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Homeowners Association FAQ

Written by Lawrence Opalewski on April 11, 2014 Category: Nonprofits

Below are some helpful tips regarding some questions we have received regarding homeowners associations (HOAs). If your HOA needs assistance with anything from dues collection to updating bylaws, do not hesitate to contact us. We would be happy to assist you.

1. What is the recommended legal structure for an HOA, and how do you find or what your current structure and standing is?

Answer: You can find your current structure by looking through your governing documents (most likely the Articles of Incorporation) or look up your association on the Michigan Department of Licensing and Regulatory Affairs website business entity search.

Answer: The vast majority of HOAs in Michigan are nonstock, membership nonprofit corporations organized under Michigan’s Nonprofit Corporation Act. The majority of HOAs do not qualify for tax-exempt status under IRS Code 501(c)(3) or 501(c)(4). This is because the organizations and their purposes do not fit the criteria of those particular IRS codes. Some HOAs may be able to qualify for tax-exempt status under 501(c)(7) as a social club, but an attorney should be consulted before filing to determine if the HOA qualifies. Finally, the most likely avenue for a HOA to qualify for tax-exempt status is IRC 528. This code section was enacted as an alternative section for HOAs since most did not qualify for 501(c)(4) exemption. An attorney can advise a particular HOA if it qualifies.

TIP: Just because your HOA is a nonprofit corporation in Michigan does not exempt it from filing a federal tax return. Make sure to check which form you are required to submit.

2. What are some liability risks/concerns for Association Board members and for members themselves? The charter of many of the Associations tasks them with the upkeep and management of trails, parks, ponds and/or lakes.

Answer: This will depend to a large extent on what type of business organization the HOA is. As noted above, most Michigan HOAs are nonprofit corporations, which makes them subject to corporate law principles.

a. Board members and directors will typically be protected by the business judgment rule. This rule says courts will not review the business decisions of directors who performed their duties (1) in good faith; (2) with the care that an ordinarily prudent person in a like position would exercise under similar circumstances; and (3) in a manner the directors reasonably believe to be in the best interests of the corporation.

b. The Articles of Incorporation or Bylaws can also provide Board members and directors with certain protection from liability or indemnity.

c. Directors and Officers Insurance can be purchased.

d. With regards to members generally, the corporate form generally protects members from liability. A plaintiff will sue the HOA itself, and it would be extremely difficult for a plaintiff to “pierce the corporate veil” to reach an individual member.

e. Intentional wrongdoing and gross negligence are the things which could possibly lead to director or member liability.

f. Every HOA should have general property and liability insurance at a minimum.

3. What are some options for pursuing collection of dues from non-paying members?

Answer: This simply depends on the situation. The first step should be to consult the governing documents of the HOA (Articles and Bylaws, also check Declaration of Covenants, Conditions, and Restrictions) to see what actions are authorized. Be sure to comply with things such as proper notice to the delinquent members. If there is no firm collection policy, strongly consider adopting one.

Do NOT ignore delinquency. Delinquency can be costly for HOAs. Additionally, failure to enforce and collect dues can be a breach of the Board and director’s fiduciary duty to the HOA. Fiduciary duty means that the Board and directors need to act solely in the best interest of the HOA.

Be sure to comply with the Federal Fair Debt Collection Practices Act. A HOA typically will not qualify as a “debt collector,” but it is something to keep in mind when selecting a collection method.

-Lower delinquency amounts make certain methods of collection impractical.

-Consider collection agencies.

-Consider placing a lien on the property (consult attorney).

-Consider suspending member privileges such as access to a community pool or common recreational areas. (Again, check governing documents)(This is a low or no-cost method)

-Bring a lawsuit, obtain a judgment, and garnish the offender’s wages. (Can be expensive and time-consuming)(consult an attorney)

-Consider a payment plan with financially distressed members. (get this in writing)

-For larger delinquency amounts, consider foreclosure. (consult an attorney)

-Be aware of delinquent members going through mortgage foreclosure. A lien for HOA dues will likely be extinguished in the foreclosure unless there is money left over after the mortgage company is paid (unlikely in the current market).

4. Can an Association “expand” beyond its original charter or subdivision to encompass homes on adjoining “orphan” streets (i.e., those developed independently and not part of a formal subdivision and/or on main roads)?

Answer: It depends. Check your governing documents (Articles and bylaws) to see if such an action is permitted or prohibited. If so, what sort of vote or other procedure is needed?

The next step is to check your Declaration of Covenants, Conditions, and Restrictions (CCR) to see what covenants and restrictions any new members would have to adopt and record. The CCR is where a HOA derives its power, the deed covenants and restrictions usually “run with the land” and thus cannot be removed by property owners without difficulty, and sometimes not at all. A HOA cannot force property owners to join the HOA unless the covenants and restrictions already appear in that property owner’s deed. In order to bring in new members, the new members would need to voluntarily accept and properly record the covenants and restrictions of the HOA. It would seem to be difficult to obtain the consensus of an entire street.

The assistance of an attorney would likely be needed as this has the potential to be a complicated transaction.

5. Can a HOA restrict “group homes” (whether for seniors, medically needy, recovering addicts, etc.) from entering a neighborhood?

Answer: Probably not. This is a complicated question that involves several different areas of law. Local zoning codes will likely shed light on this question. Check the zoning codes first.

-Next, check your CCR to see what types of uses are permitted or prohibited.

-If it is permitted by zoning codes and your governing documents to amend the CCR to include new restrictions to permit “group homes,” civil rights laws must be complied with.

-The federal Fair Housing Act (FHA) prohibits organizations such as HOAs from discriminating on the basis of race, color, national origin, religion, sex, familial status or handicap. Michigan also has a similar law which prohibits discrimination on the basis of religion, race, color, national origin, age, sex, familial status, or marital status. MCL 37.2505 Therefore, any amendments to a CCR to prevent group homes would need to be extremely carefully crafted to avoid even the appearance of discrimination. To do otherwise would be to invite a costly lawsuit. It may be best to attempt to work with a local zoning board or planning commission on this issue to avoid potential liability.

-It is best to consult a lawyer on this matter.

Keep in mind that this list is for general informational purposes only. Every situation is different and requires its own analysis. However, this list should give you and your HOA a few things to keep in mind when considering these issues.

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