January 2012 –In one small Chicago condo association, HOA board members mistakenly thought they had to get the majority of the owners’ approval for every decision; they followed that mode of operation for years. When they double-checked their governing documents, they, of course, learned they had sole authority do determine how to spend condo funds.
Our experts say it’s common for HOA boards to misinterpret, fail to read, or to plain ignore their governing documents. “That does come up more often than you might expect,” says Nathaniel Abbate Jr., a partner at Makower Abbate & Associates PLLC in Farmington Hills, Mich., who represents associations. “People have been misguided or ill-advised or just took it upon themselves to interpret things. Then a new board has come in, or someone’s pointed it out to us, and we have to say, ‘You’re doing it wrong.'”
Here, Abbate and other HOA experts explain the errors they find boards making and how boards can correct the error of their ways.
Democracy Rules, Even When It Shouldn’t
Why do boards make basic mistakes like misapplying their governing documents? “One of the most common problems in condos is that the board and unit owners aren’t familiar with the governing documents,” explains Robert Galvin, a partner at Davis, Malm & D’Agostine PC in Boston who specializes in representing condos and co-ops. “It’s important that the board especially and also the unit owners become familiar with the governing documents because, after all, they govern the association. It’s common to find they’re facing a problem they wouldn’t be facing if they’d have just familiarized themselves with the governing documents.”
The Chicago condo’s everybody-gets-a-vote mode of operation? Very common, especially in smaller HOAs. “I’ve seen boards make that mistake many times,” says Duane McPherson, Addison, Texas-based western region division president at RealManage, an association management firm that oversees properties in Arizona, California, Colorado, Florida, Louisiana, Nevada, and Texas. “It’s usually the smaller HOAs that don’t have professional advice, and nobody’s had experience working in an HOA. They understand the democratic process because it’s all around us in our national and local governments, but applying it to the HOA is hard to do."
“If they’ve got 20 members, they think it’s just as easy to get everybody to make decisions, and it’s not,” adds McPherson. “Boards find out very quickly that it’s very hard to have the owners make all the decisions. It takes a lot of stress off board members, but nothing ever gets done, or decisions take too long. In one case, a board wanted to hire an outside accounting company, and it took three to four months to make the decision by going with the owners. And delegating decision-making power to the owners is the opposite of what the owners did when they elected the board.”
Another common board blunder occurs when it comes to assessing fines. “Errors we consistently find boards making are in the area of fines,” says Abbate. “Some boards think they simply have to send a letter to an owner saying, ‘You’re violating the bylaws, and this is your second violation, so we’re assessing a $25 fine.’ There are due process requirements, which means boards must give notice and an opportunity for owners to be heard. No fine is valid unless you tell owners, ‘We’re going to have a meeting on X day. If that’s not convenient, we can reschedule. If you don’t appear, we may enter a fine by default. If you do appear and provide a defense, we may not apply the fine.’ If the first thing you do is apply the fine, that probably won’t fly with a court.”
That Thing You’re Doing? Stop It.
What can you do when you realize you haven’t been following your governing documents? Stop!
“First, some boards do the wrong thing even at that point,” says Ben Solomon, an attorney and founder of the Association Law Group in Miami Beach, Fla., who advises more than 500 associations and also represents developers through his second law firm, Solomon & Furshman LLP. “They might say, ‘We’ve been doing it that way for a long time.’ Once you learn of the mistake, you need to correct it. It’s not an excuse to say, ‘This is the way we’ve done it in the past.’ Second, if you’ve allowed mistakes to occur, you need to correct them and notify owners, if appropriate.”
Abbate agrees. “It’s hard to unscramble the egg,” he says. “But once you’re in a hole, the best thing to do is stop digging. As soon as you realize you’ve been doing something wrong, you have to stop doing it and then determine what you have to do if people have been damaged by doing things the wrong way. You don’t want to sweep things under the rug, but sometimes it’s fair to say, ‘We were acting in good faith, and nobody was financially harmed. So no harm, no foul.'”
If, however, owners have been financially harmed, you’ve got to undo that harm. “There have been situations where fines were applied incorrectly, and fines were piled on fines where the board’s actions became punitive,” explains Abbate. “We’ve said, ‘You have to advise people that they’ve overpaid on fines, and their future assessments will reflect a credit for the amount they’ve overpaid.'”
More Fixes for Your Mistakes
It may also be wise to give owners notice that you’re changing how you’re enforcing the documents. “Maybe you haven’t been enforcing certain restrictions for a long time, whether they relate to parking, tenants, or pets,” says Solomon. “You don’t want to start catching people in the net without proper notice. So you may have the board pass a resolution or notify owners that there’s going to be a change in enforcement. It’s not that you waived your right to enforce these rules before, but you don’t want owners to make a selective-enforcement argument.
“To avoid that, notify owners of your change in policy,” adds Solomon. “You might say, ‘From this day forward, we’ll start fining owners for violating this rule.’ Even if you don’t have to notify owners because the rule is already in your governing documents, it’s prudent to do that.”
Solomon also suggests ratification as a housekeeping measure. “If you've done something improperly, one way to help fix it is to pass a resolution authorizing the actions taken without proper authority,” he says. “Maybe you allowed the owners to vote on something they didn’t have the right to vote on. But the outcome was what you wanted, anyway. Draft a board resolution stating that those actions that were taken by the owners are hereby ratified and approved by the board. Now you’ve corrected the mistake with the property authority.”
Matt Humphrey is president of the Alameda, California-based HOAleader.com, from which this article was adapted.