Governing Documents, Who, Why, What, When and Where

With many, many thanks to Tony Rafel, Managing Partner, The Rafel Law Group, we spent the evening discussing all the governing documents, as above.


Since attendees represented condominiums, this is the 'flavour' of common interest community that we focused on in our discussion, there being no need to cover HOAs or co-ops at the session. Be aware that different state laws apply to HOAs and to co-ops.


When one buys a condominium, one looks at the view, the exterior, the amenities and falls in love with the space. Maybe it's the granite counter tops, the hardwood floors, or the tricked-out bathroom fixtures.


But, what you're really buying is a lifestyle that will only become visible when you read the governing documents. In Washington, condominiums are sold with Resale Certificates (or as new condominiums, with a Public Offering Statement), which includes governing documents. (Currently, in Washington, warranty rights are robust for buyers of new construction.)


Buyer beware of not reading and understanding the governing documents for the community where you've decided to build a life in the space you'll purchase. These define your legal rights and obligations as an owner.


Here are a few nuggets about each of the governing documents. In the hierarchy of applicability, if the governing documents are silent, the state law applies.

Articles of Incorporation

This is the least frequently used document, written by the developer's attorney, and establishes the association as a business entity. It is filed with the Secretary of State and its validity updated annually by the payment of an annual filing fee. In Washington, some condominiums are incorporated as non-profit corporations.


The purpose of this document is to establish the state, corporate-business guidelines under which the community leaders operate the business of the association. 

Declaration Containing the Covenants, Conditions, Restrictions and Reservations

Nicknames for this document include decs and CCandRs. This document is written by the developer's attorney based on state condominium law -- Revised Code of Washington §64.35 -- and establishes the real estate entity known as the condominium.


CCandRs are filed with the local county records office and they detail the land-use parameters for the community.


Generally, initial editions are designed to protect the developer in the beginning stages of community development, so this version preserves development rights and identifies the developer as Declarant.

By-Laws

By-laws are prepared -- again by the developer's attorney -- as a template by which the association's business is to be conducted and managed. Generally, these are based on the guidelines established in the corporate guidelines for the style of corporation identified in the Articles of Incorporation, such as a non-profit corporation.


Association affairs are managed by a board, not by directors. Officers are different from directors. Officers carry out the directors' decisions. Owners elect directors, then the board appoints among all the directors elected, who serves in each officer role. Each director has responsibility to the association, the duty of care*, a fiduciary duty, and owe a loyalty to the association.


Directors vote, roles to not vote. Generally, proxies of board members are not allowed; but By-laws can be amended to accept unanimous e-mail votes, called 'consent in lieu of meeting'. All directors must sign the decision in writing. The board makes a record of this decision, and may choose to make a motion at a future board meeting to ratify such a decision. As well, decisions made in executive sessions can be ratified at an open board meeting, which protects the board by documenting business decisions.


If there is a conflict between what's written in the decs and what's written in the By-laws, what is written in the decs prevails.

Generally, unless stated otherwise, Washington State condominium board meetings shall be open to all members.
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*Duty of care means that a director must decide in favour of the association if there is a conflict of interest.

Rules and Regulations

Once the association begins operations, the board of directors can define rules and regulations for the association. These generally address, specifically, the behaviour required of residents, owners, guests, visitors, in addition to parking and animals. Generally, these are crafted by an attorney based on the requirements outlined by the board.


This is a smart place to include a fine schedule. Your fine schedule can be based on one used by the local municipality. Fines must be reasonable according to the geography, and to the violation.


Generally, if something is not prohibited, it is permitted. However, it's always wise to request advice or guidance from your board or from your association manager if you plan something that could affect your neighbors or the community.


Rules apply when they are sent or by a later effective date, and cannot be retroactive.

Resolutions

Boards can craft resolutions to address specific policies, such as assessment collections, master insurance policy, deductible-liability in the case of owner or unit-caused damage, or other policy guideline. Resolutions are published to owners, and have the same general effect as Rules and Regulations.

Resolutions must be reasonable and are best crafted by association counsel, based on guidance by the board.

Minutes

Although minutes are not governing documents per se, they do document the business actions of the association. There are basic requirements for board meeting minutes -- and for some meetings, there are special elements to include. The board approves minutes of board meetings; the association approves association meeting minutes. 

Owners can object to the contents of board meeting minutes, but they have no standing.

Association Progress  of Governing Documents Over Time

When the developer -- who wants to sell units -- controls the board, s/he may appoint members to the board. Your governing documents are specific about the duties of these appointed board members. Generally, there is a higher fiduciary duty required of these directors, who are required to put the interests of the association above all other interests. Depending on your governing documents, it's possible that the developer can remove board members that s/he appoints.


At some point, the control is passed to the association. The developer must convey control when 75% of the planned units are sold, or earlier, and there must be a termination date to the declarant's rights. Turnover is not a magic date, and in Washington State may be conducted unceremoniously. (Oregon requires a formal Turnover Meeting with the developer required to pass along materials to the owner-elected board.)


At turnover, the owner board may reject contracts -- usually within a 90-day period after turnover. Some associations use this option to change management companies, or invalidate too-long and developer-favoured contracts.


All governing documents can be amended, and should be as the association develops its community standards. Best practices dictate that amendments be prepared by the association's counsel, based, on guidance from the board.

Amendments to Governing Documents

Each governing document usually contains the percentage vote required, either by the board or by owners, to amend each. Generally, if an amendment is not challenged within 12 months of its adoption by the board, it becomes law.

For example: 

• Decs can be amended by 67% of the voting power of the association, or more may be required, depending on the amendment.
• By-laws can be amended by 51% of the total votes in the association, or as otherwise noted in the association's By-laws. There are times when the board can amend them: association counsel can advise the board in particular.
• Articles of Incorporation can be amended by the corporation, according to law for that style of corporation.
• Rules and Regulations can be amended by the board.

How Owners Can Employ Governing Documents

Owners can challenge a decision of the board by sending notice to the board. Owners can also call special meetings of owners, by written petition to cover a stated subject. For example, owners can remove a board member at such a meeting according to its voting requirements.

Decs contain a due process guideline that is useful in the case of a violation -- whether by an owner or a tenant. (Tenants must follow the governing documents and live in the community as owners, except that they cannot vote on association matters.) Due process contains guidelines for notices, hearings and ruling.

Decs define committee work, which is an easy way to become involved in the association's business, and focus on a topic of interest, such as finance, maintenance, safety, landscape and so forth. There are two types:

• Advisory committees have no power, but do advise the board, commonly only one director is required
• Authority committees are delegated authority by the board to perform certain tasks, such as rule on proposals. Two directors must sit on authority committees.

Best practices dictate that a committee be established by a resolution, or by a motion with stated authority.


There are some contents of the governing documents which can be 'abandoned' in place, because they are never enforced. However, when money is involved, the impact may be different and the board may want to act to amend those contents.