 welcome to the condo insider show where we discuss all things pertaining to condo living. Today we are going to be discussing the consequences of not adhering to your your governing documents. I'm your host today Cheryl Franklin and today Jane Sugimora and I will be discussing those consequences. Many of you are familiar with Jane. She is an industry expert and so we're just gonna dive right in. Hi Jane. Hi Cheryl. How are you? Good good good. So let's talk about some of the consequences. What prompted the show was I've you know I've experienced instances where properties move from one management company to the next and in particular a conversation that I was having recently the Association did not have an annual meeting for years and I just thought you know that's unacceptable and that's an example of not adhering to your governing documents. So I think all your governing documents that include your declaration, your bylaws, your house rules, any policies or resolutions that the board has adopted over the years and you know all governing documents fall for an annual meeting of the Association and you know that's when the owners get you know a chance to basically participate in in in this overall plan you know for the project and you know if you don't have an annual meeting and there's a lot of consequences on number one can't choose directors or officers that means that the old board and the old officers continue to run the show and you know in a lot of places that's not a good thing you know because the owners have a right under their governing documents every year to elect officers and you know usually on a condominium there are nine board members and and typically what it is is they have three-year terms and it's staggered so you have three people running every year you always have six people who are like part of the old you know who are carryovers and three incumbents yeah you know so so so you know so if you don't have the board meet annual board meeting then you don't have the election of officers or directors and there's this thing that they do at every annual meeting it's a rollover resolution for IRS purposes in other words because at the end of the year most associations have some extra money left over and if you don't do the rollover resolution that says we you know we resolve and we take this extra money and we're going to roll it over and use it to pay expenses for the next year that money is taxable right yeah right yeah and so they you don't do the rollover then I guess you have a tax liability because you know you're supposed to pay taxes on that amount and I guess if you're a small association it might not be significant but you know that the IRS wants to come after you they can absolutely that's something and then management these are usually the the declarations or the statute 514b says at the annual meeting you will confirm who your managing agent is so if you don't have an annual meeting the old managing agent or you know this is a property management company like Hawaiian a touchstone associate right they continue they automatically roll over and there might be some people in the building who are upset with the management you know of the building and they maybe wanted a new manager yeah they don't get that opportunity because there's no annual meeting yeah well it happens a little too often but let's let's take a step back and let's talk about some of those governing documents and where and what they stipulate for example the bylaws and the declaration and things like that the declaration is the document that creates the condominium and you know the condominium is created by statute which means that it doesn't exist until you have a declaration the declaration is the one that basically says this is our condominium it is a one-story building it has 34s and on each floor we have 10 units and we have this many two bedrooms and this many one bedroom and this many three bedrooms and these are our common elements and they list all the common all the common elements all the limited common elements and they list all the limited common elements so if you're if there's an issue about you know what is your condominium you say look at the declaration that tells you what our condominium is and that gets registered filed with the state of Hawaii it gets recorded with the DCCA the Department of Commerce and Consumer Affairs and when that happens the doc of the condominium is created right and in it it basically tells you the rules it says that the the management of the condominium is to be done by border directors at a border directors shall mandatory shall hire because board board directors you're talking about it is 30 story building and you know and your board of directors are volunteer okay volunteer owners they have they don't have a clue on how to manage this building so how are they gonna manage it right yeah so that that lends itself to the bylaws which is the declaration say you shall hire a professional management company and they're the ones who do the day to day they hire your help they hire your contractors and you know they they make sure that everything runs and make sure the bills get paid and then your bylaws basically tell you how do you operate this entity has the rules how do you elect your officers how do you elect your board and what do the board what does the board do what does the officers do when you have your annual meetings and it says you have to have annual meetings and and it this is your roadmap that tells you how to do the day-to-day right and then you have your house rules which are rules that the board probably you know develops and establishes and then circulates to all the owners and all the owners you know have to comply with these rules and regulations called house rules and regulations and sometimes you know the the board comes up with design criteria in other words if you want to fix your apartment you want to close your line I this is how you do it and and and you know they all have this in the standard terms you have to have license contractors and if it requires a permit you've got to comply with all sitting counting rules and so you know and but you know if you want to do put in a floor these