By Leslie Godfrey

 

 

Published in the August 2008 edition of Communiqué, the official publication of the Clark County Bar Association

 Common interest communities or homeowners associations have become increasingly popular as Nevada’s population grows. They are designed with the goal of organizing a neighborhood community and preserving property values. Municipal governments have taken advantage of these organizations, handing over the significant responsibility of maintaining and repairing the community infrastructure. This often includes security lighting and gates, sewer, road and sidewalk paving, landscaping, fencing, block walls, and other vital components of a neighborhood. Many communities have fallen short of the necessary funds to uphold this responsibility, and as a result, Nevada Revised Statutes Chapter 116 (Chapter 116) was amended in 2005 to regulate how a community funds its infrastructure improvement and repair reserve.

 

Mandatory funding required

Since 2005, common interest communities have been required to obtain a reserve study to project the repair, replacement and restoration costs of the major components of the community’s common elements. NRS 116.31152(1). Further, Chapter 116 places an affirmative obligation upon common interest communities to calculate and levy assessments necessary to fund the reserve. The community may adopt a funding plan “that is designed to allocate the costs for repair, replacement and restoration of the major components of the common elements over a period of years if the funding plan is designed in an actuarially sound manner which will ensure that sufficient money is available when the repair, replacement, and restoration of the major components of the common elements are necessary.” NRS 116.3115(2).

 

Statutory conflict with a community’s governing documents

Conflict arises when a community’s governing documents effectively prevent the funding of the reserve plans. One specific example includes a community in which the governing documents provided that the Board of Directors must obtain two-thirds majority approval of homeowners before the homeowner assessment may be increased by more than 10 percent in any given year. Further, the same governing documents provided that “any special assessment for capital improvements to the common elements must be voted on by membership.” This language became a problem for one community when the reserve required a greater than 10% increase in the community’s assessment, and the community could not obtain approval of two-thirds of the homeowners.

 

The legislature likely intended to resolve this problem when it enacted NRS 116.1206. It states that “any provision contained in a declaration, bylaw or other governing document of a common-interest community that violates the provisions of this chapter shall be deemed to conform with those provisions by operation of law, and any such declaration, bylaw or other governing document is not required to be amended to conform to those provisions.” NRS 116.1206. In addition, the Bureau of the Legislative Counsel issued a letter in 2007 confirming the legislature’s intent. In that letter, the Bureau states:

 

An association has the mandatory statutory duty to fund adequately its reserves, to include in its annual budget a statement concerning its reserves and whether it will be necessary to impose any special assessments and to review its study of the reserves on an annual basis. . . . Any provision in the governing documents of a common interest community that conflicts with a statute is illegal, invalid, unenforceable and void and is deemed by operation of law to conform to the superseding statutory requirement. . . . The executive board of an association may, without an affirmative vote of the units’ owners, impose an assessment to fund the reserves of the association despite the fact that the governing documents of the association require an affirmative vote of the units’ owners to impose such an assessment.

 

The Bureau relied on several major principles of statutory construction in arriving at its conclusion. First, the Bureau examined the plain language of the statute. Moore v. State, 117 Nev. 659, 661 (2001) (citing Anthony Lee R., a minor v. State, 113 Nev. 1406, 1414 (1997). “When a statute is clear and unambiguous, we must apply the plain and ordinary meaning of the language as written, unless such a meaning violates the spirit of the act or leads to an absurd or unreasonable result.” The Bureau notes that NRS 116.3115 specifically states that a community “shall establish adequate reserves . . . .” “The term ‘shall’ imposes a duty to act and is construed as mandatory unless the statute demands a different construction.” Ewing v. Fahey, 86 Nev. 604, 607 (1970). See also NRS 0.025(1)(d). The Bureau thus concluded that associations are mandated by the plain language of the statute to fund a reserve. The Bureau also noted that NRS 116.1206 “implicitly recognizes that when a conflict arises” between a provision of a community’s governing documents and a statutory provision, “the statutory provision controls.” Accordingly, the plain language of these statutes clearly demonstrates that the legislature intends to allow an association to levy special assessments to fund adequate reserves even if the association’s governing documents require a two-thirds majority vote.

