FHA GOOD NEWS

FHA GOOD NEWS

The Federal Housing Administration's policies have been a significant drag on the housing market which, in turn, has slowed our nation's economic recovery. The Community Associations Institute has been in discussions with the Administration over the past few years asking for more sensible regulations.Last week the FHA finally removed some of the onerous requirements they had imposed on condominium developments.
Delinquencies. Previously no more than 15% of of the units in a condominium development could be more than 30 days delinquent. That meant that owners who were a few days late in paying their assessments could disqualify the entire development from eligibility for FHA insured loans. The Administration revised their requirement from 30 days to a more reasonable 60 days.

Fidelity Bond. In prior newsletters I had reported on the problems with Administration requiring management companies to carry employee dishonesty insurance covering the associations they manage. The FHA now recognizes the problem and modified their requirements. The new  standards now require condo developments with more than 20 units to carry employee dishonesty insurance as follows:

1. The policy must cover all officers, directors and employees of the association and all other persons handling HOA funds;
2. The coverage must be no less than three months assessments plus reserve funds;
3. Their management company, if any, must (i) have its own fidelity coverage that meets FHA requirements; or (ii) the association’s policy names the company as an insured; or (iii) the association’s policy covers management company employees.

Project Certification. Previously, certification created such significant risks for boards of directors that most law firms advised against signing FHA documents. The FHA has seen the light and scaled back on their requirements. Now, an HOA representative need only attest to the following:

1. To the best of their knowledge, the information is true and accurate;
2. They reviewed the application and upon advice of counsel it meets all state and local condo laws;
3. They reviewed the application and it meets all FHA condo approval requirements, and
4. They have no knowledge of circumstances or conditions that might have an adverse impact on the project (such as construction defects, substantial operational issues, or litigation, mediation or arbitration issues).

COMMENTS: With the above changes, I withdraw my objections to directors signing FHA certification applications. Kudos to the Community Associations Institute for their work on this issue. As Neil Armstrong once said, "One small step for man, one giant leap for the housing industry." See Mortgagee Letter 2012-18 for more detail about the changes.

RENOVATIONS VIOLATE CC&RS

In an unpublished decision, the court of appeals upheld the enforcement of CC&Rs related to tile on balconies and encroachments into the common area.

Remodeling. Larisa Garbar bought a unit in a highrise in San Francisco. She raised the ceilings in her unit, tiled her balcony and installed hardwood floors without submitting plans. The board issued a stop work order and requested that she immediately submit plans. When it learned of the raised ceiling, the board put her on notice of her encroachment into the common areas. As part of a major waterproofing project, the association removed the tile from her balcony. A dispute arose because Garbar sought to re-tile her balcony despite prohibitions in the CC&Rs and warnings that doing so would void the manufacturer's warranties related to the waterproofing.

Lawsuits Fly. The association filed suit. Garbar denied that her new ceiling encroached upon the common area. She claimed her unit’s boundary extended to a concrete slab that separated the unit from the floor above. She also claimed that balcony tile would actually protect the waterproofing (note: industry evidence shows otherwise).

Ruling. The court found in favor of the association. The CC&Rs were clear and explicit when it came to tile on balconies. The court also concluded that the space above Garbar's ceiling was common area.

RECOMMENDATION: Even though the case is unpublished and cannot be cited as precedent, it shows that courts will defer to recorded restrictions and reasonable enforcement decisions by boards of directors. See Cathedral Hill Tower v. Garbar.

FEEDBACK

Manager Contract #1. Please correct your newsletter, you said something wrong. You are saying that a board needs a reason to change management. That is absurd. No reason is needed and no documentation is necessary UNLESS the board wants to sue for any illegal activities against them. Please do not put out wrong impressions, I'm on a board and I don't need to argue your wrong points when we have HOA stuff to discuss. -Kimberly P.

RESPONSE: Hilarious! Thank you for the comic relief. When you have a manager under contract, they are no longer at-will. You need cause to fire them. If you fire employees willy-nilly, you better have goodEmployment Practices Liability insurance in place.

Manager Contract #2-#9. I received a number of thoughtful responses asking about the 1-year contract limitation commonly found in CC&Rs.  

RESPONSE: The ability of a board to enter into a multi-year employment contract with a manager will depend on the language in an association's governing documents. Following is language found in some old documents that presents no impediment to 3-year agreements. It limits the original developer but not subsequent HOA boards:

Neither Grantor, nor any of its agents, shall enter any contract which would bind the Association or the Board for a period in excess of one (1) year.