other specs this is how you know you have to put in a padding and it has to be this big and has these many requirements right and if you want to put in carpet this is what you do and if you want to put in tile this is what you do yeah you know but something and some buildings have committees that establish establish these design criteria as to what you can do in your unit and and you know so there are all these you know different rules that the board will review and doc and then it affects everybody who lives in the building yeah so let's talk about when that goes awry first of all yeah everyone every owner receives a copy of their governing document yes they do when they buy their unit when they buy their unit and if they don't read it or they lose it they have access to obtaining their governor a copy from the now many associations have online access right right they have websites I know a lot of the management companies have websites or they out they will help you set up your website and one of the things that they put on this website are you're coming back right your declaration all the amendments your file laws and all any amendments your house rules your design rules any type of rules you got right so the information yeah website it's all it's all there so in lieu of the fact that all the information is there all of the governing documents are there that you should adhere to let's talk about some of the consequences when you do not adhere to those governing documents and in the case that we're speaking of where they are not conducting annual meetings let's talk about some of the consequences when you don't do that and your ownership kind of takes a look at these things and they decide to do something about it well in the draft in the most drastic case and I can tell you this without naming the condominium there is a condominium in town and the board president kind of ran it like his own feet you know like he was paying those condominium and he owned several units in it and he was acting as own property manager but he was the board president for like 18 19 years oh and and and there was this huge lawsuit that got generated and he ended up the association lost ended up with a whole lot of attorney's fees and naturally the owners had to pay for it say they had to pray and they were not happy yeah and you got one owner who had an adoption to organize and and they went three years without any annual meeting and I was told there were no board meeting no monthly board meeting so there were he was just running it and and the owner basically took over he managed to get an annual meeting run and he got himself elected as kind of straighten things out and and he hired a lawyer who was Terry here you know yeah no and Terry went after the board president and management company and at that in that instance the previous president becomes personally liable there's something called fiduciary duty fiduciary duty is a is a legal it is a legal concept and it means that if you're you know you know it's a it's you're in a situation of trust if you're the fiduciary and let's say and and in in a condo land the board has a fiduciary duty to the association and that's the the group the association means a unit owners as a group I don't old if I'm the board member I don't know fiduciary duty to you if you're a unit owner but I owe it to you if you're part of the association so if I do something to screw up something that affects the company let's say the maintenance fees right that how we set the maintenance fees is a board function because we do the budgeting but if I screw that up so that all of a sudden there's this huge debt and the only way you pay the debt is you go after the unit owners and say okay now we have to do a special assessment because we don't have enough money in the classroom problematic right and so if you're if you're you're going to be really angry at the board yeah you're going to get upset because it's a special assessment it's something extra that you have to pay on top of the maintenance fees that you're already obligated to pay and so that's how other so condominium functions they collect maintenance fees from everybody and if there's not enough money you have to do a special assessment and so in this case you know if you do a special assessment uh and you know that would affect everybody in the in the building and in that sense the board owes the fiduciary duty to everybody to make sure that when that happens it is happening for the right reasons right for something that was catastrophic let's say you thought you were taking care of the building and your pipes right you know and and and you hire the engineer and the engineer says oh you got to replace all your pipes yeah well that's unexpected and you don't have the money in the reserves so you've got to do a special assessment yeah I mean that's nobody's fault right you know you people are always looking for a while whose fault is how come you didn't tell us why didn't you plan for this yeah most of us are not quite avoid it well yeah and you are best you are best because you know the board is charged with taking care of the building and you do your best and if you do your best then you can't be personally liable but you still do your best and you and and and you know to when I teach the class after the sherry duty I tell people you know it's really easy if you're a board member most board members we know have no clue right they are unpaid volunteers yeah they live in the building they're owners they have a stake and they care about the building that's why they're on the board yeah we know that they're not engineers and lawyers right the things like that so if you got a plumbing problem what do you do so this is just a rule says we know you don't have a clue you hire you hire a plumber you follow in the experts you hire an attorney yeah and if you have a financial problem you hire a cpa and you pay that for their written opinion right how do we fix this and then you're protected and then you protect it you take you you can follow their opinion and because they have you know every mission if they have they give you the wrong information or the wrong opinion and you follow it yeah you are not