Amend Your Way to Efficiency and Cost Savings – Article by David E. Hickey, ESQ

Article by David E Hickey, ESQ

“Reprinted with permission from California Association of Community Managers, Inc. (CACM) The Law Journal (Copyright, 2011, CACM)”

Amendments to governing documents can increase the cost effectiveness of an association’s operations. Amendments that can create greater efficiency and cost savings are numerous, but are often unique to each individual set of CC&Rs. However, in recent times, a handful of beneficial amendments have emerged as somewhat universal in their potential applicability and benefit. They include:   

Insurance Provision Amendments

A review of the insurance provisions of the CC&Rs with the association’s insurance professionals can often reveal a number of amendments that would allow associations to benefit from modern insurance concepts while still providing reasonable coverage for the association. The most common is an amendment providing that a condominium association may reduce its coverage to a “bare walls” type policy. A “bare walls” type policy, in general terms, provides coverage for damage to the common area and extends into the units only to the interior “bare” surface of the units’ drywall (in other words, it excludes coverage for unit interior fixtures, floor and wall coverings, or other personal property).

 Such an amendment shifts the responsibility to insure unit contents to the homeowner, who can typically obtain that coverage at a lesser cost. When considering such an amendment, particular attention should be given to the applicable rules, regulations or guidelines of FNMA, GNMA and FHLMC, as some restrictions related to “bare walls” policies may apply. Other potential insurance-related amendments include provisions that clarify the allocation of insurance deductibles and provisions that require the homeowners to carry their own policies covering interior damage and damage caused to other property. Such amendments often reduce association costs by reducing the frequency of claims and litigation.

Reallocation of Maintenance Responsibility

Consider amendments that shift repair and replacement responsibilities between the association and the owners. For example, the CC&Rs could be amended to allocate the repair responsibility for plumbing or other utility components exclusively serving a particular unit to the individual owner, even if those components are located outside the unit or lot. Even small changes, like shifting the painting responsibility for the interior of a patio fence, can significantly impact reserve allocations.

Elimination of Mandated Meeting Dates and Times

Consider removing mandated meeting dates and times to allow the board more flexibility in the scheduling of meetings, particularly if meeting every other month will still allow the board to perform its required functions. Also consider reducing the quorum requirement for an adjourned membership meeting, or even a reduction of the initial quorum requirement, to avoid the costs of repeated mailings and related administrative expenses.

Amend Interest and Late Fee Provisions

If the governing documents do not already do so, consider an amendment that permits the association to seek the maximum allowable interest rates and late charges for delinquent assessments. 

 Increase the Scope of Self-Help Remedies

Consider adding or expanding the association’s right to self-help remedies, which may reduce legal costs associated with obtaining compliance if the violation can be quickly and efficiently remedied by the association. A common example of a self-help remedy clause permits the association to perform maintenance on an unkempt home or lot.  

Clarify Responsibility for Resulting Damage

A significant potential amendment would be the addition of provisions that clearly delineate responsibility for repairs after accidental damage has occurred (such as a plumbing leak). Limiting the association’s responsibility for damage to unit interiors can result in considerable savings for some condominium associations.

 Once decisions have been made as to the amendments to propose, the specific proposed amendment language must be drafted such that it both complies with legal requirements and achieves the board’s desired efficiency (or other) goals. Thereafter, the proposed amendments are distributed to the membership for approval, using the secret ballot process described in Civil Code §1363.03 et seq. At the same time, it is typical, and often beneficial, to distribute materials explaining the purpose of the amendment(s) and explaining why it is believed that they will benefit each homeowner. Typically, legal counsel assists in preparing these documents. 

 In the amendment process, it is important to determine the required membership approval for each amendment. Some governing documents require heightened approval requirements for certain provisions. If a “super majority” (more than 50%) approval is required for an amendment and an association has difficulty in obtaining that required percentage, the California Civil Code provides a mechanism for the association to petition the Superior Court, requesting that the Court reduce the percentage of votes required for approval. In order to file such petition, the board must (prior to the petition) receive greater than 50% approval, but less than the required “super majority.”

 It is also important to determine whether the approval of mortgagees is required for the specific amendments contemplated. Further, if applicable, the amendment(s) may also be required to be consistent with the rules, regulations or guidelines of the programs administered by FNMA, GNMA and FHLMC. Finally, some governing documents may also require that the city, county or another governmental entity similarly approve the proposed amendment(s).

 Amending the governing documents to allow for greater efficiency in the association’s operations can provide for a long-term solution for both the association and the membership. Amending the governing documents can also provide greater enforcement strength should the application of the amended language be challenged in court. Although preparing and presenting the amendments to the membership represents a short-term cost, the long-term savings they can create for the association can be quite significant.

– To learn more about David E Hickey’s services, click here

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