Illinois Court Rules HOA Cannot Collect Assessments that were Improperly Levied
One of the responsibilities of a board of directors or a board of managers in any homeowner’s association is to set the amount of regular assessments for the members. This is typically done by way of a budget that is decided upon by the board in advance of the upcoming year. However, each association may have different rules as it relates to the setting of assessments and passage of a budget that must be followed exactly by the board. If these rules are not followed, it could have serious consequences for the association. Recently, the Third District Court of Appeals, in the case of Morgan’s Orchard Lake Homeowners’ Assn v Morgan, 2022 IL App (3d) 220006-U, outlined what could happen if the association attempts to collect assessments that were not properly passed.
What is a Common Interest Community Association and How are Assessments Set?
In Illinois, common interest community associations (including most homeowners associations) are governed by their declaration, bylaws, articles of incorporation (or organization) and the Illinois Common Interest Community Association Act (765 ILCS 160/1, et seq.). Section 1-5 of the Common Interest Community Association Act defines a common interest community as “real estate other than a condominium or cooperative with respect to which any person by virtue of his or her ownership of a partial interest or a unit therein is obligated to pay for the maintenance, improvement, insurance premiums or real estate taxes of common areas described in a declaration which is administered by an association.” Additionally, common interest communities can be attached or detached townhomes, villas, or single-family homes, but a master association cannot be a common interest community.
The maintenance, improvement, insurance premiums and real estate tax payments referenced in the Common Interest Community Association Act are generally referred to as “assessments” or “dues,” and each set of governing instruments is different in how the amount will be determined and what rights the association has to collect on unpaid assessments. In most instances, as said above, the board is responsible for setting a forward-looking budget and then the members of the association are given an opportunity to review the budget and potentially object, and in some instances, must vote on the budget before it is implemented.
Section 1-45 of the Common Interest Community Association Act sets specific parameters for the finances of an HOA. Under that section, sometime between 30 and 60 days before a budget is passed, each member of the association must be provided a copy and the budget must include a breakdown or indication of the amount for “reserves, capital expenditures or repairs or payments of real estate taxes.” The board must also provide a detailed summary of the receipts, common expenses and reserves from the preceding year. Importantly, if the board decides on a budget, coupled with any separate assessments, that will result in the amount paid by the unit owners to exceed 115% of the sum of the same paid for the preceding fiscal year, 20% of the members can prepare and serve a written petition demanding a formal meeting. At that meeting, if a majority of the total votes assigned to the unit owners rejects the budget, then it will not be passed.
What Rights do the HOA possess in the case of a Delinquency?
Unlike the Illinois Condominium Property Act (which governs condominium associations), the Illinois Common Interest Community Association Act does not include specific provisions regarding the placement or foreclosure of liens or evicting an owner or tenant in the case of a delinquency or a failure to pay assessments. Therefore, in order for a homeowners association to be able to record and foreclose on a lien, it must be a right granted in the HOA declaration or the HOA bylaws.
Although the Common Interest Community Association Act does not explicitly describe evicting an owner, Illinois’ Eviction Act provides that an eviction action may be maintained by a homeowners association pursuant to 735 ILCS 5/9-102(a)(8). In order for a homeowners association to evict an owner, three conditions must be met: (1) the HOA must be a not-for-profit corporation or a limited liability company; (2) the unit owners must be authorized to attend meetings of the board of directors or board of managers of the association in the same manner as provided for condominiums under the Condominium Property Act; and (3) if the HOA declaration was recorded before 1985, the board must have voted to have the provisions of the Eviction Act apply to such homeowners association and delivered or mailed notice of such action to the unit owners.
What Can Happen if the HOA does not Properly Levy Assessments?
The Morgan’s Orchard Lake case is a prime example of the problems that arise when an HOA board fails to follow the procedures set forth in the operative instruments for the association related to assessments. That appellate decision started as an eviction action filed by the HOA against two lot owners who purportedly failed to pay about $6,700.00 in assessments, along with late fees, attorneys’ fees and costs.
In that case, the HOA was formed in 1994 when a declaration was recorded with the DuPage County Recorder of Deeds’ office. There are 9 residential lots and 3 outlots in the association. The declaration provided that the management and maintenance responsibilities for the entire development were vested in the HOA. More specifically, and pertinent to this article, the declaration stated that the association, “acting through its membership or its Board of Managers, as the case may be,” had the responsibility of establishing and approving the annual budget, establishing assessments, and collecting assessments.
