Misallocations of Assessments: What's the Board To Do?

So you’ve been elected to the Board; you’ve reviewed all of the governing documents (at least, those that you’ve been provided); you faithfully review your board packets in preparation for your regular meetings, you’re well on your way to helping your association conduct its business in a businesslike manner. At your board meeting, a curious owner inquires why her monthly assessments are different than her neighbor’s.

You and the rest of the Board and your management company are at a loss to answer the question, other than to say “Well, that’s the way we’ve always done it.” That probably doesn’t satisfy the inquisitive owner, who then starts reviewing the governing documents herself and finds that assessments are not supposed to be allocated based on the size of a unit, but rather, are supposed to be allocated solely based on an equal percentage to all owners, so that they all pay the same amount. But, as everybody said, “That’s the way we’ve always done it.” So what now?

You should review the Association’s declaration to see what the real allocation formula is. If the community was formed after July 1, 1992, then it is subject to the Colorado Common Interest Ownership Act (“CCIOA”). CCIOA requires every declaration to state what the formula is for allocating assessments. This can be as easy as saying that each unit will be allocated a percentage equivalent to a fraction, where the numerator is one and the denominator is number of units in the community. In this case, all units would be allocated the same amount. The formula could be the percentage equivalent to a fraction where the numerator is the area of the unit and the denominator is the area of all units in the community. The formula may get more complicated yet, by making special allocations of certain expenses to owners based on actual usage (e.g., utilities, particularly if they are submetered), or other factors. If your community was formed before July 1, 1992, then the declaration (or the bylaws if you are a condominium) should have a statement of how the assessments are allocated, but you may need to search for that.

If you discover that you have indeed been assessing contrary to the formula stated in the declaration, you have a duty to correct the incorrect allocations, you cannot continue to incorrectly assess. You can imagine that this will not be an easy task. So, what do you do?

  • Carefully review the declaration to make sure you understand how assessments are to be allocated, including any special allocations.
  • Determine the actual amount of assessments owed by all owners.
  • Inform the community of the mistake and the Board’s intent to correct it. It is probably wise to give information via newsletter, website posting and any other written means available to the Association first and let owners know that you will be scheduling an informational meeting. Then, schedule an informational meeting of the members. Allow members to ask questions and provide comments.

The Board will need to determine whether to retroactively apply the incorrect allocations, or whether that will be done proactively only. Considerations include the cumulative effect of the incorrect assessments, the extent to which owners that have overpaid would be entitled to a refund, the extent to which owners that have underpaid would be required to pay additional amounts, how long the incorrect allocations have been made, and similar questions.

While there is no one clear resolution to this problem for all associations, the important thing to do is address the issue and get it corrected. At least one court has said that, where assessments were improperly allocated for a period of time, that the Association had no liability for refunding excess assessments made by an owner where the annual assessments were assessed in good faith, and the owner had constructive knowledge (because the declaration was recorded and he knew of it) that the assessments were not being assessed in accordance with the declaration. Nevertheless, the owner acquiesced in the method of assessment and paid the assessments. The Association expended the moneys for purposes authorized by the declaration and the owner received the benefit of those expenditures. Therefore, he could not return the benefits or restore the association to its former position, and he was not entitled to a refund of overpaid assessments.

The association must act in good faith. Doing so requires that the problem, once discovered, be corrected.