Our attorneys are active participants in the dialogue that shapes the areas in which they practice. The articles presented are important sources of information for clients. However, the information is general and should not be relied upon as legal advice for a particular situation.
What are the requirements at present for a community to be 55+?
For “stick built” housing (traditional, non-mobilehome housing) the community must satisfy both state and federal law on senior housing. Federal law requires three things: (1) that at least 80% of the occupied units be occupied by at least one person 55 years of age or older; (2) that the community publish and adhere to policies and procedures designed to effectuate the intent to provide housing for seniors; and, (3) that the community verify the ages of its occupants in accordance with regulations published by the Department of Housing and Urban Development (HUD). State law requires the community satisfy both a design element and a resident profile. The design element specifies the community must have a certain minimum number of units (depending on where the community is located), and that the development has been developed for, or substantially rehabilitated or renovated for senior use. The resident profile requires that residents be either seniors (55 or older), “qualified permanent residents,” permitted health care providers, or persons who were lawfully in residence on January 1, 1985. These requirements are slightly milder for communities located in Riverside County, and mobilehome communities of any description, wherever located in California, need only satisfy federal law.
Our 55+ community CC&Rs say residents must be “45 or older” and that persons under 18 may only visit for a limited period of time. Are these documents satisfactory?
These documents are not satisfactory. The CC&Rs must be amended to specify that all residents must be either 55, or qualified permanent residents, permitted health care providers, or those lawfully in residence on January 1, 1985. Sometimes it is extremely difficult to obtain the votes necessary to procure this type of amendment; HUD regulations indicate that the government, in investigating claims of familial status discrimination, will take into account any unsuccessful attempts to amend the governing documents, but some type of attempt must have been made. If the community simply enforces the existing documents to the extent permitted by state law, it would not satisfy federal law. The documents must be changed. Sometimes older communities have the habit of referring to themselves as “adult” communities. This practice must be discouraged, because federal regulations indicate that an “adult” community is not a senior community. It is appropriate to refer to the community as “senior,” “55+,” or “housing for older persons,” for example, but it is not appropriate to identify the community as “adult” in either the governing documents or signage.
One of our residents refuses to provide age verification. We are fairly sure she is over 55, but she won’t provide us with a copy of any document and she won’t sign anything attesting to her age. What can we do?
Federal regulations currently require age verification every two years. Residents should be required to provide copies of some proof of age, such as a driver’s license, birth certificate, passport, immigration documents, and so on. If a resident refuses to provide such proof, a member of the household over the age of 18 may certify on behalf of the resident who refuses, or in the alternative, another member of the community who has knowledge of the age of the resident may provide the proof. If none of these alternatives is possible, the association may have to resort to fining the resident in order to secure the proof.
Once the proof is obtained, the association need not force the applicant to produce the same proof thereafter (although incoming residents must provide proof). The evidence of residents’ ages may be kept in confidence, and is required to be produced only when HUD or a qualified fair housing organization undertakes an investigation of alleged discrimination.
Recently, a family with children under 18 moved into our senior community. We approached them and told them about our CC&Rs and they moved out. Their attorney told us we had violated their civil rights and that they could have sued. What can we do to protect ourselves in the future?
The most important protection is to assure that the community does indeed qualify for the senior housing exemptions provided in state and federal law. If so, the community would be insulated from liability for age or familial status discrimination. However, even if the community actually is entitled to enforce its age restrictions, that is no guarantee that the association and its board will not be sued in a misguided attempt to prove the association was wrong. In a case such as this, the best protection is full and adequate insurance coverage. You should check your “directors and officers liability” insurance policy to make sure it will provide a defense if the association and/or its directors are accused of age/familial status discrimination. Also, the federal law provides a “good faith” defense for individuals who seek to enforce a senior community’s age restrictions. In order to qualify for the defense, the association’s board needs to execute a statement under oath that the community qualifies for the defense, and the individual directors must be aware that the board has done so.
A family with children wants to move into our senior community. They claim that senior communities must “set aside” the 20% of the units which do not need to be occupied by seniors under federal law, for families with children. Are they right?
They are not right. First, the 20% is a “safe harbor”: under federal law, a senior community can have up to 20% of its units occupied by non-seniors and still not lose the federal exemption. But, to set aside 20% of the units for non-seniors would not demonstrate the intent to provide housing for seniors. Thus, according to federal regulations, the 20% may not be set aside for family housing. Furthermore, if the housing in question is also subject to state law (as is all senior housing except for mobilehomes), then 100% of its residents must satisfy the resident profile contained in the senior exemption.
One of our senior residents has a disabled child who is not yet 55. Our CC&Rs require non-senior residents to be 45 or a spouse or cohabitant of a senior, or to provide primary economic or physical support to a senior resident. This child doesn’t satisfy any of these requirements. Is the child entitled to stay?
The short answer is “yes.” Your CC&Rs reflect California law prior to 2001. In that year, the law was changed to provide that the disabled child or grandchild of a senior or other qualified permanent resident, who needs to reside with the senior or qualified permanent resident because of the disabling condition, illness or injury, is also a qualified permanent resident. If the disabling condition or illness ends, the senior community may force the removal of the child or grandchild on six months’ notice (provided the child/grandchild has not become 45 or otherwise qualified as a permanent resident in the interim).
We used to be senior, but we sort of abandoned our senior status when the laws changed. However, we believe we are still about 80% senior occupied. Can we convert back to senior?
This is a very difficult question. The 1999 federal regulations specifically permitted associations to discriminate until May 2000, to obtain the correct percentage of 55+ occupied homes; until May, 2000 that date, communities desiring to be senior could require that incoming residents be senior households. If by that date, however, the community had not achieved the requisite 80%, the community was required thereafter to abandon its attempts to become senior.
Recently, however, in Balvage et al. v. Ryderwood Improvement and Service Association, Inc., a federal court held that a Washington state residential community that had continuously operated as a retirement community for persons age 55 or older could qualify for federal 55+ status by establishing that it currently satisfies the exemption’s three statutory and regulatory criteria at the time of the alleged violation. The problem for California 55+ communities is that there are additional requirements, and that may limit the right of such communities to convert (or reconvert.) If you are considering the possibility of a transition to senior status, contact your attorney, since the circumstances permitting transition are specific to the location and history of the community.×
What is alternative dispute resolution?
Alternative Dispute Resolution or “ADR” is a process for resolving disputes other than in court. It involves either mediation or arbitration.
What is mediation?
Mediation is a form of dispute resolution that uses a neutral third party whose role is to assist the parties in reaching an agreement between themselves. The mediator does not decide the dispute for the parties. The mediator acts as a moderator or facilitator who helps the parties resolve their dispute by mutual agreement. Mediation is non-binding on the parties, unless the parties come to an enforceable agreement as a result of the mediation process.
How is a mediation conducted?
Mediation is an informal process. The mediator helps the parties to reach an agreement between themselves. The mediator will not decide who is right or wrong. Sometimes both parties will be in the room together with the mediator, and sometimes the mediator will speak privately with each party. If the parties agree on a resolution of their dispute, the mediator will help them prepare a written agreement. The parties will then be bound by their agreement.
What is arbitration?
Arbitration is similar to a court proceeding in that the arbitrator will listen to the evidence presented by both sides, and then decide the outcome of the case. The setting is less formal than a courtroom since there is no jury, and the arbitrator is not a judge. Because the arbitrator decides who wins and who loses, he or she acts like a judge.
How is an arbitration conducted?
An arbitration is conducted like a trial, only somewhat less formal. Each side is given an equal opportunity to present its case. Witnesses can be called and cross examined. The parties will be allowed to argue their case to the arbitrator. The rules of evidence are usually less strict than in a trial. At the conclusion of all the evidence, the arbitrator will decide who wins and who loses.
Is arbitration binding or non-binding?
Unless the parties have previously agreed in a contract that any arbitration will be either binding or non-binding, the parties have the option of deciding the form of arbitration. If the arbitration is binding, the ruling of the arbitrator can be enforced just as if a judgment had been entered after a trial in court.
What are our rights if we are unhappy with an arbitration award?
If the arbitration is “non-binding,” you can reject the award, and even file a lawsuit if you so desire. The arbitration will have no effect on the rights of the parties. However, if the arbitration is “binding,” your options are limited. You may not reject the award and file a lawsuit. Unlike a lawsuit decided by a judge or jury, your rights of appeal are extremely limited. These disadvantages must be balanced against a relative speedy and final result.
Are we required to mediate or arbitrate?
For certain types of cases, yes. Civil Code section 5930 requires that an attempt must be made to mediate or arbitrate certain types of disputes before a community association or individual owner will be allowed to file a lawsuit against the other. Generally, this applies to all cases in which the association is seeking injunctive or declaratory relief, and the amount in question is under $5,000. An injunction is a court order to one of the parties to do something or to refrain from doing something. Declaratory relief asks the court to make a binding interpretation or declaration of the rights of the parties. With respect to assessment collection cases, if an owner requests ADR pursuant to Civil Code section 5925 et seq., the association must participate before initiating nonjudicial foreclosure. Similarly, if an owner requests IDR (Internal Dispute Resolution) pursuant to Civil Code section 5900 et seq., the association must participate before recording a lien. Small claims cases are excluded from the requirement to mediate or arbitrate.
Why consider mediation or arbitration to resolve a dispute?
In some cases, the law requires you to utilize alternative dispute resolution before litigating. Litigation of a dispute also can be very expensive and can be very lengthy. Mediation and arbitration can usually be accomplished more quickly and at less cost than litigation. Instead of the dispute lasting over a year before it is resolved, the dispute may be resolved in only a few weeks or months. Because the time frame is shorter, and because mediation and arbitration are more informal than litigation, the attorney’s fees are usually much less than if litigation is used to resolve disputes.
Can we mediate or arbitrate other kinds of disputes?
Civil Code section 5930 requires alternative dispute resolution in only certain defined situations. However, any dispute may be resolved through mediation or arbitration if both parties agree to do so. All that is required is the desire for both sides to resolve their disagreement quickly and inexpensively as compared to the cost and time necessary for litigation. The parties can agree to both the form of alternative dispute resolution and the individual who will conduct it unless by prior agreement they have already made these decisions.
How much does it cost to mediate or arbitrate a dispute?
Because mediation is a more informal process, there are local mediation services that will mediate a dispute between an association and a homeowner for a few hundred dollars. Private mediators can be more expensive, often as much as several hundred dollars per hour. Unless the parties agree to some different division of the cost, each party will pay an equal share of the total cost. Arbitration is a more formal process and, as a result, is usually more expensive. There are usually more options in an arbitration proceeding, such as taking depositions, and the use of expert testimony at the hearing. Although more expensive than mediation, arbitration is usually less expensive than litigation through the court.
Are attorneys involved in mediation and arbitration?
Because the mediation process is informal, the parties may decide to proceed without their attorneys. Attorneys can be present during the mediation, although their role is less involved than in an arbitration or in a trial. In cases where significant legal issues are involved, such as in interpreting provisions of the CC&Rs, it is frequently a good idea to have an attorney present at the mediation. Because the rights of the parties will be decided in an arbitration, it is preferable to have an attorney present during an arbitration, even if the arbitration is non-binding. It is common for attorneys to conduct their client’s case in an arbitration proceeding.
Where should the association start in order to implement an effective architectural enforcement procedure?
Start by reviewing the CC&Rs. Many contain an application submission process, a decision-making process according to specific criteria including deadlines for action by the association, and even a construction- monitoring procedure with time limits for improvement completion. In addition, California law provides minimum steps for architectural review procedures (Civil Code §4765) and provides certain decision-making deadlines, with failure to meet those deadlines resulting in automatic application approval (e.g., Civil Code §714 on solar energy systems and Civil Code §4745 on electric vehicle charging stations).
If the governing documents require association approval before a physical change is made to a separate interest or the common area, the association must provide a fair, reasonable, and expeditious procedure for making its decision. The procedure shall provide prompt deadlines and the maximum time for response to an application. A decision on a proposed change must be made in good faith and not be unreasonable, arbitrary or capricious. The decision may not violate any governing provision of law.
A decision on a proposed change must be in writing. Thus, the architectural committee or board should take minutes of the meetings at which these decisions are made, noting reasons for application approval or denial. If a proposed change is disapproved, the written decision shall include a description of the procedure for reconsideration by the board. An applicant is entitled to reconsideration at an open meeting of the board.
An association must annually provide its members with notice of any requirements for association approval of physical changes to property. The notice must describe the types of changes that require association approval and shall include a copy of the procedure used to review and approve or disapprove a proposed change.
What is the best way to develop architectural guidelines?
First, include any “criteria” for approval specified in the CC&Rs. Second, cover as many of the major items as possible for which owners are likely to request approval. Applications for fences, patio covers, balcony improvements, decks, and landscaping are frequently encountered. Third, ensure that guidelines are easy to understand. Owners should be able to tell exactly what the application should include, what items are totally prohibited and what items may be approved if they meet specified criteria. Fourth, consider pre-approvals; that is, a list of improvements an owner can complete without applying for prior approval, such as painting a structure its original color or constructing a patio cover whose size, materials, design and color are all “pre-approved.”
What role should neighbors play in the approval process?
To avoid the anger of disgruntled neighbors, it is a good practice to require the notification of nearby owners when an application is submitted. Allow them to offer input; however, avoid permitting neighbor consent or apathy to result in automatic approval or disapproval. Owners should be told on the application form that neighbor input is merely “information” used in the application consideration process.
Can approvals be given orally or informally?
Avoid a procedure which permits any form of approval other than written approval after a vote of the entire committee or the board. One court decision upheld the oral approval of only one committee member because the owner relied upon it, believing it represented the committee’s decision, and proceeded to build the improvement. Guidelines should specify that oral approvals are invalid and that the only effective approval is the one on the authorized form and/or otherwise issued in writing by the association after the above-described vote.
How much subjectivity can go into architectural decisions?
Many architectural decisions are inherently subjective, yet will be enforced. The key is having “criteria” such as “harmony with the architectural scheme of the community.” Always develop general criteria used or referred to in making a subjective decision. Many CC&Rs already contain such general criteria. When this occurs, it is a good idea to repeat those criteria in the guidelines.
Can variances or exceptions to the architectural guidelines be granted?
Generally, yes, if there is authority for a variance in the CC&Rs. However, variances should be used very judiciously, only in rare instances when it is necessary (for example, to make use of a unique lot and where there is minimal or no effect on other owners). If you contemplate variances, at least some reference to them should also be made in the guidelines. The idea behind using variances is to accomplish a desired result (e.g., aesthetic uniformity) despite a technical violation of the guidelines. In other words, you are adhering to the “spirit” rather than the “letter” of the guidelines. One effective tool is the recorded Restrictive Use and Indemnity Agreement whereby the owner agrees to defend and indemnify the association if another owner complains or files a lawsuit because a violation is allowed to exist. This type of agreement can also be used to limit the duration of time a structure can be kept and to require the owner to maintain it.
What should be done if an owner is ignoring the architectural procedures?
This depends on the situation. If the committee or the board seeks to compel the owner to take some particular action, a hearing should be held before the association acts further. If an architectural improvement is already in place, the committee should rule upon it as if an application were filed, as required by the court case of Ironwood Owners Ass’n. IX v. Solomon. If the owner is in the process of constructing something clearly prohibited, immediately consult legal counsel about seeking a restraining order. Undue delay when construction is underway can result in a court refusing to issue an order prohibiting further construction.
How can the association rule upon an application and avoid setting precedents?
If there is nothing unique about a particular situation, it may well be a precedent to rule on it differently. Accordingly, keep this in mind when ruling upon applications, including those for variances. If there is a unique situation or a variance is granted, document in writing the reason why an approval was issued. Doing so will help you appropriately respond if other owners ask for the same approval, but the association desires to limit its decision to the unique situation of one owner.
What is the best way to ensure success in the architectural approval and enforcement process?
First, ensure that every step of the process is documented in writing. Second, be fair and develop architectural guidelines responsive to community needs. Third, maintain perspective on the entire community rather than what one particular owner is doing. Fourth, be mindful of the fact that architectural disputes can end up in mediation, arbitration or court, and that you may be asked to explain everything the association has done. The best way to do this is through written documentation. An unbiased, documentation-oriented approach to architectural enforcement has consistently proven most effective.×
By: Jodi A. Konorti, Esq.
In a down economy, rentals flourish. What does this mean for community associations? It means that the likelihood a residence within the community is rented out instead of owner-occupied increases. As a result, we are seeing what appears to be an increase in boarding, rooming or “mini-dorm” houses in which tenants individually rent a bed or bedroom in a house with several other individual renters. The intent for the renter is to save money on renting only a room rather than an entire apartment or condominium, and the owner usually receives much greater total rental income since there are multiple tenants.
If you discover a room-rental advertisement in the local classifieds for a property in your community, or you simply notice that a particular residence has several seemingly independent residents and/or an unusual number of vehicles, the owner of the residence may be violating the association’s governing documents. Some of the more common violations related to a mini-dorm or boarding house are as follows:
Potential Single-Family Use Violation
If an association’s CC&Rs require that residences be used for single-family purposes, a boarding house may be a violation of that rule. We say “may” because when addressing possible violations of the single-family use provision, an association must use caution. This is because sometimes unrelated people living together in a house as a “single-family” can be classified as a “family” under the law. The law does not allow an association to require that a “family” consist only of persons related by blood or marriage. This definition of family is considered discriminatory. In a San Diego case entitled, College Area Renters and Landlord Association v. City of San Diego (1996) 43 Cal.App.4th 677, the court considered a definition from the San Diego municipal code that defined a “family” as persons who jointly occupy and have equal access to all areas of a residence and who function together as an integrated economic unit – whether related or not. The court upheld this definition and did not consider it discriminatory. It is possible an association’s CC&Rs include a specific definition of “family” which should also be reviewed. If the residents rely on each other financially and live cohesively as an integrated unit, an association may not be able to claim that they violate the single-family provision of the CC&Rs.
Notably, case law has upheld a prohibition on renting out single rooms in a home. Colony Hill v. Ghamaty (2006) 143 Cal.App.4th 1156, upheld a judgment in favor of the association, finding that a homeowner’s serial rental of rooms in his condominium violated the association’s CC&Rs, which limited the home’s use to single-family dwelling purposes.
Whether related or not, certain facts will indicate a violation of the single-family restriction. Such facts may include an advertisement that each room is rented individually, an indication that each tenant is assigned a bedroom or bathroom or that the tenants are on separate leases, pay separate rents, and appear to live their own lives apart from one another. Another fundamental indication the tenants do not function as an integrated economic unit is if one tenant fails to pay his or her rent, only that tenant could get evicted, without regard to the other tenants.
Potential Residential Use Violation
Many CC&Rs require that residences be used only for residential purposes and prohibit commercial uses of the residences. While a boarding house is technically used as a “residence,” a violation of the restriction on commercial use may nevertheless exist if the owner advertises the rooms (and not the house) for rent or runs the residence more like a boarding house rather than a long-term, single-family rental.
Other Potential Violations
Some CC&Rs contain limitations on an owner’s ability to rent their residence. For example, an association’s CC&Rs may require that an owner rent or lease the entire lot or condominium. In this case, an owner is only permitted to lease an undivided interest in the entire lot or condominium, and not divided portions of the lot or condominium. If a tenant is prohibited from accessing any portion of the residence (i.e., the other tenants’ bedrooms and bathrooms), a violation of this type of restriction may exist. In addition, some cities require permits or licenses to run boarding or rooming houses. If a city requires a permit to run a boarding house, and the city has not issued a permit to run the boarding house, not only may the owner be in violation of the city ordinance, but he or she may also be in violation of any CC&R provisions requiring compliance with the law. This gives the association the added bonus of potential help from the city in addressing the violation.
In conclusion, determining: (1) whether a boarding or rooming house exists in a community; and, (2) whether the boarding or rooming house violates an association’s CC&Rs, is very fact-specific and should be analyzed on a case-by-case basis with regard to the specific restrictions in an association’s governing documents. In any potential boarding house situation, we recommend you have the association’s legal counsel determine whether satisfactory evidence exists to conclude that there is violation of the governing documents before the association proceeds with its enforcement procedures.
 Note, this article does not apply to addiction treatment facilities, sober housing, cooperative housing or other group-home housing protected under the Fair Housing Act.
By: Susan Hawks McClintic, Esq.
There are many documents used or referred to in the management of a condominium project. The least understood and consulted is undoubtedly the condominium plan, even though it is referenced in every single deed to a condominium. Virtually every board member, association manager and attorney has read or analyzed the association’s Declaration of Covenants, Conditions and Restrictions, Bylaws and Articles of Incorporation a number of times. These documents are frequently consulted for answers to a multitude of questions regarding the rights and responsibilities of the association and its members. The condominium plan, however, is frequently overlooked. Although the contents and purpose of a condominium plan are limited, it has an important role to play in condominium management.
The term “condominium plan” is defined in Civil Code section 4120 and described in section 4285. It has three elements. First, it contains a description or “map” of the condominium project in reference to ground monuments. This means the location of the project is identified with respect to reference points on the ground, such as streets. The dimensions of the project will also be shown.
Second, the plan contains a three-dimensional description of the project in sufficient detail to identify the common areas and each unit. This means the plan will contain a description of the location, size and boundaries of each unit, the exclusive use common areas, and the common area. For example, the boundaries of each unit might be described as the unfinished interior surfaces of the perimeter walls, floors, ceilings, windows and doors. The location and dimensions of patios, balconies, parking spaces, and storage spaces may also be described in the plan.
Third, the condominium plan contains the consent of the record owner of the property and any lender to recordation of the plan. The original plan only requires the consent of the developer, who at the time the plan is prepared owns all of the property. However, once the project is built and sold, 100% of the members who collectively own the common area and 100% of all lenders on any unit must consent to any modification of the plan.
In terms of its use as a management tool, the condominium plan has two primary functions. The first primary function is the description of units versus common area. This is extremely important in the identification of maintenance responsibilities, which are often assigned according to whether a particular feature is common area, or part of a unit. The plan usually describes the boundaries of the unit (air space), and then lists those physical features which are either exclusive use common area or common area, and not part of the unit. Frequently, such items as bearing walls, pipes, wiring, and other utility installations (except the outlets within the unit) are identified as part of the common area. Garages, parking spaces, balconies, patios and other similar features are often identified on the condominium plan as either part of the unit or exclusive use common areas.
The second primary function of a condominium plan is the identification of exclusive use common areas. Often, parking or storage spaces, not physically connected to a unit, are identified in the plan on a plat map by location and identifying numbers. Then, when their identifying numbers are located on a deed, the plat map can be consulted to determine their exact location. Other condominium plans utilize a list format where each unit is matched up with its respective exclusive use common area, such as a patio, balcony, parking space, or storage space. The list can be consulted to identify the numbers of the exclusive use common areas belonging to any given unit, and then the plat map can be used to find their location. Though a variety of condominium plan formats can be used, the results are usually the same: fixing and identifying the location of units and their assigned exclusive use common areas.
One problem we have encountered is the “reassignment” by either boards of directors or owners themselves, of certain exclusive use common areas. For a variety of reasons, some associations have “rearranged” parking or storage space assignments, and owners are no longer using spaces originally assigned to their units on the condominium plan. Exclusive use common areas which are assigned pursuant to a condominium plan (and appear on the deed as well) are real property interests which cannot be changed without the property owner’s consent and appropriate documentation. Remember, changing the scheme set forth in the condominium plan in any way requires the written consent of 100% of the owners and 100% of the lenders on the units. If a board of directors or group of owners is contemplating action which will result in any deviation from the condominium plan, legal counsel should be consulted before taking that action.
It is likely the condominium plan will remain the least utilized of all the association’s documents. Yet, when maintenance, repair, location, or boundary issues arise, it may well be the document that should be consulted first. A copy should be kept with every association’s governing documents.×
Why do we need written contracts?
Contracts set forth the rights and duties of the parties to the contract, and help to reduce or eliminate misunderstandings regarding the work to be completed and the money to be paid. In resolving any dispute or problem under the contract, such as whether a payment is due, a reviewing court will look to the language of the contract to determine which party will prevail. Thus, the contract provisions should be carefully considered in every contracting situation.
Should we sign the contract prepared by our contractor?
Most “standard form” contracts are written to favor the party who wrote it. Thus, most pre-printed contractual forms will provide little or no protection to the association if a contractual problem develops. Whereas any contract may be acceptable if there are no problems with the contractor’s performance, only an association-prepared or reviewed contract offers the protections necessary in case of serious disputes.
What are the most important issues to address in a contract?
There are many, many important issues to be considered in every contract. Those that most frequently lead to problems or disputes include: an inadequate description of the work the contractor is to perform, poorly drafted payment provisions (when payments are due, when they can be withheld, and retentions), how change orders are approved, indemnification and mechanic’s lien issues.
What types of insurance should the contractor have?
This can vary depending upon the type of job, but all contractors should have at least a comprehensive general liability policy, an owned, non-owned and hired automobile policy and workers’ compensation coverage. The amount of insurance may vary, but should never be less than $1 million in comprehensive general liability and $500,000 in automobile coverage. The association should be named as an “additional insured” on the contractor’s insurance policies. Some contractor’s insurance policies contain an exclusion for all work performed on a community association. Contractors who are not insured to work on community associations should not be hired.
How should payment provisions be written?
The Association’s best protection against financial loss resulting from a contract problem is to not allow the contractor to receive more money than the percentage of work that has been completed. In regular maintenance contracts such as landscaping and pool service, payment should be made after the service has been provided. In construction projects, the contract should provide that progress payments can be submitted only for work actually completed, and should also provide for the association to retain a percentage of each progress payment until the job is completed. Avoid provisions that require payment “upon delivery” or “upon completion,” as few associations are set up to have a check waiting for the contractor immediately after the job is completed.
What are “indemnification” clauses?
Indemnification is the contractual obligation of a party to a contract that requires the party to pay the expenses of the other party under certain conditions, such as when the party being indemnified is named in a dispute or lawsuit. The indemnification clause defines when this obligation arises. Most often, the obligation arises when the party being indemnified is not legally liable for the alleged damage, loss or injury, while the party providing the indemnification is legally liable. Many “standard form” contracts contain clauses that require the owner/association to indemnify the contractor unless the contractor is negligent. Boards of directors should be aware that most association insurance policies contain an exclusion for “contractual obligations” such as indemnification. As a result, whenever possible, provisions requiring the association to indemnify the contractor should be stricken from the contract before it is signed.
Are provisions requiring mediation or arbitration a good idea?
Provisions requiring mediation or arbitration to resolve disputes can save the association significant time and money, especially if these forms of “Alternative Dispute Resolution” succeed in avoiding litigation. Mediation is the voluntary attempt by the parties to discuss and negotiate the dispute with the help of a neutral third party in an effort to reach an agreement or settlement. Arbitration is similar to litigation in that the facts of the dispute are presented to an arbitrator who will decide which party is right. Arbitration can be binding or non-binding. If non-binding, the losing party still has the option of filing a lawsuit. In binding arbitration, the parties agree to waive their rights to a jury trial and appeal. The arbitrator’s decision is final.
What is a mechanic’s lien?
A mechanic’s lien is a constitutionally-established procedure that helps ensure that a contractor gets paid for the work that has been completed. If the contractor is not paid, he or she can record a lien against the property where the work was performed. If payment is not timely made, the property can be foreclosed by the contractor to satisfy the debt. If the association is not vigilant, a lien can be recorded by a design professional, subcontractor, material supplier or wage earner even if the general contractor has been paid!
How does the Association protect itself against the contractor recording a mechanic’s lien?
Except for a party with a direct contractual relationship with the association (such as a general contractor or design professional), a “lien claimant” (party desiring to record a mechanic’s lien) must provide the association with a Preliminary Notice (which is sent by registered or certified mail, return receipt requested). Before payment is made to the general contractor, the association has the right to insist that every company or individual who has filed a Preliminary Notice submit a lien release with every request for payment. If the lien claimant has not been paid, the association can then write joint checks to the general contractor and the potential lien claimant.
What are liquidated damages?
Liquidated damages are the amount of money that the contractor and the association agree in advance is a reasonable sum that the contractor will be charged if the work is not completed on time. The amount is usually charged on a daily basis until the work has been completed, and is intended to eliminate the need to prove the actual damages suffered by the association because the work was not completed on time.×
You may recall that as of January 1, 2014, the annual packet to community association members changed. The new packet includes the Annual Budget Report and the Annual Policy Statement containing the information listed in Civil Code sections 5300 and 5310.
The association has the option of sending the entire packet of information to the association members or sending a summary containing a “general description” of the contents of the packet.
Please be aware that when distributing a summary of the annual packet to the association members, the summary must include the form from Civil Code section 5570 entitled, “Assessment and Reserve Funding Disclosure Summary for the Fiscal Year Ending ____.” This form is typically prepared by the reserve study preparer.
We have a Word version of a sample annual packet, both the full report and sample summaries, available for our clients. If you already received our sample summary cover letters, please remember to include the Reserve Funding Disclosure Summary for the Fiscal Year (included in our sample full report) when sending out a summary letter to the association members.
This means you may continue to use the summary letter, with the addition of the form entitled, “Assessment and Reserve Funding Disclosure Summary for the Fiscal Year Ending ____.”
If you have any questions, ask! We are here to help.×
By: Susan M. Hawks McClintic, Esq.
Davis-Stirling 2014 is here. Are you ready? While most of the changes to Davis-Stirling are merely reorganization with the language of many sections staying the same, there are some provisions that will change how a community association conducts business. The changes noted below range from notices of board meetings, voting on restated documents, and board member conflicts. Some of the changes may be seem small or not so different from what we’ve all been doing but remember, the devil is in the details!
Notice of Executive Session Board Meetings (Former Civil Code § 1363.05(f); New Civil Code § 4920)
In 2011, the law changed to require posting a notice and agenda for non-emergency executive session board meetings at least two days prior to the meeting. In Davis-Stirling 2014, this two day notice requirement is subject to any longer notice period provided in an association’s own governing documents for a board meeting. For some associations, this means that a four day notice will be required for non-emergency executive session board meetings.
Some bylaws have a provision requiring a four day notice of board meetings and make no distinction between an open session board meeting and an executive session board meeting. When the bylaws have this type of notice requirement, a four day notice is required for a non-emergency executive session.
Remember that an emergency meeting in either executive session or an open session is exempt from the notice requirements. An “emergency” is defined in both the current law and Davis-Stirling 2014 as “circumstances that could not have been reasonably foreseen which require immediate attention and possible action by the board, and which of necessity make it impracticable to provide” the four or two day notice otherwise required.
Membership Votes On Amendments to Governing Documents (Former Civil Code § 1363.03; New Civil Code §§ 5100 – 5145)
For associations rewriting their governing documents, new § 5115(e) may be an expensive change. When voting on any amendments of the governing documents, associations will be required to deliver the text of the amendments to the members with the ballot. Per § 5115(a), ballots must be mailed by first-class mail or “delivered by the association.”
