State law trumps association covenants

Q. Can a board and management company choose to hold a budget and assessment fee increase ratification vote under the lax rules of NRS 116.31151 rather than a more stringent set of meeting and voting rules specified in our covenants? Our covenants require the approval of at least 51 percent of the members if the proposed monthly fee increase is in excess of 10 percent over the previous year. This process seems designed to make it difficult for the board to raise fees. The state law, NRS 116.31151, allows the budget and any increase in fees to be automatically ratified unless 51 percent -- or a higher percentage, if stated in the association's covenants -- of the membership rejects the budget. It seems hard to believe that the state would create a budget ratification process that minimizes to such a low level the involvement of association members.

A. The answer is that the state law will take precedence over your covenants. Now let's discuss why.

The low level of involvement of association members was not created by the state. It was created by the apathy of association members. Here's the history: If you were living in this state in the 1970s, your covenants stated a certain percentage was required to have a quorum to conduct association business and a certain percentage was needed to approve the budget. These voting requirements differed from association to association as there was no standard methodology. If your association was unable to obtain the necessary quorum to conduct an open meeting to vote on the budget, your covenants generally allowed for an adjournment of that meeting to a continued meeting where the quorum was then reduced. In some cases, the meeting could literally be adjourned for an hour and then reconvened with a lower voting percentage requirement (most of these older covenants would require at least a 10- or 15-day notice for the reconvened budget meeting). Over the years, associations even lowered their quorum percentages for conducting business meetings. Even with proxies, many associations could not muster the minimum voting requirement to have a quorum, let alone approve a budget.

Picture an association with 100 members with a quorum to conduct business of 51 percent, or 51 votes. This association allowed for the reconvened meeting at which time the quorum to conduct business was 25 percent, or 25 people. To approve the budget required only 51 percent -- so 13 votes of approval would bind the membership of 100 people. It did not take long for associations throughout the state to have various quorum and voting standards.

Many of the older covenants required 90 percent approval of the membership if the increase was more than 3 percent in yearly dues. These associations faced financial crisis when the Consumer Price Index for many years in a row significantly outpaced the 3 percent cap. The associations found that their purchasing power was simply whittled away by the high inflation of the '70s.

Many association members saw significant and frequent special assessments to fund needed capital improvements. And yet, there were many associations that were unable to even pass special assessments because their voting requirements were even more stringent than the requirements to pass their yearly operating budgets. In many cases, funds for needed capital improvements were not raised and individual homeowners were forced to fix problems themselves -- replacing their own roof, as an example.

Against this background, state law slowly evolved. The current law, which requires a minimum of 51 percent to reject a yearly budget, was passed in recognition of the fact that associations are often unable to obtain simple majorities because the bulk of homeowners are apathetic in the voting process. It will not come as a surprise to many readers to learn that Nevada ranks near the bottom among the 50 states in voter participation rates for electing local, state and federal officials. If our citizens don't vote to elect these government officials, why would anyone expect them to vote for association directors?

As to special assessments for the funding of reserves, laws were passed in 1999 that allowed boards to even override the membership's vote in approving increases in dues that were attributable for the funding of their reserve requirements as outlined in their reserve studies. Again, these laws were passed in response to the reality that no one likes to have their "taxes" increased, yet HOA members want their associations to meet obligations of repairs and replacement of capital improvements.

Q. In reading NRS 116.31151, I am left with the impression that two budget mailings must be done to comply with the state's budget ratification process. A first mailing of a proposed budget is sent to allow for homeowner review and comment, followed by a second mailing of a revised adopted budget ready for ratification. Is this correct? If only an adopted budget mailing was done and just two weeks before the ratification vote, has the board and management company violated state law by not sending out an earlier proposed budget for homeowner review?

A. There are two parts to this law. The first part states that the board has an obligation to distribute copies of the new budget to its members not less than 30 days and not more than 60 days before the beginning of the fiscal year of the association.

The second part states that within 60 days of tentative adoption of the proposed budget, a meeting of members must be held within a time frame of not less than 14 and not more than 30 days to ratify or reject the budget. This section of the law does not require two mailings.

NRS 116.31083 pertains to board meetings. This state law would have required the board to notify homeowners of a meeting, which would have included a copy of the agenda (i.e., that the board would be voting on the budget -- please note that the agenda does not have to include a copy of that proposed budget).

Or the notice to members that the board would be meeting would state where members can conveniently obtain a copy of the agenda. Bottom line: Only one meeting notice of the homeowners ratification or rejection of the budget is required.

Barbara Holland, certified property manager, is president and owner of H&L Realty and Management Co. Questions may be sent to Association Q. & A., P.O. Box 7440, Las Vegas, NV 89125. Her fax number is 385-3759.