A Tip for Free Association Governance Resources

July 13, 2012

By Curtis G. Kimble.

For those that might not be aware, Community Associations Institute (CAI) is a national organization that provides information and education to community associations and the professionals who support them.  Their mission is “to inspire professionalism, effective leadership and responsible citizenship.”  CAI offers a variety of resources to HOAs, including boards, property managers, and people who own, rent or are considering a home in a community association.

CAI has recently published a document called From Good to Great.  It includes the full text from three CAI initiatives—Rights and Responsibilities for Better Communities, Community Association Governance Guidelines and the Model Code of Ethics for Community Association Board Members.   Those who want to see industry standards on homeowner rights and responsibilities, community association governance principles and ethics for association board members can now find it all in this free brochure called From Good to Great.  Click here to see it.

Also, visit this link  for information that can help you better understand the nature, benefits and obligations of living in an association and for additional links to free information and resources from government agencies and nonprofit organizations.  There’s a particularly helpful tip sheet on “Preventing Fraud and Embezzlement” in an association available at that site, as well.

Can an HOA Board Draft their Own CC&Rs?

June 1, 2012

By Curtis G. Kimble.

I am routinely asked if I will review amended governing documents (CC&Rs, bylaws, etc.) which the board, their manager or another person has drafted in order to save money over having an HOA attorney draft them.

While this method can sometimes save some money if the association is just looking for a legal review to determine if any of the provisions are contrary to the law or fatally ambiguous or deficient, unfortunately, the new documents typically just exchange an old set of problems for a new set of problems and can even leave the association with worse documents than the original ones.

What about if a board drafts the documents and a qualified attorney reviews and revises them as necessary?  Unfortunately, that doesn’t work well either for several reasons.

1.  This approach is almost never more cost-effective.  It usually takes more work than if the attorney simply drafted the documents from scratch.   All of the drafting done by the board (or other person), down to even the individual words and punctuation (because certain punctuation can have a big effect on the meaning of a provision), not only has to be carefully and painstakingly reviewed to determine if the language would be interpreted in court in the way intended, to ensure that it complies with applicable laws and regulations, and adequately establishes the legal foundation of the development and the association, but also has to be analyzed together with the rest of the document and the other governing documents to ensure they are all consistent.  Then, revisions, comments and explanations have to be drafted and then conveyed to the board.  All of that is extraordinarily time consuming, and that’s often just the beginning of the revision process.

2.  This approach is never more efficient.  It results in the attorney spending the vast majority of time analyzing language written by someone else to determine what its effects will be in different circumstances, how it will be interpreted by a court, and whether it adequately accomplishes its goal.  One of the biggest problems with that is the attorney does not necessarily know what the underlying goal or intent is.  If the language is unclear at all, the attorney either must seek clarification from the board or must guess from the language itself, and then revise it to more clearly state what the attorney thinks was intended.

This would not be a big deal with a one page document.  But an association’s CC&Rs and bylaws are long, complex documents – and necessarily so.  If there is one thing I’ve learned, it’s that it is better to address potential questions and issues in the documents now and have those documents be a few pages longer, than for the association to be dragged into a long, drawn-out lawsuit over an issue that could have been addressed in the documents but wasn’t.

3.  Things get left out.  Because of the inefficiencies and constraints of this process, important remedies, clarifications, standards, and other language will inevitably be left out that may have otherwise been included if the attorney drafted the documents.  If the board drafts the documents, the attorney assumes the board knew what it wanted and what it didn’t want, and therefore that the documents include things and don’t include things on purpose.

4.  I can say with certainty that the inevitable result with this approach is that much of the language is left by the attorney “as is,” or is revised just enough to be satisfactory, rather than improved to an ideal level, because the budget of the association simply doesn’t allow for the attorney to revise every word and comma necessary in the 50 to 80 page document, or because of the other inefficiencies and constraints of this process.

As a side note, the CC&Rs and bylaws are together a 50 to 80 page document regardless of whether or not they are actually 50 to 80 pages (if they are shorter, they may be inadequate).  In other words, 50 to 80 pages are necessary in virtually any HOA to properly institute all of the provisions (rights, obligations, remedies, procedures, etc.) that should be in an association’s governing documents in order to adequately establish necessary obligations and rights, address common issues of dispute, include policy and procedures that help the association comply with current laws and regulations (both state and federal), and make clear the association’s ability and authority to operate and govern balanced against the rights of its members, all based on current case law, statutes, and local and national best practices.

