Sec. 11. Minnesota Statutes 2008, section 515B.3-114, is amended to read:
515B.3-114 REPLACEMENT RESERVES; SURPLUS FUNDS.

• (a) The annual budgets of the association shall provide from year to year, on a cumulative basis, for adequate reserve funds include in its annual budgets replacement reserves projected by the board to be adequate, together with past and future contributions to replacement reserves to cover fund the replacement of those parts components of the common interest community which the association is obligated to replace . These reserve requirements by reason of ordinary wear and tear or obsolescence, subject to the following:

• (1) The amount annually budgeted for replacement reserves shall be adequate, together with past and future contributions to replacement reserves, to replace the components as determined based upon the estimated remaining useful life of each component; provided that portions of replacement reserves need not be segregated for the replacement of specific components.
• (2) Unless otherwise required by the declaration, annual budgets need not include reserves for the replacement of (i) components that have a remaining useful life of more than 30 years, or (ii) components whose replacement will be funded by assessments authorized under section 515B.3-115(e)(1), or approved in compliance with clause (5).
• (3) The association shall keep the replacement reserves in an account or accounts separate from the association’s operating funds, and shall not use or borrow from the replacement reserves to fund the association’s operating expenses, provided that this restriction shall not affect the association’s authority to pledge the replacement reserves as security for a loan to the association.
• (4) The association shall reevaluate the adequacy of its budgeted replacement reserves at least every third year after the recording of the declaration creating the common interest community.
• (5) Unless otherwise required by the declaration, after the termination of the period of declarant control, and subject to approval (i) by the board and (ii) by unit owners, other than declarant or its affiliates, of units to which 51 percent of the votes in the association are allocated, the association need not annually assess for replacement reserves to replace those components whose replacement is planned to be paid for by special assessments levied under section 515B.3-115(c), or by assessments levied under section 515B.3-115(e)(2). The approval provided for in the preceding sentence shall be effective for no more than the association’s current and three following fiscal years, subject to modification or renewal by the same approval standards.
• (6) Unless otherwise required by the declaration, subsection (a) shall not apply to a common interest community which is restricted to nonresidential use.
• (b) Unless the declaration provides otherwise, any surplus funds that the association has remaining after payment of or provision for common expenses and reserves shall be (i) credited to the unit owners to reduce their future common expense assessments or (ii) credited to reserves, or any combination thereof, as determined by the board of directors.

EFFECTIVE DATE. The amendments to this section are effective and apply to common interest communities for their fiscal years commencing on or after January 1, 2012.

By David G. Hellmuth, Esq. and Nancy T. Polomis, Esq. 

“One Thousand Americans Stop Smoking Every Day – By Dying.” ~ Author Unknown

The Surgeon General’s warning on every pack of cigarettes warns of the dangers of smoking.  Those dangers, of course, relate to the person smoking the cigarette.  But what about the effect of smoking on the health on those around the smoker?  Based on a study released on February 12, 2007, warning signs for cardiovascular disease are higher in people exposed to secondhand tobacco smoke, adding to the link between “passive smoke” and heart disease.[1]  According to the lead author of the study, Dr. Andrea Venn of the University of Nottingham in Britain, “Our study provides further evidence to suggest low-level exposure to secondhand smoke has a clinically important effect on susceptibility to cardiovascular disease.”  Studies such as Dr. Venn’s are only the tip of the iceberg.  Research findings, health studies, and documented reports of the health risks associated with secondhand smoke abound.

In 1975, Minnesota was among the first states in the nation to adopt clean air legislation, enacting the Minnesota Clean Indoor Air Act (“MCIIA”).  The MCIIA generally prohibits smoking in public places, places of employment, public transportation and in public meetings.  Through the years, MCIIA’s definition of “public places” has been expanded and, in 2007, was expanded to include, among other places, indoor areas of bars and other establishments serving food or liquor.  On March 31, 2005, Hennepin County also passed an ordinance, Ordinance No. 24, prohibiting smoking in indoor areas of restaurants and bars located within Hennepin County.  Several other counties have followed suit.  Both the MCIIA and ordinances such as Hennepin County’s create a smoke-free environment in all licensed food and beverage establishments.  The laws and ordinances related to prohibition of smoking prevent the exposure of secondhand smoke to both patrons and employees of food establishments, thereby protecting their health.[2]  The MCIIA, however, specifically excludes “private places” such as homes from the places where smoking is prohibited.

If laws banning smoking exempt private homes, what do those laws have to do with community associations?

Since the various smoking bans went into effect, many of our community association clients have inquired as to whether or not their communities can ban smoking within the association.  Although it is clear that community associations can govern and regulate their common elements, including banning smoking within public areas, the question continues to arise as to whether or not an association can ban smoking within individual units.  Based on recent court decisions, there is legal support for banning smoking within individual units and areas not owned by the association, even if such places are not covered by the laws banning smoking.

Several years ago, Heritage Hills #1 Condominium Owners Association, located in Colorado, amended its governing documents to prohibit smoking within the community, including within individual units.  Two of the owners were smokers and disagreed with the ban on smoking within units.  The dispute resulted in litigation.  Evidence in the case showed that the condominium had always had problems with secondhand smoke infiltrating other areas of the building.  Although the association and individual unit owners attempted to take action to stop smoking infiltration from unit to unit, these efforts were ultimately unsuccessful.  The building’s age and structure made it impossible to stop smoke infiltration from unit to unit.  The trial court upheld the smoking prohibition.  In upholding the ban, the court noted that secondhand smoke constitutes a nuisance under the association’s governing documents.  The court held that the amendment to the association’s governing documents was not unreasonable, arbitrary or capricious.  The court further noted that “unit owners do not have a constitutional right to smoke.”  Although Colorado law differs from Minnesota law, one thing is clear: there is no constitutional right to smoke in Minnesota, either.

