Why Amend the Governing Documents?
Associations considering an amendment to one or more of their governing documents will want to begin with an analysis of the community association’s existing documents, including identifying specific goals for any amended governing documents. If there is nothing to improve, there is nothing to gain. The governing document amendment process will be time-consuming and requires an investment of attorneys’ fees and costs. Therefore, the identified goals for the amended governing documents must justify the process. Common reasons for amending governing documents include the following:
Update to Current Status
A community association otherwise considering an amendment to its governing documents must understand whether it is currently governed by the Minnesota Common Interest Ownership Act (“MCIOA”), and if not, whether it would be advantageous to be governed by it. Common advantages in becoming governed by MCIOA include:
- Original governing documents lack certain rights for the benefit of the community association (i.e. foreclosure by advertisement, right to impose fines, right to access units);
- Superlien provisions for delinquent assessments accrued during senior mortgage foreclosure;
- Statutory authority for assessments, late fees, fines, and the collection of attorneys’ fees and costs; and
- Expanded operational guidelines.
Other Common Areas For Governing Document Improvement
Maintenance Obligations - In general, community associations repair and maintain the common elements and building exterior surfaces. As such, specific repair and maintenance items must be reviewed in light of the governing documents to determine whether current practices are consistent with the existing governing documents and whether changes are desired or necessary.
Leasing Restrictions or Prohibitions - A community association homeowner has the right to lease his/her unit unless the declaration restricts or prohibits the leasing of units. The right to lease cannot be prohibited or unduly restricted through a community association’s rules and regulations, so associations wishing to adopt such restrictions will need to look at amending their declaration. Many options exist for enforcing new leasing restrictions or prohibitions when there are existing landlords within the community association.
Smoking Bans - Associations can ban smoking in common areas through their rules and regulations. However, any association contemplating instituting a ban on smoking in the entire association, including within the units themselves, will need to do it through an amendment to the declaration.
Rules and Regulations - Community associations may promulgate rules and regulations regarding additional matters to assist in the operation of the association, unless the governing documents state otherwise. Therefore, restrictions on the right to promulgate rules and regulations in the declaration may necessitate an amendment to the declaration. Otherwise, simple changes in policy can be handled by the board of directors by making changes to the rules and regulations.
Community associations and their homeowners rely on insurance for the protection of their community. With the rising costs of community association insurance, the original governing documents may not adequately protect the community association’s interests. A common problem for associations not governed by MCIOA is the inability to increase assessments by the amount necessary to pay increasing insurance premiums while maintaining an adequate budget for common expenses and reserves. Another common problem is the inability to set insurance deductibles at a reasonable amount, and the inability to assess insurance deductibles to homeowners in a fair manner.
Assessment Powers - Community associations must have effective assessment powers to ensure proper operations and management. This includes the authority to assess legal fees and other costs back to homeowners in appropriate circumstances.
Assessment Enforcement - Community associations must be able to effectively collect delinquent assessments. Lien foreclosure is the most effective means to collect delinquent assessments. A community association lacking the ability to pursue lien foreclosure, specifically through the more cost-effective and timely advertisement method, should consider an amendment.
Further the Goals of the Association - Minnesota community associations, like any organization, change over time. Amending the governing documents allows a community association to further its goals for a better community by making the governing documents match its current goals. However, community associations must be careful to draft the governing document amendment to allow flexibility in its application by the board of directors to ensure that future governing document amendments are not required to make simple policy changes.
Clarify and Resolve Unclear Issues - Many older governing documents are poorly drafted, making interpretation and enforcement difficult, if not impossible. Initial governing documents are often drafted before the units are built and homeowners occupy the units. Once the community association is in operation, and the homeowner-elected board of directors has the opportunity to work with the documents, changes are often necessary to clarify and resolve unclear issues under the initial governing documents.
Amending Community Association Governing Documents
The legal process for amending community association governing documents (other than rules and regulations, which can usually be amended by the board without a vote of the owners) is governed by the original governing documents and MCIOA, if applicable. The general amendment process is as follows:
Document Amendment - The first step is to identify the documents to be amended. Depending on the circumstances, the amendment process may include amendments to one or all of the community association’s governing documents (Articles of Incorporation, Bylaws, Declaration, and Rules and Regulations). After an initial consultation, the association’s attorney will usually draft the amendment documents for review and comment by the community association’s Board of Directors and/or a committee formed for the governing document amendment project.
Once the amendment documents have been approved by the community association’s Board of Directors, the amendment documents are often mailed/delivered to the individual homeowners for review and comment. An informational meeting is typically (though not required to be) conducted with the community association attorney available for homeowner questions and comments. Depending on the issues raised by homeowners, additional drafting may be necessary to improve the documents or make them more likely to be approved by the homeowners.
Homeowner Approval - Once the amendment documents are in final form, a meeting of the homeowners is usually conducted to vote on the applicable amendment. Amendments to the Articles of Incorporation and Bylaws are commonly voted upon by the homeowners at a special or annual meeting. In lieu of holding a meeting of the owners, associations governed by MCIOA may conduct the vote by mail ballot and/or electronic voting if permitted under their governing documents. The electronic voting may be combined with a mail ballot, but neither one may be combined with a vote held at a meeting. For associations not governed by MCIOA, you will need to look to the specific requirements of your governing documents to determine how consent of the owners is to be obtained. Some declarations require that the amendment actually be signed by the requisite number of homeowners and/or mortgagees to show their consent.
First Mortgagee Approval, If Necessary
Many governing documents require first mortgagee approval for amendments. Once homeowner approval is obtained, first mortgagee approval is then sought when necessary. Often, the documents require approval only from a specified percentage of “eligible mortgagees”, which are usually defined as those first mortgagees that have notified the association in writing that they want to be notified of certain things. Since mortgagees rarely, if ever, bother to submit such a request, it is often the case that an association will not have any “eligible mortgagees” and will therefore not need to obtain mortgagee approval for an amendment. For associations governed by MCIOA, a statutory amendment went into effect August 1, 2010 that allows associations amending their governing documents to obtain required mortgagee approval by sending a notice to the mortgagee giving the mortgagee 60 days to respond to the proposed amendment. If the mortgagee fails to send a written refusal to consent to the amendment within that time period, the mortgagee is legally deemed to have consented to the proposed amendment.
Declarant consent - Most governing documents and MCIOA require that as long as the declarant still owns any unsold units, written consent from the declarant must be obtained for any amendments to the declaration, bylaws or articles of incorporation that affect the declarant or modify the special declarant rights in any way.
Filing - As soon as all required approvals are obtained, some amendments are required to be filed before they can become effective. An amendment to the Articles of Incorporation is filed with the Minnesota Secretary of State. An amendment to the Declaration must be filed with the county in which the property is located, and an amendment to the Bylaws may be similarly filed when required by the existing documents. Recent changes in the recording statutes have made this process much easier and less expensive for some associations where the property is all Torrens property by allowing the amendment to be recorded only once in the County property records against a Common Interest Community Certificate of Title (“CICCT”) instead of requiring it to be recorded separately against each individual unit within the Association.
It is not recommended that an association attempt to amend its governing documents without the assistance of an attorney experienced in this area, as an improper amendment and/or failure to follow the required procedures may invalidate the amendment and subject the association and/or board of directors to possible litigation by homeowners affected by the proposed amendment. Additionally, amendments that are not properly drafted may be difficult to enforce either because the language used is vague or unclear or because the amendment actually conflicts with one or more other provisions of the governing documents or applicable statutes. For questions on amending your governing documents, feel free to contact the author.