Moretz Law Group - Community Associations and Business Lawyers

Tuesday, July 23, 2019

Agency Law and Your HOA or Small Business

A client recently posed this question:

"If a singular board member of an HOA incorrectly tells an owner that a requested fence installation is approved, does it bind the HOA?  I recently had a board member tell an owner he was approved incorrectly."

Seems simple, right? If an architectural review request did not go through the right procedure and was not properly approved by the board or the Architectural Review Committee (aka the "ARC"), then no approval can be valid, right? Or, if an employee signs a contract on behalf of a company, but that employee had no authority to do so, the company is not bound by the contract, is it? Well, it depends.

This question involves the legal theory of agency. Agency law addresses under what circumstances one person (the "agent") can legally bind another person or an entity (the "principal"). Unfortunately, agency issues come up all too often in the practice of HOA and small business law because HOAs and other small businesses are generally run by volunteers or others without legal training who sometimes speak when they should not.

(Note: We are not talking about the law applicable to real estate "agents" here. While the law applicable to real estate agents, more commonly called "brokers" nowadays, certainly includes agency law, we are speaking here of agency law in general - i.e., the legal ability of one person to legally speak or act on behalf of another person or entity - and not with regard to any particular type of agent.)

There are generally two types of agency authority: actual authority and apparent authority. Actual authority is of two types - express and implied. From an HOA perspective, actual authority occurs, for example, where the board has met and considered whether to approve a fence request, has approved it, and has authorized the president of the HOA, as its agent, to communicate the approval to the homeowner. The president has actual, express authority to legally bind the HOA, the principal, as its agent in communicating the approval to the homeowner. The approval is binding on the HOA.

Implied actual authority to legally bind an entity as its agent is the authority that naturally and reasonably comes with an officer's position in a company. For example, the president of the company or HOA has the natural ability to sign checks, issue purchase orders and the like in the ordinary course of business, and third parties who know that person is in fact the president need not worry whether the president has the actual express authority to do such things - they can rely on his or her implied authority as the holder of that office.

Apparent authority is more problematic. This is the authority that a person appears to have from their words and actions, and which may appear to be reasonable to a third party, but which may or may not have been authorized by the board of directors or other governing body of the entity. 

The problem with apparent authority is that an agreement or commitment entered into with a third party by an agent of an entity who may have no authority may still be binding on the entity even if completely unauthorized, if the agent had apparent authority to do so in the eyes of the third party.

Apparent authority will arise when the agent appears to have authority and holds themselves out as having it, and when such authority would not be unreasonable for he or she to have when viewed by the third party, and when the third party has no reason to know that the agent may not in fact possess such authority. If the third party then changes their position in reasonable reliance upon the commitment of the agent - for example, spends the money to erect the fence in reliance upon the approval - the commitment of the agent will then be binding upon the principal even if completely unauthorized by the principal. This is also an example of the legal doctrine of "estoppel".

Back to our situation with the improper fence approval. This is how I answered my client:

"If it was just a board member and not the president or a vice president, or the head of the ARC, communicating the fence approval improperly, I would say it was clearly not binding upon the HOA. But the general rule of agency is, did the recipient have a reasonable belief that the speaker was authorized to bind the entity? If so, then the entity can be bound notwithstanding that the speaker did not have actual authority. Sorry to answer with an "it depends", but that is the law. Officers generally have apparent authority to bind the entity, even if not actual authority. So based on only the facts you gave me, the answer is no. But there could be more to the story..."

You can see how apparent authority can be an issue for HOAs and other small businesses. It is important to have clear roles established for officers, and where certain responsibilities have been delegated to committees, draw up a written committee charter which clearly specifies what that committee can and cannot do. Can the ARC chairperson communicate approvals or disapprovals to applicants? Bad idea. Have that done through the board, which is the governing body of the HOA. Make clear to officers what they can and cannot do without express board authority. And make sure that board and committee members know that serving on a board or committee gives them no authority whatsoever - only the officers of the company generally have authority to legally bind the company in any way.

Be in touch if you have questions or concerns regarding agency and your HOA or small business.



Monday, December 17, 2018

Update on New South Carolina HOA Legislation - Don't Miss the January 10 Deadline!


