OVERVIEW
Every so often we hear from homeowners who want to know whether it’s possible to disband their homeowners association (“HOA”).* Often such an inquiry arises because the homeowners are unhappy with how their HOA is being managed. In any case, we always provide the same answer.
Yes, the members of an HOA can sometimes dissolve their HOA. But doing so is an extremely complicated process, and there are a lot of significant legal hurdles to get over before dissolution can happen.
EQUITABLE SERVITUDES AND HOA GOVERNANCE
In California, HOAs are associations formed, most often as mutual benefit non-profit corporations, to own and manage common interest developments. The shareholders of an HOA (or “members,” as they’re more commonly referred to) own not only their individual homes, but a piece of the common areas located throughout their development. And like all corporations in California, an HOA is governed by a board of directors tasked with abiding by and enforcing the HOA’s governing documents. Chief among an HOA’s governing documents are the Codes, Covenants, and Restrictions, more commonly known as the CC&Rs. The CC&Rs describe not only the rights and obligations that each member owes to the other members of the HOA, but also the mutual rights and obligations between the members and the HOA itself (remember, the HOA is considered a person under the law). An HOA’s CC&Rs are, therefore, intended to address a wide scope of governance type issues ranging from the maintenance of the common areas and property use restrictions (e.g., setbacks, view rights, neighborhood “character,” architectural guidelines, etc.), to enforcement powers, the raising and spending of revenues (e.g., assessments), and dispute resolution.
While an HOA’s CC&Rs are treated (and viewed) very much like a contract between the homeowners and the HOA as an entity, CC&Rs are actually “equitable servitudes,” which is a fancy legal term used to describe a set of “covenants, codes, and restrictions” governing how, among other things, members of an HOA may use their land. CC&Rs are recorded with the county recorder’s office, and once that occurs, the obligations imposed in the CC&Rs are said to “run with the land” (meaning, all future homeowners will be bound by what’s in the CC&Rs).
And just like other corporations, the board of directors of an HOA is responsible for managing its affairs and conducting the association’s “business.” Such business would necessarily include not only the sale of all, or substantially all, of the HOA’s assets, but also the dissolution of the HOA itself.
DISSOLVING AN HOA
This article assumes that the CC&Rs doesn’t place additional hurdles on dissolving the HOA. For example, some CC&Rs might require more than a majority of the board to vote in favor of dissolution, while others might also require the consent of a third party, such as the city/municipality where the HOA is located. Assuming, however, that an HOA’s CC&Rs contain no such additional hurdles, the first step to dissolving an HOA would be for the board of directors to pass a resolution to dissolve the corporation. To pass, the resolution would require the vote of at least a majority of the directors serving on the Board.
That’s pretty easy to accomplish.
The tricky part comes in the second step—obtaining the consent of the HOA’s members (i.e., the homeowners). And unlike in the case of the vote by the board of directors, which required only a mere majority, 100% of the HOA’s members would have to vote in favor of the dissolution. In other words, if a single member of the HOA objected to the dissolution, that member could prevent it from occurring.
Assuming, however, that the members of an HOA could manage to obtain unanimous consent—something that is extremely difficult to obtain—there are some practical consequences for such a decision.
PRACTICAL CONSIDERATIONS AND CONSEQUENCES
Aside from the usual obligations that accompany a corporation’s winding up of its affairs (e.g., notification to creditors, payment of taxes and other liabilities, and the sale of any assets owned by the corporation), dissolution of an HOA in particular has its own set of consequences.
Take, for example, the case of an HOA consisting of condominiums. As most people know, condominiums consist of a lot of common area property (i.e., property owned by the HOA and maintained for the benefit of all the members), including the roofs, exterior walls, and other structural components. What happens when the roof leaks? Whose responsible? Whose responsible for painting the building(s) in which the condominiums are located? What about all the plumbing that used to be owned and maintained by the HOA? Or for that matter, what about HOAs that have private roads, tennis courts, clubhouses, landscaping, fencing, parking, etc.?
Certainly, a willing city/municipality could absorb some of the challenges referenced above, but not all of them. For example, a lot of mortgages that people obtained to purchase their properties contain restrictions preventing the dissolution of an HOA. Dissolution in such cases could result in the lender declaring a breach and accelerating the loan (i.e., declaring the entire sum owing on the mortgage immediately due).
Those are not insurmountable challenges by any means. After all, if an HOA could convince the applicable city or municipality to take over responsibility for common area roads and parks. And some mortgages don’t contain restrictions relating to HOAs. But that’s not the norm.
CONCLUDING THOUGHTS
Dissolving an HOA is possible. But not only is it extremely difficult to accomplish, even if the board of directors and members at large all agree to the dissolution, there will very likely be a number of significant consequences attached to that decision, and all of those consequences will need to be addressed. Consequently, while it may be tempting for members of an HOA to scrap the HOA altogether, it will almost certainly be easier, less expensive, and less fraught with danger to simply reform how the HOA is being managed.
*This is an update to an article written by Michael Kushner on March 7, 2019