Common Interest Development (aka Homeowner Associations)
Condominium projects and planned unit developments also differ with respect to the form of joint ownership of common area or common elements. Title to the common elements in a condominium must be held by the owners in percentage shares of undivided interest. By contrast, title to the common area in a planned unit development is almost always held by the homeowners’ association.
What is in the Declaration of Covenants, Conditions and Restrictions (sometimes called the Declaration or the CC&Rs)?
CC&Rs describe the rights and obligations of the homeowners’ association and of each owner. CC&Rs are recorded with the county recorder of the county where the property is located, and automatically bind anyone who becomes an owner of the property after the CC&Rs are recorded. CC&Rs vary widely in content and length, but usually cover some of the following topics:
- The boundaries of the common area and of each unit or lot;
- The legal description of the property;
- The allocation of association operating costs among the owners
- The mechanism for collecting owner payments;
- Allocation of owner voting rights;
- Any restrictions on alienation of units; and
- The rights and protection of mortgage lenders.
The Articles of Incorporation or “Articles” are usually short and often contain only the name of the homeowners’ association, the name of the association’s initial agent for the service of process (the person authorized to receive legal notices), and a statement that the association is a nonprofit mutual benefit corporation. Sometimes the Articles also include language about voting, directors, amendments, and dissolution of the association. Articles are required only when an association is incorporated. (Unincorporated associations sometimes have Articles of Association, but these are not required.) Articles are prepared by the developer’s attorney and filed with the secretary of state. The Bylaws describe the mechanics of association decision making and management. Bylaws vary widely in content and length, but usually include the following:
- Numbers and selection methods for officers and directors;
- Notice, meeting and voting procedures for owner and board decisions; and
- Association record keeping and reporting requirements.
The initial project Bylaws are typically prepared by the developer’s attorney and may be reviewed by a government agency at the time a condominium project or planned development is formed.
The Declaration of CC&Rs is the most difficult of the governing documents to amend. In general, any amendment to the CC&Rs must be approved by a vote of the owners. An owner vote to amend the CC&Rs typically requires approval of a super-majority of the total voting power of the Association and may require approval from a government agency. There is usually a section of the CC&Rs that states the percentage of owner votes required to adopt a CC&R amendment, and sometimes the required percentage varies depending on which part of the CC&Rs is being amended. For example, the CC&Rs might state that at least 50% of the owners must approve an amendment in general, but that an amendment that would shift maintenance responsibility for some element of the property from the HOA to the individual owners requires a 75% vote. In another variation, the CC&Rs might state that to change the boundaries of someone’s lot, or to change the percentage of expenses someone pays, a 50% vote of the owners is required plus the approval of 100% of the owners who will be directly impacted by the amendment. Refer to your governing documents for specific percentages.
There are a few types of CC&R amendments that can be adopted by the board of directors without an owner vote. The board can amend the CC&Rs to delete provisions that illegally discriminate against or harass any person because of the race, color, religion, sex, gender, gender identity, gender expression, sexual orientation, marital status, national origin, ancestry, familial status, source of income, disability, or genetic information. The board can also delete references to sections of law that no longer exist or have been renumbered.
If an owners’ association is unable to get the votes needed to adopt a necessary amendment, it is possible to petition the court to amend the CC&Rs without the required number of owner votes; however, a court will not grant such a petition unless there is a good reason to ignore the voting requirement spelled out in the CC&Rs.
It is common for CC&Rs to provide that some or all amendments must be approved by eligible mortgage lenders who hold mortgages on the lots or units within the property, or by a local government agency. These provisions are intended to prevent the owners from adopting amendments that undermine the lenders’ or local government’s rights or powers. Before adopting an amendment, owners should review the CC&Rs to determine whether the approval of lenders and/or a local government agency might be required.
Once a CC&R amendment has been approved, it must be recorded in the records of the county where the property is located. A CC&R amendment that has not been recorded in the county records is not valid.
Who is the Declarant referred to in the governing documents, and why does the Declarant seem to have special privileges?
Ownership and Possession
In a condominium project, the individually owned area is called the unit. The exact physical location of each condominium unit within a project is shown on the recorded map or condominium plan for that project. The map or plan, and/or the CC&Rs, will also contain a definition of the term “unit” as it is used for that project, listing the elements of the building that are part of the unit. These definitions vary significantly from project to project, and it is unwise to apply generalizations or assumptions. Instead, read the definition with the following questions in mind:
- Does the unit include any exterior surfaces such as roofing, siding, or foundation?
- What portions of the interior walls does the unit include? The whole wall (i.e., both sides and everything in between), half the wall (i.e. everything from one side to a point halfway to the other side), one finished surface (i.e., only the wallboard or plaster on one side), or just the finish (i.e., the paint or paper)? Note that some unit definitions distinguish perimeter walls (i.e., walls between units, or between a unit and the common area) from partition walls (i.e., walls between rooms in the same unit), or structural walls (i.e., walls that help hold up the building) from non-structural walls (i.e., those that simply divide rooms). Where these wall-type distinctions are made, the portions of the wall that are part of the unit will vary depending on wall type.
- What portions of the floors and ceilings does the unit include? The entire floor or ceiling, all portions up to a midpoint, the finished portion (i.e., ceiling plaster or sheetrock, finished wood flooring), or just the finish (i.e., paint or carpet)? Here again, some definitions distinguish floors and ceilings between units, or between a unit and the common area, from floors and ceilings between levels of the same unit.
