Condo Law in California

Just loved your condo fire story. It was not until my neighbor’s home burned down that I learned about fires. A fireman told me that you have only about four minutes to get out once a fire starts. The fire next door started from a bad surge protector. The neighbor told me she woke up to the sound of the fire alarm. She went into the hallway from her bedroom and saw smoke coming from the adjacent bedroom.

She saw six-foot long sparks arcing out of the surge protector which caught the drywall on fire. She put her robe on, got her two dogs and one cat out. The house was too much on fire to get anything else. That was about four minutes. There she stood outside in her robe and slippers as six fire trucks battled the blaze. Her home was a total loss. That day I went out and bought all new surge protectors.

The following website will help consumers find all kinds of items that have been recalled: www.cpsc.gov. -DeeDee G.

DRYER VENT FIRES

The following was submitted by Rose Coughlin, owner of Focused Resources, specializing in environmental health & safety compliance.

The biggest accidents waiting to happen are clothes dryers. The combination of heat, natural gas, lint and the potential for static electricity for the ignition source are all found in dryers. Here are the problems I have observed over the years: • Lint traps are not cleaned, especially by renters. • Walking out of the condo leaving the dryer unattended. • Improperly ventilated dryer enclosures.

HOAs should publish warnings requesting that lint traps be cleaned after every drying event and that no dryer should be left unattended. In addition, HOAs should have regular inspections and violations should be written up. Finally, a fire extinguisher should be placed within proximity of the dryer.

POOL SAFETY

QUESTION: Our gated homeowners association has a fenced pool that needs a key to get into. Our CC&Rs state that anyone 14 or younger must be accompanied by a homeowner. Would we need to comply with the new pool safety act?

ANSWER: I don’t think you can rely on your rules to protect you–children don’t always follow rules. In addition, older people as well as children can drown if caught in pool suctions. I recommend installing the federally mandated safety equipment—it’s a lot less expensive than drownings, statutory fines, and litigation. The deadline for compliance is December 19, 2008.

QUESTION: The board wants to publish the names of delinquent owners in our newsletter. First is this legal and two is it a good idea?

ANSWER: Associations cannot publish the names of owners where the board voted to foreclosure on their units. Civil Code §1367.4(c)(2) However, there is nothing that prohibits publishing the names of delinquent owners. For guidance on this issue we can turn to the State, which routinely publishes the names of delinquent taxpayers. We can look to its procedures because courts have already noted the quasi-governmental nature of homeowners associations and analogized assessments to taxes. Chantiles v. Lake Forest II

California’s Procedures. According to the state’s website: California mails each person on its list a certified letter providing the person an opportunity to pay their taxes before the list is published. To avoid being published, taxpayers must do one of the following: (i) pay the liability in full, (ii) establish an installment agreement, (iii) enter into an offer in compromise, or (iv) substantiate a bankruptcy filing.

Association’s Procedures. If an association wants to publish the names of delinquent owners, I recommend the following:

1. Amend the governing documents to include publishing names as one of its collection policies.

2. Amend its collection policy to include sending a certified letter, return receipt requested, to the owner giving him/her an opportunity to pay before the list is published.

3. Distribute or mail the list to members only (not renters). Do not post the list in the common areas where visitors can see it.

4. Title the list “Delinquent Owners.” Do not characterize owners as “Deadbeats of the Month” or any other pejorative term, and do not state whether foreclosure has commenced against their units.

5. Include a disclaimer such as: “This information was last updated on <date>. Payments made after <date> are not reflected.”

6. Be consistent in publishing names (perhaps quarterly) and be even-handed by publishing all names (unless they have paid in full, worked out payment plan, or declared bankruptcy).

RECOMMENDATION. In my opinion, the above procedures are reasonable. However, in our litigious society, there is no guarantee a disgruntled owner won’t claim defamation. Also, there is an unresolved question about whether publication would trigger the Fair Debt Collection Practices Act. Not everyone is going to agree with my analysis so boards should seek and follow the advice of their association’s legal counsel on this issue.

READER COMMENT REGARDING
DEFERRED RESERVE CONTRIBUTIONS

Deferment of current obligations to future generations is a time honored American tradition, hence our national debt and social security system. However, HOAs should take great caution in deferring Reserves contributions. Depleting the fund every time there is a potential cash shortage may deprive current and future owners of important options. HOA Board Members should only reduce or eliminate Reserve funding when there is no other alternative.

Many attorneys, accountants and reserve analysts consider deferral of reserve payments as borrowing from reserves, which, of course, requires approval at an open meeting. Additionally, such a change in reserve funding will typically result in deferral of selected repairs/replacements, which also requires disclosure to the membership. Prudent management would also include these steps prior to implementing any significant changes to the reserve funding plan. Scott Clements, CMI Reserve Studies Inc.

QUESTION: Certain members of the board are too nosey. They ask new residents where they work and what they do, how much money they make. How much did they pay for their European vehicle? They watch everyone’s comings and goings and relate this information to other occupants of the building. I personally feel this invades and violates the right to privacy.

ANSWER: Those same directors would probably be just as nosey if they were not on the board. Members can politely decline to answer their questions.

READER COMMENTS
MID-YEAR BUDGET INCREASES

#1. Thank you again for a supportive position on mid-year budget adjustments. As a practitioner and trainer of managers, I have always interpreted the Civil Code to be exactly as you have stated in your newsletter. We use the mantra to reticent boards, to “send, then amend,” meaning publish timely to preserve their authority to amend the budget with 30 days notice any time during the year, of course you lose the elapsed months. Sometimes getting the board to adopts a truly “sufficient budget” in today’s economy may take time beyond the publication deadlines! -Lisa Esposito, Chief Operating Officer Massingham & Associates Management, Inc.

