Reserve Account Expenditures Require Proper Procedures and Authorization

Homeowners associations are required to maintain an appropriate level of funds in a reserve account in order to have sufficient funds available for the repair, restoration, replacement, maintenance of, or litigation involving the repair, restoration, replacement, maintenance of, major components that are part of the association’s common areas that the association is obligated to maintain. The officers and directors of associations that have control over the association’s funds frequently deal with issues concerning the use of reserve funds for other purposes such as the payment of unexpected legal fees for the defense of litigation that has been commenced against the association and/or its management personnel and which is not covered by insurance.

Because reserve funds are typically afforded special protection by state statutes and an association’s governing documents, the use of those funds necessitates the following of designated procedures and “proper authorization” by the association’s board of directors. “Proper authorization” means that, absent an emergency situation, the decision to transfer reserve funds out of the association’s reserve account and use those funds for a purpose other than those specified above, was made by a quorum of the association’s directors acting collectively at a properly noticed meeting of the directors which included prior notice to the association’s members of the directors’ intention to consider borrowing from the reserves in the meeting notice and agenda. Thus, the decision to use reserve funds is not a decision that can be made by the association’s property manager or any one or two officers or directors who typically have authority to expend the association’s funds.

Because state laws and/or governing documents may impose additional requirements for the borrowing of reserve funds, it is critical that the associations’ directors be familiar with those additional requirements. For example:

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