- Compliance with Governing Documents and Applicable Law
- Maintenance
- Budgets
- Reserves
- Assessment Collection
- Enforcement of Rules
- Elections, Board Meetings and Actions, Officers
- Standard of Conduct for Board Members
- Representing the Homeowners, Insurance
- Records
- Communication and Transparency
- Discrimination and Fair Housing Requirements
New board members naturally have many questions about what their duties are and what authority they have. This primer is a brief, concise introduction to many fundamental concepts of association governance, operation and management every board member should be familiar with.
I. Compliance with Governing Documents and Applicable Law
Condominiums are bound by the Utah Condominium Ownership Act. The Utah Community Association Act applies to non-condominium HOAs. All associations, when incorporated, are subject to the Utah Revised Nonprofit Corporation Act. It is essential that you understand what type of HOA you live in (condo or non-condo) because the law that applies to a particular association is determined by what type of community it is and whether the association is incorporated and currently registered as a nonprofit corporation. Other areas of law apply as well, and all of these laws must be strictly followed. Each board member is obligated to know and follow the applicable law and the governing documents of the association (if you’re in a condominium association, you may be more familiar with the term “management committee.” The terms “board” and “management committee” are synonymous, I use the term “board” in this primer).
In addition to the express requirements of law, a board member must be familiar with the controlling documents which form a contract between the homeowners themselves and between the homeowners and the association. These governing documents typically include the declaration (the CC&Rs), the plat map(s), the articles of incorporation, the bylaws, and the rules and regulations. The governing documents are the source of most of the authority, rights, and obligations of the association and the homeowners and they form the road map for the association because they dictate which actions must be taken and which actions cannot be taken, both by the board and the homeowners.
It’s vital to understand that the governing documents are not guides containing mere recommendations for operation of the association. They are binding contracts, their terms must be followed, and they must be followed strictly and precisely. A court will look at and enforce every sentence, even every word and punctuation mark, of a governing document. A board cannot afford to take them lightly or be ignorant of their content. One of the most common sources of lawsuits in associations is the failure of the board to know and abide by the governing documents and the law.
Sometimes the governing documents will conflict with provisions of the applicable statutes. In general, the statutes will prevail over conflicting provisions of the governing documents (except when the statute specifically defers to the declaration or bylaws). The declaration generally governs over conflicting provisions of the bylaws, and the bylaws generally govern over conflicting provisions of any rules and regulations adopted by the board.
Every board should conduct periodic reviews of governing documents to ensure legal compliance and to determine whether amendments are necessary. Your CC&Rs should not be viewed as set in stone, ageless, or otherwise immutable. Effective governing documents are not stagnant, but change with the times to meet the association’s needs and reflect changes in the law and best practice standards.
Many of your association’s practices may have changed since its inception. In addition, courts continue to review the workings of HOAs and to interpret different provisions of CC&Rs. Legislatures and courts continually change and interpret the law. Do your governing documents reflect these changes and recent court decisions? Do they provide clear guidance for maintenance, enforcement, collecting assessments, insurance, water damage, and so forth? Do they reflect current best practices for HOA operation and management? Every board should consider these things and consult their association attorney, as necessary.
II. Maintenance
A primary function (if not the primary function) of most associations is the repair and maintenance of common areas and, in attached or stacked housing (such as condos and townhomes), the building exteriors. Sometimes, the association maintains part or all of the landscaping of the individually owned lots, as well. But, generally, responsibility for those portions of the property which an owner has an exclusive right to use or possess will fall upon the individual owner.
However, there is no general rule applicable to all associations. The key is to remember that the maintenance responsibilities of the association and the owners are established in the declaration.
The board must become very familiar with the property, they must know who is responsible to maintain what, and they must know (or estimate) what is and will be needed to properly maintain the property. Part of this process is evaluating the costs of both short term and long term maintenance, knowing what the budgetary constraints of the association are, and developing a plan for carrying out the maintenance necessary for a valuable and beautiful property and required by the declaration.
An effective plan for maintenance should provide for how and when to provide repairs to each element of the property in order to assure the components will enjoy their maximum useful lives and repair costs will be kept to a minimum. Some key goals of such a plan include: (1) preserving the investments of the owners by extending the life of building components and sustaining and enhancing the value and appearance of the property, (2) helping buildings and related equipment function as they should and operate at peak efficiency, (3) preventing failures of systems and equipment by regular inspection, preventative maintenance, and replacement, (4) preserving a safe and healthy environment for residents, (5) providing cost-effective maintenance by performing timely repairs, preventative maintenance, careful planning, and organized and effective bidding, scheduling and oversight of maintenance, repair and replacement work.
