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December 24, 2007
What if You Find Out That Assessments Are Not Being Allocated Correctly?
If an HOA is notified that it is not allocating assessments correctly, what should it do?
Some HOAs assess all owners equally and some allocate assessments on a pro rata basis based on exterior surface size or square footage of a unit. Some allocate operating expenses equally but assess insurance costs, water costs, painting or other costs on a pro rata basis based on square footage.
First and foremost, a Board should check the governing documents for the HOA to make sure it is allocating assessments properly. Improper assessment allocation can continue from year to year, from board to board, and from management to management incorrectly, and then someone comes along and says "Oops". And then what.
If an HOA is allocating assessments improperly according to the governing documents (usually the allocations appear in the CC&Rs, in the assessment, insurance and/or damage and destruction sections) and it is brought to light, a decision needs to be made about what to do. How far back do you go to try and correct a situation? Do you have to go back at all?
I believe these things matter, in California anyway:
The governing documents control on the allocation of assessments. CHECK ALL SECTIONS IN THE GOVERNING DOCUMENTS. If they are clear, they rule! If the allocation is not specified, then it probably should be equal (but this is not legal advice, only information, so consult with an attorney if you think your governing documents are silent on the subject).
A Board of Directors does not have authority to change the allocation without proposing a document amendment to the members and getting membership approval. Boards are not the almightly. They may have assessment authority to raise assessments or impose special assessments, within the statutory authority (Civil Code Section 1366), but they do not have authority to change the allocation, at least not without member approval or a court order. Thus, if the change occurred somewhere along the way and the allocation differs from what the governing documents say, legal advice is important (good legal advice from a knowledgeable HOA attorney).
Reliance of Owners (in paying an assessment contrary to what is required) is not a basis for continuing with improperly allocated assessments. Arguing that owners relied on the assessment allocation for years as a defense to misallocating the assessments and ignoring the governing document requirements or prescribed assessments probably won't fly, but again, get legal advice on this if you think it will. This is just my belief.
Recovering more than 4 years of misallocated assessments from any party may be an unrealistic expectation. 4 years is the outside statute of limitations on enforcing many debt types of contracts in California, and this time frame has been used to cut off recovery going back more than 4 years in assessment cases. So don't get your expectations up on this one, consult a knowledgeable attorney. If you base a collection process, and including lien and foreclosure, you may see it unravel before your very eyes, at considerable cost.
If you have been misallocating assessments for years and are called on it, or you do not believe you are misallocating, but have been accused of it, get help now! It is a situation that will probably fester into a much bigger problem if left unattended or ignored. Think about it. Say that an owner raises the question and at the time you have a special assessment that is being voted on by members that is misallocated according to the governing documents. You sign contracts. You move forward. You try to collect the improper assessment, and one or more owners resist. You could find yourself in a whole heap of a mess.
I know of at least one case where an arbitration that went against an association (a small one) resulted in a loss of attorneys fees of over $60,000 (for the other side), not to mention their own costs in defending a claim of misallocated assessments.
Get thee help!
Posted by Beth Grimm at December 24, 2007 10:00 PM