Reasonableness Standard

Collecting homeowners’ association fees from unit owners in foreclosure, fixing leaky roofs from hurricane damage, and hiring a new landscaper. These are just a few examples of the many decisions that a condominium association’s board of directors must consider on a regular basis. The condominium association is the governing body of a community, with duties ranging from promulgating and enforcing rules and regulations to handling financial matters such as the collection of dues. See Matter of Levandusky v. One Fifth Ave. Apartment Corp., 75 N.Y.2d 530, 536 (N.Y. 1990); Papalexiou v. Tower W. Condo., 401 A.2d 280, 285 (N.J. Super. 1979). Those brave few who volunteer to serve on the association’s board should always remember that it is nearly universally accepted that they owe a fiduciary duty to all of the association’s members. See, e.g., Bd. of Managers of Weathersfield Condo. Ass’n v. Schaumburg Ltd. P’ship, 717 N.E.2d 429, 436 (Ill. App. 1999); Bd. of Managers of Fairways at North Hills Condo. v. Fairway at North Hills, 603 N.Y.S.2d 867, 870 (1993); Schwarzmann v. Ass’n of Apartment Owners, 655 P.2d 1177 (Wash. 1982). But see Smith v. Ridgeview Homeowner’s Ass’n, 2011 WL 1743787, at *3 (Minn. Ct. App. 2011) (holding the governing body of a condominium association owes a duty to members as a whole as opposed to individual unit owners); Office One, Inc. v. Lopez, 769 N.E.2d 749 (Mass. 2002) (holding that members of the governing board of a condominium association, in their capacity as trustees, owe no fiduciary duty to individual unit owners).

When a disgruntled condominium unit owner challenges the board’s decision through litigation, under what standard will the board’s action be governed? The answer depends on the jurisdiction, and even then, the answer is not entirely clear. Most jurisdictions apply one of two standards: reasonableness or business judgment. Under the reasonableness standard, the condominium association’s board of directors must demonstrate its decision was reasonable, thus requiring the court to conduct a fact-intensive inquiry into the substantive and procedural decision-making process. See, e.g., Bolandz v. 1230-1250 Twenty-Third Street Condo. Unit Owners Ass’n, 849 A.2d 1010, 1014–15 (D.C. 2004). On the other hand, the business-judgment rule gives deference to the decision made by a condominium association’s board of directors absent a showing of fraud, bad faith, incompetence, or a variety of other factors varying by jurisdiction. See, e.g., Micheve, LLC v. Wyndham Place at Freehold Condo. Ass’n, 885 A.2d 35, 39 (N.J. App. Div. 2005) (finding the business-judgment rule afforded when the board’s actions authorized by statute or its own bylaws, and when the decision is not fraudulent, self-dealing, or unconscionable); Black v. Fox Hills N. Cmty. Ass’n, 599 A.2d 1228, 1231–32 (Md. App. 1992) (holding the business-judgment rule precludes the judicial review of a condominium association’s board of directors absent fraud or bad faith).

While courts try to distinguish their decisions to neatly fit under one of the two standards, the history of cases involving decisions of condominium association boards of directors proves the two concepts to be anything but neatly distinguished. In fact, case law shows “reasonableness” and “business judgment” in the context of condominium associations to be more like overlapping circles on a Venn diagram than two separate, distinct standards.

Origin of the Reasonableness and Business-Judgment Confusion

One of the earliest cases to consider the standard for reviewing a decision of a condominium association’s board of directors is Hidden Harbour Estates, Inc. v. Norman (Hidden Harbour I), 309 So. 2d 180 (Fla. 4th Dist. Ct. App. 1975). In Hidden Harbour I, the association’s board of directors adopted a rule, subsequently ratified by the vote of unit owners, prohibiting alcoholic beverages from the clubhouse and adjacent areas. Id. at 181. The trial court granted a permanent injunction prohibiting the association from enforcing the rule because the action engaged in by the board constituted a nuisance. The Fourth District reversed, concluding the association can adopt rules passing the test of “reasonableness,” and each case must be reviewed based on the particular facts and circumstances. Id. at 181–82. The Fourth District held the same standard in Hidden Harbour Estates, Inc. v. Basso (Hidden Harbour II), 393 So. 2d 637 (Fla. 4th Dist. Ct. App.  1981). In Hidden Harbour II, the association’s board of directors denied the association members the right to drill a well next to their mobile home unit. Id. at 638. The members drilled the well anyway, and the trial court denied injunctive relief to Hidden Harbour. On appeal, the Fourth District held the board of directors must demonstrate “reasonableness” when the validity of promulgated rules is challenged or when a board refuses an owner’s action where the board has the power to grant or deny the action. Id. at 640. Because Hidden Harbour failed to demonstrate its decision to deny the drilling of a well was reasonably related to its concerns, the Fourth District affirmed the trial court’s ruling.

