Chapter 7 DUTIES OF COMMON INTEREST COMMUNITIES

JurisdictionNorth Carolina

7 DUTIES OF COMMON INTEREST COMMUNITIES

§ 7.01. In General

There are a number of duties of an association — whether a planned community or a condominium association. Responsibilities of these organizations are generally not discretionary — they have to be done. Since most associations are nonprofit corporations, the articles of incorporation will generally set forth the powers of the association, which may or may not be done. These are not necessarily duties. A right or power to do something is not the same thing as an affirmative duty or obligation to do something. An association always has the power to exercise a duty.1 With planned communities and condominium associations, affirmative duties of the association are generally found in the declaration, bylaws, PCA, Condominium Act (and the Unit Ownership Act for older condominiums) and Nonprofit Act. These duties also arise out of sound management practices and common law principles governing board members for nonprofit corporations, as well as some specific statutory requirements.

A failure to fulfill a duty can subject the association to liability. An association organized as a corporation acts through its board. Thus, an association's failure to act in fulfilling a duty generally results in a claim against a board member for negligence or breach of fiduciary duty. A failure to fulfill a duty can also result in a claim against the association itself. However, not all duties require affirmative action on the part of board members for an association. For instance, there are times when it would not be advisable for the board to authorize legal action to enforce covenants, even though, broadly speaking, enforcing the covenants is indeed a duty of an association. What is required of the board, acting on behalf of the association, is thoughtful consideration of all issues and questions that come before the board and making a reasonable business decision as to what sort of action, if any, is required of the association. In instances where the board is unsure of what its responsibilities are, the board should consult with legal counsel.2 If decisions cannot be made without consulting experts such as engineers, contractors, accountants or lawyers, the board should consult such experts prior to making a final decision on any matter. So long as the board follows these guiding principles, associations, acting through their board, will generally fulfill their responsibilities.3

§ 7.02. Budgeting

Any association that has expenses should have a budget. The thoroughness and complexity of the budget will vary from community to community. Communities with limited amenities and no pool, tennis courts, clubhouses, private roads, golf courses, lakes or other major amenities to maintain, will undoubtedly have smaller, less complicated budgets. However, a community with private roads, pools, clubhouses, BMPs, tennis courts and other improvements or amenities will have a much more detailed budget that is more akin to the budget of a small municipality. Most communities fall somewhere in between these two extremes. Townhome communities will have to allocate reserves for siding and roof replacement on townhomes that they may be responsible for maintaining. Even communities not responsible for exterior maintenance may have to allocate reserves for the maintenance of buildings or other improvements on common elements. Regardless of the form or size of the community, having a budget for annual association expenditures is an absolute responsibility of an association.

A budget serves several functions for an association. First, it serves as a roadmap for the budgeting period (typically annually). Throughout the year the income and expense statements may be compared against the budget to determine how the association is doing financially. This allows the board to make necessary adjustments throughout the year based on whether the association is "over" or "under" budget. Second, it serves to determine the amount of assessments to be levied against homeowners. In this regard, the budget serves to set priorities for the community. Neither the PCA nor the Condominium Act have a minimum or maximum assessment that can be charged to an owner. Most declarations limit the maximum amount by which assessments can be raised without a vote of the membership. However, within this maximum, the board has the discretion to decide how, or even whether, to raise assessments on owners. In exercising this discretion, the budget forces the board, and in some instances the membership, to set community standards and priorities.4 The board retains the right to make spending adjustments based on increased and decreased revenues during the year, even after the budget is deemed "ratified" by the members.5

Within a budget, there are mandatory items of expense and discretionary items of expense. Mandatory items include items such as landscaping, insurance, management fees and other normal recurring costs of the association. Discretionary items may include certain repairs that need to be made but are not absolutely necessary or based on some sort of annual contract or maintenance agreement. A budget should start with mandatory items and end with discretionary items. Fundamentally, a budget consists of three distinct entries: (1) income, (2) expenses, and (3) reserve fund allocations. Income for associations is mainly from assessments levied from owners. However, income may also be derived from interest in deposit accounts, fines and membership fees charged to owners or non-owners to use amenities.6 Expenses are all the normal operating expenses for the association that the entity anticipates incurring for the budgeting period. Finally, reserve fund allocation "expenses" in the form of the association "paying itself" for anticipated future liabilities. A reserve fund allocation, in its most basic form is the association setting aside funds for future anticipated liabilities such as maintenance of roofs, siding or other maintenance of structures the association is responsible for and that have a finite useful life. Depending on the requirements of the declaration, reserves can or should be set aside for the exterior of homes or condominiums or the amenities owned by the association, or all of the above.7

§ 7.02.01. Planned Communities

The procedures for budgeting in the PCA apply to planned communities formed after the effective date of the PCA.8 These procedures do not necessarily apply to pre-1999 communities; however, it is good practice for all associations to follow these procedures. The process starts by the executive board adopting a budget. The board can and should, if possible, adopt the budget at an actual physical meeting of the board with a quorum present.9 An actual physical meeting is preferable when it comes to preparing a budget because the decisions that are made in arriving at a budget reflect the priorities of the entire board across a wide range of issues. If the association is operating on a calendar year, then the meeting of the board should be held in October or earlier in the year preceding the year when the budget is to go into effect. The budget should be adopted no more than 30 days before the annual meeting of the association. The budget adopted by the board is a proposed budget. It does not become a final budget until after the annual meeting of the association.10

Within 30 days of the board adopting the proposed budget for the association, the executive board must send all the lot owners a summary of the budget and a notice of the meeting to consider ratification of the budget, including a statement that the budget may be ratified without a quorum.11 Note that the full budget is not necessary to be sent to all lot owners. Rather, a summary of the budget is sufficient. Even for the largest communities, a summary of the budget should be able to fit on one to two pieces of paper, so sending the actual budget is certainly feasible. The summary of the budget should be sent along with notice of the annual meeting not less than 10 nor more than 60 days of the actual meeting.12 There is no requirement that a quorum be present at the meeting to consider ratification of the budget.13

The budget is deemed ratified unless at that meeting a majority of all the lot owners in the association or any larger vote specified in the declaration rejects the budget.14 This is not a "majority of a quorum." Rather, it is a majority of all the owners in the entire association that must reject the budget. Thus, if the association has 100 lots and 50 people show up to the meeting in person or in proxy, it is impossible for the owners to reject the budget. This places a very high burden on the membership to reject a budget that has presumably been adopted by members of the board that are more knowledgeable about the day-to-day details of the association operations and negotiations with contractors for the coming fiscal year. While the developer can make it harder for the owners to reject the budget by setting a higher percentage that must reject, it may not set a lower percentage than a majority. In this regard, the PCA makes it difficult for the membership to overturn the work of the board in compiling the budget. In the event the proposed budget is rejected, the periodic budget last ratified by the lot owners remains in place until such time as the lot owners ratify a subsequent budget proposed by the executive board.15

§ 7.02.02. Condominiums

The procedures with respect to budgeting in a condominium association apply to all condominiums — both those formed before and after the effective date of the Condominium Act.16 The process starts by the executive board adopting a budget. The board can and should, if possible, adopt the budget at a meeting of the board with quorum present.17 If the association is operating on a calendar year, then the meeting of the board should be held in October or November of the year...

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