Homeowners associations are operated by the collective action of a board of directors that is elected by the homeowners. For individual HOA directors and officers to take action on behalf of the HOA, they must first have the authority to enter contracts. That authority typically comes from a resolution adopted by the associations board of directors at a proper meeting. When it comes to negotiating and entering into contracts, state laws and the governing documents for a homeowners association vest the associations board of directors with the power to contract for the association. Thus, absent action taken in an emergency situation, HOA directors or officers do not have the right to individually negotiate with vendors, instruct vendors, or enter into contracts with vendors without proper authorization from the associations board of directors.
If individual HOA directors or officers approve and enter into a contract in a non-emergency situation without proper authorization from the associations board of directors, the association may still be bound by the unauthorized agreement and thus be required to perform in accordance with the agreement, or be subject to liability for nonperformance. In such a case, the individual officer or director who acted without authority in entering into the contract may be subjected removal from the board of directors and/or personal liability for his or her wrongful actions and damage caused to the association. Action that is taken by an individual officer or director in contracting for emergency repairs, such as repairs that are necessitated to deal with a broken water pipe that is causing flooding, constitutes an exception to the requirement for advance authorization by the associations board of directors, and an individual officer or director will not be subject to liability or removal under such circumstances.
For proper authorization, the associations board of directors should hold a noticed meeting at which a quorum of the directors is present and adopts a resolution that specifies a need for the contemplated action and which specifically authorizes one or more individuals (typically a property manager, officer or director) to obtain bids and a proposed contract for the boards future review and consideration. The bids and proposed contracts are then presented to the board at a subsequent meeting for further discussion and evaluation and the associations final approval of a contract is generally done in an executive session meeting of the board.
Unless they involve routine repairs, or minimal amounts of money for which blanket authorization has previously been given (i.e. the associations board has previously authorized a particular officer, director, or the associations property manager to enter into agreements with vendors and make expenditures up to a maximum amount, such as $1,000, without prior board approval), homeowners associations should not enter into contracts that become binding on the association until they have been reviewed by the associations legal counsel and are subsequently approved by the associations board of directors. Written contracts that have been provided by vendors are typically drafted by lawyers for the vendor and contain provisions that are designed to be most beneficial to the vendor. Notwithstanding same, it is not uncommon for unknowing volunteer directors to accept written contracts provided by proposed vendors without having them first reviewed by the associations counsel thereby binding the homeowners association to undesirable terms that could be extremely costly to the association in the future.