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Subject: Lawful Use of Assessments
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SarahW4
(Virginia)

Posts:3


01/01/2021 7:46 PM  
Background:  I am a board member in a smallish (under 70 lots) HOA in Northern Virginia.  This is my first post.  I know the documents and the statutes fairly well...enough to know what to ask and look for.  But am I not seeing clearly any more?  If anyone feels like weighing in, I would appreciate it.  To summarize but not go into everything here, I feel I am in the category of MOVE, no solution possible.  I am not ready to resign the board yet and I still feel I have a duty to inform the homeowners, but dither over how.  Below is one small part of the story.  Our current budget includes several hundred dollars for items that are not specified.  The primary purpose of the association is to enhance, protect the value, desirability and attractiveness of the real property which it fails to do.  I feel those goals should have funding priority.  The length of this post is due to quoted governing documents at the end.  

The current matter involves the HOA committees according to the By-Laws and Covenants, and the authority the board has to use assessments for items that do not have recorded authority under Covenant for Assessments.  It appears to me that the only mandated committees are the Architectural Control and Nominating Committees as outlined in the By-Laws.  

Question:  In reading the language in the By-Laws and Covenants, does it appear to anyone that the Board has the authority to use assessments for welcoming gift baskets, or to use funds for a Recreation Committee (called Social Committee in this HOA)?  We do not have any recreational facilities on our premises that require maintaining.  None of these categories are specified in the documents as a lawful use of assessments.  Does anyone have an opinion?  

The HOA has been warned about the lawfulness of charges, fees, fines and collecting for services that are not spelled out in the documents.  Everything from collecting assessments to architectural control rules, to other services, need to be specified in the documents.  I don't feel we have the authority to implement something that may not benefit each homeowner.  The benefit of welcoming newcomers is in the friendly human contact and the materials provided to help them adjust in their new community.  The younger members of the community will benefit from the social committee activities which have always been dependent on volunteer contributions.  Older people will not participate in these events to any degree.  I always contribute to the committees. The last conflict over unapproved use of funds was when the same board member tried to get homeowners to update their landscaping by offering free mulch!   A number of people complained that they should not pay for someone else's obligation no matter how small.  I point out that regardless of the funds, the committees will still manage to do their work and make people happy.  Do we have to pay for it?

QUOTED SOURCES:
The relevant Virginia Statue:  
https://law.lis.virginia.gov/vacodeupdates/title55.1/section55.1-1805/§ 55.1-1805. Association charges. (2020 updated section)Except as expressly authorized in this chapter, in the declaration, or otherwise provided by law, no association shall (i) make an assessment or impose a charge against a lot or a lot owner unless the charge is a fee for services provided or related to use of the common area or (ii) charge a fee related to the provisions set out in § 55.1-1810 or 55.1-1811 that is not expressly authorized in those sections. Nothing in this chapter shall be construed to authorize an association or common interest community manager to charge an inspection fee for an unimproved or improved lot except as provided in § 55.1-1810 or 55.1-1811. The Common Interest Community Board may assess a monetary penalty for a violation of this section against any (a) association pursuant to § 54.1-2351 or (b) common interest community manager pursuant to § 54.1-2349, and may issue a cease and desist order pursuant to § 54.1-2352.

By-Laws:  Article on Committees
Section 1. The Association shall appoint an Architectural Control Committee, as provided in the Declaration, and a Nominating Committee, as provided in these By-Laws. In addition, the Board of Directors shall appoint other committees as deemed appropriate in carrying out its purposes, such as:
(a) A Recreation Committee which shall advise the Board of Directors on all matters pertaining to the recreational program and activities and use of the recreational facilities, if any, of the Association and shall perform such other functions as the Board, in its discretion, determines;
(b) A Maintenance Committee which shall advise the Board of Directors on all matters pertaining to the maintenance, repair or improvement of the Properties, and shall perform such other functions as the Board in its discretion determines;
(c) A Publicity Committee which shall inform the members of all activities and functions of the Association, and shall, after consulting with the Board of Directors, make such public releases and announcements as are in the best interests of the Association; and
(d) An Audit Committee which shall supervise the annual audit of the Association's books and approve the annual budget and statement of income and expenditures to be presented to the membership at its regular annual meeting. The treasurer shall be an ex officio member of the Committee.