Davis-Stirling 2014 includes detailed new provisions addressing delivery methods for notices between the association and its members. Notices from the association are divided into two categories – “individual notices or delivery” and “general notices or delivery.” Section 5115(a) addressing delivery of ballots and the text of amendments does not use the defined delivery terms but it must mean individual delivery. This means that the ballot and text of the amendments must be delivered to every owner by first-class mail or e-mail or other electronic means, if the owner has first consented, in writing, to receive the ballot and/or text of amendments by electronic means.
For a ballot and a simple one or two item amendment, first-class mail is not a problem. For a 60 to 100 page restatement of bylaws and CC&Rs, copying and mailing the entire text with the ballot may be very costly. Certainly, owners should be able to receive a complete text of the changes, but currently many associations provide the text by hand-delivery, which is not an option under the new law, or by posting on a website, providing a CD, or other similar means that are only an option with an owner’s prior written consent. Further, many associations provide the full text to the owners prior to the voting to allow owners’ an opportunity to review and comment prior to the voting and then just provide any changed pages with the ballot.
Inspection of Association Books and Records (Former Civil Code § 1365.2; New Civil Code §§ 5200 – 5230)
The new records inspection provisions are split into multiple sections, but there are no substantive changes. The scope or list of association records or enhanced association records that a member may inspect and copy or the method of delivery, time frames to produce such documents, ability of an association to charge the requesting member for mailing, copies, and redaction (when applicable), or other existing document inspection procedures remain the same.
Board Member Conflicts of Interest (New Civil Code § 5350)
This new law prohibits a director or member of a committee of the board from voting on the matters listed below. It is important to note that the new law does not prohibit a director from being present during any discussion of these matters, only that the director refrains from voting.
The existing provisions of Corporations Code § 7233 relating to contracts or transactions in which a director has a material financial interest are still in effect.
Reprinted with permission from Common Assessment Magazine, a publication of the Community Associations Institute San Diego Chapter, October 2013.×
By: Mary M. Howell, Esq.
One of the most critical periods in the life of a community association occurs when the developer’s involvement is about to end. Many significant events arise within a very short period of time. Following are some of the more common issues with which an association will need to deal:
Securing Completion and Turnover of the Common Areas
The Board must confirm that all common area promised by the developer has been conveyed to the association and needs to inspect those common areas to determine whether they have been appropriately completed, and whether the workmanship is adequate. Poor workmanship may not delay the transfer of the property from developer to association, but may give rise to claims for construction defects. On the other hand, failure to complete construction may require the association to call on “on site completion” bonds (copies of which may be lodged in the Bureau of Real Estate’s files for the project).
Obtaining Copies of Important Documents
While there are few documents the developer is required by law to relinquish to the new association, there are many documents which would be helpful and should at least be requested: corporate records (such as the articles of incorporation, corporate minute book, originals of bylaws and CC&Rs, and annexation documents); real property records (deeds, tract maps, condominium plans, easements and licenses); bank statements; tax records; contracts with vendors and service providers; “as built” plans for recreational facilities, irrigation systems, etc.; grading plans; Bureau of Real Estate (BRE) final subdivision reports (“white papers”) for each phase; BRE budgets for each phase; copies of completion and assessment bonds; warranties for equipment; maintenance manuals; legal correspondence; insurance policies; subsidy agreements; records of architectural review applications and decisions.
Arrange for Education of Homeowner Directors and Committee Members
The administration of common interest developments is a highly regulated area. Obtaining education, via Community Associations Institute or other classes, or by reference to texts on the subject, will vastly improve director performance and homeowner satisfaction.
Confirm Payment of Real Property Taxes on Common Areas
While the real property which will be “common area” is still owned by the developer, it is subject to property tax. When the common area is transferred to the association, there should be no regular property tax due thereafter. Unfortunately, several things can go wrong: if the Assessor’s office is not properly notified of the change in ownership, the lots continue to be taxed; if tax is assessed and not paid, the property may be sold by foreclosure of a tax lien. It is therefore essential to have a complete list of the common areas, and to confirm when the transfer to the association was recorded, and whether there were outstanding taxes at that time, or at present.
Bring Developer Current on Unpaid Assessments
Often a developer will fail to bring assessments current in the last stages of sales. Because the developer will no longer have a significant presence in the community at this stage, it is particularly important to either obtain full payment or lien the unpaid homes prior to the sale to a third party. While it is important to timely collect all unpaid assessments, sale of the units without a lien in place will make collection against a developer much more difficult.
Determine What Easements the Developer Will Retain
Most CC&Rs contain easements in favor of the developer to allow it to continue to market and sell within the community, even after construction is completed. Some developers claim a right to continue to occupy recreational facilities, even after completion of construction, on the basis of such retained rights. The Board needs to review these provisions to see what specific rights were retained, and whether the developer has the right to continue to occupy common area buildings without paying rent to the association.
Determine Developer Voting Rights
After construction is completed, but before sales are done, the developer will typically retain rights to appoint some of the Board. It is important to determine how many developer-appointees are permitted, so that the Board may correctly conduct the election of homeowner directors.
Inspect Common Area Improvements for Possible Defects
While both developer and association desire to avoid litigation to resolve allegations of defective construction, it is important to note that housing constructed after January 1, 2003 is subject to a relatively short period wherein the Board must advance its claims, under the law commonly referred to as “SB 800.” Old law allowed a board up to 10 years in some cases to pursue defects; current law shortens that period substantially in many cases (in some cases, to one year). Accordingly, the Board needs to be vigilant in investigating claims of poor construction or landscaping. Furthermore, some CC&Rs impose on the association an annual inspection requirement, and may further require the use of specified maintenance manuals prepared by the developer.
This is a short list of typical problems. In a bad economic market, the turnover process may be complicated by developer failure, sales to successor developers, lender foreclosures, and insolvency proceedings. Any of these will force the association to obtain legal advice specifically addressing these problems.×
By: David A. Kline, Esq.
What Does the New Law Say?
On July 21, 2014, the Governor signed AB 2100 into law. The new law, which became effective immediately, amended Civil Code section 4735. Because the Governor has already declared a state of emergency due to drought, the new law now prohibits associations from fining owners for failing to water their plants and lawns. We may also see more drought-related legislation in the near future, so stay tuned for updates.
Does This Mean That We Can No Longer Enforce Landscaping Restrictions?
Even though Civil Code section 4735 already blocked restrictions that prohibited low water-using plants as a group, the amendment of this statute does not prevent associations from adopting and/or enforcing other landscape restrictions. Thus, associations may still impose restrictions regarding landscape design, the placement of trees, bushes and turf, topography, hardscape, and general aesthetics. In addition, associations may still enforce the owners’ obligation to maintain their lots in a neat and attractive condition. And, owners who choose to alter their landscaping are still required to obtain architectural consent.
While an association may no longer fine an owner for failing to water his lawn, we believe that an association may still fine an owner for failing to mow his lawn, remove weeds, trim bushes and trees, remove or replace dead and dying vegetation, prevent erosion of slopes, or for otherwise allowing his lot to become a nuisance and an eyesore.
Although the law addresses only fines and monetary assessments, associations should probably seek legal advice before attempting to impose other forms of discipline upon a member for failing to irrigate landscaping.
What Can My Association Do To Protect Itself?
Because associations can no longer rely on their members to irrigate their landscaping sufficiently, associations should probably consider adopting or amending their landscape rules or guidelines to allow for plants that use less water. In addition, associations should consider encouraging landscape designs that incorporate less turf, well-planned irrigation zones, the proper use of irrigation timers, the use of forest mulch to reduce evaporation and runoff, the use of heartier vegetation and drought tolerant plants, the use of shade from taller plants to reduce evaporation, and the smart use of topography to reduce runoff.
When considering applications for changes to the landscaping or when considering adopting or amending any landscape guidelines or rules, associations may wish to consult professional landscape architects or designers to minimize the negative impact of the drought upon the aesthetic appeal of the community. Associations should seek legal advice before adopting an immediate rule change without a thirty-day comment period, in light of the state of emergency.
In addition, associations may wish to educate their members regarding the increasing cost of water and local programs that may be available to buy back turf or provide rebates to offset the cost of converting to water efficient landscaping.
While the new law eliminates one method of enforcing landscape restrictions, associations should not be afraid to enforce an owner’s obligation to maintain his lot in a neat and attractive condition. Associations should consider amending their landscaping rules and guidelines to protect the value of the properties in their communities in anticipation of limited irrigation.
by Mary M. Howell, Esq.
With the advent of the 2012 amendments to the Davis-Stirling Common Interest Development Open Meeting Act (the “Act”) which restricted the use of emails by board members, unanswered questions have been flying. The statute does not address many of these, but the Brown Act (which regulates the meetings of public agencies, and upon which the Act is modeled) has the virtue of quite a bit of case and law commentary. It appears to answer many of the questions regarding Davis-Stirling, so even though the Brown Act does not, itself, apply to community association board meetings, the following discussion, based on the Brown Act, will be helpful.
Question: Can a director email the rest of the board purely to discuss a possible action the board might take in the future? It’s not on the agenda yet, and all that would happen is a discussion of the issue, not any action.
Answer: Probably not. A lot depends on the extent to which the current prohibitions on email meetings are intended to mirror what’s already in the Brown Act. The Davis-Stirling Act now defines a “meeting” as a congregation of the majority of the directors “to hear, discuss or deliberate” on some action that is within the board’s purview. The language in the Brown Act defining “meeting” (Govt. Code 54952.2) is very similar.
By analogy to the Brown Act, such communication would be prohibited, even if there isn’t a vote on the issue. As one court put it (in connection with the Brown Act), “It is clearly the public policy of this state that the proceedings of public agencies, and the conduct of the public’s business, shall take place at open meetings, and that the deliberative process by which decisions related to the public’s business are made shall be conducted in full view of the public…[T]he legislature has considerably broadened the [Brown Act] by passing amendments ‘intended to bring the informal deliberative and fact-finding meetings within [the Brown Act's] scope…’” Wolfe v. City of Fremont (2006) 144 CA4th 533, 541-542.
Question: Can a director email the community association manager with directions? What if that email goes to all the other directors too?
Answer: Generally, a director can email the manager with either directions or questions. And that email can be copied to the other directors. What is prohibited is using the manager as an intermediary, to obtain the concurrence of the other directors on a possible issue of association business, outside of a meeting. Thus, in Stockton Newspapers v. Redevelopment Agency (1985) 171 CA3d 95 (another Brown Act case), the court condemned the use of an intermediary (in this case, the attorney for the agency) to take a “poll…for the purpose of obtaining a collective commitment or promise” from the members on an issue to go before the board. Accordingly, if the direction given by the initial email is ‘go ask the others how they would vote on this issue’, the email to the manager would violate the Davis-Stirling Act. But if it’s simply, ‘put this item on the agenda’ or ‘here’s how I want you to handle that situation’, the email does NOT violate the Act.
Question: Can a director email one or two, but less than all, the directors about anything that remotely concerns the association?
Answer: It depends on what constitutes a majority of the board. If the board only has three members, such an email would violate the Act. If there are five directors, emailing one other director would be appropriate, but emailing two others would constitute a congregation of the majority of the board. If there are seven directors, then one director could safely email two others. Note, however, that if such emails are part of a serial attempt to obtain the concurrence of all other board members (discussed below), the numbers don’t matter: such a communication is not allowed.
Question: Can one director individually email each of the other directors what they think about an issue the director proposes to bring up?
Answer: As above, that would be permissible UNLESS the emails were part of a serial attempt to obtain a concurrence of the board on an issue of association business. Part of the problem with drawing bright lines of distinction is that the permissibility of such communications depends on the subjective intent of the parties to the communication. A director might not start out with that goal in mind, but over time as responses come in, that director might shift to the “polling” mentality condemned in the Stockton Newspapers case discussed above. To avoid this, refrain at all times from forwarding “threads” about a subject, which contain other directors’ observations and thoughts.
Question: Can one director individually email each of the other directors to discuss what a committee (say, the budget committee) has said during its deliberations?
Answer: Yes, provided the communication is not a direct or indirect action leading to a concurrence of the other directors as to the subject matter of the communication.
Question: Can a director instruct a manager by email to contact each of the other directors to get their input on a certain issue?
Answer: No. As noted above, the use of an agent or intermediary to take a poll or obtain a consensus on anything pertaining to the association circumvents the Act.
Question: That’s dumb! By this logic, the board can’t even take a poll on what’s a good meeting date, or where to hold the annual meeting. Can this really be the law?
Answer: Dumb doesn’t even begin to cover it. Bottom line is that what’s prohibited is the use of emails, between a majority of the directors (serially or all at once) “to develop a collective concurrence as to action to be taken on an item, which includes any exchange of facts, or substantive discussions which advance or clarify a member’s understanding of an issue, or facilitate an agreement or compromise amongst members, or advance the ultimate resolution of an issue.” Cal. Department of Justice, The Brown Act, Open Meetings for Local Legislative Bodies (2003), page 12. On the good side, the same document states that the Attorney General “does not think the prohibition against serial meetings would prevent an executive officer from planning upcoming meetings by discussing times, dates, and placement of matters on the agenda. It also appears than an executive officer may receive spontaneous input from any of the board members with respect to these or other matters so long as a quorum is not involved.” Ibid.
Question: So exactly what can a director legally do in terms of emails to other directors?
Answer: So far, as is clear today, and by analogy to the Brown Act:
1. The directors can meet/communicate via email when there is an emergency, and the individual directors have consented, in writing (including email), to such an email meeting. The consents must be filed with the minutes. Civ. Code Section 4910(b)(2).
2. An individual director may communicate (back and forth) with another director or directors, even about association business, PROVIDED the total number of directors involved does not exceed a majority of the board, and FURTHER PROVIDED that the communication isn’t part of a serial attempt to obtain board concurrence on an issue, outside of a meeting. 84 Ops. Cal. Atty. Gen. 39 (2001)
A “serial meeting” is “a series of communications, each of which involves less than a quorum of the legislative body, but which taken as a whole involves a majority of the board’s members.” As one commentator put it, “[o]nce serial communications are found to exist, it must be determined whether the communications were used to develop a concurrence as to action to be taken. If the serial communications were not used to develop a concurrence as to action to be taken, the serial communications do not constitute a meeting and the Act is not applicable…” Note, however, the Attorney General goes on to say, “conversations which advance or clarify a member’s understanding of an issue, or facilitate an agreement or compromise among members, or advance the ultimate resolution of an issue, are all examples of communications which contribute to the development of a concurrence as to action to be taken by the legislative body. Accordingly, with respect to items that have been placed on an agenda or that are likely to be placed upon an agenda, members…should avoid serial communications of a substantive nature concerning such items.”
Note that the Wolfe case further provides that the Act can be violated by improper communications which lead to a consensus, whether intentional or not. When in doubt, don’t.
3. A director can communicate with the manager to give instructions, and can receive from the manager information pertaining to association business. Such information might include committee reports, legal opinions, copies of correspondence, proposed minutes–even a meeting between the manager and director wherein the manager lobbies the individual director–but generally such one-on-one communications are permissible unless and until they turn into an attempt to find out what other directors think on the issue in question. Wolfe v. City of Fremont, supra, at 546-547.
4. A director can receive, and respond to, emails from non-director homeowners (though the wise director will not respond unilaterally, but after permissible consultations with fellow directors and on behalf of the board as a whole.)
5. All directors can receive information from other directors so long as they do not deliberate collectively with respect to such information, outside of a meeting. Thus, a director can send an email to all other directors, even about association business, so long as this action is ‘one way’ and not an invitation to open dialog about the issue. Presumably if a director sent out an email with an opinion or facts, and said ‘DON’T REPLY TO THIS EMAIL’, (and there were no subsequent replies) then such communication would not violate the Act. Roberts v. City of Palmdale (1993) 5 Cal.4th 363.
6. The directors can communicate regarding agendas and date, time and place of proposed meetings.
We hope the legislature clarifies some of these issues, but Davis-Stirling 2014 simply recycled this content. If you see the dilemma, and believe volunteerism will be impaired as a result of these prohibitions, contact your legislators, and request some amendments to allow more communication between directors, or at least to clarify what can and cannot be handled by email.×
by Pejman Kharrazian, Esq.
Martin Lomansey, an early twentieth century political boss from Boston, is credited with giving the following warning to young politicians — “Never write if you can speak; never speak if you can nod; never nod if you can wink.“
When emailing, it is not often we consider what consequences putting our thoughts into writing and pressing “send” will have down the road. The same traits that make email so appealing – the speed and ease of communication – can also expose pitfalls. These potential issues can be even more important when you serve as a volunteer in your association.
As a general rule for email, save discussions for board meetings (less is more) and email as if your mom is watching over your shoulder (watch what you say). Beyond these common sense warnings regarding brevity and discretion, the following discussion highlights a few issues surrounding email communications in community associations. These issues should be considered when creating or revising an email policy for your association, which is considered good practice.
Emails can be Discoverable
Emails can be discoverable in a litigation context, meaning if the association is involved in litigation, emails sent by directors, officers, committee members, and other volunteers can be sought out by the opposing side. Even outside of litigation, certain emails may be subject to a request for production under Civil Code section 5205, which allows members of the association to make document requests for association books and records. In either scenario, the contents of your email communications, as an association volunteer, could essentially become public.
Separate Email Account for Association Communications
If you serve as a volunteer in your association, then you should have a separate email account for your volunteer role (i.e., firstname.lastname@example.org). Such an account is quite easy to set up and it’s free. Many providers offer free cloud based email accounts that include storage on the cloud for your emails and the ability to sync the email account to your tablet or smartphone so you don’t have to log into a computer separately to gain access (gmail, yahoo and ymail are a few such providers).
Having a separate account helps keep a bright line separation between your communications as an association volunteer and your work or personal communications. This separation is important because if your emails become the subject of a discovery request, it will prevent you from having to sift through and separate association communications from other communications. The separation also helps you realize which hat you are wearing when communicating, which helps keep your association communications thoughtful, brief and professional and lets the recipient know the capacity in which you write them.
Further, litigants have the ability to subpoena an employer for access to your work email if they suspect you were using a work account to conduct association business. This can be problematic because an employer may not take the time to separate out association only emails and may simply produce all emails sent by you on your work account. Not to mention, your employer will likely not be thrilled to receive the subpoena and find you were using a work account for non-work communications!
Cloud Based Services
One caveat to the cloud based services such as gmail, is that they too can be subpoenaed and often are for production of emails during litigation. Therefore, if you do set up a separate association volunteer email address through a free cloud based provider, you must still keep in mind that what you say in an email can be shown to the membership, broadcast to the public or published to a jury down the road.
Shared Email Accounts and Shared Communications
It is also not a good practice to have a shared email account with a spouse or significant other (i.e., email@example.com). Certain privileges that may prevent the discovery of an email communication can be waived or defeated because of the joint nature of an email account. In a scenario where one spouse is a board officer and the other is not, a confidential communication meant for the board officer could become discoverable where it otherwise would not. For the same reason it is not wise to forward or share association emails with third parties.
Use of Email for Association Communications
Finally, when you are communicating over email in your capacity as an association volunteer, everything you say can be construed as being on behalf of the board as a whole. If asked a specific question by a member, use caution when answering and in most cases it is best to direct the member to discuss their issue at the open forum of the next board meeting.
Also, as discussed in other articles (See Email Do’s and Don’ts for Community Associations), except for some very narrow exceptions, email meetings are not allowed and board members should discuss association business at board meetings and not over email.
Next time you are about to press “send” consider the potential impact of your email communication. Remember that when it comes to email, less is more and watch what you say. It is a best practice for your association to have an approved email policy for the board and volunteers setting forth guidelines for procedural items such as the establishment of separate email accounts and for the use of email for association communications such as communications by an individual board member to a member.
 Document requests under Civil Code section 5205 have tight deadlines (as little as 10 days). If you receive one contact your association’s legal counsel immediately.
By: Nancy I. Sidoruk, Esq.
Got Election Rules?
We hope most community associations can answer “yes” to this question, but still come across some that say “no.” This may seem surprising, since it’s been years since election rule requirements became lawand since failure to adopt election rules carries multiple risks and potential liabilities. Dangers lurk at every turn for community associations without election rules—from exposing elections to legal challenge, to restricting board authority to appoint an association manager as election inspector. Still think it’s not a big deal? Here’s why election rule compliance is something to take seriously.
Can’t We Just Follow The Code?
In 2006, former Civil Code section 1363.03 changed how most common interest developments conduct elections. The provisions of former section 1363.03 have since been incorporated into Civil Code sections 5100 – 5130. Community associations must adopt rules and policies covering specific voting and election issues. Attempting to follow Civil Code secret balloting requirements without actually adopting conforming rulesis not compliance.
Community associations without election rules find themselves in noncompliance simply for failure to adopt the required rules, but that’s not all. These associations are also at risk of taking actions which might seem insignificant and might even seem normal – but are nevertheless unauthorized. For example, for a board to appoint a community association manager as inspector of election, the association’s election rules must allow for the appointment. Otherwise, the manager may be designated to collect ballots on behalf of the inspector…but that’s it. The manager cannot be the association’s inspector of elections unless the election rules allow it. Only independent third parties may serve as an inspector of election or an inspector’s appointed helper. An independent third party may not be a person, business, entity, or subdivision of a business entity who is currently employed or under contract to the association for any compensable services unless expressly authorized by the association’s duly-adopted election rules. (Civil Code section 5110) So, before appointing a community association manager as inspector of election or as an inspector’s assistant, confirm that election rules were adopted and that appointment of the community association manager is expressly authorized.
What’s The Big Deal?
California law permits a member to bring a civil action against a community association for violation of Civil Code section 5100 et seq. A court may void election results and impose civil penalties of up to $500 per violation. In addition, a prevailing member is entitled to reasonable attorney’s fees and court costs, while a prevailing association is not entitled to any costs unless the action is determined to be frivolous, unreasonable or without foundation. (Civil Code section 5145)
Community association managers and boards of directors should review their associations’ rules and regulations to make sure that appropriate election rules were adopted. Once adopted, be sure to carefully review the rules when conducting covered votes. Not every community association’s rules are the same. Just because one set of rules authorizes appointment of a community association manager or other employed or contracted third party (e.g., CPA) as an election inspector doesn’t mean that all others do, too. If a community association did not adopt election rules or has questions about compliance, the association should contact its legal counsel.
 Former Civil Code section 1363.03 became effective on July 1, 2006.
 Election rule adoption must be performed pursuant to operating rule adoption procedures of Civil Code section 4340 et seq.
How should a director perform his or her duties in order to minimize the risk of personal liability?
Corporations Code section 7231, commonly known as the “Business Judgment Rule,” requires a director to perform his or her duties as follows:
(a) A director shall perform the duties of a director, including duties as a member of any committee of the board upon which the director may serve, in good faith, in a manner such director believes to be in the best interests of the corporation and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances.
(b) In performing the duties of director, a director shall be entitled to rely on information, opinions, reports or statements, including financial statements and other financial data, in each case prepared or presented by:
1. One or more officers or employees of the corporation whom the director believes to be reliable and competent in the matter presented;
2. Counsel, independent accountants or other persons as to matters which the director believes to be within such person’s professional or expert competence; or
3. A committee upon which the director does not serve that is composed exclusively of any or any combination of directors, persons described in paragraph (1), or persons described in paragraph (2), as to matters within the committee’s designated authority, which committee the director believes to merit confidence, so long as, in any case, the director acts in good faith, after reasonable inquiry when the need therefor is indicated by the circumstances and without knowledge that would cause such reliance to be unwarranted.
(c) A person who performs the duties of a director in accordance with subdivisions (a) and (b) shall have no liability based upon any alleged failure to discharge the person’s obligations as a director, including, without limiting the generality of the foregoing, any actions or omissions which exceed or defeat a public or charitable purpose to which assets held by a corporation are dedicated.
Does a director of a community association owe a fiduciary duty to the membership?
Yes. Having a fiduciary duty to another involves being in a position of confidence and trust. A director owes a fiduciary responsibility to the association and to all of its members. The director’s personal needs and desires must be put aside in favor of the director acting in good faith and in the best interests of the association and the entire membership.
Is a director responsible for the actions of the other board members if the director is not at a meeting where the action was taken?
Failing to attend a meeting will not shield a director from liability. A director has a duty to participate in the affairs of the association, including attending meetings. A director can only protect himself or herself by attending the meetings and voting against actions which he or she cannot support.
How can a director fulfill his or her responsibility as a director if he or she is not an expert in all of the issues being considered?
No director can be knowledgeable about every subject which confronts the board. Frequently, the best directors are those people with good general knowledge. Directors must often rely on advice and information provided by experts or other professionals in the field being considered. The board need not always accept the advice given by the chosen expert. However, if professional advice is not going to be followed, the board should have good reasons for rejecting the advice, and should carefully document its decision.
How much time should a director spend on association business?
Enough to do the job properly. A director should attend all meetings of the board, should prepare for the meetings in advance and be knowledgeable on the issues to be discussed and decided. An association is not a social organization; it is a business, often involving assets in excess of several million dollars, and annual budgets that exceed hundreds of thousands of dollars. Protecting these assets and fulfilling a director’s fiduciary duties requires spending sufficient time to enable the director to make informed decisions on the issues being decided.
Is a director individually liable for his or her acts as a director?
Provided a director does not intentionally act wrongfully, the acts of a director will be considered the acts of the association, and not the personal acts of the individual director. Under such circumstances, only the association can incur liability, if any, for the director’s actions. Acting in good faith and with the interests of the association in mind will protect a director from individual liability. In addition, Civil Code section 5800 provides that a director will not be personally liable for any personal injury or property damage in excess of the association’s insurance, if:
(a) the association has at least $1,000,000 in general liability and directors & officers insurance ($500,000 if there are 100 or less units in the development);
(b) the director is a volunteer;
(c) the act or omission performed by the director was within the scope of the director’s duties;
(d) the act or omission was performed in good faith;
(e) the act or omission was not willful, wanton or grossly negligent
Can a director also perform services to the association for which he or she is paid?
Although it is not necessarily improper for a volunteer director to agree to provide paid services to the association, such a relationship is unwise. The protection against liability afforded by section 5800 of the Civil Code, discussed above, could be lost. The director will often be accused of having a conflict of interest, and the homeowners may never be satisfied that the director is not taking unfair advantage of his or her position as a director in order to improve his or her financial situation. If a director does offer a compensable service to the association, the association should endeavor to comply with Corporations Code section 7233. That section states that a transaction may be valid even if a director has a financial interest in the transaction, if there is full disclosure of all material facts and if the transaction is approved by either the membership of the association or the board, excluding the vote of the interested director. Also, many governing documents expressly preclude compensation to directors without a vote of the members.
How does a director avoid personal liability if he or she disagrees with a decision made by the other board members?
A director will not incur responsibility for an erroneous decision made by the majority of the board if the director is in attendance at the meeting when the vote is held and votes “No” on the resolution. The director should also request that his or her opposition to the motion be recorded in the minutes of the meeting.
Does the board need to maintain minutes of its board meetings, and what should they contain?
Yes, Corporations Code section 8320 requires corporations to keep board meeting minutes. The minutes are an excellent source of protection for a board, as they provide a written record of the actions taken. Over time, the minutes become the association’s historical record. Minutes should not be lengthy dissertations of everything that was said at the meeting, but they should contain all motions made at the meeting, and the results of the vote on each motion. It is not necessary to indicate how each individual voted, although a director may ask that his or her specific objection to the motion be recorded. The minutes should also include a summary of the factors considered by the board in passing or rejecting each motion.
What sort of protection should the association provide its individual directors?
The members of the board are volunteers. Every association should provide the board with broad indemnification rights in the governing documents, and should also provide adequate directors & officers insurance coverage. No director should be asked to place his or her personal assets in jeopardy for performing a volunteer service.×
Does our Directors and Officers “D&O”insurance cover only those who are actually directors and officers?
You must check the policy. Better policies have broader coverage that includes former directors, committee members, and even volunteers who work for the association. Some carriers now provide coverage to association managers under the association’s D&O policy. Make sure that everyone working on the association’s behalf is defined as an “insured” under the policy.
Who pays the deductible when an owner makes a claim covered under the association’s property and casualty insurance policy?
When property belonging to an individual owner is damaged, the loss may be covered under a property insurance policy purchased by the association. When this occurs, the association will typically make the claim for damage to such property; and the association will be named as a payee on the proceeds check because the association is the party to the insurance contract. The association will receive a check for the amount of the claim less the deductible. Before the association can require an individual owner to absorb the loss of the deductible on the claim, the policy designating who is responsible for the deductible should be set forth in the association’s governing documents, preferably in the recorded covenants (“CC&Rs”).
Will the association’s insurance cover damage to an owner’s personal property?
An association’s property insurance generally will not cover an owner’s moveable personal property, although some association property policies may cover unit fixtures such as carpeting, cabinets and installed appliances. Owners should be notified annually that they should procure coverage for their own property. A general liability policy protects the association where it is legally obligated to pay for physical damage to an owner’s personal property. The issue usually arises when an item the association must maintain (e.g., the roof) fails and results in damage to an owner’s property (e.g., furniture, carpeting). Although some courts have ruled that an association would not be liable to the owner absent negligence in maintaining the roof, other courts have held that the association’s obligation under the governing documents to maintain the roof would render it liable for any damage caused by its failure, even if the association were not negligent.
How does the board know what to insure?
First, read the governing documents, since they may make certain insurance mandatory. Second, read the statutes for the insurance required to qualify for limitations on the association’s and owner’s liability. Third, itemize everything the association owns or must repair or maintain (called insurable interests). Fourth, consider all available types of insurance and evaluate whether they are appropriate for your Association as part of a prudent insurance package (e.g., fidelity bond, workers’ compensation, D&O, earthquake, flood, etc.) Finally, look at all available options under your current property and liability coverage and evaluate them in light of your association’s particular needs. Talk to an experienced community association insurance agent.
What is the individual owner’s responsibility for insurance?
Look first in the association’s governing documents to determine what responsibilities individual owners have for procuring insurance, if any, as the individual owner’s responsibility for insurance will vary depending upon the type of community association involved. In associations where individual owners are responsible for maintenance and repair of the building structure, the governing documents may require each owner to obtain specific types of property and casualty insurance. If the association maintains and repairs unit structures, however, there may be no insurance requirement for individual owners. Moveable personal property (contents) is typically never covered by the association, although, as indicated above, some association policies may provide coverage for certain fixtures such as carpeting and built-in appliances. Individual owners should procure liability insurance to protect them against their own negligence and other conduct, and for injuries to others which may occur within their own unit or exclusive use areas. Owners also need their own coverage for alternate housing, if the unit is not habitable after a casualty loss, as this is usually not covered by an association’s master policy.
Our property is insured for its “cash value.” Is this good coverage?
