Community Associations Newsletter - November 2017

Date: November 14, 2017

Strategies for Surviving the Covenant Amendment Process

Originally published in the June 2017 volume of the Washington Metropolitan Chapter Community Association’s Institute’s Quorum.

By: Tiffany Releford, Esq.

An association’s governing documents (i.e. declaration, bylaws, etc.) are the legal documents that guide the board of directors on how the association is being operated and managed. As time goes by, it is not unusual to find these documents are outdated and need to be amended from time to time. Amending covenants in governing documents for an association can be a challenging and time-consuming task, however, but may be necessary for a building to thrive, as well as to address current changes in building operations, legislation, etc. Below are some helpful tips for planning and surviving the covenant amendment process.

TIP #1 - Selectively Determine What Needs Amending

Planning is essential when it comes to amending covenants. First, review your current governing documents to determine what changes are necessary. Many associations mistakenly think they need to discard their existing covenants and adopt a whole new set of covenants, which is not always the case. Most covenants are salvageable with some changes. Bylaws amendments usually start with the board of directors. Often, the board initiates the first step of reviewing the covenants to determine which items are outdated or need to be changed for the betterment of the building. However, some associations may also designate this first step to a committee. Either way, there should be clear communication as to what needs to be changed or updated to make the process efficient. Any proposed language to be added or modified should be thoroughly reviewed to ensure it does not conflict with other sections or make the covenants cumbersome. Once the board or committee has made suggested changes, the draft should be sent to legal counsel for review. After the lawyer confirms that there are no issues with the proposed amendments, a copy should be circulated to all owners for consideration and comment.

TIP #2 - Use Informational Meetings

Once legal counsel has reviewed the proposed changes to the covenants, the board faces the onerous task of obtaining enough votes to pass the amendments. It is crucial that they consult with counsel and have a clear understanding of the required number of votes needed to pass the amendments, as well as any consent or notice requirements to first mortgagees or other third parties. Education of the owners is the best way to assist the board with its efforts in collecting sufficient votes to pass amendments. The board should consider holding an informational meeting to discuss the proposed bylaw changes and why they are necessary. This meeting should also engage owners so they feel like they are part of the decision-making process. For example, at the informational meeting, owners should be encouraged to ask questions or raise concerns they may have about the amendments that were put forth. Sometimes, it may even be possible for a board to collect proxies at the informational meeting. Depending on the results from the meeting, the board will have to determine whether additional informational meetings should be held before the meeting to vote on the amendments.

TIP #3 - Carefully Schedule the Meeting Date

Once there is a final set of amendments to be presented to the owners, the next step is to plan a meeting for the vote. A call to vote on the amendments can be made during a special meeting of the association, or in some cases, during an annual meeting. The board must determine what makes the most sense for the association to get the votes needed to pass the amendment. For example, if the association’s annual meeting routinely takes place close to a holiday or over the summer when owners may be traveling, it may be wise to call a special meeting at another time for optimal voter turnout.

TIP #4 - Be Deliberate When Drafting the Ballot

A poorly prepared ballot can affect whether an amendment passes. Associations usually are successful in passing amendments when the ballots are short, clear, and concise. Even if a ballot is lengthy, it should clearly state the proposed changes. The board needs to consider whether certain amendments can be paired together on the ballot as one item so that if an owner votes for one amendment, they are essentially voting for another amendment as well. This method helps if there are several amendments being proposed to the owners, or if the amendments work in conjunction with each other such that if one passes, and the other does not, the amendment would not make sense. Likewise, if some amendments are stylistic (i.e. removing terms such as, he or she throughout the covenants) and not substantive, the ballot may have one box where an owner votes in favor or against all stylistic changes. Carefully drafting your ballot will help owners understand what they are voting on.

TIP #5 - Know the Effective Date of the Amendment

Assuming the amendments pass, the next action is to work with counsel to properly record the amendment. Some governing documents contain language indicating when a change becomes effective. Absent such language, an amendment may not be effective until recorded. Thus, it is imperative that the board work with legal counsel to determine when the amendment becomes effective and ensure it is recorded accurately. Once recorded, the amendment becomes part of the governing documents, and a copy of the recorded amendment with notice of its effective date should be sent to all owners.

Although this process seems to be long and rigorous, it is imperative to ensure the association is successful for years to come. By following the above tips, the process can be manageable and hopefully result in a positive outcome.

Recorded Association Governing Documents do not Create Liens on Their Own

By: Anthony Clark, Esq.

The Maryland Court of Appeals (Maryland’s highest court) has specified that in order for a lien to be effective, the procedures of the Maryland Contract Lien Act (§14-201 et seq. of the Maryland Code, Real Property Article) (the “Act”) must be followed. In Select Portfolio Servicing, Inc. v. Saddlebrook West Utility Company, LLC, et al., No. 71, September Term 2016, the main issue the Court reviewed was whether a lien could be created on a property by a declaration without following the procedures of the Act.

The subject declaration was recorded prior to the conveyance of any property to a new owner from the developer, and prior to any mortgages or deeds of trusts being secured against properties subject to the declaration. The disputed lien in this case was for annual assessments to be paid by each respective property owner over the course of time in accordance the provisions of the declaration for the financing, construction, and installation of water and sewer infrastructure within the subject community association.

The Respondent, Saddlebrook West Utility Company, LLC (the “Utility”) argued that a lien was created by a recorded declaration, pursuant to §14-202 of the Act, simply by virtue of the existence of a contract that provides for the creation of lien, and pursuant to §14-203 of the Act, by virtue of a breach of contract, if the procedures set forth in that section are followed.

The Court rejected these notions, and provided that the declaration did not create an enforceable lien by mere virtue of its recording in the Land Records. As noted above, the Court affirmed that a lien is only effective if all procedures in the Act are complied with.

How does this effect my Association?

Many community association governing documents provide that a lien exists on a property for assessments and related charges. However, this is no longer the case: a lien for assessments is not effective by the simple fact that a document is recorded. A lien for association assessments only exists if a lien is recorded in conformance with the Act which provides the individual property owner notice and an opportunity to contest the lien being recorded through the courts.

If you would like our office to discuss the effect of the Saddlebrook case on your community association, please feel free to contact any of our Maryland community association attorneys.