Covenants:   Article on Covenant for Maintenance Assessments [see section 2]Section 1. Creation of the Lien and Personal Obligation of Assessments. So long as Declarant is a member, the Declarant, for each Lot subjected to this Declaration, hereby covenants, and each Owner of any Lot by acceptance of a deed therefor, whether or not it shall be so expressed in any such deed or other conveyance, is deemed to covenant and agree, to pay to the Association:
(1) Annual assessments or charges
(2) Special assessments for capital improvements, and (3) Special assessments as provided in Article VII hereof. [Exterior Maintenance]
Such assessments are to be fixed, established, and collected from time to time as provided in the By-Laws of the Association. The annual and special assessments, together with such interest thereon and costs of collection thereof, including reasonable attorney fees shall be a charge on the land and shall be a continuing lien upon the property against which each such assessment is made. Each such assessment, together with such interest, costs, and reasonable attorney’s fees, shall also be the personal obligation of the person who was the Owner of such property at the time when the assessment fell due. Such personal obligation shall not pass to his successors in title unless expressly assumed by them.Section 2. Purpose of Assessments. The assessments levied by the Association shall be used exclusively for the purpose of promoting the recreation, health, safety, and welfare of the residents in the areas subjected to this Declaration and in particular for the improvement and maintenance of the Common Area, services (including street lighting and entrance lights), and facilities devoted to these purposes and related to the use and enjoyment of the Common Area.

One person controls all here. Everything.  Hates laws and argues anything.  Does not provide any authority beyond his own.  Cannot keep board members. It is concerning to me that we have no liability protection (no D&O).  I want an eventual way out that I can respect myself for while somehow fulfilling a duty to the homeowners by warning them.  Thank you for any help.  
MelissaP1
(Alabama)

Posts:9862


01/02/2021 5:45 AM  
I kind have to call out a new way of thinking here. It kind of comes off on how you want things to run when it's everyone has feedback. I don't necessarily agree with "welcome baskets" or "Gift cards" but if majority of the board does, then it is what is done. This is like a "cultural" thing within your HOA. This is where they hold value. Cultural changes are the hardest changes to make in any situation.

HOA's are not there for protection of "home values". Home values are based on REAL #'s. What homes sell/foreclose for with similar bedroom/bath/square footage in an few mile radius. HOA's are in the business of maintaining common property and making sure the HOA property looks good for potential owners. I use this example: Did not buy a house because hated the wallpaper. It was really ugly. Did the house value go down or sell for less? No. It sold for it's appraised value to someone else. It just wasn't attractive enough for me the potential buyer to purchase. A HOA's role would be making sure an eyesore or appearance is addressed.

A HOA is only funded by it's members for it's members. Not everyone is ever going to use the funds equally in a HOA. It's not possible. Many people are just satisfied to pay their dues each time they are due and that's it. Some people like to have social activities. If so, then the HOA has to agree to that. No reason it can't fund itself by it's participants. It doesn't have to be by all of the HOA membership.

So if your issue is not anyone else's issue, then it may be yours...

Former HOA President
CathyA3
(Ohio)

Posts:1484


01/02/2021 6:02 AM  
My community is similar to yours, although we're condos. No amenities. The only mandated committee is the nominating committee. In addition, our CC&Rs do not address any expenses explicitly except for utilities (and it's limited to a statement noting that including things like water in assessments will provide an unfair advantage to some owners and an unfair disadvantage to others).

A number of years ago we tried having a social committee with a modest budget, and it was not successful - due to committee members believing they should be able to do whatever they wanted and displaying poor judgement. Fortunately the committee self-destructed in less than a year and the board did not re-instate it.

I have misgivings similar to yours. I believe that association funds should be used to benefit all owners equally (as much as possible) and social activities don't do that because a number of them won't participate. This is more noticeable in communities without amenities because they tend to attract people who aren't interested in socializing. Another problem with social events is that they sometimes are geared for only a portion of the community (eg. a wine tasting event for the adults or an Easter egg hunt for the kids) - these things flirt with Fair Housing Law violations, the same way adult-only swim periods in pools so (and don't get me started on that).

The only community I've come across where socializing was actually part of the CC&Rs is a nearby 55-and-older "active adult" community where activities are part of the amenities and the community employs a full-time social director.

Having said that, I understand the benefits of socializing. I think that events should be self-supporting as much as possible. I wouldn't get too upset about a very small budget, as long as the committee keeps good records, is transparent, and remembers that they serve at the pleasure of the board and have no authority of their own.

