Dealing with Complaints & Difficult Owners

While most board members truly act with best interest of the Association in mind, even with the best of intentions a board may at some point have to deal with opposition from homeowners. Sometimes the opposition is legitimate. Other times it is not. Knowing how to respond to members in the Association and handle conflict is important to building and maintaining a strong community.

While most board members truly act with the best interest of the Association in mind, even with the best of intentions a board may at some point have to deal with opposition from fellow homeowners. Sometimes the opposition is legitimate. Other times, it is not. Knowing how to respond to members in the Association and handle conflict is important to building and maintaining a strong community.

Problems often can arise when an owner or owners are not happy with particular board decision or policy. For example if the board has instituted a necessary but unpopular parking program, or someone wants to paint their home a color that is not approved by architectural review committee. The owner disapproves of the decision, but the board supports the committee’s decision. In such cases there is a conflict between the owner and the board. But when does a person cross the line from simply expressing their disapproval of the decision to actually becoming a problem?

Typically a problem arises when, in response to a board decision, the owner declares “war” and begins interactions with an aggressive attitude, and makes demands that are designed to harass the board and manager. A situation like that is detrimental to the entire Association because it distracts the board or manager from their important tasks, and uses Association resources in order to respond to the upset owner.

Other times the problem may be less obvious. Because board members are often neighbors and friends of other residents, owners don’t always respect board members’ personal time. It’s easy for fellow owners to stop board members outside their homes, poolside, or by the mailbox to discuss issues within the community. While the owner’s concerns may be warranted, it may border on being overzealous or even harassing since it can occur at any given moment. Typically, when this occurs there is a lack of knowledge about how a homeowners association is structured, and how the board should function. Owners (and board members) need to recognize that the boards’ authority comes from the board acting as a whole, not from any one individual board member.

Transparency is good

One of the key steps in dealing with all members in an Association is to maintain regular, open communication with owners so the board’s actions are always clear. A good board is responsive to residents and takes the position that every owner has a legitimate interest in what’s going on and that their questions deserve to be answered. Open lines of communication will help lessen confusion and reduce any “us vs. them” attitude that some members may feel toward the board. When considering an item that may be controversial in the community, consider soliciting the input of the other owners via a survey, or even a town hall meeting.

Handling Complaints

Even while taking steps to involve the community in the difficult decisions, there will be times when an owner has a complaint. In evaluating any complaints, there are several tried and true approaches the board (and management) should consider:

  • Gather as much information as possible about the facts surrounding the complaint;
  • In gathering facts, initiate contact with the affected owners in a neutral fact gathering rather than confrontational fashion;
  • Unless there is an emergency, only act on written complaints;
  • Use IDR — internal dispute resolution, whenever possible;
  • Keep the emotions in check and make sure they are not a factor in deciding any outcome;
  • Listen to the complaints from the owner’s perspective and evaluate if the complaint has any merit;
  • Keep your end of the agreement even if the other side doesn’t;
  • Standardize procedures in dealing with violations and follow the procedures as consistently as possible.
  • If none of these concepts work, seek out the right kind of professional for help.

Don’t get sucked into a pattern of ineffective behavior in dealing with difficult people. Follow the policies the board has adopted in compliance with the association’s governing documents. When these issues arise, give the complaining party an opportunity to state their case, and do your best to let them know that they have been heard. Lastly, in resolving the issue, be fair and reasonable. Most of the time following these steps will resolve the situation. In cases where things continue to escalate, or the owner continues to make unreasonable demands or complaints, the association may need additional help. In those rare cases, discuss your options with your Association’s counsel who can advise the board on specific options the board may implement to deal with such a situation.

 

Protect Board Members from Personal Liability

While most homeowners are grateful for the work done by the members of their Board of Directors (and community managers!), there are times when the actions taken by the Board, or by individual Board members, are challenged. While this risk would deter many from volunteering their time, the laws in California provide some legal protections for Board members from personal liability.

