Can an HOA be dissolved? This is a question many homeowners ask when they become frustrated with rules, rising costs, or ongoing management issues. Before considering such a significant change, it is important to understand what usually triggers a dissolution, the potential aftermath, and how the process works.
Can an HOA be Dissolved?
Homeowners associations go a long way in maintaining curb appeal and protecting property values. Yet, residents may find their HOA to be too restrictive or expensive. This leads to the question: can an HOA be dissolved?
In most cases, the answer is yes, but only if the community meets certain legal requirements. Whether dissolution is possible depends on several factors, including state and local laws and the governing documents.
Can an HOA be Dissolved? What State and Local Laws Say
Many states have statutes governing nonprofit corporations, HOAs, and condominiums. These laws often establish the procedures for dissolving an association, including filing requirements, creditor notifications, and asset distribution.
In Maryland, Section 11-123 of the Condominium Act addresses dissolution or termination. On the other hand, planned communities or HOAs must turn to the Maryland General Corporation Law.
Additionally, cities and counties may require an association to remain responsible for privately owned roads, stormwater facilities, parks, retention ponds, gates, or streetlights. If no other party agrees to maintain these assets, it may be impractical or even impossible to dissolve an HOA.
Can an HOA be Dissolved? What Governing Documents Say
An association’s governing documents often contain provisions that address termination or dissolution. These documents may specify what percentage of owner approval is necessary, whether mortgage lender approval is required, and how common property must be transferred.
Moreover, many governing documents require approval from at least two-thirds or even 80% to 100% of all owners to dissolve the association. This is often the largest barrier, as not everyone wants to terminate the community.
Can You Dissolve an HOA?
In general, it is possible to dissolve an HOA or condominium. The process usually begins with the homeowners or the board of directors.
In many communities, owners may petition the board to consider dissolution or request a membership vote if the governing documents permit it. While owners are usually the ones to initiate, the board must coordinate all the legal, financial, and administrative work involved. This includes consulting attorneys, accountants, engineers, and managers.
Dissolving an HOA almost always requires a membership vote. In Maryland, condominiums may be terminated by owners holding at least 80% of the voting power. The CC&Rs can require a higher percentage, but they can’t require a lower one.
After the vote, the board must put the agreement to dissolve in writing. This agreement must also explain the terms of the sale if the association intends to sell the entire condominium. Moreover, the association must then record the termination agreement in the land records.
Some CC&Rs require approval from mortgage holders before dissolution can occur. Lenders have an interest in protecting the value of the collateral securing their loans, so their consent may be needed.
Common Reasons for Dissolving a Homeowners Association
Dissolution is not usually the first thing that comes to mind when problems occur. That said, here are the usual triggers.
- Ongoing Leadership Problems. Homeowners tend to lose confidence in their association with consistently poor leadership, decisions, or conflicts.
- Rules That No Longer Fit the Community. Some neighborhoods believe their restrictive covenants are outdated or overly burdensome, requiring termination.
- Persistent Maintenance Issues. An HOA that constantly neglects maintenance and repairs can lead to frustrations.
- Rising Dues and Financial Pressure. Increasing dues, frequent special assessments, and expensive repairs can push owners to call for a dissolution.
- Very Few Shared Amenities. Communities with little or no common areas sometimes question whether an HOA is still necessary.
- Falling Home Values. Owners might view dissolution as a way to rebuild the community and recover property values.
Typically, long-term problems or a combination of the above lead to calls for dissolution. It rarely happens that a single instance or mistake compels owners to petition for termination.
What Happens if an HOA Dissolves?
Dissolution isn’t a quick process. After homeowners vote to dissolve an association, the HOA doesn’t just disappear overnight. The association must wind up its affairs and determine what happens to its responsibilities.
Depending on the community, the following may occur:
- The local government, another association, or individual owners may assume ownership of common areas.
- A new owner becomes responsible for maintaining private roads, parks, drainage systems, and utilities.
- Existing contracts with vendors may need to be completed, assigned, or terminated.
- The association must pay its outstanding debts and liabilities.
- Pending lawsuits must reach a resolution.
- The board will close the association’s bank accounts after satisfying its remaining obligations.
- The association files corporate dissolution documents with the state.
- If the law and governing documents permit, restrictive covenants may terminate.
In some cases, homeowners may assume maintenance responsibilities individually. It is also common for homeowners to start from scratch, creating a new association to manage shared properties.
How to Dissolve an HOA
The dissolution process comes with several steps, and boards must navigate them correctly. Here is a guide to terminating an association.
1. Review State Laws and Governing Documents
First, it is important to determine whether dissolution is even an option. State laws and the governing documents will tell the board if it is legally permitted. These should also identify the required approval thresholds and procedures for dissolution.
2. Consult Legal and Financial Professionals
Because HOA dissolution affects property rights, contracts, and corporate obligations, the association should obtain guidance from qualified attorneys and accountants. This step is critical to limiting legal and financial exposure.
3. Evaluate Community Assets and Liabilities
Next, the board must inventory all common property, infrastructure, bank accounts, debts, contracts, insurance policies, and pending legal matters.
4. Develop a Transition Plan
A transition plan will ensure a smooth dissolution process. This plan determines who will own and maintain the association’s assets, including private roads, parks, stormwater systems, and recreational facilities. After dissolution, these items will still need consistent maintenance.
5. Hold the Required Membership Vote
Dissolution typically requires approval from the membership. The association must conduct the vote according to state laws and the governing documents. This vote must take place at a properly noticed meeting with a quorum.
6. Resolve Financial and Legal Obligations
If the vote passes, dissolution is made official. The association must then pay all of its outstanding debts, terminate existing contracts, and distribute any remaining assets. It is important to resolve all issues.
7. Complete the Legal Dissolution
Finally, the association must file the required dissolution documents with the appropriate state agency. Local governments may also require additional filings.
Key Obstacles to HOA Dissolution
Terminating an association isn’t always a seamless process. There are three main hindrances to dissolving an HOA.
1. Municipal Refusal
Many cities and counties won’t accept ownership of private roads, streetlights, parks, retention ponds, or stormwater systems. Those will just add to the municipality’s obligations and financial stress. If no one agrees to maintain these assets, it may be impossible for an association to dissolve.
2. Property Values
Without an HOA, community standards will often plummet. While some owners may welcome the newfound freedom to do whatever they please, others will rightfully worry about curb appeal and property values tanking.
3. Financial Obligations
An association can’t simply walk away from its obligations. It must settle all loans, unpaid invoices, insurance claims, employee matters, vendor contracts, and lawsuits. Only then can it legally dissolve.
Find the Right Solution
Dissolving an HOA may be possible, but it is a complex process with lasting consequences. Before pursuing termination, boards should explore other solutions that could address operational issues, financial challenges, or community concerns. With the right professional support, an association may be able to improve board operations and continue serving homeowners effectively.
Majerle Management, Inc. provides management services to HOAs and condo associations in Maryland. Call us today at (301) 220-1850 or contact us online to learn how we can help strengthen your association.
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