Outline of Legislation for Democratic Governance of CIDs/POAs

2006 June 29
Last update:  2008 Dec 27.  See History for brief descriptions of changes and updates. 

Work in Progress — Posted at this time for use and comment.

• 2006 Jul 21 — Description of legislation for governance at maturity is nearly complete.  Remaining work should only concern refinements. 

    Every common interest development and property owners association may have different governing documents.  However, a pattern of content has evolved for many reasons.  A general analysis of the many factors and aspects for current practice is presented in outline form in Outline & Analysis, CID & POA Issues.  The outline provides links to other posts at this weblog and on the internet to provide more depth supporting the analyses.  The analyses of the various aspects of the governance of most common interest developments (CIDs) and property owners associations (POAs) provide: what works well; what does not work well; what problems exist; and what problems can potentially exist — in short, what is working well and should be preserved, and what is not working well and should be discarded or improved. 

    While reactive improvements can be made by detail amendments to the appropriate legislation or governing document, the resulting patchwork may create additional problems.  A general proactive approach requires a "clean sheet of paper" and "out-of-the-box" thinking — a synthesis to create something new that moves the governance definition to a new, higher level. 

    The continuation of this post is an outline of a Democratic Model for Governance of CIDs and POAs as a broad-based, proactive approach. 

Don Nordeen
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• History: 
  • 2006 Jun 29 — Initial Post
    
  • 2006 Jul 08 — added brief description and outline of the phases in  a CID from inception to maturity
  • 2006 Jul 21 — added outline elements:  overview of legislation, difficulty of including a social contract in the CC&Rs, additional  description of enforcement and dispute resolution
  • 2006 Jul 30 — added and integrated section on superordinate (transcendent  principles for private government, also expanded material on liens, foreclosures, fines and other charges
  • 2006 Nov 27 — added reference and link to Statement of Rights 
  • 2008 Dec 23 — added discussion on interfaces with constitutions and laws
  • 2008 Dec 27 — revised minimum requirements for amendment of CC&Rs
    
• Links:  Outline of Legislation for Democratic Governance of CIDs/POAs at <http://swagman.typepad.com/poa_governance/2006/06/outline_of_legi_1.html>
  
• Key Words:  KeyWords

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Outline of Legislation for Democratic Governance of CIDs/POAs (continued)

Introduction

    Common Interest Developments (CIDs) and their associated/required Property Owners Associations (POAs) have evolved from a combination of legislation and common law concerning property and organizations.  The property law has provided the vehicle for covenants, conditions and restrictions (CC&Rs) to be applied to a land development that limit how the property may be used and to create an organization for enforcement of the CC&Rs and management of the CID and common property that may have been created.  That organization is typically a mutual-benefit nonprofit corporation.  Thus, directly or indirectly, the state has authorized CIDs and POAs with or without any considerations of the degree to which the state should exercise control of this combination.  What has evolved I refer to as the Developer's Model for Governance of CIDs/POAs. 

    Experience with CIDs and their related POAs indicates that the combination has resulted in a number of problem areas.  This is not surprising since neither the property law concerning CC&Rs nor the corporation law anticipated this combination.  In fact in many states, the major provisions of property law and nonprofit corporation law predate the large increase in CIDs/POAs.  It is not surprising, therefore, that the combination has resulted in unintended consequences.  The posts, Systemic POA Problems and Analysis of POA Problems, provide a perspective of some of those consequences. 

    Many states have partially addressed, or have begun to address, the unintended consequences.  The common themes in the new legislation and amendments to existing legislation are to require a larger use of democratic principles and more disclosure prior to purchase and resale/purchase.  Much of this legislation has been reactive.  This work is intended to review the issues more fundamentally, and be proactive in defining the needed legislation to ensure preservation of constitutional rights and use of democratic principles in the governance of CIDs/POAs. 

    Rather than to include all of the relevant and applicable provisions, the outline refers to other posts and papers which discuss particular aspects.