No. Coverage for “full replacement cost” offers better protection. It provides the cost of actually replacing what is damaged or destroyed. “Cash value” is the purchase price less depreciation. When older property is destroyed, you receive only its depreciated value, which is almost always less than the actual cost of replacing it.
Our association signed a contract, agreeing to indemnify our landscaper if he is sued. Will our insurance cover this?
Probably not. If the landscaper is sued for something due to the landscaper’s conduct, the association’s liability policy might defend and indemnify the landscaper. Most policies, however, exclude “contractually assumed liabilities;” i.e., liabilities you have voluntarily assumed in a contract. You should consider an “endorsement” (a supplement to the policy) providing such coverage, especially if such a clause appears in the contracts with several of your vendors. The insurance carrier may be unwilling to issue this endorsement, so check with the carrier before signing any contract containing an indemnification obligation.
Is the association required to disseminate information about its policies to the membership?
Yes. Civil Code section 5300 requires a community association to distribute information annually to the members about its property, general liability, earthquake, flood and fidelity policies. Included must be policy information on the name of the insurer, type of insurance, policy limits of the insurance and amounts of the deductible. The association must also notify members of any cancellation or significant changes in its policies. (Civil Code §5810)
When an owner makes a claim that involves an actual or potential lawsuit against the association, must the association always tender it to the insurance carrier?
Unless the governing documents require otherwise, the association has the discretion to decide which claims to tender. However, unless the claim is relatively small, or less than the deductible, the decision must be made carefully. The better practice is to tender all claims, even if the claim is small or less than the deductible. First, small amounts can become large amounts if, for example, additional damage is discovered, or repair estimates are revised, or costs of defending are considerable. Second, do not withhold tendering under the assumption you can do so later. Insurance companies can reject late claims, especially if the delay has prejudiced the carrier. An owner request for alternative dispute resolution (e.g., mediation) might seem of little consequence at the time it is made but could later result in an expensive lawsuit. Do not withhold tendering just because a small claims case is involved, as you may have to pay the claim yourself and/or incur legal fees to appeal an adverse small claims judgment. The result of any court proceeding is uncertain, so never expose the association to financial risk by withholding or delaying a tender just to save a few dollars on next year’s premium. Consider adopting a policy of tendering all claims, whether or not a lawsuit has been filed, unless there are substantial and compelling reasons not to do so. Finally, tender claims to your D&O carriers if you know of any facts and circumstances that may give rise to a claim. Most D&O policies are “claims made,” and if you wait until there is an actual lawsuit, it may result in no coverage, especially if the association has changed carriers before the actual lawsuit is filed.×
By: Jay W. Hansen, Esq.
Associations are feeling the effects of multiple factors that have hit the insurance industry. Lower interest rates and a depressed stock market have reduced insurance company revenues. The 9/11 attacks unexpectedly depleted insurance company reserves, while the threat of terrorism has increased risks. Insurers of associations have seen increased claims, most often from water damage, as homeowner carriers have insisted that associations must process claims first, because owner policies are secondary to any coverage provided by the master policy. These factors, whenever they have occurred, or may occur in the future, result in higher premiums for all associations and difficulty in obtaining coverage for associations with histories of water damage or mold claims. This article provides suggestions to reduce insurance claims and to prevent costs from spiraling out of control when the current insurance climate is influenced by factors like these.
An association’s governing documents are the starting point. Associations must comply with these requirements, and the board cannot implement these suggestions if the documents provide otherwise. Document amendments are an option, but it is always difficult to meet the amendment requirements. Also, changing insurance language may require lender approval. In an extreme case, where the governing documents may require an association to comply with all requirements of federal guarantee programs like Federal National Mortgage Association (aka FNMA or “Fannie Mae”) such as: to obtain an all-risk policy, to pay all deductibles, to insure virtually all attached property in all units against virtually all types of loss and to obtain lender consent for all amendments, there may be little point in reading further. However, if there is flexibility in any of these areas, there may be hope for gaining some control.
An important point is that many governing documents require the association to insure not only the building structure but also the attached components inside individual units, such as carpeting, other floor and wall coverings, built-in appliances, cabinets, plumbing fixtures and other built-in components. The documents may not allow an association to exclude coverage for these components. The lenders, who have a significant influence on insurance requirements in governing documents, consider that these components represent part of the purchase price and want to ensure that the association insures everything that forms part of the security for their loans.
An association might contemplate an amendment that requires owners to insure these components and not require the Association not to insure them. However, that type of amendment probably requires lender consent. Also, if it were adopted, and if there were a major casualty that destroyed the unit, the homeowner may not have individual coverage. Thus, the structure of the unit might be rebuilt, but the owner may lack the funds to install critical fixtures, like plumbing fixtures that are needed before the owner could obtain a certificate of occupancy. Under those circumstances, the owner may walk away from the unit causing the lender to foreclose. If an association adopted such an amendment improperly, the lender may seek to hold it liable for the cost of restoring the unit. Since many directors and officers liability (aka “D&O”) policies will not defend or indemnity directors on a claim that they failed to obtain the proper types of amounts of insurance, a lender claim like this may result in a denial of coverage.
Thus, if any of our suggestions may require an amendment and lender consent, or may cause an owner to walk away from a damaged unit, thereby dumping an expensive problem in a foreclosing lender’s lap, it is wise to formulate an insurance solution that will provide a safety net to deter owners from walking away, or will prevent lenders from inheriting a significant liability to restore a unit to a habitable condition. For example, an association could adopt a deductible policy that provides that once a certain number of units are damaged, or if the total damage exceeds a certain dollar amount, the association will pay the deductible.
Many older documents require associations to obtain a “fire and extended coverage” policy. This is also called a “named perils” policy because it covers only specifically named causes of loss. Typically these are fire, lightning, wind, hail, aircraft, riot, vehicles, explosion, smoke, vandalism and malicious mischief. A named perils policy typically does not cover water damage. Thus, for an association that has high water damage claims that needs to gain control over those claims for a period of time to get coverage, it can purchase a named perils policy and eliminate all water damage claims.
The downside risk is that no water damage claims are covered. Not only are water damage claims in owner units not covered, but water damage claims in association clubhouses and common areas of residential buildings won’t be covered either. Unlike homeowners who can purchase a separate policy to insure against their individual water damage claims, the association will have to self-insure those claims. In our view, switching to a named perils policy should be reserved for an association with such high water damage claims that it cannot obtain any other policy at a reasonable price.
If the declaration requires obtaining “broad form” coverage, that is essentially a named perils policy which expands the list of named perils to include water damage claims, so obtaining a broad form policy will not eliminate water damage claims. If the declaration requires an “all-risk” policy (now typically replaced by “special form” policies), those policies provide coverage for risks except those that are specifically excluded (such as earthquake, war, and many other specifically identified exclusions), but they do include coverage for water damage claims, so only a named perils policy is likely to exclude water damage claims.
Some association documents may require an all risk, special form or broad form policy, but mandates it only if it is commercially available, or if it is available only at a reasonable price. An exemption like this can empower the board to purchase a named perils policy, if a more comprehensive policy cannot be obtained, or it may be language the association can adopt by amendment, if its water damage claims are out of control.
Many associations are also increasing their deductibles to eliminate claims for lesser amounts, and $5,000 is now a common deductible. Some federally-guaranteed loan programs have been permitted to have up to a $10,000 deductible. However, this option makes sense, only if the association can shift the payment of deductibles onto the owners. It doesn’t help, if an association must pay the deductible on every claim. Logically, the chances of having a water damage claim increase in proportion to the number of units in the association. If owners don’t assume part of the risk by carrying their own insurance, associations may be unable to find or keep insurance.
Associations also need to implement some type of deductible “policy” before a claim occurs. Preferably this should be in the recorded declaration, since the courts give recorded covenants a presumption of validity. There are various options available for such policies, each having various pros and cons. They usually break down into variations of imposing the deductible either (1) on the person whose property was damaged in proportion to the dollar amount of the insured loss, or (2) on the owner who is at fault or whose component failed resulting in the damage.
Under the first option, if one owner (or the association) has 50% of the damage, that party would pay 50% of the deductible. The negative aspect of this option is that some owners may be forced to pay even if they had no responsibility for the component that failed. However, they can usually have it covered under their owner’s policy. Under the second option, someone has to find a way to collect the deductible from the owner whose component produced the damage. Assume a plumbing leak in a second floor unit caused 80% of the insured loss in the unit below. That owner may get 80% of the insurance proceeds, but will be short in an amount equal to 80% of the deductible. It may require a lawsuit to force the second floor owner to pay the shortfall, and who will file it? Thus, a general preference is the equitable apportionment, because the downstairs owner will have to pay 80% of the deductible, but most could be covered under that owner’s individual insurance. Even if the association’s policy provides for an equitable apportionment of the deductible, it could also provide that the damaged owner has the right to sue another party for the deductible the damaged owner had to pay.
Another option is to see if the carrier will exclude just water damage claims, but not other causes of loss. However, there are few carriers that will offer such an endorsement. Also, as indicated above, if there is no coverage for water damage claims in owners’ units, there is no coverage for water damage for any water damage claims in the common area either. A similar option is to exclude certain property from coverage. The property most often damaged is wall, floor and ceiling coverings and drywall. If the association’s carrier will write an endorsement to exclude these components from coverage, it would eliminate a large number of claims. However, many insurance carriers will not write this exclusion. Also, if the association excludes coverage for these components, it is essentially self-insuring them in recreational facilities, common hallways and other common areas. Thus, these last two options should be reserved for extreme cases where the alternative may be obtaining no coverage at all.
Through a document amendment, owners could be required to obtain individual coverage to insure all attached components. The difficulty is trying to verify that each owner has actually done so. For every 52 units in any association, the association must seek verification an average of once a week throughout the year. The more units there are in an association, the more time-consuming verification becomes. When most associations have difficulty getting a majority of owners just to send in a proxy or a ballot for the annual meeting, it could be a logistical nightmare to obtain verification from every owner.
While amendments to implement these options may require lender consent, a couple factors may help to overcome that requirement. Many newer documents require lender approval only by “eligible lenders.” This means lenders who have notified the association that they want to vote on such amendments. During 35 years in this industry, I heard of only two owners whose lenders ever made such a request.
In conclusion, the association’s policies on insurance and deductibles really should make units fully habitable after catastrophic losses. However, providing coverage for every conceivable loss, regardless of amount, and for every owner’s interior damage, is a recipe for an undesirable claims history and an inability to find an affordable policy and perhaps any policy at all. Absent a disastrous claims history, the best options for most associations are probably increasing deductibles to reduce the number of claims, shifting the deductible burden to owners for smaller, non-catastrophic claims, and providing an association-paid deductible for larger or catastrophic claims. However, before implementing any policy, each association should consult with its insurance professional and its legal counsel to make sure it is not inviting an unreasonable risk.×
By: Jon H. Epsten, Esq., and Anne L. Rauch, Esq.
For those of you who have been involved in managing or sitting on a board of directors for a community association, you are aware that the association typically makes an insurance claim through its insurance agent. For many years, this has been an acceptable method for submission of insurance claims; however, there are pitfalls to making the claim directly to the insurance agent which could result in denial of an insurance claim or the insurance claim never being received by the insurance company. Here are some suggestions on how to properly tender an insurance claim to an insurance company.
Read the policy
We stress time and time again the importance of the association manager or board of directors obtaining the actual insurance policy. It is important to review the insurance policy not only for coverage issues, but also for claim submission information. Many insurance policies dictate how the insurance tender should be handled. Many of those policies require that the notice be sent to a specific corporate address. Most associations rely on the insurance agent to submit the claim to the corporate office of the insurance company; the burden, however, rests on the party making the claim to make certain it is properly tendered to the claims office.
Put the claim in writing
Associations will frequently call the agent to report a claim by telephone without following up in writing with the agent or the corporate office for the insurance company. All claims or notices of a claim must be submitted in writing. That is not to say that a telephone call to an agent or an adjuster to get a claim moving is inappropriate. However, those discussions must be confirmed in a letter describing the claim. In the letter, it is imperative that you address the substance of the claim, identify the policy number and the policy period in which you are tendering the claim. That letter should be sent by certified mail, return receipt requested, and first class mail to the appropriate parties.
Timely submit claims
It is important that you submit a claim as soon as you have notice of a claim or a circumstance that could result in a claim. Untimely reporting can result in denial of your claim by the insurance company. Many insurance companies have a claim reporting period and the failure to submit a claim within the claim reporting period could result in the denial of the claim.
Tender the claim under all applicable policies
There may be more than one policy that covers your claim. Speak to your insurance agent about insurers to which the claim should be tendered. If necessary, consult legal counsel. Again, failure to timely report a claim to a previous insurance company could bar coverage for that claim in the future. Don’t overlook the fact that coverage may be triggered under previous policies.
Don’t overlook tendering small claims actions
When an association or its officers or directors are defendants in a small claims action, that claim should be tendered to the insurance company. At a minimum, the insurance company should be notified of the action. If the small claims court action later results in a larger, related claim against the association but the original small claims action was not tendered or the insurance company was not notified of the claim, you run the risk that the insurance company may deny coverage of the later-filed claim on the grounds it was not notified of the earlier claim.
Consider notifying the insurance company of requests for Alternative Dispute Resolution
In some cases, an owner must offer an association Alternative Dispute Resolution (ADR) (and vice versa) before suing. The association should tender the claim as soon as the ADR letter comes in. Many insurance companies will pay for the defense of an ADR proceeding. The insurance company’s rationale in providing a defense is that if it can dispose of a claim through mediation or arbitration, then the ADR process is preferable to lengthy litigation with the claimant. We recommend that you also consult with legal counsel to determine if Internal Dispute Resolution (IDR) matters should be reported.
Should you tender claims when you know there is no coverage or the amount is less than the deductible?
It is always important that the insurance company be informed about a potential claim. Remember: Claims that start off under the deductible amount, or in a form which happens to fall outside the scope of coverage, could turn into larger claims where coverage is afforded. For example, there may be an exclusion in an insurance policy for coverage for a mold related claim. If the association does not tender the claim or put the insurance company on notice and, later, the homeowner claims discrimination because the association did not treat them fairly (assuming that is a covered claim), the insurance company may deny the claim based upon untimely notice. The rules vary from policy to policy regarding this issue. We strongly advise the association to consult with legal counsel when in doubt and err on the side of caution. Consulting with your insurance agent in these matters is important. But confirm the information that you have discussed with your insurance agent with an attorney as an added measure of your due diligence.
Who can tender an insurance claim?
The insured or anybody who has a right under the policy may tender a claim. Depending on the nature of the association’s policy, an owner may be able to make a claim against the association’s policy. However, the board should encourage owners to make their claims directly through the association so the association may assess the claim and be given the opportunity to discuss the merits of the claim with the insurance adjuster and legal counsel, if appropriate.
The loss of insurance coverage can be devastating to an association. Remember that an insurance policy is nothing more than a contract between the insurance company and the insured. It will be interpreted according to contract law. If you fail to comply with any express terms regarding claim tenders, you may provide the insurance company with a viable reason for denying a claim. When in doubt, tender early and often.×
On July 21, Governor Brown signed Assembly Bill 2100 (Campos) into law. As urgency legislation, the law immediately became effective. When there is a Governor-declared state of emergency due to drought, or when there is a local government-declared state of emergency due to drought, a community association is prohibited from fining or assessing a member for reducing or eliminating watering of vegetation or lawns during the period of the declared drought.
Associations still have authority to enforce other reasonable landscape maintenance restrictions contained within their governing documents. For example, enforcement activities related to failure to remove weeds, trim trees, and mow lawns are not directly impacted by Assembly Bill 2100.
Specifically, Civil Code section 4735 has been amended to read as follows:
By: Nancy I. Sidoruk, Esq.
Your association has sent violation letter after violation letter to Member X, repeatedly called him to hearing, possibly levied fines and got absolutely nowhere. The violation’s still there and it’s eating at you and the rest of the board, manager and neighbors. You feel like Member X is thumbing his nose at the entire community. You’re at your wit’s end and maybe even anxious to file a lawsuit. OK, time to cool off, assess the options and focus on your goal of achieving compliance with the governing documents.
This is just one of many scenarios that may ultimately result in an association serving a member with a Request for Resolution under Civil Code Section 5925 et seq. Before an association can file a lawsuit regarding most violations, it must have “endeavored” to submit the dispute to alternative dispute resolution (ADR).
Webster’s Ninth New Collegiate Dictionary defines “endeavor” as follows: “to attempt (as the fulfillment of an obligation) by exertion of effort…to work with set purpose.” Does the endeavor begin with sending a Request for Resolution and end once Member X accepts the offer to mediate? It shouldn’t, and that’s where effective mediation preparation comes into play.
Purpose & Early Preparation
To best prepare, first determine what you expect and wish to accomplish at mediation. What is your set purpose? You might meet with the homeowner, reach an agreement, obtain compliance and avoid the time and expense of litigation. Even if an agreement isn’t reached, perhaps the process of community healing and consensus building may begin. However, if you firmly believe successful resolution of the dispute is unlikely without litigation and you’re only going to mediation because the statute requires it in your situation, mediation just might provide you with a good preview of the strategies and arguments the homeowner (or his attorney) will bring up in court. Hey, by the time you’re done, maybe a solution will present itself after all! These possible accomplishments are all important, so don’t they deserve a little exertion of effort?
Your mediation endeavor starts well in advance of sending a Request for Resolution. It begins with all of the association’s enforcement efforts leading up to that Request. Be consistent with enforcement efforts. The association should communicate with members regularly, clearly, and in writing regarding violation matters. Maintain a detailed and accurate violation chronology. Establish a clear “paper trail,” demonstrating consistent association efforts to spur compliance and showing association observance of its own published rules and enforcement policies.
If applicable, take, and continue to take, photographs of the violation and of neighboring lots or units. These photographs will be invaluable to a mediator and other participants, including the association’s attorney, so they may better understand the standards and expectations of your community. What is acceptable in one neighborhood may not be considered up to par in another. When addressing violation matters, act from the outset as if the issue will end up going to mediation or even trial. Your paper trail will be seen by the mediator or trial judge, so also keep that in mind when preparing written documentation. By keeping good records of violation enforcement activity, you’re taking an important step toward making disputes easier for mediators to understand and, hopefully, toward facilitating resolution.
The Mediator’s Role
Understanding the role of the mediator is also critical to effective preparation. Mediation is not trial, and the mediator does not act as a judge or make decisions based upon witness testimony or presentation of evidence. Evidentiary information can be useful to convince the other party that a real problem exists and to assist the mediator in understanding the issues, but a mediator can not and will not order either side to do anything. The mediator will instead attempt to bring the parties to a mutually satisfactory resolution. He or she may help you acknowledge valid points made by the other party, and may also help the other party understand the association’s position.
The mediator may also help both sides explore reasonable alternatives, as well as potential risks and benefits of going to trial. Mediation is really a facilitated negotiation. Therefore, before mediation the board should attempt to identify and explore alternatives, and consider the potential risks of not reaching an agreement. By doing so, you’ll have a head start on the negotiation process and get in the mindset of dispute resolution. Mediation isn’t about winning or losing—it’s about finding a mutually acceptable solution.
The ultimate decision makers at mediation are the parties themselves (i.e., the association and the homeowner) and not the mediator. So, to prepare for mediation, the board must discuss in advance the specific parameters within which it would be willing to settle a dispute. Any board members who will be attending should have authority from the entire board to enter into an agreement to resolve the matter in its entirety. One of the most difficult situations occurs when an agreement is about to be reached, but its terms are outside the scope of the participating board member’s settlement authority. Although it may be possible to reach an informal agreement, pending obtaining board approval of the terms, this does not achieve desired closure at the mediation table.
Although it is important that the mediator understand the nature of the dispute, it is equally (if not more) important that the other party understand it, too. Since an association’s primary goal is compliance with the governing documents, think about what the association might be willing to offer to achieve that goal. Every situation is different, but a mediator will often expect that each side give up something. Maybe this means offering a payment plan, a waiver or reduction of fines, an extension of time to complete work, or possibly a charitable donation or a simple apology. Think about what may have a high level of value to the homeowner, and a low cost to the association. Coming to mediation prepared to propose such low-cost alternatives makes you, as an association representative, part of the solution rather than part of the problem.
Finally, always keep in mind the goal of achieving compliance. As you endeavor to submit a dispute to mediation, make a concerted effort to identify alternative solutions, establish a scope of settlement authority, and be prepared to provide documentation that supports and justifies your expectations. Your efforts will help demonstrate unbiased credibility at the negotiation table and assist the mediator in facilitating clear, direct communication designed to reach a mutually agreeable solution.×
Should our association adopt formal parliamentary rules for conducting its membership meetings?
Yes, Civil Code section 5000(a) requires it for membership meetings, but not for board or committee meetings. The purpose of having such rules is (1) to provide order so meetings can proceed in a business like manner, and (2) to provide a fair opportunity for everyone to participate. In addition, Civil Code section 5105 requires associations to adopt written rules governing the association’s election and voting procedures.
Should we always have a written agenda for membership meetings, and what should it contain?
You should provide a written agenda to show the order in which the business of the meeting will be conducted. A typical agenda would include the following items:
(1) call to order and verification of a quorum by the Chair;
(2) introduction of the Chair, board members, inspectors of election, special guests, and speakers, if any;
(3) election of directors with the counting and tabulation of the secret ballots by the inspectors of election;
(4) presentation of reports by directors, officers, and committees;
(5) adoption of any resolutions regarding tax and accounting issues;
(6) member comments or member forum;
(7) unfinished business from the previous meeting, if any;
(8) new business (which must be business members have a right to vote on);
(9) announcement of election and other voting results;
In developing a procedure for holding our membership meetings, where should we start?
Start by reviewing your bylaws. Most contain rules on giving notice of meetings, proxies, quorums, voting rights, and electing directors. In some cases, the Corporations Code and the Davis-Stirling Act have rules which supersede your bylaws and in other cases the rules in the law are to be followed when the bylaws are silent. Following the requirements in these documents and the parliamentary rules your association adopts, should enable you to conduct your meetings successfully.
Should the notice of the membership meeting contain anything more than the date, time, and place of the meeting?
Yes. The notice should be in writing, and should identify all matters the Board plans to present to the members for a vote. For special meetings, only the business identified in the notice of a special meeting may be brought up at the special meeting for a vote. Always consult your bylaws, the Davis-Stirling Act (Civil Code section 4000 et seq.) and the Corporations Code to verify notice requirements.
Must all voting use secret ballots?
Civil Code section 5100 requires associations to utilize a secret balloting method defined by the statute for all votes concerning assessments legally requiring a vote, election and removal of members of the Association Board of Directors, amendments to the governing documents, or the grant of exclusive use of common area property pursuant to Section 4600. These types of votes must be cast on a totally anonymous ballot inserted into a sealed envelope which is then inserted into another envelope and returned to the inspectors of election. Ballots pursuant to Civil Code section 5115 must be mailed by first-class mail or delivered to the association members, together with the double envelopes for the members to return their ballot, at least 30 days prior to the deadline for voting. For most other types of votes, ballots are required only if the bylaws make them mandatory.
For more routine matters, other less formal methods are appropriate. These include a voice vote (all say “aye”), a show of hands, a roll call vote (owners names are read from the list of owners), and unanimous consent (if there are no objections, the matter is approved).
We have previously appointed inspectors during our membership meetings to count votes. When is the best time to do this, and how do they know what to do with an improperly marked ballot or proxy?
Inspectors of election have broad powers under Civil Code sections 5110 and 5120, and Corp. Code 7614, including the power to determine who can vote, whether proxies are valid, and how a particular vote is cast. In addition, inspectors of election are vested with the responsibility to receive and maintain the ballots submitted by the members. Because inspectors must designate the location where the ballots are to be returned and maintained (Civil Code section 5125), associations should appoint inspectors prior to mailing a ballot to the owners and well in advance of the meeting or pending vote.
Inspectors of election use the requirements of Civil Code section 5100 et seq., other laws, and the association’s governing documents in reaching a determination concerning an election. For example, an outer envelope containing a secret ballot must legibly indicate the required identifying information. If the inspectors receive a ballot envelope that does not, the inspectors must decide whether to accept the ballot. For this reason, it is advisable for the inspectors to consider possible balloting defects prior to receiving the ballots and determine how to treat such defects uniformly, such as: “If the voting member can still be reasonably ascertained, then, the ballot should be counted even though not all of the identifying information is legible.” All rulings or decisions of the inspectors should be in writing and kept with the voting records, including reasons for invalidating a proxy or ballot.
Some of our members actually go door to door soliciting proxies from other members. Can they do this?
A proxy is a written authorization signed by a member which gives another member the power to vote on behalf of that member. The proxy is not to be used in lieu of a ballot. An association may accept these proxies if permitted or required by the bylaws of the association and if the proxies meet the requirements of Civil Code section 5130, other laws, and the association’s governing documents. However, associations are not required to prepare or distribute proxies pursuant to Civil Code section 5130. For this reason, the member wishing to authorize a proxy must ensure the proxy complies with all requirements to be valid. The inspectors of election will verify the proxies received by the association.
How do owners bring matters before the membership for voting or approval?
First, the matter must be one the members are entitled to decide. Then, unless the matter is one which requires the use of a secret ballot pursuant to Civil Code section 5100 et seq., parliamentary procedures provide four basic motions by which a member may bring an issue before the meeting. The first is called a “main motion.” It brings new business before the members for discussion and a vote. For example, “I move we adopt the tax resolution to allocate any excess association funds left over at the end of this fiscal year to next year’s budget.” The second is a “subsidiary motion” which changes or amends the pending main motion. For example, “I move we amend the motion to return excess association funds to the members.” The third is an “incidental motion,” one involving a procedural issue that concerns another pending motion or item of business. For example, “Point of Order. Did the notice of this special meeting state that a tax resolution would be presented for a vote?” The fourth is a “privileged motion,” one not concerning a pending motion but so important that it may interrupt anything else without debate. For example, “I move we recess until the Chair’s microphone is repaired.”
The election of directors is usually the most important business at our meetings. Are there any special rules regarding elections?
Civil Code section 5115 requires votes on the election or removal of directors to be conducted using a secret mailed ballot system modeled after the procedures used by California counties for ensuring confidentiality of absentee voter ballots. Most other requirements are found in the bylaws, such as whether to allow nominations from the floor, provide for cumulative voting, allow for proxies, and the like. If cumulative voting applies, you should explain it to avoid member confusion when filling out ballots. Counting of ballots must be conducted by inspectors of election in public at a properly noticed meeting of the members, or open meeting of the directors as permitted in the bylaws. The results of the election are reported to the board by inspectors of election and then recorded in the minutes of next board meeting. The tabulated results must also be publicized to all members within 15 days of the election.
Our membership meetings are often disrupted by owners who disregard the rules and want to vent their anger at the board of directors. How can we stop this behavior?
Associations face this periodically. First, to help alleviate the problem, consider appointing a committee to develop written rules for member behavior. Second, require persons who are going to speak in the homeowners forum to complete a form stating what topic they will address and limit the time each member can speak. Third, develop a written policy for handling disruptive members so the Chair knows exactly what to do. This would include warnings, recesses, speaking to the person in private, and even monetary penalties for disrupting the association’s business. Fourth, consider appointing a sergeant-at-arms if you have a member who has a special talent for dealing with unruly individuals. Fifth, the Chair can always threaten to or actually adjourn with the hope of bringing peer pressure on the disruptive member. Sixth and finally, being courteous, respectful, and professional can often be disarming, and a good method for enlisting the support of other members to assist in dealing with the disruptive individual.×
By: Jodi A. Konorti, Esq.
Many associations hold “movie-under-the-stars” nights. While these gatherings generally enhance the sense of community in an association, being hit with a copyright infringement lawsuit for failure to obtain a performance license can bring a quick end to the fun.
Copyright Law – Protected Work
The Federal Copyright Act (Title 17 of the U.S. Code) protects songwriters, music publishers, film producers, and the like, from unauthorized use of their copyrighted work. Federal copyright laws consider the creation and publication of music and film as “property” owned by the creator and publisher. If a work is copyrighted, the owner of the work has the exclusive right to publicly perform that work and give their permission for someone else to lawfully perform or display  the work in public. These laws directly affect community associations that play music or films in the clubhouse without obtaining a performance license before playing the work to the public in a community gathering.
What is a Public Performance?
In the performance licensing context, an association clubhouse or other common area may be considered a public place. While viewing a movie or listening to music in a private home does not require a license, to the extent a work is performed or displayed in a place “open to the public or at any place where a substantial number of persons outside the normal circle of family and its social acquaintances is gathered,” a public performance is deemed to exist (without regard to whether a fee is charged). (17 U.S.C. §101) This definition extends to performances in semi-public places such as clubs and lodges (e.g., an association clubhouse), and presumably outdoor common areas. A conservative interpretation could extend this definition to association-sponsored events even if only residents are invited.
Examples of two cases demonstrate how copyright infringement liability can arise. In one case, an association held a dance, open to the public, with an orchestra and requested a $3.00 donation. While the court did not opine on whether the clubhouse was a public place, it held an unauthorized public performance took place because the association invited the public and a fee was charged. The court’s opinion in this case indicates that if the association limited attendance to only members and did not request the donation, it may have avoided liability (liability might still have been found based on the number of guests, however).
In another case, a semi-private golf club played music in the dining room for 21 members and their guests. The court held this transmission of music was a public performance because 21 guests constituted a substantial number of persons outside a normal circle of friends. This case indicates that an association clubhouse could be deemed a public place, and even when a small number of attendees gather in the clubhouse to listen to music, a license could be required.
Exemptions to License Requirement
Even if a performance is public, an association may be exempt from the license requirement if it can meet an exemption. The most obvious exception to the license requirement is if the performance is not “public.” In addition, the law exempts the playing of radio or television stations in a public place if the association does not charge a fee to enjoy the performance (the exemption does not include playing DVDs, CDs or iPod/mp3 playlists). The law also exempts performances that are not “transmitted,” where there is no commercial advantage to the performers, organizers, or promoters, if there is also no admission charge. (17 U.S.C. §110(4)(A)) A common example of this exemption is a spontaneous sing-along at the clubhouse, but would probably not include an association-sponsored event with music playing, even without an admission charge.
Copyright Infringement Liability
Liability exists if, among other things, a work is copyrighted and the defendant publicly performed the work without first obtaining permission. The potential financial liability for copyright infringement is substantial. The Copyright Act provides for federal statutory damages of $750 – $30,000 for each inadvertent infringement, plus attorneys’ fees and costs. The damages substantially increase for intentional infringements (up to a $150,000).
Save for a few limited exceptions, the public performance of a work requires the permission of the owner through a performance license. To manage risk associated with federal copyright laws, community associations should either: (1) not allow the playing of music or movies in the common areas, or (2) obtain the necessary license from the appropriate performing rights organization (see Appendix). An association could also obtain an indemnity agreement from the performers, but this may not protect the association entirely, because joint and several liability is imposed on all parties who participate in the infringement.
As the determination of whether a license is necessary is fact-specific, we recommend you contact your legal counsel for advice.
Appendix: So, You Want to Have a Party…Now What?
If your party constitutes a public performance, the proper license(s) must be obtained from the relevant licensing entities. These entities ensure songwriters, music publishers and film producers are properly compensated when their work is played in public.
The three recognized Performing Rights Organizations (“PROs”) for music are:
Two of the major licensing firms for movies are:
Practically, the cost to obtain a license is likely much less than the cost of the risk to the association and directors and the cost to the association to litigate an infringement action and pay-out significant damages.
Article adapted and reprinted with permission from Common Assessment Magazine, a publication of the Community Associations Institute San Diego Chapter, Summer 2013.
 “Display” is defined as “to show a copy of it, either directly or by means of a film, slide, television image, or any other device or process or, in the case of a motion picture or other audiovisual work, to show individual images non-sequentially.” (17 U.S.C. §101)
“Perform” is broadly defined as “to recite, render, play, dance, or act it, either directly or by means of any device or process or, in the case of a motion picture or other audiovisual work, to show its images in any sequence or to make the sounds accompanying it audible.” (17 U.S.C. §101)
 Public performance is further defined as transmitting or communicating a performance or display of a work to a place open to the public, or to the public by means of any device whether the public is capable of receiving the performance in the same place or separate places and at the same time or at different times. This somewhat convoluted definition means that a community with a central television channel that plays music or movies that can be viewed from individual owners’ homes may be considered a public performance. (17 U.S.C. §101)
 Hinton v. Mainlands of Tamarac 611 F.Supp.494 (S.D. Fla. 1985).
 Fermata International Melodies, Inc. v. Champions Golf Club, Inc. 712 F.Supp. 1257 (S.D. Tex. 1989).
 “Transmit” is defined as communicating a performance by any device or process where images or sounds are received beyond the place from which they are sent. (17 U.S.C. § 101(2))
 Gershwin Publishing Corp. v. Columbia Artists Management, Inc., 443 F.2d 1159, 1162 (2d Cir. 1971).
By: Nancy I. Sidoruk, Esq.
Productive board meetings are productive business meetings. However, the issues handled by community association boards are not necessarily easy. Productivity can be sidelined by flaring tempers, controversy, interruptions and the challenges that come with addressing sensitive and sometimes complex matters. To successfully manage productivity and decorum issues that may occur at board meetings, a board might enact procedural rules to govern meeting conduct. A board might also consider adopting a code of conduct applicable to directors and other association volunteers.
Rules of Procedure
While some associations’ governing documents specify a particular “order of business” or parliamentary procedure (e.g., Robert’s Rules of Order), most do not (and if they do, are more likely prescribed for membership meetings, rather than board meetings). Thus, the majority of boards are left with little guidance on how to hold effective meetings which allow for efficient conduct of business and which also facilitate a healthy level of member input.
Board meetings are supposed to enable the conduct of essential association business; they are not social events. From prohibiting consumption of alcoholic beverages at meetings to establishing time periods and guidelines for member input, standing rules of meeting procedure can help provide an atmosphere conducive to conducting business, preserving decorum, and facilitating member contribution.
The Open Meeting Act restricts the ability of community association boards to take action on non-agenda items, albeit with certain limited exceptions. (Civil Code §4930) In certain respects, these restrictions can be helpful to boards challenged by meeting interruptions and by the temptation to engage in excessive dialogue with those in the “audience.” It is, of course, still important to encourage member attendance and participation at meetings, so more members become interested and participate in community activities.
Directors should note that although members will not always agree with every action taken by the board, member participation typically brings with it the potential to improve the board’s chances for achieving better long-term results for their community and minimize claims that the board lacks transparency. On the other hand, as those elected to handle the business of the association, the board must be permitted to conduct business without unreasonable interference. Thus, owner participation should remain orderly and be limited to the portion of the meeting set aside for such participation.
From establishing a “first, second, final warning” or similar system for admonishing those who interrupt board meetings, to setting forth the process and criteria for recessing and adjourning unmanageable meetings, and setting time periods and guidelines for member input, standing procedures for meeting conduct can be effective tools for conducting effective board business and ensuring fruitful member participation.
Codes of Conduct
While there is no statutory requirement for a director to execute a statement or agreement regarding ethics as a condition of serving on a board, many associations find such policies to be good general statements of what the board expects in terms of individual director performance. A code of conduct or code of ethics is something that could be used for both the board and members of an association’s volunteer committees. Professional and courteous treatment of fellow directors and of association management, employees (if any) and vendors is necessary to accomplish the business of the association, and to help protect the association and its directors from liability.
Codes of conduct vary in their exact content and level of detail, yet their provisions typically target three objectives: maintaining decorum, facilitating efficient business operations and fulfilling fiduciary duties. In addition to keeping meetings civil and accomplishing association business, the need for directors to fulfill their fiduciary duties must not be overlooked. Director duties of loyalty, confidentiality and fair dealing are owed by each director to the association as a whole and are assumed upon taking office as a director. Adopting and adhering to a code of conduct can thus help an association and its directors minimize potential liability.
Although the policies discussed above are operating rules, in that they apply generally to the management and operation of the association or the conduct of its business and affairs, they are not among the specified rules subject to the rulemaking procedures of Civil Code section 4360. Before adopting rules of procedure for board meetings or a code of conduct, a board should nevertheless consult with the association’s legal counsel to review its proposed rules and policies or to assist in drafting such rules and policies to suit the association’s particular needs and concerns.
Reprinted with permission from Connect Magazine, a publication of the Community Associations Institute of Greater Inland Empire Chapter.×
Senior Living Communities in California frequently face a host of unique challenges and difficulties that may be remedied relatively easily. We have compiled some of our top solutions to very common problems. As always, consult with your legal counsel prior to making any changes to your governing documents.
1) Age Verification
Problem: Often times, age restricted communities experience difficulties in securing up-to-date and accurate age verification of residents.
Solution: Obtain a handheld ID scanner. These inexpensive devices cost between $50.00 and $300.00 depending on sophistication and ease of use. These devices allow an individual to obtain a digital copy of a driver’s license or other document with ease. It is important for age restricted community associations to conduct age verification checks every two years to comply with federal law. Note that there are alternatives allowed by law when an owner refuses to provide verification (such as declarations under penalty of perjury).
2) Rules and Regulations
Problem: Many of our clients have board-adopted rules and regulations which contain language that specifically prohibits certain age groups from using recreational facilities, such as pools. While the Department of Fair Employment and Housing (DFEH) has not ruled specifically on whether this language is allowed, it may pose a problem if challenged.
Solution: Amend the rules and regulations to contain age-neutral language. For example, if your current rules read: “No children under age twelve allowed in the pool,” alter the language to read: “Individuals who are wearing diapers may not use the pool.” This type of language change may help the association avoid a DFEH complaint.
3) Escrow Demand
Problem: Brokers are selling lots or units within the Association without any regard for the age restricted status of the community and an underage homeowner who recently purchased a home in an age restricted community claims he was not aware of the age restrictions.
Solution: Include at the top of any escrow demand documentation language stating clearly: “Association is a 55+ Age Restricted Community.” Post signs to that effect on the common area. While homeowners are put on legal notice due to the CC&Rs, this clear language can help avoid any confusion.
4) The 80/20 Conundrum
Problem: New underage homeowner wants to move in claiming that federal law only requires 80% of the residents to be 55+.
Solution: Federal regulations make clear that the 80/20 rule does not mean that 20% of the units are set aside for non-seniors; in fact, that would be in violation of other federal requirements. Aggressively pursue violators of this rule as they could place your association’s age restricted status in jeopardy.
5) Sunshine Committees
Problem: Many of our clients have “Sunshine Committees” that take in small donations to pay for flowers, condolences and remembrances. These donations may be taxable income to the association.
Solution: Consult with your association’s CPA to ensure that the Sunshine Committee donations are being tracked and reported appropriately.
6) Permitted Health Care Residents
Problem: A 55+ resident is hospitalized and their underage Permitted Health Care Resident (PHCR) wishes to remain at the owner’s home while the resident is away.
Solution: Adopt clear guidelines defining when a PHCR may remain in the residence pursuant to Civil Code section 51.3(b)(7) (or 51.11(b)(7) for Riverside County). A PHCR is entitled to continue occupying the dwelling as a permitted resident if: (A) the senior citizen became absent from the dwelling due to hospitalization or other necessary medical treatment and expects to return to his or her residence within 90 days from the date the absence began; and, (B) the absent senior citizen or an authorized person acting for the senior citizen submits a written request to the owner, board of directors, or governing board stating that the senior citizen desires that the PHCR be allowed to remain in order to be present when the senior citizen returns to reside in the development. Upon submission of the written request, the owner, board of directors, or governing board shall have the discretion to allow a permitted health care resident to remain for a time period longer than 90 days from the date that the senior citizen’s absence began, if it appears that the senior citizen will return within a period of time not to exceed an additional 90 days.
7) Qualified Permanent Residents
Problem: One of the 55+ residents within the community lives with his spouse who is under 55, but older than 45. After the 55+ resident passes away, can the underage resident remain within the 55+ community?
Solution: Yes. A spouse of any age is a “Qualified Permanent Resident.” To avoid confusion, the board should include clear language within its rules defining “Qualified Permanent Residents” (QPRs). QPRs are individuals who may remain in the senior community after the 55+ resident dies if they meet certain criteria. QPRs must reside with the 55+ resident prior to death and be (a) at least 45; or, (b) a spouse or cohabitant of any age; or, (c) a person of any age providing primary physical or economic support for the 55+ resident. A QPR also means a disabled person or person with a disabling illness or injury who is a child or grandchild of the senior citizen or a qualified QPR, who needs to live with the senior citizen or QPR because of the disabling condition, illness, or injury. Please note that PHCRs may not be QPRs. Remember, these rules and the rules relating to PHCRs may not apply to senior mobilehome communities. If your housing consists of mobilehomes you should confer with counsel.
8) Reasonable Modifications
Problem: When a resident submits a reasonable modification request to the Association, there is significant delay between the application and approval.
Solution: Adopt clear guidelines with step by step instructions detailing exactly how a resident needs to request a reasonable modification. Provide the requesting party with a form allowing the resident to describe three items: 1) verification of the disability; 2) the needed modification; and, 3) documentation showing the relationship between the disability and the need for the requested modification. The verification of the disability can be provided in several ways, such as a doctor’s note or handicap placard; if the disability is obvious, the board should not seek additional verification. Even if the disability is obvious, the board can request for documentation showing the relationship between the disability and the modification. If the disability is verified and the modification is necessary to afford the resident an equal opportunity to use the dwelling or common areas, the board should evaluate the request on a case by case basis to determine whether the modification is reasonable. Remember, in nearly every case, the applicant, not the association, pays for the modification since the Association is not normally subject to the ADA. When in doubt, contact your legal counsel for advice.
9) Rules Enforcement
Problem: The association has easy to understand rules and regulations, but fails to enforce them consistently.
Solution: Once the association has clear rules and regulations, the board should draft an enforcement policy. These policies lay out clear guidelines for notices, hearings, fines and further legal action. A clear framework will create clear boundaries and ensure the rules and regulations are enforced equally.
10) Underage Tenants
Problem: Homeowners lease out their lots or units and rent to underage individuals, thus potentially jeopardizing the association’s age restricted status.
Solution: Adopt rules or amend the CC&Rs to require every owner who leases his or her property to include age restriction language within the leases. Further, require these homeowners to provide the board with a copy of the lease and age verification of the tenants within a specified period of time after rental. Associations with transponder-operated access to recreational facilities may be able to deactivate the tenants’ transponders after a hearing, in cases of violation.×
By: Jodi A. Konorti, Esq.
Keeping in stride with California’s continuous movement to ban smoking in public areas, a 2009 California Court of Appeal decision and, more recently, a new state law adopted in 2011 and municipal ordinances, may support a community association’s ban on smoking in common areas.
Birke v. Oakwood Worldwide
As you may recall, in Birke v. Oakwood Worldwide, a residential apartment complex, Oakwood Worldwide (“Oakwood”), banned smoking in all indoor common areas and indoor units, but permitted smoking in all outdoor common areas, such as the pool decks, barbeque and dining areas, and playgrounds, so as to accommodate residents and guests who smoke. The plaintiff, a five-year old resident with asthma and allergies, filed a lawsuit against Oakwood alleging that Oakwood’s failure to abate secondhand tobacco smoke in the outdoor common areas was a public nuisance. Specifically, Birke claimed that Oakwood’s failure to ban smoking in the common areas increased the risk of heart disease and lung cancer in the general public and aggravated her asthma and allergies. Oakwood disregarded previous requests by Birke’s father to prohibit smoking in the outdoor common areas. In response, Oakwood argued, among other things, that it did not have a legal duty to prohibit smoking in the outdoor common areas of the apartment complex, so it could not be liable for failing to stop the alleged nuisance.
The court agreed with Birke and ruled her Complaint did allege a valid nuisance claim against Oakwood such that she could pursue her claim against the landlord.The Court reasoned that Oakwood, as a landlord, has a duty to maintain its premises in a reasonably safe condition. The Complaint alleged that Oakwood failed to do so because, by permitting smoking in the outdoor common areas, Oakwood created a harmful condition to the health of others, obstructed others from freely using the common areas, and interfered with the comfortable enjoyment of life or property. To establish a public nuisance, however, the Court ruled that Birke must prove at trial that outdoor smoking or secondhand smoke affects a significant number of people at once, reasonably annoys or disturbs an ordinary person, and causes harm that outweighs the social utility of permitting smoking in the outdoor common areas. The Court determined that Birke should have the opportunity to prove that Oakwood’s failure to ban smoking in outdoor common areas was a substantial factor in causing Birke’s aggravated symptoms, and that neither Birke nor her parents consented to the smoking policy.
The result of this case, as it relates to community associations, is that community associations that permit smoking in common areas may face potential liability for nuisance claims brought by residents.Similarly, the case provides support for associations that attempt to ban smoking in all outdoor common areas. This does not mean, however, an association is required to prohibit secondhand smoke entirely. It may instead impose restrictions on smoking, such as designating smoking and no smoking areas. To that end, a board would likely be acting within its power to adopt reasonable smoking prohibitions if it found that such activities created an unreasonable threat to the health, safety and welfare of the Association’s residents.
Civil Code Section 1947.5
In 2011, the California legislature took a significant step towards supporting smoke-free communities. Civil Code Section 1947.5 (Senate Bill 332), effective January 1, 2012, allows rental property owners to ban smoking within their apartment units or complexes. This is important because the laws affecting the landlord-tenant relationship are frequently looked at by the Courts when considering lawsuits involving community associations. Furthermore, the findings regarding the effects of secondhand smoke in Senate Bill 332 mention condominium associations. This indicates the legislature may have intended to include condominiums in its coverage. Notably, the facts in these findings may be very useful for an association to cite as support for banning smoking as a health and safety risk.
As a further example of the legal trends in this area, the City of Pasadena passed a no-smoking ordinance applicable to existing and new construction multi-family residences, defined as two or more dwelling units. The ordinance applies to condominiums. The municipal ordinance makes it unlawful to smoke in any area of the property, including in any common area, patio, or balcony – and yes, even inside the units. The ordinance requires an association to post specific signage in the community. Fortunately, the ordinance does not require the community associations to enforce the ordinance. Enforcement is left to the City.
No Smoking Provisions in the CC&Rs
As indicated by the developments above, the laws establishing smoke-free environments are evolving to support smoke-free condominium associations (at least in common areas). Nevertheless, the laws in this area are still unsettled. Thus, we cannot explicitly conclude whether or to what extent a court would uphold an association’s efforts to enforce a smoking prohibition within the common area and/or exclusive use common areas. Support may be found, however, if an association modeled its smoking provisions in the CC&Rs (or rules) on the Municipal Codes for the relevant area, if any exist. A recorded CC&R amendment approved by the members would undermine an argument the Board exceeded its authority in establishing such a prohibition.
Furthermore, this would provide new owners with notice that in purchasing within the project, they are giving up their right to smoke within areas of the project for which they secured a right of use and enjoy when they purchased their units. If an association passes a CC&R amendment banning smoking in various areas of the community, the enforceability of such a prohibition will be easier, more cost-effective and more robust than nuisance abatement or a board-adopted rule.
No Smoking Rules
Another option for a board is to adopt a rule banning smoking in the common areas and exclusive use common areas (and even possibly the units), so long as the rule is within the Board’s rule-making authority. For example, if an association’s governing documents limit the Board’s rule-making authority to rules governing the common area only, a proposed rule seeking to prohibit smoking in exclusive use common areas or on lots may be subject to legal challenge. Nevertheless, this limitation may be addressed, in part, by a nuisance provision contained within the CC&Rs, if one exists. It is reasonably clear that secondhand smoke emanating from a person’s property is a nuisance.
While a rule prohibiting smoking is fairly easy to adopt, it is also fairly easy to repeal, as a rule does not carry the weight and legitimacy presumptions of a CC&R amendment. Thus, the best way to ensure a court would uphold an association’s efforts to prohibit smoking is to enact an amendment to the CC&Rs whereby the members vote to make certain areas smoke-free.
In conclusion, as with many decisions a board must make, the decision on whether to prohibit smoking in all or part of a community is a difficult one. However, the trend in California seems to be geared towards smoke-free communities. As with all decisions the Board is armed to make, the Board must use its best business judgment in determining what is best for the Association as a whole.
 This case is cited as Birke v. Oakwood Worldwide et al. (2009)169 Cal.App.4th 1540.
 It is important to note the ruling in this case is not a judgment against Oakwood (at this point). Rather, the Court simply determined that Birke had alleged a valid nuisance claim against Oakwood which she may pursue. The Court did not express any opinion as to whether it thought Birke could prove the allegations.
 The Court also confirmed that apartments and condominium complexes are not subject to the American with Disabilities Act.
 See Frances T. v. Village Green Owners Assn. (1986) 42 Cal.3d 490, 499 (homeowners associations, like landlords, have a duty to exercise due care for residents’ safety).
 Bear in mind, any proposed rules must still be within the Board’s rule-making authority.
The following statutes are new, amended or newly added to our 2014 Community Association Law Resource Book. The statutes identified with (‡) below are not in the printed copy of our 2014 Community Association Law Resource Book though they are on our more extensive electronic version. The amendments in some of the sections identified below contain primarily technical or editorial changes.
You can view these bills and find or new legislation, at the Official California Bill Information website: http://www.leginfo.ca.gov/index.html. From there, you can click on “Bill Information” and narrow your search by Session Year, Assembly or Senate bills or both, by bill number, etc. From the Home Page, you can click on “New Laws” for a list of Statutes (i.e., Chaptered/Enacted Bills by Chapter and Year) or Click on “California Law” for the Codes (i.e., Chaptered Legislation Arranged by Codes and Section Number). The newly enacted bills will not appear in the on-line Codes until January 1, 2013.
California Business and Professions Code (B&P Code)
Definitions of Contractor and Consultant; Not to Include Common Interest Development Manager (Newly Added to Resource Book; Amended Statute SB 822 / Ch. 319)
Real Estate Broker Education Requirements (Amended Statute SB 752 / Ch. 605)
“Limited-equity Housing Cooperative” and “Workforce Housing Cooperative Trust (operative on July 1, 2013) (Amended Statute SB 820 / Ch. 353)(urgency legislation operative July 1, 2013
|§11010.||Requirements for BRE Public Report (Amended Statute AB 1317 / Ch. 352)(urgency legislation operative July 1, 2013)|
|(‡)§11211.7.||Exemptions (2012 Amended Statute AB 806 / Ch. 181)|
Persons Exempt from Registering Time-Share Plan (Amended Statute AB 1317 / Ch. 352)(urgency legislation operative July 1, 2013)
Filing Fees (Amended Statute AB 1317 / Ch. 352)(urgency legislation operative July 1, 2013)
|§11500.||Definitions (2012 Amended Statute AB 806 / Ch. 181)|
Qualifications for Manager Certification (2012 Amended Statute AB 806 / Ch. 181)
|§11504.||Annual Disclosure by Manager (2012 Amended Statute AB 806 / Ch. 181)|
Unfair Business Practices (2012 Amended Statute AB 806 / Ch. 181)
California Civil Code (CC)
Senior Citizen Housing in Riverside County (2012 Amended Statute AB 806 / Ch. 181)
Display of Political Signs (2012 Amended Statute AB 806 / Ch. 181)
Covenants Restricting Solar Energy System Are Void (Amended Statute SB 752 / Ch. 605)
Permitted Restrictions by Common Interest Development Associations (Amended Statute SB 752 / Ch. 605)
Recorded Instrument Deemed Revised to Omit Discriminatory Restrictions (Amended Statute SB 752 / Ch. 605)
Condominium Defined (Amended Statute SB 752 / Ch. 605)
|§783.1.||Separate and Correlative Interests as Interests in Real Property (Amended Statute SB 752 / Ch. 605)|
Good Neighbor Fence Act of 2013 (Newly Added to Resource Book AB 1404 / Ch. 86)
|§895.||Requirements for Construction Defect Actions – Definitions (2012 Amended Statute AB 806 / Ch. 181)|
Builder’s Prelitigation Duties (Amended Statute AB 1317 / Ch. 352)(urgency legislation operative July 1, 2013)
Effect of Civil Code Section 6000 (2012 Amended Statute AB 806 / Ch. 181)
Defect Standards Binding on Purchasers, Successors and Associations (2012 Amended Statute AB 806 / Ch. 181)
Plumbing Compliance Dates for Multifamily Residential and Commercial Properties (Amended Statute SB 745 / Ch. 183) (deletion only)
Mandatory Real Estate Transfer Disclosure Statement (amendments operative July 1, 2014) (Amended Statute SB 652 / Ch. 431)
Persons Entitled to Notice of Default or Sale; Notice Procedure (Amended Statute SB 752 / Ch. 605)
California Corporations Code (Corp. Code)
|§7140.||Powers of Corporation (Amended Statute AB 491 / Ch. 255)|
|§7151.||Bylaws; Contents; Limitations (Amended Statute AB 491 / Ch. 255)|
|§7237.||Indemnifying Corporate Agents (Amended Statute AB 383 / Ch. 76)|
California Code of Civil Procedure (CCP)
|(‡)§116.232.||Fee for Court to Mail Copy of Claim (Amended Statute SB 75 / Ch. 31)|
|§116.540.||Participation by Individuals Other than Plaintiff and Defendant; Corporations (Amended Statute SB 752 / Ch. 605)|
|(‡)§116.940.||Small Claims Court Advisory Services (Amended Statute AB 383 / Ch. 76)|
|(‡)§527.6.||Civil Harassment and Civil Restraining Order Sought by an Individual (operative until July 1, 2014) (Amended Statute AB 499 / Ch. 158)|
|(‡)§527.6||Civil Harassment and Civil Restraining Order Sought by an Individual (operative on July 1, 2014)|
|§729.035.||Right of Redemption after Assessment Lien Foreclosure (2012 Amended Statute AB 806 / Ch. 181)|
California Government Code (Govt. Code)
Fees Paid for Corporate Filings (Amended Statute SB 752 / Ch. 605)
Unlawful Employment Practices – Definitions (Amended Statute AB 556 / Ch. 691)
Unlawful Employment Practices; Discrimination (Amended Statute AB 556, Sec. 4.5 / Ch. 691)
Mandatory Disclaimer on Copies of Recorded Documents (Amended Statute SB 752 / Ch. 605)
|Removing Discriminatory Provisions from Recorded Documents (Amended Statute SB 752 / Ch. 605)|
Supplemental Law Enforcement Services; Orange County Pilot Project Until January 1, 2017 (New Statute SB 298 / Ch. 626)
California Health & Safety Code (H&S Code)
Mandatory Liability Insurance or Bond (2012 Amended Statute AB 806 / Ch. 181)
Emergency Medical Services; Employer Policies (New Statute AB 633 / Ch. 591)
Substandard Buildings (Amended Statute SB 488 / Ch. 89)
Asbestos; Notice to Owners and Employees (Amended Statute SB 752 / Ch. 605)
Asbestos; Notice to Building Co-owners; Immunity from Liability (2012 Amended Statute AB 806 / Ch. 181)
Dog Breed Specific Ordinances (Newly Added to Resource Book Ch. 668 (2005))
California Insurance Code (Ins. Code)
Insurer’s Duties on Renewal or Nonrenewal (operative until January 1, 2019) (Amended Statute AB 251 / Ch. 369)
Insurer’s Duties on Renewal or Nonrenewal (operative on January 1, 2019) (New Statute AB 251 / Ch. 369)
California Revenue & Taxation Code (R&T Code)
Taxation of Individual Condominium Units (Amended Statute SB 752 / Ch. 605)
California Vehicle Code (CVC)
Removing Vehicles from Private Property (Amended Statute SB 752 / Ch. 605)
When Towing is Prohibited for at least One Hour (Newly Added to Resource Book / Ch.206 (2006))
By: Jodi A. Konorti, Esq.
Theft of community association funds is unfortunately a reality, and in times of economic distress, the likelihood of such theft tends to increase. Community association funds can be stolen in any number of ways, by any number of people with access to the funds or bank accounts of a community association. While the following list is by no means exhaustive, some red-flags that Board members and community association managers should watch for include: outright taking of cash; not receiving regular and timely monthly statements; discrepancies between monthly statements and ledgers; lack of receipts for purchases; payments to family members; clubs having access to an association’s bank accounts; illegitimate credit card receipts and charges; and difficulty in explaining expenses by the person(s) handling the funds.
The Board of Directors, whether self-managed or professionally managed, is ultimately responsible for reviewing all of the financial activity of a community association. To help protect an association’s funds from theft, it is important the Board implement, and consistently use, various internal and external controls and an effective checks and balances system. One fundamental control is to have different people responsible for invoice approval, check writing, collection of funds and depositing of funds. For example, the person who records receipts should not make deposits, and the person who approves invoices should not write checks. Additionally, the person who reconciles the accounts should not do any of the other tasks. The Board should also consider requiring two signatures on all operating, reserve, and investment transactions. In fact, Civil Code section 5510(a) requires two signatures for withdrawals from reserve accounts.
The signatures of at least two persons, who shall be directors, or one officer who is not a director and one who is a director, shall be required for the withdrawal of moneys from the association’s reserve accounts. (Civil Code section 5510(a))
In addition, the Board should implement an effective checks and balances system, such as requiring duplicate monthly statements for every account and having two parties without access to the bank accounts regularly reconcile each monthly statement to the general ledger. When reconciling statements, verify the accuracy and necessity of expenditures and make sure expenditures are properly authorized. The Board should also insure its association’s money by obtaining a fidelity bond that extends to cover the management company, all of the board members, and all other persons having access to association funds.
Furthermore, every Board of Directors should set aside sufficient time each month for a full discussion of all of its association’s financial matters, while maintaining a level of healthy skepticism. Consistent communication between the Board, management company, legal counsel and accountant is also important to reducing the chances of theft. The Board should consider consulting with an auditor experienced in community association finances and implementing any suggestions made by the auditor to improve the association’s financial controls. One such control includes conducting an annual audit.
Finally, the Treasurer should be educated on how to effectively perform his or her job and interpret the association’s financial records for the rest of the Board. This can be done by retaining advisors and/or a management company to educate or assist the Treasurer in regular reviews of the financial documents. The more the Board regularly and thoroughly discusses and reviews its financial documents for accuracy, the less likely it is that it will miss a discrepancy in the financial documents.
While there is no guaranteed way to protect a community association’s funds from theft, the more controls the Board implements, the more it will help to minimize the risk of financial loss due to theft.
The above general information is for educational purposes only. If the Board needs further guidance or has specific questions on this issue, please contact your legal counsel.
Where does the association derive the power to assess homeowners?
The power to assess homeowners is derived from the association’s governing documents, deed restrictions, and the California Civil Code. Usually, the power to assess is found in the association’s Declaration of Covenants, Conditions and Restrictions (“CC&Rs”). However, the Civil Code also provides the association with the power to assess. In older projects, the power to assess may actually be in the homeowner’s Grant Deed.
Can assessments be increased without a vote of the membership?
Under the Civil Code, the board of directors may increase regular and special assessments without a vote of the membership under certain circumstances, despite what the CC&Rs provide. If the board of directors has complied with the Civil Code, it may impose a regular assessment that is up to twenty percent (20%) higher than the regular assessment for the association’s preceding fiscal year, or it may impose a special assessment which, in the aggregate, does not exceed five percent (5%) of the budgeted gross expenses of the association for that fiscal year. To exceed these limits, approval of the owners is required, according to the voting requirements set forth in the Civil Code. However, the board can still increase the assessments in certain emergency situations. For example, an extraordinary expense required by a court order, an extraordinary expense necessary for repair or maintenance where there is a threat of personal safety, or where an extraordinary expense is necessary for repair or maintenance and the board could not have reasonably foreseen it when preparing the budget. Whenever you are proposing an emergency assessment, you should seek the advice of legal counsel. Strict compliance with the Civil Code is necessary in order to take advantage of the assessment increase provisions. (Civil Code section 5605)
When can late fees and interest be charged on delinquent assessments?
First, you must review the association’s governing documents to determine what late charges and interest may be imposed. If the association’s governing documents set forth both the late charge amount and the interest amount, you must abide by the governing documents. However, if your governing documents are silent on one or both of the prongs, then you follow the Civil Code. The Civil Code states that a late charge not exceeding ten percent (10%) of the delinquent assessment, or $10.00, whichever is greater, may be charged unless the CC&Rs specify a late charge in a smaller amount, in which case any late charge imposed shall not exceed the amount specified in the CC&Rs. Interest may also be charged on all the sums owed, including the delinquent assessments, reasonable costs of collection and late charges, at an annual rate not to exceed twelve percent (12%), commencing thirty (30) days after the assessment becomes due unless the CC&Rs specify a late charge in a smaller amount, in which case any interest imposed shall not exceed the amount specified in the CC&Rs. The Civil Code provides that assessments are delinquent fifteen (15) days after they become due. However, if your governing documents state that the assessments are delinquent thirty (30) days after they become due, your documents take precedence over the Civil Code.
What are the options for collecting delinquent assessments?
Basically, there are three (3) ways to collect delinquent assessments. The first is through Small Claims Court to obtain a money judgment against the delinquent owner. The second is to bring a nonjudicial (i.e., not involving court action) foreclosure action. The third is to bring a Superior Court action to either foreclose the property or obtain a monetary judgment.
What are the advantages and disadvantages of each collection opinion?
A book could be written as to the advantages and disadvantages of each of the different collection options. In summary, the Small Claims Court allows the association to represent itself and obtain a monetary judgment against the owner. In pursuing a Small Claims action, you may be waiving your right to foreclose on the property. It is inexpensive and can be quite successful. It is typically utilized when property has already been foreclosed by a lender, or there are small amounts owed to the association.