In between Hidden Harbour I and II, the Superior Court in New Jersey decided Papalexiou v. Tower West Condominium, 401 A.2d 280 (N.J. Super. 1979). In Papalexiou, the board of directors for Tower West Condominium voted to levy an assessment of $100,000 to pay overdue bills and repair leaks in the roof. Id. at 284. All but seven unit owners paid the special assessment. The remaining unit owners secured an injunction restraining the association from asserting a lien or imposing other sanctions on the nonpaying owners. Id. at 282. In beginning its analysis, the court cited Hidden Harbour I for the “test of reasonableness.” Id. at 285. The court also cited Ryan v. Baptiste, 565 S.W.2d 196, 198 (Mo. Ct. App. 1976), in which the Missouri Court of Appeals considered the reasonableness of a board’s actions by weighing the rights of objecting owners against the rights of the entire residential community.

The Papalexiou court inexplicably transitioned from the “reasonableness” rules of Hidden Harbour I and Ryan to a discussion of the business-judgment rule. The court defined the business-judgment rule to require a showing of fraud or lack of good faith before a board’s decisions can be questioned. Id. at 285–86. The court held fraud, self-dealing, or unconscionable conduct must be evidenced before a court will review authorized conduct of directors. Id. at 286; see also Comm. for a Better Twin Rivers v. Twin Rivers Homeowners’ Ass’n, 929 A.2d 1060, 1074 (N.J. 2007). In declining the invitation to review the board’s decision, the court found no fraud, lack of good faith, self-dealing, dishonesty, or incompetence in the decision-making process. Id. at 286–87.

The only link between the “reasonableness” discussion and the “business judgment” holding is the court’s explanation that, while directors are not expected to be perfect, “[a]ll that is required is that the persons in such positions act reasonably and in good faith in carrying out their duties.” Id. at 286. Without rejecting the holdings of Hidden Harbour I or Ryan, the court did no analysis of the particular facts and circumstances nor any balancing test of the objecting owners’ rights versus the rights of the community at large. Left unclear by the court’s decision is whether there remains an argument to be made that boards’ decisions can be overturned by showing unreasonableness.

In an oft-cited and arguably clearer opinion, the New York Court of Appeals addressed the issue of “reasonableness” versus “business judgment” head-on in Matter of Levandusky v. One Fifth Avenue Apartment Corp., 75 N.Y.2d 530 (N.Y. 1990). In accordance with an agreement the board and Levandusky executed, the board of directors for the condominium cooperative issued a stop-work order to prevent Levandusky from moving a steam riser pipe in violation of Levandusky’s proprietary lease. Id. at 533–34. The supreme court initially granted Levandusky’s petition to set the stop-work order aside and held the board’s decision to stop the renovations was “arbitrary and capricious.” Id. at 535. On rehearing, the supreme court withdrew its decision, holding it was “precluded by the business judgment rule from reviewing the board’s determination.” Id. On appeal, a majority of justices in the appellate division agreed with the original supreme court decision, while two justices dissented and agreed the board’s actions were not subject to judicial review under the business-judgment rule.

After a thorough discussion about the role a cooperative or condominium association board of directors plays in governing the affairs of the respective community, and the unit owners’ rights they tacitly relinquished by agreeing to be regulated by the rules and regulations, the court of appeals held the appropriate standard of review for a board’s decisions is analogous to the business-judgment rule. Id. at 536–37. “So long as the board acts for the purposes of the cooperative, within the scope of its authority and in good faith, courts will not substitute their judgment for the board.” Id. at 538; see also Yusin v. Saddle Lakes Home Owners Ass’n, 73 A.D.3d 1168, 1170–71 (N.Y. App. Div. 2010). The court further supported its opinion by citing other cases inside and outside of its jurisdiction (including Papalexiou) applying the business-judgment rule to cooperative and condominium boards. Id. at 537.

The court of appeals then took the extra step the court in Papalexiou did not take by explicitly rejecting the “reasonableness” test. Id. at 538. The court recognized the “reasonableness” standard and business-judgment rule have a lot in common, but pointed out the two biggest differences. Id. at 539. First, the business-judgment rule places the burden on the objecting unit owner to demonstrate the breach of fiduciary duty, whereas the reasonableness standard places the burden on the board to show the decision was reasonable. And, second, citing Hidden Harbour II, the reasonableness standard requires the court to independently evaluate the board’s decision. The court of appeals, therefore, decided the more appropriate standard was the one of limited judicial review.

New York is one of the few jurisdictions in which an appellate court went the extra mile to explain what the reasonableness standard is, what the business-judgment rule is, and why one is more beneficial than the other. Most other jurisdictions fail to provide a clear statement of the standard to be applied. The court selects one of the standards without a thorough review of the other and, in skipping this part of the process, conflates the two. It is understandably difficult to separate them, as the analysis in Levandusky illustrates. But a review of opinions from around the country demonstrates some courts are not just conflating them, but also perhaps mislabeling them.

Does the Business-Judgment Rule Require Finding Reasonableness?