Phases in a Common Interest Development with Governance by a Property Owners Association

    (added 2006 Jul 08)  The statutory provisions for common interest developments (CID) with Governance by a property owners association (POA) can be modeled and related to the distinct phases.  For the purposes of this outline, the following phases are used:

• Formation
  • land acquisition
  • approvals by municipal and other governmental jurisdictions
  • public policy issues concerning CIDs apply
  • initial governing documents drafted and recorded
    • CC&Rs
    • Articles of Incorporation filed with State
    • Bylaws
  • rights and obligations of developer and owners/members defined for all phases of the CID project
• Initial Construction and Preparation for Sales
  
  • developer activity only
  • no sales of any property units
  • systems for POAs developed and made effective
• Sales and Continued Construction
  • sales of property units and/or residences begins
  • occupancy of units sold
  • beginning of governance
  • governing documents typically take effect with first sale
  • POA must be fully functional
  • purchasers of property units are now stakeholders
  • rights and obligations of developer and owners/members fully defined
• Transition to Control and Governance Entirely by Property Owners Association
  • transition team appointed
  • clear definition of the requirements
  • required legal documents drafted and approved for execution
  • financial transactions defined
  • definition of amendments, if any, required for governing documents
  • staffing, education & training
• Mature Governance for the POA
  • developer no longer has any role in the POA
  • governance for the POA fully defined
    • amended CC&Rs as required
    • amended Articles as required
    • amended Bylaws as required
  • operation of the POA fully transferred to the owners/members

Normally, the thought process considers these various phases in sequence.  But is also appropriate to consider the phases in reverse order.  The object must be to have effective governance in the mature phase.  The requirements for an effective mature phase then must be incorporated into all the prior phases, particularly in the formation phase, to achieve the desired end result.

     Foundation for Community Association Research Best Practices Report #7 on Transition — This 52-page Best Practices Report on Transition describes some of the same phases, but reflects the viewpoint and interests of the CID/CA Industry.  Note that the participants do not include any individual property owners who are clearly stakeholders in the process.  Note also the assumption of absolute control of the POA (called Community Association) by the developer, as depicted in the graphic on page 7.  The graphic also implies that all of the upfront activities will somehow create a mature, effective POA in the period labeled Association Control in the graphic — all without any legislation to define the content in the law and governing documents.  It is this deficiency that is the primary focus of a democratic model for governance which is reflected in the outline below. 

 

Democratic Model of Governance

Memo: This is a synthesis of the various analyses attempting to define the required legislation for democratic governance of common interest developments (CIDs) and property owners associations (POAs).  An abbreviated systhesis is part of a separate post at Outline & Analysis, CID & POA Issues, (being developed but not yet posted) then click on Democratic Model for Governance in the Table of Contents.  This outline reverses the time order for the development and evolution of CIDs/POAs beginning with what the CID/POA should be at maturity and then works backward in time.

• start with what the POA should be at maturity
  • POA legislation could be considered separately
    • separate legal entity, private government, that comprehends the unique conditions for POAs
    • but must require the constitution, or charter, provisions to run with the land — effectively to be part of the CC&Rs as described below
    • best to require CC&Rs to be amended and re-recorded with the required provisions concerning members' rights and limits on authority of POAs as described below
  • overview of the principal sources for content
    • statement of rights of residents adapted from Article I of the Michigan Constitution for example
    • (2008 Dec 23)  rights under federal and state constitutions cannot be infringed
    • (2008 Dec 23)  rights under laws can only be infringed by unanimous approval of the owners/members after transition to owners' control
    • (2008 Dec 23)  rights under federal and state constitutions and under laws cannot be infringed by the developer in the initial CC&Rs
    • requirements for a legal entity adapted from the mutual benefit (membership) provisions of the nonprofit corporation act
    • democratic and functional aspects from municipal law for villages, towns and/or townships
      • villages, towns and townships work reasonably well with the enabling legislation honed over many years
      • many of the provisions apply more broadly than just to villages, towns, etc:  open meetings and freedom of information acts for example
      • checks, balances and oversights to prevent the municipalities from become dysfunctional and/or abusing residents
      • the more POA governance looks like a "village" the easier it is for residents governed by POAs to understand the private government
    • make as simple as possible but no simpler
  • recognized as a private government based on democratic principles, or as a municipality which is based on those same democratic principles
    • part of civil code, not corporation code
    • POAs are a different kind of legal entity
    • common law from corporations, particularly business corporations, may or may not apply — probably doesn't apply
    • courts often recognize the quasi-governmental role of POAs, but still tend to apply common law developed for cases involving business corporations
    • statutory definition of fiduciary duty and business judgment rule consistent with the unique characteristics of POAs
      • mandatory membership
      • mandatory dues and assessments
      • entity (POA) exists for purpose of providing benefits and services to members paid for by members from mandatory dues and assessments
      • the POA may have the responsibility to administer a social contract defined in the CC&Rs
      • enforcement of CC&Rs on both property and members
      • board actions can create future financial obligations for members
      • board actions can affect property values
  • (added and integrated 2006 Jul 30)  superordinate (transcendent) principles (Statement of Rights) for private government to be Article I of the POA Act creating the private government entity
    