While this is generally a North Carolina HOA law blog, we represent many South Carolina HOAs as well, and as most of them are aware by now, the new South Carolina Homeowners Association Act was enacted on May 17th, 2018 and was the first major legislation in South Carolina to regulate homeowners associations. The major focus of this new law is to provide owners access to all of a community’s governing documents and rules, regulations, policies and procedures. Obviously, this applies to HOAs located in South Carolina only.

On or before January 10, 2019, all “governing documents” and rules and regulations must be recorded with the register of deeds’ office to remain enforceable. All governing documents other than bylaws must be recorded already under present law, so no change there.

All “rules and regulations”, which presently need not be recorded, must now also be recorded by January 10 to remain enforceable. This includes:
o   Bylaws;
o   Rules and regulations;
o   Architectural guidelines;
o   Any other policies and procedures, such as collection policies.
o   Basically, anything you want to be enforceable against a homeowner or a lot or unit in your HOA.
  • In addition to the recording requirement, all “rules and regulations” must be made accessible to members upon request, or posted conspicuously on the common areas, or posted on the community’s website.
  • Any amendments to any of the above made after January 10 must be recorded by January 10 of the year following their adoption. 
  • The act also requires the South Carolina Department of Consumer Affairs to collect and publish online data regarding complaints by and against homeowners associations. It will provide copies of any complaint to the HOA and/or the owner. The Department will publicly report the complaints in a searchable database.
  • The act provides that small claims court is now a proper forum for resolving disputes between homeowners and HOAs.  
  • Finally, the act requires sellers of homes in HOAs to provide additional disclosures to prospective buyers.

If you're a South Carolina HOA, make sure you don't miss the January 10 deadline!
  • Contact your attorney or management company and get your documents compiled and to your county Register of Deeds or Clerk of Court (depending on how your particular county handles these types of recordings).
  • You should also post all of these same documents in PDF form on your website.

Call us if we can help! Good luck!

Thursday, June 21, 2018

The Wild West, Tamed a Bit


Although far from comprehensive, the South Carolina legislature has successfully taken its first steps to regulate homeowners’ associations.   The South Carolina Homeowners Association Act (“Act”) became official on May 17, 2018 when the governor signed it into law. Up to this point, South Carolina has never had a comprehensive law governing homeowners’ associations. Until now, there was only the South Carolina Horizontal Property Act, which governs condominiums, and the South Carolina Nonprofit Corporation Act, which deals with operational issues within nonprofit corporations and generally applies to homeowners’ associations since they are non-profits.


The Act places new requirements upon homeowners’ associations. It defines a homeowners’ association as any entity developed to manage and maintain a planned community or condominium in which there is a recorded declaration requiring a person to pay assessments.  This definition covers all mandatory homeowners’ and condominium associations.



The Act requires every homeowners’ association to have recorded its declaration and bylaws by January 10, 2019 in order for those documents to remain enforceable.  This does not present a new requirement for declarations; declarations already had to be recorded to be enforceable.  The requirement to record bylaws, however, is new.   Most HOAs do not typically record their bylaws, so those whose bylaws are not presently recorded will need to do so prior to January 10, 2019 (some declarations have the bylaws attached as an exhibit when they are recorded and in that case the bylaws will not need to be re-recorded independently, unless they have been modified since they were first recorded.) The unspoken requirement is that the bylaws must be formally adopted by the HOA, which is sometimes an overlooked corporate formality during the rush to incorporate an HOA. By way of comparison, North Carolina does not require HOA bylaws to be recorded.  

A note regarding what we mean by the term “recorded”. This term means filed with the county office which oversees land records.  Originally known as the “Register of Mesne Conveyances”, the name of the land records office in some counties is known as the Register of Deeds, or in some counties, the Clerk of Court’s office records land records (“mesne” is an Old English term referring to the office which records the documents making up the chain of title for a particular piece of real estate). Upon recordation, a recorded document serves as public notice of the contents of that document to all the world.

In an unprecedented move, the Act also requires HOA rules and regulations to be recorded by January 10, 2019 to be enforceable, and by January 10 of each successive year to remain enforceable. Somewhat confusingly, the Act states that rules and regulations are effective at the time they are properly adopted by the HOA, but to remain effective as of January 11 and thereafter, they must be recorded by January 10 of each year. So again, this provision does not affect the current enforceability of an HOA’s current rules and regulations, but HOAs must record them by January 10th of each year. And, given that they will now be a public record, HOAs may now wish to be more careful in the wording of their rules and regulations, and most likely, make sure they have been vetted by legal counsel to ensure, for example, that they do not contain provisions which could be deemed to be discriminatory. 

