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October 13, 2008
What Happens When The Board Becomes a NonFunctioning Entity?
That's a good question. Sometimes, nothing ..... for a long period of time, until the automatic pilot on the ship runs it aground, or into an iceberg. Then, the domino effect of problems begins. I received this email recently from a very frustrated reader, who is not alone:
"I'm a homeowner in planned development that is governed by a HOA. Apathy is rampant. We have no ARC at all, so one of the board members acts as the ARC. Our HOA is in danger of becoming a "non-functioning entity" and then the State will have to step in (and nobody wants that to happen--as you know, whenever the State of California steps in, it always costs somebody a ridiculous amount of money, and often a headache as well). I believe this will happen because the last two remaining board members have had enough abuse and say they are going to resign and it seems there's no one to step up and replace them. We will have no board. My question to you is, what exactly happens when an HOA becomes a non-functioning entity? Nobody on our board knows, and even the management company doesn't know."
Before getting into what happens when there is no board, so long as there remains one board member, although there is no quorum, that board member has the legal authority to appoint other board members. That said, if there are no board members, it may be a long time before anyone sees the result of that (or a short one), but once the signs begin, like ship without anyone at the helm, things start to go awry and the people trying to ride it out will start to feel the effects, some worse than others.
If there is no common area to be maintained, it provides the wayward ship a lot more open water to navigate (meaning it will take longer for the ship to run into trouble). However, these are the things that could happen.
There will be no one to collect and deposit the assessments, so no bills will be paid (that means no maintenance, landscaping, etc. which may or may not matter, depending on whether the HOA has any responsibilities in those areas). In a PD, there is less likelihood that there will be any lights turned out or water turned off, so the most likely problems to start to rear their ugly heads are the lack of architectural control or standards, and the lack of parking regulation.
You may first see little things crop up, like arbors, patio or yard extensions, grottos, garage conversions, larger vehicles in driveways, perhaps leading to commercial vehicles, larger commercial vehicles, boats, RVs, junkers, etc. Perhaps the residents will have problems with construction next door relating to views, setbacks, odd style of fencing, loss of harmony in home colors, roof covering materials, windows, driveway alterations (for more and more vehicles), changes in landscape, sometimes as bizarre as green cement lawns, etc. For some associations, this could take years, and for others, a matter of months. With no structure, no one in charge and no enforcement or simple rules, it is certainly possible that the neighborhoods could go "down hill". That can lead to neighbor infighting, deterioration of property values, and legal battles in some cases. The HOA presents a pretty sizable target.
The State will not come in and take over HOAs as a rule. In some very limited circumstances I believe that cities have taken over crime ridden neighborhoods and restructured them through redevelopment special projects; however, do not hope for, or hope against State takeover because that is not likely any kind of a viable solution.
An HOA may end up in receivership, where the court orders that a receiver take over, collect assessments, and fulfull the HOA obligations; however, this is not likely to resolve any of the disputes related to architectural debacles from failure of any reasonable controls. The Receiver commands a very large salary that must be paid, and he or she has unlimited assessment authority, so do not think you as homeowners are likely to end up paying less in such a situation.
If there is no one to pay the bills, there is no one to pay the Directors and Officers or other liability coverages and so if there is an accident in the development, or a loss in property values and an angry homeowner with money to sue, or any kind of a lawsuit against the HOA, the costs and damages can fall to the individual owners.
It's not a pretty picture to try and imagine. I believe it is more likely to happen with self-managed associations than those that are professionally managed. However, in the above scenario, it looks like management may not be able to save this association. Once the board members who sign the management checks are gone, the managers are usually gone. Of course, if management is authorized to sign their own checks, there may be an interest in continuing with collections of assessments and payment of [some] bills for awhile. But at some point, management will have to throw in the towel as without a board, there is no captain and that can lead to a sinking ship.
Posted by Beth Grimm at October 13, 2008 5:27 PM