Chapter 8 POWERS OF COMMON INTEREST COMMuNITIES

• Jurisdiction: North Carolina

8 POWERS OF COMMON INTEREST COMMuNITIES

§ 8.01. In General

In recent years, there have been a number of commentators who suggest that homeowners associations have too much power. Some believe additional safeguards are necessary or the entire model should be scrapped altogether.¹ Indeed, the frequency with which the North Carolina legislature has amended the laws related to associations and has met to consider proposed legislation is indicative of the concern at least the legislature has over the increasing number of people living in common interest communities.² In reality, there are a myriad of laws that do govern and limit the powers of planned communities and condominiums. In fact, homeowners associations today are some of the most highly regulated entities in the State of North Carolina. The overwhelming majority of associations in North Carolina exercise restraint in the exercise of all powers available to them. Although there are a number of powers homeowners and condominium associations have in North Carolina and elsewhere, there are also layers upon layers of federal, state and local statutes, regulations and ordinances that limit these powers in certain ways, not to mention a developing body of common law, which effectively limits the powers of associations as well.³

In North Carolina, some powers can be exercised unilaterally by the board or even officers of the association, while other powers have to be put before the membership before they are exercised. Unlike a duty that is required, a power is a right to do something, but it is not necessarily an obligation to do so. There are plenty of powers associations have that they simply do not exercise for various reasons. Unlike a duty, the failure to exercise a power that is not also a duty, will generally not get the board, officers or the association sued successfully. Powers of associations can be found in the Unit Ownership Act, the PCA, the Condominium Act and the Nonprofit Corporation Act. Any association powers can be limited in the articles of incorporation or declaration of the association.⁴ If not limited, then these statutes grant broad powers to these associations to enter into certain transactions and engage in various types of conduct. While these statutes do not necessarily require that the association exercise these powers, it gives the association, and in some cases, the membership, the right to do so if desired by the particular community.

When actions or conduct are not authorized by statute or the association's declaration or articles, it is said to be "ultra vires," or "beyond the powers." In North Carolina, an incorporated association's power to act may be challenged in a proceeding by: (a) a member against the association to enjoin the act; (b) the association directly, derivatively, or through a receiver, trustee, or other legal representative, against an incumbent or former director, officer, employee, or agent of the association; or (c) the Attorney General under N.C.G.S. § 55-14-30.⁵ Most circumstances involve the first of these ways, where a homeowner sues the association to get a court order preventing the contemplated transaction on the grounds that the association lacks the power to engage in it. If an association's actions are deemed ultra vires, the action may be set aside.⁶ However, disagreement alone with the association or the board's decision does not mean the decision is unauthorized or beyond the powers of the association. Rather, it must be shown that the decision to act and the contemplated action are beyond the scope of any powers conferred upon the association by any applicable statutes or the association's own governing documents. An association may have the power to do something, but the particular act may also not be properly authorized.⁷

Since most associations are nonprofit corporations, the general statutes and common law relating to corporate powers is applicable. Many years ago, corporations (including nonprofit corporations) were viewed as possessing only such powers as were specifically granted to them by the State.⁸ This grant of power was usually found in the articles of incorporation.⁹ Today, in all states, a corporation is deemed to possess all the powers of a natural person except those powers that are specifically forbidden to such corporations by law.¹⁰ The Official Comments in the Model Nonprofit Corporation Act state:

It is clear that narrow and limited powers clauses are undesirable: they encourage litigation by bringing into question reasonable transactions that further the activities and interests of the corporation and to the extent transactions are unauthorized, may defeat valid and reasonable expectations . . . The general philosophy of Section 3.02 is thus that nonprofit corporations formed under the act should be automatically authorized to engage in all acts and have all powers that an individual may have.¹¹

In North Carolina, almost every nonprofit corporation incorporated under the Nonprofit Act has the purpose of engaging in any lawful activity unless a more limited purpose is set forth in its articles of incorporation.¹² Unless its articles of incorporation or the Nonprofit Act provides otherwise, every North Carolina nonprofit corporation has the same powers as an individual to do all things necessary or convenient to carry out its affairs, including, without limitation, the power to "purchase, receive, lease, or otherwise acquire, and own, hold, improve, use, and otherwise deal with, real or personal property, or any legal or equitable interest in property, wherever located."¹³ In other words, unless the articles of incorporation limit the powers of the nonprofit corporation, then the nonprofit corporation may engage in any lawful activity.

