January 24, 2017
Promoters of community associations tout them as “mini-democracies,” reflecting the American tradition of public participation in governmental activity on a local level. One hallmark of “representative government” is that constituents may openly observe and review what their elected officials are doing with the money and property controlled for common benefit. Norman Rockwell enshrined this in his famous illustration of a working-class gentleman standing up to speak during a “town hall” meeting. If a citizen could not review proposed enactments and observe the deliberations of their rulemaking bodies, a fundamental element of democracy and the rule of law would disappear.
Lack of transparency and accountability between the management group and the owners is a widespread problem. With every news report about a condo building collapsing, managers embezzling thousands of dollars or the board awarding lucrative contracts to affiliated vendors, questions arise about how effective oversight could cure these ills. Today, the Washington Post ran an article about a Maryland HOA case where the judge found that the board improperly enforced a resolution requiring all owners to replace their mailboxes with a new $500.00 design. Fair elections, open meeting policies and freedom of information are the supposed safeguards for a resident’s peace of mind. Given Americans’ love affairs with democracy, truth, home ownership and their own pocketbooks, one would expect legislative efforts to strengthen HOA boards’ transparency to their members. Unfortunately, legislation passed by the 2016 Virginia General Assembly and a new bill introduced in the 2017 session trend in the opposite direction. This blog post examines the HOA open meeting principle, legislative and board governance trends limiting transparency, and whether the proposal currently before the General Assembly will promote openness.
According to the “open meeting” requirement, HOA boards and committees may not conduct deliberations and decisions outside of a publicized meeting. One exception to the “open meeting” requirement is the power of the board to meet in “executive session” to discuss certain sensitive matters such as the status of anticipated or pending litigation. The board must exit executive session and make an open resolution about any matter covered behind closed doors. When the election of board members and the open meeting policy work, board members are accountable to owners. When it works, the only way the owner can lose his voice is by avoiding the meetings. Quite often, these rules are simply ignored by directors and managers who either don’t know or care about them. The failure to observe these formalities leaves many attorneys who represent boards concerned that this might have adverse effects on the outcome of owners’ lawsuits challenging the decisions.
Many HOA bylaws and statutes appeared decades ago when people communicated by paper and the telephone and met in-person. In 2017, there are many ways that people can meet through communication technology. In person meetings by groups have mostly been replaced by “staying in touch by group e-mail.” HOA board members are not paid. Most would like to minimize in person meetings to save time. Attorneys and managers like to accommodate their boards’ requests while maintaining regulatory compliance. Owners who attend meetings who are not directors tend to not say much, ask time consuming questions or directly challenge the decisions and practices of the board and management. Management’s motive to limit the “open meeting” duty is obvious. The risks of this to the community are well known. The board is supposed to oversee the property management company and other employees, contractors and agents that take care of things on a day-to-day basis. Without effective board oversight, a HOA can easily devolve into one where the president and/or the property management company is running things without accountability.
On January 11, 2017, Delegates David Bolova & Joseph Lindsey introduced House Bill 1553 into the Virginia General Assembly that addresses this very issue. HB 1553 would amend a section of the Property Owners Association Act, Va. Code § 55-510.1 regarding meetings of the board of directors. HB 1553 proposes how 2016 legislation allowing for nonstock corporation board action by written consent without a public meeting would apply in the HOA context. The General Assembly amended Va. Code § 13.1-865 in 2016 to greater facilitate “action without meeting of board of directors” of a nonstock corporation. Almost all Virginia HOAs are nonstock corporations. Previously, a nonstock corporation board could only act without a meeting where the governing documents didn’t specifically require it and all of the directors signed a written consent to the resolution without the meeting. The 2016 amendments relaxed the onerous unanimous consent requirement. Now, if the articles of incorporation so allow, a board can act by written consent in lieu of a meeting if accepted by a majority of the directors (or by a quorum if larger). The directors may indicate their consent by paper or electronic means. A few sentences in the governing documents can greatly limit the duty to conduct business in open meetings.
