HOW A COMMUNITY ASSOCIATION COMES INTO EXISTENCE, AND THE ORDER OF PRECEDENCE IN REGULATIONS

The Fairfax County (Virginia) Community Association Manual has a good overview of the steps involved in bring a community association into existence, from ownership by the developer to the time when the developer turns responsibility over to the new association's  board of directors. 

Property ownership is often defines by a 'bundle' of documents, each describing its protections and requirements within its sphere of influence, and the 'Order of Precedence' of controlling documents is listed, as well as something called the 'Business Judgment Rule' which allows the board to make errors of judgment without being judged criminal, "The mere fact that a decision turned out to be unwise or incorrect does not make Board members liable for any resulting harm or loss."

The following are excerpts from the Virginia manual, and North Carolina probably has a similar easy to read and understand manual somewhere.

Property Owners’ (Homeowners) Associations:

The Fairfax County (Virginia) Community Association Manual provides general information and guidelines concerning the legal authority, structure, and management procedures for mandatory-membership property and condominium owners associations.

In a property owners (homeowners) association, the land is subdivided into residential lots and common grounds.

Each lot is privately owned, taxed, and assessed association dues whereas the common grounds and facilities are owned in the name of the association.

The association is legally established and defined when the Declaration of Covenants, Conditions and Restrictions, an approved subdivision site plan, the Deed of Dedication, and (occasionally) the Bylaws are recorded in the County Land Records Office. The Deed of Dedication may contain restrictive or permissive easements, covenants or other regulations that apply to and govern the use of all lots included in the association. Prior to recordation, the County reviews these documents for their form, content, and compliance with law, including the County Code and the Virginia Property Owners Association Act.

Recordation of these approved documents legally defines and establishes the entity of the association, and the mandate for association membership.

At this moment of the association’s “birth,” the developer/declarant is the only member and, thus, possesses full voting control of the association until the first property is sold.

Thereafter, the owner membership and owner control grows with the purchase of each lot or unit. Usually, the governing documents establish different classes of membership such that the developer has 2 or 3 votes per unsold lot or unit whereas the new owners have 1 or 2 votes per lot. This assures that the developer maintains voting control of the association until sales reach about 70% - 75% of the lots and the new owners are sufficient in number and knowledge to assume control of the association and its operations.

Eventually, all of the properties or units in the association, together with the voting rights, are sold and the control and operation of the association is taken over by the owners. The developer is still available on site for several months, a year, or longer as the construction is completed and reviewed by County officials prior to the release of the developer’s bond.

Association membership, rights and obligations are mandatory and automatic with the purchase of a property or residential unit subject to a declaration or master deed.

This mandate for association membership “runs with the land” and automatically transfers to each new owner every time the property or unit is sold.

This mandatory membership cannot be waived or voided by an owner, and is enforceable by law.

This also assures each member’s right to use the common facilities and grounds, and imposes upon each member an obligation to share in the common expense and responsibilities of governance.

The association has the lawful authority to annually assess and collect fees for maintenance of the community and operation of the association; to enforce the covenants, conditions, and restrictions; and, if necessary, to levy monetary penalties or assessments for violations thereof.

Hierarchy of Documents (Order of Precedence)

The board can delegate duties to the property manager, committees, and/or staff employees, however, the final responsibility and authority for decisions and for fulfilling its obligations remains with the board. Directors must be aware of the laws and legal requirements applicable to their association and apply due consideration in all decisions and actions of the board. The board’s responsibilities and scope of authority are set out in the following hierarchy of documents or order of precedence:

Generally, board actions and decisions must yield to or comply with requirements or restrictions in documents of higher priority, precedence or legal standing. Federal laws at the top of the hierarchy are the most rigid and inflexible of documents and leave little or no discretionary choice. On the other hand, the adopted rules and regulations of the board’s making have the least legal standing and, therefore, are the best opportunity for flexibility and discretion. Between these extremes, the other documents provide more or less opportunity for discretion by the board. The board cannot adopt rules and regulations, or pass decisions that conflict with or violate provisions and requirements in the bylaws, the declaration, or a higher level of authority. Board decisions and resolutions cannot be in conflict on issues when the higher levels of authority are silent.

Directors must also understand and comply with the obligation of “shall” and “may” in any document. “Shall” means it is mandatory and that there is no permissible choice, whereas “may” means something may or may not be done – it is not mandatory but rather an opportunity for choice, using good business judgment, application of reasonableness, and understanding of the situation. Hopefully, all conflicts in the governing documents were eliminated by initial review, but in case of any conflict, the order of precedence will control and decide the issue. For example, if the bylaws say that the board “shall” do (whatever) that conflicts with the recorded declaration or state law, the precedence or hierarchy of the restrictive document will prevail over the bylaws.

Duty of Loyalty and The Business Judgment Rule

Board members are charged with a duty of loyalty and fiduciary responsibility to use good business judgment in conducting the governance of the association. Directors must make sure that their decisions work to the benefit and protection of property values in general and without consideration of personal interest or gain. Members of the Board are protected by the business judgment rule. “So long as the board acts for the purposes of the cooperative, within the scope of its authority and in good faith, courts will not substitute their judgment for the board’s.”

It is not illegal to err or even cause financial loss or other harm provided that the board can demonstrate reasonable investigation, consideration, thoroughness, and good business judgment in reaching its decisions. “A complainant must establish that a board acted negligently, willfully in bad faith, outside of its authority, or for discriminatory purposes. The mere fact that a decision turned out to be unwise or incorrect does not make Board members liable for any resulting harm or loss.

 Board members must be very familiar with the documents of their association, stay informed about association issues, regularly attend meetings, and request that their perspective, opinion and/or decision be recorded in the meeting minutes if and when they disagree with a board’s action.

It is helpful to hold an orientation session for newly elected board members and/or provide each director with specific information about the association. A “Welcome Aboard” manual might include copies of association documents; i.e., bylaws, rules and regulations, budget materials, and minutes of the last three or four board meetings. This might be followed by an orientation session to inform new directors about association practices and procedures, reviewing current contracts, budgets, committee reports, etc.

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