Homeowners Associations and Budgeting for Attorney’s Fees
We have all seen the TV commercials: “What’s in your wallet?” A similar question is, “What’s in your budget (for attorney’s fees, that is.)”
Several years ago, a property manager told me that all his communities budgeted more for the community garage sale than for attorney fees. We still see that today. That either speaks volumes about how some Boards of Directors (or community managers) prioritize expenditures, or it points to a misunderstanding of the need to budget for attorney fees. If a, HOA Board purposefully budgets attorney fees at a very low amount, that Board might be deciding in advance that their community association will not involve an attorney for much of anything. Another common scenario is that the Board believes that its HOA or condo association will recover all attorney fees incurred from a violating or delinquent homeowner, so there’s no need to budget for it. I discuss both of those scenarios below.
One way to start analyzing the amount of the attorney fees to budget is to look at the combined property values of all the homes in your community. Let’s say that you have 100 homes and the average market value is $150,000. Even if that community doesn’t have any amenities like a swimming pool, the value of the homes would be $15 million. If you owned your own business that was worth $15M, would you budget $500 in attorney fees for the year?
Some might respond and saying something like “Our HOA is nothing like a business, and everyone gets along, so there’s no need to treat it like a big business.” Although your HOA is not General Motors, it still is a business for which the Board of Directors has a fiduciary duty to preserve and uphold the property values by enforcing the covenants and collecting money from the homeowners to pay for the services that are necessary. Having a realistic amount of money in your budget for attorney fees will go far in helping the Board fulfill those duties.
Some association Boards will say that they don’t need an attorney because they never have any legal problems. However, when pressed, those boards will often admit that there are problems that they just chose to ignore. Some Boards believe that there is nothing that can be done to enforce their covenants or get delinquent owners to pay. They believe that covenants are completely unenforceable in the courts. This is the furthest thing from the truth! There are many cases from the Indiana Court of Appeals and the Indiana Supreme Court that have shown that covenants are enforceable and judges often will give great deference to the judgment of a community association’s Board of Directors.
The vast majority of the community association clients we represent have provisions in their covenants or by-laws that give the association the right to recover attorney’s fees and costs incurred from an owner who is either delinquent on the payment of mandatory dues or assessments, or in violation of the covenants and restrictions that “run with the land” for the particular community. However, even for a “run of the mill” delinquency file, if the owner doesn’t pay in response to our demand letter, filing suit is often our recommended next step. To do, the court requires a filing fee to be paid when the suit is filed. The minimum amount in Indiana for a court filing fee is now over $100 for a delinquent account. If an HOA or condo association has 10 delinquent owners, the court costs will exceed $1,000. Ideally, the community association will recoup those from the homeowner, but there is no guarantee. The same is true for the attorney’s fees that the association incurs.
Court costs and attorney’s fees for covenant violations are similar, in that there are no guarantees of reimbursement. If an owner fails to comply after the HOA or condo association has gone through the mandatory grievance resolution procedures and the Board of Directors decides to file suit for an injunction, the minimum court filing fee is $157. That doesn’t take into consideration the billable time incurred by the attorney in preparing the complaint to be filed in court.
Sometimes, in a contested suit, the judge will cut the amount of attorney’s fees that the HOA is requesting, yet still give the association what it really wanted. For example, the judge may order the owner to remove an above-ground swimming pool that violates the covenants, but might not grant all the attorney’s fees that the HOA incurred to “soften” the impact on the homeowner. The amount of attorney’s fees awarded is always at the discretion of the judge. Thus, the HOA or condo association will be “out of pocket” and will not recoup everything from the homeowner in those circumstances.
If the Board of Directors of a homeowners association, condominium association or other type of community association prepares its annual budget with a realistic amount allocated for attorney’s fees, it will stand in a much better position to address the needs of the community. If you are unsure how much to budget, ask your association’s attorney.
