By Justin Bayer, Caretaker Landscape and Tree Management
Spring is officially upon us, and that means it is time to get your landscape ready for the growing season and cleaned up from the fall and winter. April is arguably the most important time of the year for landscape in Colorado, and that is because there are many steps that need to be taken in order to set your community up for success.
Getting the proper start to your landscape maintenance is absolutely vital, and by following the tips and advice above you can ensure that your community will look healthy, green, and gorgeous all spring and summer!
Caretaker Landscape and Tree Management is a privately owned and operated company with locations in both Colorado and Arizona. Caretaker has been in business for over 30 years, and have built their reputation on customer service, exemplary communication, and through utilization of cutting-edge technology.
By Andrew Loyola, Denver Elevator Company
An overwhelming number of owners and managers I speak with are either dissatisfied with the performance of their elevators or frustrated with the lack of communication from their maintenance provider. “I never see my mechanic but I sure see the invoice”. “The inspector just came and all my tests are past due”
Here are some basic steps to follow to improve your elevator experience:
To prolong the life of your equipment, ensure your mechanic communicates well, checks in and out and keeps you informed, doesn’t miss maintenance visits, keeps car tops, pits and machine rooms clean and painted, timely performs annual safety tests and documents performance in the onsite MCP log.
If your building is over 25 years old and the elevator equipment is original, it’s a good idea to start planning and budgeting for an elevator modernization. How soon is an unknown? It really depends on the usage, type of equipment and how well it’s been maintained. The good news is, authorities having jurisdiction in your area will only mandate elevators be brought up to current code if you make a major alteration to the equipment, change in speed, capacity, controls just to name a few.
Also, the State of Colorado Conveyance Division and the Denver Fire Department are implementing a couple of code changes everyone needs to be aware of.
Andrew Loyola has over 30 years’ experience in the elevator industry and is President and Owner of Denver Elevator Company.
By Peter O’Brien, President Solutia Adjusters
In general, property claims should be filed when there is a benefit to the insured for filing a claim and should be avoided when there is little or no benefit to be gained. It is beneficial to the community to complete the steps below before filing a property damage claim, whether for a small water leak or a major hail event, since the repercussions of incorrectly filed claims can be significant for the long term financial solvency of the community:
Verify that there is actual damage and confirm the extent of anticipated damage: Too often claims are called in for the wrong thing and/or for damage that is much less severe than anticipated.
Confirm the date that the loss took place: Calling in a claim for the wrong date of loss can cause problems, including filing a claim with the wrong insurance company.
Verify there is coverage for the loss or damage: Exclusions and coverage limitations exist in every insurance policy that could limit or exclude certain types or aspects of loss.
Form a reasonable expectation of outcome: Before filing a claim it is best to have at least a reasonable expectation of the size of the loss and what benefit the community can expect after application of the deductible and any applicable policy limitations or exclusions.
Meet the policy deadlines and timelines: There are requirements in most policies that claims be filed as soon as it is reasonably known that a claim is necessary. Once damage is known, it is important to move quickly through the decision-making process and file the claim on time.
If you are unsure about a particular situation or have questions about claim best practices for Community Associations, please let us know.
Peter O’Brien a founding partner of Solutia Adjusters. He managed large and complex claims for over nine years and provides proactive training and claims resolution solutions for communities and commercial property owners.
By Ryan Gager, Hearn & Fleener, LLC
The new year is upon us and it remains to be seen if 2018 will bring more changes to construction defect litigation. After years of both sides battling, 2017 saw two major decisions in the construction defect industry. First, was the introduction of House Bill 1279, a step towards construction defect litigation reform. Whether it was a step in the right direction or a step backwards probably depends on who you ask. The bill was touted as a bipartisan effort toward addressing the housing squeeze in Colorado. Construction defect has long been a hot topic in Colorado as developers and builders cite how easy it is for homeowner associations to sue, along with the high cost of insurance as the reasons there are very few condominiums being developed throughout the state. Homeowner associations and those representing them argue that it is their only recourse when a building isn’t built correctly.