    • All political power is inherent in the people (purchasers/owners/members), and property owners association derive their just powers from the consent of the governed, and are established to protect and maintain individual rights.
    • statement of owner's rights (added 2006 Nov 27)
      
      • the statement of rights inherently describes the content for the proposed legislation
      • term is preferred over bill of rights which is often used to describe the concept  (See Homeowners Bills of Rights for more information.)
      • defer to more important concepts in democratic governance, namely
        • bill of rights in the U.S. Constitution
        • Declaration of Rights in the Michigan Constitution and likely the constitutions of most states
      • pattern the language after Michigan Constitution which begins with a Declaration of Rights as Article I
      • first and foremost right is to preserve constitutional rights for owners/members as required provisions in the CC&Rs or in appropriate law  (See POA Members' Rights for more information)
        • use language recommended by Retired California Supreme Court Justice Armand Arabian
        • if above is limited in any way, any constitutional right not preserved in CIDs/POAs must be clearly defined, stated and disclosed
      • All other provisions of the POA Act shall be subordinate to the provisions in Article I
    • require clear definition in the CC&Rs of the common interests on which the CID is intended
      • put positive focus on the CID by defining its intended character
      • basis for actions in enforcement of restrictions
  • CIDs/POAs have many similarities to municipal government
    • boundaries of CIDs are similar to municipal limits
    • POAs are private government, or quasi-governmental
    • owners are familiar with municipal government, so adopting those forms makes it easier for members of POAs
    • dues and assessments are analogous in taxes and assessments
    • restrictions on land use are similar to zoning and land use ordinances
    • common areas and recreational facilities may exist in both
  • but also have differences
    • POA is an "incomplete" municipality and depends upon other governmental governmental units for some services and functions
    • POA is still part of a municipality (city, township, and/or county)
  • CIDs/POAs also have some similarities to other forms for legal entities, particularly nonprofit corporations
    
    • See Hyatt and Stubblefield for discussion of various models
    • conclusion is that no existing legal entity provides a full model
    • conclusion is part of justification for creating a separate legal entity, private government, for POAs though authors didn't so state
  • all governing documents should be written for the CID and POA after transition of control by developer to control by POA (at maturity)
    • CID complete and developer no longer involved
    • any special rights of developer in prior phases must be written in supplements to the governing documents which become null and void at transition
  • CC&Rs must clearly define the common interest of owners/members that creates the common interest development (CID), or makes the CID — a physical location, a neighborhood, a territory, a graphical area, or sometimes called a subdivision — into a community which involves the residents
    • purpose and character of the CID
    • could be just a physical location or a geographical area
    • could be a community which involves the residents
    • provides the basis and standards for the restrictions on use of property units and common area
    • inclusion of a description of the common interest focuses on the positive
      
      • may help reduce the negative effect of the restrictions (reciprocal negative easements)
      • a POA focused on enforcing the negative is a poor foundation
        
    • legislation describing the principles for interpretation of CC&Rs is needed
      • CC&Rs are a contract under property law and therefore must be understandable to prospective buyers and owners as written
      • need predictability and stability
      • use latest summary interpretation by the courts — see summary at beginning of Michigan Case Law on Restrictive Covenants
    • in the CID/POA concept, the CC&Rs may also create a social contract by granting owners "an easement for use and enjoyment of common facilities" and granting the POA the authority to govern the CID "land" and the owners
      
      • the social contract introduces people and governance, i.e. "governing the owners"
        
