BUYER’S REMORSE – SORRY!

As the saying goes; I wish I had a dollar for every client I had over the past many years who came in with a contract seriously asking “How can I get out of this contract”.   If I did get a dollar each time, I might be driving a Lamborghini – they are very nice cars!.  It is a common occurrence for a buyer(s) to sign on for their dream home, time share or whatever he, she or they committed themselves, only to realize that they made a mistake and want “out”.  Perhaps the buyer now believes the house will cost too much, the house is too small or the buyer just got offered a great job in Missoula, Montana and has to leave town right away.  The reasons are endless.

What do you say when a buyer or buyers decides after agreeing to acquire the most expensive purchase in their life that they don’t want to go through with the transaction?  This assumes the seller has performed, contingencies have been met and all requirements of the contract have been met.  Everything is ready to “go” except the buyer.  In a transaction involving the Arizona Association of REALTORS’® contract form if the buyer does not perform the seller must give the buyer a three day written notice to perform or be in default.

The simple answer is that a mere change of one’s perspective or desire to go through with the contract (what is often referred to as buyer’s remorse) is insufficient to get out of a contract.  To not close or go through with the contract would be a breach of the contract leaving the buyer susceptible to losing the down payment, or liable for potentially substantial damages, or susceptible to a suit for specific performance whereby the seller obtains a court order that the buyer must perform on the contract.  Buyer’s remorse is simply not grounds to walk away from a contract.

So, are there defenses which a buyer could rely upon to not perform?  The simple answer is “Yes”.  But, the defenses are very few in number and usually not ones available in the case of true buyer’s remorse.  Those defenses are:

(1) Statute of Frauds – A contract for the sale of real estate must be in writing.   If the contract was not reduced to writing the buyer may be entitled to ignore the agreement to purchase.

(2) Contract is Illegal – Courts will not place themselves in a position to enforce a contract made for an unlawful purpose.  Consequently, if the contract is to pursue an unlawful purpose there are no legal ramifications if a buyer backs out of it.

(3) One of the Parties to the Contract is Incapable of Making the Contract -  Contracts made where one of the parties is incapable of doing so, such as by reason of insanity, will not be enforced by the courts.

(4) Mistake By All Parties – If all parties enter into a contract but the contract does not express what the parties agreed upon then any of the parties may avoid the contract.

(5) Unconscionability/Duress – If the contract was induced by force or may be so one-sided that a court could not in good conscience enforce it, then the victim of the duress or unconscionability could walk from the contract.  Naturally what would constitute unconscionability can be very difficult to define in advance of a judge making that determination after a trial on the issue.

(6) Fraud – If the execution of a contract is obtained through fraud, deceit, or misrepresentation, the contract may be cancelled.

(7) Breach by the Other Party – Where the other party breaches the contract first, the non-breaching party may cancel the contract.  This raises two separate issues which are too long to discuss in detail in this article.  However, what if the other party merely claims they will not perform as agreed upon.  This is called an anticipatory repudiation of the contract.  That requires a separate article to discuss.  The other is what if the other party breaches but it is just a minor breach – like the seller indicating the seller won’t leave the garage clicker on a $400,000.00 sale?  That example is probably not a material breach which would not permit the buyer to cancel.  But the buyer would have a claim for damages.  If it is discovered the seller knew the foundation had structural cracks but covered them up and did not disclose them as required then that could be a material breach.  With a material breach the buyer may walk from the contract.  That is the issue of a minor breach versus a substantial breach of contract.    As one can imagine it may be difficult in a given situation to know which type of breach it is.

As briefly mentioned above, if the buyer does decline to perform and none of the above defenses are available to the buyer, then the seller can sue the buyer for “specific performance” to obtain a court order requiring the buyer to proceed with the contract and pay the contracted for consideration.  This remedy is rarely utilized but, is available.

The seller may demand the earnest money be defaulted to the seller.  This remedy must be provided for in the contract.  If the seller takes the earnest money as damages upon a breach by the buyer, then the seller has agreed to accept the earnest money deposit as its sole remedy and may not also sue for damages.  In some situations the earnest money may be sufficient to cover the seller’s damages and in other situations it may be woefully inadequate.