As discussed in Papalexiou and Levandusky, the business-judgment rule restricts a court’s ability to review the substance of a decision made by the condominium association’s board of directors. Some courts looked to stay in line with these early cases on point. The Court of Special Appeals of Maryland cited Papalexiou in adopting Maryland’s business-judgment rule, requiring the court to give deference to a board’s decision absent bad faith or fraud. Black v. Fox Hills N. Cmty. Ass’n, 599 A.2d 1228, 1231–32 (Md. App. 1992). The Superior Court of Massachusetts adopted the business–judgment rule discussed in Levandusky and held trustees of the condominium trust were not liable for actions “taken in good faith and in the exercise of business judgment in the lawful and legitimate furtherance” of the unit owner’s interests. Pederzani v. Guerriere, 1995 WL 1146832, at *1 (Mass. Super. Ct. 1995). The Superior Court of Connecticut also adopted the business-judgment rule as enumerated in Levandusky. Powder Farm Park Ass’n v. SKF Leader Hill, LLC, 2008 WL 4853332, at *4 (Conn. Super. Ct. 2008).

Another one of the leading cases applying the business-judgment rule to condominium associations is Lamden v. La Jolla Clubdominium Homeowners Ass’n, 980 P.2d 940 (Cal. 1999). In Lamden, the Supreme Court of California reviewed several of its past cases in which actions of a condominium association were at issue. Id. at 947–49. The court looked to its then recent opinion in Nahrstedt v. Lakeside Village Condominium Ass’n, 878 P.2d 1275 (Cal. 1994), wherein it concluded that “courts will uphold decisions made by the governing board of an owners association so long as they represent good faith efforts to further the purposes of the common interest development, are consistent with the development’s governing documents, and comply with public policy.” Lamden, 980 P.2d at 950. Staying in line with its holding in Nahrstedt, the court in Lamden concluded the board’s decisions should be given deference when the board is acting on reasonable investigation, in good faith with regard to the best interests of the association and its members, and exercises discretion within the scope of its authority under relevant statutes, covenants, and restrictions.

Other courts have relied on legal treatises and their own body of case law to allow condominium associations the deference afforded by the business-judgment rule. The Court of Appeals in South Carolina reviews conduct of directors under the business-judgment rule and will not disturb their actions absent a showing of incompetence, dishonesty, or bad faith. See Goddard v. Fairways Dev. Gen. P’ship, 426 S.E.2d 828, 832 (S.C. Ct. App. 1993). An Illinois Appellate Court applied its corporate business-judgment rule to a derivative suit brought by unit owners on behalf of the condominium association. Davis v. Dyson, 900 N.E.2d 698 (Ill. App. Ct. 2008). The Davis court makes its analysis of the business-judgment rule based on the holding in Stamp v. Touche Ross & Co., 636 N.E.2d 616 (Ill. App. 1993). The Stamp court concluded the business judgment of directors would not be interfered with absent bad faith, fraud, illegality, or overreaching. Id. at 621. In affirming the rule from Stamp, the court also noted that, for a board to get the benefit of the business-judgment rule, exercise of due care is a prerequisite. Davis, 900 N.E.2d at 714. Because the plaintiffs in Davis alleged “inexcusable unawareness or inattention” as well as illegality, they alleged enough to survive the business-judgment rule challenge at the pleadings stage. Id. at 715–16.

The Supreme Court of Washington in Riss v. Angel discusses condominium directors’ fiduciary duty to “exercise ordinary care in performing their duties and to act reasonably and in good faith.” 934 P.2d 669, 680–81 (Wash. 1997). The court appears to conflate the two differing standards by stating the duty as such, and by concluding “whether or not the business judgment rule should be applied to property owners associations, the decisions of these associations must be reasonable.” Id. at 681. Quoting its business-judgment rule from prior decisions, the court stated it will not disturb the directors’ judgment absent a showing of fraud, dishonesty, or incompetence, but that “reasonable care” is also required, and good faith is insufficient because the standard requires the directors to act as reasonably prudent people in like situations would act.

The business-judgment rule quoted by the Supreme Court of Washington reflects the “pure” business-judgment rule approach. But does this approach support its conclusion? The court concludes the rule does not “exonerate the homeowners for their unreasonable decision to reject Plaintiffs’ proposal.” Why was the decision unreasonable? Because it was an unreasonable decision-making process. Id. at 679. Although the court refers to a “reasonable decision” in several places in the opinion, Washington does appear to adhere to the “pure” business-judgment rule.

Florida is perhaps the most difficult state to understand whether its courts apply the business-judgment rule. As discussed earlier, one of the first cases on point as to the issue of the appropriate standard of review for condominium associations is Hidden Harbour I. In a recent decision by the Fourth District Court of Appeal in Florida, the court in Hollywood Towers Condominium Ass’n v. Hampton cited numerous cases holding the business-judgment rule to be the appropriate standard of review. 40 So. 3d 784, 787 (Fla. 4th Dist. Ct. App.  2010) (citing Garcia v. Crescent Plaza Condo. Ass’n, 813 So. 2d 975 (Fla. 2d Dist. Ct. App. 2002); Farrington v. Casa Solana Condo. Ass’n, 517 So. 2d 70, 72 (Fla. 3d Dist. Ct. App. 1987); Tiffany Plaza Condo. Ass’n v. Spencer, 416 So. 2d 823, 826 (Fla. 2d Dist. Ct. App. 1982)). When deciding on the appropriate business-judgment review test, the court adopted the two-prong test in Lamden, stating the decision must be within the association’s scope of authority and must be reasonable, meaning not arbitrary, capricious, or in bad faith.

