We are often asked what an association can or cannot spend their money on. In fact, this blog was inspired by a request from one of our regular readers. Associations are tasked with performing various community functions based on the requirements of their particular governing documents and state statute. You will often hear us say that assessments are the “lifeblood of an association.” That is because without them the association cannot do its job.
There are some obvious uses for community funds, such as paying for the maintenance of the common area, improving association property, hiring professionals such as managers, attorneys, and accountants. Additionally, townhomes and condominiums will have additional maintenance obligations for building exteriors that will certainly require the use of assessments. Depending on what type of community you live in (condominium vs. homeowners association) the association may also be required to provide certain levels of insurance.
Very generally, most governing documents have “Purpose of Assessments” provisions that broadly outline what the developer anticipated the assessments would be used for. The language in these provisions typically would allow for most types of expenses. However, those provisions should be reviewed closely with management and the association’s attorney. Also, both the NC Planned Community Act and Condominium Act contain provisions regarding the “powers of the association.” Arguably, if the association by statute is given the power to perform a certain act, they most likely have the ability to spend community funds to exercise those duties provided.
The better question is usually what might NOT be an appropriate use of funds or what limitations might be in place for expenditures? Some of those answers may not be so black-and-white. For example, many purpose of assessment provisions state that funds shall be used to promote the “recreation, health, safety and welfare of the residents…” That is a very broad statement, which is a good thing. And that likely would mean that the association could hold a social to promote community recreation and welfare. However, does the association plan to have a reasonable community gathering such as a Thanksgiving potluck, or does the association plan to rent an extravagant ballroom for a lavish holiday party? The answer may depend on the type of community, financial resources, level budgeted for such activities, and need for the money on arguably more important items, such as a roofing project. These decisions will require the Board of Directors to exercise their best business judgment as stewards of the community coffers.
We sometimes see caps on the amount that a Board can authorize for expenditures without a membership vote. Seeing these provisions is rare (and usually a bad idea), but they do exist and managers and Board members should review association documents to make sure there are no such limitations. For example, there could be language that states that no expense may be authorize d by the Board for more than $10,000 without submitting the expenditure request to the members for approval by some certain voting percentage. Additionally, there can be document provisions requiring a community vote to initiate litigation. We do not like such provisions as they tend to unreasonably tie the hands of those Board elected by the homeowners, which can be especially problematic in the event of an emergency or urgent need. However, North Carolina courts will enforce such provisions if properly worded and enacted. That’s because if the appropriate procedure in the governing documents, if any, for spending funds are not followed, the action may not be authorized.
If you have specific questions about whether or not an expenditure is appropriate, please contact one of our community association attorneys at Law Firm Carolinas.