While the MCIIA exempts private homes from areas subject to the ban imposed by the MCIIA, there are other statutory provisions which may provide a basis for a ban of smoking within homes in a community association.  For example, for associations governed by Minnesota Statutes Section 515B, known as the Minnesota Common Interest Ownership Act (“MCIOA”), Section 515B.3-102(a)(1) specifically gives an association (through its Board of Directors) the power to:

adopt, amend and revoke rules and regulations not inconsistent with the articles of incorporation, bylaws and declaration, as follows:  (i) regulating the use of the common elements; (ii) regulating the use of the units, and conduct of unit occupants, which may jeopardize the health, safety or welfare of other occupants, which involves noise or other disturbing activity.

Clearly, based on this language, an association governed by MCIOA has the right to adopt rules governing the use of units and conduct of occupants.  More particularly, such an association can regulate use of a unit and the conduct within a unit which jeopardizes the health, safety or welfare of other occupants of the community.  There is no question that secondhand smoke jeopardizes the health of other residents of a common interest community, particularly apartment-style condominiums.[3]

As a supplement to MCIOA, an association’s governing documents often include language prohibiting nuisances.  Specifically, the declarations of most associations contain provisions prohibiting unit owners and occupants from engaging in activity detrimentally affecting other owners’ uses and enjoyment of the property.  These phrases are commonly referred to as “nuisance clauses,” and may be a starting point to find authority for a smoking ban within your community association.  By arguing that secondhand smoke that infiltrates from unit to unit causes a potential health hazard, an association can create a viable argument that a smoking ban is in the best health interests of all members of the Association.

If you are interested in advice and guidance of the implementation of a smoking ban, we can help.  We regularly draft rules and regulations, policies and procedures, amendments to governing documents and related materials for our community association clients.  If your association is interested in imposing a ban to address the health concerns of your residents, or if your association has questions concerning the possibility of a smoking ban, you can contact the authors, David G. Hellmuth, dhellmuth@hjlawfirm.com and/or Nancy T. Polomis, Esq., npolomis@hjlawfirm.com.

By Chad A. Johnson, Esq. 

Successful collection of community association assessments and related fees begins with the community association’s board of directors, which adopts the community association’s annual budget for expenses, assesses those expenses to the homeowners, and establishes deadlines for payment.  The community association’s board of directors should adopt a late fee policy, which provides an incentive for homeowners to timely pay assessments each month.

When homeowners will not or cannot pay their assessments to the community association, the board of directors must take action to collect the amounts due and owing. A community association’s board of directors has the choice to refer the assessment collection to a collection agency or a collection law firm.

A collection agency typically accepts collection matters on a percentage fee basis. In exchange for collecting some or all of the debt, the collection keeps a percentage of the money collected. By contrast, a law firm experienced in the collection of community association assessments and related amounts due will accept the collection matter on an hourly fee and cost basis. The law firm is compensated for its time in pursuing the collection on behalf of the community association, and is reimbursed for out-of-pocket expenses incurred, regardless of the outcome of the collection matter.

At first look, the typical collection agency compensation appears to be an advantage to a community association. However, this is only true in the case when the amounts due cannot be collected from the homeowner. In that case, the community association will not owe a fee to the collection agency, but would be obligated to pay the collection law firm for the time and expense incurred in pursuing the unsuccessful collection.

The collection agency compensation will not be advantageous when the amounts due can be collected. In that case, the collection agency receives a percentage of the money collected, which means that the community association is receiving less than the full amount due from the homeowner (leaving a deficit in meeting the community association’s expense budget). A collection law firm on the other hand collects the original amount due from the homeowner, plus the attorneys’ fees and costs incurred by the community association, as authorized by the community association’s declaration or Minnesota law. As such, the community association receives the full amount of the assessment obligation, allowing the community association to meet its original expense budget.

The processes used by collection agencies and collection law firms will typically start in a similar fashion, but will quickly become vastly different. Both a collection agency and collection law firm will begin the collection process by sending a letter to the homeowner, which advises the homeowner that a debt is owed to the community association, the amount of the debt, and that the collection agency or collection law firm has been hired to collect the debt on behalf of the community association. The initial letter must include language required by the federal Fair Debt Collection Practices Act, which includes the advice that the homeowner has thirty (30) days in which to dispute the debt alleged as due and owing.

Following the initial demand letter and the failure of the homeowner to pay the amount due and owing to the community association, a collection agency and a collection law firm will proceed to collect the debt in very different ways. A collection agency will typically follow the initial demand letter with telephone calls and follow up letters at regular intervals in an effort to convince the homeowner to voluntarily pay the amount due. However, since the collection agency is not a law firm, it cannot pursue legal action on behalf of the community association to collect the debt owed by involuntary means. When the collection agency’s telephone calls and follow letters are unsuccessful, its efforts typically conclude with a derogatory notation on the homeowner’s credit file, and the collection agency will often recommend that the community association retain an attorney to pursue legal action. At this point, the collection agency has done little, if anything, to collect the debt owed by the homeowner, and the community association is now months behind in the collection process.

A collection law firm, on the other hand, will typically follow the initial demand letter and the failure of the homeowner to pay the amount due and owing to the community association, by recommending one of two forms of legal action to collect the amount due. As part of this proceeding, the collection law firm will typically recommend one or more of the following courses of action.

1. Assessment Acceleration. Many community associations have the ability to accelerate the remaining installments of the annual assessment before commencing further legal action. The community association’s attorney will be able to advise on whether assessment acceleration is available and advisable in specific circumstances.

2. Lien Foreclosure.  In most cases, the community association may foreclose its lien by advertisement or by action. In our experience, provided there is sufficient equity in the property from which to satisfy the association’s lien, lien foreclosure is the most effective method for collecting delinquent assessments.

3. Conciliation Court Judgment Proceedings.  In some cases, conciliation court is appropriate. The community association’s attorney or manager may file a conciliation court Statement of the Claim and Summons and then appear at the hearing.  However, conciliation court has many disadvantages. First, conciliation court is a “people’s court.”  There is a perception that conciliation court referees often try to reach a conclusion with which both sides will be content. Second, either party has the absolute right of appeal to the district court.  If the homeowner appeals the community association’s conciliation court judgment, all time and effort at conciliation court is wasted.  Based on current court rules, the community association must then be represented by an attorney in district court.