HB 1279 requires that a unit owners’ association obtain approval through a vote of unit owners before filing a construction defect claim. The bill requires an association to notify all unit owners and the developer or builder of a potential construction defect action, call a meeting where both the HOA and developer or builder have an opportunity to present arguments and potentially remedy the defect, and obtain a majority vote of approval from the unit owners to pursue a lawsuit before bringing that lawsuit against a developer or builder.
If you are a homeowner in a community that always wanted to be more involved or know what was going on, this bill ensures that. All owners will be notified of a potential claim, and all will have a voice in a community-wide vote. Majority approval of the owner vote does not include nonresponsive owners and the court will determine whether diligent efforts were made to contact the owner, whether mail was undeliverable, whether the owner is occupying the unit, and if other contact information such as email or a phone number were used. All of this means that unit owners should keep all records and contact information up-to-date with their HOA, to ensure they can be part of the vote.
The other significant development in construction defect litigation last year, was the Colorado Supreme Court’s decision in Vallagio at Inverness Residential Condo. Ass’n, Inc. v. Metro. Homes, Inc. The issue was whether a condominium developer can place a provision in the project’s governing documents, a provision that requires that any dispute with the developer be summitted to binding arbitration and prohibits the condo unit owners from amending the document to remove that provision. The state Supreme Court ruled that the homeowner association was wrong to sue the builder after disregarding bylaws, including the provision, that require binding arbitration to settle claims of construction defects.
The building industry favors binding arbitration as a more streamlined way of dealing with allegations of defects. However, HOAs and those representing them argue that this decision gives too much power to developers and builders. It remains to be seen if developers and builders will now use this decision to place provisions in governing documents of all developments.
Whether these decisions are considered victories for developers and builders or not, developers and builders still need to continue to implement successful strategies to mitigate risks of construction defect litigation. These include third-party inspections, insurance programs, familiarity with state code and standard requirements, disclosures to homebuyers and turnover procedures to associations.
The one thing we do know is, based on the decisions and outcomes of 2017, we are a long way from a definitive solution to construction defect in Colorado.
Ryan Gager is the Director of Marketing at Hearn & Fleener, LLC, a construction defect firm serving all of Colorado.
By Matthew Pearson, Wes Wollenweber, Lisa Greenberg, Gravely Pearson Wollenweber Freedman, LLC
As many managers and certain board members know, condo and townhome associations are often involved in difficult disputes with their insurance carriers over significant property damage resulting from catastrophic weather events. These disputes unfortunately can result in lengthy court battles, many of which are in federal court. Catastrophic weather is truly on the rise in Colorado. Consequently, these disputes are not going away. The disputes are often incredibly similar: a condo community suffers damage from a major storm, such as hail and/or high winds, and contractors or public adjustors provide estimates of the damage to property owners in response to the low estimates prepared by the insurance companies or their representatives. To combat this problem, managers should know that Colorado has a relatively new but powerful statute that punishes insurers for unreasonably denying and/or delaying payment on valid claims (Insurance Bad Faith). Because this statute exposes an insurer who violates it to significant financial exposure, insurance companies are fighting these lawsuits vigorously.
Certain trends are resulting from these legal battles. Among these emerging trends are insurance companies’ reliance on two policy provisions. These provisions are in nearly every commercial policy that covers a multifamily community, and insurance companies are claiming in litigation that homeowner associations are violating these provisions. The first provision requires policyholders to “promptly” notify their insurance company in the event of a loss. The second provision, commonly referred to as a fraud clause, arguably prohibits misrepresentations during the claims process.
Under the prompt notice provision, insurance companies try to defeat a breach of contract claim (based on denial or underpayment of a claim) by arguing that the policyholder failed to promptly notify them of the loss and therefore somehow caused the insurer some type of harm. Insurance companies are making the argument that multifamily community policyholders are obligated to take steps to inspect for weather damage as part of ordinary maintenance and that the failure to do so violates this provision. While it is not known yet how our courts will ultimately view this argument, it is important to be aware of this litigation trend.
