Condo Law in California

QUESTION: By a vote of 3 to 2 my board approved a bid to repair a fence. The treasurer voted against it. A week later he asked our management company to hold off on the repair. At our next meeting I was told that the treasurer has the right to stop motions approved by the board. Is this true?

ANSWER: A treasurer does not have veto power. His vote is the same as every other director’s. He does not have special powers that gives him the right to overrule the board’s decision and give contrary instructions to the management company. However, if cash flow is a problem, he can put a temporary hold on the work until funds become available, but he cannot stop the repairs. The treasurer can also ask the board to reconsider its decision if he has new facts that were not considered when the board made its decision. Absent that, he must step aside and allow the repairs to proceed. If the treasurer continues to interfere with board decisions, he should be removed as treasurer.

RECALLED DIRECTORS
RUN FOR BOARD

QUESTION: We are voting to recall the board of directors. Two of the directors we are recalling have there names on the election ballot. Are they allowed to run again when we are recalling them?

ANSWER: Yes. As long as they meet the qualifications of a director, they can nominate themselves and run for the vacated seats.

MEMBER OPINIONS IN
NEWSLETTERS

QUESTION: Do homeowners have any rights when it comes to having their views published in the association’s newsletter?

ANSWER: Not really. Just like your local newspaper, you cannot demand that your views be published in the newspaper. The editor can pick and choose which “letters to the editor” are published. Members have other avenues for making their views known. They can (i) speak during the open forum at board meetings, (ii) publish and distribute their own newsletter, and (iii) set up a website to publish their views.

Campaign Exception. There is an exception. If the newsletter is used to campaign for or against a matter being voted on by the membership, the association must provide equal access to all members advocating a point of view on the issue.

BYLAW LIMITATIONS
ON OFFICES

QUESTION: Our bylaws include a statement that “Any number of offices may be held by the same person, except that neither the president nor the vice president shall hold any other office.” Some members of the HOA believe that this precludes board members from holding the position of President or Vice-President. Others believe that this only precludes the President and Vice-President from also holding the positions of Secretary or Treasurer. The phrase “… hold any other office.” seems to be inconveniently vague in this regard.

ANSWER: Your bylaws do not preclude board members from being officers. It means the president cannot also be secretary or treasurer.

MENTALLY INCOMPETENT?

QUESTION: At our annual meeting, there were 3 vacancies and 4 candidates. Before the results of the election were read, one of the directors resigned, with the understanding that the 4th candidate would also be seated to that vacancy. The board (other than me) refused to seat the 4th candidate, stating that the board has the right to appoint a director to that position and that the 4th candidate was mentally incompetent.

ANSWER: If one of the candidates withdrew before the election results were announced, then the remaining three directors automatically fill the three open positions. If one of the directors whose seat was not up for election resigned, the board can appoint a replacement to fill the seat (unless your governing documents state otherwise). Even though the resignation took place at the annual meeting, the board is not required to appoint the fourth candidate to fill the vacated seat.

Mentally Incompetent. The board does not have the right to decide for itself who is mentally competent to serve as a director. That is a decision for the courts to make. As a rule, homeowners who are not competent to serve on boards are elected to Congress.

LATE FEES
OR LATE PENALTIES?

QUESTION: A delinquent homeowner, who was billed a late fee of 10%, claims a late fee cannot be greater than documented expenses to the HOA due to the delinquency. What is your opinion?

ANSWER: Tell him to pay up. Associations are allowed to charge a 10% fee regardless of the actual costs incurred. Civil Code §1366(e). That’s because the “fee” is actually a penalty to encourage owners to be on time with their payments. Your delinquent owner is probably referring to Civil Code §1366.1, which restricts associations from imposing assessments or fees that exceed the amount necessary to defray the costs for which it is levied. This fee restriction does not apply to late charges.

UNAUTHORIZED
PUBLICATION OF MINUTES

QUESTION: Does the management company have the right to publish motions, actions and votes by the board before the minutes have been read and approved by the board of directors? Aren’t minuets only “official” when they are approved by the board?