The nonjudicial foreclosure is a process similar to foreclosing a trust deed. The procedure entails the recording of a Notice of Default and subsequently a public sale of the property. However, to proceed with nonjudicial foreclosure, the amount of delinquent assessments must equal or exceed $1,800.00 or 12 months. Another major disadvantage to the nonjudicial foreclosure is that once the sale is completed, if title reverts to the association, it is difficult to obtain title insurance unless you bring a separate lawsuit to confirm title. If the lender begins foreclosure, it could extinguish the association’s lien. In that event, if the association has not already foreclosed, the association will be forced to switch to a Small Claims action or a Superior Court action. The advantages to nonjudicial foreclosures are that they are quick with definite time deadlines, and can be handled entirely by legal counsel. Nonjudicial foreclosures are probably the most popular method of collecting delinquent assessments.
The final method is the Superior Court action. The process entails the filing of a Superior Court lawsuit to either foreclose on the property or alternatively to seek a monetary judgment against the unit owner. The disadvantage to the Superior Court lawsuit is the risk of a cross complaint by the homeowner, usually for the association’s alleged failure to fulfill some responsibility, often the maintenance of the common area or the homeowner’s property. All these methods have advantages and disadvantages. It is important to consult with legal counsel to find which is the best option in each particular situation.
Can a monetary penalty be considered an assessment?
No. Civil Code section 5725(b) provides that a monetary penalty cannot be treated as an assessment for which the property can be liened and foreclosed, even if the governing documents state otherwise. The exception is a monetary penalty imposed to reimburse the association for costs incurred to repair damage to common area caused by a member.
Can the association assess the homeowner for damages he or she causes to the common area?
This depends upon what your governing documents allow. Most CC&Rs allow the association to assess a homeowner for damages he or she has caused to the common area. Such an assessment may be lienable. In the event it is not lienable, the board of directors should actively pursue the collection of this money through Small Claims Court if it is within the monetary jurisdiction limits (up to $5,000.00). This type of “special assessment” usually requires a hearing.
Can the board of Directors determine how payments are applied to a delinquent account?
No. Civil Code section 5655 requires payments to be applied first to assessments owed, and only after the assessments are paid in full may payments be applied to interest, late charges, and the costs of collection.
Are there any restrictions on recording and foreclosing a lien other than what may be in the governing documents?
Yes. The Civil Code provides that before an association may record an assessment lien, the association must make a laundry list of disclosures to the homeowner in writing. Please contact our assessment recovery department for a complete list of requirements. The lien itself must contain the following information: (i) the amount of the assessment and other sums imposed; (ii) a legal description of the homeowner’s interest in the project (not just the address); (iii) the name of the record owner or owners; and, (iv) in order for the lien to be enforced by nonjudicial foreclosure, the name and address of the trustee authorized by the association to enforce the lien by sale, and a copy must be mailed via certified mail to record owners within ten (10) days of recordation. The association must offer the homeowner internal dispute resolution and alternative dispute resolution throughout the process. If an owner requests internal dispute resolution pursuant to Civil Code section 5900 et seq., the association must participate before recording a lien. If an owner requests alternative dispute resolution pursuant to Civil Code section 5925 et seq., the association must participate before initiating nonjudicial foreclosure.
Does a homeowner have the right to withhold 5payments if he or she disputes what is owed?
No. However, the homeowner is entitled to internal dispute resolution and alternative dispute resolution, as set forth above.
Should the board of directors adopt a collection policy?
Absolutely. The Civil Code requires that the association provide to the members during the sixty (60) day period immediately preceding the beginning of the association’s fiscal year an annual statement describing the association’s policies and practices in collecting delinquent assessments.×
By: Debora M. Zumwalt, Esq.
The process of collecting delinquent assessment accounts requires an aggressive, yet flexible, approach. Frequently, the proper approach for one association is less effective for another. The following steps are followed to collect delinquent assessment accounts. Following recordation of a lien, associations can generally take one of two courses of action to collect delinquent assessments. The first option is nonjudicial foreclosure. The second option is to file a lawsuit against the owner for the costs of collection, including the delinquent assessments, late charges, interest and legal fees owed.
Warning of Lien Letter and Lien
The California Civil Code requires that before an association records an assessment lien, it must provide certain information to the delinquent owner via certified mail. The next step is recording a lien against the property in accordance with the provisions of the California Civil Code, the association’s governing documents and the association’s collection policy. The lien must be approved by a majority of the board of directors in an open board meeting and recorded in the minutes of that meeting. Recording a lien secures the debt to the association if the owner sells the property, and improves the association’s position if the delinquent owner files bankruptcy. Sometimes delinquencies are brought current after a lien is recorded, without the need for further enforcement action.
Following recordation of a lien, the association’s first option is to nonjudicially foreclose on the lien, if the assessments are delinquent $1,800 or for 12 months. In those cases where the board of directors determines that a foreclosure is appropriate, a three-step process is involved. First, the decision to foreclose must be made by a majority of the board of directors in executive session. The vote must be recorded in minutes of the next open meeting, referring to the property by parcel number. The owner must then be notified of the board ‘s decision to foreclose in the method required by the Civil Code. Once a foreclosure is properly authorized, a Notice of Default is recorded, and a mandatory 90-day waiting period is initiated. During the 90-day period after the
Notice of Default is recorded, the owner can “redeem” the obligation to the association by paying all delinquent assessments, late fees, interest and cost of collection including legal fees owed. If the 90-day redemption period passes without the owner paying, a Notice of Sale can be recorded. Thereafter, a public sale of the property can be held as early as twenty-one days later. Nonjudicial foreclosure sales of association assessment liens are subject to a 90-day right of redemption following the foreclosure sale.
Nonjudicial foreclosure can be effective in encouraging an owner to bring his or her account current, especially if the owner lives in the property or is collecting rents, and especially if there is equity in the property. Throughout the foreclosure process, the decision to foreclose is examined several times. For example, if a lender initiates its own foreclosure action shortly after the association records its Notice of Default; it is often unwise to continue the association’s foreclosure, as the lender’s foreclosure usually takes priority over the association’s. This usually occurs when there is no equity in the property. In such a case, we the board may wish to consider filing a Small Claims or Superior Court action against the owner.
At the foreclosure sale, if nobody purchases the property, the association would take title by default. The association would not have to pay for it. Rather, it would “credit bid” its interest in the property (the amount of delinquent assessments, late charges, interest and costs of collection, including legal fees). The association would take title subject to any liens which were recorded prior to the association’s lien. The foreclosure would eliminate any liens which were recorded subsequent to the association’s lien, with the exception of certain tax liens.
One issue that may arise is whether the association or a third party can obtain title insurance if it acquires title through nonjudicial foreclosure. This issue could arise if the association took title to the property and subsequently wished to sell it to a third party. In that case, the association may be obligated to file a “quiet title action” in Superior Court to obtain a “Court-sanctioned” sale. In essence, it is the title insurance companies’ opinion that if the Court approves the sale, the title is more secure. The title companies worry that with nonjudicial foreclosures there may have been errors in the sale process. Once the association takes title to the property, it could try to sell the property or wait for a senior lienholder to foreclose. If the senior lienholder nonjudicially forecloses and is unable to sell the property for enough to satisfy the amount due on its deed of trust, it cannot obtain this “deficiency” amount from the association, unless the association had expressly assumed the obligation. The association is not required to pay back taxes on the property it acquires. However, if it does not do so, any tax encumbrances against the property would remain. Once the association takes title to the property, it is recommended that it carry insurance.
While there are many ramifications to nonjudicial foreclosure, if there appears to be some equity in the property, the chances are greater that the owner will redeem his or her obligation to the association prior to the sale.
If the delinquency is not at the threshold required for nonjudicial foreclosure, or if at any point it is determined that the association should not proceed with nonjudicial foreclosure, a lawsuit in Superior Court may be selected as the best method of collecting the delinquency. This course of action will allow the association to obtain a money judgment against the delinquent owner and, where appropriate, to perfect the association’s ability to sell the property to satisfy the judgment. A Superior Court lawsuit provides the association with the most flexibility in selecting how to enforce the judgment and collect the money owed.
In deciding whether to file a lawsuit or proceed with nonjudicial foreclosure, the board should consider any of the owner’s assets of which it is aware, such as employment income, income from a rental property, or a bank account. If the board is not able to readily ascertain whether the owner has any assets which could be levied upon to satisfy a judgment, the board of directors could attempt to locate them through use of a private investigator. It is sometimes difficult to locate assets to satisfy a judgment. Also, a judgment is only effective through the date it is entered. Assessments, late charges, interest and costs of collection which accrue after the date of the judgment are not included in the initial judgment. The association can file a second lawsuit to recover post-judgment assessments, late charges, interest and costs of collection. There are also procedures by which the association can request that post-judgment interest and costs of collection be added to an existing judgment.
Small Claims Court can be a cost-effective method of obtaining a judgment, especially when the unit has already been foreclosed by the lender. Although Small Claims Court requires more effort on the part of the association manager or board members, the time required to obtain a judgment is reduced, and the cost of Small Claims is less than prosecuting a Superior Court lawsuit. Its primary disadvantage is that you cannot foreclose the lien on the property, but are limited to collecting the money directly from the owner. Further, in the unlikely event the association does not prevail, an adverse judgment cannot be appealed.
Enforcement of Judgment
If the assessment recovery process results in a judgment, the final step is to collect the money owed. If the owner is employed or has other assets, there are effective methods available to obtain payment. We may require the debtor to appear in court to answer questions relative to his or her employment, assets, and general ability to pay the judgment, or recommend retaining an investigator to ascertain this information. Again, each circumstance is different, and our recommendation as to how to proceed will depend upon each owner’s specific circumstance.
By being aggressive in our collection efforts, we maintain a high rate of success in collecting delinquent assessment accounts. Unfortunately, all collection efforts must be tempered with the realization that it is a process of percentages. The more delinquencies we pursue, the more money we will collect, but there will always be some who are able to escape payment or have no assets.×
By: Debora M. Zumwalt, Esq.
|30-90 Days Before the End of Fiscal Year||Statement Describing the Association’s Policies and Practices in Enforcing Lien Rights or Other Legal Remedies for Default in Payment of Assessments Distributed to Members||Civil Code §5310(7)|
|30-90 Days Before the End of Fiscal Year||Mandatory Assessment Disclosure Notice Distributed to Members||Civil Code §5310(6)|
|30-60 Days Prior to Due Date||Notice of Increase in Assessment||Civil Code §5615|
Delinquency (Nonjudicial Foreclosure):
|Day 1||Monthly Assessment Payment Due|
|Day 15||Monthly Assessment Payment Delinquent; Late Charge Assessed||Civil Code §5650(b)|
|Day 25||Warning of Lien Letter (any time after Day 15)||Civil Code §5660|
|Day 30||Interest Assessed||Civil Code §5650(b)(3)|
|If Owner Requests Board Meeting to Discuss Payment Plan, Board of Directors Must Meet with Owner Within 45 Days||Civil Code §5665(b)|
|Day 60||Record Lien||Civil Code §5675|
|Day 70||Last Day to Mail Copy of Lien to All Record Owners||Civil Code §5675(e)|
|Day 90/Account Delinquent $1,800 or 12 Months in Assessments Only||Notice of Board’s Decision to Foreclose||Civil Code §5705|
|Day 100||Record Notice of Default||Civil Code §5720(b)(2)|
|90+ Days Later:||Publish Notice of Sale||Civil Code §2924f|
|30 + Days Later||Sale||Civil Code §2924f|
|90 Days After Sale||Right of Redemption Expires||Civil Code §5715|
|Within 21 Days of Receiving Payment in Full||Record Lien Release||Civil Code §5685(a)|
Unless the Declaration provides a longer time period
By: Debora M. Zumwalt, Esq.
Record an Abstract of Judgment
This converts the judgment into a lien on all real property then owned or later acquired by the judgment debtor. The lien is valid for ten years and can be renewed for additional ten year terms.
A wage garnishment requires the employer to withhold a maximum of 25% of an employee’s wages, and pay that money to the County Marshal, who in turn pays the association. The association must locate the employer. The cost of a private investigator for this purpose starts at approximately $300.00.**
Levy on a Bank Account
This procedure is relatively simple and uses the services of the County Marshal’s office. However, the association has the burden of locating the bank account. A private investigator will charge approximately $300.00 to $500.00 to locate a bank account.
If the judgment debtor is receiving rents, it is necessary to file a motion with the court for an order that the rents be “assigned” to the association. Thereafter, all rents are paid directly to the association until the judgment is satisfied. The cost is approximately $1000.00 for this procedure.
If the judgment debtor earns commissions (i.e., real estate or insurance sales), it is necessary to file a motion with the court assigning those commissions to the association (identical to rent assignment). Thereafter, all commission earnings will be paid to the association.
This procedure involves serving the judgment debtor with a court order that he or she appear in court and answer questions, under oath, about income and assets. The cost is approximately $1000.00, including the attorney’s time. If the debtor appears and truthfully answers questions it is possible to learn of virtually everything that person earns and owns. Unfortunately, our experience has been that only about one out of five persons actually appear for the examination even though the court has ordered them to appear. The court will order an arrest warrant, but the process of compelling a non-appearing judgment debtor to appear can be lengthy and costly.
Locating Other Assets.
The judgment debtor may have other assets that can be taken to satisfy the judgment (e.g., automobile). The cost of an asset search starts at approximately $250.00 for the services of a private investigator.
A final option is to retain the services of a collection agency to collect the judgment. Costs of such services can be as high as 50% of what is being sought. One such agency will add its fee to the judgment, and then share on a pro rata basis all funds as they are collected.
**Note: costs and fees are approximate only, and will vary depending on the complexity of the particular matter, and the amount of time actually expended.×
By: Elisa M. Pérez, Esq.
In today’s economic climate mired with job loss, underwater mortgages and rising consumer debt, talk of foreclosures in any given community is commonplace. More and more frequently, community associations opt to take the same route as lenders in choosing to foreclose on a delinquent homeowner’s property. Despite the fact that this option may be the most cost-effective way to cut the association’s losses and remove a repeatedly delinquent homeowner, many community association boards of directors still shy away from even considering it due to various misconceptions about foreclosures.
Misconceptions that tend to circulate amongst boards and community association members alike include the belief that foreclosures are so incredibly burdensome on an association that they should be avoided at all costs. These types of beliefs diminish the ability of many boards to clearly see what the best available options are for maintaining an association’s financial stability and minimizing the impact of delinquencies on its members. Some of the more prevalent misconceptions that abound are described below.
Misconception #1: The Association Will Have to Take Over Mortgage Payments Owed on the Property
Probably one of the most widespread misconceptions is that if a community association forecloses on a property, the association will become responsible for the mortgage payments on that property in addition to paying taxes on the property. When some delinquent homeowners receive notice that an association is about to lien their property, their first inclination is to think there is no way the association will foreclose if it has to take over the mortgage payments on the property. Such homeowners heedlessly tend to brush aside the association’s lien notice. Some board members likewise believe an association will be obligated to take over payments on the mortgage if it forecloses on a property, which would be a good reason to decide against foreclosure, if it were true.
The fact is that the association has no contractual relationship with the mortgage lender because it did not sign any promissory note or enter into any purchase or loan agreement with the lender. The same goes for the association as for any other senior lienholder. Notably, it is the prior owner as borrower on the loan who maintains the obligation to pay the debt to the lender, whether or not title to the property has transferred. Of course, if no payments are made on the loan, the lender will eventually exercise the rights on its secured interest as senior lienholder and foreclose on the property. At that point, either the lender or a third party purchaser will be responsible for payment of assessments to the association since ownership of the property has been taken over, and that is a good thing for the association.
Misconception #2: No Reason to Foreclose if There is No Equity in the Property
Related to the misconception about making mortgage payments is the notion that an association should never foreclose on a delinquent owner’s property if it is without equity, or is “underwater.” Although an equity analysis should be performed as part of the foreclosure process, its results should not be determinative as to whether or not an association should foreclose.
It is true that a property with equity is more likely to sell to a third party at a foreclosure sale, while a property with no equity will almost surely revert to the association. However, in many circumstances it is better for the association to take over ownership of a property through foreclosure, than to have the property remain with a repeatedly delinquent owner who may very well be intentionally letting go of a significantly underwater property. The problem with delinquent owners such as these is that through the channels of possible short sales and loan modifications, a lender may be considerably delayed in completing its own foreclosure proceedings, all to the detriment of the association.
For an association to shy away from foreclosing on an underwater property may not only lead to a greater likelihood of delay tactics, but may also result in the property being an eyesore to the community if an absent or negligent owner lets it fall into disrepair. While community associations should not make it their business to own properties, in some circumstances the best interests of an association as a whole may necessitate that it take over properties with the hopes of getting a paying homeowner in and a nonpaying homeowner out. An association has a better chance of making this happen sooner than later if it owns the property because a lender may be more inclined to speed up its own foreclosure. Even if the lender remains reluctant to foreclose, the association can recover past due assessments by renting out the property until the lender forecloses.
These are all scenarios for a Board to consider with its legal counsel, along with the specific facts and circumstances of a particular property, when deciding whether or not to foreclose. Additionally, when considering renting out any property, an association should consult with its legal counsel to ensure it is in compliance with fair housing laws and other landlord/tenant laws that may apply, including state statutes on rent-skimming.
Misconception #3: No Reason to Foreclose if the Lender is Foreclosing
All too often, if there is even an inkling that a homeowner is not paying his or her mortgage and the lender might foreclose, boards indefinitely table the decision to foreclose on a property in hopes that the lender will take care of the problem and complete its foreclosure sale. Unfortunately, we commonly see lenders initiating foreclosures on homes by recording a “Notice of Default” indicating to all that the property is in foreclosure, only to have the property remain in foreclosure proceedings for two years or more. Seeing one postponed sale date after another leaves association boards frustrated and seemingly powerless, waiting and watching a delinquent homeowner remain on the property without paying any assessments. Indeed, the lender’s incentive lies with avoiding a foreclosure sale if it can because if the property does not sell, the lender becomes obligated to pay association dues and take care of the property.
For this reason, given the right circumstances, an association may prudently decide to move forward with foreclosure, even if the lender has begun its own foreclosure proceeding, in order to avoid any delay in transfer of the property. As different factors play into each specific case of a delinquent owner’s property, an association should consult with its legal counsel before making any final decision to start the foreclosure process.×
By: Joyce J. Kapsal, Esq.
Associations are frequently asked to provide members of the association with a list of the homeowners who are delinquent in their assessment payments. Under California law, a board is not obligated to provide such information to the general membership for several reasons. Further, we believe that provision of the information is inappropriate, and may be a violation of the debtor-homeowner’s privacy rights.
Under the Open Meeting Act (Civil Code section 4900 et seq.), members are NOT entitled to attend executive session meetings of the board that are held “to consider litigation, matters relating to the formation of contracts with third parties, member discipline, personnel matters, or to meet with a member, upon the member’s request, regarding the member’s payment of assessments….” (Civil Code section 4935) This is a clear indication that the legislature considers information about owners’ accounts and delinquencies to be highly confidential.
Further, under Civil Code section 5215, the statute that addresses the types of documents that may be disclosed to a member pursuant to an inspection request, associations are entitled to withhold information if “the release of the information is reasonably likely to compromise the privacy of an individual member of the association,” or the information relates to “records of disciplinary actions, collection activities, or payment plans of members other than the member requesting the records.”
In the event an association receives a request from a member asking for a list of the members who are delinquent in their assessment payments, under Civil Code section 5215(d), the association must provide a written response that explains the legal basis for the association’s refusal to provide the requested information. The short answer is, “This information is protected by California law, and will not be produced.”
In summary, this information is volatile, and open discussion of the information could have troubling consequences for the association. Suppose, for example, that a delinquent owner is attempting to refinance, and claims that disclosure of information regarding his collection status resulted in a denial of the loan. And what is the benefit to the association of providing the information to other owners? Creating a “hall of shame” or holding up delinquent owners for ridicule is generally not an effective collection tool. Finally consider that the collection of this type of debt is, in certain circumstances, subject to state and federal fair debt collection practices legislation. It is unwise to publish information when to do so may arguably lead to liability under such legislation.×
Court of Appeal Holds Property Manager Not Subject to Fair Debt Collection Practices Act Because
Debt It Was Collecting Was Not Yet In Default
By: Debora M. Zumwalt, Esq.
A U.S. Court of Appeal in Pasadena decided the case of Dios v. International Realty & RC Investments, which involved an interpretation of the Fair Debt Collection Practices Act (“FDCPA”) as it applied to a manager of rental property.
There existed a dispute between tenant Dios and her landlord over whether her recently increased rent was excessive in light of a 2006 rent stabilization law. Dios filed a lawsuit against the landlord, and the landlord and Dios agreed that Dios would continue to pay the pre-increase rent amount until there was a judicial ruling on the applicability of the rent stabilization law. Eventually, the court ruled that Dios must pay the increased rent.
In early July 2007, the landlord had retained the defendant, International Realty, as the agent to manage and collect rents from the property. After the judicial ruling, in late July 2007, International Realty sent Dios a letter stating that accrued rent from August 2006 to the present would be due August 15, 2007. In response, Dios filed a lawsuit, alleging that International Realty had violated various disclosure obligations under the FDCPA.
The FDCPA applies to “debt collectors,” that is, those who collect debts owed to another. However, the FDCPA exempts as debt collectors those collecting a debt which was not in default at the time it was obtained. The court concluded that the property manager in this case was not a debt collector because it acquired the debt before it was payable. Since the debt was not yet payable, it was not in default. Therefore, the property manager was exempted from the FDCPA.
The applicability of the FDCPA to association managers is not a clear-cut issue, and must be examined on an individual basis. The issue turns on the relationship between the manager and the association, as well as the manager’s role in collecting assessments. We are sometimes asked whether sending billing statements for assessments is sufficient to trigger the applicability of the FDCPA. In light of this case, the answer would probably be no, as long as the communication only addressed assessments not yet due. If a billing statement contains a delinquent balance, an argument might be raised that this could trigger the FDCPA, and the appropriate disclosures may need to be included in the billing statements. While we are of the opinion that this is a weak argument, it nevertheless might be raised.
A counter argument could be made that an association manager is given the responsibility for collecting all assessments; therefore, he or she is not subject to the FDCPA if an assessment account later becomes delinquent. However, it is likely that a court would consider such factors as whether the account is transferred to an assessment collection arm of an association management company when it becomes delinquent.
Unless or until there is a definitive ruling on whether and when association managers are considered debt collectors subject to the FDCPA, it is best to use caution and consult with legal counsel about the necessity of complying with the provisions of the FDCPA when collecting delinquent assessment accounts.×
Law Firm That Pursued Collection of Time-Barred Debt Violated Fair Debt Collection Practices Act (FDCPA), Despite Initial Reliance on Client-Provided Information on Debt Validity
By: Debora M. Zumwalt, Esq.
The case of McCollough v. Johnson, Rodenburg & Lauinger addresses FDCPA issues. The issue in this case is the level of due diligence that should be exercised to determine that a debt is valid.
In this case, McCollough fell behind in his credit card payments. His credit card company retained the defendant law firm to collect the debt from him. The statute of limitations for this type of case in Montana, where the case was to be filed, was five years from the date of the last payment on the account. In reviewing the file to determine whether to file a lawsuit, an attorney at the defendant law firm saw that the statute of limitations on the debt was approaching. She contacted the credit card company to determine the last payment made on the account, and was told via email, without further documentation, that a payment had been made on June 30, 2004. That information turned out to be incorrect—it was not a payment that had been made on that date, but rather a credit to the account. Thus, a lawsuit had been filed on a debt which was time-barred by the statute of limitations.
Upon being served with the lawsuit, McCollough advised the law firm that the debt was eight and one half years old, and that the statute of limitations precluded the law firm from pursuing him for this debt. After confirming that the claim was indeed time-barred, the law firm continued to prosecute the lawsuit for several months. Although the law firm eventually dismissed the lawsuit against McCollough, it was thereafter sued by McCollough for violating the FDCPA by attempting to collect a time-barred debt.
The FDCPA prohibits debt collectors from engaging in practices such as pursuing time-barred claims. The FDCPA contains a narrow “bona fide error” defense. However, in this case, the court determined that the error was not the law firm’s inadvertent failure to catch a time-barred claim, despite having procedures in place to guard against this type of error. Rather, the problem was that the law firm relied on information from its client, without independently verifying that information. The court deemed that it was unreasonable for the law firm to rely solely on information from its client, and determined that the law firm had violated the FDCPA by failing to independently verify the information about the debt.
This case in important to those managers who perform assessment collection services on behalf of their association clients, as well as those who work with our firm in doing so. This case stands for the proposition that it is not enough to rely on a bare statement that a debt is valid—independent confirmation of the debt’s validity should be obtained. In the world of assessment collection for associations, this includes verifying compliance with the Civil Code requirements for levying and collecting and assessments, confirming that no portion of the debt to be collected has been discharged in bankruptcy, and promptly investigating clues that a debt may in fact be invalid. Having a procedure in place to ensure that all debts to be collected are valid will help debt collectors avoid liability under the FDCPA.×
By: Debora M. Zumwalt, Esq.
Recognizing the impact of the ongoing multitude of lender foreclosures, such as increased crime and a drop in property values, the San Diego City Council enacted three ordinances regarding this issue which have the potential to benefit community associations located within the City of San Diego.
Property Value Protection Ordinance
Under this ordinance, which was signed into law by Mayor Filner on December 18, 2012, lenders are required to register with the City homes on which they are foreclosing, providing accurate contact information. The main purpose of this ordinance is to help Code Enforcement officers track properties which may develop problems such as squatters and lack of maintenance. Lenders will be required to pay a $76.00 fee to the City within 10 days of recording a Notice of Default against a property to offset the cost of maintaining the registry, and will be levied a daily fine if they fail to comply with the ordinance.
The notices of default recorded by lenders rarely contain meaningful contact information, so when a community association must contact a lender regarding a property, there is no guarantee that the communication finds its way to the responsible party. This registry is expected to provide that necessary information.
Abandoned Properties Ordinance
This ordinance was amended on October 10, 2012, expanding the definition of “vacant” properties which are subject to certain municipal code requirements. Owners of vacant properties will be fined if they fail to maintain and secure vacant properties, and fail to remove debris, abandoned vehicles and graffiti. Further, owners of vacant properties are required to submit a “Letter of Agency” to the San Diego Police Department, authorizing the Police Department to remove trespassers from the vacant property, and also to provide a “Statement of Intent” to advise how long the property is intended to remain vacant, provide a maintenance plan, and provide contact information for responsible parties.
Responsible Banking Ordinance
Finally, under this ordinance, which was added to the San Diego Municipal Code on October 10, 2012, lenders that do business with the City of San Diego must annually provide the City with lending information such as loan modification and foreclosure details. The purpose of this ordinance is to ensure that the City is contracting with lenders that do not engage in predatory lending practices. Hopefully this will help decrease predatory lending practices in San Diego, which should in turn reduce the number of lender foreclosures and associated problems which result for community associations.
By: Debora M. Zumwalt, Esq.
Approval of Lien
For liens recorded on or after January 1, 2006, the decision to record a lien for delinquent assessments shall be made only by the board and may not be delegated to an agent of the association. The board shall approve the decision by a majority vote of the directors in an open meeting. The board shall record the vote in the minutes of that meeting.
California Civil Code section 5673
Approval of Foreclosure
The decision to initiate foreclosure of a lien for delinquent assessments that has been validly recorded shall be made only by the board and may not be delegated to an agent of the association. The board shall approve the decision by a majority vote of the directors in an executive session. The board shall record the vote in the minutes of the next meeting of the board open to all members. The board shall maintain the confidentiality of the owner or owners of the separate interest by identifying the matter in the minutes by the parcel number of the property, rather than the name of the owner or owners. A board vote to approve foreclosure of a lien shall take place at least 30 days prior to any public sale.
California Civil Code section 5705(c)
By: Debora M. Zumwalt, Esq.
Following recordation of an assessment lien, associations may proceed with nonjudicial foreclosure. This is an overview of the nonjudicial lien foreclosure process.
Warning of Lien Letter and Lien
Before recording an assessment lien, an association is first required by law to provide an itemized statement of the owner’s balance and the association’s fee and penalty procedures to the delinquent owner via certified mail. The next step is recording a lien in the county where the property is located. The lien must be recorded in accordance with the provisions of the California Civil Code, the association’s governing documents and collection policy. Recording a lien against the property protects the association and may provide “secured creditor” status if a bankruptcy is filed. A lien should be recorded in every case where the delinquent owner is still the owner of record.
Following recordation of a lien, associations have the power to foreclose on the delinquent property. First, a Notice of Default is recorded, and a mandatory 90-day waiting period is initiated. During the 90-day period after the Notice of Default is recorded, the owner can “redeem” the property by paying all delinquent assessments, late fees, interest and legal fees owed. If the 90-day redemption period passes without the owner paying, a Notice of Sale can be recorded. Thereafter, a public sale of the property can be held as early as twenty-one days after the Notice of Sale is recorded.
Nonjudicial foreclosure can be effective in encouraging an owner to bring his or her account current, especially if the owner lives in the residence, is collecting rents, or there is equity in the property. Throughout the foreclosure process, the decision to foreclose is examined several times. For example, if a lender initiates its own foreclosure action shortly after the association records its Notice of Default, it is often unwise to continue the association’s foreclosure, as the lender’s foreclosure usually takes priority over the association’s action. Lender foreclosures usually occur when there is no equity in the property. In such a case, we usually recommend that the association file either a Small Claims or Superior Court action against the owner.
At the foreclosure sale, if the residence is not purchased by a third party, the association takes title by default. The association does not have to pay for the property. Rather, it “credit bids” its interest in the property (the amount of delinquent assessments, late fees, interest and legal fees). The association would take title subject to any liens which were recorded prior to the association’s lien. The foreclosure would eliminate any liens which were recorded subsequent to the association’s lien, with the exception of certain tax liens.
One issue that may arise is whether the association or a third party can obtain a title insurance policy if it acquires title through nonjudicial foreclosure. Title insurance is rarely an issue because the property is typically subsequently foreclosed on by the first trust deed holder, or the owner pays his obligation prior to sale. However, this issue could arise if the association took title to the property and subsequently wished to sell it to a third party. In that case, the association may be obligated to file a “quiet title action” in Superior Court to obtain a “court sanctioned” sale. In essence, it is usually the title insurance companies’ opinion that if the court approves the sale, the title is more secure. Following the quiet title action, the association should be able to secure title insurance.
