Does Your Condominium Association or HOA Need to Update its Articles of Incorporation?

The vast majority of Michigan condominium and homeowners associations are formed as Michigan nonprofit corporations under the Michigan Nonprofit Corporation Act, MCL 450.2101, et seq.  In order to create a Michigan nonprofit corporation, such as a condominium or homeowners association, a developer is required to file the articles of incorporation with the Michigan Department of Licensing and Regulatory Affairs (“LARA”). Similar to other community association governing documents, such as declarations, HOA bylaws, or master deeds, changes in technology and the law, such as the 2015 amendments to the Michigan Nonprofit Corporation Act, necessitate amendments to the articles of incorporation.  Generally speaking, the cost of updating the articles of incorporation is much less expensive than updating other community association governing documents, and the process for amending articles of incorporation is much simpler.  This article will discuss the benefits of updating the articles of incorporation for a condominium and homeowners association, as well as outlining the process for doing so.

The Benefits of Updating the Articles of Incorporation for a Condominium or Homeowners Association

1. Ensuring that your Condo or HOA is operating in compliance with the Michigan Nonprofit Corporation Act.

The Michigan Nonprofit Corporation Act, specifically, MCL 450.2202, sets forth the mandatory requirements that are to be contained in the articles of incorporation for a Michigan nonprofit corporation.  Generally speaking, the main requirements in the articles of incorporation for a condominium or homeowners association are as follows:

• • • • The name of the corporation.
      • A specific purpose for which the corporation is formed.
      • A statement that the corporation was formed on a non-stock, membership basis, and an identification of the assets of the corporation.

In most cases, the developer will include the above items in the original articles of incorporation.  However, if they are missing or the articles of incorporation contain errors, such as identifying the wrong condominium or subdivision that is administered by the corporation, or organizing the corporation to have stock, as opposed to a membership basis, the articles of incorporation should be amended to address these issues.

2. Allowing Condo and HOA members to vote outside of a meeting.

The 2015 amendments to the Michigan Nonprofit Corporation Act, specifically MCL 450.2408(1), permits a community association to vote without holding a formal meeting if certain language is included in the governing documents.  Similarly, in addition to voting via ballot outside of a meeting, MCL 450.2409(1) permits voting at a polling place, either in-person or online, if specifically permitted by the articles of incorporation.  Amending the articles of incorporation to include an action without meeting provision or allowing voting at a polling place makes it easier for owners to vote, as they do not need to attend the meetings in-person to vote. Given that many condominium and homeowners associations struggle with establishing quorum and getting enough members to vote on various issues, increasing member participation is an important reason to update the articles of incorporation.

3. Increasing liability protection for HOA directors and officers, which may lead to a reduction of lawsuits and decrease potential insurance claims.

MCL 450.2209, which was also updated as part of the 2015 amendments to the Michigan Nonprofit Corporation Act, permits the articles of incorporation to contain a provision that eliminates a director’s liability for monetary damages unless the director received a financial benefit they were not entitled to, intentionally inflicted harm on the corporation or its members, declared an improper distribution, committed an intentional criminal act, or was liable for attorney’s fees and costs as a result of a bad faith derivative action.  The major change in 2015 was the ability of a condominium or homeowners association to eliminate potential liability for gross negligence, in addition to ordinary negligence.

Amending the articles of incorporation to eliminate director liability, to the extent possible, has numerous benefits, such as:

• • • • Preventing lawsuits that deter volunteer directors and officers from serving on the board of directors
      • Reducing potential claims against board members that may increase the costs of the directors and officers insurance for the condominium and homeowners association in the future.
      • Reducing the possibility that the condominium or homeowners association will incur unforeseen expenses to indemnify an officer or director for a lawsuit that is not covered by directors and officers insurance.
      • Providing additional defenses that may reduce the length and expense of a lawsuit.

Accordingly, while some members may think that eliminating director and officer liability only benefits the individuals serving on the board, there are benefits to the entire community for setting a high threshold to filing a lawsuit against the directors and officers of a homeowners association.

4. Providing the Board of Directors of a Condominium or Homeowners Association with Emergency Powers.

During the COVID-19 pandemic, many condominium and homeowners associations struggled with whether taking certain actions to protect the health, safety, and welfare of their communities was within their authority under the governing documents.  Similarly, the Surfside condominium tragedy has taught us that an unforeseen catastrophe may require that a board have clearly defined emergency powers.  In Michigan, MCL 450.2209(1), provides a community association with the ability to define emergency powers for the board of directors and states in pertinent part:

The articles of incorporation may contain any provision that is not inconsistent with this act and not expressly prohibited by any other statute of this state, including, but not limited to, any of the following:

(a) A provision for management of the business and conduct of the affairs of the corporation, or creating, defining, limiting, or regulating the powers of the corporation, its directors, officers, members, or shareholders, or a class of directors, shareholders, or members.