Is it worth moving over? Maybe. I'm a big advocate of walking away from situations that fit my definition of "unacceptable" and that I can't change. Moving usually involves less wear and tear on your nerves, and less time and money expended. Fighting an HOA often involves legal action, and I personally would never go that route unless there is something unique about my community that I just have to have and can't find anywhere else. I've yet to come across a community that is so wonderful that I can't find a replacement for it.
SheliaH
(Indiana)

Posts:3670


01/02/2021 8:08 AM  
One person's opinion:

I start with the end, where you say one person controls everything but didn't say how many people on the board. I always say the only reason anyone or two people get so much power over a bunch of others is if they allow it. That also applies when HOMEOWNERS let a board of three, five, or however many people do whatever they want (because they're the board and therefore they are). Why, then, are you and the rest of your board colleagues (the ones who are left, anyway) letting this person run over you? This person is only one vote and if he or she is an officer, the rest of you can probably remove him/her from that position. Why haven't you?

Next, the social event spending. It can be argued that by promoting activities that encourage residents to get to know one another IS meeting the association's prime directive to "enhance, protect the value, desirability, and attractiveness of the real property." People often forget you don't just buy a house or condo, you buy a neighborhood. Ideally, everyone living in it also behaves in a manner that keeps the community clean, safe and attractive - in other words, you can drive around and see EVERYONE keeping up their home, picking up after their pets, etc.

This is why some HOAs have budget line items for community fellowship or some such, but they're very specific in how and when that money can be spent. The social/recreation committee might do the planning and run the project, but the board could pay for minor things, e.g. trash bags for a neighborhood cleanup. In your case, it doesn't sound like there are any ground rules, which is a problem.

You didn't say if other infrastructure needs of the community are being neglected for social use - do you have any examples? For example, if the association is responsible for street maintenance and you have a bunch of potholes that haven't been addressed, THAT is far more important than giving people free mulch - and you should say something. You said there are homeowners who also object to the mulch giveaway - you could and should encourage them to attend the next meeting and say so - loudly. It's one thing for this board member to ignore you, but to ignore the people who do the voting of board members is a lot trickier. In fact, if these homeowners are also concerned about this, that can be the start of rallying together everyone else and vote this person off in the next board election or even do a recall of the other board members who sit and let this happen.

This brings me to how you should react going forward and if you should continue with board service. Start with deciding what's most important to you and whether you want to continue on the board to press your point. It's not easy when the rest of your colleagues haven't said anything or done even less because they're afraid or more in love with the title as opposed to doing anything to actually earn it. You can't be effective if you're frustrated over the board's actions all the time and your mental health is more important. Sometimes you have to leave in order for the others to wake up and see there's a problem and perhaps develop a backbone to address it.

If you decide to stay on the board, you have to pick your battles, which often requires looking at things from a different angle. If all of this angst is over spending on welcome baskets and whatever, could it be you're nitpicking a bit? How much is the association actually spending relative to everything else in the budget? Maybe you should focus your energy on things like getting an updated reserve study so reserves for major improvements/repairs of the common area will be addressed and the association won't have to resort to special assessments.

How much do you love your home? If you really love it but are tired of the board director drama, it may be easier to step down. That doesn't mean you stop caring - you can still attend a few meetings (especially the annual) and vote for board members you feel will do a better job. If people ask why you left, you should be adult enough to express your concern about spending without getting personal. You can also submit your resignation in writing and say the same thing, and ask it be attached to the minutes - this way, everyone can read it and come to their own conclusions. If people are bothered, it'll be up to them to take a closer look at the budget and then go to meetings and ask their own questions. Good luck to you in whatever you do.
AugustinD


Posts:4828


01/02/2021 8:11 AM  
Posted By SarahW4 on 01/01/2021 7:46 PM
Question:  In reading the language in the By-Laws and Covenants, does it appear to anyone that the Board has the authority to use assessments for welcoming gift baskets, or to use funds for a Recreation Committee (called Social Committee in this HOA)?
-- SarahW4, thank you for quoting Virginia statute and your governing documents. This helps enormously. I feel like I am strict regarding assessments only being used as state statute and the governing documents direct. My take:

-- For the spending of the membership's assessments, the Virginia statute refers to "express" authorization in the Declaration. You quoted your Declaration as follows:
Covenants:   ... 2. Purpose of Assessments. The assessments levied by the Association shall be used exclusively for the purpose of promoting the recreation, health, safety, and welfare of the residents in the areas subjected to this Declaration and in particular for the improvement and maintenance of the Common Area, services (including street lighting and entrance lights), and facilities devoted to these purposes and related to the use and enjoyment of the Common Area.
In my opinion, gift baskets do not promote the recreation, health, safety and welfare of the residents and certainly have nothing to do with maintenance of the common area. Put enough sugar or allergens like peanut oil-foods in the gift baskets, and I might make an argument that the gift baskets are anti-health, anti-safety, and anti-welfare of the residents.

