By Deborah Goonan
This blog series will compare the typical governance structure of Homeowners’ Associations or HOAs (using the term generically to include condominium associations and property owners’ associations) to US local governments, as guided by the principles of our Constitutional Republic.
Your HOA is a corporation like no other
The very first thing a real estate buyer should know is that HOAs, with very few exceptions, are set up as legal corporations. Even though HOAs perform many functions of a local government, they are not municipalities. Therefore HOAs are not governed as cities or towns. Instead, HOAs are governed by a set of documents that includes the Articles of Incorporation, By-Laws, and Covenants, Conditions, & Restrictions often referred to as Restrictive Covenants (1) or CC&Rs. The law views CC&Rs as a contract between individual owners and the Association, even though individual buyers have no power to negotiate the terms of this contract prior to purchase.
Governing powers held by HOAs are governed by laws (statutes) that vary by state. These powers include the authority to issue fines or other penalties for violating a rule, restriction, or covenant. HOAs can also file a lien on your home or even foreclose if you do not pay your assessments or fail to pay fines.
Most businesses are corporations. You are probably aware that contractors such as roofers have a legal right to place a lien on your home for nonpayment for services they have completed. On the other hand, as a consumer, you have the legal right to withhold payment to a roofing contractor that has failed to complete the job.
However, an HOA is not like other business corporations. If your HOA does not maintain the elevator, or plow the snow from the roads, or repair a leak in the roof of your condo or townhouse, you cannot withhold payment of your assessments.(2) If you do, you risk late fees, interest, attorney and collection fees, lien and possibly even foreclosure of your home!
Let’s say you purchase a new car from an auto dealer, and you finance that purchase with a loan. What happens if you stop making regular loan payments? An auto dealer or its lender has the right to repossess your vehicle because it is collateral for the loan. In other words, you signed a promise to either repay the loan or return the vehicle.
But the auto dealer would have no legal right to take your vehicle away if you paid in full with cash at the time of sale. Likewise, if you borrowed the money for the car from your credit union, and stopped making payments on the loan, the credit union could repossess your car, but the auto dealer could not.
However, an HOA can foreclose on your home for non-payment of assessments and related charges, even though the HOA did not lend you any money to purchase the home. In short, assessments are comparable to property taxes. They must be paid, no matter what.
In America, only a municipal corporation can compel its residents to pay taxes or fines. But an HOA is almost always a non-profit corporation, and the only one of its kind that has been granted these special rights under state law.
(1) Definition of Restrictive Covenants
(2) Condo unit owners can’t withhold payment, Janan Hanna, Illinois Bar Journal, June 2014, Volume 102, Number 6, Page 266
Next: Control and Voting Procedures in HOAs