Is it time for your community association to audit its governing documents?

In other posts we have discussed the governing documents of a homeowners association. Many communities were established 20 to 40 years ago with governance documents that worked well for the developer and, for the most part, the community association. However, many of these guiding documents are out of date. Federal and Virginia laws regarding community associations have changed substantially. If your board of directors hasn’t done an audit of the documents that govern your communities in the last 5-7 years, you should.

What is an “audit” of our governing documents?

An “audit” of your documents is an in-depth review conducted by your HOA’s board of directors in conjunction with your association’s attorney. The Board reviews each document and notes sections that lack clarity, no longer apply, appear not to apply to your community, protect a defunct developer, or fail to provide the association with adequate resources. The Board prepares a list of concerns or issues facing the community, such as housing that is not being maintained, large numbers of delinquent appraisals, or enforcement capabilities of the association. The Board provides this information to the association’s attorney.

When should the documents be modified?

Although there are many reasons to amend documents, these 7 reasons are the most common:

1. The documents do not comply with federal or Virginia law.

The board of directors of a community association are volunteers. Documents that do not comply with the law create hardship and expense for a community association. The board members read the documents and determine that they should enforce a covenant, only to discover that the covenant has been superseded by a change in the law. Instead of requiring the constant involvement of an attorney to interpret and advise the association as to whether the provisions of the documents have been changed by new legislation, amended documents that comply with the law allow a board to carry out its duties without the continuous and constant involvement of an attorney.

2. Documents include declarant/developer language.

Once the developer/declarant term ends, the board should consider removing the provisions relating to developer/declarant rights. Most of the provisions containing developer/declarant rights are probably no longer relevant and may cause confusion among owners. Removing these provisions provides document clarity and can often result in a substantial decrease in the page count of your documents.

3. Documents contain high quorum percentages for meetings or difficult requirements to modify documents.

Many associations face apathetic owners. Reducing quorum requirements allows an association more flexibility in conducting business. Reducing quorum requirements encourages owner participation because an owner who wants to vote “no” on an issue can choose not to attend a meeting, and effectively the “no” vote is exercised by not participating. Increased quorum requirements make it necessary for the owner to attend the meeting to record their “no” vote. Modifying documents shouldn’t be a daunting process. Communities must be prepared for change. The modification of documents must be efficient and possible. Reducing the percentage required to pass an amendment makes our communities more viable for the future.

4. The documents require the approval of the mortgagees.

Although this requirement is still necessary for condominium communities to allow financing through government-guaranteed loans, single-family communities no longer require mortgagee approval. In our ever-changing mortgage world, non-condominium communities that wish to consider eliminating mortgagor requirements may also consider authorizing the board of directors to make document changes if necessary for government-guaranteed loans.

5. The documents only allow the association to enforce the agreements and rules by filing a lawsuit.

Filing a lawsuit is the most expensive enforcement remedy available to an association. Amending the documents to allow assessment of charges under the Virginia Condominium Law or the Homeowners Association Law allows for a less expensive application by the association. Associations should also consider adding provisions that allow the association to “self-help” in certain situations. Abandoned houses that are neglected and in disrepair have plagued some communities. Allowing the association to correct the deficiency and assess costs against the owner is more efficient and less expensive than a lawsuit.

6. Documents include unrealistic caps on increases in assessments.

All communities want to keep assessments low. However, the reality for some communities is that they cannot afford the necessary operating expenses and adequately fund reserve accounts because the documents restrict how much assessments can be increased. Amending the documents allows the association to eliminate outdated limits and replace them with a limit that allows for an appropriate budget by the association.

7. The documents include strict limitations on the types of building materials allowed in the community.

Today’s building materials have changed. Providing flexibility in the documents to allow the use of new materials is not only convenient for the owner, but can also provide substantial cost savings for the association in its responsibilities.

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