Condo Law in California

QUESTION: Can a condo association charge visitors to park on the common area? We only have 26 guest parking spots. Yet, we turn about 125 visitors a day and have daily arguments about parking availability.

ANSWER: The association manages guest parking for the benefit of the membership. If the demand is greater than the supply of spaces, charging for parking will help reduce demand to a manageable level and provide income to the association. It is no different than cities installing parking meters. So, yes, you can charge for guest parking. Implementation may be a problem; let me know how you handle that issue.

PARKING HOGS

QUESTION: Some residents hog the guest parking to the point where enforcement has become a full-time job. The board is tired and inquired if HOA owned guest parking spaces could be rented on a long-term basis to individual unit owners.

ANSWER: For most associations, guest parking is quite limited. Renting the spaces to owners only makes it worse. In my opinion, boards cannot take away parking meant for all owners and give it to a few owners. You can deter parking hogs with increasing fines (as provided for in your fine schedule), suspension of parking privileges, and towing (provided you have proper signage).

SUSPEND RENTER’S CABLE TV

QUESTION: Our association has a bulk account with Comcast. We have owners who are thousands of dollars behind in their dues. If a deadbeat owner has his unit rented, can we disconnect the tenant’s cable TV?

ANSWER: Yes, you can suspend the tenant’s services. The tenant may be paying rent to the owner and expecting full service, but he is not entitled to those services if the owner is delinquent. If the tenant is unhappy about his loss of cable TV, he can take it up with the owner.

SUSPEND MEETING ATTENDANCE?

QUESTION: There is a homeowner who owes the association money for cumulative fines. This particular homeowner now comes to the monthly meetings and is a real pain. I don’t believe any homeowner who has outstanding fines should be allowed to attend association meetings. Should this not be a privilege that is taken away like that of association amenities?

ANSWER: The Open Meeting Act (Civ. Code §1363.05) states that “Any member of the association may attend meetings of the board of directors of the association . . .†Since the statute says “any member†rather than “any member in good standing†I don’t believe you can exclude delinquent owners from your meetings. You can suspend their voting rights and their common area privileges but not their right to attend meetings.

READER COMMENTS

#1. I like your solution for [bidding] small projects. A knowledgeable manager should be able to make a recommendation after evaluating the proposals, which should include allowing the original bidders to resubmit based on a final spec. By the way, boards and managers should make it a policy and make it clear to bidder that they will not “bid shop.” That is a sure way to turn a contractor against the association and refuse to bid in the future.

A long time ago a wise board member taught me that bidding everything is not necessarily the right course. When you find a contractor that is honest, knowledgeable, and has a good work ethic, you should try to work with him on a regular basis. This is particularly helpful with plumbing. Also, you forgot to mention that architects and engineers are usually better spec writers than construction managers. -Mike G.

#2. Great information on trees and contract specifications. When on our Board I always used the two books used by county, city, state and special districts to write the specifications for items such as concrete work, asphalt repairs and asphalt sealing etc. All contractors are familiar with the Blue Book and the Green Book of Construction specifications and are always willing to bid using those specifications. These books are also what the code enforcement people and building inspectors use. -Bill S.

QUESTION: Our board is removing 20 to 30 large trees from the common areas in our complex. There is quite an uproar about it. Can the membership vote to override the board’s vote?

ANSWER: I’ve had associations where owners ran out and chained themselves to trees. While I applaud the protection of nature, sometimes removing trees is the right course of action.

Developer Trees. When developers create a new project, they overplant the property to make it attractive to buyers. Those trees eventually grow up. When they do, their roots invade sewers, lift sidewalks, crack building foundations, and drop leaves that clog gutters and drains. They can also create excessive shade, which leads to high humidity and mold.

Potential Litigation. In addition to large maintenance expenses, there is the risk of litigation related to (i) property damage from backups caused by root infested sewer lines, (ii) mold damage and personal injury claims, and (iii) slips and falls from lifted sidewalks–including public sidewalks surrounding your development.

In Alpert v. Villa Romano Homeowners Assn., a woman suffered injuries when she tripped over a portion of the city’s sidewalk that had been raised by tree roots. The offending roots came from one of the association’s trees. The association had known of the sidewalk’s condition and had taken no action to warn pedestrians of the dangerous condition or to repair it. The trial court found in favor of the association. On appeal the decision was reversed. The Court of Appeal noted that under Civil Code §1714, persons (including associations) are responsible for injury to others occasioned by their want of ordinary care or skill in the management of their property.

