Residential association managers and directors should bear in mind that association members (co-owners or homeowners) will always have some rights to review Association records. These requests can sometimes seem burdensome, but, given the unique and complex relationship between an association and its members, and the fact that residential associations are funded by assessments paid by those members, it makes perfect sense that members would have substantial rights to review documents. That said, members should be only seeking to review documents in good faith. Even if requests for documents create extra labor for the association, unless requested documents are privileged or infringe on privacy rights or fall within other limited exceptions, the appropriate way to handle them is not to deny them unless permitted pre-existing set criteria established by the Association in good faith via an amendment to its governing documents and/or a resolution/rule passed by the board of directors.
Sources of Member Rights to Inspect Association Records
Co-owner rights to review Association documents come primarily from three overlapping sources: (1) The Michigan Non-Profit Corporations Act; (2) the Michigan Condominium Act (in the case of a condominium); and, (3) the governing documents. Each of these three sources are discussed briefly below.
(1) Michigan Non-Profit Corporation Act
Residential associations are organized as non-profit corporations under the Michigan Non-Profit Corporation Act (MNCPA). Section 487 (MCL 450.2487) of the MNCPA provides that shareholders have the right to have balance sheets and certain financial documentation mailed to them on request and, on statement of a proper purposes and so long as the records sought are directly connected with that purpose, to inspect the corporation’s stock ledgers, lists of shareholders or members, and its other books and records. If a corporation does not permit the inspection within five (5) business days after receipt of a request that complies with Section 487, or if it imposes unreasonable conditions on the inspection, the member may apply to the circuit court for an order compelling their inspection. If the Court orders the production of the records demanded, Section 487(5) provides that the Court shall order the corporation to pay the member’s reasonable attorney fees incurred in obtaining the order unless the corporation can prove it failed to permit the inspection in good faith because it had a reasonable basis to doubt the right of the member to inspect the records demanded.
(2) Michigan Condominium Act
Under Section 57 of the Michigan Condominium Act (MCL 559.157(1)) , “books, records, contracts, and financial statements concerning the administration and operation of the condominium project shall be available for examination by any of the co-owners and their mortgagees at convenient times.”
(3) Governing Documents
Whether the association is a homeowners association or a condominium association, the association’s governing documents (its corporate documents as well as the declaration or master deed or other agreements as the case may be) will typically contain provisions regarding the right to inspect documents as well as potential limitations on those rights of inspection.
Handling Member Records Requests
Assuming it is made in good faith, the Association’s response to a records request should be one that fosters transparency and openness in the community. Since associations are funded by assessments paid by members, generally, documents that relate to how money is spent, for instance, signed contracts, including insurance policies, budgets, etc., should be available for co-owner inspection and often it can be easier and more efficient to directly provide these documents to co-owners when they are requested. That said, an association should protect against disclosure of records that violate other members’ privacy or records that are privileged. Individual unit files and documentation regarding other members’ financial standing or that could embarrass other members should not be disclosed. Documents that are legally privileged, i.e., documents that are communications of a legal nature between association counsel and the association should not be provided.
It is fair to say that the right of members to bring a cause of action and especially the potential for recovery of attorney fees that were included in the 2014 amendment to the MNCPA took most attorneys that practice residential association law in Michigan by surprise. The threat of attorney fee recovery in the context of document requests to residential association creates a situation where a refusal or failure to permit document inspection within a very short five-day deadline could have substantial consequences for the finances of a community and in the hands of a certain small percentage of co-owners could, unfortunately, even be used as a weapon. While risk can never be eliminated, there are a number of steps associations can take to help avoid additional cost and headache in dealing with co-owner document requests. Briefly, some of those are:
(1) Associations should foster transparency and operate with the default mindset that a large number of non-confidential and non-privileged association documents will be available for inspection.
(2) Associations should make sure, within five business days, to advise a member making a document request that the records requested will be provided—unless the documents requested fall into an exception to disclosure.
(3) Regarding such exceptions, the MNCPA (MCL 450.2487(7)) allows an association, via its articles, bylaws, or in a resolution, to limit disclosure of records or certain records if directors in good faith determine that disclosure of such records impair rights of privacy or free association of members, impair the association’s lawful purposes, or are not in the best interest of the association or its donors. Accordingly, it is advisable for ALL associations to have a resolution specifying and limiting, reasonably and in good faith, those records that are subject to co-owner review. Such a resolution must also comply with the specific association’s governing documents.
(4) Associations should forward record requests (including subsequent requests) to association counsel when they are received for review and advice.
Board members and managers should be aware of the basic rules that apply in dealing with member document requests, however, given the various overlapping sources of member rights to review documents, the evolving case law on the topic (which has not been discussed), and the relative complexity of dealing with some member requests, association boards and managers should be consulting with association counsel when a document request is received to make sure it is complying with its obligations under Michigan law.
We at Tilchin & Hall, P.C. have many years of practice in assisting residential associations in these matters and we are available to assist your association in these matters. Please reach out to us at (248) 349-6203 or email us using the form below.
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