As the Fall season starts, we are looking forward to annual meetings and elections of boards of directors. Many HOA boards face the grim reality that there are not enough owner volunteers willing to fill the open seats on the board. The board members ask, cajole, beg, and guilt trip their neighbors to be on the board during the coming term, only to learn that many owners believe that serving on their HOA board is akin to having a monthly appointment at the dentist with the drill running non-stop for a long time.

The owners I am speaking about are not bowing out because they don’t have the time or availability to serve on the board. These are the owners who believe that the experience of being on the board will not be a pleasant or satisfying volunteer opportunity. Why is this?

Homeowners associations are microcosms of our democratic government: the administration is elected and can be removed by the members, and has to get the approval from the members before undertaking certain actions like raising assessments above a specified limit and amending the governing documents. And, like our national government, the constituents do not always approve of the way the administration is governing their property and their community. The difference is, on the small scale of most HOAs, the dissidents and self-appointed monitors in an HOA can strongly impact and affect community dynamics.

Over my 27 years in representing homeowners associations, I have encountered at least 20 instances where there is a homeowner or group of owners who do not trust or agree with the Board on most of its decisions. Such owners have their own ideas about the way the association should be operated, including the degree of perfection and vigilance expected or required from the board, the manager, and the service providers. And, in some of these cases, the concerned homeowner(s) becomes a watchdog, going to every board meeting, asking often to see a number of the documents that pertain to the business of the association, and questioning in lengthy and frequent emails and presentations at meetings, the wisdom or propriety of the board’s actions and decisions. If this becomes a regular dynamic, the result is growing disinterest by other homeowners in volunteering to sit on the board, serve on a committee, or simply attend an occasional board meeting.

How can the current board encourage participation from other homeowners? Generally, Board meetings need to be well-organized and tightly run.  For example, the board could establish a policy that no meeting will exceed 2 hours in length unless the board agrees at the outset that the agenda will require more than 2 hours, and will set an alternative time limit. This will require the Board to stay focused to get through the agenda in a specified timeframe.  To this end, the open meeting law in the Arizona Planned Communities Act [A.R.S. §33-1804] and Arizona Condominium Act [A.R.S. §33-1248] allows members to speak during board meetings, but permits the board to place restrictions on when and how long owners have to address the board.   In addition, the board should adopt and enforce ground rules and structure for meetings. These rules would outline procedure for board or association meetings, and would have provisions describing the civil behavior that is required, partially by giving some detail on behaviors that will not be tolerated and could result in the adjournment of the meeting.

What happens if there are no willing volunteers to replace current board and committee members who want to retire (usually after many years of uninterrupted service)? Some people think that there is a government agency that will come in and assume control of the association if the current board wants to retire and there are no replacements—there is not. Other association members believe that the community management company can operate the association without a board, but this is not the case.  Arizona law, most governing documents, and best practices require a non-profit corporation to have a board of directors. Thus, a current director’s term does not end until there is a qualified successor to take his/her place. Rather, in the worst case scenario (which I have yet to see in Tucson), the exiting board or other affected party would have to file a lawsuit to get a receiver appointed to run the association. The receiver reports back to the assigned Judge periodically, and has broad powers and authority to control the operations of the association, usually resulting in increased assessments for the homeowners.

Thus, if there is ongoing dissension or dissatisfaction continually expressed by one or more homeowners, it is important to contain and control this dynamic so that service on the board does not become an unpleasant proposition for current and prospective board members.

This article presents one perspective on one aspect of association governance and participation, and is not intended to fully address the multi-layered issue of volunteerism in HOAs.

Written by: Carolyn B. Goldschmidt
September 2014

Reverse mortgages are a fairly new financing tool for homeowners. In FHA terms, reverse mortgages are Home Equity Conversion Mortgages (HECM). Owners of single-family homes, 2-4 unit properties, post-1976 manufactured homes, condominiums, and townhouses are eligible for an HECM. Co-ops do not qualify. Basically, HECMs are designed to pay the borrower the remaining equity in his/her home and, if the loan is not repaid when the owner dies or abandons the property, the property is foreclosed to repay the lender.

In order to qualify, the homeowner must be at least 62 and have enough equity in the property. Until this year, these were the only underwriting requirements. Lenders now will conduct financial review of every reverse mortgage borrower to assure that he/she has the financial wherewithal to continue paying mandatory obligations, such as property taxes, insurance and HOA assessments, as required in the Loan Agreement. If a lender determines that a borrower may not be able to keep up with property taxes and insurance premiums, it will be authorized to reserve a portion of the loan proceeds to cover these charges in the future. Generally, none of the reserve funds will be allocated to cover unpaid HOA assessments. (This is in alignment with current practices that exclude HOA assessments from monthly impound payments with home loans.)

A borrower can choose to receive reverse mortgage proceeds all at once as a lump sum, in fixed monthly payments, as a line of credit, or a combination of these. The amount of funds a borrower can receive depends on his/her age (or the age of the youngest spouse when there is a couple), appraised house value, interest rates, and in the case of the government program, the FHA lending limit, which is currently $625,500.  In general, the older one is and the more equity in the property, the more money will be loaned.