ANSWER: Without board authorization, management companies do not have a “right” to publish draft minutes. Minutes in draft form must be made available for membership within 30 days of the meeting (Civil Code §1363.05(d)) but it’s not a good idea to actually publish them until the minutes have been reviewed and approved by the board. Draft minutes sometimes contain errors that are corrected when the board reviews them. Once they have been approved, the minutes should be communicated to the membership in some fashion–either by summarizing them for the newsletter, posting them on the association’s website, or mailing them to the membership.

CERTIFICATE OF INSURANCE

Feedback. When hiring a contractor, “proof of insurance” is not enough. Association’s should insist on a certificate of insurance directly from the contractor’s insurance agent naming the association as an “additional insured” on the contractor’s policy which also provides notice to the owner in case of imminent cancellation. Attached to the cert must be an “Additional Insured” endorsement. To rely on the contractor to show the owner a copy of a policy declarations page does not guarantee that the insurance is actually in force and does nothing to protect the owner in the event of accidents, defective workmanship and resultant damage. -Stephany Yablow, Esq.

BOARD PRAYER

Feedback. I read the commentary on prayer with amusement: Does the questioner really feel that what a particular HOA does is important to God?  -FG

COMMENT: God might, since he lives in a gated community himself (Heavenly Gates). -Adrian

QUESTION: One board member wants to begin each meeting with a prayer and the pledge of allegiance. How do we handle the request without alienating members?

ANSWER: Interesting question. Although prayer is not illegal, whatever decision you make will please some and alienate others.

Civic Prayer. Civic prayer has been a tradition in our Country since the Pilgrims landed on Plymouth Rock in 1620. The Pledge of Allegiance was added to civic functions in the late 1800s. Both remained relatively noncontroversial until the 1960s when significant change roiled through the nation challenging institutional traditions at all levels. The courts became a battle ground for church/state issues.

Court Review. In the 1983 case Marsh vs. Chambers, the U.S. Supreme Court ruled that prayer at public meetings followed a long, historic tradition and was constitutional. Citing public prayers from George Washington’s inaugural address to George Bush’s cabinet meetings, the 7th U.S. Circuit Court of Appeals held that “prayers and the invocation of divine guidance have been accepted as part of American political discourse throughout the history of this Republic.” DeBoer v. Village of Oak Park, Ill.

Homeowners Associations. Thus far, the church/state battle has not affected homeowners associations because HOAs are private organizations, not governmental entities. As a result, the “wall of separation” argument does not apply to board meetings. Even so, many are uncomfortable with public prayer and each board must decide for itself whether to employ it. It should be noted that a policy adopted by one board does not bind subsequent boards. Even if a board decides to forgo public prayer, I’m sure it will continue privately. “Dear Lord, will that person ever stop talking?”

SMALL CLAIMS COURT
LAW AMENDED

Last week Governor Schwarzenegger signed Assembly Bill 712 amending the Small Claims Court Act. The amendment gives small claims judges the power to grant equitable and injunctive relief when authorized by other statutes to award such relief. Code Civ. Proc. §116.220. The legislative analysis that accompanied the bill gave two examples of how it could impact homeowners associations. In addition to levying fines, small claims judges may (i) order associations to produce records for inspection and (ii) order actions related to association elections and meetings.

UPDATING OLD CC&Rs

QUESTION: Our CC&Rs are 25 years old. The board is divided. Some want to update our documents to keep up with the Davis-Stirling Act. Others argue that the CC&Rs and bylaws are only suggestions and guidelines and don’t need updating. Our management company said we should wait because the legislature is constantly changing the laws and the Davis-Stirling Act is going to be completely overhauled. What do you recommend?

ANSWER: CC&Rs and bylaws are more than mere suggestions and guidelines; they are legally enforceable restrictions and obligations. If your CC&Rs are 25 years old, they went into effect prior to the enactment of the Davis-Stirling Act. As a result, they are due for restatement.

