Jul 31

Anything in the home that burns a fossil fuel can create carbon monoxide–a colorless, odorless gas that can be lethal. As a result, carbon monoxide detectors are now required in every dwelling unit where the home has a gas burning furnace, cook stove, water heater, fireplace, wood burning stove, or attached garage (auto exhaust).

Installation Deadline. Single-family homes must install them by no later than July 1, 2011. Condominiums and townhomes must install them by no later than January 1, 2013. The requirements are found in Health & Safety Code §§17296, 17926.1, and 17926.2. For more information, see Senate Bill 183.

RECOMMENDATION: For most associations, the responsibility will fall on individual owners to install the devices. However, depending on how governing documents are written, that duty may fall on the association. To be safe, boards should have legal counsel review their documents and advise them on this issue.

CPA PEER REVIEW
REQUIREMENT

Associations with a gross income over $75,000 are required to annually prepare a financial statement on an accrual basis and distribute it to the membership. That statement must be independently reviewed by a California licensed certified public accountant (unless the governing documents call for an audit instead of a review). The financial statement must be distributed to members within 120 days of the close of the fiscal year. Civil Code §1365(C).

Grading CPAs. Starting July 1, 2011, California CPAs are subject to mandatory review of their auditing and accounting practices. Think of it as analogous to a restaurant getting a letter grade (A, B, C . . .) posted in their window for their food preparation practices. The peer review report is then available to clients who request it. Accordingly, boards of directors should request a copy of their CPA’s Peer Review Report.

Review Points. So as to provide a meaningful financial statement, CPAs who review HOA financials should do the following:

  • inquire about the board’s quarterly review of the HOA’s funds. Civil Code §1365.5(1)-(5).
  • review the HOA’s reserve study and related disclosures. Civil Code §1365.2.5.
  • inquire about whether the management company has been examined (if required).
  • review the association’s insurance, including workers’ compensation coverage. Civil Code §1365.7 & §1365(e),(f)(1)-(D)(4).
  • offer to meet or correspond with the board of directors, especially when significant issues occur.
  • inquire if the HOA performed an annual inspection of the major components that the association must repair and replace. Civil Code §1365.5(e).

Information. For more information about CPA peer reviews, see California’s Board of Accountancy website. In addition, see Replacing SAS 70 in the August 2010 edition of the Journal of Accountancy.

IMPACT: The change in law for CPAs will trickle down to HOAs in two ways. First it will result in a closer look at HOA financial practices, which now includes a review of the internal practices and controls of the management companies handling HOA funds. Second, it may significantly drive up the cost of annual reviews/audits.

Thank you to Robert West, CPA of Robert Garrett West & Co. for providing this information. Mr. West is a peer reviewer of CPAs and can be reached at 866-838-8400 or at rwestcpa@sbcglobal.net.

ELECTRIC CHARGING
STATIONS

On July 25, Gov. Brown signed Senate Bill 209, which takes effect January 1, 2012.

Major Points. The bill prohibits HOAs from unreasonably restricting the installation of electric vehicle charging stations. Homeowners who place charging stations in the common areas will be responsible for costs associated with maintaining and repairing the station, as well as costs for damage to common areas and adjacent units resulting from installation and maintenance of the station. The bill imposes other responsibilities on the homeowner, including maintaining an umbrella liability coverage policy of $1,000,000 that names the association as an additional insured.

Major Flaw. Unfortunately, the new statute allows individual owners to use or occupy common areas contrary to existing statutes and case law. The author of the bill plans to introduce legislation that protects the right of common interest developments to establish reasonable rules for any use of common areas for charging stations. See Gov. Brown’s signing message.

Thank you to Skip Daum, President of Capitol Communications Group, for this update. Mr. Daum works with CAI’s Legislative Action Committee.

FEEDBACK

Rent Restrictions #1. SB 150 will kill HOAs. We are an 8 unit complex with 4 rentals. As it is none of the rental owners want to change our CC&Rs and one more rental and we can all kiss goodbye our ability to sell or refinance. CAR was very short-sighted in sponsoring this type of legislation. -D.R.