But how did the Florida courts transition from the reasonableness standard to the business-judgment rule? Arguably, they never did. In Farrington, the Third District Court found support for its decision to support the business-judgment rule. One case was Papalexiou, a business-judgment rule case. Another is Hidden Harbour I, a case oft-cited for the reasonableness standard. Indeed, many courts outside of Florida have used Florida cases to support their position that the reasonableness standard is the appropriate standard. See Barclay Square Condo. Ass’n v. Grenier, 899 A.2d 991, 996–97 (N.H. 2006) (citing Hidden Harbour I); Hutchens v. Bella Vista Vill. Prop. Owners’ Ass’n, 110 S.W.3d 325, 330 (Ark. Ct. App. 2003) (citing Scudder v. Greenbrier C. Condo. Ass’n, 663 So. 2d 1362, 1369 (Fla. 4th Dist. Ct. App. 1995)). In Florida, therefore, there appears to be authority to support both the reasonableness standard and the business-judgment rule as appropriate standards of review.

Reasonableness Standard Isn’t Far from Business-Judgment Rule

Many other jurisdictions adhere to the “reasonableness” standard when reviewing the decisions of a condominium association’s board of directors. Conceptually, as discussed in Levandusky, the reasonableness standard is going to have a significant amount of overlap with the business-judgment rule. Can there be a scenario where an action taken or decision reached by a condominium association’s board of directors is both reasonable and done arbitrarily, capriciously, incompetently, or in bad faith? But one would expect if a court intends to employ a reasonableness standard, there should be some difference between reasonableness and the business-judgment rule. When looking at the specific standards the courts use, however, it seems clear that the reasonableness standard hardly varies, if at all, from the business-judgment rule.

For example, an Arkansas Court of Appeal in Hutchens v. Bella Vista Village Property Owners’ Ass’n held the power of the governing body for a condominium association is limited by the “reasonableness” test, requiring a determination of whether action is unreasonable, arbitrary, capricious, or discriminatory. 110 S.W.3d 325, 330 (Ark. Ct. App. 2003). The Supreme Court of North Dakota also employs the same reasonableness test. See Buckingham v. Weston Vill. Homeowners Ass’n, 571 N.W.2d 842, 845–46 (N.D. 1997); see also Barclay Square Condo. Ass’n v. Grenier, 899 A.2d 991, 996–97 (N.H. 2006) (finding the amendment at issue “is reasonable and not arbitrary or capricious”). On its face, this standard is the business-judgment rule, almost exactly as defined in Florida, California, New York, and New Jersey, with an additional “unreasonable” defense. Yet neither jurisdiction proposes what “unreasonable” means. Is it procedurally unreasonable, thus making the actual standard the business-judgment rule, since the court does not question the substance of the decision? Or is it substantively unreasonable, thus making the test the more traditional reasonableness standard?

Both Hutchens and Buckingham cite the Ohio Court of Appeals case Bluffs of Wildwood Homeowners’ Ass’n v. Dinkel, 644 N.E.2d 1100, 1102 (Ohio App. 1994), in describing the “reasonableness” test in Ohio. One of the cases cited in Dinkel sheds some light on Ohio’s reasonableness standard. In River Terrace Condominium Ass’n v. Lewis, the First District Court of Appeal in Ohio stated, when reviewing a decision by the association’s board of directors, “the trial court does not substitute its judgment for that of the board of managers or weigh the various elements and considerations to be taken into account as though the court were acting de novo.” 514 N.E.2d 732, 737 (1st Dist. Ct. App. Ohio 1986). In so holding, the court applied a three-part test of reasonableness, looking at whether the decision was arbitrary or capricious, whether the decision was nondiscriminatory and even-handed, and whether the decision was made in good faith for the common welfare of the owners and occupants. The reasonableness standard in Ohio, and by extension in Arkansas and North Dakota, appears to be, for all intents and purposes, the business-judgment rule.

Perhaps the purest “reasonableness” standard can be found in Washington, D.C. On a case of first impression, in Johnson v. Hobson, the D.C. Court of Appeals reviewed a condominium association board’s decision to have cars without valid license plates or registration towed from the premises. 505 A.2d 1313, 1314–15 (D.C. App. 1986). Citing Hidden Harbour I and Ryan (like the court in Papalexiou), as well as Holleman v. Mission Trace Homeowners’ Ass’n, 556 S.W.2d 632, 636 (Tex. Civ. App. 1977), the court adopted the reasonableness standard. Id. at 1317. In a footnote, the court specifically declined to adopt the business-judgment rule as adopted in Papalexiou. Id. at 1317 n.7.

