What You Don’t Know Could Hurt You

Jonathan Ebertshauser: We’ll go ahead and introduce ourselves. My name’s Jonathan Ebertshauser, I’m a partner here at CHDB Law.

Erin McManis: Hi, Erin McManis. And thank you all for joining us today. And I think Jonathan’s going to get us started, but we have kind of pretty broad issues of topics to discuss and we know there’s quite a bit of experience for everyone watching on Zoom, so hopefully we might be able-

Diana: Can I get the Tylenol?

Jonathan Ebertshauser: Diana, it looks like you’re unmuted. There you go.

Diana: Sorry, they all just heard I needed an Excedrin.

Erin McManis: It hasn’t even started yet. You don’t need-

Jonathan Ebertshauser: Don’t we all? Don’t we all? So we’re talking about what you don’t know could hurt you. The goal today for us, and Erin and I have really gone through the statutes to identify details in the statutes that we as practitioners forget, that managers forget, that boards forget. The details and nuances that as we go through our practice and our lives, we see big picture. And we understand the gist of what the law is, but we forget those details that can get us into trouble.

And the reality is when we’re talking about opposing counsel, we’re talking about homeowner plaintiffs, they’re looking for loopholes. They want to find ways to get out of violations. They want to get out of the issues that they’ve encountered with their homeowners’ association. And it’s really, we have to recognize that homeowners are at an advantage in that hindsight’s 20/20. And they’re able to scrutinize our decisions with a fine-tooth comb. Where in the moment, we think we’ve captured everything, but it’s easy to find those details when you take actual facts and place them against statutory case laws and things like that.

Erin McManis: And I think too with us, I’ve been practicing for a while. And for everyone watching, I know you’ve been in the industry for a while. It kind of gets sometimes these statutes just become second nature, but you forget what the actual statute really says. And I know when we were preparing for the presentation, we were talking about some statutes we wanted to discuss and we were going back and forth between us on, “Well, what does this section say?” And eventually, Jonathan just brought out his statute book over lunch, which was slightly embarrassing that he just keeps carrying it around everywhere. But that’s what we need to do and that’s what we wanted to dive into today.

Jonathan Ebertshauser: Perfect. And we have the chat feature enabled. With a group this size, it tends to be easier to field those questions through the chat function. So feel free to shoot those in. We’ve got Andrea, our client relations director, on board with us today to help us navigate those chats and she’ll read off your questions to us. We will answer them as we work our way through.

And we’re going to start our presentation with diving into the Nonprofit Corporation Act. So the first thing that we noticed was the articles and bylaws amendments. ARS 10-11021 says that if a membership vote is required for a bylaw or article amendment. So we look to your bylaws, we look to your articles. If it says that membership approval is required in order to amend the bylaws or articles, we need to look to the statute, not necessarily to the document itself, on what our voter threshold would be to amend that document. Because the statute is going to supersede the actual text of your bylaw or articles.

In ARS 10-11003 it tells us a process for how to amend our bylaws in our articles. And it says that the board has to actually take the step of recommending the amendment. And that’s why you’ll see when we’re drafting bylaw and article amendments for membership approval we’ll start off with, the purpose of this membership meeting is to consider a bylaw amendment. The board is recommending your approval of this amendment. That’s a statutory requirement that the board actually recommends the approval. Unless we find that there’s a conflict of interest or some special circumstance that would say, that would indicate that the board doesn’t need to recommend. This happens a lot when we’re talking about a membership initiative where members are seeking to amend the bylaws and the board may not necessarily agree with the amendment. But the statute tells us that the board has to take an extra step in those cases. We have to identify to the membership why we aren’t recommending the vote, why we aren’t recommending the amendment. Not something that is easily forgotten.

So you kind of get the gist of what we’re talking about today, the things that’s easy to forget. Not everyone knows that you have to recommend it. Not everyone knows that we have to identify why we aren’t recommending it. So keep that in mind as you move forward.

And then the important thing is that even if your bylaws talk about a 10% membership approval to amend the bylaws, not the case, the statute controls, we have to seek 2/3 of the vote cast once a forum is established, forum being whatever is in the bylaws with the articles, or a majority of the voting power, whichever is less. So unless our bylaws or articles create a higher threshold than 2/3 of those votes cast. So let’s say maybe your bylaws say we need 2/3 of all votes in order to amend the document, we would look to 2/3 of those votes cast or a majority, whichever is less.

Erin McManis: And that just is for if it must go to the membership, right? Can the board still unilaterally [inaudible 00:05:23]?

Jonathan Ebertshauser: Great question. Yep, if we’ve got a document that says our bylaws, our articles are amendable by the board, this statute wouldn’t apply. This is only applicable if we’ve got a scenario where membership votes are required. So just keep that bug in your ear. If the membership vote is required for amendments, we need to look to the statute to tell us how many votes. We can ignore, essentially, what the documents say to some extent.

Erin McManis: And for the member lists for membership meetings, this is one of those where I think on a practical level, we’re almost always going to have some form of a membership list because we’re going to have a sign-in sheet for the owners. So that will have the membership list to an extent.

However, the Nonprofit Corporation Act actually requires a more specific membership list and it requires that once the meeting has been set for anyone that was entitled to get notice of the meeting, the association would need to prepare an alphabetical list of all the members entitled to the notice and their name, address, and the number of votes. And you don’t have to necessarily publish this or do anything with it, you just need to have it in case a member were to ask for it. And you need to have this list available at the meeting of the members.