We all know that Board members volunteer their time, often putting in many hours per week for the betterment of their communities. While most homeowners are grateful for the work done by the members of their Board of Directors (and community managers!), there are times when the actions taken by the Board, or by individual Board members, are challenged. While this risk would deter many from volunteering their time, the laws in California provide some legal protections for Board members from personal liability. While this protection is not absolute, so long as a volunteer board member complies with the following checklist they should avoid personal liability for actions they take as a director

  • Act in good faith;
  • Act in a manner which the board member believes is in the best interests of the Association;
  • Act with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances (this includes, but is not limited to, consulting with the Association’s attorney, CPA, insurance and other experts, as needed);
  • Avoid acting in a manner that is willful, wanton, or grossly negligent;
  • Act within the scope of their duties as an officer or director of the Association;
  • The Association carries insurance which meets the minimum requirements set forth in California Civil Code 1365.7(a). These requirements include both liability insurance and directors and officers liability coverage.

When these requirements are met, the law provides a qualified immunity for volunteer officers and directors which shields them from personal liability, even if the amount of the damage is more than the amount of insurance coverage. In other words, a person attempting to file a civil action against a volunteer officer or director of an Association should have their claim dismissed by the courts. It is, of course, impossible to predict what a court will do in any one particular case, and many courts apply the law incorrectly, which is why we have Courts of Appeal.

Boards should also be aware that many insurance policies require that the insurance carrier be notified of potential claims as soon as the insured (the Association, or particular officers and directors, depending on the policy) has “notice” of the potential claim. This “notice” often occurs well before a lawsuit is filed. Therefore, it is important for the Board to consult with the Association’s attorney as soon as they suspect there may be any claim which might be made against the Association or any directors. The Association’s attorney should be able to guide the Board with respect to providing notice to insurance carriers in order to comply with an insurer’s “notice” requirements. Associations should also be encouraged to obtain fidelity coverage. A common mistake made by associations is to assume that their liability insurance also provides fidelity coverage. Frequently, this assumption is in error, and the coverage must be purchased separately.

Lastly, Board’s should also be made aware of the additional liability protection available for all Owners in an Association. California Civil Code Section 1365.9 protects the individual owners of the association from being sued for damages such as personal injury that occur in common areas of the association such as a neighborhood park. To receive this protection, the association must maintain liability coverage of at least $2,000,000 if there are 100 or fewer separate interests in the association, and $3,000,000 if the Association contains more than 100 separate interests.

How to Protect a Board’s Personal Emails

Imagine this scenario; a person volunteers their time, and spends countless hours working for the betterment of their community. Many of these hours are late at night or on weekends. They and their fellow Board members exchange countless emails at all hours of the day. One of the many decisions made by the Board is challenged by a member of the Association who files a lawsuit. In seeking to examine what discussion the Board members had with management or other Board members on the issue the member’s attorney requests that the Association produce all correspondence related to the issue, issues a subpoena to each Director requesting they produce all Association related emails.

Imagine this scenario: a person volunteers their time, and spends countless hours working for the betterment of their community. Many of these hours are late at night or on weekends. They and their fellow Board members exchange countless emails at all hours of the day. The emails are often sent from their work or personal computers or phones. One of the many decisions made by the Board is challenged by a member of the Association who files a lawsuit. In seeking to examine what discussion the Board members had with management or other Board members on the issue, the member’s attorney requests that the Association produce all correspondence related to the issue, and issues a subpoena to each Director requesting they produce all Association related emails.

The Director has been using their personal email for Board business, or worse, their work email, in which case the subpoena went to their employer, who is now asking why the Board member was using their work email for personal matters. The employer is concerned that complying with the subpoena will expose private, trade secret information to outsiders, and they are not happy, to say the least. Not to mention the fact that use of a work email address for personal communication, such as Board business, will often violate the employer’s email policy and expose the Board member to potential discipline from the employer. The employer is also faced with having to decide between spending thousands of dollars to have the employer’s attorneys review the emails to identify the relevant emails to produce and redact any information not relevant to the subpoena, or to file a protective order. If the Director has been using a personal email address, they will face a similar dilemma. How do they produce only the Board related emails without all their personal emails being revealed to others? The jokes exchanged between friends, bills, financial related emails, stories about children and spouses, all will be produced to the other side unless someone sorts through the emails to identify the ones that are relevant to the subject matter of the suit.

Associations are required to make certain corporate records available for inspection by owners. Several statutes specify the records to be maintained, and the conditions upon which the records must be available for inspection and copying by Owners in the Association. I am not taking a position on whether such emails would qualify as Association or corporate records subject to production by Owner request. Rather, it is litigation, where the ability to request documents is much broader, and the stakes higher, that Directors and Managers should consider in evaluating the risks of using personal or work emails for Board business.