III. Budgets
A budget is an estimate of anticipated revenues and expenses for the upcoming fiscal year. A budget serves several purposes, not the least of which is determining what the regular assessment amount will be for that year. But, it also serves as a means of disclosure and communication to the homeowners. It discloses what the assessments will be used for and how they were determined. Preparing a budget should not consist of simply carrying over the assessment amount from last year and then trying to figure out how to best spend the money.
In preparing the budget, the board must first determine the costs of necessary and proper association operation and management for the coming year, plus a reasonable reserve. Begin by reviewing the financial statements (including income statement, balance sheet and the comparative budget for the current year) and determine what the association spent this year. Look at the trend for the expenses and determine where there are excesses and shortages with respect to the current working budget.
The more fixed-price common expenses in the budget, the better to limit variances between actual and budgeted expenses. Obtain signed contracts with as many vendors as possible during the budget process, especially for any large expense. Don’t rely strictly on history or trends. Contact all utilities to see if they their services are anticipated to increase in pricing for the coming year and how much. Do the same with your insurance provider.
A separate portion of the budget should be used to fund long-term maintenance items, or “reserve components.” Review the most recent reserve study and allocate the monthly reserve expenses directed by the study.
Once the necessary costs of operation and reserves are established, then the monthly assessment is determined by dividing the annual budget among and between the homeowners.
Be extra careful to budget for bad debt. Bankruptcies, foreclosures and chronic delinquencies are inevitable, and since the funds needed by an association are divided up among the homeowners, these events will cause a shortfall. Past history regarding receivables and bad debt can be helpful in budgeting for bad debt, but every situation is different and this line item is crucial to spend some time on and estimate conservatively.
IV. Reserves
It’s only fair that the homeowners who use the property contribute toward the maintenance, repair and replacement of the property, including roofs, streets, building exteriors, and other major components. But what if a particular component is used and enjoyed for many, many years and then major repair or replacement is performed all at once in a given month or year? Who should pay for that? Just the members of the association at the time the maintenance happens to be performed?
Obviously, the only fair method is for all owners to contribute to these long-term maintenance expenses consistently and equally over time. Not only that, but a special assessment to fund such projects can be very difficult to get approved by the owners, as is required by most governing documents, and can be notoriously difficult to collect from less solvent homeowners.
Utah law requires all homeowner elected boards to conduct a reserve analysis. A “reserve analysis" is an analysis to determine: (a) the need for a reserve fund to accumulate money to cover the cost of repairing, replacing, and restoring common areas that have a useful life of three years or more, but excluding any cost that can reasonably be funded from the association's general budget or from other association funds, and (b) the appropriate amount of a reserve fund. The board may conduct a reserve analysis itself or engage a reliable person, as determined by the board, to do it.
A board should be careful to determine what is an operational versus a reserve expense. Operational expenses are reasonably predictable, occur at least annually and can be effectively budgeted for each year. Reserve expenses are major expenses that occur less frequently and must be budgeted for in advance in order to have the required funds on hand when needed.
Once each long-term maintenance item is identified, their remaining useful lives and replacement costs must be determined, and a schedule for funding replacement costs created. The traditional method of calculating required reserves is the “straight-line” method where the replacement cost in today’s dollars, minus accumulated reserves, is divided by the estimated remaining life of the components. For example, assume that the roof on a condominium building has a twenty year useful life, is ten years old, and will cost $100,000.00 to replace. Further assume that the current amount of money in the roof reserve is $50,000.00. The association will need to collect $5,000.00 per year, over the next ten years, to accumulate another $50,000.00 so as to “fully fund” the roof reserve. Similar calculations are then made for all other required reserve items and the annual contribution required to fully fund the reserve account is thus arrived at.
V. Assessment Collection
A homeowners association is entirely funded by the assessments of its members. This means that an owner's delinquency in paying assessments directly affects the association's ability to operate. Owners who do pay their assessments subsidize the delinquent owners who are not paying.
The situation could be made worse yet if the paying owners had to pay more money yet to implement collection remedies against delinquent owners. Fortunately, Utah law provides that community associations are entitled to recover their attorney's fees and costs from the delinquent owner.
