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HOA board has fiduciary responsibility to community - May 11th, 2018

 

Q: Do homeowners association board members have fiduciary responsibilities to protect the investments of all of their residents? If so, by not intervening with the city and allowing a special use permit to be approved and thus invalidating the terms of Federal Housing Administration financing, has the HOA failed it its duty? If so, how can this be remedied?

My other question is: Do HOA board members have the legal responsibility to ensure that no illegal activity is conducted on its property? And does operating an unlicensed business that is openly evading taxes constitute an illegal activity?”

A: Nevada Revised Statute 116.3103 pertains to the fiduciary responsibilities of the board of directors.

“In the performance of their duties, the officers and members of the executive board are fiduciaries and shall act on an informed basis, in good faith and in the honest belief that their actions are in the best interest of the association.”

The law continues by stating that board members are required to exercise the ordinary and reasonable care of a nonprofit corporation subject to the business judgment rule. In addition, board members are subject to the conflict-of-interest rules governing them under the laws of Nevada.

You ask if association board members have a fiduciary responsibility to “protect the investments” of all the residents. In addition to the language of NRS 116.3103, protecting the investments is a pretty broad term and one that I don’t think applies to association board members. It is not the association’s problem if you overpaid for your home or leased to a destructive tenant. The association board has an obligation to protect the physical integrity and financial integrity of the community as outlined in your governing documents.

Now, one can argue that, in order to protect the integrity of the community, the board should have become a political advocacy group by fighting against a special use permit. At what point in time should a community take action? We have seen in newspaper articles where associations are fighting developers and using association funds for legal battles. Unless associations have accounted for such money in their projected operating budgets, money to fight these legal battles would prevent the funding of the required operating services as set in their covenants, conditions and restrictions.

There is a legitimate battle to be taken to the Legislature as to the existing rental cap law, which should be modified, as well as addressing short-term rentals in more specific language to assist associations in preventing their communities from turning into apartment properties into hotels. We are seeing FHA and Veteran Affairs financing issues, which the Legislature was warned about many years ago. By creating these rental caps, associations can lose these financing programs, ultimately hurting their membership.

As to your second question of whether association boards have a legal responsibility to ensure no illegal activity is conducted on their property, including the operating of an unlicensed business that evades taxes: Most CC&Rs state that the homeowners agree to abide by the laws of their jurisdiction, state and federal. (Obviously the smoking of marijuana has its own legal complications between state and federal laws.) The association can certainly send a violation letter based upon solid evidence as opposed to speculation that some homeowner or resident is conducting illegal activity. The association can contact the local police department or attorney general to seek assistance, but please remember that your association is not the local police department.

Q: We are in a 6-month-old HOA and during that time have had two meetings. Our third meeting is soon. At this meeting, the board of directors has a review, discussion and renewal of their contract on the agenda. Frankly, we have been disappointed in this HOA. Our impression is that the decision-makers are more interested in collecting their pay as opposed to actively addressing the homeowners’ issues. The HOA is just now opening the board for homeowners to run for positions. Although there are currently no homeowners on the board, is it possible that we owners can veto the renewal of this HOA’s contract?

A: The answer is no. There are no homeowners on the board of directors. This association is being managed by the declarant (the builder’s) members on the board. Under NRS 116.3105, once the association is turned over to the homeowners, the homeowner board would have two years in which to terminate without penalty any contract that was entered into before they were elected, including any management, maintenance, operations or employment.

It should also be noted that, even if the current board consisted of homeowners, the answer would still be no. Homeowners cannot veto a contract at a board meeting.

Q: I am renting a home. When I went to get my membership for the facilities, I was told the property owner still has their cards and I could not get a membership. The owners want to keep their membership, and I cannot get one. Is there any solution to this for me?

A: Yes. You will need to contact your property owner to surrender her cards to the association. Please refer to your lease agreement, as it probably states that you have the rights to use the association’s facilities. Your property owner has the obligation to follow association requirements.

Barbara Holland is a certified property manager, broker and supervisory certified association manager. Questions may be sent to holland744o@gmail.com.