Rent Restrictions #2. SB 150 seems to provide that any CC&R rental restrictions in place prior to Jan. 1, 2012, would remain effective for all owners, regardless of whether they were originally effective before or after an owner acquired title. Do you agree?. -Tom H.

RESPONSE: That is correct. SB 150 grandfathers existing rent restrictions. It only affects those adopted by associations after January 1, 2012. Accordingly, if any HOAs want to adopt rental restrictions, they should amend their CC&Rs (and record the amendment) before that date.

Small Claims. I don’t know what part of the State Don H is in but we went to small claims several times here in San Diego. These pro tems are in their own fiefdoms. Our HOA has never won a small claims case, at best, rulings have split the baby resulting in the HOA losing half. One time we had pictures of the incident showing the resident damaging the common area property. The pro tem merely ignored the proof stating the resident could not afford the repairs as easily as the HOA and should only have to pay half. Is that justice? Those of us that actually have attempted to recover our rightful money know better than to rely on small claims rulings. We have never lost in superior court and have attorneys fees by statute in our CC&Rs. -Gary V.

Superior Court Delays. The ability to seek delinquent dues in superior court may change due to funding cutbacks by the state. This week, San Francisco Superior Court was forced to close 60% of the Civil Courts, terminating 190 court staff, two who live in our HOA. As a board member it now concerns me how we will handle our delinquent units. I work for the Sheriff’s Office in SF and we have even removed 32 of our staff from those courts and back to other divisions. It’s now projected any civil case filed in SF won’t be heard for 2 years. -J.L.

Low Turnout a Good Sign. I don’t fret if members don’t show for board meetings. To me it is indicative of satisfaction. Board meetings are not social events, they’re business meetings. How many attend city council meetings in their free time? One thing for sure, if an agenda item is of interest, people will show. You want attendance? Announce you are considering a $1,000 special assessment or you are planning on banning children from the pool or you will be considering new parking prohibitions. Then they’ll show . . . and they won’t be apathetic. -Ed V.

-Adrian J. Adams, Esq

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Jul 24

Impact of Renters. Historically, homeowner associations have experienced problems with renters who tend to be transient, have little or no stake in their communities and violate rules in greater numbers than owners. By no means are all renters bad but high rental populations often drive up HOA expenses and depress property values–a phenomenon recognized by banks, insurance companies, Fannie Mae, FHA and the courts. In an effort to keep rentals at reasonable levels, associations throughout California have enacted various forms of rental limitations.

Realtors. The California Association of Realtors (“CAR”) was unhappy with this trend since it impeded their ability to sell property to investors, which includes many of their own Realtor members. As a result, CAR sponsored SB 150 which exempts owners in a common interest development from rent restrictions unless the restriction was in effect prior to the date the owner bought into the development.

In addition, the bill requires owners to provide buyers with a statement describing any provision in the governing documents that prohibits the rental or leasing of units in the development.

On July 7, Governor Brown signed the bill into law to take effect January 1, 2012.

Tina Chu, Esq.

POOL DRAIN RECALL

Eight manufacturers have recalled pool and spa drain covers that are a possible entrapment hazard to swimmers. For a list of the manufacturers, see the Consumer Product Safety Committee’s press release. If you have any of the recalled pool drain covers, the CPSC recommends closing your pool until the drain covers are replaced. (Thank you to manager Lorna Leviste for this update.)

BANK’S RIGHT TO VOTE IN RECALL

QUESTION: For purposes of a recall election, how does the fact that 30% of the properties in our development were foreclosed and are now owned by banks affect the vote?

ANSWER: Bank-owned units count toward the total voting power of the association. Banks, provided they are in good standing, have the right to vote in a recall. Unfortunately, banks rarely participate in any votes unless the issue directly affects the bank, at which point they vote “no” and preserve the status quo.

FEEDBACK

I’m sorry I could not print everyone’s feedback this week–there were too many. Following is a sampling:

Bible Study #1. The religion response was hysterical. Just thought you should know your newsletters are both informational and entertaining. -J.C.