One of a board’s primary duties is to take every reasonable action to collect assessments. It is crucial that the board take timely action on delinquent accounts. The longer a debt goes unpaid, the more difficult it can be to collect. Associations have several options and remedies when collecting delinquent assessments, some of which can be quite powerful.
Problems collecting assessments arise when an association has insufficient or ineffective procedures for collecting delinquencies. To avoid problems, a board should implement and follow a written collection policy that includes procedures for: 1. identifying accounting errors, 2. maintaining accurate mailing addresses of owners, and 3. identifying potential claims the owner may make against the association.
When an owner becomes delinquent and fails to respond to notices and letters, it is important that the board preserve the association's rights by turning the matter over to the association attorney to properly and lawfully pursue appropriate legal remedies. These remedies include, among other things, attorney demand letters, liens, lawsuits, and foreclosure of the association’s lien through sale of the property.
Properly recording a lien early on is the single most important remedy, as it secures the association’s interests and gives notice of such interests in the event of the sale of the property, bankruptcy or foreclosure. If attorney demand letters and liens are ignored by a homeowner, a collection action is generally pursued by either foreclosing the association’s lien by sale of the property, or by pursuing a judgment against the owner in court.
Other remedies include acceleration of the entire year's assessment amount, collecting rent from the tenant of a delinquent owner, and shutting off a delinquent owner’s common utilities (such as water, cable, etc.). The law strictly governs the use of these remedies, so they should only be utilized with the counsel on the association’s attorney.
VI. Enforcement of Rules
Covenants and restrictions without enforcement are ineffective. Besides maintenance, the other chief function of an association is enforcement of the covenants and rules governing the community. Even though the individual property owners ordinarily have the power to enforce the covenants, collective enforcement by the community is one of the main benefits of owning property in a common interest community. However, every board must act reasonably in exercising enforcement powers and must pay careful attention to the law and the association governing documents. Well drafted governing documents make it clear that the board has the ability to exercise judgment and decide what is appropriate in each circumstance.
The duty to treat members fairly requires consistent application of the rules. A board cannot selectively enforce a rule against one resident and ignore the same violation by another resident. Selective enforcement differs from making an informed business decision that enforcement is not appropriate in a particular situation and fully documenting that decision.
Notices of violations, fines, withdrawal of privileges to use recreational facilities, various self-help measures, and litigation may be used to enforce the rules. Fines are commonly used and can be very effective to deter violations. Withdrawal of privileges is particularly appropriate for violations of rules governing their use, but can be effective in other circumstances, as well. Self-help can range from the board removing or correcting an offending object or circumstance to turning off utilities, but self-help must be specifically authorized in each case by law or the governing documents.
In all cases, the situation should be addressed in a manner that is reasonably related to the severity of the violation. The board should always follow well-publicized procedures that give residents the opportunity to correct violations before imposing fines or other sanctions. The board should provide a process that residents can use to appeal enforcement and fining decisions and that allow residents to bring grievances before the board.
VII. Elections, Board Meetings and Actions, Officers
A. Elections.
The most fundamental principle of association governance is that the membership elects their representatives to serve on the board. It is the duty of the board to ensure a fair and free board election in strict conformance with governing documents. The board must establish procedures necessary to be sure that there are qualified candidates and that each homeowner has the opportunity to vote and participate in the political process. Each candidate should have an equal opportunity to express their views.
B. Board Meetings.
The homeowners are entitled to be fully informed about the decisions and actions of the board, and to exercise oversight through the political process. The board should share with the homeowners the information and facts of the problems and issues that face the association, and patiently explain the rationale and reasoning behind board decisions.
Most associations allow the homeowners to address the board at the regular meetings of the board and to address the members at the annual meeting. These meetings are a great opportunity for the board to communicate with the homeowners and to obtain input and advice from the members. It is necessary for the board to hold regular meetings in sufficient frequency to properly and efficiently handle the affairs of the association. Most boards meet monthly or quarterly.
C. Rights of Board Members.
As a member of the board, you have the right to proper notice of, and to attend, every meeting of the board, and the right to make proposals, and vote on the decisions and actions of the board. It’s important to remember that the only way an association can operate is through the decisions of its board. The board may delegate many decisions and actions to its manager or the president or other officer or committee, but the decision to so delegate is made by the board. No one member of the board (or anyone else) has any authority to act or make decisions for the association except as permitted in the governing documents or as authorized by the board.
