Homeowners Associations (“HOAs”) are associations formed, most often as non-profit corporations, to own and manage common interest developments in California. The shareholders of an HOA (or “members,” as they’re more commonly referred to) own not only their individual homes, but a piece of the common areas located throughout their development. And like all corporations in California, an HOA is considered a separate person under the law, capable of entering into contracts, suing other persons/entities, or, as this blog is intended to discuss, being sued.
So, under what circumstances might members of an HOA wish to take their HOA to court?
To answer that question, we first need to look at how HOAs are actually governed. To begin with, HOAs in California are largely governed by the Davis-Stirling Act, a series of statutes located in the Civil Code (although there are sections of other laws, such as those found in the Corporations Code, that also apply to HOAs). The Davis-Stirling Act lays out the ground rules regarding how HOAs may be formed, governed, and dissolved. In other words, all HOAs in California must abide by the Davis-Stirling Act, as well as other applicable California laws.
Each HOA in California is further governed by its own set of “governing documents,” the most important of which is the Covenants, Conditions, and Restrictions (“CC&Rs”). The CC&Rs describe not only the rights and obligations that each member owes to the other members of the HOA, but also the mutual rights and obligations between the members and the HOA itself (remember, the HOA is considered a person under the law). An HOA’s CC&Rs are, therefore, intended to address a wide scope of governance type issues ranging from the maintenance of the common areas and property use restrictions (e.g., setbacks, view rights, neighborhood “character,” architectural guidelines, etc.), to enforcement powers, the raising and spending of revenues (e.g., assessments), and dispute resolution. There are other governing documents (e.g., articles, bylaws, etc., rules & regulations, etc.), but it’s not necessary for purposes of this blog to go into too much detail about those documents.
Like all corporations that you’re probably familiar with, an HOA is governed by a board of directors elected by its members. And just like other corporations, the board of directors of an HOA is responsible for managing its affairs and conducting the association’s business. To accomplish the task of managing and conducting the affairs and business of an HOA, its board of directors typically enjoys many of the same powers that any corporation’s board of directors enjoys, such as:
• Creating committees and appointing people to sit on those committees.
• Calling and running membership meetings.
• Setting elections and selecting election inspectors.
• Adopting and enforcing architectural guidelines and rules.
• Filing lawsuits to protect the HOA’s rights.
• Defending against lawsuits filed against the HOA.
• Entering into contracts (with, for example, vendors, contractors, management companies, etc.).
• Hiring employees (e.g., handymen, landscapers, etc.).
• Hiring accountants, attorneys, architects, and other professionals to guide the board.
• Levying and collecting assessments.
• Maintaining, improving, and/or repairing the HOA’s common areas.
• Preparing and managing budgets.
Because an HOA’s board of directors is tasked with so many important obligations, the law also imposes on the board, as well as on each individual board member (also called a director), a heightened duty of care and loyalty, often referred to as a “fiduciary duty.” This fiduciary duty requires an HOA’s board of directors to act reasonably in carrying out the affairs of the association. An HOA’s board of directors must also treat all members of the HOAs fairly (i.e., an HOA can’t enforce certain rules against certain HOA members, but not others), without showing favoritism to certain members (e.g., to directors sitting on the board).
When Things Go South with an HOA
The problem is that unlike in the case of most regular corporations, for the most part, HOA boards are made up of volunteers who often have no experience running a business — especially one with millions of dollars in assets. Think about it. If a particular HOA is large (i.e., has lots of homes and common amenities), then it’s quite possible that it has extremely valuable assets. This is especially true if, for example, the HOA has amenities like swimming pools, tennis courts, club houses, parks, roads, etc.
