Condo Law in California

I conducted an informal survey regarding late charges. While some use the postmark for imposing charges, it is a minority position and seems to be limited to the IRS and to associations and management companies that handle funds without using lockbox services.

The majority of HOAs and management companies use lockbox services and do not track the postmark–they impose late charges based on the date payment is received (as do credit card companies). Some noted that online banking has also become a factor. In online banking, payment is counted when received by the bank, not when transmitted. Accordingly, charges are levied on the 16th or later. If the 15th falls on a weekend, most allow an extra day and then apply the late charges if the payment is not received on the Monday following the 15th.

Jeffrey Farnsworth, Director of Operations for Steward Property Services, offers a good explanation for how his company handles late charges:

Due to lockbox handling of our payments, we also are in the group that cannot monitor postmarks as qualification for timely payment. Our practice is to wait until all the deposits have been downloaded for the 15th before assessing late payments on the 16th. Many of our boards have policies to allow waiving one late fee per year per account, when requested, so we find that communication with the owner is the best way to deter late payment. Once an owner contacts us in protest, we try to work with the owner to educate them that the dues are actually due on the first and late after the second of the month, but that the association allows a grace period of fifteen days before levying a penalty. Many seem to think they are not due until the 15th, but we try to express that the association has monthly bills to pay and this is why they penalize for delinquent remittance. If an owner protests and wants more than one late fee reversed, we ask them to write a letter to the board for consideration.

RECOMMENDATION: Both policies for applying late charges are acceptable: using the postmark for when payment is sent as well as using the date when payments are received. Boards need to work with their management companies to pick one of the above policies and then make sure the collection policy is in writing and annually distributed to the membership. Thank you to everyone who responded to the informal survey. -Adrian Adams

WHAT IF THE CANDIDATE DIES?

QUESTION. What if you have a candidate running for the board and he dies with enough votes to win. Does the board fill the vacant seat?

ANSWER: It depends on when he dies. If he passes prior to the counting of ballots, his votes are removed from consideration. The remaining candidates with the highest votes win the election. If he dies after the election results are announced, the board appoints a replacement (unless the bylaws specify otherwise).

ATTORNEYS AT BOARD MEETINGS

QUESTION. Are attorneys required to attend the HOA’s monthly board meetings? What happens when no members want to be on the board of directors; because previous law suits have been filed against them, no one wants to take on that responsibility.

ANSWER: There is no law requiring that attorneys attend board or membership meetings. However, boards will frequently ask legal counsel to attend meetings whenever someone starts threatening directors. Because board members are unpaid lay people who are not versed in the complexities of corporate law and the Davis-Stirling Act, it is not unusual that they would seek help by asking legal counsel to attend meetings until the crisis passes. I am always amazed at the ability of one person, whether a fellow director or a member of the audience, to generate chaos and drive up legal expenses. Their ranting, defamatory communications, and threats can force good directors off boards and create a large spike in legal expenses, which are ultimately paid by fellow owners through special assessments and higher monthly dues.

SURPLUS BUDGET FUNDS

QUESTION. We just ended the year with a surplus which we wish to transfer to the current year. Can this occur by board action or do we need an owner vote?

ANSWER: Since HOAs are nonprofit, any excess income at the end of an association’s fiscal year (a budget surplus), must be applied to next year’s budget or refunded to the membership. Revenue Rulings 70-604 and 75-371. Although boards approve next year’s budget and the carryover of surplus funds, revenue rulings require a membership vote on the carryover so as to avoid taxation issues. Most associations vote on an excess income resolution at their annual meeting. The resolution may be included on the ballot along with the election of directors or done by voice vote at the meeting and recorded in the minutes of the meeting. For a more detailed explanation, see Gary Porter’s article on this issue.

FEEDBACK

Satellite Dishes. HOAs should consider installing dishes owned by the association to the benefit of the members. We are two structures, 132 units. We installed dishes on both structures for both satellite companies in our area; DishNetwork & DirecTV, through a local company TrueDigital. The total cost to the HOA was $3,000 with a rebate if a specific number of residents joined. The lines run into our existing cable rooms. Owners now have a choice of cable or satellite, and we’ve avoided the installation of personal dishes and provided reasonable assess for members to have a choice. -Joseph L.

QUESTION: Our annual meeting is coming up and we have two seats up for election. One of the four candidates running for the board withdrew after the ballots were sent to members. If this person gets enough votes to be elected, can we just ignore the votes for this person and install the next person with the most votes? Our bylaws have no provision for this kind of situation.

ANSWER: Yes, you can ignore the votes. Everyone who voted for this person unfortunately wasted their votes. The two people with the highest votes (discounting the person who withdrew) will be the winners. You should still report all vote tallies, including those for the person who withdrew.

HUD/FHA APPROVAL UPDATE

In November 2009, the Federal Housing Administration issued new requirements outlining their lending requirements for condominium associations.

U.S. Approvals, a company that provides HUD/FHA and VA project review services published an updated summary of the requirements.

If you want to know why the housing market collapsed, which led to a world-wide recession and the new FHA restrictions, I recommend A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers by Lawrence G. McDonald. It is a riveting story.

SATELLITE DISHES ON
COMMON AREA ROOFS

QUESTION: Civil Code 1376(b)(2) says in part: “…that has a diameter or diagonal measurements of 36 inches or less on a separate interest owned by another.” Questions and confusion keep arising on the interpretation of the phrase in bold lettering. We have some condominiums whose balconies cannot receive a satellite signal. The owners of these units want to place dishes on the common area roof. They claim the wording of 1376 allows them to do this as the roof is “a separate interest owned by another.” Are they correct?

ANSWER: No, they are not correct. The term “separate interest owned by another” refers to the portion of the project owned exclusively by another member of the association which, in the case of condominium projects, is air space. Civil Code 1351(l)(2)&(f). The portions of the project owned by the association are referred to as “common area.” Civil Code 1351(b). Therefore, Civil Code §1376(b)(2) would not give residents the right to install a satellite dish on a common area roof.

Federal Preemption. Moreover, parts of Civil Code §1376 have been preempted by the Telecommunications Act of 1996 (47 USC § §151-615b) and Over-the-Air Reception Devices Rule (OTARD Rule) (47 CFR §1.4000), which provides that while owners have a right install satellite dishes on their separate interest or exclusive use common areas (i.e. balconies, patios), they do not have a right to install them on common area roofs.

Roof Damage. Finally, due to possible damage to roofs and potential liability from injuries, most associations do not allow the installation of antennas on common area roofs. A small percentage of our clients allow installation in designated roof areas that have been prepped for antennas so as to avoid damage. Even so, some impose strict restrictions on when and how installations occur, and some require signed releases from owners. NOTE: Such restrictions do not apply to single family homes and do not necessarily apply to townhomes.

FEEDBACK

Late Charges. I believe your opinion regarding late payments is misleading at best. The law says that assessments are late 15 days after the due date. Nothing in the law addresses the issue of postmarks. May I advise you that credit card and mortgage companies to not accept a postmark as acceptable dates of delinquency. If you’ve missed their grace period, too bad. -Ed V.

Late Charges #2. In our industry most times, post mark dates are not relied on. Since a vast majority of our business is through lock box services at banks, the date posted to a homeowner’s account is the date received by the bank. Also, many homeowners choose to use banking on line for paying their assessments, and once again it is when the payment is received by the bank. And finally, for those payments sent by an over night delivery service, it is based on when the payment is received. -Lisa E.

RESPONSE: From the feedback on this subject, there seems to be a split in our industry on when late charges can be applied. Some use the postmark and some do not. I will poll others in the industry to see if there is a majority opinion on the subject. -Adrian

Taxes. While associations wouldn’t owe property taxes, there frequently are special district user fees put on by, for instance, the water district which I understand the association does need to pay. -Marla H.

RESPONSE: Good point. If an association receives a property tax bill, the board needs to exam it to determine the purpose of the tax. If they have any doubts about the appropriateness of the tax, they should contact the association’s CPA and/or legal counsel.

Old Decade. Please do not perpetuate sloppy thinking and cheapen your excellent Newsletter — US citizens suffer more than most from poor arithmetic “skills” — a century or decade starts with 1, ends with 10. That ’s why we have ten fingers instead of a zero finger and 9 other digits. You uphold the law, so please uphold the laws of logic & arithmetic! -LeRoy M.

New Decade. If a decade is ten years, and the year 2000 (for instance) counts as a year (why wouldn’t it?), then 10 years takes us to the end of 2009. -Marla H.

