How to Have an Educated HOA Board that Limits the HOA’s Legal Risk
How to have an educated HOA board that limits the HOA’s legal risk. It isn’t that difficult. It only requires that board members invest the effort to get an HOA education. We live in a litigious society, and many people view HOA’s as “deep pockets”. So, many people will be quick to sue an HOA. It’s the boards’ responsibility to make decisions that follow the law and the governing documents. If the board complies with the law and governing documents, they reduce the HOA’s legal risk.
There are many sources of HOA board member education in every state. Below are a few:
In 2013, Florida passed a law that new HOA board members must take an approved education class. The director must provide a certificate of education within one year of election.
Four Subjects HOA Board Member Must Understand
Two Arizona Law Titles affect Arizona Planned Communities. Most HOA’s are non-profit corporations, and planned communities. Thus, an HOA director must have a working knowledge of Title 10 and Title 33.
The governing documents consist of CC&R’s, Articles of Incorporation and the Bylaws. All board members must have a working knowledge of those governing documents.
An HOA educated board is responsible to administrate the HOA funds. Each board member should study the financial statements, budgets, and current reserve study.
All HOA board members must know the adopted parliamentary procedures. Also, they must know the rules of decorum to have peaceful, productive meetings.
Fiduciary Relationship and Responsibility
The HOA board members have a fiduciary duty to the members of the association.
Each board member must act in good faith and in the best interests of the members of the association.
Each board member must be familiar with the fiduciary duties.
Sub section A of ARS 10-3830, below, spells out the directors’ fiduciary duties
Arizona Law, ARS 10-3830 General Standards for Directors
A. A director’s duties, including duties as a member of a committee, shall be discharged:
1. In good faith.
2. With the care an ordinarily prudent person in a like position would exercise under similar circumstances.
3. In a manner the director reasonably believes to be in the best interests of the corporation.
B. In discharging duties, a director is entitled to rely on information, opinions, reports or statements, including financial statements and other financial data, if prepared or presented by any of the following:
1. One or more officers or employees of the corporation whom the director reasonably believes are reliable and competent in the matters presented.
2. Legal counsel, public accountants or other person as to matters the director reasonably believes are within the person’s professional or expert competence.
3. A committee of or appointed by the board of directors of which the director is not a member if the director reasonably believes the committee merits confidence.
4. In the case of corporations organized for religious purposes, religious authorities and ministers, priests, rabbis or other persons whose position or duties in the religious organization the director believes justify reliance and confidence and whom the director believes to be reliable and competent in the matters presented.
C.A director is not acting in good faith if the director has knowledge concerning the matter in question that makes reliance otherwise permitted by subsection B unwarranted.
D. A director is not liable for any action taken as a director or any failure to take any action if the director’s duties were performed in compliance with this section. In any proceeding commenced under this section or any other provision of this chapter, a director has all of the defenses and presumptions ordinarily available to a director. A director is presumed in all cases to have acted, failed to act or otherwise discharged such director’s duties in accordance with subsection A. The burden is on the party challenging a director’s action, failure to act or other discharge of duties to establish by clear and convincing evidence facts rebutting the presumption…
A resident of Iron Oaks HOA reported to Channel 3 that the HOA issues speeding fines to residents in the community. He reported that the HOA cited him for speeding. The report showed a letter from Iron Oaks HOA stating that the member was speeding. However, it showed that he was only going thirty-seven miles per hour in a thirty-five mph zone.
The HOA speeding fine is $50.00. But, in this instance, the HOA didn’t issue a $50.00 fine; they sent a “friendly notice”. However, it is a notice of non-compliance. And the HOA may follow with a fine if the resident repeats the violation.
Two miles an hour over the speed limit doesn’t sound like much, does it? It isn’t much. Nevertheless, two miles per hour is over the HOA posted speed limit. Consequently, the association has the right to issue speeding fines.
That brings up two questions:
Does the HOA have the right to control the speed in the community?
Is a speeding fine for two miles per hour over the limit being nit-picky?
To answer the first question:
Streets located within a gated community are private streets. The HOA owns and maintains the streets. Thus, the Local police have no authority over speeding within that community. For that reason, the HOA Board of Directors must set a speed limit for the safety of community residents.
