Fiduciary Relationship and Responsibility

The members of the and each officer of the association have a fiduciary relationship with the members of the association. This fiduciary relationship imposes obligations of trust and confidence in favor of the corporation and its members. It requires the members of the board to act in good faith and in the best interests of the members of the association. It means that board members must exercise due care and diligence when acting for the community, and it requires them to act within the scope of their authority.

The fact that the association is a not-for-profit corporation, or that the members of the board are volunteers and unpaid, does not relieve them from the high standards of trust and responsibility that the fiduciary relationship requires. When a member accepts a position on the board of directors, he or she is presumed to have knowledge of the duties and responsibilities of a board member. Board members cannot be excused from improper action on the grounds of ignorance or inexperience and liability of board members for negligence and mismanagement exists in favor of the association and the property owners.

Each board member must recognize the fiduciary relationship and the responsibilities that the board has to the association and each of its members. The board's duties must be performed with the care and responsibility that an ordinary prudent person would exercise under similar circumstances, and the ultimate responsibilities of these unique positions cannot be delegated to a manager, a management company or other third party.

A Recap of the Board Member's Role:

Acting through the board as a whole, a board member should:

 Enforce the documents  Establish sound fiscal policies and maintain accurate records  Develop a workable budget, keeping in mind the needs, requirements and expectations of the community  Establish reserve funds  Act on budget items and determine assessment rates  Collect assessments  Establish, publicize, and enforce rules and penalties  Authorize legal action against owners who do not comply with the rules  Review local laws before passing rules or sending bylaws to membership for approval  Appoint committees and delegate authority to them  Select an attorney, an auditor, insurance agent and other professionals for the association  Provide adequate insurance coverage, as required by the bylaws and local governmental agencies  Inform board members of all business items that require their vote  Inform members of important board decisions and transactions  See that the association is protected for the acts of all parties with fiscal responsibilities  Attend and participate at meetings

Operating a homeowner association carries with it many of the very same duties and responsibilities as overseeing any other business. Serving as a board member is a valuable and rewarding experience that should be undertaken by those who see it as an opportunity to serve their fellow neighbors while protecting and enhancing the assets of the community. It is serious business, but also a task worth doing well in order to safeguard the investments of all.

The Board of a homeowner association (HOA) has various and sundry tasks. To understand what those tasks should be, it's critical that the Board understand what the HOA "thing" really is. And often it's not what most think it is. Here are some of the myths:

Monthly fees should be kept low.

The Board is elected to maintain the association assets properly. There is a big difference between being a good steward and a tightwad. Tightwads skip routine and necessary maintenance services which erode the value of the homes. It takes money to do it right and the Board should spend the money necessary to accomplish the tasks.

Volunteer boards aren't held to the same standards as professional managers.

Volunteers maybe, but charged with running HOA business in an informed and business like manner. This means taking care of things in a timely manner, planning ahead to anticipate problems, getting and acting on good advice.

The association is small and so are the needs.

The smaller the HOA, the more important planning is since the cost per owner goes up the smaller the association is.

We're too small for professional management.

In areas like financial management and rules enforcement, all associations should have outside professionals. Collecting money from neighbors and controlling their antisocial behavior is bound to cause problems for the person doing it. It's even worse when you live next to the offender. There are management professionals that do these tasks 24/7.

The board is elected to be the manager.

The board is elected to hire and supervise competent service providers. If properly organized, the board's job should usually take only a few hours a month. The board is entrusted with the most valuable asset most people own.

The responsibilities of an HOA board are not unlike those of any Fortune 500 company board. In both cases, there are physical and human assets entrusted to the board. Careful planning and effective communication to the stockholders (owners) is needed.

Community Association 101

Sometimes we get inquires from owners and managers unfamiliar with law addressing homeowners associations. This article is intended as an introduction to the field of community association law in Colorado. Feel free to contact one of our attorneys if you have any questions regarding the application of CCIOA to your community.

Homeowners Associations in Colorado

Homeowners associations are entities organized to govern the operation of common interest communities in Colorado. They are generally created by the developer (also called the declarant) of a new community and organized before the first unit is conveyed to a purchaser. Most commonly they are organized as nonprofit corporations, although they may also be organized as for-profit corporations or LLCs.

The Colorado Common Interest Ownership Act (“CCIOA”), C.R.S. 38-33.3-101 et seq., was enacted in 1991 with the purpose of establishing a clear, comprehensive, and uniform framework for the creation and operation of common interest communities (including homeowners associations) in Colorado. A common interest community is defined in CCIOA as a community in which ownership of real property within the community obligates an owner to pay for the real estate taxes, insurance premiums, maintenance, or improvements of other real property (typically the common elements) within the community. Common interest communities are classified by CCIOA into three categories, (1) communities, (2) cooperatives and (3) planned communities. Planned communities are typically single family home communities that have their own private common areas, such as open space, playgrounds, recreation center, or pools, but can also be mixed use communities that include retail units and/or . A community that does not contain common property is not considered a common interest community under CCIOA.