      • including people and governance requires constitutional guarantees and members' rights as described above, which have been left out of CC&Rs and POA/CID legislation
      • property law and social contracts are "oil and water"
      • many of the problems in POA governance are related to the social contract defined in the CC&Rs without the appropriate constitutional rights and members' rights
      • municipal and other laws already regulate conduct, but it may or may not apply to regulation of conduct on private property, namely the common areas
      • use municipal law for guidance on what regulation of people is authorized and what regulation is prohibited
      • either find an alternative for defining the social contract or place the appropriately tight restrictions on the CC&Rs to avoid the difficulties in defining a social contract in property law
      • a separate post on the social contract is planned
    • must limit the scope of the POA to the above and any legal requirements defined in law (use nonprofit corporation law as a guide)
    • the above basically defines the constitution, or charter, for the POA, which is the primary connection between the CID with its CC&Rs and the POA
      
      • legally, the CC&Rs run with the land which is awkward for a constitution that involves people as well as land
      • the CC&Rs may also create a social contract, which applies to owners of property subject to the CC&Rs
    • mission for POA is to provide stewardship for the common interest and to protect the rights of members
    • (added 2006 Jul 30)  authority for liens and foreclosures must be defined in the CC&Rs and run with the land
      • no nonjudicial foreclosure is in the Declaration of Owner's Rights
      • foreclosures only for nonpayment of dues and assessments billed to all owners/members and actual collection, other costs and legal fees for non-aggressive collection
      • owner/member must reject repayment schedule for delinquent dues and assessments before foreclosure can be commenced
      • liens for fines permitted in the CC&Rs can be included in a foreclosure, but foreclosure must be based on delinquent dues and assessments
      • adapt the due process for forfeiture/foreclosure for non-payment of property taxes
    • fines and other monies due the POA
      • lien may be recorded if so provided in the CC&Rs only after violation is determined to be valid
      • some form of ADR must be provided with POA paying costs
      • no foreclosure for a lien based on a fine only
      • other authorities for alternate method to collect delinquent charges should be provided
      • charges for use of facilities shall be governed by commercial law
  • powers of POA should be limited to the above plus any legal requirements to function as the private government legal entity
    • open ended "act for the general welfare" clauses should be prohibited since they often become the justification for associations and boards to expand their powers
    • need legislative definition of private government entity to replace use of a nonprofit corporation as the legal entity for a POA
    • will need legislative definition for the preservation of constitutional rights and description of the rights of members
  • members' rights and obligations in the governance
    • members should, and want to, approve changes that affect their rights, benefits and privileges, services, and obligations which include dues, assessments, and restrictions
      • residents of municipalities typically vote on any tax increases or renewals
      • ordinances restricting use of property is limited by state legislation
      • authority for referendum to overturn ordinances
    • quorums and voting numbers must consider level of member participation (high in residential CIDs to low in resort PUDs with second homes and seasonal residents)
      
      • quorum for meetings — greater of 1/10 of all members or 1/3 of the average number of valid ballots in last three elections for the board of stewards
      • valid signatures for special members' meeting — greater of 1/20 of all members or 1/6 of the average number of valid ballots in last three elections for the board of stewards, but not more that 1/10 of all members
    • members' meeting
      • for most POAs, annual meeting could (should) be a New England style town meeting
      • to be outlined based on nonprofit corporation act and resident participation in towns and villages
      • specific requirements to ensure democratic processes and to prevent abuse by boards
    • provisions to ensure informed votes by members without advocacy by boards of stewards
    • require three readings with comments by members distributed to all members before a vote in taken, or equivalent
    • neutral and even-handed administration of members' meeting and members' matters by the board of stewards
    • much more to be added, probably in a separate post
  • powers of the board of stewards must be limited, enumerated and specific
    • general and open-ended missions for a POA are an invitation to abuse by boards
    • stewards is a much better term than directors (or could be trustees)
    • straw man for limited powers at Obligations and Authorities for the Board of Directors
    • powers of the board are based in part on members reserving exclusive authority to approve changes that affect members' rights, benefits and privileges, services, and obligations which include dues, assessments, and restrictions
    • need legislative definition of fiduciary duties and breach thereof, presumption of validity (business judgment rule for POAs), and other aspects that are appropriate for private government — concepts typically defined in common law for for-profit corporations that are not applicable to POAs
    • clear legislation of fiduciary duties of care, loyalty, and obedience as related to the unique characteristics of POAs as described above (See Fiduciary Duty for general discussion.)
    • need clear definition of business judgment rule as related to the unique characteristics of POAs as described above
      • applies only to operational decisions, not to actions affecting members' rights, obligations, benefits and privileges
      • does not apply if fiduciary duties are not met and documentation thereof
      • standards of reasonable (not unreasonable), not arbitrary, not capricious apply, not (gross?) negligence
    • a post on these last two items will be written; several scholarly papers available
    • board meetings 
      