-- Regarding no liability protection (no D&O):
The Virginia HOA statute does require certain insurance. See 55.1-1827 (B).
The Virginia Nonstock Corporation statute does not have a requirement.
Do your covenants require that the HOA have D&O insurance?

-- Regarding offering Owners free mulch, so as to promote the beauty of non-common areas: No, this isn't allowed. If an Owner's property is unsightly, no doubt the HOA has covenants that would allow the Board to issue a notice of violation to remedy the unsightly-ness.
I want an eventual way out that I can respect myself for while somehow fulfilling a duty to the homeowners by warning them. 
-- I think this is about (1) picking one's battles; and (2) being able to have no internal conflict once the battle is picked. I think the best elected government officials do this well, and so are able to cause progress. But of course it's not like any elected official can be liked by everyone and at the same time, accomplish anything. Actor Paul Newman's line comes up here now and then: "If you don't have enemies, you don't have character."
GenoS
(Florida)

Posts:4242


01/02/2021 12:57 PM  
Posted By SarahW4 on 01/01/2021 7:46 PM
The HOA has been warned about the lawfulness of charges, fees, fines and collecting for services that are not spelled out in the documents.

Warned by whom?

Posted By SarahW4 on 01/01/2021 7:46 PM
It is concerning to me that we have no liability protection (no D&O).

I wouldn't serve as a Director for a minute without D&O coverage. Your own home is at risk should something go really wrong.
SarahW4
(Virginia)

Posts:3


01/02/2021 1:05 PM  
Thank you so much! You all have provided some wonderful answers and thoughts. I want to respond more fully later but I do not have time right this minute. I have sent a response to the board and these comments helped. The issues with this association are enormous--the committee expenses are small compared to the other subjects. They are working on budget (one person is). I am very happy there is not the level of hostility toward owners that there once was. Another fine member is responsible for that improvement. Yes, one person has tainted nearly everything and a couple of people enabled along the way. It is fascinating situation (and depressing).

More later.
GeorgeS21
(Florida)

Posts:3602


01/02/2021 7:31 PM  
OK - since I told Melissa I would follow-up each time she spoke like this: "HOA's are not there for protection of "home values". Home values are based on REAL #'s." I must do so. This is not accurate, however heartfelt it is to her. HOAs are specially designed to protect home values by ensure those communities maintain standards. HOAs with tight rules are almost always valued more per SF than homes not inside said HOA.

Now, to the OP. I will take a less stringent angle. Some have sounded very, very definite - that almost nothing can be purchases unless it is noted in CCRs. I would consider this position too tight.

I have been on boards in several communities, president in more than two - we spent money where it was appropriate for the good of the community, including one community that rented a larger chipper to help maintain private lots and wooded areas - for both aesthetic reasons and to assist others in the community - a work part of 20 men can get a lot done in a day.

So, while gift baskets are a bit too far for me, funding recreational items, and social activities is certainly in zone.
SarahW4
(Virginia)

Posts:3


01/04/2021 6:57 PM  
There are some really excellent comments here but It is hard to answer everyone individually. I will try to cover the comments and questions below, but I believe I need a new post and subject line:

Board Profile: The 10 member board is controlled by one person and almost everything that has happened is a result of this influence. The level of control requires enormous energy. Discouraging education and facts is one method of control. There are at least two main enablers. I am not one of them. Yes, it is the community's fault this happened which prompted me to join the board. When new people join they are not informed, are easily manipulated and generally go with the flow. They don't last long and soon resign or retreat when they discover they do not have equal say and are not respected. The board meetings are typically 2.5 - 3 hours and consist primarily of two dominant people talking to each other--two uninformed people. The present board has four who stopped attending meetings but hover, watching rather than resigning. There are two who sometimes miss meetings. The people who don't attend are not voted off after the three required missed meetings (By-Laws). If the authoritarian director does not address a problem no one else will--there is dead silence (which is why there is no D&O). One director has attended only one meeting in eleven months yet still votes by email when asked. The long controlling behavior, its consequences, and possible remedies are what I am debating with myself and one other person. Prior to this date many stands have been taken and there have been some victories--not without a battle. Who wants to be on a combative board and fight constantly for honesty, respect for the law and ethical behavior?