The court’s analysis went through both the substantive and procedural aspects of applying the reasonableness standard. Id. at 1317–18. For substantive reasonableness, the court looks at whether the action taken was within the powers granted to the board by statute or condominium documents; whether the substance bears a relationship to the “health, happiness and enjoyment of life” for owners; and whether the substance has an unfair or disproportionate impact on select unit owners. As for procedural reasonableness, the court should review whether owners had notice the board could regulate the topic at issue and whether the board failed to follow the procedures mandated by the condominium documents. Id. at 1318. The D.C. Court of Appeals definitively affirmed the reasonableness standard, the decision to not adopt the business-judgment rule, and the analysis of Johnson in Bolandz v. 1230-1250 Twenty-Third Street Condominium Unit Owners Ass’n, 849 A.2d 1010, 1014–15 (D.C. 2004). The court in Bolandz left no doubt about the inquiry to make when utilizing a reasonableness standard, citing the quoted language Johnson used from Hidden Harbour I, “[E]ach case must be considered on the peculiar facts and circumstances thereto appertaining.” Id. at 1015.

Other jurisdictions that have elected to apply a version of the reasonableness standard go so far as to explain how the business-judgment rule is properly incorporated. The Supreme Court of Alaska, in upholding the condominium rule at issue, held the reasonableness standard was “supported by case law and commentary.” O’Buck v. Cottonwood Vill. Condo. Ass’n, 750 P.2d 813, 817 (Alaska 1988) (citing Hidden Harbour I and Johnson). In a footnote, the court additionally stated that applying the business-judgment rule advocated by the condominium association, while favored by commentary and with good authority, would make little to any difference in this case because “the rule at issue measures up to any standard of reasonableness.” Id. at 817 n.4. The language in the footnote left some question as to whether the Supreme Court of Alaska would adopt the business-judgment rule in the future because the court elected not to take the association’s invitation to make the business-judgment rule the law. Little doubt remains as evidenced by the holding in Bennett v. Weimar, 975 P.2d 691, 696–97 (Alaska 1999). The Supreme Court of Alaska, this time forced with the argument of reasonableness versus business judgment (as applied in Papalexiou), stayed with its holding in O’Buck in favor of the reasonableness standard. Id. at 697. The court continues to leave itself an “out” for ruling on the business-judgment rule by not taking a firm position and once again stating, “[T]he rule at issue measures up to any standard of reasonableness.”

The Restatement Attempts to Balance the Two

The Court of Appeals of Arizona dealt with the reasonableness standard versus business-judgment rule debate by following a third option. In Tierra Ranchos Homeowners Ass’n v. Kitchukov, the association advocated for the business-judgment rule of Lamden while the unit owner argued Arizona case law did not allow for judicial deference to condominium associations. 165 P.3d 173, 177–78 (Ariz. App. 2007). Because the court found this case of reviewing the decision of a condominium association’s board of directors to be a case of first impression, Arizona law mandated the court look to the appropriate Restatement for guidance. Id. at 179. Under the Restatement (Third) of Property: Servitudes (2000), a unit owner challenging an action by the association must show the association breached its duty to treat members fairly or its duty to act reasonably in the exercise of its discretionary powers. When challenging a discretionary action, the unit owner also has the burden of proving the breach of duty has caused, or threatens to cause, injury to the member individually or to the interests of the common-interest community. Finding the Restatement’s approach to be well-reasoned, the Arizona court adopted it. Id. at 180.

The court discussed the Restatement commentary as it related to the reasonableness standard and business-judgment rule. Id. at 179. The Restatement does not adopt the business-judgment rule because it provides “too little protection against careless or risky management,” but balances the protection taken away from the association by now requiring the unit owner to establish the board’s action was unreasonable, as opposed to putting the burden on the association to prove its actions were reasonable. Id. at 179–80. What the Restatement sees as balancing between the two standards may ultimately be very detrimental to the unit owner. Is the burden of proving unreasonableness a fair burden to put on one unit owner? Can one unit owner ever prove a board’s decision was unreasonable as to all unit owners? In a condominium development of nearly 1,000 units, what sort of time and expense will a unit owner have to endure to prove his or her case? Ultimately, more case law will need to be developed to conclude how effective the third Restatement option really is.

Conclusion

A review of the case law shows three approaches to reviewing the validity of an action challenging the decision of a condominium association’s board of directors. The two most readily recognizable approaches, the reasonableness standard and the business-judgment rule, share so many characteristics that defenses of one are almost certainly defenses to the other. The minority approach, as prescribed by the Restatement (Third) of Property: Servitudes (2000), attempts to be a hybrid between the two majority approaches, but may only create an undue burden on the challenging unit owner as opposed to clarifying the standard. When reviewing a decision by a condominium association’s board of directors, a lawyer should probably allege all substantive and procedural flaws in the association’s decision-making process to avoid missing a successful defense to any of the above standards.

 

Receivership for HOAs and Condominiums

Receivership for HOAs and Condominiums

When associations cease to function properly, everything stops: bills go unpaid, directors resign, and critical maintenance is ignored. In this situation, the remaining board members might look to a court-appointed receiver as a way out. But should they? Consider the following points on receivership: The appointment of a receiver is a drastic remedy.

Receivership is expensive, time-consuming and someone outside the association makes all the decisions that the Board or members would make. Sometimes receivership is the ONLY remedy to break a deadlock or to get critical health & safety repairs completed. An association seeking the appointment of a receiver must have a compelling reason that would satisfy the judge that there is an immediate threat of injury, damage or destruction to property and to property values of the residences within the community association.

