FLS Friday Forum is a free write-in column authored by Brian R. Fellner on topics of law affecting community associations. To submit a question, email Mr. Fellner at bfellner@flslawyer.com. All posts are for informational purposes only and do not constitute legal advice. Only your individual attorney can provide assurances that this information is applicable or appropriate to your particular situation. Nothing hereunder creates an attorney-client relationship between any reader and the author.
Our documents have a minimum annual assessment, which we have gone under. They also have a maximum annual assessment increase, which we will need to violate to come back into compliance with the minimum. What do we do?
— Tammi, an HOA board member in Maryland
The question for the FLS Friday Forum this week encompasses two different issues, and then asks how they affect one another. Let’s discuss each one first.
Most (but not all!) HOA documents, and several (but far from all!) condominium documents, have a maximum annual assessment increase. This is a cap on the amount that the assessments may be raised over the prior year’s assessment. So for example if the maximum annual assessment increase is 10%, and the annual assessment for 2021 was $1,000, then the annual assessment for 2022 may not be greater than $1,100. Simple enough. The documents may also have a provision for how to exceed this maximum – usually by vote of a percentage of the ownership. In other words, if the board wants to increase the assessments by more than the maximum increase, they may be able to do so with owner approval.
A question many boards ask is this: does the maximum annual increase accumulate regardless of if it is utilized or not? What they mean by this is, if we go five years without increasing assessments, are we still bound by the percentage increase over the prior year, or do we get five years of increases in the maximum?
In case you are not quite with me, let’s take a look at an example. Say the board begins with an annual assessment of $1,000 and a 10% maximum annual increase. In Year 1, they increase by the maximum to $1,100. In Year 2, they increase by the maximum again to $1,210. In Year 3 they increase by the maximum to $1,331. All entirely fine.
But take the same board. Say they begin with an annual assessment of $1,000 and a 10% maximum annual increase. In Year 1, assessments stay at $1,000. In Year 2, assessments stay at $1,000. In Year 3, what is the maximum that the assessments may be? Is it $1,100 (a 10% increase from the prior year)? Or is it $1,331 (an allowance for the maximum annual increase from each sequential year)? Now any good lawyer knows that the answer is “it depends.” And that is especially true when dealing with community association documents, whose language can vary significantly. But the answer in this instance is not clearly decided, so associations should consult their legal counsel.
Back to the second part of Tammi’s question – what happens if we are below our minimum? Community association documents also sometimes contain a minimum assessment below which the board may not go. NOTE: The Board should not knowingly violate the minimum assessment provision of the association’s documents. Doing so can lead to lawsuits and liability, insurance claims, underfunding of needed reserves, and other issues.
However, in our question, we are asked what this board should do if they find themselves below that minimum, and have to go over their maximum annual increase just to get back in compliance with the original minimum. In either case, they are violating a provision of their documents; the only question here is, which one?
This is the exception to the old rule your mom used to tell you: “Two wrongs don’t make a right.” Here, the only way to correct the first wrong (the drop below the minimum) is to commit a second wrong, and violate the maximum annual increase. The violation of the minimum was never permitted, and thus should have been an invalid action. Returning to the status quo is permitted here.
Confused? Let’s play it out like we did above. The board begins with an assessment of $1,000. The documents also have a minimum annual assessment of $1,000. Despite this provision, the board decreases the assessments to $850. Subsequently, the board discovers their mistake and wishes to raise the assessments back to $1,000. However, their maximum annual assessment increase of 10% would prohibit this; the most they can go to is $935.
Wrong. Per our discussion of the “two wrongs” above, the original wrong of reducing the assessment below the minimum must be corrected, even at the expense of committing another wrong. So back to $1,000 go the assessments. The invalid action is now reversed.