The 2016 amendments contain an interesting privilege for directors who do not want the board to act outside of the public meeting. If any director doesn’t like the proposal, she can either abstain from it or submit a written objection within 10 days that forces the board to take up the matter in a future open meeting. This statute allows directors to initiate new proposals outside of the open meetings. If the proponent has enough director consents, the only way that a non-director owner could comment on it would be if one director submits a timely objection. One or more directors who disapprove of the majority’s policies would have to decide if they want to force an open meeting on the subject or simply allow the likely outcome to run its course without a meeting. Where the articles of incorporation allow, this legislative amendment creates a potent exception to the open meeting requirement.
A written consent without a meeting cannot be made casually by a majority hashing things out informally by email. The directors’ entitlement of 10 days’ notice is a practical impediment if the board meets once a month. While powerful, these new procedures are not a free-for-all to the board majority enjoying a favorable set of governing documents.
HB1553 proposes how these 2016 amendments to the Nonstock Corporation Act would apply within the context of the statutory requirements for board meetings. Va. Code § 55-510.1 requires that all board and committee meetings be open to all owners. The statute forbids directors from using “work sessions” or other informal gatherings to circumvent the open meeting requirements. Boards must take and keep written minutes of the director’s meetings. HB1553 would require any written consents without a meeting pursuant to the amendments to the nonstock corporation act to be added to the agenda packet for the next HOA board meeting. Members would be permitted to make comments on these consents, which by that time may already be valid and in force. The board has the authority to rescind any consent made without a meeting. Of course, it is a lot harder for an owner to argue against a resolution once it is already adopted and valid.
I have several questions about how this proposed 2017 legislation would work with the 2016 amendments and the realities of HOA governance:
- How Do Board Open Meeting Requirements Reconcile with Power to Act by Written Consents without a Meeting? The proposed amendment does not eliminate the open meeting requirement, it just clarifies a significant exception for certain written consents executed outside of meetings. Are directors permitted to deliberate and debate the proposed consents outside of meetings, despite the open meeting requirement? Or are they only allowed to accept, decline or object to the proposed consent, with no questions asked or information given? Is the “consent without a meeting” option a narrow exception to the “open meeting” requirement, prohibiting any back-and-forth other than the notice, text, acceptance or objection? Would this drive boards to make ill-informed or erratic decisions without regular meetings? Some dissident directors might feel compelled to exercise their “objection” privilege to force all such proposals into an “open meeting.” This could easily strain tenuous director relationships.
- Could Written Consents without a Meeting Deprive Owners of their Rights to Educate Themselves and Engage their Concerns? None of these statutes require any proposed written consents to be circulated to the owners before consideration by the directors. The legislation doesn’t require the proposal to go before the owners or an open meeting before circulation for approval. The proposal might greatly affect certain owners’ interests. An owner whose rights or interests are infringed by the written consent would later find herself fighting to undo resolutions that have already been adopted. There are many decisions that a board can make that are difficult to reverse once a contract is awarded. This legislative relaxation of requirements for consent without a meeting is ripe for abuse by boards and managers who don’t like people asking questions about what they are doing.
- Are Owners Entitled to Review Electronic Mail Between Directors Related to Written Consents without a Meeting? I’m concerned that that where these practices are adopted, the exception will practically swallow the open meeting requirement whole. If directors exchange emails or text messages with each other regarding a proposed written consent without a meeting, are owners entitled to review those messages as minutes, books and records of the association? As a practical matter, the HOA’s attorney may struggle to explain to the board what types of email communication are permitted and which ones aren’t under these laws.
- What is Left of HOAs as a “Mini-Democracy?” What is left of the “town hall” model in HOAs where the governing documents and state statutes allow board majorities to act outside of the “open meeting” ideal? This trend runs a strong risk of leaving owners with a level of transparency and accountability lower than what they enjoy with their city or county government. With regulatory agencies, the public has minimal “notice and comment” protections in administrative rulemaking. This new consent without an open meeting exception would offer even less protections to owners affected by adverse board decisions.
House Bill 1553 does not go far enough to keep all of the “tentpoles” up on the open meeting policy. I hope that the general assembly improves this bill so that the accountability of managers to boards and boards to members does not stray even further from the “Town Hall” civil ideal.
For Further Reading: