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 assessment.

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 requirement.

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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