The declaration required that the board of managers (which was set at 5 owners) would send out notice and have an annual meeting in April or May of every year. At that annual meeting, there would be a board member election. Additionally, the board was responsible for passing an annual budget and, at least 30 days before it was adopted, providing a copy to all the unit owners. Further, the financial statements for the previous year were supposed to be provided to each unit owner at the annual meeting.
In March of 2017, the HOA board passed a resolution electing to be covered by the Common Interest Community Association Act. Therefore, the rules related to budgets in the Common Interest Community Association Act applied to the HOA after that date to the extent that they contradicted the specific provisions of the declaration.
An eviction action was filed by the HOA in October 2019 against the purportedly delinquent owners and the court eventually conducted a bench trial. The evidence presented during the case was that regular assessments were charged to the owners on a quarterly basis. The HOA board conducted regular meetings, which were open to the unit owners, but all matters were voted on by the board only. Before the HOA voted to become subject to the Common Interest Community Association Act, the unit owners were allowed to vote on a proposed budget, but starting in 2017, the board did not allow for a unit owner vote on the budget.
In February of 2018, the board sent out a notice that the budget for the upcoming year was increasing by 115% because of a new contract for landscaping purposes. That budget was then passed by the board. The next year (2019), a similar notice was sent out and the budget was approved by the board only. The defendants failed to pay assessments after the first quarter of 2018.
The court held a bench trial and found in favor of the HOA and granted a monetary judgment of $6,583.00 plus attorneys’ fees and costs. One of the two owners then moved to vacate the judgment (the other had moved out and was dismissed). The argument presented by the owner was that the declaration required unit owner approval of the budget and that this could not be changed simply because the association was now part of the Common Interest Community Association Act. In December 2021, the trial court agreed with the owner and vacated the judgment. The appeal was then filed by the HOA.
The Court of Appeals sustained the ruling of the trial court in favor of the owner and against the HOA. In doing so, the court held that there was no basis for the board to unilaterally set the amount of assessments, there needed to be an annual meeting wherein the unit owners could actively participate and that certain information needed to be provided in advance of that meeting. The court also rejected the HOA’s argument that the Common Interest Community Association Act somehow negated the provisions of the declaration related to how budgets and assessments would be handled:
We do not agree with plaintiff’s assertion that the requirement under the Declaration for Voting Members to determine the assessments either conflicted with, or was invalid under, the CICAA. The CICAA does not alter the Voting Members’ authority under the Declaration to determine regular assessments. See 765 ILCS 160/1-20(a) (West 2016) (“[t]he administration of every property shall be governed by the declaration and bylaws or operating agreement”). While the CICAA gives an HOA board the authority to adopt separate assessments related to emergencies or mandated by law without member approval (765 ILCS 160/1-45(e) (West 2016)) and the authority to adopt separate assessments for additions/alterations to common areas subject to the approval of a simple majority of the total members at a meeting called for that purpose (765 ILCS 160/1-45(f) (West 2016)), it does not similarly give any authority to an HOA board to adopt regular assessments related to common expenses. See 765 ILCS 160/1-5 (West 2016) (“common expenses” are “the proposed or actual expenses affecting the property, including reserves, if any, lawfully assessed by the common interest community association”).
As a result, the judgment in favor of the unit owner was sustained and the HOA did not have any basis to seek collection of assessments.
Following the language in an HOA’s declaration related to budgets and assessments is a must. The fact that there are additional provisions in the Common Interest Community Association Act that may also govern finances of the HOA does not mean that the HOA board can simply ignore the provisions in the declaration. The failure to do so can result in a situation like this where the HOA litigated a case for over 2 years and spent tens of thousands of dollars in attorneys’ fees which are not recoverable from the unit owner who did not pay assessments. Because assessments are the lifeblood of the HOA, such a finding can have devasting consequences for the association. Retaining an attorney who can walk the board through these specific requirements may be a worthwhile endeavor and save the association thousands of dollars in the long run.
The attorneys of Hirzel Law, PLC focus their practice on condominium and homeowners association law in addition to real estate law. Our attorneys have extensive litigation and trial experience in state and federal courts involving commercial litigation issues and real estate matters. We stand by our clients, offering quality legal representation and promptly responding to our clients’ needs. Contact Hirzel Law online or call 312-552-7669 to learn how our Illinois attorneys can help.