So you can still have your sign-in sheet that you always do, that most likely just has their names, maybe lot number. You don’t have to have this full list on the table for everyone to see when they come in, but you need to have it available to the extent that someone who to ask for it.

And so the good news is that since it’s a pretty obscure provision and one that probably isn’t followed all the time because it’s just not very practical, the statute does say that failure to comply with this section doesn’t affect the validity of any action taken at a meeting. So if you forget or you haven’t done it, it’s not going to be probably as big of a deal. We might just have to explain it, why it wasn’t done if an owner were to challenge it later.

Jonathan Ebertshauser: This is becoming important because we’re getting more records requests for this document, so make sure we’ve got it. I have hardly ever been to a meeting where we don’t have this present. This is kind of standard practice as part of your sign-in sheet, as Erin mentioned. But members are starting to request this document. They’re aware of this statutory requirement, and so we’re, got to make sure we’re on our toes.

Erin McManis: And the next thing we wanted to talk about are the written consent forms and establishing a record date. The written consents are almost always going to be used when you’re amending the declaration. Sometimes you’re not able to use the written consents and you must use a ballot. But to the extent your documents allow this, many associations amend the declaration through the written consent process. That’s typically easier than doing an actual vote at a meeting because with the consent forms, you can extend out the time to return the consents, but you should specifically set forth on the consent that the time can be extended.

So for example, if we were doing an amendment now, it’s the beginning of May, we might say, “Please return the consent forms by July 1st, but please know this is just a date to help assist with the collection of forms. The association can extend that out if needed.” However, the issue becomes who is eligible to return a consent? And that’s going to be known as the record date.

Andrea Rizen: We do have two questions. One is do we have to give a written copy of the membership list? And the other is do you have to set a date for the written consent to be finalized or can it go on forever?

Erin McManis: Yeah. And I think for the second question, that was just what we were talking about. We do a recommended return date, but I mean there’s always going to be an element of reasonableness. So it’s going to be an issue if we’ve been collecting consents probably for three years, but you can extend it out for many months.

And in terms of the member list, if an owner asks for it, you need to provide it and it would be a part of the association’s records. So it would be subject to the record request if someone asked for it.

Jonathan Ebertshauser: Exactly. And establishing that deadline to return the written consensus, it’s important because we’re trying to set expectations. But when we look at the statute itself, the written consent is valid until a result is achieved. And so that’s why you see these written consents continue on for long periods of time. These documents exist at a federal level. We’re amending constitutional provisions. This is a procedure that we use. Some of these stay in place for decades, so that’s not necessarily what we want to do in a homeowners’ association context, but it does say eligible for a vote until a result is achieved, one way or another.

Erin McManis: And as Jonathan was saying, we extend out these consents, but that’s when somewhat of a potential problem with the record date could come in. So that’s why it’s important that we really know what the record date is. Because if obviously we’re extending out a consent, if we’re in a large association and if it was a five-month process, you’re likely going to have some ownership changes within the process. So then the issue becomes, well, does the owner get to return a consent that initially owned the property when the consents were mailed out? Or does the new owner that purchased the property on month three get to return the consent? The issues going to be both statutorily based and in the governing documents.

So the first step, look to see what’s in your governing documents. And if there’s a specific record date set, and it’s almost always called the record date in the documents but it might just say eligibility, something like that, you’ll use that date. And it’s almost always in the bylaws, but certainly check your declaration and articles. A lot of times it’s common for a record date to be for meetings, but not the written consent process, but just something to be aware of.

And then if it’s, oh, sorry.

Jonathan Ebertshauser: No, I was just going to maybe jump on this one. And just to clarify what we’re talking about when we say “record date,” this is the date that we are setting the membership list. These are the members who are entitled to notice. These are the members that are entitled to vote.

And the problem, again, is that as we extend out that written consent deadline, ownerships change, owners pass away, things happen. And so we’re establishing that record date to draw that hard line in the sand to say, “Okay, as of this date, this is our membership. This is the individual who’s entitled to vote. These are the only people we want to hear from.”

Erin McManis: And so the other issue is going to come up, like what happens if your governing documents don’t establish a record date? The statute would say that if a record date is not established, the record date is the date the first member signs the consent. So let’s say we sent out consent today for a declaration amendment and then on Friday you received your first consent back from any owner, that Friday is the date. Essentially everything gets frozen. That’s who’s eligible to return a consent, unless it’s otherwise fixed. If your governing documents, if your bylaws do not fix or otherwise provide for a record date, you as the association will have an option to set a date to something in the future.

Jonathan Ebertshauser: So your practice tip there is the first day you get, if you haven’t gone through the steps of setting your record date, we’re going to talk about on the next slide, if you haven’t done that, the first day you receive a written consent is the day you as the manager want to go in and pull that membership list. And then you save that with the consents to say, “Okay, these are the people who are entitled to vote as of this day.”

Erin McManis: But before you send out the consent, it’s not fixed in the bylaws, the association can set a record date. And we recommend that you set the date, the date the final consent is obtained. So you’re in a planned community, you need 70% of the membership to approve a CC&R amendment. And so the day that you get that final consent that hits you at that 70% threshold, that would be the date that the membership list gets frozen. That’s your record date if you’ve established and set that forth in a resolution.

