional” reserves (roof, painting and paving) now require a majority vote of the total voting interests to reduce or waive. The bill also addresses official records requests and the distribution of inspection reports to unit owners. Finally, disclosure guidelines have been added to ensure potential buyers of units are fully apprised of the integratory of the building and provide the prospective buyer with the opportunity to cancel or void the contract.

Overall, Senate Bill 154 introduces much needed clarification to the regulations adopted last year as a means of ensuring the structural integrity and safety of buildings in Florida. The requirement of milestone inspections and SIRS to identify, address and ensure funding for necessary repairs and maintenance for condominiums and cooperatives clearly remains at the forefront of Florida politics.

For a full breakdown of these statutes as well as the changes to insurance coverage construction defect claims, golf carts and more in Florida, view our full recap.

Exploring Franchising: Legal and Business Considerations for Launching a Successful Franchise

6 23 Advisory Exploringfranchisingsocial Linkedin 1200x628

Expanding your business can be an exciting but daunting prospect—including financially. Traditionally, entrepreneurs have relied on their own resources and capital to grow their businesses; however, there are other options available that are less onerous and capital intensive, such as joint-venture transactions, licensing arrangements and franchising systems. While each of these options has its own advantages and disadvantages, franchising has become increasingly popular due to its potential for rapid expansion and revenue growth with potentially lower business and legal risks.

A franchising system is a business model under which you, as the “franchisor,” retain ownership of your intellectual property (“IP”) assets that you license to others (known as the “franchisees”) to use in connection with their own business(es) via a comprehensive franchise agreement and an “FDD” (Franchise Disclosure Document). Additionally, a franchise allows you to maintain significant control over the use of your IP and the franchisees’ operation of their businesses using your IP, and you also receive several forms of monetary remuneration from the franchisees (e.g., initial franchise fees, franchise royalties, marketing fees and other amounts) rather than share in the profits or losses of the franchisee’s own business.

To successfully launch a new franchise business, franchisors must carefully consider several legal and business aspects, including state and federal rules and requirements, as well as key launch considerations, projects and tasks.

State Rules and Requirements

From a legal standpoint, it is essential to comply with state rules and requirements when launching a new franchise. This typically involves providing written notification to the respective state(s) in which you would like to franchise before any advertising or sales of your franchise can begin. Michigan’s notification requirement is less onerous and rather simple compared to many other states, requiring only a written statement of your intention to sell or offer for sale franchises without having to submit an FDD with the franchise notification. Each state has different rules, requirements and procedures (for example, submitting the FDD with the state notification and/or requiring state feedback or approval of the FDD before launching the franchise), so it is important to consult with legal counsel familiar with franchise law to ensure compliance.

Federal Rules and Requirements

While no written notification to the federal government/FTC is required to launch a new franchise, it is mandatory to prepare an FDD, with the following among the key requirements:

  1. 23 specific items must be disclosed in detail, including the estimated total financial investment, initial franchise fees, ongoing royalties and other fees, franchisee’s obligations, restrictions on franchisee’s sourcing and sales of products/services, franchisor’s assistance, territory, trademarks and existing franchisee information;
  2. A copy of the Franchise Agreement form document must be included in the FDD, along with numerous accompanying informational exhibits and schedules; and
  3. The FDD must be provided to prospective franchisees in advance of any Franchise Agreement signing or any monetary payments to the franchisor by the franchisee.

Business Considerations for Launching a Franchise

From a business perspective, franchisors must undertake several projects and tasks to prepare for the franchise’s successful launch. These include, among others:

  1. Identifying the goals, objectives and strategies of your franchise system and overall operations;
  2. Determining in what state(s) to launch the franchise initially and other states to follow in subsequent prioritizing phases;
  3. Identifying what franchisor resources are needed to successfully launch and support the franchise system;
  4. Determining all other business and legal areas on which to focus in preparing your franchise (e.g., business entity structure, IP protection, confidential operations manual, and the key disclosure items, terms and conditions of your FDD and Franchise Agreement);
  5. Preparing and finalizing cost projections and budgets (including professional services fees and state filing fees); and
  6. Establishing priorities and a timeline to prepare and handle all of these projects and tasks.  

If you are considering starting a franchise or have any questions related to franchising, contact Timothy K. Kroninger or Timothy D. Kroninger.

California Assembly Approves the College Athlete Protection Act

Advisory Califas Athlete Protection

On June 1, 2023, the California Assembly narrowly passed legislation that could revolutionize the way college athletes are compensated. If enacted, the College Athlete Protection (“CAP”) Act, or A.B. 252, would open the door for student-athletes in California to receive payments directly from their schools, aligning their compensation with the revenue generated by their teams. Proposed by Assembly Member Chris Holden, a former basketball player at San Diego State University, the bill has gained significant momentum since its introduction in January, receiving approval from the Assembly’s Higher Education Committee and clearing the Appropriations Committee.