liable and that's what this is judgmental all right I'm getting a message this is a great time for a break lots more to talk back please come back and join us thank you I'm Rusty Kamori host of beyond the lines I have a tv show based on my book which is also called beyond the lines it's about leadership creating a superior culture of excellence and building winning teams we are having a fun drive for think tecawaii and please please please please help us keep these shows going please go on our website think tecawaii.com to donate thank you and thank you for returning we're going to just continue the conversation with Jane here I believe before the break Jane you were speaking to some of the consequences of not adhering to your governing documents and we'll just continue down that line I just want to ask a quick question here I know that in the instance where they're not having annual meetings they're not adhering to their bylaws but they're making decisions or one board member in this case a president is making all the decisions those decisions can be challenged yes they can or are they even valid they can they can be challenged that's why you know board members you know have to you know remember that they have a fiduciary duty when they make a decision they're making a decision on behalf of every member of the association so they have to think what is what when I make a decision it's got to be for the best interests of the group and and and if you don't know the you know the statute says you use the business judgment rule you hire an expert and the expert you say well this is the issue how do I solve the problem how do I address it okay you get a written opinion and then as a board you discuss it and if if if everybody agrees that you follow what the consultant says then fine you make that's how you make your decision in other words you can't just pull stuff out of thin air you can't decide oh I want to I want to do this job and my uncle Joe right it was not a license plumber but yeah he's been doing it for years and so yeah he knows what he's doing you don't do you don't make decisions like that because first of all you know they're not based on the business judgment rule you're using an unlicensed plumber to do repairs on a building that doesn't really belong to you it belongs to everybody in the building so that's why when you make a decision you have to make sure that it's got to be good for everybody and you have to use license contractors right you have to and the repairs that you do you have to make sure that an expert has looked at it and the attorney has looked at the contract and maybe the cpe has looked at the finances you have to all these consultants look at this and say oh yeah this will work and then then if if that decision turns out to be wrong all those experts have errors and omissions go ahead and sue them but you are not liable right but if if you don't do that and you decide i'm going to do it by myself because i know better you know i i know i you know i'm the king and i know everything and i'm going to do it this way and if you screw up you can be personally liable yeah yeah and you know people say you know that well i'm on the board and there's dno insurance right that's directors and officers right but what does that do but directors and officers insurance does which and most condos have it it means that if you get sued or somebody makes a claim the insurance company has to come in and defend it doesn't mean that you're off the hook right because if they if they you know if it turns out that you screwed up and the way you made your decision was not supported by the business judgment rule or by any solid you know basis you could be held personally liable yeah because you know because number one you have a new share duty you have an obligation to follow the business judgment rule if you didn't follow the decision-making processes that are in place that you should be following and you just make it on your own and something bad happens and rather why why should the association meaning all of the members who live there pay for your mistake right they'll come after you and that's what's happening with this association that didn't have any meetings for three years well even starting right there if you're not having meetings you're not even documenting the decisions right to demonstrate that you're doing your due diligence you're not you're basically a lone ranger and that's a two-edged sword right yeah and and and that's what happened in that case the owners rebelled they got there's a certain point you can probably do this but at some point you're going to get somebody so angry yeah because they're paying out of their pocket and they're saying why am i doing this right this is crazy and i'm going to put a stop to it and that's what usually does it and and and and you know and now you have litigation with this conduit no board meetings or annual meetings for three years and they're going after the board president for you know personal liability and they should and they should and i'd venture to say that in doing so i would i can only assume that that means that he made all the decisions regarding the budget right and the maintenance fees and things like that so they're probably not fiscally stable right right or fiscally sound and so they have to go back and try to repair all that damage to make sure that they're they're planning and adhering to their fiduciary duty so you basically need an entire new board because you haven't had your meeting in a couple of years which you know i don't even know how you do that but it's it's being done unfortunately right and they're little by little they're you know they're clawing their way back to a normal level where things are supposed to be happen happening in a normal way where you have monthly board meetings where the owners can select their board members and their officers and they're having you know budgets that are being discussed in front of the owners and approved and implemented and they're trying to claw their way back and it's going to take them time but i think they're going you know i'm very sure that they're going to make it and the problem is is that you know now they've got