I mean, the practical advantage for that is the owners that are the owner of record on that final date are the ones that get to participate in the process. So therefore, if there was an ownership change during the middle of this consent gathering process, it’s going to always be easier to deal with a current owner. The former owner’s long gone, they’ve moved to California. But if you set the record date at the very end, you can kind of go back and if needed, get the consent from a new owner.

Jonathan Ebertshauser: And it’s especially important because remember, written consents are revocable by the homeowner at any time.

Erin McManis: And we know this is a pretty convoluted statute, so if nothing else, just know it’s there and out there, and your legal counsel can certainly assist. And we go over this in more detail with associations so it’s something that either Jonathan and I are happy to help with too.

Jonathan Ebertshauser: Absolutely.

I’m going to talk about board resignations. I think we all can recognize that board members have the right to resign at any time. They do that through written notice pursuant to ARS 10-3807. So we have to have something in writing to effectuate a resignation of a board member. That resignation notice needs to go to a member of the board, an officer or the corporation itself. They are effective immediately. That’s the practice tip that I think boards really struggle with. As soon as we receive it, you are no longer a member of the board. So there’s no takesies-backsies. Once you’ve resigned, you’ve resigned. Unless that notice that you’re providing to the board says, “I’m going to resign at the end of the quarter, at the end of this week, on this specific date.” You can set the date that you’re intending to resign. But if you don’t, it’s effective as soon as we hold that piece of paper in our hands, or receive that email, or whatever that written communication is.

Erin McManis: And if a board member, if things got kind of heated at the actual meeting and they just verbally stated, “I’m done, I quit,” our recommendation would be, I mean, especially if it’s a board member that the rest of the board, that’s maybe kind of a problem, but you’d want to follow it up probably with an email as soon as you can. “Hey, just to confirm, you resigned last night. Please respond.” And then you’ll have it in writing there.

Jonathan Ebertshauser: Exactly. Now, if we have a situation where board members put a notice in front of you saying, “I’m going to resign at the end of the quarter,” the board has the right, not the obligation, but the right to proceed forward with filling that vacancy. So they can go through the process of appointing and whatever else, or an election, or whatever they deem appropriate to fill that vacancy. And then whoever they elect or appoint would take possession of that seat at the expiration of that individual’s notice. So as soon as that effective date for the resignation goes into a place, that director slides in.

Andrea Rizen: We have a few, sorry.

Jonathan Ebertshauser: Sure, go ahead.

Andrea Rizen: We have a few questions. One from the previous section. What if the owner is a consortium or not a person but other form of ownership, who votes?

Jonathan Ebertshauser: I’m trying to look at that one. Can you read it again to me?

Andrea Rizen: What if the owner is some other form of ownership, who votes?

Erin McManis: So like an entity owner?

Jonathan Ebertshauser: Sure.

Andrea Rizen: Yeah.

Jonathan Ebertshauser: That’s going to be more dependent on your governing documents themselves. We can typically look to the joint ownership provisions or something like that in the CC&Rs to evaluate who our actual member is, but we’re going to have to go through the documents specifically to identify how that member is designated.

Erin McManis: And if it’s an entity, a lot of times we might have to check the Corporation Commission’s page to see if they’re truly a member or an officer of this corporation. So there would be a couple of different steps.

Andrea Rizen: And then is a director covered by DNO policies for actions taken while on the board, even after resignation?

Jonathan Ebertshauser: You’d have to check your policy, but generally speaking, yes. The policy would exist to cover you as of the date that you were on the board. Your subsequent actions as a homeowner might not be covered. And then-

Andrea Rizen: And then one more.

Jonathan Ebertshauser: Sorry, go ahead.

Andrea Rizen: How quickly does the board need to appoint a new person?

Jonathan Ebertshauser: This is the reasonableness standard that Erin was talking about earlier. Every time the board has discretionary authority, we have to be reasonable in our exercise at that discretionary authority. So probably not indefinitely, probably not for years. But if we’re talking about weeks, maybe even months, if we’re going through a process, we’ve just got to have the gut check and some way to say, “Yes, I believe that what I’ve done is reasonable under the circumstances that I have before me.” And your director’s just going to continue to hold the seat until that resignations effective, or until someone’s elected or appointed to fill the seat.

I feel a little bit like I’m talking about judicial relief a lot, but I’m going to pivot a little bit here and talk about that again. This is just coming up so often. As we see homeowners’ associations that are seeking assessment increases, they’re seeking special assessments, they’re seeking loans, and they’re trying to amend the governing documents and we just don’t have the participation necessary or we have the opposition to prevent us from making effective change for management of the corporation.

There is a Nonprofit Corporation Act that allows us to take some judicial action. This judicial really, ARS 10-3160 says that if it’s impractical or impossible to call or conduct a meeting of the members or obtain membership consent, the director, officer or a member may petition a court for judicial relief. In doing so, the court can order that a meeting be called overriding those hurdles of the meetings. So perhaps maybe even the core requirements or the total threshold for the membership meeting to occur in the first place. We can look for alternative ways of obtaining votes. Anything that the court feels is going to address the concern and advance the interest of the corporation are essentially within the court’s power to grant for the association.