4.  District Court Proceedings.  The community association’s attorney prepares a Summons and Complaint, which is served on the homeowner, who then has 20 days to respond with an Answer. If no response is received within 20 days, the community association is entitled to a default judgment.

After proceeding through conciliation court or district court, the collection law firm will often obtain a judgment against the homeowner on behalf of the community association. A judgment does not guarantee payment. However, the collection law firm may pursue a number of post-judgment remedies to collect the judgment on behalf of the community association. As stated above, the attorneys’ fees and costs incurred by the community association in retaining a collection law firm to collect amounts due and owing from a homeowner may be recovered under authority provided by the community association’s declaration or Minnesota law.

Since a collection agency’s typical compensation will result in the community association receiving less the original debt owed, and given the deficiencies in a collection agency’s methods for pursuing collection from a homeowner on an involuntary basis, a community association will be well served by referring its collection matters to a collection law firm experienced in community association collections.

By Nancy T. Polomis, Esq.

For any newly-elected Board member, the responsibilities and obligations of the job can be daunting.  Taking those responsibilities and obligations seriously is important, not only because it’s the “right thing to do,” but also because doing so is in the best interests of the Association and better ensures an amicable relationship between the Board of Directors and the Association membership.

The members of the Board of Directors of a homeowners association have a great responsibility to the association’s members to govern the association properly and appropriately.  The legal obligations of a Board of Directors apply to all Boards, regardless of the size of the community and regardless of whether a community is professionally managed or self-managed.  Ignoring those obligations—or even simply being unaware of them—can contribute to discord within a community and, sometimes, a lack of trust in the Board by the homeowners.

• Be Familiar with your Governing Documents:
• Board members must be familiar with their community association’s governing documents: the Articles of Incorporation, Declaration, Bylaws and any Rules and Regulations.  Of course, no one Board member is expected to understand all the many nuances of the governing documents, and the Board members may rely on the services of appropriate professionals to interpret and guide the Board in making decisions.  Board members should be wary of seeking advice or input from members of other associations, since those associations’ governing documents may contain different provisions than those of the association at issue.
• In particular, Board members must be familiar with and understand the maintenance responsibilities and the allocation of those responsibilities between homeowners and the association.  It is important that Board members not simply rely on the premise of “this is how we’ve always done it.”  Many associations create a maintenance chart or matrix, identifying various maintenance issues and the party responsible for that maintenance.  While certainly helpful, such charts are not foolproof.  Sometimes assumptions made are carried forward on such charts, serving only to perpetuate errors in the allocation of maintenance responsibilities.
• Act in Accordance with your Governing Documents:  Board members must act in compliance with their community’s governing documents and applicable state law.  While such a duty seems obvious, it is far more difficult to meet the duty in reality than in concept.  Board members should refer to the documents frequently to ensure that the Board is following policies and procedures that are stated in those documents.  For oft-repeated tasks (e.g., calling meetings, providing financial data, providing notice of violation/right to a hearing, etc.), the Board may wish to make a “flow chart” or “checklist” based on the provisions of the governing documents.

Consider these real-life examples of issues that can easily “trip up” a Board:

• If the Bylaws require the annual meeting to be held on the third Saturday in November, the meeting must be held on that date—even if the membership is amenable to holding the meeting on a different date.  Unless the Bylaws are amended to change the date on which the meeting is to be held, it must be held on the date stated in the Bylaws.
• If the Declaration absolutely prohibits leasing of homes in the community, then the Board of Directors must enforce that prohibition without exception.  Unless the terms of the Declaration give the Board discretion to grant waivers of a general prohibition, the Board does not have any such discretion, and must enforce the provisions of the Declaration as written, no matter how sympathetic the Board may be to a homeowner’s plight.
• If the Declaration/Bylaws requires assessment payments be made monthly or quarterly, the Association must collect payments as stated in the governing documents, even if the members would prefer to make them according to an alternate schedule.  If the membership wishes to make payments according to a schedule other than as stated in the governing documents, the association must amend the appropriate document (Declaration or Bylaws—or both, if necessary) to so provide.
• If the Bylaws or Declaration require that a certain procedure be completed or a certain report be provided to all homeowners, then it is inappropriate for the Board to ignore such mandates–even if “we’ve never done it that way before.”[1]
• If the Declaration states that it is the responsibility of the association to perform the maintenance of the decks, then, irrespective of whether the cost can be passed on to owners of units with decks, the association must perform that maintenance.

• Monitor Your Vendors (including your management company):  Some Board members may be under the mistaken impression that, if they have engaged vendors to “take care of everything,” they have shifted the responsibility for ensuring completion of those tasks identified to the vendors.  Not true.  Most associations’ bylaws include language that says, for example, even though the association may delegate a given officer’s functions to a managing agent, such delegation does not relieve that officer of the ultimate responsibility for the his or her duties.  This is most especially true for the duties of the Treasurer.  The Board of Directors is ultimately responsible for the actions of its vendors.  Granted, there may be legal action that can be taken against a vendor that breaches its contract with the association, but, nonetheless, it is the Board that answers to the association members, and the Board that is responsible for the operations of the association.  Choose and monitor your vendors carefully.
• Keep Appropriate Records:  Minutes should be kept for all Board meetings, committee meetings and association meetings.  Bear in mind that minutes are a record of what was done, not what was said.  Minutes need not be—and should not be—a transcript of the meeting.  Rather, minutes should reflect topics discussed at a meeting (thorough detail of the discussion may be omitted), votes taken and the results of those votes.
• Use Meetings and E-Mail Appropriately

