Association boards should perform legal audit annually

Each year, a condominium or homeowner association board should conduct a legal audit of its corporate procedures and activities. It’s a process that the board can do on its own for the most, or with minimal assistance of third parties, and it can be very revealing. The analysis will either confirm that the association is following proper procedure or permit the association to make adjustments that may be necessary to avoid running afoul of legal requirements or best practices. Here is a summary of some of the basic items that the board should consider for review.

Associations need to maintain certain books and records. Confirm that:

• All the books and records that are required by law, or the association’s governing documents, are being maintained for examination and copying by owners.

• Owner list/contact information is accurate and up to date.

• Minutes are being timely prepared following board and owner meetings.

• Minutes are approved by the board at a meeting and signed by the secretary.

• Minutes reflect the annual members’ meeting, annual directors’ meeting, regular and special board meetings, and the decisions of the board and actions authorized to be taken.

There are protections afforded to an association that is incorporated, and many banks require associations to be incorporated. Confirm that:

• The association is incorporated as a not-for-profit corporation.

• An annual report has been prepared and filed with the Secretary of State, and that the association’s attorney is designated as the registered agent.

• The association is in good standing with the Secretary of State. If the association’s corporate status has been dissolved (for failure to file an annual report), articles of reinstatement need to be prepared and filed with the Secretary of State.

In the era of email and text messaging, more and more board members communicate and make decisions informally and are at risk for not following corporate formalities, and laws concerning open meetings of associations. Confirm that:

• The association is holding an annual meeting to elect board members.

• The board is holding open meetings periodically (that means at least four times a year for a condominium and common interest community association) to conduct association business.

Associations usually have numerous contractual obligations with different ending dates. To avoid contracts that expire without replacement or that unintentionally automatically renew:

• Prepare a timeline of contract expiration dates and for when bids should be issued for new contracts or negotiations commenced for extensions of existing contracts, so there is a seamless transition from contract to contract.

• Calendar dates by which notice of nonrenewal must be provided to the contractor for contracts that include automatic renewal provisions, and issue timely notice of termination (if the board intends to cancel the contract).

Laws governing the contents of an association’s declaration and bylaws are ever changing, and documents that do not conform to the law can mislead an association.

• Review the association’s declaration and bylaws with counsel to confirm they are up to date with changes in the law, and amend as necessary.

The board should meet with its insurance agent/broker to ensure that the association has appropriate types and amounts of insurance. This includes:

• Directors and officers coverage for board members.

• General property damage and liability coverage.

• Workers’ compensation coverage, if appropriate (and it may be even if the association does not have employees).

Associations are organized as not-for-profit entities; however, associations are still required to file tax returns. Confirm that:

• State and federal tax returns have been prepared and filed.

Real estate tax issues for common area and units should be reviewed, and preparations made to challenge over-assessed property.

• Real estate (common area) owned by the association should be assessed at $1, thereby resulting in no real estate tax liability for the association entity.

• The assessed valuation of units in the association should reflect current “market value.”

An annual legal review will provide assurance to the board that its activities are appropriate, will permit the board to make any course adjustments that may be necessary, and reduce exposure to liability.

• Matthew Moodhe is an attorney with Kovitz Shifrin Nesbit in the Chicago suburbs. Send questions for the column to him at CondoTalk@ksnlaw.com. The firm provides legal service to condominium, townhouse, homeowner associations and housing cooperatives. This column is not a substitute for consultation with legal counsel.