Real Estate Law
Ten HOA law gotchas
By Sharon Reuler
The legal environment for common interest develop-ments becomes more complicated every time the Leg-islature meets or a court rules. Here are 10 quirky aspects of laws pertaining to “HOAs”—this article’s tag for mandatory membership associations for all types of residential common interest developments, including condominium HOAs (subject to Property Code Chapter 82) and subdivision HOAs (subject to Property Code Chapter 209).
Getting Rid of the HOA
Unhappy owners think they can terminate a “bad” HOA by forcing dissolution of the HOA’s corporate entity (if it has one). Not so. HOAs are real property organizations whose existence, powers, and duties run with the land. They arise from documents recorded in the county records, which are unaffected by state records. To pull the plug on an HOA typically requires a declaration amendment that is approved by most if not all owners, plus their mortgage lenders and possibly local gov-ernments. The Texas Uniform Condominium Act has detailed procedures for termination. Although no comparable statute exists for subdivision HOAs, termination instructions may be in the subdivision restrictions. Dissolving the HOA’s corporate entity (if it has one) is only one step in a complex process.
Judicial or nonjudicial—do HOAs have options when foreclosing for delinquent assessments? Yes and no. HOAs with valid liens can always pursue old-fashioned, full-blown judicial foreclosure, which starts with a lawsuit and ends with a sheriff’s sale. Nonjudicial foreclosure (first Tuesday on the courthouse steps) requires a valid lien and a private power of sale. Condo HOAs have a statutory lien and power of sale, subdivision HOAs don’t. If subdivision restrictions provide a lien and private power of sale, the subdivision HOA may foreclose nonjudicially (courthouse steps) but only by jumping through legal hoops that don’t pertain to condo HOAs. Sub-division HOAs must first obtain a special type of expedited court order, similar to home equity lien foreclosures.
Did you hear the one about the city planner, the architect, the real estate broker, and the title attorney who collaborated online to define “townhome” for all purposes? They’re still work-ing on it. “Townhome” is a word with many meanings. Texas cities define townhome for city purposes, such as zoning and building codes. State laws use the “T” word, but don’t define it. Most often townhome refers to a type of structure—homes attached side-to-side. A townhome development with an HOA is either a condo or a subdivision, a determination that can’t be made from the property’s appearance or name. Two townhome communities that look identical may be subject to different statutes and may have different ways of divvying up mainte-nance, insurance, and exclusive use areas between owners and the HOA. Best practice is to assume nothing from the “T” word and excavate the context in which it’s used.
Folks often assume an HOA must own at least one common area to justify its existence. Not exactly. A subdivision HOA may govern a subdivision that has no common area. Why? Perhaps for architectural control. The typical subdivision has a common area that’s owned by the HOA by virtue of a recorded deed or plat. Condos are different, of course. Condo law requires a common area (“common element” in condo-speak). The kicker is that the condo HOA doesn’t own the common area—doesn’t have a deed or title to the common area. Instead, the unit owners own the condo common area collectively in undivided interests, as tenants in common. That’s the essence of condo ownership—each unit owner owns a share of the common area.
Open Board Meetings
Folks know that HOA members have a legal right to attend HOA board meetings. The right doesn’t come from the Texas Open Meetings Act, which applies only to governmental entities. Nor does it come from corporation laws. From whence, then, does the right arise? Two chapters of the Texas Property Code—82 and 209. The condo statute has required open board meetings since 1998. The Texas Legislature passed a similar law for subdivision HOAs in 2011. The two statutes differ in specifics and exceptions, and neither gives HOA members the right to speak.
Complying With HOA Documents
Once upon a time, Texas had few HOA laws and each HOA had only a few governing documents. In that era, the documents were “the law” of the HOA. “The way we’ve always done it” was a revered mantra. No more. The Texas Legislature is far down the path of overriding private HOA documents with statutes that manage many aspects of HOA life. On some topics—like meetings, records, elections, and foreclosure—state laws act like “super bylaws.” They void or supplement parts of the recorded HOA documents. And HOAs are responding with flurries of new documents. Increasingly, it takes a skilled lawyer to compile and navigate the maze of statutes and recordings that are applicable to a given issue, whether advising the HOA or the owner.
Fiduciaries are held to high standards of loyalty, honesty, and accountability. Are HOA leaders fiduciaries? Depends. The role of fiduciary typically arises by contract (the HOA documents) or by statute, but may also arise from the relation-ship of the parties. This paragraph focuses only on statutory authority. No fiduciary duty for HOA leaders in the corpo-ration laws. Nor in the laws specific to subdivision HOAs. Nor in the law specific to condo HOAs created before 1994. Only condos created since 1994 (and certain older ones) are subject to a statute that holds condo HOA directors and officers to the standards of a fiduciary.
Developer Control—How Long?
HOA “control” means authority to elect or appoint at least a majority of the HOA’s directors. New HOAs are controlled by the developer who puts his or her own people on the board. Mature HOAs are controlled by an owner-elected board. The move from developer control to homeowner control is often bumpy. Developers perceive a need to con-trol HOAs until projects are 100 percent done. A large development may take decades to complete. Homeowners are impatient to take the reins. While Texas is fast growing in people and housing, HOA control will be an issue.
Fact Check 1. It’s false that all developer-controlled HOAs must hold an election in the HOA’s 10th year. That rumor started with a 2011 statute for subdivision HOAs that’s triggered by particular circumstances. If subdivision restrictions give the developer more than 10 years to control the subdivision HOA and also state the potential maximum number of homes, the statute-required election occurs when 75 percent of that number is built and sold—however many years that takes. Even then, the owners elect one-third of the board and the developer continues to control the subdivision HOA with two-thirds of the board. Condo law caps developer control at the sale of 75 percent of the maximum units.
Fact Check 2. It’s true that developers don’t have divine or statutory rights to control the HOAs they create. The control power must be spelled out in each project’s restrictions. No statute uses time (years) to cap the developer’s control of the HOA. However, statutes do recognize developer control periods and impose some conditions.
“Local” HOA Statutes
A bizarre aspect of Texas HOA statutes is the large number of state laws that don’t apply statewide. What? Some parts of the Texas Property Code are “bracketed” to certain locations, often on the basis of population. We understand the need for laws that are specific to coastal regions or international boundaries. However, brackets in the HOA statutes typically arise for political reasons, only. It starts with a lawmaker who wants to pass an HOA bill for his or her constituents. By making a bill “local” instead of statewide in applicability, the bill has better luck sliding through the Legislature and into law. Because statutory populatin brackets are based solely on the official U.S. decennial census, every 10 years a bracketed statute could apply to different locations.
POAs Are the New HOAs
Texas recently recognized HOA law as a sufficiently unique practice area to warrant state certification as a legal specialty. The official name for the practice is Property Owners Association Law, a sub-specialty of Real Estate Law in the classification system used by the Texas Board of Legal Specialization. Eventually “POA” may replace “HOA” in common parlance as the generic term for any type of common interest entity, at least in Texas. Lawyers will appreciate that “property owners association” is defined in the Property Code, whereas “homeowners association” is not. Be the first kid on your block to start using “POA.”TBJ
SHARON REULER is a solo attorney who focuses on preparing "HOA Docs" for real estate developers who create common interest communities. She is a frequent TexasBarCLE contributor on the law of condominiums and property owners associations. For more information, go to www.txlandlaw.com.