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…
Develop the five year plan in increments of one year. Then, set goals for the first year, the second, and so on. It also rolls into year six, then seven, so there is a continuing five year business plan.
The HOALeader refers to long range planning as “Strategic Planning”. A five year business plan is essentially the same thing. It is examining the HOA assets, finances, needs and desires of the community, and planning ahead.
I finally realized that would probably not be the most efficient way to develop a five year business plan. That’s because it takes more time to do the developing work. Now, I believe a committee can do a more efficient job of developing the HOA Boards five year business plan.
A Committee Should Develop the HOA Boards Five Year Business Plan
The committee should consist of four or five members.They should have diverse views so that a cross section of the community is represented. They would meet once each week and report their progress to the board at each monthly meeting. The job of the committee is to make recommendations to the board. The board makes the decisions.
In order to develop the HOA Boards five year business plan they need to consider the following:
Query members to learn what the community wants, and needs.
Recommend projects to the board that represent the desires of a majority of community members.
Study the HOA’s budget.
Plan the additions of programs in the year(s) that the budget allows.
Recommend that the board establish a Maintenance Oversight Committee
That committee will inventory the assets and compare with the Reserve Study.
They will develop a schedule to periodically inspect every physical asset.
They will schedule regular maintenance repair schedules which will catch problems before becoming an emergency.
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.
Why is a Home Owner Association Reserve Study Necessary
I’ve heard people ask this question: Why is a Home Owner Association Reserve Study necessary? It’s because a Reserve Study is a planning tool for major repair and replacement of community assets. It details the money to set aside for replacement of assets not in the operation budget.
The association must budget for major repair, upgrade, or replacement of assets. That means conducting an inventory of association assets. Then determining the life expectancy of each asset.
Let’s take a building roof as an example:
Assume a building’s tile roof has a life expectancy of 40 years. The anticipated cost to replace it in 40 years, adjusted for inflation, is $30,000. Divide $30,000 by 40 years. The result is the amount of money the HOA must contribute to the roof reserve fund line item each year. Therefore, in this example, the HOA must contribute $750 each year. Also, they must repeat that process for each asset.
The best way to do this is to hire a Home Owner’s Association Reserve Study Specialist to do the inventory. An association representative familiar with the association assets may assist the Specialist. The specialist will then determine a “useful life” and “cost to replace” for each item. So, if the useful life of the 15 year old roof is 40 years, the line item will show the remaining life of 25 years. The HOA should update the reserve study at least every 2-5 years.
A board should provide a home owner’s association reserve study and keep it updated. This demonstrates that the board is acting by its fiduciary duty. Also, it reduces the individual directors’ exposure to personal liability risk.
Arizona HOA Reserve Study Law
There is no Arizona law for a Home Owner Association Reserve Study at the present time. Yet, even without a law, the operating and reserve funds should be in separate bank accounts. An HOA should not commingle the funds. Attorney Jonathan Olcott said a board may use reserve funds for capital improvements. However, they should be prudent and repay the funds to the reserve account. That prevents the account from becoming underfunded.
The HOA should fund the reserve fund at a level to provide the funds to replace assets as required. The association should contribute a set amount to go into the reserve account each month.
Why is a Home Owner Association Reserve Study Necessary?
It is important for the board to keep the reserve fund funded. That ensures that today’s owners, who are enjoying the use of the amenities, are paying their fair share. If the HOA under-funds the reserves, future owners will have to make up for the short-fall. That isn’t fair to future owners. Also, if the board under funds reserves, the association may be at financial risk.
Home Owner’s Association Reserve Study Funding Levels
There are three funding levels:
Full 100% funding
As assets age, the fund grows so that it is fully funded at the estimated end of the useful life.
Baseline funding allows the reserves to get to, but not below, zero. In this method, there are funds available. But, there is a high risk of a special assessment or not being able to repair or replace an asset
Threshold funding Threshold funding is any percentage between 0 and 100% that an association chooses to maintain.