• Under the Minnesota Common Interest Ownership Act (MCIOA), all Board meetings must be open to all members, except when the discussion involves certain sensitive matters.  Association members are entitled to attend Board meetings but may not participatewithout Board authorization.  They are, in effect, an audience for the Board meeting.
  • Since association members are entitled to “watch the Board in action,” a Board who acts via e-mail may indeed be violating the open meeting provisions of MCIOA.  Board members may e-mail one another to exchange ideas, etc. (so long as the “presence” of two Board members does not constitute a quorum).  However, if a quorum of Board members were to engage in an online chat room not available to all homeowners, or discuss issues and conduct votes via e-mail, such conduct may violate the open meeting law.  The purpose of the law is to allow association members to be present when the Board discusses an issue or votes on that issue.  Engaging in discussions and votes via e-mail circumvents that purpose.
  • Of course, emergency situations occur from time to time.  In the event of an emergency, a quorum of Board members could use e-mail for discussion and voting on the issue creating the emergency.
  • For those associations not governed by MCIOA, only the Minnesota Nonprofit Corporations Act (Chapter 317A) applies.  Under that statute, a board may hold meetings via remote communication, provided everyone participating is able to “hear” each other simultaneously (conference call, private chat room, etc.).  Since exchanges of electronic mail messages do not allow for simultaneously “listening,” an e-mail exchange does not count as a permissible meeting by remote communication.  Further, although associations not governed by MCIOA are not requiredto hold open meetings (unless, of course, their governing documents so require), Boards should endeavor to hold meetings in as open a manner as possible to avoid the perception that business of the association is being conducted “secretly.”
    • A Board member exercises the required “good faith discharge of duties” by seeking the advice and opinions of its professional advisors – including accountants, attorneys, and management agents – as long as the director reasonably believes that the matter is within the advisor’s professional or expert competence.  Board members must, therefore, take reasonable steps to ensure that their advisors are well-versed in community associations.
    • In making a determination as to whether a director acted prudently, many courts and attorneys look to the business judgment rule, which provides that if board members act in what they believe to be the best interests of the association – in an ordinarily prudent manner, after reasonable inquiry – then those directors are not liable for their decision, even if their decision later proves to be a poor one.  The protection afforded by the business judgment rule highlights the importance of documenting the board’s actions in conducting a reasonable inquiry.
    • If unsure as to whether a proposed action is permitted or advisable, a Board should ask for an opinion before it acts—not after.  It is far easier to avoid a misstep than to correct one already taken.
    • “Acting prudently” includes abiding by and uniformly enforcing the community association’s governing documents.  If the Board of Directors makes a business decision against enforcement of a particular provision in the governing documents (often because it is unpopular or will affect a significant number of homeowners), the Board must appreciate the consequences.  The Board may unintentionally establish a precedent that makes future enforcement difficult, and may open itself to liability for failing to discharge its responsibilities to the community association.  Remember, the fact that a restriction is unpopular does not absolve the Board from its obligation to enforce that restriction.
• Consider Board Training.  Because serving as a member of a homeowners association’s Board of Directors is so important—and so daunting—many boards opt to participate in training and planning sessions for association boards.  Such training can help boards conduct effective board and association meetings, facilitate resolution of conflicts, and generally understand their job responsibilities—and limitations—better.  Participating in such training and planning can also help directors recognize potential pitfalls and special areas of concern that may need to be addressed, either in the long term or short term. Training also avoids the dangerous “seat-of-the-pants” mode of governance some associations employ.

• Act in Association’s Best Interest:  The responsibility to act in the best interest of the association is paramount in fulfilling the role of Board member.  In a community association, where homeowners pay assessments – often incorrectly called “dues” –­ to an organization that is responsible for administering the community and safeguarding property values, the need to put the best interests of the community association in first position should be obvious.  Homeowners depend on their community association, through its Board of Directors, to maintain, protect, preserve and enhance the common areas and exteriors of the property, which, as a result, safeguards each homeowner’s investment.
• Each Director must put aside personal agendas, remembering the legal obligation to act in the best interest of the association as a whole. 
• Board members must remember that they must always act as a unit – no individual has the authority to independently make decisions.  Homeowners, however, do not always appreciate this fact.  Often (particularly when an association is self-managed), homeowners will contact a Board member to seek assistance on a particular issue.  The director contacted should advise the homeowner to submit issues in writing for Board consideration.  Board members should avoid telling homeowners that they will “go to bat” for them or otherwise champion their cause.  Doing so will only cause discord in the event the Board acts in a manner contrary to the homeowner’s position, and may call into question whether the Board member is in fact acting in the best interest of the entire community association.
• Act Prudently:  Upholding the duty to act in the best interest of the community association is not simply a good idea, it is the law.  Most community associations are incorporated under the Minnesota Nonprofit Corporations Act, Minnesota Statutes Chapter 317A, which provides that, “a director shall discharge the duties of the position of director in good faith, in a manner the director reasonably believes to be in the best interest of the corporation, and with the care an ordinarily prudent person in a like position would exercise under similar circumstances.”  Minn. Stat. § 317A.251.

Consequences of Misconduct

An association entrusts its Board of Directors with the responsibility to act in the best interests of the association.  The members of the association rely upon the Board to exercise its discretion and best judgment on behalf of the association—not to exploit their positions for personal gain or advantage.  When directors fail to carry out those responsibilities, they may be found to have breached their fiduciary duty to the members of the association.

Clearly, no association can reasonably expect perfection of its Board of Directors.  Directors are volunteers, donating their time, talent and wisdom to the association.  Mistakes happen.  While many directors assume the association’s insurance will cover any “misstep,” such an assumption may prove dangerous—and, under the right circumstances, financially and/or emotionally ruinous.  While insurance and statutory shields offer some protection (see below), a wise Board member seeks to avoid errors and breaches in the first place, rather than relying on the availability of insurance and other liability shields.  Even if a claim of breach is an insured claim, the emotional cost and time involved in defending the claim are significant.