The rules and regulations must also be made accessible to members.  The Act allows such accessibility through a website maintained by an HOA, or by posting the rules and regulations in a conspicuous area within the common areas. This makes sense since arguably rules and regulations are not enforceable if there is no way for members to know of them.

Unincorporated homeowners’ associations, a rarity nowadays, must now provide members with notice at least 48 hours in advance of a meeting where the budget is to be increased in a given year. Incorporated HOAs are presently subject to lengthier notification requirements, and are therefore exempted from the 48-hour notification provision.

The Act authorizes Magistrates Courts (generally referred to as “small claims court”) to hear HOA disputes, provided the dispute does not exceed the jurisdictional limitation of small claims court, currently $7,500.00. This is new, as it was previously uncertain whether the very limited subject matter jurisdiction of small claims court allowed HOA disputes to be heard there.

The Act authorizes the South Carolina Department of Consumer Affairs to produce and disseminate educational information to the general public about homeowners’ associations and rights, responsibilities and the roles of homeowners’ associations, boards of directors and homeowners. The Department is directed to collect and publish data about homeowners’ complaints against homeowners’ associations, or homeowners’ associations’ complaints against homeowners, including the HOA name and any property management company. Notably, personal identifying information of the complaining party may not be published, allowing the complainant to remain anonymous while spotlighting the HOA and management company publicly, which we hope does not end up becoming a harassment tactic for disgruntled homeowners.

BOTTOM LINE: As with most new laws, time will tell how effective this new legislation is at enabling homeowners to educate themselves about their subdivision’s governing documents. In general, we are big believers in transparency and are in favor of HOAs’ governing documents, including rules and regulations, being publicly available and easily accessible. We are glad that the South Carolina General Assembly did not seek to regulate the content of declarations, bylaws or rules and regulations, but only seeks to ensure that they are publicly available. We hope this legislation may silence some of the dubious complaints that we sometimes hear that a member did not know about the homeowners’ association or what was required for compliance. It should also result in more accountability for board members. We query whether the reporting of conflicts between owners and their associations will have a positive effect. At least in our experience, a single or small group of vocal complainers may give the appearance of systemic disagreements; however, in reality, most interactions between homeowners’ associations and their members are positive.

Please stay tuned as this new law is implemented, and of course feel free to contact us to discuss any of these issues and steps needed for compliance, or any other issues affecting your South Carolina or North Carolina HOA. 

The full legislation is available here.

Saturday, March 3, 2018

Caselaw Update: Supreme Court Reverses Willowmere Decision re HOA's Lack of Standing

Caselaw Update! 

The North Carolina Supreme Court, in a decision filed on March 2, 2018, REVERSED the Court of Appeals' decision discussed below. You can read the Supreme Court's decision here. As we discussed in our blog post below, which we posted on December 14, 2016, we disagreed with the Court of Appeals' reasoning, and thankfully the Supreme Court did also. The Supreme Court confirmed the longstanding rule that only members of an association can contest whether the board properly followed its own internal procedures in making the decision to bring a lawsuit - failure to follow the bylaws or other requirements cannot be used by the third-party, non-member defendants to claim that the association did not have standing to bring the lawsuit. In this case, two Charlotte-area homeowners associations can now proceed with their lawsuit against the City of Charlotte for approving a rezoning which would allow lower-income housing next door to the two associations.

However, our bottom line below still stands -  while it may sometimes be a pain to follow board meeting and voting procedures, a cavalier attitude can come back to bite you.  In this case, years of litigation and many tens of thousands of dollars in legal fees were wasted due to the failure to follow simple procedural steps. Don’t let that happen to your HOA.


Thursday, February 22, 2018

NC Community Association Mediation Program (CAMP) Now Available

For homeowner in North Carolina homeowners associations, access to a mediation process, for their HOA-related grievances, recently became much more accessible.



Background
In 2013, the North Carolina legislature passed a law encouraging homeowners associations and aggrieved members to agree to voluntary, non-binding mediation to resolve HOA-related disputes (see our 2013 blog discussing the law here).  The law has mostly gathered proverbial dust, and we have not actually seen any owners or HOAs avail themselves of it.