Bible Study #2. I thoroughly enjoy your Davis-Stirling articles, especially with their humorous twists. In a recent response to a question about a Bible study group putting fliers in mailboxes, for example, you closed with “The group should spend some time meditating on Romans 13:1-5.” When I went and looked Romans 13:1-5, I almost spit my coffee out laughing. Thanks for making HOA work interesting, and at times even entertaining! -William P.

Bible Study #3. Praise God on this one, Bible study anyone? -S.K.

Bible Study #4. I was on board and enjoying your response regarding Clubhouse Bible Study until you made the leap to “advocating violent jihad” and “a quick call to the FBI.” Such comments continue to feed Islamic fear mongering and are really out of line in a newsletter as classy as yours. Change the sentence to “advocating violent overthrow of the United States Government” by any group, and I am a happy camper. There are plenty of threats to our country from both edges of the bell shaped curve of religious and secular organizations to go around. Sign me, fourth generation American daughter of three generations of military service and a middle-of-the-road Protestant. -Nancy K.

Bible Study #5. I love your response! Creative research! -Patty F.

Bible Study #6. Our association considered prohibiting fliers a few years ago but the argument that won out was this would be an infringement of freedom of speech. Your thoughts? -Bill C.

RESPONSE: Some associations prohibit fliers altogether while others restrict them to bulletin boards setup for that purpose. HOAs can legally prohibit door-to-door solicitors and the distribution of fliers, provided the development has restricted access. Developments that are freely and openly accessible to the public cannot prohibit leafleting, solicitations, and fliers. For more information, see free speech.

Bible Study #7. Regarding religious meeting notices in the mailbox, in some cases, depending on the design of the mailboxes, it is a federal offense for anyone other than a postal employee to put something in a mailbox. The publisher of our community newsletter was threatened with a $10,000 fine by the local postmaster if they he didn’t stop putting the newsletter through the mail slots in our front doors. This applies to  cluster boxes as well and could be used by HOAs to prevent distribution of flyers. -Andy P.

Bible Study #8. For cat’s sake let them have their Bible meetings!!! We need all the religion people we can get to neutralize the selfishness going on in the world. Forget about rationalizations like the dogmatic differences of what Islam believes and the Buddhists believe, etc., all religions preach doing good and helping one’s neighbor. Any little amount of religion helps to counteract the porno, greed, corruption and malfeasance going on in both high and low places. -Henry Z.

Bible Study #9. The Bhagavad Gita is a Hindu holy book not Buddhist! -Lance M.

RESPONSE: Oops. You’re right, it’s Hindu (and interesting reading).

Small Claims #1. I agree with Frank (July 17 Newsletter). Small claims courts usually use pro tem judges and rule against not only the prevailing law but against any larger institution. I have found that pro tems bring their own prejudices and biases to their rulings completely disregarding the published law. Their arrogance is incredible. We simply use our attorneys and file in superior court where we have a chance of the law being upheld. Small claims courts are a waste and a fraud. -Gary V.

Small Claims #2. We are having solid success with small claims actions. There is a provision in the SCA for plaintiffs to challenge decisions if they do not follow the law (CCP §116.725). -Don H.

Small Claims #3. My associations have been very successful in collecting assessments using small claim filings. The trick is doing your research before moving forward with a particular method. Payment plans, small claims actions and foreclosures all have a place in the collection process. From my experience, the reason a lot of boards find themselves with such high delinquent accounts, is that they fail to follow their own procedures early on. -Donna B.

Apathy. The comments of Stephen P. (July 17) regarding attendance at board meetings are very true. Our HOA has over 1,900 homes, and a resident population in excess of 3,000, yet it is the same 25 to 30 people who attend board meetings. We have an excellent BOD assisted by very devoted committees, but the level of apathy in the balance of the community is disgusting. -John R.

-Adrian J. Adams, Esq

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Jul 17

QUESTION: A couple in our senior community is holding Bible study meetings in the clubhouse one night a week. It’s open to anyone who wants to attend. Unfortunately, they advertise putting fliers in everyone’s mail tubes with sayings such as if you don’t pray you’ll go to hell. Is it s legal for the board to approve the clubhouse for such meetings?

