The Michigan Court of Appeals, in a 12 page opinion that was just released, has ruled that an assessment levied by a condominium association was invalid because the board of directors failed to follow the requirements of the condominium bylaws.
In that case, the board levied an assessment to raise funds to pay for legal fees for a lawsuit against the condominium developer. However, the board chose to disregard the bylaw provisions which required it to hold a meeting of the Association members and take a vote on whether to file the litigation and whether to approve a proposed litigation special assessment. The board decided to levy the assessment without the required vote. Members of the Association who objected to the failure to take a vote and who declined to pay the special assessment had liens recorded against their units. The Association then promptly filed actions to foreclose the liens.
While the trial court ruled in favor of the condominium association and upheld the assessment, the Court of Appeals reversed. The appellate court held that the board was not authorized to levy the assessment in its sole discretion, but instead was required to follow the processes contained in the bylaws. The court reasoned that the bylaws were in the nature of a binding contract between the association and its members. The appellate court rejected the condominium association's arguments that the bylaw requirements were too onerous or that they purportedly conflicted with the Michigan Nonprofit Corporation Act. The court also determined that, even if a particular procedural requirement of the bylaws was unreasonable, the trial court could have severed that provision and still give effect to the remaining provisions.
Additionally, the appellate court also reversed the trial court's award of attorneys fees to the Association. The Association incurred approximately $15,000 in legal fees in attempting to collect the $3,000 assessment. The Court of Appeals found that since the assessment was invalid, attorney fees and costs were not authorized.
This case underscores the importance of a board of directors knowing what provisions are in the condominium documents and obtaining sound advice and direction from its association counsel. Our law firm represented the co-owner in this case because we believed that the board should not have wholly disregarded the requirements in the bylaws.
Nottingham Village Condominium Association v. Pensom, Docket No. 319552
The Michigan legislature recently enacted significant changes to the Michigan Nonprofit Corporation Act. Since condominium associations and homeowner associations are typically non-profit corporations, several of these changes impact them.
Here are some of these changes, which may affect community associations:
- A nonprofit corporation must distribute to its members an income statement, year-end balance sheet and statement of source and application of funds.
- A nonprofit corporation must have an annual meeting to elect directors and conduct other business, unless the members act by written consent or vote for directors by ballot. Thus, instead of electing directors at an annual meeting, directors can be elected through a written ballot if authorized by the bylaws or articles of incorporation.
- Unless otherwise restricted by the articles of incorporation or bylaws, a member, or proxy holder. may participate in a meeting of members by a conference telephone or other means of remote communication that permits all persons that participate in the meeting to communicate with all the other participants. However, there are certain measures that an association must take before a member can participate in the meeting and vote by a means of remote communication.
- A member may give their proxy to authorize another person to vote for them for the election of directors. The proxy may be given by a signed writing or electronically (such as an e-mail).
Allowing inspection of certain records would impair the rights or privacy of the members.
- A member may inspect, for any proper purpose, certain books and records of the association (similar to shareholders in a profit corporation). However, the articles of incorporation, bylaws, or a board resolution may provide that the members do not have the right to inspect certain records if the members or directors that approved the limitation make a good faith determination that:
Allowing inspection of certain records would impair the lawful purposes of the corporation.
- A member may bring an action in court to establish that the acts of the directors or members are illegal, fraudulent, or willfully unfair and oppressive to the corporation, the director, or member.
- Ten percent of the members can file a circuit court action to remove a director from office if the director was involved in fraudulent, illegal, or dishonest conduct or gross abuse of authority or discretion, and removal is in the best interest of the association. Typically, the bylaws of an association specify a procedure which requires that a petition for a special meeting, signed by a certain percentage of the members, be submitted to the board and that a special meeting be called for the purpose of removing one or more directors.
- An association may eliminate a director's or volunteer officer's liability to the corporation, or its members, for any action taken (or the failure to take action) subject to certain exceptions. Previously, the limitation of liability only applied to a breach of the director’s or officer's fiduciary duty. The new law permits an association to eliminate liability for any action taken. Notably, a director does not need to be a volunteer in order to have the benefit of this protection.
Due to these changes, community associations would be wise to have their articles of incorporation and bylaws reviewed to see if any amendments are warranted.
This author is a member of the Non-Profit Corporations Committee of the Business Law section of the State Bar of Michigan, and commends those members of the committee and others who contributed to the drafting of the changes, for the many, many hours that they dedicated to it.
