Page Title

Recommendations for the 80th Legislative Session

January 2007

1) Eliminate judicial and non-judicial foreclosures by HOAs. Article 16, Section 50 of The Texas Constitution protects homeowners from this activity and legislators should enact laws upholding this protection. Aside from this, HOA boards lack the objectivity to use foreclosure so that it benefits the association. Evidence of this are the miniscule amounts of late dues in contrast to large legal fees, as well as boards expending more funds collecting unpaid dues than are recovered. Effective alternatives exist and were used before the 1987 Supreme Court ruling in Inwood North v. Harris. They are not used because they do not create income for those advising HOA boards, the management companies and HOA attorneys.

2) Eliminate fines imposed by HOAs. Fines should be left to the discretion and oversight of the judiciary with a cap of $500. The imposition of a fine is a governmental power. HOA boards enjoy no separation of powers and are not bound by principles of due process. Even when HOAs and members are treated as contracting parties to CCRs, long established and fundamental principles of contract law dictate that "penalties" are void and unenforceable. Certainly, one private party must never have the unilateral discretion to modify the terms of compliance, determine compliance, and/or fine the other party to a contract.

3) Prevent suspension of voting rights. No reason should trump homeowners' voting rights. Suspension of voting rights has little or no effect in coercing homeowners to abide by the rules or to keep dues current. Frequently board members together with the management company create policies or make up "violations" purposefully to disenfranchise other residents and maintain control. Voting privileges are not suspended when citizens owe government taxes and the same should hold true for mandatory HOAs.

4) The power to award attorney fees should be given to the presiding judge. In any HOA lawsuit, the judge should determine the award of attorney fees to the prevailing party. This is appropriate and will also help curb excessive legal fees.

5) Regulate payments from homeowners. The policy adopted by HOA boards of applying payments to fees and fines before assessments circumvents the intent of Property Code Chapter 209, Section 209.009 that says HOAs may not foreclose for fines or fees. This policy also ensures that the HOA is the last to be paid which is contrary to the board's fiduciary duty to the association and sound business practices. Sadly, it is a common practice by management companies, HOA attorneys and boards to reject partial payments or hold payments for an undetermined amount of time and must be stopped. It is damaging to the association and unnecessarily causes homeowners to pay more fines or fees.

6) Place caps on attorney fees. Uncapped legal fees have permitted the HOA board to avoid the use of any reasonable business judgment in the exercise of incurring legal expenses to the detriment of its members. Caps should be placed on any legal fees that might be awarded to the association in order to deter the provocation of lawsuits and to encourage settlement by boards that have a fiduciary obligation to the homeowners. Common Cause recommends attorney fees should not exceed two times the unpaid assessment and suggests that deed restriction violations be addressed in small claims court.

7) Require that boards offer homeowners affordable payment plans before any fees, fines, or legal action is taken. Most delinquent homeowners are behind because of an unforeseen financial crisis. Immediately adding fees or fines only adds to their crisis. It is in the best interest of the association and the delinquent homeowner to offer an affordable plan of bringing their dues current within one year before fees or fines are incurred. It should be the burden of the HOA board to offer this payment plan to any delinquent homeowner as soon as delinquency occurs.

8) Regulate the voting process. An impartial group of homeowners, or an impartial independent agent at the request of only a small percentage of homeowners should handle the entire voting process. Homeowners must have equal access to newsletters, web sites and any other communications over issues and candidates. Prohibit proxy balloting, but instead establish a system of absentee voting over a period of two to four weeks.

9) Remove the brackets in Government Code Chapter 551 on Open Records and Government Code Chapter 552 on Public Government. The HOA board has the power over considerable real estate interests owned by the members - not the association. As members, homeowners require the ability to monitor the activities of their board. Homeowners must be entitled to access all business records of the association including viewing contracts, notices of violation, assessment logs, tax records, invoices, attorney fees, etc. Homeowners should be able to view these documents without cost and copying should be a pass-through cost only. The laws applied to government entities regarding closed board meetings should also apply to HOA board meetings. Membership meetings should be open to all members and their invited guests.

10) Place a cap on resale certificates. The cost should be minimal, less than $35, as the information required for a resale certificate is readily at hand.

11) Establish a system of annual reporting by HOAs. Industry professionals argue that home buyers are not forced to buy homes in a mandatory association. It is imperative that prospective buyers are made aware of all the governing documents and policies of an HOA in an easy and affordable fashion prior to submitting offers to buy. Currently a buyer depends on the real estate agent or seller to disclose this information. Unless the buyer asks in advance for this information it is presented, only in part, to the buyer for the first time at closing. Representative Solomons' bill, HB 222, requiring HOAs to submit information to the Texas Real Estate Commission addresses this issue. In addition to HB 222, information on every foreclosure and lien filed during the year should be submitted listing separately the amount of past dues and other fees for each filing. This information not only aids potential buyers but also current homeowners and future legislators in determining the need for amending laws and/or creating new laws.