Issue of Committee Funds: No, I will not move over this question which is a tiny part of my HOA problem. Yes, flexibility is important and I am flexible about the social committee but our common area landscaping has been deficient for years. It was last done twenty years ago and has slowly dissipated. When I joined the board no one understood the obligation to keep it up. The appearance of the private lots are not being enforced. Pavement, fences and retaining walls are good (after much urging). Trees are being removed due to disease or safety issues only after loud complaining but I do not see a replacement plan. I feel we have a duty to prioritize spending and our budget is not reflecting a required 2021 reserve study, funds to cover planned document revisions, and a proposed audit. I questioned the committee expenses being added to the budget while the other items were not but are still actively discussed. Rhetoric denying the need for a professional reserve study has been taking place for one year.

D&O / Fidelity Bond insurance: HOA is under a statute of limitations for a threatened lawsuit for 2.5 more years. For this reason HOA is unable to get D&O. HOA has Fidelity Bond Ins. The board members have been informed of fiduciary duties and the business judgment rule but it is not understood and not being practiced. They feel safe because they believe insurance will protect them, even without D&O. Director tells them they have D&O (in the general policy).

Authority to charge fines, late fees, administration charges and use of assessments: The HOA was cautioned in a letter from the association lawyer that the HOA is only allowed to file liens for delinquent assessments, to suspend privileges, and to take legal actions for delinquent assessments (Virginia). That's it--the governing documents are old (1970). There is case law limiting architectural restrictions, charges for community services, the requirement to provide equal benefits to owners, all of which require articulation in the documents to allow use of the assessments or to charge an additional assessment against a lot. I have seen documents with long descriptions of allowable assessment uses and charges under a covenant for assessments. It makes me question the newly requested committee budgets when we have so little money and vague authority. They are new committees and are not described in our dues collection policy that outlines uses of assessments. In Virginia we have a current 10-person limit for gatherings requiring social distancing and mandated mask wearing outdoors when closer than six feet. We don't see an end to this pandemic and I wonder why a social committee was formed at this time. It was part of a sudden collection of ten documents sent to the homeowners in one email.

Nitpicking?: Fair point. Let me know after I post more. The constant distortion of information flowing from one person has a negative effect on the board and the community.

Resignation: Good advice. I am working on it. I will turn it over to the community in some form and resign from the board. It must be accomplished in as neutral a way as possible without drama. Resignation does not mean I cannot continue to work for the community. If no one is interested in change there is nothing more for me to do. In the past, board hubris has been addressed with a legal letter which stopped the objectionable activity. The current matter is really systemic.

I am interested if anyone ever finds solid references to gift baskets, especially if they are restricted under 501(c)(4). I have not actually found any HOA that supports gift baskets. All authorities (HOA law practices, management companies, CAI, HOA online resources) seem to encourage welcoming "materials" to help people adjust to their new community.

These perspectives are valuable and I appreciate your support. I will post another subject soon and you can decide whether it is suitable for discussion on this forum. I think it has some unique aspects.
GenoS
(Florida)

Posts:4242


01/04/2021 10:09 PM  
Posted By SarahW4 on 01/04/2021 6:57 PM
D&O / Fidelity Bond insurance: HOA is under a statute of limitations for a threatened lawsuit for 2.5 more years. For this reason HOA is unable to get D&O. HOA has Fidelity Bond Ins. The board members have been informed of fiduciary duties and the business judgment rule but it is not understood and not being practiced. They feel safe because they believe insurance will protect them, even without D&O. Director tells them they have D&O (in the general policy).

This doesn't completely make sense. There's D&O insurance. Then there's Fidelity Bond/Crime Insurance. Those are different things. Fidelity Bond/Crime Insurance is almost strictly concerned with people sealing money from the association. D&O insurance covers much more than that.

Is the potential lawsuit civil in nature? It sounds odd that an insurer would deny coverage based on something that hasn't happened yet. Can that dispute be settled without litigation? The other thing I'm thinking is that D&O insurance probably IS available to you albeit at a costly premium because of the potential lawsuit, and the board just doesn't want to pay for it.

I wish you the best, but my stance continues to be that any directors serving on a board are certifiably nuts unless and until a D&O policy is obtained. If I was a director, I would resign within 24 hours if I discovered there was no D&O policy in effect. Doing so is criminally stupid.
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