While most, if not all, insurance policies do not require routine inspection for weather related damage, periodic photographs or video inspections, especially if used to compare to previous photo and video inspections, can help identify exactly when the damage occurred, preventing any prompt notice arguments. The lack of routine inspections can sometimes result in a community discovering weather related property damage months after the actual weather event occurred because the damage is not obvious and did not cause any leaks. Insurance companies are arguing that the lack of such routine inspections is somehow a breach by policyholders even though the insurance policies require no such routine inspection. It remains to be seen how federal and state judges will view this argument.
Under the fraud provision, insurance companies are working hard to establish what they call “reverse bad faith” by arguing that associations and their vendors are misrepresenting key facts or intentionally inflating estimates during the claims process. Insurance companies are developing these arguments to potentially recover insurance proceeds they have already paid under the pertinent policy. One of the reoccurring legal theories insurance companies have put forth involve allegations that the association’s roofing contractor has padded its estimate and, thus, padded the association’s claim.
In addition, as many community managers and board members know, because of the nature of these claim disputes, more and more communities are turning to Public Adjustors to serve as their advocates in the claims process. Certain insurance companies are fighting hard to paint a picture that Public Adjustors are conspiring with roofing contractors, and even the association’s community managers to inflate the value of the insurance claim. The insurance companies even cite to community management contracts that allow managers to earn a fee for assisting with the association’s claim as evidence of fraud or at least an incentive to inflate damage estimates.
Based on these trends, Associations, as policyholders, should be diligent to periodically document the condition of their community by photos or video. In the event of a loss, notify the insurance company as soon as possible and make sure that one person is designated to communicate with the insurance company or their adjuster. If the community needs to hire a contractor or public adjuster to assist them with the claim, make sure they are qualified and have experience evaluating and repairing damage. Insurance claims are often frustrating and time consuming. However, the Colorado law is in place to help policyholders obtain what they bargain for in paying premiums: fixing their property damage.
By Ashley M. Nichols, Cornerstone Law Firm, P.C.
Believe it or not, the electric car has a long and storied history dating back to the 19th century when inventors across the globe started tinkering with building cars which would run on electric power. In 1891, William Morrison of Des Moines, Iowa built the first successful electric automobile in the United States.
However, with the introduction of Henry Ford’s gasoline powered Model T in 1908 and the invention of the first practical electrical automobile starter in 1912 (which made gasoline powered vehicles more alluring because it eliminated the hand crank starter), the vision of the electric car began its demise. However, throughout the late 20th century and certainly in the 21st, we have seen advances in the electric vehicle, leading to greater horsepower, the ability to drive longer distances, and lower costs allowing more access to the market.
The growing interest in these vehicles should not come as a surprise if you’ve driven on the roads in Colorado. In September of 2017, the Denver Post reported that there were more than 10,000 EVs on Colorado roads compared to less than 100 in 2011. Colorado boasts the sixth highest EV market share in the nation and the fourth-fastest growing EV market, according to the report.
Colorado passed legislation in 2013 regarding community associations and electric vehicle charging stations, declaring that the “widespread use of plug-in electric vehicles can dramatically improve energy efficiency and air quality for all Coloradans, and should be encouraged wherever possible.”
So, why are we talking about this in 2018? While Colorado was one of the early adopters of legislation promoting the use of electric vehicles, associations should not consider it “old hat.” It’s certainly a trend affecting condos and HOAs across the nation in 2018. We are in a time where more and more individuals own or are looking to purchase electric vehicles. Because of this, associations, which may not have had to deal with this issue regularly since 2013, may have to entertain more requests for accommodation for owners’ electric vehicles. So, what exactly is the law in Colorado and how can you make sure that your association is compliant?
In Colorado, community associations are required to permit owners to install Level 1 and Level 2 electric vehicle charging stations on their lots and on limited common elements designated for an individual owner’s use.
Level 1 Charging:
The law does not require that associations incur expenses related to the installation or use of the stations. Because of the growing number of consumers purchasing electric vehicles (in large part to state and federal tax credits), community associations should consider adopting a policy regarding electric vehicle charging stations. Provisions which can be included in the policy are:
The bill also created the electric vehicle grant fund, which is used to provide grants to install recharging stations. Therefore, communities that want to participate in the progressiveness of today’s electric vehicle are encouraged to apply for grants to assist with funding electric vehicle charging stations on common elements as an added amenity for owners.