So common examples would be issuing an order that requires a meeting to be held, changing the requirement for the vote, maybe authorizing written consents where ballots are the only option available to a homeowners’ association. We’ve already talked about the advantages where that would come. Changing the core requirements, this one’s fairly common. Decreasing the participation necessary for holding the meetings, trying to address that voter apathy. The, “We can’t get 75% of our members to approve the special assessment. They just don’t vote. But we need the money, but we need the special assessment.”

Erin McManis: And I don’t think that courts are going to, it’s not going to be your first option. You’re definitely going to need to go out and try to get the amendment, try to get the votes. But sometimes when we’re talking to associations, they might say, “Well, there’s a 90% requirement to amend. It’s just impossible,” or, “We’re not even going to try.” And this is just something that can be in your toolbox to be like, “Well, we can try. Let’s try a couple times and maybe we can get there this way.”

Jonathan Ebertshauser: Yeah, I would say this is going to be an extremely high burden for a homeowners’ association. And so as Erin said, this is a last effort. We’ve exhausted all other remedies before we get to this. We don’t want to be bombarding the court with these requests. They’re generally, courts are not proponents for removing contractual obligations. And so this is going to be a very difficult thing to accomplish, but it is in the toolbox.

And I’ll talk about safe Harbor in ARS 10-3830. Directors are not liable for actions they take as a director if the director discharges their duties in good faith in the care of an ordinarily prudent person in a similar circumstance and in the best interest of the corporation. That’s probably not coming to a surprise to anyone on the call. What is important is that we keep in mind that it’s the director that’s not liable for the action taken as a director. Doesn’t mean the corporation’s going to have safe harbor. It means the director has some safe harbor. Personal protection, protect your personal asset.

And when we’re seeking safe harbor there’s really only a few things we can rely on. It’s officers, employees that we believe are reliable and competent in the matters presented. That’s where you as managers really come in, that you are being trained, you have daily experience. This is your profession. You are competent in the matters that you’re being presented with. So you serve that function for homeowners’ associations. We as legal counsel, serve that same function. Other professionals or expert competent individuals have that function. So it could be a landscaper with an expert competence in tree removal that we would look to provide guidance that would give directors safe harbor.

Erin McManis: And then something too we were discussing earlier that we’ve seen come up a couple times, and your boards, obviously that’s a collection of individuals so you’re going to have people that have different skill sets. And a lot of times associations, obviously we need to be good stewards of the money and the assessment funds that come in. So maybe an architect on the board or an accountant on the board wants to really dive in and give an in-depth opinion on this issue. And you should certainly, can and should generally rely on the input and expertise of people on the board. But if it comes time for a really in-depth architectural accounting legal issue, you can’t really rely on yourself to get you out of the situation. The board should still get some outside accountant help or outside legal help and not just rely on that person’s opinion because that board member is still going to be out on a limb.

Jonathan Ebertshauser: Yeah, that’s a great point. We experience that as lawyers, landscapers experience this all the time on homeowners’ association boards, this pressure of, “Hey, you’re on the board, you have a professional qualification to answer this question, or an expert competence to answer this question. What do you think?” The problem with that is when I answer that question, I lose my safe harbor. I’m now answering as the expert, not necessarily as the director seeking expert protection.

So just make sure you’re giving that guidance to your boards as they seek to maybe step outside of their homeowner or their board member hat and into their professional capacity, that that might not create safe harbor for them personally.

Erin McManis: I think at one time, weren’t you on one of the boards of your association?

Jonathan Ebertshauser: Very briefly.

Erin McManis: A while ago.

Jonathan Ebertshauser: Not something I want to do.

Andrea Rizen: We have a question about judicial relief going back. How many times do you need or should you try to pass a special assessment for a life safety issue, such as required fire sprinkler replacement, before you go to court?

Jonathan Ebertshauser: It depends. It’s very fact specific. If I would like to see in any circumstance, we want to have an understanding of what’s going on. So we send out a vote, we get a good picture of what the problem is. Is it voter apathy? Is it that we have opposition? Why do we have opposition? We maybe have a town hall, or we solicit surveys, or things like that. We want to get to the bottom of what the problem really is so that we can go to the court and explain that.

So it’s, I would say, always multiple attempts. You would definitely want to try multiple times. And in doing so, being consistent or positive in the way that those votes are changing to address those concerns. And if we ultimately get to the point that we say, “It is actually physically impossible for us to get this done and it’s a life and safety issue,” then we need to go to the court and say, “Help us.” Because we can’t allow individuals to get hurt, we can’t allow the board to sustain that type of liability simply because we can’t get the membership out for one reason or another.

And then the thing I want to just add onto the end of this safe harbor is the burden of proof is on the complainant, so typically your homeowner, to prove that your court directors have breached their duties. And it’s a clear and convincing standard, which is essentially more likely than not 75%. You hear those words thrown around of beyond a shadow of a doubt, or preponderance of the evidence. This is a much higher burden, clear and convincing.

We’ll talk about annual meetings. ARS 10-3701 requires membership meetings to be held annually. This always gets very confusing for boards that may not be falling within the guidelines. We have to hold it annually. The plan community and the condo act says we have to hold it each year. It’s very similar requirements there.

If we don’t hold a membership meeting within 15 months of a prior meeting, at that point the court can order the association to hold their meeting. But we have to be 15 months outside of the prior annual meeting to do that.