- What portions of the windows and doors does the unit include? The entire window or door, or only glass and screens? Note that some definitions distinguish interior doors from exterior doors. Does the definition include window and door frames? Does it include window and door hardware?
- Does the unit include all of the fixtures and appliances located within it? Note that the term “fixtures,” when used in this context, encompasses cabinetry, lights, electrical outlets, sinks, showers, and tubs.
- What portions of the plumbing, electrical, heating, and air conditioning systems are part of the unit? All elements that serve only the unit, or only elements visible from within the unit?
- Does the unit include any decks, balconies, or patios, and if so, how does the definition describe the boundaries of these areas? Note that even if the unit does not include these areas, they may be assigned as exclusive use common area as discussed below.
The term “limited common elements” (“LCE”) refers to parts of a condominium project that are not within the defined boundaries of a unit but are intended to be used exclusively by one owner. Technically, LCEs are part of the common elements owned by all the owners, but one owner holds a type of easement which gives him/her exclusive usage rights. The easement is permanent, and cannot be taken away by the association or by the other owners. Decks, patios, parking spaces, and storage spaces are often assigned as LCEs on the recorded plat or survey map, in the CC&Rs, or in the deed conveying the unit to its owner.
The terms “percentage interest” and “common interest” are used only when the shared area is jointly owned by the individual owners (rather than by the association). In these cases, terms “percentage interest” and “common interest” refer to the percentage share of the common area/common element owned by an owner. An owner’s “percentage interest” or “common interest” does not necessarily determine that owner’s usage rights or cost responsibilities.
The term “party wall” usually means a shared wall, fence, or other building element that sits on the border of two or more lots or between two or more units in a condominium. Where there are party walls, the CC&Rs will usually allocate responsibility for maintenance, impose restrictions on alterations, and provide access rights for maintenance. When the CC&Rs are silent on any of these issues, general rules of law apply. These laws are complex and beyond the scope of this article. For additional information, consult an attorney.
Can Limited Common Elements (LCEs), such as parking spaces or storage spaces, be sold to or exchanged with another owner?
If the LCE is assigned to a particular unit or lot on a map or plat recorded separately from the CC&Rs, the sale or exchange would require an amendment of the map or plat as described in the previous answer. If the LCE is assigned to a particular unit or lot only in the CC&Rs and/or the initial deed conveying the unit or lot, and is not assigned on the map or plat, the sale or exchange will require an amendment to the CC&Rs and/or a new deed. In these cases, the owners directly involved with the sale or exchange will need the approval and cooperation of both the association and of their mortgage lenders. The CC&Rs may also require approval and cooperation of some or all the other owners and their mortgage lenders.
Most CC&Rs state that the homeowners’ association has the right to enter any unit or lot whenever necessary to fulfill the association’s duties. Among the duties that would justify entry are common area maintenance, verification of an owner’s compliance with owner maintenance requirements or alteration restrictions, and pet rules. Often, the CC&Rs will require that the association provide advance notice of the entry except in an emergency. When the CC&Rs are silent on these issues, both the right of entry, and the requirement for advance notice, would be implied.
Use of Common Area
Is each owner entitled to use the common area, regardless of his/her ownership and assessment percentage?
Each owner in a condominium project or planned development is equally entitled to use all common area (other than Limited Common Elements) regardless of ownership or assessment percentage. However, governing documents may contain more specific requirements and limitations.
An owner’s guests and tenants have the same common area usage rights as the owner unless the governing documents specifically provide otherwise. The owner is responsible for ensuring that his guests and tenants comply with all applicable association rules and can be liable for violations by his guests or tenants.
A homeowners’ association may charge fees for the use of recreational facilities and refuse access without payment, provided the charge applies equally to all owners and is not specifically prohibited by the governing documents. Such fees can be initiated and adjusted by the board unless the governing documents specifically require an owner vote.
The association may also temporarily suspend an owner’s recreational facilities usage privileges as discipline for a violation of the governing documents. This type of discipline is permitted only if: (i) the governing documents do not specifically prohibit it, (ii) the board has adopted the discipline policy in advance, (iii) notice of the policy has been provided to all the owners in advance, and (iv) the violating owner is given notice of the violation and the opportunity to request a board hearing before the recreational facilities usage privileges are removed.
Association Powers and Decision Making
Each homeowner’s association decision must adhere to the following standards:
- It must be within the scope of the association’s authority under the governing documents and the law;
- It must be based upon a reasonable investigation;
- It must be intended to serve the best interests of the association and the owners as a group;
- It must be made in good faith; and
- It must be reasonable considering the information available at the time the decision is made.
Additional standards may apply for specific types of decisions such as owner discipline or alteration approvals. Where the association has formally established policies or procedures, they must be uniformly applied and followed. But the fact that the association has permitted or approved a certain activity or alteration by a particular owner at one time does not mean that the association must permit or approve that same activity by the same or a different owner at a later time. In evaluating an association decision for compliance with these standards, the courts will defer to the board’s authority and presumed expertise.
There is no governmental agency with authority to oversee homeowner associations. Association duties and standards must be enforced by owners and lenders through the court system or through some alternative dispute resolution process such as mediation or arbitration.
The owner should begin by attempting to discuss the matter with the president, a director, committee chair or property manager. If this attempt does not yield satisfactory results, the owner should attend a board meeting or call an owner meeting to discuss the problem with the other owners. If the owner wishes to pursue the matter further, he/she should consult an attorney.
