Condo Law in California

QUESTION: I was informed that banks that hold defaulted mortgages while the occupants still reside in the units do not collect dues and are not obligated to pay assessments on defaulted homes. This means that the association has to absorb the revenue losses and pass the losses on to the other members of the association. This has become a substantial problem. Can the delinquent dues be added to the mortgage liability so that when the house is sold the delinquent dues will be satisfied?

ANSWER: You cannot make a bank responsible for an owner’s delinquent assessments. Banks are obligated to pay only those assessments that come due after the bank takes ownership of a unit. That explains why some banks drag their feet on foreclosures. With a defaulting owner, a bank loses mortgage income. If the bank forecloses, it not only loses income, it must also reach into its pockets and pay the association’s assessments. As a result, many banks sit on their hands and do nothing. This leaves a delinquent owner in possession of the property and the association without assessment income.

Options. Since banks are not responsible for an owner’s delinquent assessments and they can indefinitely delay their own foreclosure actions, associations are left with two options. The first is to sue the owner for the delinquent assessments. Unfortunately, this often produces a meaningless judgment because the owner has has no assets. The second option is to move as quickly as possible to foreclose on the delinquent owner.

Foreclosure. If the association forecloses and someone buys the unit, the new owner starts paying assessments. If no one buys the unit, the association takes ownership subject to the mortgage. Once it has ownership, the association can either pay the mortgage (a further drain on resources) or refuse to pay and invite the bank to foreclose on the association.

Rent. If the bank continues to sit on its hands, the association can rent out the unit. Then it does not matter how long the bank sits on the sidelines. The association can receive rental income until such time as the bank finally wakes up and forecloses on the association or takes a deed in lieu of foreclosure.

RECOMMENDATION. No matter which course of action an association follows, it will have bad debt that will ultimately need to be written off. This will continue until the economy gets back on track–probably another two years. In addition to budgeting for bad debt and filing liens as quickly as possible to protect the association’s position, boards should record a “Request for Notice” as described below.

REQUEST FOR NOTICE

In the event a lender actually forecloses on a defaulting owner, a change in the law that went into effect on January 1 requires the trustee to mail to the the association a copy of the deed within 15 days of recordation. This speeds up the process of billing the new owner for assessments as they come due. To take advantage of the law, associations must record a “Request for Notice” as described in Civil Code §2924b. Boards should contact legal counsel for the proper form and recording procedures.

QUESTION: My question is regarding bad debt. Our association has not deposited the entire money budgeted for our reserves. Can we claim this as bad debt or does bad debt pertain only to the amount lost specifically from non-payment of dues?

ANSWER: Unfunded reserves do not count as bad debt. Assessments (regular and special) which are unlikely to be repaid, either because the debtor doesn’t have any money or because the debtor cannot be found, are classified as “bad debt.”

COMMENTS ON SMOKING BAN

The following reader comments concern the recent case on smoking in the common areas.

#1 Ah Civil liberties – how many have I had to give up because of other people’s children? They should be careful about expecting the world to accommodate them while clamping down on other’s rights, that is a slippery slope. I must say condo living does give us lots of behavior-science experiments. I am single, own my own business, pay for my own mortgage, employ folks, pay lots of taxes for schools, et al. and I smoke occasionally. I will stay out of your playgrounds and away from your fast food mania world (fat will kill faster than anything) if everyone will let me smoke a cig every once in a while in peace. I say set up areas with huge ventilation systems and make everyone else pay for it! -Rose C.

#2 Very timely newsletter in regards to some recent events at the Association that I am president of. However, the question we have is: Can smoking be banned in ‘exclusive use’ areas, specifically outdoor patios? -Mark D.
ANSWER: Yes.

#3 Banning smoking in all “indoor units”!? I do not smoke and I think that is ridiculous! That would never hold up in court. -Steven N.
COMMENT: It would probably hold up in court.

#4 Very timely. Our board is about to consider a draft resolution with respect to smoking. The issue we face relates to smoking inside a condominium apartment. The smoke penetrates into neighboring apartments to the annoyance of other residents. -S.F.

#5 This is most interesting as my HOA sells cigars in their Golf Pro Shop, provides pedestal ashtray’s outside bar area for smokers as outside Public is allowed into our facilities as well. -Connie B.

#6 Here, the city [of Novato] has done it for us. Trudy Morrison, CCAM

A case came down this past week that may effectively eliminate smoking in the common areas of condominium complexes.

Facts: The Oakwood Apartments banned smoking in all indoor units and indoor common areas, but permitted it in the outdoor common areas (including locations near swimming pools, common BBQs, playgrounds and outdoor dining areas) in order to accommodate residents and guests who smoke.

