Sooner or later every homeowners association is faced with the question of whether or not to amend its legal documents. This process can be long and confusing, leaving many boards stressed out and frustrated. To help shed light on this topic (and hopefully relieve some of your stress), we've gathered a list of our members' most frequently asked questions and sat down with the experts to find the answers.
Effects of Outdated Governing Documents
Are associations legally required to amend their documents?
No, but -
- Directors can be misled as to their duties and responsibilities by relying on outdated provisions.
- The legal documents may not accurately set forth the legal requirements for preparation and distribution of financial reports.
- The legal documents may provide certain time limits for notices of meetings that may no longer be legally correct because of statutory changes.
- Members may be misled into believing the documents accurately' describe members’ rights, legal procedures, etc.
- Documents may fail to take advantage of liberalized rules regarding meetings, participation by members, telephone meetings, etc.
What is the effect if HOA documents conflict with new legislation or new case law?
In cases of conflict between the association legal documents and the law (statutory or case law), the law will, in most cases, prevail.
The Process of Amending Governing Documents
What documents will the attorney need to review in order to update the association legal documents?
In addition to the three basic documents (Articles of Incorporation, Bylaws, and Covenants, Conditions and Restrictions), the attorney should also review the subdivision map creating the project and, in the case of a condominium, the condominium plan. The attorney should also be given a current preliminary title report showing how title is held to the common area, and what the title company indicates is the status of title to a lot or unit in the project. In some cases, particularly in projects that are 15 or 20 years old, mistakes may have been made that were never corrected. The ideal time to correct the old records is when the association legal documents are being given their first major overhaul. There may be inconsistencies between the subdivision map and the condominium plan, on one hand, and the Declaration of Covenants, Conditions and Restrictions, on the other. There may also be inconsistencies between the project legal documents and the grant deeds by which title was conveyed to the original purchasers of units or lots; this may require amendments to the condominium plan, and occasionally amendments may be required to the subdivision map.
What documents should be amended?
The basic HOA legal documents that may need amending are:
- Articles of Incorporation
- Declaration of Covenants, Conditions, and Restrictions (CC&Rs)
Why should HOA documents be amended?
- To eliminate obsolete provisions.
- To eliminate provisions no longer observed or enforced.
- To eliminate provisions that conflict with current laws.
- To eliminate provisions required by the Department of Real Estate in a start-up project that are no longer needed.
- To eliminate developer privileges no longer being used, such as two-class voting or exemption from use restrictions.
- To improve poorly drafted documents by clarifying ambiguous provisions.
- To tailor documents to fit the living experience of owner/members.
- To provide for changes in technology (satellite dishes, home office use, etc.).
- To make documents more "user friendly"—better organization, add a table of contents and descriptive paragraph headings, etc.
- To eliminate or correct mistakes and errors.
How often should association documents be amended?
Association documents should be updated approximately every 5 years to incorporate all the changes in statutory and case law.
Is it better to record amendments to existing documents or revise the entire document?
If the legal documents are reasonably up-to-date and in fairly good shape, only one or two sections may need to be amended; in such cases it is preferable to attach some simple amendments rather than to create a whole new document. However, if the documents are in need of multiple amendments, or are extremely outdated (for example, over 10 years old), it is far better to start with a brand new up-to-date set of documents. It is more efficient, and therefore less expensive, for an experienced attorney to provide an up-to-date modern format for the project legal documents, tailored to fit the project, than to try to review each and every paragraph of existing documents and decide which paragraphs to keep, delete or modify.
What is grandfathering?
An association may wish to amend its documents, but be reluctant to impose new restrictions on current members. For example, an association may wish to reduce the number of pets allowed to be kept by one Member, but will allow a member who presently has more than the new lower number of pets to keep his or her pets until the member moves out, or until the pets die. A "grandfather" clause is used to exempt current owners from a particular rule, for a specified period of time.
How long should it take to amend HOA documents?
Two to four weeks is a reasonable time for an attorney to produce an acceptable first draft of updated and amended documents.
Is it necessary to retain counsel to amend, or can the members do it by themselves?
The analysis of HOA documents to determine whether or not amendments are desirable, and, if so, how the documents should be amended, requires a degree of expertise which can only be provided by a legal specialist, that is, an attorney who specializes in the drafting of HOA documents. Unless an association has such an attorney as a member, and that attorney is willing to contribute his or her time to amend the documents, the association should retain legal counsel for that purpose.
