“Condo Board Spending Limits Examined” – News-Press
Q: I was unable to find any information on spending limits in our condominium documents for discretionary projects not included in the budget. I also did not find a process in place for presenting these projects to owners for approval. How can owners effectively control the board’s spending on non-budgeted items? (G.P., via e-mail)
A: What is a “discretionary” expenditure or not, whether budgeted or not, is often in the eyes of the beholder. Generally, Florida law grants the board wide discretion in managing association affairs, as long as its actions are reasonable, within its authority, and not arbitrary, capricious, or in bad faith.
The primary protection for unit owners against “runaway spending” is the so-called “material alteration rule.” Under the law, there can be no material alteration or substantial additions to the common elements except as authorized by the declaration of condominium. If the declaration is silent, 75 percent of the entire voting interests of the association (there is usually one voting interest assigned to each unit/apartment) must approve the alteration or addition before it is undertaken.
The decisions from the Florida appellate courts apply a very broad standard in defining what kinds of alterations are “material” and what kind of additions are substantial. The test still applied was first enunciated in an appeals court decision published in 1971 called Stirling Village Condominium, Inc. v. Breitenbach. The Stirling Village court defined material alterations or substantial additions as those which “palpably or perceptively varies or changes the form, shape, elements or specifications of a building (i.e., common elements) from its original design or plan, or existing condition, in such a manner as to appreciably affect or influence its function, use, or appearance.”
The Florida Condominium Act also imposes what is not really a spending cap, but a procedure whereby unit owners can overrule a budget enacted by a board. Section 718.112(2)(e)2., of the Florida Condominium Act provides that if an adopted budget exceeds the previous year’s budget by more than 115 percent, at least 10 percent of the owners may file a petition within 21 days of the adoption of the budget, to consider an alternate budget.
A substitute budget requires approval of a majority of all voting interests, unless the bylaws require a greater percentage. Expenses related to reserves, insurance premium increases, non-recurring expenses, and betterments re-excluded from calculating the 115% increase. If no quorum is achieved for the meeting to adopt the substitute budget, or if the requisite percentage vote for a substitute budget is not achieved, the budget adopted by the board goes into effect.
The condominium documents can also contain their own internal “spending limits,” though they are not common and are found mostly in older documents. One example is bylaws which do not permit the board to adopt the annual budget, but instead require a vote of the unit owners for budget adoption.
Another somewhat common example of documentary board spending limits are requirements that require owner approval for special assessments. For whatever reason, such provisions were relatively common in condominium documents written in the 1980’s.
In my view, “spending limits” in the condominium documents are not desirable. The primary means by which owners in a condominium can protect themselves against “spendthrift boards” is through the material alteration provision of the declaration of condominium. Owners also have the ability to “overrule” a board budget that exceeds the previous years by more than 115 percent, by filing a petition for the consideration of an alternate budget.
Owner approval requirements for special assessments are not, in my opinion, desirable. There are times where funding unexpected expenses is critical to the survival of the association, sky-rocketing insurance premiums being a common example. Subjecting the ability to meet such needs to an owner voting requirement is inimical to a board’s ability to operate the community in a fiscally responsible manner.
Joe Adams is an attorney with Becker & Poliakoff, P.A., Fort Myers. Send questions to Joe Adams by e-mail to jadams@beckerlawyers.com. Past editions may be viewed at floridacondohoalawblog.com.