Changing Laws. The argument that you should wait because laws are constantly changing means you will never update your documents. The flow of new laws never stops. This argument is like the person who never buys a computer because he is afraid that as soon as he does, it will be outdated. That is a terrible argument for not buying a computer or restating documents. When it’s time to update your documents, you should do it.

Major Overhaul. The pending overhaul of the Davis-Stirling Act argument would have merit except that the California Law Revision Commission is not making any substantive changes to the law. It is merely reorganizing and renumbering the statutes, plus rewriting ambiguous sections for clarity. Thus, there are no compelling reasons to wait.

MORE LIABILITY FOR HIRING
UNLICENSED CONTRACTORS

A recent decision by the California Court of Appeal reinforces the importance of avoiding unlicensed contractors. If associations hire unlicensed contractors, they could be liable for wage and hour claims filed by employees of the contractor. Although the case involved a general contractor and its subcontractors, associations who hire unlicensed contractors can be deemed a “general contractor” and the unlicensed contractors as “subcontractors.” This means that any unpaid workers will be considered employees of the association and the association will be liable for paying those workers, even it the association already paid the contractor. Sanders Construction v. Cerda (2009) 175 Cal.App.4th 430.

RECOMMENDATIONS. Homeowner association boards should verify each contractor’s license with the Contractors State License Board. In addition it should get proof of insurance. Boards should also add a provision to their contracts requiring contractors to indemnify the association for any wage and hour claims by its employees.

FHA RESERVE MANDATE

Feedback #1. I’m surprised to hear your apparent defense of underfunded reserves by your opposition to the new FHA 60% reserve funding requirement. As we all know, underfunding of reserves is a long standing problem which has created major hardships for some associations. Maybe the new proposal needs some modification, but it is clearly a step towards healthy associations and some sort of new rule should be welcomed. -Norm. H.

RESPONSE: Normally I’m a strong proponent of higher reserves. In this case, the FHA’s decision to further weaken the housing market and increase foreclosure rates will not produce higher reserves. It will likely reduce reserve contributions as associations struggle to meet operational expenses. The smart approach is to wait until the market is stronger and then phase in the requirement. Higher reserve funding is something the FHA should have done years ago. Instead, it waited until housing was crippled, at which point it doused everything with gasoline. On November 1, it will throw a lit match. That’s not going to help build healthy reserves. -Adrian Adams

Feedback #2. Regarding your FHA reserve requirements article, consideration should be given to taking out bank loans to meet the FHA fund requirements. Loan costs would have to be considered of course, but they could be offset somewhat with interest earned in the reserve account. While costly, it seems a better choice than sitting with uncollected revenue on those condos not selling. -Diane H.

QUESTION: Regarding the FHA 60% reserve funding requirement; just what does the 60% mean?

ANSWER: As reported last week, starting November 1 the FHA will not insure loans in condo developments where the association’s reserves are less than 60% of the funding levels called for in the association’s most recent reserve study. The 60% reserve requirement is not a national standard, it was issued by the Santa Ana HUD/FHA office. Since the Santa Ana office serves the Western region, their rule controls all loan guarantees in California.

Reserve Requirements. In addition to requiring 60% reserve funding for existing condominium associations, the Santa Ana office obligates condo conversions to 100% reserve funding. Below describes how the new requirements work.

Existing Condos. If an association’s roof costs $100,000 to replace in 20 years, then $5,000 must be set aside annually for the next 20 years. Assume the roof is now 10 years old; to be fully funded, the association must have $50,000 in its reserve account for the roofs. To meet the Santa Ana requirement, the association needs at least 60% of the $50,000, i.e., $30,000 cash on hand for the roofs. To arrive at the total cash for all reserve items, the same calculation is applied to each item in the reserve study. If all components taken together total $1 million as of today’s date, then the association must have 60% of $1 million in the bank, which means $600,000.