The proceeds from a reverse mortgage can be used for anything, including additional income for daily living expenses, home repair or modification, health care, debt reduction, etc. Interest is not paid out of the loan proceeds, but instead compounds over the life of the loan until repayment occurs. A HECM will be in first position, meaning that it is superior to all other liens (including the Association’s lien for unpaid assessments) except governmental liens (e.g., for property taxes or federal taxes).

Many borrowers immediately draw all of the available loan funds after closing, and there will be no further payments from lender to borrower. Thus, unless a reserve fund is established, there may be no proceeds available for property expenses, especially if there are other liens. If the borrower has fully drawn the loan proceeds and does not pay taxes/insurance/ HOA fees, the loan is in default under the HECM security instruments and the lender many times will place insurance on the property and will pay property taxes to avoid a tax lien foreclosure. If there is a delinquent HOA assessment account, the loan servicer should be informed (in writing) and asked to pay the assessments due on the borrower’s account or, at the very least, to pay the full account from the escrow that will occur after the lender takes possession and then sells the property. Such requests are handled on a case-by-case basis.  If a lender who is eligible to foreclose delays the foreclosure sale, this should be pointed out since the delay is prejudicing the Association.

If the lender does not voluntarily pay assessments before it finalizes its foreclosure sale (i.e., the trustee’s sale), a homeowners association typically has no legal basis to require the lender to cover the assessments or to hasten the foreclosure sale. The homeowner remains personally liable, however, and a judgment for assessments can be obtained and collected from the borrower’s assets. All too often, there are no assets and, in some cases, the borrower has left Arizona, leaving the association with no affordable recourse to pursue payment of a judgment.

Note that some of the information for this article is from the National Reverse Mortgage Lenders Association [reversemortgage.org].

Written by: Carolyn B. Goldschmidt
August 2014

The typical home buyer is very focused on the details of the particular home, townhome or condominium he or she is buying. Since most prospective homes are in a common interest development – an HOA – a whole new layer of considerations is added to pre-purchase investigation. It is important for the buyer to be guided to review the governing documents, finances and culture of the community before the inspection period expires.

Governing Documents

All buyers should review the Declaration of Covenants, Conditions and Restrictions (“CC&Rs”) and Rules of the community with a particular eye toward the use restrictions that might preclude an important facet of the buyer’s expected lifestyle. One family bought a large house with the intention of operating a day care center in the house as their means of livelihood. The CC&Rs clearly prohibited business uses of homes in the community, which the Board enforced as soon as signs of business operations occurred, and the house went back on the market, causing an unnecessary financial loss to the family. Other areas of interest are restrictions on leasing, pets, parking, RVs, boats and other recreational equipment, age restrictions, and yard sales.

Architectural Control

Most CC&Rs have a provision requiring any exterior modification to be approved by the Association before construction or installation. If a buyer intends to build an addition or undertake other remodeling that is apparent from the exterior, it is prudent to assure that the Association would be inclined to approve the project if the plans and specifications are acceptable. There may be setback restrictions or other CC&Rs provisions that would preclude the new owners from their desired modification.

Finances

Arizona’s Condominium Act and Planned Communities Act require an Association in a community of 50 or more units, to provide specified information to a prospective buyer upon request.  Unfortunately, most buyers obtain this disclosure very late in the escrow process – almost always too late to adequately assess them. Therefore, it is important for buyers or their agents to assure that the information is requested and received during the due diligence period. The disclosure available to the buyer includes the current operating budget of the association, the most recent annual financial report of the association, and a copy of the most recent reserve study of the association, if any. If there are substantial assets that the Association owns and/or maintains (like roads, tennis court, swimming pool, clubhouse, building exteriors), then it is important that adequate reserves have been funded. Otherwise, the new owner may be surprised with a sizable special assessment after the purchase. The budget will show whether there are any problems areas in the Association. For example, a condominium with failing roofs or construction deficiencies will have line items for maintenance and repair that are far higher than typical.

Maintenance

The CC&Rs generally elucidate the Owner’s maintenance responsibility. With a condominium or townhouse, the Association often is responsible for exterior maintenance, which is the basis for higher assessments than communities with single family homes. In any event, the buyer should be clear on what amenities and services are covered by the assessments that the Association levies and collects.

Culture of the Community

I always recommend that a buyer reviews at least one year’s worth of Board meeting minutes and newsletters and determines whether the Association is involved in any litigation. An HOA does not need to produce these documents to a prospective buyer; however, an Association member (i.e., the seller) has the right to review and request copies of all Association records that are not privileged.  Therefore, the purchase contract should include as a condition the production of minutes and newsletters for a specified time period. It also is a good idea to determine whether the Association sponsors any social events for its members. An Association Board that is committed to community building is demonstrating positive leadership values and a commitment to fostering good community relationships.

