Because association reserves perhaps play a more important role than any other issue, with the exception of insurance, in the long term viability of a homeowners association, I’m hard pressed to find an issue that triggers the concept of fiduciary duty more than the decision of whether or not to fund an association reserve account and in what amount to fund it.
Every board member is legally bound by a fiduciary duty to his or her association. It is the duty to act in good faith and in the best interests of the association. This means a board member cannot put his or her own interests before those of the association. This duty imposed by law is a very powerful tool. It is not taken lightly by the courts and breaching this duty subjects a board member to personal liability.
A new law was passed in Utah that is a little disconcerting to me. It completely circumvents the tool and safeguard of fiduciary duty when it comes to association reserves. It requires the board to present a reserve study to the homeowners at the annual meeting each year and that a simple majority of those homeowners that show up at the meeting will determine whether to fund a reserve account and the amount of the reserve account, thereby taking the decision completely out of the hands of the board.
If there’s one thing I’ve learned in my years of practice in HOA law, it’s that the individual owners don’t always have the best interests of the association in mind. It’s usually the other way around, they are concerned with their own best interests. There’s nothing wrong with that, it’s human nature – something the folks on Capitol Hill don’t get, apparently.
As an owner of a home within an HOA myself, I personally have no interest in what the other homeowners in my HOA think about whether to fund a reserve account and in what amount to fund it. The only individuals who are legally obligated to put the association’s best interests before their own are the members of the board. The individual homeowners are free to put their own interests first, to be selfish and short sighted, to take the attitude that they may not live here in a few years, so why should they fund expenses ten or fifteen years down the road. Board members are not. They are bound by fiduciary duties to the association as a whole. If board members breach this duty, that’s a different issue and there are remedies for that. But, as a homeowner, I want that duty to be attached to decisions regarding funding of reserves.
As an attorney who has had to repeatedly deal with the fallout and consequences of inadequate or nonexistent reserve accounts, I hope the collective wisdom of a majority of homeowners at a meeting will allay my above concerns as this new law goes into effect.