Published on: September 17, 2019
By Janet Oulousian Aronson and Mark Einhorn
The temperatures are still screaming summer, but the calendar is whispering that fall is near. And for condominium boards and managers, that means it’s time to bring out the fall maintenance checklist to make sure the community’s buildings, operating systems and grounds are ready for the cold weather to come. But buildings and grounds aren’t the only components that require regular maintenance. The associations policies, procedures, rules and business records need to be reviewed periodically, updated and repaired occasionally, as well. We’ve identified what we consider to be the essential components of association governance – the best practices that will help the board avoid unnecessary problems and keep the community functioning smoothly and efficiently throughout the year.
POLICIES AND PROCEDURES
- Unit Sales. The association isn’t directly involved when owners sell their units, but it does play a role in these transactions. Buyers often ask boards to provide financial records and other information about the community or to answer questions about it, and boards or managers typically respond to those requests, as they should. But they should also insist that buyers and sellers sign agreements indemnifying the association from liability should the sale fall through for any reason. These agreements should specify that the indemnification applies to any information association representatives provide to the seller or any other third party in connection with the sale.
Boards should also establish a set policy for responding to the questionnaires the lenders providing mortgages to buyers typically submit seeking detailed information about the community. The best policy, in our view, is to have on file a completed questionnaire containing the information generally sought by lenders, which the condominium association can then submit upon request. If lenders insist on using their own form (which happens often), boards and managers should be very careful about how they respond to the questions. In those cases, our general advice: Don’t answer any question that requires information you don’t have or requires an expert opinion in an area in which you are not an expert. Rather, in those instances, it may be appropriate to seek advice of counsel before answering. A few examples:
- If the building is destroyed, could it be rebuilt? Impossible to know without obtaining a zoning opinion.
- Are there any environmental factors affecting common areas or individual units? We don’t know what that question means, let alone how to answer it.
Boards that complete the lender’s form should have the association’s attorney review it and should make it clear that the unit owner will be required to pay any legal fees the association incurs in connection with the review.
- The 6(d) certificate – affirming that the owner is current on all payments owed the association – should also be reviewed and revised, if necessary, to reflect best practices. We suggest wording specifying that there are no unpaid common expenses or other charges that are “due and payable” as of the date the certificate is issued. We also suggest additional language stating that the certificate does not cover assessments and common expenses that may have been assessed but “are not yet due and payable” as of the certificate’s issuance date. This would address the not at all uncommon situation in which a board has approved an assessment but has not yet billed owners for it. It would also allow the association to impose a lien for any move-out damages for which the seller is responsible that occur after the date listed in the 6d. And it would protect the association if the board has authorized a major renovation project requiring an assessment or a bank loan, but has not yet implemented them. If there is an ongoing assessment in place, for which the payment is not yet due, the certificate should specify that it is not a release of the lien for that assessment.
- Trustee Certification. Is your association’s board properly constituted? The response from most boards would be, “Of course.” The correct response for some would be, “Not necessarily.” In Massachusetts, most condominium documents require associations to file a certificate with the Registry of Deeds listing the members of the board, and to file an updated certificate every time the board membership changes. Many documents also require that at least 51 percent of owners attend a meeting at which trustees are elected. Absent a quorum, most documents allow the trustees currently serving to appoint trustees to fill open positions, but usually only after owners have had an opportunity to elect new trustees within a specified time after the positions become open. Failure to follow these procedures may raise questions about whether board members were properly appointed. Unfortunately, the issue can snowball over time, as members who, arguably, were not properly appointed, appoint new trustees, who also, arguably, would not be “legal” members of the board. If the selection of board members can be challenged, the decisions they make may also be subject to challenge. Equally problematic a trustee who is not properly elected or appointed may not be covered by the association’s directors and officers liability insurance. This trustee also may be disqualified from signing off on an insurance claim or a bank loan, possibly delaying funds needed for emergency repairs. Failure to certify the trustees in the manner specified in the condominium documents could create the same risks.
As a part of its annual policy check-up, boards should review the association’s requirements for appointing and certifying trustees and assign someone with the responsibility for ensuring that these requirements are met.
- Annual Meetings. An association’s governing documents typically describe the requirements for annual meetings, specifying when the meeting must be held and the timing and format of the notices that must be sent to owners, among other details. What constitutes a quorum for a valid meeting and what votes are needed are details that the condominium documents should specify. Over time, some boards may operate less formally and become less precise about adhering to these requirements. But failure to follow the annual meeting procedures creates the risk that votes taken, including the election of board members, could be challenged. An annual review will educate newly elected trustees, refresh the memories of long-serving board members, and remind everyone of the need to do what the governing documents require.