And much more frequently than many would like to admit, homeowners find themselves dealing with board members who like to tell other homeowners what to do, or who refuse to properly manage the HOA (by failing to take care of the common areas, or by failing to make repairs to a member’s property when it is the HOA’s responsibility to do so). Sometimes boards of directors refuse to enforce the governing documents, for example by allowing one member to negatively impact the rights of another member, while other boards of directors might act arbitrarily, dishonestly, or capriciously. Often, such conduct is engineered by one or two directors who exert more influence on the board as a whole than they should. In short, sometimes board members are dishonest, sometimes they are power hungry jerks who like to flaunt their authority, and sometimes they become directors solely to benefit themselves at the expense of the other members, viewing their HOAs as their personal fiefdoms.
In all cases where one or more directors on an HOA’s board are violating their obligations under the CC&Rs, members of that HOA may sue the HOA as a whole, or in some cases, even individual board members, to compel the HOA’s compliance, and even to remove a bad director.
Internal Dispute Resolution & Alternative Dispute Resolution
With some exceptions, members cannot just decide to sue their HOAs without first trying to resolve things informally. The two most common types of dispute resolution in the context of homeowner/HOA disputes are internal dispute resolution (“IDR”) and alternative dispute resolution (“ADR”).
The Davis-Stirling Act requires HOAs to provide members with an opportunity to engage in IDR. This is usually a one-way right, meaning that while an HOA must provide a homeowner with the right to engage in IDR, the homeowner is not required to do so if the HOA requests it. Typically, however, by the time a member of an HOA is ready to sue, the member in question has already spent a good deal of time trying to address the matter internally.
For example, assume that an HOA and a homeowner are embroiled in a dispute because the HOA has demanded that the homeowner take down a shed erected in the owner’s backyard. A homeowner might try to point out that many of his/her neighbors have similar sheds and the HOA is not requiring them to take their sheds down. Such a homeowner might appeal to the HOA’s management company, and/or write emails to the board, and/or even speak up at board meetings. In such a case, the owner may decide that he/she has already attempted to address the dispute informally – i.e., that he/she has already engaged in IDR – and thus skip out on sending a formal request to the HOA’s board of directors for further IDR.
The next step is ADR. Although the Davis-Stirling Act only requires ADR prior to filing a lawsuit that is “solely for declaratory, injunctive relief, or writ relief,” more often than not homeowner/HOA disputes can be resolved through the ADR process. ADR, therefore, in addition to sometimes being required by law, often plays a vital role in helping homeowners resolve disputes with their HOAs.
For that reason, it’s typically at this point in the dispute that an HOA member will hire an attorney, preferably one familiar with the requirements of the Davis-Stirling Act, and with experience mediating disputes with HOAs.
At the very least, ADR accomplishes three things: (1) it tells the HOA that a homeowner is serious about whatever dispute is at issue; (2) it provides an opportunity for the homeowner and the board to have one on one time to hash out the dispute; and (3) both sides get to hear the opinions of an experienced, knowledgeable, and impartial mediator regarding the dispute. With respect to the latter, that’s often enough to convince a stubborn board to do what the HOA is required to do.
And in such cases, an experienced attorney will also demand that the HOA cover a homeowner’s attorneys’ fees. While the HOA is not obligated to agree to repay a member’s attorneys’ fees as part of the ADR process, attorneys representing HOAs know that if the case does not settle at ADR, and a lawsuit becomes necessary, if the homeowner prevails against the HOA in court, the Davis-Stirling Act (as well as most CC&Rs), empowers the court to award the homeowner his/her attorneys’ fees and costs.
Because ADR can so often resolve a dispute between a homeowner and the HOA (even a serious dispute) taking advantage of the ADR process, even when not technically required, often proves much more beneficial to the homeowner than to the HOA.
Filing a Lawsuit & Attorneys’ Fees
Sometimes, however, no matter how hard homeowners try to resolve things with their HOAs, a lawsuit is necessary. If the parties attempted ADR but failed to reach a settlement, or if the HOA rejected or ignored a member’s request to engage in ADR in the first place, the homeowner interested in filing a lawsuit can proceed in court, or in the case where the CC&Rs require binding arbitration, proceed with filing a demand for arbitration. And again, upon prevailing, the Davis-Stirling Act entitles the homeowner to reimbursement of his/her attorneys’ fees and costs.