As an HOA board member, your actions can have a significant impact on the community’s wellbeing. And so, you want to be sure that you are serving your role and association as responsibly as possible. You can ensure this by understanding the fiduciary duties of HOA board members.
Fiduciary Duties of HOA Board Members: Why Do They Exist in Communities?
Fiduciary duties commonly exist in the context of businesses and corporations. Corporate law mandates that since a corporation’s board of directors is placed in a position of trust and authority, they have a fiduciary duty to the corporation and its stockholders.
How does this relate to the fiduciary duty of the board of directors of homeowners associations? Most HOA communities have articles of incorporation in their governing documents, which establishes them as non-profit corporations. Even though they are non-profits and board members are volunteers, HOA communities also follow corporate law. This means that an HOA board of directors has a fiduciary duty to their association and its members.
What Are the Fiduciary Duties of HOA Board Members?
A fiduciary duty (or fiduciary responsibility of HOA board members) is defined as the obligation that a fiduciary owes to the beneficiary.
In this context of HOAs, the fiduciary is the board of directors and the beneficiary is the association (and its homeowners). Since fiduciaries are placed in a position of trust and authority — meaning they can act on behalf of the association — it is their legal duty to act in the best interests of their beneficiary, the HOA.
The fiduciary duty of HOA board members has three components: duty of loyalty, duty of care, and duty to act within the scope of authority.
1. Duty of Loyalty
Duty of loyalty requires HOA board members to act in good faith to promote the best interests of the entire association. HOA fiduciary duty prevents board members from making decisions to further their personal interests. Board members must also avoid conflicts of interest, such as choosing a vendor owned by family members or voting on an issue that the board member may be biased about.
2. Duty of Care
Duty of care requires HOA board members to make informed decisions regarding HOA matters. However, corporate law acknowledges that board members are constantly faced with countless decisions and it is impossible to thoroughly review information related to each decision. As such, the board of directors can rely on other people such as an HOA manager or staff to provide the information necessary to make a decision. However, the HOA board of directors is still responsible for making the final decision.
This component can apply to several situations, including imposing fines on homeowner violations. An HOA board member must first make sure that he/she is up-to-date on the association’s rules and regulations. You can’t simply fine a homeowner for doing something that you don’t like. HOA boards must follow the protocol for fines, which is clearly outlined in the bylaws.
3. Duty to Act Within the Scope of Authority
In this third component, board members are required to only act within the scope of their authority. They cannot act or make decisions on matters that are outside the boundaries of their HOA roles and responsibilities. HOA board members must read their governing documents to educate themselves on the limitations of their authority.
Board members must also know that governing documents do not supersede local, state, and federal laws. As such, a community that prohibits pets cannot refuse a homeowner with a disability who has a service animal. A board member who rejects the disability needs of the homeowner is acting outside the scope of authority because he/she is already violating the Fair Housing Act.
Why Must HOA Board Members Uphold Their Fiduciary Duties?
HOA fiduciary duty protects both the association and its board of directors. For associations, imposing fiduciary duties on the board of directors encourages them to act responsibly at all times. If they do not fulfill their fiduciary obligations to the association, they will be held accountable for their actions.
Meanwhile, fiduciary duties of HOA board members also protect them from personal liabilities. For instance, a disgruntled homeowner can sue a board member for making bad decisions.
However, if the court can prove that their decision was in the best interest of the community — regardless of the bad outcome — the business judgment rule will not hold them personally liable. This empowers board members to serve their community without fear of losing their personal assets.
Most associations have an indemnification clause, which allows board members to reimburse legal expenses in case they are sued. If you want to protect the finances of your association, think about purchasing directors & officers (D&O) insurance coverage.
How Can Board Members Fulfill Their HOA Fiduciary Duty?
Upholding your fiduciary duties is a mark of being a good HOA board member. Board members can fulfill their duty of loyalty by prioritizing the needs of the community. Keep in mind that as a homeowner yourself, the success or failure of the community will also affect you. As such, put aside your personal interests when dealing with HOA matters.
Meanwhile, board members can uphold their duty of care by thoroughly understanding their duties and responsibilities — and by always trying to fulfill these obligations to the best of your ability. Board members should also understand their governing documents, especially CC&Rs, bylaws, and articles of incorporation. You can fulfill your duty to act by knowing the scope of your authority and obligations. Moreover, board members must also be up-to-date on local, state, and federal laws.
Taking Pride in the Fiduciary Duties of HOA Board Members
HOA board members should not treat their fiduciary duties as a burden or something that they always have to worry about. Rather, treat this legal responsibility as a reminder to always take care of your community.
When homeowners see that their HOA board is acting responsibly, the more they can trust you with the community. Board members can also take pride in their service to the community. It is a rewarding feeling knowing you helped protect your community’s value, which, in turn, enabled it to grow into a bigger and more successful homeowners association.