Once the association takes title to the property, it could try to sell the property, rent the property being mindful of rent-skimming statutes and wait for a senior lienholder to foreclose, or not rent the property and wait for a senior lienholder to foreclose. If the senior lienholder nonjudicially forecloses and is unable to sell the property for enough to satisfy the amount due on its deed of trust, it cannot obtain this “deficiency” amount from the association, unless the association had expressly assumed the obligation. The association is not required to pay back taxes on the property it acquires. However, if it does not do so, any tax liens on the property would remain. Once the association takes title to the property, it is recommended that it carry insurance.
While there are many ramifications to nonjudicial foreclosure, if there appears to be some equity in the property, the chances are good that the owner will redeem his or her obligation to the association prior to the sale. Nonjudicial foreclosure has proven to be an effective tool in the assessment collection process. Always consult with legal counsel throughout the process.×
In this Unpublished Decision, a California Court of Appeal Ruled that a Board Member’s Alleged Breach of Fiduciary Duty Did Not Excuse a Former Association Member from His Obligation to Pay Assessments
By: Debora M. Zumwalt, Esq.
This case has not been certified for publication in the official case reports of California. This means it cannot be cited or relied upon in court cases; however, it is worth reviewing.
How often do we hear from an owner that they refuse to pay their assessments because of a breach of the CC&Rs by the association? Well, this case illustrates that the association’s alleged breach of the CC&Rs does not excuse an owner’s obligation to pay assessments.
Canterbury Woods is a common interest development, consisting of 18 individually owned lots and 3 common area lots, all subject to recorded CC&Rs. Pursuant to the CC&Rs, the Association is responsible for maintaining the common area lots. Oddly enough, these common area lots were not owned by the Association. Rather, the common area lots were owned by an Association board member and leased back to the Association. The CC&Rs required homeowners to pay assessments to the Association.
The defendant homeowner did not pay the assessments and instructed his tenants not to use the common area lots. (Nonuse of the common area is another frequently heard, but invalid, excuse for failure to pay assessments.) Because the Association had not recorded a lien to secure the delinquent assessment account, the defendant homeowner was able to sell his lots without paying the assessments he owed. The Association thereafter sued him to recover the delinquent assessments and related charges. However, the trial court found that the board member had breached his fiduciary duty to the Association. This board member owned the common area lots and leased them to the Association. The court found this lease of the common area lots to be invalid, and on this basis, found a breach of the board member’s fiduciary duty to the Association. The trial court then found that this breach of fiduciary duty excused the defendant from paying his assessments.
The Association successfully appealed the trial court’s ruling. The Court of Appeal reversed the decision, ruling in favor of the Association. In doing so, it laid out the law clearly: The homeowner took title to his property subject to the CC&Rs. The CC&Rs require the homeowner to pay assessments. The Court of Appeal cited the 1994 case of Park Place Estates Homeowners Association v. Naber. The Naber case set forth the rule that even if an association had breached the CC&Rs, this was not a defense to the homeowner’s nonpayment of assessments. The Court in Naber justified its position by pointing out the importance of assessments to the proper functioning of community
The Canterbury Woods case was not certified for publication because it does not set forth a new legal principle—it simply applied the existing law and corrected the improper decision of the trial court. However, it is an important reminder regarding the obligation to pay assessments. While allegations of wrongdoing of an association must be addressed appropriately, the obligation to pay assessments is an independent covenant and is not excused by any alleged wrongdoing on the part of the association.×
This notice outlines some of the rights and responsibilities of owners of property in common interest developments and the associations that manage them. Please refer to the sections of the Civil Code indicated for further information.*** A portion of the information in this notice applies only to liens recorded on or after January 1, 2003. You may wish to consult a lawyer if you dispute an assessment.
ASSESSMENTS AND FORECLOSURE
Assessments become delinquent 15 days after they are due, unless the governing documents provide for a longer time. The failure to pay association assessments may result in the loss of an owner’s property through foreclosure. Foreclosure may occur either as a result of a court action, known as judicial foreclosure, or without court action, often referred to as nonjudicial foreclosure. For liens recorded on and after January 1, 2006, an association may not use judicial or nonjudicial foreclosure to enforce that lien if the amount of the delinquent assessments or dues, exclusive of any accelerated assessments, late charges, fees, attorney’s fees, interest, and costs of collection, is less than one thousand eight hundred dollars ($1,800). For delinquent assessments or dues in excess of one thousand eight hundred dollars ($1,800) or more than 12 months delinquent, an association may use judicial or nonjudicial foreclosure subject to the conditions set forth in Article 3 (commencing with Section 5700) of Chapter 8 of Part 5 of Division 4 of the Civil Code. When using judicial or nonjudicial foreclosure, the association records a lien on the owner’s property. The owner’s property may be sold to satisfy the lien if the amounts secured by the lien are not paid. (Sections 5700 through 5720 of the Civil Code, inclusive)
In a judicial or nonjudicial foreclosure, the association may recover assessments, reasonable costs of collection, reasonable attorney’s fees, late charges, and interest. The association may not use nonjudicial foreclosure to collect fines or penalties, except for costs to repair common area damaged by a member or a member’s guests, if the governing documents provide for this. (Section 5725 of the Civil Code)
The association must comply with the requirements of Article 2 (commencing with Section 5650) of Chapter 8 of Part 5 of Division 4 of the Civil Code when collecting delinquent assessments. If the association fails to follow these requirements, it may not record a lien on the owner’s property until it has satisfied those requirements. Any additional costs that result from satisfying the requirements are the responsibility of the association. (Section 5675 of the Civil Code)
At least 30 days prior to recording a lien on an owner’s separate interest, the association must provide the owner of record with certain documents by certified mail, including a description of its collection and lien enforcement procedures and the method of calculating the amount. It must also provide an itemized statement of the charges owed by the owner. An owner has a right to review the association’s records to verify the debt. (Section 5660 of the Civil Code)
If a lien is recorded against an owner’s property in error, the person who recorded the lien is required to record a lien release within 21 days, and to provide an owner certain documents in this regard. (Section 5685 of the Civil Code)
The collection practices of the association may be governed by state and federal laws regarding fair debt collection. Penalties can be imposed for debt collection practices that violate these laws.
When an owner makes a payment, the owner may request a receipt, and the association is required to provide it. On the receipt, the association must indicate the date of payment and the person who received it. The association must inform owners of a mailing address for overnight payments. (Section 5655 of the Civil Code)
An owner may, but is not obligated to, pay under protest any disputed charge or sum levied by the association, including, but not limited to, an assessment, fine, penalty, late fee, collection cost, or monetary penalty imposed as a disciplinary measure, and by so doing, specifically reserve the right to contest the disputed charge or sum in court or otherwise.
An owner may dispute an assessment debt by submitting a written request for dispute resolution to the association as set forth in Article 2 (commencing with Section 5900) of Chapter 10 of Part 5 of Division 4 of the Civil Code. In addition, an association may not initiate a foreclosure without participating in alternative dispute resolution with a neutral third party as set forth in Article 3 (commencing with Section 5925) of Chapter 10 of Part 5 of Division 4 of the Civil Code, if so requested by the owner. Binding arbitration shall not be available if the association intends to initiate a judicial foreclosure.
An owner is not liable for charges, interest, and costs of collection, if it is established that the assessment was paid properly on time. (Section 5685 of the Civil Code)
MEETINGS AND PAYMENT PLANS
An owner of a separate interest that is not a time-share interest may request the association to consider a payment plan to satisfy a delinquent assessment. The association must inform owners of the standards for payment plans, if any exists. (Section 5665 of the Civil Code)
The board must meet with an owner who makes a proper written request for a meeting to discuss a payment plan when the owner has received a notice of a delinquent assessment. These payment plans must conform with the payment plan standards of the association, if they exist. (Section 5665 of the Civil Code)
*** For example, the annual policy statement, prepared pursuant to Civil Code section 5310, shall include this notice in at least 12-point type.×
The Board of Directors is sometimes faced with a challenging question—does the association’s insurance company have a duty to defend the association or provide insurance coverage in a particular situation? The answer is often unclear, particularly when terms are left undefined in the association’s insurance policy. In the Ameron case, the California Supreme Court provides guidance on this issue. [Ameron International Corporation v. Insurance Company of the State of Pennsylvania, et al. (2010) 50 Cal. 4th 1370)]
Factual Background & Proceedings
Beginning in 1975, the United States Department of the Interior, Bureau of Reclamation (“Bureau”) contracted with Peter Kiewit Sons’ Company (“Kiewit”) for the fabrication and installation of concrete siphons used in the Bureau’s Central Arizona Project aqueduct. Kiewit then subcontracted manufacture of the siphons to Ameron International Corporation (“Ameron”), requiring it to defend and indemnify Kiewit in the event the siphons proved defective.
In 1990, the Bureau discovered defects in the siphons that required their replacement at a cost of approximately $116 million. In 1995, the Bureau’s contracting officer issued two final decisions finding Kiewit responsible for the siphons’ defects and seeking almost $40 million in damages from Kiewit and Ameron. Kiewit and Ameron challenged the contracting officer’s decision before the United States Department of Interior Board of Contract Appeals (“IBCA”). Ameron provided timely notice to its insurers.
The IBCA administrative law proceeding lasted 22 days and concluded when Ameron and Kiewit settled the Bureau’s claims against them for $10 million. Following the settlement, the majority of Ameron’s insurers generally failed or refused to pay for the cost of defending or indemnifying Ameron in the litigation before the IBCA.
In 2004, Ameron, for itself and as the assignee of Kiewit’s rights, filed a complaint against its insurance providers, alleging causes of action for breach of contract, breach of the covenant of good faith and fair dealing, declaratory relief, waiver and estoppel,and contribution. Ameron claimed that the insurance companies failed or refused to defend or settle the Bureau’s claims against it before the IBCA, failed to indemnify it for the IBCA settlement, and neglected to investigate the potential for coverage.
The trial court granted the demurrers of the insurance companies and dismissed Ameron’s complaint. The trial court held that the IBCA proceeding was not a “suit” that would trigger an insurance company’s duty to defend its insured or provide insurance coverage. The Court of Appeal reversed in part and held that the insured could recover under certain comprehensive general liability policies that defined a suit as a civil proceeding. The California Supreme Court granted review.
Supreme Court Observations & Conclusions
The Supreme Court observed that case law interpreting comprehensive general liability policies has defined a suit, absent a definition of the term in the policy, as a proceeding brought in a court of law by the filing of a complaint. Applying contract interpretation rules to determine the parties’ intent and to resolve ambiguity, the Supreme Court concluded that because the Contract Disputes Act describes an adjudicative proceeding as a “suit” and characterizes of the initial pleading as a “complaint,” the parties to an insurance contract would have reasonably intended that such a proceeding was a suit, thus trigging the defense and indemnity provisions in the insurance policies.
Community associations should be aware of the implications of the Ameron case. If a community association’s insurance policy does not define “suit,” there is a compelling argument that any administrative proceeding may trigger defense and indemnity obligations of the association’s insurer. This may result in the association’s insurance carrier having to provide legal counsel and/or pay for defense of the action.×
By: Joyce J. Kapsal, Esq.
Are attorney’s fees expended for Alternative Dispute Resolution (“ADR”) before litigation recoverable by the prevailing party in subsequent litigation under the Davis-Stirling Act?
In Grossman v. Park Fort Washington Association (2012) 212 Cal.App.4th 1128, the California Court of Appeal, Fifth District, determined that attorneys’ fees and costs incurred during prelitigation ADR are recoverable if two conditions are met: (1) an action is brought after the prelitigation ADR proceeding to enforce the governing documents; and, (2) the court finds one of the parties to be the prevailing party.
Grossman involved a dispute between the Association and two homeowners who built a cabana and fireplace in their backyard without the Association’s approval. The homeowners requested a variance for the unapproved structures which the Association denied based on its interpretation that the governing documents prohibited the cabana and fireplace. The Association informed the owners that the cabana and fireplace had to be removed and imposed a fine of $10 per day until the structures were removed.
The Association and the homeowners thereafter agreed to mediate the dispute as required under former Civil Code §1369.520 (current Civil Code §5930). The case did not settle at mediation and the homeowners filed a lawsuit alleging that the Association improperly interpreted the governing documents in refusing to approve the cabana or grant a variance and in imposing fines against them.
The trial court disagreed with the Association’s interpretation of the governing documents and held in favor of the homeowners finding that the Association’s governing documents allowed the cabana and the fireplace as long as the fireplace was more than 10 feet from the property line. Judgment was entered in favor of the homeowners and the fines imposed against the homeowners were rescinded.
The homeowners filed a motion for an award of their attorneys’ fees and costs as the prevailing party in the action. In their application for fees and costs, in addition to seeking an award of their fees and costs incurred during the lawsuit, the homeowners also asked for an award of their fees and costs incurred in connection with the prelitigation mediation. The Association opposed the motion arguing that the attorneys’ fees and costs incurred in conjunction with the prelitigation mediation were not authorized under former Civil Code §1354(c) (current Civil Code §5975(c)).
The trial court again disagreed with the Association and awarded the homeowners $112,665 in fees and costs which included fees for the prelitigation mediation. The Association appealed and the court of appeal affirmed the trial court’s award of attorneys’ fees and costs, including those that were incurred in the prelitigation mediation.
The appellate court carefully analyzed former Civil Code §1354(c) and held fees incurred during prelitigation ADR may be included in an award of reasonable attorneys’ fees and costs if two conditions are met: (1) an action is brought after the prelitigation ADR to enforce the governing documents; and, (2) the court finds one of the parties to be the prevailing party.
The court of appeal reasoned that since former Civil Code §1369.580 (current Civil Code §5930) essentially makes ADR mandatory, for a court to deny reasonable attorneys’ fees incurred in pursuing prelitigation ADR would be contrary to the strong public policy of promoting the resolution of disputes through mediation and arbitration. The court of appeal determined that public policy is served in interpreting former Civil Code §1354(c) (current Civil Code §5975(c)) in a manner that awards reasonable attorneys’ fees and costs incurred in prelitigation ADR proceedings.×
By: Joyce J. Kapsal, Esq.
In the case of Silk v. Feldman (2012) 208 Cal.App.4th 547, the California Court of Appeal, Second District, was asked to determine whether letters sent to the membership of an Association by a board candidate constituted an exercise of free speech.
Sherrill Silk and Philip Feldman each owned units within the residential beachfront development known as Malibu Bay Club. Between 1996 and 2000, Silk served on the Association’s Board of Directors. Feldman became a board member in 2009.
During the time that Silk served on the Board, the Association was involved in a lawsuit that was brought by the son of the developer to establish ownership over 36 parking spaces located within the development. In 1999, the case went to trial and the trial court ruled that the developer’s son rightly owned the parking spaces along with another portion of the Association’s common area. Based on that ruling, the parties held a mediation and settled all remaining issues in the case. The settlement was negotiated by the attorneys for the respective parties, and was later approved by the boards of the respective parties. Following the settlement, a full disclosure of the settlement was made to the Association’s members at numerous meetings, and through the publication of letters to the members, including the community newsletter.
Shortly after the settlement was reached, the developer’s son began offering the parking spaces for sale to the general public and to the members of the Association for $25,000 per space. In December 2003, [four years after the parking spaces first went on the market] Silk purchased six parking spaces for $114,000 or $19,000 per space.
In 2009, Feldman, an attorney, wrote a letter to the members of the Association on his law office letterhead that encouraged members of the Association to vote for him in the upcoming Board election. Feldman’s letter further noted that Silk [who was also an attorney] was running for the Board and to promote himself over Silk, Feldman accused Silk of overseeing the prior lawsuit for her own personal gain.
Later that year, Feldman sent a second letter to the members which stated in part:
… Silk was on the Board and without the knowledge of the lawyers who settled the Knox matter, she and [the Board's] president cut secret deals to purchase nine parking spaces for themselves with manufactured rights to use our beach along with each space. They never revealed what they did and never apologized. Successive ‘friendly’ boards kept their secret for a decade.
Silk sued Feldman for defamation. In response to the lawsuit, Feldman filed a special motion to dismiss the lawsuit as a Strategic Lawsuit Against Public Participation (“SLAPP”) claiming his statements were an act of free speech and were therefore protected. A “SLAPP” lawsuit is an unmeritorious action brought by one litigant for the illicit purpose of misusing the legal system to chill the opposing party’s exercise of the constitutional right of free speech or right of petition guaranteed by the Federal and California Constitutions. The trial court denied Feldman’s motion to dismiss the lawsuit and he appealed.
In refusing to dismiss the lawsuit, the Court of Appeal eloquently stated that “not all speech is free” and that “speech can be costly.” The court found that Silk was likely to prevail on her claim against Feldman because Feldman’s letter accused Silk of a serious breach of her fiduciary duty as a director which amounted to libel per se and that the accusations against her were false.
Moral of the story: One should make sure any accusations made in campaign materials are accurate as it could cost you more than a seat on the board.×
By: Carrie M. Timko, Esq.
Advances in technology have caused significant changes in the way civil discovery is conducted. Before the advent of the computer age, most documentation was easily identified as paper. Today, however, documentation is more likely to take the form of an email, text message, or computer file. Just as society’s method of communication has evolved, so has the law. California’s Electronic Discovery Act (Code of Civ. Pro. § 2016.010 et seq.) allows litigants to obtain electronically stored information (“ESI”) through the discovery process. As a result, when a party reasonably anticipates litigation (whether by filing a lawsuit or by being sued) there is a duty to preserve all ESI that may be discoverable.
What is “ESI”?
ESI should be defined as broadly as possible. ESI includes any information stored electronically, magnetically, digitally, or optically, such as email, voicemail, instant messages, text messages, sound or video recordings, word processed documents, spreadsheets, and other similar electronic media. Devices used to store, produce, and transmit ESI include computers, laptops, servers, cellular phones, handheld wireless devices, and the like. ESI also includes information about electronic data called “metadata.” Metadata is a hidden recorded history about an electronic file’s creation, modification, location, and size, which can be vital to a document’s significance in litigation.
When does the duty to preserve ESI arise?
The duty to preserve ESI arises when a party reasonably anticipates litigation. Since there is no bright-line rule as to when litigation can be “reasonably” anticipated, it is best to preserve ESI at the time a dispute arises, whether a lawsuit has been threatened or not.
Who does the duty to preserve ESI extend to?
In the case of a common interest development (homeowners associations, planned developments, condominium projects, community associations, maintenance associations, etc.), directors, officers, committee members, managers, agents, and employees all have a duty to preserve ESI once litigation is anticipated. Additionally, any vendor, consultant, or other third party who may have ESI related to the dispute has a duty to preserve that ESI. For example, if the dispute is over financial expenditures, the association should notify its accountant in writing to preserve ESI in his or her possession that is related to the dispute. The same applies to other vendors, depending on the nature of the dispute. If a director utilizes his work email account, computer, or cellular phone to conduct association business, his employer would also be subject to the duty to preserve ESI under its control. Extending this preservation duty to the director’s employer as a result of communications outside the scope of the director’s employment can have negative implications for the director as well as the association if the ESI is not properly preserved. Therefore, directors and committee members should be careful from where they send and receive email, and from what account. Directors should consider setting up a separate email account solely for association business. Associations may also consider creating their own domain name and supplying email addresses to its directors and committee members.
What do I need to do to preserve ESI?
Once litigation is anticipated, refrain from deleting or destroying any ESI that exists. Enact procedures to prevent future deletion or destruction of ESI and ensure that all automatic computer operations that delete ESI by age, capacity, or other criteria are turned off. Do not overwrite or erase any back-up media and do not use any defragmenting or compression programs, or metadata scrubbers. Note that when ESI is “deleted” it can still be recovered. Therefore, be careful to preserve all ESI at the appropriate time. The penalties for failing to preserve ESI can be significant, and the penalties for purposely deleting or destroying ESI can be even worse.
How do I properly dispose of ESI when litigation is not anticipated?
The association should implement a policy on ESI destruction and deletion for use during times when litigation is not anticipated. If the association has such a policy in place (for example, ESI will be purged after five years if no litigation is anticipated), it will be harder for a challenging party to claim that evidence has been improperly destroyed than if ESI is randomly deleted.
In a time where email and text messages are often a more common means of communication than speaking face-to-face, associations must be aware where the duty to preserve ESI arises and to whom it extends. Every time you push the send button, you are creating a potentially discoverable document. Protect your association from potential discovery challenges and penalties by enacting proper policies on the use and storage of electronic information.
By: Carrie M. Timko, Esq.
The case of Chapala Management Corporation v. Stanton (2010) 186 Cal.App.4th 1532, started out like most other enforcement actions. I received a call from the manager of Chapala Management Corporation asking for help in dealing with owners who installed two windows on the front of their condominium unit in disregard of several denials from the Association’s Architectural Review Committee (“ARC”). Although the type and style of the windows were acceptable to the ARC, the color was not. The Stantons insisted on installing “sandtone” colored windows (which is a light taupe color), although every other similarly-situated window in the community was darker brown. Anyone driving by the Stanton property (which was conveniently located by the front gate of the community) could see that these windows were inconsistent with the architectural style of the development.
The Association offered mediation to the Stantons in an effort to resolve the matter without litigation, but the Stantons refused to participate. The Association even tried to resolve the matter informally, but to no avail. Worried that allowing such a departure in window color would open the proverbial flood gates for others to have inconsistent window color, the Association decided to proceed with an enforcement action against the Stantons in the San Diego County Superior Court, represented by me and EG&H attorney Rian W. Jones.
It is important to note that this dispute could have been resolved by simply painting the windows a darker brown, which would have cost about $300. The Association had a self-help provision in its CC&Rs that provided the Association with the right to remedy an architectural violation and charge the cost back to the member. However, the dispute with the Stantons over window color was about eight years in the making, and ultimately the Stantons had defied the Association by installing the windows without authorization. As a result, self-help did not seem to be a viable option that would have permanently resolved the matter. Moreover, the Association had demanded that the Stantons paint their windows on several occasions, and the Stantons refused to do so. Given the circumstances, painting the windows without permission would certainly have resulted in a lawsuit, so the Association decided it was best to file an enforcement action first to force the Stantons to bring the windows into compliance with the Association’s color standards.
About a year after the lawsuit was filed, the case went to trial. After spending around $80,000 in attorney’s fees (thanks mostly to the unnecessary litigation tactics of the opposing attorney), the Association prevailed at trial. Based on well-established law and the provisions of the Association’s governing documents, the trial court ruled that the Association had the right to restrict the color of windows to preserve the aesthetics of the community, and that the Stantons had breached the CC&Rs by installing the windows despite the ARC’s multiple denials. The Stantons were ordered to either replace or repaint the windows in accordance with ARC standards, and were further ordered to pay the majority of the Association’s attorney’s fees and costs.
But the Stantons really wanted sandtone windows. They appealed the trial court’s decision. After another year on appeal, and after forcing the Association to incur thousands more in attorney’s fees and costs, the court of appeal confirmed the trial court’s decision. Interestingly, part of the Stanton’s argument on appeal was that the Association should have exercised its right to self-help and just painted the windows rather than filing a lawsuit. As disingenuous as this argument was (if the Stantons were willing to have the windows repainted, why did they fight this case all the way to the court of appeal?), the court of appeal ruled that the CC&Rs allowed the Association to either exercise the right to self-help or file an enforcement action. These options were not mutually exclusive. The court of appeal, however, was not pleased with the fact that a dispute that could have been resolved for $300 ended up costing the parties over six-figures in attorney’s fees and costs. The Association agreed with the court on this point; however, in dealing with homeowners who were so intent on breaching the CC&Rs, there was little choice but to litigate.
There are (at least) two morals to this story: (1) while “sandtone” may be an attractive color for replacement windows, it may not be worth the additional cost if it’s not a color approved by the association, and (2) boards should do their best to resolve enforcement matters informally or through internal enforcement measures before resorting to court intervention, which can be very expensive and time consuming. However, sometimes an association has no other choice than to sue an owner to enforce the provisions of the governing documents. If violation notices and fines are not working to bring an owner into compliance with the governing documents, consult the association’s attorney to see what other legal enforcement options are available.×
by Mark R. Raftery, Esq.
Litigation (a contest in court to enforce a right) is a simple, inexpensive, and expeditious way to resolve disputes with homeowners and developers, right? Not always. Litigation can also be complex, expensive, lengthy, and contentious. In certain cases, however, it may also be the most effective (if not the only) way to resolve certain disputes and enforce the rights of a community association. This discussion will dispel some popular misconceptions about litigation and discuss specific ways community associations can work more effectively with their attorney and reduce the time, cost, and aggravation of litigation.
Litigation is Your First Option
Rarely. Before a community association files a lawsuit against a homeowner or a developer, it should consider the following alternatives:
Litigation is Simple
Sometimes. But in a typical (non-Small Claims) case, the association will have to retain an attorney to draft and file the necessary documents with the appropriate court to start the case; personally serve the defendant with the documents; participate in the discovery process where each side learns the facts supporting the other side’s case; attend the necessary court hearings; prepare the various documents that must be exchanged with the other side; prepare for and participate in a trial; and, if the association is successful, take the steps needed for the association to be paid or obtain the relief ordered by the court. A great deal of work, by the attorney and the association, is frequently involved in the litigation process.
Litigation is Quick
Not always. California’s long-standing budget problems are having a serious and dramatic effect on its judicial system. This affects all participants in the judicial system because it takes longer in many larger counties to get cases to trial, to have significant motions heard by judges, or even to get important pleadings from a court such as judgments, writs, or abstracts.
For example, because of a lack of funds, Los Angeles County Superior Court has closed a number of courthouses. The San Diego County Superior Court has transferred judges from civil trial departments to other duties. And in virtually all counties, the number of support staff needed to assist judges and process the court’s orders, judgments, and other important pleadings has been sharply reduced. This means further delays in resolving cases.
Also, unless a community association seeks and obtains a preliminary injunction (an interim order from the court before the case is tried on it merits), or the case settles before trial, the association will likely have to wait until a judgment is entered against the homeowner to obtain compliance.
Litigation is Easy
Not usually. Litigation, like football, is a “contact sport.” Just like with any winning sports team, a great deal of preparation is usually required to get the result the association wants.
Litigation is Inexpensive
Usually not. A lawsuit can be very expensive. Out of pocket costs and attorney’s fees may quickly exceed the monetary damages sought from a homeowner or other parties. Although the “prevailing party” as determined by the court in an enforcement action is entitled to “reasonable” attorney’s fees from the other party, the award is not made until after the case has been tried. In a non-enforcement action, attorney’s fees are not recoverable from the other side unless there is a law or a contract that permits it.
You Control all the Cards in Litigation
You don’t.In any case, there are at least two other significant players besides the association. First, the opposing attorney may take steps to make a simple and straightforward case complicated and more expensive than necessary. Second, every case has a judge. Most enforcement cases are tried by a judge and not a jury. The judge has the final say on who wins and who loses and controls the litigation from the inception to trial with case management orders and rulings on pre-trial motions.
It’s a Slam Dunk, Right?
Sorry, but there are few guarantees in litigation. Every seasoned attorney will tell you that no one can give you a 100% assurance on any outcome for litigation. Also, what appeared to be clear when a case is started may turn out to be not so after discovery and investigation.
A Judgment Is Not a Check
We won the case so now the other side has to pay up, right? Not so fast. A judgment is a decision by the court that one party has won something from another party. A judgment is not a check you can deposit at a bank. Even if the association wins the case and receives an award of attorney fees and costs, the losing side does not have to voluntarily pay the judgment. Unless the defendant voluntarily pays the judgment, the association needs to take additional steps to enforce the judgment and compel payment. These steps involve everything from recording Abstracts of the Judgment in California counties where the defendant owns real property, to levying on or attaching the homeowner’s bank account, garnishing their wages, or seizing assets, to selling the homeowner’s personal or real property. Each remedy, however, has certain costs and expenses. For example, even if real property is sold, senior lien holders, such as a county for unpaid real property taxes, and any senior secured lender for an unpaid mortgage or deed of trust, will be paid before an association.
Despite These Limitations, Sometimes You Must Go to Court
Some disputes, especially those with highly charged issues, large amounts of money in dispute, or recalcitrant parties, cannot be resolved without litigation.
Nine Ways to Work More Effectively With Your Attorney (and Reduce Your Legal Fees)
• Be Prepared
• Be Completely Honest
• Be Proactive
• Ask Questions
• Develop, Agree on, and Follow a Strategy
• Develop, Agree on, and Follow a Litigation Budget
• Minimize Surprises
• Stay Informed
• Be Flexible×
In response to escalating violence in the workplace across the country, on January 1, 2000, California enacted a statute that enables employers to better protect their employees in the workplace. Just as this law can protect traditional employees, California Code of Civil Procedure (CCP) section 527.8 can and should be utilized to offer protection to “employees” of community associations in certain specific situations.
Purpose of the statute: California code section assists in prohibiting violence
The purpose of the statute is to provide employers with a fast, relatively inexpensive means of protecting its employees from people who are violent or who threaten acts of violence. In the association context, this protection allows employees to perform association business free of the fear of violence from those who seriously disrupt an otherwise peaceful community.
Often tempers will flare and disagreements will occur within an association when an unpopular decision is made. Residents sometimes show anger against board members, committee members, officers of the association, management or maintenance people who are carrying out the decisions of the Board. These residents may try to stop a project or say inappropriate things to association employees. When these actions or comments consist of a violent act or a credible threat of violence, CCP Section 527.8 can be used to protect the employees. Unless the conduct escalates into violence or threats of violence, however, mere anger or inappropriate language do not constitute the type of conduct which calls for court action under this statute.
Who is defined as an “employee” under this statute?
An association need not have traditional paid employees to obtain the benefit of the statute. The following people qualify as “employees” under CCP Section 527.8:
1. Board members, officers and committee members;
2. Paid employees of the association, such as maintenance workers and grounds keepers;
3. Most independent contractors and vendors, including community association managers and those who work for association management companies;
4. Anyone whose job it is to go onto association property to perform work of any kind, whether paid or on a volunteer basis; and,
5. All household members of an “employee.” There does not have to be a specific threat or act of violence toward each family member to obtain this additional protection.
Prerequisites to obtaining the order:
1. There must be: (1) an actual violent act; (2) a credible threat of violence; or, (3) stalking of the “employee.” Mere harassment cannot be enjoined under this statute. Often, the threatening conduct has gone on for months or years, but becomes increasingly more frequent and violent over time. One extremely violent act or episode, however, may be sufficient for an injunction to be granted.
2. The person to be protected must be an “employee” of the association. Homeowners and tenants, who are not classified as employees under the statute, are not covered and must obtain their own restraining orders.
The process for obtaining the protective order
Obtaining a permanent order protecting the employee is a two-step process. First, the association will obtain a Temporary Restraining Order (TRO). This order is what the name implies; it is temporary, is granted on very short notice and provides almost immediate protection to the employee. After the TRO is granted, the court will hold a hearing to determine whether to make the order permanent. This hearing is generally held two weeks after the TRO is granted. At that time the association must be prepared to prove that the order should be made permanent (generally, “permanent” means for a specific period of time up to a maximum of three years).
