Audit of a homeowners’ association and the activities of its board

Who can commission a housing community audit?

It should be noted that every member of a housing community (an owner of a unit within the housing community) has the right to review the actions and omissions of the community’s board. In practice, the initiative to conduct an audit often comes directly from the owner of a single unit or a group of unit owners. Often, a housing community council is also established within the community, whose function is to increase oversight of the management board’s actions and the community’s financial situation, including the authority to commission an audit.

The significance and purpose of a legal audit of a housing community and the Polish Activities of the housing community board

A legal audit of a homeowners’ association is a detailed analysis of the association’s documentation and activities, as well as those of its board, aimed at assessing compliance with applicable laws and the association’s internal regulations. The purpose of the audit is to identify potential irregularities, shortcomings, and errors that could lead to legal and financial problems for the association. A legal audit also allows for the improvement of the association’s day-to-day operations by identifying areas requiring improvement or adaptation to current regulations. Thanks to the audit, it is possible to protect the association from the adverse effects of mismanagement.

An audit of a housing community also contributes to increasing the transparency of the community board’s activities and the efficiency of its operations. Conducting regular audits allows for ongoing monitoring of the board’s activities and adapting them to changing legal regulations and the community’s needs.

A legal and financial review of a housing community also serves a preventive function. Detecting irregularities at an early stage allows for their prompt correction, which can prevent more serious legal problems in the future. In extreme cases, however, when the housing community’s board grossly violates its duties or is simply unable to properly manage the common property, a direct consequence of the audit may be filing a petition with the court to appoint a forced administrator for the housing community. In such a situation, the conclusions resulting from the audit constitute a key element of the petition to the court.

Legal audit of a housing community – legal regulations concerning housing communities

During a legal audit of a housing community, it is essential to carefully consider the applicable legal provisions governing its operations.

The primary legal act regulating matters concerning housing communities in Poland is the Act on Ownership of Premises. This Act defines the basic principles governing the operation of housing communities, including, among others:

the establishment of a housing community (according to the regulations, a community is established upon the transfer of the first unit to an owner who holds a share in the common areas of the building),
the appointment of the community’s management board, its powers, and duties,
the method of determining and collecting funds for the maintenance and management of the common property.

Other legal provisions concerning the operation of housing communities are also of significant importance. In this regard, the provisions of the Polish Civil Code regarding contracts of mandate (art. 734 et seq. of the Polish Civil Code) apply, which are applied mutatis mutandis to contracts for the management of common property, in conjunction with the provisions of the Polish Act on Ownership of Premises. These regulations pertain, among other things, to the rules of liability for the obligations of housing communities and issues related to the conclusion of contracts.

During the audit, each of the above areas requires a detailed analysis to ensure that the housing community operates in accordance with applicable laws, which is crucial for the proper functioning of the community and the protection of its members’ interests.

Audit of a housing community – most common violations and irregularities

A legal and financial audit of a housing community aims to identify any irregularities that may affect its proper functioning. Potential violations may cover a wide range of legal, financial, and organizational issues. Below, we present the most common violations identified in audit practice, noting that individual irregularities may occur in combination, and the classification provided is for organizational purposes and serves the objectives of this study.

The most common violations related to housing community management

A housing community makes decisions in the form of resolutions, which should comply with the law and the community’s bylaws. The absence of formal resolutions or the adoption of decisions in a manner inconsistent with applicable procedures generally constitutes a violation of the law; for example:

adopting resolutions inconsistent with the Polish Act on Ownership of Premises, which may be deemed unlawful,
adopting resolutions without the required majority of votes, in a situation where, in accordance with the law or a resolution of the unit owners, a specific majority was required, and the resolution was adopted without it,
insufficient documentation of the housing community board’s ongoing activities.

The most common violations related to documentation

The housing association’s board is required to maintain records of its activities, including meeting minutes and board decisions. A lack of proper documentation can lead to issues related to transparency and accountability. However, unit owners have the right to oversee the Polish Activities of the housing community’s board, which primarily includes access to the community’s documents and financial records. The most common examples of violations in this regard include:

lack of minutes from board meetings,
incomplete documentation,
outdated documentation,

which may prevent the verification of the housing community board’s decisions.