D. Board Decisions and Actions.
Board decisions are made by a majority of those board members that are present at a meeting, after a quorum has been established. It’s not uncommon for boards to need to conduct business outside of a regular board meeting, in which case the board needs to call a special meeting of the board (and provide the required notice to all board members), or conduct the business without a meeting at all, which is referred to taking “action without a meeting.”
The law dictates that a very specific procedure be followed to make decisions and take action without a meeting, including that each board member must agree to forego a meeting. Your bylaws may have specific requirements, as well. Making decisions and taking action without a meeting can be the most effective and convenient way to conduct certain business. But, it has to be remembered that meetings are generally required by law or your governing documents, and the purpose of this is so that each board member is afforded full notice and an opportunity to participate and vote in decisions of the board. If the board takes action without a meeting, care must be taken to ensure that each board member’s rights are not diminished or cut-off in any way.
E. Officers.
Another typical duty of the board is to appoint officers, such as the president, vice president, secretary or treasurer of the association. It is important for the board to exercise careful oversight of the actions of the officers between meetings of the board. The officers should account to the board for any decisions or actions taken on behalf of the association. The authority that each officer has to make decisions or act separately and apart from the board is set forth in the association’s bylaws. If the documents do not explain the authority and duty of each officer, then the officer has that authority that is given to them by the board (and only that authority). In other words, a board may assign to the president the duty and authority to conduct the day to day business of the association. The president can then make decisions and perform acts necessary for the daily operation of the association, such as overseeing weekly landscaping, or other issues that cannot practically involve the entire board. Note that the law requires that the bylaws or the board must specifically delegate to an officer, or other person, the responsibility for the preparation and maintenance of minutes of the board and members’ meetings and to maintain the other records of the association.
VIII. Standard of Conduct for Board Members
Every board member is held to a certain standard that regular homeowners are not. The reason for this is obvious. The business, affairs, and powers of the association are managed and exercised by the board of directors, not the individual homeowners. So, the directors are held to a high standard. A board member must make decisions and otherwise discharge his or her duties: 1. in good faith, 2. with the care that an ordinarily prudent person in a like position would exercise under similar circumstances, and 3. in a manner the director reasonably believes to be in the best interests of the association. If these standards are followed, then the board members are generally protected from personal liability.
Board members owe a fiduciary duty to the homeowners to manage and operate the association according to the three standards above. This means that the board must exercise “business judgment” in making decisions while operating or managing the association. Business judgment involves making rational, informed decisions in good faith. The board must strictly follow the law and the governing documents and apply and enforce them in a fair and uniform manner. The board must obtain and consider all of the relevant facts and circumstances, identify the various options available to the board, and carefully weigh which course of action would be in the best interests of the association and its membership as a whole. It is important to do this even if it is decided by the board that no action will be taken at all regarding a particular issue. In such a case, the minutes should reflect that the board considered an issue and decided not to take any action, then it becomes a decision—not simply inaction, so it is protected under the business judgment rule.
The fiduciary duty owed by board members requires that they cannot act out of passion or prejudice, personal self-interest or gain, or through revenge or other negative motivations. The rational basis for all decisions must be the best interests of the association consistent with its purposes.
This fiduciary duty owed by each board member to the homeowners is the same one that directors of publicly traded corporations owe to their shareholders. Of course, the directors of major corporations are sophisticated and experienced business persons and they have professional executives, accountants, and attorneys to assist them at every step. Although the extent and scope of activity of an association board may not be as broad as the activities of a major corporate board, the extent, scope and ramifications of an association board’s decisions are far reaching enough that it’s incumbent on the board to engage professionals on a regular basis.
Many associations retain property managers to operate the day to day affairs of the association and to guide and assist the board. A manager's service can be very valuable to the association, but be aware that property managers are not all created equal. Just like any single officer, the board as a whole has to closely supervise and direct the manager. A board should consult with various professionals such as attorneys, accountants and financial advisors often, or at least occasionally, to ensure the association is being operated properly.
IX. Representing the Homeowners, Insurance
The board represents the interests of the association as a whole and, generally, any matter that affects the collective interests of the homeowners, as opposed to the individual rights of an owner, is appropriately handled by the board.
The board must ensure that all tax obligations of the property as a whole have been met, and that the property has the necessary and required insurance. Requirements for insurance are set forth in the Condo Act and the Community Association Act. Note that the statutory insurance requirements will supersede your declaration and it’s very possible that they conflict, because of changes to the law. The board must insure the property against casualty and loss, and must obtain liability coverage. It’s also imperative to include Directors and Officers coverage, as well as fidelity coverage.
