Agency Law and Your HOA or Small Business

A client recently posed this question:

“If a singular board member of an HOA incorrectly tells an owner that a requested fence installation is approved, does it bind the HOA?  I recently had a board member tell an owner he was approved incorrectly.”

Seems simple, right? If an architectural review request did not go through the right procedure and was not properly approved by the board or the Architectural Review Committee (aka the “ARC”), then no approval can be valid, right? Or, if an employee signs a contract on behalf of a company, but that employee had no authority to do so, the company is not bound by the contract, is it? Well, it depends.

This question involves the legal theory of agency. Agency law addresses under what circumstances one person (the “agent”) can legally bind another person or an entity (the “principal”). Unfortunately, agency issues come up all too often in the practice of HOA and small business law because HOAs and other small businesses are generally run by volunteers or others without legal training who sometimes speak when they should not.

(Note: We are not talking about the law applicable to real estate “agents” here. While the law applicable to real estate agents, more commonly called “brokers” nowadays, certainly includes agency law, we are speaking here of agency law in general – i.e., the legal ability of one person to legally speak or act on behalf of another person or entity – and not with regard to any particular type of agent.)

There are generally two types of agency authority: actual authority and apparent authority. Actual authority is of two types – express and implied. From an HOA perspective, actual authority occurs, for example, where the board has met and considered whether to approve a fence request, has approved it, and has authorized the president of the HOA, as its agent, to communicate the approval to the homeowner. The president has actual, express authority to legally bind the HOA, the principal, as its agent in communicating the approval to the homeowner. The approval is binding on the HOA.

Implied actual authority to legally bind an entity as its agent is the authority that naturally and reasonably comes with an officer’s position in a company. For example, the president of the company or HOA has the natural ability to sign checks, issue purchase orders and the like in the ordinary course of business, and third parties who know that person is in fact the president need not worry whether the president has the actual express authority to do such things – they can rely on his or her implied authority as the holder of that office.

Apparent authority is more problematic. This is the authority that a person appears to have from their words and actions, and which may appear to be reasonable to a third party, but which may or may not have been authorized by the board of directors or other governing body of the entity.

The problem with apparent authority is that an agreement or commitment entered into with a third party by an agent of an entity who may have no authority may still be binding on the entity even if completely unauthorized, if the agent had apparent authority to do so in the eyes of the third party.

Apparent authority will arise when the agent appears to have authority and holds themselves out as having it, and when such authority would not be unreasonable for he or she to have when viewed by the third party, and when the third party has no reason to know that the agent may not in fact possess such authority. If the third party then changes their position in reasonable reliance upon the commitment of the agent – for example, spends the money to erect the fence in reliance upon the approval – the commitment of the agent will then be binding upon the principal even if completely unauthorized by the principal. This is also an example of the legal doctrine of “estoppel”.

Back to our situation with the improper fence approval. This is how I answered my client:

“If it was just a board member and not the president or a vice president, or the head of the ARC, communicating the fence approval improperly, I would say it was clearly not binding upon the HOA. But the general rule of agency is, did the recipient have a reasonable belief that the speaker was authorized to bind the entity? If so, then the entity can be bound notwithstanding that the speaker did not have actual authority. Sorry to answer with an “it depends”, but that is the law. Officers generally have apparent authority to bind the entity, even if not actual authority. So based on only the facts you gave me, the answer is no. But there could be more to the story…”

You can see how apparent authority can be an issue for HOAs and other small businesses. It is important to have clear roles established for officers, and where certain responsibilities have been delegated to committees, draw up a written committee charter which clearly specifies what that committee can and cannot do. Can the ARC chairperson communicate approvals or disapprovals to applicants? Bad idea. Have that done through the board, which is the governing body of the HOA. Make clear to officers what they can and cannot do without express board authority. And make sure that board and committee members know that serving on a board or committee gives them no authority whatsoever – only the officers of the company generally have authority to legally bind the company in any way.

Be in touch if you have questions or concerns regarding agency and your HOA or small business.