And the thing that we hear a lot is the, “Hey, you didn’t hold the annual meeting on the date and time that was specified in the documents. The board shouldn’t have been elected. We’ve got to invalidate everyone. We’ve got to start over.” No, the thing I want you to take away is 10-3701 says the failure to hold the meeting in accordance with the governing documents does not affect the validity of the action taken. So we’ve got a quick response to those homeowners or attorneys that come to us and say, “Hey, meeting was supposed to be held on March 31st, 2024. You held it on April 7th, therefore it was invalid. You’re in statutory breach and the board doesn’t get elected.” Not necessarily.

Erin McManis: And so those are the provisions specifically that we wanted to highlight in the Nonprofit Corporation Act. But there are also just some statutes that are going to be more general in applicability that we wanted to go over too.

The first one would be the deadline to record an amendment to the declaration. And this is one that I constantly am trying to tell people. If we do amendment projects together, it’s going to be in almost all the emails at the bottom because it’s so hard a lot of times to get the votes or get the consents to amend the declaration. And so the last thing we want to do is miss the window to record the amendment because that’s the easiest part of the process.

Pursuant to both the planned community statutes and the Condominium Act, the amendment must be recorded within 30 days after the adoption of the amendment. And so if you’ve amended your declaration at an actual meeting of the members, that’s going to be a lot easier to remember and trigger that. Because if the meeting was May 15th, there’s a set date and then really all you need to do is probably get it to your attorney to have it recorded.

Where it can get a little more tricky is with perhaps the written consent process, because this still applies. And as we talked about, you can extend out the consents as necessary to achieve the result. And so probably a lot of times as managers, you might be having one of your admin assistants helping and tracking the process. So it’ll be important to speak with him or her to really not just be charting them when they come in, but really keeping track of how many more do we need to get to that threshold if your documents say 70%? Because you can obviously see how it’s kind of easy to maybe see that window closing in if you’re just collecting consents, and then every once in a while looking at them. So it’s just something to be pretty cognizant of because it’s easy to miss.

And also we don’t want to be thrown off by amendments that set a later effective date. For example, sometimes we see an amendment maybe for a capital contribution fee, and it’ll say it’s not going to take effect until November 1st to kind of give owners an opportunity to prepare for the amendments. So even though the amendment language may say it’s not going to take effect until November 1st, you still have to record it within 30 days of getting the result. It may just not take effect until November 1st, but it’s still going to be a valid amendment. So just make sure that doesn’t sit in your desk.

Jonathan Ebertshauser: The hard thing, for me, with declaration amendments is you get the vote you need and it’s just the collective sigh of relief, right? And you say, “Great, we did it. Moving on. It got signed, it’s effective.” No, it started a really tight timeline of 30 days. And it sounds very easy to record something, but then sometimes we see CC&Rs require you to record the actual ballot or the actual consent. We can run into a lot of problems internally with the county recorders getting those documents approved because we don’t have originals, the signatures are not clear. They want to be able to identify every person’s name that’s identified in that document. We all know it can be difficult to read handwriting.

Erin McManis: And even though I know it’s not the case, for years I’ve been secretly convinced there’s an actual person behind in the recorder’s office there because sometimes it records perfectly fine and then the next day almost it could look the same, we’ll get error messages. “Oh, this isn’t clear.” And so this says it does take time and you certainly don’t want to be on day 30 trying to work this out.

Jonathan Ebertshauser: Yeah, make sure you’re getting those signatures from your board members on the amendments quickly, getting it to your legal counsel quickly so that they can go through the process of getting it recorded.

We’re going to talk about this statute that everyone’s dealing with it seems like, the regulating of public roadways. It’s time for us all to start talking about collecting a vote from the membership to see if we’re going to retain our right to enforce public roadway regulations in our CC&Rs.

This is ARS 33-1818, and it applies to our planned communities that have declarations recorded before January 1st, 2015 that include a regulation on public roadway. We have to, have to, not can, not should, we are required by law to hold a membership vote prior to June 30th, 2025 to evaluate whether the members want to continue enforcing their public street regulations. We’re looking for a majority of the members voting once quorum is present to establish whether or not we will continue regulating those public roadways. The quorum is going to be still determined based on your governing documents. We don’t have a statutory reference for what the quorum will be, and often it’s about 10%.

If we don’t get the vote, the homeowners’ association can no longer enforce street parking. We have to record a notice if we’re going to continue with this process. So we’ve got to make it clear in the corporate record on whether we are or not regulating the public roadway. Did this vote pass or fail?

Erin McManis: And it’s kind of the same thing we were talking about recording the amendment. You’ve done the hard part of having the meeting, getting the vote, so you don’t want to forget the, record the notice, which is the easy part.

Jonathan Ebertshauser: I know I’ve talked to our participants about this before, but it isn’t just about street parking, it’s about regulating public parking, or parking on public roadways, or just public roadways in general. So maybe you don’t have a provision in your CC&R as it says no parking on the streets. We probably have something about commercial vehicles. We probably have something about recreational vehicles. We may even have something about speeding. Do I have a speed limit sign in my community? Do I have restrictions on inoperable vehicles? Do I have restrictions on storage pods? Do I have a requirement that garbage cans be pulled in and put out every night, and they’re to be placed on the public roadway? These are things that we could lose control over if we do not take the vote on time and we do not get the membership approval. And so we just need to be very transparent in what we’re telling the membership so they’re aware of what the implications of the statute might be.