Examples of common emergency powers that condominium and homeowners associations should consider including in their governing documents are the ability to take any action necessary to implement any order or guidance of a governmental entity (even if otherwise precluded by the governing documents), adjourning any required association meetings to a later date, and closing various common elements or other amenities if they are not safe.

5. Removing Developer-Anti-Lawsuit Provisions from the Articles of Incorporation.

Some condominium developers will include an anti-lawsuit provision in the articles of incorporation, in addition to the condominium bylaws, to protect themselves from liability. After a developer transitions control of the board of directors for a condominium or homeowners association, the owner controlled board should ensure that these types of provisions are removed from the articles of incorporation as they can negatively impact the community association in the long run.  Examples of problems that certain types of anti-lawsuit provisions can create are as follows:

• • • • Decreasing property values due to the potential inability to enforce condominium bylaws and other restrictive covenants without a vote of the members.
      • The potential inability to collect HOA assessments without a vote of the members.
      • The potential inability of a condominium or homeowners to defend itself in a lawsuit without a vote of the members.

Accordingly, the removal of anti-lawsuit provisions is another good reason for a community association to update its articles of incorporation.

6. Providing Protection from Creditors.

Pursuant to MCL 450.2204 and MCL 450.2205, the articles of incorporation may contain provisions that protect a condominium or homeowners association against difficult creditors, and allow for a condominium or homeowners association to be reorganized if it is facing extreme financial difficulties.  Accordingly, if certain language is included in the articles of incorporation, it may allow the community association to escape financial hardship if a larger number of creditors agree to the reorganization, and there are several holdouts.

How to Amend the Articles of Incorporation for a Condominium Association or Homeowners Association

The process for amending the articles of incorporation for any Michigan nonprofit corporation is generally set forth in MCL 450.2611 and is outlined as follows:

1. 1.  Contact a community association attorney to draft the amendment to the articles of incorporation, as well as an explanatory letter explaining the proposed changes.
   2. Provide notice of the proposed amendment to the articles of incorporation to the members as required by the governing documents.
   3. Hold a meeting to vote on the articles of incorporation, or vote outside of a meeting, if permitted by the existing governing documents.
   4. File the approved amendment to the articles of incorporation with the Michigan Department of Licensing and Regulatory Affairs (“LARA”).

While many condominium associations are reluctant to amend their master deed and condominium bylaws, as it requires 2/3 co-owner approval under MCL 559.190, and in some cases mortgagee approval under MCL 559.190a, the process for amending the articles of incorporation is typically much simpler.  Unless the developer included a specific amendment provision in the articles of incorporation, the default approval rules under the Michigan Nonprofit Corporation Act apply.  Specifically, MCL 450.2611 permits a community association that provides at least 20 days notice of a meeting to approve an amendment to the articles of incorporation with a majority vote at a meeting at which a quorum is established.  Accordingly, in most cases, significantly less than 2/3 owner approval is required to amend the articles of incorporation of a community association.

Conclusion

Having up-to-date articles of incorporation is essential to any well-run condominium or homeowners association.  Many community associations forget about amending the articles of incorporation as the articles of incorporation are typically not enforced on a day-to-day basis like condominium bylaws, deed restrictions, or other restrictive covenants.  However, updating the articles of incorporation is important, as it ensures that your community association is 1) being operated in compliance with the Michigan Nonprofit Corporation Act 2) it makes it easier for the owners to vote 3) it may decrease the potential for legal fees, liability and insurance claims 4) it clearly defines the emergency powers of a board 5) it can eliminate developer anti-lawsuit provisions and 6) it may provide an HOA with protection from difficult creditors.  Given that most articles of incorporation can be amended for less than $1000, and by a majority of a quorum at a meeting of the Association, community associations should not delay updating their articles of incorporation as it could have numerous positive benefits.

Kevin Hirzel is the Managing Member of Hirzel Law, PLC. He concentrates his practice on commercial litigation, community association law, condominium law, Fair Housing Act compliance, homeowners association law and real estate law. Mr. Hirzel is a fellow in the College of Community Association Lawyers, a prestigious designation given to less than 175 attorneys in the country and has served on various CAI boards at the national level. He has been recognized by Best Lawyers, Super Lawyers, Leading Lawyers, and as a “Go-To-Lawyer” in condominium and real estate law by Michigan Lawyer’s Weekly. Mr. Hirzel has been interviewed by various media outlets, such as CBS, CNBC, Crain’s Detroit Business, Dan Abrams Live, the Detroit News, Dr. Drew Midday Live, Fox Business News, Fox News, the Law & Crime Network, MLive, Newsmax, NPR, the Wall Street Journal and WWJ. He represents commercial property owners, community associations, condominium associations, cooperatives, homeowners associations, property owners and property managers throughout Michigan. He may be reached at (248) 986-2290 or kevin@hirzellaw.com.