Know When to Hold ’Em: Document Retention for Community Associations and Their Managers
“This can become a problem because community associations are required to keep a great deal more documents than any individual director is accustomed to in their personal lives,” says Mitch Drimmer, president of business development at Axela Technologies, a Florida-based collections firm specializing in delinquent association fees, and a former advisory board member with Florida Community Association Professionals.
“So naturally the task of document retention falls on the management company, and the failure to do it properly can have many negative effects.” Imagine, for example, the dire consequences for an association trying to make an insurance claim, institute collections actions, or defend a lawsuit brought by an owner without the necessary documentation.
The Document Dilemma — and the Antidote
Associations often need help from their managers in this area.
“I have seen many associations that either don’t know what their obligations are with respect to document retention or otherwise misinterpret those obligations,” says Joshua Weinstein, an attorney with Kovitz, Shifrin Nesbit in Mundelein, Ill., whose practice concentrates on community association law. “In both cases, an association can be exposed to liability.”
Weinstein advocates establishing formal document retention policies. “It exhibits transparency and allows board members to be prepared in the event of owner issues, litigation, fines, discovery, and local government requirements.”
The optimal approach, Drimmer says, is for the board to vote for a document retention policy, memorialize it in the minutes, and approve them at the next meeting. He also recommends writing a one- or two-page manual to help subsequent boards and managers to understand the policy.
The scope of the documentation that associations must retain, and the duration, varies depending on state law and governing documents, so the policy must reflect the applicable requirements. Managers can provide a valuable service to their clients by helping them develop and comply with such policies.
“If you’re a manager, it’s essential for you on day one to establish a document retention program to enhance information hygiene,” Drimmer says. “It even makes life easier for the manager, who doesn’t have to shuffle through boxes of paper.”
He adds that managers also should get on top of document retention to preempt lawsuits filed by their clients if, for example, an insurance claim is denied due to lack of proper documentation.
“When they first come into an association, managers should do an inventory of the documents they didn’t get from the previous manager and have letters that show they requested the missing documents and never received them,” Drimmer says. “That’s very helpful for a manager to have.”
So which documents should a formal policy encompass? Again, it’s critical to check the state laws and governing documents to ensure everything is included, but, in general, policies should address at least the following:
Corporate records. “Associations are a business,” Drimmer says. As such, they should hold on to the declaration, bylaws, and articles of incorporation, as well as meeting minutes, notices, ballots, and other election records. When governing documents are amended, the association must keep the originals plus the documents that together make up the whole.
Legal documents. Weinstein says associations should hold on to any records of past, current, or potential or probable litigation. That includes any legal communications between the board and owners or others. They also should retain all contracts, including insurance policies, generally for the duration of the agreement plus the relevant statute of limitations.
Taxes. The IRS generally has three years from the due date of a federal income tax return (not the filing date, unless the return is filed late) to conduct an audit. Of course, the due date is in the following year, so you should hold on to the supporting documentation — including statements of dues, contractor payments, and other information — for four years. Note, too, that state tax statutes of limitation can run longer. In California, for example, the general tax statute of limitations is four years.
Maintenance information. Associations have no legal obligations to retain information related to capital purchases, warranties, and repairs, but they’re wise to do so. It’s a good idea, too, to keep blueprints and architectural drawings in case they’re needed in future. But they can discard paperwork as equipment and similar items are replaced or retired from use.
Miscellaneous. Managers and associations should keep communications to and from owners to establish a paper trail in case a dispute arises. Financial and accounting records, including bank statements and detailed records of expenditures, also should be saved.
“Association documents should always be stored in a safe and secure location to avoid destruction, whether accidental or intentional,” Weinstein says, “but also readily accessible by any entitled parties.”
Drimmer is a big fan of electronic storage wherever possible. “For everything that doesn’t require an original copy, you can scan them and put them in the cloud,” he says. “If you want to be old-fashioned, put it on a thumb drive in folders and put the drives in envelopes by year, but some sort of digital technology should be used.
“It should not be paper. Paper goes in the basement, and it gets lost, dirty, moldy, decayed, or flooded.”
Electronic storage has obvious advantages, but only if appropriate security precautions are put in place. “If an association chooses to utilize electronic storage, electronic documents should be stored on computers that have the most recent security updates,” Weinstein says. “Further, board members should safeguard login details, utilize strong passwords, and protect password confidentiality.”
Craft Detailed Records-Management Policy to Shield Association from Liability
Protect Association from Document Discovery Pitfalls
Streamline Association’s Records System
Tailor Recordkeeping to State Law, Association’s Specific Needs