Associations must maintain proper reserve levels
By Robert Ducharme
11 November 2018
We like to think we’re the center of the universe in New Hampshire. Sadly, we’re not.
Rather, we are simply small municipalities in a small state in a small
region of a large country. Among other things it also means we don’t
have a lot of case law in New Hampshire regarding condominium law.
So, I spend time reading case law from around the nation in order to
learn about what issues there are in other areas and how they might
apply to New Hampshire condominium and homeowners associations. Doing
this helps me guide clients on how to best conduct themselves as
associations, and, occasionally, it helps me guide courts as well.
So, a case recently across my desk about the funding of reserves. I’ve
long argued that a situation will arise where a new owner who suffers
from the neglect of a board of directors in not properly saving for
capital expenses may not have to pay the special assessment and would
have a case against the association’s board of directors for breach of
its fiduciary duty. Why? If reserves are properly funded, there should
never, or very rarely, be a special assessment. And if not properly
funded, a board of directors could be held liable by a new owner who
walks into a purchase and shortly thereafter is levied a large special
Such an owner would have a solid case of breach of the fiduciary duty
of a board of directors for its inaction, one which has essentially
punished new owners for the sins of previous owners in not abiding the
by law and having adequate reserves.
That’s similar to what happened in a case issued by the Ohio Court of
Appeals this past August, titled El Attar v. Marine Towers East
Condominium Owners’ Association, Inc. In this case, the El Attar board
of directors had to specially assess 137 unit owners a total of $4
million (that’s not a misprint) to pay for unfunded costs to replace an
HVAC system because it had no reserve fund at all. None. The
association apparently had been in the habit of simply specially
assessing owners whenever it needed funds.
Certain owners refused to pay the assessment, an average of slightly
more than $29,000 per unit, and sued the board of directors for breach
of its fiduciary duty in failing to properly fund the reserve fund
causing the rather large assessment.
The board of directors defended its actions, cleverly arguing that just
because the budget had a line item in the budget to fund the reserves
that did not actually mean they had to fund it. The court disagreed. It
noted that although the bylaws did not actually use the word “fund,”
the language in the bylaws that required the association to “build up
and maintain” an adequate reserve account permitted “no other
conclusion than that the association create an ongoing reserve fund or
account separate from its yearly line-item budget.” In English, the
fund had to be funded.
Not one to do what is right without being forced to do so, the board of
directors next argued that since the bylaws allowed it to specially
assess for extraordinary expenses, it did not have to establish a
reserve account; it could just lurch from capital project to capital
project specially assessing along its merry way. This was so, the board
argued, because the bylaws permitted it to specially assess for
extraordinary expenses without having to take money from the reserves.
The court noted the special assessment power but also noted that in the
order of priority, the power to specially assess is secondary to the
Essentially, the court noted special assessments in Ohio, as in New
Hampshire, are intended only as a means of making up a shortfall, not
an alternative funding mechanism.
The court then sent the matter back to the trial court ... and awarded legal fees to the owners.
The takeaway? Specially assessing punishes the last owners who purchase
for the financial sins of the long-time owners who have, usually to
keep the condominium fees artificially low, intentionally underfunded
reserves. Don’t do it, or you expose your association to liability.
Attorney Robert E. Ducharme is a former teacher whose civil practice is limited to condominium law.
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