Board member protections
Community association directors are protected from liability under statutory law, which includes protections afforded under the Minnesota Nonprofit Corporations Act, as discussed above.  In addition, as long as a director does not receive compensation for service (which includes not only direct payment, but also, for example, a reduction in annual assessment payments during a director’s term of service), the director is not civilly liable for an act or omission that was made in good faith, was within the scope of the person’s responsibilities as a director or officer of the community association, and did not constitute willful or reckless misconduct.  (See Minnesota Statutes §317A.257.)  While some governing documents include provisions for compensating directors for their service, accepting any compensation eliminates the liability shield provided under the statute.  (Directors may be reimbursed for out-of-pocket expenses without jeopardizing their liability shield.)
Conclusion

Serving as a member of an association’s Board of Directors can be overwhelming, especially at the beginning of one’s term.  Such service, however, is also rewarding.  Armed with reasonable expectations and an awareness of the responsibilities of the job, a director can make his or her term on the Board a time of building knowledge and building relationships—all while building a stronger, more effective homeowners association.

[1] Note that associations governed by the Minnesota Common Interest Ownership Act (MCIOA) are required to provide an annual report at or prior to the annual meeting of the association, irrespective of whether the Bylaws of the association so provide.  See Minn. Stat. Section 515B.3-106 for details as to the minimum information that must be contained in such annual reports.

By Nancy T. Polomis, Esq. 

While many associations are focusing their energy and resources on collecting every possible penny from delinquent homeowners, an association’s board of directors cannot disregard the rest of its obligations to the association membership, including periodic reviews of the association’s governing documents, particularly with regard to collections-related matters.  In some cases, such reviews will highlight significant shortcomings, while in other cases, the review is merely a timely refresher for the directors.   As you review your governing documents with legal counsel, here are a few things to keep in mind:

• Do the documents allow the association to establish rules regarding conduct within a Unit or Lot, or just within the Common Areas?  (An association cannot impose a fine for violation of a rule the association has no right to impose.)
• Has the current fine schedule been recently reviewed, updated and distributed to homeowners?  (A $10.00 fine established a number of years ago will probably not act as any great deterrent to a potential violator.)  Are fine amounts limited by the terms of the Declaration or Bylaws?
• Do the governing documents allow the association to collect late charges, interest or both?  Are specific late charge or interest amounts set forth in the governing documents (and, if so, is the association abiding by those provisions of those documents)?
• Are the late charges/interest charged by the association reasonable?

Associations need to be aware of what their governing documents say, and what the association is permitted to do under the terms of the governing documents.  Sometimes, in its zeal to collect unpaid assessments, an association may overstep the authority granted in the governing documents, which can lead to unpleasant results for the Board of Directors and the association as a whole.

Hellmuth & Johnson stands ready to assist you in your review of your association’s governing documents or any other community association issue.  Please contact Nancy Polomis at (952) 746-2105 or npolomis@hjlawfirm.com for more information.

By Phaedra J. Howard, Esq.

We hear a lot about open meetings, but what does that really mean for an association?  With a few exceptions that will be discussed below, the Minnesota Common Interest Ownership Act (“MCIOA”) requires that board meetings be open to the members.  Associations that are not subject to MCIOA should abide by the open meeting provisions even if not required to do so under their governing documents for one simple reason:  transparency.  Homeowners become suspicious of boards that meet and make decisions in secret.  But when the board’s actions are open and transparent to the members, it reduces suspicions and accusations and helps the board focus on the business of running the association instead of wasting time having to defend its every action.  Having open meetings does not mean that the members are entitled to participate in the discussions or voting process, but simply that they are entitled to observe the Board as it carries out the business of the Association.  Many associations opt to hold an open forum before or after the official meeting to allow homeowners to bring issues or concerns to the board’s attention, but once the open forum portion is done, homeowners should be quiet observers and not active participants in the remainder of the meeting.

MCIOA permits board meetings or portions thereof to be closed to the members to discuss the following:  (1) personnel matters; (2) pending or potential litigation, arbitration or other potentially adversarial proceedings, between unit owners, between the board or association and unit owners, or other matters in which any unit owner may have an adversarial interest, if the board determines that closing the meeting is necessary to discuss strategy or to otherwise protect the position of the board or association or the privacy of a unit owner or occupant of a unit; or (3) criminal activity arising within the common interest community if the board determines that closing the meeting is necessary to protect the privacy of the victim or that opening the meeting would jeopardize investigation of the activity.[1]    Rule violations and collection matters typically fall within the second category and therefore can and should be discussed in private and not in front of the general membership.  Any matters not falling within one of the above exceptions are subject to the open meeting requirements and may not be discussed, voted on or acted on outside of an open meeting of the board.  This includes, but is not limited to, contracts, budgets, maintenance or repair projects, etc.

Under the Minnesota non-profit corporation statutes, Chapter 317A, a board meeting may be deemed to occur any time a quorum of board members are together discussing association matters.  Therefore, board members must be careful not to conduct association business (other than matters falling within the above exceptions) outside of regular or special meetings unless proper notice has been given and the members have an opportunity to observe the discussion and vote.  This does not mean that members of the board cannot gather socially or that they cannot meet with a potential contractor or vendor in an information-gathering meeting.  It does mean, however, that the board cannot vote on whether to approve a contract, budget, etc. or make any other decisions about association matters while they are gathered together for some other purpose outside of a properly noticed meeting.

The problem arises for many associations when issues come up between board meetings that require action or a decision before the next regularly scheduled meeting.  It is not uncommon for board members to simply call or e-mail each other to discuss and/or decide on a matter.  However, this common practice may violate the open meeting requirements under MCIOA and/or the meeting requirements of Minnesota Statues Chapter 317A.  Unlike MCIOA, Chapter 317A does not contain any requirement that board meetings be open to non-board members.  However, it does require that meetings be conducted in a manner that provides for simultaneous participation and discussion between the board members.[2]  This can be accomplished through an in-person meeting, a conference call, through the use of a dedicated chat room or some other web-based product that permits participants to communicate live with each other, or any combination of the above.  It cannot, however, be done via an e-mail discussion or vote, since regular e-mail does not permit the participants to engage in a “live” discussion.  An action that is required or permitted to be taken at a board meeting may be taken by written action signed, or consented to by authenticated electronic communication, by all of the directors.[3]  Even if all of the directors consent to an action in writing or by authenticated electronic communication (note that regular e-mail may or may not qualify as an authenticated electronic communication), thereby satisfying the requirements of Ch. 317A, the board may still be in violation of the open meeting requirement under MCIOA unless the matter was one of the above noted exceptions that are permitted to be discussed in a closed session.