Recently, the North Carolina Chapter of the Community Associations Institute, a group which gathers no dust and is deeply involved with educating homeowners and property managers throughout the state, began offering mediation services through its new CAMP program (CAMP stands for Community Association Mediation Program).  In full disclosure, we as a firm are members of CAI-NC, and we strongly believe in its mission, education and advocacy. We are excited that this new program may provide a cost-effective means for working out HOA disputes without the necessity of court proceedings.

CAMP Program Details
The program offers to locate an experienced mediator with significant HOA experience, who is either a professional community manager or an attorney, to preside over an owner-versus-HOA dispute. 

The cost for this process is $500.00, which is evenly split between both sides. The fee ensures a minimum, 2-hour mediation, although the parties may engage the mediator for longer time periods, paid by the hour.  


Neither party is required to hire an attorney for representation during the mediation, although the parties may be represented by counsel if they wish. 




How Parties Enter the CAMP Program
Since mediation is voluntary, both parties must agree to mediation by filling out an online application on the CAMP webpage. Each party must pay its half of the mediation fee at this time.  

Upon submitting the required forms and paperwork, a mediator will contact the parties within thirty days. The mediator is permitted to speak with the parties before the mediation commences, and to hold separate meetings or discussions with the parties prior to or during the mediation. 

The mediator may also request the parties to provide a written statement summarizing the dispute and to request the parties to submit all documents supporting their claims and the dispute.

All information received by the mediator will remain confidential.  The mediator’s role is that of a settlement facilitator; the mediator does not render a decision about which side has the better argument or would win the case if a lawsuit were filed, but assists the parties in reaching a mutual settlement.

It remains to be seen whether the CAMP program will breathe new life into the statutory mediation program, although hopefully it will result in more disputing parties finding “common elements” to resolve their disputes. If you have any questions as to how your association could use the CAMP program, or any other HOA-related questions, please contact us.

Monday, February 12, 2018

8 Homeowners Association Collection Laws

It's HOA collection season, so our HOA Ninjas want to remind you of the 8 laws of HOA collections to help your homeowners association help its members pay their assessments on time. 

Following these laws will collect more dues more quickly, and keep your HOA in compliance, so you'll have the best chance to win any potential court cases that may arise.

HOA Collection Laws

  1. Collect early and often
    • Don’t delay collections in your HOA. You don’t do the HOA or the homeowner any favors if their balance mushrooms to an amount they can’t pay all at once – then payment plan costs, interest, late fees and attorneys’ fees can start to stack up, and they all hurt your association’s cash flow.
  2. Follow your policies
    • Have a written collections policy and follow it with each and every homeowner. Not only does this allow your board members to avoid pleas from their neighbors to cut them a break, but it also insulates your HOA from accusations of discrimination, which can arise when everyone isn’t treated the same.
  3. Prioritize collections
    • Someone on your board needs to be responsible for making sure collections is a regular monthly habit, and they need to be honest and accountable to the board for the numbers at every meeting. If you don’t have such a person, get professional help.
  4. Make payment easy
    • Does your HOA accept credit cards, ACH payments, personal checks, even cash? Why not? The first rule of business is to make it easy for the customer to pay.
  5. Keep contact info current
    • If your homeowners association doesn’t have current email addresses and telephone numbers for its members when they are current with their dues, take our word, members probably aren’t going to share that information when you’re in “bill collector” mode. Have a system to update contact info based on checks, emails and phone calls your HOA receives.
  6. Stay alert to clues
    • The broken window theory suggests that failing to police small crimes sends a signal of decay and lawlessness which can lead to bigger problems. Keep an eye out for homes that suddenly seem to be less-well maintained or have an increase in violations. These could signal changes in the home that could impact your association economically.
  7. Show respect and expect respect
    • Every HOA member is a neighbor and deserves respect from the board, property managers and attorneys. Showing respect and understanding can be one of the best ways to get a sum collected and turn a potential adversary into an advocate – we’ve even gotten thank-you notes from homeowners we’ve collected on.
  8. Never give your opponent ammunition
    • Violating fair debt laws or failing to treat all homeowners equally can land your homeowners association in hot water that will cost you thousands in attorneys’ fees to escape. Always follow all laws and your covenants, bylaws and policies to a T – you’ll be glad you did in the off chance the case does wind up in court. Just remember everything you learned in kindergarten and you’ll stay clear of most regulatory violations.
Following the above laws won't guarantee collection, but they will make the process stronger, more accountable, and more successful. If you have any questions, give us a call at (704) 721-3500, or fill out the form on our website. 