Condo Conversions. If the development is a condo conversion, the association needs 100% of the reserve study’s fully funded requirement. In the roof example above, condo conversions need the entire $50,000 in roof reserves to qualify for FHA loan guarantees. Keep in mind that roofs are only one component. If all components taken together total $1 million, then the association must have $1 million in its reserves to qualify.

Bona Fide Reserve Study. An obvious way to meet the FHA requirement is to doctor the reserve study to reduce the $1 million funding requirement to whatever amount is currently in your reserves. That would be a very bad idea. Directors would face potential liability for fraud (not covered by insurance) and breach of fiduciary duties. In addition, the FHA requires that associations use a bona fide site visit reserve study for their calculations. Bona fide means “made in good faith without fraud or deceit.”

Thank you to Robert Nordlund of Association Reserves, Inc. and Clifford Treese of Association Information Services for their input on this question.

COMMENT: It’s understandable the FHA would not want to guarantee loans in weak associations. Unfortunately, the Obama Administration’s  timing is terribly short-sighted. The new requirement is being imposed when the housing market is already distressed and associations are suffering record foreclosures. FHA insured loans are vital to the housing market because they enable buyers with modest incomes to purchase homes. On November 1 when the new regulations go into effect, tens of thousands of condominiums in California will become virtually unsalable. This will further depress the housing market and drive more condominiums into foreclosure. Not a smart move. -Adrian Adams

WILDFIRE
SMOKE DAMAGE CLAIMS

The wave of recent wildfires has resulted in a great deal of smoke and soot damage to common areas in associations near the burn areas. Typically, this is a covered loss under the association’s insurance policy.

Adams Kessler has partnered with another law firm to assist association boards pursue both visible and invisible damage claims with their insurance carriers. If your HOA was situated in or around the recent fires, contact us for a free consultation about fire and smoke damage.

PAYING UNUSED VACATION
UPON TERMINATION

The Court of Appeal recently upheld an employer’s policy limiting employees’ vacation benefits. Owen v. Macy’s, Inc. (2009) 175 Cal. App. 4th 462. The employer’s policy allowed employees to earn vacation benefits after 6 months on the job. However, the benefit vested only twice a year: 50% in May, and 50% in August–a policy clearly described in Macy’s employee handbook. When the employer terminated employees in April without paying for unvested vacation time, Plaintiff sued demanding payment.

Courts had previously ruled that employers cannot adopt “use it or lose it†policies and must, upon termination, pay employees all earned vacation time. In this case, the court deemed the unvested vacation time as unearned and sided with the employer.

RECOMMENDATION: For associations with employees, boards need to review their employee handbooks. When associations give vacation benefits, their handbook should explain (i) when employees start earning it, (ii) how it accumulates, (iii) when employees can use it, and (iv) the maximum vacation that can be accumulated. Once the vacation time vests, employees are entitled to keep it until used, or until receiving compensation at termination. To keep costs under control, associations should consider capping the total amount of vacation time employees can earn. Contact us for more information.

Matthew Gardner, Esq.
Adams Kessler PLC

SOLAR PANEL POWER
PURCHASING AGREEMENTS

You recently ran a question in your newsletter about loan financing for the installation of solar panels. Other funding options are Solar Leases and Power Purchase Agreements (PPA). Under a Solar Lease or PPA, a third party pays for and owns the solar installation, taking advantage of the tax benefits and selling the electricity generated to the association. The advantages to the association are (a) no or minimal up-front costs, (b) lower energy rates and (c) certainty about the rates/tariffs the association will be paying for energy for years to come (typically 15-20 years).

There are some contractual risk management issues to be addressed and PPAs are quite different from any other contracts boards may have encountered before, but I have negotiated several agreements over the past six months and it can be done. -Linda Cummings, Esq.

If you are interested in Solar Leases or Power Purchase Agreements, you may contact Linda Cummings directly. -Adrian Adams

QUESTION: Is there any type of assistance on the federal or state level for CIDs who have been hit hard because of the economic climate?

