Many communities were established with governing documents that worked well for the developer, but may or may not work so well for the HOA and the homeowners. Many of these governing documents are outdated. Whether they are 10 years old or 50, Utah and federal laws, as well as best practices pertaining to community associations have changed substantially in recent years. If your board of directors has not engaged in an audit of your community’s governing documents in the past 6 to 8 years, it should.
What is an “audit” of our governing documents?
An association's governing documents are its CC&Rs (declaration), bylaws, articles of incorporation, and rules and regulations. An “audit” of your documents is an in-depth review by the HOA’s board of directors (in conjunction with your association attorney, as necessary) to identify significant sources of risk and potential for dispute, or unnecessary or overly burdensome requirements (causing increased time and costs to the association over time), or insufficient provisions or authority.
The board reviews each document noting any sections that lack clarity, are no longer enforced or are no longer applicable, appear to not apply to your community, protect a long-gone developer, do not provide the association with adequate remedies, or do not match the actual practices of the HOA. The board prepares a list of concerns or issues facing the community, such as homes that are not being maintained, high number of rentals, maintenance responsibilities that are unclear or that do not match actual practices (as to who is responsible for what), delinquent assessments, or enforcement capabilities of the association. The board provides this information to the association attorney.
When should documents be amended?
Although there are many reasons for amending documents, these 7 reasons are the most common:
1. The documents do not comply with Utah or federal law.
The board of directors for a community association are volunteers. Documents that do not comply with the law create difficulties and expense for a community association. Board members read the documents and determine that they should be enforcing a covenant, only to find out that the covenant has been preempted by a change in the law. Rather than require constant attorney involvement to interpret and advise the association on whether provisions of the documents have been changed by new legislation, amended documents that comply with the law permit a board to fulfill its duties without continued and constant attorney involvement.
Example: The CC&Rs for the ABC HOA require an owner to pay a fee to the association for review and approval of architectural or design plans for the construction or improvement of a lot. The fee is a general fee and is not tied to any actual costs the association incurs. A recent Utah law now prohibits HOAs from charging a fee for review and approval of plans that exceeds the actual cost of reviewing and approving the lot plans. The ABC HOA only incurs the time of its volunteers to review plans submitted to it for review and approval, it does not incur any actual costs. The ABC HOA may not charge a review fee and the board would be breaking the law if it attempted to enforce the CC&Rs as to this issue.
2. The documents include declarant/developer language.
Once the developer/declarant is no longer around, the governing documents should be amended to remove the provisions regarding developer/declarant rights. These provisions are usually no longer relevant and make it much more difficult, time consuming and confusing to read the governing documents and ascertain the rights and responsibilities that are relevant today. Removal of these provisions provides clearer, simpler documents that are easier to read, reference and interpret, thereby saving valuable time and reducing the risk of misinterpreting and misapplying the governing documents.
3. The documents contain high quorum percentages for meetings or overly difficult requirements for amending the documents.
Many associations are faced with apathetic homeowners. Reducing quorum requirements permits an association more flexibility in conducting business, and at the same time, can encourage homeowner participation because the owner who wants to vote “no” on an issue can choose not to come to a meeting, and effectively, the “no” vote is exercised by not participating. Increased quorum requirements make it necessary for the owner to participate in the meeting in order to register their “no” vote.
Amending documents should not be an impossible process. Communities need to be prepared for change and they need to be able to change their documents to match the intent and desires of the community as it matures and develops, rather than reflecting a template adopted by the developer years ago. The process for amending documents should be as efficient as possible. If the percentage of owners required to approve an amendment is overly high, approval of an amendment can be controlled by an apathetic or contrarian minority of homeowners. The percentage should be reduced to a number that allows the community to adapt in the future as needed.
4. The documents require approval by mortgagees.
Although this requirement is still necessary for condominium communities to permit financing through government guaranteed loans, single-family communities no longer require mortgagee approval. In our ever-changing mortgage world, non-condominium communities who want to consider removing mortgagee requirements may also want to consider authorizing the board of directors to make changes to the documents if necessary for government guaranteed loans.
5. The documents only permit the association to enforce the covenants and rules by filing a lawsuit.
Filing a lawsuit is the most expensive enforcement remedy available to an association. Amending the documents to permit assessing fines or other penalties, such as suspending voting rights, permits less-expensive enforcement by the association. Associations should also consider adding provisions that permit the association to “self-help” in certain situations. Homes that are neglected, in disrepair or in violation of the CC&Rs have plagued some communities. Permitting the association to correct the deficiency and assess the costs against the owner can be more efficient and less expensive than a lawsuit.
6. The documents include unrealistic caps on increases in assessments.
All communities want to keep the assessments low. However, the governing documents spell out the responsibilities of the association regarding maintenance, repair, replacement and other expenses. The association must be able to carry out the requirements in the governing documents and must have the funds to do so. The reality for some communities is that they may at some point be unable to pay necessary operating expenses and adequately fund reserves because the documents restrict how much assessments can be increased without the approval of a certain percentage of the homeowners. For instance, a community’s CC&Rs might require the approval of 67% of all homeowners to increase assessments by more than 5%.
This is backwards. CC&Rs should not impose certain responsibilities on the association and at the same time undermine the ability to carry out those legal responsibilities by potentially allowing a minority of owners to block the association from carrying out those responsibilities, even if favored by a majority of the owners. Amending the documents permits the association to replace antiquated caps with a cap that permits appropriate budgeting by the association.
Example: The CC&Rs for the ABC HOA require the approval of 67% of all homeowners to increase assessments by more than 5%. Due to this restriction, years have gone by with no increase in the regular monthly assessment, despite inflation and increased costs. Finally, the association simply doesn’t have the money to meet its responsibilities, so a vote is conducted to increase assessments by 10%. 65% of the homeowners vote in favor. The assessment increase therefore does not pass, and a minority of 35% of the homeowners has blocked the association from carrying out its responsibilities mandated by the CC&Rs.
7. The documents include strict limitations on the types of construction materials permitted in the community or other strict design guidelines.
Construction materials of today have changed. Providing flexibility in the documents to permit the use of new materials is not only owner-friendly but also may provide a substantial cost savings to the association for its responsibilities. Additionally, changing the structure of the governing documents to place the major restrictions or guidelines in the recorded CC&Rs and then authorizing the board or architectural committee to promulgate additional, detailed guidelines or standards by separate rule allows for more efficient, cost-effective changes and refinements to those guidelines and standards in the future.
Your HOA's governing documents should reduce and mitigate the association's risk, not create or compound it. Review your governing documents today and determine if new documents will help your association reduce risk by complying with current law and recommended practices. Always use a qualified HOA attorney to avoid the pitfalls of the board or someone else drafting CC&Rs, bylaws or amendments.
By Curtis G. Kimble