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Georgia Real Estate InfoBase Contents - Chapter 57

Chapter 57

Operation of Community Associations


This chapter builds off of the previous chapters dealing with the organization, management and governance of community associations, and uses acronyms and terms defined in those previous chapters.  For example, “GCA” means the Georgia Condominium Act, “POAA” means the Georgia Property Owners Association Act, “HOA” refers to a homeowners association, and “POA” refers to a property owners association (i.e., an HOA that has been submitted to the POAA).  Please consult the previous chapters of this guide for more information and for assistance with interpreting and understanding this chapter.

COMMUNITY ASSOCIATION FINANCES 

The money-side of a community association is just like any other business entity.  The corporation brings in revenue.  The corporation budgets for expenses.  The board members and officers make decisions and adjustments throughout the year. The corporation files tax returns, evaluates investments, brainstorms creative ways to increase income and sometimes sues its debtors to collect funds owed to it.

ACCOUNTING METHODS 

Cash Basis Accounting:  Income recorded upon receipt; expenses recorded when paid

Accrual Basis Accounting:  Recognizes income and expenses when they are scheduled to take place, not when they actually do take place.

For example, condominium assessments are due on the 1st day of each month.  If a community employs cash basis accounting January assessments that get paid in February are report as income in February.  Under an accrual method, this income would be reported for January (even though it was not actually received in January).   

In reality, most communities use a hybrid cash and accrual basis of accounting.  Income and expenses are reported on a cash basis, but certain other items are entered on an accrual basis.

FINANCIAL STATEMENTS 

Income Statement: Reflects corporation’s profitability for a specific period of time.

Balance Sheet: Corporation’s assets, liabilities, and members’ equity at a specific moment in time.

Budgeting:

Approving the Budget:

QUESTION: Once approved, can the budget be changed?

ANSWER: Yes, the budget is an active document.  It should be evaluated on a monthly basis.  Sometimes there will be unexpected expenses -- increases in utility charges, termite issues on the common property, broken pool pumps . . . The money needs to come from somewhere to address these issues.  Other expense items need to be removed or lowered to create available funds for these expenses.  It’s possible that the holiday party may not be as elaborate one year because that money was needed for some required expense during the year instead.

Creating the General Assessment from the Budget

The amount of the general assessment SHOULD BE calculated by determining the amount of money needed to pay the budgeted annual expenses less budgeted income from sources other than the general assessment and dividing the sum by the percentage of ownership income for each condominium unit or by the number of lots in an HOA/POA.

NOT A GOOD IDEA -- Some boards of directors “back into” the budget by deciding what they want the general assessment to be, determining how much income that creates and then evaluating how to divide that income through the expense line items in the budget.

QUESTION: What do we do if we need more money?

ANSWER: The association may need to impose a special assessment, a specific assessment or obtain a loan.

Special Assessment: The covenants hopefully include a provision allowing the board to impose a special assessment.  If such a provision exists, then the board must comply with the described process or the special assessments could be challenged in the future. 

The GCA states that as long as the condominium legal instruments allow it, the board can impose a special assessment of not more than an average of $200 per unit per year without a vote of the association members.  If the condominium documents do not include a provision that mirrors this one in the GCA or if the board needs to pass a special assessment for more than an average of $200 per unit, the board will need the consent of a majority of the condominium owners.

Specific Assessment:  A specific assessment is a “charge back” to a particular unit or lot owner for an expense that would be inequitable to pass on to all the owners.  The GCA and POAA permit specific assessments as long as the covenants allow them.  In an HOA, the covenants need to permit specific assessments.

For example, an owner drives into the front entrance sign.  Insurance might pay to rebuild it, but the association will have to fund the deductible.  That amount should be passed on by specific assessment to the owner who caused the problem.  In a condominium, expenses for limited common element repairs and maintenance can be specifically assessed to the owners of the units benefited by the limited common element so the association can recoup some of those funds.  For example, if the patio or deck for one unit needs to be repaired, the association can charge back the repair costs to the owner of the unit attached to that deck.  Doing this sets a precedent, so it’s important to determine whether the short term gain of funds from the specific assessment is the right route.