So what should boards be doing to ensure that they satisfy the requirements of Chapter 317A and the open meeting requirements under MCIOA?  The simple answer is to never hold any discussions or make any decisions outside of a properly noticed meeting.  However, since that solution is not practical for many boards, I typically recommend that boards be proactive to the extent possible and establish parameters at a meeting that provide guidance and authority for one or more board members or other authorized agent to take certain kinds of action outside a meeting under established criteria and/or in emergency situations.  In this way, the decision has been made at the open board meeting and the authorized person or persons are merely carrying out that decision later on.   A board resolution or meeting minutes should document the decision and the extent of authority granted and/or the criteria that must be met prior to an exercise of that authority.   This solution will not work in all cases, but it can help boards maneuver through the statutory open meeting requirements while recognizing that it is not always possible to wait until the next meeting or call a special meeting of the board to make certain decisions or take certain actions.

If you have any questions about open meetings, please feel free to contact the author.

By David G. Hellmuth, Esq. Last updated May 15, 2011 

Recent newspaper headlines throughout the country have made it clear that the mortgage industry is in trouble and that the real estate market is in severe decline.  As a result, mortgage foreclosures are on the rise due to declining economic conditions. 

Many of our community association clients have asked: “What is the effect of these mortgage foreclosures on our ability to collect assessments?”

Unfortunately, community associations can become unintended victims of mortgage foreclosures.  Since liens for association dues are generally subordinate to first mortgage liens, these liens are eliminated (either in whole or in part) by first mortgage foreclosures.  However, community associations have many potential strategies and legal rights when owners become delinquent.  With that in mind, community associations should consider:

• Establishing and strictly enforcing collection policies and procedures in order to minimize potential losses due to mortgage foreclosure;
• Taking early action when homeowners become delinquent on their association dues;
• Recording liens and considering starting a foreclosure prior to first mortgage lenders taking action;
• Reviewing owner titles to ascertain status of association liens against owners;
• Pursuing personal lawsuits against owners who have failed to pay assessments but who may be subject to mortgage foreclosure;
• Having legal counsel determine the amount of the association’s “superlien” under Minnesota Statutes, Chapter 515B, if applicable;
• Recording Request for Notice of Foreclosure against property, if Owners become delinquent, so that the association is notified if mortgage foreclosure proceedings are commenced.

Timely collection of association assessments is vital to an association, since assessments fund the operation of the community.  To the extent some owners do not pay assessments, the obligation ultimately falls onto the other owners, since assessments are generally the sole source of funding.

Please contact our collection department in the event that your association is experiencing issues with delinquent owners.

By Nancy T. Polomis, Esq. Last updated June 15, 2011 

The 2009 legislative session brought changes to laws affecting foreclosure of mortgages and association liens and vacant properties. Most changes affect the mechanics of the foreclosure procedures, but a few changes were clearly aimed at addressing the growing number of foreclosures and the problems related to vacant properties.

Homeowners May Now Postpone Sheriff’s Sales

Previously, a sheriff’s sale could be postponed by the foreclosing creditor only.  However, a homeowner now has the right to request that a sheriff’s foreclosure sale be postponed for up to five (5) months from the originally-scheduled date of the sale.  In order to postpone the sale, the homeowner need only complete and record an affidavit, and provide a copy of the recorded affidavit to the sheriff and to the foreclosing creditor.  The creditor is not required to publish any notice of postponement or even to modify its published Notice of Sale.  In exchange for the right to postpone the sale, however, the homeowner agrees that the redemption period following sale after such postponement is reduced to five weeks.  As a result, the foreclosure process is not unduly extended by any such postponement.

A homeowner may request a postponement only once, even if there are foreclosure proceedings commenced again after reinstatement during the postponement, and the postponement option is available only on homesteaded residential properties (one to four dwellings).  Postponing the sheriff’s sale gives a homeowner more time to reinstate the loan by paying the amount in default (the back payments), as opposed to being forced to pay the entire loan balance off during the redemption period.

Such postponements may prove to be a benefit for associations governed by the Minnesota Common Interest Ownership Act (MCIOA), so long as the foreclosure sale still takes place after the postponement.  MCIOA allows the association to retain a “superlien” for assessments accruing during the six months prior to the date on which the redemption period expires, so whether the redemption period is five weeks or six months, the association is entitled to collect six months’ assessments from the foreclosing lender.  Further, the lender takes full title in just five weeks after the sheriff’s sale, meaning the association has a new “dues paying” member (the lender) on the books sooner.

If the delinquent homeowner is able to reinstate the mortgage during the period of postponement, that homeowner retains ownership and possession of the home.  If the homeowner is also delinquent on his or her association assessments, the association may then be in a position to pursue collection of those unpaid assessments more aggressively.

Since 2009, only a small percentage of homeowners have taken advantage of the opportunity to postpone sheriff’s sales, usually in conjunction with efforts to complete a loan modification or short sale.

Cities Gain Right to Secure Vacant Buildings

Effective August 1, 2009, if a building becomes vacant and is deemed hazardous because it has not been secured—and the building could be made safe by securing it—the city may order the owner of the building and holder of the sheriff’s certificate to secure the building.  If the building is not secured, the city may do so, and the costs associated with securing the property may be assessed against the property.  “Neighborhood associations”—which by definition would include homeowners associations—may request that they also be notified of such demands.  Associations are encouraged to notify city officials of the association’s desire to be notified of vacant buildings in the community.  While many associations are usually aware of vacant homes in the association, requesting formal notice from the city ensures that the association is “in the loop” regarding those properties.

