New Decision Gives Washington HOAs Broader Deference in Allocating Assessments

In brief

• The Supreme Court of the State of Washington has confirmed that HOAs in Washington have broad deference when deciding how to allocate assessments.
• The court ruling could reduce lawsuits challenging discretionary board decisions relating to assessments.
• The decision applies only to common law communities under RCW 64.38—it does not apply to HOAs governed by WCA and WUCIOA.

Surowiecki vs. Hat Island Community Association et al. is an important decision for homeowners’ associations throughout Washington State. It gives associations broad deference when deciding how to allocate assessments. So long as the association is making a discretionary decision in a procedurally valid manner and with reasonable care, the courts will not second-guess the association. The ruling may reduce the number of lawsuits challenging discretionary board decisions relating to assessments.

First, some context: not every HOA in Washington will benefit from this decision. The HOA at issue in this case is a common law community governed by RCW 64.38 (the Washington Homeowners’ Associations Act). The ruling therefore does not apply to HOAs governed by the Washington Condominium Act (WCA) or the Washington Uniform Common Interest Ownership Act (WUCIOA). Under both the WCA and WUCIOA, assessments must be based on a formula set forth in the declaration. There are certain exceptions for some types of costs—but even then, the WCA and WUCIOA both require the declaration to specify the method used. In other words, there is much less discretion in determining how to allocate assessments under the WCA or WUCIOA. With that context out of the way, we can turn to a discussion of the case.

The community at question in this case is known as Hat Island, a small private island located in Puget Sound. Hat Island is governed by a set of restrictive covenants and easements. The Hat Island Community Association is the homeowners’ association formed to own and maintain the common areas and amenities on Hat Island. The common areas include roads, a golf course, a marina, a ferry, and a water treatment and distribution facility. The covenants grant the club:

the power to charge and assess its members on an equitable basis for the operation and maintenance of the said facilities . . . and to charge and assess [i]ts members on an equitable basis for such additional recreational or other facilities as shall be duly authorized by its membership for the mutual benefit of all [i]ts members.

The association’s bylaws divide assessments into two categories: annual assessments and special assessments. The bylaws specifically say that special assessments need not be uniform (but otherwise do not specify how assessments must be allocated to each lot).

The association’s board adopted a “Use-Based Fee” approach to assessments. Each year, it budgets for assessments and income from use-based fees such as green fees for the golf course, moorage fees for the marina, water use fees, and ferry ticket sales. The board calculates the amount of money it expects to generate from use-based fees, and then calculates the amount needed to meet its remaining obligations. That remaining amount is then raised from the association’s members through assessments. The board submits a proposed budget (which includes the proposed assessment amount) to the owners, who vote to ratify it. Assessments are then levied on a uniform, per-lot basis to recoup the amounts not covered by the use-based fees.

The plaintiff—Mr. Surowiecki—owns several lots on Hat Island, most of which are undeveloped. He challenged the board’s use-based fee approach to assessments, arguing that it violates the language in the covenant requiring that assessments be allocated on an “equitable basis.” At least part of his argument relied on the notion that because not all lots are the same (e.g., some lots are developed while others are not), they should not be all assessed equally.

The court disagreed. It relied heavily on the reasoning in another case—Riss v. Angel, 131 Wn.2d 612 (1997)—noting that “Riss suggests that when a homeowners’ association makes a discretionary decision in a procedurally valid way, courts will not substitute their judgment for that of the association absent a showing of ‘fraud, dishonesty, or incompetence (i.e., failure to exercise proper care, skill, and diligence)[.]’” It also noted that “implicit in ‘the power to charge and assess’ is a broad grant of discretion in deciding the method of allocating costs to its members,” and that “the phrase ‘on an equitable basis’ serves only to limit the range of options available to the [Association]; it does not imply that there is one equitable basis that is better than another.” In direct response to Surowiecki’s argument, the court also made clear that the mere fact there is an alternative allocation method that might also be equitable “is simply not enough to create a question about whether the current system is not equitable.”

The court’s approach on this issue is good news for homeowners’ associations. It grants them broad deference in their decision-making—so long as the board acts equitably in accordance with established procedures in its governing documents—and will likely reduce the possibility of lawsuits every time an individual homeowner disagrees with a discretionary choice of the board.