4 Ways Ignoring Experts Are Detrimental to HOA Boards
We're thinking that failing to seek experts' opinions before the Board issues its decisions (attorneys, CPAs, landscapers) could prove quite the bad idea. Read on for examples in which doing so would inure to the HOA's detriment -- and to the Board members personally.
Breach of Fiduciary Duty. The law charges members of the HOA's governing Board with the obligation to care and protect the homeowners' interest in the community's assets and finances. Part of this duty requires the members to seek expert opinions on topics before they render their decisions. The law refers to this fiduciary duty as the duty to make reasonable inquiries. In practical terms, this means that the Board and its members must investigate each situation before they render a decision. Once they render a decision, they have a fiduciary duty to act in "a non-negligent and prudent manner". Failure to do either will result in a breach of fiduciary duty with negative impacts to both the HOA, the HOA Board and to its individual Board members. The breach of a fiduciary duty can subject the Board members to individual, personal liability because of the extremely high standard of conduct for fiduciaries.
Determining Reserve Funds. There's a landmark case that instructs Board members on the issue of failure to determine reserve funds for an HOA. The case is Ravens Cove Townhomes, Inc. v. Knuppe Development Co. (1981) 114 Cal.App.3d 783 ("Raven"), in which the Plaintiffs accused the Board (controlled by the developer) of failure to create and maintain reserve funds adequate to protect the HOA. The Court determined that the creation and maintenance of adequate reserve funds fell within the fiduciary duties of the Board and its members. In Raven, the Board members were found in breach of the fiduciary duty to conduct good management of the HOA assets. The case stands for the rule that courts will hold Board members individually liable if they mismanage or fail to manage an HOA's business affairs. Seeking a CPA's recommendations on adequate reserve funds for the particular HOA is one way a Board can carry out its duty to inquire with respect to business affairs.
Adopting Use Restrictions. A homeowner who buys into an HOA subjects himself to various restrictions on the way he can use his property. As one example, many boards adopt restrictions on whether or not a homeowner can have pets, what kind and size the HOA permits as well as the number of them. In adopting such rules, the Board must see that the rules and regulations bear a rational relation to protecting, preserving, or operating the HOA as outlined in the governing documents. The Board cannot enforce rules that exceed its authority in the governing documents or do not bear a rational relation to the Board's fiduciary duty toward the community assets and homeowners. Seeking expert opinions from the HOA attorney and from the a professional HOA management company regarding best practices in the community management area is another way to exercise the duty to inquire and avoid the pitfalls.
Preserving, Maintaining, and Repairing the Community's Property. One of the primary duties of an HOA Board is that of entering into contracts with independent contractors who carry out the Board's duty to preserve, maintain, and repair the HOA property.
- To pay for such services, the Board must establish HOA fee assessments from the owners and have the business policies/procedures to pay outside help.
- As part of the Board's financial management responsibility, the Board must adopt an HOA fee that is adequate to maintain the assets. The Board must also keep accurate records. Here again a CPA's expertise is invaluable in determining the amount of the HOA assessment, special assessments when necessary, and the everyday business records in terms of regular books and retention policies.
- When it comes to maintaining the park-like setting of the community property, the Boards often hire landscapers to do the actual work. In addition, the Board may seek the landscapers' expertise in the types of trees that would work best in the location -- or an arborist's expertise to help determine which trees should come down and the types of bushes and flowers that work best in the area to help in land conservation.