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Court Says “Business Judgment Rule” Is the Standard for HOA Decisions

On Behalf of | Jun 24, 2013 | Firm News, Home Owners' Association News

The Court of Special Appeals has recently reinforced the notion that decisions made by homeowners associations’ boards of directors will not be disturbed on judicial review, absent a showing of fraud or bad faith. The Court previously addressed this issue in a 1992 decision, at which time it refused to overturn a decision that it determined was “within the exclusive purview of the [homeowners] association.” The Court held that the “business judgment rule” precludes judicial review of a legitimate business decision of a corporation, absent fraud or bad faith.

Most recently, a homeowner filed a complaint in the Circuit Court for Montgomery County when their homeowners association denied their request to install an asphalt roof on their home – in contravention of the HOA’s Declaration. On appeal, the Court held that the business judgment rule precluded judicial review of the decision of the homeowner’s association where fraud or bad faith was not alleged or shown.

It is important that Homeowners’ Associations (and their management companies) comply with the procedures contained in their Declaration and By-laws and avoid any actions which may be perceived as bad faith. Likewise, Homeowners should carefully review the HOA documents prior to purchasing a home and consult the documents and the HOA before commencing any projects which may require advance approval from the HOA.