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Associations Tend to Forget About Their 'Legal Checkup'

Most associations have a relationship with a law firm, but many boards of directors fail to use their lawyers for one of the most important services they offer, i.e., legal risk management.

When was the last time your board had a "legal checkup." It may cost a little more than what Lucy charges the Peanuts gang, but the cost savings it can provide could be in the thousands, let alone the peace of mind it should provide. The board should consider areas in which it may feel vulnerable and review them with legal counsel and maybe their insurance professional.

First, your attorney should be familiar with all of the association’s legal documents, including the Declaration, By-Laws and rules and regulations. Next, the board should compile a list of potential problem areas for the attorney and then convene a meeting to discuss proactive policies. The attorney should also have a list of areas that he sees may pose a risk of liability for the association. Thereafter, new policies can be put into place either by revising and updating the rules, amending the Declaration or convening an owners meeting.

Typical areas where an association needs to analyze problems are:

Updated Legal Documents -- Is the Declaration consistent with Illinois law? Statutory changes and case law may create confusion among owners in such areas as special assessments, unit owner responsibility for maintenance, etc. Do the documents need an entire "facelift" or is an amendment or is a legal opinion all that is necessary? The same holds true for rules. Since the board generally adopts the rules after owner input, the rules can be updated as often as necessary, but certainly no less than every other year. Are the rules enforced uniformly and are they non-discriminatory? Legal decisions are frequently handed down by reviewing courts and the legislature adopts new law integrating or striking down certain association policies, and laypeople are generally not informed so they rely upon their original documents. A periodic review of new laws in the form of a newsletter can at least keep owners informed.
Financial Procedures -- Regardless of whether the association uses professional management; is there a system of checks and balances in place? Are there regular financial reports available to the board and to owners (upon request)? Is it concise, readable and performed in accordance with generally accepted accounting principles? Is more than one signature required on checks and withdrawals? This is a primary area where associations can get into trouble.
Insurance Coverage -- What is covered and what is not? Each board should obtain a copy of its master policy and review it in order to see what is excluded. If the building is gong to undergo major repairs and unit owners must be re-located, are these costs covered? Are floods covered, broken water heaters, the on-site janitor’s car? These are issues that boards need to be aware of to avoid unnecessary disputes.
Rule Enforcement -- Is a violator afforded due process? is there adequate notice and a warning procedure for violations? Are the hearings impartial? Are the fines reasonable? An association can get in serious difficulty with a judge if it imposes an outrageous fine, did not give the owner proper notice or allows the complaining witness, who is a board member, to vote on the issue of levying a fine. The procedures need to be reviewed and updated.
Contracts -- Is the board using the contractor’s agreement form that he purchased at the office supply store or does the board have a file of standard agreements it uses for all situations which were drafted or at least reviewed by legal counsel? What are the penalties for non-performance? Is there a no penalty cancellation clause? Are attorneys fees awarded for a breach, etc.? Many boards are reluctant to spend the hundreds necessary to have a good contract, but then are obligated to pay out thousands when the contract proves to be inadequate. This is where "preventive" law really has a significant value.
Board Procedure -- Is the board and the association meeting often enough to comply with legal requirements? Is there adequate notice, a proper agenda, comprehensive minute-taking? Are board meetings business meetings or coffee-klatches? Is there an annual owners meeting to elect the board? When unit owners and the association enter into a dispute that winds up in court, you can be certain that the owner’s attorney is going to scrutinize minutes and board procedures to see if the association is administered properly and that the directors are acting within the scope of their authority. A board never wants to have been found guilty of breaching its fiduciary duties.
Communications -- Is there a system of communicating board decisions to the owners and likewise a way for owners’ complaints to be handled quickly and efficiently? Whether it is a management company’s customer service department, a newsletter, accessible forms, etc., there is no greater contributing factor to unit owner unrest than to ignore owner inquiries. This does not mean that every board meeting should be taken up with owner complaints...that is not the proper forum unless the owner can demonstrate that he has been repeatedly ignored. Rather, there has to be a systematic approach to deal with complaints, with follow up and documentation.

These are just some of the problem areas that associations might deal with on a day-to-day basis. By creating a working document outlining risk management and limitation of liability procedures and working in conjunction with its hired professionals, an association can be a viable, efficient organization with minimal risks attached to operating and administering the board. This will also get you a clean bill of health whenever you have a "checkup."