What can a Director do to avoid the situation described above? What can a manager do to guide a Board before this all comes to pass? The first thing to do is rather easy. If you are a Director, do not use a work or existing personal email address for any communication with either the Manager or other Board members. There are other, better, alternatives. These include the free email services available from many providers. Sign up for an email address with Google, Yahoo, Hotmail or others, and use that address for Board business only. That will protect a Director’s private emails from disclosure should they ever have to turn over Board related emails to a third party. These services all offer the ability to sync or download email to a Smartphone and provide easy web access. Any burden that might be caused by having to send and receive emails from a separate email address used exclusively for Board business will more than be offset by the fact that should a Director ever have to produce Board related emails, they will already be separated from their work and personal emails.

Second, the Board and Management should consider an email policy addressing various factors, including whether Board members should be allowed to use personal email addresses for Board business, or whether Board members will be required to set up a separate email address for Board communications. The Board should keep in mind that email discussions between Board members could potentially be construed as a “meeting”. In places such as California, which requires that Board meetings be noticed and open to the membership, the Board should be careful to save such discussion for a properly noticed Board meeting which the members can attend (with some exception for items which can be discussed in closed or executive session). The Board should also consider what type of archival efforts it will make to keep emails for any length of time.

Lastly, the Board should consider whether it will set up and maintain an email service for all Board members. After all, Associations are essentially a business, and an email address is now a basic business tool. Providing email service to all Directors will provide the Association the benefit of having control over retention and archival of emails, and make it easier to respond to any legal requests for Board communications. The costs of providing such a service to Board members should be trivial compared to the cost associated with having to gather and identify the Board related emails from personal email accounts of Board members, or their employers. In order to increase adoption of such an email service, Boards should require that any service provide the ability to sync with all modern smartphones, and provide web access.

Taking these basic steps will go a long way to avoiding having the work and personal emails of a Director disclosed to anyone, even if only the Association’s lawyer. All Boards should discuss these issues with their counsel, and work to develop a policy that meets their needs. With these easy steps taken, a Board can go a long way to saving costs in litigation, and better control Board communications.

HOA, for better or worse

Before you reach for your light saber, though, consider this: Homeowners associations (HOAs) often can be a force for good, cleaning up snow, maintaining the pool and ensuring that the neighborhood looks its best when potential buyers come to call

Lisa Rauschart has an interesting story in today’s Washington Times discussing living in an HOA, and pointing out some of the benefits an Association provides it’s members. An excerpt of the story is below. You can read the entire article here.

You’ve heard the horror stories: The elderly woman forced to move from her condo because she couldn’t carry her cocker spaniel across the common-room floor, the Virginia couple fined because they posted a “Happy Birthday Jesus” sign on their front lawn shortly after Thanksgiving, the California man called on the carpet for planting too many roses. There’s even an old “X-Files” episode that has the president of a homeowners association conjuring up a Tibetan monster to kill residents who broke the rules.

Before you reach for your light saber, though, consider this: Homeowners associations (HOAs) often can be a force for good, cleaning up snow, maintaining the pool and ensuring that the neighborhood looks its best when potential buyers come to call.

The Question of the Correct HOA Reserve Funding Level

Some think reserves should be 100% funded. However, a 100% funding level for reserves can be difficult to achieve without imposing a special assessment on the members, and can be a real burden on the association.

I am often asked about appropriate funding levels for reserves. The funding level of reserves can have an impact on the desirability of a property, impact property values, and the ability of buyers to obtain mortgages on property within an association (Fannie Mae recently revised its lending guidelines to require HOA’s set aside 10% of their budget to funding reserves in order for properties to be eligible for loans).

Some think reserves should be 100% funded.  However, a 100% funding level for reserves can be difficult to achieve without imposing a special assessment on the members, and can be a real burden on the association.

In requiring an HOA to periodically prepare a pro forma operating budget, Section 1365(a)(4) of the California Civil Code calls for identification of the methods of funding used to defray future repair, replacement, or additions to major components. However, a specific funding goal is not indicated in the law.  The truth is the right level of reserve funding depends on the HOA’s individual circumstances, and there is no “industry standard” as to the level of funding for reserves.  Often, the funding goal will depend on the methodology the board uses in developing a funding strategy.