What can these orders do for an association and its employers?
The kinds of protection that can be included in these orders include the following:
1. All TROs and injunctions under this code section include the following standard language:
“Violation of this order is a misdemeanor, punishable by a $1,000 fine, one year in jail, or both, or may be punishable as a felony. This order shall be enforced by all law enforcement officers in the State of California. Any person subject to a restraining order is prohibited from obtaining or purchasing or attempting to obtain or purchase a firearm by Penal Code Section 12021. Such conduct may be a felony and punishable by a $1,000 fine and imprisonment.”
2. In addition to the automatic order, the orders often prohibit the defendant from:
a. assaulting, battering or stalking the employee and other protected persons;
b. attending any board meetings or annual meetings of the association;
c. following or stalking the employee to or from their place of work;
d. following the employee during hours of employment;
e. telephoning or sending communications to the employee by any means, including but not limited to, the mail, interoffice mail, fax or e-mail; or,
f. entering the workplace of the employee.
3. The orders will often require the defendant to “stay away” from the employee. For example, the orders may require that the defendant stay 100 to 300 yards away from: (1) the entire association (if a non-resident); (2) the employee or the employee’s family members; (3) the employee’s place of employment; and, (4) the school or employment of the employee’s family members.
This legal tool should be utilized in appropriate cases after consultation with counsel. It is an important tool that can be used by an association to stop violent and abusive people from intimidating and threatening employees within the association. Utilizing this statute in the appropriate manner can assist in keeping the association safe and allows both volunteer and paid employees to perform their duties without fear and with the knowledge that their associations are doing everything in their power to provide a safe working environment.×
By: Gordon A. Walters, Esq.
California law on construction defect claims requires a prelitigation notice to be given to the builder. The law also contains several default provisions for how the prelitigation process is conducted. In addition, the trend in the law, as demonstrated by the 2014 case of McCaffrey Group, Inc. v. Superior Court (“McCaffrey“), is to allow builders to establish and enforce homeowner compliance with reasonable alternative prelitigation procedures. Although the McCaffrey case involved individual homeowners, its outcome is also relevant to construction defect claims brought by community associations.
In McCaffrey, the Court of Appeal upheld a builder’s contractual provision for a mandatory prelitigation alternative dispute resolution procedure prior to the filing of a construction defect lawsuit. The case involved a group of homeowners suing the builder of single family homes for alleged construction defects. The builder’s purchase and sale agreements contained contractual provisions requiring a two-step process be followed before homeowners filed a construction defect lawsuit. First, the homeowners were required to provide the builder written notice of their claim and permit the builder an opportunity to inspect and repair the alleged defects. The second step required the parties to submit the claim to non-binding mediation if the claim did not resolve. Finally, the contractual provisions described that if mediation did not resolve the claim, either party would then be permitted to file a lawsuit, which would be resolved by judicial reference.
In McCaffrey, the homeowners attempted to bypass the prelitigation procedures called for in the purchase and sale agreements by immediately filing a lawsuit. The builder responded by filing a motion to compel alternative dispute resolution, asking the trial court to enforce its contractual prelitigation requirements. The trial court sided with the homeowners, finding the contractual provisions to be unconscionable and, thus, unenforceable. However, the Court of Appeal reversed the trial court’s decision and ordered the trial court to enforce the contractual provisions.
To understand the Court of Appeal’s decision, it helps to have some background regarding the Right to Repair Act, also known as Senate Bill 800 (California Civil Code sections 895 et seq.). The Right to Repair Act, which applies to new residential construction sold on or after January 1, 2003, enumerates a variety of applicable standards for home construction and specifies the rights and responsibilities of the parties. It also provides a number of procedural rules and a detailed prelitigation procedure.
At issue in McCaffrey was Chapter Four of the Right to Repair Act, which prescribes a prelitigation procedure that a homeowner is required to follow prior to filing a construction defect lawsuit. The Right to Repair Act’s prelitigation procedure requires the homeowner to provide notice to the builder of construction defects, which then triggers a series of short deadlines for the builder to acknowledge the claim, conduct an inspection of the property and make an offer to repair the alleged defects. The Right to Repair Act also expressly authorizes the builder to contract for an alternative prelitigation procedure, effectively opting out of the statutory procedure enumerated under the Right to Repair Act.
In McCaffrey, the Court of Appeal considered whether the alternative prelitigation procedure designed by the builder was unconscionable. The Court dismissed each of the homeowners’ arguments as to the unconscionability of the builder’s alternative procedure. In doing so, the Court pointed out that to be substantively unconscionable, a contract term must do more than merely grant a greater benefit to one side; rather, the term must be so one-sided as to “shock the conscience.” The Court found nothing in the builder’s alternative procedure that reached this level of inequity.
Although McCaffrey specifically dealt with contractual provisions in the purchase and sale agreements of individual homeowners, these alternative prelitigation procedures are terms often found within an association’s CC&Rs. The Court’s discussion regarding the substantive unconscionability of these terms can also be applied to an analysis of such CC&R provisions.
Given the Court’s decision in McCaffrey, the trend appears to be that builders will have a wide degree of freedom to draft their own alternative prelitigation procedures. It also looks like that these alternative procedures will be enforceable unless they are found unconscionable. It is important to be aware of these provisions and their potential impact on an association’s rights and responsibilities when considering a construction defect lawsuit.×
Methods of Building have Undergone a Revolution
In recent years, residential developers have begun to employ commercial construction techniques in the development of residential buildings. These techniques include the use of concrete and steel mid-rise and high-rise tower construction with exterior building envelope components known as curtain walls, window walls, exterior insulation and finish system (EIFS) foam cladding. These innovative and complex design and construction processes present new problems for homeowner associations faced with construction defects.
Remediation of Post-modern Construction
The highly technical processes and complicated structural components used in modern commercial construction are a challenge even to those with industry experience. Previously, only sophisticated commercial building owners had to concern themselves with the remediation of construction defect damage in such buildings. Now homeowner associations are faced with this same responsibility.
Our Multi-Disciplinary Team Offers Special Expertise
Epsten Grinnell & Howell has represented clients in complex construction defect litigation for more than 28 years, recovering more than $275 million. Using a multi-disciplinary team of attorneys and construction industry experts, we have successfully tackled such problems as water intrusion through the building envelope (including roofs, walls, and plaza decks), and defects in the mechanical, electrical or structural components of condominium towers. These are all serious problems.
Post-Litigation: Now the Association Must Chart Unknown Waters
Some law firms are so narrow in the scope of services they offer that after a judgment or financial settlement, the association can be left with a sum of money, a list of problems, and no idea where to begin the reconstruction or repair process. Not so, for clients of Epsten Grinnell & Howell. Our attorneys are also very knowledgeable about the business side of construction transactions. This knowledge is not only helpful during litigation, it becomes critical once the association receives a judgment or financial settlement.
Repairs and Reconstruction: More Daunting Tasks for the Association
Large-scale repair or reconstruction projects are complicated. Enormous sums of money are either well-spent on appropriate remedial solutions, or wasted on the wrong scope of work, the wrong contractors, or the wrong construction techniques.
Epsten Grinnell & Howell can help the association through the entire process. We will assist the board by working with a team of properly qualified reconstruction and repair consultants who will advise the association on how best to control the major elements of their repair or reconstruction program: time, cost, and quality. Once the repair or reconstruction needs are prioritized and the scope of work defined, we will assist in the preparation of construction contracts that are comprehensive and best serve the interests of the association. If we have served as the litigation team, we will be familiar with the construction defects impacting the association and will be in the best position to help the board avoid any construction-related problems that could thwart a successful rebuilding program.
By: Douglas W. Grinnell, Esq.
In 2002, the California legislature enacted SB 800, adding 10,000 words and a series of 46 new sections to the California Civil Code. SB 800 transformed the law of construction defects in California, both procedurally and substantively. Homeowners associations plagued by known or suspected construction defects need to be aware of the numerous new rules and potential pitfalls found in what has become “Title 7″ to the Civil Code.
Substantive Changes in the Law
Prior to SB 800 developers complained that California law was too vague. They argued for a specific definition of what a “construction defect” is so they could design and build to a certain known standard and avoid liability. Thus, Civil Code section 896 sets forth numerous definitions of “construction defects.” The definitions are set forth on a building component-by-building component basis. For every building component listed a performance standard is attached. (For example, “Roofs . . . shall not allow water to enter the structure,” or “Windows . . . shall not allow water to pass beyond . . . the moisture barriers,” or “Decks . . . shall not allow water to pass into the adjacent structure.”) Such performance based definitions exist for almost every imaginable building component or system.
The statutorily-defined defects carry both benefits and dangers for homeowners associations. On the beneficial side, proving liability for most construction defects is easier for associations. Once a violation of the performance standard is proven, the developer’s liability is established. The requirement to prove consequential property damage caused by the construction defect is eliminated. But, on the detrimental side, each defined defect carries its own distinct statute of limitations (1 year, 2 years, 4 years, 10 years). Some specified defects allow an association up to 10 years to bring a claim while other defined defects allow as little as 1 year. This arbitrary patchwork of various and sundry statutory deadlines for bringing construction defect claims is a pernicious trap for the unwary.
Procedural Changes in the Law
Prior to the enactment of SB 800, pursuant to the Calderon Act enacted in 1995, homeowner associations were required to follow certain procedures and engage in certain communications with the developer before filing suit in court against the developer. Much of those pre-litigation procedures, or their concepts, is carried forward in SB 800 (e.g., written notice to the builder, right of both parties to obtain relevant documents, right of builder to inspect claimed defects, right of builder to make an offer, etc.). But SB 800 added a significant new feature: The builder’s right to repair the claimed defects. When first enacted SB 800 was known in the construction industry as the “fix it law.” Several code sections specify the manner in which the builder may propose repairs, how the association may respond, and the consequences of the repairs on claims following their implementation. In practice, however, very few builders have ever exercised their right to implement repairs. Rather, as has been the case for many years, builders’ insurance companies prefer to pay money (as little as they can get away with) to resolve construction defect disputes.
Necessity of Involving Attorneys
No homeowner association should endeavor to negotiate construction defect claims with a developer without assistance from attorneys experienced in construction defect litigation. As noted above, a dangerous patchwork of differing statutes of limitations exists for different components and systems. Worse, the statute of limitations can run out even as the association and developer are following the SB 800 procedures.
There are numerous other nuances and complications to SB 800 which are too complex to describe in detail. For example, SB 800 does not apply to condominium conversions. The SB 800 procedures may be affected or revised by arbitration or alternative dispute resolution provisions. And, where sales of homes in the community occurred both before and after January 1, 2003, a portion of an association’s claims may be covered by SB 800 while another portion is governed by pre-existing law. Depending on the circumstances, an association’s construction defect claims may be benefited by the statutory construction defect definitions yet not burdened by the statutory procedures.
Consult your attorney!×
By: Lori F. Bessler, Esq.
Consider this: You enter into a prime contract with a general contractor to perform work at your project. The general contractor hires a subcontractor to perform some of the work. The subcontractor negligently performs its work causing property damage. Typically, coverage would be provided through the insurance company who issued the general contractor’s commercial general liability policy (“CGL policy”). However, there are a growing number of insurance companies issuing “contractor’s condition” endorsements to CGL policies. Such an endorsement generally requires the named insured contractor to obtain indemnity agreements from their subcontractors, holding the general contractor harmless from any claim arising out of the subcontractor’s work, and/or an additional insured endorsement naming the general contractor as an additional insured under the subcontractor’s policy. Remember, an insurance policy is nothing more than a contract to provide insurance.
In effect, the “contractor’s condition” endorsement conditions the insurer’s obligation to provide insurance coverage on the general contractor’s status as additional insured under the subcontractor’s policy and/or the existence of a hold harmless agreement between them. If the subcontract does not contain a hold harmless agreement or obligate the subcontractor to name the general as an additional insured, the contractor’s condition endorsement eliminates or reduces coverage for losses. That includes both the carrier’s duty to defend the general contractor against claims and the duty to indemnify for damages.
In Yangtze Realty, LLC v. Sirius American Insurance Company, the New York Supreme Court interpreted a similar endorsement and held that the insurance company had no duty to defend or indemnify the contractor in an underlying property damage lawsuit. There, the general contractor’s insurance policy contained an endorsement barring coverage for “property damage arising out of work performed on behalf of the insured by a subcontractor where no prior written agreement exists indemnifying and holding harmless the insured in the event of a loss.” The insurance company submitted evidence showing that the property damage in the underlying action was caused by the work of a subcontractor hired by the named insured general contractor. The subcontract between them did not contain the required indemnity and hold harmless language. Accordingly, the Supreme Court properly held the general contractor’s insurance company had no duty to defend or indemnify it in the underlying action.
How to Protect Yourself: Include provisions in the prime contract requiring the general contractor to (a) obtain written indemnity and hold harmless agreements from every subcontractor who will perform work on your project; and, (b) require the subcontractor(s) to name the general contractor as an additional insured. Include a requirement that the general contractor provide you with a copy of the additional insured endorsement and subcontract containing the indemnity and hold harmless agreement before starting work on your project.×
Defective construction practices
Leaking roofs or windows, plumbing problems, cracks in stucco or drywall, cracks in foundations, and drainage problems are typical construction defects that create headaches for homeowner associations.
Unfortunately, too many residential projects are plagued with faulty construction. Whether the result of shoddy workmanship or builders who intentionally cut corners, homeowner associations are frequently faced with the need to provide project-wide repairs at costs far beyond dollar amounts established in their reserves.
In construction defect cases, time is not an ally. Various statutes of limitations apply. As soon as a problem becomes apparent, associations should notify the developer and ask for immediate repairs. Associations should also consult legal counsel, to ensure that even in the event of developer repairs, the association is properly protected. Investigations by building industry experts are often needed to determine the full extent of the defect problems and sometimes take time to complete. The association needs proper counsel to ensure that its claims are not camouflaged by band-aid or temporary repairs. Quick action on the part of the association and its legal counsel is crucial.
Seeking reputable and competent legal counsel: Epsten Grinnell & Howell, APC
As legal counsel for hundreds of California common interest developments, Epsten Grinnell & Howell has a unique understanding of the operations of homeowner associations and the fiduciary responsibilities of their boards of directors. We also know that construction defect problems are some of the most complex issues that a homeowner association and its board may have to deal with.
Our experienced attorneys will assist the association in negotiating with builders and developers to rectify construction problems. Or, if the situation calls for more action, our attorneys can guide the association to a proper resolution of the issues through mediation, arbitration or construction defect litigation. The cost of qualified design and construction consultants and competent legal counsel is money well spent. The association may recover costs paid to industry experts from the developer if a case is filed. In addition, Epsten Grinnell & Howell will, in some cases, take the case on a contingent fee basis, which means that legal fees are not paid during the case, but only when funds are recovered for the association.×
By: Anne L. Rauch, Esq.*
Pop Quiz! The board of directors for a community association retains litigation counsel to represent the association in an action for construction defect damages against the developers and others. During the lawsuit, the association’s lawyer meets in executive session with the board of directors to discuss the lawsuit. The board also authorizes its lawyer to meet with the individual homeowners at certain points in the lawsuit to discuss the lawsuit. Question: Which of the following best describes the nature of the attorney’s privileged communications (choose one):
(a) The communications between the association’s lawyer and the board of directors in executive session.
(b) Any and all communications between the association’s lawyer and all the individual homeowners, without any limitation.
(c) Certain communications between the association’s lawyer and the individual homeowners which are reasonably necessary to further the purposes for which the association’s counsel has been retained.
(d) All of the above.
(e) (a) and (c) only.
If you chose (a), then you may not be aware of the recent decision in Seahaus La Jolla Owners Association v. Superior Court (2014) 224 Cal.App.4th 754. The answer is (e)!
Many practitioners in the community association industry would assume that the attorney-client privilege only applies to communications between the association’s attorney and the board of directors. In fact, in 2000, the California Court of Appeal concluded that homeowners who are not on the board cannot force disclosure, over the board’s objection, of confidential material possessed by the association’s attorney. The Court reasoned that the board of directors holds the privilege, and homeowners cannot compel disclosure of confidential information without the board’s consent. (Smith v. Laguna Sur (2000) 79 Cal.App.4th 639.) Citing the many sleepless nights an association’s litigation counsel would have worrying about the damage homeowners could do to an association client if any and all homeowners had unfettered access to its confidential information, the Court reasoned, “It’s no secret that crowds can’t keep them.” (Smith v. Laguna Sur, supra, 79 Cal.App.4th at 645.)
If this is true, then what happens when the board authorizes its attorney to meet with homeowners for certain purposes related to the prosecution of the association’s lawsuit? It is common for an association’s litigation counsel to meet with homeowners to discuss things like investigation of the property, homeowner votes which may be called for under the CC&Rs, and the like. There are countless reasons the association’s lawyer may need to speak with homeowners. They own (or have an interest in) the property which is the subject of the lawsuit. Are those communications with the homeowners outside the “dome of silence” such that anyone can probe the details of those conversations? In other words, when the board authorizes the association’s litigation attorney to speak with the individual homeowners about the lawsuit, can the defendants in the case capitalize on those communications by conducting discovery into the discussions and potentially using them at trial? Smith v. Laguna Sur only dealt with the issue of whether homeowners can force disclosure of information in the association’s litigation file, over the board’s objection. However, what happens when the board determines it is necessary for the success of the association’s lawsuit to have its attorney address the membership? Can the defendants in the lawsuit (or any third party) inquire into the details of those communications?
The developers and other defendants in Seahaus La Jolla Owners Association v. Superior Court (2014) 224 Cal.App.4th 754 certainly thought so. In that case, the Association’s litigation counsel attended a series of meetings and spoke with homeowners (who were not on the board) concerning the Association’s lawsuit. When the defendants started to take the homeowners’ depositions, they asked questions about what the lawyers said at these meetings. The Association’s counsel objected, and argued the communications were privileged because those communications were essential to the prosecution of the Association’s lawsuit. The legal battle over the defendants’ right to probe the details of these communications went all the way up to the California Court of Appeal.
In a unanimous published decision, the California Court of Appeal agreed with the Association and held that, although homeowners may not be able to compel disclosure of material in the Association’s attorney’s files over the Board’s objection, the attorney’s conversations with the homeowners may still be privileged from disclosure to the defense. When the Board determines that it is necessary to further the Association’s lawsuit, the Association’s counsel may speak with the homeowners confidentially. Those communications are privileged from disclosure to the defendants in the case. The Seahaus court came to this conclusion based upon the long standing rule that the attorney client privilege extends to communications between the attorney and non-clients when those communications are reasonably necessary to further the purpose for which the attorney has been retained. The Court also recognized the common interest between the Association and its members in the Association’s lawsuit against the developers for construction defect damages. Applying well-settled general principles to the communications between the Association’s litigation counsel and the homeowners at certain key points in the Association’s lawsuit, the Court of Appeal held that association lawyer’s communications with the homeowners were privileged.
This does not mean that all communications between an association’s lawyer and individual homeowners not on the board will be confidential. The conversations have to be reasonably necessary and related to the association and its members’ common interest in the lawsuit. However, the Seahaus court did not define what would be “reasonably necessary.” This was probably for good reason. It would be impossible to list all the various circumstances that might arise during the course of a lawsuit by an association. As long as the communications are reasonably necessary to further the purposes for which the association has retained counsel, those communications should be considered privileged.
Results achieved in any given case depend upon the exact facts and circumstances of that case. Epsten Grinnell & Howell cannot guarantee a specific result in any legal matter. The results discussed in this advertisement are dependent on the facts of the cases, and those results will differ if based on different facts. To view our entire disclaimer, visit www.epsten.com.
* Anne L. Rauch is an attorney with Epsten Grinnell & Howell APC. Ms. Rauch is co-counsel for Seahaus La Jolla Owners Association and represented the Association before the California Court of Appeal.×
By: Lori F. Bessler, Esq.
Major problems often arise on construction projects because of subcontractor default. Defaults most frequently occur when a subcontractor fails to complete its scope of work midway through a project. Historically, the risk of subcontractor default was mitigated by obtaining surety bonds or retention. Now, when an association contracts with a general contractor, it may be asked whether it wants the general contractor to obtain Subcontractor Default Insurance (“SDI”). SDI is essentially an alternative to performance and payment surety bonds which protect against the risk of subcontractor default. SDI is best suited for large projects with large subcontracts.
Typically, when a contractor provides surety bonds, an association has the peace of mind that a third party is 100% liable to ensure completion of the project and payment to subcontractors in the event of a default. SDI, on the other hand, puts that requirement on the general contractor who is reimbursed by the insurer for the costs incurred to cure the default. The insurance company becomes obligated to reimburse costs incurred because of subcontractor default. This differs from a traditional performance bond, for example, where the insurer actually steps in to complete the defaulting subcontractor’s work, many times causing extra delay and disruption to the project.
One benefit of SDI is that premiums are usually less than performance and payment bond premiums, which translate into owner savings. This and the greater flexibility and expediency in responding to subcontractor defaults are two of the advantages over traditional bonds. For example, with a traditional performance bond, where the surety is obligated to step in and complete the work of the defaulting subcontractor, a surety may take its time in investigating the default before taking any corrective action. This may cause significant delay on any given project. With SDI, unlike a performance bond, the surety has no contractual obligation to complete a defaulting subcontractor’s work. Instead, after providing timely notice of the default to the SDI insurer, the general contractor can move forward with a solution to the problem, such as hiring a replacement subcontractor or completing the work itself, which may substantially mitigate any further delay or disruption to the project. The SDI insurer will then reimburse the general contractor for the costs incurred in remedying the subcontractor’s default.
There is another important difference between SDI and traditional surety bonds. Under SDI, the insurer has no direct payment obligation to a subcontractor’s supplier or a sub-subcontractor. Instead, this is a risk the general contractor takes on, in exchange for the cost reimbursement provided under the SDI policy. This is similar to the risk the general contractor assumes in curing subcontractor default, subject to reimbursement by the SDI insurer.
SDI policies also usually carry large deductibles and overall loss limits. Co-payments by the insured general contractor are sometimes required. Overall, SDI seems to offer more control to the association or general contractor, but also puts more of a financial burden on the general contractor who must front the costs to cure a subcontractor default. If an association allows a general contractor to obtain an SDI policy, the contract between the association and general contractor should include a provision obligating the general contractor to absorb all unreimbursed costs. Before agreeing to SDI in lieu of performance and payment bonds, the association should also perform due diligence to ensure the general contractor is financially stable and capable of managing the additional obligations imposed by SDI.×
By: Douglas W. Grinnell, Esq.
It is dangerously easy for an association to “blow the statute of limitations” when defective construction is at issue. It has been our impression that boards of directors generally have a tendency to believe the builder is going to do the right thing, because “that is what the builder promised us when the roofs leaked last year.” Boards prefer not to hire attorneys when communications with the builder appear to be going smoothly. We have observed that boards have a tendency to put matters off when the rains stop falling. Many board members in this situation do not know there is a time clock clicking away at their association’s legal rights. There is a crazy quilt-work of statutes of limitations and statutes of repose that can destroy an association’s legitimate claims for defective construction.
Statutes of Limitations
The most basic statute of limitations is the three-year statute for “damage to real property.” An association has three years in which to take action for any activity that causes property damage. Two questions immediately arise. The first question: Three years from when? Answer: Three years from the date the property damage is “discovered.” “Discovery” occurs when the association’s board of directors suspects, or reasonably should suspect, that someone has done something wrong, causing harm. A board of directors has reason to suspect when it has “notice or information of circumstances to put a reasonable person on inquiry.” Said another way, discovery of the damage occurs when the damage is “sufficiently appreciable to give a reasonable man notice that he has a duty to pursue his remedies.”
In a 2007 case (Landale) involving an eight-unit, single building condominium association, the board president had in 1997 observed rain water collecting on the roof above her unit and rainwater leaking into her unit and two other units. She also saw a handyman apply tar to the roof of the building in an effort to prevent further leaks. Suit was filed against the builder in 2001, four years after the president’s observations. The court dismissed the association’s case due to the three-year statute.
Contrast that with a 2009 case (Creekridge) involving a 61-unit, 11-building condominium community. There, one homeowner wrote a letter to the board in 1997 complaining of a roof leak in her unit and “several broken tiles.” Her letter was discussed at the next board meeting. Nothing else ever occurred regarding roofs until the winter of 2003 (six years later) when numerous roof leaks throughout the community were reported. Following those leaks the board hired a roofing consultant who found multiple causes for the leaks and multiple types of roof defects. Suit was filed in 2003. The court in that case refused to dismiss the association’s case, holding that the single homeowner’s 1997 experience did not amount to “discovery;” the board did not have a duty to undergo expensive, community-wide roof investigations based upon that single 1997 event.
As one can see from these two cases, whether “discovery” has occurred is a matter of degree.
The second question arises: “Take action” – what must be done within three years of discovery? Answer: The usual answer is: file suit. But in the case of community associations written notice to the builder pursuant to Civil Code section 910 or 6000, or both, is required, depending on when sales occurred. The California Legislature has enacted laws that require community associations to follow certain procedures when seeking redress for construction defects. By giving the builder written notice the association temporarily “tolls” the statute of limitations, i.e., prevents the statute from continuing to run.
Statutes of Repose
In addition to the three-year statute of limitation, overlying that statute, are statutes of “repose.” Statutes of repose impose certain deadlines beyond which no action is permitted regardless of when the problems are discovered, indeed even if they are never discovered before the deadline runs. The traditional statutes of repose are four years for “patent” deficiencies and ten years for “latent” deficiencies. (A patent defect is one that is open and obvious to an average person at the time construction is complete; a latent defect is not open and obvious at that time.) These statutes begin to run upon “completion of construction,” as narrowly defined by the statute. These statutes can eliminate an association’s construction defect claims even if the construction defects are not discovered until after the four or ten year periods of time (as several condominium associations plagued by polybutylene plumbing found out in the 1990s).
With the passage of SB-800 in 2002 the California Legislature added a minefield of other statutes of repose for various and sundry building components:
The SB-800 statutes of repose commence at the “close of escrow.” For community associations the “close of escrow” is the date the developer no longer has “control over the association’s ability to decide whether to initiate” a construction defect claim. (Some sophisticated developer CC&R provisions contain rather unnoticeable “poison pill” provisions on the definition which substantially shortens the applicable deadlines.)
Tolling Agreements: An Easy Solution
Statutes of limitations and repose can present real problems. But there is an easy solution to these problems: a tolling agreement. A tolling agreement signed by the association and the builder (and perhaps others) stops the statute of limitations from continuing to run for an agreed upon period of time. In every case where our firm has encountered construction defect problems and builders willing to discuss the problems we have entered into a tolling agreement with the builder. This allows the parties and their experts to investigate, communicate and negotiate without fear that the association’s legal rights may be slipping away due to one or more of those quirks known as statutes of limitations and repose. Tolling agreements are simple and inexpensive to prepare. They should be employed at the initial stage of virtually every construction defect investigation.
As this article implies, even after narrowing down the issues to the most basic points, these concepts are confusing even to experienced construction defect litigators. The lesson to be learned is to get professional help early on. When presented with construction defect problems or potential construction defect problems boards should not endeavor to deal with the builder or contractor without help from attorneys specializing in this field.×
By: Susan M. Hawks McClintic, Esq.
Senate Bill 752 established the new Commercial and Industrial Common Interest Development Act. Purely commercial and industrial common interest developments are no longer subject to the Davis-Stirling Common Interest Development Act. The new Commercial and Industrial Common Interest Development Act is based on Davis-Stirling 2014 and was also effective as of January 1, 2014. It exempts purely industrial or commercial common interest developments from even more of the Davis-Stirling-type requirements than in the past.
Unless otherwise provided in the governing documents, commercial and industrial common interest developments are exempted from most financial and accounting requirements, IDR, ADR, owner review and comment on draft rules, secret balloting, limitations on assessment increases and many requirements to allow owner inspection of records.
One important change seems to be the deletion of a statutory right to collect attorneys’ fees in a dispute. (There is language allowing attorneys’ fees for assessment collection costs.) We do not think this was intentional and fortunately most CC&Rs have an attorneys’ fees provision.
PRACTICE TIP: Many commercial and industrial associations may want to amend their governing documents to remove requirements previously required by the Davis-Stirling Common Interest Development Act.
PRACTICE TIP: For portfolio managers who represent both purely commercial/industrial common interest developments and residential common interest developments, it will be important to understand the differences in the legal requirements.×
By: Jay W. Hansen, Esq.
Did you know that if an association’s corporate status is suspended, it may prevent the association from being able to sue or defend itself in court? If the association sues, even in small claims court when its corporate status is suspended, the association could be sued for malicious prosecution.
Recently it seems that we have seen corporate suspensions more frequently than in the past, and some of them even appear to be errors either by the California Franchise Tax Board (“FTB”) or the Secretary of State (“SOS”). A suspension typically occurs because an association has failed to file its annual nonprofit tax return (FTB Form 100), its annual information return (FTB Form 199), its biennial corporate statement of information (SOS Form SI-100) or its biennial common interest development statement of information (SOS Form SICID). A suspension can also lead to a revocation of the association’s nonprofit tax exemption. Even an unincorporated association could have its nonprofit status suspended for failing to file Form SI-CID.
You cannot just assume that an incorporated association is in good standing. To be sure, you must confirm that it is in good standing. If it is not, the association must begin immediately to correct that condition. The fastest way to check the status is to go to the SOS’s website at http://kepler.sos.ca.gov. A search can also be done on an engine like Google or Yahoo. Try searching “California Business Search page.” Once on the page that says “Business Search,” follow the directions, and type in the corporate name (or corporate number, if known) in the appropriate blank. When using key words, keep in mind that the search engine will list every corporation with those words in it. So be sure to look for the exact corporate name and then click on it. If the next screen says “Active” next to “Status,” most likely it is in good standing. If it says “Suspended,” the association has problems that need to be fixed. Also check to be sure that the “Agent for Service of Process” lists the correct person and address, as the association’s named agent will get notices from the SOS and the FTB intended for the association, including the forms the association will need to complete and return periodically to stay in good standing. The agent named there can be served with legal papers, if someone sues the association, so the named agent must be instructed to alert the association if that happens, and not just throw them away. If the association does not receive the legal papers, this could result in a significant default judgment being taken against the association. The named agent should not be a developer representative who is no longer involved or a management company that hasn’t managed the association for several years.
If the association sues or gets sued and then discovers that it cannot proceed or defend itself because of a suspension, there are some ways to expedite the process of lifting the suspension, but there are also additional fees required. Also, the normal process of reinstatement now can take a lot longer to proceed through the SOS’s or FTB’s offices due to their state’s cutbacks in staffing and working hours. The process of lifting a suspension can be complicated, so be sure to contact the association’s attorney.