The size of a community association’s budget will vary depending upon the number of elements of the development that it may have the responsibility to maintain, such as landscaping, sprinkler systems, roadways, roofs, windows, balconies, etc. If an association has a management company, the budget must account for that, too. No matter the size of the budget, associations rely on the payment of assessments from their members to raise the money necessary to pay their contractors and service providers. Since association members have their own household budgets, they tend to keep a keen eye on association spending and typically want the Board of Directors to operate as lean as possible and keep the assessments down and in check. “Where is all the money going?” is often a frequent refrain at annual meetings and in chats between neighbors. All of this may lead condominium or homeowners associations to adopt budgets that do not have much, if any, room for cost-overruns and unanticipated expenses, and which depend on virtual 100% compliance by association members in the payment of assessments. In tough economic times, if several members begin to fall several months behind in paying the assessments, the association may suddenly find itself struggling to pay its bills. Therefore, it is vital for a community association to ensure that it has a collection policy and procedures in place, and that it follows them.
For instance, the policy and procedures can and should provide for the following:
· Payment due date and grace period;
· When a “reminder” or demand letter will be sent to a member who has fallen behind;
· When the matter will be turned over to provide that when a members falls two months behind, the matter is turned over to the community association’s legal counsel;
· When a lien will be recorded;
· Whether the Association will pursue collection from a tenant in the condominium unit (as provided in the Michigan Condominium Act);
· How payments will be applied (i.e., first to legal fees and costs incurred, then to late charges/interest, and then to assessments in order of greatest delinquency).
The collection policy and procedures should be systematically followed, and the members should be aware of them. The further a member falls behind, the bigger the debt becomes, and the more difficult it will be to collect what is due and bring that account current. Thus, minimizing delinquencies and promptly taking action in accordance with a collection policy is critical because the association’s cash flow will be significantly impacted if there are too many members who are substantially behind. Remember, a community association is technically a non-profit corporation and although the members may be your next-door- neighbors, sound business practices should be followed in running the association’s financial affairs. An experienced community association attorney should be able to assist the association in drafting and adopting a good collection policy.
In a Michigan Court of Appeals decision released on March 18, 2014, the court ruled that a mortgage foreclosure purchaser's obligation for unpaid condominium assessments begins when they acquire the Sheriff's Deed to the condominium unit.
The case involved a dispute between Wells Fargo Bank and a condominium association as to when the bank, which was the purchaser of a condominium unit at its own mortgage foreclosure sale, began to be responsible for the payment of condominium assessments. The bank took the position that it's responsibility began at the close of the redemption period (typically six months later), and not before. The Michigan Court of Appeals rejected that position, however, and there is now a published court decision in the State of Michigan which supports the long-espoused view of many Michigan condominium association lawyers that the purchaser at a mortgage foreclosure sale must begin paying condominium assessments from the date of the sale forward.
As we know, a condominium association has many duties and obligations to fulfill, including the collection of assessments, and the enforcement of the provision of the Condominium Documents. In addition, the association also has another very important duty: the maintenance and repair of the common elements. This duty not only is relevant to the aesthetics and the upkeep of the appearance of the condominium, but also encompasses safety concerns as well. A Board of Directors of an association that ignores its maintenance and repair duties or otherwise does not take them seriously enough exposes the association to potential liability from claims of co-owners and others who come to the condominium.
When faced with a maintenance and/or repair issue, the stating point, of course, is to determine whether the area in question is, in fact, an item for which the association has the duty to maintain, repair and/or replace. This may not necessarily be as simple as it sounds. While the Master Deed for the condominium generally will define the general and limited common elements of the condominium project and delineate the corresponding maintenance and repair responsibilities of the co-owners and the association, sometimes the item in need of repair may fall into a “gray area”, leaving it unclear who has the responsibility of repair. For example, while the Master Deed may provide that the Association has the duty to maintain the structure of the floor between unit levels, consider what happens when a co-owner requests that the association fix a floor in his unit that constantly squeaks when walked upon. The question then arises: Is a floor squeak a structural problem, which the association must remedy, or a “cosmetic” one that is left to the co-owner to solve? In dealing with a repair responsibility that falls into such a “gray area”, the Board would be wise to seek out advice and assistance from its legal counsel and professionals associated with the construction industry. Inaction or procrastination by the Board in addressing the issue ultimately engender legal action by a frustrated co-owner to enforce the association’s repair responsibilities, resulting in the association, at the very least, incurring attorney fees and costs to defend the lawsuit.
