Reviewing and amending the Covenants and By-Laws
What are some common reasons to amend?
The Boards of Directors of many Indiana homeowners associations and condominiums feel that they are “stuck” with the covenants and by-laws that the developer wrote. Typically, there are many provisions that are included for the developer’s benefit. Once the homeowners association or condominium association is “turned over” to the homeowners, many of the provisions become obsolete. Common examples of this would be references to Class A Membership and Class B Membership as well as the “applicable date”. Additionally, the original covenants and by-laws may contain mistakes or inconsistencies. Finally, there may be provisions that are contrary to law or simply “don’t fit” the community. Boards should seriously consider a comprehensive legal review of the covenants and by-laws, especially if the Board is experiencing problems because of some of the provisions.
A common problem concerns the quorum, which is the percentage of homeowners who must attend a homeowners’ meeting (such as the annual meeting) in person or by proxy. The original documents for many Indiana communities set the quorum at 50%. If your community consists of fifty, two hundred, or five hundred homes, experience shows that a 50% quorum is simply unrealistic. Normally, the quorum is set forth in the community’s by-laws. Therefore, that is the document that needs to be amended in order to reduce the quorum to a more realistic figure.
Restrictions on items like mini-barns and fences are typically not contained in the by-laws, but instead are addressed in the covenants. For many Indiana communities, that document is called the Declaration of Covenants, Conditions & Restrictions. If the Board wishes to change those types of provisions, the covenants would need to be amended, not the by-laws.
Boards can consider not only amending the original provisions, but also adding more restrictions. Rental restrictions are one of the most popular things that Indiana HOAs want to add to their covenants. Another provision commonly added is one that clearly states what homeowners must do to adequately maintain their property. Often, the original covenants are ambiguous in this regard. As communities age, it is important for homeowners to keep up their properties so that their neighbors don’t suffer.
How extensive should the amendments be?
The scope of amendments is to be decided by the community’s Board of Directors. Sometimes, a Board will decide to only amend or add one provision. Other times, the Board will propose several amendments at the same time. Other times, the Board will decide to prepare an Amended and Restated version of either the covenants and/or the by-laws. This is very helpful if a number of amendments have been previously adopted, or if the Board is going to propose a significant number of changes. The main benefit of preparing amended and restated versions of covenants or by-laws is that the former versions no longer need to be referenced.
Let’s get started!
What’s the first step? That perhaps is the most daunting question facing the Board! We recommend that the Board provide copies of all of the original covenants and by-laws, as well as all amendments, to a community association attorney who has extensive experience in amending such governing documents. We also recommend to our clients that the Board members prepare their own “wish list” of amendments they want. The attorney can then meet with the Board for a couple of hours to review the “wish list”, but also to point out other provisions that should or could be amended at the same time. The attorney can also explain the technical amendment procedures that will need to be followed. Normally, the procedure to amend the covenants is different from the by-laws. After that initial consultation, the Board can then decide whether to move forward with the amendment project and, if so, to define its scope.
The drafting phase
If the Board of Directors decides to proceed, the attorney will prepare the first drafts of the amendments. If an Amended & Restated Declaration of Covenants is to be prepared, we recommend that the amendments be prepared in a redline format so that all of the additions or deletions are clearly shown. (Another benefit is that the document will show the provisions that are not being changed.) This is extremely helpful for both the Board of Directors and eventually the homeowners so that everyone can see the precise changes that would be made. Once the attorney forwards the draft of the amendments to the Board, the Board will need to decide whether another meeting with the attorney is in order. Often, Board members will have questions about some of the language that the attorney can explain.
Once the Board approves the final version of the amendments, the Board members need to remind themselves of the exact procedures that will be required for the amendments to be adopted. Some by-laws state that the Board acting alone can amend them. However, an equal number of by-laws for Indiana HOAs state that any amendments must be presented to the homeowners for their approval. In contrast, almost all covenants require amendments to be approved by the homeowners; Board action alone is not enough.
What options does the Board have when it’s time to present the amendments to the owners?
If the amendments require a homeowner vote, the Board has two choices. First, they can simply send the draft of the amendments to the homeowners with a notice of a meeting at which the amendments will be discussed and voted upon. Second, the Board could send the drafts to the homeowners to seek their input before calling for an official vote. Although the Board could ask for homeowners to submit their comments by mail or email, we strongly recommend that the Board actually hold a meeting with the homeowners for the sole purpose of discussing the proposed amendments, answering homeowner questions, and seeking their feedback. This is an opportune time to address problems that one or more owners may have with some of the proposals. It also gives the Board a good gauge on whether it will be realistic to obtain the necessary number of approvals for the amendments for them to be adopted. We refer to that kind of a meeting as a “town hall meeting” since it is for discussion purposes only; it should be clearly stated that there will be no voting at that meeting. At the conclusion of that meeting, the Board may well decide to change one or more of the proposed amendments to improve the likelihood of the amendments being adopted. There is often “give and take” at this stage, with the goal being to get enough owners to approve the amendments, even though there may be one or more provisions with which they do not totally agree. This is especially true for an amended and restated version of either the covenants or the by-laws
How does the Board obtain the necessary homeowner approvals?
The Board will then be ready to present the proposed amendments to the homeowners and ask that they be formally approved. Normally, this is done at a special meeting. Although entirely driven by what the current documents say, the most typical procedure for an Indiana HOA is for the Board to hold a meeting of the homeowners at which owners can vote either by proxy or in person at the meeting. In the vast majority of Indiana communities, the percentage of owners needed to approve such amendments is not based on those owners who are in “good standing” on paying their assessments. Rather, the percentage is based upon the total number of homes. This is an important distinction from most annual meetings where delinquent owners are ineligible to vote for the Directors or the Association’s proposed budget.
In most cases, the Board will not receive enough approvals from the homeowners by the conclusion of the meeting. Often, there must be a door to door campaign to collect additional approvals until the Board has received the minimum number necessary. This can take months! Most often, it has nothing to do with the fact that a homeowner objects to anything in the amendments. Instead, it is simply a reflection of the apathy that many owners have with respect to their HOA.
What needs to be done once enough owners have given their approval
Once the necessary approvals are obtained, the community association’s attorney will then take whatever steps are necessary to finalize them. Amendments to covenants must be filed with the County Recorder. Amendments to by-laws may or may not need to be filed with the County Recorder. If the Articles of Incorporation are amended, they need to be filed with the Indiana Secretary of State.
Once the amendment process is complete, the Board will undoubtedly breathe a sigh of relief. Amending the covenants and/or by-laws can be some of the most time-consuming tasks that a Board undertakes, but the rewards can be long-lasting.
Note that all of the above is based on certain assumptions. There is a joke that says that the typical answer from an attorney to a specific question is, “That depends”! This is truly one area where that really is true! We have seen a wide range of variations in the language of Indiana HOA and condominium covenants and by-laws concerning the amendment procedures. Thus, the above is for discussion purposes only and is illustrative of the applicability of amendment provisions in many Indiana community associations. Thus, extreme care must be exercised to determine exact procedures that will be required. Be sure to consult the association’s attorney.
