Introduction to HOA
A home owners’ association (HOA) is fundamentally a community scheme in which the association manages a collective of individually owned conventional properties. In almost all HOAs the infrastructure is owned by the association and that includes the erven on which the internal roads are built, the services reticulation systems and the security provisions. The HOA often also owns recreational facilities which are intended for the use of residents in the development. Of course the levies the members of the HOA pay contribute to an administrative fund from which all these communal expenses are paid.
Process of establishment
While it is possible to retrofit an HOA to a group of existing properties, almost all HOAs result from the local municipality making its approval of a subdivision of land conditional on the formation of an HOA to own and manage the infrastructure serving the individual properties in that subdivision. A simple illustration of the process would be:
The later part of this process could be and often is in a different order. Not all HOAs are established before the properties are sold, it’s common to buy off plan with one of the many conditions in the sale contract being the approval of the project! And this is one of the things the initial buyers need to be aware of.
Developer control during “development period”
There is always an initial period in which the developer retains effective control of the HOA, even after it is established and all the properties including the infrastructure are transferred to the owners and the association.
This is usually called the “development period” and it, and the way the developer retains control, will be detailed in the constitution. Common techniques are for the developer to be entitled to appoint executives, that board decisions require the support of all the developer appointed executives and the developer controls an overwhelming majority of voting rights in member meetings. (Which means the members can’t change the constitution).
There are many reasons for this control, perhaps the most obvious is to make sure the development is and, until all the properties are sold, remains what the developer marketed so that there is no come back from purchasers who really don’t get what they thought they bought.The development period usually lasts until all or most of the individual properties have been sold and transferred by the developer to the initial owners but there are many developments, particularly developments for retired persons, where the developer retains control permanently.
Developer liability for levies on unsold properties
A close companion of developer control of new HOAs is their freedom from levy payments on individual properties it still owns. This usually seems very unfair to initial owners who share all the operating costs of the HOA without contribution from the developer but from a developer’s perspective, this freedom is essential in case the market does not support the development.
Erf maintenance and the building period
As the individual properties in most new HOAs are sold as empty lots/erven and the owners themselves see to the building of their homes, there is usually a set period from the establishment of the HOA in which the all the building must be complete. During this period, and until building works start, owners are usually required to ensure that basic maintenance of the erven, clearing vegetation, removal of alien vegetation, and so on, is done. There is also usually a penalty for non-completion of the building within the stipulated period, usually double levy payments every month. A knock on effect of this penalty is that it applies to second buyers, this is, people who buy the lot from an initial owner. This fact often influences the sale price of empty lots in new HOAs.
There are many, many good reasons to buy into a new residential HOA. In just a few years most are beautiful, safe, places to live with desirable recreational facilities and excellent resale values and with the added benefit of a new home tailored to one’s needs and preferences. But read the sale document very, very carefully. In fact, it’s probably worth getting a specialist community scheme lawyer to check it, the proposed constitution/MOI and its attendant rules/landscaping and building guidelines as well as all the marketing material. Just so you know what to expect.
Article reference: Paddocks Press: Volume 10, Issue 8, Page 2.
Anton Kelly is an extremely knowledgeable specialist Sectional Title and HOA teacher and consultant. Having been the lead teacher on all the Paddocks courses for the last 5 years, Anton lives and breathes Sectional Title and HOA law, all day every day. There are not many issues he hasn’t come across before.
This article is published under the Creative Commons Attribution license.