HOMEOWNERS ASSOCIATIONS: THE DETAILS ARE IMPORTANT
Friday, August 25th, 2017
A recent court of appeals opinion serves as a wake-up call to homeowners associations that may be operating too informally. If the HOA is a corporation, it has to act like a corporation, or its actions may be void.
Germantown Manor consists of 29 lots, 14 of which were still owned by the original developer. Residents of the neighborhood created a homeowners association, as many neighborhoods do. The HOA began collecting fees in 2004 and later became a non-profit corporation in 2008. The corporate HOA first elected its board of directors in 2014. Despite owning half of the lots in neighborhood, the developer never paid any fees to the HOA. The HOA sued the developer for the unpaid fees.
Before the court ruled on the amount owed to the HOA, it had to determine if the HOA had the legal authority to collect fees from the neighborhood’s residents. Since the HOA was incorporated, it was required to follow the rules applicable to corporations. Tennessee law requires corporations to have a board of directors. The board of directors makes decisions for the corporation.
Although the HOA had been collecting fees since 2004, the court ruled that it was only legally allowed to collect fees after the board of directors was first elected. Without a proper board of directors, the HOA corporation had no power. The trial court entered a judgment against the developers for the 2015 and 2016 fees only and the court of appeals upheld the ruling. The fees prior to the 2014 board election were invalid.
Although the HOA won, it received significantly less money than it wanted. This is because it did not follow the rules applicable to corporations. An incorporated HOA, no matter how small, must properly elect a board of directors and follow other legal procedures. In this case, the HOA’s failure to follow the law cost is a significant amount of money.