All other efforts have failed. An association may be required to show to the court different degrees of evidence depending on the reason for its dysfunction. In most cases, the association must show that efforts to resolve the matter were not successful: e.g., ADR failed or was refused, and there is correspondence showing multiple, but unsuccessful attempts to obtain voluntary compliance. Different events can trigger a motion to appoint a receiver. Some reasons include member apathy or fear of personal liability (no one will step forward to serve on the board), failure of board to meet its fiduciary duty (failure to undertake reasonable investigations, due diligence or to impose essential emergency assessment), or in a small complex with an even number of units, a tie-vote precludes the passage of a special assessment to fund critical health & safety repairs to structures.

It is expensive, the association loses control, and the court directs the receiver to perform all necessary work. The court may impose assessments, and the law requires a receiver to make monthly reports and to file documents with the court. Both requirements add to the cost of the receiver (usually an attorney), who already charges by the hour to do the work that a volunteer board did before the receiver was appointed. How long does it last? The receiver will stay in place until the problem(s) is solved to the satisfaction of the court.

Rules Enforcement

A Focus on Covenant Enforcement

In practically every discussion of topics related to HOA governance, it is important to remember that one size does not fit all.  Consider how the following factors can define the simplicity or complexity of covenant enforcement:

  • State laws vary widely such as board authority versus membership votes to adopt or amend governing documents, rules and resolutions, requirements for hearings and limitations on fines.
  • Covenant/rule violations are less personal when consistently enforced by a management company based on written procedures and policies adopted by the board.  Enforcement may be interpreted more personal for self-managed boards.
  • Covenant/rule enforcement is significantly more challenging when there is a legacy of non-enforcement or selective enforcement.
  • Issues vary by type of association.  Condominiums and townhomes frequently deal with issues of noise and parking.  Single-family associations on the other hand deal more frequently with home additions, fences, landscaping, and playground equipment.

Covenant/Rule enforcement is one of the most difficult aspects of running a homeowners association.

The Board has a duty to reasonably enforce the covenants and rules, and avoid risking liability to the board, committee members or to the association. At the same time, board members are residents with neighbors and friends in the community.  Covenant enforcement can result in personal attacks, disharmony, and polarization.

Enforcing the association’s covenants/rules can cause destructive emotional conflicts in associations. Two fundamental undercurrents collide:

  1. It is my land, and nobody can tell me how I can use it.
  2. The use of one’s land affects the neighbor’s rights and the rights of subsequent purchasers.

Violators can become emotional about the enforcement action taken. Neighbors can become emotional about a lack of enforcement action taken.

Why Have Rules

  • Protect the property values and assets of the community.
  • Required by the governing documents.
  • Legal Obligation – A board and its individual members are considered agents of a corporation and are liable for the actions of a nonprofit organization.
  • Avoid court rulings against the association and expensive legal fees for poorly developed or enforced rules.
  • Promote community harmony.

Who Breaks the Rules?  Violators can be lumped into four categories:

  • Uninformed homeowners – This frequently results with first-time homebuyers who are not familiar with the HOA concept, to experienced but apathetic homeowners, to culturally diverse communities where knowledge and language barriers compound issues. Use educational opportunities such as a welcoming brochure, email, and website to inform.
  • Procrastinators – Use procedure and persistence.
  • Hardship cases – often willing to remedy the violation when they understand the escalating costs of enforcement and that the associations may be willing to waive the fines for compliance or arrange a payment plan.
  • Defiant homeowners – a threatening initial communication will often result in a defensive and threatening response.  Do not confront.  Follow procedure and try to prevent escalation.  Be prepared to consult with the association’s attorney.

In all situations, the association should open the door to establishing communications and expressing a desire to work together to address the issue.

Two Types of Rules

Architectural Guidelines typically apply to the exterior appearance of the property.  Some examples:

  • Fences
  • Decks & Patios
  • Sheds and Outbuildings
  • Boat & RV Parking
  • Satellite Dishes
  • Mailboxes
  • Exterior Colors
  • Building Materials
  • Pools
  • Playground Equipment
  • Landscaping

Rules typically apply to issues where the behavior of one resident, tenant, or visitor has an adverse impact on a neighbor.  Some examples:

  • Use of Common Areas
  • Pet Restrictions
  • Parking
  • Solicitation & Yard Sales
  • Garbage & Trash
  • Noise
  • Leasing Restrictions
  • Age Restrictive
  • Single Family Use
  • Residential Use/Business Use

Inspections

Without regular inspections, covenant violations often go undetected which makes enforcement more difficult.  Sometimes a delivery of building materials and knowing that an architectural review application has not been approved is sufficient to inquire.  Sometimes the scope of work is expanded without approval.  The board, architectural review committee and management company, should watch for any new construction activity and respond immediately.  Emotions will be elevated if a homeowner is advised that a project cannot proceed and may have to stop completely.  In extreme situations, it may be necessary for the association’s attorney to file an injunction stopping work.  The board should also know it is authority to enter private property in order to inspect.

