Legal Articles

Forewarned is Forearmed
In a recent case, New Jersey's appellate court held that a homeowner association board may breach its fiduciary duty to its members by failing to maintain the common elements, failing to increase assessments sufficiently to maintain the property and fund adequate reserves. In Ebert v. Briar Knoll Condominium Association, Ms. Ebert alleged that the board was not maintaining the property, was not setting aside adequate reserves and was not raising assessments sufficient to fund these things.

The appellate court reiterated the longstanding rule that an HOA has a fiduciary duty to its owners, and is legally responsible to maintain, repair and replace common elements. The appellate then added that an HOA must assess and collect funds for common expenses sufficient to carry out those responsibilities. Then it wrote that a board's decision associated with repairs, reserves and the amount of assessments is protected by the "business judgment" rule only if the board's actions or inactions were authorized by law or its governing documents and, if so, whether the actions or inactions were "fraudulent, self-dealing or unconscionable".

Here, Ms. Ebert presented evidence that the HOA board had "allowed the common elements to deteriorate" thereby diminishing the value of the common property. She presented evidence that the HOA board "failed to provide adequate reserves for the maintenance of common elements by refusing over the course of years to increase maintenance fees sufficiently to create such reserves". This evidence included the HOA's own reserve study which recommended to the board, at that time, that "maintenance fees be increased threefold in order to create adequate reserves".

New Jersey's Planned Real Estate Development Full Disclosure law requires that all HOAs must "prepare and adopt an operating budget which shall provide for .... adequate reserves for repair and replacement of the common elements and facilities". A board that fails to raise its maintenance fees to levels sufficient to maintain the property and set aside adequate reserves could very well be found to have breached its fiduciary duty.

Cases like this one remind HOA boards that despite the objections of owners, or concerns about a backlash, a homeowner association board must raise maintenance fees to a level sufficient to maintain the property and set aside "adequate" reserves.

Reserve planning is the solution to this charge. The "reserve study", as it is called, identifies common element components that have a useful life of, normally, thirty years. When those components are identified, they must be measured and assessed for condition to determine their remaining useful lives. (For example, a thirty year roof may only have ten years of life left.) This kind of information directly impacts the funds the HOA needs to replace the roof when due. The same principle applies to all other components.

The scope of a reserve study can vary a lot. The average garden style condominium with no pool or clubhouse has 15-20 reserve components. A high rise condominium could easily have 100 or more components. Each reserve study is unique to the HOA it describes.

The principle of planning for and funding common element repairs applies to HOAs in every state regardless of the state statute. The board is elected to reasonably and properly plan for maintenance and repairs. Scheduling and paying for these events is necessary to sustain the value of member homes. Failing to do so will cause property values to fall and the board to fail in its fiduciary duty. Forewarned is forearmed.

Excerpts from www.njlawblog.com BACK

Upside-Down Flag Dispute
A woman who angered her neighbors by displaying the United States flag upside-down can continue to do so after her homeowners association decided not to pursue further action. Beth Hammer had been flying the flag upside-down from the side of her home to protest the Iraq war.

Neighbors complained to the Cambridge Park Homeowners Association which demanded that Hammer remove the flag, saying it violated community policy. Hammer claimed the HOA was attempting to silence her freedom of speech and expression. "We're losing lives, liberties and our honor in this terrible, terrible war". She further indicated that the manner in which the flag was being displayed would not be changed.

After sending her a "First Letter of Non-Compliance", a hearing before the HOA was requested and held on July 11, 2007. The Hearing Board determined that the Cambridge Park Homeowners Association adopted its Patriotic and Political Expression Policy guided by and in compliance with the Colorado Revised Statutes Section 38.33.3-106.5 that states:

"The display of the American flag on a unit owner's property, in a window of the unit, or on a balcony adjoining the unit if the American flag is displayed in a manner consistent with the Federal Flag Code."

The Federal Flag Code states: "When the flag of the United States is displayed from a staff projecting horizontally or at an angle from the window sill, balcony, or front of a building, the union of the flag should be placed at the peak of the staff unless the flag is at half staff." and "The flag should never be displayed with the union down, except as a signal of dire distress in instances of extreme danger to life or property."

The Hearing Board found that the individual violated the Federal Flag Code and therefore, the HOA's Patriotic and Political Expression Policy.

The question of whether an individual has a legal right to ignore the HOA's Policy is not a settled issue. The HOA has the discretion to decline taking enforcement action to achieve compliance with its governing documents and restrictions based on the Business Judgment Rule.

In this case, the Hearing Board found that the best interests of the HOA’s members would not be served by pursuing enforcement under these specific circumstances. The financial and other resource costs to the HOA outweigh any harmful impact this violation may have. The individual will not be fined nor further requested by the HOA to change the manner in which she displays her American flag.

From HindmanSanchez P.C.