Practical example:

The housing community’s board holds regular meetings but does not keep minutes of these meetings. As a result, there is no documentation regarding the decisions made, which makes it difficult to account for actions to residents and may lead to misunderstandings and disputes.

Members of the housing community’s board may find themselves in situations that create a conflict of interest, which may affect their objectivity and the decisions they make—decisions that may not necessarily align with the legal and financial interests of the housing community. The most common examples include:

hiring family members or close associates in entities cooperating with the association, bypassing or abusing tender procedures,
entering into contracts with entities in which board members have a personal financial interest, without following transparent selection procedures.

Practical example:

A member of the housing community’s board owns a cleaning services company. The board decides to hire this company to clean the building, even though no competitive bidding process was conducted.

The most common violations related to housing community finances

A housing community must manage its funds in accordance with the Polish Act on Ownership of Premises and with resolutions adopted by the unit owners. The provisions of the Polish Act specify the rules for collecting, storing, and spending the association’s funds, and also require that all financial decisions be transparent, consistent with resolutions adopted by the owners at association meetings, and made in the financial interest of the housing association.

The most common financial violations by housing community boards include:

allocating housing community funds to inappropriate, unjustified, or non-compliant purposes,
inappropriate or delayed financial reporting, including failure to submit reports on the implementation of the housing community’s budget,

Practical example:

The homeowners’ association receives invoices for renovation services that are billed twice. Although the services were performed only once, the invoices are paid twice, leading to unjustified expenses and the need to seek reimbursement.

Irregularities in financial settlements

The financial settlements of a housing community involve a range of activities related to the collection, management, and expenditure of funds for the needs of the common property.

Irregular financial settlements may primarily include:

improper invoicing, such as so-called double invoicing or invoicing for services that were not actually performed or were performed defectively,
a lack of payment control mechanisms, which may lead to unauthorized expenditures or fraud.

Practical example:

A homeowners’ association commissioned a roof renovation, which was performed by Company X. Upon completion of the work, Company X issued an invoice for 10,000 PLN for the service rendered. However, a month later, the association received another invoice from the same company, also for PLN 10,000, for the same service, even though the work had already been paid for and completed.

Irregularities related to the renovation fund

The law requires housing communities to establish a renovation fund, which is intended to finance work related to the maintenance, modernization, and renovation of the common areas of the property. Funds for the renovation fund are collected through regular contributions from unit owners, and the amount and method of collection are specified in community resolutions. Management of the renovation fund should be transparent, and the expenditure of funds must be in accordance with their intended purpose and approved by the owners in the form of resolutions. The most common irregularities related to the renovation fund include:

using funds from the renovation fund for purposes other than those provided for in the resolutions, i.e., not allocating funds for renovations,
lack of oversight by the housing community’s board over the size of the renovation fund and owners’ contributions in accordance with the community’s resolutions.

Practical example:

The housing community’s board uses renovation funds to cover unplanned administrative expenses, such as purchasing new office furniture for itself. As a result, the renovation fund is insufficient for planned renovation work.

Most common contract-related violations

In the course of its day-to-day operations, the housing community’s management board enters into contracts regarding property management, renovation services, or the day-to-day administration of the property. Potential violations in this area include:

entering into contracts without conducting a competitive bidding process or contractor selection procedures, which may violate competition rules.
entering into contracts on terms that are disadvantageous to the community, which may lead to excessive costs.
entering into contracts on terms that are unfavorable or inappropriate for the community, leading to excessive or unjustified costs,
failing to conduct a market review of contractors’ bids before entering into a contract,
insufficient oversight of contract performance, including failure to enforce contractual provisions

Practical example:

The housing community’s board signs a contract with a company providing elevator maintenance services; however, the contract is signed without a competitive bidding process, and the terms are unfavorable to the community (e.g., an excessively high rate for services). After a few months, it turns out that the company is not performing the services in accordance with the contract, and the community has no grounds to file a claim.