Buyer’s Due Diligence

The following documents and information sources will assist a buyer in his/her evaluation of a community governed by an HOA:

• Disclosure statement from HOA: This will tell you whether there are any unpaid HOA fees or other violations pertaining to the subject property that may need to be resolved, etc.
• Reserve study: This will tell you how much money is saved for paying for long-term repairs. HOA fees cover operating expenses and savings for roofs, streets, painting, etc. The reserve study tells you how much the community should have saved for those capital repairs and replacements and how much is actually saved. Usually, less is saved than what the reserve expert says should be, so when the bill comes due, all the HOA unit owners may bear the costs in a special assessment.
• Financial statements and budgets: These will show you whether the HOA is collecting enough money to pay its bills and whether it is putting away money for reserves.
• Insurance master policy declarations page: This will tell you what the HOA insurance covers. A buyer should take this to his/her insurance agent to see what is not covered, so he/she can get the proper coverage. It is recommended that condominium or townhouse purchaser has an HO-6 interior unit policy in place for a personal residence or rental property.

Written by: Carolyn B. Goldschmidt
July 2014

The 2014 Arizona Legislative Session (51st Legislature, First Regular Session) adjourned and left us with seven bills pertaining to planned communities and condominiums that were signed into law by the Governor. This year 17 bills were introduced that would affect HOA governance. One of the bills included changes to seven statutes.

This article reviews the changes in the law that pertain to an association’s powers to control rentals. The new statute applies to rentals in planned communities and in condominiums and becomes effective on July 27, 2014. You may remember that a law addressing rentals in Arizona community associations was passed last year with many of the same provisions that will be discussed in this article. Last year’s rental property law was declared invalid and, therefore, went through the legislative process again with a few changes.

As a threshold, the statute states that an association cannot prohibit a dwelling unit owner  from renting his/her unit unless there is a provision in the Declaration of Covenants, Conditions and Restrictions restricting rentals. In addition, a landlord/owner must abide by any time period restrictions in the Declaration that pertain to rentals.

The statute provides that a landlord/owner may designate in writing a third party (e.g., a residential property manager) to act as the owner’s agent with respect to all Association matters relating to the rental unit, except the owner’s right to vote and to serve on the Board of Directors. The association is authorized to deal with the owner’s third party agent on all association matters.

There is a wide variety of requirements that different Arizona homeowners associations have imposed on landlord/owners prior to this new legislation. Now, an association CAN require its receipt of ONLY the following information:

• Tenant’s name
• Contact information for adult tenants
• Duration of lease
• Vehicle(s) description
• License plate(s)

An association CANNOT require the landlord to produce any of the following:

• Rental application
• Credit report
• Lease agreement
• Personal information (except for above-enumerated information).

In an age-restricted community, the association can require the production of a government-issued identification document that bears a photograph and confirms that the tenant meets the age restriction requirements.

The association or its managing agent may charge a fee of not more than $25.00 to process the owner’s required disclosures for a new tenant. (This fee does not apply to lease renewals.) Neither the association nor its managing agent can impose any other fee or requirement on a rental unit that is different from those imposed on an owner-occupied unit. In addition, the association cannot prohibit absentee owners from serving on the Board, regardless of any provision to the contrary in the Bylaws.

The association or its managing agent cannot charge more than $15.00 as a penalty for incomplete or late information from a landlord/owner. If the association or managing agent charges a fee, assessment, penalty or other charge that is not authorized by this statute, the requirement to pay the $25.00 fee and to provide information to the association is nullified.

Many associations have recommended or required that landlord/owners use a crime free lease addendum or follow other facets of a crime free program. The new law states that an association cannot require a tenant to sign a waiver or other document limiting the tenant’s due process rights as a condition of the tenant’s occupancy of the rental unit. However, the law also states that there is no prohibition on the landlord/owner requiring a crime free lease addendum.

In addition, an association is not prohibited from enforcing sex offender occupancy restrictions in CC&Rs if the registered sex offender is classified as Level 2 or Level 3. (Before an association board considers recommending to the members such a restriction, consult with your Association’s attorney.) And, finally, the new law adds community associations to the list of entities that can bring an action in a County superior court against the owner, owner’s managing agent or any other party responsible for the property to abate and prevent a “nuisance”, which is defined in A.R.S. §12-991 as “residential property that is regularly used in the commission of a crime”. This gives a homeowners association another tool to deal with a rental unit that may be causing disruption in the community.

Written by: Carolyn B. Goldschmidt
June 2014

Enforcement of restrictions in CC&Rs and other community rules and regulations can be a troublesome issue with which Association Boards and their Managers must grapple. This article will look at three common questions that often arise concerning HOA enforcement issues.

Question 1: How can an Association begin a program of enforcement if there has been a long period of non-enforcement, or lackadaisical enforcement in the past?

This issue arises many times upon the transition of control of the Association from the Developer to the Owners; however, it can come up anytime a newly-elected Board begins its term.  A history of non-enforcement can undermine an Association’s enforcement authority. Concurrently, Owners may object when existing violations that went unnoticed or unenforced for a period of time are now being pursued by the Association.