this uh this issue of you know trying to recover from the board president for the losses that this association occurred yeah yeah so in many cases do homeowners know where to start when there's a situation where they feel that their board has gone rogue if you will um do they even know uh where they can go to i don't know if they they they know where to go but you know one wonderful resource is the state of hawaii uh real estate commission website and i think if in the way you know if you you know want to google it it's hawaii real estate commission and they have a page that talks about all the issues that if you live in a condo that you you know it has you know a legislative page and that you know of the new legislation how to resolve disputes of budgets and research it's all out there and it's free and it's on the internet and so anybody and and and it will tell you if you have a dispute with your board this is what you can do and they even on they even have subsidized programs where where money is paid by all condominium owners into a condominium education it's been happening for 25 years and now the state well if you have a dispute with another owner and now you or with the board or if you have a board member who's mad at the other board members you can do that never happens no but you know you can you can do media but the value of mediation and the state will put subsidize it they will pay for it there's money out of the and you can go to the the you know these mediation organizations and you know they're not free you have retired judges who act as mediators and arbitrators and you know their fees are anywhere from three to four hundred dollars an hour and that's subsidized by this fund in order for you to participate in in a dispute resolution and you gotta be with a board member or another unit owner or if you're a board member and you're mad at the other board members you couldn't go to you know this the the the real estate commission and say I want to mediate this tell me where to go and they'll tell you yeah they have you know you go to the website and it tells you the the contracts contractors that are hired by the state and you go and say I have a dispute and they will set you up for mediation or a voluntary binding arbitration it's just that simple huh and and it is paid for by the state of Hawaii and it's not taxpayer money it's money that it's sitting there yeah that all of us if you live in a condo you've been paying for over 25 years and when it started off the the the cost was something like a hot a dollar and a quarter per unit every other year every other year as of last year i was told it's almost ten dollars per unit every other year yeah yeah so you know everything else but you know if you look at the number of condos in the state of Hawaii and you're talking millions of dollars in this fund right so you know so you know if you have a dispute there's money there that won't get you professional assistance to try to help you resolve the issue well we definitely need to get the word out on that um i don't know the website yeah but even the accessibility to the website like how do we really educate boards for one um is there anything coming down the pike in fact that's um we we are now working as as we speak there is a resolution that is circulating for uh to establish a task force uh to come back to the next legislative session with uh some kind of a bill that will mandate that all board members have to be educated in order to serve in other words because you know we the legislature and the real estate commission they've had so many complaints over the years about abusive boards and boards you know who just don't have a clue and who you know are just beating up other owners that you know and and these are the guys who don't go to the seminars that CAI has or Hawaii council or all the management companies when they do board training and it's not that there's no resources there's plenty of resources and a lot of it is free like i told you the the the DCCA the real estate commission website is a treasure trove of information and all you have to do is find a computer you go to the library get on the computer and just google it and do Hawaii real estate commission yeah and you zoom right into this page that has all kinds of information it even has a map of all the contos in the state you know where so if you want to know where a particular condominium is there it is it's all out there have a list of every condominium that's registered with the state of Hawaii and who their contact person is and it's usually the the managing agent right right and so so you know there is just a treasure trove of information for anything you might want and then they have a list they have a calendar of events so if you want to go and be educated they have the seminars some of them are free some of them you pay for right but the calendar is there and if you want to know where to go you just go to the calendar but when that bill passed you definitely have to come back and talk about that right there's there's a lot to consider with that I think it's a great idea um my only other word you know in other words you know the concept behind it is you know if you make it mandatory some of these guys who are on the board that are bullies yeah they'll get off the board because they don't want to you know sit for four hours or whatever and and and and get certified yeah as having educated being educated or they'll have to sit there and then when it comes time when they're sued they can't claim they can't because you know what you can't anyway but yeah right now they can can claim ignorance and they don't say oh well you're an offender so i'm not going to hold you liable but they won't be able to do that once you know we make it mandatory and and so once we make it mandatory they don't have that excuse they will be personally liable for anything harm that they you know they uh you know bring to the owners in the buildings that they're supposed to be serving yeah well thank you we could go on yes and we'll continue on another show but thank you again for joining us and please come back for more discussion on everything pertaining to condo living okay aloha thank you