Real Estate

Dissolving a Homeowners' or Community Association (HOA)

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A homeowners' association (HOA) is a legal entity, with a separate identity from its collective homeowner-members. Depending on state laws, an HOA is usually either a corporation or a nonprofit organization, and as such must comply with state law regarding both formation and dissolution.

During the formation of the planned community or condominium association, the HOA plays a key role, in organizing and establishing the community structure and rules. Over the life of the community the HOA is also important, handling governance tasks, maintenance and repair of common areas, and more.

There may, however, come a time when the homeowner members of the community, who in most instances also serve as the volunteer board members of the HOA, feel that it no longer makes sense to maintain this legal entity. Perhaps a disaster struck, and the community can no longer maintain its current physical layout or pay its bills.

A homeowners' association can, however, be difficult to dissolve. Based on its corporate or other legal status, it will need to comply not only with applicable state laws concerning dissolution, but with the HOA's internal rules (bylaws, articles of incorporation, and master document, often known as covenants, conditions, and restrictions or CC&Rs). And it will need to take the rights of affected third parties and local government permitting agencies into account.

Majority of Members Must Consent to Dissolution of HOA

Because an HOA technically consists of two parts, the legal entity plus its membership, one part usually needs the consent and approval of the other in order to take an extreme action like dissolution.

The first step in dissolving an HOA is typically to get the consent of a majority of homeowners or members, following the procedures outlined in the bylaws or other governing documents. The exact percentage may also be found in the HOA's governing documents, or in the applicable state's law.

Some states require a 100%, unanimous decision, others something less. States that have adopted the Uniform Common Interest Ownership Act (UCIOA) of 2008, for example, require an 80% majority for dissolving an HOA. (Vermont, Connecticut, and Delaware are among these states.)

When a homeowner does not participate in the voting, it often counts as a vote against dissolution.

Third-Party Rights and Agreements Must Be Honored

An HOA will almost always have entered into contracts with third parties, such as lenders, suppliers, and so on. Perhaps, for instance, the HOA took out a construction loan for creation of the homes in a community, which loan has not yet been paid off.

One cannot simply cancel these contracts. Before or in the course of dissolution, the HOA or its members will need to either pay off the obligations, refinance, or renegotiate the various agreements.

Local Government Permitting Conditions Must Be Honored

In order to obtain approval for the construction of the buildings and improvements upon the property and operating of the HOA, it may have had to comply with conditions imposed by the government agency or agencies granting the needed permits or approvals.

For example, a condition may have been imposed requiring that the HOA operate for a minimum number of years. These conditions will need to be examined and dealt with before consideration a breakup of the HOA. And the local government may have imposed a requirement that its consent be obtained before dissolving the HOA.

Internal HOA Dissolution Procedures Must Be Followed

After you get the consent of the required number of homeowners, you must address the specifics of closing down the legal entity of your HOA. Many HOAs include terms for dissolution in their documentation, including specific steps and requirements.

Depending on whether the association is a corporation or a nonprofit, the state government also will have certain requirements for shutting it down.

New Deeds May Be Required

The deeds to each homeowner's property may include reference to the HOA. If the HOA no longer exists, the deeds may have to be redrafted and rerecorded. This could involve working with the mortgage lenders for each property. This is often a stumbling block to dissolution, because some owners who don't have serious grievances with the HOA might not want to go through the trouble and expense.

Someone Must Take Over the HOA's Assets

Your HOA probably owns at least some of the development's property, such as the common areas (walkways, garage, community center, and even portions of the buildings where owners live).

Title to the HOA-owned portions of the development must usually be transferred to another legal entity when the HOA is dissolved, or else divided among individual homeowners.

You might be able to sell these assets to an investor willing to take over maintenance responsibilities. Most investors will expect a reasonable profit in return.

Questions to Ask Your Real Estate Lawyer

  • What are all the applicable legal and contractual requirements affecting dissolution of our HOA?
  • How much mortgage and other debt is owed by our HOA, which would need to be paid off or refinanced in the course of dissolution?
  • Is there a way to solve our HOA's current problems without taking the extreme measure of dissolution?
  • Do our governing documents prescribe or limit who could take over the HOA assets after a dissolution?
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