In Heritage Heights Home Owners Association v. Esser, control of the Association had just transitioned from Developer control to owner control. During the previous several years, the Developer had not pursued correction of violations, and the owner-controlled Board began a program of enforcement to eliminate violations already existing, and to prevent further violations. The Esser case particularly addressed “grape stake” fences, which were prohibited in the CC&Rs, but were used on a number of lots in the subdivision. The Board adopted a policy that required replacement of all grape stake fences within the ensuing five years. Mr. Esser installed such a fence after the policy was adopted and insisted he was entitled to keep it for five years.

The Court’s opinion recognized that the Board’s enforcement policy addressed not only grape stake fences, but also other violations that the Developer overlooked. The Board gave several notices to owners in its newsletter of its intention to enforce the restrictions for the good of the community and outlined a program for doing so. The evidence also showed that many existing violations were corrected; however, in some cases, the Board granted variances or an extended period of time for the removal of violations (as with the fence replacement program).

The Court accepted the Association’s program as justifiable, reasonable, and fair. Further, it concluded that there was nothing arbitrary or inequitable about providing reasonable accommodations for good faith violations, as described above. And, Mr. Esser was required to remove his fence since his violation occurred after the enforcement program was put into place.

The Court stated unequivocally that when an owner accepts a deed to a property that is restricted by CC&Rs, that the owner consents to and is bound by those restrictions, which amount to a contract between the owner and the Association. However, the Court also implicitly adopted an additional standard that enforcement of the restrictions must be reasonable and equitable.

Question 2: How much discretion does an Association Board have in determining whether a particular violation should be enforced?

In Johnson v. The Pointe Community Association, a Board of Directors chose not to enforce a violation of the CC&Rs that appeared to be minimal. Here, the Johnsons and their neighbors, the Boyles, were in a dispute over a trellis the Boyles had constructed in their backyard without first seeking approval from the Architectural Review Committee (ARC). However, after the ARC took notice of the trellis and other architectural violations, the Board failed to take further steps to ensure that the Boyles brought their lot into compliance. The Board took the position that it reasonably interpreted and enforced the CC&Rs, in an exercise of its discretion, and the Court was required to defer to the Board’s decision.

The Court refused to defer to the Board and stated: “In the absence of declaration [CC&Rs] provisions providing alternative means of resolving disputes arising from the enforcement of [CC&Rs], both homeowners and their associations are entitled to bring their case before the courts without either party’s position receiving deference. The civil courts afford a neutral interpretation of the development’s declaration and “significant protection against overreaching” by either homeowners or their association. However, the broad reach of this decision has been limited by another, more recent case from the Arizona Court of Appeals.

In Tierra Ranchos Homeowners Association v. Kitchukov, the Court addressed its previous conclusion in Johnson, and narrowed its view significantly. At issue in this case is the placement of a garage on the Kitchukovs’ Lot. After the ARC refused to approve the garage placement because it would be too close to the northern Lot line, the Kitchukovs challenged the ARC’s discretionary decision as arbitrary and unjust.

The Court, looking at Johnson and other law, adopted the rule from the Restatement (Third) of Property, and concluded that in cases involving the interpretation of a CC&Rs provision [i.e., whether an action by an owner on his property constitutes a violation under the CC&Rs], the Court has the power to make an independent determination, but in a case involving an ARC’s discretionary decision, made within the scope of its authority and upon reasonable investigation, a court should defer to the ARC’s decision.

Taking both of these decisions together: although a Board is not permitted to interpret and enforce the CC&Rs in any manner that is wholly inconsistent with the actual provisions, it may reasonably exercise its discretion, when faced with a violation, as to how enforcement will proceed.

Question 3: How should an Association enforce restrictions if the CC&Rs are unclear as to whether a violation exists?

This may be the most important of the three questions, because it must be settled before either of the first two questions can be addressed. Many times, to abuse a familiar phrase, a possible violation may walk like a duck, and talk like a duck, but may not be described or listed under the “duck” provision in the CC&Rs. So is it a duck?  In Arizona Biltmore Estates Association v. Tezak, the Tezaks parked a large customized bus on their property. The applicable restriction stated that no trailer, camper or “similar equipment” shall be permitted on any property within Biltmore Estates. The Tezaks argued that the plain wording of the restriction did not include the word “bus” or any similar term that could adequately describe their customized bus, which was not used for living space or camping or any other purpose that would put it in the same category as the vehicles mentioned in the restriction.

At the time of the Tezak case, the law was settled that restrictive covenants (i.e., restrictions in CC&Rs) were to be strictly construed in favor of the free use and enjoyment of property. However, the Court instead applied the principle that the intention of the parties to the CC&Rs is paramount. Pursuant to this principle, the Court found that the intent behind the restriction was to prohibit bulky vehicles, such as the Tezaks’ bus, and concluded that the restriction did apply.

Since the Tezak case, the Arizona Supreme Court, in Powell v. Washburn, has shifted its view away from upholding the “free use” of property and adopted the intent principle in Tezak.  The more modern focus, on upholding the intent of the parties to the restriction, establishes a clear standard for the interpretation of CC&Rs regarding enforcement provisions: if it walks and talks like a duck, and the terms evidence the intent for the provision to restrict ducks…well, I’m sure you know the rest.

