DO’S AND DON’TS: HOW TO STAY OFF THE EVENING NEWS
A quick internet search quickly reveals that foreclosures pursued against homeowners living in planned communities have received significant negative press. Stores of abuse by dictatorial boards of directors against honest, hardworking property owners abound. Homeowners have been foreclosed for planting flowers on common property and for not watering their lawns during times of drought. Widows owing a few hundred dollars in assessments have been evicted from their homes. These headlines have created public outrage and cries for reform to protect innocent homeowners against abusive boards. Board members can find themselves in the awkward position of defending these heavy-handed actions on the evening news or in the morning papers.
Most board members would offer a different perspective from that found in these sensationalist headlines. They would correctly point out that North Carolina law imparts on board a fiduciary duty to preserve property values for all homeowners by maintaining common property and by protecting aesthetic standards in their communities. It costs money to maintain signs, parks, grounds, playgrounds and pools and each homeowner should contribute their fair share by paying their assessments on time. Those who pay should not suffer for those who do not. Nor should homeowners who maintain their property and follow neighborhood rules be penalized by a decline in property values at the hands of those who do not. Foreclosure provides a difficult but effective means that boards can use to ensure the fiscal and aesthetic integrity of their communities.
This article will discuss practices and procedures to assist boards in their efforts to both preserve property values and to avoid negative press. These policies can be broken down into two broad categories: 1) Common-sense practices established by boards and 2) adherence to the legal requirements of the North Carolina Planned Community Act (the “PCA”).
Policies and Practices Established by the Board of Directors
1. Act like a Corporation
To avoid negative press, boards should always conduct their affairs in an orderly and business-like fashion. Homeowner associations are incorporated under North Carolina law as non-profit corporations. Board members owe a fiduciary duty – the highest duty of the law – to their associations. They must act in the best interest of the corporation and must make hard, sometimes unpopular decisions without regard to personal benefit. Boards should strictly adhere to the business formalities required of any corporation, including calling meetings, establishing quorums, holding elections, using proxies and voting on association business. Meetings should be conducted according to Roberts Rules of Order. Board should accurately record the minutes of each meeting and be able to easily produce these records. Board should be especially careful when it comes to financial matters. Members should have a firm grasp on budgeting and financial matters and the expenditure of funds. Special care should be taken with regard to the assessment accounts of individual homeowners. Account ledgers should be unfailingly accurate and show all assessments owed, payments made, late fees assessed and any other charges, a task generally delegated to the association’s management company. Account ledgers are presented as evidence at foreclosure proceedings. Inaccuracies are embarrassing, can provide fodder for unflattering news stories and can lead to litigation against the association.
2. Formulate a Coherent Collections Policy.
One of the most difficult duties undertaken by a board is collection of dues that fund those services necessary to preserve property values in a neighborhood. Unfortunately, not all owners voluntarily pay, thus requiring board intervention and legal action. As such, it is absolutely essential that a board formulates a coherent collections policy as a roadmap to be consistently followed when a collections action becomes necessary. In consultation with the PCA and the association’s governing documents, a collections policy should delineate when an account becomes delinquent; state when late notices should be sent; decide when a delinquent account is turned over to an attorney; explain the timing and dollar amounts of late fees imposed on delinquent accounts; and note when an attorney should place a lien or file a foreclosure action against a delinquent homeowner’s property.
An effective collection policy should address the degree of discretion delegated to the association’s attorney especially with respect to filing liens and foreclosures actions and the negotiating of payment plans. The board should devote an entire section of its collection policy to the procedures that should be followed when imposing fines on homeowners who violate the association’s rules and regulations, including a clear statement of when a foreclosure action should be pursued to encourage compliance with those rules. The collections policy should be made available to all association members, preferably via publication on the association’s website. If a website is unavailable, the collections policy should be mailed to every homeowner in the community and provided to every new owner when they purchase a home in the neighborhood. A clear and coherent collections policy, made available to all homeowners and applied consistently will serve as an effective tool in minimizing misinformation and misunderstanding that can accompany the collections and foreclosure process.
3. Acting with Common Sense and Compassion.
Effective board members should possess the following traits: commonsense, a sense of fairness and compassion.
Boards should always remember that the individuals that they may be foreclosing against are their neighbors who may be experiencing difficult financial times. Unemployment, divorce and illness can destroy otherwise hardworking people’s finances. Often, extended payment arrangements can be made when serious circumstances exist. While there are habitual non-payers in most communities, boards must realize that not everyone who fails to meet their financial obligation is a “deadbeat.” All delinquent owners should be treated professionally and with respect.
Moreover, any personal differences between board members and individual homeowners should be left outside the boardroom. A board member with a personal agenda or who wishes to pursue a vendetta should not be serving on the board of directors. A delinquent owner, who has been treated with respect and compassion and who does not feel singled out, will be much more likely to work with the association in resolving any differences and will be less likely to air their grievances publicly with the press.
By Ed Flowers, Esq.