Andrea Rizen: We have a question. How does this apply to declarant-controlled communities?

Jonathan Ebertshauser: We’re looking at, if we’re in a declarant-controlled posture we’re probably outside of the realm. This would only apply to your community if you recorded prior to 2015. After that, we can’t regulate public roadways. Declarant-controlled communities can.

Andrea Rizen: Okay, that kind of goes with the next question. If your declaration was recorded after January 1st, 2015 and your documents have provisions regulating public roadways, should you amend your documents to remove that language?

Jonathan Ebertshauser: Well, if we’re talking about private-owned streets, this wouldn’t apply. This would only be if we’ve got, let’s call it a non-gated community with a public roadway.

Erin McManis: Yeah. And for something like that, you probably want to get with your legal counsel to really look at the provisions. But the statutes change over time, obviously. And so if there’s a situation where a statute is going to control over your governing documents, the statute is just going to control. If you’re in the process of amending your governing documents, we usually try to clean up old language, but you’re not required to amend if something is going to be controlled by statute.

Jonathan Ebertshauser: Perfect. And then we are offering a flat-rate program for these. Many of you have already taken advantage of that opportunity. $950. We will look at your documents and determine whether or not there’s an implication based on the new legislation. We’ll tell you if you need to take this vote. We’ll prepare the notice, we’ll prepare the ballot. And if the vote passes, we will record a resolution as well for an additional $250 on that program. Reach out to us if you have that need.

Solar energy devices. This one’s always fun for me because we get these questions, we feel like we know the answer is. I bet if I asked all of you this question, you’d say, “We can’t regulate solar energy devices.” And for the most part you’re right. But I want you to understand why and get out of our minds that we’re talking about solar panels. We’re talking about solar energy devices, and I’ve seen some really creative solar energy devices over the years.

33-1816 says we cannot prohibit the installation or use of a solar energy device, so we’re talking about the planned communities. But it’s more than just solar panels, it’s any series of mechanisms designed to provide heat, provide cooling, produce electrical power, produce mechanical power, solar day lighting, provide for the combination of collecting and transferring solar energy.

So I’ve seen some where, maybe you have different examples, Erin, but the one that kind of threw me for a loop most recently was piping installed on the roof. We’re not going to heat our water through solar energy through a solar panel. We want the water to be heated by the sun directly. And so we’re actually physically heating the water in tanks and then pumping that into the home. And so now we’ve got a series of pipes and tubes on the roof, that’s a solar energy device. And so it’s going through the same analysis that our solar panels go through.

We can’t impair the function of the device in our rulemaking authority. We can’t restrict its use. We can’t affect the cost adversely for the homeowner, and we can’t adversely affect the efficiency. Which means we essentially can’t do much because for the most part, if you move it, it affects the efficiency, it affects the cost.

Erin McManis: Yeah. And when I work with some associations on rules, we can put the rules on there about maybe I would prefer for the solar panel to be on this side of the roof, and that’s fine. But as Jonathan said, it can’t adversely affect the efficiency or impair the functioning of the device.

And solar panels at least, I’m not as familiar with all the new heating stuff, but solar panels are almost always put in a very specific place to maximize the efficiency or reduce the cost. But an owner could certainly come back and say, “Well, I can’t have it on your preferred location because my installer says, and here’s the documentation, this is the best place.” So you can still have it and work with the owner, but know if they’re challenging where they want to have it, not always, but likely you’re going to need to at least take that into consideration.

Jonathan Ebertshauser: And it’s important because the statute goes far to say that if an owner substantially prevails in asserting a violation of this statute, the court must award the owner their attorney fees. And so there’s practical implications. And it doesn’t even mean they have to be 100% right. They just have to substantially prevail.

And then we talk about condos in this context too. There is no matching provision in the Condominium Act, but we do have a general provision in 33-439 that’s very similar to the plan community statutes, that says we cannot effectively prohibit the installation or use of solar energy device, but that would not apply to a declaration if it was recorded before April 17th, 1980. So for our clients that are non-planned communities and formed prior to April 17th, 1980, there may be a conversation to have regarding these solar energy devices.

Andrea Rizen: We have a question. Does this also apply to commercial HOAs?

Jonathan Ebertshauser: Yes. For a condominium, typically when we’re talking about a commercial homeowner association we’re talking about a commercial condominium, things change a little bit because we don’t have, owners don’t get the right to install solar energy devices on portions of the property that they don’t have control over. And so if we have control over the roof as the condominium association, there might not be an option for a solar energy device.

Erin McManis: But as Jonathan was saying earlier, that these solar devices are becoming and more nuanced, and so certainly if it’s an area they’re controlled right outside of the maybe the porch area, they might have that type of right. And so that timing of that statute prior to 1980 is something to at least keep in the back of your mind.

And another thing that we wanted to talk about were resale assessments, capital contribution fees. And what I’m talking about, what we’re talking about is really the fee paid by a new owner when they purchase a lot or unit within your association, kind of the quote, unquote, “buy-in fee.” We’re not talking about the resale disclosure fees that are charged to charge for the preparation of documents, things like that, on the transfer of the membership. So what we’re talking about are those essentially buy-in fees.

In 2010, the Arizona legislature enacted a law regarding the imposition of these fees, and they were really limiting the fees and prohibiting in certain circumstances. But there are exceptions for community associations if certain requirements are met.