The CAP Act, which aims to provide rights, benefits and safeguards for college athletes, requires certain intercollegiate athletic programs at four-year private universities or campuses of the University of California or California State University that receive an average of $10,000,000 or more in annual income from media rights for athletics to comply with specific requirements regarding student-athlete rights. These requirements include a degree completion fund for college athletes, distribution of notices outlining college athlete rights and protection against retaliation for reporting violations. Following graduation, student-athletes would earn access to the designated funds, which not only support degree completion programs but cover medical expenses and improve safety measures. The CAP Act would further establish the College Athlete Protection Program within the Office of Planning and Research, overseeing a 21-member CAP Panel composed of appointed individuals responsible for administering the CAP Act. A California Athlete Protection Fund would also be created, with appropriated funds allocated to the CAP Panel for implementing the CAP Act.

The bill proposes equal pay for both men’s and women’s program members, requiring institutions to demonstrate annual compliance with Title IX. Under the proposed plan, starting from the 2023–24 school year, revenue exceeding the baseline of the 2021–2022 academic year would be shared among student-athletes. Payments to players would be distributed using a formula that allocates half of the funds to male athletes and the other half to female athletes each year, benefiting players in revenue-generating programs. Schools would have discretion over the distribution of any remaining funds in the men’s or women’s pools, potentially providing paychecks to graduating student-athletes in sports that do not generate profits.

The National College Players Association, a California-based advocacy group for college athletes, is a major proponent of the bill. In 2019, they successfully advocated for and helped pass the first state law protecting college athletes’ name, image and likeness (NIL), a move that prompted the Supreme Court to strike down the NCAA’s policies against NIL in 2021. Despite the bill’s uncertainties and complexities, it represents a significant development in expanding college athlete protections through state legislation, and is blurring the lines between “amateurism” and “professionalism” in college sports, challenging the NCAA’s long-held policies that regarded student-athletes as amateurs in their sports.

Although the CAP Act primarily targets California schools and student-athletes, its potential passage could have far-reaching implications for the rest of the country. When California enacted the first NIL bill in 2019, it triggered a wave of similar legislation in other states that were driven by the desire to stay competitive in the college sports arena. If the CAP Act is signed into law, a similar domino effect may occur, creating a nationwide paradigm shift in how student-athletes are able to benefit from their name, image and likeness.

2023 summer associate Dilan Kama contributed to this advisory. Dilan is currently a student at Wayne State University Law School.

Download Varnum's State-by-State NIL Compliance Playbook

Cover of Varnum's State-by-State NIL Compliance Guide PlaybookTo aid individuals, schools and collectives with the often inconsistent and rapidly developing legislative and executive actions of the states, Varnum’s dedicated team of NIL attorneys created an all-inclusive, state-by-state compliance playbook. Learn more and download your free copy: varnumlaw.com/NILguide

IRS Declares NIL Collectives Not Tax-Exempt: Implications for Athletic Boosters

Advisory Nil Irs Linkedin 01 1

In a significant development for higher education athletic boosters, the Internal Revenue Service (IRS) recently declared that Name, Image and Likeness (NIL) collectives, in many cases, are not tax-exempt entities. This ruling carries significant implications for NIL collectives, as it could directly affect tax deductions for athletic donors and the organizational structure of these collectives.

On May 23, 2023, the IRS issued a statement asserting that NIL collectives operating for a substantial nonexempt purpose (e.g., serving the private interests of student-athletes), which is more than incidental to any exempt purpose furthered by the activity, do not qualify for tax-exempt status, reshaping previous assumptions that these collectives operate as tax-exempt entities, like nonprofit organizations. In its memo, the IRS argues that in most cases, NIL collectives, unlike traditional nonprofit organizations, do not serve a charitable purpose or provide a public benefit. Therefore, they do not meet the criteria for tax-exempt status under the Internal Revenue Code.

Tax Implications for NIL Collectives

The IRS ruling is expected to have a significant impact on the operations and appeal of NIL collectives. By removing the tax-exempt status, this ruling could deter donors from joining or forming these collectives in the future. The financial advantages previously associated with the collectives may be reduced and could also lead to increased administrative burdens for NIL collectives. Collectives may be subject to additional reporting and compliance requirements that come with being taxable entities, potentially straining the resources and capabilities of these collectives and requiring them to adapt and restructure their operations accordingly.

Conclusion

Although it has not set precedent, the IRS’s declaration that NIL collectives, in many cases, are not tax-exempt marks a significant shift in the tax treatment of athletic booster activity. While it’s still uncertain how this decision will impact the popularity and viability of NIL collectives going forward, the IRS ruling serves as a reminder of the evolving landscape surrounding NIL and the continuing investigations into the frameworks that govern NIL policies.

Download Varnum's State-by-State NIL Compliance Playbook

Cover of Varnum's State-by-State NIL Compliance Guide PlaybookTo aid individuals, schools and collectives with the often inconsistent and rapidly developing legislative and executive actions of the states, Varnum’s dedicated team of NIL attorneys created an all-inclusive, state-by-state compliance playbook. Learn more and download your free copy: varnumlaw.com/NILguide