      • the principles in Michigan Open Meetings Act should be included
      • to be outlined based on Virginia POA Act §55-510.1 and Florida HO Act §720.303(2) (Use browser to search for Board Meetings.)
      • Virginia and Florida Acts provide ideas for simplification
      • could just use the Michigan Open Meetings Act by substituting owners/members for residents/organizations in the Act
  • liens and foreclosures
    • unfortunately necessary for collection of delinquent dues and assessments
    • judicial foreclosures authorized for collection of delinquent dues and assessments
      • recovery of collection costs and legal costs
      • same due process protections for owners as provided in forfeitures/foreclosures for non-payment of property taxes
    • liens authorized for non-payment of fines
      • some form of ADR must be provided with POA paying costs
      • alternative method for collecting fines should be included
  • governance based on democratic principles
    • provisions should be included to cover each of the 20 principles listed
    • includes a practical means of enforcement (of law, governing documents, etc.) and related dispute resolution by members that is effective, certain, quick and low cost to members
      • See section on "Enforcement Recommendations for Property Owners Associations" in Dispute Resolution Considerations
      • this is likely the most important section in the private government legislation
      • without the practical means of enforcement and dispute resolution, the rest is just words on paper that can be enforced by the individual owner only through costly civil legislation
    • enforcement and dispute resolution two way
      • board representing the association wants a practical means to enforce the CC&Rs which they are obligated to do
      • individual members need a practical means to defend against arbitrary and capricious actions of the board and to require the board to carry out its duties including adhering to the governing documents
  • oversight considerations
    • no organization is sustainable without effective oversight — part of checks and balances
    • members can provide that oversight which will improve self regulation, reduce number of disputes and reduce disputes that reach the courts
    • key to oversight by members is transparency
    • generally don't have active press that performs any oversight (exceptions developing in Arizona and Nevada with influencial results on legislation)
    • members need way to communicate with one another (See Virginia Property Owners Association §55-510.2. Distribution of information by members.)
    • key tools are well defined in other organizations
      • transparency, transparency, transparency
      • open meetings — adapt Open Meetings Act to POA
        • tight restrictions on use of closed sessions with strict reporting requirements
        • requires 2/3 vote for closed session
        • all votes in open session
        • records available for inspection and copying after matter justifying closed session has been completed
      • access to all records — adapt Freedom of Information Act to POA
      • simplified requirements in Virginia POA Act §55-510 and Florida HO Act §720.303(5)
      • access applies to communication with professionals (attorneys, accountants, etc.)
      • standard is access to all records unless prohibited by law
      • also allow temporary restriction to access for activities in progress if immediate disclosure would cause material harm to POA, but with 2/3 vote of the board
      • legislative and audit committees independently elected
  • attorney issues (See Attorney Issues.)
    • POA is the client — needs definition for the application of MRPC 1.13 to the unique aspects of POAs
    • no privilege (except for temporary restriction for activities in progress); all communications open to members
    • members are the POA's highest authority as described in MRPC 1.13(c)
    • letter of engagement required which must define all of the relationship issues concerning the POA, board and members
    • organization's attorney cannot represent POA in litigation with a member (See Freivogel on Conflicts.)
      • avoids potential conflict of interest
      • prevents self-serving recommendations for litigation
      • consistent with Freivogel analysis for other entities involving partners, shareholder
  • accounting
    • books and records shall be in accordance to generally accepted accounting practice  (See Virginia POA Act §55-510.)
    • POA is the client
    • no privilege; all communications open to members
    • reserves for capital components
      
      • sufficient reserves for unanticipated and capital repair, replacement and renovation required
      • See Virginia Property Owners Association Act §55-514.1 for appropriate language
    • annual audits required with exceptions for smaller POAs
      
