What happens when the state takes over an HOA? This is a common question that many board members and homeowners ask. In most cases, the state doesn’t take over the association in the literal sense. Instead, a court will usually appoint a neutral third party to temporarily manage the community.
What Happens When the State Takes Over an HOA?
Homeowners associations and condominiums are governed by a set of directors known as the board. Due to certain circumstances, this board may no longer continue to operate the association. But can the state really take over an HOA?
This is a common misconception. States don’t assume direct control of an association when it starts failing. In general, a court will step in to appoint a receiver. In some cases, regulatory investigations or enforcement actions by state agencies will come into play instead.
What is HOA Receivership?
In simple terms, receivership is a temporary remedy wherein a neutral third party assumes governance of an association until it reaches stability. It is considered an emergency measure, with the board eventually reassuming control.
The authority of a receiver is similar to that of the board. This person can collect dues and assessments, pay bills, maintain common areas, hire vendors, prepare budgets and reports, enforce the rules, manage employees, and file lawsuits (if necessary).
That said, the receiver does not report to the board. Instead, they report to the court.
Reasons for HOA Receivership
Receivership doesn’t just happen randomly. There are a few potential circumstances that would trigger receivership, including but not limited to:
- No Functioning Board. If there are too many resignations, no quorum, or a failure to elect directors, receivership can happen.
- Severe Financial Problems. A receiver may be appointed if the association is insolvent or bankrupt. This can also stem from unpaid vendors, inability to collect dues, and a total depletion of reserves.
- Failure to Maintain Common Areas. An association may need a receiver if it fails to maintain common areas, leading to unsafe conditions or health hazards.
- Persistent Violations of Governing Documents or State Laws. Examples include failure to hold elections, hold meetings, or maintain records.
- Fraud or Mismanagement. Embezzlement, financial misconduct, self-dealing, and missing records can all trigger receivership.
- Internal Dysfunction. If the association suffers from ongoing board disputes or directors refusing to perform duties, a receiver can enter the picture.
- Developer-Related Problems. A failed transition, an abandoned development, and an insolvent developer can all lead to receivership.
How Does HOA Receivership Work?
Boards should check state laws and their governing documents to understand what receivership entails. That said, in Maryland, two statutes come to mind: Section 11B-111.5 (for HOAs) and Section 11-109.3 (for condos).
Petitioning the Court
In general, anyone can request receivership, including homeowners, creditors, vendors, and mortgage lenders.
According to Maryland law, homeowners can seek a receiver if the HOA doesn’t have enough board members to form a quorum or if the board has failed to fill enough vacant positions to meet that quorum. At least three homeowners must join together to file the request.
30-Day Notice
Homeowners can’t immediately ask the court to appoint a receiver. They must first give the board at least 30 days’ written notice explaining that they intend to file a petition. They must also send the same notice to every homeowner in the community.
This gives the board one final opportunity to appoint or elect enough directors to make the board functional again. If the board fills enough vacancies to restore a quorum within the 30-day period, the homeowners can’t move forward with the petition.
On the other hand, if the board doesn’t restore a quorum, the homeowners may ask the court to appoint a receiver.
Who can be a Receiver?
The receiver must be independent. Specifically, the receiver can’t live or own a lot in the community. They must have no personal stake in the association whatsoever. This helps ensure that the receiver remains completely neutral.
When Does Receivership End?
Receivership isn’t a permanent situation. Eventually, it will end once a court determines that the association can function independently. Elections will take place to restore the quorum, and authority will once again rest with the board.
What Happens When the State Takes Over an HOA?
When a court appoints a receiver, the board loses its authority. The receiver assumes the powers and duties of the board, including overseeing day-to-day operations.
More often than not, the receiver can also skip homeowner voting and impose the necessary dues or special assessments that would dig the community out of its financial problems. Homeowners are then legally obligated to pay these fees, including board members.
If finances are an ongoing issue, the receiver will focus on the association’s critical spending first. Essential services are prioritized. When necessary, the receiver will also address any lawsuits, renegotiate contracts, and fix other issues to put the association back on its feet.
Keep in mind that receivership doesn’t come free. The receiver’s salary, attorneys’ fees, and court costs are still shouldered by the association. This means that the homeowners themselves will foot the bill, even if the state is the one who intervened.
FAQs: What Happens When the State Takes Over an HOA?
Can homeowners remove a receiver?
In general, no. A court appoints the receiver, so homeowners can’t vote to remove one. That said, if the receiver is suspected to be acting improperly or is no longer necessary, homeowners can petition the court to replace or remove the receiver. The final say will come from the judge.
Who pays for an HOA receiver?
The HOA pays all of the costs associated with the receivership. This includes the receiver’s salary, court costs, and reasonable attorneys’ fees.
Can the HOA board still make decisions during receivership?
Typically, no, the board can’t make decisions during receivership. The only exception is if the receiver authorizes it. Most receivership cases place complete control of the association on the receiver, with the board either fulfilling an advisory role or losing total power.
How long does HOA receivership last?
There is no fixed timeline for receivership, but it is also not permanent. In general, receivership ends once the court determines that the association can run independently again.
Can the HOA recover after receivership?
Absolutely. Receivership is designed to help the association dig itself out of whatever problem it’s currently in. It’s a temporary solution, and an association can certainly resume normal operations after the receiver’s service.
Is HOA receivership the same as bankruptcy?
No. While both usually involve financial difficulties, they are not the same. Bankruptcy helps associations manage, restructure, or eliminate debt under bankruptcy laws.
On the other hand, receivership is more about restoring management and operations if an association can no longer function properly. Financial problems are not its only trigger. Receivership can also come into play if the board consistently fails to meet a quorum or fulfill its obligations.
Receivership doesn’t give the state direct control of a community. Instead, a court assigns a neutral third party to help with operations and finances, ultimately returning control and governance responsibilities to the board. It is a temporary fix but can go a long way in helping communities bounce back.
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 get started!
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