The other remedy is for the seller to sue for damages which were incurred by reason of buyer’s refusal to perform.  Thus, the seller can sue to recover those losses incurred as a consequence of the buyer’s breach or failure to perform the contract as agreed.

A caveat to real estate agents is that they should be extremely cautious about ever advising a buyer not to perform their contract.  If an agent does so and the seller suffers damages, the seller may sue both the buyer and the buyer’s agent.

Yes, it may be painful in a given situation but once a contract has been finalized a buyer must go through with the contract or there will most likely be financial consequences.  After reading this you may feel that this is elementary advice, but, I again say, Lamborghinis are very nice cars!

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Hoarding – Not just a television show!

Landlords and homeowners associations have long been concerned with health and safety conditions.  So what can they do when a tenant or owner is discovered to be a hoarder?

Hoarding has been defined as including three main characteristics:”(1) the acquisition of, and failure to discard a large number of possessions that appear to be useless or of limited value; (2) living spaces sufficiently cluttered so as to preclude activities for which those spaces were designed; and (3) significant distress or impairment in functioning caused by the hoarding.” This definition distinguished hoarding from the collecting of objects generally considered interesting and valuable. Frost and Hartl (1996).  When the clutter includes excessive numbers of pets without keeping up with cleaning, pest infestations or inability to properly use kitchens or bathrooms, hoarding becomes a health issue.  When the clutter reaches the point that hallways and exits are blocked, hoarding becomes a safety issue.

In May 2013, the American Psychiatric Association declared hoarding a mental disability.  This strengthened the protection for hoarders under the federal Fair Housing Act.  Thus, landlords and homeowners associations must tread delicately when addressing hoarding rather than jumping directly to eviction or assessments.  While the hoarder has the legal obligation to request reasonable accommodation, as many hoarders are secretive about or do not recognize their compulsion, the landlord or homeowners association is encouraged to initiate the discussion of accommodation.  The primary accommodation is a written plan for clean-up with specified reasonable time lines, which the landlord or homeowners association monitors in writing for compliance.  The plan should include future monitoring after the initial clean-up, as hoarders are likely to return to the hoarding behaviors, and may also include the requirement for counseling.   Having the hoarder responsible for his or her own clean-up can result in significant savings for the landlord or association, who otherwise would need to engage HazMat (hazardous materials) teams to clean, as well as the landlord’s costs of eviction and securing a new tenant or the associations costs for assessment and collections.

Despite the recognition of hoarding as a mental disability, Houston City Council passed an ordinance in April 2014, making hoarding illegal in an apartment, townhouse or condominium.  The concept is the initial report that will allow the City to make a welfare check and fine the hoarder per day until clean-up.  Thus the ordinance transfers the responsibility for rectifying the resulting health and safety concerns to the government.  It will only be a matter of time until this law is challenged on the basis of criminalizing a disability.  If the challenge is successful the obligation to deal with the hoarding will remain with the landlords and homeowners associations.

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RULING PROVIDES FOR GREATER FLEXIBILITY IN LIMITED LIABILITY RELATIONSHIPS

Recently, the Arizona Court of Appeals ruled that fiduciary duties are not automatically imputed in limited liability company (“LLC”) relationships, i.e. relationships between LLC members and between members and the company itself.  Instead, the Appellate Court determined that LLC members where free to determine and agree to what extent, if any, the members owe specific duties to one another and/or to the company.  TM2008 Investments, Inc. v. Procon Capital Corp., 323 P.3d 704 (20014).

In its ruling, the Appellate Court reiterated that LLCs are “statutorily-created entities, designed primarily to provide the personal liability protection found in a corporate structure, while allowing the LLC members the state and federal tax benefits generally provided in a partnership setting.”  Id. At 707.  LLCs are created and governed by the Arizona Limited Liability Company Act, A.R.S. §29-601, et. seq.  However, unlike other statutorily created entities, the LLC Act does not automatically create or provide any fiduciary duties which the LLC members owe to one another or to the LLC itself.

