Reasonable is a term that is used a lot in the world of homeowner associations. It is a term that can have different meanings depending on who is interpreting the term and in what context the term is being used. According to Meriam-Webster’s Dictionary, the term reasonable means, “1a : being in accordance with reason; b : not extreme or excessive; c : moderate, fair; d : inexpensive; 2a : having the faculty of reason b : possessing sound judgment. As you can imagine, it can be difficult to interpret what one person thinks is reasonable in comparison to another and can present problems when attempting to resolve issues.
In the legal sense, the term can be applied objectively or subjectively depending on the circumstances and it is not always viewed in terms of the “average person”. Some factors a court may look to are circumstances that are known to both parties and that are likely relevant to the way a person would understand his situation. In answering that question in the subjective sense, courts enjoy latitude and may make allowance not only for external facts, but sometimes for certain characteristics of the party himself. As is often the case in the legal world, there is not one set definition for what is and what is not reasonable and it will often be up to the court to decide on a case by case basis.
While the Board has a fiduciary duty to collect delinquent assessments, that fiduciary duty requires the board members to act in good faith and for the benefit of the Association as a whole. As highlighted by Suzanne Leff in her previous blog, in Colorado, the courts often apply the Business Judgment Rule when evaluating Board decisions. The Business Judgment Rule serves as a defense for Directors. To prevail when using the Business Judgment Rule as a defense, a Board of Directors must show that it acted in good faith, in a way that was reasonable under the circumstances and that was not arbitrary or capricious. When applying the Business Judgment Rule, a court recognizes that Board Members must make decisions based on the information available at the time the decision-making occurs; accordingly, courts generally refuse to interfere with honest business decisions through the benefit of hindsight.
In terms of collecting assessments, the Board of Directors may have to determine what is reasonable under the circumstances with regards to a delinquent account. The first step should be to look to the Association’s governing documents and the Board should be consistent and follow the procedures outlined in the documents. However, the question arises when a homeowner reaches out to the Board in an attempt to negotiate a settlement with the Association. In a good number of cases, the governing documents will not have steps defined as to how to negotiate with a homeowner. In most cases, it will be up to the Board to determine what is reasonable under the circumstances. Some factors the Board may want to ask in its decision making process is what is the standard practice of the Association, what has the Association done in the past in similar circumstances, what is fair and rational under the circumstances and what is in the best interest of the Association. The Board can also seek guidance or advice from the Association’s attorney, but the ultimate decision is a decision that must come from the Board.
While a Board may not want to set precedents with each decision it makes, the Board can avoid this issue by establishing legitimate and good-faith-based reasons for their beliefs. If the Board believes that an unusual circumstance should be handled in a certain manner, the Board should make findings of fact that are documented in the minutes of the Board meeting that acknowledge the uniqueness of the issue and that take into account the uniqueness when the final decision is made. To blindly follow the same course of action without regard to the specifics of any particular case does not further the interests of the community and may not ultimately be considered reasonable. The Board should ultimately exercise its collective business judgment in good faith and above all, the golden rule is to be reasonable.