When the HOA needs to get legal advice in order to respond to an owner, can it charge the owner for attorney’s fees?
A homeowner association is typically not entitled to recover its attorney’s fees from an owner unless it prevails in a court proceeding or arbitration involving the enforcement of the governing documents. However, some association’s governing documents do allow for this so a review of your specific governing documents is needed.
Association Structure and Funds
How are HOA powers distributed between the owners, the board of directors, the committees, the officers, and the manager?
In general, the distribution of power and authority within the HOA is determined by the governing documents. Where the governing documents simply give the association power to do or approve something without specifically requiring owner approval, the power can be exercised by the board of directors without owner approval. In practice, most governing documents require owner approval for a variety of major decisions including changing the items which the association is responsible to maintain, changing the owners’ assessment percentages, changing the unit or lot boundaries, and imposing leasing or resale restrictions.
The board of directors has complete control over all committees, officers, and managers. This means that the board decides who will serve in these capacities, and what authority they will have, subject only to restrictions in the governing documents. The board retains the power to override the decision of any committee, officer, and manager.
In general, the owners cannot override a board, committee, officer or manager decision. If the owners are unhappy with a board decision, they can convene a meeting, vote to remove one or more directors, and hope the replacement directors make a more satisfactory decision. If the owners are unhappy with a committee, officer, or manager decision, they can attempt to convince the board to overrule it or, if that does not work, vote to change the board. Alternatively, one or more owner could challenge any board, committee, officer or manager decision through litigation or arbitration on the basis that the decision was not reasonable, made in good faith, and/or in compliance with formally established policies or procedures. One notable exception to the general rule is that, in some circumstances, an owner may be authorized to convene a meeting and overturn a new Rule enacted by the board.
The first step in homeowner association decision making is determining whether the course of action under consideration would be reasonable and in the best interests of all owners. If this question can be answered affirmatively, the next step is to review the governing documents with the following questions in mind:
- Is a particular action or decision required under the governing documents and/or the law?
- Is a particular procedure for making the decision required under the governing documents and/or the law?
- Does the decision under consideration require an owner vote?
Questionable action should be reviewed by an attorney. If the action could have a significant impact on one or more owners, it is wise to get a written opinion of counsel before acting upon which the board can rely in the event of a legal challenge. A legal opinion may protect the board from liability for an erroneous decision by allowing it to assert reasonable reliance on the advice of counsel as a defense. But remember that the failure of an association to follow the advice of counsel or its own internal decision-making procedures will make inappropriate action vulnerable to a legal challenge.
The law states in Washington and Oregon that the signatures of at least two directors is required for withdrawals from the association reserve account(s). Withdrawal requirements for other association accounts are usually set in the governing documents, but if they are not, the requirements can be established by the board.
The decision of whether the association should enter into a particular contract is made by the board unless the governing documents require owner approval, or unless the board has delegated the decision to an officer, committee, or manager.
While it is legal to pay directors and officers for their service, it is not a good idea. Under the law, volunteer directors and officers of properly insured homeowner associations face no personal liability for their decisions absent intentional fraud or self-dealing. Paid directors and officers can face personal liability for bad judgment and unintentional mistakes.
An HOA operating budget is a projection of the money needed by the association to cover its recurring operating expenses and it should also include a line item for the amount to be transferred to fund the association’s reserve fund. Washington and Oregon law requires that the HOA adopt an operating budget every year. In practice, this means the HOA revises its budget from the previous year to consider changes in its financial position and cost structure. The budget adoption process is typically controlled by state law, but procedures are included in some governing documents. In most associations, the governing documents provide that the budget is adopted by the board rather than by a vote of the owners. However, even when the documents give the board the right to adopt the budget, a vote of the owners may be required to ratify the budget or to adopt a budget that would require a significant increase in regular assessments (aka owner dues) as discussed below. The HOA must distribute its budget to all owners.
Homeowner associations are required to pay federal and state income tax only if they generate income from sources other than the collection of assessments and fees from the owners, and then only if the income from these other sources, offset by the expenses associated with generating it, exceeds $100. The only non-assessment income most associations generate is interest on association funds. Federal and state income tax is owed on this income to the extent it exceeds $100 per year, but most associations avoid paying tax by carrying forward any potentially taxable income by applying it to the next year’s budget.
The law requires that an HOA segregate its reserve funds from its operating funds and perform an annual financial review. Some governing documents increase the scope or frequency of this review and require periodic audits that are more thorough than financial reviews.
The law also requires preparation and distribution of a budget and financial report each year as described under the heading “Association Budgeting, Reserve Planning, and Reporting Requirements” above.
Reserve funds can be used only for repair, restoration, replacement or maintenance of the portions of the property that the association is obligated to maintain, or litigation involving these items. In some circumstances, the association can borrow reserve funds to cover operating expenses, but a plan to replenish the reserve funds must generally be adopted within one year.
The board is responsible for fulfilling the association’s accounting responsibilities, but it can delegate this responsibility to an officer, committee, or professional manager provided the board retains final authority.
Meetings and Decisions
Most governing documents require that the association prepare and maintain minutes of all owner meetings and that these minutes be made available to owners for inspection on written demand at any reasonable time for any reasonable purpose. There may be a requirement that the secretary is responsible to prepare the minutes within a prescribed number of days following the meeting. All minutes remain in draft form until they are approved at the next association or board meeting.