The primary purpose of the law in Colorado was to “ensure that common interest communities provide their residents with at least a meaningful opportunity to take advantage of the availability of plug-in electric vehicles rather than create artificial restrictions on the adoption of this promising technology.” And that is also certainly one of CAI’s initiatives. According to CAI,
by 2040, community associations will represent over 50% of the housing stock in the United States. By the same year, it is anticipated that electric vehicles will represent 35% of new car sales. To help promote these principles in your community or for questions about the potential impact of electric vehicles in your association or for your members, contact your legal counsel.
Ashley Nichols is the principal and founder of Cornerstone Law Firm, P.C. She has been in the community association industry for ten years, providing associations with debt recovery solutions for their communities. Cornerstone Law Firm represents Colorado communities in all areas of common interest community law. You may find out more at www.yourcornerstoneteam.com.
By Lindsay Smith, Winzenburg, Leff, Purvis & Payne LLP
This article is written by an attorney, but is not intended to be legal advice. It is general in nature. This article is intended to provide you with a broad understanding of the declaration amendment process and highlight some common problematic provisions so you can better discuss with community members, but it is not an in depth analysis. Every situation differs, and you should consult with your association’s attorney before undertaking a declaration amendment.
The declaration creates the community. C.R.S. § 38-33.3-103(13). It is common for attorneys and developers to work closely together to ensure that the declaration that is created properly reflects the community that is created, but this doesn’t happen in every instance. Sometimes, a declarant “saves money” by copying from another community’s declaration. Other times, miscommunications between attorney and client result in a declaration that reflects what the attorney understood to be the declarant’s intent, which actually has nothing to do with the declarant’s intent.
The difficulty in creating a declaration that properly governs a particular community can be exacerbated by the passage of time. Communities created before the adoption of the Colorado Common Interest Ownership Act (“CCIOA”) are not required to have the same declaration provisions as communities formed on or after July 1, 1992. These older declarations may have definitions that aren’t aligned with CCIOA, missing assessment and maintenance provisions, or provisions that are now contrary to public policy. While many of these provisions are superseded by CCIOA, their presence in your declaration can make governance and management an expensive headache. When your declaration does not allow the association to properly govern or function without constant legal opinions, you need an amendment.
Common Problematic Provisions
We see a lot of common problems in declarations. Some provisions that may need to be amended out, either by a limited amendment or by an amended and restated declaration, follow.
The Amendment Process
CCIOA governs declaration amendments in section 38-33.3-217. “Section 217” provides the process by which an amendment can be made, exceptions to that process, lender approval guidelines, and the judicial approval process. Your legal counsel should review your existing declaration to ensure that any unusual amendment provisions are appropriately addressed.
Section 217(1) creates the maximum threshold for most document amendments. Declarations – especially for older communities – frequently require approval by members representing 75% or more of the community. These provisions effectively precluded amendment in many communities, so the legislature took action in 2005 to amend the law. Now under Section 217(1), any amendment percentage greater than 67% is declared void as contrary to public policy. The amendment percentage can be as low as a simple majority of all votes in the association, but it cannot be higher – except when it is.
Sections 217(4) and 217(4.5) allow for higher percentage thresholds for amendments that create or increase special declarant rights, increase the number of units, change the boundaries of any unit, change the allocated interests of any unit, or change the uses to which any unit is restricted. Section 217(4) applies to pre-CCIOA communities; section 217(4.5), governing use restrictions, does not (don’t worry, it gets more complicated soon). These types of amendments require a minimum of 67% of the votes in the association, but are governed by any higher percentage specified in the declaration. Thus, a community could be forced to obtain unanimous consent for a change in how common expenses are allocated, if the original document required unanimous consent for such an amendment. The community would have to obtain unanimous consent to decrease this amendment threshold for future amendments as well.
If the association does not reach whatever percentage threshold is required by CCIOA and/or the declaration itself, all hope is not lost. Section 217(7) sets forth a process by which an association can obtain judicial approval of an amendment where the failure to reach the voting threshold is due to non-response (as opposed to substantial opposition). To ensure your community can proceed with judicial approval, make sure that you discuss the amendment at a meeting of the association, send out at least two notices of the amendment, and obtain at least half of the votes you would need to approve the amendment outright. Consult with your association’s attorney to make sure the meeting notice is appropriate for the proposed amendment, as document amendments have been a favorite topic of the Colorado appellate courts in recent years.
