A Costly Mistake: Court Says HOA Maintenance Dispute Had to Be “Derivative”

This case involved a dispute between a corporate homeowner (“Owner”) and its homeowners association (“Association”) over Owner’s claims that the Association was not properly maintaining the common areas and common area amenities.

Owner filed suit against the Association and a board member for breach of contract and breach of the implied covenant of good faith and fair dealing, alleging the Association failed to maintain a long list of common areas and amenities, including the clubhouse, fences, parks, pools, lakes, fountains, and more.

The trial court dismissed the lawsuit because Owner did not comply with mandatory statutory requirements for a “derivative[1]” claim, then awarded attorney’s fees in the amount of $59,970.00, and imposed $5,000 sanctions for pursuing claims “without substantial justification.”

[1] A derivative action is a lawsuit where a member/owner sues on behalf of the organization (the HOA/corporation), because the organization’s leaders (typically the board) allegedly failed to enforce the organization’s rights. You sue because the HOA was harmed (e.g., waste of HOA funds, damage to common property, failure to enforce a right that belongs to the association). Any recovery generally goes to the HOA, not directly to the individual plaintiff—though the plaintiff may seek reimbursement of fees/costs in some situations. A key feature is the “demand requirement”: before filing, the member usually must send a written demand to the board asking the HOA to take action, and then wait the required period (unless a state recognizes a futility exception). Derivative lawsuit requirements may vary from state-to-state so applicable state statutes must be reviewed and complied with.

The court stated that a claim is “without substantial justification” when it is: