A Device To Protect Homeowner Association Boards

February 22, 2003

By George K. Staropoli (View author info)

The attached bill, SB 1151 makes a number of changes to Arizona statutes affecting homeowner associations. It is an extensive 22 page bill.

I view this bill as a device whereby the state protects the private HOA organizations against the rights, liberties and interests of the homeowners for no overwhelming public interest. This statute lends support for the designation of HOAs as state actors according to the US Supreme Court opinion in 99-901 US SC.

For reference purposes, the Arizona Revised Statutes, ARS, specifically relating to HOAs come under Title 33, Chapter 9, Condominiums (33-1201 to 33-1270) and Ch 16, Planned Communities (33-1801 to 33-1808). The provisions of Title 10, Corporations and the chapters relating to membership nonprofit corporations also apply.

SB1151 is a confusing 22 page "amend everything" that deals with the Condo Chapter and Planned Community Chapter, so you will read the changes twice. It is basically the Voss / CAI bill of last year, HB2604. While on the surface things may look good, such as a dispute resolution option, things are in favor of the board. If you look for items in the best interests of the homeowner, you will not find them.

Items of concern (I will address only the planned community issues under 33-1800):

1802, Definitions, has not been reviewed. Sections 1805, Assn records and 1809 -1812 have been added and not reviewed.

1807 foreclosures-- This will need to be worked out if we wish to keep Farnsworth's changes. What will we be asked to give up, or accept? Better that this bill dies now.

1803 budget, penalties --

(A) has been added to require a majority vote of all homeowners to accept any proposed budget and if not accepted, the old continues. In the real world, everything stops until a budget is approved, so this is nothing for the homeowners. It offers no incentive for the board to be responsive to the homeowners. Also, it doesn't address the fact that there are some CC&Rs that do not require a proposed budget be reviewed or submitted to the members.

(B) Raising annual assessments beyond 20% requires only a majority of those voting, which is a significant change from other CC&R restrictions that require a vote of ALL the members. Who's being favored here?

(C) The appeal of "reasonable monetary penalties" procedure has been introduced. (Please see the discussion of 1803, penalties). This creates a "pseudo" board for the homeowner to appeal. A 3 member panel is selected, one by each party and they select the 3rd member. In the event the board member refuses to agree to a third person, the board appoints the 3rd person anyway. So much for justice. A unanimous decision by the board can overturn any panel decision.

Under alternative selection processes, such as Amererican Arbitration Association, the parties get to select from a panel of AAA approved mediators who then select a third from among the list. The learned CAI attorneys left this step out which would provide for a neutral panel.

(F) Says that the parties must act in good faith, like the statute that requires directors to act in good faith, but is ignored by rogue boards.

1803 Penalties. This section is added to ARS 33-1243 as subsection (D). This section of the ARS statutes stands in conflict with the Rhode Island SC decision that said a statute that allows private organization to fine its members as penalties is an unconstitutional delegation of government powers. Why is CAI keeping this section of the statutes?

A similar decision by the Virginia courts held that any such provision in the CC&Rs also is a violation of government powers.

In the June 2002 issue of CAI's Management Insider Newsletter, HOA managers are told to remove any reference to penalties in the CC&Rs because the courts don't like it.

1804 open meetings --

(A) Pending or contemplated litigation or rules enforcement cannot be held in executory session, excluding homeowners. (GOOD).

(B) Notice of board meeting shall be just 48 hours, regardless of CC&Rs. Why not a week? Board to notify homeowners of its actions every 3 months.

Without enforcement penalties against the board, these changes amount to nothing, still requiring a suit by the homeowner to get compliance.

1805 records inspection -- Specifies for HOAs what records are allowed to be viewed. Legal advice to the board is restricted. We would like to see a FOIA statute here.

1806 resale -- Still no requirement for a disclosure document to warn buyers of the consequences of living in an HOA. A disclosure of whether or not a reserve fund exists is required, but no requirement to have a reserve is established.

Again, without enforcement against the board or other parties involved, such as developers, agents and title companies, the home buyer must sue.

Overall, this bill must be rejected. An honest effort to help homeowners and to alleviate the horror stories must be made by sponsoring legislation to address specific statutes, such as open meetings, etc rather than to put forth a huge bill in one sweeping effort, as if only technical changes were being made. This bill reeks of, "trust us, CAI, we have the best interests of Arizona at heart".