The level of owner voting power required for approval is determined by the governing documents and tends to vary depending on the type of decision. Most governing documents list a group of decisions requiring greater than majority approval, specify the level of approval required for each, and state that all other owner decisions are made by a majority. In instances where the governing documents are not specific, a majority approval requirement is presumed.
When interpreting voting requirements in governing documents or in the law, it is important to pay close attention to the wording. When a matter requires the approval of a specified percentage, or the majority, “of all owners” or “of the total voting power of the association,” it means that the voting power cast for approval must be measured against the total voting power of all owners including those who did not cast votes. When a matter requires the approval of a specified percentage, or a majority, “of the owners” (i.e., without using the word “all”), or “of the votes cast,” it means that the voting power cast for approval is only measured against the total voting power cast.
An owner’s voting power is determined by the governing documents. In most homeowner associations, each owner has one vote of equal weight regardless of his/her ownership or assessment percentage, or the value or size of his/her unit or lot. If voting power is not specified in the governing documents, the law presumes that each unit or lot is entitled to cast one vote, with all the votes being weighed equally.
A matter that could be decided at an owner meeting may also be decided by casting a written mail-in ballot. Most governing documents contain provisions allowing for business to be conducted by written ballot with some exceptions. The provisions differ greatly, and a careful review of the association’s governing documents is necessary to determine whether this is authorized.
An owner who cannot attend an owner meeting should give another person a proxy, which is a written form authorizing the other person to attend and be counted toward the voting requirement. A proxy may also be granted to allow the proxy holder to vote on behalf of the absent owner.
The governing documents specify the minimum amount owners present for a quorum. This is also known as the owner voting power. This minimum amount must be present for decisions to be made at an owner meeting. In Oregon, the law sets 20% as the minimum quorum, and in Washington, the minimum quorum is 25% for condominiums. There is no minimum quorum requirement in Washington for planned unit developments.
Decisions made at an owner meeting held without proper notice are valid only if all the following are true: (i) enough owners (a “quorum”) were present to allow decisions to be made at a properly noticed meeting, (ii) none of the owners at the meeting objected to the improper notice at the beginning of the meeting, and (iii) every owner who did not attend the meeting signs a waiver of notice or an approval of the meeting minutes.
Both regular and special owner meetings require a written notice at least ten (10) but not more than fifty (50) days before the meeting in Oregon, and at least ten (10) but not more than sixty (60) days before the meeting in Washington. The notice may be given in several different ways: (i) by email to an owner who has consented to receive notice in that manner; (ii) by first-class mail; (iii) by hand-delivery to the owner.
An owner meeting notice must include the place, date and time of the meeting, and the general nature of the business to be conducted at the meeting.
A regular owner meeting is one held on a schedule prescribed in the governing documents. Most governing documents require one regular meeting (the “annual meeting”) each year. A special owner meeting is one that is not required by the governing documents but rather has been convened for a specific purpose.
The law requires that the association maintain minutes of all director meetings except executive sessions. The meeting minutes should be approved at the next association or board meeting. The governing documents usually state that the secretary is responsible for preparing the minutes. There is a new Washington PUD law requiring meeting minutes within 60 days of the meeting effective August 1, 2014.
Board meetings are likely to be more productive, and less frustrating for participants if formal procedures are adopted and followed. Boards should refer to Robert’s Rules of Order for direction on meeting requirements, however, other less-formal procedures are acceptable.
Can directors discuss and act upon matters not described on the agenda that is part of the meeting notice given to the owners in advance?
Generally, directors should not discuss or take any action on any matters not listed in the agenda. However, matters may arise as new business during the meeting that require immediate action or discussion. Those items should be noted on the meeting minutes so all owners have information about the actions that were taken.
There is no requirement that owners be permitted at all board meetings. However, it is good practice to allow time for owners to provide input at board meetings during an open forum. The board has discretion to set procedures, including time limitations, for the open forum.
Owners are entitled to attend all board meetings except Emergency Board Meetings (as described above) and executive sessions. The board is permitted to hold an executive session only to discuss litigation, contracts with non-owners, the formation of contracts with third parties, owner discipline, personnel matters, or to meet with an owner regarding the payment of assessments. If only part of the meeting will be an executive session, owners may attend the remainder. Any gathering (including a conference telephone call) where a majority of directors discuss any item of business scheduled to be heard by the board is considered a director meeting (other than for purposes of litigation or mediation) and triggers owner notice and attendance rights.
The governing documents generally specify the minimum number of directors (the “quorum”) that must be present for decisions to be made at a board meeting. When the governing documents do not specify a director quorum, a majority of directors shall be required for a quorum. A majority vote of the directors attending a meeting can make decisions unless the governing documents impose a higher voting requirement.
The requirement for owner notice of board meetings in Oregon is that for meetings other than emergency meetings, notice of the meeting must be posted at least three days prior to the meeting. In Washington, the owner notice requirements are contained in association governing documents.
If the board meeting is characterized as an emergency, there are no owner notice requirements.
In general, the governing documents will prescribe the frequency of regularly-scheduled board meetings, but allow the board to established the exact time and place. The governing documents usually also provide that the time and place of a regularly-scheduled meeting can be changed, or a special meeting can be scheduled, by the chairman of the board (if any), the president, or a quorum of directors. Owners who are not directors or officers cannot call board meetings.
Director Election and Term
The method of selecting a director to fill a vacancy following a resignation or removal is usually prescribed in the governing documents. Often the governing documents will provide that the remaining directors have the authority to appoint a new director until the owners are able to elect a replacement director, but you should carefully consult your governing documents on this topic.