If you are proceeding with judicial approval, section 217(1) does not apply to the amendment. Appellate courts have not clarified whether this inapplicability is simply recognition that the court is approving an amendment rather than the homeowners, or whether this inapplicability means that the 67% threshold established by that section is ignored when calculating whether you obtained at least half of the votes you would need to approve the amendment outright. The cautious approach is to proceed under section 217(7) with whatever higher percentage is contained in the Declaration.
In addition, courts are not entitled to approve amendments that change the allocated interests, except to the extent that they change the portion of the allocated interests that is the common expense liability. You cannot obtain judicial approval of an amendment that changes the ownership interests in the common elements in a condominium, or the votes in the association in any community.
Declaration amendments, contrary to a statement made to me by an owner at a document amendment meeting, are not easy. You need to engage with legal counsel early to determine the appropriateness and viability of an amendment and create a roadmap to get from where you are to where you need to be. Do not try a declaration amendment on your own, but don’t be afraid of the hard work associated with an amendment. They may take years in some circumstances, but the benefit to the community is long term.
Lindsay Smith is a community association attorney with Winzenburg, Leff, Purvis & Payne LLP. Her practice focuses on general community association matters such as document amendments, governance, and document interpretation.
As general counsel to community associations throughout Colorado, my job is, first and foremost, to provide legal guidance to the Boards of Directors who represent and act on behalf of my clients. Often, my clients have their managers act as my main point of contact. This can increase efficiency and decrease unnecessary legal fees, but can create conflicts when the managers take actions they shouldn’t be taking – or fail to take actions they should take. This article addresses common errors that I see from the general counsel perspective, and offers tips intended to protect both my clients, and their managers, from conflict and liability.
Managers as Agents
Community association managers often walk a fine line between encouraging Board action and taking action for a Board. When a Board is non-responsive and time is of the essence, a manager may take action for the Board, knowing that the Board will agree to that action at a later date.
Don’t do that.
A community association manager is typically an agent of the corporation. As a corporate agent, the manager will have broad authority to entertain negotiations with third parties, and often has “apparent authority” to bind the corporation to a contract or other course of action.
Sometimes, a community association manager will exercise his or her apparent authority in an inappropriate context. For example, the manager will select a contractor rather than wait for the Board to vet bids, or will approve a payment proposal offered by a delinquent owner. When a community association manager steps into the Board’s shoes without legal authority to do so, third parties who rely on the manager’s actions are usually permitted to enforce the agreement made by the manager. While the third party will be entitled to the benefit of the bargain made, the manager might not be as fortunate. Because the manager has taken action on behalf of the corporation without legal authority, the manager may face personal liability from the corporation for the contract. Put simply, if a manager contracts for an association without legal authority, the manager might have to pay for whatever was in that contract.
This is a general statement and will necessarily be impacted by the language of a management agreement. While all contracts differ, it is crucial to recognize the scope of management authority and to avoid making assumptions regarding a Board’s potential decision. Additionally, Colorado law requires that certain decisions only be made by the Board (e,g. foreclosure). Make sure that you know what you are permitted to do on behalf of your client, and what you are not permitted to do. When in doubt, ask, and get it in writing.
Managers as the Board
A community’s governing documents will often permit the association to charge a negligent or improperly-acting homeowner with the costs associated with that owner’s bad acts. Communities subject to the Colorado Common Interest Ownership Act can assess unit owners for common expenses caused by their misconduct without additional authorization in the Declaration.
These provisions beg the questions – what is negligence? What is misconduct? And should the manager be the person who makes that determination?
Negligence is the failure to act in accordance with a legal duty, in a manner that causes harm to another person. The legal duty, in the community association context, may be a failure to maintain the interior of a condominium unit, a failure to report damages caused by exterior sources, or a similar failure to act as a reasonable person would in a similar situation. Misconduct is more affirmative in nature, and would include deliberate harm to common elements or gross negligence, such as drunkenly destroying a railing or cutting down a tree.