As if board members and managers don’t have enough liability to worry about, the unauthorized practice of law also exposes them to potential liability.  Drafting a complex legal document defining, granting and restricting the legal rights and obligations of people other than the person drafting it, and which is recorded against the real property of people other than the person drafting it, constitutes the practice of law. As all states do, Utah specifically prohibits the practice of law without a license.

“To leave these issues up to laypersons that aren’t aware of or up to date on the many sources and intricacies of these issues should be unthinkable to any conscientious board.”

But not only that, CC&Rs are the source of broad, complicated contractual rights and obligations that involve property rights and obligations that are tied to the land directly and can affect the ability of owners to sell and finance the purchase of the properties within the association. To leave these issues up to laypersons that aren’t aware of or up to date on the many sources and intricacies of these issues should be unthinkable to any conscientious board. The first goal of drafting any legal document is to avoid expensive court battles over the interpretation and meaning of the terms of the document. Someone who has defended and enforced governing documents in court is able to draft documents effectively by knowing how that document will be interpreted and enforced by the courts.

In an illustration of how intricate and complex contract interpretation can be, the Iowa Supreme Court examined whether a $200,000 special assessment for garage repairs was void because the board failed to obtain preapproval of the repairs from two-thirds of the members in Oberbillig v. West Grand Towers Condominium Association.  The following phrase was in the association’s CC&Rs: “The board shall not approve any expenditure in excess of $25,000, unless required for emergency repair, protection or operation of the Common Elements without the prior approval of two-thirds of the total ownership of the Common Elements.”

Does the word “emergency” refer to all three words “repair, protection or operation” or does it just refer to and modify the word “repair”?  In other words, does an expenditure in excess of $25,000 for the protection or operation (in a non-emergency) of the Common Elements require a two-thirds vote of the members?  The court applied a legal doctrine of interpretation called the doctrine of the last preceding antecedent to rule that no vote of the members was necessary to levy a $200,000 special assessment for the protection or operation of common elements in a non-emergency.

I’ll spare you the boredom of an explanation of the doctrine of the last preceding antecedent.  Suffice it to say, legal documents, especially documents that govern the rights and obligations of dozens or hundreds of homeowners now and for years into the future, should not be drafted by a layperson that is unaware of how seemingly insignificant words and punctuation will affect a court’s interpretation of the document.

Additionally, an HOA attorney who routinely assists boards and property managers with the many issues that face associations on a daily basis knows what problems can and should be addressed in governing documents and how best to address them to minimize problems in the future.  Importantly, they’ll also know whether something properly belongs in the CC&Rs rather than in the rules and vice versa.  They know what works in other associations and what doesn’t.  They know what can lead to hate and discontent and they know what helps promote balance and harmony.

This isn’t to say documents shouldn’t be carefully tailored to an individual community. They definitely should be.  That is why form documents or documents taken straight from another community are never acceptable.

Every board should be careful to recognize the importance of their governing documents.  They should work closely with their attorney to ensure the documents match the needs and desires of the membership.  The attorney will need the input and direction of the board, but the board and manager should stay away from the drafting.

Answers to the Quiz and Announcement of Experts

August 19, 2011

The results are in.  I purposely designed this quiz to be difficult with subtleties that almost amounted to trick questions, and sure enough, it was a difficult quiz.  But, a few experts emerged from the results (if you haven’t taken the quiz yet, go here (link), and take the quiz and then come back and review the answers below).

Congratulations to the following high scorers who have proven that they are not mere layman in the HOA realm:

  • Michael Johnson, FCS Community Management
  • Vernon Rice, Northpoint Homeowners Association
  • Harold Alston, The Cottonwoods Condominium Homes
The fastest submittal with the highest score and the winner of the grand prize $25 Amazon gift card is Michael Johnson (you should receive the gift card emailed to you shortly, contact me if you don’t).

DO NOT READ FURTHER if you haven’t taken the quiz yet!

Here are the answers (in bold):

1. Each board has to present the issue of reserve funding to the association members for discussion and a vote:

  •  √ every year. 
  •  every two years.
  •  never because the board decides reserve funding issues.
  •  never because the law has reserve funding requirements.

2. A board is required to conduct or have conducted a reserve study every _____ years and review and if necessary update it every ______ year(s).

  •  3 … 1
  •  √ 5 … 2 
  •  7 … 3
  •  It depends on the outcome of a vote of the members.