A director may be removed by owner vote at any time. The owners do not need a reason for the removal. The number of owner votes needed to remove a director is controlled by state law and varies. To remove a director, the owners typically will be required to call a special owners meeting with director removal on the meeting agenda.
The length of the directors’ terms is usually specified in the governing documents. It is not necessary for all directors to have terms of the same length, or for all directors’ terms to expire in the same year. Frequently, the governing documents provide for staggered terms, so that fewer than all the board seats are open at one time.
After the Association is turned over from declarant control, the directors are elected by a vote of the owners. Most governing documents require this election to occur at the association’s annual meeting. Some governing documents also contain specifics about the procedure for the nominations and the election, but there are no specific requirements that apply to every association.
The governing documents can require that directors have certain qualifications provided the requirements are reasonable. In most associations, directors must be owners. In some associations, directors must be resident owners. In other associations, directors are required to be “in good standing” which means that they are not delinquent in payment of assessments.
Officers Managers and Committees
Most governing documents authorize the formation of one or more specific committees, but the board has the authority to create committees even if that power is not specifically mentioned in the governing documents. Unless the documents specify the size of the committee, the qualifications required of the members, and the method of selecting and removing the members, these matters can be determined by the board. Committee recommendations are not binding on the board, and committee decisions may be overridden by the board.
The power and authority of each officer is determined by the governing documents, or, if the documents are silent, by the board. Regardless of how power and authority is delegated among the officers, the board can override the decision of any officer on any matter.
Incorporated associations are legally required to have at least a chairman of the board or president and a secretary. There may also be one or more vice presidents, and a chief financial officer or treasurer. Unless prohibited by the governing documents, one person may hold more than one of these offices however, the same person cannot be both the president and the secretary. The officers are typically not required to be directors. Unincorporated associations need not have officers.
Homeowner associations are not required to provide or disclose any information directly to prospective purchasers of units or lots but are required to provide a variety of documents to selling owners so that these owners can meet seller disclosure and resale certificate requirements. These include: (i) a copy of all governing documents and, if the association is not incorporated, a statement in writing that the association is not incorporated; (ii) a copy of the most recent annual budget report and annual policy statement, along with a statement of any change in the association’s current regular and special assessments and fees which have been approved by the board, but have not become due and payable; (iii) a true statement as to the amount of the association’s current regular and special assessments and fees, and any unpaid assessments or monetary fines/penalties owed by the selling owner; (iv) a copy or a summary of any notice previously sent to the selling owner alleging a violation of the governing documents; (v) a statement describing any restriction of rentals; and (vi) if requested by the prospective purchaser, a copy of the minutes of board meetings, excluding meetings held in executive session, conducted over the previous 12 months.
The Association is required to make all association records available to owners upon reasonable request. The Board may adopt processes for handling owner document requests and may impose reasonable charges for providing copies of documents. Association records include membership lists, governing documents, meeting minutes (association meetings and board meetings), proxies and ballots, budgets, year-end financial statements, tax returns, executed contracts, and insurance policies and documents relating to insurance claims. There are also some association records that should not be produced to protect owner confidentiality; those include documents such as individual owner delinquency reports and confidential owner contact information.
The law does not explicitly state that the reserve study must be performed by a qualified expert but does require that it be reasonably competent and diligent. In practice, the competency requirement probably cannot be satisfied without one or more outside experts, and the board will be exposing its members, and the HOA itself, to a risk of liability to owners and/or mortgage lenders if it does not use an outside expert to perform the reserve study.
A reserve study is a careful analysis of the future repair and replacement needs of a homeowner association based on the condition of the elements of the property it maintains, a projection of the remaining useful life of these elements and future cost to repair or replace them, and the amount of money the association has in its reserve fund. A reserve funding plan is a plan for collecting funds from the owners through regular and/or special assessments to fund the reserve needs of the association. Both Washington and Oregon require each HOA to undertake a new reserve study at least once every three years, subject to some specific exceptions.
Professional managers offer a wide variety of services to homeowner associations including accounting, budgeting, record keeping, assessment collection, bill payment, meeting coordination, and common area maintenance. Associations choose from among the services available and enter into a contract with the manager describing the scope of work. The management contract should also include the fee, the duration of arrangement, and the circumstances under which the arrangement can be terminated early. Some governing documents limit the duration of management agreements or require specific early termination provisions. Most governing documents list certain association functions that cannot be delegated. Non-delegable functions typically include borrowing money, levying assessments, making capital expenditures more than budgeted amounts, and imposing discipline for violation of the governing documents. Regardless of what functions are delegated and regardless of the content of the management agreement, the board retains the duty to supervise the manager and the authority to override any decision.
Some governing documents require professional management or state that an owner vote (or even the approval of mortgage lenders) is required to discontinue professional management. Absent these provisions, professional management is not required, but it is generally advisable, particularly for larger associations.
Can the HOA charge for parking, use of recreational facilities, and other services, and is there an upper limit on these charges?
A special assessment is an assessment for an association expense that was under-budgeted or not budgeted. It can be made payable in a single installment or in multiple installments. In general, the board has the power to impose small special assessments and to determine the payment schedule, but some governing documents require owner approval for all special assessments. All owners must be notified of a new or increased special assessment at least 30 days before it is due.