In light of these definitions, when a Board needs to determine whether a homeowner’s negligence or misconduct has caused $25,000.00 in damages to the common elements, a manager should step back and make sure that whatever determination is made, it is made by the Board. In the event the homeowner challenges the determination that he or she is responsible for the damage to the common elements, and the challenge rises to the level of a lawsuit, the manager and the association will almost certainly find themselves with a conflict. To avoid this, and preserve your client relationships, stay in your lane and make sure your Boards are making the fact-based decisions.
Managers as Psychic
Your clients may rely on you more than you know. If your management agreement provides that you are the association’s agent, you might have more responsibility than even you know! A recent case out of Texas held a property management company jointly and severally liable with the community association for failure to make repairs to a retaining wall as recommended by a reserve study. The court found that the management company’s contract imposed upon it duties to maintain the common elements. While the association did not expressly delegate the obligation to maintain the common elements to the management company, the management company assumed a duty to properly maintain the common elements by making this obligation part of the contract.
The court found that the management company and the association were liable for the failure to repair common elements, even after the membership refused to approve a special assessment intended to fund the repairs.
Additionally, a recent case out of Maryland held that owners had a negligence claim against the board for failure to properly bring a construction defect lawsuit against the developer in a timely manner. While the case did not address the manager’s liability, there could be liability based on a contract with the association. When managing relatively young communities, carefully consider whether there are defects in the developer’s construction, and consult with professionals (and the Board) to protect yourself, and your communities.
The lessons in these cases are twofold: managers need to carefully consider the content of management agreements, and associations need to be diligent and proactive in investigating repairs for possible construction defects as well as funding repairs and associated reserves.
While not all liability can be avoided, it can be mitigated – for both the manager and the association – by ensuring that all parties are on the same page with respect to what actions are appropriately handled by management, and what actions are not to be delegated by the Board.
By Melissa M. Garcia, Esq., HindmanSanchez, P.C.
In simplest terms, to be a fiduciary to another person or party is to be in a position of trust. For example, a patient trusts her doctor to make the correct diagnosis. A parishioner trusts his priest to keep his confessions confidential. And if you are my client I hope you will trust me, as your lawyer, to give you the correct advice!
How does being a fiduciary play into the setting of a community association? Again, a fiduciary relationship exists where people place a special trust in someone. In the association context, this means that if you are elected to the board of directors, the homeowners have placed their trust in you to preserve and protect the association’s assets, maintain the association’s property, enforce the association’s covenants, and, in general, to promote the interests of the common interest community.
If you are a member of the board of directors then you owe a fiduciary duty to the association. On the whole, your fiduciary obligation encompasses the following four duties, each of which is discussed below:
Duty of Care
The duty of care requires a board member to make decisions: (i) in good faith, (ii) in the best interests of the association and (iii) prudently. The foregoing standard is what courts will review when determining if a board member(s) acted appropriately when a decision is challenged. Directors are recognized as having the same duties as those of a business operation, so they must give the business of the association the same degree of care and diligence that prudent persons would exercise in their own affairs in similar circumstances. So what does this mean?
First, to act in good faith means, quite simply, act with honesty, fairness and good intentions. When taking action, do not act with deception; do not act maliciously; do not act with ill will. Sounds easy enough, but sometimes this can be one of the most difficult rules to follow. As a board member have you ever been faced with a person who repeatedly interrupts you during meetings, constantly challenges your decisions and seems to look for ways to personally attack you? Then, all of a sudden, that same person asks you to approve his or her fence request. And you find yourself looking for a way to deny it? That, my friends, is acting in bad faith. Always remember that as a board member you have to look at every decision objectively, and act with honesty and fairness.
Second, to act in the best interest of the association means set aside your self-interest. Even if you may be a homeowner, while on the board you must remove your homeowner hat and put on your board member hat. If moving forward with a particular action would be in the best interest of the association, you must cast your vote in favor of that action, even though it may not align with your own personal interests.
