COVID-19 has forced many businesses to alter their operating procedures and, in many cases, temporarily stop offering services or refund the cost of prepaid services. Property Owners Associations (POA) have also been forced to alter their normal operating procedures and adopt emergency procedures during the COVID-19 pandemic by closing amenities and temporarily pausing services. Should POAs follow the path of some other businesses and fully or partially refund assessments to owners for closing the pools, fitness centers, clubhouses and limiting professional services?
We are not recommending POAs consider reimbursements or a reduction of assessments for a variety of reasons. First and foremost, POAs are non-profit organizations bound by Chapter 22 of the Texas Business Organization Code. That means they are created not to make a profit but rather to provide certain non-profit services.
Secondly, a reduction in services does not necessarily mean a reduction in the price of the contract or the obligation to pay. Many contracts cannot be suspended or terminated without paying a penalty or the full contract price. Even contracts with force majeure clauses may not excuse payment obligations.
A “force majeure” clause is a provision in a contract that relieves one or both parties from certain obligations due to an extraordinary event but may not relieve them from the associated payment obligation.
Even assuming the POA is successfully able to terminate or reduce its financial obligations in a contract without penalty, the availability of the terminated services in the future may also present new financial hurdles for the POA. Try to imagine attempting to hire a pool/lifeguard company in July if the POA wishes to still open the facility after a long delay. Many facilities, like the pool, must still be maintained even if it is not allowed to open. If not properly maintained, the pool chemistry and equipment will become a health hazard as well as extremely costly to restore in the future. The POA must continue to meet ongoing maintenance expenses while facilities remain closed.
Also, it is important to note that many vendors are providing limited services and/or additional services, not necessarily contemplated under the contract, due to the unique challenges being presented under the current shelter in place orders. Reducing or reimbursing assessments when the POA’s expenses are not reduced will likely create current and future financial issues for the POA, not to mention potential liability for a breach of contract if vendors are not paid.
In addition to contract issues, most deed restrictions do not give the POA authority to grant reimbursements or reductions of assessments. Typically, the restrictions do not permit the POA to provide for any offsets or reductions for any reason, including the reduction or failure of the POA to provide services. Therefore, if the POA does not have the authority to reduce or reimburse assessments for any reason, the POA cannot take this action.
The likelihood POAs may experience any possible reduction in their expense obligations for this year due to COVID-19 is speculative and does not justify a reduction or reimbursement in an owner’s assessment obligation. We have also seen that the number of owners not paying their assessments when due has been increasing, which is placing financial burdens on the POAs. Given that we are not out of this crisis yet, there are still many uncertainties in the way a POA’s expenses and revenue may fluctuate throughout the year. If there are any potential cost savings in expenses for the current year, POAs should strongly consider either a higher reserve fund contribution at the end of the current year or a possible reduction in the following years’ assessment amount.
If you have questions on what your deed restrictions allow, please reach out to your attorney to have a better understanding of your deed restrictions.