By Jeffrey M. Bellamy, Esq.
Provisions of a new law governing homeowners associations should not be plowed to the side like last winter’s snowfall. Builders and developers (and occasionally their counsel) can at times discount the importance of their HOA governing documents by recycling forms drafted 20 years ago or using documents obtained from colleagues or competitors that were not even drafted with them in mind.
Not now. On July 1, 2009, a new law went into effect changing how homeowner’s associations (HOAs) operate. Signed into law on May 13, 2009, the new provisions of House Bill 1071 will require all homeowner’s association documents to be written and enforced in compliance with the new law. This will impact residential developments that have not yet incorporated or otherwise adopted governing documents by July 1, 2009, and all new associations created thereafter.
While many changes only apply to newly created associations, an existing association may elect to be covered by the new provisions by amending its governing documents. Other changes, though, will apply to all associations regardless of when created.
Application of the New Law:
The first step to understanding these changes is to understand how the new law is applied. While the July 1, 2009, date is relevant, the act covers any organized entity, incorporated or not, that governs or otherwise manages individually owned residential dwellings. Thus, the act would cover a single family residential development and condominiums, too. However, where the statute provides that the new law’s application is distinctly linked to the subdivision of property, those provisions do apply to condominiums. The reason for this is that Indiana’s planning and zoning statutes specifically provide that condominiums are not subdivisions and cannot be governed by local subdivision control ordinances. Therefore, when dealing with a condominium development regime read the statute carefully to determine if certain provisions are based upon the subdivision of property or not; this will help to determine if those provisions apply to condominiums.
Provisions that Apply to Lien Assessments for All Subdivided Associations:
In 2007, a bill was passed by the General Assembly that curtailed an association’s ability to enforce its lien rights for collection of delinquent assessments. While not fully restoring the potency of an association’s ability to collect delinquent assessments, the new Act makes several improvements that make lien enforcement viable.
The prior law caused HOA liens to expire after one year, thereby forcing associations to either lose their secured claims against the real estate liened or to initiate foreclosure litigation sooner than preferred. The new bill creates some balance by prohibiting an HOA from foreclosing its lien within the first year of being filed, but allows the lien to remain in force for five years rather than expire after one year. The prior law required an HOA to foreclose on its lien within 30 days of being notified by the property owner to do so; the HOA now has one year from the date of that notice to initiate foreclosure. The language of the lien statute is applicable to subdivided land; therefore, it would not alter the lien provisions contained in the condominium statute.
Finally, the new law requires an HOA’s board of directors or other governing body to address an item of business at a regularly scheduled meeting, or a special meeting if one is not scheduled, if the Board is petitioned by at least 10 percent of the members of the association. This provision duplicates requirements of the Indiana Non-Profit Corporation Act of 1981, but now also applies to organized, but unincorporated, associations.
Provisions Applying to Governance of Associations Formed After July 1, 2009:
Several provisions of the new law relating to the operation of associations only apply to new associations formed after July 1, 2009, or existing associations that elect to opt into the law. Opting in requires a majority vote of the members of the association, unless amending the HOA’s existing bylaws require a greater than majority vote. It is unclear from the language of the law if an existing association that opts in retains the ability to opt out later. As a result, an existing association should tread cautiously down the path of opting into the new law. These provisions, except for a contract approval provision, are not linked to the subdivision of land and therefore would include condominiums as well as subdivided developments.
A new association is required to maintain a current roster of all members of the HOA, including the members’ mailing addresses, legal description of a members’ property and e-mail addresses or fax numbers of its members. E-mail addresses and fax numbers may be kept only with the consent of the member.
This roster must be made available to any member upon request and can be used only for association-related business. However, maintaining member privacy once the roster is distributed is not discussed in the statute.
The law requires an HOA to prepare an annual budget to be approved by a quorum of the members. Either the proposed budget or a notice that the proposed budget is available must be sent to the members. In the absence of a quorum, an association’s board of directors may approve an interim budget not to exceed 110 percent of the last approved budget, but, only if the association’s governing document permit such an interim budget.
If the governing documents do not permit an increased interim budget, then the last approved budget can be used as an interim budget until a quorum approves a budget. Further, if a proposed budget results in a change in member assessments, that change must be specifically noted in the budget notice.
Regarding entering new contracts or special assessments for projects, an association is not permitted to enter into any contract, regardless of the budget process, that increases a member’s assessments by more than $500 per year without first holding two meetings regarding the contract. Also, the contract must be approved by at least two-thirds of the members of the association, regardless of the quorum provisions contained in the governing documents.
Likewise, an association may not borrow more than $5,000 or 10 percent of the last approved budget, whichever is greater, unless the debt is approved by a majority of the members. However, this section links the voting rights for such an approval to subdivided property giving each lot or unit one vote. This would not alter condominium voting procedures, as some condominium arrangements do not provide for ‘one unit = one vote’ but set voting, assessments and other rights and responsibilities based on the size of the living unit at issue, thus giving proportionate rights to the owners based on the size of their condominiums. Other than this particular voting provision, condominiums formed after July 1, 2009, would need to conform to all the other new provisions noted.
An association may not suspend the voting rights of any members for non-payment of assessments unless the governing documents provide for such suspension and the member’s assessments are delinquent for more than six months. This provision does not prohibit denying a member access to common amenities, such as association-owned pools or parks, if a member’s assessments are delinquent.
Finally, the act states that “the governing documents must include grievance resolution procedures that apply to all members of the homeowner’s association and the board.” No further guidance is given to what an acceptable grievance resolution procedure is and in what context such a procedure must be employed. By contrast, the General Assembly used the term “grievance resolution procedure” rather than the more legally meaningful “alternative dispute resolution,” which would encompass the realm of mediation and arbitration.
Given the vagueness of the language and until further clarified by either the General Assembly or a court, a grievance resolution procedure could be crafted that simply gives an owner the opportunity to petition the association’s board of directors on an issue or complaint without going so far as to engage the special meeting provisions required upon a 10 percent member petition, referenced above.
Penalties for Non-Compliance:
The new act does not contain any stated penalties for non-compliance. As such, the likely results of non-compliance would be to make the relevant portion – or possibly an entire set – of governing documents unenforceable in Court. A well-drafted set of governing documents should contemplate “saving” the remainder of the document with a savings clause if one provision is faulty, but if poorly prepared, an entire set of documents could be disregarded by a Court due to an error.
Further, if an HOA refuses to comply with certain sections of the act – such as holding special meetings or entering contracts without proper approval if it is required – then those contracts could be declared invalid, an injunction could be entered or a member may be able to bring a civil tort action against the association seeking various remedies, such as general damages, punitive damages or attorneys’ fees.
HB 1071 is the first law that seeks to specifically govern the operation of homeowner’s associations (HOAs). Compliance with it should not be overlooked. As counsel to a builder or developer, you should urge clients to review thoroughly their governing documents and make required changes. Property management clients or builder clients also managing their developments until turned over to the owners must be notified of operational changes on assessment collections, budgeting, covenant enforcement and borrowing, among other things. Take the time to educate your developer or property manager clients on how to comply with this new law and help them avoid becoming a test case on the penalties for non-compliance.
