Written by Richard Thompson
Governing documents are often overlooked until an issue spotlights deficiencies. When this occurs, it’s often too late to amend the governing documents to correct the deficiency. HOAs should periodically review their governing documents to identify areas which may warrant an amendment. This is especially true for communities with older governing documents. Here are some important reasons to amend:
Modifying Quorum Requirements. Quorum requirements in governing documents may be difficult or nigh impossible to achieve in certain HOAs like resort communities or where many units are second homes. Also, some documents have a very high quorum threshold that simply isn’t realistic under the best of circumstances. What often happens in these HOAs is they simply disregard the quorum requirement altogether and proceed with business. While this often goes unnoticed, as soon as some piece of controversial business is passed, like a special assessment, the quorum monster while likely raise its ugly head. To avoid this eventuality, amending the quorum to something reasonably achievable allows business to get done without fraud.
Protect Against Personal Liability. Serving on the board can be stressful enough without the threat of facing personal liability as the result of being sued by a disgruntled homeowner. The governing documents should provide language ensuring that the homeowner association will protect and defend directors and other volunteers against such lawsuits.
Eliminate Assessment Caps. Many governing documents impose restrictions on annual assessments increases. These can be particularly onerous when the developer under budgets to begin with. These restrictions handicap the board’s ability to increase the budget to where it should.
The assessment restrictions can be in the form of caps (assessments may not be increased by more than ___% per year or may be tied to something like the Consumer Price Index (CPI). While intended to control an irresponsible board, they more often make it impossible for the board to operate the HOA because the expenses constantly exceed revenue. When this happens, HOA maintenance, services and owner property values suffer. Indexes such as the CPI are based on the cost of consumer goods and not reflective of HOA maintenance and repair costs. Amending the declaration to remove these caps allows the board to set appropriate assessment levels to meet the necessary operating and reserve expenses.
Removing Mortgagee Approval Requirements. The governing documents may have a provision which requires the homeowner association to obtain lender consent prior to amending the documents. Lenders have no incentive to respond to proposed amendments so they rarely respond. But lenders may still have a legal right to this approval. One “work around” involves an amendment that requires lenders to respond within, say, 30 days and that failure to respond is deemed to be an approval. Check with your attorney.
Provide Adequate Indemnification. Indemnification means the HOA pays legal expenses to defend directors of the board from lawsuits and any judgment that might arise from a lawsuit. Indemnification provisions are generally found in the bylaws. Board members serve as volunteers and should therefore be given the maximum protections permitted by law to encourage owners to serve on the Board.
Provide Proper & Adequate Insurance. HOAs have special insurance needs. Insurance provisions in the governing documents are often incomplete or tie the HOA to dollar amounts and deductibles that may not be available or affordable when the insurance market changes. Older condominiums should carry Building Ordinance or Law coverage which provides additional money for building code required repairs. All HOAs should carry Directors & Officers coverage to protect HOA volunteers.
Some governing documents require an ludicrously low deductible like $500. In today’s insurance market, that kind of deductible would be extremely expensive, if available at all. Since insurance is so important, the governing documents should make sure the board understands what kind to buy and flexibility to adjust when premiums take a hike.
Well drafted indemnification provisions provide more protection for individual board members. With the ideal indemnification provision, the HOA automatically pays to defend all members of the board from the lawsuit and there is no discretion to pick and choose which directors will be defended. Additionally, the provision should provide that all legal fees are paid for in advance.
Amendments to governing documents can save thousands of dollars by correcting inconsistencies, addressing deficiencies and making the document work for rather than against the needs of the HOA. If your HOA is ten years old or more, have them reviewed by an attorney specializing in homeowner association law in your state.