Written by: Carolyn B. Goldschmidt
April 2014

Board Removal Elections are controlled by the Arizona Condominium and Planned Communities Acts [A.R.S. §33-1813 & §33-1243]. For communities that are neither condominium nor planned community, the governing documents and/or Arizona Non-Profit Corporations Act would govern the process. I will address the statutory procedure later in this article, but first some commentary.

Reasons Removal Petitions Happen. Although sometimes justified, a removal election is never a good occurrence in a neighborhood and should be avoided where possible.  These are the underlying reasons for the removal elections that my law firm has handled over the past 27 years:

1. The Board made decisions that angered a number of homeowners (e.g., raising the assessment, installing speed humps, changing management company or firing a popular staff person, more diligent assessment collection).
2. Board member sued HOA for lax enforcement of restrictions (and was then removed from the Board by the members).
3. Board members are not acting in accordance with the governing documents.
4. Board members are not holding meetings.
5. Minority faction wants control due to its ongoing disagreement with Board actions and procedures.

Avoiding the Removal Petition. There are a number of cases where the removal effort may be misguided and is a strong reaction (bolstered by rumors) to a Board working on changes and improvements in the neighborhood. In such situations, there often is a split in members’ opinions on whether the improvement should be made (like building a new office for management staff or becoming a gated community). And, just as often, there is confusion on the part of the members on their rights to make decisions on behalf of the Association.

In these instances, many removal petitions can be avoided if the Board seeks owner input before moving forward with an expensive improvement project for the common area. Even if there is no basis for a vote of the members, it is advisable to take a non-binding advisory vote and hold one or more “town hall” meetings of the members to discuss the proposed project. The Board can then gauge community resistance to the project and adjustments that may need to be made.

In other cases, the removal effort is justified. For example, In the case of the removal petition that was being circulated because the Board had not held a meeting (including an annual meeting) for at least two years, I counseled the Board to call an immediate special meeting of the members, and have me there to provide guidance on proper procedure. The Board offered to step down, explaining that they stopped having meetings due to rampant apathy in the neighborhood, and were tired of doing all the work of this self-managed association. A transition plan was negotiated at the meeting with the community leaders who started the removal petition and the removal election was avoided.

It also seems that some Boards that are subjected to a removal petition have been lax in communicating with the members. To make matters worse, in such communities, there may be a dissident faction with a website and/or extensive e-mail list that is putting out more information to the members than the Board is. By the time the Board responds with its own rebuttal and information, it already is on the defensive and at a disadvantage. In the 21st century, a website is the best overall communication hub for a homeowners association, and allows the Board to keep the members up-to-date when there is a big (i.e., “expensive”) decision needing to be made. (For HOAs with small budgets, there are several organizations that offer free website set-up and training for an administrator; see Google or some other web browser.)

Procedural Difficulties. Once the removal petition is served, under the Condominium and Planned Communities Act, the Board has 30 days in which to hold a special meeting for the purpose of a removal election. Needless to say, there are difficulties caused right from the outset because the subjects of the removal election are responsible for organizing and holding the election.   Oftentimes, the petitioners will make demands on how the removal and replacement elections are conducted. However, according to the statutes, the Board calls and provides written notice of the special meeting.  There is no further guidance in the statutes on procedure; however, this is a meeting of Association members; therefore, the Bylaws provisions in this regard would govern. If the President is the subject of the recall petition, he/she probably will not want to lead the meeting. Thus, a manager or the Association attorney may do so.

If less than the entire Board is being recalled, the remaining Board members typically are authorized in the Bylaws to appoint any needed replacements. However, if the entire Board is being recalled, there often is confusion on how and when the replacements will be elected. Some Boards undertake a quick nominating process and send out a slate of replacement candidates for the members to vote on, with the understanding that the results will be counted only if the removal election is successful. Other Boards leave organization of a replacement election to be done at the removal meeting, if removal is successful, and plan the election in the same manner as the annual Board election. This can be tricky as all non-profit corporations must have boards of directors. Therefore, if there is not a manager in place to handle the administration of the Association on an interim basis until the new Board is elected, the old Board may need to stay in place until their successors are elected and qualified [A.R.S. §10-3805(E)]

Avoidance Techniques. This article would not be complete if I did not mention Association Boards who refuse to hold a removal election after being served with a petition. I have seen this happen on two occasions:  in one case, there was a Bylaws provision that divested any member of his voting rights if he was in violation any provision of the governing documents. The Board took the position that many of the petitioners were in violation and, therefore, not eligible to vote or sign the removal petition. (A Superior Court Judge disagreed with this position.) In another case, the Board took the position that the members who signed the petition were given inaccurate information and, therefore, the petition was void. The petitioners opted not to take the matter to court, even though they believed (more than ever) that the petition was justified and valid. To avoid giving credence to this position, it is best if there is a concise statement of grievances on every page of the petition so signing members are all given the same information.

It is certainly understandable for a volunteer director, who gets wind of a removal effort against him to react negatively. However, in a perfect world, directors might avoid a removal election or mitigate divisiveness in the community by doing some self-examination and striving for better communication and understanding of dissident members’ position.