Furthermore, for a housing community to operate properly, it is essential to update contracts with external entities. Failure to update them can lead to a situation where the contracts do not account for the community’s changing needs.

Practical example:

The community signs a long-term electricity supply contract. After a few years, it turns out that a new market offer is more favorable, but the board has not taken steps to renegotiate the contract or solicit bids from a new supplier, leading to excessive electricity costs.

Consequently, when the board fails to take steps to review the contractual terms or analyze available market alternatives, the community may incur inflated operating costs over an extended period that lack economic justification. Such inaction may be deemed a failure to properly perform management duties, especially if there were realistic opportunities to reduce expenses while maintaining a comparable standard of service.

Violations related to the housing community’s bylaws and internal procedures

The community should comply with the housing community regulations and other internal documents governing the use of common property. The most common violation is the improper application of the regulations, which may include situations such as inconsistent enforcement of rules against unit owners. For example, residents may be treated differently in terms of the application and enforcement of rules, leading to a perceived or actual lack of fairness.

Practical example:

The homeowners’ association decides to replace the building’s roof. The association’s board conducts a bidding process, selects a contractor, and signs a contract, but does not hold a vote on a resolution regarding this matter. As a result, the residents were not formally notified of the decision, and the renovation costs are later contested.

The housing community board may also fail to enforce existing rules, which in practice leads to tolerating violations of the regulations by residents without taking the prescribed disciplinary or punitive actions.

Residents may also not be adequately informed about the applicable rules or changes to the regulations, leading to unintentional violations.

The board may also fail to implement adequate control procedures or use inappropriate or ineffective procedures regarding the oversight of the community’s expenditures. Such irregularities can lead to disruptions in the community’s financial management, including unjustified expenditures, a lack of proper oversight of cash flows, and difficulties in identifying and documenting transactions.

Practical example:

The community’s bylaws stipulate that the use of common areas in the building requires the board’s approval. Nevertheless, some residents organize private parties in common areas without obtaining the required approval, which leads to complaints from other residents and a disturbance of order in the building.

Violations related to personal data protection

A housing community must comply with data protection regulations, including the provisions of Regulation (EU) 2016/679 of the European Parliament and of the Council of April 27, 2016, known as the “GDPR” (General Data Protection Regulation). The most common violations in this area include processing the personal data of unit owners without their consent or in violation of applicable regulations, as well as insufficient safeguards for personal data, which may lead to its disclosure or unauthorized access.

Practical example:

A housing community stores residents’ personal data in paper form without adequate security measures, such as locked cabinets or offices. As a result, documents containing personal data are accessible to unauthorized persons, which violates GDPR regulations and may lead to a data breach.

Legal audit of a housing community – the legal audit process

Conducting a legal audit of a housing community is a comprehensive process aimed at assessing the community’s compliance with applicable laws and identifying potential legal risks. It consists of the following stages:

Planning and scheduling the housing community audit

The first step in the legal audit process is detailed planning. The scope of the audit must be defined, which generally includes:

analysis of the community’s documents (agreements, minutes, resolutions, financial records),
review of the board’s activities (implementation of resolutions, board decisions, and procedures).
assessment of compliance with legal regulations.

Gathering the necessary documents for the housing community audit

An important stage of the audit is gathering all relevant documents concerning the community and the management board. The review of the housing community’s documents includes, among other things:

formal documents – the community’s bylaws, regulations, resolutions,
contracts entered into by the association,
financial documents—the association’s budget, financial reports, invoices, contracts,
documents concerning the board—contracts with board members, minutes of board meetings, correspondence.

Analysis of documents provided as part of a housing community audit

The audit of a housing community’s documents involves verifying and analyzing whether the community’s and the board’s actions comply with applicable laws and the community’s internal regulations. It is essential to assess:

compliance with the Polish Act on Ownership of Premises, the Polish Civil Code, and the Polish Act on Real Estate Management, to verify whether the management board operates in accordance with the provisions of the aforementioned acts,
compliance with resolutions, to verify whether the management board implements the community’s resolutions in accordance with their content,
the financial management of the housing community—to verify whether the community’s funds are being spent as intended and whether there are any financial irregularities.

Interviews and consultations during the housing community audit

The audit of a housing community may also include interviews with members of the management board and residents of the community. These interviews can help in understanding the practical aspects of the community’s operations and in identifying potential problems.

Preparation of a housing community audit report, audit conclusions, and recommendations for further action

After conducting the housing community audit, a detailed report should be prepared, which should include:

a summary of the most important audit findings,
identified issues, i.e., areas of the housing community’s or the housing community board’s operations where irregularities or legal risks exist,
proposals for implementing specific corrective actions and ways to improve the community’s operations.

The housing community should then take appropriate steps to implement the auditor’s recommendations, which may include actions such as aligning the board’s activities with the auditor’s recommendations, updating bylaws, resolutions, and agreements, and conducting training for board members and community residents to improve their understanding of regulations and procedures. After implementing the recommendations, it is also necessary to regularly verify whether the board is effectively carrying them out.

Liability of the housing community board

The issue of the legal audit of a homeowners’ association is directly linked to the topic of the liability of the members of the association’s board. Members of a housing community’s board play a key role in managing the common property and are responsible for the proper performance of their duties. Their liability is governed by a number of legal provisions and rules set forth in the community’s bylaws.

In the event of improper performance of duties, board members may face civil, administrative, or even criminal liability. Below, we outline the main principles regarding the liability of housing community board members that should be considered as part of a housing community audit.

Civil liability of the housing community board

The provisions of the Polish Act on Ownership of Premises do not contain detailed regulations regarding the liability for damages of members of the housing community board. Nevertheless, there is a risk that the housing community may suffer damage as a result of the Polish Actions of board members. In such cases, the provisions of the Polish Civil Code regarding liability for damages apply, in accordance with Article 1(2) of the Polish Act on Ownership of Premises.

Therefore, if the damage results from a failure to perform or improper performance of duties arising from the law or resolutions adopted by the unit owners, a member of the management board may be held contractually liable under Article 471 of the Polish Civil Code. In the case of damage caused by a tortious act, the liability of a board member will be governed by Article 415 of the Polish Civil Code.

Criminal liability of the housing community board

Members of the housing community board may also face criminal liability for economic crimes related to the improper management of the community. For example, if the board commits fraud, such as by falsifying financial documents, embezzling the association’s funds, or engaging in other actions intended to obtain benefits at the association’s expense, it may be held criminally liable. Acting to the detriment of the housing community and mismanagement by the housing community’s board are the most common types of criminal violations.

Board members may be held liable for failing to implement administrative decisions, such as those issued by supervisory authorities, e.g., local building authorities, and may be subject to fines or other administrative sanctions.

We can help you conduct an audit of your housing community

A legal and financial audit of a homeowners’ association is a key tool for ensuring the association’s proper functioning and compliance with the law. A law firm specializing in real estate law and audits can play a significant role in conducting such an audit. Below, we outline how we can assist homeowners’ associations in this process:

A detailed analysis covering a review of the association’s bylaws, an analysis of resolutions adopted by the association, and a detailed examination of contracts entered into by the association. The goal is to assess the compliance of these documents with applicable laws and to identify any irregularities and areas requiring improvement.
Conducting a comprehensive financial audit of the housing community in cooperation with a specialized financial entity, including, among other things, an analysis of cash flows, cost structure, the method of accounting for advance payments and the renovation fund, as well as verifying the accuracy of accounting records and the compliance of applicable practices with applicable accounting standards and regulations regarding the financial management of housing communities.
Conducting a detailed review of the actions (and omissions) of the housing community’s management board regarding compliance with applicable legal regulations, in particular the Polish Act on Ownership of Premises. The analysis aims to ensure that the management board operates in accordance with applicable regulations and legal standards.

Identifying potential legal violations and improper practices within the community. Based on the identified issues, we prepare a report on improper practices and detailed recommendations aimed at improving the community’s operations. Recommendations may include changes to expense approval procedures and other measures that will contribute to better control over community funds and improved financial transparency.