Lenders Now Have Obligation to Secure Vacant Buildings

Previously, foreclosing lenders had the right, but not the obligation, to enter foreclosed properties to secure them and protect them from waste and trespass.  As of August 1, 2009, however, if a property is vacant or unoccupied and the holder of the sheriff’s certificate has knowledge of facts that support a court’s determination that the property has been abandoned, the certificate holder has a duty and obligation to enter the property, make reasonable inspections, change the locks on the doors, install locks on windows, and ensure that all locks are functioning properly.  Such certificate holders may (but are not obligated to) board windows, doors and other openings, install alarm systems, or otherwise prevent or minimize damage to the property from the elements, from vandalism, trespass or other illegal activity.  The costs related to securing the property may be added to the balance due or the costs allowable on redemption.

Cities Have Right to Reduce Redemption Period for Abandoned Properties

As many associations know, the typical six-month redemption period following a foreclosure sale can be reduced to five weeks if the property has been abandoned.  Evidence of abandonment would include, for example, boarded windows and smashed doors, as well as terminated utility service.  The right to request such a reduction was previously limited to the foreclosing party (usually, the first mortgage holder).  Such lenders often opted not to seek an order reducing the redemption period because of the cost and time involved.

In 2009, the foreclosure statutes were modified to allow cities to make a motion to a court to request a reduction in the redemption period.  If this right is exercised by cities, it should allow cities to minimize the time that abandoned properties are owned by the homeowner that has abandoned the property, and allow lenders to market and sell the properties more quickly.  To date, however, few cities seem to be exercising the right to reduce redemption periods on abandoned properties.

While these statutory provisions will not necessarily solve the problems associated with vacant properties, they do impose a higher duty upon foreclosing lenders to monitor their properties and to take steps to protect them from trespass and the elements.

By Chad A. Johnson, Esq.

There are a variety of options available to restrict or regulate leasing within Minnesota community associations, depending on the desired end result. The available options range from implementing rules and regulations to regulate leasing and govern occupant activity to amending a community association’s declaration to restrict or limit or prohibit leasing of community association units.

Implementation of Leasing Rules and Regulations

A community association’s bylaws and applicable Minnesota law generally provide authority to the board of directors to adopt rules and regulations regarding the operation of the community association.  The board of directors typically maintains implied or express authority to regulate the use, maintenance, repair, replacement and modifications of common elements and units.  With this authority, the board of directors may establish and levy fines for violations of the community association’s rules and regulations.

A community association’s board of directors may therefore create rules and regulations specifically addressing leasing and imposing fines for violations of those rules.  These rules could include requirements that (i) owners provide certification that the owner completed a background check on the prospective tenant (using a professional company specializing in providing such services); (ii) owners register the property with the community association as a rental property, and provide and maintain current contact information for both the tenant and owner; (iii) owners include language in any lease that it is subject to the terms of the community association’s governing documents (articles of incorporation, bylaws, declaration, and rules and regulations), and a violation of any of the governing documents constitutes a violation of the lease; (iv) the community association is not required to address any maintenance issue or other issue unless such issue is raised by the owner of the property (except in the case of an emergency), and that the community association is entitled to assess an administrative fee whenever a tenant directly contacts the community association (except in the case of an emergency); and (v) move-in/move-out may be conducted only during specified times and upon prior written notice to the community association, and the parking of moving trucks and related vehicles may be regulated.

Fines for violation of any of these types of rules could be significant, and will vary depending on the type of property and general community standards.  For example, a fine for failing to provide certification of a background check could be $500.00; the fine for failing to register a rental property could be $250.00.  The fee assessed each time a tenant directly contacts the community association (except in an emergency) could be $100.00.  Many community associations charge a move-in/move-out fee of $200.00 to compensate the community association for damage to the common elements (damage to hallways/elevators in a multi-story condominium, and damage to sod, curbs, doorways, etc., in a townhouse community), but the fee should be equally assessed against owners of owner-occupied and non-owner-occupied units; some community associations assess a separate fine ($100.00 or more) for failure to notify the community association in advance of a move-in/move out event.

Imposing such fees and fines may be sufficient to curb the number of units leased in the community association, or at least to encourage a bit more investigation on the part of the leasing owners to ensure their tenants are unlikely to violate the governing documents, thereby minimizing the fines and fees assessed to the owner.

In general, homeowner approval is not required to adopt rules and regulations.  The board of directors is wise to seek homeowner input on any proposed rule, but this is generally not required.  A community association attorney can offer a template of a rules and regulations manual, and will be able to review the proposed rules and regulations manual to ensure that it is consistent with the declaration and bylaws.

Amendment of Declaration to Restrict or Prohibit Leasing

A more permanent (and more involved) approach to addressing rental units in the community association involves an amendment to the declaration to restrict or prohibit leasing.  Such an amendment could prohibit leasing entirely (effective as of the date the amendment is recorded in the county property records), or could limit or prohibit leasing, subject to certain exceptions, including any or all of the following:

• An exception “grandfathering in” units that are subject to a lease as of the date the amendment is recorded.  This “grandfathering” could apply (i) for the balance of the lease term, (ii) for as long as the unit is leased (whether under the current lease or a new one), (iii) for as long as the current owner owns it, or (iv) to any unit leased as of the date the amendment is recorded, without regard to any change in ownership.

• A hardship exception, by which an owner could apply to the board of directors for a waiver of the general prohibition on leasing in the event extenuating circumstances should merit a waiver (e.g., long term military deployment, long term absence to care for ill family member or to receive medical treatment).

• An exception permitting ownership by an estate planning trust or permitting short term corporate ownership following relocation of the owner.

• An exception permitting leasing to family members

The declaration amendment may also provide that leasing is prohibited as of a date sometime in the future (e.g., 6 months after the date the amendment is recorded), so that owners currently leasing their units would have the opportunity to notify tenants of the change and make appropriate arrangements.

In order to amend the declaration, a community association must follow the amendment procedures in its current declaration and Minnesota law, as applicable.  In general, a community association must obtain the consent of a percentage of homeowners (typically more than a majority and in rare situations this could be as high as unanimous consent).  Once the necessary homeowner consent is achieved, many community associations are required to obtain consent from a majority of first mortgage holders, but this obligation may be limited by the declaration language.  Once all required consent is received, a community may then file the declaration amendment with the county and thereafter enforce the new requirements.