 

Further, the Bureau reasoned that to construe the effect of these statutes otherwise would create a senseless result. “A statute should always be construed to avoid absurd results.” General Motors v. Jackson, 111 Nev. 1026, 1029 (1995); “A statute must be read in light of what is reasonable and not merely what is conceivable.” Ebarb v. State, Dep’t of Motor Vehicles and Public Saftey, 107 Nev. 985, 987 (1991); The Bureau states: “If the legislative mandate to fund a reserve was interpreted to be subordinate to the requirements contained in the governing documents of [an association] . . . the goals and purposes for which the statute was enacted would be rendered wholly nugatory if the units’ owners refused to vote in favor of the assessment.” If the statute were interpreted allowing homeowners to vote down additional assessments necessary to fund a reserve, that interpretation would defeat, rather than promote the statutes’ purpose and would therefore constitute an unreasonable and absurd result.

 

Opponents’ argument

Nonetheless, homeowners resisting an assessment increase have successfully argued that NRS 116.3115(2) is silent as to whether a community is required to allow their homeowners to vote, and therefore, the mandate to fund a reserve and an association’s voting requirement are not mutually exclusive. Arbitrator Dee Newell for the Office of the Ombudsman for Common Interest Communities ruled in July 2007 that “[c]lear and concise language [of the statute] does not extend to a particular method or plan that must be used to establish ‘adequate reserves.’ That is…, the Statutes do not deny other means (than the Board’s Special Assessment) to adequately fund the legally mandated monetary reserve. There simply is no language on how such reserves are to be funded.” See the Decision of Arbitrator Dee Newell, In Re: NRED Control No. 7-60. The Arbitrator pointed out that each relevant statute refers to the “Association” in mandating adequate reserves. She reasoned that homeowners comprise the “Association” and accordingly, they “should have some type of input in rendering adequate reserve plans.” An association’s executive board must work in tandem with the homeowners in rendering a method to comply with statutes requiring reserve funding, while at the same time meeting the voting requirements of the community’s governing documents.

 

This decision places common interest communities in a very awkward position. Essentially, if an increase greater than 10 percent is necessary in any given year to fund the reserve and the Board of Directors cannot obtain a two-thirds majority approval of homeowners, then it cannot properly fund its reserve. In addition to the risk associated with obvious safety risks of failing infrastructure, the Board of Directors are open to statutory repercussions for a failure to fund the reserve. Specifically, a fine may be levied against the association for failure to adequately fund the reserve. NRS 116.785(c). Ironically, such a fine would be paid through the homeowner assessment, which may require an increase of 10 percent or more. This begs the question: could the homeowners simply refuse to give a two-thirds majority approval to pay the state fine?

 

Arbitrator Newell clarified her opinion in Memorandum of Clarification dated August 14, 2007. Instead of requiring a full two-thirds majority as required by the association’s governing documents, she modified her opinion holding that the Association was only required to obtain a two-thirds majority of those homeowners who actually cast a vote. While this provides equitable assistance to an association attempting to obtain enough votes to fund their reserve, it highlights the impossible conundrum entwining Chapter 116 and voting requirements in communities’ governing documents.

 

Statutory amendment and veto

Assembly Bill 396 was introduced during 2007’s 74^th Legislative Session. The bill included language amending NRS 116.3115(2) to directly invalidate any voting provision in an association’s governing documents that would impede the funding of a reserve. See Assembly Bill 396 First Conference Committee Amendment CA19, § 22(b).

 

However, AB 396 was vetoed by Governor Jim Gibbons. In his June 15, 2007 letter to the Secretary of State, the Governor states “[s]ome aspects of this bill represent good public policy. Other aspects, however, could have unintended and unanticipated impacts . . . including the possibility of increased assessments and the possibility of dramatic changes to common-areas without an opportunity for homeowners to participate.”

 

Current practice recommendations

Practically speaking, the present state of the law obliges common interest communities to fund their reserve while upholding any voting requirements within their governing documents. If the reserve requires a significant increase in the homeowner assessments, the Board of Directors must engage in a campaign to educate their homeowners. Then the Board of Directors must convince the homeowners that their method of funding the reserve is appropriate. An attorney advising an association under the current state of the law should assist the association in clearly defining for the homeowners the statutory responsibility to fund the reserve, the process of assessing the condition and lifespan of the community infrastructure, the necessary financial investment to properly fund the reserve, and the possible repercussions if the reserve is not funded. If a two-thirds majority approval is not obtained, the Board should provide different options to their homeowners.

 

However, changes to Chapter 116 addressing this conflict are expected in the next legislative session. Hopefully, new law will set forth clear procedures to balance homeowners’ input with the community’s responsibility to preserve community infrastructure in good condition.

 

Leslie Godfrey is an associate with the law firm of Kummer Kaempfer Bonner Renshaw & Ferrario. Ms. Godfrey practices primarily in the area of business and commercial litigation.