HOA Boards Enjoy Broad Powers on Borrowing and Spending
Spending money to revamp recreational facilities is within the powers of HOA boards.
Q: The board at our homeowners association (HOA) on Long Island has decided unilaterally to take out a seven-figure loan to revamp the recreational facilities. To repay it, the board is diverting our annual assessments away from their intended purpose of funding reserves. Our governing documents do not require the board to seek approval before borrowing, and do not put limits on how much the board can borrow. What can residents do?
A: In an HOA the board of directors is elected to make decisions for the community, and this typically includes borrowing for renovations, replies the Ask Real Estate column in The New York Times. Whatever the benefits of the HOA arrangement, there’s little residents can do in a situation like this.
“When you move into an association, you give up certain rights and are submitting to certain powers of the board as set forth in the governing documents,” says Marc Schneider, the managing partner at the law firm Schneider Buchel.
If HOA board members are acting in accordance with the governing documents and they're making decisions in good faith, then they are protected from liability through a legal principle called the business judgment rule. Borrowing to renovate the community’s recreational facilities is typically permissible in associations’ governing documents, and would be an action considered in good faith.
If you were in a condo, it would be a different story. Condominiums in New York are governed by a law requiring that unit-owners vote on all borrowing. Condo boards cannot borrow unilaterally, unless the bylaws contain that right.
There are two aspects of your HOA’s project that could potentially contravene the governing documents, giving you a legal claim: First, whether the board is adding new amenities that didn’t exist before; and second, whether the documents allow the use of annual assessments for the loan repayment to fund the renovations (which isn’t an unusual practice).
“The governing documents should be carefully reviewed to determine if the board is exceeding its powers,” Schneider says.
As always, collective action with your neighbors can change the direction of your community. Andrew Lieb, founder of his eponymous law firm, offers a modest proposal: “Why not just run for the board against these board members if you disagree with the allocation of funds, and use that as your platform?”