Association boards must establish reasonable reserves

Q. To the best of my knowledge, our association has never had a reserve study done. The buildings are more than 30 years old. I am concerned we are not saving enough in reserves to try and prevent having another special assessment. I have asked our board of directors to look into having a reserve study done, but the board says it is not necessary and does not want to spend the money. How important is a reserve study?

A. The typical declaration requires an association to establish a reserve study, and it's also required by common law established by Illinois case law. Establishment of a reasonable reserve may be one of the more important of the fiduciary responsibilities of an association's board of directors.

There is no "rule of thumb" or formula for determining the annual reserve contribution. Therefore, in my opinion, a professionally prepared reserve study is the foundation of the establishment of a reasonable reserve. I don't understand how the typical board member would have the resources, experience and knowledge to determine the amount of money that should be in the reserve account or to determine the annul reserve contribution. Reliance on a professionally prepared reserve study also helps insulate the board from a breach of fiduciary duty claim, if an owner contends that the amount of the reserve is not reasonable. Of course, the reserve study should be updated from time to time, and contributions to the reserve account should be adjusted accordingly.

Q. Our common interest community association is considering a restriction on leasing of units. One of the board members commented that the law requires all current owners be grandfathered. Is that correct?

A. That is not correct. Section 1-20(c) of the Common Interest Community Association Act includes a very limited exception to the applicability of a lease restriction amendment adopted by a common interest community association. If a common interest community association, that currently permits leasing, amends its governing documents to prohibit leasing, the restriction cannot prohibit a unit owner, incorporated under 26 USC 501(c)(3), who is leasing a unit at the time of the prohibition, from continuing to do so until such time that the unit owner voluntarily sells the unit.

501(c)(3) refers to a tax-exempt organization under the Internal Revenue Code. The most common types of tax-exempt nonprofit organization are those whose activities have the following purposes: charitable, religious, educational, scientific, literary, testing for public safety, fostering amateur sports competition, or preventing cruelty to children or animals.

While there are 501(c)(3) organizations that own units in common interest community associations, it isn't necessarily common. As a result, the limitation imposed by Section 1-20(c) of the Common Interest Community Association Act will have very limited applicability.

Q. Our property manager signs contracts on behalf of the association, at the direction of the board after the contract is approved by the board. The manager normally just signs his name to contracts. One of the board members has suggested that the manager needs to note that he is signing the contract on behalf of the association. Is there some signature format the manager should follow when signing contracts for the association?

A. The manager should sign the contracts "as agent" for the association. The manager would sign the contracts, for example, as follows: "John Smith, as agent for XYZ Condominium Association." Otherwise, the manager could be deemed to be signing contracts personally, and that is certainly not the intention. Also, too often I see a proposal submitted to an association that identifies the management company, and does not identify the association. The contract should clearly identify the association as a the party to the contract.

• David M. Bendoff 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.