Controlling the Look
Homeowner associations maintain control over the common elements and exterior appearance of the structures for a variety of reasons. Most HOAs are built with a design theme, exterior materials s and color palette that, if compromised, reduces the value of the homes. Well designed and enforced architectural design policies help maintain uniformity, which in turn helps support the highest home market values.

Maintaining high quality designs and materials improves maintenance by reducing repairs and frequency of replacement. Uniformity standards does not mean that changes can't be made. For commonly requested modifications, the board should establish standards and specifications that include cost, durability, color, style, make and model so that all such changes are uniform.

Establishing architectural policies goes a long way in preventing future problems. A well-crafted architectural policy will assist the members in designing their project, guide them through the architectural review process, and provide guidance for consistent review by the board or committee.

The policy should detail:

Section(s) of the governing documents referencing the architectural design policy and the board’s authority to control it
Objectives of architectural review
Projects that require architectural review and approval
How the Architectural Review Committee is created, empowered, and staffed
What are the architectural review procedures
Specific criteria and standards needed for design approval
List of specifications and design practices that will assist those applying for project approval

Some owner requests (like heat pumps) have the potential to cause heat, noise and leaking. So approval of all requests should consider ramifications besides just curb appeal.

The governing documents generally describe the authority of the board of directors to adopt rules and policies to control modifications. However, the authority seldom includes the specifics like the what, how and who. That is the hard part. (See Policy Samples section for a sample which can be used as a template). Make sure any such policy is reviewed by a knowledgeable attorney to ensure it complies with governing documents and statutes. BACK

Grandfather Clause
A grandfather clause is an exception to a rule that allows someone who previously had the right to do something to continue doing it even though the law forbids it to others.

The term comes from discriminatory practices against blacks. In the late 19th and early 20th centuries, some Southern states had laws requiring payment of a poll tax or taking of a literacy test before one could vote. These laws ensured that the poor and illiterate were denied the right to vote. Some states had clauses in their state constitutions that exempted someone from poll taxes or literacy tests if their grandfather had had the right to vote. This meant that virtually all whites, whose grandfathers could vote before the imposition of these laws, were allowed to vote, while most blacks were denied the right to vote.

Over the years, the term has lost the racial stigma and no longer connotes racial bias.

From www.wordorigins.org BACK

The Three Rs
Every homeowner association has various methods available for establishing acceptable community standards, generally called rules, regulations and resolutions (Three Rs). Those standards must comply with state and federal law. For example, the board cannot enact a rule that violates Fair Housing Act.

Rarely are the Three Rs clearly defined in the governing documents. That is by design to allow flexibility and customization. Amending bylaws is tedious and difficult. The Three Rs can be modified as needed by the board. The board may use either rules and regulations or resolutions to accomplish this goal. So what’s the difference?

Rules and Regulations are used to address rules of conduct. Appropriate topics include:

Hours of operation
Pets
Parking
Noise
Restrictions (use of clubhouse, pool rules)
Limitations on guest use.

When adopting new or revised rules, it’s wise for the board to solicit owner input for a greater degree of compliance. Any proposed rule or regulation must comply with the governing documents. For example, if the governing documents state that guest parking may only be used by guests, a board rule cannot change that. That requires an amendment voted upon by the members.

Resolutions are the preferred method of establishing procedures for the homeowner association. Resolutions come in two types: policy and administrative.

Policy Resolutions define acceptable community standards. An example of a policy resolution: Many governing documents are unclear with regard to homeowner association versus owner maintenance responsibilities. Who repairs a water supply line after it enters an owner’s unit? Who repairs damage from a flood originating in an upper unit? There are many variations on this theme that could be answered in a policy resolution that defines each item according to who is responsible. This particular resolution directly impacts homeowner insurance and owner responsibilities. Other significant policy resolutions deal with money collection, architectural guidelines and enforcement procedures.

Administrative Resolutions define procedural guidelines, like how to run board and homeowner meetings.

Mechanics of a Resolution. The resolution should first cite the relevant provisions of the governing documents and any applicable state statute, especially those sections which give the homeowner association authority to establish policies. Following the authority section are the details of the resolution. It is highly recommended to circulate proposed resolutions to the membership for a minimum 30 day period for comment before the board votes on it. Once approved, it should be dated and signed by the board president and the secretary.

About amending the governing documents. The Three Rs can be enacted by the board but amending the governing documents must be approved by the members by the percentage indicated in the governing documents. Getting this vote is often difficult so amendments should not be undertaken lightly. However, if the documents are unwieldy or in violation of the law in some respect, amending may be prescribed. Always consult with an attorney knowledgeable in homeowner association law.

Rules, regulations and resolutions help provide a clear and systematic way to deal with routine issues. Once enacted, they need to be enforced consistently and apply to all members, including the board. BACK