Business Judgment Rule in Homeowners Associations

Business Judgment Rule in Homeowners Associations

Under the community documents (declarations/covenants,
bylaws, rules and regulations) and under the planned community and condominium
acts in North Carolina, an HOA has certain obligations, for example,
maintaining or repairing the common elements of the association. Unless it
specifically sets forth in the declarations how late the pool can stay open or
how many times a year the crape myrtles are pruned, the board of directors
makes those day to day management decisions. If homeowner has a problem with
the management of the common areas or other obligations like those, does he
have standing to file a legal complaint against the HOA and the board and force
them to perform?

Theoretically, they do, but the way the law is set up, the
facts need to be so extreme, that it is extremely rare. Boards of an HOA have
the advantage of the same business judgment rule that other corporations do.
Homeowners don’t really consider that they are part of a corporation when they
own a home in a planned community with a homeowners association, but they are.
The corporate business judgment rule gives a legal presumption to a Board. In
any legal action against a Board for failure to perform its duties, a court initially
is required to presume, without any additional evidence, that the Board acted
due care and on an informed basis for any decision they made. The court further
presumes that the Board acted with good faith that the decision was the best
for the association, even if later the Board is found to be wrong. The
complaining homeowner is the one who must produce evidence showing this was not
the case. All the Board has to show is that there was some rational business
reason for the decision. The Board doesn’t have to have made the best decision,
just have any rational reason for making that decision.

Usually the best way to effect changes in the management of
a Board is to run for the Board and elect directors with the change you want.
This usually can be done at an annual meeting, or at a special meeting called
to remove the present Board.  

–Bradley A. Coxe
is a practicing attorney in Wilmington, NC with Hodges & Coxe PC who
specializes in Personal Injury, Medical Malpractice, Homeowner's Associations,
Contract and Real Estate disputes and all forms of Civil Litigation. 
Please contact him at (910) 772-1678.

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