RESPONSE: One of the research attorneys in my office did a quick search of the internet and found an article that does a good job of summarizing both sides of the “decade” debate. Wikipedia also makes arguments pro and con. I’m hanging tough with the new decade argument, i.e., 2010 is the start of a new decade. -Adrian

Bankruptcy. In chapter 7 the trustee does not want us to file a proof of claim unless they ask us to. Your response gives the impression that we are to always file a claim in a 7 which is not true. Also, in a chapter 7 why would you file for relief from stay to pursue post petition?? In a chapter 7 it just stops the collection process until completed which is just a few months so a relief from stay is not necessary in a 7. If the lien was on the property before the sale and the owner is keeping the property the association can recover pre and post petition debt. If the lien was not on the property in time then the pre is wiped out but the owner is responsible to pay the post until they are no longer the owner of the property. If the chapter is a 13 and the owner is keeping the property but not paying the post petition debt then and only then should the association consider a relief from stay AFTER they verify that the lender has not initiated foreclosure or seeking relief. -Beverlee G.

RESPONSE: Actually, my response was aimed more at getting legal advice from lawyers. They can better assess legal issues. Each bankruptcy must be evaluated on its own merits. Were liens filed? How much is owed? What is the potential for recovery? What will it cost? How long will it take? What form of bankruptcy was filed? Board members who rely on managers for legal advice will likely lose the protection of the Business Judgment Rule since an ordinarily prudent person would not seek legal advice from a non-lawyer. When it comes to nonjudicial liens and foreclosures, collection companies (such as SBS Lien Services, ASAP Collection Services, Association Lien Services, and Witkin & Neal, to name a few) are also good sources of information as well. -Adrian

QUESTION: We have a homeowner in chapter 7 bankruptcy. Our management company told us that it is a waste of time to go to the creditors meetings and therefore decided not to tell us about it because they said nothing ever happens. I am not sure what to think.

ANSWER: Your board should not rely on your management company for legal advice. I’m sure your manager meant well but he/she is not in a position to properly advise the board on legal matters. Even though a chapter 7 bankruptcy is a total liquidation of assets, the association is not automatically wiped out. You may recover something, although it may be pennies on the dollar. As a result, you need to timely file a claim for the monies owed. In addition, you may want to file for relief from the automatic stay to pursue any post-petition delinquent assessments. You should seek guidance from your association’s attorney on this issue.

NEW LAWS

For a summary of new laws, both statutes and case law, prepared by Gary Kessler, see 2009 Changes in the Law.

PROPERTY TAXES

QUESTION: Is real estate owned by the association as common area subject to local property taxes?

ANSWER: No. Each member’s property values are increased by the common areas and thus reflect the value attributable to the common areas. Hence, each owner pays a higher tax, which reflects that added value. Double taxation would result if the association also paid real property taxes on the common areas. In planned developments, there is a specific code section that applies: Rev & Tax Code §2188.5.

Accordingly, most associations do not have a property tax obligation. However, there may be exceptions and boards should use CPAs who specialize in homeowner associations to prepare their tax returns. NOTE: just because an association is nonprofit does not mean it is tax exempt. Even when no taxes are owed, tax returns must be filed.

Thank you to Helene Fransz, Esq. and to Steven Schonwit CPA for their input on this question.

WHEN ARE FEES DELINQUENT?

QUESTION: If we receive association dues by mail on the 16th, which is when late fees are assessed, should we honor the date that the envelope is postmarked?

ANSWER: As provided for in Civil Code §1366(e), regular and special assessments are delinquent 15 days after they become due, unless the CC&Rs provide for a longer time period. If the envelope was postmarked on or before the 15th but arrives after the 15th, late penalties should not be levied.

SPECIFIC MOTIONS

QUESTION: Does the specific wording of a motion need to be included in the minutes or just the intent of the motion? For example,

Intent: RM made a motion to decrease the dues;
Specific: RM made a motion to decrease the dues by 10%.

ANSWER: The motion needs to be specific. If motions are vague, they are open to different interpretations and disagreements. Directors will have different memories of the intended size of the decrease and the effective date. It is also good to include some language explaining the purpose of the motion, such as: “Due to a significant reduction in insurance premiums and an unexpected drop in utility costs, the treasurer forecast a large surplus in the budget. So as to zero-out the surplus, the Treasurer made a motion to decrease the dues by 10% to take effect in the next billing cycle.

