Andy Sirkin | 12-07-2013
What is the difference between an incorporated HOA and an unincorporated HOA?
The law allows a homeowners association to be either incorporated or unincorporated. An incorporated association has a legal identity that is separate from that of its members, just as Microsoft has a legal identity that is separate from its shareholders. Unlike Microsoft, which is a for profit corporation, an incorporated homeowners association is a non-profit mutual benefit corporation which means that its powers are limited to those normally associated with a homeowners association, and it is exempt from certain governmental fees and taxes.
Traditionally, homeowners associations have been incorporated to protect owners from responsibility for association debts, losses and liabilities. But California law extends most of these protections to owners of unincorporated associations provided the associations have proper insurance. Under current law, the advantages of incorporation are some (very limited) additional protection from owner liability, ease of opening association accounts with certain banks and vendors, and qualification of the units or lots for mortgage loans from lenders that require an incorporated association. Balanced against these advantages are the costs of forming the corporation, the burden of annually filing a form with the Secretary of State, and additional procedural formalities such as having officers and directors, and conducting formal meetings.
An unincorporated association can be incorporated by its owners at any time. The process of incorporation involves amending the governing documents, preparing Articles of Incorporation, and filing with the Secretary of State.
How are HOA powers distributed between the owners, the board, the committees, the officers, and the manager?
In general, the distribution of power and authority within the homeowners association is determined by the governing documents, but the law contains some restrictions on how the governing documents can distribute this power. The law presumes that most association power and authority will be exercised by the board without the direct involvement of the owners. Where the governing documents simply give the association power to do or approve something without specifically requiring owner approval, the power can be exercised by the board without owner approval.
The law imposes very few restrictions on how much power the documents can give the board.
The following is a partial list of the acts which always require owner approval:
- Amending the CC&Rs (with some exceptions as described above
- Increasing regular assessments more than 20% except in emergency circumstances (defined as an extraordinary expense required by an order of a court, necessary to alleviate a threat to personal safety, or necessary for a repair that could not have been reasonably foreseen by the board);
- Imposing special assessments during one year that total more than 5% of the budgeted expenses for that year except in emergency circumstances as defined above; and
- Removing a director without cause.
In practice, most governing documents also require owner approval for a variety of major decisions including changing the items which the association is responsible to maintain, changing the owners’ assessment percentages, changing the unit or lot boundaries, and imposing leasing or resale restrictions.
The board has complete control over all committees, officers and managers. This means that the board decides who will serve in these capacities, and what authority they will have, subject only to restrictions in the governing documents. The board retains the power to override the decision of any committee, officer and manager.
Can the owners override a decision by the board, a committee, an officer or the manager?
In general, the owners cannot override a board, committee, officer or manager decision. If the owners are unhappy with a board decision, they can convene a meeting, vote to remove one or more directors, and hope the replacement directors make a more satisfactory decision. If the owners are unhappy with a committee, officer, or manager decision, they can attempt to convince the board to overrule it or, if that does not work, vote to change the board. Alternatively, one or more owner could challenge any board, committee, officer or manager decision through litigation or arbitration on the basis that the decision was not reasonable, made in good faith, and/or in compliance with formally established policies or procedures. One notable exception to the general rule is that owners may convene a meeting and overturn a new Rule or Rule change enacted by the board.
How should HOA decisions be made?
The first step in homeowners association decisionmaking is determining whether the course of action under consideration would be reasonable and in the best interests of all owners. If this question can be answered affirmatively, the next step is to review the governing documents and the Condominium Bluebook with the following questions in mind:
Is a particular action or decision required under the governing documents and/or the law?
Is a particular procedure for making the decision required under the governing documents and/or the law?
Does the decision under consideration require an owner vote?
Questionable action should be reviewed by an attorney. If the action could have a significant impact on one or more owners, it is wise to get a written opinion of counsel before taking action upon which the board can rely in the event of a legal challenge. A legal opinion may protect the board from liability for an erroneous decision by allowing it to assert reasonable reliance on the advice of counsel as a defense. But remember that the failure of an association to follow the advice of counsel or its own internal decision-making procedures will make inappropriate action vulnerable to a legal challenge.
Who can write checks and sign contracts for the association?
The law states that the signatures of at least two directors, or of one officer and one director, must be required for withdrawals from the association reserve account(s). Withdrawal requirements for other association accounts are usually set in the governing documents, but if they are not, the requirements can be established by the board.
The decision of whether the association should enter into a particular contract is made by the board unless the governing documents require owner approval, or unless the board has delegated the decision to an officer, committee, or manager. The law is currently unclear regarding how many officers, and which officers, must sign the contract in order for it to be valid.
Until this issue is settled by the courts, it is prudent to have the contract signed by two officers:
(i) the president or vice president, and (ii) the secretary or chief financial officer.
The law provides that a contract signed by an officer can be binding even if there was never a proper association decision to enter into it. To avoid liability for non-approved contracts, the board should exercise extreme care in selecting officers, and provide written notice to all of its vendors that no contract should be considered valid unless the vendor receives a board resolution authorizing the agreement. A sample board resolution is provided in The Condominium Bluebook.
Can directors and/or officers be paid for their service?
While it is legal to pay directors and officers for their service, it is not a good idea. Under the law, volunteer directors and officers of properly insured homeowners associations face no personal liability for their decisions absent intentional fraud or self-dealing. Paid directors and officers can face personal liability for bad judgement and unintentional mistakes.
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