Furthermore, Oakwood encouraged smoking in its outdoor common areas by providing ashtrays for smokers, by permitting its employees to smoke in outdoor areas, and by making a business decision to allow such outdoor smoking to aid its efforts to market their residential units to an “international clientele.â€

One of the Oakwood residents was a five year old girl, Melinda Birke, who had allergies and asthma. The secondary smoke in Oakwood’s outdoor common areas exacerbated Melinda’s symptoms and caused her to suffer through three bouts of pneumonia. Although Melinda’s father requested that Oakwood ban smoking in the outdoor common areas, Oakwood denied these requests.

Melinda filed a lawsuit against Oakwood, claiming that Oakwood’s failure to ban outdoor common area smoking constituted a public nuisance and a violation of the Americans With Disabilities Act (ADA).

Ruling of the Court: In Birke v. Oakwood Worldwide (January 12, 2009), the California Court of Appeal ruled that Melinda could continue with her nuisance claim against Oakwood, but her ADA claim must be dismissed.

Reasoning of the Court: Melinda’s public nuisance claim could proceed because Oakwood “plainly has a duty to maintain its premises in a reasonably safe condition†and her complaint properly stated that:

1) Oakwood’s decision to allow smoking in the outdoor common areas created a condition which was harmful to health or obstructed the free use of the common areas, and which interfered with the comfortable enjoyment of life or property;

2) allowing smoking in the outdoor common areas affected a substantial number of people at the same time;

3) an ordinary person would be reasonably annoyed or disturbed by smoking in the common areas;

4) the seriousness of the harm caused by second hand smoke outweighed the social utility of allowing smoking in the outdoor common areas;

5) neither Melinda nor her parents consented to Oakwood’s conduct;

6) Melinda suffered harm which was different from the type of harm suffered by the general public; and

7) Oakwood’s conduct was a substantial factor in causing Melinda’s harm.

However, Melinda’s ADA claim was dismissed because the court was persuaded that “the ADA does not apply to apartments and condominiums.â€

COMMENTS: This decision was based upon the court’s legal interpretation of the facts which Melinda wrote in her court complaint. In order to obtain a judgment against Oakwood, she will still have to present evidence establishing each of the above seven points at a trial. Nevertheless, this case demonstrates that those associations which allow smoking in their common areas are subject to potential liability to residents for nuisance. To limit such exposure, Board of Directors and managers should consider, in consultation with their counsel, amending their governing documents to ban or restrict common area smoking.

I am pleased to welcome Lawrence Stirling, Superior Court Judge, retired, to our firm as Director of the Davis-Stirling Mediation Services.

Mr. Stirling’s extraordinary background makes this talented arbitrator/mediator unique to resolving disputes between owners and their associations.

Co-Authored Davis-Stirling Act. While serving in the California Legislature, Larry Stirling co-authored the Davis-Stirling Common Interest Development Act. The Act that bears his name created the body of law that governs all community associations in California.

Public and Judicial Service. Mr. Stirling’s distinguished career includes four terms in the State Assembly and a term in the State Senate. This was followed by an appointment as judge to the Municipal Court and then a move to the Superior Court. During his fourteen-year tenure on the bench, Judge Stirling presided over tens of thousands of cases, both civil and criminal. Because of the tone set by Judge Stirling in his courtroom, he was able to facilitate the settlement of more than 90% of his cases.

Dispute Resolution Services. Judge Stirling now brings his judicial experience to the community association industry as a mediator and arbitrator. Most homeowners associations throughout the state have already experienced the expense and stress of litigation. The disruptions, delays, and high cost of the court system have made alternative dispute resolution an attractive and necessary element of controlling legal fees in our industry. Judge Stirling’s informal approach to resolving disputes is both accessible and cost-effective.

Scheduling. Judge Stirling is available to act as a mediator/arbitrator throughout the state. For information on costs and scheduling, call our resolution center at (800) 464-2817 or e-mail us at info@davis-stirling.com.

Very truly yours,

Adrian Adams, Esq.
Adams Kessler PLC

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DAVIS-STIRLING DISPUTE RESOLUTION SERVICES

Dear Readers,

Community associations are an important and growing part of the California lifestyle. Unfortunately, disputes naturally arise whenever people live near each other and are bound by shared ownership of property.

My goal is to work with all parties to quickly and fairly resolve their disputes. The sooner disputes are resolved, the sooner everyone can peacefully go about their lives.

I look forward to working with you.

Hon. Larry Stirling (ret.)
Davis-Stirling Resolution Services
by Adams Kessler PLC
info@davis-stirling.com
(800) 464-2817