Many boards will opt to put in speed humps to help prevent speeding. Speed humps control the speed near the humps, but many drivers will speed up between the humps. It is an effort and expense to buy speed lasers, and have a community volunteer or employee use the laser. For many communities, the laser option is not workable.
The HOA board can develop rules to issue speeding fines.
To answer the second question: ” Is a fine for two miles per hour over the limit being nit-picky?”
It would seem that way; yet, a board must enforce the CC&R’s across the board. Besides, if the compliance coordinator doesn’t issue a violation for two miles over the limit to one person, and issues a violation for four miles over the limit to another person, that is not enforcing the rules across the board. Both drivers exceeded the speed limit. Therefore, the person getting the violation notice could allege discriminatory treatment.
Thirty-five mph is the speed limit on a street where no houses front the street. The speed limit where houses front the street is usually 25 mph. Speed limits on major thoroughfares such as Dobson Road or Germann, is usually 45 mph. So, a limit of 35 mph on a major community street with no houses fronting the street is reasonable. The key word is “limit”, which means that is the maximum speed in that area. On public streets, police may allow a cushion of 5 or 7 mph where they will not issue a ticket. An HOA does not have that flexibility. They must enforce the rules evenly.
Compliance coordinators must follow rules that are set by the board. They must administer those rules without exception. If they do not administer the rules by the guidelines, they could lose their jobs. Also, other residents may sue the HOA for uneven enforcement of the rules.
HOA Issues Speeding Fines to Residents
In the TV article, an Iron Oaks spokesperson said they have issued hundreds of violation letters. However, he did not say if all those were fines, or if they were first notices.
“The articles of incorporation or bylaws may prescribe qualifications for directors…”
Therefore, the law seems clear to me that an HOA board cannot determine qualifications for directors. Any required qualifications must be in the Articles of Incorporation or the Bylaws; and only the association members can amend or add qualifications to those documents.
The Association Bylaws
Below is a section from Article IV Section 1 of an associations Bylaws. The first sentence lists a qualification; however, it is a rather broad qualification. This one allows the association to elect directors who are members and non members. Some associations don’t allow non-members to serve. Therefore, in those latter associations a candidate must be a member to qualify as a candidate for the board of directors.
BOARD OF DIRECTORS; SELECTION; TERM OF OFFICE
Section 1. Number. “The affairs of this Association shall be managed by a Board of Directors, who need not be Members of the Association…”
Below is Article V of the same set of Bylaws:
NOMINATION AND ELECTION OF DIRECTORS
Section 1. Nomination. “Nomination for election to the Board of Directors shall be made by a Nominating Committee. Nominations may also be made from the floor at the annual meeting of the Members…”
“…The Nominating Committee shall make as many nominations for election to the Board of Directors as it shall in its discretion determine, but not less than the number of vacancies that are to be filled. Such nominations may be made from among Members or non-Members…”
Those Bylaws call for the board to establish a Nomination Committee to nominate candidates for board seats that are up for election. The Nomination Committee must nominate at least the number of candidates to fill the number of seats up for election, but they can nominate as many candidates as they desire.
Question: Does that mean that only the candidates the Committee nominates can run for the board?
Answer: In my opinion, the answer is no, because these Bylaws also allow nominations to be made from the floor at the annual meeting of the Members.
HOA Nomination Committee, What Does it Do?
Answer: I believe the purpose is to locate people willing to run for election to serve on the board. However, if the Bylaws list qualifications, the Nominating Committee need to determine if the candidates meet those qualifications.
California HOA law doesn’t allow nomination committees. Many other associations have stopped using those committees.
In this blog site, I offer my layperson interpretation of the law and governing documents. All board members should have a working knowledge of the planned community laws and association’s governing documents. Then they can make proper decisions without an attorney present at every meeting,.
The laws are written so the layperson can understand and apply them. However, if there are differing opinions among directors, then it’s time to get a professional opinion.
Jonathan Olcott of” Phil Brown and Jonathan Olcott” law firm generously provided the statement below. The statement is for information purposes only, and should not be taken to be a legal opinion. Jonathan stated:
“This is a challenging question. The statute below (ARS 10-3802) can be persuasively interpreted to mean that qualifications can only be in the Articles or bylaws.
Some might argue that the Board can use its rule making authority to enact additional qualifications. I do not find that persuasive. Especially if there are qualifications in the Articles or bylaws (generally being an Owner and sometimes being in good standing).
I’m not an attorney, but I agree with Mr. Olcott’s statement. That’s because rules are to explain and clarify CC&R’s; but cannot add to, delete, or alter a covenant. Therefore, I don’t believe a qualification can be “added” to the Bylaws by an HOA board, or Nomination Committee. I believe that only the association members can amend the Bylaws to add qualifications.
To more fully understand HOA Hierarchy, Why it Matters, it’s first necessary to understand the HOA hierarchy of governance.
HOA Hierarchy Begins With HOA Laws
State and federal laws are at the top of the HOA hierarchy. Thus, a law will always trump the governing documents. That is, unless it specifies that the HOA’s Declaration or Bylaws apply. If an article in the governing documents conflicts with the law, the law takes precedence.
The Non-Profit Corporations Act of ARS Title 10 governs all non-profit corporations.
Most planned communities are non-profit corporations. If they were not corporations then all homeowners could have individual liability.
The Planned Communities Act of ARS Title 33 governs all planned communities.
An HOA should research the Non-Profit Corporations Act and the Planned Communities Act when seeking answers to legal questions. The Planned Communities Act is specifically for planned communities. Therefore, one should look for an answer there first. That’s because in most cases this Act will trump Title 10. Yet, one should also look to Title 10 to be certain that it doesn’t contain language that would override Title 33. If Title 33 doesn’t address a question, then one would proceed to Title 10 to search for the answer.
Next in the HOA Hierarchy is the HOAGoverning Documents
These are the internal documents that govern an HOA. They are collectively referred to as the “governing documents.” They are:
Declaration of Covenants, Conditions and Restrictions (CC&R’s);
Articles of Incorporation;
Rules and Regulations.
A board of directors governs the association and acts in compliance with the state laws, local ordinances, and the governing documents. It also complies with federal laws such as the FHA, ADA, and any others.
The homeowners elect the board of directors to govern the association.
The homeowners elect the directors. Thus, only homeowners can remove a director. In planned community law, there is a specific procedure for homeowners to remove a director.
Some association Bylaws may have a section providing that a board may declare a director position vacant if a director is absent from three consecutive regularly scheduled meetings.
HOA Hierarchy, Why it Matters Explained
The board of directors elects the officers of the board.
Usually, there are four officers: president, vice president, secretary and treasurer.
Directors who are not officers are “directors at large.”
Directors at large may serve on committees or undertake special projects.
The officers have specific assigned duties for their office, yet they can delegate those duties to the management staff.
The board of directors can remove an officer from the assigned office, after which that person reverts to being a director at large.
The entire board has the fiduciary duty to act in the best interest of the association.
The owners cannot micro-manage the board.
Yet, the owners can and should attend meetings, ask questions, and voice their concerns and desires for the community.
The Bylaws will spell out the powers and duties of the board.
The board hires and supervises a community manager to run the daily operation.
The board makes the policies that the manager must follow.
The manager hires and supervises his or her staff.
The board cannot micro-manage the manager or the staff.
Recently, someone asked about an HOA document retention policy, it’s the law. They asked if there is a statute covering HOA document retention, and which documents a planned community must keep, and for how long.
The answer is found in the Arizona Statutes, ARS 10-11601 which is posted down below. You’ll notice that the last paragraph, subsection F states:
“Notwithstanding this chapter, a condominium association shall comply with title 33, chapter 9 and a planned community association shall comply with title 33, chapter 16 to the extent that this chapter is inconsistent with title 33, chapters 9 and 16.”
There is nothing in title 33 regarding HOA document retention, therefore, this title 10-11601 applies.
All of the requirements for an HOA document retention policy are listed in the title 10 statutes, along with the time required to retain the documents. Every Association that works with a professional property management company or has in-house management will, or should have, an HOA Document Retention Policy which lists in more detail what records should be maintained.
As an example, here is the requirement in ARS 10-11601 subsection 5:
“All written communications to members generally within the past three years…”
To me, that means all emails, all regular postal service mail, and all other written communication to members. If an association sends Notices of Non-Compliance, Notices of Violations, Notices of Fines, etc., in a form format, that is a communication with members and must be retained. In fact, if any of those types of forms are sent to a member regarding a violation, and the copies are not retained, the Association may be placed at risk for a lawsuit with a member alleging that the Association either,
violated the contract by not sending the appropriate Notice, or
that the Association violated the law, ARS 10-11601, by not retaining the required copies.
The duty and responsibility of maintaining Association records is that of the board Secretary. In many cases, the duty of maintaining the records, along with other duties, is relegated to a property manager. However, the Secretary cannot relegate the responsibility. The buck stops with the Secretary, and ultimately, the board.
Since all HOA boards have the responsibility to supervise their employees and contractors to see that their work is properly performed, it may be feasible for a board to form an “Oversight Committee”, whose responsibility could include various oversight duties including monitoring records retention, etc., and reporting regularly to the board.
Below is the complete HOA document retention statute:
A corporation shall keep as permanent records minutes of all meetings of its members and board of directors, a record of all actions taken by the members or board of directors without a meeting and a record of all actions taken by a committee of the board of directors on behalf of the corporation.
A corporation shall maintain appropriate accounting records.
A corporation or its agent shall maintain a record of its members in a form that permits preparation of a list of the names and addresses of all members and in alphabetical order by class of membership showing the number of votes each member is entitled to cast and the class of memberships held by each member.
A corporation shall maintain its records in written form or in another form capable of conversion into written form within a reasonable time.
A corporation shall keep a copy of all of the following records at its principal office, at its known place of business or at the office of its statutory agent:
Its articles or restated articles of incorporation and all amendments to them currently in effect.
Its bylaws or restated bylaws and all amendments to them currently in effect.
Resolutions adopted by its board of directors relating to the characteristics, qualifications, rights, limitations and obligations of members or any class or category of members.
The minutes of all members’ meetings and records of all actions taken by members without a meeting for the past three years.
All written communications to members generally within the past three years, including the financial statements furnished for the past three years under section 10-11620.
A list of the names and business addresses of its current directors and officers.
Its most recent annual report delivered to the commission under section 10-11622.
An agreement among members under section 10-3732.
Notwithstanding this chapter, a condominium association shall comply with title 33, chapter 9 and a planned community association shall comply with title 33, chapter 16 to the extent that this chapter is inconsistent with title 33, chapters 9 and 16.
The 2017 Planned Community law changes are listed below, in part:
Senate Bill 1060 formally moved the Planned Community/Condo dispute process between members of a planned community and condo community from the Dept of Fire, Building and Life Safety to the Arizona Department of Real Estate. Hearings were already being held at the Real Estate Department.
An association may not require advance notice of audio or videotaping an open board meeting.
A board can preclude members from audio or videotaping if the board itself audio or videotapes the meeting and makes the unedited audio or videotapes available to members on request and without imposing restrictions on its use as evidence.
The notice for any annual, regular or special meeting of owners shall state the purpose for which the meeting is called.
Before conducting an executive meeting, the board must identify the section, for each agenda item, authorizing the closure of the meeting.
There are five topics that may be used to authorize the discussion in closed session:
Legal advice from an attorney for the board or the association.
Pending or contemplated litigation.
Personal, health or financial information about an individual member of the association, an individual employee of the association or an individual employee of a contractor for the association, including records of the association directly related to the personal, health or financial information about an individual member of the association, an individual employee of the association or an individual employee of a contractor for the association.
Matters relating to the job performance of, compensation of, health records of or specific complaints against an individual employee of the association or an individual employee of a contractor of the association who works under the direction of the association.
Discussion of a member’s appeal of any violation cited or penalty imposed by the association except on request of the affected member that the meeting be held in an open session.
If an emergency meeting of the board is called for a topic that cannot be delayed for the 48 hours required notice, the board may act only on the emergency issue.
The requirement passed by last year’s legislature (2016) to have the envelope used for returning an absentee or mail-in ballot contain the name, address and signature of the voter is repealed.
This blog post is for informational purposes only. To understand the actual law, refer to the statutes or consult with your HOA or Condo association attorney.