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Executive Desk: Homeowners’ associations face rules changes

ROWE: Details new association rules

ROWE: Details new association rules

Many New Mexicans only get involved in their homeowners’ association by attending the annual potluck picnic and membership meeting, where the biggest issue is why the single tray of enchiladas is gone long before the overcooked hotdogs.

That’s all going to change this summer.

Under a new law, all homeowners’ associations in New Mexico will be required to file a public notice and detailed disclosure statement each time a property is sold. What’s more, if the homeowners’ association fails to comply with these requirements, it could subject individual board members to civil liability.

Since statehood, homeowners’ associations were largely unregulated organiza-tions governed by private contracts of recorded covenants, declarations and deeds. Thus, homeowners’ associations could pretty much create their own rules and regulations, sometimes called restrictive covenants.

During the 2013 legislative session, the state Legislature passed the first-ever New Mexico Homeowner Association Act, which makes significant changes for both new and existing homeowners’ associations. The new law takes effect next month and applies to all homeowners’ associations in New Mexico.

A number of legislators said at the time that they felt homeowners’ association rules and regulations were oftentimes imposed on homeowners who did not have adequate knowledge of their scope or effect.

There was also the perception that sometimes associations would change their rules and regulations by less-than-majority votes, so that a minority made rules for the majority of homeowners.

The Legislature saw this as a significant problem and passed the law with the intent to improve things. Time will tell whether things actually will improve with the new act.

Disclosure statement

The first requirement is that a written disclosure statement be delivered by the homeowners’ association to every new buyer who purchases real estate within the homeowners’ association.

The disclosure statement requires a lot of basic information:

• All rules and regulations that will be imposed upon the new owners.

• Any fees and special assessments payable by an owner to the homeowners’ association.

• Funding available for any capital expenditures anticipated by the homeowners’ association during the current fiscal year.

• A balance sheet showing the association’s income and expenses.

Finally, the disclosure statement must provide any information regarding unsatisfied judgments pending against the homeowners’ association, and whether the association provides any insurance coverage to benefit the property owner.

Preparing and updating these disclosures will not be an easy task for a homeowners’ association. It may impose a reasonable charge for the preparation of the disclosure statement on the owner/seller.

If a homeowners’ association fails to provide the disclosure statement in a timely manner, the act provides that the seller of a home should not be held liable.

The act is unclear as to what liability, if any, the board of directors might have individually for failure to provide the disclosure statement. However, the act, for the first time, does establish that board members are liable for “failure to exercise ordinary care” in their duties.

As a result, board members must be cautioned that they have potential exposure to civil liability for failure to provide a complete disclosure statement in a timely fashion. That liability could include any financial losses or damages from a real-estate sale that falls through because of the lack of disclosure.

It is likely the Legislature did not intend to create this very potentially harsh situation for board members. Some clarification from the Legislature would seem to be in order. In addition, board members would be well advised to seek legal advice regarding their potential liability.

County filing

The second major requirement is that each homeowners’ association must record with the county clerk a notice of homeowners’ association document, which contains basic information such as name and address, recording data for the subdivision plat and, most importantly, the rules and regulations.

This notice is a one-time requirement; however, it would seem the intent of the act is that as information changes, an association would be required to file a supplemental notice.

There is a specific penalty in the act for failure to file the notice. If an association does not file a notice, then it is not entitled to pursue collections of any liens, assessments or charges.

The act also requires that a homeowners’ association provide any homeowner within the association copies of any records upon request. This means the bylaws, names of association members, minutes of board meetings, budgets, financial statements, financial audits, insurance policies and current contracts. Again, this is something homeowners’ associations weren’t previously required to do and creates a burden of significant detail and time.

Another significant provision of the act is a homeowners association’s board of directors must be elected by a majority vote of all of the individual owners. Association boards that previously have been elected by an organizational or management subgroup will no longer be allowed.