CCIOA generally applies to all common interest communities formed on or after July 1, 1992. However, there are exceptions for small cooperatives and limited expense planned communities and large planned communities. Only certain provisions of CCIOA apply to pre-existing common interest communities formed before July 1, 1992, although any pre- existing common interest community can elect to have all the provisions of CCIOA apply to it. The terms of CCIOA do not apply to communities that are not considered common interest communities. If a common interest community is subject to the terms of CCIOA, membership in the homeowners association is mandatory and shall at all times consist exclusively of unit owners in the common interest community. In such communities, homeowners associations (referred to in CCIOA as a “unit owner’s association” or simply “association”) are subject to the terms of CCIOA, as well as the association’s declaration (the recorded instrument that creates the community), bylaws, and rules. If the association is organized as a nonprofit corporation it is also subject to the terms of the Colorado Revised Nonprofit Corporation Act (“Nonprofit Act”).

If a community is not subject to CCIOA, either because it qualifies for one of the exceptions or is not considered a common interest community, the homeowners association is only subject to the provisions of the declaration, its bylaws and rules. It may also be subject to the Nonprofit Act if organized as a nonprofit corporation.

The board of directors and officers of a homeowners association function similar to that of other nonprofit corporations. However, homeowners associations often contract with property management companies to handle the daily functions of the association. Under CCIOA, Board members and officers not appointed by the declarant are generally not liable for actions taken or omissions made in the performance of their duties except for wanton and willful acts or omissions.

There are many parts of CCIOA that address the management and operation of homeowners associations. For example, Section 302 of CCIOA sets forth the general powers and duties of the homeowners association. This includes the power to adopt a budget for common expenses, maintain and regulate the use of the common elements, impose late charges for the late payment of assessments, and levy fines for violations of the declaration, bylaws, or rules of the association. CCIOA also contains numerous provisions addressing governance matters, including procedures for meetings and voting, conveyance of the common elements, insurance requirements, and maintenance of association records. The association’s declaration, bylaws, or rules may set forth additional provisions addressing association governance that do not conflict with CCIOA.

One particular provision to be aware of is Section 303(4)(b), which addresses budget procedures for homeowners associations. This section requires that within ninety days of the adoption of any proposed budget for the community, the executive board deliver a summary of the budget to the owners and set a date for a meeting of the owners to consider the budget. Unless the declaration requires otherwise, the budget proposed by the executive board is deemed approved by the unit owners in the absence of a veto by a majority of the owners, or such larger amount as set forth in the declaration.

CCIOA also has certain requirements pertaining to the or review of the association’s books and records. In general, an audit is required when (1) the association has annual revenues or expenditures of at least two hundred fifty thousand dollars; and (2) an audit is requested by the owners of at least one-third of the units represented by the association. A lesser review of the association’s books and records, which may be performed by a qualified person other than a certified public accountant, is required when requested by the owners of at least one-third of the units. An audit must be performed using generally accepted auditing standards, or a review, using statements on standards for accounting and review services, and made available to the owners no later than thirty days after its completion.

It is also important to note that CCIOA imposes a number of disclosure requirements on homeowners associations. Section 209.4 requires associations to annually disclose the following documents:

1. The date on which its fiscal year commences; 2. Its operating budget for the current fiscal year; 3. A list of the association's current assessments, including special assessments, if any; 4. Its annual financial statements, including any amounts held in reserve for the fiscal year immediately preceding the current annual disclosure; 5. The results of its most recent available financial audit or review for the fiscal year immediately preceding the current annual disclosure; 6. A list of all association insurance policies, including, but not limited to, property, general liability, association director and officer professional liability, and fidelity policies. Such list shall include the company names, policy limits, policy deductibles, additional named insured, and expiration dates of the policies listed; 7. The association's bylaws, articles and rules and regulations; 8. The minutes of the board and member meetings for the fiscal year immediately preceding the current annual disclosure; and 9. The association's responsible governance policies adopted pursuant to Section 2.095 of CCIOA.

Section 209.5 further requires that associations adopt and disclose eight responsible governance policies concerning (1) collection of unpaid assessments, (2) handling of conflicts of interest among board members, (3) conduct of association meetings, (4) enforcement of covenants and rules, (5) inspection and copying of association records by owners, (6) investment of reserve funds, (7) procedures for the adoption and amendment of policies, procedures, and rules, and (8) procedures addressing disputes arising between the association and owners.