Should Your Association Revise Its Governing Documents?
Robert D. Hillshafer
SHOULD YOUR ASSOCIATION REVISE ITS GOVERNING DOCUMENTS?
IS IT WORTH THE COST AND EFFORT?
There's nothing like a full-scale disaster to force an
Association and its counsel to take a long serious look at the documents
which the Board, the members, the property manager and prospective buyers
and lenders rely on in evaluating any number of issues that effect them
almost on a daily basis. On January 17, 1994, the Northridge earthquake
provided just such a stimulus for this type of analysis. The analysis
became dramatically necessary simply because the practical realities
of disaster management made it abundantly clear that certain fairly
standard provisions appearing in countless sets of C, C & R's did
not adequately address problems of the magnitude encountered by many
homeowner's associations in Southern California and particularly in
the San Fernando Valley. In the aftermath of the crisis and the rebuilding
effort that has occupied so much of our time over the last 19 months,
now is the time for association clients to culminate this rebuilding
effort by rehabilitating the documents which can make the task of running
an association either efficient and in the best interests of the members
or, alternatively a constant struggle to accomplish even basic goals.
This article is intended to identify the questions to ask of association
boards and yourself to determine whether the governing documents of
your association should be revised. If you answer several of these questions
affirmatively, it is my opinion that your association and its members
need, and deserve the benefits of a rehabilitated set of governing documents.
QUESTION NO. ONE:
Are the C, C & R's more than 15 years old? If they are and have
not been revised or updated periodically, the document is probably deficient
in that it does not reflect much of the legislation enacted specifically
to govern the conduct of Homeowners Associations. Numerous laws have
been passed since the advent of the Davis-Stirling Act in the early
1980's which directly control many important aspects of association
administration. One of the primary purposes of the declaration is to
give notice to the members of their rights and obligations. A few examples
include the alternative dispute resolution provisions, the insurance
requirements to prevent individual member liability, and the use of
reserve funds for emergency purposes among others. A revised set of
C, C & R's which reference all the current code requirements will
meet all the disclosure obligations placed on the board and manager
and eliminate the problem areas encountered over the history of the
Association.
QUESTION NO. TWO:
Do the documents contain numerous references to the developer and are
there class A and B voting rights mentioned? If the developer is gone
from the project, there is no good reason to keep clauses in the documents
that refer only to the developer and which are invariably confusing.
Removal of these items is quick, simple and makes the document more
relevant to the present.
QUESTION NO. THREE:
Did the SBA require the documents to be amended to obtain an earthquake
loan? If this was the case, the documents should be reviewed with an
eye to mitigating any future collection problems concerning repayment
of the loan. I also strongly recommend that the amendment address a
particular protocol to follow in the presentation of information needed
to permit the owners to vote on the loan. So much misinformation was
disseminated regarding collection and liens that it can be spelled out
clearly.
QUESTION NO. FOUR:
Is the board required to obtain at least two bids from a contractor
and award the contract to the lowest? This is not the most advantageous
and cost effective way for an association to let repair work of any
magnitude. It fails to take into consideration that the board and the
association can better achieve their mutual goals by using professionals
to negotiate a guaranteed maximum price contract for less cost with
a better result. A recommended amendment would give the board clear
authority to exercise discretion to engage the most qualified contractor
at a competitive price.
QUESTION NO. FIVE:
Do the documents establish a short time period within which to vote
to repair major damage or destruction? Many of our clients had documents
which required the association to record a certificate of intention
to rebuild within 90 days after the damage or destruction occurred.
It became obvious after the earthquake that 90 days was grossly inadequate
to make informed decisions because it was rare that reliable information
could be obtained concerning the cost of repairs within that time, let
alone know whether the insurance carrier would voluntarily cover the
loss. An amendment to the document requires that the association and
its board perform reasonable due diligence prior to taking the vote.
QUESTION NO. SIX:
Is your board repeatedly seeking legal opinions regarding provisions
in the documents that are not easy to understand. I cannot tell you
how many different times I was asked to interpret the "common area"
versus "unit interior" provisions.The fact that this is an
important legal document does not require that it be beyond comprehension
except to an attorney. The use of clear and "non-legalese"
in revised documents can avoid the necessity of obtaining constant legal
opinions. This is not to say that they will never be needed, but a document
that is designed to inform non-lawyers should lessen the need for interpretation.
In most cases it will eliminate many minor disputes between the board
and individual owners because both will now be able to understand what
the controlling provisions mean.
QUESTION NO. SEVEN:
Is your association confronted with important situations which the governing
documents simply do not address? A simple amendment to address specific
problems can be easily inserted in the overall amendment process such
that it is consistent and legal. Many amendment provisions consist of
rules which were put into effect by boards previously but are so important
that they are appropriately made part of the recorded document. The
amendment process, if approached thoughtfully, can allow the association
to "hand-craft" its documents to ensure an efficient and harmonious
operation.
QUESTION NO. EIGHT:
Is your association unincorporated or is the project an "own your
own apartment" type project? If it is then I strongly recommend
that the documents be reviewed because there are many important issues
to be addressed in that context. One of the most timely aspect is that
SBA refused to allow such associations to obtain a disaster loan without
collateral, instead requiring each owner to borrow monies secured by
their unit. The process of incorporation is simple and does not take
a great deal of time. Since nearly all new declarations establish a
non-profit mutual benefit corporation, if your association falls into
this category, you have likely answered number one yes also.
An association's governing documents are its bible and
its roadmap. As we all know, road maps grow out of date over time and
bibles can be written in archaic language, making both difficult to
use. If you have answered several of the above questions with a "yes",
you should give strong consideration to undertaking an overhaul of the
association documents. In the long run it will educate the members more
effectively than a hundred opinion letters that are not read and eliminate
many unnecessary legal costs related to disputes over the meaning of
certain provisions.
As with most important decisions, one important factor
is the cost of the amendment process. The cost of an overhaul of the
documents will largely be dependent upon how extensive the rehabilitation
is and that will be determined by the board or committee appointed to
work with the attorney. The cost is not insubstantial so the board and
the membership needs to be aware of the cost ahead of time, at least
in the form of an estimate. Most attorneys will provide an estimate
based on the extent of the changes desired. These legal fees can run
from $3,000.00 to $10,000.00 depending on the amount of changes and
the time spent laying them out.
In my opinion, this is money that it well-spent by an association
because it reflects a desire to create and maintain a business plan
that affirmatively addresses the problems faced now and looks for a
long term solution. Oftentimes the most difficult task confronting me
concerning association clients is to convince them they need to approach
their problems as a business. The amendment process underscores that
business approach and can go along way towards enlightening board members
and owners to that reality.
Finally, in many cases, the savings realized because
of the new documents and the amendment process itself will justify the
short term expense. Even it you undertake to amend the documents it
does not guarantee that the amendment will pass. Therefore, it is essential
that as part of the process the members have ample opportunity to participate
and that timely disclosure is given. I generally like to distribute
a draft thirty or more days before the vote and have a question and
answer session with the membership prior to the vote. I find that this
eliminates confusion and assures the owners that the board is not trying
to "pull a fast one." Public relations is definitely an integral
aspect of a successful amendment campaign. If you have questions or
would like an estimate on revising your association documents, please
feel free to contact me.