Reserve funds are monies collected for the repair and replacement of major components of the property maintained by the HOA. They differ from operating funds which are collected to fund annually recurring expenses such as insurance, management and legal fees, common area utilities, janitorial services, and common area landscaping. An Association’s obligation regarding reserves and reserve accounts is typically found in the Civil Code. However, some Association’s governing documents also contain requirements which the Association must follow in maintaining and even funding reserve accounts. An example of such a requirement might appear in the CC&Rs and/or bylaws as follows:

Reserves, The Regular Assessments shall include reasonable amounts as determined by the Board collected as reserves for the future periodic maintenance, repair or replacement of all or a portion of the Common Area, or any other purpose as determined by the Board. All amounts collected as reserves, whether pursuant to this Section or otherwise, shall be deposited by the Board in a separate bank account to be held in trust for the purposes for which they are collected and are to be segregated from and not commingled with any other funds of the Community Association. Such reserves shall be deemed a contribution to the capital account of the Community Association by the Members

Types of Accounts. Assessments collected by the Community Association shall be deposited into at least two (2) separate accounts with a responsible financial institution, which accounts shall be clearly designated as (i) the Current Operation Account and (ii) the reserve account. The Board shall deposit those portions of the Assessments collected for current maintenance and operation into the Current Operation Account and shall deposit those portions of the Assessments collected as reserves for replacement and deferred maintenance of major components which the Community Association is obligated to maintain into the reserve account. The Community Association may expend funds from the reserve account only for the purposes set forth in Section 1365.5 of the California Civil Code

Because reserve funds are collected for specific purposes, they can only be used for certain types of expenses. The Civil Code states that reserve funds can only be used for the “repair, restoration, replacement, or maintenance of major components which the Association maintains” or to “pursue litigation involving the repair, restoration, replacement, or maintenance of major components which the Association maintains.” In addition, reserve funds can also be used to meet short-term cash flow needs. However, since borrowing from reserves means the monies may not be available for the purposes they were originally collected, before an Association can take money out of reserves to fund operating expenses, certain formalities must be met.

First, the Board must provide notice of a meeting to the members advising them of the intent to consider a transfer out of reserves. The notice must state (1) why the transfer is needed, (2) possible options for repayment, and (3) whether a special assessment may be considered to repay the amount transferred out of reserves. Lastly, the Board must discuss and approve the transfer during the open session of the properly noticed meeting. These requirements are designed not only to give members notice of the potential transfer out of reserves, but to offer them the opportunity to hear the discussion explaining why such a transfer may be necessary, as well as an opportunity to address the Board and state any concerns they may have over such a transfer.

Once the Board has made the decision to transfer funds out of a reserve account, the next consideration is with regard to repaying the funds. The Civil Code is specific with regard to repayment of reserve funds and requires that funds borrowed from reserves to meet short-term cash flow needs be repaid within one year of the initial transfer. While the time to repay the loan from reserves can be extended briefly, if the Association is not going to meet the one-year repayment requirement the Board must give the same notice of meeting to the members as it did before the initial transfer out of reserves was approved, and discuss the option of delaying the repayment during open session. The Board is also required to make a finding, supported by documentation, that a temporary delay in repaying the amount borrowed from reserves would be in the best interest of the Association. Such documentation should include some form of cash flow projection which shows the impact of the proposed repayment plan and the impact on the Association’s ability to meet its operating expenses over the time period which the Board is considering extending the repayment period. In addition, the Board must consider whether a special assessment would allow it to recover the full amount of the funds which must be repaid into reserves.

In light of the stringent requirements on borrowing from reserve accounts, and the requirement that an Association actually have reserve accounts, one would expect that the legislature would have imposed some minimum requirement on the funding levels for reserves. However, there is no statutory requirement to fund reserves to a certain level. All that is required is that the Board adopt a reserve funding plan in the open session of a meeting. The plan should indicate how the Association plans to fund the contribution necessary to defray the costs to repair, restore, replace or maintain the major components with a remaining useful life of less than thirty years. While there are no statutory requirements for minimum funding levels, the Association’s governing documents must also be reviewed to determine any requirements contained in the documents themselves.

