Directors’ Duty to Maintain Common Areas Requires Performing Deferred Maintenance
A fundamental duty of a homeowners association’s board of directors is the duty to maintain the association’s common areas. Notwithstanding said duty, a frequently encountered issue within homeowners associations pertains to the failure on the part of the association’s directors to perform necessary deferred maintenance. As properties age, the various components used in the common areas deteriorate and begin to fail and the association’s directors must make decisions about repairs and replacements. Unfortunately, the decisions that are made about the necessary deferred maintenance are often misguided as a result of shortsighted attempts by the association’s directors to keep dues artificially low and / or avoid making the dreaded “special assessment.” The reasons for such decisions generally relate to not having the funds available for the necessary expenses due to poor budgeting and prolonged underfunding of reserves. When there are not sufficient reserves, the association tends to avoid performing necessary maintenance until the problem reaches a level that can no longer be avoided. It then becomes necessary to borrow funds or make special assessments on the members in order to generate the funds that are required to perform the repairs.
Implicit in the duty to maintain the common area is a requirement for the prudent management of the association in a manner that provides for collecting sufficient assessments in order to have the funds available to perform deferred maintenance as needed. Decisions to defer necessary maintenance for the wrong reasons are a breach of the directors’ fiduciary duties. For example, deferring necessary maintenance in order to avoid spending money or raising dues is inappropriate because such decisions: (i) tend to increase the cost of the repairs that are eventually made when they can no longer be avoided; (ii) expose the association to litigation and liability for damage caused by the failure to perform the deferred maintenance; and (ii) make living in the community less desirable and negatively impact the value of the properties within the community.
Improper decisions made by a homeowners association’s board of directors regarding the performance of deferred maintenance are not typically protected by the “business judgment rule” and can expose the association’s directors to claims by homeowners and/or other parties that suffer damage for:
a. Gross negligence in the performance of their duties;
b. Breach of the association’s governing documents (generally the CC&Rs);
c. Breach of state statutes that impose duties to maintain common areas;
d. Breach of fiduciary duties.
Under certain circumstances, decisions by an association’s board of directors to defer maintenance can be justified. Thus, a planned temporary short deferral of necessary maintenance in order to raise the funds that are required for the repairs will generally be acceptable so long as the board is actively addressing the maintenance issues and taking the necessary action to raise the funds. Directors can also responsibly deal with deferred maintenance by scheduling the repairs over a period of time and performing the maintenance in various phases so long as appropriate care is taken to protect the association’s members from suffering damage that may be caused by the delay.
Issues regarding the performance of deferred maintenance can be avoided by proper planning and a clear understanding of the directors’ responsibilities. Proper planning necessitates the creation of a realistic budget on an annual basis. A realistic budget takes into account: (i) known operating expenses of the association; (ii) anticipated changes in expenses; (iii) a contingency for unexpected expenses; (iv) the previous years’ shortfall or surplus; and (v) the retention of proper reserves based on a reserve study. If a realistic budget is prepared annually, the dues assessed to members should remain the same or slightly increase over time. In theory, the dues could decrease, but that is not likely due to ongoing increases in the cost of living.
Because in the real world, the owners of the separate interests change over time as properties are bought and sold, the past failures to have realistic budgets and necessary reserve funds results in a financial burden being imposed on the current owners of properties within the association and a financial windfall for the prior owners who did not pay their fair share. This situation will be avoided by prolonged proper budgeting and contributing the required amounts to the reserves. Having a realistic budget and maintaining proper reserves will result in the association having sufficient funds available when the need for performing deferred maintenance arises.
Frequently, the volunteer members who take on the responsibilities of being a director of their association do not fully understand their responsibilities concerning maintenance of the association’s common areas and the importance of the annual budget and the maintenance of proper reserve funds. For association’s to successfully operate and be financially secure, the directors must be educated in their responsibilities and be willing to make decisions that are in the best interests of the association. Thus, the directors must recognize their fiduciary duties to the members of the association and establish a level of dues that is adequate to pay for all operating expenses and also maintain the level of reserve funds that is required by a current reserve study.