NC House Bill 542 Proposes Sweeping Changes to HOA and Condo Laws

By Michael S. Hunter

NC House Bill 542 was filed in March of this year.  It has gone through multiple revisions by various committees since then, is now in its third version, and has been re-referred to the Senate Committee on Rules and Operations of the Senate.  It was conceptualized as sort of a “consumer protection” bill to make the laws more protective of homeowners against overreaching HOAs.  There are some provisions in the bill that are well-justified and needed, but as is so often the case in well-intentioned legislation, the “tentacled beast” being confronted is not as pervasive or lethal as the sponsors of the legislation would have you believe.

Below is a summary of the main provisions of the bill (along with my commentary).  The proposed changes to both the Planned Community Act and the Condominium Act are essentially identical.

1. HOA management contracts would be limited to one-year, with no automatic renewal. The reality of this change is that management companies will likely have to increase their fees, since much of the expense of taking on a new HOA client is front-loaded – meaning the management company incurs more expense in the first year due to “on-boarding” of all the information of the HOA and the homeowners, vendor selection, and other administrative matters.  Thus, if the management contract could be terminated without penalty after one year, the company is obviously going to have to charge more for that year than they would for a three-year contract (which is the industry norm). 

2. Homeowners will be specifically authorized to obtain a copy of their HOA’s management contract.

3. Management companies will not be allowed to keep any revenue generated through fines levied against homeowners for violations of the community’s governing documents. This is a good thing, since management companies should not be incentivized to fine owners based on revenue-sharing.

4. HOAs will not be allowed to restrict on-street parking on public streets, even if the governing documents prohibit it. I understand the reasoning behind that, and it sounds like a homeowner-friendly change, but there are many communities where the streets were built too narrow (with approval of municipal planning agencies) to safely provide for pedestrian/vehicular traffic and emergency vehicle access if the sides of the streets are lined with parked cars.

5. HOAs will no longer be able to prohibit or fine homeowners for providing tutoring or lessons out of their home (which is considered the operation of a business in a residential setting), as long as the student groups do not exceed five people at a time.

6. The bill adds a provision that closes a loophole that allowed management companies to charge extra administrative fees upon the sale of a home.

7. All fines collected by HOAs will have to be remitted to the state “Civil Penalty and Forfeiture Fund,” reducing the incentive for HOAs to take enforcement measures against rules violators.

8. There are several proposed changes to the lien/foreclosure laws. They include:

• • Liens for fines will HAVE to be filed within 30 days after the date the fine was originally imposed. Further, foreclosures of liens for fines will HAVE to be filed within 180 days of when the lien was filed (currently, that deadline is three years). I am curious whose idea this was or why they thought this was needed.

  • Forcing HOAs to file liens or foreclosures for fines on a very short timeline makes no sense, and benefits neither the HOA nor homeowners.

  • HOAs will have to notify owners of delinquent assessments and liens, including by phone and email (if an owner has provided those), and by mail to multiple addresses. For those smaller, self-managed associations that are not as familiar with statutes and how they apply to the execution of their duties, this could easily cause associations to violate the Fair Debt Collection Practices Act. This will open up the association and the board to lawsuits.

  • Attorney’s fees on foreclosures of liens consisting of only fines (and attorney’s fees related to the fines) will be limited to 15% of the “amount recovered,” which is not necessarily the same as the “amount due.” 15% often will not be enough to cover the actual attorney’s fees and court costs, which means the HOA will have to absorb the difference.

  • Foreclosures may be filed only if the amount due is at least $2,500, or 12 months’ of assessments, whichever is lower.

  • The bill will eliminate HOA’s ability to foreclose liens using the more efficient “power of sale” foreclosure process that is used for mortgage foreclosures. Instead, all HOA foreclosures will have to be brought using “judicial foreclosure,” which is essentially a full-blown lawsuit. This has the real potential to drastically increase the time required for HOA foreclosures to run their course, because contested litigation can drag on for years. It will also drastically increase the cost, which must eventually be paid by the homeowner to prevent a foreclosure sale of their home. This change will hurt both the HOAs and the homeowners.

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Making it more expensive and difficult for HOAs to collect delinquent assessments will only make it easier for homeowners to avoid the repercussions of not paying their assessments. When this happens, HOA revenues fall short of budget – which means that services must be cut, or other homeowners have to pay more to cover the shortfall. This becomes critically impactful when it affects associations responsible for providing insurance, water and sewer service, solid waste disposal, fire protection, and other life essential and safety services to its homeowners.

Yes, there are some unscrupulous HOA boards and management companies who have abused their power and authority.  The same could be said for any industry.  But based on my observations, they are a very small percentage of the more than 14,000 HOAs in North Carolina.  While some of the proposed changes to the laws are needed, this bill goes too far.  The legislature is essentially throwing out the baby with the bathwater.  If the legislature agrees to more discussion instead of ram-rodding this legislation through, we hopefully will see a bill that provides needed protections to homeowners without increasing burdens on the HOAs and homeowners who follow the rules and pay their assessments on time.

Author: Kirk Palmer & Thigpen
Articles have been Reprinted with permission from the charlotte observer and Mike Hunter.

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