Given the lack of any specific minimum reserve funding level requirement, the Board’s funding plan could conceivably consist of a special assessment being passed when the funds are needed. However, while such a plan would satisfy the statutory requirements, one could question whether such a plan would satisfy the Board’s fiduciary obligations to exercise prudent fiscal management in connection with the Association’s affairs. In light of the difficulties many Associations face in collecting regular monthly assessments, even if it complies with statutory requirements, failure to fund reserve accounts could expose the Board to claims of breach of fiduciary duties. Therefore, without a minimum funding level mandated by statute, a question arises as to how a Board determines the correct funding level for their Association.

The benefit of the lack of a statutory minimum reserve funding level is that the Board has flexibility in exercising its judgment when it comes to determining the funding level for an Association’s reserve account. The right level of reserve funding depends on the HOA’s individual circumstances, and there is no “industry standard” for funding reserves. Often, the funding goal will depend on the methodology the Board uses in their funding strategy.

There are several possible strategies a Board can consider in determining the funding level. These include:

  • Fully Funded Model – setting a reserve funding goal which keeps the reserves at or near 100% funded
  • Threshold Funded Model – setting a reserve funding goal which keeps the reserve balance above some predetermined threshold. This is generally more than “Baseline Funding” and less than “Full Funding”
  • Baseline Funded Model – “Minimum Funded Model” – setting a reserve funding goal which keeps the reserve cash balance at the end of each year in the overall reserve funding projection at or above $0

Each of these models depends on an analysis of cash flows into and out of the reserve fund over thirty years. Once the funding model is determined, assessment calculations should then be made sufficient to reach the Board’s funding goals.

The stringent requirements on borrowing from reserve funds, as well as the Board members’ fiduciary obligations, require that the Board exercise prudent fiscal management in maintaining the integrity of the reserve accounts. Any Board contemplating borrowing from reserve accounts should seriously consider levying a special assessment to recover the amount needed to fund the reserves and also consider increasing dues to meet operating expenses. In addition, if not already part of the budget, the Board should consider budgeting for “bad debt” to ease the impact of late assessments on the overall financial health of the Association. Failure to do so puts the Association’s assets at risk and exposes the directors to claims for breach of fiduciary duties.

Reserve funds are monies collected for the repair and replacement of major components of the property maintained by the HOA. They differ from operating funds which are collected to fund annually recurring expenses such as insurance, management and legal fees, common area utilities, janitorial services, and common area landscaping. An Association’s obligation regarding reserves and reserve accounts is typically found in the Civil Code. However, some Association’s governing documents also contain requirements which the Association must follow in maintaining and even funding reserve accounts. An example of such a requirement might appear in the CC&Rs and/or bylaws as follows:

Reserves, The Regular Assessments shall include reasonable amounts as determined by the Board collected as reserves for the future periodic maintenance, repair or replacement of all or a portion of the Common Area, or any other purpose as determined by the Board. All amounts collected as reserves, whether pursuant to this Section or otherwise, shall be deposited by the Board in a separate bank account to be held in trust for the purposes for which they are collected and are to be segregated from and not commingled with any other funds of the Community Association. Such reserves shall be deemed a contribution to the capital account of the Community Association by the Members

. . .

Types of Accounts. Assessments collected by the Community Association shall be deposited into at least two (2) separate accounts with a responsible financial institution, which accounts shall be clearly designated as (i) the Current Operation Account and (ii) the reserve account. The Board shall deposit those portions of the Assessments collected for current maintenance and operation into the Current Operation Account and shall deposit those portions of the Assessments collected as reserves for replacement and deferred maintenance of major components which the Community Association is obligated to maintain into the reserve account. The Community Association may expend funds from the reserve account only for the purposes set forth in Section 1365.5 of the California Civil Code

Because reserve funds are collected for specific purposes, they can only be used for certain types of expenses. The Civil Code states that reserve funds can only be used for the “repair, restoration, replacement, or maintenance of major components which the Association maintains” or to “pursue litigation involving the repair, restoration, replacement, or maintenance of major components which the Association maintains.” In addition, reserve funds can also be used to meet short-term cash flow needs. However, since borrowing from reserves means the monies may not be available for the purposes they were originally collected, before an Association can take money out of reserves to fund operating expenses, certain formalities must be met.

