For this week’s Guest Post Friday here at Musings, I welcome back a good friend. John Tarley is an attorney with the Williamsburg law firm of Tarley Robinson, PLC. John is the managing partner for the firm and leads the firm’s business and litigation practices. A large part of the firm’s practice involves the representation of homeowners’ associations. In his spare time, John teaches two classes a semester as an adjunct at the William & Mary Law School, serves as the 9th Judicial Circuit’s representative on the Virginia State Bar Council where he serves as Vice-Chair of the Budget and Finance Committee, and is the editor of the Tarley Robinson blog and the @TarleyRobinson twitter account. Megan Scanlon, an associate with Tarley Robinson (and also an adjunct at W&M Law), provided substantial analytical, drafting and editing assistance with this post.
We see many news articles about a big, bad homeowners’ association interfering with Harry Homeowner’s “right” to live peacefully in his neighborhood. Whether it is demanding the removal of a flag pole that is too tall or forcing an owner to paint a faded mailbox, the stories we read often leave us asking the question: Why don’t they just leave that poor owner alone?
When you live in a community governed by a HOA, regardless of whether you know it, you have entered into a contract to abide by the Association’s Governing Documents: its Declaration (Master Deed), Bylaws and for incorporated Associations, the Articles of Incorporation. These documents contain covenants, conditions and restrictions that run with the land and all owners are subject to these documents’ terms and provisions.
Similarly, HOAs are governed by a Board of Directors, almost always composed of volunteers, our neighbors, good people like you and me. They soon find out, unfortunately, that they may not comprehend the immense and time-consuming obligations for which they are now responsible. It would be outstanding if new board members could receive Board of Directors’ training from their homeowners association attorney, because these volunteer directors are bombarded with new and often foreign concepts such as Governing Documents, Due Process and Fiduciary Duty.
Of these concepts, a director’s Fiduciary Duty is of the utmost importance, and incorporated HOA Boards of Directors in Virginia must comply with the Virginia Nonstock Corporations Act. Like directors in every stock and nonstock corporation, directors must follow the business judgment rule. This includes the duty of loyalty and the duty of care. Part and parcel of these duties is a director’s to enforce and not turn a blind eye to the Associations covenants, conditions and restrictions.
A recent case highlights what happens when an Association’s Board of Directors, trying to uphold its fiduciary duty by enforcing and upholding its governing documents goes head to head with homeowners, both believing that they are in the right.
When Sam and Maria Farran placed an “Obama for President” sign in their yard in October of 2008, the sign was four inches larger than the Association’s covenants permitted. The Association contacted the Farrans, asking them to remove the sign. The Farrans refused, and instead cut the sign in half and put it back up, claiming the sign was now in compliance with Association standards. The Board of Directors passed a resolution, relying upon Va. Code Ann. § 55-513(B), permitting charges (fines) for noncompliant owners, and then imposed those charges upon the Farrans in accordance with that statute. The statute reads as follows:
B. The board of directors shall also have the power, to the extent the declaration or rules and regulations duly adopted pursuant thereto expressly so provide, to . . . (ii) assess charges against any member for any violation of the declaration or rules and regulations for which the member or his family members, tenants, guests, or other invitees are responsible.
Apparently the Farrans did not pay the assessed charges, but instead filed a lawsuit against the Association, alleging that the Association did not have the authority to levy charges. After many months and many dollars in legal fees, the Fairfax County Circuit Court ultimately held in favor of the Farrans. The Court held that such charges could be assessed only if the “association’s declaration expressly allows it to impose fines or its declaration expressly allows it to adopt rules or regulations which impose fines.” Because the declaration was silent on those issues, the Court ruled for the Farrans and ordered the Association to pay the Farrans’ legal bills too (by statute), a cost that would ultimately get passed on to all of the homeowners.
Many media reports cheered for the victory of “the little guy” and demonized the Association for letting the dispute go so far. But what should the Association have done differently? Weren’t the directors simply upholding their fiduciary duty to enforce the restrictive covenants drafted by the developer and agreed to by all the homeowners? What would happen if the Board of Directors only selectively enforced the covenants?
Remember that the Court did not determine that the Association improperly ordered removal of the “Obama” sign. When the homeowner left the sign standing, but cut it in half, the Association could have filed suit for an injunction in the Circuit Court (beginning in 2011, an Association can now seek an injunction in General District Court). However, that lawsuit would be costly and time-consuming, so it’s probable that the Association decided to try a less litigious approach in an attempt to encourage compliance with the Governing Documents. Furthermore, up to the time of the lawsuit, no reported cases had determined an association could not unilaterally impose fines by using Va. Code Ann. § 55-513(B).
Complicating the matter was a seemingly conflicting decision by the Circuit Court of neighboring Loudon County, a decision that was affirmed by the Virginia Supreme Court in Lee’s Crossing v. Zinone. In that case, the trial court and Supreme Court approved the developer-controlled Board’s decision to unilaterally impose fines, holding that “nothing in the [Property Owners Association Act] prohibits a declarant from making express provisions in a declaration for a different manner of amending the declaration.” The unanswered question remained “what if the declaration was silent on the issue?”
Most recently, after the “Obama Sign” case had already been decided, the Virginia Supreme Court gave us a window into how it would likely rule if presented with the facts of Farran v. Olde Belhaven, in the case of Shadowood Condominium Association v. Fairfax County Redevelopment and Housing Authority. As we wrote in our blog on the Shadowood case, the case, as an unpublished order with no precedential value, still provides insight into the Virginia Supreme Court’s position on the issue of charges holding:
[A]n association should nonetheless follow the Court’s analysis and reasoning. Unless the condominium instruments or governing documents specifically permit the common interest community to impose the charges and/or suspension of rights for violations of the documents and authorize the charges to be assessed by the association, it is likely that a court may find against the association where the owner contests such actions.
HOA Governing Documents are drafted by counsel for the developers, and when the developers leave, the enforcement of those restrictions is left to the volunteer Boards of Directors of your neighborhood. Although we urge HOAs to consider a review to amend their Governing Documents, it is not an easy process.
Media articles and blogs portray a Board of Directors that acted badly. Although this case ended favorably for the homeowners, in this situation, are there really any winners? Did the Board of Directors run rampant over the rights of the homeowners? Were the actions of the homeowners what we would call “reasonable” under the circumstances?
Our experience is that the volunteer Boards of Directors, when faced with tough choices, try to make decisions consistent with their fiduciary duties, in an attempt to protect the rights of all the owners in the neighborhood. That doesn’t mean they always make the right decisions, but these ordinary people are not ogres, either.
*Note – this blog post does not address the Association’s denial of the Farran’s architectural review applications for roof and deck modifications which ultimately became part of a separate lawsuit.