Money, Money Everywhere

This is the third in a series of postings providing a detailed look at the governing documents for the homeowners associations (HOAs). 

So let’s talk assessments.

In the Declaration, the origin of an expense determines how it will be paid.  Some items clearly benefit the entire community, and so are paid through the regular annual operating budget.  Other expenses are linked directly to a subset of homeowners, and are billed exclusively to them.  Some expenses will occur in future years, requiring the collection of capital funds or initiation fees.  And some unplanned expenses require the imposition of emergency funding via a special assessment.

Community-wide assessments may be evenly divided among all homes, or split based on percentage of ownership tables, with larger homes paying a greater share.  They may also be calculated based on utility meter readings.  If the Association is handing the master billing for a particular utility, it has the right to turn off said utility whenever a homeowner becomes delinquent.  For condominiums, this power may only be invoked after obtaining a $750+ judgment against the home.

There are also indirect assessments, which arise if the Association orders owners to conduct repairs or safety-related measures (such as the purchase of fire extinguishers), or to obtain homeowners insurance.  Regardless of the type of assessment, courts have made it clear that nothing mitigates the requirement to pay.  Full payment is required even if a homeowner does not use the community pool, or has incurred personal expenses due to poorly maintained roads.  Any dispute the homeowner has with the Association must be taken up separately.

Individuals who enter in to contracts with a homeowner may also be held liable for unpaid assessments.  If outstanding debt wasn’t collected from the seller of the home at the sale, the buyer may be pursued for the full amount.  The Declaration may also stipulate that tenants in an HOA be required to pay full monthly rents to the Association until an owner’s outstanding balance is cleared.  Facing this, the tenant may decide to break the lease rather than get caught in the crossfire.  To avoid losing tenants, the landlord often settles accounts with the Association.

While many communities offer homeowners the ability to spread out the payment of an assessment over a period of time, technically the full amount is due on the first day of the fiscal year.  When a homeowner becomes delinquent, the Association has the option to call the full annual amount due.  This is known as acceleration, and is normally invoked toward the start of the year, providing a higher dollar amount to be pursued via lawsuits.

During the collections process, the homeowner may enter into an agreement to pay back outstanding assessments over a span of months.  However, remember that payments of fines, late charges, interest, and legal fees often come before the principal balance is addressed.  If the payment agreement doesn’t suspend future late charges, or the homeowner is slow in paying debt, many more months may be required before payments actually start being applied to principal.

Stay tuned for future blogs on specific sections of the governing documents that Boards need to heed!

Can I Have the Definition?

This is the second in a series of postings providing a detailed look at the governing documents for a homeowners association.

One of the mainstays in our public education system is the emphasis on definitions.  For most, a list of definitions is as interesting as reading a list of genealogies.  We already have a general grasp on the meaning of words and phrases, and often gloss over this section in reference materials.

However, homeowner associations are neck deep in contract law, with a very precise use of language that has been agreed to over centuries of legal wrangling.  A misunderstanding of definitions can be a fatal mistake for the Board of Directors.  While Directors should rely on advisement of third party experts (managers, attorneys, CPAs, engineers, insurance brokers, etc.) when it comes to definitions, a basic understanding is also a basic fiduciary duty. 

Here are some interesting terms you come across in the governing documents: 

Boundaries – this item describes the borders of a homeowner’s property, and while more important for townhomes and condominiums, in all instances it is vital in determining maintenance and insurance responsibilities.

Common Elements – lying outside of the boundaries described above, these areas are managed and maintained by the Association, with some maintenance responsibility shared with homeowners when exclusively assigned for use by a single home (such as a patio area).  Often, the Board is empowered to redefine usage (assigning parking spaces) or close off access to Common Elements (shutting down the swimming pool for the winter).

Indemnification – a promise to spend money as necessary to defend another party.  For example, the Association will agree to defend the management company if sued, since the management company has been designated as an agent of the community.

Self Help – the power of the Association to send in agents to correct a violation or address a safety issue on a homeowner’s property, without the homeowner’s consent.  While typically invoked to mow the lawn, more frequently the Association will first obtain a court order before conducting more intrusive actions, such as repainting the home.

Grandfathered – an exemption from a regulation for a homeowner who qualifies via time limits.  Newly adopted leasing restrictions frequently see use of this concept:  Owners who are leasing out homes at the time of the leasing amendment are permitted to continue leasing.

Lien – a claim against property (in this instance, a home) for funds to be collected when a sale or refinance occurs.  In addition, homeowners may be personally liable for delinquency amounts.  A bank foreclosure removes the association’s lien, but the homeowner remains personally liable unless he or she successfully goes through a bankruptcy process.

Proxy – a person appointed by the homeowner to act in his or her absence when casting votes

Quorum – the minimum number of people who must be represented in a meeting, either in person or via a proxy, before votes may be cast.  The quorum is established at the start of the meeting, and failing to reach the required threshold bars formal business from being conducted.

Majority – while this usually is 51% of all homeowners, to approve items such as budgets, some governing documents may define it differently, or limit the pool of owners to those not delinquent in paying assessments.

May/Shall – one of the most abused terms in governing documents.  ‘May’ indicates that the Board has the option of acting on an item, where ‘Shall’ is a command to take action.  Too often, a Board obligates the community to work not required, or refuses to do required work.  Both errors lead to costly results.

Stay tuned for future blogs on specific sections of the governing documents Boards need to heed!

I Do Declare

One of the fundamentals of homeowner associations is the presence of a binding agreement on obligations and rights between neighbors.  Similar to the Mayflower Compact, these promises are established in a document that goes by various names, such as Covenants, Conditions & Restrictions (CC&R) or a Declaration of Protective Covenants.

For those new to the homeowner association concept, we are beginning a series of blogs to provide a framework for understanding how these obligations operate.

At the basic level, an association is an agreement governed by contract law.  Because many of the regulations mimic civic law, it is easy to forget that the two are not the same.  Civic law creates the foundation that permits property ownership, along with restrictions on the use of that property.  Some of these restrictions are imposed by civil government, such as zoning ordinances. 

Other restrictions are created by the persons who buy and sell the property.  For example, an area of farmland may be sold to a housing developer, with the stipulation that 10% of the acreage be dedicated to parks.   Depending on how this restriction is structured, the park land may have to exist ‘forever’ or it may be removable under certain conditions.

In homeowner associations, this same concept is utilized on a larger scale.  Some of the use conditions are easier to alter than others.  In some cases, a restriction may be considered a violation of public policy, and be voided by the civil authority.  For example, the Right of First Refusal was a common restriction in many land exchange transactions going back a century or more, and permitted prior owners the option of buying back a home to prevent it from being sold to non-white Americans. 

On the opposite end of the spectrum, some civic laws may be ruled as an impairment of contract and not enforceable against homeowner associations.   An example of this would be a state law permitting an individual homeowner to use the courts to bypass the community’s amendment process for changing the governing documents.

Future posts in this series will drill down into specific sections of the Declaration and consider their implications...so stay tuned!