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Friday, February 22, 2013

Working with an HOA/COA Lawyer Part III: Budgets and Boundaries

This is the final entry of the "Working with an HOA Lawyer" series.  You can find the previous entries in the series in Part I and Part II

Budgets: The Downside of OPM

One of the more difficult tasks as a home owner association or condo owner association board member is to decide priorities and budgets.  You are, after all, spending not just your own dues, but you are also spending dues of non-board members who are represented by the Board but are not themselves often entitled to vote on priorities.  So the issue can be difficult, since you are at times deciding between your own personal priorities and the slightly different priorities of your neighbors.  Obviously listening to the members is important, and very often priorities can be aligned if rationale and reasoning can be communicated.  But sometimes complete disclosure is not possible, particularly in the legal realm.  This can get very tricky, and is the reason why legal budgets are some of the most misunderstood of the building expenses.

In deciding on a legal budget, many properties, to their peril, often only budget what they paid last year, and very often those budgets only include some very minor funds for collection efforts on dues and the occasional declaration/policy enforcement.  In other words, they rarely, if ever, budget for every day dialogue with counsel.  This is a mistake.

When making a legal budget, prudent boards budget for contingencies, and think about legal issues in their reserve planning.  What would your budget look like if there were a major common area construction defect?  What would your legal budget be for advice to avoid problems with consistent and problematic residents?  How would your property afford a lawyer to review your governing documents and to assist to make sure changes to the declaration and/or policies are done correctly and would be supportable under TUCA and survive challenge by a resident?

Now it is admittedly easier to budget for maintenance expenses on a pool, or to build a gazebo, these are things the residents see being completed.  But legal is often spent for the Board to get advice, make sure the Board is doing things correctly, and to make sure the governing documents are structured in accordance with the property's priorities and to increase value.  But good legal advice from experienced counsel familiar with these laws is not inexpensive. But budgets should reflect an understanding that as Board's act, they need to be free to consult the Board's lawyer freely to ensure that bigger issues are avoided.  This is basically "an ounce of prevention is much less expensive than a pound of cure." Lawyers can help avoid future expenses, or repeating the problem if you do it wrong.  Budget for your Board to spend some time with lawyers several times a year and you'll likely avoid bigger issues down the road.  It is tough for your residents to see that value, but it is most certainly there if you choose counsel wisely.

Boundaries: Whose Lawyer Are You?

For many HOA and Condo Association Board Members, they're residents and not necessarily people used to dealing every day with lawyers.  This is one of the reasons we wrote this series.  But one of the biggest issues a lawyer has to deal with, that is often misunderstood by Board Members, is the concept of representation.

Typically, and technically, the lawyer for a property owner's association does not represent the individual members of the board, the developer or the individual owners of the membership interests.  They also don't represent the property management company.  The lawyer for the owners' association represent the association itself.  The owners association, typically a non-profit, will be controlled by a Board and those Board members are typically elected by the membership interest owners (usually in an annual meeting).

Unlike most professional services (realtors, CPA's, business brokers), a lawyer has to be clear as to whom he or she represents.  The concept is foreign to most clients, but it is a very dicey thing for a lawyer to navigate, particularly when corporations are involved.  Corporations have their own distinct interests, apart from their individual owners and apart from their officers and directors.  While it is true that corporations can only act through humans, those humans are seen collectively and not individually.

For example, what may be best for an owners' association is to build a walking trail through the neighborhood.  It will increase amenities, will likely increase property values, and generally show the association's money is going to something all could potentially enjoy.  But it is an expenditure of money, and it has to be adjacent to someone's lawn somewhere.  So individual members of the association (as well as different Board members) may be for or against it for a variety of reasons ("I don't want screaming strollers rolling near my back yard", "I'm 95 years old and I won't be able to use it", "I live too far away from the entrances, it's not worth the money", "This is great! My property is next door and my kids will love it!").  So when the Board asks whether they need to change the declaration to accomplish the goal, it is very important to know that the advice given is from the perspective of the Association as a whole, and not anyone who is "for" or "against" the building of the trail.  Therefore, it is not appropriate for the Board president to say to their association lawyer, "keep this from Hannah, but we're going to build this anyway", or "let's find a way to draft the language so that it goes by my property".  The lawyer represents the interests of the entire association, not the individual membership or Board members, so its directives need to come from the entire Board.  So when the lawyer tells the president in this situation "no", he or she is merely doing their job.

Very frequently the board members individually will ask advice of the lawyer on their own dealings with the association.  And although a lawyer could provide answers generally, and can state the opinion that he or she would provide to the Board on the topic, everyone should know that the association lawyer does not represent that person individually, cannot keep information confidential from the Board, and cannot represent the individual with a dispute with the association.

In other words, don't ask the association's lawyer anything that you wouldn't want the entire Board to know about.  And if you have disputes with the association, you will need your own lawyer that represents only you to deal with those issues.  Sure it may be convenient for you to discuss with a lawyer that is already familiar, but it is not recommended due to the duties that lawyer has to the association.  This is the nature of "conflicts of interest" and is unfortunately the way the Texas bar has developed.  It may not be logical for seven lawyers to be involved in the discussion, but Texas law and its licensing board often require this duplication to make sure everyone has someone representing only their interests.

Now do all lawyers draw the line in the same place? No, and it is pretty tricky to navigate with constantly changing issues and board members.  But a prudent board of directors for an owners' association that knows what is appropriate to discuss and what is not will make the lawyer's job a lot easier.  No lawyer likes to decline providing help, but sometimes it is the requirement of the position.