Obtaining a Loan:  Increasingly more common for community associations

COLLECTING DELINQUENT ASSESSMENTS

Georgia case law has established that owners have the legal obligation to pay lawfully imposed assessments. In Forest Villas Condominium Ass’n, Inc. v. Camerio, 205 Ga.App. 617, 619, 422 S.E.2d 884, 886 (1992), the Georgia Court of Appeals held that: 

There is no legal justification for a condominium owner to fail to pay valid condominium assessments.  This reflects a clear choice by the legislature that the owner’s obligation to pay assessments be absolute…The obligation to pay the assessment is independent to the Association’s obligations to provide services.  This is necessary because the communal business of the condominium association for the benefit in common of all condominium owners continues unabated during the pendency of any…individual dispute.  The public policy expressed in the [GCA] assure that fulfillment of obligations and the functioning of a condominium association as a whole not be jeopardized or compromised by individual disputes, which may or may not be meritorious. 

Case applies to GCA, but it is used to support the assessment obligation in HOAs/POAs also.

In Timberstone Homeowners Ass’n, Inc. v. Summerlin, 266 Ga. 322, 323, 467 S.E.2d 330, 332 (1996), the Georgia Supreme Court enforced an HOA’s right to impose a lien and file a lawsuit for past due assessments against an owner who claimed that he did not affirmatively agree to the fees and never used the common property.  The Georgia Supreme Court held that the covenants created the lien right and since they were recorded in the county land records, the owner took title to the property with “constructive notice” of these obligations.  The court stated:

The purpose of mandatory assessments is to maintain the common property in the [community] for the use and enjoyment of all owners.  The effects of invalidating mandatory payments of assessments for maintenance of amenities in a community without affirmative acceptance would render the provision of services or facilities in a community an impossibility because it would permit property owners to determine for themselves what portion of the amenities they would be willing to accept or to reject.

Collections can be broken down into 5 steps:

How Do We Know What To Do?

Boards should establish a collection policy.

LIENS
GCA/POAA Liens

What Options are Available if a GCA/POAA Lien is Wiped Out by a Tax or Lender Foreclosure?

GCA/POAA Lien Payoffs:

HOA Liens:

What Options are Available if an HOA Lien is Wiped Out by a Prior Liens Foreclosure?

LAWSUITS AND JUDGMENTS

Post-Judgment Collections:

Credit check/Skip Trace/Private Investigator:

Garnishments

Suspension of Use Rights and Services

Suspension of Utilities: There are different requirements for condominiums, homeowner associations and property owner associations to suspend utility services provided by association (gas, electric, heat, air conditioning and water).  Either way, this right is only available as a valuable remedy if there exist separate exterior cutoffs to individual units or lots.

GCA:

HOAs/POAs:

Personal Property Levy

Post-Judgment Discovery

ASSOCIATION FORECLOSURE

GCA/ POAA:

OBSTACLES TO COLLECTIONS

Lender Foreclosure

Bankruptcy

Pre-petition debt

Post-petition debt

Chapter 7 – Liquidation

Complete relief from personal obligation of pre-petition debts – lenders typically foreclose after owner surrenders property. 

Chapter 13 – Reorganization 

Association receives partial or full payment of secured pre-petition amounts owed over a five year period - association secured by liens (GCA/POAA – automatically includes all principal owed upon petition.  HOA – only includes amounts listed in recorded liens) 

Results of Bankruptcy

Audits/Financial Review: Often required by bylaws; prepared by an independent CPA

QUESTION: What does the association do if the common property tax bill is really high?

ANSWER: The board should file a real property tax return which will trigger a revaluation of the property and a new tax assessment notice. If the assessment notice continues to show a high fair market value for the common property, the board should appeal the taxes and explain why the common area property should be assigned a nominal fair market value. Most county tax assessors’ offices and boards of equalization will remedy the tax valuation of the common property without a hearing. Sometimes a hearing will be required though. 

QUESTION: Is there a problem if the HOA/POA is not getting a tax bill for the common property? 

ANSWER: Yes. This could mean that the common property was never properly conveyed from the developer to the association. Most likely, the developer is getting, but not paying, the tax bill. The association needs to obtain title to the common property and then pay the unpaid back taxes, penalties and interest to the county or the common property could be lost at a tax sale. 