Following is more typical language in most of the documents I work with. It limits contracts with vendors, i.e., third parties who providegoods or services to an association. It does not limit employment agreements:

The Association may not take any of the following actions unless approved by a majority of the voting power of Association Members (other than Declarant): (a) Enter into a contract for a term longer than one (1) year with a third person who furnishes goods or services for the Common Area(s) of the Association...

Following is a broader restriction I run into from time to time. It clearly limits manager contracts to one year.

The Board of Directors, on behalf of the Association, may contract with a Manager for the performance of maintenance and repair and for conducting other activities on behalf of the Association, as may be determined by the Board. The maximum term of any such contract ("Management Contract") shall be one (1) year... 

I sometimes run into conflicting language on this issue between an association's CC&Rs and its bylaws. When that happens, the CC&Rs prevail. The order of documentary control is explicitly described in the Davis-Stirling rewrite which takes effect January 1, 2014. It states that in the event of inconsistencies, the following hierarchy determines the outcome: the law, the CC&Rs, articles of incorporation, the bylaws, and lastly the rules. See Civil Code §4205.

Budget Tie. It's clear that the vote to break the tie on the budget should not be in executive session. But how is it justified to have the tie-breaking occur at an emergency open meeting? Shouldn't it be a a special meeting of the board with four-day notice? Or, can time-sensitive matters (if that was the case) be considered "emergencies"? -Carol R.

RESPONSE: Passing a budget is a time-sensitive matter. If not approved and distributed within a 30-90 day window prior to the start of the association's fiscal year, penalties are imposed. Accordingly, an emergency meeting would be justified if the board were up against that deadline. 

DS Rewrite. Isn't the Davis-Stirling Act restriction on what board members may discuss via e-mail or what they can talk about in person outside of board meetings unconstitutional due to our First Amendment right to free speech? It seems to me that the Act can only restrictdecisions made outside of a board meeting but cannot restrict people from discussing things because of our First Amendment rights. -Steve S.

RESPONSE: There is wide misconception about First Amendment Rights. Too many people believe that "free speech" gives them the unlimited right to say whatever they want whenever they want. That is not the case. The courts have imposed time, place and manner restrictions on speech (such as shouting fire in a crowded theater, disrupting city council meetings, protesting on private property, etc.). In addition, the courts make a distinction between political speech and commercial speech. Commercial speech is heavily regulated. As a member of your association, you can talk about board business pretty much whenever, wherever and to whomever you want. Once you are elected to the board, time, place and manner restrictions are imposed. You must reserve discussions about board business with other directors to noticed meetings of the board as described in the Davis-Stirling Act. See speech limitations.

Adrian J. Adams, Esq. Adams Kessler PLC

DAVIS-STIRLING
REWRITE SIGNED INTO LAW 

On Friday, August 17th, Governor Brown signed into law the long-anticipated rewrite of the Davis-Stirling Act. The billreorganizes and renumbers the Act to make it more user-friendly. In addition, the rewrite made substantive changes which I will cover in future newsletters.

Current CC&R Restatements. Associations that are currently restating their CC&Rs and Bylaws do not need to wait for the rewrite to take effect. One of the provisions in the bill allows boards to update their governing documents by replacing old statutory references with new ones without the need for a membership vote: 

Civil Code §4235(a) Notwithstanding any other provision of law or provision of the governing documents, if the governing documents include a reference to a provision of the Davis-Stirling Common Interest Development Act that was repealed and continued in a new provision by the act that added this section, the board may amend the governing documents, solely to correct the cross-reference, by adopting a board resolution that shows the correction. Member approval is not required in order to adopt a resolution pursuant to this section.

Sneak Peak. Although signed a few weeks ago, the rewrite does not go into effect until January 1, 2014 so as to give everyone a chance to familiarize themselves with the new Act. To get a peak at the new Davis-Stirling Act, see Assembly Bill 805. I will be speaking about the rewrite to the annual conference of CPAs later this month. See next article. 

Adrian Adams and Kelly Richardson will be speaking to the "Common Interest Realty Associations Conference" put on by the CalCPA Education Foundation. The event will be held September 20, 2012 at the Burbank Airport Marriott. The conference will highlight:

• State of the Common Interest Industry
• Davis-Stirling Rewrite
• Foreclosure Issues
• CID Fraud
• Financial Statement Disclosure Issues
• Insurance
• Taxes

The program is designed for CPAs, attorneys, association managers and other professionals interested in homeowner association management, taxation and auditing. Other speakers include Ron Stone, John Elhai, Thomas Noce, Patrick Prendiville, Cheryl Martin, and Ron Maddox. If you want to attend, sign up at www.calcpa.org.