12) Restore homeowners' ability to govern themselves. HOA boards have become "all powerful." Concerned homeowners and groups of homeowners are unable to remedy problems because boards re-write or disregard their governing documents and break the laws of Texas with impunity.

a) Standard Rules of Order should be required for meetings. At board meetings homeowners must be allowed a reasonable time to speak. At membership meetings all homeowners must be allowed a reasonable time to speak, make and vote on motions, vote on policy issues, etc.

b) Homeowners should approve large expenditures, special assessments and increases in regular assessments greater than ten percent over five years. Board increases should be allowed only if the reserve funds are less than half of the annual income.

13) Protect the property interests of homeowners that bought subject to a particular version of CCRs.

a) Phrases in governing documents such as "powers not specifically stated in the governing documents are reserved for the board, policies may be determined solely by the board, the board may interpret or add to deed restrictions, covenants, or CCRs, and the board may modify governing documents" must be prohibited.

b) It should be required that any Policies, Architectural Control Standards or Guidelines, Deed Restrictions, Bylaws, CCRs or any governing document that was adopted or amended solely by the board be revoked, and a statement to the effect filed with the county clerk if such documents were filed with the county clerk.

14) Provide homeowners with a remedy. Allow small claims court judges to fine HOA boards when the board breaks the law or their governing documents.

15) Reinforce the concept of "laches" to deed restriction enforcement. When deed restrictions are selectively enforced or not enforced for several years, boards should lose the power to enforce those deed restrictions.

16) Notices must be given to prospective buyers in a mandatory HOA and to all homeowners and potential buyers of a voluntary HOA engaged in the process of converting to a mandatory HOA. These notices must include the following warning and should be amended as laws are amended, repealed or created.

a) A mandatory HOA is a private organization and is not subject to governmental standards of democracy.

b) A mandatory HOA is empowered to charge assessments in perpetuity without limit.

c) Homeowner's homes/lots will have a permanent lien for unpaid assessments, fines or fees and the HOA will have the ability to foreclose on their homes/lots irrespective of any homestead exemption.

d) The HOA may borrow money with the member home's being the effective security for such financial transactions.

e) A mandatory HOA can impose further restrictions upon the use and enjoyment of their property.

f) A mandatory HOA may have the ability to fine members and such fines may result in liens and ultimately foreclosure, if not paid.

g) Bankruptcy law may not protect members from paying management company fees, attorney fees, and collection fees relating to payment of these assessments, fines and fees even if a member is forced into bankruptcy or foreclosure.

h) A mandatory HOA is not subject to constitutional protections of due process. In the event that disputes are to be resolved by binding alternative dispute resolution (ADR), prospective members must recognize that 1) the member will have to pay for his/her own expenses as well as those of the HOA, and 2) arbitrators are expensive and are not obligated to follow law, the rules of evidence, principles of fairness or due process. Any ADR decision is unlikely to be subject to appeal or to incur any judicial scrutiny and thus any statutory protection, Bylaw, or CCR provision purporting to protect the homeowner is illusory.

17) Revise the requirements for conversion of voluntary HOAs to mandatory.

a) Require unanimous approval of homeowners subject to the mandatory HOA.

b) Prior to voting require one or more membership meetings, at association expense, for discussion and allow presentations from any homeowner.

c) Require notices of possible conversion given to all potential buyers.

d) Require two weeks notice for all meetings and one month notice of voting period mailed with clear instructions for voting to all homeowners.

e) Prohibit proxies.

f) Limit the voting period to two weeks.

g) Upon passage, require all governing documents be approved or revised by a majority of homeowners before the effective date of conversion.

h) Due to the property interests at stake, votes cast in favor of a mandatory association must be in writing and a form suitable for recordation.

i) For those associations that have already converted, require approval of all homeowners to renew mandatory status within one year, following the same procedure described above.

18) Eliminate conflicts with conservation of resources. Conflicts homeowners might have with their deed restrictions on installing or using recommended energy saving devices, alternate energy sources, or observing water conservation must be eliminated. Representative Ritter's bill, HB 231, addresses part of this issue.

19) Eliminate assignment of or require payment of Fair Market Value for "right to collect." Industry professionals argue that the HOA needs to have flexibility in efficient solutions for collecting from delinquent homeowners. One such "industry" proposal is to permit the HOA to assign its "right to collect" to management companies, attorneys, etc. in order to "keep collection costs low" for the association. Transfer of any such "right to collect" should be prohibited.

20) Eliminate indemnification clauses for non-member agents of the HOA. Unscrupulous management companies and other so-called professionals often utilize engagement contracts with indemnity agreements. In other reputable professions, such indemnity agreements are prohibited. True professionals are obligated to refrain from malicious behavior either through threat of the loss of a license or threat of a claim of malpractice. As professionals, these management companies must be obligated to protect themselves through the purchase of malpractice insurance or bonds like every other professional. These indemnity agreements permit unscrupulous management companies to prey upon the HOA and members with impunity.

21) Prohibit HOA boards from using HOA funds to contribute or become a member of another organization, charity, corporation, political entity, etc. without approval from all homeowners.

22) Prohibit cities, counties and municipalities from adopting a rule that requires a creation of a homeowner's association or property owner's association as a condition of approving a plat. Representative Solomons' bill, HB 222, addresses this issue.