ANSWER: Theologically, the Bible study’s advertising is a little off base. I did some research and found that prayer is not what saves or condemns. For Christians, it is faith in Jesus that brings salvation. For Muslims, it is adherence to the “Five Pillars of Islam.” For Buddhists, it is the shedding of desire via the “Eightfold Path.” I could not find any teaching where lack of prayer was the road to Hell.

Fliers. In the opinion of many, the road to Hell is paved with fliers littering the common areas. I tend to agree. Most HOAs have a rule against stuffing fliers in mail tubes, hanging them on walls and doors, or dropping them in front of doors. If your association has such a rule, it is bad form for Bible study participants to break the rules. The group should spend some time meditating on Romans 13:1-5.

The Clubhouse. As for the clubhouse, there is nothing illegal or improper in letting a Bible study meet there. It would be intolerant to exclude homeowners from using the space based on their religion. Some homeowners may be concerned that allowing a Bible study might lead to Hindus studying the Bhagavad Gita or Muslims studying the Qur’an. As long as space is available and they follow the rules, there should be no prejudice or discrimination toward any religious group that wants to peacefully gather. However, if someone starts advocating violent jihad, a quick call to the FBI may be in order.

RECOMMENDATION: If your association does not already have them in place, your board should adopt rules about distributing fliers.

ELECTION RULES


QUESTION: Can we use our election rules to modify the qualifications listed in the bylaws such as requiring candidates’ names to be on the deed, be in good standing, or prohibiting related members from serving?

ANSWER: Election rules must be consistent with your bylaws. If your bylaws do not have director qualifications, your elections rules cannot have them. To add director qualifications, the membership must vote to amend the bylaws.

SMALL CLAIMS JURISDICTION
INCREASED AGAIN


Senate Bill 221 was signed by Governor Brown. The bill increases small claims jurisdiction for personal claims from $7,500 to $10,000. That means members can sue their associations for up to $10,000 but associations are limited to $5,000. The change takes effect January 1, 2012.

Law of Unintended Consequences. Aside from the obvious inequity in the new law, it will have the unintended consequence of forcing more claims against homeowners into superior court where legal fees and costs will be be much higher for all parties and potential losses for members more costly. Our tax dollars at work.

FEEDBACK


Small Claims #1.
Doesn’t a claim for small claims court have to be at least $1800.00? If so that would be important information to include in that article concerning small claims court. -Gloria F.

RESPONSE: The $1,800 limitation does not apply to small claims actions; it applies to foreclosures. Associations may not foreclosure until a delinquent assessment is at least $1,800 or the delinquency is at least 12 months old. Civil Code §1367.4(b)(2).

Small Claims #2. We made one run at small claims court. The judge ruled in favor of the owner who owed us money. We got nothing. The judge explained that this poor owner was on hard times and the nasty old board was just trying to rub salt in his wounds. There were a few thousand dollars involved in unpaid dues. Our board decided that small claims court was not the way to go–ever. -Frank B.

Small Claims #3. Your answer is incomplete. Can’t the HOA foreclose on delinquent homeowners? -Mark M.

RESPONSE: HOAs can foreclose via a trustee sale, initiate judicial foreclosure, suspend privileges, and file suit in superior court. These other means of collection are covered on the website.

Out of Control Board. I would like to point out all too often, homeowners are very good in emails and complaints but seldom attend board meetings to voice their opinions. Directors are not necessarily ill-willed and crooked, and they too want the best for the entire ownership. I would suggest that all homeowners talk to the board, put their names on the ballot and join the board, and stop complaining. -Stephen P.

-Adrian J. Adams, Esq

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Jul 10

The Court of Appeal handed down another decision. The case involves an HOA board that approved a construction project which violated the association’s architectural guidelines. In addition, the board failed to monitor the project they approved.

