Real Estate & Property Law

Check Your HOA Corporate Status!

Many association boards do not even have a clue about what "corporate status" means. When I get a new client, I ask for the governing documents and when I ask them to include the Articles of Incorporation I often get the response "what are those?"

Then I explain that most HOAs are incorporated and they are the "charter" document for the corporation. By the time I get to this point in the conversation, I realize that there is a good chance that this association's corporate status has been suspended. Here is an email I received from a board member of such an association:

"I found out through the California Secretary of State Department that the Corporate Status of the HOA where I live has been Suspended. Is this a serious situation and if so what can be the ramifications or nothing to be concerned about?"

The association status needs to be reactivated. It's a process that involves dealing with the Franchise Tax Board, filing past tax returns, and paperwork with the Secretary of State. The association cannot legally sign any contracts or do business with inactive status. But the truth is lots of associations do continue to operate with inactive status because the boards don't even know that is the case.

Sometimes it comes to light when the association needs a loan and the attorney who is asked to write the "loan" letter has to say "sorry, I cannot do a letter that says the corporation is acting legally when the status is suspended." It is something knowledgeable attorneys check. They also need to check this when an association engages their services to perform a document update restatement project. Some check at the first inquiry for services.

So sometimes it comes to light when a contractor says, "hey, we checked your corporate status and it's suspended and so we can't contract with you," (although I am not sure most contractors' tendency is to check this out and turn work away).

I was asked the other day if an HOA can get insurance if it's status is suspended. I invite any insurance agent or broker for HOAs to enlighten me because I do not know the answer to the question. I do not know if the insurance companies check status before selling insurance to the association. I do not know if it affects payment of proceeds. To date (and I have been doing this kind of work for over 20 years) I have never had an HOA board member contact me and say "we have found that our corporate status is suspended when we went to purchase insurance and couldn't get it."

I have written an article in partner with a CPA who does the reinstatement work for an HOA and it appears on the Condo Guru Website in the many articles on pertinent topics. The article contains more information on what it means when the association's status has been suspended and what it takes to get it reinstated.

The sky does not fall in the day that the association board finds out the corporate status is suspended. However, there are definitely portentially serious ramifications to ignoring the situation.

Full post as published by California Condo & HOA Law on January 17, 2011 (boomark / email).