The governing documents always specify how assessments are allocated among the owners, and usually require a high percentage of the owners and the mortgage lenders to approve any change in the allocation. The allocation is established by the developer at the time the governing documents are prepared and is reviewed by a governmental agency. There are no legal grounds for an owner to challenge the assessment allocation based upon fairness or equity.
Maintenance, Alterations, and Defects
The term point of origin refers to the first event that sets in motion the series of other events leading to a maintenance need. It is important to understand the point of origin of the damage because it may determine responsibility for its cost. For example, if the bathtub of a condominium unit overflows, the owner is responsible for all resulting damage to other units and to the common area. This is true because the point of origin of the damage was either a malfunction of the faucet or drain (elements for which the owner is responsible) or an occupant’s negligence in allowing the tub to overflow (an act for which the owner is responsible). The Association will still be involved in the repair process and may require the use of specific contractors, but the owner may be responsible for all the costs.
Each Owner is responsible for maintenance necessitated by the negligent or intentional action or inaction of his/her guests, employees and contractors, the occupants of his/her unit (including tenants), and the guests, employees, and contractors of these occupants. The association is responsible for maintenance necessitated by the negligent or intentional action or inaction of its employees and contractors.
The allocation of maintenance responsibilities between the individual owners and the association is usually determined by the governing documents, and varies widely from project to project. A step-by-step procedure for determining responsibility is discussed above under the heading “What portions of the property are individual owners obligated to maintain?”
In most condominium projects, the association is obligated to maintain the following elements of the property:
- All exterior elements including siding and roofing (but not windows and doors);
- All foundations and other structural elements;
- All landscaping, exterior lighting, drives, and walks;
- All interior common areas including lobbies, hallways and stairs (except stairs connecting levels within units);
- All portions of the plumbing, electrical, heating and air conditioning systems serving more than one unit or located within the common elements; and
- All fire protection alarms and equipment located within the common elements.
Where exterior areas such as decks, patios or yards are included as part of a condominium unit or assigned as limited common elements, association maintenance obligations vary widely, and no generalizations are possible.
In most planned developments, the association is obligated to maintain the following elements of the property:
- All common area;
- All exterior surfaces of homes, including roofing, siding, trim, decks, balconies, exterior stairs, railings, window frames, and door frames;
- All fences and exterior, nonstructural walls;
- All landscaping on each lot; and
- All fire protection alarms and equipment except smoke detectors within homes.
As discussed below, association maintenance obligations change when an element or area is damaged by negligence, or because of the malfunction of an element that an owner is responsible to maintain.
Maintenance responsibility for elements on the border of lots within a planned development (often called “party walls”) is determined by the governing documents or, where the documents silent on the issue, by general rules of law. In most cases, each of the bordering lot owners is responsible for a percentage of the cost which reflects the extent to which the element serves his/her lot. Any of the bordering lot owners can undertake necessary maintenance, and recover the appropriate share of the costs from the other bordering lot owners.
The governing documents usually include a minimum standard for owner maintenance such as the statement “each owner shall maintain the elements of the property for which he/she is responsible for in a condition which does not impair the value or desirability of other units or lots”. Most governing documents also provide that if an owner fails to satisfy his/her maintenance requirements, the association may do so and assess any related expense against the responsible owner as an assessment. It is advisable (and required by some governing documents) that the association provide a written warning, an opportunity to correct the problem, and the opportunity to request a board hearing, before undertaking a repair for an owner.
In condominium projects and planned developments, maintenance obligations are not necessarily determined by ownership. In other words, the fact that an element or area is individually owned does not necessarily mean that it is individually maintained. To determine whether an element or area is individually maintained, begin by reading the sections of the governing documents that specifically discuss maintenance obligations. The maintenance sections may or may not refer to the ownership sections (such as the definition of the condominium unit). If responsibility for the element or area is not clear, attempt to determine the author’s intent by analogy to similar elements or areas that are mentioned in the documents. If the documents provide no clues as to the authors intended allocation of responsibility, determine ownership of the element or area and allocate responsibility based on ownership.
In most condominium projects, individual owners are obligated to maintain the following elements of the property:
- Everything included within the definition of the unit as explained under the heading “What portions of a condominium are individually owned?” above;
- The glass, screens, moving frame, and hardware of windows (even if they do not fall within the definition of the unit);
- All doors, door frames, and door hardware (even if they do not fall within the definition of the unit); and
- The finished wall surfaces of storage spaces assigned as limited common elements.
Where exterior areas such as decks, patios or yards are included as part of a condominium unit or assigned as limited common elements, individual maintenance obligations vary widely, and no generalizations are possible.
In most planned developments, individual owners are obligated to maintain the following elements of the property:
- All interior elements and areas of the homes;
- All portions of the plumbing, electrical, heating and air conditioning systems serving the homes;
- All foundations and structural elements of the homes (but not roofing and siding);
- All glass, screens, moving frame, and hardware of windows; and
- All doors, door frames, and door hardware; and
- All patios and decks.
As discussed below, owner maintenance obligations change when an element or area is damaged by negligence, or as a consequence of the malfunction of an element the owner is not responsible to maintain.
Most governing documents contain detailed procedures for the submittal, consideration, and approval of proposed alterations and improvements. Where the governing documents do not contain these procedures, or where the procedures are incomplete, the board should develop new or supplemental procedures and express them in a written resolution or Rule. If formal approval procedures are not established, or if they are not strictly followed, the association may be prohibited from enforcing its architectural guidelines. Alteration approval is a responsibility of the board, but it may delegate this responsibility to an officer, committee, or professional manager provided it retains final authority.