Associations may find it helpful to create a “repair matrix” in the form of a chart that can serve as a quick reference guide for determining the maintenance and repair responsibilities of the association and co-owners. This chart should be submitted to the association’s attorney for review and any additions or corrections.
Once the Board determines that the association is responsible for the maintenance or repair of a particular area, it should then thoroughly evaluate the scope of the need maintenance/repair and obtain estimates from licensed contractors. Obviously, this step is less complicated when dealing with simple or routine maintenance such as painting the exterior of buildings, as opposed to being confronted with the problem of deteriorating roads or roofs, for example. Some contractors may propose different repair approaches than other to solve the problem. It is the Board’s duty then to determine which repair approach to adopt. While the Board may not necessarily be compelled to select the most expensive repair, the Board may want to think twice about choosing the cheapest repair that merely represents an “band-aid” solution that may ultimately prove not to be a proper repair. While cost is an important consideration, it should not be the sole basis for the decision. Conversely, association funds in the short term may only lead to the expenditure of even more money down the road to rectify a failed “repair”.
Perhaps the most important thing that the Board should do is to take prompt action. The time frame within which the Board should act as dictated, of course, by the type of maintenance or repair that is needed. Routine maintenance associated with the appearance of the condominium is less urgent than addressing potential safety concerns or conditions that may lead to damage to the common elements or a co-owner’s unit. For example, sidewalks that are heaving and creating a tripping hazard require quicker action than scheduling the repainting of signs or buildings. For those repairs needed to correct safety hazards or to avoid damage to the common elements or units, prompt action should be taken by the Board, and any concern regarding the availability or expenditure of funds should not be allowed to pose a serious impediment to moving forward with corrective measures. If the Board has truly been attentive to its duties, a reserve fund should be available for any major repairs. The Board has a statutory duty to ensure that adequate reserves are set aside for major repairs and replacement of common elements. It is a breach of the Board’s fiduciary duty to fail to establish reserves. If such reserves are not set aside, a court will probably not listen very favorably to an association that claims that it did not have the money to make a repair, where the failure to respond resulted in an injury to a co-owner or damage to a co-owner’s unit.
How soon should a Board take action to make a repair? At least one court has held that a condominium association must perform a repair within a “reasonable time”. What constitutes a “reasonable time”, the court stated, is a question of fact that depends on the circumstances. In Lemon v. Golf Terrace Owners Association, the Supreme Court of Alabama found that the association did act within a reasonable time when it took over three years for a re-roofing project to progress from the planning stage to actual construction. The resident in that case had a serious roof leak in his unit and sued the association for failure to fix it within a reasonable time. The roofs in the project were over sixteen years old, were defectively designed and not subject to a permanent repair. More and more roofs began to deteriorate and leak. The Board appointed a committee to develop a plan to deal with the roof problem and an architect was hired to prepare a design. The Board was constrained in its actions, the court noted, because it then was required by the Condominium Documents to submit the new design for a vote by the co-owners. Once the approval was obtained, the Board then had to secure four bids from roofing contractors, one of which then had to again be submitted for co-owner approval. The court expressly acknowledged that “[t]he delay in the construction appears to have resulted from the fact that the Association had to follow the corporate procedure set out in the [Condominium Documents] for making extensive structural alterations to the roofs… The record affirmatively shows that the Association took [the co-owner’s] problem seriously.” The court then went on to document extensive efforts undertaken by the Association to try to stop the leaks in the co-owner’s unit while awaiting construction of the new roof. Thus, it appears that if a Board diligently pursues any procedures mandated by the Condominium Documents before a repair project can be undertaken, an argument can be made that the Board should not be held responsible for the delay in actually effectuating a repair. If there are no constraints on the Board’s ability to make an immediate action, however, the Board should not unduly hesitate to begin the repair.
If an association acts diligently to address a maintenance and repair issue, and does so in good faith, while being well informed, it will significantly reduce any potential liability for claims that it did not live up to its obligations.
Since 1978, the Michigan Condominium Act has required that an Association’s book and records be audited or reviewed annually by “independent accountants.” For small condominium associations, this requirement may have been ignored or otherwise neglected. The statute was recently amended to require that only associations with revenues in excess of $20,000.00 have their books and records undergo an independent audit or review. The amendment becomes effective January 14, 2014, and mandates that the review be conducted by a certified accountant. However, the law also provides that an audit will not be required if a majority of the association’s members vote to opt out.