The issue the Appellate Court was asked to decide was whether or not, in the absence of specific statutory language, fiduciary duties could be imputed into the LLC relationship; rather, should the LLC members be treated like shareholders of a corporation and therefore no fiduciary duties are owed to one another and/or the company; or, should the members be treated like partners in a partnership and therefore fiduciary duties are owed to the other members and the company.  Id.

Ultimately, the Appellate Court found that the LLC Act allows LLC members to create an operating agreement and, in so doing, delineate in that agreement the duties, if any, the members owe to one another and/or to the company.  Id. At 108; A.R.S. §29-682(B) (“An operating agreement governs relations among the members and the managers…and may contain any provision that is not contrary to law and that relates to…duties or powers of its members…”).

What this ruling provides is greater flexibility and control for LLC members who are free to determine the relationship amongst the members and the company.  It also allows LLC members to consider the nature and purpose of the LLC and thereby decide what duties and obligations, if any, the members owe to one another and/or to the company.

In light of the Appellate Court’s ruling, the importance of having an operating agreement cannot be overstated.  All too often, LLCs are formed with multiple members, each having different ideas, experience and abilities, and yet no formal operating agreement is created amongst the members and company.  This ruling also highlights the significance of careful consideration and balancing between the purpose for which the company was formed, the nature of its business operations, as well as the objectives and interests of the company’s members.

The moral of the story:  when forming multiple member LLCs, always prepare and execute an operating agreement.

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NEW ARIZONA LEGISLATION AFFECTING HOAs

The 2014 Arizona Legislative Session (51st Legislature, First Regular Session) adjourned  and left us with seven bills pertaining to planned communities and condominiums that were signed into law by the Governor. This year 17 bills were introduced that would affect HOA governance.  One of the bills included changes to seven statutes.  For a summary of the new Arizona HOA laws CLICK HERE.

This article reviews the changes in the law that pertain to an association’s powers to control rentals.  The new statute applies to rentals in planned communities and in condominiums and becomes effective on July 27, 2014.  You may remember that a law addressing rentals in Arizona community associations was passed last year with many of the same provisions that will be discussed in this article.   Last year’s rental property law was declared invalid and, therefore, went through the legislative process again with a few changes.

As a threshold, the statute states that an association cannot prohibit a dwelling unit owner  from renting his/her unit unless there is a provision in the Declaration of Covenants, Conditions and Restrictions restricting rentals.  In addition, a landlord/owner must abide by any time period restrictions in the Declaration that pertain to rentals.

The statute provides that a landlord/owner may designate in writing a third party (e.g., a residential property manager) to act as the owner’s agent with respect to all Association matters relating to the rental unit, except the owner’s right to vote and to serve on the Board of Directors.    The association is authorized to deal with the owner’s third party agent on all association matters.

There is a wide variety of requirements that different Arizona homeowners associations have imposed on landlord/owners prior to this new legislation.  Now, an association CAN require its receipt of ONLY the following information:

(a)    Tenant’s name.
(b)    Contact information for adult tenants.
(c)    Duration of lease.
(d)    Vehicle(s) description.
(e)    License plate(s).

An association CANNOT require the landlord to produce any of the following:

(a)    Rental application.
(b)    Credit report.
(c)    Lease agreement.
(d)    Personal information (except for above-enumerated information).

In an age-restricted community, the association can require the production of a government-issued identification document that bears a photograph and confirms that the tenant meets the age restriction requirements.

The association or its managing agent may charge a fee of not more than $25.00 to process the owner’s required disclosures for a new tenant.  (This fee does not apply to lease renewals.) Neither the association nor its managing agent can impose any other fee or requirement on a rental unit that is different from those imposed on an owner-occupied unit.  In addition, the association cannot prohibit absentee owners from serving on the Board, regardless of any provision to the contrary in the Bylaws.

The association or its managing agent cannot charge more than $15.00 as a penalty for incomplete or late information from a landlord/owner.  If the association or managing agent charges a fee, assessment, penalty or other charge that is not authorized by this statute, the requirement to pay the $25.00 fee and to provide information to the association is nullified.

Many associations have recommended or required that landlord/owners use a crime free lease addendum or follow other facets of a crime free program.  The new law states that an association cannot require a tenant to sign a waiver or other document limiting the tenant’s due process rights as a condition of the tenant’s occupancy of the rental unit.  However, the law also states that there is no prohibition on the landlord/owner requiring a crime free lease addendum.

In addition, an association is not prohibited from enforcing sex offender occupancy restrictions in CC&Rs if the registered sex offender is classified as Level 2 or Level 3. (Before an association board considers recommending to the members such a restriction, consult with your Association’s attorney.)  And, finally, the new law adds community associations to the list of entities that can bring an action in a County superior court against the owner, owner’s managing agent or any other party responsible for the property to abate and prevent a “nuisance,” which is defined in A.R.S. §12-991 as “residential property that is regularly used in the commission of a crime.”  This gives a homeowners association another tool to deal with a rental unit that may be causing disruption in the community.

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CAN YOU SUE YOUR SUBCONTRACTOR?

Here is a scenario.  You hire a general contractor to build your dream house.  You move in and are all ready to enjoy chocolate bon bons and drink your margarita while you float on your air mattress in the pool.  Unfortunately, your vision is rudely interrupted with the reality that the plumbing work in your newly constructed home was installed in a defective manner causing a very damaging flood destroying carpets, walls and your wallet.  So, let’s sue the *&^%# plumber – right?  Well, not so fast.  But, you want to sue the plumber for breach of the implied warranty of workmanship and habitability.  He did you wrong.  Such a claim is based on a breach of contract for not doing the job correctly.  So, shouldn’t you have a right to sue the plumber for the shoddy workmanship?  “No”, said the Court of Appeals.

In November 2013 the Arizona Court of Appeals, Division Two, located in Tucson came down with a decision [Yanni v Tucker] that would preclude such a suit The case was decided utilizing the concept of ‘privity’.  Privity can be defined as being a legally recognized relationship between two, or more, parties such as between two persons or entities who have entered into a contract together.  In our example above, you hired a general contractor who was responsible for the oversight of all of the construction of your house.  Your contractor hired a licensed plumber to do the plumbing.  The law recognizes that there is ‘privity’ between you and your general contractor since you directly contracted with the general contractor.  But there is not privity between you and the plumber since the contractor, and not you, entered into a separate contract with the plumber to which you, the home owner, were not a party.

In the case of Yanni v Tucker Plumbing those were essentially the facts.  The homeowner, Yanni, sued the plumber.  The trial court dismissed the plumber and the homeowner appealed.  The Court of Appeals agreed with the trial judge and threw out Yanni’s claim against the plumber.  The rationale of the Court was that there was a lack of contractual privity between the homeowner and the plumber.  The claim was for a breach of implied warranty (a contractual claim) of fitness and habitability.  The court indicated that the homeowner could have sued the general contractor for the faulty work since the general is responsible for the work of the subcontractors she or he hires and there is privity between those parties.  Then, the general contractor can sue the plumber to be reimbursed for the damages paid since there is contractual privity between the general contractor and the plumber.  As you can see the existence (or non- existence) of privity is an important concept in contract law.

There can be a very practical problem with this determination by the Court of Appeals.  What if the general contractor has no funds or assets for the homeowner to collect from?  Worse yet, what if the general contractor goes bankrupt?  One solution for the homeowner in such a situation would be to pursue collection of the homeowner’s damages from the Arizona Registrar of Contractors monetary recovery fund that reimburses persons who are damaged by contractors provided certain criteria have first been met.  However, since, even if the criteria is met to receive damages from the recovery fund there is a monetary limitations on how much the homeowner might be able to collect by making a claim on the Arizona Registrar of Contractor’s recovery fund.  Thus, that may not be a perfect solution.

The Court of Appeals noted that Arizona Courts have made a few exceptions concerning the privity rule.  One exception the courts carved out is that a subsequent homebuyer, despite lacking contractual privity with the general contractor, can sue the homebuilder for breach of implied warranty of fitness.

It is counterintuitive that a homeowner cannot sue the party which actually performed the faulty workmanship.  But now you know – that’s the law.

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POTENTIAL NEW COURT FOR BUSINESS CASES IN ARIZONA

Specialty courts in Arizona and elsewhere are nothing new.  At the Superior Court level in Arizona there are specific judges assigned solely to handle family law cases, criminal cases, juvenile offenses, tax matters, and probate related matters.  Soon, Arizona may have a court dedicated solely to handling certain types of business related cases.

Arizona State Supreme Court Chief Justice Rebecca White Berch initiated this idea.  She indicated that commercial cases often consume a lot of a court’s time and can be very expensive for the court and the parties.  Chief Justice Berch appointed a committee to investigate what a business court would look like and what it could accomplish in Arizona.  The current vision for this court would be that it would handle cases where one business is suing another business.  It is possible that the first such court would be in Phoenix and would be experimental in nature.

It was pointed out by the chairman of the new committee investigating the creation of such a court, that often businesses have mutual interests such as minimizing expenses and keeping expenses in proportion to the matters at issue as well as getting all the matters resolved both fairly and expeditiously.

The chairman of the committee pointed out that the court would be familiar with the issues surrounding discovery in business cases where often times the information requested can be massive –terabytes of data, not just file cabinets.

It was pointed out that there is certainly expense involved in creating such a court, such as hiring a judge and staff and providing facilities.  However, it was also noted that the costs of such a court can be outweighed by the net benefit to the public by keeping such cases out of the regular civil system and making the process faster for all concerned.

The recommendations of the committee investigating this type of court are due to the Arizona Supreme Court in December 2014.  This could be the start of a new era for business law in Arizona.  It could help change the old adage that the wheels of justice grind slowly.  We’ll have to wait and see about that.

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Another adventure with Dodd-Frank! TILA-RESPA Integrated Disclosure Rule

 (Truth in Lending Act – Real Estate Settlement Procedures Act)

For more than 30 years, TILA and RESPA have each required lenders to provide a specific form to consumers applying for a mortgage loan, and each had different forms of disclosure for consumers at or before closing.  The TILA and RESPA forms have long been acknowledged as inconsistent in language and overlapping in content.  The Dodd-Frank Act required integration of those forms.

The new forms have gone through the rule making process and have now been approved.  The Loan Estimate, disclosing estimated costs, features and risks of the loan, is required no later than the third business day after submission of a loan application.  The Closing Disclosure, disclosing final costs of the loan, is required at least three business days before closing.

The required use of these forms applies to consumer loans made by creditors who issue more than five loans per year.  It does not apply to home equity lines of credit, reverse mortgages, or mobile homes.

The new forms are ready and their use is required as of August 1, 2015.  However, the use of the old forms is required until then and the new forms will not be accepted before then.

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Signs on Aging Loved One May Need Additional Assistant

Courtesy of Wells Fargo Advisors

Helping an aging loved one grow older with dignity and respect is important to all of us. Preparing for the eventuality that he or she will no longer be able live alone is equally vital. Use the questions below to assess your relative’s situation and determine what help he or she needs. (This is not meant to be a comprehensive listing; you may uncover other concerns that indicate assistance is needed.)

Perhaps these questions will prompt a conversation early — before a crisis occurs — so you and your loved one can evaluate and prepare potential strategies that satisfy both your needs.

Overall

How well is your relative physically? Are sleeping and eating habits regular? Are medications being taken as prescribed? Is there a list of medications indicating when they should be administered?

Has the individual met with a doctor and dentist in the past 12 months for preventive care purposes, even if there have not been any specific health issues?

How is the individual’s mood and mental capacity?

Is the individual continuing with social activities and regular contact with family members, friends and associates?

Are there friends, neighbors or relatives who regularly check on the individual?

Have the grooming, bathing and dressing behaviors changed? Can he or she maintain his or her personal appearance and hygiene?

How is the individual’s mobility? Can he or she get up and down from a sitting position and move around the house easily? Is the individual still driving? If not, does he or she have access to public transportation, budget for cabs, or assistance from friends or neighbors for transportation?

Housing

Is the house clean and free of obstacles that could cause a fall? (Ask your Financial Advisor for a copy of our report, “Home Safety Considerations for the Elderly.”)

Can the individual maintain the home’s exterior and lawn or arrange for outdoor maintenance?

Is the home becoming too large for the individual? Are laundry facilities still accessible? (Difficulty climbing stairs could lead to serious injury.)

Does the individual need light, in-home care for cleaning, laundry or meal preparation? Is there a need for more extensive in-home help?

Should you consider a full-time or live-in professional caregiver?

Are you considering assisted-living or skilled-nursing facilities? (Ask your Financial Advisor for a copy of our “Nursing Home Checklist” to help evaluate your alternatives.)

Financial/legal

Is there complete and accurate documentation of personal records and legal documents (will, power of attorney, living will, trust, etc.) along with assets and liabilities? (To compile a comprehensive listing, ask your Financial Advisor for our estate planning organizer, “Your Personal Information.”)

Are bills being paid in a timely manner?

Is mail being opened and dealt with appropriately?

Are there any unusual cash disbursements – checks written or money missing that can’t be explained? (If you need help initiating conversations regarding money, ask your Financial Advisor for a copy of “Talking With Loved Ones About Money” or see familyfinancialtalk.com.)

Is the individual aware of and watchful for potential scams or schemes to defraud him or her? Is a family member or friend watching for signs of potential elder financial abuse? (Ask your Financial Advisor for a copy of our report, “Guide to Financial Protection for Older Investors.”)

Will family members or other relatives be requested or expected to provide some financial assistance for the individual’s care?

You’re not alone

You don’t have to face these issues by yourself. In addition to your Financial Advisor, you can access these and many other resources:

Your state’s veteran’s services office at va.gov/statedva.htm for veteran’s benefits, including long-term care

Local community agencies at eldercare.gov

Family Caregiver Alliance at caregiver.org

An elder law attorney at naela.org

Social Security and Medicare benefits at ssa.gov

American Society on Aging at asaging.org for a wide variety of educational and support group resources

The Administration on Aging Programs section of the U.S. Administration of Aging at aoa.gov for resources to assist with home care, community-based care, health and wellness programs, and elder-rights protection

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DON’T MESS WITH NAR!

Over the years many persons including licensed real estate agents and brokers have sought to incorporate the word “REALTOR” into their domain name.  The National Association of Realtors® (NAR) is very protective of its trademarked term of “REALTOR”.

Recently a couple registered various domain names containing the term “REALTOR” in the name.  Some examples were <realtoreview.com>, <realtorranking.net> and <realtorreportcard.net>.  All of the subject domain names in question were in turn linked to the registrants’ website that was called “REALTOR REVIEW®.”

NAR has a number of trademark registrations related to the REALTOR mark (the blue square with a gold “R” inside of it) and owns various domain names such as <realtor.com> and <realtor.org>.  In turn, NAR grants a limited license to its members to use the REALTOR® mark subject to certain restrictions.

NAR, upon learning of the attempted registration of the poaching domain names filed an application with the United States Patent & Trademark Office (USPTO) seeking denial of the Registrants’ application.  NAR also filed a complaint with the World Intellectual Property Organization (WIPO) claiming Registrants’ application was submitted in bad faith and sought the right to have the Registrants’ proposed names turned over to NAR as its property.

The Internet Corporation for Assigned names and Numbers (ICANN) is responsible for the management of certain domain names such as .com and .org.  ICANN appointed WIPO as the body to resolve disputes such as the one in question.

