Tuesday, October 21, 2014

Can I Have the Definition?

This is the second in a series of postings providing a detailed look at the governing documents for a homeowners association.

One of the mainstays in our public education system is the emphasis on definitions.  For most, a list of definitions is as interesting as reading a list of genealogies.  We already have a general grasp on the meaning of words and phrases, and often gloss over this section in reference materials.

However, homeowner associations are neck deep in contract law, with a very precise use of language that has been agreed to over centuries of legal wrangling.  A misunderstanding of definitions can be a fatal mistake for the Board of Directors.  While Directors should rely on advisement of third party experts (managers, attorneys, CPAs, engineers, insurance brokers, etc.) when it comes to definitions, a basic understanding is also a basic fiduciary duty. 

Here are some interesting terms you come across in the governing documents: 

Boundaries – this item describes the borders of a homeowner’s property, and while more important for townhomes and condominiums, in all instances it is vital in determining maintenance and insurance responsibilities.
Common Elements – lying outside of the boundaries described above, these areas are managed and maintained by the Association, with some maintenance responsibility shared with homeowners when exclusively assigned for use by a single home (such as a patio area).  Often, the Board is empowered to redefine usage (assigning parking spaces) or close off access to Common Elements (shutting down the swimming pool for the winter).
Indemnification – a promise to spend money as necessary to defend another party.  For example, the Association will agree to defend the management company if sued, since the management company has been designated as an agent of the community.
Self Help – the power of the Association to send in agents to correct a violation or address a safety issue on a homeowner’s property, without the homeowner’s consent.  While typically invoked to mow the lawn, more frequently the Association will first obtain a court order before conducting more intrusive actions, such as repainting the home.
Grandfathered – an exemption from a regulation for a homeowner who qualifies via time limits.  Newly adopted leasing restrictions frequently see use of this concept:  Owners who are leasing out homes at the time of the leasing amendment are permitted to continue leasing.
Lien – a claim against property (in this instance, a home) for funds to be collected when a sale or refinance occurs.  In addition, homeowners may be personally liable for delinquency amounts.  A bank foreclosure removes the association’s lien, but the homeowner remains personally liable unless he or she successfully goes through a bankruptcy process.
Proxy – a person appointed by the homeowner to act in his or her absence when casting votes
Quorum – the minimum number of people who must be represented in a meeting, either in person or via a proxy, before votes may be cast.  The quorum is established at the start of the meeting, and failing to reach the required threshold bars formal business from being conducted.
Majority – while this usually is 51% of all homeowners, to approve items such as budgets, some governing documents may define it differently, or limit the pool of owners to those not delinquent in paying assessments.
May/Shall – one of the most abused terms in governing documents.  ‘May’ indicates that the Board has the option of acting on an item, where ‘Shall’ is a command to take action.  Too often, a Board obligates the community to work not required, or refuses to do required work.  Both errors lead to costly results.

Stay tuned for future blogs on specific sections of the governing documents Boards need to heed!

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