By Wes Wollenweber and Lee Freedman, PWF Legal
Is it better to wait until problems occur or to address issues ahead of time to prevent those problems from arising? This is a concept that community associations around the country, not just in Colorado, struggle with on a daily basis. Basically, the community version of the chicken versus the egg scenario – if we address the issue now, we may prevent the issue from ever occurring; however, if we do not address the issue now, we may never have to. This debate always involves risk assessment.
The “reactive” approach is premised on the thinking that it is likely not worth a community association spending time and money – which could amount to a great deal of money – if the problems the association is addressing may never occur. Board members and owners under this concept generally look at whether the association can save money by just addressing the issues on a piecemeal basis as the problems arise. Basically, the “we are not going to increase assessments if these issues may never occur” approach or the “money saved is money earned” approach. Further, such board members may believe they are better off politically by getting re-elected on a term-to-term basis if they can just keep assessments low by pushing the problems off to a future board of directors.
A big risk of this approach is that an association may be unprepared when the problems actually do occur. The association may not have sufficient funds in its reserves to cover the costs to remediate or otherwise address the problems. Greater damage or personal harm may result from the problem than originally anticipated if the association had taken reasonable precautions. The association’s insurance policy may not cover any such damage or remediation if the association did not take reasonable precautions to prevent or limit the risk of harm from such problems.
From a legal perspective, an association or certain of its prior or current directors or officers could face legal consequences by failing to comply with their fiduciary duties to the association or the community. In Colorado, an association must not act in bad faith and in an arbitrary and capricious manner. Directors and officers must act in good faith, in the manner a reasonable director or officer in a similar circumstance would act, and in the best interests of the association. Ultimately, the prior decision not to be proactive can come under scrutiny and substantially cost the association and its directors and officers dearly, not to mention the harm the problem may cause to person or property.
The “proactive” approach is to consider what problems are reasonably likely to occur in the future and address them now. This does not mean spending all of the association’s money or levying a special assessment in order to address all problems that can occur and remedy them in all ways possible to avoid them from occurring in the future. This approach focuses on a board acting reasonably to consider potential areas of concern; determine (a) which of those areas must be addressed first, (b) which may be addressed later, and (c) which may not need to be addressed at all by the current board; and come up with a proper strategic financial approach to address these areas that is affordable to the association in compliance with its governing documents.
In doing so, in Colorado, the board members have the right to rely upon consultants (reserve specialists, contractors, attorneys, accountants, etc.) and others who may have reliable information about the area of consideration. A board should utilize such people to help guide its strategic analysis in formulating a proper plan for and adopting proper policies for implementation in their community.
This does not mean the “proactive” approach does not have its own negatives. It does. The biggest negative is that it costs money – and may, in certain circumstances, cost a lot of money. A community association may just not have the financial resources to fund such a proactive approach without harming the owners or property in the community financially. This approach also requires some forward thinking about issues that simply may never arise, which could lead to accusations that the approach was not reasonable for this community.
However, some forward thinking in this regard is reasonable and appropriate in most communities. This typically should at least start with analyzing the common element improvements in the community and determining an appropriate reserve strategy for future repairs of such improvements. After analyzing its current financial status and limitations which its governing documents may place on its ability to levy assessments, an association should determine a reasonable amount of assessments to levy each year. Increasing assessments annually, even by just a little bit, will help alleviate any surprise in the future should a problem arise that the association must address financially.
Being proactive may very well prevent serious surprises and avoid serious consequences.
Pearson Wollenweber Freedman, LLC is the fusion of Matthew Pearson of the San Antonio litigation firm, Pearson Legal, PC, with Colorado housing litigation lawyers, Wes Wollenweber, and Lee Freedman. Our collective experience is your answer to the difficult issues that housing communities face in this ever complicated world. In short, clients turn to us when their issues are complex and require unique problem solving and extensive trial experience. Clients also turn to us when they want a different approach to the typical legal needs.