And so if you’re wanting to charge the capital contribution fee, let’s just say it was $1,000 for the new owner when they purchase a lot in your association, you can do that and it’s not prohibited, but it needs to be in the document payable to the association to be used exclusively for the purpose authorized in the document.

And when I’m doing a declaration amendment, it can be broad. We might just say we’re doing it to build up the association reserves to be used for any purpose that the reserve fees might otherwise be used for. I mean, so it can certainly be broad, but you need to have some type of tie in. And the fee must touch and concern the land, which is the hang-up for a lot of associations because our opinion and our advice is going to be that needs to be in a recorded declaration. A resolution, that’s definitely going to be subject to challenge. And the fee can’t be passed to a third party. So it’s going to the association in your recorded documents for the purpose stated in those documents.

So there’s certainly ways to charge the fee. And as you know as managers, it can really be a good income revenue source for the association. So definitely something that we’d be encouraging of. You just need to make sure it meets those six requirements.

Jonathan Ebertshauser: Absolutely. Let’s talk about the Condominium Act. Going to talk about pass through. This is a fun one.

Erin McManis: Yeah, and I’m sure most of you on the call are aware. We call it just informally the pass through statute, but it will be section 33-1255(C) of the Condo Act, which states that unless the declaration states, provides otherwise any common expense or portion of a common expense benefiting fewer than all the units shall be assessed exclusively against the units benefited.

And the next couple of slides are really going to break that down a little bit more. But as a general proposition, Arizona law is going to dictate that community associations may be able to require to those owners that are only benefiting to really pay for that charge.

So let’s just say in this example it was potentially an insurance deductible so long as fewer than all the units are affected. So for example, let’s just say there was a bad monsoon storm and only one building out of eight in the condo association suffered roof damage, and there’s association insurance available for the roofs. If the declaration doesn’t provide otherwise, the association has this obligation to pass that cost of the deductible to just those units benefited. So only the building that actually suffered that roof damage.

And really that’s kind of just what we talked about, but it applies unless otherwise provided in the declaration.

Jonathan Ebertshauser: The comment that’s coming through is shall is the keyword. Absolutely. This is an obligation, not a discretionary choice on the association. If we don’t have a document that provides otherwise, Condo Act tells us we shall impose the assessment through to the owner’s benefit.

Erin McManis: And I think one of the slides, we’ll give some example language. And Jonathan and I were talking before the presentation. Of course the attorney is representing owners. When it’s their client that’s affected and that’s being assessed the charge, they’re going to say, “Oh, the declaration provides otherwise-“

Jonathan Ebertshauser: Almost always.

Erin McManis: … “it shouldn’t be done.” But that’s not really going to be the case and we’ll talk about that a little more.

And so it’s also important to know that this is not dependent on invoking the pass through statute, either whether someone is at fault or not. I mean, there’s going to be some other statutes that would addressing misconduct, but in my earlier example, obviously it’s nobody’s fault if a monsoon damage damaged the roof. But the pass through statute, if the declaration doesn’t otherwise apply, would be invoked regardless of fault.

And we talked the mandatory obligation, and unless the declaration otherwise provide. And we’re looking for some type of language that, example of otherwise providing would be common expenses that benefit fewer than all units shall be paid for all unit owners equally, that specific.

Jonathan Ebertshauser: Right. We are looking for fairly specific language. We want the declaration to actually contemplate what happens if there is an expense that benefits fewer than all. Opposing counsel’s perspective on this is always that most CC&Rs will say, “The common expense should be shared equally. Any common expense incurred by the association should be shared equally amongst the owners.” They believe that otherwise provides. Our position is that, no, we need to actually contemplate this fact scenario in order for the declaration to override the statute. And so you end up in disputes on that.

Erin McManis: And our next slide, you’re going to talk about insurance statutory notice so that kind of dovetails, but the deductible is always a hot button issue as to who pays for the deductible and the roof damage.

And so with the pass through statute, you might be looking for language that maybe it specifically addresses the deductible and says the deductible is going to be paid by all owners equally regardless of where the damage is. So that very specific language is going to be otherwise providing and you’re not going to be able to pass that deductible expense to those units or unit that benefited. But absent that type of language, certainly the pass through statute would apply. And it’s slightly more nuanced with the declaration language. So if you have a really big expense, definitely discuss with your legal counsel.

Andrea Rizen: There is a question about that. Could the pass through statute apply to stairs in each building if they need to be replaced?

Jonathan Ebertshauser: I have seen it with a staircase. Maybe that’s not contemplated by the CC&Rs. We have to look at it in a global scale of does it affect all of the units or not? With stairs that are, I think Erin’s example is great, where it’s kind of an act of God or some loss that’s been sustained that’s covered by insurance, this triggers more often than something where we’re looking at just deferred maintenance or something like that where all the staircases are going to be replaced. Everyone has a staircase and therefore we would share that equally. But if we’ve got, hey, only second floor units have a staircase, then maybe we’re talking about the pass through.

Erin McManis: And if for whatever reason, only one staircase out of the four buildings were damaged or needed to be replaced, that’s maybe would lean more towards invoking the past three statute. But as Jonathan said, if it’s something where over the next three years we’re going to be replacing all the staircases and we’re just doing it in phases, it’s probably benefiting all units.