It is slower than the internet, but one can also check a corporate status by “snail mail.” Download a Business Entities Records Order Form at http://www.sos.ca.gov/business/pdf/be_ircform.pdf. Request the “Certificate of Status” on the second page of the form. A certified copy is the only official way to confirm the association’s corporate status, but the webpage is generally correct. The form states the mailing instructions and costs for the report, certification fee, and copy options×
by Vincent J. Sincek, Esq.
Your eyes may be glazing over, head bobbing, and you’re probably thinking… do I really need to know about easements and licenses? If you’re at all involved in the management or governance of a community association, the answer is…yes, you do. It’s wise to start with the essentials, and – believe me – they truly are more interesting than they are dreary. This article provides a concise summary of easement and license essentials. And if you think you already know enough about these issues to muddle through, there’s a good chance that this article will touch upon a new concept or one which has long been tucked away in the cobwebs of your memory. It will also provide food for thought, in the form of issues to consider when easements and/or licenses are involved, and a list of “musts” for prudent easement and license drafting.
Both easements and licenses involve one or more parties using the real property of another. In community associations, these parties may be the associations themselves, owners of lots or units within the association, utilities, municipalities and others. It is therefore important to appreciate the differences between easements and licenses, how they are created, how their terms are applied, and the legal implications of both.
An “easement” is an interest in land that gives the owner of the easement the right to use the land of another (or, in some instances, to prevent a certain use of the land by the other owner). Examples of easements are easements for ingress and egress over roads and right of way easements for utilities such as power lines and water mains. Documents creating easements are most often recorded and frequently labeled “Easement Grant Deed,” “Grant Deed,” or “Agreement Concerning Real Property.”
On the other hand, by a “license,” the owner of land gives permission to another (the “licensee”) to perform an act on the land. It makes lawful an act that would otherwise be a trespass. Examples of licenses are using the land for walking or driving, or for parking a vehicle, as in a parking lot. Documents creating licenses are sometimes recorded and frequently labeled “License” or “Agreement Concerning Real Property.”
Methods of Creation
Easements may be created by express grant or reservation. However, they may also be created by implied grant or reservation, by necessity, by prescription (adverse use), by CC&Rs, as well as other means. Licenses are essentially a contract. They are often express but may be implied from past use, custom, or the parties’ relationship. When express, they may be created in writing or orally.
The location of both easements and licenses may be made certain through a clear and accurate description. Frequently, this entails not only a metes and bounds description of the easement or license area but also the inclusion of a drawing depicting its shape and location. While a general description of the area or the location based upon an improvement (such as, “the graded road as it existed as of February 25, 1925″) may occasionally suffice, it is fraught with risk of disagreement, especially if the easement or license will exist for a number of years. The services of a licensed land surveyor or registered civil engineer are frequently employed to locate and describe the location.
Easements are frequently perpetual. Often easements are “appurtenant” (attached to a piece of property for its benefit) and pass with the property upon its transfer regardless of whether it is mentioned in the deed. However, an easement need not be perpetual. An easement can be created for a defined period of time (such as five years) or until the occurrence of some event (such as the construction of an improvement, like a public road). On the other hand, licenses are usually limited in time, such as parking in a parking lot until the ticket expires, or limited to the life of the licensee. The privilege afforded to the licensee is generally personal and cannot be assigned, inherited, or transferred to another. Licenses can usually be terminated at will by the grantor of the license.
The concept of the “scope” encompasses the rights and obligations of the parties to use an easement or license. The scope will vary depending upon the express terms if it was created in writing or orally, the actual use made of the easement, any restrictions upon the property, the reasonable expectations of the parties, and statute and case law. Any rights in the land not held by the easement or license owner are retained for use by the land owner. The relative rights and obligations of the parties may include but are not limited to the following:
Other terms are frequently included in the document creating the easement to protect the grantor, avoid misunderstandings, and avoid surprises. Such provisions include, but are not limited to, the following:
Both easements and licenses are interpreted in much the same way as contracts. The court will try to carry out the intention of the parties. When a clear intent is lacking, the court may interpret what the parties reasonably expected and what other courts have ruled in the past. To the extent a document that creates or may create an easement or a license leaves out terms, it creates fertile ground for disagreement and litigation.
Prudent Drafting “Musts”
While no amount of careful drafting can completely avoid disagreements and litigation, the following points will go a long way toward that goal:
The above overview is not intended to address all possible issues relating to easements and licenses. It is also not meant to encourage drafting of easement and license documents without the advice of an association’s legal counsel. In fact, the complexities and nuances of both drafting and interpreting easements and licenses make it important to consider involving legal counsel as early in the process as possible—from drafting to interpretation, negotiation to dispute resolution and litigation, if necessary.
The information you’ve read today provides a helpful guide which should serve as a handy reference tool, and one which will assist you in spotting issues involving easements and licenses.×
By: Karyn Larko, Esq.
On September 13, 2012,the U.S. Department of Housing and Urban Development (HUD) issued a letter outlining a number of significant, but temporary, changes to the requirements for FHA project approval. These changes, which in most cases became effective immediately, are set to expire on August 31, 2014, unless HUD decides to extend their applicable period or, conversely, decides to further revise these requirements prior to September 1, 2014.
The good news is that HUD’s changes to the requirements for FHA approval should make it easier for associations to obtain FHA project approval. These changes include:
Relaxing the Restriction on Commercial and Mixed Use Projects
Prior to September 13th, the general requirement was that a maximum of 25% of the floor space within a project or unit could be used for commercial purposes. However, the FHA had the discretion to grant an exception to a project that did not meet this requirement, provided that a) no more than 35% of the floor space was used for commercial purposes, and, b) the project’s use remained primarily residential, homogenous with residential use and free of adverse conditions to the occupants of individual units.
Now, the FHA may grant an exception to a project where up to 50% of the floor space within that project is mixed development (i.e., commercial, retail, office or parking space), provided additional information and documentation is submitted to the FHA so that it can verify that the mixed use does not have a detrimental impact on the residential nature of the project. Moreover, with the approval of the FHA Commissioner or his/her designee, associations comprised of more than 50% commercial space may receive FHA approval.
Relaxing the Restriction on Investor Owned Units
Prior to September 13th, a project could not be FHA approved if more than 10% of the units within that project were owned by the same investor owner. Excepted from this rule were projects with less than 10 units, where no investor owner could own more than 1 unit.
Now, up to 50% of the units can be owned by the same investor if the remaining 50% of the units are owner occupied or under contract for purchase to an owner-occupant principal residence purchaser.
Relaxing the Restrictions on Delinquencies
Prior to September 13th, generally no more than 15% of the units within a project could be delinquent in paying assessments by more than 30 days. However, exemptions to this requirement were sometimes granted to projects where more than 15% of the units, but not more than 20% of the units, were delinquent by more than 30 days provided other requirements were satisfied.
Now, no more than 15% of the units may be delinquent in paying assessments by more than 60 days. However, exemptions to this requirement will no longer be granted.
Providing Alternatives to the Management Company Fidelity Bond/Insurance Requirement
Prior to September 13th, if a project consisted of more than 20 units, the management company was required to maintain a bond or policy for its officers, employees and agents handling the project. The required coverage had to: 1) name the association as an obligee; 2) be in an amount not less than the estimated maximum of funds, including reserve funds, in the custody of the association or management agent at any given time during the term of each bond; and 3) be of an amount no less than a sum equal to 3 months aggregate assessments on all units in the project plus reserve funds (unless State law required a maximum amount of required coverage).
Now, if a project has more than 20 units, one of the following requirements must be satisfied:
The submitter had to further attest that he/she understood and agreed that he/she was under a continuing obligation to inform HUD if any material information compiled for the review and acceptance of the project was no longer true and correct.
A signed and dated certification on company letterhead is still required by the person submitting the application for FHA project approval (e.g., the association or its representative, the management company or its representative, attorney or lender). The signer is now required to certify that:
It is important to know that the penalties for being found to have “knowingly” and “willfully” submitted false information have not changed. In other words, any party deemed to have engaged in this conduct may be subject to a civil penalty of up to one million dollars and/or up to 30 years in prison.
It is also important to know that when preparing this certification, the certification signer should disclose every circumstance, condition, dispute (including homeowner dispute), etc., that currently exists or that the signer thinks may develop that the signer thinks has the potential, however remote, to negatively impact the project, including the value or marketability of the units within the project.
ADDITIONAL FHA APPROVAL REQUIREMENTS
Below is a list of some of the other key FHA approval requirements:
1) At least 50% of the units must be owner occupied.
2) Reserves must be 100% funded or at least 10% of the annual budget must be allocated to reserves.
3) The only kinds of rental restrictions that may be, but are not required to be, contained in the governing documents are as follows:
a) Requirement that all leases must be in writing and subject to the governing documents;
b) Requirement that owners provide the association with a copy of the sublease or rental agreement;
c) Requirement that owners provide the association with the name(s) of all tenants including the tenants’ family members who will occupy the unit;
d) A prohibition on leasing for an initial term of less than 30 days;
e) A maximum allowable lease term, e.g., six months, twelve months, etc.; and
f) A restriction on the maximum number of rental units within the project, provided this percentage does not exceed 50%.
4) There must be “Master or blanket” property insurance in an amount equal to 100% of current replacement cost of the condominium exclusive of land, foundation, excavation and other items normally excluded from coverage. (If the HOA does not maintain 100% coverage, the unit owner may not obtain “gap” coverage to meet this requirement.).
5) A project with more than 20 units is required to obtain and maintain fidelity insurance for all officers, directors, and employees of the association and all other persons handling or responsible for funds administered by the association. This coverage must be no less than a sum equal to three months aggregate assessments on all units plus reserve funds unless State law mandates a maximum dollar amount of required coverage.
6) If the project is all or partially located within a FEMA special hazard flood zone, the association must maintain flood insurance.
If you would like more information on this subject or our assistance in applying for FHA approval, you are invited to contact Epsten Grinnell & Howell.
 Hereinafter referred to as “September 13th“
By: Jay W. Hansen, Esq.
We believe a number of community associations may have a gaping hole in their fire and casualty insurance about which they are unaware. Virtually all condominium associations and most planned developments that have attached units require the association to carry fire and casualty coverage for the “full insurable replacement cost” of the homes. Many associations do have policies that provide for “full replacement cost” or “guaranteed replacement cost.” This terminology may give a board or community manager a false sense of security about the adequacy of the association’s insurance coverage. The problem, from a legal standpoint, is that building codes are being strengthened constantly, as the years go by, to improve fire, earthquake and other safety standards. Inevitably, these code changes also increase the cost of reconstruction. Unfortunately, these full replacement cost policies often provide just for reconstruction of the building as originally constructed but do not cover the extra costs needed to meet all the subsequent code changes.
When a building is partially damaged, the repairs may require some code upgrades in the area where the damage occurred. The additional cost for such code upgrades may not be significant, as long as the damage is confined to a relatively small area. However, if the building sustains major damage, the local building department may require the entire building to be reconstructed to meet current building codes. This could add appreciably to the cost of reconstruction. Obviously, the cost for code upgrades becomes increasingly significant as the development gets older and older, and as more and more building code changes become law. After ten to twenty years or longer, the cost of code upgrades in one building could be ten to twenty times the association’s deductible or even more. If significant damage were to occur in multiple buildings, the cost of code upgrades could be astronomical. However, unless the fire and casualty policy specifically includes “code upgrade coverage” or “increased cost of construction coverage” or similar terminology, the board could learn too late that the association’s policy does not provide this coverage, and the additional cost of construction could be overwhelming.
Even for a relatively young association, a single major code change could have a sizable impact. For example, around 1994, San Diego County was reclassified from a seismic Zone 3 to Zone 4 for purposes of meeting structural standards to withstand stronger earthquakes. A building built to Zone 3 standards before 1994, if rebuilt, would now have to meet Zone 4 standards. Other code changes have been implemented in the past five to ten years to make residential buildings more accessible to disabled individuals. Certainly many two or three-story, multi-family buildings were built just with stairs leading to the upper floors. If those buildings had to be rebuilt to current building codes, an elevator may be required. It is not difficult to imagine the effect such changes might have on the cost of rebuilding, especially if they are not covered under the insurance policy.
Typically code upgrade coverage is not included automatically in a fire and casualty policy. It usually involves an extra cost, and the association must ask for it. It is also important to realize that some insurance companies do not even offer code upgrade coverage as an option. Thus, you certainly should ask your insurance agent or broker whether your policy covers code upgrades or not. If the broker says that it does, ask for confirmation in writing including a citation to the exact section of the policy in which code upgrade coverage is found or a highlighted copy of the page(s) on which the code upgrade coverage is found. Certainly if your association policy does not include code upgrade coverage, it may be tens of thousands of dollars short of what it will really take to rebuild even one building. If you were to experience a major casualty in a very large building or one that were to cause significant damage to multiple buildings, the problem could be even more significant. Rather than run that risk, check the policy yourself to see if the wording about code upgrades appears in the section cited by the broker. Regardless of any written confirmation, and even if you received a highlighted copy of the policy language, it is certainly better to be skeptical and to double check to be sure you can find the language in the association’s copy of the policy. This is far better than to have to rely on a lawsuit against your agent or broker to obtain relief. Apart from the cost and inconvenience of litigation, you have to worry about whether your agent or broker has adequate errors and omissions insurance against a negligent misstatement. If your agent makes a mistake in citing the proper language from your policy, what are the chances that he or she will have enough errors and omissions insurance to cover your loss.
Assume that the carrier that insures your association does not even offer code upgrade coverage. Also assume that your insurance agent sells policies exclusively for that company. Under such circumstances, how likely is it that the agent will suggest that you may need code upgrade coverage for your property? Such a selfless act is almost guaranteed to cause a client to seek out a different carrier.
Brokers and carriers who deal regularly with associations know (or certainly should know), that most community association documents call for a master policy that provides coverage for the full insurable replacement cost of the buildings. If, due to intervening building code changes, it is now legally impossible to rebuild your buildings exactly the way they currently exist, can an agent tell you, in good conscience, that a policy provides for the full insurable replacement cost of your buildings, if it doesn’t contain code upgrade coverage? If an agent works for a company that cannot provide code upgrade coverage, or the company can offer code upgrade coverage, but the agent fails to suggest that you purchase it, has the agent been negligent if you later suffer a significant uncovered loss because you don’t have it? Again, the better course of action is to avoid the problem in the first place than to worry about how you will fix it after it occurs. As the old saying goes, “an ounce of prevention is worth a pound of cure.”
We trust this information will help you to avoid a costly error if your association is unfortunate enough to experience a major fire or other casualty loss.×
By: Jay W. Hansen, Esq.
Explains how both a former and current directors and officers (D&O) insurance carrier may deny coverage when a potential claim doesn’t materialize until after the association changes carriers. Because of this risk, associations and managers must be extremely careful any time a prospective or existing D&O carrier sends an application asking if the board knows of any actual or potential claims. This is a time for extreme caution, not haste.
Recently we have seen some cases in which carriers denied coverage under directors and officers (D&O) liability policies on what normally should have been covered claims. The carrier’s denials arise out of a “Catch-22″ that few people recognize. The nature of D&O insurance is such that associations actually can have D&O coverage in effect continuously from one carrier to the next and yet not have coverage when a claim arises. To avoid this outcome, it is essential (1) to tender a claim to the carrier whenever there is even a potential risk of a lawsuit and (2) to be extremely careful when completing an application for new insurance.
D&O insurance is almost always a “claims-made” policy. These policies, theoretically, cover any claim made during the policy period, sometimes even if the incident on which the claim is based occurred before the policy began. However, most D&O policies will not cover a claim, if the association knew of ANY facts or circumstances before the policy began that might give rise to that claim.
D&O insurance provides different coverage from the typical comprehensive general liability (or “CGL”) policy. CGL policies typically cover only those claims that result in bodily injury or property damage and sometimes non-bodily “personal injuries.” CGL policies are typically “occurrence” policies, so named because they protect the insured against claims arising from an “occurrence” during the policy period. They provide coverage even if a claim does not arise until after the policy period ends. It is fairly easy to identify an occurrence and when it occurred, because it usually produces bodily injury or property damage at that time. D&O insurance, on the other hand, usually covers only those claims made during the policy period. With a D&O incident, it is often easier to identify when the claim is made than when the occurrence happened that gave rise to the claim.
Some claims-made policies will cover claims that are made during the policy period even if the occurrence giving rise to the claim occurred prior to the start of the policy period. The catch is that a new carrier will accept such claims only if the insured party had no prior knowledge, when the policy period began, of any facts or circumstances giving rise to that particular claim.
What exactly is a “claim?” Certainly a lawsuit is a claim under any policy, but some policies define a claim as any written threat or demand or even a verbal threat or demand. Whatever the definition, it is easy to understand that no carrier wants to cover a lawsuit that arises out of any facts or circumstances about which the association was aware before the policy began. Many carriers will cover it, if neither the carrier nor the association knew it existed at policy inception, but no carrier will cover what amounts to a known pre-existing liability.
What if facts or circumstances have occurred, but they don’t yet meet the policy definition of a “claim?” Maybe there was a verbal threat, but the policy defines a claim as a written threat. Some claims-made policies consider that a claim was made, if the insured party notifies the carrier during the policy period of the facts that may become a claim. Even if the policy does not provide for notifying the carrier of a potential claim, it is still wise to do so before the policy period ends. If the incident becomes a real claim after the policy period ends, the earlier notice may be enough to trigger coverage, but it will be impossible, if the former carrier’s first notice occurs after the policy ended, because the claim wasn’t made during the policy period, and the carrier will deny coverage.
This is how an association can lose coverage. Assume one owner objects verbally when the association approves a neighbor’s architectural modification. The complaining owner sends no written complaint or anything that the policy defines as a “claim.” Then, things calm down for a period of months, and the association either concludes that the complaint is minor or believes it resolved the problem. The association doesn’t notify the current D&O carrier of the owner’s complaint.
Three months later the association selects a new D&O carrier. The carrier sends an application to the manager to complete, or maybe the broker asks the association board or manager if there are any pending claims, completes the application, and the board or manager signs it. The signed application states that the association has no pending claims nor any knowledge of any facts or circumstances that may give rise to a claim. The board may have forgotten the prior threat, or the board may have changed, and the new board doesn’t know of the prior complaint. Either way, the old D&O carrier got no notice of the potential claim, and the new carrier is told that there are no potential claims.
The new D&O policy takes effect, and the complaining owner surfaces with written threats or litigation. The association tenders the claim to both the old and the new D&O carrier. The prior D&O carrier denies the claim, because it wasn’t made during the policy period. The new D&O carrier denies coverage, either because the association failed to disclose the potential claim on the application, or because the new policy states it will not cover a claim, if the association knew of any prior facts or circumstances that might give rise to a claim.
Addresses what associations should do to avoid having both the old and new carrier deny coverage. Part 2 also discusses being alert to “burning balance” policies, in which the coverage limit available to pay claims is reduced by the amounts expended in defense costs.
Before completing it, the board and manager should review the events of the past year or longer for any incidents or complaints that may become a lawsuit or other claim against the association. New directors should review the correspondence of the past year and ask any employees, the manager and legal counsel if they are aware of any incidents that might give rise to a future lawsuit or other claims. If such incidents exist, the prudent course of action is to notify the current carrier of the potential claims before the policy ends, or at the very latest, before the end of any grace period provided in the policy. Also give notice of any claim or potential claim to the proper party, at the address and in the manner called for in the policy, keep a copy, ask for an acknowledgment and follow up.
The safest course of action for providing notice in the manner required by the policy is to provide the actual policy to the association’s attorney with any information on the potential claims or claims, then ask the attorney to give notice to the carrier. While many insurance policies require that notice be sent to the carrier by certified mail, return receipt requested, this is advisable even if the policy does not require it, as the returned receipt may be the only proof the association may have that it mailed timely notice. If the association finds that it is really up against a deadline, use a fax that provides a confirmation sheet or even email, if you can find an email address for sending the notice. At least try to speak with someone at the claims department of the company, and use the person’s name in any notice of a claim you send to the company. While some carriers allow claims to be submitted through the agents, many times the policy provides that the carrier has not received notice until it is actually received by some employee of the insurance company. If you are anywhere close to a deadline, do not assume that notice to your insurance agent is the same as notice to the carrier.
It is essential that all boards treat the applications for new insurance and changes in D&O carriers with seriousness and great care. The failure to do so can result in paying for uninterrupted coverage and yet being denied coverage when it is needed.
How to end up with less coverage than what might be expected
A second issue that is often overlooked both in D&O and general liability policies is what is sometimes called a”burning balance.” Each association should know if defense costs are part of or paid in addition to the coverage limits. The former is what is called a “burning balance,” because the carrier will deduct any attorneys’ fees and costs incurred to defend a claim from the limits of liability. In other words, under a burning balance policy, the amount available to pay the claims or to settle the case is reduced by every dollar spent in defense. For example, if an association has a $1,000,000 policy, and a large potential claim (or perhaps multiple claims that could be significant in one policy period), and if the association expended $150,000 in defending the claim or claims, it would have only $850,000 left to pay any and all judgments or settlements during that policy period.
If an association is evaluating insurance policies, it needs to be aware that two policies that are identically priced and identical in every respect except for the burning balance are not a comparable value, since the burning balance policy presumably will have less available to pay claims. So, if an association purchases a burning balance policy, it should seriously consider increasing its limits of liability to be sure that there will be enough coverage to pay out any claims that it may encounter.
Also recognize that the limits of liability are the maximum that the carrier will pay in any policy period. So if an association has a $1,000,000 policy and incurs a $300,000 claim early in the policy period, there will be only $700,000 left to pay all other claims that may occur for the remainder of that policy period. Fortunately, major liability claims are rare. However, if an association were to experience a large claim, or multiple injuries or claims arising out of the same incident in any given year, a burning balance could have a serious impact on the association’s ability to defend and pay liability claims.
Associations should evaluate their current policies for “burning balance” provisions and anytime they are comparing policies prior to a possible change in coverage.
Additional Insurance Information Available
For greater details about the issues to consider when evaluating insurance policies, please contact our office.
What is a mechanic’s lien? In essence, a mechanic’s lien is a claim against the title of your property that, if unpaid, permits a foreclosure action. The foreclosure action forces the sale of the property in order to satisfy the claim. The mechanic’s lien is recorded with the County Recorder’s office, usually by an unpaid contractor, subcontractor or supplier (and others). Frequently, a mechanic’s lien occurs when a property owner, including a community association, has not paid the general contractor, or the general contractor has not paid its subcontractors or suppliers. Mechanic’s liens are drawing quite a bit of attention lately due to significant changes in the law.
The mechanic’s lien in the state of California is derived from the California Constitution. Article XIV, § 3, of the California Constitution states that “mechanics, materialmen, artisans, and laborers of every class shall have a lien upon the property upon which they have bestowed labor or furnished materials, for the value of such materials, for the value of such labor done and materials furnished; and the Legislature shall provide, by law, for the speedy and efficient enforcement of such liens.”
Pursuant to the California Constitution, the Legislature is responsible for enacting the procedure for enforcing mechanic’s lien rights. Historically, the lien procedures have been set forth in California Civil Code (“Civ. Code”) §§ 3082-3154, 3258-3268. In 2010, the Legislature passed Senate Bill 189, and enacted two sets of revisions to the California mechanic’s lien law. One limited set of revisions became effective January 1, 2011, and a second significant set of revisions became effective July 1, 2012. This article will only address a select few of the many changes made by these enactments.
Before January 1, 2011, no specific law required a lien claimant to serve the owner or reputed owner with the mechanic’s lien. Civ. Code § 8416 now requires that each lien claimant serve the owner or reputed owner with the mechanic’s lien and the Notice of Mechanic’s Lien before the lien is recorded, as further described therein. Failure to serve the mechanic’s lien, including the Notice of Mechanic’s Lien, as prescribed shall cause the mechanic’s lien to be unenforceable as a matter of law.
Before January 1, 2011, a lien claimant also had the discretion to record a lis pendens (a notice of pending litigation) with the filing of its lien foreclosure action. Civ. Code § 8461 now requires the lien claimant to record a lis pendens to be able to enforce the lien against purchasers or encumbrancers who acquire their interests after the lien is recorded. The lis pendens should be recorded on the same day the complaint is filed, but Civ. Code § 8461 allows the lis pendens to be recorded within 20 days of filing suit.
Perhaps the most noteworthy change under the set of revisions that became effective on July 1, 2012, is the recodification of the entire statutory framework governing the California mechanic’s lien law. This law is no longer found in Civ. Code §§ 3082-3154, 3258-3268. Instead, it has been recodified in Civ. Code §§ 8000-9566.
This set of revisions also includes numerous substantive and technical changes. Among the most interesting changes are those involving terminology, the division of works of improvement into three distinct categories, the forms used for preliminary notice and waiver and releases, the decrease in the amount of lien release bonds, and the elimination of the $2,000 cap on attorneys’ fees for the prevailing party on a lien release petition.
Terminology changes include, but are not limited to, the following: the term “original contractor” under Civ. Code § 3095 is now “direct contractor” under Civ. Code § 8018, the term “materialmen” under Civ. Code § 3090 is now “material supplier” under Civ. Code 8028, the term “20-Day preliminary notice” under Civ. Code §§ 3097, 3098 is now “preliminary notice” under Civ. Code § 8034, and the term “stop notice” under Civ. Code § 3103 is now “stop payment notice” under Civ. Code § 8044.
In addition, works of improvement are now separated into three different categories: Works of Improvements Generally (Civ. Code §§ 8000-8154), Private Works of Improvement (Civ. Code §§8160-8848), and Public Works of Improvement (Civ. Code §§ 9000-9566). The forms required for providing preliminary notice are different for private works of improvement under Civ. Code § 8200 and public works of improvement under Civ. Code § 9300, and direct contractors are also required to now provide preliminary notices.
Further, there are new mandatory waiver and release forms for conditional and unconditional progress and final payments under Civ. Code §§ 8132, 8134, 8136, 8138. Also, the amount of a lien release bond has been reduced from 150% to 125% of the lien amount under Civ. Code § 8424, and the $2,000 cap on attorneys’ fees on a petition for a release order is now eliminated and the prevailing party is entitled to its reasonable attorneys’ fees under Civ. Code § 8488(c).
These are but a few of the many changes to the California mechanic’s lien law that went into effect on July 1, 2012. If you have any questions about how this new statutory scheme will impact your community association or ongoing business concerns, please do not hesitate to contact us.×
In late 2012, the California Building Code was amended, effective immediately, altering the sign requirements for pools. Various Departments of Health have failed to give clear and concise guidance on when these signs must be updated and/or added. It appears that enforcement may vary county by county. The conservative approach is to change your signs. If a community association does not update its signs, it will likely be asked to update them at the next inspection or receive a fine depending on the county. Below, you will find a partial list of the signage currently required by law. Each sign listed below is accompanied by the relevant Building Code section. Please review the list and make sure your pool facilities have each of the following signs!
This list is not exhaustive, it merely highlights certain changes.Contact your local licensed and insured pool contractor for more information.
 The new pool sign regulations in the California Building Code (Title 24) were adopted by the California Department of Public Health (CDPH) effective September 1, 2012, and are numbered beginning with Section 3120B.1. See the following CDPH web page for links to the final regulations, including additional sign requirements:
By: Jay W. Hansen, Esq.
Almost every year since I moved to California in 1985, I have heard of some association that learned that it has been paying water bills for water meters that serve other properties, or conversely, that one association learned that a second association has been paying water bills for meters that have been irrigating the property of the first. When this occurs, the accusations begin to fly from the current board to prior boards, from the association to its developer, from the association to one or more prior management companies, from the current management company to the prior management company, and so on.
The fact is that most association boards and their managers assume that, if they are getting a water bill, it is for water they have used. When the mistake is discovered, many times it is a mistake that has continued undetected for years, and in some cases, for a decade or more. While there is probably some recourse for recovering money that was paid on someone else’s behalf, there is probably not much chance for recovering more than the payments made over the last two because of the applicable statutes of limitations. There is obviously no written agreement between the parties, or the mistake would not have occurred. Thus the four year statute of limitations will not apply. Unless there is some provable fraud by the party obtaining the “free” water, most likely the statute of limitations will be two years. (See Code of Civil Procedure section 339 regarding obligations or liabilities not founded upon an instrument in writing.) Also, because there is no written agreement between the parties, there can be no attorney’s fees clause, and thus any legal fees expended in the dispute will reduce the ultimate recovery and increase the chances that any settlement will be for less than what has been paid unknowingly by the injured party.
Many of these problems date back to when the association was first formed. The same developer may have built several adjoining properties, or adjoining properties may have been built by different developers around the same time. The associations may have been managed by the same management company, even if the developers were different. For whatever reason, including a mistake by the applicable city water department or water district, the wrong party gets the bill and pays it. From that point on, all future bills are addressed to the wrong party and paid month after month, year in and year out.
How can you determine if this is happening in your association? First, you need to start with each water bill that you pay. The water bill will either have a meter number on it or an account number from which you can obtain the meter number from the local water district. You need to identify the meter number for each such water meter and match that up with the meter number in the field. If you have difficulty determining where the water meters are located that do match up with your bill, the water district should be able to tell you approximately where they are located, since their meter readers need to find all of them to prepare the bills.
Once you have identified the water meters, you also need to know what the water meter supplies. In some cases, we have found water meters that connect to the irrigation systems of two different associations. This may happen if a developer originally plans one development and later decides to create two or more associations over the property originally planned for one association. The developer may form the additional association or associations but forgets that the water meter is irrigating several slopes now encompassing slopes in more than one association. Of course you can also work backwards, starting with the water meters you know serve your association and then seeking to match them up with the right water bills.
However you check on the meters, you really want to make sure that you are not paying for anyone else’s water and that someone else is not paying for yours. While you may have gotten a “free ride” for some time, sooner or later it will be discovered. Also, once you know that you are obtaining water that someone else is paying for, if you continue, the act then becomes a knowing taking of someone else’s water which may provide sufficient intent to constitute a criminal misdemeanor for theft of utility service under Penal Code section 498.
Since these problems continue to surface on a regular basis, there are obviously associations that have never verified that they are paying just their own water bills, or paying the water bills for all the meters that serve their respective associations. Thus, it is a good idea to prepare a map showing the location of each water meter and the areas that it serves. The map showing the location of the meters and what they serve should be given to the association’s landscape and plumbing contractors so that the water meters can be located to shut off the appropriate valve anytime there is an emergency, such as a burst pipe. It is then critical to correlate each meter on the map with a serial number and water bill account number, to be sure that the association is not paying for too many or too few water meters. It is certainly advisable for any newly-formed association to check on all water meters and to make sure that all the information is accurate by the time the association is fully built out. Also, when an association changes management, it is advisable for the new manager to verify this information early in the manager’s tenure. Once the information is verified, it should be kept in a safe place and passed from one board to the next along with other important records.×