How long does the developer retain control of the HOA?

Q: My home owners association (HOA) never held a members’ meeting to elect a board of directors after the developer’s five-year period of control ended in 2010. The developer-appointed board consists of the developer, his wife and son. The developer maintains that, according to the North Carolina Condominium Act, the term of office of the board members he appointed continues until there is an election. I have read every line of the act and that reading does not substantiate his claim. A lawyer friend maintains that until there is an election there is no board of directors. What do you think?

A:  Developers of condominiums and planned communities usually, for good reason, want to retain control over the HOA until all of the homes are sold or nearly sold.

There are various mechanisms by which they can do this, but one is by retaining the right to appoint all (or a majority) of the members of the board until the “declarant control period” has ended.

Another method is to give the declarant three, five or even more votes for each lot or condo owned by the developer, while homeowners get only one vote per lot or condo. In the latter scenario, there are two classes of members in the HOA – the declarant, and everyone else – each with different voting rights.

Contrary to what the developer told you, the declarant control period is not governed by North Carolina law, but it is probably defined in your declaration of condominium.

The control period usually terminates on 1) a date based on the ratio between the number of votes held by each respective class reaching a certain point (the number of votes held by the declarant goes down, and that of members goes up, as homes are sold); 2) the date on which a certain percentage of the lots or condos have been sold; or 3) a specified “drop dead” calendar date some years down the road, if the other events have not yet occurred.

The North Carolina Nonprofit Corporations Act states that the term of a director is one year, unless the bylaws or articles of incorporation specify a different term.

However, the Act also says that “despite the expiration of a director’s term, the director continues to serve until the director’s successor is elected, designated, or appointed and qualifies …” Thus, even with a one-year term, a director will retain the position until elections are held, or he or she resigns and the remaining board members appoint a replacement.

I suggest you start by reviewing your declaration of condominium – there should be a section that addresses voting classes or the declarant control period.

Next you should check your bylaws to determine how the board of directors is elected, who qualifies to serve on the board, and how long the terms are. The original members of the board were probably specified either in the articles of incorporation filed with the Secretary of State, or in the bylaws.

Alternatively, the declaration or bylaws can have language that gives the declarant the unilateral authority to appoint the board members, as noted above. If any of these apply, then yes, your HOA can have a validly appointed board without an election.

Keep in mind that an HOA board controlled by the developer still owes the same legal “fiduciary” duties to homeowners that a board elected by the owners would. For a previous article related to this topic, see http://bit.ly/175zEhZ

 

Originally published in the Charlotte Observer August 24, 2013

2 thoughts on “How long does the developer retain control of the HOA?

  1. Is it the responsibility of the Declarant to fund the annual fee on all of the unsold lots to the HOA? This is not cited in the CCR’s.

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