And I think the last major topic we wanted to talk about today was the insurance statutory notice. So in last year’s Legislative Session, House Bill amended section 33-1253 of the Condo Act. And so it’s important to remember this is only for condominium associations. But what it did was it’s going to require that as of October 30th, 2023, condo associations must send an annual notice to the membership outlining the unit owner’s responsibility for association’s insurance deductible for the association insurance coverage and the amount of the deductibles.

I mean, this is kind of going to, I mean, I don’t like that anytime there’s a mandatory obligation for the association to do something because I don’t want a client to accidentally forget it. But generally speaking, I think this will be helpful to associations because as I’m sure most of you on the call know when you’re dealing with a deductible problem owners are going to say, “Well, I didn’t know I was responsible, or if I did, I would’ve planned better.” Things like that.

So here we’re really just putting the unit owners on notice of how much the deductible is going to be for association’s insurance coverage and who’s responsible. So we’re going to want to make sure that, like I said, it’s only going to be for our condo associations and get the deductible information from your insurance professional. And as you know, and what we’re seeing a lot of times now with doing these notices is that you may have different deductible amounts. Like water leaks might have a higher deductible than other forms of damage. And so you’re going to want to make sure you set all of that out.

And we already talked about how to maybe look for applying the deductible, whether the pass through applies. So kind of want to skip that over since we’re about done.

But I am under the belief, well, since we already have this requirement that we have to send this notice out to the owner, we might want to consider putting other things in the notice at the same time. Especially things that are going to be helpful to the association.

Pursuant to the Condo Act, the association must be allowed to report a claim to their own policy before the owners do so themselves. So this statutory notice, while it’s not a requirement, it might just be a good value add or something good to put in there. And putting the owners on notice that they can’t just call and make a claim on the association’s policy without notifying you first and giving the association time to report the claim.

And you can also use this statutory notice as another way to kind of hammer in the point, “Hey, and you need to be getting your own insurance coverage to fill in the gaps or to supplement what the association’s insurance covers.” I mean, obviously owners are going to do what they want to do, but if there’s ever an issue that comes up, I think that would make a great exhibit in a lawsuit, letting the court know we’ve told them that they couldn’t report this claim. We told them to get some gap coverage.

And just like the roadway package, we are doing this for a flat fee. For our clients for $950, we’ll go through your CC&Rs and look for the insurance deductible obligations, set that forth, draft the notice, go through the deck page and set forth the amount of the different deductibles, and put all that in the notice letter for the association to send to the membership. So if that’s something that you have a community that could benefit from, Jonathan and I would be certainly happy to help.

Jonathan Ebertshauser: Great. We’re right on time.

Erin McManis: Yeah, we were. So we might have time for a couple more questions if there is. I’m not seeing anything in the chat.

Andrea Rizen: There were a couple that we weren’t able to get to.

Jonathan Ebertshauser: Okay.

Erin McManis: Okay.

Andrea Rizen: It was about the parking. When would declarant-control communities need to host a vote if documents were recorded prior to the requirement but remained declarant-controlled until after the voting deadline?

Jonathan Ebertshauser: That’s one that would be so unique. I’d really want to look at that specifically.

Erin McManis: Yeah, because we might just be more of a risk analysis to what the association’s willing to get. So we’d be happy to maybe chat more detail offline.

Jonathan Ebertshauser: Sure.

Andrea Rizen: And then we have another one, kind of hypothetical. Why is it even legal for HOAs to regulate public streets? Could a citizen sue the HOA for enforcing taxpayer-maintained public streets?

Jonathan Ebertshauser: Well, the statute gives the association authority essentially to regulate the public roadways. Obviously opposing counsel will always disagree with me, but that’s the basis of this is preserving your right. And when we look at the CC&Rs, we’ve got to understand what the definition of, it’s typically capital P property. Is that capital P property encompassing the entire boundaries of the association, including the streets, and therefore those streets are also subject to the recorded CC&Rs, signed off on by the city or the town? That’s generally the argument that goes to that.

Erin McManis: And we all know that unfortunately, owners are going to, I think that part of the question was could an owner file a lawsuit? Unfortunately, we know that owners are going to file frivolous lawsuits from now to the end of time. So yeah, I mean they could file a lawsuit, but whether it would have merit, no, because of the statutory obligations that are set forth.

Andrea Rizen: Sorry, just one more quick one. We’re a non-gated community. We have been told that we cannot prevent cars parking on the streets if they’re licensed and insured. We can have police chop tires to confirm that they’re not abandoned. Is it true that city vehicle rules supersede HOA CC&Rs?

Jonathan Ebertshauser: No. The city policies, they work in conjunction with one another, but they don’t necessarily control. So we would have to look at your documents. You need to have something in your CC&Rs creating that type of use restriction in order for this to be valid. And it’s got to be a restriction that was recorded prior to that 2015 date. But assuming you have all of that and there’s a restriction that says no parking on the streets, or no overnight parking, or whatever it might be, then the fact that the city allows parking on the street would not prevent you from enforcing the CC&R restriction.

Perfect.

Andrea Rizen: Thanks everybody for coming and listening. And if there is anything that we could help you with or a more in depth question, we’d be happy to talk with you later this week.

Jonathan Ebertshauser: Yeah, absolutely. Give us a call. Thanks for joining us today.

Andrea Rizen: Thank you. Great job.