#2. Some newer CC&Rs have a provision that states that the board can approve mid-year increases if the budget is insufficient. Managers and board members should check their CC&Rs first, and if they are considering restating their CC&Rs they should add that provision. For those HOAs that do not have it in their CC&Rs, we attempt to strengthen the HOA’s position by putting a disclosure in our budget packet that says that the board reserves the right to do a mid-year increase if the approved budget is insufficient to meet expenses and reserve transfers. -Sue Nelson, Horizon Management Company

REDUCING RESERVE
CONTRIBUTIONS

QUESTION: Due to the current economic situation, associations are not collecting adequate assessments to cover their operating expenses. To cover the expenses, it would seem prudent to fund reserves at a less amount or fund at zero percent until the association becomes solvent. Is it possible to reduce or eliminate reserve allocations? If so is it possible to make the change mid year?

ANSWER: Yes to all three questions: (i) in the current economic climate it is prudent to reduce expenses wherever possible; (ii) associations can reduce reserve allocations; and (iii) reductions can be done mid-year. Notice of the changed reserve funding plan must be given to the membership. Also keep in mind that large-ticket reserve components will still need repair/replacement and if reserve monies are not available, special assessments will result.

DOES LAWSUIT
REQUIRE RESIGNATION?

QUESTION: Our president is named as a defendant in a suit by a homeowner for breach of fiduciary duty. Should the president resign temporarily as a matter of ethical conduct until the suit is settled? Should he recuse himself from all voting or what, if anything, is required in the law under such circumstances?

ANSWER: There is a presumption of innocence in the American legal system. Being sued by an owner does not disqualify a director from serving on the board. More often than not, such lawsuits have no merit and are filed for the sole purpose of harassing a director. Allowing questionable litigation to force directors off the board would only encourage more lawsuits.

LITIGATION SPECIAL ASSESSMENT

QUESTION: Is it legal for a member of the board to use association money to defend himself in a legal case which was initiated by an association member? It does not seem right that a board member can use the members’ money to defend himself–all the other members may be penalized by a special assessment because of it.

ANSWER: Yes, it’s legal for the association to fund the defense of a director who has been sued for his actions as a director. Most governing documents require that associations defend their directors. It is also provided for in Corporations Code §7237. Too many litigious members forget that when they sue their associations, the entire membership may suffer as a result.

QUESTION: Is it legal for a board to produce an amended budget if they find 6 months into their year that they are not able to operate within the approved budget?

ANSWER: There are three options for funding a mid-year unbudgeted expense. They are as follows:

1. A special assessment (i) imposed by the board of 5% or less or (ii) approved by the membership if more than 5%.

2. Borrowing from the reserves, provided proper notice is given and a repayment plan adopted.

3. A mid-year increase in membership dues. Since the most common surprise mid-year expense is a large increase in insurance premiums, this particular expense is one that would carry into future budgets, thereby justifying a mid-year increase in the regular dues.

Mid-Year Increase. Mid-year dues increases are not addressed in the Davis-Stirling Act. However, the Act does require that associations levy regular assessments sufficient to perform their obligations under the governing documents. Civil Code §1366(a) Accordingly, I believe boards can revise the budget, provided (i) the original budget was properly implemented, (ii) boards stay within their 20% increase limitation, and (iii) they give a minimum 30-days notice of the change.

20% Limitation. To stay within the 20% limitation, boards must take into account any increase that occurred at the beginning of the fiscal year. For example, if there was a 5% increase at the beginning of the fiscal year, the board’s mid-year increase is limited to 15%.

I have not polled other law firms to see where they stand on mid-year increases, so there may be some disagreement on this issue.

CAN BOARDS
CHANGE THEIR MINDS?

QUESTION: Our board voted to make a repair and recorded the vote in the minutes. At its very next meeting, they voted not to make the repair. Can the board change its mind like that?

ANSWER: Yes, boards can change their minds. New information may be under consideration or issues may arise that cause the board to modify spending priorities. Nonetheless, if the association is responsible for the repair, the work needs to be done in a reasonable time-frame.

SCREENING RENTERS

QUESTION: With today’s economy so bad, many residents are resorting to renting when homes don’t sell. Unfortunately many of these people do not follow the Rules. Does an HOA have any say in who an owner can rent to and do we have the right to final approval of the proposed renters?

ANSWER: I understand the rationale for controlling renters but it’s a terrible idea. It’s fraught with risk. If the association were to disapprove a renter, it could be vulnerable to fair housing discrimination claims. Your best course of action is to levy fines and suspend the privileges of repeat offenders.

GIFT CERTIFICATES
FOR DIRECTORS

QUESTION: Two directors retired and the board decided to reward each with a $200.00 gift certificate. The treasurer used association funds without approval of the membership. Doesn’t this constitute misappropriation of membership funds?

ANSWER: Recognition in the form of a plaque or gift certificate is a small thank you to volunteer directors who put in a great deal of time and effort for their community. Some of our client associations give retiring directors plaques that cost $50 to $200. In my opinion, nominal gift certificates are not a misappropriation of funds. Even so, gift certificates may raise eyebrows among members, which is why I prefer plaques—they are less controversial.