UPDATE:  As of May, 2012, a board is required to conduct or have conducted a reserve study every 6 years and review and if necessary update it every 3 years

3. Every HOA is now required by law to register both as an HOA and as a nonprofit corporation.

  •  True
  •   √ False  (it is not required by law that an HOA be a nonprofit corporation)

4. For claims on the association master insurance policy associated with a particular unit or lot, the association can require that unit owner to pay the deductible if:

  •  the association has set aside an amount equal to the deductible.
  •  it is authorized by a governing document of the association.
  •  the owner is at fault (caused the incident or was negligent).
  •  √ all owners had been notified of the deductible responsibility.

5. Every HOA in the state has to update their HOA registration information with the Department of Commerce:

  •  annually.
  •  within 30 days of a change in the information.
  •  within 90 days of a change in the information. 
  •  never because only an initial one-time registration is required.

6. A board can use reserves funds in an emergency for daily maintenance expenses:

  •  only once in a 2 year period.
  •  if authorized by the association governing documents.
  •  √ after receiving approval from a majority of the members. 
  •  Never.

7. During any period that an HOA fails to be properly registered with the state, the HOA:

  •  cannot file a lien against any unit or lot.
  •  cannot enforce a previous lien against a unit or lot.
  •  can seek a judgment against an owner for past due amounts.
  •  √ all of the above.  (The HOA can still pursue a personal judgment against a delinquent owner or past owner, even if it can’t enforce a lien.  Remember, assessments are both a personal obligation of an owner (meaning the HOA can pursue the personal assets of the owner for payment) and a lien on the property (meaning the HOA can pursue the property itself, by foreclosure or by effectively preventing its sale because of a recorded notice of lien)).

Thanks for playing!

Curtis G. Kimble

A Follow Up on Fidelity

August 2, 2011

As a quick follow up to my post on June 28, 2011, regarding embezzlement and fidelity insurance, this complaint underscores the importance of fidelity coverage even more.  Even if you never have an issue with misuse of funds or embezzlement, a lack of fidelity coverage could affect the ability of owners to buy and sell units within your association.

FHA, Fannie Mae and Freddie Mac all require that condominium associations carry some level of fidelity insurance, even if the association has professional management which handles the day to day aspects of collecting assessments.   Even a conventional loan with 20% down is likely to be sold by an initial lender on the secondary lending market and thus the loan must meet Fannie Mae and Freddie Mac standards.

While Wells Fargo didn’t exhibit best practices in the situation described in the link above, it’s always the best practice for an HOA to carry fidelity insurance coverage.

Curtis G. Kimble

Don’t be a Hater! Or Your Peeps Will Accuse the Board of Selective Enforcement

July 22, 2011

As illustrated in this comical but true story: “Chris Brown on Condo Complaints: I’m Being Setup by Haters!” it’s vitally important that an association’s governing documents are in order and that they clearly outline the rights of each owner, including rights to parking spaces.  If parking spaces must be used as handicap spaces at some point due to a Fair Housing request, ensure that the whole process is done legally and properly under the governing documents and the law.  Consult professionals as needed, especially an attorney in the case of a Fair Housing request for reasonable accommodation.

The story in that link above also brings to mind the importance of clear and specific enforcement provisions in the governing documents.  If someone scratches their initials in the elevator, can you fine them?  What about excessive noise or other vandalism?

Perhaps most importantly, this story shows the importance of treating members equally and fairly.  In HOAs, the stakes are high.  Financially, the home is a major investment.  Psychologically, it may be even more important as a safe haven and source of security.  On the other hand, living in an HOA requires some sacrifices of individual freedom for the communal good.  The sacrifices must be fairly shared, however.  Unequal treatment of members who are similarly situated will lead to issues more serious than being called a hater.  The number one problem we see is when personality issues are the impetus behind an enforcement issue, rather than the goal of equal, consistent and uniform enforcement.  Contact us for guidance in any enforcement situation where determining what is fair is causing or may cause difficulty.

Curtis G. Kimble

Are Automatically Renewing Service Contracts Valid in Utah?

