Is the Developer Running the HOA Correctly?

In my HOA law practice, I often hear complaints from homeowners in communities that are still being developed, that the developer is not tending to the affairs of the HOA as it should be.  Many developers view the management of the HOA as an afterthought, instead focusing on development and sales.  In most cases, developers have various tools available to them (all legal) to allow the developer to control the HOA, typically by retaining the authority to appoint most or all of the members of the board of directors, until the development is complete and sold out (or nearly sold out).

A recent case from the North Carolina Court of Appeals has brought this issue into sharp focus.  Though it dealt with an office condo as opposed to a residential condo, it is nevertheless instructive.  The case is Ironman Medical Properties, LLC v. Chodri.  Chodri is a doctor who developed a 10-unit office condominium in Asheboro through his development company, White Oak Medical Properties, with one of the condo units housing his medical practice.  According to the court’s opinion, Dr. Chodri had no experience as a developer, and no experience running an HOA or otherwise managing real estate.  However, he undertook management of the HOA, basically running it as part of his medical practice.  The HOA never held meetings and never held a board election. It kept no corporate records.  Chodri did not establish a separate bank account for the HOA’s funds – the HOA’s funds were co-mingled with the bank account for White Oak.  He relied on his medical office manager, who also had no experience managing real estate or an HOA, to manage the affairs of the HOA.  White Oak did not pay any separate assessments on the units it owned – it simply paid the HOA’s expenses out of the co-mingled account.

Ironman Medical owned one of the other units in the office condo, which it leased to another medical practice.  Ironman and its tenant requested financial records from the Association.  After discovering the mismanagement and improprieties, Ironman stopped paying its condo assessments and sued the HOA, White Oak and Chodri for breach of the condominium’s governing documents, breach of fiduciary duty, and fraud.  The HOA filed a counterclaim seeking to recover the HOA assessments owed by Ironman of more than $37,000.

The trial court, in essence, dismissed all of the claims against White Oak and Chodri except the claim for breach of the condo’s governing documents.  The jury awarded Ironman only $1 in damages and awarded the HOA over $51,000 in damages against Ironman due to its willful withholding of the assessments it owed to the HOA.

Though this case is an outlier, there are some lessons to be learned here.  Developers who don’t have the experience or interest in managing the HOA should hire a professional management company with HOA-management experience and ensure that all finances for the HOA and the developer are segregated.  Observe corporate formalities and keep good records.  Hold regular meetings of the board and the HOA members, communicate with owners frequently, and provide them with accurate financial statements.  On the other hand, homeowners should take from this case that it’s never a good idea to withhold payment of assessments simply because information and communication from the HOA or the developer is not forthcoming.

Original article can be found at: https://www.offitkurman.com/blog/2020/03/03/association-answers-is-the-developer-running-the-hoa-correctly/

Mike Hunter