An HOA can determine that many assets may never need replacing. That would be because of periodic operational type maintenance and repair. So, they don’t need to be at 100% funded. They could choose to be 80% funded, which is in the low risk category of requiring a special assessment.
“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.
HOA board meeting decorum requires that participants know, understand, and comply with the rules. The chairman of the meeting is charged with enforcing the meeting decorum rules. Also, the board has adopted Robert’s Rules of Order, the chairman should follow the rules of decorum discussed in Robert’s Rules of Order > Rules Governing Debate. They are discussed here:
At the HOA board meeting, Confine All Remarks to the Merits of the Pending Question
Any members’ remarks must be germane to and have a direct bearing on the question before the board.
Do not interrupt a speaker who has the floor.
Every speaker has the right to use his or her time to speak without interruption.
The chairman must control the meeting to prevent interruptions.
All members must refrain from attacking a member or his/her motive.
A member must avoid personalities, and under no circumstances can he attack or question the motives of another member, or call another member a derogatory name.
The issue, not the member, is the subject of debate.
The moment one member begins to attack another member, the chairman must act immediately and decisively to stop the member, and prevent any recurrence.
Adhere to the Time Restriction
The HOA board should require a time limit, such as 2 minutes, or 3 minutes, depending on the amount of business to be conducted and the overall time allotted for the meeting. Each speaker should be respectful of other members and plan their remarks to fit within the allotted time frame.
The HOA board chairman does not have the authority to allow extra time. Only the board may extend the time. If the chairman believes the speaker should have another minute or two, he can say to the board,
“If there is no objection, we will allow the speaker another 2 minutes.” (Then pause.) Next, he can say,
“Hearing no objections, the speaker has another 2 minutes.”
If there is an objection, then the speaker either has to stop, or someone on the board can make a motion so that the majority of the board can decide.
HOA board members should address all remarks through the chair
Generally, address all remarks through the chair. Avoid the use of members’ names. The proper way to refer to another person is to say “the member” who spoke last, etc. However, in a small board consisting of neighbors, that requirement may be a bit too impersonal. If one’s name is not mentioned in a derogatory manner, using the person’s name should be fine. It’s up to the board how they would like to amend these rules to best fit in with the atmosphere they wish to provide.
Refrain from Disturbing the Assembly
No member may disturb the assembly by whispering or being distracting in any other way.
HOA Board Meeting Decorum Requires Active Listening
Every director should learn how to be an active listener. Here are several suggestions:
Look at the speaker while she is speaking.
Try to understand what the speaker is communicating.
Do not be thinking of your response while the speaker has the floor.
Try to summarize what you believe the speaker is saying in order to show that you are listening closely and want to understand the speaker’s position.
Ask questions to more fully understand what the speaker is trying to communicate.
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.
This HOA Boards web site and Blog is meant to be an educational site, with articles to educate HOA residents and board members about HOA operation. It is our belief that the more educated board members are on the planned community laws and the governing documents of their association, the less conflict there will be.
Anyone may comment and/or ask questions. We only ask that you please:
Be respectful of others.
If you discuss incidents, do not mention the name of persons involved in the incidents, unless you're discussing a published case law.
Do not mention the name of any particular community.
HOA Boards, What You need to Know, but Weren't Told, cover in design stage
The book cover for our book, "HOA Boards, What You Need to Know but Weren't Told", that was previously shown on Amazon was a temporary cover. In order to do the advance listing on Amazon, a cover was required. Since the cover was in design stage we had to do a quick cover and submit that.
The design for the front cover has been completed, and this is the front cover photo.
Update August 20, 2017
We're in the second stage of the book cover design now. Our book cover graphic designer, Jason Orr of Jera Publishing did a great job of taking our input and running with them to create more design concepts.
We settled on the front cover and now need to complete the back and spline .
However, before the back and spline can be completed, the interior design of the HOA Boards book must be completed so the page count is known.
Without knowing the exact page count, which will depend on the interior design, the spline cannot be designed.