In addition to state law such as the Colorado Common Interest Ownership Act (CCIOA) and the Colorado Revised Nonprofit Corporation Act (CRNCA), homeowner associations in Colorado are primarily governed by the association’s Articles of Incorporation, Bylaws, Declaration of Covenants, Plat Map, Design Guidelines, and Rules and Regulations. These documents are collectively commonly referred to as the association’s “governing documents.”
Among other things, the governing documents establish corporate operational requirements, set forth the purposes of the association, outline maintenance and insurance obligations of the homeowners and association, and regulate property uses and architectural issues within the community.
The association’s initial set of governing documents are prepared by the developer’s attorney. Those documents commonly contain provisions related to the development of the neighborhood and developer rights that no longer apply to a fully built-out community. In addition, as communities age so do their governing documents. Over time the association’s Board of Directors may find that their governing documents do not comply with changes in law, no longer suit the needs of community, and/or that updates are needed to address current trends and current operational challenges. This article discusses some of common reasons associations may want to consider amending their governing documents in the new year.
Quorum
Quorum is the minimum number of participants necessary to take action at a meeting. Has your association ever called an annual homeowner meeting only to find that not enough homeowners were in attendance to hold the meeting, approve prior meeting minutes, and elect a Board of Directors?
There is a provision in the CRNCA that addresses this issue and provides that directors in office remain in office despite the expiration of their terms until such time as their successors are properly elected. However, it is problematic if year after year the association is unable to obtain the quorum necessary to allow the homeowners to elect their Board of Directors. This can lead to homeowners who are disenfranchised and do not feel that the Board adequately represents their interests.
If this is a common problem for the community the Board can take steps to try to encourage attendance at meetings. For example, the meeting notice for the relevant meeting could be sent as far in advance as allowed by the governing documents and applicable law – typically 50 days in advance of the meeting. The Board could form a committee of volunteers to reach out to homeowners after the notice is sent to encourage them to attend the meeting or to return a proxy.
However, if failure to obtain quorum is a recurring issue, the Board of Directors should consider a more permanent solution. An amendment to the Bylaws could serve to reduce the number of homeowners required to meet the association’s quorum requirements. The process would typically involve the preparation of a limited to the Bylaws which would be mailed out to the homeowners along with associated voting materials. The process and voting would be conducted entirely by mail. This action should especially be considered for associations with quorum requirements in excess of 20% who are routinely unable to reach a quorum at their annual homeowner meeting.
Assessment Caps and Limitations
Most associations today utilize what is known as the CCIOA budget ratification process. In general terms, this process requires the Board of Directors to prepare and adopt a budget for the association. The budget includes the anticipated expenses and the assessment or “dues” amounts to be paid by the homeowners. The budget is then mailed out to the homeowners and a homeowner meeting is called to allow the homeowners to consider the budget. Unless a majority of all homeowners attend the meeting and vote to veto/reject the budget then the budget is deemed to be ratified and approved. There are nuances to this process, but that is a general overview of the CCIOA budget ratification process.
However, some covenants place caps and limitations on the assessments that may be charged by the association without an affirmative vote of the homeowners (as opposed to a veto). It was common in the 1980s to include such assessment caps and to tie assessment increases to indexes such as the consumer price index.
This can be problematic for several reasons. First, expenses commonly incurred by a community association such as those related to water/electrical usage, insurance premiums, landscaping, snow removal, and building maintenance often bear no relationship to the consumer price index which was created to track pricing trends for retail consumer goods. In addition, some of the indexes referenced in older documents are outdated to the point of no longer existing thereby creating confusion as to the level of increases that may be properly imposed. Finally, in communities with significant apathy, such as those where units are not predominantly owner-occupied, it can be challenging, if not impossible, to obtain an affirmative vote of a percentage of the total homeowners to approve an assessment increase even if there is no objection to the proposed increase.
These circumstances can create situations where the association is spending funds to call multiple meetings in an attempt to get enough homeowners to attend meetings to approve assessment amounts. It can leave a Board in a situation where the association cannot levy assessments in amounts to cover necessary expenses such as insurance premiums and reserve allocations. If these issues sound familiar it might be time to amend the covenants to update the assessment provisions and to consider moving to the standard CCIOA budget process.
Director Number, Qualifications, and Terms of Office
CCIOA requires that the association’s Bylaws must, among other things, provide: (i) the number of individuals on the Board of Directors; (ii) qualifications to serve on the Board; and (iii) the terms of office for the directors.
It is not uncommon for an association to discover that the Bylaws provide for a Board of Directors consisting of three members, but that the association has, in fact, been operating with a five-member Board. It may be that prior documentation was lost or that that the expansion of the size of the Board was never formally approved/documented. Under such circumstances, a limited amendment to the Bylaws should be prepared and approved formalizing the expansion of the number of directors and ratifying the current size of the Board. This is an amendment that can likely be approved by the Board of Directors without a vote of the homeowners.
Qualifications for directors in the Bylaws may include requirements such as that directors must be owners within the community, directors must be current in the payment of their assessments, and only a single owner per property may serve on the Board at a time. It may be time for the association to review these qualifications and determine if they are still appropriate and/or if updates are needed.
Finally, the Bylaws are to include the terms of office for directors. In the event the Bylaws fail to state a term, the CRNCA provides that the term of each director shall be one year. It is generally recommended that directors on HOA Boards serve staggered terms so that each year the terms of some directors are expiring to allow new members to join while other directors remain in order to provide some degree of operational continuity. Amendments changing director qualifications or terms of office commonly require a homeowner vote and legal counsel should be consulted to confirm the scope and approval requirements for such amendments.
Functional governing documents are critical to the success of your association. If your community’s governing documents need an update or if you would like to further discuss a possible amendment to your governing documents please contact an Altitude Community Law attorney at 303.432.9999.