Community associations are controlled by a set of governing documents. The three main governing documents are the Declaration, the association’s Articles of Incorporation and its Bylaws. The governing documents relate to the community association in its dual role as a non-profit corporation and a community association (with restrictive covenants, conditions and easements controlling the real estate upon which the homes are located).
WHERE TO FIND WHAT
What’s in a name? And why does it matter?
All too often, I hear people incorrectly refer to the Declaration as “the Bylaws.” Others refer to all three governing documents as a single document called “the Bylaws.” With all due respect to Jordan Peele, “Nope.”
It is important to use a document’s proper name. Quite simply, using the wrong name creates confusion. Moreover, if members of the Board of Directors of an association use the wrong terms, it undermines the Board’s credibility.
Furthermore, if members of the Board of Directors have a clearer understanding of what each document is called and each document’s purpose, it can help the association operate more effectively, and reduce the time spent reviewing all of the governing documents to find a specific provision.
Declaration (of Covenants …, for Condominium/Apartment No. …, of Common Interest Community No. …)
The Declaration controls the real estate in the community association (and therefore the owners of that real estate). Given the Declaration’s control over the real estate and its owners, it is the primary document establishing the Association government powers and rights.
The Declaration is where the following provisions can be found:
- Use restrictions (leasing restrictions, business use restrictions, smoking restrictions, etc.)
- Assessment information (whether owner approval of a special assessment is required, whether there is a cap on year-to-year increases in annual assessments, what methods an association can use to collect of unpaid assessments, whether association approval is required for making alterations to a home, etc.)
- Allocations of maintenance obligations between association and owner.
The Bylaws set forth the operational guidelines for the community association as a corporate entity. The Bylaws cover a broad spectrum of corporate governance and procedure, including the following:
- Membership. The Bylaws dictate the procedure for member meetings, including meeting notices, quorum thresholds, voting procedures (both in-person and by mailed/electronic ballot) and other operational issues.
- Board of Directors. The Bylaws define the Board of Directors, including the number, eligibility criteria, manner of election and removal, as well as voting procedures for the Board. The powers and duties of the Board of Directors are also found in the Bylaws.
- Officers. The Bylaws typically detail the roles and powers of individual officers for the corporation.
Articles of Incorporation
The Articles of Incorporation initiate the community association’s corporate existence after being filed with the Minnesota Secretary of State. The Articles of Incorporation define, establish and limit various powers of the non-profit corporation. While the Articles typically do not have an impact on day-to-day operations of an association, members of a Board of Directors need to have at least a passing familiarity with the terms of the Articles. For some older associations, restrictions on an association’s borrowing authority (including requirements for homeowner approval of loans) may be found in the Articles only.
What if there are conflicts in the Governing Documents or Rules?
On occasion, an association’s Governing Documents or its Rules may conflict with one another. Sometimes, a master association’s Governing Documents or Rules will conflict with the Governing Documents of a sub-association. In many cases, conflicts are created when one document is amended without considering what terms may be in the other documents on the same topic.
Most associations’ Governing Documents include provisions that specifically set out the hierarchy of documents in the event of a conflict. In general,
- State law, such as the Minnesota Nonprofit Corporations Act (Minnesota Statutes Chapter 317A) and Minnesota Common Interest Ownership Act (MCIOA) (Minnesota Statutes Chapter 515B), unless the statute allows the Governing Documents to include language different from applicable law.
For example, Section 515B.3-1151(e)(1) of MCIOA state “Unless otherwise required by the declaration, . . . any common expense associated with the maintenance, repair, or replacement of a limited common element shall be assessed against the units to which that limited common element is assigned, equally, or in any other proportion the declaration provides[.]” (Emphasis added.) Many declarations include language that allows, but does not mandate, assessment of expenses related to Limited Common Elements to the unit to which the Limit Common Elements is assigned. In contrast, MCIOA’s Section 515B.3-1151(b) provides, “The replacement reserves required by section 515B.3-114 shall be paid to the association by each unit owner for each unit owned by that unit owner in accordance with the association’s annual budget.” (Emphasis added.) There is no qualifying language that allows an association to provide otherwise. In that case, regardless of what the Governing Documents for an association subject to MCIOA, the provisions of MCIOA control.
- The terms of the Declaration will take precedence over the terms of any other Governing Document or the Rules and Regulations. For example, if the Declaration states that the Board of Directors is empowered to do X, but the Bylaws were amended at some point to state the Board of Directors is not empowered to do X, the terms of the Declaration will take precedence over the conflicting language in the Bylaws. If the Declaration states that the minimum term of a lease is six months, but the Rules state the minimum term is one year, the terms of the Declaration control.