Written by: Carolyn B. Goldschmidt
April 2014

Many homeowners association boards find themselves in the difficult position of needing a large sum of money for maintenance projects that can no longer be deferred; such as roof replacement, exterior painting, or street replacement. Ideally, the Association has been building reserves to pay for such projects. However, there is no law in Arizona that addresses the obligation to fund reserves or the amount of reserves that should be accumulated. One strategy that many Boards use for planning purposes is to commission a reserve study. Reserve studies are an analysis of all of the Association maintenance obligations with a projection of needed funds over the ensuing 10 years or more. This analysis can be done by a professional or by an internal long range planning budget if the maintenance obligations are few and uncomplicated.

If there are not adequate reserves for needed maintenance and replacement of common areas, the Board has three options:

1. to defer or stagger the maintenance projects while increasing the regular assessment to accumulate funds
2. to levy a special assessment
3. to borrow the needed funding.

Option #1 may not be feasible if there already has been deferring of maintenance and there are immediate needs for major maintenance, like roof replacement or street repair.  As for special assessments, the Board must follow the procedure in the Declaration of Covenants, Conditions and Restrictions (CC&Rs) and, hopefully, get the Association members’ to approve the assessment and to pay the assessment when due. Many CC&Rs have a provision requiring the special assessment  to be levied and spent in the same fiscal year.  Another common provision is to require a quorum of 60% for the member vote on special assessments, with approval needed from 2/3rds of the participating voters. If the quorum is not met, another meeting can be held where the quorum will be only 30% of the members. In any event, special assessments are never welcome and often bring normally inattentive members to meetings to discover why the special assessment is required and to encourage (or demand) avoiding or minimizing the assessment.

If the members will not pass a special assessment, the Board can consider a bank loan to fund the needed repair or improvement projects. Generally, the collateral for the loan will be an assignment of the Association’s right to collect assessments. From a legal standpoint, there are several considerations for the Board to make:

The first inquiry for the Board is whether or not the members’ approval is needed before a loan can be procured. There may be a provision in the CC&Rs or Bylaws that requires member approval before the Board can borrow money. Repayment of the loan may require an increase in regular assessments, which may require the approval of the members. And, if the community is a condominium, Section 33-1242(A)(14) of the Arizona Condominium Act specifically authorizes the Association to assign its right to future income, including the right to receive assessments from its members.  However, this statute states that this assignment for collateral can be made “only to the extent the [CC&Rs] expressly provides”. If the CC&Rs do not have this authorization, an amendment approved by the members will be required to proceed with a loan.  It is more likely that such an amendment will be approved by the members if it states that a member vote is required before the assignment can be made.

If an association is not a condominium and the Board has no constraints on its proceeding to commit to loan, it is still important to inform the members of the prospective loan and how it will be repaid before proceeding. Oftentimes, a Board will have discussed the prospective loan in several Board meetings and in newsletters. Nevertheless, since many members don’t attend meetings or pay a lot of attention to the operations of their homeowners association, it is important for the Board to send a letter or offer a specific newsletter article or website posting with full information about the loan and maintenance plan, even if member approval is not required for any facet of the loan transaction.

In conclusion, the worst case scenario would be critical maintenance needs and members’ refusal to increase the annual assessment, approval a special assessment and/or approve the loan or collateralization for the loan. At this point, the Association’s Board would have to file a court action to seek a Judge’s order for an assessment levy or loan approval. In my 26 years of HOA legal representation, I have never seen a funding issue get to this point and hopefully I never will!

Written by: Carolyn B. Goldschmidt
March 2014

Johnson v. The Pointe Community Association is a 2003 Arizona Appeals Court case that addresses a homeowners association’s obligation to enforce restrictions in its governing documents, specifically in the “Restated Declaration: Homeowner Benefits and Assurances for The Pointe” (an elegant title for the document typically referred to as “CC&Rs”).

The Johnsons became upset when their neighbors, the Boyles, made some changes in their backyard, particularly the installation of a trellis against a common wall. The Johnsons also complained that the Boyles changed the texture of the stucco on the back of their home without approval of the Association’s Architectural Committee[1]; and that there was “exposed” electrical wiring on the Boyles’ altered patio.

During the course of a year, the Association addressed each of the Johnsons’ complaints, but took the position that it would not pursue the Boyles for the strict enforcement that the Johnsons were seeking on two issues:

1. Electrical wiring: The Board of Directors determined that the electrical wiring at issue was in conduit and painted the color of the house, which was how the wiring was installed during original constriction. Even though the CC&Rs requires all exterior wiring to be concealed, the Board believed it could not require a change from original construction, even if it was removed and replaced during renovation. The Johnsons’ position was that the Board did not have the authority to waive compliance with a restriction in the CC&Rs, and the electrical wiring needed to be completely hidden and not in visible conduit.
2. Stucco Texture: Johnsons’ original complaint was that the Boyles did not seek nor receive the required prior approval of the Architectural Committee before changing the texture of the stucco on the back of their house. The Association’s position was that Committee approval was not required.

