Editor’s note: Attorneys at Goede, DeBoest & Cross, respond to questions about Florida community association law. The firm represents community associations throughout Florida and focuses on condominium and homeowner association law, real estate law, civil litigation, estate planning and commercial transactions.
Q: I am a resident in a community governed by a condominium association. I recently attended the board of directors meeting at which the annual budget for next year was discussed, voted on and approved by the board. For as many years as I can remember the unit owners were allowed to vote to waive reserve accounts. However, at this year’s budget meeting unit owners were not be permitted to vote to waive reserves. Many of the unit owners in attendance objected but were told by the board president that the decision to permit unit owners to vote to waiver reserves is a board decision, and that unit owners cannot overrule that decision. What rights do unit owners have force the board to permit them to vote to waive reserves?
S., Boca Raton
A: Establishing a condominium association annual budget in governed by the Florida Condominium- Chapter 718, Florida Statutes (the “Act”)- and by the Florida Administrative Code (the “Adm. Code”), copies of which can be obtained by logging on to www.myfloridalicense.com/dpbr/isc/index.htlm. §718.112(e) and (f) of the Act, and Chapter 61B-22 of the Adm. Code set out the requirements which the board of directors must follow when preparing the condominium association’s annual budget.
As to the reserves portion of the proposed annual budget, reserve accounts for capital expenditures and deferred maintenance, to include at a minimum roof replacement, building painting, pavement resurfacing, and any other item that has deferred maintenance expense of replacement cost that exceeds $10,000.00 must be established and funded in every annual budget. The amount reserved for each reserve account must be computed by using a formula based on the estimated useful life and estimated replacement cost of deferred maintenance expense of each reserve item. Unlike unit owner assessments paid to fund the annual budget (which can be spent as needed to pay for the association’s regular recurring annual expenses without limitation as to the specific estimated line item amount for each classification of annual expense estimated in the annual budget), generally speaking funds collected for reserves must be segregated, earmarked specifically for the purposes indicated, and used to pay for those replacements, unless a majority of the unit owners at a duly called meeting for that purpose vote to permit the use of such reserves funds for another purpose.
Thus, under the Act and the Adm. Code, the association is required to fully fund reserves on an annual basis. However, the board of directors, pursuant to the proper exercise of business judgment, has the discretion to allow the unit owners to vote to either waive or partially fund reserves for any budget year. If so, the annual reserve account funding may be waived or partially funded if a majority of the unit owners at a duly called meeting of the association vote to do so. If a majority vote of the unit owners to waive or reduce reserves is not obtained, then the reserves must be fully funded for the year. Therefore, the answer to your question is unit owners cannot compel the board to permit unit owners to vote to waive or partially reserves. Please be mindful that waiving or partially funding reserves does not extinguish the need to replace roofs, resurface paving, or paint the buildings. Those components of the condominium property will age and ultimately require replacement. Consequently, if there are no or limited reserve funds on hand at the time those replacements are needed, then the board will be required to raise the funds to pay for those replacements by imposing a special assessment, or obtaining a bank loan, the amount and payment terms of which may impose a much greater financial hardship on the units owners than if the unit owners had been squirreling money into reserve accounts over a more extended time period.
Although unit owners cannot compel the board to waive or partially fund reserves, they do have a voice when an association’s annual budget requires assessments which exceed 115% of the assessments for the prior fiscal year, the calculation of which excludes any authorized provision for reasonable reserves for repair or replacement of the condominium property, anticipated expenses which the board does not expect to be incurred on a regular or annual basis, or assessments for betterments to the condominium property. Under that scenario, the board shall conduct a unit owner meeting for the purpose of considering a substitute budget if the board receives, within 21 days after adoption of the annual budget, a written request for a special meeting signed by at least 10% of all voting interests. Such a meeting shall be conducted within 60 days after the adoption of the annual budget, notice of which must be delivered or mailed to the unit owners at least 14 days in advance of the meeting. Unit owners may consider and adopt a substitute budget at the special meeting which will become effective if approved by a majority of all voting interests present in person or by proxy at the special meeting, unless the bylaws require a greater percentage of voting interests. If a quorum of the unit owners are not present in person or by proxy (usually defined in the documents to mean a majority of the unit owners) at the special meeting, or if the required majority vote is not secured, then the budget adopted by the board shall take effect as scheduled.
Ronald E. D’Anna, Esq., is Partner of the Law Firm Goede, DeBoest & Cross. Ask questions about your issues for future columns, send your inquiry to: question@gadclaw.com. The information provided herein is for informational purposes only and should not be construed as legal advice. The publication of this article does not create an attorney-client relationship between the reader and Goede, DeBoest & Cross, or any of our attorneys. Readers should not act or refrain from acting based upon the information contained in this article without first contacting an attorney, if you have questions about any of the issues raised herein. The hiring of an attorney is a decision that should not be based solely on advertisements or this column.