Community associations must remember that owners of owner-occupied and tenant-occupied units may oppose restrictions or prohibitions on leasing for a variety of reasons.  Given the time, effort and expense of a declaration amendment project, community associations will be wise to ensure support for any declaration amendment before starting the process.  If the support is present, a community association can justify the time, effort and expense in pursuing the project, but continuing homeowner support is key to achieving a successful conclusion to the project.  A community association can maintain homeowner support by keeping them involved in the process: regularly seeking input on document drafts and conducting at least one informational meeting before a vote is taken.

If your community association is experiencing issues with non-owner occupants, seek out experienced legal counsel to guide you through the decision on whether your community association should adopt rules and regulations to regulate leasing or amend the declaration to restrict or prohibit it.  For additional information, contact Chad Johnson at 952-941-4005 or cjohnson@hjlawfirm.com.

By Nancy T. Polomis, Esq. 

New Year’s resolutions are in abundance these days:  Lose weight.  Get organized.  Call Mom every Sunday. Exercise every day.  But wait, those are all personal resolutions.  How about some resolutions by community associations to help foster a sense of community?

Encourage Open Communication

In many associations, homeowners routinely complain that “they don’t know what’s going on.”  Fists raised in protest, they pester the Board for information, claiming they “have a right to know!”  “Lack of transparency” is one of the concerns most often voiced by homeowners.

While some Board discussions must take place in private, and some decisions must be made confidentially, most association business should be conducted openly.  As non-governmental entities, associations are not subject to “open meeting laws” that govern public meetings (City council meetings, school board meetings, etc.).  However, if the association is governed by Minnesota Statutes Chapter 515B, the Minnesota Common Interest Ownership Act (MCIOA), then most board meetings are required to be open to members of the association.  If homeowners are able to observe the actions and decision-making process of the association, it is less likely that homeowners will object to actions taken by the Board.  They may not agree with the actions taken, but they cannot say they were not aware of the issues, the concerns of the Board, and the basis for the decisions reached.[1]

Even associations that are not governed by MCIOA may wish to consider having open Board meetings.  Facilitating open communication minimizes the “us vs. them” mentality that affects some associations, and shows homeowners that there is “rhyme and reason” to the decisions reached by the Board.

While it is important to conduct Board business in the open, it is also important to lay reasonable “ground rules” at the beginning of each meeting:

• Remind association members that they are welcome to observe the meeting, but, since they are not members of the Board, they are not entitled to participate in the meeting unless invited to do so by the Board.
• Establish an “open forum” at the beginning or end of Board meetings, during  which homeowners have an opportunity to raise questions, voice concerns or express opinions on issues currently before the Board.  Be sure to set aside a specific amount of time for the forum.  When that time period has expired, close the forum.  Allowing an open forum to go on “until everyone has had a chance to speak,” while noble, may hamper the Board’s ability to complete association business in a timely manner and often results in chaos.
• Encourage homeowners to submit questions, concerns, etc., in writing before the meeting.  This practice documents the homeowner’s concerns, and reflects the seriousness of the issue to that homeowner.  The Board, in turn, should give those concerns the same serious attention the homeowner did in taking the time to put “pen to paper” in making the written submission. Before the meeting, ask if the homeowner would like to be placed on the meeting agenda to discuss his concerns.  Placing the matter on the agenda allows the Board to plan for the discussion (both in terms of time and documentation/preparation) and will also reduce open forum time that homeowner may wish to use to address the Board.

Speak Kindly of Your Neighbors

Remember the Golden Rule you learned as a child?  “Treat others the way you want to be treated.”  It still applies.  When a homeowner is upset, she may react strongly or emotionally to a comment or question.  An effective tool for disarming the anger that homeowners may express is to remain calm and keep the discussion professional and focused.  Avoid making the issue “personal”—even if it is.  Stick to objective facts.  If the dispute involves the Association’s authority to take a specific action, cite the provision in the governing documents or law that support the Association’s position.  If it becomes clear that civil discussion can no longer happen, stop.  Re-schedule the discussion for a later date, when tempers have cooled.  If necessary, consider engaging an objective mediator or facilitator who can ensure civil discussion and, one hopes, civil and amicable resolution to the problem.

Above all, never speak disrespectfully or unkindly about a homeowner, in public or even in private Board sessions.  Such comments always seem to find their way back to the homeowner, and will serve no useful purpose—and usually serve only to add fuel to an already-blazing fire.  If the Board treats all homeowners with dignity and respect, they should expect the same in return.

Ask For—and Accept—Help from All Members of the Community

Every association has one: the Complainer.  The Complainer complains that the Board isn’t doing its job, the grounds look awful, the dues just keep going up, his neighbor’s deck got fixed but his didn’t, etc.   Rather than listen half-heartedly to the complaints—or worse, complain about the Complainer—ask the Complainer to help resolve the issue.  If the complaint is that the grounds look awful, ask the Complainer to form a committee (overseen by the Board, of course) to look into changes in groundskeepers, landscaping, etc.  If the Complainer fails to produce anything for the Board to consider, but continues to complain, the Board can point out that it is interested in hearing the Complainer’s proposals and wonder when he will be ready to present them to the Board.

Sometimes, the complaint is based on lack of knowledge—which often stems from a lack of communication.  As discussed above, open communication between the Board and association members goes a long way toward dispelling rumors—and complaints.

If, according to the Complainer, nothing the Board does is right, encourage the Complainer to consider serving on the Board.  If a Complainer is elected to the Board, he will see that the Board really does do a great deal of work, using limited financial resources as effectively and efficiently as possible.  The Complainer may still complain initially, but, usually, once he “digs into” association business, he sees just how difficult it is to satisfy everyone’s needs and desires.  He may even have some suggestions for dealing with Complainers.

Community associations are, at their root, communities.  By encouraging a sense of neighborliness, community associations may find that there is less acrimony, less ridicule, more respect, more encouragement and more cooperation—all of which will no doubt lead to more pleasant living for everyone.