One of the first things you should do on the board is make sure that your association has a comprehensive Directors and Officers (D&O) liability insurance policy. Discuss your D&O policy with your insurance representative and your association attorney. They will know the best policies that are available. Consider the option with the most coverage. This is a critical issue. You are a volunteer and you simply should not accept undue risk of liability. Your association is likely required to indemnify the board members from any liability, but you need to ensure that the association is financially able to accomplish this through proper insurance.
X. Records
One of the common traps associated with volunteer operation of an HOA by otherwise busy board members is the failure to properly document all actions of the board and to keep proper records. One of the biggest problems arises when a homeowner requests to inspect the records of the association and the board is unable to produce complete records in a simple and timely fashion.
A condominium board is required by law to keep detailed, accurate records in chronological order, of the receipts and expenditures affecting the common areas and facilities, specifying and itemizing the maintenance and repair expenses of the common areas and facilities and any other expenses incurred, and to make those records available for examination by any unit owner.
All incorporated associations are required to keep the following as permanent records: accurate copies of the association's declaration; articles of incorporation; bylaws; all amendments to the foregoing; plats; rules and regulations; board resolutions; minutes of all board and member meetings; a record of all actions taken by the members or by the board without a meeting; waivers of notices of meetings; an alphabetical listing of the names and addresses of the members; copies of all written communications to members in the last three years; a list of the names and addresses of its current directors and officers; appropriate accounting records that show the assets and liabilities and results of the operations of the association; and records of receipts and expenditures specifying and itemizing the maintenance and repair expenses of the common areas and other expenses.
Other items that should be part of an association’s records include: insurance policies, contracts, leases, and other agreements in effect.
Homeowners are allowed by law to have reasonable and timely access to these books and records, so they should be kept in an organized and easily producible or accessible format. A board should consult the association’s attorney before denying an owner access to any records.
XI. Communication and Transparency
Every board member should actively engage homeowners and maximize communication within the association. The board should share with the homeowners the information and facts of the problems and issues that face the association, and patiently explain the rationale and reasoning behind board decisions. The majority of association conflict arises from lack of communication - actual or perceived. Information related to the association should be liberally disseminated. The board should provide at least one form of regular communication with homeowners and use it to report substantive actions taken by the board, the general financial condition of the association, and other issues affecting the association. For instance, if the board knows that major roof repair and replacement is imminent, it should make the details known to all residents well in advance of the actual repair project (months or even years in advance). Consider forming a committee or creating an interactive website to encourage and obtain input from owners, as well as to distribute and communicate information.
The board should conduct business in a transparent manner when feasible and appropriate. It should share critical information and rationale with residents about budgets, reserve funding, special assessments and other issues that could impact their financial obligations to the association. Ideally, the board should give members an opportunity — before final decisions are made — to ask questions of a representative who is fully familiar with these financial issues.
XII. Discrimination and Fair Housing Requirements
Both the federal and state Fair Housing Acts prohibit discrimination by HOAs and landlords. The most common problems arise out of the language of the declaration or the rules or in the refusal of a board to grant a “reasonable accommodation” in the case of a disability. The governing documents must be written and enforced in a neutral fashion as to the protected classes (such as families with children). For example, the association may not set an “adults only” time for use of the pool and generally may not restrict children from access to recreational services or amenities provided to other residents. In the case of a disabled resident, reasonable accommodation in the rules and restrictions must be made as necessary for a disabled individual to use or enjoy a dwelling. See the Fair Housing Act section for a summary and explanation.
If you are in an age restricted community (e.g., a 55 & older community), there are specific requirements that must be followed on an ongoing basis by the association, including establishing procedures and performing periodic surveys. In order to avoid jeopardizing the association’s status as an age restricted community, it is important to work with an attorney experienced in these issues to adopt procedures and carry them out in compliance with the law. See the Housing for Older Persons section.
Conclusion
The operation of an association is a complex task that requires a great deal of knowledge, information, fairness and foresight. Being a board member is not a casual undertaking. Your decisions on the board can affect the association for years to come. This primer explores the basic responsibilities and authority of the board, but in practice the issues touched upon here can be much more complex than they appear. Your association’s governing documents and the specific facts and circumstances of any given situation will have an impact upon what the board's duties are and how to meet them. However, with the desire and the right tools and advice, you should be able to help your association maintain or improve property values and be a desirable and significant factor in the quality of life of the homeowners.
By Curtis G. Kimble