Friday, January 19, 2018

Case Alert: A Very Un-Jolly Christmas for One North Carolina Homeowners Association

The North Carolina Court of Appeals delivered a lump of coal to one homeowners association this winter.  In McVicker vs. Bogue Sound Yacht Club, Inc., available here, which came out on December 20th, the Court of Appeals ruled that a homeowners association had exceeded its authority when it attempted to collect a construction bond from an owner, and again when it fined that same owner for failing to timely deposit the impermissible construction bond. 

The facts appear to be relatively straightforward.  The homeowners, not realizing that they had to obtain prior approval, hired a contractor to clear their lot of brush and other debris.  As the clearing was underway, the association notified the owners that the clearing required prior approval from the architectural review committee. 

CASE DETAILS

At issue was one of the policies enacted by the board of directors which required any owner, as a condition to the architectural review committee’s consideration of any architectural plan, to submit a $250 construction bond.  The construction bond was intended to offset the costs of any damage to the community’s common areas. The bond was not provided for in the association’s restrictive covenants, but was apparently adopted by the board as a part of its architectural approval process. Such bonds or deposits are not necessarily unusual; we know of some high-end associations which charge as much as $10,000 as a deposit to ensure compliance during the construction process.

After a violation hearing, the board of directors in this case required the homeowners to submit an architectural plan describing what they intended to do with the property and to deposit the construction bond, or face a fine of $100.00 per day.  The homeowners submitted their plans late, which the board retroactively approved.  The owners did deposit the construction bond, albeit late and “under protest”, at the time they submitted the plans.  The board levied fines for fourteen days, totaling $1,400.00 for the failure to submit the construction bond within the required time period, although the board later reduced the fine to $1,050.00.  The owners argued that the board had neither the authority to require a bond nor the authority to impose a fine for a failure to deposit the bond, since the bond requirement was only a policy adopted by the board, not a requirement explicitly set forth in the restrictive covenants.

OUTCOMES

Although the amounts of money at stake are fairly trivial, it appears that neither the board of directors nor the owners were willing to back off of their respective positions.  The homeowners lost in the trial court, however they appealed.  

On appeal, the appellate court noted that the association was without proper corporate authority to impose a construction bond in the first place.  The court reviewed the association’s declaration of covenants, conditions and restrictions, and noted that there was no explicit provision which would authorize the collection of a construction bond.    

The court cited the long-standing North Carolina law which states that a restrictive covenant is to be narrowly construed, and a homeowners association cannot expand that authority beyond the limits set forth in the restrictive covenant.  The association also argued that since it had blanket authority to govern the upkeep of the common areas, that its authority could be extended to require a construction bond since the purpose of the bond was ostensibly to protect the common areas.  

The court disagreed on this point as well:  restrictive covenants that are “clearly expressed may not be enlarged by implication or extended . . .”.   Similarly, since the association could not charge the construction bond in the first place, it could not fine the owners because they failed to timely deposit the construction bond.

Notably, there was a dissenting opinion which argued that the appellate court exceeded its scope of review, because the bond was ultimately refunded, rendering the question moot, and also that the homeowners had asked only whether the association followed proper procedures to impose the fine, not whether the association had the authority to demand the bond.  The presence of a dissent means that the case may be further heard by the North Carolina Supreme Court, if it believes the case warrants further review. 

The Bottom Line

a homeowners association is bound by the explicit authority granted to it in the governing documents, and that authority may not be expanded without amending the declaration. The proper remedy in this situation was to amend the governing documents to grant the authority to charge the construction bond. Boards of directors may, and should, adopt policies and procedures to flesh out their restrictive covenants and ensure that decisions are made in fair, uniform and even-handed ways, but in doing so they must take care not to add substantive requirements for which there is no authority in the document itself.


If you have questions about the scope of authority in your community’s governing documents, please contact us to discuss in further detail.