Did HOA Board Act Outside The Scope of its Authority?

In this action an association member (“Owner”) sought to annul a license agreement between his property owners’ association (“Association”) and another owner. In late 2017, Association’s Board of Directors, acting on behalf of Association, entered into the license agreement which granted the other owner the exclusive right to affix his private docks to Association’s community dock in exchange for a yearly license fee and for services provided to Association by the owner’s company. Owner commenced the action against Association and the Board of Directors seeking to annul the license agreement based on claims that the Board of Directors had acted outside the scope of its authority when it entered into the license agreement. In late 2018, the trial court entered a judgment that annulled the license agreement and an appeal followed.

The appellate court stated that courts should apply the “business judgment rule” when reviewing actions of a homeowners’ association and limit its inquiry to whether the action was authorized and taken in good faith and in furtherance of the legitimate interests of the association. Thus, courts should defer to actions by a homeowners’ association board so long as the action taken was for purposes of the association, within the scope of the board’s authority, and taken in good faith. Stated another way, the business judgment rule does not apply when an association’s board acts outside the scope of its authority or violates its own governing documents.

In applying the business judgment rule: