Underfunded reserve account is cause of concern
Q: Recently, you wrote about an owner who could not pay a large special assessment for a roof project. What advice would you give that owner if the following were true. Board members are constantly elected on the basis of "keeping assessments low," thus underfunding reserve accounts, which leads to the large assessments. Does an owner have any recourse?
A: Section 9(c)(2) of the Illinois Condominium Property Act describes the items a board needs to consider in establishing "reasonable reserves for capital expenditures and deferred maintenance for repair or replacement of the common elements."
Specifically, that section provides that the board must consider the following: "(i) the repair and replacement cost, and the estimated useful life, of the property which the association is obligated to maintain, including but not limited to structural and mechanical components, surfaces of the buildings and common elements, and energy systems and equipment; (ii) the current and anticipated return on investment of association funds; (iii) any independent professional reserve study which the association may obtain; (iv) the financial impact on unit owners, and the market value of the condominium units, of any assessment increase needed to fund reserves; and (v) the ability of the association to obtain financing or refinancing."
These items give the board of a condominium substantial leeway in establishing a reserve. However, if a board substitutes a mindset of "keeping assessments low" and ignores the criteria described above and the need to increase reserve contributions, the board members (former and current) may be exposed to a breach of fiduciary duty claim. That is, current owners who are funding projects that should have been funded by long-term contributions to a reserve account, that would have been partially funded by now former owners, could claim they have been damaged by this breach.
Q: A board member in our condominium is seriously delinquent in the payment of assessments. As a result, the board members want to remove him from the board. Can they?
A: The association's declaration needs to be reviewed to determine the method of removal of members of the board, per the Condominium Property Act.
The typical declaration of condominium provides that any board member may be removed from the board by the affirmative vote of owners of the association, provided at least two-thirds of the total votes in the association are cast. The vote takes place at a meeting of the owners called for the specific purpose of removing the named board member. Typically, a board member cannot be removed from the board by the board.
The board can call this meeting of the owners to vote on removal of the board member, and proper notice of the meeting would have to be issued. Owners would vote in person or by proxy at the meeting.
Q: An owner in our condominium has acquired a large number of units in the association. The board thinks, but does not know, this owner wants to eventually sell the entire condominium property. When asked about his intentions, this person denies he wants to eventually sell the entire condominium property. Is the board under any legal obligation to advise the other owners of this situation and the board's concern?
A: No, the board is not under any legal obligation to advise the other owners of this situation and the board's concern. At this juncture, the board is merely speculating as to this owner's intentions. There are various reasons why an individual may be acquiring units in a particular association, and the purpose is not necessarily to eventually sell the entire condominium property.
• 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.