My column two weeks ago addressed changes in the area of homeowners association (HOA) collections that are scheduled to take effect January 1, 2014. This week, I follow up by discussing another major new HOA law concerning manager licensing. This new law is scheduled to take effect January 1, 2015.
As background, HOAs are not required to hire professional managers. Whether they choose to do so will depend on factors such as the size of the community, the community’s financial resources, and how active the owners wish to be in community management. Many smaller HOAs manage themselves, perhaps with the assistance of an attorney and accountant, while many larger HOAs hire their own management employees or contract with professional management companies. Under current Colorado law, there is no license required for a person to act as an HOA manager.
HOAs in Colorado are governed by a comprehensive statute known as the Colorado Common Interest Ownership Act (CCIOA). The statute already creates numerous remedies for owners and HOAs against HOA managers. For one, a manager can be sued by an owner for violating CCIOA to the same extent as an HOA itself. For another, HOAs are permitted to fire their managers at any time for cause without penalty. If an HOA is concerned about its manager misappropriating funds, it can require the manager to maintain fidelity insurance covering this risk. In larger projects (more than 30 units), HOA managers are actually required to have fidelity insurance coverage. Notwithstanding these existing remedies that owners and HOAs have against managers (in addition to whatever might be negotiated in the management contract), the new law goes a step further and subjects managers to licensure requirements similar to those existing for real estate brokers.
In brief, the new law defines activities that constitute HOA management such as receiving or disbursing funds for an HOA. It then prohibits any person from engaging in those activities without first obtaining a state license. The license can be obtained by either an individual or a company, but a company must designate a manager to be responsible for its management activities. All individuals who perform management duties for the company are required to have their own licenses except employees who perform certain ministerial tasks under the direct supervision of a licensee. In order to obtain a license, applicants must submit to a criminal background check, obtain a certification from an approved trade organization, comply with other educational requirements, have a high school diploma or equivalent, pass an examination, and pay a fee. Licensees are required to maintain insurance for their activities. Many of the licensure details will be contained in rules that have yet to be promulgated.
As far as penalties for noncompliance, a valid license is required before a person can act as an HOA’s agent or enforce a contract requiring payment or indemnification from an HOA for providing management services. In addition, the licensing authority is empowered to investigate alleged violations of the licensing law and enforce them in court. Once a person is licensed, the authority has extensive powers to discipline violations and enforce rules.
It will be an enormous change for current HOA managers to go from no licensing requirements at all to heavy regulation under the new rules. The new requirements are sure to create costs that will either need to be absorbed by managers or passed on to their HOA clients. It remains to be seen whether this new layer of regulation above and beyond what already exists under CCIOA will result in significant benefits to HOA members ... or just burden HOA managers.
Noah Klug is the owner of The Klug Law Firm, LLC, in Summit County, Colorado. His practice focuses on business, real estate, and litigation. He may be reached at Noah@TheKlugLawFirm.com or 970-468-4953.