When Should You Audit Your Association's Documents?

My mother is an accountant, so I grew up learning to budget my allowance in one of those big bound ledger books with the green grid lines. My mother had shelves full of the big ledger books, along with an entire room full of banker's boxes full of paperwork. The stacks of boxes were fun to climb on but I was never really curious enough to look inside - they were all the same to me - full of manila file folders stuffed from end to end with papers.

Now it's 2017 and most workers under 35 have never even heard of a ledger book, let alone used one. If they bother to track their checkbook at all, they are doing so online. And with everyone trying to go green, most documents are generated and stored electronically. Which is why getting involved in community association management can be pretty jarring.

The CAM world is littered with filing cabinets and banker boxes full of paper. In most states, community associations are required to store important community documents for extended periods of time - some permanently, others for 3, 5, 7 and even 10 years (see the complete rundown here). But there is more to it than just filling up a storage unit with banker's boxes and forgetting about it. Part of the reason it's necessary to save your important files is knowing when they are going to expire, or what historically you have paid for, so you don't miss anything

Because missing something can have real consequences.

New Owners for Common Property

A San Francisco community recently lost access to all of their common property (streets, sidewalks, driveways, etc.) due to a $14.00 annual property tax that they had failed to pay since the 1980s. Despite the time that has passed, the total due was only $994 - an easy payment for a community of million dollar homes, but the tax bills had been sent to the accountant on record - who hadn't worked for the community in over 30 years, and the board had no idea the bill even existed. Thus, their common property went to public auction, and sold for $90,100 to a real estate developer, who is considering charging homeowners to park their cars in the community parking areas.

3 Months of Lost Income

In Florida, the legislature has a useful law on the books called the MRTA, or Florida Marketable Record Title Act. According to the Florida Department of Economic Opportunity, "The Act was intended to simplify title searches by extinguishing old title defects and other recorded issues affecting title to real property after 30 years." Unfortunately, it had an unintended side effect: when an HOA's CC&R documents hit the big 3-0 they are considered extinguished (expired). That means communities over 30 had lost their legal authority to collect assessments and enforce the covenants.

Communities who are aware of the law, and the age of their community, can stave off the reaper simply by holding a board meeting to retain and renew the declaration (more details on how to conduct that meeting here).

However, if your community is NOT aware (or not paying attention), you can turn 30 and lose it all. Getting back to legal status is a lot more tricky, and can take as much as 90 days to be reviewed and addressed, in which time your community is not able to collect assessments or enforce covenants.

90 days is one quarter of annual assessments. Could your community survive?

Loss of Mandatory Membership

In Massachusetts, a master association with multiple subdivisions was created over an extended period of years, as additional plots of land were released to the association. Each subsequent subdivision addition was added on to the previous set of governing documents, as updated deed restrictions were defined. Unfortunately, somewhere down the line, the language that defined membership in the association where "the purchasers agreed for themselves, their “heirs, executors and assigns” to pay an annual maintenance fee" was dropped.

When a homeowner challenged the association's right to charge assessments and enforce restrictions, the courts found in favor of the homeowner, and the association was left with no power.

Each of these horror stories carries with it a lesson that we can all learn from. It's not enough to just store old documents in filing cabinets and bank boxes. Your boards need to be keenly aware of what is contained in them, because what you don't know can absolutely hurt you. Just like your community association is required to have a regular audit of your financial records to identify discrepancies and maintain the financial health of the community, so too should the board be conducting regular governing document audits.

What is a Governing Document Audit?

The Governing Document Audit is a regular, thorough review of the bylaws, articles of incorporation, Covenants, Conditions & Restrictions (CC&Rs), and other rules and regulations that govern the community. While this can include financial documents, it is probably unnecessary unless the community is not conducting regular financial audits. The purpose of the review is to identify discrepancies, to reflect the changing needs of community residents, to strengthen the position of the community association and to ferret out any missing or questionable enforcement issues. This task can be assigned to a board committee, or a permanent 'Revision' committee can be chartered with an amendment to your CC&Rs.

Who Performs Governing Document Audits?

Your revision committee (or the whole board if you opt not to use a committee) should be responsible to audit current governing documents, identify discrepancies, questions, and areas in need of changes, and propose changes to strengthen the position of the community association. If no governing document audit has been performed, or if the governing documents for your community are particularly complicated, it may be helpful to involve your community's lawyer at this stage as well. These suggestions and findings should be reported to the board on a regular schedule either in the monthly board meeting, or in a special meeting expressly called for this purpose.

How Often Should a Governing Document Audit Be Performed?

While there is nothing set in stone, most recommendations call for a governing document audit every 4 to 5 years. But don't try to do it all at once! A full audit of your governing documents is a big project, particularly if you haven't conducted one before, and your community has been around the block a time or two.

It's helpful to spread major changes out over time, addressing the big issues first (such as unclear rules that prompted a recent lawsuit) and spreading out other changes over time, so your residents have time to become comfortable.

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