TAXES

Property Taxes

Condominiums: Corporations rarely own property (common elements owned by all unit owners as tenants-in-common and taxed as part of the intrinsic value of the unit). No tax bill for common elements.

HOAs and POAs: Corporations usually own common property/amenities – fair market value should be nominal because owner easements make it impossible to sell to third party for any real value. The FMV of each home in the HOA/POA is higher because the owners have the right to use and enjoy the common areas, so each lot is being taxed inherently for the value associated with the common property. Taxing both the lot owners and the association for the value of the common property creates double taxation.
Income Taxes

IRS Form 1120-H

IRS Form 1120

For example, personal property taxes could be charged on playground equipment or pool furniture and equipment owned by the association.  

1099 Forms

TRUST ACCOUNTS

MAINTENANCE AND REPAIR IN COMMUNITY ASSOCIATIONS

General Rules for All Communities

Condominiums

Example:  Documents state that exterior walls are the unit boundaries in a townhome condominium.  Unit owners are responsible for maintaining their unit, the driveway serving the unit, and the step or the patio serving the unit.  There are no other maintenance responsibilities assigned to the unit owner.  The association is responsible for maintaining all items outside of the unit boundaries unless otherwise assigned to the unit owner.

An owner’s HVAC system is stolen from the ground outside her unit.

STEP 1: HVAC system needs to be replaced
STEP 2: Boundaries are exterior walls
STEP 3: Maintenance Section of Declaration

Maintenance Section of the Declaration says:

Owner maintains:  unit, driveway and steps/patio.
Association maintains:  all other areas outside the unit boundaries.

Since the HVAC system was located outside the unit boundaries and the association is responsible for all areas outside the unit boundaries (except the driveway and the steps/patio), the association must replace HVAC system even though it serves only one unit.  (The answer is the same even if the HVAC system is a limited common element – because docs are not silent, so you don’t follow the GCA.)

Paying for Maintenance and Repairs 

General Rule -- whoever maintains it, pays for it

*Unless an exception exists (see below), not only does the association pay to maintain the common areas/elements, but the GCA and POAA affirmatively prohibit an association from charging back costs to an owner for such maintenance/repair.

IMPORTANT: The condominium declaration can state that the association does not have to charge the cost back to the owners, but if such language is not in the condominium declaration, the GCA REQUIRES the board to pass on such costs to the relevant unit owner(s).

Example:  If the declaration requires the association to maintain the roofs, the association cannot specifically assess a roof repair to a particular unit owner (even if the roof serves only one unit). 

Exceptions to the General Rule

Example: The condominium declaration states that the driveways are limited common elements (“LCE”) to the townhomes.  Another declaration for a different condominium states that the hallways are limited common elements to the units on the floors of a high-rise building.  Both declarations require the association to maintain the LCEs.  According to the GCA, the first association is REQUIRED to maintain the driveways as a common expense of the association, but also REQUIRED to charge back the cost of each driveway repair to the relevant unit owner (to reimburse the association for the work on the LCE).  According to the GCA, the second association is REQUIRED to replace the hallway carpet as a common expense of the association, but also REQUIRED to charge the carpet replacement cost back to all the owners of the units on that hallway.

Example:  An owner crashes through the entrance gates of the community in her car.  The association must fix the entrance gates.  If permitted by the governing documents, the association can assess the costs of repairing the gate back against the owner as a specific assessment.

Example:  If an association cuts a hole in the ceiling of a unit to fix a common element pipe, the association must repair the hole.  The association must put the property back to the condition it was in when it was originally built – not when it was damaged. 

INSURANCE ISSUES IN COMMUNITY ASSOCIATIONS
In general, however, there are 4 types of policies that an association carries:

Directors and Officers Insurance

Example:  If a director steals association funds, his actions will not be covered under D&O insurance.  Likewise, if a director slanders another person, the claim will typically be excluded from coverage.

Fidelity Insurance

Liability Insurance Coverage

Example:  A management contract requires the association to indemnify the manager and the management company from lawsuits brought during in the course of its work for the association.  Someone slips and falls on the common property/elements and sues the association and the management company claiming the area was not properly maintained.  The typical association CGL carrier will provide coverage for the defense of the association AND the management company in the lawsuit.  Without the indemnification and hold harmless coverage in the CGL policy, the carrier would pay for a defense of the association but the association would have to come out of pocket to pay for the defense of the management company in the lawsuit. 

HOAs and POAs

Condominiums

BEWARE: If a claim relates to any wrongdoing by the manager or management company, it is usually EXCLUDED from the CGL policy.  If the association has not made a similar exception in the indemnification provision of the management contract and a claim is brought against the manager/management company for its wrongdoing, the association’s CGL carrier may deny the claim and the association will have to defend the manager/management company out of pocket. 

Property Insurance for HOAs and POAs

Property Insurance for Condominiums

Example:  If an owner replaces the original tile in a unit with an upgraded tile or slate floor, the association’s insurance would not cover this upgrade.  In the event of a fire, the association’s insurance carrier will replace the flooring that was originally installed in the unit. 

Application of Insurance Deductibles in Condominiums

Important Notes about Condominium Insurance Deductibles

Condominium Unit Owner Insurance Policies – HO-6

These policies have three types of coverage:

*Most condominium documents require HO-6 policies for each owner. 

**Most residential lenders require HO-6 policies as a condition of loan approval (primarily because FHA and FNMA require HO-6 policies). 

COVENANT ENFORCEMENT

Covenants

    1. Is covenant clear and unambiguous?  If yes, it gets enforced. 
    2. If covenant is ambiguous, court applies rules of contract construction by looking at the entire document to resolve the ambiguity. 
    3. If the ambiguity still remains the question regarding what the ambiguous language means and what the parties intended must be resolved by a jury 

QUESTION: Who can enforce covenants? 

ANSWER:

QUESTION: Who can be sued for violating the covenants? 

ANSWER: Any owner subject to the covenants who violates the provisions is subject to enforcement mechanisms and can be sued to cease violating the covenants. 

QUESTION: What about an owner who purchased property that had a violation on it before the conveyance? 

ANSWER: Generally, the purchaser must have actual or constructive notice of the covenant violation for the association to enforce the covenant after the conveyance.  

QUESTION: How can we make sure that purchasers have actual or constructive notice of the violation? 

ANSWER: The association should record notices of violation in the county land records.  The notice simply states that the real property is the subject of a covenant violation dispute.  Doing so will put prospective purchasers on notice of existing violations.  Once a notice of violation is recorded in the land records all potential purchasers have constructive notice of the violation.  In order to avoid a potential claim for slander of title, it’s important to make sure the association legal documents affirmatively permit the recording of notices of violation as an enforcement mechanism. 

QUESTION: How can you enforce the covenants after filing notices of violation?

ANSWER:

QUESTION: If the association files suit to get a court order requiring the owner to fix the violation, is there anything the owner can say in defense that might make the association lose the case? 

ANSWER: Yes. The person can argue that he/she is not the owner of the property. Otherwise, there are 6 typical defenses to most covenant enforcement cases:

Statute of Limitations:

For instance, a covenant enforcement suit must be filed within 2 years after an owner installs an unapproved fence.  Each day the unapproved fence remains in place does NOT start a new 2-year period. 

Selective Enforcement:

Waiver:

Laches:

Look at the: 

Estoppel:

The association will not be permitted to successfully enforce the covenants if the violator was influenced by the conduct or representations of the association. 

For example, if a board member or ACC member tells an owner that the paint color he is about to use to repaint his siding looks nice, the association may be “estopped” from suing to make the owner repaint an approved color later.

Vague and Indefinite: 

Georgia Supreme Court stated that if covenant clearly establishes the rights and obligations of the parties, the covenant will not be deemed void. 

For example, covenants prohibiting “noxious or offensive activity” and “anything which may be or may become an annoyance or nuisance” were deemed too vague, indefinite and uncertain for enforcement.

