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The Basics of HOA Fiduciary Duty

Posted by Tricia Gopi on Feb 6, 2020 6:00:00 AM

fabian-blank-pElSkGRA2NU-unsplash(1)-2An HOA board of directors is the governing body of a residential community. The purpose of an HOA board is to make and oversee decisions regarding community assets and regulations. Most HOA boards are non-profit organizations where each board member serves based on trust. Fiduciary duty requires board members to uphold that trust by acting in the best interest of the community.

What is fiduciary duty?

Cornell Law School defines fiduciary duty as the obligation a professional has to act in “a way that benefits someone else, usually financially.” In the case of HOAs, it’s specified as the duty to act in a way that benefits the community. Fiduciary duty is essentially an ethical code of conduct mandated by law that HOA board members must follow. A breach happens when there is an abuse of power. It’s important to remember that fiduciary duty is not owed from the board to each homeowner in an HOA as an individual, it’s actually an obligation to the community as a whole.

Fiduciary duty can be broken down into  three main components: the duty to care, the duty to loyalty, and the duty to obedience.

Duty to Care

The duty to care requires HOA boards to make informed decisions. Board members must have a comprehensive understanding of their association’s regulations, such as CC&Rs, and they must act in accordance to those specific guidelines without personal motive. Duty to care also means that board members should make decisions that preserve the standard of living homeowners have paid for, which means keeping up with maintenance and repairs.

Duty to Loyalty

Duty to loyalty is the board’s responsibility to “make decisions honestly and in good faith.” The duty to loyalty is breached if there is a conflict of interest. For example, a board member cannot hire a property management company that they own or are employed by. This kind of conflict is self-serving, and it jeopardizes the community’s trust in their HOA board.  

The duty to loyalty also involves an HOA board’s responsibility to keep personal information confidential. Board members may have access to sensitive information about homeowners within the community. To uphold their fiduciary duty, they must not divulge that information to anyone else without reason.

Duty to Obedience.

The duty to obedience is the obligation to act within the scope of one’s authority. This means board members must adhere to the rules laid out in an HOA’s governing documents as well as those required by regional laws. Regulations and CC&Rs vary from one HOA to another, so board members must make sure to stay informed.

Do property managers have fiduciary duty to HOAs?

Property managers do not owe fiduciary duty, because unlike a board of directors, they are not responsible for anything legislative. Property managers act as an agent of the board. They don’t make governing decisions; they implement the decisions made by the board. Property managers are obligated only to what is specified in their contracts.

Topics: Blog, Property Management, Accounting, Communication, Business Growth, Hiring, HOA, Economics

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