Ramifications of Going Against Expert Advice
As a community manager, it is my job to advise my clients on how to properly run their Association and adhere to the laws that govern Associations. There are many areas we community managers need to monitor, analyze and factor, including the Association's Governing Documents, state laws, city ordinances, corporation codes, etc. Unfortunately, however, despite advising clients of the right path, there are some Association Board Members who ask that question, well what happens if we don't actually follow the law on this? Is there some sort of HOA police that will come after us? Too often, Board Members take the laws that govern their communities lightly and think that there will not be any consequences to these decisions.
Some examples of where I often hear Boards disregarding their requirements include failing to conduct reserve studies, not distributing the year-end budget disclosure package by the required legal deadlines, and also not responding to owner requests for documents. While it's true that not all homeowners will take legal action against a Board or their Association who fails to follow the letter of the law, ignoring their legal responsibilities not only puts the Association at legal risk but the individual Board Members at risk for bad faith as well.
If an owner requests documents in accordance with Civil Code, and the Association fails to produce those documents, an owner may file a small claims suit against the Association and be awarded up to $500 per each separate request for documents if the court finds the Association unreasonably withheld documents. If an owner asks for a reserve study, for example, which is required by law to be conducted (an on-site study once every three years and an update every year in between), but the Board opts not to conduct a reserve study and informs an owner it is not available, an owner can sue the Association for up to $500 for failing to produce the document. This is just one small repercussion. Often times, not conducting these studies also affects lending and refinancing to prospective buyers and existing owners, as lenders are requiring the production of more documents in order to lend to applicants. Apart from these legal repercussions, not having the right documentation and guidance with an updated reserve study cripples the Board from using a relevant document to help navigate their finances for future planning.
While the Board thinks that they are doing everyone a favor by saving a few hundred dollars by not upholding their legal responsibilities, the long-term damages can far outweigh the short-term, perceived benefits. After advising clients of the possible repercussions, I also remind them that they have a fiduciary responsibility to the Association. They should be making decisions using the business judgment rule and seeking guidance from professionals. Generally Board Members are not held personally liable for damages, as long as they act in good faith and what they believe to be in the best interest of the Association. When I am faced with a Board who does not want to follow the law, I remind them that their decision could question whether or not they are truly acting in good faith, and there could be a question of whether they would be personally liable if action were taken against them by an owner. While it is a difficult path for a disputing owner to pursue, we don't want any of our clients or individual Board Members to be questioned or be faced with such potential challenges.
If we encounter a client who seems to consistently violate the law and make decisions against our recommendation, we ultimately decide to part ways from the relationship. While the Board may want to gamble with the repercussions and take the law lightly, as professionals, we do take a stand and have to make sure that we are not liable for the Board's poor decisions. Many reputable management companies will do the same.
When managing the Association in accordance with the law, properly planning financially, and following your Governing Documents, I find that Associations generally save more money in the long run and end up becoming desirable communities. Having an organized, logical and reasonable Board results in a better run and more efficient Association. Also, making the right and smart decisions usually ensures partnering with a reputable management company who will also represent the community professionally and efficiently.