Governing documents are often overlooked until a particular issue arises that brings shortcomings, inconsistencies, or problems to light. When this occurs, it may be too late to amend the governing documents to properly address the issue at hand. For this reason, associations should periodically review their governing documents to identify potential areas of concern which may warrant an amendment. This is especially true for communities with governing documents more than 15 years old. The following is a discussion of five common reasons for an Association to amend its governing documents.
Modify Quorum Requirements
The quorum requirements for owner meetings are generally set forth in the bylaws. It has been our experience that quorum requirements for owners meetings of more than 10% are often unattainable for most associations. This is problematic because if the association cannot achieve a quorum, it cannot conduct the meeting or elect a board of directors. This problem can easily be eliminated by a limited amendment to the bylaws reducing the quorum requirement. Pursuant to Colorado law, homeowners must vote on any change to quorum requirements.
Eliminate Person Liability
Since 1988 Colorado law has permitted associations to eliminate personal liability of members of its board of directors. To take advantage of this protection, Colorado law requires that the limitation of liability provision be contained in the articles of incorporation. Since this law was enacted in 1988, many associations formed prior to 1988 do not have a limitation of liability provision in their articles of incorporation. This provision can be added by amending the articles of incorporation. Serving on the board can be stressful enough without the threat of facing potential personal liability as the result of being sued by a disgruntled homeowner.
Eliminate Outdated Assessment Caps
Many declarations impose restrictions or caps on yearly assessments increases. These restrictions can be in the form of caps (e.g. assessments may not be increased by more than 5% per year) or may be tied to indexes such as the Consumer Price Index (CPI). These restrictions can render the board unable to operate the community because the financial demands of the community exceed the association’s assessment income. Indexes such as the CPI are not appropriate to base the association’s funding upon because the index is based on the cost of consumer goods and not reflective of maintenance and repair costs which are a substantial portion of an association’s budget. Amending the declaration to remove these caps allows the board to set appropriate assessment levels to meet the necessary operational and reserve expenses for the community. This will in turn reduce the need for special assessments and provide appropriate operational funding which will serve to maintain property values.
Remove Mortgagee Approval Requirements
The declaration may contain provisions requiring the association to obtain lender (often First Mortgagee) consent prior to amending its declaration. There is no legal requirement for the inclusion of such restrictions in a declaration unless it is a condominium community. Such provisions create difficulty in making needed changes to the declaration because lenders have no incentive to take the time and effort to evaluate proposed amendments. Thus, associations often do not receive any response from lenders when requesting such consent.
At this point you may be asking yourself the following question: If lenders do not respond to requests for consent to amend the declaration, then how can our association amend the declaration to remove the requirements for lender consent? The legislature has become aware of the problem of obtaining lender consent and has set forth two alternatives allowing associations to amend their declaration to eliminate this onerous provision. Read more articles on our website for amending or revising documents or contact one of our attorneys to more fully discuss these alternatives.
Provide Adequate Indemnification
Indemnification is the practice by which the association pays legal expenses to defend members of the board of directors from lawsuits and any judgment that might arise from the lawsuit. Indemnification provisions are generally found in the bylaws. Board members serve as volunteers and should therefore be given the maximum protections permitted by law to encourage owners to serve on the Board.
In the last 10 to 20 years well drafted indemnification provisions have resulted in far more protection for individual board members. Colorado law provides that indemnification can be made mandatory. Under an ideal indemnification provision, the association will automatically pay to defend all members of the board from the lawsuit and there is no discretion to pick and choose which members of the board the association will defend. Additionally, the provision should provide that all legal fees are paid for in advance by the association. All of these provisions can be included in the association’s bylaws with a limited amendment.
Amendments to governing documents can save associations thousands of dollars by correcting inconsistencies, addressing shortcomings, and making the document work for the associations rather than against the needs of the association.