Limitations on the Enforcement of Covenants 

Charter Club v. Walker 

The Charter Club community adopted an amendment to its Declaration of Covenants restricting the leasing of homes within the community.  Prior to the amendment, leasing was permitted in the community.  The community adopted the amendment following the amendment procedure specified in the Declaration. 

A homeowner named Constance Walker voted against the amendment and leased her home in violation of the new leasing restriction.  Ms. Walker claimed that she was not subject to the amendment since she voted against it.  The Association lost this case. 

The case revolved around a statute that has long existed in Georgia, O.C.G.A. § 44-5-60(d)(4). That statute provides, in relevant part, that "no change in the covenants which imposes a greater restriction in the use or development of the land will be enforced unless agreed to in writing by the owner of the affected property at the time such change is made."  The Georgia courts for years have enforced community association amendments like the leasing amendment in this case.  The courts have upheld amendments based on the understanding that, when covenants allow for amendments to those covenants with approval of less than all owners, buyers of property in the community have agreed to be bound by lawfully approved amendments, even if they vote against the amendments. 

In this case, however, the court ruled that the leasing restriction imposed a greater restriction on Ms. Walker's use of her property and, since she did not consent to this restriction, the amendment was not legally binding on her. 

The effect of this case, at a minimum, is that amendments already adopted by many homeowner associations may not be binding on any owner who did not agree in writing to those amendments, if the amendments impose a greater restriction on the use or development of the owner's property.  This has broad application and could include everything from leasing restrictions to any provisions that regulate commercial vehicles and parking, pets, or architectural control and review procedures.  In other words, any amendment which created a greater restriction on an owner's use or development of property can be challenged by any owner who did not vote in favor of that amendment. 

While the case suggests that amendments made by associations in the past may still be binding on those owners who voted in favor or agreed in writing to the amendments, the purpose of many of these amendments may be undermined if the restrictions are only binding on those homeowners who voted in favor of the amendment and not those who voted against the amendment or did not vote on the amendment.  Additionally, to enforce these amendments against owners who voted in favor of the amendments, associations may be required to produce records to show that particular owners voted in favor of the amendments.  This can be a challenge for many communities.

QUESTION: Where does this leave community associations?

ANSWER: First, this case does not apply to condominiums that were created under the GCA.  This would cover all condominiums created after 1975.  The reason for this is that the Condominium Act contains a provision that specifically states that O.C.G.A. Section 44-5-60 does not apply to condominiums.  Amendments to condominium declarations, then, are not affected by this ruling. 

Next, the POAA contains a similar provision stating that O.C.G.A. Section 44-5-60 does not apply.  For communities that are subject to the POAA, amendments adopted after submission to the POAA are not subject to this ruling.  Certain amendments adopted BEFORE the submission to the POAA may not be binding on certain homeowners in the community. 

However, for all homeowner associations, certain amendments adopted by the community may be invalid and not binding on certain homeowners in the community.

QUESTION: What should community associations do now?

ANSWER: Any homeowner associations that have not yet adopted the Georgia Property Owners' Association Act should do so now.  This often will require a vote of the association membership, but many community covenants allow the board of directors to adopt the POAA without a homeowner vote.  If the community covenants require a homeowner vote for adoption of the POAA, the POAA itself permits that amendment by the percentage approval specified in the covenants.  This case would not force associations to obtain 100% homeowner approval to adopt the POAA, if the covenants provide for a lesser amendment approval vote, as the POAA is not considered a use restriction.

Adopting the POAA now probably will not fix the problem associated with amendments that were adopted prior to submission to the POAA, but adopting the POAA will give the community legal power to make future amendments and to ratify previous amendments.  Additionally, the POAA greatly strengthens assessment collection powers, which we believe benefits all homeowner associations.

If your community has adopted amendments in the past which impose a greater restriction on the use or development of homeowner properties, even if your community later adopted the POAA, the community should undertake an effort to ratify or readopt those amendments.

The most efficient and cost effective way to validate amendments previously approved by the community is to first adopt the POAA and then ratify earlier amendments with a community amendment vote following the amendment procedure stated in the covenants.  Unfortunately, this process cannot be accomplished without a community vote, but we believe that this process is the simplest and least costly approach to make existing covenant amendments binding on all homeowners in a community.