That being said, it’s not uncommon for a board decision to also support your own individual interest as a homeowner. That doesn’t mean the decision is incorrect or inappropriate, it just means your own self-interest is in line with that of the association. However, as a director your decisions will be scrutinized, and if there is any appearance of preferential board treatment, the decision may be challenged. Do what’s necessary to avoid the perception that your action is solely in your best interest. Make sure you document how you made your decision objectively and without preference.
And remember, your decision must be in the best interest of the association; not the best interest of another board member, not the best interest of the kindest person on the block; not the best interest of the most energetic and dynamic faction of the community. Any of the foregoing categories of people have the potential to sway, intentionally or unintentionally, a director’s decision because of who they are as individuals, and because of a director’s natural inclination to help the nicest group or the one in the most need. Do not review a proposal based on which homeowners will benefit of the decision. Review a proposal based on whether it benefits the association and is in the association’s best interest.
Third and lastly, make sure your decision is prudent. This means ask a lot of questions so you can make an informed decision. Read, be familiar with, and follow your governing documents and applicable law. Make sure you attend board meetings. Review your board packet thoroughly before the meeting, so you can be ready to ask questions at the meeting. Study and understand your financial statements, so you know where the money is going. Hire qualified professionals and vendors. In short, when making any decision, board members need to be sure they exercise sound judgment.
Making an informed and sound decision is particularly critical if the decision has a significant impact on the association and its members. If, for example, your decision has a substantial financial impact on the homeowners, such as levying a special assessment or obtaining a loan, then make sure you do your due diligence. Review your governing documents and determine whether you have authority to levy the special assessment. Ask your managing agent for assistance in reviewing the operating and reserve accounts and in understanding the present financial state of the association. Ask your attorney for a legal opinion on whether owner approval is necessary for obtaining a loan and pledging the income of the association as security.
And, paper trail, paper trail, paper trail. Make sure the association’s files contain documentation establishing that the board’s decision was made in good faith, prudently and in the best interest of the association. You can document your decision-making process through minutes, committee reports, opinion letters, memos and other such records.
Duty of Loyalty
The duty of loyalty requires a director to be loyal to the corporate entity of the association. Again, you need to set aside your self-interest in order to act in the best interest of the association. The duty of loyalty primarily relates to conflicts of interest.
A conflict of interest exists whenever any contract, transaction or other action taken by or on behalf of the association would financially benefit: (1) a director or (2) a party related to a director. A “party related to a director” means:
A common example is if a director owns a landscaping company and wants to enter into a contract with the association to provide landscaping services. This potential contract would provide a financial benefit to the director. Thus, a direct conflict of interest exists. Or, if the landscaping company was owned by the director’s sister, a similar but indirect conflict of interest arises. The existence of this conflict does not make the contract illegal or inappropriate in itself. It is the way the director proceeds with respect to the conflict that determines the correctness of the transaction.
Colorado law requires the director to disclose the facts of the conflict to the remaining directors before the board takes action on the proposed transaction. The transaction is enforceable if a majority of the disinterested directors, even if less than a quorum, in good faith, approves the transaction. And although not legally required, the director may consider it prudent to be absent from that part of the meeting during which the matter will be discussed, except when her or his information may be needed.
Note that even though the law does not require the director with the conflict to recuse him or herself from the discussion or vote, the board may adopt a conflict of interest policy which requires such recusal.
Colorado law requires the board to adopt a policy which:
So, if the policy requires the director to refrain from participating in the discussion and from voting, the director must follow the policy. The minutes should then reflect his or her absence from discussion and abstention from any vote relating to the subject of the conflict.
Duty of Obedience
The duty of obedience is an easy one: obey the governing documents and obey the laws. Directors owe a duty to the association to perform their duties in accordance with the authority granted to them by statute and in their governing documents (i.e., the declaration, bylaws, articles of incorporation, and any rules, regulations and policies adopted by the board). If directors exceed this authority, and damage results, the directors may be personally liable for their unauthorized actions.
However, your obedience is only as good as the rules you follow. If your governing documents are outdated, then you could be following illegal provisions. Make sure to review your governing documents with your attorney, and revise or rewrite them to bring them into compliance with current applicable law.