With nonprofit corporation homeowners and condominium associations, the matter can be more complicated. Clearly, the PCA and the Condominium Act are very specific statutes that apply to planned communities and condominiums, but the Nonprofit Act applies to all nonprofit corporations, not just homeowners and condominium associations. While the powers conferred on nonprofit corporations under the Nonprofit Act can apply to supplement the powers conferred on associations under the PCA and Condominium Act, the Nonprofit Act cannot contradict the PCA and the Condominium Act.¹⁴ This point is best illustrated by the powers in the PCA and Condominium Act that are specifically not available to pre-1999 and pre-1986 condominiums if these communities have not otherwise taken steps to "opt in" to these statutes.¹⁵ The Nonprofit Act may very well empower a nonprofit corporation to exercise these powers; however, the legislature has made a conscious decision for these powers not to be made available to homeowners and condominium associations. As such, it may not be proper to "bootstrap" the powers in the Nonprofit Act to a pre-1999 planned community or pre-1986 condominium, thereby doing an end run around the inapplicability of these specific powers in the PCA and Condominium Act.¹⁶ However, in instances where the PCA and Condominium Act are silent, the Nonprofit Act can indeed serve to supplement the powers of homeowners and condominium associations beyond those specific powers enumerated in the PCA and Condominium Act. Irrespective of the applicability or lack thereof of the PCA and Condominium Act, if the association has the power to perform an act in its governing documents, then the association has the power and the enabling powers in the PCA and Condominium Act are unnecessary.¹⁷

§ 8.02. The Power to Adopt and Amend Bylaws

The bylaws document usually governs the internal ways an association conducts business. For instance, the bylaws typically contain the detailed procedural requirements for membership meetings, quorum requirements, rules for the use of proxies, the ways in which directors are elected and how board members and officers are appointed. All planned communities and condominiums, regardless of when formed, have the power to adopt and, thereafter amend bylaws.¹⁸ The bylaws for the association are usually adopted by the initial board of directors for the association.¹⁹ The bylaws can contain anything for managing the affairs of the association that is not inconsistent of the articles of incorporation, but must at least contain what the PCA and Condominium Act require the bylaws to contain.²⁰ Broadly worded provisions in an association's bylaws that grant the board the power to exercise powers of the association not expressly reserved for the membership are enforceable.²¹ Amendments to bylaws should be done in accordance with the provisions in the bylaws themselves, which have to specify how they are to be amended under both the PCA and the Condominium Act.²²

The bylaws are important for an association and can limit the powers an association can otherwise exercise. In Penninsula Property Owners Ass'n v. Crescent Resources, 171 N.C. App. 89, 614 S.E.2d. 351 (N.C. App. 2005), the developer for a planned community inserted a provision in both the declaration and bylaws requiring two-thirds of the membership to approve of litigation being commenced against the developer. The association sued the developer before obtaining the required vote and the trial court dismissed the case. On appeal, the Court of Appeals affirmed the dismissal, noting that the provision in the bylaws may establish procedural prerequisites before an association may file suit.²³ Thus, it is important for an association to consult not only its articles and declaration, but also its bylaws before exercising any powers it has under any other statute.

§ 8.03. The Power to Sue and Be Sued

Planned Communities and condominium associations have the power to sue and be sued under the PCA, the Condominium Act and the Nonprofit Act.²⁴ This power is available to all planned communities and condominiums regardless of when formed.²⁵ The Official Comments to the Uniform Planned...