Sources of Authority

As a Board Member or Director of a homeowner association, you have certain powers, duties, and authority that are required in most cases by federal and state laws; local ordinances, and association documents.  This includes covenant and rules enforcement.

Liability of Corporate Boards of Directors

What liability do corporation board of directors members have in their board positions? Not as much as you might expect. Corporate board members have a good deal of latitude within the scope of their duties as corporate board members. Board members must be free to act in the interest of the shareholders in order to run the association in the best way they see fit.  That said, most boards purchase Directors and Officers insurance (D&O) to protect themselves and the association against lawsuits.

Boards should not become involved in neighbor versus neighbor disputes.  Whenever possible, the Board should refer enforcement of certain covenant violations to local or state authorities.  Municipal code enforcement of abandoned cars and animal control are two examples.

Avoiding Lawsuits & Defenses for Failure to Enforce the Covenants/Rules

Ultimately, an association’s approach to covenant enforcement is critical. The association should ensure that it timely, consistently and uniformly enforces its documents, including the covenants and restrictions. Associations should understand the failure to timely, uniformly and consistently enforce the documents, subjects the association to defenses which could preclude enforcement, both concerning the individual case at hand as well as future cases. As such, an association which postpones or allows deviations from the requirements of its documents is putting itself and its future enforcement actions in jeopardy. Many associations fail to realize that significant defenses can arise by virtue of their failure to enforce their documents timely, uniformly and consistently. Such defenses include, but are not necessarily limited to the following:

  • Laches – which in layman terms means simply by virtue of the passage of time, the association’s rights may become stale and unenforceable (i.e., if the association fails to timely enforce a provision, it may lose its right to enforce it);
  • Selective Enforcement – which in layman terms means the association should be precluded from enforcing against Mr. Jones that which it does not enforce against Mr. Smith.
  • Waiver – which in layman terms means a relinquishment of a known right (i.e., the association must have a right and knowingly and voluntarily relinquish the right)
  • Estoppel – which in layman terms means in fairness, in equity, the association should be precluded from enforcing a provision by virtue of some previous action or potentially some inaction.

Check Your Documents for a No Waiver Clause

Many association documents have language that states in no event shall the Association’s failure to enforce any covenant, restriction or rule provided for in the Declaration, the Bylaws or the Rules constitute a waiver of the Association’s right to later enforce such provision or any other covenant, restriction or rule.

Other Enforcement Measures

  • Suspension of Voting Rights
  • Suspension of Use of Recreational Facilities and Common Areas

Use of Government Agencies to Enforce

  • Health Department for multiple families in a single unit
  • Inspections & Zoning for fence or sheds, setback requirements, commercial use of residences, abandoned vehicles, building permits
  • Police for traffic on public streets and possibly towing
  • Fire Department for parking that interferes with fire lanes;  also, hazardous materials
  • Animal Control for lease laws, waste removal, number of pets, nuisance, dangerous pets, exotic animals

Avoiding Covenant/Rule Violations

  • Education and Communication is Key
  • New Member Welcome Package
  • Email Reminders
  • Websites
  • Reminder enclosure in mailed annual meeting notice and assessment increase notice.
  • Lease Requirements & Educating Tenants
  • Review and amendment of governing documents for outdated and conflicting provisions.

Solutions for Associations That Have Failed to Enforce the Covenants/Rules

A common scenario is the self-managed association that has over time neglected to set rules and consistently and effectively enforce them.  The appearance of the community has crossed a ‘threshold point’ where residents frequently complain.  The association may be operating without an active board.  Typically, a few residents are encouraged to run for office, and a new board is elected with a mandate to ‘straighten things out”.  This is a difficult process; however, it only becomes more difficult if unaddressed over time.

Suggestions:

  • Conduct an informal inspection of the community and make a list of violations.
  • Review the association’s documents with particular attention to approved rules and policies that have been previously distributed to residents.
  • Consult with an HOA attorney regarding laws that may have changed and the risks/rewards and costs of enforcement.  For example, a board or architectural review committee that failed to respond to a written request in a prescribed time frame may be unable to enforce the covenant/rule.
  • Inform the residents with a Notice that the Board is Reviving Overlooked Rules

The Notice should address the following:

  • The value to the community of having rules
  • That previously overlooked rules will once again be enforced in a fair and consistent manner.
  • List those rules that will be enforced and provide copies of rules that have been previously adopted.
  • That rules will generally not be enforced retroactively.  Consult with an attorney regarding retroactive enforcement.
  • Provide reasonable grace periods based on the type of violation for residents to comply with the revised rules.

Summary of Recommendations

  • Educate residents with periodic email reminders.
  • Conduct regular inspections.
  • Review the governing documents with regard to architectural control.
  • The association should maintain a book of adopted resolutions and rules that are supported by meeting minutes.
  • Utilize the resources of a management company and or attorney who is experienced in homeowner association laws for your state.
  • Associations should adopt a specific covenant enforcement procedure via a resolution.
  • Associations, using the adopted covenant enforcement procedure, should uniformly, timely and consistently enforce the covenants/rules regardless of the violation and regardless of the violator.
  • Adopt resolutions or rules where needed that specify specific policies for covenant/rule enforcement.
  • Maintain D & O Insurance and consult with your agent regarding exposure to ‘exclusions.’

 

Drafting Rules

 

Although many may not realize this, but drafting rules is a form of art.  It is an art in the sense that you have to know when it is too much, when it is too little, when it needs clarification, and when it conflicts with the law.  For this reason, it is always recommended that draft rules be reviewed by an association’s attorney prior to finalization.  Unfortunately, however, this does not always happen, and associations may find themselves in hot water attempting to enforce unlawful, or otherwise unenforceable, rules.

To assist you with the preparation of an initial set of rules, we have compiled specific examples and tips of what NOT to do:

  • Do NOT write rules that conflict with provisions of your declaration, bylaws, or articles of incorporation:

Example:

Declaration provides:

All parking spaces in the common area parking lot must be designated as guest parking and may not be utilized by owners.

Rule provides:

No owner may park in the common area parking lot unless he/she has obtained prior written approval from the board.

  • Do NOT write rules singling out children:

Examples:

⇒ No child under 14 may be on common area after 8 p.m. without adult supervision.
⇒ All tricycles and toys must be removed from common area after use.
⇒ Children may not run around or be involved in horseplay in the pool area.

  • Do NOT write rules containing unclear or ambiguous terms:

Examples:

⇒ No unsightly objects may be kept on decks.
⇒ No offensive behavior is allowed in the pool area.
⇒ All commercial vehicles must be properly screened from view.

  • Do NOT write rules that are unreasonable:

Examples:

⇒ No owner may retain a contractor without prior board approval.
⇒ Garage doors may only be open when entering and exiting the garage and may not be open for more than 15 seconds.
⇒ Absolutely nothing may be kept on patios or decks.

  • Do NOT write rules that conflict with State or Federal laws:

Examples:

⇒ No satellite dishes or other antennae may be installed on townhome roofs.
⇒ In the event, an owner shall violate these rules, and an immediate fine of $100 will be imposed.
⇒ No signs or flags of any kind may be placed on the lots.

  • Do NOT write rules treating certain religions differently than other religions:

⇒ Christmas lights and decorations may be put up 45 days before the holiday and taken down 30 days after the holiday.
⇒ The only religious activities the clubhouse may be utilized for are events sponsored by a local church.
⇒ No religious activity may be performed in the clubhouse, except that one Christmas mass may be held in December of each year.

Board of Directors

Most homeowners associations in California are formed as non-profit corporations.  A corporation is governed by and acts through its Board of Directors.  (See, Corporations Code Section 7210.)  The Board’s rights and powers as set forth in its governing documents are subject to the Corporations Code and the Davis-Stirling Common Interest Development Act.  (See, Corporations Code Section 7210 & Civil Code Section 1363.)  In what can only be described as a little knowledge is not always a good thing, confusion often arises as to the validity of the Board’s action when homeowner members perceive that a Board’s decision was not made in accordance with Robert’s Rules of Order.  Assuming that the Board had statutory authority to make such a decision, the action is not invalidated simply because of a purported breach of parliamentary etiquette.

Contrary to popular belief, “[t]he law does not require formal procedures during board meetings.  Nevertheless, board meetings are likely to be more productive and less frustrating for participants, if formal procedures are adopted and followed.”  (See, B.E. Bickel, 2012 Condominium Bluebook, p. 44.)  For this reason, many homeowner association Bylaws provide for the use of Robert’s Rules of Order, or some other form of parliamentary procedure, to be used during Board Meetings.  Unfortunately, confusion as to the scope and application of Robert’s Rules of Order sometimes presents an obstacle to the expeditious conduct of business.

For example, there is a common misperception that, pursuant to Robert’s Rules of Order, the President of the Association cannot vote on an action unless it is necessary to break a tie.  As pointed out on The Official Robert’s Rules of Order Web Site, “Frequently Asked Questions,” “it is not true that the president can vote only to break a tie.  If the president is a member of the voting body, he or she has exactly the same rights and privileges as all other members have, including the right to make motions, to speak in debate, and to vote on all questions.”  (Emphasis added.)

In a homeowners association, the President of the Corporation is typically a member of the Board of Directors.  Pursuant to Corporations Code Section 7211(c), “[e]ach director shall have one vote on each matter presented to the board of directors for action.”  As the President is part of the voting body, he or she can make motions, speak in debate, and vote on all questions unless the Bylaws expressly provide otherwise.

Not surprisingly, there is no authority that allows a member to repudiate an action of the Board that was made within the scope of its discretion vested by its governing documents, the Corporations Code, or the Civil Code simply by asserting a breach of Robert’s Rules of Order. “The law respects form less than substance.”  (See Civil Code Section 3528.)   The use of parliamentary procedure is intended to facilitate the orderly conduct of a Board meeting, as opposed to frustrate the operation of the Association.  In raising and ruling on parliamentary objections, common sense and fair play should be overriding factors.  If the Board has authority to act, and the appropriate number of directors as dictated by the governing documents approve the resolution, the action of the Board should be upheld.