FEEDBACK

Political Contributions. Regarding last week’s article on political contributions, if the association is a 501(c)4 tax-exempt corporation I would suggest they consult with their CPA/tax accountant. We have been advised that political contributions or forming a PAC may result in our losing our tax exempt status. -Carol H.

RESPONSE: Good point! -Adrian

New Decade. In reference to Gary Kessler’s statement about the beginning of the second decade of the 21st Century, I believe the second decade starts on January 1, 2011. 2010 is the last year of the first decade. -Margaret H.

A super-informative newsletter this morning re nuances of governance. Thank you. Please tell Gary that the decade is not over. Unless I’m mistaken a decade constitutes ten years and we are just now starting the tenth year of the first decade of the century. -S.Y.

RESPONSE: Technically, you may be correct. However, common usage has “0″ as the start of the decade, as in “the Roaring 20s, the Psychedelic 60s, the 1980s.” I don’t know what they’ll call the decade that just ended–the “double aughts” … “the nulls” … “the zeros”?

QUESTION: If an HOA’s CC&Rs and bylaws do not specify that an HOA and HOA board must have physical (i.e. face-to-face) meetings, may the HOA and HOA board hold exclusively telephonic meetings and simply never meet in the same room?

ANSWER: The Corporations Code allows directors to participate in meetings through the use of a conference telephone, electronic video screen communication, or electronic transmission. As long as all members participating in the meeting are able to hear one another and participate in the meeting, it constitutes “presence in person” at the meeting. Corp. Code 7211(a)6.

However, HOAs are also subject to the Open Meeting Act, which allows members to attend meetings of the board of directors. If the board can structure a telephone or video conference meeting in such a way that all homeowners can “attend” the meeting, and can participate in an Open Forum at that meeting, then “virtual meetings” are permissible.

DIRECTOR IN A COMA

QUESTION: Our board recently appointed new directors after the Annual Meeting failed to achieve a quorum. One of the directors they appointed, a former board member, has been in a coma for the past five months. Though tragic, is this legal?

ANSWER: Directors have a duty to appoint competent, trustworthy, and independent persons to the board. Lewis v. Elk Hills 36 Oil Co. (1929) 103 Cal.App. 14. Since the appointee is in a coma, he cannot perform his duties as a director. Therefore, it would be improper to appoint this person to the board.

POLITICAL CONTRIBUTIONS

QUESTION: The board special assessed the membership 5% to contribute to a political action committee, which is currently suing the city to block construction of a nearby city park. What are our options for stopping the board?

ANSWER: Your options are limited. California Courts have held that boards have broad authority under the CC&Rs to act in the best interest of their associations. In Finley v. Superior Court, the court found that political contributions were not illegal and that boards could take actions they felt were in the best interest of the association, even if members disagreed. As a result, unless your governing documents provide otherwise, your board can impose a 5% special assessment to raise funds for a political action committee. If the membership is unhappy with the board’s actions, they have recourse–they can recall the board and elect directors who agree with their position.

GRANDFATHERING

QUESTION: Looking for legal definition of the term “grandfathering.”

ANSWER: Black’s Law Dictionary defines “grandfather clause” as “an exception to a restriction that allows all those already doing something to continue doing it even if they would be stopped by the new restriction.” If, for example, the board adopted a rule that pets over 50 pounds were prohibited, the board could grandfather existing oversize pets. Therefore, the owner of a 75 pound dog who resides in the development prior to the adoption of the restriction could keep the pet. However once the pet died, his next pet would have to comply with the new restriction.

RECUSED FROM VOTING

QUESTION: If a board member recuses himself from a vote, must he leave the meeting? If he does not, can he be asked to leave an executive meeting?

ANSWER: Recusal normally occurs when a director has a conflict of interest or prejudice concerning a particular matter. A conflict of interest is any situation in which financial or other personal considerations may unduly influence the director’s judgment. This includes matters such as a disciplinary action against the director for violating the CC&Rs or voting on a potential contract with a company owned by a close relative of the director.

Recusal. In each case, the director has a personal interest in the outcome of the vote–an interest not shared by the other directors. In such instances, the interested director should voluntarily recuse himself by leaving the meeting so the remaining directors can freely discuss and vote on the issue. If he were to stay, his presence could inhibit discussion and influence the vote.