By Gordon H. Rowe III
BIG CHANGES FOR HOMEOWNERS’ ASSOCIATIONS COMING IN THE SUMMER OF 2014
Many New Mexican’s only involvement with their homeowners’ association seems to revolve around the pot-luck picnic at the yearly membership meeting. The biggest issue at the yearly pot-luck picnic is why the single tray of enchiladas is gone long before the overcooked hot dogs. That’s all going to change in the summer of 2014. Under a new law, all homeowners’ associations in New Mexico will be required to file a Public Information Notice and also provide a detailed written Disclosures Statement each time a property is sold. What’s more, if the homeowners’ association fails to comply with these requirements it could subject the individual board members to civil liability.
The New Mexico Legislature recently passed the first ever New Mexico Homeowners’ Association Act §§ 47-7E-1 through 47-7E-14 NMSA 1978. The Act makes significant changes for both newly created homeowners’ associations and existing homeowners' associations. The new law dealing with existing homeowners’ associations, takes effect in June of 2014, and applies to all homeowners’ associations anywhere in New Mexico.
THE LEGISLATURE DECIDED TO PASS A LAW DEALING WITH HOMEOWNERS’ ASSOICATIONS
Prior to 2013 New Mexico homeowners’ associations were left as a largely unregulated organizations governed by private contracts. The rules and regulations of the homeowners’ association were set forth in recorded covenants, declarations, and deeds. There were no statutes or regulations for New Mexico homeowners’ associations. Thus, homeowners’ associations could pretty much create their own rules and regulations. It was the responsibility of a new owner to get their information about rules and regulations from a review of the real estate record. The principal remedy for disputes relating to any of the homeowners’ association rules and regulations between an owner was a civil lawsuit. Although this practice had existed since statehood, the Legislature in 2012 found a need to make some major changes in the way that homeowners’ associations do business.
Based on the commentary from the 2012 Legislative Session, there were a number of Legislators who felt that the homeowners’ covenants, and the rules and associated regulations were often times imposed upon new and existing owners who did not have adequate knowledge of their scope or the effect. It was perceived that often times homeowners’ associations failed to provide adequate notice to new homeowners’ association members about the existing rules and regulations. It was also suggested that sometimes homeowners’ associations changed their rules and regulations by less than a majority vote of the homeowners’ association members, such that a minority was making rules for the majority ownership. The Legislature thus perceived this as a significant problem and passed a law with the intent to improve things. Time will tell whether things will be actually improved by the new Act.
TWO MAJOR CHANGES FOR NEW MEXICO HOMEOWNERS’ ASSOCIATIONS
1. A written Disclosure Statement must be given to every new owner as part of every sale transaction.
The first requirement of the law is that all existing homeowners’ associations must prepare and maintain a disclosure certificate. The disclosure certificate must be delivered by the homeowners’ association to every new buyer of record who purchases real estate within the homeowners’ association. The disclosure statement requires a lot of information to be included. It must include copies of all rules and regulations that will be imposed upon the new owners. The disclosure certificate must also address things like first right of refusal on an owner selling a property, any common expense assessments, fees payable by a property owner to the homeowners’ association, any capital expenditures anticipated by the homeowners’ association for the current fiscal year, the reserves for capital expenditures, and a balance sheet and income and expense statement of the association. Finally the disclosure statement must also provide any information regarding actual knowledge of unsatisfied judgments pending against the homeowners’ association, and whether the homeowners’ association provides any insurance coverage for the benefit of the property owner.
This type of disclosure statement was not required under prior law in New Mexico. The new Act imposes a significant burden upon the homeowners’ association by requiring them to prepare the disclosure statement. This will not be an easy task for the homeowners’ association. It will also be the responsibility of the board of directors, to maintain, update and verify the very detailed information required. Although, the homeowners’ association may impose a reasonable charge for the preparation of the disclosure statement upon the owner/seller, the task of preparing the disclosure statement will be a significant burden and new responsibility upon homeowners’ associations.
2. The Homeowners’ Association must file a Notice of Homeowners’ Association with the County Clerk.
The second major change for homeowners’ associations under the Act is the requirement that each homeowners’ association must record with the county clerk a Notice of Homeowners’ Association document. The document requires basic information such as the name of the association, a permanent address, recording data for the subdivision plat, and most importantly the rules and regulations, sometimes called restrictive covenants that the homeowners’ association is governed by. This Notice of Homeowners’ Association is a one time requirement; however, it would seem the intent of the act is that as information changes, the homeowners’ association would be required to file a supplemental Notice. With respect to this homeowners’ notice; there is a specific penalty in the act for the failure to file the notice. The Act provides
that if the homeowners’ association does not file a notice it is not entitled to pursue collections of any liens, assessments or charges that may be provided by the homeowners’ associations, rules, regulations and/or covenants. The act also provides that the homeowners’ association has a responsibility to provide any owner within the association copies of any of the records of the homeowners’ association. This means the bylaws, names of association members, minutes, budgets financial statements, financial audits, insurance policies, and current contracts of the association. Again, this is something the homeowners’ associations weren’t previously required to do and creates a burden of significant detail and time for the homeowners’ associations in responding.
POTENTIALLY BAD SITUATIONS FOR BOARD MEMBERS
If the board of the homeowners’ association fails to provide the disclosure statement the act does not specify any specific penalty or consequence. It does provide that the Seller should not be liable for failure or delay of the homeowners’ association to provide the disclosure in a timely manner.
However, while the act does provides that the Seller shall not be liable for the homeowners’ association’s failure to provide the disclosure statement, the Act is unclear as to what liability, if any, the board of directors may have for failure to provide the disclosure statement. The Act, for the first time does establish that homeowners’ association board members are liable for the “failure to exercise ordinary care” in their duties as a board member. While the Act is unclear whether the failure of a homeowners’ association board member to provide a satisfactory disclosure statement would create liability upon such a board member, the argument could certainly be made. Board members must be cautioned that they have potential exposure to civil liability for either the failure to provide a disclosure statement or inadequate or untimely disclosure statement. Also, it is unanswered whether the board of directors could be liable for any loss or damages in connection with a real estate sale, as a result of the failure to timely provide an accurate and complete disclosure statement.
It is likely that 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. Because, these requirements and responsibilities are a major change in the way homeowners’ associations have conducted their business in New Mexico, a board member of a homeowners’ association would be well advised to seek independent advice and counsel regarding the potential liability associated with the new Act and its requirements.
Another significant provision of the Act is to specify that proxy voting on behalf of another is allowed. But the election of the homeowners’ associations’ board of directors must be by a majority vote of all of the individual owners. Homeowners’ association boards that have been previously elected by an organizational or management subgroup will no longer be allowed.
The new Act which goes into effect for existing subdivisions in the summer of 2014 imposes a number of very important requirements for a homeowners’ association to operate legally in the state of New Mexico. Of equal importance is the potential for the act to impose a broad new set of responsibilities and potential liabilities on individual owners who elect to serve on a homeowners’ association board of directors. Because the Act is law, it is not up to the homeowners’ associations or their advisors to pass judgment on whether the law makes sense or not. Rather associations, their board of directors and their members, need to clearly understand that there are substantial new changes in the way things are done for homeowners’ associations in New Mexico. The new Act has brought widespread change and the association and their advisors are responsible for compiling a number of very significant and somewhat burdensome requirements. The failure to do so could result in individual liability for a homeowners’ association board member. Clearly in 2014 the homeowners’ association will have a lot more pressing issues than worrying about why the single tray of enchiladas was gone so early at the last annual members' meeting.