WIPO ruled that NAR had met all the requirements for the transfer of the domain names and ordered the disputed trade names be turned over to NAR.  NAR sufficiently demonstrated that the Registrants did not have a legitimate right or interest to use the domain names.  They were not members of NAR and did not have a license to use the term REALTOR.  They also created a false impression by including the “®” symbol on their website page when in fact USPTO had previously rejected their attempt to register the mark.  Therefore it ruled the Registrants had acted in bad faith.  

As a result the panel ordered that all sixteen (16) domain names in dispute be turned over to NAR.  The moral is “don’t abuse the word REALTOR”.  NAR is very, very protective of its valuable property right in that word and mark.

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Funding for Maintenance Projects in Homeowners Associations

Many homeowners association Boards find themselves in the difficult position of needing a large sum of money for maintenance projects that can no longer be deferred; such as roof replacement, exterior painting, or street replacement.  Ideally, the Association has been building reserves to pay for such projects.  However, there is no law in Arizona that addresses the obligation to fund reserves or the amount of reserves that should be accumulated.   One strategy that many Boards use for planning purposes is to commission a reserve study.   Reserve studies are an analysis of all of the Association maintenance obligations with a projection of needed funds over the ensuing 10 years or more.  This analysis can be done by a professional or by an internal long range planning budget if the maintenance obligations are few and uncomplicated.
If there are not adequate reserves for needed maintenance and replacement of common areas, the Board has three options:

  1. to defer or stagger the maintenance projects while increasing the regular assessment to accumulate funds;
  2. to levy a special assessment;
  3. to borrow the needed funding.

Option #1 may not be feasible if there already has been deferring of maintenance and there are immediate needs for major maintenance, like roof replacement or street repair.  As for special assessments, the Board must follow the procedure in the Declaration of Covenants, Conditions and Restrictions (CC&Rs) and, hopefully, get the Association members to approve the assessment and to pay the assessment when due.  Many CC&Rs have a provision requiring the special assessment to be levied and spent in the same fiscal year.  Another common provision is to require a quorum of 60% for the member vote on special assessments, with approval needed from 2/3rds of the participating voters.  If the quorum is not met, another meeting can be held where the quorum will be only 30% of the members.  In any event, special assessments are never welcome and often bring normally inattentive members to meetings to discover why the special assessment is required and to encourage (or demand) avoiding or minimizing the assessment.

If the members will not pass a special assessment, the Board can consider a bank loan to fund the needed repair or improvement projects.   Generally, the collateral for the loan will be an assignment of the Association’s right to collect assessments.    From a legal standpoint, there are several considerations for the Board to make.

The first inquiry for the Board is whether or not the members’ approval is needed before a loan can be procured.   There may be a provision in the CC&Rs or Bylaws that requires member approval before the Board can borrow money.   Repayment of the loan may require an increase in regular assessments, which may require the approval of the members.  And, if the community is a condominium, Section 33-1242(A)(14) of the Arizona Condominium Act specifically authorizes the Association to assign its right to future income, including the right to receive assessments from its members.  However, this statute states that this assignment for collateral can be made “only to the extent the [CC&Rs] expressly provides. “  If the CC&Rs do not have this authorization, an amendment approved by the members will be required to proceed with a loan.  It is more likely that such an amendment will be approved by the members if it states that a member vote is required before the assignment can be made.

If an association is not a condominium and the Board has no constraints on its proceeding to commit to a loan, it is still important to inform the members of the prospective loan and how it will be repaid before proceeding.   Oftentimes, a Board will have discussed the prospective loan in several Board meetings and in newsletters.   Nevertheless, since many members don’t attend meetings or pay a lot of attention to the operations of their homeowners association, it is important for the Board to send a letter or offer a specific newsletter article or website posting with full information about the loan and maintenance plan, even if member approval is not required for any facet of the loan transaction.

In conclusion, the worst case scenario would be critical maintenance needs and members’ refusal to increase the annual assessment, approve a special assessment and/or approve the loan or collateralization for the loan.    At this point, the Association’s Board would have to file a court action to seek a Judge’s order for an assessment levy or loan approval.   In my 26 years of HOA legal representation, I have never seen a funding issue get to this point and hopefully I never will!

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