Construction Project. Homeowner Daniel Lass submitted plans to the Sagewood Homeowners Association to combine two condominiums into a single unit, convert a carport into a garage and convert ~1,000 square feet of common area to his personal use.

Conditional Approval. The board gave Lass approval subject to the following major conditions: (i) obtaining building permits; (ii) depositing a $5,000 performance bond with the HOA; (iii) executing a maintenance and hold harmless agreement protecting the HOA, (iv) receiving approval of at least 67% of the membership.

Violations. None of the conditions were met prior to construction and the board took no action to enforce them. To make matters worse, Lass assured his neighbors the project would take no more than six months to complete but then took two years during which his neighbors were subjected to noise, fumes and dust on weekdays, weekends, holidays and evening hours.

Board Inaction. One neighbor, Ted Telford, repeatedly informed the HOA of the violations but the board took no action. When finally completed, the project varied materially from the approved plans and again the board took no action. Lass was alleged to have a personal and business relationship with the board president.

Lawsuit Filed. Telford sued alleging the Association had a duty to the owners to act in good faith and with reasonable prudence in approving Lass’s construction project and a duty to ensure that Lass complied with the governing documents.

Decision. The Court ruled as follows:

1. Owner’s Right to Enforce. When an association fails or refuses to enforce its CC&Rs, homeowners can sue for damages and compel the association to enforce the covenants.

2. Business Judgment Limited. Although decisions of the board are granted deference under the business judgment rule, deference is accorded only if the association acts upon reasonable investigation in good faith with regard for the best interests of the association and its members. Accordingly, the board had a duty to monitor the project once it was approved.

3. Consistent with CC&Rs. Boards must exercise their authority to approve architectural improvements in conformity with the CC&Rs and they must do so in good faith, consistent with their fiduciary obligations to homeowners.

4. Exculpatory Clause. The association argued that the CC&Rs expressly exempted the association from liability resulting from the approval of any construction plans or the performance of any work whether or not pursuant to approved plans. The court concluded that the exculpatory clause did not relieve the association from liability for the board’s breach of its fiduciary duties.

RECOMMENDATION: Although the court’s decision is unpublished, its reasoning is consistent with other cases. Boards have discretion in how they enforce their documents but the clear message is that boards must investigate and take some form of good faith action. They cannot sit on their hands and do nothing. This was the same message given by the court in the Affan v. Portofino Cove case where the board failed to investigate and take action to fix a sewer line. To read more, see Telford v. Sagewood HOA.

OUT OF CONTROL BOARD

QUESTION: I love your website, however our property manager says the website is just your interpretation of the Davis-Stirling Act and therefore anything homeowners find on it cannot be used. We have a board that engages in illegal electioneering and misuses our funds, and exceeds the 5% max for spending without a vote all of the time, they are out of control and the property management company just ignores us.

ANSWER: It is true that some of the information on the website includes my opinions. However, that does not mean the information is useless. Regarding the management company ignoring you, it is possible they have been directed by the board to not respond to members. It sounds like the membership needs to take action.

SMALL CLAIMS
COLLECTION MATTERS


QUESTION: We are filing small claims action against a homeowner who has not paid HOA dues. As the amount is heading over the $5,000 limit, can we file another suit to collect money that is not included in the last suit? Can we keep using small claims for ongoing dues?

ANSWER: Yes, you can keep going to small claims but with limitations.  You can file only two claims in a calendar year that ask for more than $2,500 but you can file as many claims as you want for up to $2,500 each. Code Civ. Proc. §116.231.

Smaller Bites. If the delinquent owner is $7,000 in arrears, small claims limits HOAs to a recovery of $5,000. The board must either waive everything over $5,000 or limit their claim. For example, if the owner is nine months in arrears (January through September) for a total of $7,000, the board sues in small claims for six months (January through June) which brings it under the $5,000 limit. Once the board has a judgment for the first six months, the association can go back to small claims for July through September, which is under $2,500. The board then files as-needed as delinquent amounts approach the $2,500 limit. In addition, the board should be recording abstracts of judgment to secure the debt in the event the owner declares bankruptcy.

-Adrian J. Adams, Esq.

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