Condominium governing documents usually require association approval for improvements and alterations which:
- Change the appearance of any exterior area;
- Change any interior common area (except entirely separated exclusive use common areas such as storage closets);
- Impair structural integrity;
- May interfere with another owner’s use or enjoyment of their unit (such as installation of hardwood floors above a neighbor’s ceiling); or
- Interfere with plumbing, electrical, heating, or air conditioning service to other units or the common area.
Planned development governing documents usually require association approval for improvements and alterations which:
- Change any common area;
- Involve the construction of new structures or additions, including fences, walls, pools, spas, balconies, patios, patio enclosures, screens, tents, awnings, window air conditioners, exterior shutters, exterior antennas, or exterior wiring;
- Change the appearance of the exterior elements of existing structures including paint, siding, and roofing;
- Change the appearance of existing landscaping visible from the common area or other lots;
- Obstruct the view from another lot or from the common area; or
- Interfere with the water supply, sewage or drainage systems.
What disclosures must be made to a prospective purchaser when there are construction defects in the project?
The seller of a unit or lot is required by law to disclose all material defects in the property, including defects located in the common area, and defects located in other units or lots if they affect the unit or lot being sold. The disclosure requirements extend to all defects of which the seller is aware or should be aware, including construction defects. Additional disclosure requirements apply when construction defect litigation has been commenced or is under consideration.
Any real estate agent involved in the sale is also required to disclose any defects of which he/she is aware or should be aware, and is further required to conduct a reasonably competent and diligent visual inspection.
Homeowner associations are not required to provide or disclose construction defect information to prospective purchasers of units or lots.
A homeowner association should consult an attorney as soon as it discovers construction defects. Failing to act quickly could result in the loss of recovery rights. The law contains extensive requirements, deadlines, and procedures for construction defect dispute resolution.
When an owner discovers construction defects in a portion of the property which the association is obligated to maintain, he/she should report the problem to the manager or, if there is no manager, to an association officer or director. The association is obligated to repair the damage under the governing documents, regardless of whether the developer is ultimately responsible. The board is required to exercise prudent business judgment in deciding whether to attempt to perform repairs immediately or to first seek to recover repair costs from the developer.
When an owner discovers construction defects in a portion of the property which the owner is obligated to maintain, he/she must repair the damage under the governing documents. The repair obligation exists regardless of whether the developer is ultimately responsible, or whether a previous owner or real estate agent has violated disclosure laws. If the owner fails to repair, the association may do so and assess the costs against the owner. The owner may be entitled to recover his/her repair costs from the developer, a previous owner, or a real estate agent, and should consult an attorney.
Insurance and Liability
The law does not require a minimum amount of liability insurance, but most governing documents specify minimum policy limits. The law does state that if certain statutory policy limits are met, the individual owners cannot be held responsible if the damages exceed the coverage.
Who is responsible for insuring the HOA, the owners, the directors and the officers, for liability?
The governing documents contain detailed liability insurance requirements. These typically mandate liability insurance for the association and its directors and officers. The owners are responsible for insuring against their own liability.
Under what circumstances can an owner be held liable for personal injuries that occur in another home or in the common area?
If the personal injuries were caused by a property condition and not by the actions of a person, and if the association is incorporated, an individual owner should not be responsible for personal injuries that occur in another owner’s home or in the common area. If the association is unincorporated, an individual owner can be held responsible only if the association is responsible and unable to satisfy the claim, and then only if the association does not carry liability insurance meeting the statutory minimums.
Under what circumstances can HOA directors and officers be held liable for damages resulting from their service?
The law provides that a volunteer director or officer cannot be held liable for damages resulting from his/her service to the association if he/she performs his/her duties (i) in good faith, (ii) in a manner which he/she believes to be in the best interests of the association, and (iii) with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances. At the risk of oversimplifying this standard, the idea is to protect honest directors and officers from liability for mistakes unless their actions are self-interested or unreasonable. Directors are entitled to rely on information and opinions provided by the association’s officers, committees, and hired experts.
To provide additional liability protection to directors and officers, most governing documents state that the association will indemnify them absent gross negligence, intentional misconduct, or fraud. Indemnity means that the association will pay the damages that are awarded against the directors or officers. Most governing documents require the association to carry director and officer (“D&O”) liability insurance for these costs, and such insurance is always a good idea.
Managing agent bonds and fidelity bonds are a form of insurance for the theft or misappropriation of funds. This type of insurance is not required by law in Washington or Oregon but is required by some governing documents. It is advisable for large associations to obtain this type of insurance unless their funds are handled by a professional manager who already has adequate bonding or coverage.
In general, when insurance proceeds are insufficient to pay repair costs, the association must levy a special assessment to cover the shortfall. But most governing documents describe a procedure for dissolving the association and selling the property following a very large uninsured or underinsured loss. These procedures are intended to provide an alternative to a special assessment so large that most owners could not pay it.
Homeowner associations must provide copies of their insurance policies upon request.
Most governing documents do not require earthquake insurance, and it is not required by law. Since earthquake insurance is expensive and typically involves a large deductible, its benefits are debatable, and a board should not face liability for choosing not to obtain it if the decision was based on competent advice from an insurance professional.