- Fines. A written policy governing fines is an essential component of the association’s rules enforcement procedures. Owners need to understand the consequences of violating association rules. The policy should specify the amount of fines for violations and how and when the fines will be assessed (After one warning? Only after the second or third violation of the rule?). The policy should also note that the board has the discretion to impose fines that are either higher than those specified (for particularly egregious violations) or lower, in response to extenuating circumstances. Some governing documents specify a fine schedule. If those amounts are outdated (which they probably are if they haven’t been adjusted in recent memory), the board should consider asking owners to amend the documents. If that option is not possible or desirable, Massachusetts boards can approve a new schedule, relying on a provision in the state condominium statute allowing boards to impose “reasonable” fines for rules violations.
- Late Fees. All communities should have a formal, written policy for dealing with late payments. The annual review should verify that the board has such a policy, and that it is consistent with what the governing documents require. The policy should specify how payments are to be made, when payments are considered late, the fees imposed on late payments and the grace period (if any) before those fees are assessed. The board should review its late fees annually and adjust them, as needed, to reflect rising costs.
- Insurance. In addition to reviewing the association’s insurance coverages annually (see below), boards should have in place a rule (or enact one if they don’t) describing the claims process in the event of a loss, specifying that owners are responsible for obtaining coverage for their units and personal belongings, and specifying that they are responsible for paying the deductible, or their proportionate share of it, on a claim for coverage under the association’s master policy for damages to owners’ units. Reminding owners annually of these obligations is another “best practice” we recommend.
RECORDS AND DOCUMENTS
The annual review in this area has three primary goals: Ensuring that the association is collecting, storing and protecting essential association records and documents; ensuring that records owners are entitled to see (which would be most, though not all of them) are readily accessible to them; and ensuring that the board has on file current versions of all standard forms used regularly in the course of business.
As a first step, boards should review the state condominium law and the association’s governing documents to determine what records they are required to collect and the period of time for which they are required to maintain them. The Massachusetts condominium statute provides some guidance for boards on what records must be retained and for how long. . The law identifies several categories of essential financial records that associations are required to hold for at least seven years. These include:
- Records of all receipts and expenditures, invoices and vouchers authorizing payments, receivables, and relevant bank statements.
- Records related to the replacement reserve fund “or any other funds” of the community association and bank statements related to those records.
- Audits, reviews, accounting statements, and financial reports
- Contracts for work to be performed or services to be provided.
- Minutes of board meetings
- All current insurance policies for the association.
Although the statute puts meeting minutes on the seven-year retention list, we recommend that boards retain those records for as long as the policies and decisions they document can be challenged in court. Records documenting homeowner complaints, recommendations and actions of association committees, and copies of work orders, similarly should be retained until the expiration of the statute of limitations on any legal action they might trigger. Warranties and maintenance records aren’t on any of the statutory essential document lists, but they should be retained nonetheless for as long as the components to which they are related are in place.
Standard Forms. Any forms the association uses regularly (we put 6(d) certificates, lender questionnaires, buyer-seller indemnification agreements, and proxies for owners to use if they can’t vote in person on this list) should be in place and ready to implement. You don’t want to scramble to draft or update the forms or have an attorney review them every time you need them. You also want to be sure the forms you are using are consistent with statutory requirements (which can change) and with the association’s governing documents.
Rules and Regulations. Communities evolve and owners’ attitudes and concerns change over time. The association’s rules and regulations should reflect these changes. An annual review will identify outdated rules that are no longer being enforced, rules that are inconsistent with changes in state laws or local ordinances, and areas in which rulemaking may be needed.
Vendor Contracts. An annual review will identify contracts that are up for renewal or soon will be, so the board can begin thinking about how to deal with them. Some contracts (laundry leases, for example) contain self-renewal clauses, requiring advance notice to avoid the renewal. If you don’t stay on top of the notice requirements, you could be locked into these contracts forever.
Insurance Policies. Boards should meet with their insurance advisor annually to make sure they have the appropriate insurance in the amounts needed to protect the association from the losses it might incur. This discussion should focus not only on premium costs, coverage limits and deductibles, but also on ways to manage and mitigate potential risks.