CondoTalk: An association should invest reserve funds

Q. Our association’s reserve fund is in a checking account that does not yield any interest. Can an association invest reserve funds and, if so, are there any restrictions on the type of investments the board can select?

A. An association can, and should, invest its reserve funds. Return on investment is one of the criteria to determine how much an association should budget for reserves each year. With savings accounts often currently yielding an interest rate of less than 1 percent, many associations are looking for alternatives to the traditional savings account.

As fiduciaries, board members are guided by the “prudent investor rule.” The board’s investment strategy should consider both the reasonable production of income and the safety of principal. That is, the principal should not be at risk. If a board invests reserve funds where principal is at risk, the board has to be concerned that it may be exceeding the parameters of the prudent investment rule and the protection of the business judgment rule.

FDIC-insured savings accounts and certificates of deposit, and U.S. government treasuries and bonds, are potential reserve fund investments associations should discuss with its advisers.

Q. One of the board members of our association misses most of our board meetings. Can the board declare the seat vacant and appoint another owner to fill the vacancy?

A. Unless the association’s declaration specifically states that a board member is deemed to have resigned if they have missed a certain number of meetings, the board cannot declare the seat here vacant. However, failure to attend board meetings may be a breach of fiduciary duty.

The board should review the association’s governing documents to determine what is required to remove the board member, and consider implementing those procedures. As recent news articles about a certain former “punky” quarterback indicate, an absent board member is nonetheless exposed to liability for decisions of a board even if the board member did not attend the meetings where the decisions at issue were made.

A board member who is routinely unable to attend board meetings would serve themselves and the association well to resign.

Q. Is an owner whose unit is in foreclosure eligible to be voted to and serve on the association’s board of directors?

A. Generally, ownership of a unit is the criteria for serving on a board of an association. The mere filing of a foreclosure action by a lender does not affect ownership of an owner’s unit. So, unless and until a unit is sold at a judicial sale at the conclusion of a foreclosure, an owner would be eligible to serve on the association’s board. It is more of a political issue as to whether the owners want to elect someone to the board who is involved in a foreclosure.

Q. A board member of our condominium association passed away. Can the president of the board appoint someone to fill the vacancy on her own?

A. “No,” the president cannot fill a vacancy on his or her own. A vacancy on the board can be filled until the next annual meeting by two-thirds vote of the remaining members of the board.

The owners, at the next annual meeting, would then vote to fill the unexpired time, if any, left of the term of the board member whose seat was vacated. However, if a vacancy is filled by the board, the owners may file a petition with the board to hold a meeting of the owners. The owners would then vote to fill the vacancy for the balance of the term.

Note that if a board member resigns from an officer position (president, secretary, or treasurer), but remains on the board, the board members would appoint another member of the board to serve in that office position. However, unless the association’s governing documents provide otherwise, no one board member can serve in more than one officer position at a time.

Q. My association is considering amending the declaration to restrict leasing of units. I am currently leasing my unit, and intend to continue to do so. Since leasing of units was permitted when I bought my unit, would I be bound by this amendment?

A. “Yes.” Owners purchase units subject to the ability of the association to amend the governing documents. An association can amend the declaration to restrict leasing of units if the association follows the amendment procedures described in the declaration.

However, the amendment should include a carefully drafted “grandfather” provision. At minimum, current leases should be “grandfathered in;” however, a broader “grandfather” provision may be in order depending on the facts and circumstances of the particular association.

Ÿ David M. Bendoff is an attorney with Kovitz Shifrin Nesbit in Buffalo Grove. Send questions for the column to him at CondoTalk@ksnlaw.com. The firm provides legal service to homeowner associations. This column is not a substitute for consultation with legal counsel.