In this opinion, the Appeals Court agreed with the Johnsons and held that the decision of a Board of Directors will not be given deference when a matter of enforcement is brought before a judge. Rather, the judge will make his/her own findings and conclusions. The Court also held that the Board of Directors did not have authority to waive compliance with the CC&Rs (the electrical conduit) or to allow the change in stucco texture without review by the Architectural Committee. The opinion points out that the Johnsons were not trying to prevent the Architectural Committee from approving the stucco change, and only sought to have the Association require the Boyles to submit for approval from the Architectural Committee. Since the Board of Directors did not require the Boyles to obtain the approval of the Architectural Committee with respect to the change in stucco texture, the Association violated the CC&Rs, which specifically requires an owner to obtain the written approval of the Architectural Committee for any exterior modification.

The Johnson case gives us at least two guidelines:

1. When an HOA’s governing documents place a specific obligation or prohibition on the owners, the Association must enforce the pertinent restriction as written. If the restriction no longer reflects the needs and culture of the community, then go through the process to amend or remove the restriction.
2. In retrospect, it appears that this lawsuit between two neighbors might have been avoided if there had been some communication and reasonable negotiation before the Boyles made changes to the appearance of their yard that affected the Johnsons’ equanimity. I do not have all of the details on the relationship between these two neighbors; however, my own experience has shown that many enforcement cases that wind up in court start with pre-existing tensions between neighbors. This often is not easily undone; however, in some cases a mediation process between the neighbors may help. More information will be forthcoming on mediation in a subsequent newsletter.

[1] The Johnsons also had complained that the Boyles painted the back of their home (over the re-textured stucco) with a color that was not among the approved colors for the subdivision. The Johnsons withdrew this complaint during the course of the litigation, stating that the color was from the Association’s approved palette but looked different on smooth stucco.

Written by: Carolyn B. Goldschmidt
January 2014

Homeowners who have gone through a bankruptcy or a lender’s foreclosure are often surprised to learn that they still owe unpaid assessments to their former homeowners association.

HOA Assessments are the Personal Obligation of the Homeowner.

Homeowners associations charge assessments to fund their operations.   The assessments are the personal obligation of the owner of the lot or unit for the entire duration of his/her ownership.   Thus, even if a homeowner abandons his/her property and stops paying the mortgage payment, he/she remains obligated to pay the HOA assessments.   Even if the lender chooses to delay its foreclosure for many months, the homeowner remains responsible to pay the HOA assessments.

HOA Assessments also are a Lien on the Property.

According to most Declarations of Covenants, Conditions and Restrictions (CC&Rs) and Arizona statutes (the Planned Communities Act and Condominium Act), HOA assessments also are a lien on the homeowner’s lot or unit. The HOA lien arises in the CC&Rs and, generally, no notice of lien needs to be recorded in the Pima County public records at the Recorder’s office. Nevertheless, it is prudent for a Board of Directors to authorize the recording of a Notice of Lien to assure that the property is not sold without the Association’s lien being paid and released; or that the homeowner has not filed for bankruptcy relief; or that the homeowner is in default of the mortgage resulting in a Notice of Trustee’s Sale. According to the Rules of the Arizona Supreme Court, only attorneys or certified document preparers can prepare a notice of lien.

Depending on the terms in the CC&Rs, the homeowner may be liable for:

• the unpaid assessments
• late charges
• reasonable costs of collecting (for example, attorneys’ fees)
• interest

Not only will an assessment lien cloud the title to the homeowner’s property, thereby hindering his/her ability to sell or refinance, but also the assessment lien can be foreclosed and the property sold at a Sheriff’s Sale (an auction on the courthouse steps) to satisfy the debt. The opening bid at the Sale is the Association’s credit bid for all of the amounts it is owed, including attorney fees and Sheriff’s fees.

Foreclosure of HOA Liens

In Arizona, an HOA assessment lien is foreclosed judicially. This means that a lawsuit in filed in Superior Court for a judgment in the Association’s favor for all amounts due under the HOA lien.   The Defendants are all persons or entities whose lien on the property will be extinguished by the Association’s lien foreclosure.   Most CC&Rs and the Arizona statutes contain a provision making the HOA lien subordinate to (lower priority than) a first mortgage even if the mortgage was recorded after the CC&Rs were recorded that established the assessment lien. Thus, the first mortgage lien will remain on the property following the HOA foreclosure. A second mortgage, on the other hand, would be extinguished by the foreclosure of a senior HOA assessment lien. An Arizona HOA lien also is subordinate to liens for property taxes and other governmental assessments or charges against the lot or unit.

Limitation on HOA Foreclosures

Arizona’s Planned Communities Act and Condominium Act [A.R.S. §33-1807 and §33-1256] provide that an assessment lien cannot be foreclosed unless the owner has been delinquent in the payment of assessments secured by the lien, excluding reasonable collection fees, reasonable attorney fees and late fees, for a period of one year or in the amount of $1200 or more, whichever occurs first. These statutes also provide that: (a) monetary penalties and associated fees are not part of the HOA assessment lien, and (b) a lien for unpaid assessments is extinguished unless lien foreclosure is initiated within three years after the full amount of the annual assessments becomes due.