Can Members Override the Board? Members do not have the power to override the board’s decision. As with civil governments, a member’s voting rights are limited. If the membership is truly unhappy with a board’s decision, it ultimately has the power to recall the board and elect directors who agree with their desire to keep all the trees. Even so, once new directors are seated, they immediately become fiduciaries. This imposes a legal obligation on directors to act in the best interests of the association. Sometimes that means making decisions that are not popular–such as removing trees.

RECOMMENDATION: From time to time boards need to remove trees to protect sewers, sidewalks and foundations, and minimize potential litigation. It is cheaper to reduce the number of trees than to constantly repair damaged infrastructure and defend against lawsuits. Members should not have a knee-jerk reaction against tree removal. They should work with the board to find the right balance of trees in the development–both the kind and number of trees, as well as their placement. Another solution that can be investigated is the installation of root barriers. They offer some protection against damage to sidewalks but not against invasion of sewer systems.

PERFORMANCE BONDS

QUESTION: Just wondering what is your opinion regarding a board fulfilling its responsibility for the completion of a contract ($150,000). How important is a performance bond? If the applicant does not qualify, how would you advise that HOA to proceed?

ANSWER: Performance bonds are discretionary. Your board must make a business decision as to whether it needs one or not, since the cost is borne by the association. If you have concerns about a contractor’s ability to complete the project, you should purchase the bond. However, if a contractor does not qualify for a bond, you should consider using a different contractor. For more information see surety bonds.

MANAGEMENT COMPANY
BIDDING AND OVERSIGHT

QUESTION: As a board, what can we do if the management company refuses to write specifications when bidding out contracts?

ANSWER: You need to review the management company’s contract to see what services it offers for the fee it’s being paid. Writing bid specs is not necessarily a management company service. It may be an extra under the management agreement, i.e., it can be done for an hourly fee–in concert with consultants who are versed in roofing, painting, etc.

Bid Specs. Normally, managers are not experts in construction. They don’t necessarily know what roof is best for your property. Should you have a three-ply hot tar built-up roofing system or single-ply bitumen? They don’t know which paint is best for your property or how many layers should be applied or the mil thickness. Should the paint on the stucco be the same as the wood trim? Should it be brushed or sprayed? Water based or oil?

Sometimes an experienced manager can help define the scope of work and administer the project from conception to completion. However it’s unfair to put that burden on your manager without paying for it. It usually comes down to money—boards don’t want to spend any, and management companies don’t work for free.

Small Projects. For small projects, you might invite contractors to review the work and then prepare and bid their own specs. If the specs proposed by the bidders are similar, you pick the best price and have the work done. If the specs are wildly different, you need to have each bidder explain the pros and cons of their particular approach to the project. The board can then pick one set of specs and go back out for a second round of bidding on those specs. The management company can lend a hand by contacting various contractors and asking them to bid.

Construction Managers. For large projects, you may need to hire a construction manager to define the scope of work, prepare specifications, oversee the bidding, make recommendations to the board, and then either manage the project or simply report to the board on the progress of the project. Construction managers who specialize in condominium associations can be found in our Service Directory.

QUESTION: We have a number of owners who are defaulting on their mortgages and not paying their HOA fees. Can we disconnect their gas, water & electricity? Can we disconnect their Cable TV? Laundry is coin operated through a vendor, but can we ban them from using the laundry rooms? We have outdoor areas and gardens. Can we ban them from sitting in the gardens or walking through those areas and parking lots? Can me ban them from using the elevators and require them to use the stairs? Can we prohibit them from going through the main lobbies and only use the freight entrances and back doors? Just how far can we go to make it uncomfortable for them and get these deadbeats to pay up or sell their units so the rest of us don’t have to have a dues increase to fund their non-payments. It’s getting bad and more owners are defaulting every month.

ANSWER: I know the defaults are getting bad, but not everyone is a deadbeat who deserves to be painted with a scarlet letter and paraded through the courtyard. Many owners are decent people going through tough economic times. Can you suspend privileges? Yes, provided your governing documents allow it, and you follow due process. In addition to suspending an owner’s right to vote, you can suspend some, but not all, services. Following are the ones you listed:

Utilities. The courts treat associations as landlords when it comes to utilities. Under landlord-tenant law, landlords may not interfere with or terminate utility services (gas, electricity, heat, etc.).

Cable TV. Suspension of cable services can be quite effective. If your association has a bulk contract with the cable company, you can suspend services. In one case, an owner had a Super Bowl party planned for the weekend. When his cable was disconnected, he paid his entire delinquent account (thousands) in cash, in a matter of hours.

Laundry. If laundry machines are paid through owners’ dues, the service can be suspended. If they are coin operated, it cannot.

Elevators. If you make elderly or medically challenged owners and gests walk up stairwells and they have a heart attack, you’re going to get sued. Moreover, elevators have been classified in landlord-tenant law as a utility. That means you cannot cut elevator service to owners and their guests. However, I believe you can require that furniture deliveries and other deliveries use the stairs. Not everyone agrees with me on this point.

Main Lobbies. No, you cannot bar owners and guests from walking through the lobby. Owners have the right of ingress and egress. Except as provided by an order of the court, associations may not deny owners or occupants access to their separate interests by restricting access through the common areas. Civil Code §1361.5

Gardens. Can you prevent delinquent owners from walking through the gardens? I suppose, but really, who is going to enforce it? That’s a bit much.

Other. The list of privileges that can be suspended will depend on the privileges being offered by the association.

READER COMMENTS

Comment #1 Re HOA foreclosing on a bank for delinquent dues–even in a depressed market, it could be a great windfall for an HOA–the bank won’t know what hit it when it’s foreclosed on because the right hand doesn’t know what the left hand is doing and, they may be happy to have the REO off their books even at a loss. But, the HOA would acquire the unit (more likely than not) free and clear of any loans, so whatever it’s sold for, it’s clean money for the HOA!!! Nice chunk of cash to put in the reserves. You gotta love it.  -Stephany Y.

Comment #2: While there are sophisticated trading, hedging and investment strategies employed by institutional and “ancient:” traders who like myself have been around since the 1980’s, to profit from markets such as we have seen here since last year takes minute by minute diligence, foresight and experience. Can profits be made today, absolutely. Do I agree with Adrian and hundreds of other attorneys and CPAs? yes, emphatically. Your average HOA Board is not willing to hire the “experts” nor pay the high price associated with a seasoned investment advisor or trader, but they are willing to pay 20-30% to recover money from a construction defect suit. In addition, most “brokers” in business today will not take the time, trouble or risk connected with employing this type of strategy. It takes every minute of every market day to employ such techniques successfully. Most would rather put you into a mutual fund or so-called managed account. Managed accounts are also down considerably since last year, which just goes to show you, Adrian was right. Err on the side of conservancy, unless you are willing to pay the freight. -Nico F. March, Senior Vice President, Investments, The March Group of Wachovia Securities.

Comment #3: Another reason that HOA funds should not be invested in the stock market is because only long-term money should be in the market. Funds that may be needed in an emergency or that are for maintenance with a specific due date are not appropriate for risk investments. -Al P.

WINE & HORS D’OEUVRES

QUESTION: Our Board meets at 6:00 p.m. in the Manager’s apartment. The Manager has recently started to serve wine and hors d’oeuvres prior to and throughout the meeting. As a shareholder in a million dollar corporation I do not feel this is appropriate. I would appreciate your opinion.

ANSWER: The practice is not illegal but it could present potential problems. If the directors drink excessively, their judgment will be impaired when it comes to making decisions for the association. If they injure themselves in a trip and fall on the way back to their units, you will have insurance claims. However, if their drinking is light–one glass of wine, then it may be harmless.

DELINQUENT DIRECTORS

QUESTION: Can board members who are in violation of the rules, have fines and/or suspended privileges, and are behind in assessment payments be sanctioned and banned from board activities until such time they come into compliance?

ANSWER: Elected directors who are not in good standing because of rules violations and delinquencies can be censured for the bad example they set for the community but they cannot be banned from attending meetings and voting. However, they can be removed from the board by fellow directors if your bylaws allow for it. You may need to amend your bylaws to add director qualifications to provide for this. If your bylaws are deficient in this area, directors not in good standing can always be removed by the membership. However, if you have cumulative voting, that will be a challenge. If you amend your bylaws to add directory qualifications, you should remove cumulative voting at the same time.

NEW LAWS SIGNED BY GOVERNOR

The Governor signed four new bills related to associations which will take effect on January 1, 2009 concerning solar energy, certain disputes between owners and associations and foreclosures. To find out more about these new laws, as well as the six bills passed by the legislature but vetoed by the Governor–read the latest entry in Gary Kessler’s Condo Court blog.

QUESTION: While it appears most large nonprofit charities, universities, foundations, and pension plans all use some sort of balanced portfolio investing policy to earn higher than CD interest rates, and often higher than market average incomes, all attorneys and CPAs seem to advise against this proven strategy. Why are you and others not advising condo boards to recognize the risks of all investments, set a written plan to deal with them, and hire appropriate advisors to manage them?

ANSWER: Attorneys and CPAs recommend conservative investment strategies because directors will not get sued for giving up potential investment gains but they can get sued over losing principal. A small unrealized gain has very little consequence. A special assessment to replace funds squandered by the board is another matter entirely. It will significantly impact cash-strapped members, who will demand that directors personally pay for the lost funds. The next story is a good example.

INVESTING
IN THE STOCK MARKET

A homeowners association in Northern California recently received millions from a construction defect claim. The board paid a fellow director $75,000 to manage the funds. In addition, he was allowed to receive commissions and trading fees on the funds.

Conflict of Interest. The director did not resign from the board–he continued as a board member and voted on matters directly affecting his control of the funds. Because he financially benefitted from the use, management and spending of the settlement monies, his votes ceased to be arm’s length. This created a glaring conflict of interest.

Accountability. Another problem with the arrangement was the director’s unwillingness to follow the board’s instructions. While an independent, third party financial manager will follow instructions (or face liability and loss of business), benefitted directors often do not feel such constraints. They sometimes think they are the smartest person in the room. Moreover, benefited directors feel it is “their” money and will act outside the scope of their authority both as a director and a money manager. That occurred in this case.

Large Losses. Without board approval, the director invested $3 million in the stock market. His investments resulted in losses of $400,000 before the board took control of the situation.

RECOMMENDATION: First, boards should NEVER pay fellow directors to manage their association’s money; they should use outside professionals. Second, boards should NOT invest in the stock market–they court disaster when they do.

FDIC LIMITS INCREASED

On Friday, President Bush signed into law the Emergency Economic Stabilization Act.

The benefit to homeowners associations is a provision raising FDIC insurance from $100,000 per depositor to $250,000. This means boards can purchase jumbo CDs up to that amount without fear of losing principal if the bank becomes insolvent.

PRIVATE BANK INSURANCE

If an association’s governing documents do not require FDIC insured investments, boards should still make certain the association’s monies are insured. Some banks carry private insurance to cover deposits, including deposits that exceed FDIC limits. One program (www.bancinsure.com) will issue an insurance policy in the association’s name. If the bank fails, the deposit is covered by the insurance. If boards elect to use non-FDIC insured accounts, they should have the insurance reviewed by legal counsel to make sure there are no loopholes in the policy.

FORECLOSING ON BANKS

QUESTION: I’ve been hearing that HOAs are taking a hit when banks take over properties but do not pay their monthly dues.

ANSWER: Yes, it’s a problem for associations in areas suffering from high foreclosure rates. Some banks foreclose and then do nothing to pay their monthly assessments. This increases the burden on other owners who are forced to pay special assessments and/or higher dues to cover the lost income. When a bank forecloses, boards should immediately contact the bank, find out who is in charge of paying the association’s dues, and make sure that monthly statements are sent to that person. Otherwise, the billing statements will get lost in the bank’s bureaucracy. If the bank becomes delinquent, boards should immediately lien the property. When the dues reach $1,800 or one year, boards should promptly initiate foreclosure proceedings against the bank.

HALLOWEEN

QUESTION: Our community is gated. Traditionally, Halloween was practiced by allowing the gates to be opened during Halloween evening. Most new residents are opposed to opening our gates to the public since our governing documents dictate privacy 365 days of the year. Is there any case law regarding opening up a community to Halloween celebrants?

ANSWER: I’m not aware of any law on this issue. If your CC&Rs actually dictate that the gates never be opened to the public, then you need to follow your CC&Rs. If they are silent, then it’s up to your board of directors, weighing celebration of the holiday against the security concerns of your members. The board should consider surveying the membership for input.