ANSWER: To find an answer, I turned to Clifford Treese who knows all and sees all when it comes to this kind of stuff. Unfortunately, neither one of us could find any government assistance for financially distressed HOAs. The administration has cash for clunkers but no cash for condos.

FHA REGULATIONS

The Community Associations Institute published an update on the Obama Administration’s FHA insurance regulations. CAI believes the new regulations “would be a serious burden for condominium associations, and lead to market confusion that could hinder the housing and economic recovery.”  Provisions that most impact associations include:

• The FHA will require 50% of the units to be owner-occupied or sold to owners who intend to occupy the units. [Boards should consider amending their documents to limit rentals.]
• The FHA will not insure a loan if more than 15% of the units in the development are 30 days past due on their assessments. [Boards need to be aggressive in their collection efforts.]
• The FHA will require associations to fund at least 60% of the reserves called for in their most recent reserve study. [This will cause the most difficulty for HOAs. If they want to be eligible for FHA financing, boards must figure out what combination of dues increases and special assessments can quickly bring their reserves to the 60% funding level. In the alternative, boards might decide to forego FHA eligibility. However, this may impact marketability and resale values of units in their development.]

Originally scheduled to take effect on October 1, the regulations have been delayed to November 2, 2009. See CAI’s summary for more detail. In addition, Clifford Treese sent me a copy of the FHA’s June 12, 2009 letter on this issue. Mr. Treese specializes in insurance and risk management for common interest developments and is President of Association Information Services.

TAKING CONTROL FROM
THE DEVELOPER

QUESTION: When does the membership officially take control of the HOA from the developer?

ANSWER: It varies depending on the type of project. Initially, the developer has three votes for each lot or condominium he owns. In a single phase project, Class B converts to Class A when either the total number of Class A votes equals the total number of Class B votes or on the second anniversary of the conveyance of the first lot or condominium in the project, whichever occurs first. In a multiphase project, Class B converts to Class A either on the second anniversary of the first conveyance in the most recent phases or four years after the first conveyance in the project, whichever occurs first.

Fiduciary Duties. Even when developers control the board of directors, they cannot use their power to their own benefit at the expense of the association. Corp. Code §7231, Raven’s Cove v. Knuppe Development.

Thank you to attorney Helene Fransz for this response. Ms. Fransz represents builders of common interest developments. For more information on this issue, see transfer of power.

PETITION DEMANDING
RESIGNATION

QUESTION: We believe the board is mismanaging our reserves. They depleted our reserve account from several hundred thousand dollars to under $50,000 on poorly prioritized and self-serving projects. Owners circulated a petition asking the president and another board member to resign. It was signed by 75% of the membership. Do members have the right to demand their resignation?

ANSWER: Yes, members have a right to circulate a petition demanding that directors resign. Although directors are not obligated to step down, sometimes discretion is the better part of valor. If they don’t resign, it will further inflame the membership and the directors will be recalled. It is impressive that 75% of the membership support the demand. Your two directors should pay attention to the numbers and let common sense prevail.

DOGS, PROSTITUTION & PARKING

Feedback #1: I doubt there is an Animal Control agency in the United States that would concur with having dogs under voice command or e-leash walking or running on public streets. Having physical control over your pet is for protection of the owner and the pet. There is no alternative to a leash. -James L.

Feedback #2: I believe dogs not on leashes is controlled by state or local law. I believe the county’s leash law requires a physical leash no longer than six feet. This applies to dogs on both public and private property and would likely supersede the CC&Rs. You also note that the board could be sued in the event that someone is injured because of a failure to enforce the leash requirements. You might also note that the dog owner gets sued and, if the owner knew, or should have known of the animals dangerous propensities, they may be facing punitive damages. I do not believe the punitive damages would be covered by insurance. -Richard P.

Feedback #3: [Regarding drugs and prostitution] I once had luck curbing illegal activities by "ignoring" what was being sold and sending a violation for operating a business out of the home based on "clients" visiting the property. -Marla H.