- As between the Bylaws and the Rules & Regulations, the terms of the Bylaws control.
- As between the Bylaws and Articles of Incorporation, the Articles control. Although there is nothing in the Nonprofit Corporations Act establishing the priority of these two documents, the terms of documents that are a matter of public record (such as the Articles filed with the Minnesota Secretary of State) are generally given priority over those not of public record.
- As between the Articles of Incorporation and the Rules & Regulations, the terms of the Articles control.
- As between the Governing Documents and Rules & Regulations of a master association and one of its sub-associations, most master association’s documents provide that the terms of the master association’s Governing Documents take precedence over the sub-association’s Governing Documents, but, if there is a conflict between the master association’s Rules & Regulations and the sub-association’s Rules & Regulations, the more restrictive rule will take priority.
Keep in mind the importance of reviewing each association’s Governing Documents to ensure there is no “quirky” language in that association’s Governing Documents.
AMENDING GOVERNING DOCUMENTS
What if an association wants to change something in the Governing Documents or Rules & Regulations?
The terms of Governing Documents and Rules & Regulations are not written in stone. They can be changed. The requirements for amending Governing Documents and Rules & Regulations can differ from one association to another, and from one document to another. It is imperative, then, that the Board review the document(s) being amended to ensure the Board is following the proper procedures for amendment.
In virtually all cases, amendments to the Declaration will require some level of homeowner approval. The approval threshold, however, can vary significantly. The default threshold under MCIOA for owner approval of an amendment to the Declaration for a residential community is sixty-seven percent (67%) of the total votes in the association. Some Declarations require seventy-five percent (75%) approval, while others may require approval of ninety percent (90%) of Owners—or approval by all Owners.
In most cases, amendments to the Bylaws also will require some level of homeowner approval, although some association’s Bylaws allow the Board to amend the Bylaws without homeowner approval. If homeowner approval is required, the approval threshold can vary significantly. The default threshold under the Nonprofit Corporations Act is a majority of Owners. Some Bylaws require approval from a majority of a quorum, while others set a higher threshold ranging from sixty-seven percent (67%) to ninety percent (90%). MCIOA does not impose a minimum approval threshold for amendments to the Bylaws.
Amendments to the Articles of Incorporation also usually will require homeowner approval. Often, the approval threshold is the same as that required under the Bylaws, but it can vary.
In most cases, the Board has the authority to create, amend and revoke Rules & Regulations without homeowner approval. However, I have seen a few Declarations that require homeowner approval of new or revised Rules & Regulations before they take effect.
In some cases, amendments to the Declaration or Bylaws require approval by mortgage lenders. Where lender approval is required, the Association usually must seek approval from only first mortgage holders, although some older associations’ Governing Documents require unanimous lender approval.
If lender approval is required, that approval is in addition to, not in lieu of, Owner approval.
It would be extremely unusual to see any requirement of lender approval for new or revised Rules & Regulations.
If an owner or lender does not respond, is silence consent?
The lawyer’s favorite answer: It depends!
MCIOA now includes provisions where silence is consent when it comes to amending Governing Documents. If a community meets MCIOA’s definition of “common interest community” set forth in Section 515B.1-103(10) of MCIOA, then, even if the community is not otherwise governed by MCIOA, the community can utilize the “silence is consent” provisions of MCIOA. Under those provisions, if the association sends the request for approval to owners and lenders (if required) in accordance with Section 515B.2-118 of MCIOA, then any owner or lender who does not respond within the prescribed time period is deemed to have approved the proposed amendment.
Moreover, if the owner approval thresholds are unusually high (e.g., unanimous approval of owners), Section 515B.2-118(d) of MCIOA includes a provision under which an association may seek a court order authorizing the adoption of an amendment without having met the approval threshold set forth in the document being amended.
Lastly, an amendment to the Declaration is not effective until the amendment has been recorded in the property records of the county in which the community is located. Older condominium associations may also need to record amendments to the Bylaws; if so, then, as is the case for amendments to the Declaration, an amendment to the Bylaws is not effective until the amendment has been recorded in the county property records. An amendment to the Articles of Incorporation must be filed with the Minnesota Secretary of State’s office before such amendment is effective.
Although it may sound self-serving, I strongly recommend any association seeking to amend any of its Governing Documents work with the association’s legal counsel to ensure the amendment itself is drafted properly, and to ensure the association follows the proper procedures for adopting that amendment. If an association does not follow proper procedure, the amendment is subject to challenge.
Knowing how the Governing Documents interact will help any Board operate more effectively and efficiently. That knowledge will also increase a Board’s credibility with the Owners. If an association needs to amend any of its Governing Documents, it is critical that the Board follow proper procedure to ensure the amendment is not subject to challenge on technical grounds.