      • See Florida HO Act §720.303(7); search for "audit"
      • probably best to specify an audit interval of 5 years, 3 years and every year for the Florida categories
  • achievable but stringent and appropriate requirements for amendment of the governing documents (recommendations include the following)
    
    • 2/3 of those voting for all governing documents
    • quorum or minimum number of valid ballots appropriate for type of document and type of CID/POA
      • CC&Rs — (revised) 2008 Dec 27)  statutory or common law requirement which in Michigan is in Ardmore Park v. Simon (approval by majority or higher percentage of owners to be binding on all owners)
      • articles and bylaws — lesser of majority of all members and the average number of valid ballots in last three elections for the board of stewards
      • above lower limits recognize that participation in votes may be low in CIDs with many resort (vacation) homes or second (seasonal homes)
  • appropriate but limited regulation by the state ensuring consumer (owner/member) protection
  • examine municipal law for all provisions that may have application to private government
  • no change in governing documents should be required at the transition from developer to POA (the supplementary provisions granting the developer certain controls just become null and void)

• intermediate phase with land/property development phases and with some property units or housing sold and occupied
  • definition of provisions that apply in this phase must be supplements to governing documents that become null and void at transition from developer to POA
  • the supplements provide full disclosure of those provisions
  • clear definition of, and requirements for, the "phase in" to POA control for common property and governance
  • clear definition of the requirements for both developer and POA for the transition (financial, reserves for capital repair, property, governance, etc.)
  • special requirements granted to the developer to provide reasonable protection of economic interests of the developer
  • no interference from members of POA if development meets requirements as represented for the CID
  • reciprocal obligation of the developer for "no interference" to protect the investment by existing owners
  • protection for purchasers in the event the developer is unable to complete the development as represented
  • governance as defined above for maturity except for special provisions in supplements that become null and void at transition from developer to POA
    • giving the developer the powers to manage the POA during the initial selling period when number of members is small
    • providing phased-in participation of members of the POA in the leadership as the number of members increase
    • requiring the developer to provide the additional funding of the POA for the benefits and services represented by the developer as long as the developer is involved in the POA affairs
  • method with stringent requirements for re-definition of the character of the CID if the original plan is not economically viable
    • this possibility must be recognized
    • both developer and existing owners of property units are involved
    • court supervision should be required

• approval and initial construction/development phases
  • full approval by all applicable state and municipal governments
  • public policy issues reflected in the requirements to form CIDs
  • clear definition of the CID and its scope
  • clear definition of the mature development and the governance of the POA
    • character
    • common interest and its associated restrictions
    • governance and its associated rights and obligations
    • completed governing documents (CC&Rs, articles, bylaws, etc.)
    • (2008 Dec 23)  rights under federal and state constitutions and law cannot be infringed in the initial CC&Rs and other governing documents
    • documents recorded as required
  • time and/or sequential plan for the development and governance
    • special authorities for developer with protections for buyers
    • common interest and its associated restrictions (if different from above at maturity)
    • governance and its associated rights and obligations with clear definitions of authorities and obligations of developer
    • defined special provisions in governing documents in supplements that become null and void at transition
  • public policy issues addressed and resolved
    • See •Common Interest Developments• for details
    • reviewing bodies are state and municipal governments
  • xxx

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Copyright 2006-2009 © Donald L. Nordeen.  All Rights Reserved.  See Copying Posts on This Weblog.
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Comments

[Lil Freedman]

2008 Nov 22

Our state nonprofit statutes require open meetings for the Board of Directors, with the usual exceptions for personnel, litigation etc. But "meeting" is not defined. Our Board avoids open meetings with labels like "general discussions", "working sessions", XX committee meeting even though a quorum of the Board is present and substantive discussions take place. When I challenge him on this, the President states that it is "his view" that open meetings are not required if no votes are taken. However it often slips out that the Board "decided" this or that and it was never discussed at an announced meeting or in any Board minutes. It appears that in his mind decisions can be distinguished from formal votes. I think this is incorrect and violates the spirit and intention of the law. Is there something I can read to flesh out this issue? Is there substantial variation from state to state? Our state has no ombudsman or similar institution. Civil remedies (lawsuit) are not a viable (affordable) option.

Lil Freedman