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.
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