July 12, 2011

This entry deals with contracts within your HOA that “automatically renew” for periods of time beyond that which was originally contracted for.  Many contracts that an HOA Board signs with a  vendor such as a landscaper, pool company, property manager, etc., are intended to “renew” after the inital period expires, unless you, the HOA, give notice of cancellation.  Strictly speaking, there is nothing wrong which such renewal provisions but both your vendors and the HOA needs to know what must, by statute, be contained in such a contract in order for the auto-renewal provision to be valid.  If the statutory language is NOT contained in the contract, then the auto-rewnewal provision is null and void per public policy.    For purposes of this blog entry, I am referring to Utah Code 15-10-101 et seq.

Here are the basics.  As always, before your HOA takes drastic measures to terminate a contract for failure to comply with the Act, please contact us to make sure your actions are proper.   Otherwise you could be alleged to have breache your contract with a particular vendor.  This blog entry is for information purposes only.  Note that the discussion below is for contracts entered into after July 1, 2011, the effective date of the amendments to the existing Act.  However, if you have a contract that was signed before July 1, 2011 and it contains an auto-renewal clause, the prior version of the Act applies.  Again, please contact us if you want to discuss an existing contract.

First, both condominium and PUD association’s are deemed “consumers” under the Act.  “Seller” means any person or entity providing service, maintenance or repair under a service contract.  “Service Contract” means a contract for service, maintenance or repair in connection with real property; or that provide a benefit to the real property.

So, a HOA contract with an accountant probably does not fall under this Act but one with a landscaper will  (Tip:  a lot of HOA’s find themselves in contracts that just are not workable, affordable or beneficial over time.  This Act may provide a way out of such situations but be very careful and  please contact us first).

Second, there are strict notice requirements that must be in the contract in order to make the auto-renewal provision valid.  In other words, auto-renewal clauses are permissble but only if the proper notice is contained in the original contract.

Third, keep in mind that the notice requirements for a service contract entered into after July 1, 2011 and which automatically renew after the expiration of the original term, fall into 2 categories:

(a)  Contracts that renew for periods less than 12 months:   The requirements of “b” below all apply except for the provision requiring that “notice be displayed prominently on the first page.”

(b)  Contracts that renew for periods greater than 12 months  (for example, renews for a 24 month period):  The “Seller” must provide written notice of the automatic renewal provision prominently on the first page of the service contract.  In addition, the seller must provide written notice to the HOA (1) personally, (2) by certified mail; or (3) by prominently displaying the notice of the renewal on the first page of a monthly statement.  The Seller must provide the notice (described above) no later than 30 days (but not sooner than 90 days) before the last day on which the HOA may give notice of the HOA’s intention to terminate the contract.

Fourth, the wirtten notice must be in clear and understandable language and printed in an “easy to read” type size and style.

Fifth, if the above requirements are not complied with the automatic renewal provision is void and unconscionable as a matter of public policy and the contract renews on a “month to month” basis.

Obviously, I am not suggesting that you can or should try to “break” every contract that automatically renews.  I do feel, however, that this statute is an important tool for an HOA to understand in order to help you avoid contracts that truly are not in your best interest.

Once again, thanks for reading this entry.  We have a lot more to come!  Best regards, John Richards

Embezzlement in an HOA?

June 28, 2011

If there’s one thing you do as a board member (and I mean if it’s literally the only thing you do as a board member because you’re too busy to be involved, or because the president or the property manager does everything), you need to make sure there is current fidelity insurance coverage for the association (protecting against loss of money from  dishonesty, embezzlement, forgery, etc.).

Recently, I’ve had involvement with an association where two of the three board members were simply not involved at all in the operation of the association and the third board member embezzled funds, failed to pay bills, and let the insurance lapse.  Finally, one of the lawsuits that had started to come in because of unpaid bills got served on one of the other board members and that clued him into the fact that something was amiss.   Of course, the embezzling board member had let the insurance coverage lapse long ago so there was no coverage and the association had to levy a large special assessment just to pay the outstanding bills.

Embezzlement, forgery, and other similar things may sound like exotic, foreign things that only happen in big corporations or in the movies, but it happens wherever you are and in HOAs of all sizes.  The HOA I mentioned above had less than 20 members.  No one is immune.  Besides the situation above involving a board member, I’ve had experience with an HOA where an employee of the property management company siphoned HOA funds for his personal use.

Even if you are actively and directly involved as a board member and you even look at monthly bank statements for your HOA, make sure they are the original bank statements, not something generated by a personal computer.  In the HOA in this story:  Police say woman stole from condo group, the treasurer used a computer to generate statements that made it appear that she was spending money on maintenance work that was never done. 

Curtis G. Kimble 

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