We have discussed in previous postings that S.B. 100 (the “Act”) was signed by Governor Owens on June 6, 2005. Portions of the Act became effective immediately, while the balance of the Act becomes effective on January 1, 2006. For the most part, the Act modifies the provisions of the Colorado Common Interest Ownership Act (“CCIOA”). We continue to receive a number of questions about the applicability of the Act to pre-CCIOA associations (those formed before July 1, 1992), as well as associations that were exempt from the provisions of CCIOA, and specifically, whether the mandatory responsible governance policies required by the Act must be adopted by all associations.
CCIOA became effective on July 1, 1992 and automatically applied to every common interest community formed after that date, with a few exceptions. The exceptions apply to small (10 single family home units or less at the time CCIOA was adopted and now 20) common interest communities, limited expense common interest communities and common interest communities made up exclusively of non-residential units. These exemptions do not apply if the declaration provides that CCIOA applies to the community. In addition certain provisions of CCIOA also automatically apply to all common interest communities formed before July 1, 1992.
A common interest community is defined by CCIOA as “real estate described in a declaration with respect to which a person, by virtue of such person’s ownership of a unit, is obligated to pay for real estate taxes, insurance premiums, maintenance, or improvement of other real estate described in a declaration.” Essentially, every condominium community is a common interest community, as is any single family or townhome community in which there are common elements.
As we have noted before, the Act mandates that associations adopt certain specified responsible governance policies. Specifically, the Act states:
(1) To promote responsible governance, associations shall:
(a) Maintain accounting records using generally accepted accounting principles; and
(b) Adopt policies, procedures, and rules and regulations concerning:
(I) Collection of unpaid assessments;
(II) Handling of conflicts of interest involving board members;
(III) Conduct of meetings, which may refer to applicable provisions of the nonprofit code or other recognized rules and principles;
(IV) Enforcement of covenants and rules, including notice and hearing procedures and the schedule of fines;
(V) Inspection and copying of association records by unit owners;
(VI) Investment of reserve funds; and
(VII) Procedures for the adoption and amendment of policies, procedures, and rules.
By the provisions of the Act, this section becomes effective January 1, 2006. Furthermore, the Act amends CCIOA to provide that these provisions automatically apply to all common interest communities formed before July 1, 1992 with respect to events and circumstances occurring on or after January 1, 2006. In other words, unless the community is exempt from CCIOA, it must adopt the seven mandatory responsible governance policies by January 1, 2006.
The further question has been raised of what the consequences are if an Association does not comply with the Act by January 1, 2006. The Act itself does not impose any penalties for failure to meet its requirements. However, CCIOA provides for the mandatory award of attorneys fees to a prevailing party in any action brought to enforce its provisions, in addition to any damages that might be proved. While damages are dependent on the specific facts and circumstances, we believe that a reviewing court would require an association to adopt the requisite policies, and would also award attorneys fees to the party bringing an action to require the association to comply with the statutory requirements. Further, while typical actions brought against the Association and its board of directors would be defended and covered under the Association’s directors and officers insurance policy, it is possible that an action brought to require the Association to adopt the mandatory policies would not be covered insofar as it could be determined to be a willful violation of a known duty. We believe that an association and its directors that fail to adopt the mandatory policies have significant risk for failure to do so.