Duty of Confidentiality
Board members will have access to private and confidential information that must remain confidential. A director should not individually disclose information about the association’s activities unless they are already known by the members or are part of the association’s records. In the normal course of business, a director should treat all matters involving the association as confidential until there has been general disclosure, such as at a board meeting (outside of executive session) or an owners meeting, or unless the information is part of the records available to members for inspection (i.e., minutes, resolutions, etc.) or common knowledge. This presumption of confidential treatment should apply to all current information about legitimate board or association activities.
To be effective, a community association needs a strong board of directors that comprehends its role entirely and pursues it effectively. And to be an effective board member, you must fully understand your fiduciary duties and responsibilitiesas outlined above.
By Jonah Hunt, Orten, Cavanagh & Holmes, LLC
Many associations are struggling with the decision regarding whether or not to regulate short term rentals in their community. Short-term rentals are generally defined as rentals which are 30 days or less in duration.
With the rise of companies such as VRBO, HomeAway and Airbnb, vacation rentals have soared, with the short-term rental market in the U.S. expected to exceed $36 billion in 2018. Short-term rentals are growing at nearly twice the rate of the traditional tourism lodging market, climbing 11 percent in 2016. It is fair to say that short-term rentals are here to stay.
To Regulate or Not
Positive impacts of short-term leasing include that with increased visitors and tourists comes increased visibility and dollars spent in the community. Many owners who rent their units on a short-term basis do so primarily or solely for the income, which keep them solvent and lessen the probability of foreclosures in the community.
Opponents of short-terms rentals argue that their inherent nature is not harmonious with community associations, which emphasizes bringing people together, strengthening neighborhood bonds and promoting a sense of community. In contrast, short-term visitors with no ties to the community may not be contractually bound to the association's governing documents nor financially invested in the overall good of the community. Similar concerns include the change in character from a residential community to a transient one, increased noise, trash, and parking problems. Security and maintenance issues are also concerns for associations.
Regulation and Case Law
While some associations have covenants which address short-term rentals, most associations who choose to regulate do so through their rules and regulations. Colorado’s Common Interest Ownership Act specifically confers upon associations the right to “(a)dopt and amend… rules and regulations.” C.R.S. § 38-33.3- 302(1)(a). Rules must also not conflict with the association’s governing documents. See Pagosa Lakes Property Owners Assoc. v. Caywood, 973 P.2d 698 (Colo. App. 1996), cert. denied.
Rules are typically enacted because owners who rent on their own are receiving association benefits while not paying a commission or fee to the association or its rental management program. Typically, there is also added impact on the physical components in the community. In Watts v. Oak Shores Community Assn., 235 Cal. App. 4th 466 (2015), the Court ruled in favor of an association which had adopted rules and implemented fees to address the negative impact short-term renters were having on the community.
The Colorado Court of Appeals has held that in order for short-term vacation rentals to be prohibited, “the covenants themselves must be amended … the board’s attempt to accomplish such amendment through its administrative procedures was unenforceable.” Houston v. Wilson Mesa Ranch Homeowners Association, Inc., 360 P.3d 255 (Colo. App. 2015). Houston also found that short-term rentals are not a commercial use of property. This is not necessarily the law elsewhere. See Eager v. Peasley, et. al., published opinion of the Michigan Court of Appeals, issued November 30, 2017 (Docket No. 336460) (holding that short-term rentals violate “residential use” and “non-commercial use” restrictions contained in restrictive covenants).
In Colorado, if an association is seeking to ban short-term rentals, it must do so through a covenant amendment. If an association is merely seeking to regulate such rentals, it may do so through rules and regulations, provided such rules are not arbitrary, capricious, unduly burdensome, or discriminatory.
Associations should work proactively with owners looking to rent on a short-term basis to ensure all owners are adhering to the same regulations, in ways that work best for the community. The Association should poll the community on the issue and have meetings and discussions to address owner concerns and needs. From there, the association can make the determination if it is appropriate to amend the covenants, or if there are appropriate rules or policies that can be adopted to address the issues.
Jonah G. Hunt
Community Association Attorney
Orten, Cavanagh & Holmes, LLC
Orten Cavanagh & Holmes advocates a proactive approach in providing legal representation to community associations throughout Colorado. The firm provides communities and associations with timely, value-oriented legal services.
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