Post-Bankruptcy

The purpose of a bankruptcy case is to relieve the debtor of his/her debt and give the person a “fresh start.” In general, all personal debts that arise before the bankruptcy filing are discharged. However, because the debtor’s homeowners association assessment account also is a secured debt (i.e., it is a lien on real estate), the assessment lien is not extinguished in bankruptcy so long as the debtor continues to own the property.   Therefore, the homeowner’s personal obligation to pay assessments might be discharged in a bankruptcy [pursuant to 11 U.S.C. 727]; however, the property that is the subject of the secured HOA lien remains liable for the debt. A homeowner could finalize a bankruptcy in 2013, retain ownership of his/her dwelling unit; sell the unit in 2015 and find out that he/she needs to pay the homeowners association before the property can be conveyed free and clear of liens to its new owner.

Written by: Carolyn B. Goldschmidt
November 2013

The Bylaws for homeowners associations as well as the Arizona Non-Profit Corporations Act (the “Act”) requires homeowners associations to have annual meetings of members. (Most, if not all, homeowners associations are non-profit corporations.) This article will address several of the common questions that arise about annual meetings and the annual election of boards of directors.

Q: What will happen if there are no candidates for the board of directors and all of the current directors’ terms are expiring?

Some members believe that a state agency will take over the operations of the association if there is no board. However, there is no public agency that will operate a homeowners association. Rather, if there indeed is no board of directors to run the association, any interested party can (and will need to) file an action in Superior Court to have a receiver appointed. A receiver will operate the association, be paid by the association, and must report regularly to the Court. However, this is a radical short-term measure and one I have not seen in my 26 years of representing associations.  Typically, members can be cajoled to step forward to sit on the board, or current board members will agree to stay on for another term. Generally, letters to the members calling for volunteers are not enough. Personal visits or phone calls by current board members must be made. If an association is self-managed, waning volunteer power is a good reason for the board to consider hiring a professional community management company. A manager reduces the workload of the board significantly. A manager also may mean increased assessments, which is another motivation for volunteers to step up and keep the community managed solely by volunteers. In any event, a manager can take care of association business a short time without an operating board of directors; however a manager cannot (and usually will not) proceed without the direction of the board of directors. The management company cannot make deci­sions regarding collection of assessments or enter into contracts with major vendors, including the management company itself. Without board decisions, the maintenance of the common areas, the property taxes, the liability insurance premiums, and other bills may go unpaid.

If there are no willing or able replacements to serve on the board for the coming term, and the current board intends to step down, some arrangement needs to be made to repopulate the board. The Act requires that all non-profit corporations have boards of directors. Furthermore, a functioning board of directors is necessary to carry out the requirements of the governing documents and maintenance of association property. In addition, the Act states that the term of a sitting director does not expire until his/her successor is elected and qualified. Thus, it is a breach of duty for all of the board members to walk away and leave the association without a board. So, board of directors need to plan for the annual meeting and election far enough in advance to assure that the vacant board seats will be filled and the association operations can continue without interruption or confusion.

Q: If the annual meeting is a members’ meeting, can the members initiate business at the meeting?

It is true that the annual meeting is a members’ meeting and is the time for the board to inform the members about the finances and operations of the association and for the members to voice their questions and concerns to the board. Therefore, some members believe that they can, for example, make a motion to heat the swimming pool throughout the winter months or to change the parking rules. In fact, members have specific decision making power in their homeowners association. Members elect and can remove the board of directors; members generally have the exclusive power to amend governing documents; members usually must approve assessment increases above a certain percentage; and the governing documents may give members other powers. But the day-to-day operations of the Association and decisions about expenditures, contracts, maintenance, etc. are directed by the board of directors. Thus, association members cannot seek to make decisions that are not within the powers given to to them in the governing documents. A proper member motion at an annual meeting would be (for example) to ask the Board to consider heating the pool throughout the winter months. Then, the board can put the matter on its board meeting agenda.

Q: Does the annual board election have to take place at the annual meeting, with voting allowed in person and by absentee ballot?

A.R.S. §10-3708 in the Arizona Non-Profit Corporations Act allows action by written ballot on “any action that the corporation may take at any annual, regular or special meeting of members.”  Therefore, the annual election of directors can be held before the annual meeting by written ballot, though the votes will not count toward the quorum at the meeting. If written ballots are used, the following requirements apply:

a. A written ballot must be delivered to every member entitled to vote.
b. The written ballot must: set forth each proposed action and provide an opportunity to vote “for” or “against” each proposed action.
c. The number of votes cast by written ballot must equal or exceed the quorum required to be present at a meeting authorizing the action.
d. The number of approvals must equal or exceed the number of votes that would be required to approve the matter at a meeting at which the total number of votes cast was the same as the number of votes cast by written ballot.
e. All solicitations for written ballots must:

i. indicate the number of responses needed to meet quorum
ii. state the percentage of approvals necessary to approve each matter other than the election of directors
iii. specify when the ballot must be delivered to the association in order to be valid

Written by: Carolyn B. Goldschmidt
October 2013