First, the Board must provide notice of a meeting to the members advising them of the intent to consider a transfer out of reserves. The notice must state (1) why the transfer is needed, (2) possible options for repayment, and (3) whether a special assessment may be considered to repay the amount transferred out of reserves. Lastly, the Board must discuss and approve the transfer during the open session of the properly noticed meeting. These requirements are designed not only to give members notice of the potential transfer out of reserves, but to offer them the opportunity to hear the discussion explaining why such a transfer may be necessary, as well as an opportunity to address the Board and state any concerns they may have over such a transfer.

Once the Board has made the decision to transfer funds out of a reserve account, the next consideration is with regard to repaying the funds. The Civil Code is specific with regard to repayment of reserve funds and requires that funds borrowed from reserves to meet short-term cash flow needs be repaid within one year of the initial transfer. While the time to repay the loan from reserves can be extended briefly, if the Association is not going to meet the one-year repayment requirement the Board must give the same notice of meeting to the members as it did before the initial transfer out of reserves was approved, and discuss the option of delaying the repayment during open session. The Board is also required to make a finding, supported by documentation, that a temporary delay in repaying the amount borrowed from reserves would be in the best interest of the Association. Such documentation should include some form of cash flow projection which shows the impact of the proposed repayment plan and the impact on the Association’s ability to meet its operating expenses over the time period which the Board is considering extending the repayment period. In addition, the Board must consider whether a special assessment would allow it to recover the full amount of the funds which must be repaid into reserves.

In light of the stringent requirements on borrowing from reserve accounts, and the requirement that an Association actually have reserve accounts, one would expect that the legislature would have imposed some minimum requirement on the funding levels for reserves. However, there is no statutory requirement to fund reserves to a certain level. All that is required is that the Board adopt a reserve funding plan in the open session of a meeting. The plan should indicate how the Association plans to fund the contribution necessary to defray the costs to repair, restore, replace or maintain the major components with a remaining useful life of less than thirty years. While there are no statutory requirements for minimum funding levels, the Association’s governing documents must also be reviewed to determine any requirements contained in the documents themselves.

Given the lack of any specific minimum reserve funding level requirement, the Board’s funding plan could conceivably consist of a special assessment being passed when the funds are needed. However, while such a plan would satisfy the statutory requirements, one could question whether such a plan would satisfy the Board’s fiduciary obligations to exercise prudent fiscal management in connection with the Association’s affairs. In light of the difficulties many Associations face in collecting regular monthly assessments, even if it complies with statutory requirements, failure to fund reserve accounts could expose the Board to claims of breach of fiduciary duties. Therefore, without a minimum funding level mandated by statute, a question arises as to how a Board determines the correct funding level for their Association.

The benefit of the lack of a statutory minimum reserve funding level is that the Board has flexibility in exercising its judgment when it comes to determining the funding level for an Association’s reserve account. The right level of reserve funding depends on the HOA’s individual circumstances, and there is no “industry standard” for funding reserves. Often, the funding goal will depend on the methodology the Board uses in their funding strategy.

There are several possible strategies a Board can consider in determining the funding level. These include:

· Fully Funded Model – setting a reserve funding goal which keeps the reserves at or near 100% funded

· Threshold Funded Model – setting a reserve funding goal which keeps the reserve balance above some predetermined threshold. This is generally more than “Baseline Funding” and less than “Full Funding”

· Baseline Funded Model – “Minimum Funded Model” – setting a reserve funding goal which keeps the reserve cash balance at the end of each year in the overall reserve funding projection at or above $0

Each of these models depends on an analysis of cash flows into and out of the reserve fund over thirty years. Once the funding model is determined, assessment calculations should then be made sufficient to reach the Board’s funding goals.

The stringent requirements on borrowing from reserve funds, as well as the Board members’ fiduciary obligations, require that the Board exercise prudent fiscal management in maintaining the integrity of the reserve accounts. Any Board contemplating borrowing from reserve accounts should seriously consider levying a special assessment to recover the amount needed to fund the reserves and also consider increasing dues to meet operating expenses. In addition, if not already part of the budget, the Board should consider budgeting for “bad debt” to ease the impact of late assessments on the overall financial health of the Association. Failure to do so puts the Association’s assets at risk and exposes the directors to claims for breach of fiduciary duties.