Factors that Contribute to the Cost of Amending
Can an association save money by creating a first draft in-house?
Attempts by boards or committees appointed by boards to save on attorneys’ fees by creating an initial draft of the documents seldom, if ever, result in any savings. An experienced association attorney can quickly review a set of documents that was drafted some years ago and determine whether they are salvageable or should be scrapped in favor of a more modern format. However, when presented with a draft that purports to update the project legal documents, the attorney is forced to read every sentence very carefully and to compare it with his own checklist of current legal requirements. This process can be quite time-consuming.
If an association wants to be helpful in providing its attorney with some suggestions or amendments, it should provide a list of points to cover, such as the number of directors, the length of the term of office, the number of pets, the number of vehicles, etc. In other words, give the attorney the basic facts, or the basic principles, but do not try to draft the actual language. That is what you are paying the lawyer to do.
What should it cost to amend association documents?
The cost to amend can vary widely, depending upon the type of common interest development and the age and condition of the legal documents. The fees can be as low as $500 for a simple amendment of one or two provisions, and anywhere from $5000 or higher for a complete updated set of the three basic legal documents.
What is better—a fixed fee or an hourly rate?
The advantage of a fixed fee is that the association can budget for that amount, and the membership knows what to expect. But fixed fees do not always result in lower fees because attorneys tend to set fixed fees based upon their estimates of how much time it will take at their hourly rate. Most attorneys will include some "cushion" in the fixed fee to protect themselves against unanticipated variables.
Beware of fixed fees which are set unrealistically low, because they may be "loss leaders" intended just to get the association's business, with the expectation that other business will follow for which higher rates can be charged. Like everything else in life, the rule is: “You get what you pay for." The hourly rate is not always determinative of how much the job will cost. The "bottom line" should be the total fee charged, regardless of hourly rate, but equally important is the quality of the job and the efficiency of the service.
What variables determine the cost of amending project documents?
The following are examples of variables that can affect the total cost of amending legal documents:
- Repeated revisions.
- Multiple additions.
- "Wordsmithing" efforts by the directors, committees or members.
- Asking an attorney to explain in writing the reason for a particular amendment or amendments.
- Asking an attorney to appear at a question and answer session.
- Asking an attorney to help the board "sell" the amendments to the membership.
- Asking an attorney to write a detailed summary of the amendments to the members.
- Asking the attorney to draft a letter to the members, or a ballot, proxy, notice of meeting to vote on amendments, etc.
- Misjudging the members' desire and willingness to have the project documents amended.
Boards would be well advised to seek member approval before committing association funds to the amendment process. Ideally, the association will get the money up front, that is, have enough funds on hand, either through a special assessment or funds "earmarked" for the purpose of amending the documents, before authorizing an attorney to start drafting.
Board Members' Role
What happens after the revised documents are approved by the Board?
The current documents will indicate what vote is required for approval of amendments. Some older documents require a super majority vote such as 75 percent of the total membership. As part of the amendment process, that requirement should be changed to a simple majority vote. If the association can get a simple majority to vote for an amendment, but not the higher percentages, there is a statutory procedure for lowering the voting requirements. Certain lender protection provisions may require a two-thirds or three-quarter vote of the members. There may also be provisions requiring that certain amendments be approved by the city or county in which the project is located. There are some basic legal rights that cannot be changed by amendment without 100 percent approval. Current law requires amendments of the governing documents to be approved by secret written ballot.
The amendment can be executed by the President and Secretary of the association, who certify and declare, under penalty of perjury, that the requisite number of members have voted to approve the amendment, and cause it to be recorded (in the case of the Declaration), filed in Sacramento (in the case of the Articles of Incorporation), or simply adopted (in the case of the Bylaws).
What can be done to obtain member support for amended documents?
To enhance the chances of a favorable response from the membership to proposed amendments, appoint a committee, broadly based, to solicit input and support from members.
What should be done with the amended documents?
The amended Declaration, with the recorder’s stamp on it, should be kept with the official records of the association. The certified amended Articles of Incorporation should also be kept in the association's minute book. The original executed copy of the amended Bylaws should also be kept in the association's minute book. Copies of the documents should be provided to all of the members. Only the Declaration must be recorded in the county. The Articles and the Bylaws do not need to be recorded.
The old documents should be kept in the association's archives for historical reference purposes.
John Paul Hanna is a principal in the law firm of Hanna and Van Atta and a member of the ECHO Legal Resource Panel.