DEVELOPER ARBITRATION

On August 16, developers won a major victory in thePinnacle Museum Tower case. The California Supreme Court reversed direction from prior decisions and held that homeowner associations are bound by arbitration provisions in their CC&Rs, even though those provisions were written and recorded by the developers. In other words, associations lose their right to go to court for a trial before a judge and a jury.

The expected benefit to developers is the elimination oflarge jury verdicts by removing juries from the process. Historically, monetary awards by judges and arbitrators are smaller than those given by juries. As a result of the Pinnacle decision, developers may offer smaller settlements for construction defects. If their offers are rejected, HOAs will be forced to prove their cases in binding arbitration. Even so, the arbitration process is streamlined and less expensive than litigation and could produce good results if the association can prove its case to the arbitrator. Only time will tell what effect it will have on the industry.

The bulk of existing associations in California will not be affected by the Pinnacle decision. Only those developments less than 10 years old that have construction defects and an arbitration provision will be affected (unless they are already in litigation).

RECOMMENDATION: If your development is less than ten years old, various statutes of limitations are running on any defect claims you may have. To avoid losing your rights, you should contact legal counsel to determine your best course of action. To read the case in its entirety, see Pinnacle Museum Tower Assn v. Pinnacle Market Development.

ASSEMBLY BILL 2273

Good news! On Friday, September 7, Governor Brown signed AB 2273.
The bill requires lenders to record foreclosure sales within 30 days of the foreclosure. It makes banks accountable for the properties they acquire, i.e., once the sale is recorded, the lender must pay HOA dues and assessments.

As expected, lenders strenuously opposed the bill. Thanks to the thousands of letters you sent to legislators and the efforts of CAI’s legislative advocate Skip Daum and others the bill overcame lender opposition.

JASMINE FISHER
IRONMAN ATTORNEY

Ironman. How did Jasmine do in her Ironman race? -Paige B.

RESPONSE: Jasmine not only survived the grueling race (a 2.4 mile swim, followed by 112 mile bike race, followed by a 26.2 mile marathon), she received a medal. I think she had an unfair advantage, she speaks Canadian.

YUKON TRIP

Comment. As always, a great newsletter. I hope you get rich panning for gold. -Wendy M

RESPONSE: I had so much gold it set off the screening equipment at the airport. They made me empty my pockets and now I have nothing. Such is life. 

Comment. Bring a mosquito net for your head, and lots of bug repellant - I'm not kidding. -Mark D. 

RESPONSE: At one campsite I fed so many mosquitoes they made me an honorary environmentalist. Other than that, the trip was fabulous. We canoed, fished, camped along the river, explored the remains of log cabins and paddle wheel boats from the early 1900s, admired bald eagles and watched for bears. At night around the campfire Judge Stirling read humorous tales of the Yukon such as "The Cremation of Sam McGee" and "The Shooting of Dan McGrew" by celebrated author and poet Robert Service.

FEEDBACK

Budget. In your August 12th newsletter under the topic of "Distributing the Budget" the person's bylaws stated "no less than 45 days prior to the start of the new fiscal year" and D-S states "not less than 30 days nor more than 90." Your reply stated that these two are in conflict. In reality, they are not as the 45-day requirement of their bylaws easily falls within the 30-90 day requirement of D-S. They merely need to send their budget out at least 45-days, but no more than 90-days, to be in full compliance with both. -Bruce F.

RESPONSE: If the budget is sent out out 30 days before the start of the fiscal year, it violates the CC&Rs. Which prevails? The statute. The Davis-Stirling Act gives associations more flexibility when it comes to distributing the budget and controls over any provisions to the contrary in the governing documents. Civil Code §1365(a)4.

Association v. Membership. The feedback from "Diana S." is way off base, at least in the discussion of incorporated associations. There is definitely a specific "entity separate" from the membership. Such corporations, defined in Corporations Code §7110 et seq clearly defines these entities. Corporate officers and directors of the corporation owe their fiduciary duties and responsibilities to that entity, NOT the members. Officers and directors are responsible to maintain the operational and physical assets of the corporation such that it is capable of delivering to the members those goods and services appurtenant to membership in that association. The benefits derived from membership in the association come from the corporate entity, not from the members themselves. Misunderstanding that concept causes many members to expect or demand from boards more than is appropriate. -Ted L.

Adrian J. Adams, Esq. Adams Kessler PLC