Community Association Legal Audit (Part 2 of 2)

Community association board members fill tough roles that require a great deal of attention to association business. We understand that, as board member volunteers, you need guidance from professionals to facilitate informed decision-making, allowing you to uphold your fiduciary duties to the association that you serve. To assist you in evaluating the legal priorities for your community, we have created this Legal Audit checklist. Place a check mark in the box beside each statement that applies to your community association--and don't forget to complete Part 1 of the Community Association Legal Audit.

My community association has . . .

?   checked that the assessments charged to individual units match the allocated interests stated for those units in the association’s governing documents.

Associations must assess individual units for budgeted expenses in accordance with the allocated interests stated in the governing documents. When we advise clients of discrepancies that we note in unit assessments and allocated interests, we sometimes hear, “We’ve always done it that way; that’s what people are used to.” If the governing documents do not align with the association’s manner of assessing owners, then past mistakes do not support future disregard for the documents.

?   received legal advice concerning contracts entered into on behalf of the association. 

We prefer to take a proactive approach to legal representation by helping our community association clients avoid conflict with vendors, employees, and any other person with whom the associations enter into contractual relationships. By reviewing association contracts before they are signed, we can help to ensure that the contracts capture your understanding and intent and that the terms protect the association in the event that things do not go according to plan. 

?   turned over all homeowner assessment accounts that show a 90-day delinquency.

Our experience shows that delinquent accounts with amounts more than 90 days past due prove more difficult to collect from the homeowners than newer delinquent balances. We recommend turning over the accounts to our office as close to the 90-day past due point as possible. 

?   conducted an audit or review of its accounts. 

In most cases, community association executive boards can determine whether to conduct an audit or review of the corporate books. Associations with annual revenues or expenditures of two hundred fifty thousand dollars, and owners of at least two-thirds of the units requesting an audit, must have a certified public accountant conduct an audit of the associations’ accounts. 

?   updated its reserve analysis. 

Updated reserve analyses ensure proper budgeting for reserves. Your association’s reserve specialist can recommend a frequency for reserve analysis updates. If your association has not conducted a reserve analysis of its common elements to determine the useful life and replacement costs of various components, then the executive board should consult with a professional now to minimize the need for special assessments later.

?   reviewed rules and regulations to ensure compliance with state and federal laws. 

One of two scenarios often occurs with community association rules: (1) your association’s rules and regulations stay the same while the laws change, or (2) recent revisions to the rules and regulations do not match the existing law. Rules and regulations that violate state and federal housing laws, as an example, can cost your association tens of thousands of dollars if challenged. An attorney’s review of those rules and regulations can bring your association’s rules into compliance before a violation occurs.

?   reviewed governing documents to ensure that basic business practices conform to their requirements and to understand the rights and obligations that they state. 

Association bylaws serve as the operating manual for community association business, while the recorded covenants contain explicit guidance on common expense assessments, maintenance and insurance obligations, and restrictions on the use of property subject to the covenants. Community association board members and managing agents should familiarize themselves with the details of both of these important governing documents, which means reading the documents themselves and not relying on other board members’ or homeowners’ paraphrasing of the documents. When questions arise about what the governing documents mean, we can provide the assistance that you need. 

? reviewed the architectural design guidelines.

Many associations have written guidelines regarding architectural design within the community. We suggest that associations review these guidelines annually to make sure they state up-to-date building standards and align with the association’s current practices.

? reviewed its insurance policies.

All associations should have liability insurance protecting them from injury claims and property insurance covering the common elements. Associations may also obtain directors’ and officers’ liability insurance, fidelity insurance, and workers compensation insurance. We recommend that every association review its insurance policies to make sure they offer adequate protection and provide the coverage mandated by statute and the governing documents.

?   provided an annual education opportunity for members. 

Colorado law requires community associations to provide free education to members on an annual basis. While the executive board can set the criteria for the education classes, the classes must educate members on general operations of community members and the rights and responsibilities of owners, the association and board members.  The attorneys in our office are happy to provide educational classes for your members.

?   provided education for Board members.    

Colorado law permits community associations to include board member education class costs as a part of the common assessments. The Rocky Mountain Chapter of the Community Associations Institute hosts numerous education programs for board members throughout the year. You can check for upcoming events at http://www.hoa-colorado.org/.

?   recorded a Notice of Association Address to protect the association’s rights as a lien holder.

Colorado’s foreclosure statutes contain a new provision that could inadvertently wipe out community association priority liens against foreclosed units. To protect your association’s rights, the association should record a Notice of Address in the real property records of the county where the community is located. The Notice of Address, which provides a mailing address for the association, together with a recorded Notice of Assessment Lien for those units with delinquent accounts, will result in the association receiving notices of pending foreclosures within the community.

How does your community association’s Legal Audit look? Did you identify some legal needs that your association may need to address? We can help you prioritize your association’s legal matters. Please do not hesitate to contact us about this Legal Audit or other community association legal matters. We look forward to hearing from you soon.

The Law Firm of Winzenburg, Leff, Purvis & Payne, LLP