Most governing documents include a minimum insurance requirement by stating that the limits of coverage shall not be less than the full current replacement cost of the structures. In other cases, the documents allow the board to determine the appropriate amount of insurance. Regardless of what the documents say, the board is empowered to exceed any minimum insurance requirement and must use prudent business judgment in determining the amount and type of insurance.
The governing documents contain detailed property insurance requirements. In condominium projects, these typically require that the association obtain property damage insurance (sometimes called casualty insurance) for everything located on the property except the contents of the units. These policies usually cover damage to interior walls, floors, and ceilings within units, but do not cover damage to cabinetry, plumbing and electrical fixtures, appliances, wall and floor coverings, and furniture. The individual owners are responsible for insuring the contents of their units, and may also be responsible for payment of the Association’s insurance deductible in some circumstances.
In planned developments, the governing documents usually require the association to insure all portions of the property which it is obligated to maintain. But in some cases, the individual owners are required to insure everything on their lots even though the exterior surfaces of the homes are maintained by the association.
Mortgages and Liens
The term “mechanic’s lien” describes a document that can be recorded with county government by an unpaid contractor or construction materials supplier. The recording of a mechanic’s lien relating to a property effectively prevents the owner from selling or refinancing the property without either paying the bill or establishing in court that the lien is invalid. When construction is performed for an individual owner on his/her condominium unit or planned development lot, the owner’s contractors and construction materials suppliers can record mechanic’s liens against that owner’s unit or lot, but cannot record mechanic’s liens against the common area or against any other owner’s unit or lot. When construction is performed for the association on the common area, the association’s contractors and construction materials suppliers can record mechanic’s liens against the common area and every unit or lot. An owner who learns that a mechanic’s lien has been recorded against his/her unit or lot should consult an attorney.
Most lenders will refuse to make mortgage loans on homes within condominium projects and planned developments unless there are special provisions in the governing documents to protect them. These provisions are designed to ensure that the basic rights and responsibilities associated with the home at the time the loan is made cannot be easily changed. The lender is particularly concerned about changes that might devalue the home such as an increase in the home’s assessment allocation, the removal of a parking or storage space, or an uninsured or underinsured loss. Most lenders review the mortgage protection provisions of the governing documents before they approve a mortgage within a condominium project or planned development.
When an owner defaults on his/her mortgage, the lender is entitled to undertake a foreclosure procedure that ultimately results in an auction-like sale of the defaulting owner’s unit. The lender has no recourse against the association or any other owner. The purchaser at the foreclosure sale must comply with all the provisions of the governing documents, including the obligation to pay assessments. But a foreclosure sale purchaser is not responsible for any unpaid, pre-foreclosure assessments.
Enforcement and Disputes
An owner is responsible for his/her tenant’s compliance with the governing documents and can be fined or penalized for the tenant’s violations. Any owner who rents his/her unit should have a written rental agreement incorporating all the governing document usage restrictions, and making the tenancy subject to any additional restrictions that are enacted by the association during the rental term.
Statutory law explicitly prohibits housing discrimination based on race, color, gender, religion, familial status, national origin, and disability. The law against discrimination is so broad that any occupancy restriction could be interpreted as discriminatory, including limits on the maximum number of occupants in a home. The only limitations that are clearly valid and enforceable are those that track the language of local and state health codes, and those that establish a project as senior citizen housing.
Alternative dispute resolution requirements imposed by law, and those imposed by the governing documents, are applicable to owner disputes. For a general discussion of alternative dispute resolution requirements, refer to the question “What are mediation and arbitration, and when are they mandatory.
Each owner in a condominium project or planned development has the right to independently enforce the governing documents against any other owner. The mechanism for enforcement is either the court system or alternative dispute resolution depending on the nature of the violation and the dispute resolution provisions of the governing documents. Owners interested in pursuing an enforcement action should consult an attorney.
Yes, associations must enforce their governing documents. In some cases, HOAs have discretion whether to enforce the governing documents if the dispute can be better resolved between a few neighbors. This discretion is removed, and enforcement is mandatory in instances where the governing documents explicitly require association action. But regardless of whether enforcement is mandatory, it is usually advisable for the association to avoid future enforcement problems.
The law provides that in any legal action brought by an owner, or by a homeowner association, to enforce the provisions of the governing documents, the prevailing party shall be entitled to recover his/her attorney’s fees and costs, provided they are reasonable. Some governing documents broaden the right to recover attorney’s fees and costs so that it applies to all disputes relating to the property, including those that do not involve enforcement of the governing documents. In all instances where a right to recover attorney’s fees exists, it will apply in arbitration as well as in court.
Mediation and arbitration are methods of alternative dispute resolution (“ADR”). Their purpose is to save time and money by resolving disputes without going to court. Mediation involves a neutral person who attempts to help the parties resolve their dispute through discussion and compromise. A mediator does not make rulings or decisions. Consequently, mediation is always informal and non-binding. Arbitration involves a neutral person who acts as a surrogate judge. An arbitrator considers the position of each side, and the applicable law then makes a ruling. The parties decide in advance whether the ruling will be binding or non-binding.
Most governing documents require some form of ADR, but there is wide variation regarding the type of ADR required and the situations where the requirement applies. Regardless of what the governing documents say about ADR, there are certain circumstances when the law requires at least an attempt at ADR as a prerequisite to beginning any legal process.
It is generally the best practice for the association to act each time an owner violates the governing documents. When HOAs ignore minor owner violations, it signals that repeated minor violations, or more significant violations, will be tolerated. This generally leads to more problems in the end.